☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Exact Name of Registrant as Specified in Its Charter
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, Hawaii96813
Hawaiian Electric Company, Inc. – 1001 Bishop Street, Suite, 2500, Honolulu, Hawaii96813
(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)
Not applicable
(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 July 23, 2021
Hawaiian Electric Industries, Inc. (Without Par Value)
109,311,034
Shares
Hawaiian Electric Company, Inc. ($6-2/3 Par Value)
17,324,376
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 Industries, Inc. and Subsidiaries
Hawaiian Electric Company, Inc. and Subsidiaries
Form 10-Q—Quarter ended June 30, 2021
GLOSSARY OF TERMS
Terms
Definitions
ACL
Allowance for credit losses, which is the current credit loss standard, requires recording the allowance based on the expected loss model
AES Hawaii
AES Hawaii, Inc.
AOCI
Accumulated other comprehensive income/(loss)
ARA
Annual revenue adjustment
ASB
American Savings Bank, F.S.B., a wholly owned subsidiary of ASB Hawaii, Inc.
ASB Hawaii
ASB Hawaii, Inc., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and the parent company of American Savings Bank, F.S.B.
ASU
Accounting Standards Update
CARES Act
The Coronavirus Aid, Relief, and Economic Security Act enacted March 27, 2020
CBRE
Community-based renewable energy
Company
Hawaiian Electric Industries, Inc. and its direct and indirect subsidiaries, including, without limitation, Hawaiian Electric Company, Inc. and its subsidiaries (listed under Hawaiian Electric); ASB Hawaii, Inc. and its subsidiary, American Savings Bank, F.S.B.; Pacific Current, LLC and its subsidiaries (listed under Pacific Current); 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
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
ECRC
Energy cost recovery clause
EIP
2010 Equity and Incentive Plan, as amended and restated
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
Hawaii Electric Light
Hawaii Electric Light Company, Inc., an electric utility subsidiary of Hawaiian Electric Company, Inc.
ii
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 and Renewable Hawaii, Inc. Uluwehiokama Biofuels Corp. was dissolved effective as of July 14, 2020
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
Moody’s
Moody’s Investors Service’s
MPIR
Major Project Interim Recovery
MW
Megawatt/s (as applicable)
MRP
Multi-year rate period
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, Mauo, LLC, Alenuihaha Developments, LLC and Ka‘ie‘ie Waho Company, LLC
PBR
Performance-based regulation
PGV
Puna Geothermal Venture
PIMs
Performance incentive mechanisms
PPA
Power purchase agreement
PPAC
Purchased power adjustment clause
PUC
Public Utilities Commission of the State of Hawaii
PV
Photovoltaic
RAM
Rate adjustment mechanism
RBA
Revenue balancing account
REIP
Renewable Energy Infrastructure Program
RFP
Request for proposals
ROACE
Return on average common equity
RORB
Return on rate base
RPS
Renewable portfolio standards
S&P
Standard & Poor’s
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
Utilities
Hawaiian Electric Company, Inc., Hawaii Electric Light Company, Inc. and Maui Electric Company, Limited
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 and actual results and financial condition may differ materially from those indicated in the forward-looking statements.
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; the potential impacts of global and local developments (including global economic conditions and uncertainties, unrest, terrorist acts, wars, conflicts, political protests, deadly virus epidemic or other crisis); the effects of changes that have or may occur in U.S. policy, such as with respect to immigration and trade; and pandemics;
•the extent of the impact of the COVID-19 pandemic, including the duration, spread, severity and any recurrence of the COVID-19 pandemic due to new variants or insufficient vaccinations, the duration and scope of related government orders and restrictions, the impact on our employees, customers and suppliers, and the impact of the COVID-19 pandemic on the overall demand for the Company’s goods and services, all of which could be affected by the pace of distribution, administration, and efficacy of COVID-19 vaccines over the short- and long-term, as well as the proportion of the population vaccinated;
•ability to adequately address risks and capitalize on opportunities related to our environmental, social and governance (ESG) priority areas, which currently include decarbonization, economic health and affordability, reliability and resilience, secure digitalization, diversity, equity and inclusion, employee engagement, and climate-related risks and opportunities;
•citizen activism, including civil unrest, especially in times of severe economic depression and social divisiveness, which could negatively impact customers and employees, impair the ability of the Company and the Utilities to operate and maintain its facilities in an effective and safe manner, and citizen activism and stakeholder activism could delay the construction, increase project costs or preclude the completion, of third-party or Utility projects that are required to meet electricity demand, reliability objectives and renewable portfolio standards (RPS) goals;
•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, energy and environmental policy, and other policy and regulatory changes advanced or proposed by President Biden and his administration;
•weather, natural disasters (e.g., hurricanes, earthquakes, tsunamis, lightning strikes, lava flows and the increasing effects of climate change, such as more severe storms, flooding, droughts, heat waves, and rising sea levels) and wildfires, including their impact on the resilience and reliability of 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, which could result in lower portfolio yields and net interest margin;
•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);
iv
•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 RPS goals; the impacts of implementation of the renewable energy proposals on future costs of electricity and potential penalties imposed by the PUC for delays in the commercial operations of renewable energy projects;
•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;
•the ability of the Utilities to recover undepreciated cost of fossil fuel generating units, if they are retired before the end of their expected useful life;
•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, combined heat and power or other firm capacity supply-side resources fall short of achieving their forecasted benefits or are otherwise insufficient to reduce or meet peak demand;
•fuel oil price changes, delivery of adequate fuel by suppliers and the continued availability to the electric utilities of their energy cost recovery clauses (ECRCs);
•the continued availability to the electric utilities or modifications of other cost recovery mechanisms, including the purchased power adjustment clauses (PPACs), rate adjustment mechanisms (RAMs) and pension and postretirement benefits other than pensions (OPEB) tracking mechanisms, and the continued decoupling of revenues from sales to mitigate the effects of declining kilowatthour sales;
•the ability of the Utilities to recover increasing costs and earn a reasonable return on capital investments not covered by the annual revenue adjustment (ARA);
•the ability of the Utilities to achieve performance incentive goals currently in place;
•the impact from the PUC’s implementation of performance-based ratemaking for the Utilities pursuant to Act 005, Session Laws 2018, including the potential addition of new performance incentive mechanisms (PIMs), third-party proposals adopted by the PUC in its implementation of performance-based regulation (PBR), and the implications of not achieving performance incentive goals;
•the impact of fuel price levels and volatility on customer satisfaction and political and regulatory support for the Utilities;
•the risks associated with increasing reliance on renewable energy, including the availability and cost of non-fossil fuel supplies for renewable energy generation and the operational impacts of adding intermittent sources of renewable energy to the electric grid;
•the growing risk that energy production from renewable generating resources may be curtailed and the interconnection of additional resources will be constrained as more generating resources are added to the Utilities’ electric systems and as customers reduce their energy usage;
•the ability of IPPs to deliver the firm capacity anticipated in their power purchase agreements (PPAs);
•the potential that, as IPP contracts near the end of their terms, there may be less economic incentive for the IPPs to make investments in their units to ensure the availability of their units;
•the ability of the Utilities to negotiate, periodically, favorable agreements for significant resources such as fuel supply contracts and collective bargaining agreements and avoid or mitigate labor disputes and work stoppages;
•new technological developments that could affect the operations and prospects of the Utilities and ASB or their competitors such as the commercial development of energy storage and microgrids and banking through alternative channels, including use of digital currencies, which could include a central bank digital currency;
•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 remaining cost savings commitment related to the Enterprise Resource Planning/Enterprise Asset Management (ERP/EAM) project-related benefits and the management audit committed savings of $33 million over the 2021 to 2025 multi-year rate period (MRP);
•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 and tax rates, 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);
v
•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 related to PBR or other regulatory changes, the effects of potentially required consolidation of variable interest entities (VIEs), or required 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 credit losses, allowance for credit losses (ACL) and charge-offs;
•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), and the risks associated with the operation of transmission and distribution assets and power generation facilities, including public and employee safety issues, and assets causing or contributing to wildfires;
•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, which has increased due to the impact from the COVID-19 pandemic; 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.
vi
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Hawaiian Electric Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Income (unaudited)
Three months ended June 30
Six months ended June 30
(in thousands, except per share amounts)
2021
2020
2021
2020
Revenues
Electric utility
$
601,879
$
534,215
$
1,166,743
$
1,131,657
Bank
77,260
74,714
154,391
154,452
Other
1,118
16
2,069
22
Total revenues
680,257
608,945
1,323,203
1,286,131
Expenses
Electric utility
534,195
466,414
1,029,945
1,019,898
Bank
37,454
66,221
79,289
126,556
Other
6,752
4,754
14,082
8,419
Total expenses
578,401
537,389
1,123,316
1,154,873
Operating income (loss)
Electric utility
67,684
67,801
136,798
111,759
Bank
39,806
8,493
75,102
27,896
Other
(5,634)
(4,738)
(12,013)
(8,397)
Total operating income
101,856
71,556
199,887
131,258
Retirement defined benefits credit (expense)—other than service costs
1,216
(934)
3,651
(1,868)
Interest expense, net—other than on deposit liabilities and other bank borrowings
(23,317)
(22,613)
(47,053)
(44,388)
Allowance for borrowed funds used during construction
812
752
1,559
1,440
Allowance for equity funds used during construction
2,377
2,194
4,568
4,209
Gain on sale of investment securities, net
—
9,275
528
9,275
Income before income taxes
82,944
60,230
163,140
99,926
Income taxes
18,599
10,870
33,964
16,673
Net income
64,345
49,360
129,176
83,253
Preferred stock dividends of subsidiaries
473
473
946
946
Net income for common stock
$
63,872
$
48,887
$
128,230
$
82,307
Basic earnings per common share
$
0.58
$
0.45
$
1.17
$
0.75
Diluted earnings per common share
$
0.58
$
0.45
$
1.17
$
0.75
Weighted-average number of common shares outstanding
109,282
109,146
109,252
109,098
Net effect of potentially dilutive shares
233
159
305
276
Weighted-average shares assuming dilution
109,515
109,305
109,557
109,374
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2020 Form 10-K.
1
Hawaiian Electric Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (unaudited)
Three months ended June 30
Six months ended June 30
(in thousands)
2021
2020
2021
2020
Net income for common stock
$
63,872
$
48,887
$
128,230
$
82,307
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 of $6,214, $356, $(10,402) and $7,476, respectively
16,976
973
(28,414)
20,421
Reclassification adjustment for net realized gains included in net income, net of taxes of nil, $(599), $(142) and $(599), respectively
—
(1,638)
(387)
(1,638)
Derivatives qualifying as cash flow hedges:
Unrealized interest rate hedging gains (losses) arising during the period, net of taxes of $(243), $(69), $299 and $(688), respectively
(701)
(198)
861
(1,982)
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 of $2,086, $1,981, $4,170 and $3,967, respectively
6,008
5,690
12,018
11,396
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes of $(2,016), $(1,789), $(4,031) and $(3,578), respectively
(5,811)
(5,159)
(11,622)
(10,317)
Other comprehensive income (loss), net of taxes
16,472
(332)
(27,544)
17,880
Comprehensive income attributable to Hawaiian Electric Industries, Inc.
$
80,344
$
48,555
$
100,686
$
100,187
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2020 Form 10-K.
2
Hawaiian Electric Industries, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (unaudited)
(dollars in thousands)
June 30, 2021
December 31, 2020
Assets
Cash and cash equivalents
$
247,443
$
341,421
Restricted cash
10,618
17,558
Accounts receivable and unbilled revenues, net
312,727
281,216
Available-for-sale investment securities, at fair value
2,509,906
1,970,417
Held-to-maturity investment securities, at amortized cost
375,655
226,947
Stock in Federal Home Loan Bank, at cost
10,000
8,680
Loans held for investment, net
5,106,207
5,232,642
Loans held for sale, at lower of cost or fair value
50,877
28,275
Property, plant and equipment, net of accumulated depreciation of $2,995,484 and $2,903,144 at June 30, 2021 and December 31, 2020, respectively
5,310,162
5,265,735
Operating lease right-of-use assets
154,720
153,069
Regulatory assets
767,856
766,708
Other
668,368
629,149
Goodwill
82,190
82,190
Total assets
$
15,606,729
$
15,004,007
Liabilities and shareholders’ equity
Liabilities
Accounts payable
$
175,060
$
182,347
Interest and dividends payable
20,284
23,547
Deposit liabilities
7,873,430
7,386,957
Short-term borrowings—other than bank
95,748
129,379
Other bank borrowings
129,665
89,670
Long-term debt, net—other than bank
2,258,043
2,119,129
Deferred income taxes
384,953
395,089
Operating lease liabilities
167,997
160,432
Regulatory liabilities
966,477
959,786
Defined benefit pension and other postretirement benefit plans liability
548,840
567,438
Other
584,610
618,438
Total liabilities
13,205,107
12,632,212
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: 109,311,034 shares and 109,181,124 shares at June 30, 2021 and December 31, 2020, respectively
1,681,820
1,678,368
Retained earnings
714,317
660,398
Accumulated other comprehensive loss, net of tax benefits
(28,808)
(1,264)
Total shareholders’ equity
2,367,329
2,337,502
Total liabilities and shareholders’ equity
$
15,606,729
$
15,004,007
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2020 Form 10-K.
3
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, 2020
109,181
$
1,678,368
$
660,398
$
(1,264)
$
2,337,502
Net income for common stock
—
—
64,358
—
64,358
Other comprehensive loss, net of tax benefits
—
—
—
(44,016)
(44,016)
Share-based expenses and other, net
100
605
—
—
605
Common stock dividends (34¢ per share)
—
—
(37,156)
—
(37,156)
Balance, March 31, 2021
109,281
1,678,973
687,600
(45,280)
2,321,293
Net income for common stock
—
—
63,872
—
63,872
Other comprehensive income, net of taxes
—
—
—
16,472
16,472
Share-based expenses and other, net
30
2,847
—
—
2,847
Common stock dividends (34¢ per share)
—
—
(37,155)
—
(37,155)
Balance, June 30, 2021
109,311
$
1,681,820
$
714,317
$
(28,808)
$
2,367,329
Balance, December 31, 2019
108,973
$
1,678,257
$
622,042
$
(20,039)
$
2,280,260
Impact of adoption of ASU No. 2016-13
—
—
(15,372)
—
(15,372)
Balance, January 1, 2020 after adoption of ASU No. 2016-13
108,973
1,678,257
606,670
(20,039)
2,264,888
Net income for common stock
—
—
33,420
—
33,420
Other comprehensive income, net of taxes
—
—
—
18,212
18,212
Share-based expenses and other, net
172
(3,996)
—
—
(3,996)
Common stock dividends (33¢ per share)
—
—
(36,019)
—
(36,019)
Balance, March 31, 2020
109,145
1,674,261
604,071
(1,827)
2,276,505
Net income for common stock
—
—
48,887
—
48,887
Other comprehensive loss, net of tax benefits
—
—
—
(332)
(332)
Share-based expenses and other, net
36
2,355
—
—
2,355
Common stock dividends (33¢ per share)
—
—
(36,017)
—
(36,017)
Balance, June 30, 2020
109,181
$
1,676,616
$
616,941
$
(2,159)
$
2,291,398
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2020 Form 10-K.
4
Hawaiian Electric Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30
(in thousands)
2021
2020
Cash flows from operating activities
Net income
$
129,176
$
83,253
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation of property, plant and equipment
122,921
119,367
Other amortization
17,896
26,055
Provision for credit losses
(20,642)
25,534
Loans originated, held for sale
(239,761)
(277,738)
Proceeds from sale of loans, held for sale
266,497
259,268
Gain on sale of investment securities, net
(528)
(9,275)
Gain on sale of loans, net
(6,225)
(8,252)
Deferred income taxes
(7,355)
(21,565)
Share-based compensation expense
5,454
4,059
Allowance for equity funds used during construction
(4,568)
(4,209)
Other
(5,037)
(3,854)
Changes in assets and liabilities
Decrease (increase) in accounts receivable and unbilled revenues, net
(41,884)
23,458
Decrease (increase) in fuel oil stock
(43,681)
31,583
Decrease (increase) in regulatory assets
(17,731)
9,432
Increase in regulatory liabilities
5,824
1,717
Increase (decrease) in accounts, interest and dividends payable
2,683
(48,336)
Change in prepaid and accrued income taxes, tax credits and utility revenue taxes
(1,818)
(12,306)
Increase (decrease) in defined benefit pension and other postretirement benefit plans liability
Principal repayments on available-for-sale investment securities
320,597
181,451
Proceeds from sale of available-for-sale investment securities
197,354
169,157
Purchases of held-to-maturity investment securities
(187,172)
—
Proceeds from repayments or maturities of held-to-maturity investment securities
38,401
15,093
Purchase of stock from Federal Home Loan Bank
(32,780)
(22,966)
Redemption of stock from Federal Home Loan Bank
31,460
21,520
Net decrease (increase) in loans held for investment
91,686
(328,356)
Proceeds from sale of residential loans
17,398
—
Capital expenditures
(148,414)
(197,816)
Proceeds from sale of low-income housing investments
—
6,725
Contributions to low income housing investments
(6,478)
(1,951)
Other
7,805
4,469
Net cash used in investing activities
(771,432)
(629,256)
(continued)
5
Hawaiian Electric Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)(continued)
Six months ended June 30
(in thousands)
2021
2020
Cash flows from financing activities
Net increase in deposit liabilities
486,473
758,050
Net increase (decrease) in short-term borrowings with original maturities of three months or less
31,257
(119,211)
Net increase (decrease) in other bank borrowings with original maturities of three months or less
39,995
(20,135)
Proceeds from issuance of short-term debt
—
165,000
Repayment of short-term debt
(65,000)
(100,000)
Proceeds from issuance of other bank borrowings
—
30,000
Proceeds from issuance of long-term debt
191,487
351,942
Repayment of long-term debt and funds transferred for repayment of long-term debt
(51,989)
(177,245)
Withheld shares for employee taxes on vested share-based compensation
(2,002)
(5,700)
Common stock dividends
(74,311)
(72,037)
Preferred stock dividends of subsidiaries
(946)
(946)
Other
(2,037)
(1,672)
Net cash provided by financing activities
552,927
808,046
Net increase (decrease) in cash, cash equivalents and restricted cash
(100,918)
376,173
Cash, cash equivalents and restricted cash, beginning of period
358,979
227,685
Cash, cash equivalents and restricted cash, end of period
258,061
603,858
Less: Restricted cash
(10,618)
(29,376)
Cash and cash equivalents, end of period
$
247,443
$
574,482
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2020 Form 10-K.
6
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidated Statements of Income (unaudited)
Three months ended June 30
Six months ended June 30
(in thousands)
2021
2020
2021
2020
Revenues
$
601,879
$
534,215
$
1,166,743
$
1,131,657
Expenses
Fuel oil
139,136
112,451
266,563
285,672
Purchased power
162,465
136,838
304,761
276,654
Other operation and maintenance
118,142
110,041
232,712
237,588
Depreciation
57,381
55,696
114,736
111,546
Taxes, other than income taxes
57,071
51,388
111,173
108,438
Total expenses
534,195
466,414
1,029,945
1,019,898
Operating income
67,684
67,801
136,798
111,759
Allowance for equity funds used during construction
2,377
2,194
4,568
4,209
Retirement defined benefits credit (expense)—other than service costs
1,020
(382)
2,041
(763)
Interest expense and other charges, net
(17,995)
(17,338)
(35,978)
(33,932)
Allowance for borrowed funds used during construction
812
752
1,559
1,440
Income before income taxes
53,898
53,027
108,988
82,713
Income taxes
11,498
10,199
22,731
15,481
Net income
42,400
42,828
86,257
67,232
Preferred stock dividends of subsidiaries
229
229
458
458
Net income attributable to Hawaiian Electric
42,171
42,599
85,799
66,774
Preferred stock dividends of Hawaiian Electric
270
270
540
540
Net income for common stock
$
41,901
$
42,329
$
85,259
$
66,234
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2020 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 June 30
Six months ended June 30
(in thousands)
2021
2020
2021
2020
Net income for common stock
$
41,901
$
42,329
$
85,259
$
66,234
Other comprehensive income, 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 taxes of $2,028, $1,798, $4,055 and $3,596, respectively
5,846
5,184
11,691
10,368
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes of $(2,016), $(1,789), $(4,031) and $(3,578), respectively
(5,811)
(5,159)
(11,622)
(10,317)
Other comprehensive income, net of taxes
35
25
69
51
Comprehensive income attributable to Hawaiian Electric Company, Inc.
$
41,936
$
42,354
$
85,328
$
66,285
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2020 Form 10-K.
7
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (unaudited)
(dollars in thousands, except par value)
June 30, 2021
December 31, 2020
Assets
Property, plant and equipment
Utility property, plant and equipment
Land
$
51,612
$
51,611
Plant and equipment
7,619,886
7,509,343
Less accumulated depreciation
(2,903,421)
(2,819,079)
Construction in progress
201,802
188,342
Utility property, plant and equipment, net
4,969,879
4,930,217
Nonutility property, plant and equipment, less accumulated depreciation of $57 and $115 as of June 30, 2021 and December 31, 2020, respectively
6,951
6,953
Total property, plant and equipment, net
4,976,830
4,937,170
Current assets
Cash and cash equivalents
23,666
47,360
Restricted cash
8,968
15,966
Customer accounts receivable, net
152,392
147,832
Accrued unbilled revenues, net
132,978
101,036
Other accounts receivable, net
5,168
7,673
Fuel oil stock, at average cost
102,066
58,238
Materials and supplies, at average cost
72,959
67,344
Prepayments and other
31,913
44,083
Regulatory assets
59,905
30,435
Total current assets
590,015
519,967
Other long-term assets
Operating lease right-of-use assets
131,622
127,654
Regulatory assets
707,951
736,273
Other
141,556
136,309
Total other long-term assets
981,129
1,000,236
Total assets
$
6,547,974
$
6,457,373
Capitalization and liabilities
Capitalization
Common stock ($6 2/3 par value, authorized 50,000,000 shares; outstanding 17,324,376 shares at
June 30, 2021 and December 31, 2020)
$
115,515
$
115,515
Premium on capital stock
746,987
746,987
Retained earnings
1,311,744
1,282,335
Accumulated other comprehensive loss, net of tax benefits-retirement benefit plans
(2,850)
(2,919)
Common stock equity
2,171,396
2,141,918
Cumulative preferred stock — not subject to mandatory redemption
34,293
34,293
Long-term debt, net
1,676,043
1,561,302
Total capitalization
3,881,732
3,737,513
Commitments and contingencies (Note 3)
Current liabilities
Current portion of operating lease liabilities
68,090
64,730
Short-term borrowings from non-affiliates
37,999
49,979
Accounts payable
131,633
133,849
Interest and preferred dividends payable
17,827
20,350
Taxes accrued, including revenue taxes
175,814
192,524
Regulatory liabilities
31,713
37,301
Other
60,951
74,262
Total current liabilities
524,027
572,995
Deferred credits and other liabilities
Operating lease liabilities
76,066
69,494
Deferred income taxes
393,275
397,798
Regulatory liabilities
934,764
922,485
Unamortized tax credits
108,286
111,915
Defined benefit pension and other postretirement benefit plans liability
514,075
530,532
Other
115,749
114,641
Total deferred credits and other liabilities
2,142,215
2,146,865
Total capitalization and liabilities
$
6,547,974
$
6,457,373
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2020 Form 10-K.
8
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, 2020
17,324
$
115,515
$
746,987
$
1,282,335
$
(2,919)
$
2,141,918
Net income for common stock
—
—
—
43,358
—
43,358
Other comprehensive income, net of taxes
—
—
—
—
34
34
Common stock dividends
—
—
—
(27,925)
—
(27,925)
Balance, March 31, 2021
17,324
115,515
746,987
1,297,768
(2,885)
2,157,385
Net income for common stock
—
—
—
41,901
—
41,901
Other comprehensive income, net of taxes
—
—
—
—
35
35
Common stock dividends
—
—
—
(27,925)
—
(27,925)
Balance, June 30, 2021
17,324
$
115,515
$
746,987
$
1,311,744
$
(2,850)
$
2,171,396
Balance, December 31, 2019
17,048
$
113,678
$
714,824
$
1,220,129
$
(1,279)
$
2,047,352
Net income for common stock
—
—
—
23,905
—
23,905
Other comprehensive income, net of taxes
—
—
—
—
26
26
Common stock dividends
—
—
—
(26,784)
—
(26,784)
Balance, March 31, 2020
17,048
113,678
714,824
1,217,250
(1,253)
2,044,499
Net income for common stock
—
—
—
42,329
—
42,329
Other comprehensive income, net of taxes
—
—
—
—
25
25
Common stock dividends
—
—
—
(26,784)
—
(26,784)
Balance, June 30, 2020
17,048
$
113,678
$
714,824
$
1,232,795
$
(1,228)
$
2,060,069
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2020 Form 10-K.
9
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30
(in thousands)
2021
2020
Cash flows from operating activities
Net income
$
86,257
$
67,232
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation of property, plant and equipment
114,736
111,546
Other amortization
12,245
16,275
Deferred income taxes
(11,871)
(16,237)
State refundable credit
(5,309)
(5,060)
Bad debt expense
810
1,089
Allowance for equity funds used during construction
(4,568)
(4,209)
Other
810
116
Changes in assets and liabilities
Decrease (increase) in accounts receivable
(12,972)
10,730
Decrease (increase) in accrued unbilled revenues
(31,398)
15,780
Decrease (increase) in fuel oil stock
(43,828)
31,458
Increase in materials and supplies
(5,615)
(5,542)
Decrease (increase) in regulatory assets
(17,731)
9,432
Increase in regulatory liabilities
5,824
1,717
Increase (decrease) in accounts payable
12,297
(48,209)
Change in prepaid and accrued income taxes, tax credits and revenue taxes
(9,051)
(14,700)
Increase (decrease) in defined benefit pension and other postretirement benefit plans liability
(2,549)
14,968
Change in other assets and liabilities
(30,634)
(4,918)
Net cash provided by operating activities
57,453
181,468
Cash flows from investing activities
Capital expenditures
(138,025)
(186,532)
Other
4,670
5,441
Net cash used in investing activities
(133,355)
(181,091)
Cash flows from financing activities
Common stock dividends
(55,850)
(53,568)
Preferred stock dividends of Hawaiian Electric and subsidiaries
(998)
(998)
Proceeds from issuance of short-term debt
—
100,000
Repayment of short-term debt
(50,000)
(100,000)
Proceeds from issuance of long-term debt
115,000
255,000
Repayment of long-term debt and funds transferred for repayment of long-term debt
—
(109,000)
Net Increase (decrease) in short-term borrowings from non-affiliates and affiliates with original maturities of three months or less
37,999
(38,987)
Other
(941)
(1,347)
Net cash provided by financing activities
45,210
51,100
Net increase (decrease) in cash and cash equivalents
(30,692)
51,477
Cash, cash equivalents and restricted cash, beginning of period
63,326
41,894
Cash, cash equivalents and restricted cash, end of period
32,634
93,371
Less: Restricted cash
(8,968)
(29,376)
Cash and cash equivalents, end of period
$
23,666
$
63,995
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2020 Form 10-K.
10
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, 2020.
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 June 30, 2021 and December 31, 2020 and the results of their operations for the three and six months ended June 30, 2021 and 2020 and cash flows for the six months ended June 30, 2021 and 2020. 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.
Income Taxes. In December 2019, Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which removes specific exceptions to the general principles in Topic 740, improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP under certain situations. ASU No. 2019-12 is effective for public business entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company adopted the ASU as of January 1, 2021 with no material impact on its consolidated financial statements and related disclosures.
Leases. On July 19, 2021 FASB issued ASU No. 2021-05, “Leases (Topic 842): Lessors–Certain Leases with Variable Lease Payments.” The ASU allows lessors to treat sales-type leases with variable payments to be classified as operating leases if the sales-type lease treatment under Topic 842 would result in a selling loss at lease commencement (day-one loss). The Company plans to early adopt ASU No. 2021-05 as of September 30, 2021 retrospectively to leases that commenced on or after the adoption of ASU No. 2016-02. The impact of the adoption of ASU No. 2021-05 on the Company’s consolidated financial statements is not expected to be material.
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Note 2 · Segment financial information
(in thousands)
Electric utility
Bank
Other
Total
Three months ended June 30, 2021
Revenues from external customers
$
601,869
$
77,260
$
1,128
$
680,257
Intersegment revenues (eliminations)
10
—
(10)
—
Revenues
$
601,879
$
77,260
$
1,118
$
680,257
Income (loss) before income taxes
$
53,898
$
39,992
$
(10,946)
$
82,944
Income taxes (benefit)
11,498
9,708
(2,607)
18,599
Net income (loss)
42,400
30,284
(8,339)
64,345
Preferred stock dividends of subsidiaries
499
—
(26)
473
Net income (loss) for common stock
$
41,901
$
30,284
$
(8,313)
$
63,872
Six months ended June 30, 2021
Revenues from external customers
$
1,166,724
$
154,391
$
2,088
$
1,323,203
Intersegment revenues (eliminations)
19
—
(19)
—
Revenues
$
1,166,743
$
154,391
$
2,069
$
1,323,203
Income (loss) before income taxes
$
108,988
$
77,094
$
(22,942)
$
163,140
Income taxes (benefit)
22,731
17,254
(6,021)
33,964
Net income (loss)
86,257
59,840
(16,921)
129,176
Preferred stock dividends of subsidiaries
998
—
(52)
946
Net income (loss) for common stock
$
85,259
$
59,840
$
(16,869)
$
128,230
Total assets (at June 30, 2021)
$
6,547,974
$
8,909,904
$
148,851
$
15,606,729
Three months ended June 30, 2020
Revenues from external customers
$
534,206
$
74,714
$
25
$
608,945
Intersegment revenues (eliminations)
9
—
(9)
—
Revenues
$
534,215
$
74,714
$
16
$
608,945
Income (loss) before income taxes
$
53,027
$
17,334
$
(10,131)
$
60,230
Income taxes (benefit)
10,199
3,320
(2,649)
10,870
Net income (loss)
42,828
14,014
(7,482)
49,360
Preferred stock dividends of subsidiaries
499
—
(26)
473
Net income (loss) for common stock
$
42,329
$
14,014
$
(7,456)
$
48,887
Six months ended June 30, 2020
Revenues from external customers
$
1,131,636
$
154,452
$
43
$
1,286,131
Intersegment revenues (eliminations)
21
—
(21)
—
Revenues
$
1,131,657
$
154,452
$
22
$
1,286,131
Income (loss) before income taxes
$
82,713
$
36,303
$
(19,090)
$
99,926
Income taxes (benefit)
15,481
6,528
(5,336)
16,673
Net income (loss)
67,232
29,775
(13,754)
83,253
Preferred stock dividends of subsidiaries
998
—
(52)
946
Net income (loss) for common stock
$
66,234
$
29,775
$
(13,702)
$
82,307
Total assets (at December 31, 2020)
$
6,457,373
$
8,396,533
$
150,101
$
15,004,007
Intercompany electricity sales of the Utilities to ASB and “other” segments are not eliminated because those segments would need to purchase electricity from another source if it were not provided by the Utilities and the profit on such sales is nominal.
Hamakua Energy, LLC’s (Hamakua Energy’s) sales to Hawaii Electric Light (a regulated affiliate) are eliminated in consolidation.
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Note 3 · Electric utility segment
Unconsolidated variable interest entities.
Power purchase agreements. As of June 30, 2021, the Utilities had five PPAs for firm capacity (including the Puna Geothermal Venture (PGV) PPA that went offline in May 2018 due to lava flow on Hawaii Island, but returned to service with firm capacity of 13 MW in the first quarter of 2021 and ramped up to 23.9 MW in the second quarter of 2021) 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. 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.
Contingencies. The Utilities are subject in the normal course of business to pending and threatened legal proceedings. Management does not anticipate that the aggregate ultimate liability arising out of these pending or threatened legal proceedings will be material to its financial position. However, the Utilities cannot rule out the possibility that such outcomes could have a material effect on the results of operations or liquidity for a particular reporting period in the future.
Power purchase agreements.Purchases from all IPPs were as follows:
Three months ended June 30
Six months ended June 30
(in millions)
2021
2020
2021
2020
Kalaeloa
$
49
$
34
$
86
$
72
AES Hawaii
36
32
66
63
HPOWER
14
17
31
34
Hamakua Energy
12
11
23
24
Puna Geothermal Venture
7
—
11
—
Wind IPPs
28
25
57
53
Solar IPPs
16
17
28
28
Other IPPs 1
1
1
3
3
Total IPPs
$
163
$
137
$
305
$
277
1Includes 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 continue 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 give notice of termination of negotiation prior to October 31, 2021, to allow for a negotiated resolution. As a result, since the PPA provides for a 60-day notice of termination of the PPA, the PPA will remain in full force and effect through October 31, 2021, and from month to month thereafter, subject to termination on not less than 60 days notice.
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
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. Hawaiian Electric does not intend to extend the term of the PPA which will expire on September 1, 2022.
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 9, 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 greenhouse gas (GHG) 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. As a result, the PUC reopened the docket for further proceedings, including re-examining all of the issues in the proceedings. On July 9, 2020, the PUC issued an order denying Hawaii Electric Light’s request to waive the amended and restated PPA from the PUC’s competitive bidding requirements and therefore, dismissed the request for approval of the amended and restated PPA without prejudice to possible participation in any future competitive bidding process. On September 9, 2020, the PUC denied Hu Honua’s motion for reconsideration of the PUC’s order. Hu Honua filed its notice of appeal to the Hawaii Supreme Court of the PUC’s order denying Hu Honua’s motion for reconsideration. On May 24, 2021, the Hawaii Supreme Court vacated the PUC’s decision and remanded the matter back to the PUC for further proceedings. On June 30, 2021, the PUC issued an order reopening the docket consistent with the Hawaii Supreme Court’s order.
Molokai New Energy Partners (MNEP). In July 2018, the PUC approved Maui Electric’s PPA with MNEP to purchase solar energy from a photovoltaic (PV) plus battery storage project. The 4.88 MW PV and 3 MW Battery Energy Storage System project was to deliver no more than 2.64 MW at any time to the Molokai system. On March 25, 2020, MNEP filed a complaint in the United Stated District Court for the District of Hawaii against Maui Electric claiming breach of contract. On June 3, 2020, Maui Electric provided Notice of Default and Termination of the PPA to MNEP terminating the PPA with an effective date of July 10, 2020. Thereafter, MNEP filed an amended Complaint to include claims relating to the termination and Hawaiian Electric filed its Answer to the Amended Complaint on September 11, 2020, disputing the facts presented by MNEP and all claims within the original and amended complaint.
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 or community support 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. Hawaii Electric Light and Hawaiian Electric began to incorporate their portion of the deferred project costs in rate base and started the amortization over a 12-year period in January 2020 and November 2020, respectively. The PUC required the benefit savings of the project to be passed on to customers.
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. In October 2019, the PUC approved the Utilities and the Consumer Advocate’s Stipulated Performance Metrics and Tracking Mechanism. As of June 30, 2021, the Utilities’ regulatory liability was $11.1 million ($6.1 million for Hawaiian Electric, $2.0 million for Hawaii Electric Light and $3.0 million for Maui Electric) for the O&M expense savings that are being amortized or to be included in future rates. As part of the settlement agreement approved in the Hawaiian Electric 2020 test year rate case, the regulatory liability for Hawaiian Electric will be amortized over five years, beginning in November 2020, and the O&M benefits for Hawaiian Electric
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
was considered flowed through to customers. As part of the PBR proceeding, the regulatory liability as of December 31, 2020 of approximately $1.6 million and $2.3 million, respectively, for Hawaii Electric Light and Maui Electric was flowed to customers as part of the customer dividend in the annual revenue adjustment in 2021.
At the PUC’s direction, the Utilities have been filing Semi-Annual Enterprise System Benefits (SAESB) reports on the achieved benefits savings. The most recent SAESB report was filed on February 26, 2021 for the period July 1 through December 31, 2020.
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 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 federal Environmental Protection Agency (EPA) has since identified environmental impacts in the subsurface soil at the Site. In cooperation with the DOH 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 June 30, 2021, representing the probable and reasonably estimable undiscounted cost for remediation of the Site and the Adjacent Parcel; however, final costs of remediation will depend on the cleanup approach implemented.
Pearl Harbor sediment study. In July 2014, the U.S. Navy notified Hawaiian Electric of the Navy’s determination that Hawaiian Electric is a Potentially Responsible Party responsible for the costs of investigation and cleanup of PCBs contamination in sediment in the area offshore of the Waiau Power Plant as part of the Pearl Harbor Superfund Site. Hawaiian Electric was also required by the EPA to assess potential sources and extent of PCB contamination onshore at Waiau Power Plant.
As of June 30, 2021, the reserve account balance recorded by Hawaiian Electric to address the PCB contamination was $10.5 million. The reserve balance represents the probable and reasonably estimable undiscounted cost for the onshore and offshore investigation and remediation. The final remediation costs will depend on the actual onshore and 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. Prior to the implementation of the performance-based regulation framework (PBR Framework), the decoupling mechanism had 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 kWh sales, (2) rate adjustment mechanism (RAM) revenues for escalation in certain O&M expenses and rate base changes, (3) major project interim recovery (MPIR) adjustment mechanism, (4) performance incentive mechanisms (PIMs), and (5) an earnings sharing mechanism (ESM), 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.
Performance-based regulation framework. On December 23, 2020, the PUC issued a D&O (PBR D&O) approving the new PBR Framework. Under the PBR Framework, the Utilities’ decoupling will continue to be used with modifications, as described below. The existing cost recovery mechanisms will continue as currently implemented (e.g., the Energy Cost Recovery Clause (ECRC), Purchased Power Adjustment Clause (PPAC), Demand Side Management surcharge (DSM), Renewable Energy Infrastructure Program (REIP), Demand Response Adjustment Clause (DRAC), Pension and Other Post-Employment Benefits (OPEB) tracking mechanisms). In addition to annual revenues provided by the annual revenue adjustment (ARA), the Utilities may seek relief for extraordinary projects or programs through the Exceptional Project Recovery Mechanism (EPRM) (formerly known as the MPIR adjustment mechanism) and earn financial rewards for exemplary performance as provided through a portfolio of PIMs and Shared Savings Mechanisms (SSMs). The PBR Framework will incorporate a variety of other performance mechanisms, including Scorecards, Reported Metrics, and an expedited Pilot Process. The PBR Framework also contains a number of safeguards, including a symmetric ESM which protects the Utilities
15
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
and customers from excessive earnings or losses, as measured by the Utilities’ Return on Equity (ROE) and a Re-Opener mechanism, under which the PUC will open an examination, at its discretion, to determine if adjustments or modifications to specific PBR mechanisms are appropriate.
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). All Utilities were limited to the RAM Cap in 2020. Under the PBR Framework, the ARA mechanism replaced the RAM, and became effective on June 1, 2021. The transition to the ARA includes the continuation of the 2020 RAM revenue adjustment.
Annual revenue adjustment mechanism. The PBR Framework established a five-year multi-year rate period during which there will be no general rate cases. Target revenues will be adjusted according to an index-driven ARA based on (i) an inflation factor, (ii) a predetermined X-factor to encompass productivity, which is set at zero, (iii) a Z-factor to account for exceptional circumstances not in the Utilities’ control and (iv) a customer dividend consisting of a negative adjustment of 0.22% compounded annually and a flow through of the “pre-PBR” savings commitment from the management audit recommendations developed in a prior docket.
As a result of an Order issued by the PUC pursuant to a motion for partial reconsideration the customer dividend for “pre-PBR” savings commitment portion to be delivered to customers will be at a rate of $6.6 million per year from 2021 to 2025, and the Enterprise Resource Planning system benefits savings of $3.9 million, to be delivered to customers in 2021. The implementation of the ARA occurred on June 1, 2021.
Earnings sharing mechanism. A symmetrical ESM for actual return on equity outside of a 300 basis points dead band above and below a target ROE of 9.5%, which is the current authorized ROE for the Utilities. There is a 50/50 sharing between customers and Utilities for the actual earnings falling within 150 basis points outside of the dead band in either direction, and a 90/10 sharing for any further difference.A reopening or review of the PBR terms will be triggered if the Utilities credit rating outlook indicates a potential credit downgrade below investment grade status, or if its earned ROE enters the outer most tier of the ESM.
Major project interim recovery. On April 27, 2017, the PUC issued an order that provided guidelines for interim recovery of revenues to support major projects placed in service between general rate cases.
Projects eligible for recovery through the MPIR adjustment mechanism are major projects (i.e., projects with capital expenditures net of customer contributions in excess of $2.5 million), including, but not restricted to, renewable energy, energy efficiency, utility scale generation, grid modernization and smaller qualifying projects grouped into programs for review. The MPIR adjustment mechanism provides the opportunity to recover revenues for approved costs of eligible projects placed in service between general rate cases wherein cost recovery is limited by a revenue cap and is not provided by other effective recovery mechanisms. The request for PUC approval must include a business case, and all costs that are allowed to be recovered through the MPIR adjustment mechanism must be offset by any related benefits. The guidelines provide for accrual of revenues approved for recovery upon in-service date to be collected from customers through the annual RBA tariff. Capital projects that are not recovered through the MPIR would be included in the RAM and be subject to the RAM Cap, until the next rate case when the Utilities would request recovery in base rates.
On May 26, 2021, the PUC approved 2021 MPIR amounts totaling $21.8 million, including revenue taxes, for the Schofield Generating Station ($17.6 million), West Loch PV Project ($3.3 million), and Grid Modernization Strategy Phase 1 project ($0.9 million for all three utilities) for the accrual of revenues effective January 1, 2021, that included the 2021 return on project amount (based on approved amounts) in rate base, depreciation and incremental O&M expenses. Under the PBR framework, the Utilities began recovery of the annualized 2021 MPIR amounts effective June 1, 2021 through the RBA rate adjustment.
Exceptional project recovery mechanism. Under the PBR framework, the existing MPIR adjustment mechanism was renamed EPRM to include deferred and O&M expense projects and to permit the Utilities to include the full amount of approved costs in the EPRM for recovery in the first year the project goes into service, pro-rated for the portion of the year the project is in service.Any pending application for MPIR relief submitted by the Utilities prior to the PBR D&O, will be grandfathered under the MPIR Guidelines. The Utilities may alternatively request that pending MPIR applications be reviewed under EPRM Guidelines. EPRM recovery will be in accordance with the EPRM Guidelines limited to the lesser of actual incurred project costs or PUC-approved amounts, net of savings. Currently, the Utilities are seeking EPRM recovery of seven projects with total project costs of $245 million, subject to PUC approval.
16
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Pilot process. The PBR D&O approved a Pilot Process to foster innovation by establishing an expedited implementation process for pilots that test new technologies, programs, business models, and other arrangements. This is intended to support initiatives by the Utilities to test new programs and ideas quickly and elevate any successful pilots for consideration of full-scale implementation. The proposed pilots would be subject to PUC approval with a total annual cap of $10 million. The Pilot Process will feature the two primary activities: an initial “Workplan Development” phase, during which the Utilities identify and scope areas of interests, so as to inform the subsequent “Implementation” phase, during which the Utilities submit specific pilot proposals for expedited review by the PUC and implement the pilot upon approval. The PUC will issue an order, approving, denying, or modifying a proposed Pilot within 45 days of receiving notice of a specific pilot project.
On July 9, 2021, the PUC issued an order approving the Utilities’ proposed Pilot Process submitted in April 2021, including a cost recovery process that generally allows the Utilities to defer and recover total annual expenditures of approved pilot projects in full over twelve months beginning June 1 of the year following implementation through the RBA rate adjustment, although the Utilities may determine on a case-by-case basis that a particular project’s deferred costs should be amortized over a period greater than twelve months.
Performance incentive mechanisms. The PUC has established the following PIMs: (1) Service Quality performance incentives, (2) Phase 1 Request for proposal (RFP) PIM for procurement of low-cost renewable energy, (3) Phase 2 RFP PIMs for generation and generation plus storage project, and Grid Services and standalone storage.
•Service Quality performance incentives (ongoing). 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 $6.8 million - for both indices in total for the three utilities).
•Call Center Performance measured by the percentage of calls answered within 30 seconds. Target performance is based on the annual average performance for each utility for the most recent 8 quarters with a deadband of 3% above and below the target. The maximum penalty or reward is 8 basis points applied to the common equity share of each respective utility’s approved rate base (or maximum penalties or rewards of approximately $1.4 million - in total for the three utilities).
In December 2020, the Utilities accrued $0.9 million in estimated rewards for call center performance, net of service reliability penalties, for 2020. The net service quality performance rewards related to 2020 was reflected in the 2021 annual decoupling filing which was approved by the PUC on May 26, 2021, resulting in an increase to customer rates effective June 1, 2021.
•Phase 1 RFP PIM. Procurement of low-cost variable renewable resources through the RFP process in 2018 is measured by comparison of the procurement price to target prices. Half of the incentive was earned upon PUC approval of the PPAs. Based on the seven PPAs approved in 2019, the Utilities recognized $1.7 million in 2019 with the remaining award to be recognized in the year following the in-service date of the projects, which is estimated to occur from 2023 to 2024.
•Phase 2 RFP PIMs. The PUC order issued on October 9, 2019 establishes pricing thresholds, timelines to complete contracting, and other performance criteria for the performance incentive eligibility. The PIMs provide incentives only without penalties. The order requires contracts under the Grid Service RFP be filed for approval by May 2020 (subsequently extended to July 9, 2020), and by September 2020 under the Renewable RFPs, with a declining PIM for projects that are not filed by these deadlines. On July 9, 2020, the Utilities filed two Grid Service Purchase Agreements for the Grid Service RFP that potentially qualify for a demand response PIM, however, details of the incentive metrics will be determined by the PUC. On September 15, 2020, the Utilities filed eight power purchase agreements for the Phase 2 RFP. Of those eight, only one project qualified for a potential PIM incentive. On February 16, 2021, the Utilities filed one additional power purchase agreement that qualifies for the declining PIM. On December 31, 2020, the PUC approved the two Grid Services Purchase Agreements without further clarification regarding the demand response PIM. The Utility filed a letter in January 2021 with the PUC seeking guidance on the next steps to define the demand response incentive metric details.
•The PUC established the following two new PIMs in its PBR D&O, which were approved in an order issued on March 23, 2021 and became effective on June 1, 2021.
17
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
•Renewable portfolio standard (RPS)-A PIM that provides a financial reward for accelerating the achievement of RPS goals. The Utilities may earn a reward for the amount of system generation above the interpolated statutory RPS goal at $20/MWh in 2021 and 2022, $15/MWh in 2023, and $10/MWh for the remainder of the multi-year rate period (MRP). Penalties are already prescribed in the RPS as $20/MWh for failing to meet RPS targets in 2030, 2040 and 2045. The evaluation period commenced on January 1, 2021.
•Grid Services Procurement PIM that provides financial rewards for grid services acquired in 2021 and 2022. The Utilities can earn a total maximum reward of $1.5 million over 2021 and 2022. The evaluation period commenced on January 1, 2021.
•The PUC also established the following three new PIMs in its PBR D&O, which were approved by the PUC on May 17, 2021 and became effective on June 1, 2021.
•Interconnection Approval PIM that provides financial rewards and penalties for interconnection times for distributed energy resources systems <100 kW in size. The Utilities can earn a total annual maximum reward of $3.0 million or a total annual maximum penalty of $0.9 million. The evaluation period commenced on January 1, 2021.
•Low-to-Moderate Income (LMI) Energy Efficiency PIM that provides financial reward for collaboration between the Utilities and the third-party Public Benefits Fee Administrator to deliver energy savings for low- and moderate-income customers. The Utilities can earn a total annual maximum reward of $2.0 million. The PIM will initially have a duration of three years and be subject to an annual review. The evaluation period is based on Hawaii Energy’s program year with the initial evaluation year being the period of July 1, 2021 through June 30, 2022.
•Advanced Metering Infrastructure Utilization PIM that provides financial rewards for leveraging grid modernization investments and engaging customers beyond what is already planned in the Phase 1 Grid Modernization program. The Utilities can earn a total annual maximum reward of $2.0 million. The PIM will initially have a duration of three years after which it will be re-evaluated. The evaluation period commenced on January 1, 2021.
Annual decoupling filings. The filing reflected ARA revenues for 2021 to be collected from June 1 through December 31, 2021, as follows:
(in millions)
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Total
2021 ARA revenues
$
6.9
$
1.7
$
1.7
$
10.3
Management Audit savings commitment
(4.6)
(1.0)
(1.0)
(6.6)
Net incremental revenues
$
2.3
$
0.7
$
0.7
$
3.7
The net incremental amounts to be collected (refunded) from June 1, 2021 through December 31, 2021 under the RBA rate tariffs are as follows:
(in millions)
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Total
Incremental RAM revenues and ARA revenues
$
(14.7)
$
(2.2)
$
(6.1)
$
(23.0)
Annual change in accrued RBA balance as of December 31, 2020 (and associated revenue taxes)
Net incremental amount to be collected under the RBA rate tariffs
$
8.3
$
3.8
$
5.3
$
17.4
Note: Columns may not foot due to rounding.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Most recent rate proceedings.
Hawaiian Electric 2020 test year rate case. On October 22, 2020, the PUC issued a final D&O approving the stipulated settlement agreement filed in the proceeding. As a result, there will be no increase in base electric rates established in the 2017 test year rate case. In the final D&O, the PUC approved the capital structure that consists of a 58% total equity ratio, and a ROACE of 9.5% for the 2020 test year. The resulting return on rate base (RORB) is 7.37%. The D&O approved the agreement to implement the overall lower depreciation rates approved in the last depreciation study proceeding, effective January 1, 2020. See “Annual revenue adjustment mechanism” under “Performance-based regulation framework” above, regarding the PUC’s decision on the treatment of Hawaiian Electric’s Management Audit savings commitment. Hawaiian Electric’s proposed RBA provision tariff and ECRC tariff submitted on November 6, 2020 were approved by the PUC on December 11, 2020 and took effect on January 1, 2021.
Hawaii Electric Light 2019 test year rate case. On July 28, 2020, the PUC issued a final D&O, approving the Stipulated Partial Settlement Letter in part and ordering final rates for the 2019 test year to remain at current effective rates such that there is a zero increase in rates. The PUC determined that an appropriate ROACE for the 2019 test year is 9.5%, approved a capital structure of 58% total equity and approved as fair a 7.52% RORB. In addition, the order, among others, (1) approved a 10-year amortization period for the state investment tax credit; and (2) approved a modification to Hawaii Electric Light’s ECRC to incorporate a 98%/2% risk-sharing split between customers and Hawaii Electric Light with an annual maximum exposure cap of +/- $600,000. The proposed final tariffs and PIM tariffs took effect on November 1, 2020, and the ECRC tariff took effect on January 1, 2021.
Regulatory assets for COVID-19 related costs. On May 4, 2020, the PUC issued an order, authorizing all utilities, including the Utilities, to establish regulatory assets to record costs resulting from the suspension of disconnections of service during the pendency of the Governor’s Emergency Proclamation and until otherwise ordered by the PUC. In future proceedings, the PUC will consider the reasonableness of the costs, the appropriate period of recovery, any amount of carrying costs thereon, and any savings directly attributable to suspension of disconnects, and other related matters. As part of the order, the PUC prohibits the Utilities from charging late payment fees on past due payments. On June 30, 2020, the PUC issued an order approving the Utilities’ request made in April 2020 for deferral treatment of COVID-19 related costs through December 31, 2020. On March 8, 2021, the PUC approved the Utilities’ request to extend the deferral period to June 30, 2021. The Utilities’ request to extend the deferral period to December 31, 2021 is pending PUC approval. The Utilities are required to file quarterly reports to update the Utilities’ financial condition, report measures in place to assist their customers during the COVID-19 emergency situation, identify the planned deferred costs and details for the deferred costs, and identify funds received or benefits received that have resulted from the COVID-19 emergency period. The recovery of the regulatory assets would be determined in a subsequent proceeding and management believes the deferred costs are probable of recovery. In addition, starting in December 2020 and monthly moving forward until otherwise ordered by the PUC, the Utilities are required to file information on, among other things, number of customers, arrears balances, payment arrangements entered into, and available assistance used to assists customer bill payment. The monthly report is intended to assist the PUC in determining next steps regarding appropriate regulatory measures. As of June 30, 2021, the Utilities recorded a total of $25.6 million in regulatory assets pursuant to the orders.
Collective bargaining agreement. As of June 30, 2021, approximately 47% of the Utilities’ employees are members of the International Brotherhood of Electrical Workers, AFL-CIO, Local 1260. The current collective bargaining agreement with the union is set to expire on October 31, 2021. The Utilities are currently renegotiating the contract with the union.
Condensed consolidating financial information. Condensed consolidating financial information for Hawaiian Electric and its subsidiaries are presented for the three and six month periods ended June 30, 2021 and 2020, and as of June 30, 2021 and December 31, 2020.
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.
19
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Income
Three months ended June 30, 2021
(in thousands)
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Other subsidiaries
Consolidating adjustments
Hawaiian Electric
Consolidated
Revenues
$
422,697
91,512
87,670
—
—
$
601,879
Expenses
Fuel oil
91,345
19,586
28,205
—
—
139,136
Purchased power
124,948
24,236
13,281
—
—
162,465
Other operation and maintenance
77,903
19,474
20,765
—
—
118,142
Depreciation
38,907
10,053
8,421
—
—
57,381
Taxes, other than income taxes
40,301
8,539
8,231
—
—
57,071
Total expenses
373,404
81,888
78,903
—
—
534,195
Operating income
49,293
9,624
8,767
—
—
67,684
Allowance for equity funds used during construction
1,930
140
307
—
—
2,377
Equity in earnings of subsidiaries
10,744
—
—
—
(10,744)
—
Retirement defined benefits expense—other than service costs
884
169
(33)
—
—
1,020
Interest expense and other charges, net
(12,829)
(2,573)
(2,593)
—
—
(17,995)
Allowance for borrowed funds used during construction
654
48
110
—
—
812
Income before income taxes
50,676
7,408
6,558
—
(10,744)
53,898
Income taxes
8,505
1,668
1,325
11,498
Net income
42,171
5,740
5,233
—
(10,744)
42,400
Preferred stock dividends of subsidiaries
—
133
96
—
229
Net income attributable to Hawaiian Electric
42,171
5,607
5,137
—
(10,744)
42,171
Preferred stock dividends of Hawaiian Electric
270
—
—
—
—
270
Net income for common stock
$
41,901
5,607
5,137
—
(10,744)
$
41,901
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Comprehensive Income
Three months ended June 30, 2021
(in thousands)
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Other subsidiaries
Consolidating adjustments
Hawaiian Electric Consolidated
Net income for common stock
$
41,901
5,607
5,137
—
(10,744)
$
41,901
Other comprehensive income, 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
5,846
834
761
—
(1,595)
5,846
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes
(5,811)
(834)
(761)
—
1,595
(5,811)
Other comprehensive income, net of taxes
35
—
—
—
—
35
Comprehensive income attributable to common shareholder
$
41,936
5,607
5,137
—
(10,744)
$
41,936
20
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Income
Three months ended June 30, 2020
(in thousands)
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Other subsidiaries
Consolidating adjustments
Hawaiian Electric
Consolidated
Revenues
$
380,634
78,505
75,216
—
(140)
$
534,215
Expenses
Fuel oil
77,290
16,254
18,907
—
—
112,451
Purchased power
108,946
15,846
12,046
—
—
136,838
Other operation and maintenance
74,274
17,581
18,186
—
—
110,041
Depreciation
37,860
9,761
8,075
—
—
55,696
Taxes, other than income taxes
36,673
7,470
7,245
—
—
51,388
Total expenses
335,043
66,912
64,459
—
—
466,414
Operating income
45,591
11,593
10,757
—
(140)
67,801
Allowance for equity funds used during construction
1,807
193
194
—
—
2,194
Equity in earnings of subsidiaries
13,776
—
—
—
(13,776)
—
Retirement defined benefits expense—other than service costs
(546)
193
(29)
—
—
(382)
Interest expense and other charges, net
(12,499)
(2,533)
(2,446)
—
140
(17,338)
Allowance for borrowed funds used during construction
626
62
64
—
—
752
Income before income taxes
48,755
9,508
8,540
—
(13,776)
53,027
Income taxes
6,156
2,196
1,847
10,199
Net income
42,599
7,312
6,693
—
(13,776)
42,828
Preferred stock dividends of subsidiaries
—
133
96
—
229
Net income attributable to Hawaiian Electric
42,599
7,179
6,597
—
(13,776)
42,599
Preferred stock dividends of Hawaiian Electric
270
—
—
—
—
270
Net income for common stock
$
42,329
7,179
6,597
—
(13,776)
$
42,329
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Comprehensive Income
Three months ended June 30, 2020
(in thousands)
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Other subsidiaries
Consolidating adjustments
Hawaiian Electric Consolidated
Net income for common stock
$
42,329
7,179
6,597
—
(13,776)
$
42,329
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
5,184
751
650
—
(1,401)
5,184
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes
(5,159)
(748)
(653)
—
1,401
(5,159)
Other comprehensive income (loss), net of taxes
25
3
(3)
—
—
25
Comprehensive income attributable to common shareholder
$
42,354
7,182
6,594
—
(13,776)
$
42,354
21
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Income
Six months ended June 30, 2021
(in thousands)
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Other subsidiaries
Consolidating adjustments
Hawaiian Electric Consolidated
Revenues
$
823,251
176,661
166,851
—
(20)
$
1,166,743
Expenses
Fuel oil
180,073
36,071
50,419
—
—
266,563
Purchased power
233,552
45,833
25,376
—
—
304,761
Other operation and maintenance
155,238
37,386
40,088
—
—
232,712
Depreciation
77,821
20,101
16,814
—
—
114,736
Taxes, other than income taxes
78,928
16,532
15,713
—
—
111,173
Total expenses
725,612
155,923
148,410
—
—
1,029,945
Operating income
97,639
20,738
18,441
—
(20)
136,798
Allowance for equity funds used during construction
3,678
272
618
—
—
4,568
Equity in earnings of subsidiaries
23,254
—
—
—
(23,254)
—
Retirement defined benefits expense—other than service costs
1,770
337
(66)
—
—
2,041
Interest expense and other charges, net
(25,661)
(5,154)
(5,183)
—
20
(35,978)
Allowance for borrowed funds used during construction
1,245
92
222
—
—
1,559
Income before income taxes
101,925
16,285
14,032
—
(23,254)
108,988
Income taxes
16,126
3,719
2,886
—
—
22,731
Net income
85,799
12,566
11,146
—
(23,254)
86,257
Preferred stock dividends of subsidiaries
—
267
191
—
—
458
Net income attributable to Hawaiian Electric
85,799
12,299
10,955
—
(23,254)
85,799
Preferred stock dividends of Hawaiian Electric
540
—
—
—
—
540
Net income for common stock
$
85,259
12,299
10,955
—
(23,254)
$
85,259
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Comprehensive Income
Six months ended June 30, 2021
(in thousands)
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Other subsidiaries
Consolidating adjustments
Hawaiian Electric Consolidated
Net income for common stock
$
85,259
12,299
10,955
—
(23,254)
$
85,259
Other comprehensive income, 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 taxes
11,691
1,669
1,522
—
(3,191)
11,691
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes
(11,622)
(1,668)
(1,522)
—
3,190
(11,622)
Other comprehensive income, net of taxes
69
1
—
—
(1)
69
Comprehensive income attributable to common shareholder
$
85,328
12,300
10,955
—
(23,255)
$
85,328
22
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Income
Six months ended June 30, 2020
(in thousands)
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Other subsidiaries
Consolidating adjustments
Hawaiian Electric Consolidated
Revenues
$
801,800
167,798
162,414
—
(355)
$
1,131,657
Expenses
Fuel oil
197,825
38,686
49,161
—
—
285,672
Purchased power
216,897
35,367
24,390
—
—
276,654
Other operation and maintenance
159,911
36,685
40,992
—
—
237,588
Depreciation
75,871
19,521
16,154
—
—
111,546
Taxes, other than income taxes
77,174
15,812
15,452
—
—
108,438
Total expenses
727,678
146,071
146,149
—
—
1,019,898
Operating income
74,122
21,727
16,265
—
(355)
111,759
Allowance for equity funds used during construction
3,550
312
347
—
—
4,209
Equity in earnings of subsidiaries
22,580
—
—
—
(22,580)
—
Retirement defined benefits expense—other than service costs
(1,092)
387
(58)
—
—
(763)
Interest expense and other charges, net
(24,501)
(5,017)
(4,769)
—
355
(33,932)
Allowance for borrowed funds used during construction
1,228
98
114
—
—
1,440
Income before income taxes
75,887
17,507
11,899
—
(22,580)
82,713
Income taxes
9,113
3,994
2,374
—
—
15,481
Net income
66,774
13,513
9,525
—
(22,580)
67,232
Preferred stock dividends of subsidiaries
—
267
191
—
—
458
Net income attributable to Hawaiian Electric
66,774
13,246
9,334
—
(22,580)
66,774
Preferred stock dividends of Hawaiian Electric
540
—
—
—
—
540
Net income for common stock
$
66,234
13,246
9,334
—
(22,580)
$
66,234
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Comprehensive Income
Six months ended June 30, 2020
(in thousands)
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Other subsidiaries
Consolidating adjustments
Hawaiian Electric Consolidated
Net income for common stock
$
66,234
13,246
9,334
—
(22,580)
$
66,234
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
10,368
1,499
1,302
—
(2,801)
10,368
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes
(10,317)
(1,495)
(1,305)
—
2,800
(10,317)
Other comprehensive income (loss), net of taxes
51
4
(3)
—
(1)
51
Comprehensive income attributable to common shareholder
$
66,285
13,250
9,331
—
(22,581)
$
66,285
23
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Balance Sheet
June 30, 2021
(in thousands)
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Other subsi- diaries
Consoli- dating adjustments
Hawaiian Electric Consolidated
Assets
Property, plant and equipment
Utility property, plant and equipment
Land
$
42,412
5,606
3,594
—
—
$
51,612
Plant and equipment
5,030,706
1,368,603
1,220,577
—
—
7,619,886
Less accumulated depreciation
(1,735,717)
(612,065)
(555,639)
—
—
(2,903,421)
Construction in progress
159,300
12,961
29,541
—
—
201,802
Utility property, plant and equipment, net
3,496,701
775,105
698,073
—
—
4,969,879
Nonutility property, plant and equipment, less accumulated depreciation
5,304
115
1,532
—
—
6,951
Total property, plant and equipment, net
3,502,005
775,220
699,605
—
—
4,976,830
Investment in wholly owned subsidiaries, at equity
635,296
—
—
—
(635,296)
—
Current assets
Cash and cash equivalents
17,367
3,754
2,468
77
—
23,666
Restricted cash
8,968
—
—
—
—
8,968
Advances to affiliates
3,800
—
—
—
(3,800)
—
Customer accounts receivable, net
104,190
25,316
22,886
—
—
152,392
Accrued unbilled revenues, net
98,422
17,169
17,387
—
—
132,978
Other accounts receivable, net
13,370
4,036
4,661
—
(16,899)
5,168
Fuel oil stock, at average cost
74,673
11,193
16,200
—
—
102,066
Materials and supplies, at average cost
42,641
10,326
19,992
—
—
72,959
Prepayments and other
25,319
4,510
2,084
—
—
31,913
Regulatory assets
47,934
3,911
8,060
—
—
59,905
Total current assets
436,684
80,215
93,738
77
(20,699)
590,015
Other long-term assets
Operating lease right-of-use assets
107,191
24,095
336
—
—
131,622
Regulatory assets
494,195
109,656
104,100
—
—
707,951
Other
110,278
18,970
18,290
—
(5,982)
141,556
Total other long-term assets
711,664
152,721
122,726
—
(5,982)
981,129
Total assets
$
5,285,649
1,008,156
916,069
77
(661,977)
$
6,547,974
Capitalization and liabilities
Capitalization
Common stock equity
$
2,171,396
322,451
312,768
77
(635,296)
$
2,171,396
Cumulative preferred stock—not subject to mandatory redemption
22,293
7,000
5,000
—
—
34,293
Long-term debt, net
1,176,353
246,335
253,355
—
—
1,676,043
Total capitalization
3,370,042
575,786
571,123
77
(635,296)
3,881,732
Current liabilities
Current portion of operating lease liabilities
64,725
3,331
34
—
—
68,090
Short-term borrowings from non-affiliates
37,999
—
—
—
—
37,999
Short-term borrowings from affiliate
—
3,100
700
—
(3,800)
—
Accounts payable
90,840
18,624
22,169
—
—
131,633
Interest and preferred dividends payable
12,801
2,694
2,333
—
(1)
17,827
Taxes accrued, including revenue taxes
122,268
27,743
25,803
—
—
175,814
Regulatory liabilities
18,306
5,653
7,754
—
—
31,713
Other
50,487
11,508
16,004
—
(17,048)
60,951
Total current liabilities
397,426
72,653
74,797
—
(20,849)
524,027
Deferred credits and other liabilities
Operating lease liabilities
54,992
20,764
310
—
—
76,066
Deferred income taxes
280,920
53,115
59,240
—
—
393,275
Regulatory liabilities
666,554
175,771
92,439
—
—
934,764
Unamortized tax credits
79,867
14,890
13,529
—
—
108,286
Defined benefit pension and other postretirement benefit plans liability
367,530
75,010
77,367
—
(5,832)
514,075
Other
68,318
20,167
27,264
—
—
115,749
Total deferred credits and other liabilities
1,518,181
359,717
270,149
—
(5,832)
2,142,215
Total capitalization and liabilities
$
5,285,649
1,008,156
916,069
77
(661,977)
$
6,547,974
24
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Balance Sheet
December 31, 2020
(in thousands)
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Other subsi-diaries
Consoli- dating adjustments
Hawaiian Electric Consolidated
Assets
Property, plant and equipment
Utility property, plant and equipment
Land
$
42,411
5,606
3,594
—
—
$
51,611
Plant and equipment
4,960,470
1,352,885
1,195,988
—
—
7,509,343
Less accumulated depreciation
(1,677,256)
(597,606)
(544,217)
—
—
(2,819,079)
Construction in progress
143,616
13,043
31,683
—
—
188,342
Utility property, plant and equipment, net
3,469,241
773,928
687,048
—
—
4,930,217
Nonutility property, plant and equipment, less accumulated depreciation
5,306
115
1,532
—
—
6,953
Total property, plant and equipment, net
3,474,547
774,043
688,580
—
—
4,937,170
Investment in wholly owned subsidiaries,at equity
626,890
—
—
—
(626,890)
—
Current assets
Cash and cash equivalents
42,205
3,046
2,032
77
—
47,360
Restricted cash
15,966
—
—
—
—
15,966
Advances to affiliates
26,700
—
—
—
(26,700)
—
Customer accounts receivable, net
102,736
23,989
21,107
—
—
147,832
Accrued unbilled revenues, net
73,628
13,631
13,777
—
—
101,036
Other accounts receivable, net
17,984
3,028
2,856
—
(16,195)
7,673
Fuel oil stock, at average cost
38,777
8,471
10,990
—
—
58,238
Materials and supplies, at average cost
38,786
9,896
18,662
—
—
67,344
Prepayments and other
34,306
5,197
4,580
—
—
44,083
Regulatory assets
22,095
1,954
6,386
—
—
30,435
Total current assets
413,183
69,212
80,390
77
(42,895)
519,967
Other long-term assets
Operating lease right-of-use assets
125,858
1,443
353
—
—
127,654
Regulatory assets
513,192
114,461
108,620
—
—
736,273
Other
98,307
17,992
20,010
—
—
136,309
Total other long-term assets
737,357
133,896
128,983
—
—
1,000,236
Total assets
$
5,251,977
977,151
897,953
77
(669,785)
$
6,457,373
Capitalization and liabilities
Capitalization
Common stock equity
$
2,141,918
317,451
309,363
77
(626,891)
$
2,141,918
Cumulative preferred stock—not subject to mandatory redemption
22,293
7,000
5,000
—
—
34,293
Long-term debt, net
1,116,426
216,447
228,429
—
—
1,561,302
Total capitalization
3,280,637
540,898
542,792
77
(626,891)
3,737,513
Current liabilities
Current portion of operating lease liabilities
64,599
98
33
—
—
64,730
Short-term borrowings-non-affiliate
49,979
—
—
—
—
49,979
Short-term borrowings-affiliate
—
18,800
7,900
—
(26,700)
—
Accounts payable
97,102
19,570
17,177
—
—
133,849
Interest and preferred dividends payable
14,480
3,138
2,790
—
(58)
20,350
Taxes accrued, including revenue taxes
135,018
29,869
27,637
—
—
192,524
Regulatory liabilities
20,224
8,785
8,292
—
—
37,301
Other
57,926
13,851
18,621
—
(16,136)
74,262
Total current liabilities
439,328
94,111
82,450
—
(42,894)
572,995
Deferred credits and other liabilities
Operating lease liabilities
67,824
1,344
326
—
—
69,494
Deferred income taxes
282,685
54,108
61,005
—
—
397,798
Regulatory liabilities
656,270
173,938
92,277
—
—
922,485
Unamortized tax credits
82,563
15,363
13,989
—
—
111,915
Defined benefit pension and other postretirement benefit plans liability
373,112
77,679
79,741
—
—
530,532
Other
69,558
19,710
25,373
—
—
114,641
Total deferred credits and other liabilities
1,532,012
342,142
272,711
—
—
2,146,865
Total capitalization and liabilities
$
5,251,977
977,151
897,953
77
(669,785)
$
6,457,373
25
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Changes in Common Stock Equity
Six months ended June 30, 2021
(in thousands)
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Other subsidiaries
Consolidating adjustments
Hawaiian Electric Consolidated
Balance, December 31, 2020
$
2,141,918
317,451
309,363
77
(626,891)
$
2,141,918
Net income for common stock
85,259
12,299
10,955
—
(23,254)
85,259
Other comprehensive income, net of taxes
69
1
—
—
(1)
69
Common stock dividends
(55,850)
(7,300)
(7,550)
—
14,850
(55,850)
Balance, June 30, 2021
$
2,171,396
322,451
312,768
77
(635,296)
$
2,171,396
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Changes in Common Stock Equity
Six months ended June 30, 2020
(in thousands)
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Other subsidiaries
Consolidating adjustments
Hawaiian Electric Consolidated
Balance, December 31, 2019
$
2,047,352
298,998
292,870
101
(591,969)
$
2,047,352
Net income for common stock
66,234
13,246
9,334
—
(22,580)
66,234
Other comprehensive income (loss), net of taxes
51
4
(3)
—
(1)
51
Common stock dividends
(53,568)
(8,160)
(7,192)
—
15,352
(53,568)
Balance, June 30, 2020
$
2,060,069
304,088
295,009
101
(599,198)
$
2,060,069
26
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Cash Flows
Six months ended June 30, 2021
(in thousands)
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Other subsidiaries
Consolidating adjustments
Hawaiian Electric Consolidated
Net cash provided by operating activities
$
43,623
15,315
13,365
—
(14,850)
$
57,453
Cash flows from investing activities
Capital expenditures
(92,352)
(22,135)
(23,538)
—
—
(138,025)
Advances from affiliates
22,900
—
—
—
(22,900)
—
Other
3,087
911
672
—
—
4,670
Net cash used in investing activities
(66,365)
(21,224)
(22,866)
—
(22,900)
(133,355)
Cash flows from financing activities
Common stock dividends
(55,850)
(7,300)
(7,550)
—
14,850
(55,850)
Preferred stock dividends of Hawaiian Electric and subsidiaries
(540)
(267)
(191)
—
—
(998)
Repayment of short-term debt
(50,000)
—
—
—
—
(50,000)
Proceeds from issuance of long-term debt
60,000
30,000
25,000
—
—
115,000
Net increase (decrease) in short-term borrowings from non-affiliates and affiliate with original maturities of three months or less
37,999
(15,700)
(7,200)
—
22,900
37,999
Other
(703)
(116)
(122)
—
—
(941)
Net cash provided by (used in) financing activities
(9,094)
6,617
9,937
—
37,750
45,210
Net increase (decrease) in cash and cash equivalents
(31,836)
708
436
—
—
(30,692)
Cash, cash equivalents and restricted cash, beginning of period
58,171
3,046
2,032
77
—
63,326
Cash, cash equivalents and restricted cash, end of period
26,335
3,754
2,468
77
—
32,634
Less: Restricted cash
(8,968)
—
—
—
—
(8,968)
Cash and cash equivalents, end of period
$
17,367
3,754
2,468
77
—
$
23,666
27
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Cash Flows
Six months ended June 30, 2020
(in thousands)
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Other subsidiaries
Consolidating adjustments
Hawaiian Electric Consolidated
Net cash provided by operating activities
$
154,967
20,307
21,601
—
(15,407)
$
181,468
Cash flows from investing activities
Capital expenditures
(129,829)
(30,785)
(25,918)
—
—
(186,532)
Advances from affiliates
14,200
8,000
—
—
(22,200)
—
Other
4,354
552
480
—
55
5,441
Net cash used in investing activities
(111,275)
(22,233)
(25,438)
—
(22,145)
(181,091)
Cash flows from financing activities
Common stock dividends
(53,568)
(8,160)
(7,192)
—
15,352
(53,568)
Preferred stock dividends of Hawaiian Electric and subsidiaries
(540)
(267)
(191)
—
—
(998)
Proceeds from issuance of short-term debt
100,000
—
—
—
—
100,000
Repayment of short-term debt
(100,000)
—
—
—
—
(100,000)
Proceeds from issuance of long-term debt
205,000
10,000
40,000
—
—
255,000
Repayment of long-term debt and funds transferred for repayment of long-term debt
(95,000)
(14,000)
—
—
—
(109,000)
Net increase (decrease) in short-term borrowings from non-affiliates and affiliate with original maturities of three months or less
(46,987)
12,000
(26,200)
—
22,200
(38,987)
Other
(1,039)
(61)
(247)
—
—
(1,347)
Net cash provided by (used in) financing activities
7,866
(488)
6,170
—
37,552
51,100
Net increase (decrease) in cash and cash equivalents
51,558
(2,414)
2,333
—
—
51,477
Cash, cash equivalents and restricted cash, beginning of period
32,988
7,008
1,797
101
—
41,894
Cash, cash equivalents and restricted cash, end of period
84,546
4,594
4,130
101
—
93,371
Less: Restricted cash
(29,376)
—
—
—
—
(29,376)
Cash and cash equivalents, end of period
$
55,170
4,594
4,130
101
—
$
63,995
28
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Note 4 · Bank segment
Selected financial information
American Savings Bank, F.S.B.
Statements of Income and Comprehensive Income Data
Three months ended June 30
Six months ended June 30
(in thousands)
2021
2020
2021
2020
Interest and dividend income
Interest and fees on loans
$
51,026
$
53,541
$
100,973
$
109,086
Interest and dividends on investment securities
11,040
6,288
19,713
15,718
Total interest and dividend income
62,066
59,829
120,686
124,804
Interest expense
Interest on deposit liabilities
1,281
3,071
2,743
6,658
Interest on other borrowings
23
75
50
388
Total interest expense
1,304
3,146
2,793
7,046
Net interest income
60,762
56,683
117,893
117,758
Provision for credit losses
(12,207)
15,133
(20,642)
25,534
Net interest income after provision for credit losses
72,969
41,550
138,535
92,224
Noninterest income
Fees from other financial services
5,464
3,102
10,537
7,673
Fee income on deposit liabilities
3,904
2,897
7,767
8,010
Fee income on other financial products
2,201
1,212
4,643
3,084
Bank-owned life insurance
1,624
1,673
4,185
2,467
Mortgage banking income
1,925
6,252
6,225
8,252
Gain on sale of investment securities, net
—
9,275
528
9,275
Other income, net
76
(251)
348
162
Total noninterest income
15,194
24,160
34,233
38,923
Noninterest expense
Compensation and employee benefits
27,670
25,079
55,707
50,856
Occupancy
5,100
5,442
10,069
10,709
Data processing
4,533
3,849
8,884
7,686
Services
2,475
2,474
5,337
5,283
Equipment
2,394
2,290
4,616
4,629
Office supplies, printing and postage
978
1,049
2,022
2,390
Marketing
665
379
1,313
1,181
FDIC insurance
788
751
1,604
853
Other expense1
3,568
7,063
6,122
11,257
Total noninterest expense
48,171
48,376
95,674
94,844
Income before income taxes
39,992
17,334
77,094
36,303
Income taxes
9,708
3,320
17,254
6,528
Net income
30,284
14,014
59,840
29,775
Other comprehensive income (loss), net of taxes
16,999
(280)
(28,755)
19,567
Comprehensive income
$
47,283
$
13,734
$
31,085
$
49,342
1 The three- and six-month periods ended June 30, 2021 include approximately $0.1 million and $0.4 million, respectively, of certain direct and incremental COVID-19 related costs. The three- and six-month periods ended June 30, 2020 include approximately $3.7 million and $3.8 million, respectively, of certain significant direct and incremental COVID-19 related costs. These costs for the first six months of 2020, which have been recorded in Other expense, include $2.3 million of compensation expense and $1.1 million of enhanced cleaning and sanitation costs.
29
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Reconciliation to amounts per HEI Condensed Consolidated Statements of Income*:
Three months ended June 30,
Six months ended June 30
(in thousands)
2021
2020
2021
2020
Interest and dividend income
$
62,066
$
59,829
$
120,686
$
124,804
Noninterest income
15,194
24,160
34,233
38,923
Less: Gain on sale of investment securities, net
—
9,275
528
9,275
*Revenues-Bank
77,260
74,714
154,391
154,452
Total interest expense
1,304
3,146
2,793
7,046
Provision for credit losses
(12,207)
15,133
(20,642)
25,534
Noninterest expense
48,171
48,376
95,674
94,844
Less: Retirement defined benefits expense (credit)—other than service costs
(186)
434
(1,464)
868
*Expenses-Bank
37,454
66,221
79,289
126,556
*Operating income-Bank
39,806
8,493
75,102
27,896
Add back: Retirement defined benefits expense (credit)—other than service costs
(186)
434
(1,464)
868
Add back: Gain on sale of investment securities, net
—
9,275
528
9,275
Income before income taxes
$
39,992
$
17,334
$
77,094
$
36,303
30
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
American Savings Bank, F.S.B.
Balance Sheets Data
(in thousands)
June 30, 2021
December 31, 2020
Assets
Cash and due from banks
$
115,567
$
178,422
Interest-bearing deposits
105,800
114,304
Cash and cash equivalents
221,367
292,726
Investment securities
Available-for-sale, at fair value
2,509,906
1,970,417
Held-to-maturity, at amortized cost (fair value of $374,141 and $229,963, respectively)
375,655
226,947
Stock in Federal Home Loan Bank, at cost
10,000
8,680
Loans held for investment
5,184,459
5,333,843
Allowance for credit losses
(78,252)
(101,201)
Net loans
5,106,207
5,232,642
Loans held for sale, at lower of cost or fair value
50,877
28,275
Other
553,702
554,656
Goodwill
82,190
82,190
Total assets
$
8,909,904
$
8,396,533
Liabilities and shareholder’s equity
Deposit liabilities—noninterest-bearing
$
2,868,770
$
2,598,500
Deposit liabilities—interest-bearing
5,004,660
4,788,457
Other borrowings
129,665
89,670
Other
166,419
183,731
Total liabilities
8,169,514
7,660,358
Commitments and contingencies
Common stock
1
1
Additional paid-in capital
352,888
351,758
Retained earnings
401,310
369,470
Accumulated other comprehensive income (loss), net of taxes
Net unrealized gains (losses) on securities
$
(8,815)
$
19,986
Retirement benefit plans
(4,994)
(13,809)
(5,040)
14,946
Total shareholder’s equity
740,390
736,175
Total liabilities and shareholder’s equity
$
8,909,904
$
8,396,533
Other assets
Bank-owned life insurance
$
164,453
$
163,265
Premises and equipment, net
205,917
206,134
Accrued interest receivable
23,064
24,616
Mortgage-servicing rights
10,754
10,020
Low-income housing investments
87,371
83,435
Other
62,143
67,186
$
553,702
$
554,656
Other liabilities
Accrued expenses
$
61,156
$
62,694
Federal and state income taxes payable
1,508
6,582
Cashier’s checks
30,818
38,011
Advance payments by borrowers
10,374
10,207
Other
62,563
66,237
$
166,419
$
183,731
31
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 of $129.7 million and $89.7 million at June 30, 2021 and December 31, 2020, respectively.
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
June 30, 2021
Available-for-sale
U.S. Treasury and federal agency obligations
$
94,716
$
1,612
$
(19)
$
96,309
1
$
19,920
$
(19)
—
$
—
$
—
Mortgage-backed securities*
2,381,062
15,932
(30,693)
2,366,301
76
1,301,202
(30,679)
1
771
(14)
Corporate bonds
30,743
1,126
—
31,869
—
—
—
—
—
—
Mortgage revenue bonds
15,427
—
—
15,427
—
—
—
—
—
—
$
2,521,948
$
18,670
$
(30,712)
$
2,509,906
77
$
1,321,122
$
(30,698)
1
$
771
$
(14)
Held-to-maturity
U.S. Treasury and Federal agency obligations
$
40,065
$
316
$
—
$
40,381
—
$
—
$
—
—
$
—
$
—
Mortgage-backed securities*
335,590
3,463
(5,293)
333,760
14
191,612
(5,293)
—
—
—
$
375,655
$
3,779
$
(5,293)
$
374,141
14
$
191,612
$
(5,293)
—
$
—
$
—
December 31, 2020
Available-for-sale
U.S. Treasury and federal agency obligations
$
60,260
$
2,062
$
—
$
62,322
—
$
—
$
—
—
$
—
$
—
Mortgage-backed securities*
1,825,893
26,817
(3,151)
1,849,559
22
373,924
(3,151)
—
—
—
Corporate bonds
29,776
1,575
—
31,351
—
—
—
—
—
—
Mortgage revenue bonds
27,185
—
—
27,185
—
—
—
—
—
—
$
1,943,114
$
30,454
$
(3,151)
$
1,970,417
22
$
373,924
$
(3,151)
—
$
—
$
—
Held-to-maturity
Mortgage-backed securities*
$
226,947
$
3,846
$
(830)
$
229,963
7
$
114,152
$
(830)
—
$
—
$
—
$
226,947
$
3,846
$
(830)
$
229,963
7
$
114,152
$
(830)
—
$
—
$
—
* Issued or guaranteed by U.S. Government agencies or sponsored agencies
ASB does not believe that the investment securities that were in an unrealized loss position at June 30, 2021 and December 31, 2020, represent a credit loss. 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’s investment securities portfolio did not require an allowance for credit losses at June 30, 2021 and December 31, 2020.
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.
32
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
The contractual maturities of investment securities were as follows:
June 30, 2021
Amortized cost
Fair value
(in thousands)
Available-for-sale
Due in one year or less
$
—
$
—
Due after one year through five years
79,832
81,989
Due after five years through ten years
45,627
46,189
Due after ten years
15,427
15,427
140,886
143,605
Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies
2,381,062
2,366,301
Total available-for-sale securities
$
2,521,948
$
2,509,906
Held-to-maturity
Due in one year or less
$
—
$
—
Due after one year through five years
—
—
Due after five years through ten years
40,065
40,381
Due after ten years
—
—
40,065
40,381
Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies
335,590
333,760
Total held-to-maturity securities
$
375,655
$
374,141
The proceeds, gross gains and losses from sales of available-for-sale securities were as follows:
Three months ended June 30
Six months ended June 30
2021
2020
2021
2020
(in thousands)
Proceeds
$
—
$
169,157
$
197,354
$
169,157
Gross gains
—
9,312
975
9,312
Gross losses
—
37
447
37
Tax expense on realized gains
—
2,492
142
2,492
The components of loans were summarized as follows:
June 30, 2021
December 31, 2020
(in thousands)
Real estate:
Residential 1-4 family
$
2,122,873
$
2,144,239
Commercial real estate
1,071,716
983,865
Home equity line of credit
870,182
963,578
Residential land
18,865
15,617
Commercial construction
115,625
121,424
Residential construction
10,574
11,022
Total real estate
4,209,835
4,239,745
Commercial
856,336
936,748
Consumer
132,855
168,733
Total loans
5,199,026
5,345,226
Less: Deferred fees and discounts
(14,567)
(11,383)
Allowance for credit losses
(78,252)
(101,201)
Total loans, net
$
5,106,207
$
5,232,642
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
33
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
property purchases, the loan-to-value ratio may not exceed 75% of the lower of the appraised value or purchase price at origination.
Allowance for credit losses.The allowance for credit losses (balances and changes) by portfolio segment 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 June 30, 2021
Allowance for credit losses:
Beginning balance
$
5,261
$
34,345
$
5,901
$
573
$
1,453
$
16
$
24,504
$
19,740
$
91,793
Charge-offs
(20)
—
10
—
—
—
(319)
(1,931)
(2,260)
Recoveries
51
—
61
11
—
—
366
1,187
1,676
Provision
226
(5,637)
(637)
34
176
—
(4,493)
(2,626)
(12,957)
Ending balance
$
5,518
$
28,708
$
5,335
$
618
$
1,629
$
16
$
20,058
$
16,370
$
78,252
Three months ended June 30, 2020
Allowance for credit losses:
Beginning balance
$
4,476
$
16,587
$
6,225
$
352
$
3,446
$
14
$
12,977
$
33,007
$
77,084
Charge-offs
(7)
—
—
(343)
—
—
(699)
(6,331)
(7,380)
Recoveries
2
—
—
5
—
—
106
657
770
Provision
(560)
4,513
(11)
342
1,311
—
1,484
3,754
10,833
Ending balance
$
3,911
$
21,100
$
6,214
$
356
$
4,757
$
14
$
13,868
$
31,087
$
81,307
Six months ended June 30, 2021
Allowance for credit losses:
Beginning balance
$
4,600
$
35,607
$
6,813
$
609
$
4,149
$
11
$
25,462
$
23,950
$
101,201
Charge-offs
(20)
—
(40)
—
—
—
(1,090)
(4,791)
(5,941)
Recoveries
54
—
76
21
—
—
639
2,194
2,984
Provision
884
(6,899)
(1,514)
(12)
(2,520)
5
(4,953)
(4,983)
(19,992)
Ending balance
$
5,518
$
28,708
$
5,335
$
618
$
1,629
$
16
$
20,058
$
16,370
$
78,252
Six months ended June 30, 2020
Allowance for credit losses:
Beginning balance, prior to adoption of ASU No. 2016-13
$
2,380
$
15,053
$
6,922
$
449
$
2,097
$
3
$
10,245
$
16,206
$
53,355
Impact of adopting ASU No. 2016-13
2,150
208
(541)
(64)
289
14
922
16,463
19,441
Charge-offs
(7)
—
—
(351)
—
—
(1,068)
(12,585)
(14,011)
Recoveries
55
—
6
14
—
—
292
1,421
1,788
Provision
(667)
5,839
(173)
308
2,371
(3)
3,477
9,582
20,734
Ending balance
$
3,911
$
21,100
$
6,214
$
356
$
4,757
$
14
$
13,868
$
31,087
$
81,307
34
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Allowance for loan commitments.The allowance for loan commitments by portfolio segment were as follows:
(in thousands)
Home equity line of credit
Commercial construction
Commercial loans
Total
Three months ended June 30, 2021
Allowance for loan commitments:
Beginning balance
$
400
$
1,300
$
1,200
$
2,900
Provision
—
1,100
(350)
750
Ending balance
$
400
$
2,400
$
850
$
3,650
Three months ended June 30, 2020
Allowance for loan commitments:
Beginning balance
$
300
$
3,191
$
309
$
3,800
Provision
—
4,309
(9)
4,300
Ending balance
$
300
$
7,500
$
300
$
8,100
Six months ended June 30, 2021
Allowance for loan commitments:
Beginning balance
$
300
$
3,000
$
1,000
$
4,300
Provision
100
(600)
(150)
(650)
Ending balance
$
400
$
2,400
$
850
$
3,650
Six months ended June 30, 2020
Allowance for loan commitments:
Beginning balance, prior to adoption of ASU No. 2016-13
$
392
$
931
$
418
$
1,741
Impact of adopting ASU No. 2016-13
(92)
1,745
(94)
1,559
Provision
—
4,824
(24)
4,800
Ending balance
$
300
$
7,500
$
300
$
8,100
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.
Each commercial and commercial real estate loan is assigned an Asset Quality Rating (AQR) reflecting the likelihood of repayment or orderly liquidation of that loan transaction pursuant to regulatory credit classifications: Pass, Special Mention, Substandard, Doubtful, and Loss. The AQR is a function of the probability of default model rating, the loss given default, and possible non-model factors which impact the ultimate collectability of the loan such as character of the business owner/guarantor, interim period performance, litigation, tax liens and major changes in business and economic conditions. Pass exposures generally are well protected by the current net worth and paying capacity of the obligor or by the value of the asset or underlying collateral. Special Mention loans have potential weaknesses that, if left uncorrected, could jeopardize the liquidation of the debt. Substandard loans have well-defined weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that ASB may sustain some loss. An asset classified Doubtful has the weaknesses of those classified Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. An asset classified Loss is considered uncollectible and has such little value that its continuance as a bankable asset is not warranted.
35
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
The credit risk profile by vintage date based on payment activity or internally assigned grade for loans was as follows:
Term Loans by Origination Year
Revolving Loans
(in thousands)
2021
2020
2019
2018
2017
Prior
Revolving
Converted to term loans
Total
June 30, 2021
Residential 1-4 family
Current
$
362,487
$
492,182
$
166,552
$
85,279
$
157,993
$
844,110
$
—
$
—
$
2,108,603
30-59 days past due
—
278
—
—
—
2,920
—
—
3,198
60-89 days past due
—
—
—
—
—
1,813
—
—
1,813
Greater than 89 days past due
—
—
3,960
430
—
4,869
—
—
9,259
362,487
492,460
170,512
85,709
157,993
853,712
—
—
2,122,873
Home equity line of credit
Current
—
—
—
—
—
—
829,421
38,267
867,688
30-59 days past due
—
—
—
—
—
—
484
397
881
60-89 days past due
—
—
—
—
—
—
104
—
104
Greater than 89 days past due
—
—
—
—
—
—
1,035
474
1,509
—
—
—
—
—
—
831,044
39,138
870,182
Residential land
Current
5,586
8,055
2,524
892
523
289
—
—
17,869
30-59 days past due
—
—
—
—
—
—
—
—
—
60-89 days past due
—
—
—
—
—
696
—
—
696
Greater than 89 days past due
—
—
—
—
—
300
—
—
300
5,586
8,055
2,524
892
523
1,285
—
—
18,865
Residential construction
Current
2,148
5,264
2,883
—
279
—
—
—
10,574
30-59 days past due
—
—
—
—
—
—
—
—
—
60-89 days past due
—
—
—
—
—
—
—
—
—
Greater than 89 days past due
—
—
—
—
—
—
—
—
—
2,148
5,264
2,883
—
279
—
—
—
10,574
Consumer
Current
15,289
21,974
48,127
22,699
2,138
356
14,764
4,027
129,374
30-59 days past due
172
139
558
349
77
—
157
76
1,528
60-89 days past due
—
85
443
319
63
—
62
51
1,023
Greater than 89 days past due
—
100
308
248
44
—
106
124
930
15,461
22,298
49,436
23,615
2,322
356
15,089
4,278
132,855
Commercial real estate
Pass
90,683
280,206
68,625
64,694
31,668
255,806
11,000
—
802,682
Special Mention
1,360
4,254
29,642
53,347
47,653
61,926
—
—
198,182
Substandard
—
—
14,098
1,883
1,859
53,012
—
—
70,852
Doubtful
—
—
—
—
—
—
—
—
—
92,043
284,460
112,365
119,924
81,180
370,744
11,000
—
1,071,716
Commercial construction
Pass
10,260
30,287
31,553
11,342
—
—
28,698
—
112,140
Special Mention
650
2,835
—
—
—
—
—
—
3,485
Substandard
—
—
—
—
—
—
—
—
—
Doubtful
—
—
—
—
—
—
—
—
—
10,910
33,122
31,553
11,342
—
—
28,698
—
115,625
Commercial
Pass
199,625
182,533
87,875
60,800
21,238
50,243
97,465
17,412
717,191
Special Mention
58
35,160
12,433
448
6,204
29,376
25,297
23
108,999
Substandard
—
244
7,309
1,915
3,135
9,075
6,677
1,791
30,146
Doubtful
—
—
—
—
—
—
—
—
—
199,683
217,937
107,617
63,163
30,577
88,694
129,439
19,226
856,336
Total loans
$
688,318
$
1,063,596
$
476,890
$
304,645
$
272,874
$
1,314,791
$
1,015,270
$
62,642
$
5,199,026
36
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Term Loans by Origination Year
Revolving Loans
(in thousands)
2020
2019
2018
2017
2016
Prior
Revolving
Converted to term loans
Total
December 31, 2020
Residential 1-4 family
Current
$
567,282
$
218,988
$
111,243
$
203,916
$
184,888
$
849,788
$
—
$
—
$
2,136,105
30-59 days past due
—
—
—
—
—
2,629
—
—
2,629
60-89 days past due
—
476
—
—
—
2,314
—
—
2,790
Greater than 89 days past due
—
—
—
353
—
2,362
—
—
2,715
567,282
219,464
111,243
204,269
184,888
857,093
—
—
2,144,239
Home equity line of credit
Current
—
—
—
—
—
—
927,106
33,228
960,334
30-59 days past due
—
—
—
—
—
—
552
298
850
60-89 days past due
—
—
—
—
—
—
267
75
342
Greater than 89 days past due
—
—
—
—
—
—
1,463
589
2,052
—
—
—
—
—
—
929,388
34,190
963,578
Residential land
Current
8,357
3,427
1,598
939
22
272
—
—
14,615
30-59 days past due
—
—
—
—
—
702
—
—
702
60-89 days past due
—
—
—
—
—
—
—
—
—
Greater than 89 days past due
—
—
—
—
—
300
—
—
300
8,357
3,427
1,598
939
22
1,274
—
—
15,617
Residential construction
Current
6,919
3,093
385
625
—
—
—
—
11,022
30-59 days past due
—
—
—
—
—
—
—
—
—
60-89 days past due
—
—
—
—
—
—
—
—
—
Greater than 89 days past due
—
—
—
—
—
—
—
—
—
6,919
3,093
385
625
—
—
—
—
11,022
Consumer
Current
28,818
67,159
37,072
7,207
293
348
18,351
3,758
163,006
30-59 days past due
406
1,085
727
155
4
—
138
90
2,605
60-89 days past due
191
549
427
165
3
—
97
59
1,491
Greater than 89 days past due
131
532
409
119
7
—
262
171
1,631
29,546
69,325
38,635
7,646
307
348
18,848
4,078
168,733
Commercial real estate
Pass
270,603
63,301
62,168
28,432
55,089
155,654
11,000
—
646,247
Special Mention
10,261
36,405
57,952
33,763
68,287
48,094
—
—
254,762
Substandard
—
14,720
4,181
1,892
4,423
57,640
—
—
82,856
Doubtful
—
—
—
—
—
—
—
—
—
280,864
114,426
124,301
64,087
127,799
261,388
11,000
—
983,865
Commercial construction
Pass
14,480
31,965
26,990
—
5,562
—
22,517
—
101,514
Special Mention
1,910
—
—
18,000
—
—
—
—
19,910
Substandard
—
—
—
—
—
—
—
—
—
Doubtful
—
—
—
—
—
—
—
—
—
16,390
31,965
26,990
18,000
5,562
—
22,517
—
121,424
Commercial
Pass
392,088
117,791
75,533
29,211
12,520
35,770
74,520
11,004
748,437
Special Mention
37,836
23,087
1,920
6,990
30,264
13,250
31,362
11,218
155,927
Substandard
304
7,785
2,043
4,017
7,542
3,113
5,265
1,928
31,997
Doubtful
—
—
—
—
—
—
387
—
387
430,228
148,663
79,496
40,218
50,326
52,133
111,534
24,150
936,748
Total loans
$
1,339,586
$
590,363
$
382,648
$
335,784
$
368,904
$
1,172,236
$
1,093,287
$
62,418
$
5,345,226
37
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Revolving loans converted to term loans during the six months ended June 30, 2021 in the commercial, home equity line of credit and consumer portfolios were $0.6 million, $9.8 million and $1.5 million, respectively. Revolving loans converted to term loans during the six months ended June 30, 2020 in the commercial, home equity line of credit and consumer portfolios were $13.7 million, $8.7 million and $1.4 million, respectively.
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
Amortized cost> 90 days and accruing
June 30, 2021
Real estate:
Residential 1-4 family
$
3,198
$
1,813
$
9,259
$
14,270
$
2,108,603
$
2,122,873
$
—
Commercial real estate
—
—
170
170
1,071,546
1,071,716
—
Home equity line of credit
881
104
1,509
2,494
867,688
870,182
—
Residential land
—
696
300
996
17,869
18,865
—
Commercial construction
—
—
—
—
115,625
115,625
—
Residential construction
—
—
—
—
10,574
10,574
—
Commercial
298
224
116
638
855,698
856,336
—
Consumer
1,528
1,023
930
3,481
129,374
132,855
—
Total loans
$
5,905
$
3,860
$
12,284
$
22,049
$
5,176,977
$
5,199,026
$
—
December 31, 2020
Real estate:
Residential 1-4 family
$
2,629
$
2,790
$
2,715
$
8,134
$
2,136,105
$
2,144,239
$
—
Commercial real estate
—
488
—
488
983,377
983,865
—
Home equity line of credit
850
342
2,052
3,244
960,334
963,578
—
Residential land
702
—
300
1,002
14,615
15,617
—
Commercial construction
—
—
—
—
121,424
121,424
—
Residential construction
—
—
—
—
11,022
11,022
—
Commercial
608
300
132
1,040
935,708
936,748
—
Consumer
2,605
1,491
1,631
5,727
163,006
168,733
—
Total loans
$
7,394
$
5,411
$
6,830
$
19,635
$
5,325,591
$
5,345,226
$
—
The credit risk profile based on nonaccrual loans were as follows:
(in thousands)
June 30, 2021
December 31, 2020
With a Related ACL
Without a Related ACL
Total
With a Related ACL
Without a Related ACL
Total
Real estate:
Residential 1-4 family
$
14,076
$
7,666
$
21,742
$
8,991
$
2,835
$
11,826
Commercial real estate
15,514
1,437
16,951
15,847
2,875
18,722
Home equity line of credit
5,200
1,415
6,615
5,791
1,567
7,358
Residential land
801
300
1,101
108
300
408
Commercial construction
—
—
—
—
—
—
Residential construction
—
—
—
—
—
—
Commercial
1,718
2,505
4,223
1,819
3,328
5,147
Consumer
2,641
—
2,641
3,935
—
3,935
Total
$
39,950
$
13,323
$
53,273
$
36,491
$
10,905
$
47,396
38
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
The credit risk profile based on loans whose terms have been modified and accruing interest were as follows:
(in thousands)
June 30, 2021
December 31, 2020
Real estate:
Residential 1-4 family
$
7,596
$
7,932
Commercial real estate
3,203
3,281
Home equity line of credit
7,617
8,148
Residential land
995
1,555
Commercial construction
—
—
Residential construction
—
—
Commercial
5,258
6,108
Consumer
53
54
Total troubled debt restructured loans accruing interest
$
24,722
$
27,078
ASB did not recognize interest on nonaccrual loans for the three and six months ended June 30, 2021 and 2020.
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.
The allowance for credit losses on TDR loans that do not share risk characteristics are individually evaluated based on the present value of expected future cash flows discounted at the loan’s effective original contractual rate or based on the fair value of collateral less cost to sell. The financial impact of the estimated loss 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 credit losses.
Loan modifications that occurred during the three and six months ended June 30, 2021 and 2020 were as follows:
Loans modified as a TDR
Three months ended June 30, 2021
Six months ended June 30, 2021
(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
3
$
1,835
$
77
15
$
10,024
$
271
Commercial real estate
—
—
—
—
—
—
Home equity line of credit
—
—
—
1
163
18
Residential land
1
288
12
2
558
23
Commercial construction
—
—
—
—
—
—
Residential construction
—
—
—
—
—
—
Commercial
4
237
11
6
296
26
Consumer
—
—
—
—
—
—
8
$
2,360
$
100
24
$
11,041
$
338
39
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Three months ended June 30, 2020
Six months ended June 30, 2020
(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
$
147
$
7
Commercial real estate
—
—
—
2
16,430
4,301
Home equity line of credit
2
19
3
2
19
3
Residential land
2
330
—
2
330
—
Commercial construction
—
—
—
—
—
—
Residential construction
—
—
—
—
—
—
Commercial
—
—
—
4
751
275
Consumer
—
—
—
—
—
—
4
$
349
$
3
11
$
17,677
$
4,586
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.
There were no loans modified in TDRs that experienced a payment default of 90 days or more during the second quarter and first six months of 2021 and 2020.
If a loan modified in a TDR subsequently defaults, 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 June 30, 2021 and December 31, 2020.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides that a financial institution may elect to suspend the requirements under GAAP for certain loan modifications that would otherwise be categorized as a TDR and any related impairment for accounting purposes.
In response to the COVID-19 pandemic, the Board of Governors of the FRB, the FDIC, the National Credit Union Administration, the OCC, and the Consumer Financial Protection Bureau, in consultation with the state financial regulators (collectively, the “agencies”) issued a joint interagency statement (issued March 22, 2020; revised statement issued April 7, 2020). Some of the provisions applicable to the Company include, but are not limited to accounting for loan modifications, past due reporting and nonaccrual status and charge-offs.
Loan modifications that do not meet the conditions of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. The agencies confirmed with the FASB staff that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or insignificant delays in payment. Financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral. A loan’s payment date is governed by the due date stipulated in the legal agreement. If a financial institution agrees to a payment deferral, these loans would not be considered past due during the period of the deferral. Lastly, during short-term COVID-19 modifications, these loans generally should not be reported as nonaccrual or as classified.
Collateral-dependent loans. A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment of the loan is expected to be provided substantially through the operation or sale of the collateral.
40
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Loans considered collateral-dependent were as follows:
Amortized cost
(in thousands)
June 30, 2021
December 31, 2020
Collateral type
Real estate:
Residential 1-4 family
$
4,454
$
2,541
Residential real estate property
Commercial real estate
1,437
2,875
Commercial real estate property
Home equity line of credit
1,415
1,567
Residential real estate property
Residential land
300
300
Residential real estate property
Total real estate
7,606
7,283
Commercial
840
934
Business assets
Total
$
8,446
$
8,217
ASB had $3.8 million of mortgage loans collateralized by residential real estate property that were in the process of foreclosure at June 30, 2021 and December 31, 2020.
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 $95.6 million and $186.8 million for the three months ended June 30, 2021 and 2020, respectively, $266.5 million and $259.3 million for the six months ended June 30, 2021 and 2020, respectively, and recognized gains on such sales of $1.9 million and $6.3 million for the three months ended June 30, 2021 and 2020, respectively, $6.2 million and $8.3 million for the six months ended June 30, 2021 and 2020, respectively.
There were no repurchased mortgage loans for the three and six months ended June 30, 2021 and 2020. The repurchase reserve, which represents ASB’s loss estimate related to mortgage loan repurchases, was $0.1 million as of June 30, 2021 and 2020.
Mortgage servicing fees, a component of other income, net, were $1.0 million and $0.8 million for the three months ended June 30, 2021 and 2020, respectively, and were $1.9 million and $1.6 million for the six months ended June 30, 2021 and 2020, respectively.
Changes in the carrying value of MSRs were as follows:
(in thousands)
Gross
carrying amount1
Accumulated amortization
Valuation allowance
Net carrying amount
June 30, 2021
$
21,865
$
(11,111)
$
—
$
10,754
December 31, 2020
22,950
(12,670)
(260)
10,020
1Reflects impact of loans paid in full
41
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Changes related to MSRs were as follows:
Three months ended June 30,
Six months ended June 30
(in thousands)
2021
2020
2021
2020
Mortgage servicing rights
Beginning balance
$
10,689
$
9,120
$
10,280
$
9,101
Amount capitalized
1,023
1,726
2,570
2,362
Amortization
(958)
(935)
(2,096)
(1,552)
Other-than-temporary impairment
—
—
—
—
Carrying amount before valuation allowance
10,754
9,911
10,754
9,911
Valuation allowance for mortgage servicing rights
Beginning balance
4
—
260
—
Provision
(4)
264
(260)
264
Other-than-temporary impairment
—
—
—
—
Ending balance
—
264
—
264
Net carrying value of mortgage servicing rights
$
10,754
$
9,647
$
10,754
$
9,647
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 condensed 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)
June 30, 2021
December 31, 2020
Unpaid principal balance
$
1,535,932
$
1,450,312
Weighted average note rate
3.47
%
3.68
%
Weighted average discount rate
9.25
%
9.25
%
Weighted average prepayment speed
11.3
%
17.7
%
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)
June 30, 2021
December 31, 2020
Prepayment rate:
25 basis points adverse rate change
$
(771)
$
(738)
50 basis points adverse rate change
(1,738)
(1,445)
Discount rate:
25 basis points adverse rate change
(120)
(68)
50 basis points adverse rate change
(238)
(135)
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 June 30, 2021 and December 31, 2020, ASB had no FHLB advances outstanding or federal funds purchased with the Federal Reserve Bank. ASB was in compliance with all Advances, Pledge and Security Agreement requirements as of June 30, 2021.
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
42
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
June 30, 2021
$
130
$
—
$
130
December 31, 2020
90
—
90
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
June 30, 2021
$
130
$
158
$
—
December 31, 2020
90
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:
June 30, 2021
December 31, 2020
(in thousands)
Notional amount
Fair value
Notional amount
Fair value
Interest rate lock commitments
$
15,516
$
371
$
120,980
$
4,536
Forward commitments
20,036
(41)
100,500
(500)
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
June 30, 2021
December 31, 2020
(in thousands)
Asset derivatives
Liability derivatives
Asset derivatives
Liability derivatives
Interest rate lock commitments
$
371
$
—
$
4,536
$
—
Forward commitments
6
47
—
500
$
377
$
47
$
4,536
$
500
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 June 30,
Six months ended June 30
(in thousands)
2021
2020
2021
2020
Interest rate lock commitments
Mortgage banking income
$
(67)
$
489
$
(4,165)
$
2,044
Forward commitments
Mortgage banking income
(381)
298
459
(245)
$
(448)
$
787
$
(3,706)
$
1,799
Low-Income Housing Tax Credit (LIHTC). ASB’s unfunded commitments to fund its LIHTC investment partnerships were $43.8 million and $41.0 million at June 30, 2021 and December 31, 2020, respectively. These unfunded commitments were unconditional and legally binding and are recorded in other liabilities with a corresponding increase in other assets. As of June 30, 2021, ASB did not have any impairment losses resulting from forfeiture or ineligibility of tax credits or other circumstances related to its LIHTC investment partnerships.
44
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Note 5 · Credit agreements
On May 14, 2021, HEI and Hawaiian Electric (each a Company, and collectively the Companies) each entered into a separate agreement with a syndicate of nine financial institutions (the HEI Facility and Hawaiian Electric Facility, respectively, and together, the Amended Facilities) to amend and restate their respective previously existing revolving unsecured credit agreements. The HEI Facility was increased to $175 million from $150 million and its term was extended to May 14, 2026. The $200 million Hawaiian Electric Facility has an initial term that expires on May 13, 2022, but its term will extend to May 14, 2026 upon approval by the PUC during the initial term, which approval has been requested. In addition to extending the term, Hawaiian Electric also requested PUC approval to exercise its options of twoone-year extensions of the commitment termination date and to increase its aggregate revolving commitment amount from $200 million to $275 million, should there be a need.
None of the facilities are collateralized. As of June 30, 2021 and December 31, 2020, 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.
Under the Amended Facilities, draws would generally bear interest, based on each Company’s respective current long-term credit ratings, at the “Adjusted LIBO Rate,” as defined in the Amended Facilities, plus 137.5 and 125.0 basis points for HEI and Hawaiian Electric, respectively, and incur annual fees on undrawn commitments, excluding swingline borrowings, of 20.0 and 17.5 basis points for HEI and Hawaiian Electric, respectively. The Amended Facilities also include provisions to accommodate a transition from the London Interbank Offered Rate (LIBOR) to an alternative reference rate, based on the secured overnight financing rate administered by the Federal Reserve Bank of New York, upon the phase out of LIBOR as a reference rate.
Additionally, the Amended Facilities contain provisions for pricing adjustments in the event of a long-term ratings change based on the respective Facility’s ratings-based pricing grid, which includes the ratings by Fitch Ratings, Inc. (Fitch), Moody’s Investor Service’s (Moody’s) and Standard & Poor’s (S&P). The Amended Facilities do not contain clauses that would affect access to the Amended Facilities by reason of a ratings downgrade, nor do they have broad “material adverse change” clauses. In addition, the Amended Facilities contain provisions for potential annual pricing adjustments to the Eurodollar or Alternate Base Rate margin on draws and fees on undrawn commitments of up to +/-5 basis points and +/-1 basis point, respectively, based on performance against certain sustainability-linked metrics. The sustainability-linked metrics include achievement of renewable portfolio standards in excess of statutory requirements and increasing cumulative penetration of installed MWs of photovoltaic systems on residential rooftops.
The Amended Facilities also include updated terms and conditions customary for facilities of this type and contain customary conditions that must be met in order to draw on them, including compliance with covenants (such as covenants preventing HEI’s and Hawaiian Electric’s respective subsidiaries from entering into agreements that restrict the ability of such subsidiaries to pay dividends to, or to repay borrowings from, HEI or Hawaiian Electric, as applicable; and a covenant in Hawaiian Electric’s facility restricting Hawaiian Electric’s ability, as well as the ability of any of its subsidiaries, to guarantee additional indebtedness of the subsidiaries if such additional debt would cause the subsidiary’s “Consolidated Subsidiary Funded Debt to Capitalization Ratio” (as defined in the Hawaiian Electric Facility) to exceed 65%).
Under the HEI Facility, it is an event of default if HEI fails to maintain an unconsolidated “Capitalization Ratio” (funded debt) (as defined in the HEI Facility) of 50% or less or if HEI no longer owns Hawaiian Electric or ASB. Under the Hawaiian Electric Facility, it is an event of default if Hawaiian Electric fails to maintain a “Consolidated Capitalization Ratio” (equity) (as defined in the Hawaiian Electric Facility) of at least 35%, or if Hawaiian Electric is no longer owned by HEI.
Hawaiian Electric had a $75 million 364-day revolving credit agreement, under which no amounts had been drawn. On April 19, 2021, the revolving credit agreement terminated and was not renewed.
45
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Note 6 · 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, 2020
$
19,986
$
(3,363)
$
(17,887)
$
(1,264)
$
(2,919)
Current period other comprehensive income (loss)
(28,801)
861
396
(27,544)
69
Balance, June 30, 2021
$
(8,815)
$
(2,502)
$
(17,491)
$
(28,808)
$
(2,850)
Balance, December 31, 2019
$
2,481
$
(1,613)
$
(20,907)
$
(20,039)
$
(1,279)
Current period other comprehensive income (loss)
18,783
(1,982)
1,079
17,880
51
Balance, June 30, 2020
$
21,264
$
(3,595)
$
(19,828)
$
(2,159)
$
(1,228)
Reclassifications out of AOCI were as follows:
Amount reclassified from AOCI
Affected line item in the Statements of Income / Balance Sheets
Three months ended June 30
Six months ended June 30
2021
2020
2021
2020
(in thousands)
HEI consolidated
Net realized gains on securities included in net income
$
—
$
(1,638)
$
(387)
$
(1,638)
Gain 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
6,008
5,690
12,018
11,396
See Note 8 for additional details
Impact of D&Os of the PUC included in regulatory assets
(5,811)
(5,159)
(11,622)
(10,317)
See Note 8 for additional details
Total reclassifications
$
197
$
(1,107)
$
9
$
(559)
Hawaiian Electric consolidated
Retirement benefit plans:
Amortization of prior service credit and net losses recognized during the period in net periodic benefit cost
$
5,846
$
5,184
$
11,691
$
10,368
See Note 8 for additional details
Impact of D&Os of the PUC included in regulatory assets
(5,811)
(5,159)
(11,622)
(10,317)
See Note 8 for additional details
Total reclassifications
$
35
$
25
$
69
$
51
46
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Note 7 · Revenues
Revenue from contracts with customers. The following tables disaggregate revenues by major source, timing of revenue recognition, and segment:
Three months ended June 30, 2021
Six months ended June 30, 2021
(in thousands)
Electric utility
Bank
Other
Total
Electric utility
Bank
Other
Total
Revenues from contracts with customers
Electric energy sales - residential
$
196,318
$
—
$
—
$
196,318
$
377,557
$
—
$
—
$
377,557
Electric energy sales - commercial
192,103
—
—
192,103
360,568
—
—
360,568
Electric energy sales - large light and power
201,536
—
—
201,536
378,351
—
—
378,351
Electric energy sales - other
2,212
—
—
2,212
4,691
—
—
4,691
Bank fees
—
11,569
—
11,569
—
22,947
—
22,947
Other sales
—
—
1,089
1,089
—
—
2,013
2,013
Total revenues from contracts with customers
592,169
11,569
1,089
604,827
1,121,167
22,947
2,013
1,146,127
Revenues from other sources
Regulatory revenue
$
2,854
$
—
$
—
$
2,854
$
31,283
$
—
$
—
$
31,283
Bank interest and dividend income
—
62,066
—
62,066
—
120,686
—
120,686
Other bank noninterest income
—
3,625
—
3,625
—
10,758
—
10,758
Other
6,856
—
29
6,885
14,293
—
56
14,349
Total revenues from other sources
9,710
65,691
29
75,430
45,576
131,444
56
177,076
Total revenues
$
601,879
$
77,260
$
1,118
$
680,257
$
1,166,743
$
154,391
$
2,069
$
1,323,203
Timing of revenue recognition
Services/goods transferred at a point in time
$
—
$
11,569
$
—
$
11,569
$
—
$
22,947
$
—
$
22,947
Services/goods transferred over time
592,169
—
1,089
593,258
1,121,167
—
2,013
1,123,180
Total revenues from contracts with customers
$
592,169
$
11,569
$
1,089
$
604,827
$
1,121,167
$
22,947
$
2,013
$
1,146,127
Three months ended June 30, 2020
Six months ended June 30, 2020
(in thousands)
Electric utility
Bank
Other
Total
Electric utility
Bank
Other
Total
Revenues from contracts with customers
Electric energy sales - residential
$
187,590
$
—
$
—
$
187,590
$
377,856
$
—
$
—
$
377,856
Electric energy sales - commercial
159,874
—
—
159,874
356,979
—
—
356,979
Electric energy sales - large light and power
176,467
—
—
176,467
392,687
—
—
392,687
Electric energy sales - other
1,779
—
—
1,779
5,237
—
—
5,237
Bank fees
—
7,211
—
7,211
—
18,767
—
18,767
Total revenues from contracts with customers
525,710
7,211
—
532,921
1,132,759
18,767
—
1,151,526
Revenues from other sources
Regulatory revenue
2,826
—
—
2,826
(12,478)
—
—
(12,478)
Bank interest and dividend income
—
59,829
—
59,829
—
124,804
—
124,804
Other bank noninterest income
—
7,674
—
7,674
—
10,881
—
10,881
Other
5,679
—
16
5,695
11,376
—
22
11,398
Total revenues from other sources
8,505
67,503
16
76,024
(1,102)
135,685
22
134,605
Total revenues
$
534,215
$
74,714
$
16
$
608,945
$
1,131,657
$
154,452
$
22
$
1,286,131
Timing of revenue recognition
Services/goods transferred at a point in time
$
—
$
7,211
$
—
$
7,211
$
—
$
18,767
$
—
$
18,767
Services/goods transferred over time
525,710
—
—
525,710
1,132,759
—
—
1,132,759
Total revenues from contracts with customers
$
525,710
$
7,211
$
—
$
532,921
$
1,132,759
$
18,767
$
—
$
1,151,526
There are no material contract assets or liabilities associated with revenues from contracts with customers existing at December 31, 2020 or as of June 30, 2021. Accounts receivable and unbilled revenues related to contracts with customers
47
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
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.
As of June 30, 2021, 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 8 · Retirement benefits
Defined benefit pension and other postretirement benefit plans information. For the first six months of 2021, the Company contributed $23 million ($23 million by the Utilities) to its pension and other postretirement benefit plans, compared to $17 million ($17 million by the Utilities) in the first six months of 2020. The Company’s current estimate of total contributions to its pension and other postretirement benefit plans in 2021 is $52 million ($51 million by the Utilities, $1 million by HEI and nil by ASB), compared to $71 million ($70 million by the Utilities, $1 million by HEI and nil by ASB) in 2020. In addition, the Company expects to pay directly $3 million ($1 million by the Utilities) of benefits in 2021, compared to $2 million ($1 million by the Utilities) paid in 2020.
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 June 30
Six months ended June 30
Pension benefits
Other benefits
Pension benefits
Other benefits
2021
2020
2021
2020
2021
2020
2021
2020
(in thousands)
HEI consolidated
Service cost
$
20,465
$
18,362
$
705
$
631
$
40,929
$
36,725
$
1,410
$
1,262
Interest cost
18,800
20,164
1,569
1,856
37,601
40,327
3,138
3,711
Expected return on plan assets
(33,068)
(28,465)
(3,232)
(3,039)
(66,135)
(56,931)
(6,465)
(6,077)
Amortization of net prior period (gain)/cost
—
2
(384)
(441)
—
5
(767)
(881)
Amortization of net actuarial losses1
8,431
8,058
44
51
9,987
16,115
298
101
Net periodic pension/benefit cost (return)
14,628
18,121
(1,298)
(942)
22,382
36,241
(2,386)
(1,884)
Impact of PUC D&Os
5,513
6,261
1,176
777
16,680
12,523
2,146
1,554
Net periodic pension/benefit cost (adjusted for impact of PUC D&Os)
$
20,141
$
24,382
$
(122)
$
(165)
$
39,062
$
48,764
$
(240)
$
(330)
Hawaiian Electric consolidated
Service cost
$
19,993
$
17,891
$
698
$
625
$
39,987
$
35,782
$
1,397
$
1,251
Interest cost
17,531
18,715
1,504
1,781
35,062
37,430
3,008
3,563
Expected return on plan assets
(31,367)
(26,857)
(3,182)
(2,990)
(62,735)
(53,712)
(6,364)
(5,980)
Amortization of net prior period (gain)/cost
—
3
(382)
(439)
—
5
(765)
(879)
Amortization of net actuarial losses1
8,212
7,369
43
51
10,771
14,737
293
102
Net periodic pension/benefit cost (return)
14,369
17,121
(1,319)
(972)
23,085
34,242
(2,431)
(1,943)
Impact of PUC D&Os
5,513
6,261
1,176
777
16,680
12,523
2,146
1,554
Net periodic pension/benefit cost (adjusted for impact of PUC D&Os)
$
19,882
$
23,382
$
(143)
$
(195)
$
39,765
$
46,765
$
(285)
$
(389)
1 Six months ended June 30, 2021 amounts include the one-time cumulative impact of the change in accounting principle for the plans’ fixed income securities from the calculated market-related value method to the fair value method, which was recorded in the first quarter of 2021.
48
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
HEI consolidated recorded retirement benefits expense of $23 million ($23 million by the Utilities) in the first six months of 2021 and $31 million ($29 million by the Utilities) in the first six months of 2020 and charged the remaining net periodic benefit cost primarily to electric utility plant.
Effective January 1, 2021, the Company adopted a change in accounting principle for the plans’ fixed income securities from the calculated market-related value method to the fair value method in the calculation of the expected return on plan assets component of NPPC and NPBC. The remaining plan assets continue to use the calculated market-related value methodology. The Company considers the fair value approach to be preferable for its fixed-income securities portfolio because it results in a current reflection of the changes in the value of plan assets in a way similar to the obligations it is intended to hedge. The Company evaluated the effect of this change in accounting principle and deemed it to be immaterial to the historical financial statements of the Company and Hawaiian Electric and, therefore, did not account for the change retrospectively and recorded the cumulative effects from the change in accounting principle in earnings for non-Utility businesses in the first quarter of 2021. Amounts related to the Utilities were reflected as adjustments to regulatory assets as appropriate, consistent with the expected regulatory treatment as described in the following paragraph.
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, any actual costs determined in accordance with GAAP that are over/under amounts allowed in rates are charged/credited to a regulatory asset/liability. The regulatory asset/liability for each utility will then be amortized over 5 years beginning with the respective utility’s next rate case.
Defined contribution plans information. For the first six months of 2021 and 2020, the Company’s expenses for its defined contribution plans under the Hawaiian Electric Industries Retirement Savings Plan (HEIRSP) and the ASB 401(k) Plan were $3.2 million and $3.7 million, respectively, and cash contributions were $3.2 million and $4.6 million, respectively. For the first six months of 2021 and 2020, the Utilities’ expenses and cash contributions for its defined contribution plan under the HEIRSP were $1.5 million and $1.4 million, respectively.
Note 9 · 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 June 30, 2021, approximately 2.9 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. In June 2019, an additional 300,000 shares were made available for issuance under the 2011 Director Plan. As of June 30, 2021, there were 244,843 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 June 30
Six months ended June 30
(in millions)
2021
2020
2021
2020
HEI consolidated
Share-based compensation expense 1
$
2.9
$
2.4
$
5.5
$
4.1
Income tax benefit
0.5
0.4
1.0
0.7
Hawaiian Electric consolidated
Share-based compensation expense 1
0.9
0.4
2.0
1.2
Income tax benefit
0.2
0.1
0.4
0.2
1 For the three and six months ended June 30, 2021 and 2020, the Company has not capitalized any share-based compensation.
49
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Stock awards. HEI granted HEI common stock to nonemployee directors under the 2011 Director Plan as follows:
Three months ended June 30
Six months ended June 30
(dollars in millions)
2021
2020
2021
2020
Shares granted
29,320
35,632
29,320
36,100
Fair value
$
1.2
$
1.3
$
1.2
$
1.3
Income tax benefit
0.3
0.3
0.3
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 June 30
Six months ended June 30
2021
2020
2021
2020
Shares
(1)
Shares
(1)
Shares
(1)
Shares
(1)
Outstanding, beginning of period
236,191
$
37.91
203,441
$
40.67
193,939
$
40.89
207,641
$
35.36
Granted
4,894
44.61
916
37.90
132,492
34.37
78,595
47.99
Vested
(292)
38.77
—
—
(79,280)
38.51
(77,719)
34.19
Forfeited
(11,018)
38.74
—
—
(17,376)
40.01
(4,160)
35.81
Outstanding, end of period
229,775
$
38.02
204,357
$
40.65
229,775
$
38.02
204,357
$
40.65
Total weighted-average grant-date fair value of shares granted (in millions)
$
0.2
$
—
$
4.6
$
3.8
(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 six months ended June 30, 2021 and 2020, total restricted stock units and related dividends that vested had a fair value of $3.0 million and $4.2 million, respectively, and the related tax benefits were $0.6 million and $0.7 million, respectively.
As of June 30, 2021, there was $7.3 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 2.4 years.
Long-term incentive plan payable in stock. The 2019-2021, 2020-2022 and 2021-2023 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 EPS growth, return on average common equity (ROACE), renewable portfolio standards, Hawaiian Electric’s net income growth, ASB’s efficiency ratio and strategic initiatives and Pacific Current’s EBITDA growth and return on average invested capital.
LTIP linked to TSR. Information about HEI’s LTIP grants linked to TSR was as follows:
Three months ended June 30
Six months ended June 30
2021
2020
2021
2020
Shares
(1)
Shares
(1)
Shares
(1)
Shares
(1)
Outstanding, beginning of period
100,053
$
42.89
90,616
$
42.08
89,222
$
42.10
96,402
$
39.62
Granted
1,533
41.12
—
—
45,743
41.12
24,630
48.62
Vested (issued or unissued and cancelled)
—
—
—
—
(32,355)
38.20
(29,409)
39.51
Forfeited
(10,427)
42.82
—
—
(11,451)
43.10
(1,007)
41.72
Outstanding, end of period
91,159
$
42.87
90,616
$
42.08
91,159
$
42.87
90,616
$
42.08
Total weighted-average grant-date fair value of shares granted (in millions)
$
0.1
$
—
$
1.9
$
1.2
(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
50
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
estimated future stock volatility 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. A dividend assumption is not required for the Monte Carlo simulation because the grant payout includes dividend equivalents and projected returns include the value of reinvested dividends.
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:
2021
2020
Risk-free interest rate
0.19
%
1.39
%
Expected life in years
3
3
Expected volatility
29.9
%
13.1
%
Range of expected volatility for Peer Group
25.6% to 102.9%
13.6% to 95.4%
Grant date fair value (per share)
$41.12
$48.62
For the six months ended June 30, 2021 and 2020, total vested LTIP awards linked to TSR and related dividends had a fair value of $0.8 million and $2.6 million, respectively, and the related tax benefits were $0.2 million and $0.4 million, respectively.
As of June 30, 2021, there was $2.1 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 1.6 years.
LTIP awards linked to other performance conditions.Information about HEI’s LTIP awards payable in shares linked to other performance conditions was as follows:
Three months ended June 30
Six months ended June 30
2021
2020
2021
2020
Shares
(1)
Shares
(1)
Shares
(1)
Shares
(1)
Outstanding, beginning of period
335,702
$
38.04
336,344
$
39.64
220,715
$
41.03
403,768
$
35.15
Granted
6,133
44.49
—
—
182,977
34.33
98,522
48.10
Vested
—
—
—
—
(43,155)
34.12
(135,804)
33.48
Increase above target (cancelled)
15,881
42.92
(38,821)
34.12
1,277
31.71
(64,932)
34.12
Forfeited
(41,711)
38.27
—
—
(45,809)
38.82
(4,031)
39.67
Outstanding, end of period
316,005
$
38.38
297,523
$
40.37
316,005
$
38.38
297,523
$
40.37
Total weighted-average grant-date fair value of shares granted (at target performance levels) (in millions)
$
0.3
$
—
$
6.3
$
4.7
(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 six months ended June 30, 2021 and 2020, total vested LTIP awards linked to other performance conditions and related dividends had a fair value of $1.7 million and $7.6 million, respectively, and the related tax benefits were $0.4 million and $1.2 million, respectively.
As of June 30, 2021, there was $6.7 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 1.8 years.
Note 10 ·Income taxes
The Company’s and the Utilities’ effective tax rates (combined federal and state income tax rates) were each 21%, for the six months ended June 30, 2021. 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 tax benefits derived from the low income housing tax credit investments and the non-taxability of the bank-owned life insurance income. The Company’s and the Utilities’ effective tax rates were 17% and 19%, respectively, for the six months ended June 30, 2020.
In August 2020, the Internal Revenue Service notified the Company that its 2017 and 2018 income tax returns would be examined. The Company was previously audited every year through 2011, at which time the IRS changed their internal policies regarding audit frequency. The Company has received several initial requests for general tax return information and has responded or is in the process of responding to such requests.
51
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Note 11 · Cash flows
Six months ended June 30
2021
2020
(in millions)
Supplemental disclosures of cash flow information
HEI consolidated
Interest paid to non-affiliates, net of amounts capitalized
$
51
$
50
Income taxes paid (including refundable credits)
14
—
Hawaiian Electric consolidated
Interest paid to non-affiliates
37
32
Income taxes paid (including refundable credits)
20
—
Supplemental disclosures of noncash activities
HEI consolidated
Property, plant and equipment
Estimated fair value of noncash contributions in aid of construction (investing)
1
3
Unpaid invoices and accruals for capital expenditures, balance, end of period (investing)
31
34
Reduction of long-term debt from funds previously transferred for repayment (financing)
—
82
Right-of-use assets obtained in exchange for operating lease obligations (investing)
38
20
Common stock issued (gross) for director and executive/management compensation (financing)1
7
16
Obligations to fund low income housing investments (investing)
9
—
Loans transferred from held for investment to held for sale (investing)
62
—
Hawaiian Electric consolidated
Electric utility property, plant and equipment
Estimated fair value of noncash contributions in aid of construction (investing)
1
3
Unpaid invoices and accruals for capital expenditures, balance, end of period (investing)
27
30
Reduction of long-term debt from funds previously transferred for repayment (financing)
—
82
Right-of-use assets obtained in exchange for operating lease obligations (investing)
38
16
1The amounts shown represent the market value of common stock issued for director and executive/management compensation and withheld to satisfy statutory tax liabilities.
Note 12 ·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
52
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
characteristics of the security. In all cases, the fair value used will have been independently determined by a third-party pricing vendor or non-affiliated broker.
The fair value of the mortgage revenue bonds is estimated using a discounted cash flow model to calculate the present value of future principal and interest payments and, therefore is classified within Level 3 of the valuation hierarchy.
Loans held for sale. Residential and commercial loans are carried at the lower of cost or market and are valued using market observable pricing inputs, which are derived from third party loan sales and, therefore, are classified within Level 2 of the valuation hierarchy.
Loans held for investment. Fair value of loans held for investment is derived using a discounted cash flow approach which includes an evaluation of the underlying loan characteristics. The valuation model uses loan characteristics which includes product type, maturity dates and the underlying interest rate of the portfolio. This information is input into the valuation models 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.
Collateral dependent loans. Collateral dependent loans have been adjusted to fair value. When a loan is identified as collateral dependent, the Company measures the impairment using the current fair value of the collateral, less selling costs. Depending on the characteristics of a loan, the fair value of collateral is generally estimated by obtaining external appraisals, but in some cases, the value of the collateral may be estimated as having little or no 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. If it is determined that the value of the collateral dependent loan is less than its recorded investment, the Company recognizes this impairment and adjusts the carrying value of the loan to fair value through the allowance for credit losses.
Real estate acquired in settlement of loans. Foreclosed assets are carried at fair value (less estimated costs to sell) and are generally based upon appraisals or independent market prices that are periodically updated subsequent to classification as real estate owned. Such adjustments typically result in a Level 3 classification of the inputs for determining fair value. ASB estimates the fair value of collateral-dependent loans and real estate owned using the sales comparison approach.
Mortgage servicing rights. MSRs are capitalized at fair value based on market data at the time of sale and accounted for in subsequent periods at the lower of amortized cost or fair value. MSRs are evaluated for impairment at each reporting date. ASB's MSRs are stratified based on predominant risk characteristics of the underlying loans including loan type and note rate. For each stratum, fair value is calculated by discounting expected net income streams using discount rates that reflect industry pricing for similar assets. Expected net income streams are estimated based on industry assumptions regarding prepayment expectations and income and expenses associated with servicing residential mortgage loans for others. Impairment is recognized through a valuation allowance for each stratum when the carrying amount exceeds fair value, with any associated provision recorded as a component of loan servicing fees included in "Revenues - bank" in the consolidated statements of income. A direct write-down is recorded when the recoverability of the valuation allowance is deemed to be unrecoverable. ASB compares the fair value of MSRs to an estimated value calculated by an independent third-party. The third-party relies on both published and unpublished sources of market related assumptions and its own experience and expertise to arrive at a value. ASB uses the third-party value only to assess the reasonableness of its own estimate. ASB includes MSRs within Level 3 of the valuation hierarchy.
Time deposits. 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 fixed-rate long-term debt—other than bank 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. The carrying amount of floating rate long-term debt—other than bank approximated fair value because of the short-term interest reset periods. 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.
53
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Forward sales commitments. To be announced (TBA) mortgage-backed securities forward commitments are classified as Level 1, and consist of publicly-traded debt securities for which identical fair values can be obtained through quoted market prices in active exchange markets. The fair values of ASB’s best efforts and mandatory delivery loan sale commitments are determined using quoted prices in the market place that are observable and are classified as Level 2 measurements.
The following table presents the carrying or notional amount, fair value and placement in the fair value hierarchy of the Company’s financial instruments.
Estimated fair value
(in thousands)
Carrying or notional amount
Quoted prices in active markets for identical assets (Level 1)
Significant other observable inputs (Level 2)
Significant unobservable inputs (Level 3)
Total
June 30, 2021
Financial assets
HEI consolidated
Available-for-sale investment securities
$
2,509,906
$
—
$
2,494,479
$
15,427
$
2,509,906
Held-to-maturity investment securities
375,655
—
374,141
—
374,141
Loans, net
5,157,084
—
50,884
5,233,001
5,283,885
Mortgage servicing rights
10,754
—
—
14,213
14,213
Derivative assets
30,465
—
511
—
511
Financial liabilities
HEI consolidated
Deposit liabilities
484,357
—
485,862
—
485,862
Short-term borrowings—other than bank
95,748
—
95,748
—
95,748
Other bank borrowings
129,665
—
129,664
—
129,664
Long-term debt, net—other than bank
2,258,043
—
2,623,110
—
2,623,110
Derivative liabilities
42,087
26
3,626
—
3,652
Hawaiian Electric consolidated
Short-term borrowings
37,999
—
37,999
—
37,999
Long-term debt, net
1,676,043
—
2,006,289
—
2,006,289
December 31, 2020
Financial assets
HEI consolidated
Available-for-sale investment securities
$
1,970,417
$
—
$
1,943,232
$
27,185
$
1,970,417
Held-to-maturity investment securities
226,947
—
229,963
—
229,963
Loans, net
5,260,917
—
28,354
5,410,976
5,439,330
Mortgage servicing rights
10,020
—
—
10,705
10,705
Derivative assets
120,980
—
4,536
—
4,536
Financial liabilities
HEI consolidated
Deposit liabilities
548,830
—
552,800
—
552,800
Short-term borrowings—other than bank
129,379
—
129,379
—
129,379
Other bank borrowings
89,670
—
89,669
—
89,669
Long-term debt, net—other than bank
2,119,129
—
2,487,790
—
2,487,790
Derivative liabilities
137,500
500
4,530
—
5,030
Hawaiian Electric consolidated
Short-term borrowings
49,979
—
49,979
—
49,979
Long-term debt, net
1,561,302
—
1,890,490
—
1,890,490
54
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:
Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies
$
—
$
2,366,301
$
—
$
—
$
1,849,559
$
—
U.S. Treasury and federal agency obligations
—
96,309
—
—
62,322
—
Corporate bonds
—
31,869
—
—
31,351
—
Mortgage revenue bonds
—
—
15,427
—
—
27,185
$
—
$
2,494,479
$
15,427
$
—
$
1,943,232
$
27,185
Derivative assets
Interest rate lock commitments (bank segment)1
$
—
$
371
$
—
$
—
$
4,536
$
—
Forward commitments (bank segment)1
—
6
—
—
—
—
Interest rate swap (Other segment)2
—
134
—
—
—
—
$
—
$
511
$
—
$
—
$
4,536
$
—
Derivative liabilities
Forward commitments (bank segment)1
$
26
$
21
$
—
$
500
$
—
$
—
Interest rate swap (Other segment)2
—
3,605
—
—
4,530
—
$
26
$
3,626
$
—
$
500
$
4,530
$
—
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 assets and other liabilities in the balance sheets.
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows:
Three months ended June 30
Six months ended June 30
Mortgage revenue bonds
2021
2020
2021
2020
(in thousands)
Beginning balance
$
15,427
$
28,726
$
27,185
$
28,597
Principal payments received
—
—
(11,758)
—
Purchases
—
101
—
230
Unrealized gain (loss) included in other comprehensive income
—
—
—
—
Ending balance
$
15,427
$
28,827
$
15,427
$
28,827
Mortgage revenue bonds are 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 June 30, 2021, the weighted average discount rate was 2.05%, 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.
55
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 using
(in thousands)
Balance
Level 1
Level 2
Level 3
June 30, 2021
Loans
$
204
$
—
$
—
$
204
December 31, 2020
Loans
387
—
—
387
Mortgage servicing rights
3,001
—
—
3,001
For the six months ended June 30, 2021 and 2020, 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
June 30, 2021
Residential
$
125
Fair value of property or collateral
Appraised value less selling cost
N/A (2)
N/A (2)
Home equity lines of credit
79
Fair value of collateral
Appraised value less selling cost
N/A (2)
N/A (2)
December 31, 2020
Commercial loan
$
387
Fair value of collateral
Appraised value less selling cost
N/A (2)
N/A (2)
Mortgage servicing rights
3,001
Discounted cash flow
Prepayment speed
15% - 22%
22
%
Discount rate
9.3
%
(1) Represents 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.
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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 2020 Form 10-K and should be read in conjunction with such discussion and the 2020 annual consolidated financial statements of HEI and Hawaiian Electric and notes thereto included in HEI’s and Hawaiian Electric’s 2020 Form 10-K, as well as the quarterly (as of and for the six months ended June 30, 2021) condensed consolidated financial statements and notes thereto included in this Form 10-Q.
HEI consolidated
Recent developments—COVID-19.
Economic conditions in Hawaii have improved significantly from the start of the year and continue to improve, with daily passenger count for July 2021 achieving 89% of the passenger counts for the same month in 2019. Hawaii vaccinations have increased at a rapid pace, with approximately 60.3% of the state’s population fully vaccinated as of August 1, 2021. New COVID-19 cases in Hawaii remained at a relatively low level and continued trending down at the end of the second quarter. However, starting in mid July, as the Delta variant became more prevalent, case counts have started to increase with approximately 349 average daily new cases (7-day moving average) as of August 1, 2021.
Starting on July 8, 2021, vaccinated travelers will no longer need to quarantine or take a COVID-19 pretest if they present proof of vaccination. As a result, the Company expects that the Hawaii economy will continue to improve as tourism numbers increase. In the second quarter of 2021, kWh sales remained below pre-pandemic levels, but were 8.1% higher than the same period in 2020 due to increased economic activity following the loosening of restrictions and an increase in tourism. While the level of kWh sales does not affect Utility revenues due to decoupling, it may increase or decrease the price per kWh paid by customers. See “Decoupling” in Note 3 of the Condensed Consolidated Financial Statements for a discussion of decoupling.
At the Bank, improved credit quality from a strengthening Hawaii economy resulted in credit upgrades within the commercial real estate and commercial loan portfolios and lower net charge-offs which allowed ASB to record a $12.2 million negative provision for credit losses in the second quarter of 2021.
While economic conditions have improved, the Company remains focused on the continued safety and well-being of customers, employees, their families and the community. The Company’s mandatory work-from-home policy remains in effect through October 1, 2021 for certain employees and this policy has not impaired the Company’s ability to maintain effective internal controls over financial reporting. For personnel that cannot perform their work remotely, the Company has maintained safety protocols and policies to keep employees safe, while at the same time ensuring the reliability and resilience of its operations.
For further discussion of the impact of the COVID-19 pandemic on our subsidiaries see “Recent Developments—COVID-19” in the Electric Utility and Bank sections below. There has been no material impact on the “Other” segment and Pacific Current as a result of the COVID-19 pandemic as the primary businesses of Pacific Current are supported by PPAs that provide for contractual cash flows with credit-worthy counterparties.
For a discussion regarding the impact of the economic conditions caused by the pandemic on the Company’s liquidity and capital resources, see discussion under “Financial Condition–Liquidity and capital resources,” contained in each of the “HEI Consolidated,” “Electric utility” and “Bank” sections of this MD&A.
Environmental, Social & Governance.
At HEI, environmental, social and governance (ESG) principles and sustainability have long been fundamental values embedded within all aspects of the Company’s activities. With all of its operations isolated in the middle of the Pacific Ocean, the Company’s long-term health, and ability to deliver sustainable value for all stakeholders—including shareholders—is inextricably linked to the well-being of its employees, communities, economy, and environment. That is why the Company sees its mission of being a catalyst for a better Hawaii as advancing the Company’s long-term financial performance and sustainability. The Company has focused on ensuring ESG considerations are appropriately integrated into its governance structures, strategies and risk management. This includes:
•Integration of Board oversight of important ESG matters into its existing governance structures and processes. This includes full Board review of ESG-related strategies, Audit & Risk Committee oversight of ESG risks, Compensation Committee responsibility for ESG-related compensation matters and Nominating & Corporate Governance Committee responsibility for human capital management and for ensuring an appropriate board governance framework is in place with respect to ESG.
•Robust ESG expertise among board members, including directors with direct experience in renewable energy, climate change policy and strategy, environmental management and sustainable investing.
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•Expanded ESG goals as part of HEI and Utility executive incentive compensation.
•ESG considerations explicitly woven into strategic planning efforts and enterprise risk management processes.
The Company is committed to transparency and providing information to allow customers, community leaders, investors and other stakeholders understand how the Company’s strategies and operations advance ESG objectives and contribute to long-term value creation.
The Company issued its first ESG report in September 2020. The report encompassed ESG policies, principles and results reported during 2019 across the Company’s two primary operating subsidiaries, Hawaiian Electric and ASB, and was aligned with Sustainability Accounting Standards Board (SASB) guidance—using the electric utilities standard for Hawaiian Electric, and the commercial banks, commercial finance, and mortgage finance standards for ASB. On April 22, 2021, the Company issued its second ESG report. This report continues to include SASB disclosures for Hawaiian Electric and ASB and incorporates disclosures regarding risks and opportunities related to climate change, as well as associated risk management and governance processes, based on recommendations from the Task Force on Climate-related Financial Disclosures. It also outlines key impacts for the Company under two climate scenarios, including a scenario targeted to limit global temperature rise to 2 degrees Celsius or lower. The Company’s ESG reports can be found at www.hei.com/esg.
RESULTS OF OPERATIONS
Three months ended June 30
%
(in thousands)
2021
2020
change
Primary reason(s)*
Revenues
$
680,257
$
608,945
12
Primarily increase for the electric utility segment
Operating income
101,856
71,556
42
Primarily increase for bank segment
Net income for common stock
63,872
48,887
31
Primarily increase due to higher net income at bank segment. See below for effective tax rate explanation.
Six months ended June 30
%
(in thousands)
2021
2020
change
Primary reason(s)*
Revenues
$
1,323,203
$
1,286,131
3
Primarily increase for the electric utility segment
Operating income
199,887
131,258
52
Increase for the electric utility and bank segments, partly offset by higher operating losses at the other segment
Net income for common stock
128,230
82,307
56
Increase due to higher net income at the electric utility and bank segments, partly offset by higher net loss at the other segment. See below for effective tax rate explanation.
* Also, see segment discussions which follow.
The Company’s effective tax rates for the second quarters of 2021 and 2020 were 22% and 18%, respectively. The Company’s effective tax rates for the first six months of 2021 and 2020 were 21% and 17%, respectively. The effective tax rates were higher for the six months ended June 30, 2021 compared to the same period in 2020 due primarily to an increase in income before taxes in 2021, which reduces the rate impact of certain tax items, lower amortization in 2021 of the Utilities’ regulatory liability related to certain excess deferred income taxes resulting from the Tax Act’s decrease in the federal income tax rate and a decrease in excess tax benefits related to vesting of share-based awards in 2021. These increases were partially offset by higher nontaxable bank owned life insurance income in 2021. The effective tax rate was higher for the second quarter of 2021 compared to the same period in 2020 due primarily to an increase in income before taxes, which reduces the rate impact of certain tax items, and lower amortization in 2021 of the Utilities’ regulatory liability related to certain excess deferred income taxes resulting from the Tax Act’s decrease in the 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 (UHERO), Department of Health of the State of Hawaii , 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 news media).
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The CARES Act was passed by Congress and signed into law on March 27, 2020. The economic relief package totals more than $2 trillion and provides direct economic support to businesses and individuals. On December 27, 2020, the President signed into law the $900 billion economic stimulus package that provides, among others, direct payments to qualifying individuals, extended unemployment benefits, and additional small business aid. On March 11, 2021, the President signed into law the $1.9 trillion coronavirus relief package. The plan will send direct payments of up to $1,400 to most Americans. The bill will also extend a $300 per week unemployment insurance boost until September 6 and expand the child tax credit for a year. It will also put nearly $20 billion into COVID-19 vaccinations, $25 billion into rental and utility assistance, and $350 billion into state, local and tribal relief. Hawaii has received a significant amount of funds through these various federal assistance programs that will help attenuate the impact to Hawaii’s economy.
In September 2020, the City and County of Honolulu announced a framework for reducing the spread of COVID-19 on Oahu, which tracks metrics that dictate the extent of restrictions on businesses and activities. There were initially four tiers with Tier 1 being the most restrictive. The minimum amount of time spent in each tier is four weeks. In order to move to the next higher tier, the last two weeks of a tier must meet the higher tier’s criteria. If a lower tier’s average daily case count is realized for two weeks in a row, the county will move back to the lower tier for a minimum of four weeks. On February 25, 2021, the county of Honolulu moved from Tier 2 to Tier 3, which allows greater density for business and other social activities. On June 11, 2021, the county of Honolulu moved from Tier 3 to Tier 4, with fewer restrictions and flexibility for businesses. A new Tier 5 was also announced, which requires that the vaccination rate exceed 60% in order to move into this tier. At a 70% vaccination rate, all restrictions would be lifted. On July 8, 2021, the county of Honolulu moved into Tier 5, which further loosened existing restrictions. As of August 1, 2021, approximately 60.3% of the state’s population have been fully vaccinated with Honolulu County’s rate at 62%.
See “Recent Developments—COVID-19” in the “Electric utility” and “Bank” sections below for further discussion of the economic impact caused by the pandemic.
Hawaii’s tourism industry, a significant driver of Hawaii’s economy, suffered dramatically with a 73.8% reduction in total visitor arrivals in 2020 compared with 2019. Starting October 15, 2020, the state launched its Safe Travels Program that allows travelers to avoid the mandatory 14-day quarantine if they test negative for COVID-19 within 72 hours of departure. Effective July 8, 2021, domestic visitors can now bypass the mandatory quarantine or COVID-19 test by providing proof of vaccination. Since the launch of the Safe Travels Program, the average daily passenger arrivals have steadily improved, but still remain below pre-pandemic levels. For the second quarter of 2021, average daily passenger counts were 2,569.7% higher than the comparable period in the prior year, but still 26.9% below 2019. However, with the ongoing vaccination efforts across the nation and the implementation of the Safe Travels Program, average daily passenger counts have steadily increased throughout the quarter to an average of 23,393 passengers per day, with June average daily passenger counts 303% above January counts. A new 2021 year-to-date high of 35,435 daily visitor arrivals was achieved on August 1, 2021. The recovery in passenger counts thus far has been driven by domestic travelers, with international travelers remaining at low levels due to higher restrictions for international travelers, depending on country of origin. In June, domestic passenger counts were up 3.6% compared to June 2019 pre-COVID levels, while international passenger counts were down 93.3% compared to 2019 pre-COVID levels.
Hawaii’s seasonally adjusted unemployment rate in June 2021 was 7.7%, which was substantially lower compared to the June 2020 rate of 14.1%. The national unemployment rate in June 2021 was 5.9% compared to 11.1% in June 2020. Hawaii’s unemployment rate is expected to continue to improve now that the job search requirement has been reinstated in order for claimants to receive unemployment benefits, restrictions on travel have been reduced significantly and vaccination rates are approaching State of Hawaii targets that would further lift business restrictions.
Hawaii real estate activity through June 2021, as indicated by Oahu’s home resale market, drove an increase in the median sales price of 6.4% for condominiums and 21% for single-family homes compared to the same period in 2020, with the median single-family home price reaching a record $979,000. The number of closed sales was up 70.7% for condominiums and up 32.9% for single-family residential homes for the first six months of 2021 compared to the same period in 2020.
Hawaii’s petroleum product prices reflect supply and demand in the Asia-Pacific region and the price of crude oil in international markets. The price of crude oil gradually increased during the 4th quarter of last year and the trend has continued during the first five months of this year.
At its June 16, 2021 meeting, the Federal Open Market Committee (FOMC) decided to maintain the federal funds rate target range of 0%-0.25%. The FOMC plans to continue to maintain an accommodative stance of monetary policy to achieve maximum employment and inflation at the rate of 2 percent over the long run. The Federal Reserve stated that it will increase its holdings of Treasury securities and agency mortgage-backed securities at least at the current pace to sustain smooth market functioning and help foster accommodative financial conditions, thereby supporting the flow of credit to households and businesses.
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The most recent forecast by UHERO, which was issued on May 14, 2021, forecasts full year 2021 real GDP growth of 4.0%, increase in total visitor arrivals of 135.9%, decrease in real personal income of -0.6%, and an unemployment rate of 7.3%. This forecast reflects improvement of Hawaii’s economy compared to the prior forecast as the U.S. visitor market outperforms expectations with increases in vaccinations and broader reopening. However, the international market continues to be much slower to return. A full economic recovery is still forecasted to be several years out.
The Company expects that if economic conditions worsen from current levels or remain depressed for an extended period of time, it could have a material unfavorable impact on the Company’s net revenues or income from continuing operations in 2021.
“Other” segment.
Three months ended June 30
Six months ended June 30
(in thousands)
2021
2020
2021
2020
Primary reason(s)
Revenues
$
1,118
$
16
$
2,069
$
22
Increase in other sales at Pacific Current subsidiaries.
Operating loss
(5,634)
(4,738)
(12,013)
(8,397)
The second quarters of 2021 and 2020 include $0.6 million and $0.9 million, respectively, of operating income from Pacific Current1. Second quarter 2021 corporate expense was $0.7 million higher, primarily due to higher charitable contribution expense related to an obligation to make matching contributions under a settlement agreement with the former President and Chief Executive Officer of the Bank. The first six months of 2021 and 2020 include $1.3 million and $1.8 million, respectively, of operating income from Pacific Current1. Corporate expenses for the first six months of 2021 was $3.1 million higher than the same period in 2020, primarily due to higher incentive compensation, higher charitable contribution expense related to an obligation to make matching contributions under a settlement agreement with the former President and Chief Executive Officer of the Bank and higher charitable donations, due to timing of contributions.
Net loss
(8,313)
(7,456)
(16,869)
(13,702)
The net loss for the second quarter and first six months of 2021 was higher than the net loss for the second quarter and first six months of 2020 due to the same factors cited for the change in operating loss.
1 Hamakua Energy’s sales to Hawaii Electric Light (a regulated affiliate) are eliminated in consolidation.
The “other” business segment loss includes results of the stand-alone corporate operations of HEI (including eliminations of intercompany transactions) and ASB Hawaii, Inc. (ASB Hawaii), 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 that provides electricity to Hawaii Electric Light; Pacific Current’s subsidiaries, Mauo, LLC (Mauo), which owns solar-plus-storage projects totaling 8.6 MW on five University of Hawaii campuses, Alenuihaha Developments, LLC, which owns a collection of renewable energy assets, and Ka‘ie‘ie Waho Company, LLC, which owns a 6 MW solar photovoltaic system that provides renewable energy to Kauai Island Utility Cooperative; as well as eliminations of intercompany transactions.
FINANCIAL CONDITION
Liquidity and capital resources. As of June 30, 2021, there was no balance on HEI’s revolving credit facility or Hawaiian Electric’s revolving credit facility and the available committed capacity under the facilities was $175 million and $200 million, respectively. On April 19, 2021, Hawaiian Electric’s $75 million 364-day revolving credit agreement terminated and was not renewed. At the end of the quarter, HEI and Hawaiian Electric had approximately $58 million and $38 million of commercial paper outstanding, respectively. As of June 30, 2021, ASB’s unused FHLB borrowing capacity was approximately $2.0 billion and ASB had unpledged investment securities of $2.3 billion that were available to be used as collateral for additional borrowing capacity.
The Company expects that its liquidity will continue to be moderately impacted at the Utilities due to COVID-19. For the Utilities, the elevated level of unemployment in the state and the moratorium on customer disconnections (which ended on May 31, 2021) have resulted in higher accounts receivable balances and bad debt expense and may result in higher write-offs in the future. Additionally, lower kWh sales generally result in delayed timing of cash flows, resulting in higher working capital requirements (see “Recent Developments—COVID-19” in the Electric utility section below). At ASB, liquidity remains at satisfactory levels largely due to U.S. economic stimulus programs implemented as a result of COVID-19 that led to a
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substantial increase in customer deposits. ASB’s cash and cash equivalents was $221 million as of June 30, 2021, compared to $293 million as of December 31, 2020. ASB remains well above the “well capitalized” level under the FDIC Improvement Act prompt correction action capital category, and while the economic outlook has improved and is expected to continue to improve, there are still COVID-19 related business restrictions that remain in place that could create ongoing uncertainty regarding COVID-19’s impact on loan performance and the allowance for credit losses (see “Recent Developments — COVID-19” in the Bank section below).
On May 14, 2021, HEI and Hawaiian Electric each entered into a separate agreement with a syndicate of nine financial institutions (the HEI Facility and Hawaiian Electric Facility, respectively, and together, the Facilities), to amend and restate their respective previously existing unsecured revolving credit agreements. The HEI Facility was increased to $175 million from $150 million and its term was extended to May 14, 2026. The $200 million Hawaiian Electric Facility has an initial term that expires May 13, 2022, but its term will extend to May 14, 2026 upon approval by the PUC during the initial term, which approval is currently being requested.
As of June 30, 2021 and December 31, 2020, the total amount of available borrowing capacity (net of commercial paper outstanding) under the Company’s committed lines of credit was approximately $279 million and $360 million, respectively.
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, as well as bank borrowings, is adequate to maintain sufficient liquidity to fund its contractual obligations and commercial commitments, its forecasted capital expenditures and investments, its expected retirement benefit plan contributions and other cash requirements. However, the COVID-19 pandemic is an evolving situation, and the Company cannot predict the extent or duration of the outbreak, the future effects that it will have on the global, national or local economy, including the impact on the Company’s cost of capital and its ability to access additional capital, or the future impacts on the Company’s financial position, results of operations, and cash flows.
The consolidated capital structure of HEI (excluding deposit liabilities and other bank borrowings) was as follows:
(dollars in millions)
June 30, 2021
December 31, 2020
Short-term borrowings—other than bank
$
96
2
%
$
129
3
%
Long-term debt, net—other than bank
2,258
47
2,119
46
Preferred stock of subsidiaries
34
1
34
1
Common stock equity
2,367
50
2,338
50
$
4,755
100
%
$
4,620
100
%
HEI’s commercial paper borrowings and line of credit facility were as follows:
Average balance
Balance
(in millions)
Six months ended June 30, 2021
June 30, 2021
December 31, 2020
Commercial paper
$
52
$
58
$
65
Line of credit draws
—
—
—
Undrawn capacity under HEI’s line of credit facility
175
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 short-term commercial paper borrowings during the first six months of 2021 was $102 million.
On March 17, 2021, S&P revised HEI’s outlook to stable from positive and affirmed the “BBB-” issuer credit rating and “A-3” short-term and commercial paper ratings. On April 20, 2021, Moody’s upgraded HEI’s short-term rating for commercial paper to “P-2” from “P-3” and revised the outlook to stable from positive. On June 25, 2021, Fitch affirmed HEI’s “BBB” long-term issuer default rating, “F3” short-term issuer default rating and stable outlook.
HEI has a $175 million line of credit facility with no amounts outstanding at June 30, 2021. See Note 5 of the Condensed Consolidated Financial Statements.
There were no new issuances of common stock through the HEI Dividend Reinvestment and Stock Purchase Plan (DRIP), HEIRSP or the ASB 401(k) Plan in the six months ended June 30, 2021 and 2020 and HEI satisfied the share purchase requirements of the DRIP, HEIRSP and ASB 401(k) Plan through open market purchases of its common stock.
For the first six months of 2021, net cash provided by operating activities of HEI consolidated was $118 million. Net cash used by investing activities for the same period was $771 million, primarily due to capital expenditures, ASB’s purchases of
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available-for-sale and held-to maturity investment securities, partly offset by ASB’sreceipt of investment security repayments and maturities, proceeds from the sale of investment securities, net decrease in loans and sale of residential loans. Net cash provided by financing activities during this period was $553 million as a result of several factors, including net increases in ASB’s deposit liabilities and other bank borrowings, the issuances of long-term debt and net increases in short-term borrowings, partly offset by repayment of short-term and long-term debt and payment of common stock dividends. During the first six months of 2021, Hawaiian Electric and ASB (through ASB Hawaii) paid cash dividends to HEI of $56 million and $28 million, respectively.
Dividends. The payout ratios for the first six months of 2021 and full year 2020 were 58% and 73%, respectively. On February 9, 2021, the HEI Board of Directors approved a 1 cent increase in the quarterly dividend from $0.33 per share to $0.34 per share, starting with the dividend in the first quarter of 2021. 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, current and expected future economic conditions, including impacts from the COVID-19 pandemic, and capital investment alternatives.
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, in addition to the critical policy discussed below, see pages 42 to 44, 58 to 59, and 72 to 74 of HEI’s MD&A included in Part II, Item 7 of HEI’s 2020 Form 10-K.
Following are discussions of the results of operations, liquidity and capital resources of the electric utility and bank segments.
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Electric utility
Recent developments—COVID-19
See also Recent developments—COVID-19 in HEI’s MD&A.
Economic conditions in Hawaii improved in the first half of 2021 as vaccination rates increased and businesses were allowed to operate with fewer restrictions. Statewide daily passenger counts have improved dramatically, reaching a year-to-date high of 35,435 passengers per day on August 1, 2021, which was nearly 94.5% of the level achieved adjusted to be on the same weekday in 2019. At the end of June, statewide unemployment was 7.7%, which improved from 10.3% at the end of 2020. With the increase in economic activity, the demand for electricity has increased from 2020 levels, however, sales remain below the kWh sales levels achieved for the same period in 2019. In the second quarter of 2021, kWh sales were up 8.1% compared with the same quarter in 2020, however, they were 4.4% below the same quarter in 2019. The Utilities expect kWh sales to continue to improve throughout 2021 as the COVID-19 vaccination target are approached, allowing remaining government restrictions to be lifted.
While the Utilities’ electric energy revenues have not been significantly impacted due to the decoupling mechanism, which allows recovery of the difference between PUC approved target revenues and recorded adjusted revenues regardless of the level of kWh sales, the timing of customer collections would be delayed (or accelerated) if the level of kWh sales decreases below (or increases above) the estimated kWh sales. See “Decoupling” in Note 3 of the Condensed Consolidated Financial Statements for a discussion of decoupling. Annually, the Utilities submit a decoupling filing to the PUC, which requests recovery by the utility (or refund to customers) of the difference between recorded adjusted revenues and target revenues under the RBA. The difference is collected or refunded through an adjustment to customer rates in the following year based on estimated sales, starting on June 1st of that following year, which has an impact on the timing of the Utilities’ cash flow. Additionally, although the Utilities’ decoupling mechanism allows for collection under the RBA, the RBA balance accrues interest only at the short-term debt rate from the last rate case (2.5% for Hawaiian Electric, 3.75% for Hawaii Electric Light and 3.0% for Maui Electric). As of June 30, 2021, the RBA balance was approximately $35.6 million, compared to $7.6 million as of December 31, 2020. While the billed accounts receivable balance, net of allowance for doubtful accounts, of $152 million, as of June 30, 2021, is 3.1% higher than the billed accounts receivable balance as of December 31, 2020, due in part to higher fuel prices resulting in higher bills, the past due accounts receivable balance has decreased by $4 million or 7% since December 31, 2020 with a corresponding decrease in the number of accounts past due by approximately 8% for the same period. The decrease was primarily driven by an improvement in economic conditions with fewer restrictions, increased vaccination rates, and continued application of available assistance from various government and community programs, including the Hawaii Utility Bill Assistance Program, which was launched in the first quarter of 2021 and provided funding to Hawaiian Electric customers and other utility companies. While the moratorium on customer disconnections ended on May 31, 2021, efforts are ongoing to continue working with customers on payment plans and other bill assistance for customers through funding from non-profit organizations, as well as state and county relief programs. The Utilities are prepared to address the financing requirement related to the delayed timing of cash flows collected under the decoupling mechanism through the RBA and the modest slowing or reduction in accounts receivable collections from customers. See “Financial Condition—Liquidity and capital resources” for additional information.
The Utilities provide an essential service to the State of Hawaii, and have continued to operate to protect the health and safety of employees and customers and to ensure system reliability, and have been following the Governor’s directive that the Utilities take necessary measures to ensure they can operate in the normal course. The Utilities have also implemented certain aspects of their business continuity plans, which includes the activation of its Incident Management Team to closely manage the response to the pandemic and have implemented practices related to employee and facilities hygiene in order to ensure the reliability and resilience of their operations.
In the second quarter of 2020, the PUC approved the deferral of certain COVID-19 related costs, such as higher bad debt expense, higher financing costs, non-collection of late payment fees, increased personal protective equipment costs, and sequestration costs for mission-critical employees. As of June 30, 2021, these costs, which have been deferred and recorded as a regulatory asset, totaled approximately $25.6 million (see also discussion under Item 1A. “Risk Factors” and “Regulatory assets for COVID-19 related costs” in Note 3 of the Condensed Consolidated Financial Statements). The Utilities have approval to defer COVID-19 related costs through June 30, 2021, and a decision on the Utilities’ request to extend the deferral period through December 31, 2021 is pending. The Utilities will be seeking recovery of the deferred costs in a separate proceeding. Looking forward, while the distribution and administration of the COVID vaccine has allowed for reduced restrictions and a partial reopening of the Hawaii economy, a worsening of COVID-19 case counts or a prolonged period of current COVID-19 restrictions could adversely affect the ability of the Utilities’ contractors, suppliers, IPPs, and other business partners to perform or fulfill their obligations, or require modifications to existing contracts, which could adversely affect the Utilities’ business, increase expenses, and impact the Utilities’ ability to achieve their RPS goals. Additionally, while the state’s aggressive response to the pandemic has dramatically reduced the spread of the coronavirus,
63
the measures taken have had a severe economic impact on the state’s businesses and residents, which may influence the PUC’s actions regarding future rate increases. See “Item 1A. Risk Factors” in Part II for additional discussion of risks.
For a discussion regarding the impact of the economic conditions caused by the COVID-19 pandemic on the Utilities’ liquidity and capital resources, see discussion under “Financial Condition–Liquidity and capital resources.”
RESULTS OF OPERATIONS
Three months ended June 30
Increase
2021
2020
(decrease)
(dollars in millions, except per barrel amounts)
$
602
$
534
$
68
Revenues. Net increase largely due to:
$
29
higher fuel oil prices and higher kWh generated1
25
higher purchased power energy prices and higher kWh purchased2
5
higher revenues from 2020 RAM adjustments
4
increase related solely to a change in the timing for revenue recognition within the year, which eliminates seasonality in recognizing target revenues and results in recognizing revenues evenly throughout the year with target revenues recognized on an annual basis remaining unchanged
3
higher PPAC revenue2
2
lower ERP system implementation benefits to be passed on to the customers in future rates
139
112
27
Fuel oil expense1. Increase largely due to higher fuel oil prices and higher kWh generated
162
137
25
Purchased power expense1, 2. Increase largely due to higher purchased power energy prices, higher kWh purchased, and higher capacity and non-fuel O&M charges
118
110
8
Operation and maintenance expenses. Net increase largely due to:
6
more generating facility overhauls and maintenance work performed
2
lower bad debt expense in the second quarter of 2020 due to retrospective adjustment to defer bad debt expense related to COVID-19 to regulatory asset for first quarter of 2020
1
expense due to decommissioning of combined heat and power unit on Lanai
1
ERP system costs amortization, which started for Hawaiian Electric in November 2020
1
increase in Pearl Harbor environmental reserves
(2)
lower labor due to lower staffing and reduction in overtime
(1)
lower pension service cost due to reset of pension cost included in rates as part of Hawaiian Electric final rate case decision
114
107
7
Other expenses. Increase due to higher revenue taxes, coupled with higher depreciation expense in 2021 for plant investments in 2020
68
68
—
Operating income. higher RAM revenues, offset by higher operation and maintenance expenses and higher depreciation expense
54
53
1
Income before income taxes. Increase due to higher RAM revenues and lower pension non-service costs, offset in part by higher operation and maintenance expense and higher depreciation expense
42
42
—
Net income for common stock. higher RAM revenues, offset by higher operating expense. See below for effective tax rate explanation
2,026
1,874
152
Kilowatthour sales (millions)3
$
73.58
$
63.12
$
10.46
Average fuel oil cost per barrel
64
Six months ended June 30
Increase
2021
2020
(decrease)
(dollars in millions, except per barrel amounts)
$
1,167
$
1,132
$
35
Revenues. Net increase largely due to:
$
25
higher purchased power energy prices and higher kWh purchased2
12
higher revenues from 2020 RAM adjustments
9
increase related solely to a change in the timing for revenue recognition within the year, which eliminates seasonality in recognizing target revenues and results in recognizing revenues evenly throughout the year with target revenues recognized on an annual basis remaining unchanged
5
lower ERP system implementation benefits to be passed on to the customers in future rates
5
higher PPAC revenue2
(21)
lower fuel oil prices and lower kWh generated1
267
286
(19)
Fuel oil expense1. Decrease largely due to lower fuel oil prices and lower kWh generated
305
277
28
Purchased power expense1 ,2. Increase largely due to higher purchased power energy prices, higher kWh purchased and higher capacity and non-fuel O&M charges
233
238
(5)
Operation and maintenance expenses. Net decrease largely due to:
(5)
lower labor due to lower staffing and reduction in overtime
(4)
lower outside service costs
(3)
lower pension service cost due to reset of pension cost included in rates as part of Hawaiian Electric final rate case decision
4
more generating facility overhauls and maintenance work performed
2
ERP system costs amortization, which started for Hawaiian Electric in November 2020
1
expense due to decommissioning of combined heat and power unit on Lanai
226
220
6
Other expenses. Increase due to higher revenue taxes, coupled with higher depreciation expense in 2021 for plant investment in 2020
137
112
25
Operating income. Increase due to lower operation and maintenance expenses coupled with higher RAM revenues, offset in part by higher depreciation expense
109
83
26
Income before income taxes. Increase due to lower operation and maintenance expense, higher RAM revenues and lower pension non-service costs, partially offset by higher interest expense related to new long term debt issued in May 2020 and January 2021 and higher depreciation expense
85
66
19
Net income for common stock. Increase due to lower operating expenses, coupled with higher RAM revenues. See below for effective tax rate explanation
3,935
3,880
55
Kilowatthour sales (millions)3
$
68.59
$
72.77
$
(4.18)
Average fuel oil cost per barrel
469,378
465,953
3,425
Customer accounts (end of period)
1The rate schedules of the electric utilities currently contain ECRCs through which changes in fuel oil prices and certain components of purchased energy costs are passed on to customers.
2The rate schedules of the electric utilities currently contain PPACs through which changes in purchased power expenses (except purchased energy costs) are passed on to customers.
3 kWh sales in 2021 were higher when compared to the same periods last year largely due to recovery from the initial impacts of the COVID-19 pandemic. An increase in visitor arrivals due to changes in the Safe Travels requirements allowed travelers to bypass the 10-day quarantine by taking a COVID test or showing proof of vaccination for domestic travelers, led to a recovery in the tourism industry. This combined with easing of restrictions on business activities and increased vaccinations, led to improving unemployment and broader reopening. As restrictions ease, vaccination rates reach State of Hawaii targets and more visitors arrive, sales are expected to slowly rebound but remain lower than pre-pandemic levels.
The Utilities’ effective tax rate for each of the second quarters of 2021 and 2020 was 21% and 19%, respectively. The Utilities’ effective tax rates for the first six months of 2021 and 2020 were at 21% and 19%, respectively. The effective tax rate was higher for the six months ended June 30, 2021 compared to the same period in 2020 due primarily to an increase in
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income before taxes in 2021, lower amortization in 2021 of the Utilities’ regulatory liability related to certain excess deferred income taxes resulting from the Tax Act’s decrease in the federal income tax rate and a decrease in excess tax benefits related to vesting of share-based awards in 2021. The effective tax rate was higher for the second quarter of 2021 compared to the same period in 2020 due primarily to lower amortization in 2021 of the Utilities’ regulatory liability related to certain excess deferred income taxes resulting from the Tax Act’s decrease in the federal income tax rate.
Hawaiian Electric’s consolidated ROACE was 8.9% and 7.9% for the twelve months ended June 30, 2021 and June 30, 2020, respectively.
The net book value (cost less accumulated depreciation) of utility property, plant and equipment (PPE) as of June 30, 2021 amounted to $4.8 billion, of which approximately 26% related to generation PPE, 65% 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.
Performance-based regulations. On December 23, 2020, the PUC issued a D&O (PBR D&O) approving a new performance-based regulation framework (PBR Framework). See “Regulatory proceedings” under “Commitments and contingencies” in Note 3 of the Condensed Consolidated Financial Statements.
Transition to a decarbonized and sustainable energy future. The Utilities are fully committed to leading and enabling pathways to a decarbonized and sustainable energy future for Hawaii. The Utilities believe that a holistic approach to decarbonization is needed, and that such a strategy requires achieving the Utilities’ renewable energy commitments, facilitating and promoting beneficial electrification, and deploying carbon removal and offsets among other levers to reduce statewide emissions. Hawaii’s renewable portfolio standard law requires electric utilities to meet an RPS of 30%, 40%, 70% and 100% by December 31, 2020, 2030, 2040 and 2045, respectively. Hawaii law has also established a target of sequestering more atmospheric carbon and greenhouse gases than emitted within the State by 2045.
The Utilities have made significant progress on the path to clean energy and have been successful in adding significant amounts of renewable energy resources to their electric systems and exceeded the 2015 RPS goal two years early. The Utilities’ RPS for 2020 was 34.5%, which exceeded the statutory goal of 30%. The Utilities will continue to actively procure additional renewable energy post-2020 and expect to meet or exceed the next statutory RPS goal of 40% in advance of the 2030 compliance year. (See “Developments in renewable energy efforts” below).
If the Utilities are not successful in meeting the RPS targets as mandated by law, the PUC could assess a penalty of $20 for every MWh that an electric utility is deficient. Based on the level of electricity sales in 2020, a 1% shortfall in meeting the 2030 RPS requirement of 40% would translate into a penalty of approximately $1.6 million. The PUC has the discretion to reduce the penalty due to events or circumstances that are outside an electric utility’s reasonable control, to the extent the event or circumstance could not be reasonably foreseen and ameliorated. In addition to penalties under the RPS law, failure to meet the mandated RPS targets would be expected to result in a higher proportion of fossil fuel-based generation than if the RPS target had been achieved, which in turn would be expected to subject the Utilities to limited commodity fossil fuel price exposure under a fuel cost risk-sharing mechanism. The fuel cost risk-sharing mechanism apportions 2% of the fuel cost risk to the utilities (and 98% to ratepayers) and has a maximum exposure (or benefit) of $3.7 million.
The Utilities are fully aligned with, and supportive of, state policy to achieve a decarbonized future and have made significant progress in reducing emissions through renewable energy and electrification. This alignment with state policy is reflected in management compensation programs and the Utilities’ long-range plans, which include aspirational targets in order to catalyze action and accelerate the transition away from fossil fuels throughout its operations at a pace more rapid than dictated by current law. The long-range plans, including aspirational targets, serve as guiding principles in the Utilities’ continued transformation, and are updated regularly to adapt to changing technology, costs, and other factors. While there is no financial penalty for failure to achieve the Utilities’ long-range aspirational objectives, the Utilities recognize that there are environmental and social costs from the continued use of fossil fuels.
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The State of Hawaii’s policy is supported by the regulatory framework and includes a number of mechanisms designed to maintain the Utilities’ financial stability during the transition toward the State’s decarbonized future. Under the sales decoupling mechanism, the Utilities are allowed to recover from customers, target test year revenues, independent of the level of kWh sales, which have generally declined (with the exception of 2019 and the first quarter of 2020), as privately-owned distributed energy resources have been added to the grid and energy efficiency measures have been put into place. Other regulatory mechanisms reduce regulatory lag, such as the rate adjustment mechanism to provide revenues for escalation in certain O&M expenses and rate base changes between rate cases, and the major project interim recovery mechanism, which allow the Utilities to recover and earn on certain approved major capital projects placed into service in between rate cases. Certain mechanisms were replaced or modified under the new PBR framework. See “Regulatory proceedings” under “Commitments and contingencies” and “Decoupling” in Note 3 of the Condensed Consolidated Financial Statements.
Integrated Grid Planning. Achieving high levels of 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 their 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.
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 Utilities and contribute meaningful input throughout the IGP process. The IGP Stakeholder Council, Technical Advisory Panel and Working groups have been established and meet regularly to provide feedback and input on specific issues and process steps in the IGP. In March 2020, the Utilities launched a broad public engagement program, which consisted of a combination of in-person and online engagement. This provided customers opportunities to connect with the IGP team. The Utilities submitted an updated IGP work plan to the PUC in January 2021, marking the significant progress made through the stakeholder engagement phase of the IGP process. The Utilities will use the stakeholder feedback and input as it enters the next phase of the process which includes the development of long-range integrated grid plans and the acquisition of new resources.
Demand response programs. Pursuant to PUC orders, the Utilities are developing an integrated Demand Response (DR) Portfolio Plan that will enhance system operations and reduce costs to customers. The reduction in cost for the customer will take the form of either rates or incentive-based programs that will compensate customers for their participation individually, or by way of engagements with turnkey service providers that contract with the Utilities to aggregate and deliver various grid services on behalf of participating customers and their distributed assets.
On June 9, 2021, the PUC issued an order providing guidance to the third Grid Service RFP filed on February 23, 2021. The proposed Grid Service RFP focused only on Oahu and is seeking 60MW of grid services with focus on capacity reduction similarly in response to the potential reserve shortfall from the AES coal plant retirement scheduled on September 1, 2022. The Utilities filed a final draft on June 25, 2021, and are awaiting PUC approval to proceed with the RFP.
On June 8, 2021, the PUC approved the new program, Emergency Demand Response Program (EDRP), a battery storage incentive program to dispatch electricity between 6 p.m. to 8 p.m. daily from participating residential and commercial customers, to address the potential reserve shortfalls following the AES coal plant retirement. The PUC approved EDRP for 50MW on Oahu with an incentive budget not to exceed $34 million, which will be recovered via a surcharge cost recovery mechanism over a 10-year amortization. The Utilities’ implementation plan was approved by the PUC on June 30, 2021, and the Utilities subsequently filed the updated EDRP tariffs on July 1, 2021.
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 distributed energy resources and renewable energy integration. Under the Grid Modernization Strategy, the Utilities expect that new technology will help increase adoption of private rooftop solar and make use of rapidly evolving products, including storage and advanced inverters. The Utilities are implementing Phase 1 of their Grid Modernization Strategy, 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. As of June 30, 2021, approximately $24 million has been incurred to date under Phase 1. The Utilities are now deploying advanced meters faster and more broadly under the proportional advanced meter deployment plan, which was approved by the PUC on March 3, 2021.
The Utilities filed an application with the PUC on September 30, 2019 for an Advanced Distribution Management System (ADMS) as part of the second phase of their Grid Modernization Strategy implementation. However, on December 30, 2019, the PUC suspended the Utilities’ application for the Advanced Distribution Management System pending the Utilities’ filing of a supplemental application for the broad deployment of field devices. This supplement and update to the
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Grid Mod Phase 2 field devices application was filed on March 31, 2021. The estimated cost for the implementation over five years of the ADMS and field devices, which includes capital, deferred and O&M costs, is $105 million. A PUC order was issued on April 27, 2021, unsuspending and resuming consideration of the Phase 2 Application.
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, closed on April 9, 2020.
The second phase, which commenced on April 9, 2020, allows up to 235 MW across all Hawaiian Electric service territories in two tranches for small (under 250 kW) and large system sizes to encourage a variety of system sizes. To provide opportunities for low- to moderate-income (LMI) customers to participate in the program, separate project proposals may be submitted specifically targeting LMI customers.
Eight RFPs were required by order: one each for Oahu, Maui, Hawaii Island, Molokai, and Lanai, and LMI-specific RFPs for Oahu, Maui, and Hawaii Island. Draft RFPs for the three LMI RFPs and the RFPs for Molokai, and Lanai were filed on July 9, 2020, along with a revised tariff and associated contract models. LMI projects do not have a size cap nor do they decrease the 235 MW capacity available to other projects. Proposed final drafts of the LMI RFPs, Molokai and Lanai RFPs tariff, and contracts were filed on September 8, 2020.
For Lanai, the Utilities proposed to combine the previously issued Variable Renewable Dispatchable Generation Paired with Energy Storage RFP and the CBRE RFP to optimize the benefits of procuring renewable energy, spurring development and increasing the likelihood of success of the CBRE Program on Lanai. See “Developments in renewable energy efforts–Requests for renewable proposals, expressions of interest, and information” for additional information.
Proposed final drafts of the remaining RFPs on Oahu, Maui, and Hawaii Island were filed on December 1, 2020.
For small CBRE projects less than 250 kW in size, the Utilities are planning to accept projects over a four-month period on a first-come, first served basis as soon as the PUC approves the Utilities’ final tariff and contracts, filed on September 8, 2020. The PUC reserved 30 MW as well as a small amount of unallocated capacity from Phase 1 for small projects in Phase 2 on Oahu, Maui and Hawaii Island. If applications exceed the program capacity for that island, then a reverse auction process called Competitive Credit Rate Procurement will be triggered to allocate project capacity and determine the credit rate. The Utilities have developed a CBRE Portal where customers can subscribe to a project once the Subscriber Organization has added their project to the portal.
The Utilities have been working on interconnection improvements and proposed several ways to potentially improve the time and cost of interconnection during the development of the CBRE Phase 2 tariff and RFPs. Additionally, the Utilities increased their focus and attention on this area and worked with the parties, including the CBRE Independent Observer, to make the interconnection process more transparent, predictable and standardized, including interconnection costs, timelines and requirements in order to reduce costs and accelerate schedules. In addition, the Utilities researched interconnection solutions in other jurisdictions, and worked with the parties to identify additional improvements. The Utilities solicited from the parties a list of recommended improvements, and consolidated and adopted nearly all the near-term and continuous improvement recommendations from the parties. The Utilities filed these recommendations and associated updates to the previously filed RFPs, tariff, and contracts on March 30, 2021. These documents are pending review and approval by the PUC.
Microgrid services tariff proceeding. In July 2018, the PUC opened a proceeding to investigate establishment of a microgrid services tariff, pursuant to Act 200 of 2018. There are currently five intervenors in the docket, although initially there were eight. In August 2019, the PUC issued an order, focusing for the remainder of the docket, to facilitate the ability of microgrids to disconnect from the grid and provide backup power to customers and critical energy uses during contingency events.
Two Working Groups were formed: (1) a Market Facilitation Working Group to recommend draft tariff language for the Microgrid Services Tariff; and (2) an Interconnection Standards Working Group to develop a new section of Rule 14H specific to interconnection and islanding/reconnection of microgrids. The Utilities filed a Draft Microgrid Services Tariff and updated language for various distributed energy resources Rules on March 30, 2020.Parties to the docket filed comments on and proposed revisions to the Draft Tariff on April 27, 2020.
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On November 30, 2020, the PUC held a technical conference to present its proposed redlines to Utilities’ Draft Microgrid Services Tariff and related documents. On February 1, 2021, the Working Group filed its Draft Microgrid Tariff. Members of the Working Group separately filed their positions on areas of disagreements and later commented on other parties’ positions on areas of disagreements on February 10, 2021 and February 17, 2021, respectively.
On May 17, 2021, the PUC issued an order, directing the Utilities to submit the Microgrid Services Tariff and appendices consistent with the revisions provided by the PUC. Furthermore, the PUC stated it intends to issue a separate order to govern the next phase of the Microgrid Tariff proceeding. On May 27, 2021, the Utilities filed the Microgrid Service Tariff.
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. The D&O in the PBR proceeding modified the earnings sharing mechanism to a symmetric arrangement. Effective with annual earnings for 2021, the earnings sharing will be triggered for actual ROACE outside of a 300 basis points dead band above and below a target ROE of 9.5%, which is the current authorized ROE for each of the Utilities. Earnings sharing credits or recoveries will be included in the annual decoupling filing for the following year. Results for 2020, 2019 and 2018 did not trigger the earnings sharing mechanism for the Utilities.
Regulated returns. Actual and PUC-allowed returns, as of June 30, 2021, were as follows:
%
Rate-making Return on rate base (RORB)*
ROACE**
Rate-making ROACE***
Twelve months ended
June 30, 2021
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Utility returns
7.73
6.95
6.16
9.36
8.47
7.12
10.32
9.26
7.70
PUC-allowed returns
7.37
7.52
7.43
9.50
9.50
9.50
9.50
9.50
9.50
Difference
0.36
(0.57)
(1.27)
(0.14)
(1.03)
(2.38)
0.82
(0.24)
(1.80)
* 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 factors contributing to the difference between PUC-allowed ROACEs and the ROACEs actually achieved include the 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 return on capital additions since the last rate case in excess of indexed escalations. For Hawaiian Electric, the twelve months ended June 30, 2021 rate-making ROACE reflects higher earnings due to timing differences, that are expected to reverse during the second half of 2021, including lower overhaul expenses in the twelve months ended June 30, 2021, and a change in the timing of recognition of target revenues for the first and second quarter of 2021 relative to 2020, with the revenues recognized on an annual basis remaining unchanged.
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Most recent rate proceedings. As of June 30, 2021, the status of ongoing rate case for each utility was as follows:
Test year (dollars in millions)
Date
Amount
% over rates in effect
ROACE (%)
RORB (%)
Rate base
Common equity %
Stipulated agreement reached with Consumer Advocate
Hawaiian Electric
2020 1
Request
8/21/19
$
77.6
4.1
10.50
7.97
$
2,477
57.15
Yes
Final Decision and Order
10/22/20
0.0
0.0
9.50
7.37
NA
57.15
Hawaii Electric Light
2019 2
Request
12/14/18
$
13.4
3.4
10.50
8.30
$
537
56.91
Yes
Interim Decision and Order
11/13/19
0.0
0.0
9.50
7.52
534
56.83
Final Decision and Order
7/28/20
0.0
0.0
9.50
7.52
534
56.83
Note: The “Request” date reflects the application filing date for the rate proceeding. The date of “Interim Decision and Order” or “Final Decision and Order” reflects the issuance date of the PUC order.
1 A final D&O issued on October 22, 2020 ordered final rates for the 2020 test year to remain at current effective rates, which provides for no increase to base rates. Hawaiian Electric’s proposed RBA provision tariff and ECRC tariff submitted on November 6, 2020 were approved by the PUC on December 11, 2020. The proposed RBA provision tariff and ECRC tariff took effect on January 1, 2021.
2 A final D&O issued on July 28, 2020 ordered final rates for the 2019 test year to remain at current effective rates, such that there is a zero increase in rates. The proposed final tariffs and PIM tariffs took effect on November 1, 2020, and the ECRC tariff became effective on January 1, 2021.
See also “Most recent rate proceedings” in Note 3 of the Condensed Consolidated Financial Statements.
On December 23, 2020, the PBR D&O was issued, establishing a new PBR Framework. The PBR Framework implemented a five-year multi-year rate period (MRP), during which there will be no general rate case applications. In the fourth year of the MRP, the PUC will comprehensively review the PBR Framework to determine if any modifications or revisions are appropriate.
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. In August 2020, the project was energized and commissioning of all wind turbines was completed. However, the project was paused due to a conductor deficiency. Hawaiian Electric reconductored the 46kV circuit and in December 2020, the project reached commercial operation.
NPM received its Incidental Take Permit from the Department of Fish and Wildlife Service on September 7, 2018. Keep the North Shore Country (KNSC) has appealed this decision and the case has been transferred to the Hawaii Supreme Court. On June 17, 2020, KNSC filed a Motion for Stay Upon Appeal. On August 10, 2020, KNSC’s Motion for Stay Upon Appeal was denied. KNSC and Kahuku Community Association (KCA) have also petitioned to appeal NPM’s Conditional Use Permits. On August 6, 2020, the Zoning Board of Appeals (ZBA) granted NPM’s Motions to Dismiss the Appeal Petitions of KNSC and KCA.
Life of the Land (LOL) filed a Motion for Relief to argue the PUC’s approval for NPM PPA was invalid and should be revised. Hawaiian Electric and the Consumer Advocate filed an opposition to this motion for relief. A hearing on the motion for relief was held on November 22, 2019. On April 16, 2020, the PUC issued an order denying LOL’s Motion for Relief. On April 27, 2020, LOL filed a Notice of Appeal of the PUC’s order with the Supreme Court of the State of Hawaii. In June 2021, the Supreme Court denied LOL’s appeal.
On December 31, 2019, Hawaii Electric Light and PGV entered into an Amended and Restated Power Purchase Agreement (ARPPA), subject to approval by the PUC. The ARPPA extends the term of the existing PPA by 25 years to 2052, expands the firm capacity of the facility to 46 MW and delinks the pricing for energy delivered from the facility from fossil fuel prices to reduce cost to customers. The PUC suspended the docket pending the completion of a supplemental environmental review under the Hawaii Environmental Policy Act (HEPA). On April 12, 2021, Hawaii Electric Light filed a motion for reconsideration and clarification in the proceeding. On June 4,
70
2021, the PUC lifted the docket suspension for the limited purpose of soliciting the Department of Land and Natural Resources (DLNR) and the County of Hawaii’s (County) position on the environment review. In June and July 2021, the DLNR and the County responded to the PUC indicating their respective agencies do not have discretionary approval over the project and are not in a position to conduct an environmental review under HEPA.
Tariffed renewable resources.
•As of June 30, 2021, there were approximately 532 MW, 114 MW and 129 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 June 30, 2021, an estimated 31% of single family homes on the islands of Oahu, Hawaii and Maui have installed private rooftop solar systems, and approximately 19% of the Utilities’ total customers have solar systems.
•The Utilities began accepting energy from feed-in tariff projects in 2011. As of June 30, 2021, there were 43 MW, 2 MW and 5 MW of installed feed-in tariff capacity from renewable energy technologies at Hawaiian Electric, Hawaii Electric Light and Maui Electric, respectively.
Biofuel sources.
•In July 2018, the PUC approved Hawaiian Electric’s three-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 and has been extended for one year through December 2022. 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 2022. On June 30, 2021, the Utilities issued an RFP for all fuels, including biodiesel, for supply commencing January 1, 2023.
•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 2022, 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. As of June 30, 2021, summarized information for a total of 8 PPAs is as follows:
Utilities
Number of contracts
Total photovoltaic size (MW)
BESS Size (MW/MWh)
Guaranteed commercial operation dates
Contract term (years)
Total projected annual payment (in millions)
Hawaiian Electric
4
139.5
139.5/558
9/7/23 & 8/31/23
20 & 25
$
30.9
Hawaii Electric Light
2
60
60/240
11/3/22 & 12/2/22
25
14.1
Maui Electric
2
75
75/300
4/28/23 & 10/27/23
25
17.6
Total
8
274.5
274.5/1,098
$
62.6
The Utilities have received PUC approvals to recover the total projected annual payment of $62.6 million for the eight PPAs through the PPAC to the extent such costs are not included in base rates.
•In continuation of their February 2018 request for proposal process, the Utilities issued their Stage 2 Renewable RFPs for Oahu, Maui and Hawaii Island and Grid Services RFP on August 22, 2019. Final awards for the renewable projects were made on May 8, 2020. Final awards for the grid services projects were made starting in January 2020. On Oahu, seven solar-plus-storage projects and one standalone storage project totaling approximately 281 MW of generation and 1.8 GWh of storage were selected. On Maui, three solar-plus-storage projects and one standalone storage project totaling approximately 100 MW of generation and 560 MWh of storage were selected. On Hawaii Island, two solar-plus-storage projects and one standalone storage project totaling approximately 72 MW of generation and 492 MWh of storage were selected. Two Utility Self-Build projects were among those selected; a 40-MW, 160-MWh standalone energy storage system on Maui and a 12-MW, 12-MWh storage system on Hawaii Island. Since selection, three renewable plus storage projects have voluntarily withdrawn from the process for
71
various reasons, including change in circumstances for the developer and a misunderstanding of contract requirements. To date, the Utilities have filed 10 PPAs, 2 grid services purchase agreements (GSPA) and 2 applications for commitments of funds for capital expenditures for approval of the utility self-build projects with the PUC.
A summary of the 10 PPAs that were filed with the PUC, is as follows:
Utilities
Number of contracts
Total photovoltaic size (MW)
BESS Size (MW/MWh)
Guaranteed commercial operation dates
Contract term (years)
Total projected annual payment (in millions)
Hawaiian Electric
5
232
232/1,055
5/17/23, 7/1/23, 10/30/23, 12/29/23 & 12/31/23
20 & 25
$
62.0
Hawaiian Electric
1
*
N/A
185/565
12/30/22
20
24.0
Hawaii Electric Light
1
60
60/240
9/30/23
25
15.5
Maui Electric
3
100
100/400
4/30/23 & 12/31/23
25
28.2
Total
10
392
577/2,260
$
129.7
* See further discussion under “Review of Interconnection Process and Kapolei Energy Storage Power Purchase Agreement” below.
As of June 30, 2021, the PUC approved five solar-plus-storage PPAs for a total of 257 MW. The total projected annual payment of $68 million for these PPAs will be recovered through the PPAC to the extent such costs are not included in base rates.
A summary of the GSPAs that were approved by PUC in December 2020 is as follows:
Utilities
Fast Frequency Response - 1 (MW)
Fast Frequency Response - 2 (MW)
Capacity - Load Build (MW)
Capacity - Load Reduction (MW)
Hawaiian Electric
—
26.7
14.5
19.4
Hawaii Electric Light
6.0
—
3.2
4.0
Maui Electric
6.1
—
1.9
4.7
Total
12.1
26.7
19.6
28.1
A summary of the utility self-build projects that are pending PUC approval is as follows:
Utilities
Number of contracts
BESS Size (MW/MWh)
Guaranteed commercial operation dates
Hawaii Electric Light
1
12/12
12/30/22
Maui Electric
1
40/160
4/28/23
Total
2
52/172
•On November 27, 2019, the Utilities issued RFPs for renewable generation paired with energy storage on the islands of Lanai and Molokai. The Utilities were seeking PV paired with storage or small wind (specified as 100 kW turbines or smaller) on Molokai and PV paired with storage on Lanai. Proposals for the Molokai RFP were received on February 14, 2020. In light of a PUC order issued on April 9, 2020 in the CBRE docket, the Utilities proposed in their July 9, 2020 filing to combine the previously issued Lanai RFP with the CBRE RFP described in the order to optimize the benefits of procuring renewable energy, spurring development and increasing the likelihood of success of the CBRE program on Lanai. On May 21, 2021, the PUC approved the proposed combined Lanai RFP. On June 17, 2021, the PUC issued an order suspending the June 21, 2021 deadline for the Utilities to file the Lanai RFP in response to the Utilities comments filed on June 2, 2021 requesting clarity around the CBRE tariff. The PUC’s order noted further guidance would be forth coming. On October 15, 2020, the Utilities selected one project from the Molokai RFP for a total of 4.5 MW of solar and 24 MWh of storage. The developer, however, declined to accept the award. On March 29, 2021, the Utilities filed a proposed plan for Molokai in response to PUC’s direction to revise and re-submit the Molokai RFP. On June 29, 2021, the PUC held a status conference to discuss the Utilities’ plan and concerns from stakeholders.
Review of Interconnection Process and Kapolei Energy Storage Power Purchase Agreement.
•In February 2021, the PUC initiated a docket for the purposes of reviewing the status and interconnection progress of various utility-related renewable projects (i.e. Stage 1 and Stage 2 RFP PPAs and CBRE) and the Utilities’ transition plans for the expiration of the AES power purchase agreement, the retirement of the Kahului Power Plant, and other fossil fuel power plant transition plans, as needed. The Utilities filed initial status updates on the project timelines, steps needed for each of the renewable projects to achieve commercial operation and steps the Utilities are
72
taking to address projected extensions of guaranteed commercial operation dates (GCOD) for renewable projects under development, which are due to a variety of factors, including those outside of the control of the Utilities. The PUC subsequently held status conferences on the Utilities’ updates. In April 2021, the PUC issued an Order directing the Utilities to establish regulatory liabilities for the difference between the on-peak avoided cost and the unit price included in the applications for approval of the renewable project PPAs, effective with the GCOD included in the applications (the earliest GCOD included in the applications is July 2021) or from the date of the Order for CBRE Phase 1 projects. The amount of regulatory liabilities to be recorded in future periods are not determinable at this time and would be affected by a number of factors, including the length of the GCOD extension period, the monthly on-peak avoided cost, as well as the factors described above. The Utilities filed a Motion for Reconsideration of the entire Order, or in the alternative to clarify that at most the PUC is directing the Utilities to track the information and not record the information at this time. The Utilities further requested a Stay of the Order pending resolution of the Motion. The Utilities maintain that extensions of GCODs are allowed under the PUC-approved contracts and that the Order has the unintended consequence of imposing penalties against the Utilities without due process. In May 2021, the PUC issued an order clarifying its Order and directed the Utilities to track costs to consumers caused by the perceived delay of renewable projects, and that the PUC does not intend to, at this time, impose any penalties on the Utilities.The full text of the Order, Motion for Reconsideration and request for a Stay of the Order, and clarification Order can be found on the PUC website at dms.puc.hawaii.gov/dms (Docket No. 2021-0024).
•Also in April 2021, the PUC approved the Kapolei Energy Storage (KES) PPA (one of the PPAs as a result of the Stage 2 Renewable RFP process) (KES Decision and Order), subject to nine conditions, including the Utilities forgoing the second portion of the PIM rewards amounting up to $1.7 million for the Stage 1 RFP PPAs, removing grid constraints for the Utilities’ CBRE Phase 2 projects and for existing and new distributed energy programs, financial retirement of Hawaiian Electric generating units by specified dates and adjusting target revenues at the retirement dates for such retirements, and a requirement to charge the batteries in the project using significant levels of renewable energy generation. The financial retirement of the generating units described in the KES Decision and Order is contrary to the intent of Hawaii Revised Statutes §269-6(d), which encourages the recovery of stranded costs for the retirement of fossil fuel generation, and contrary to the regulatory compact under which in return for agreeing to commit capital necessary to allow utilities to meet their obligation to serve, utilities are assured recovery of their investment and a fair opportunity to earn a reasonable return on the capital prudently committed to the business. Hawaiian Electric filed a Motion for Reconsideration and Stay of the Decision and Order due to potentially significant financial and operational impacts. In May 2021, the PUC granted, in part, Hawaiian Electric’s Motion for Reconsideration and Stay. In this Order, the PUC addressed a number of Hawaiian Electric’s concerns, including removing the condition of the Utilities foregoing the PIM award from Stage 1 RFP projects, agreeing to address grid constraint concerns in respective DER and CBRE dockets and not in the KES docket, removing the minimum thresholds of charging energy coming from renewable energy generation and corresponding deadlines associated with these thresholds and modifying the condition on financial retirement of generating units. The PUC indicated the net book value of generating assets would be addressed at the time of retirement. The full text of the KES Decision and Order and the Motion for Reconsideration and Stay with respect thereto, and the Order granting, in part, Hawaiian Electric’s Motion for Reconsideration can be found on the PUC website at dms.puc.hawaii.gov/dms (Docket No. 2020-0136).
Legislation and regulation. Congress and the Hawaii legislature periodically consider legislation that could have positive or negative effects on the Utilities and their customers. Also see “Environmental regulation” in Note 3 of the Condensed Consolidated Financial Statements.
Fuel contracts. The fuel contract entered into in January 2019, by the Utilities and PAR Hawaii Refining, LLC (PAR Hawaii), for the Utilities’ low sulfur fuel oil (LSFO), high sulfur fuel oil (HSFO), No. 2 diesel, and ultra-low sulfur diesel (ULSD) requirements was approved by the PUC, and became effective on April 28, 2019 and terminates on December 31, 2022. This contract is a requirement contract with no minimum purchases. If PAR Hawaii is unable to provide LSFO, HSFO, diesel and/or ULSD the contract allows the Utilities to purchase LSFO, HSFO, diesel and/or ULSD from another supplier. On June 30, 2021, the Utilities issued two RFPs for all fuels for supply commencing January 1, 2023. The costs incurred under the contract with PAR Hawaii are recovered in the Utilities’ respective ECRCs.
On June 9, 2020, the Utilities and PAR Hawaii entered into a First Amendment to the fuel contract. The First Amendment amends only the LSFO pricing to create a two-tiered structure based on volume, with all tier-1 LSFO up to the tier-1 maximum to be purchased exclusively from PAR Hawaii at the established pricing, and purchases in excess of that volume (tier-2) either from PAR Hawaii at the established pricing, or from an alternative supplier. On August 4, 2020, the PUC approved the First Amendment, which has an effective date of July 15, 2020, on an interim basis. The PUC’s approval order allows the recovery of such costs associated with the First Amendment through the ECRC to the extent that the costs
73
are not recovered in base rates. The PUC intends to review whether the First Amendment is reasonable and in the public interest in the final decision, but it will not subject the recovery of the costs between the interim decision and the final decision to retroactive disallowances.
FINANCIAL CONDITION
Liquidity and capital resources.As of June 30, 2021, there was no outstanding balance on Hawaiian Electric’s revolving credit facility and $38 million of commercial paper borrowings outstanding by the Utilities.
On January 14, 2021, the Utilities received $115 million of proceeds using a delayed draw feature under a private placement executed on October 29, 2020. The proceeds were used to finance capital expenditures and reimburse funds used for the payment of capital expenditures.
The Utilities believe that their ability to generate cash, both internally from operations and externally from issuances of equity and debt securities, as well as bank borrowings, is adequate to maintain sufficient liquidity to fund their contractual obligations and commercial commitments, their forecasted capital expenditures and investments, their expected retirement benefit plan contributions and other cash requirements. However, the COVID-19 pandemic is an evolving situation, and the Utilities cannot predict the extent or duration of the outbreak, the future effects that it will have on the global, national or local economy, including the impacts on the Utilities’ ability, as well as the cost, to access additional capital, or the future impacts on the Utilities’ financial position, results of operations, and cash flows.
Hawaiian Electric’s consolidated capital structure was as follows:
(dollars in millions)
June 30, 2021
December 31, 2020
Short-term borrowings
$
38
1
%
$
50
1
%
Long-term debt, net
1,676
43
1,561
41
Preferred stock
34
1
34
1
Common stock equity
2,171
55
2,142
57
$
3,919
100
%
$
3,787
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)
Six months ended June 30, 2021
June 30, 2021
December 31, 2020
Short-term borrowings1
Commercial paper
$
4
$
38
$
—
Borrowings from HEI
—
—
—
Line of credit draws
—
—
—
Undrawn capacity under line of credit facility/facilities
—
200
275
1 The maximum amount of external short-term borrowings by Hawaiian Electric during the first six months of 2021 was approximately $50 million. As of June 30, 2021, Hawaii Electric Light and Maui Electric had short-term borrowings from Hawaiian Electric of $3.1 million and $0.7 million, respectively. In addition to the short-term borrowings above, on January 15, 2021, Hawaiian Electric paid off and terminated the $50 million term loan facility dated as of May 19, 2020.
Credit agreement. Hawaiian Electric has a $200 million line of credit facility with no amount outstanding at June 30, 2021. On June 25, 2021, Hawaiian Electric requested PUC approval of its third amended and restated revolving unsecured syndicated credit facility agreement, including approving extending its term to May 14, 2026 from May 13, 2022. See Note 5 of the Condensed Consolidated Financial Statements.
Credit ratings. On March 17, 2021, S&P upgraded Hawaiian Electric’s issuer credit rating to “BBB” from “BBB-”, upgraded the short-term and commercial paper ratings to “A-2” from “A-3” and revised the outlook to stable from positive. The rating upgrade was primarily based on Hawaiian Electric’s strong financial measures, strength of the cumulative value of the regulatory protections, and S&P’s assessment of its stand-alone credit profile as sufficient to rate Hawaiian Electric higher than HEI.
On April 20, 2021, Moody’s upgraded Hawaiian Electric’s senior unsecured rating and issuer rating to “Baa1” from “Baa2” and revised the outlook to stable from positive. The rating upgrade reflects Hawaiian Electric's considerable progress in adding renewable resources to its energy supply mix and the improving regulatory relationship with the PUC. On June 25,
SPRBs. Special purpose revenue bonds (SPRBs) have been issued by the Department of Budget and Finance of the State of Hawaii (DBF) to finance (and refinance) capital improvement projects of Hawaiian Electric and its subsidiaries, but the sources of their repayment are the non-collateralized obligations of Hawaiian Electric and its subsidiaries under loan agreements and notes issued to the DBF, including Hawaiian Electric’s guarantees of its subsidiaries’ obligations.
On May 24, 2019, the PUC approved the Utilities’ request to issue SPRBs in the amounts of up to $70 million, $2.5 million and $7.5 million for Hawaiian Electric, Hawaii Electric Light and Maui Electric, respectively, prior to June 30, 2020, to finance the Utilities’ capital improvement programs. Pursuant to this approval, on October 10, 2019, the DBF issued, at par, Series 2019 SPRBs in the aggregate principal amount of $80 million with a maturity of October 1, 2049. As of June 30, 2021, Hawaiian Electric had $9 million of undrawn funds remaining with the trustee. Hawaii Electric Light and Maui Electric had no undrawn funds as of June 30, 2021.
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 (2019 Legislative Authorization).
On February 9, 2021, the PUC approved the Utilities’ request to issue SPRBs (up to $100 million, $35 million and $45 million for Hawaiian Electric, Hawaii Electric Light and Maui Electric, respectively) through 2022, with the proceeds to be used to finance the Utilities’ multi-project capital improvement programs. The PUC also approved the use of the expedited approval procedure to request the issuance and sale of the remaining/unused amount of SPRBs authorized by the 2019 Legislative Authorization (i.e., total not to exceed up to $400 million for Hawaiian Electric, up to $150 million for Hawaii Electric Light, and up to $150 million for Maui Electric) during the period January 1, 2023 through June 30, 2024.
Taxable debt. On January 31, 2019, the Utilities received PUC approval (January 2019 Approval) to issue the remaining authorized amounts under the PUC approval received in April 2018 (April 2018 Approval) in 2019 through 2020 (Hawaiian Electric up to $205 million and Hawaii Electric Light up to $15 million of taxable debt), as well as a supplemental increase to authorize the issuance of additional taxable debt to finance capital expenditures, repay long-term and/or short term debt used to finance or refinance capital expenditures, and/or to reimburse funds used for payment of capital expenditures, and to refinance the Utilities’ 2004 junior subordinated deferrable interest debentures (QUIDS) prior to maturity. In addition, the January 2019 Approval authorized the Utilities to extend the period to issue additional taxable debt from December 31, 2021 to December 31, 2022. The new total “up to” amounts of taxable debt requested to be issued through December 31, 2022 are $410 million, $150 million and $130 million for Hawaiian Electric, Hawaii Electric Light and Maui Electric, respectively.
As of June 30, 2021, Hawaiian Electric, Hawaii Electric Light, and Maui Electric have $135 million, $85 million, and $45 million, respectively, of remaining taxable debt to issue prior to December 31, 2022. See summary table below.
(in millions)
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Total “up to” amounts of taxable debt authorized through 2022
$
410
$
150
$
130
Less:
Taxable debt authorized and issued in 2018 under April 2018 Approval
75
15
10
Taxable debt issuance to refinance the 2004 QUIDS in 2019
30
10
10
Taxable debt issuance in May 2020
110
10
40
Taxable debt executed in October 2020, but issued on January 14, 2021
60
30
25
Remaining authorized amounts
$
135
$
85
$
45
Equity. In October 2018, the Utilities received PUC approval for the supplemental increase to issue and sell additional common stock in the amounts of up to $280 million for Hawaiian Electric and up to $100 million each for Hawaii Electric Light and Maui Electric, with the new total “up to” amounts of $430 million for Hawaiian Electric and $110 million each for Hawaii Electric Light and Maui Electric, and to extend the period authorized by the PUC to issue and sell common stock from December 31, 2021 to December 31, 2022. As of June 30, 2021, Hawaiian Electric, Hawaii Electric Light, and Maui Electric have $275.8 million, $102.5 million, and $87.8, respectively, of remaining common stock to issue prior to December
75
31, 2022. See summary table below.
(in millions)
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Total “up to” amounts of common stock authorized to issue and sell through 2021
$
150.0
$
10.0
$
10.0
Supplemental increase authorized
280.0
100.0
100.0
Total “up to” amounts of common stock authorized to issue and sell through 2022
430.0
110.0
110.0
Common stock authorized and issued in 2017, 2018, 2019 and 2020
154.2
7.5
22.2
Remaining authorized amounts
$
275.8
$
102.5
$
87.8
Cash flows. The following table reflects the changes in cash flows for the six months ended June 30, 2021 compared to the six months ended June 30, 2020:
Six months ended June 30
(in thousands)
2021
2020
Change
Net cash provided by operating activities
$
57,453
$
181,468
$
(124,015)
Net cash used in investing activities
(133,355)
(181,091)
47,736
Net cash provided by financing activities
45,210
51,100
(5,890)
Net cash provided by operating activities. The decrease in net cash provided by operating activities was primarily driven by an increase in fuel oil stock due to less consumption.
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 lower net cash from long-term and short-term debts, offset by higher proceeds from short-term borrowings.
Forecast capital expenditures. For the three-year period 2021 through 2023, the Utilities forecast up to $1.2 billion of net capital expenditures, which could change over time based upon external factors such as the timing and scope of environmental regulations and/or unforeseen delays in permitting and timing of PUC decisions. Proceeds from the issuance of equity and long-term debt, cash flows from operating activities, temporary increases in short-term borrowings and existing cash and cash equivalents are expected to provide the funds needed for the net capital expenditures, to pay down commercial paper or other short-term borrowings, as well as to fund any unanticipated expenditures not included in the 2021 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.
76
Bank
Recent Developments—COVID-19
See also Recent developments—COVID-19 in HEI’s MD&A.
In the first half of 2021, economic conditions in Hawaii continued to improve following the rollout of stimulus programs and the loosening of business restrictions, both of which boosted economic activity. Continued efforts to vaccinate a high proportion of the population and the recent implementation of a “vaccine passport” in early July is expected to further accelerate the economic recovery. With increased optimism regarding an acceleration of an economic recovery, long-term rates increased sharply during the first quarter, but moderated in the second quarter. However, interest rates across the curve remain at relatively low levels, and continue to negatively impact net interest margin as new loan origination rates remain below existing portfolio yields. In the second quarter of 2021, the bank’s net interest margin was 2.98% compared to 2.95% and 3.21% for the quarters ended March 31, 2021 and June 30, 2020, respectively.
In response to COVID-19, ASB made short-term loan modifications to borrowers who were generally payment current at the time of relief. As of June 30, 2021, approximately $2 million of loans remained in their active deferral period. For the loans that have completed their short-term payment deferral period, approximately $17 million of loans required further assistance through repayment modifications and ASB reflected these loans as troubled debt restructured loans as of June 30, 2021. Approximately $12 million of loans were not able to resume their contractual payments and were considered delinquent as of June 30, 2021.
As a result of an overall continued strengthening of the Hawaii economy and a corresponding improvement in the credit outlook in the second quarter of 2021, as reflected in upgrades in the commercial loan portfolio and overall lower net charge offs, ASB recorded a $12 million negative provision for credit losses to reduce the allowance for credit losses. For the six months ended June 30, 2021, the bank recorded a negative provision for credit losses of $20.6 million. The provision for credit losses in future quarters will be dependent on future economic conditions and changes to borrower credit quality at that time.
In 2020, ASB temporarily closed 15 of its 49 branches and reduced banking hours at the branches that remained open in an effort to reduce social gathering and protect employees and customers. The bank has since reopened six of the branches that were temporarily closed and permanently closed eight branches. One of the reopened branches is now a digital branch. The reduction in ASB’s branch network should not have a significant impact to the bank’s customers as there are other branches nearby and other channels such as online and mobile banking. ASB continues to evaluate its branch network to determine whether further changes may be appropriate given its customers’ use of other banking channels.
ASB’s senior management team continues to address the impacts to the operations and business of the bank as a result of the pandemic. Senior management also continues to meet regularly with ASB’s board of directors to keep them apprised of the impacts of the COVID-19 pandemic.
The CARES Act was signed into law on March 27, 2020. The CARES Act provided over $2 trillion in economic assistance for American workers, families, and small businesses, and job preservation for American industries. The PPP was established under the CARES Act and implemented by the United States Small Business Administration (SBA) to provide a direct incentive for small businesses to keep their workers on the payroll as a result of the COVID-19 crisis. The Paycheck Protection Program Flexibility Act was signed into law on June 5, 2020 and the Economic Aid Act was signed into law on December 27, 2020, which amended some of the prior rules and guidelines of the CARES Act. The Economic Aid Act established a second round of PPP, reopening the PPP for first-time borrowers and allowing for a second draw for businesses that meet more restrictive eligibility criteria to target businesses hardest hit by the pandemic. Loans issued through the PPP are 100% federally guaranteed and have a maturity of 2-5 years, depending on when the loan was made, at a fixed interest rate of 1%. Loan payments will be deferred until the earlier of (a) the date that the forgiven amount is remitted to the lender by the SBA; or (b) 10 months from the date the covered period ends. The SBA will forgive all loan amounts to a particular small business if such small business is compliant with the terms and conditions of the PPP. Small businesses generally have 24 weeks from disbursement of the loan to incur allowable expenses such as payroll costs, interest on mortgages, rent and utility expenses that would be covered by the loan forgiveness rules, with 60% of the loan forgiveness needing to be for payroll costs. Small businesses may receive partial forgiveness if they do not spend the entirety of their PPP loan on eligible expenses, or if less than 60% of the loan disbursement is spent on payroll costs. Employers had until December 31, 2020 to restore their workforce, or, for a PPP loan made after December 27, 2020, before the last day of the Covered Period. Lenders processed and approved the PPP loans under delegated authority of the SBA. As an existing SBA certified lender, ASB worked with a number of small businesses, both customers and non-customers, to complete the loan application forms so that these businesses could participate in the program. During the first round of PPP, the Bank secured more than $370 million in PPP loans for approximately 4,100 small businesses that supported over 40,000 jobs; ASB received processing fees totaling approximately $13 million and started recognizing these fees over the life of the loans. During the second round of PPP, ASB secured more than $175 million for
77
approximately 2,200 small businesses that supported more than 20,000 jobs; ASB received processing fees for approximately $9 million. As of July 16, 2021, SBA has remitted forgiveness funds in the amount of $320 million for more than 3,700 Round 1 and Round 2 PPP loans representing approximately 99% of PPP loan applicant balances.
Other provisions of the CARES Act provides that a financial institution may elect to suspend the requirements under GAAP for certain loan modifications that would otherwise be categorized as a TDR and any related impairment for accounting purposes. See Note 4 of the Condensed Consolidated Financial Statements and “Economic conditions” in the “HEI Consolidated” section above.
ASB continues to maintain its low-risk profile, strong balance sheet and straightforward community banking business model.
Three months ended June 30
Increase
(in millions)
2021
2020
(decrease)
Primary reason(s)
Interest income
$
62
$
60
$
2
Average loan portfolio yields 8 basis points lower—impacted by the continued low interest rate environment as adjustable rate loans have repriced lower during the past year and new loan production yields continue to originate below their portfolio yields.
Average loan portfolio balances decreased $158 million - home equity lines of credit, consumer and commercial loan portfolio balances decreased by $200 million, $92 million and $56 million, respectively. The decrease in these loan portfolios were due to ASB’s strategic decision to reduce production of these loans in the current economic environment. Average commercial real estate loan portfolio balance increased $216 million.
Average investment securities portfolio balance increased $1.4 billion—excess liquidity from strong deposit growth invested in agency securities.
Average investment securities yields 23 basis points lower—impacted by the continued low interest rate environment as new investment security purchase yields were lower than the investment security portfolio yields.
Noninterest income
15
24
(9)
Lower gain on sale of investment securities - in 2020, ASB sold all of its Visa Class B restricted shares and $160 million of investment securities with no similar sales in 2021.
Lower mortgage banking income - lower residential loan sale volume due to ASB’s decision to portfolio a larger portion of the residential loan production.
Higher customer fee income - lower fee income in 2020 was primarily due to ASB’s decision to waive overdraft and other deposit account fees to accommodate the hardships customers were experiencing during the COVID-19 pandemic.
Less: gain on sale of investment securities, net
—
(9)
9
Gain on sale of investment securities, net, which is included in Noninterest income above and in the Bank’s statements of income and comprehensive income in Note 4, is classified as gain on sale of investment securities, net in the condensed consolidated statements of income, and accordingly, is reflected below following operating income as a separate line item and excluded from Revenues.
Revenues
77
75
2
The increase in revenues for the three months ended June 30, 2021 compared to the same period in 2020 was primarily due to higher interest income.
Interest expense
1
3
(2)
Lower interest expense on deposits—lower term certificate balances due to runoff of government term certificates and lower deposit yields as a result of the continued low interest rate environment..
Average core deposit balances increased $662 million; average term certificate balances decreased $245 million.
Average deposit yields decreased from 18 basis points to 7 basis points.
Lower interest expense on other borrowings—primarily due to lower repurchase agreement yields as a result of the continued low interest rate environment.
Provision for credit losses
(12)
15
(27)
Negative provision for credit losses reflects improvement in economic outlook, strong credit results including lower net charge-offs and credit upgrades in commercial real estate and commercial loan portfolios.
78
Three months ended June 30
Increase
(in millions)
2021
2020
(decrease)
Primary reason(s)
Negative provision for credit losses also due to a shift in mix - lower personal unsecured loan portfolio balances which had higher credit loss rates partly offset by higher commercial real estate loan portfolio balances.
Delinquency rates have increased—from 0.38% at June 30, 2020 to 0.43% at June 30, 2021 due to higher residential 1-4 family loan delinquencies, partly offset by lower personal unsecured loan delinquencies.
Net charge-off to average loans have decreased—from 0.49% at June 30, 2020 to 0.04% at June 30, 2021 due to lower personal unsecured loan portfolio net charge-offs.
Noninterest expense
48
48
—
Higher compensation and benefits expenses—increase in incentive compensation payout for commission based employees and payment of the separation and release agreement with the former President and Chief Executive Officer.
Lower other expenses - 2020 expenses included higher direct and incremental COVID-19 related costs1 to enhance cleaning and sanitation of ASB’s facilities as well as incremental compensation expense.
Expenses
37
66
(29)
The decrease in expenses for the three months ended June 30, 2021 compared to the same period in 2020 was due to lower provision for credit losses and lower interest expense.
Operating income
40
9
31
The increase in operating income for the three months ended June 30, 2021 compared to the same period in 2020 was primarily due to higher interest income, lower provision for credit losses and lower interest expense, partly offset by lower noninterest income.
Gain on sale of investment securities, net
—
9
(9)
The decrease in gain on sale of investment securities - ASB sold all of its Visa Class B restricted shares and $160 million of investment securities with no similar sales in 2021.
Net income
30
14
16
The increase in net income for the three months ended June 30, 2021 compared to the same period in 2020 was primarily due to higher operating income, partly offset by lower gain on sale of investment securities and higher income tax expense.
1 Higher operating expenses in 2020, which were considered direct and incremental COVID-19 related costs, included approximately $2.3 million of incremental compensation expense and $1.1 million of enhanced cleaning and sanitation costs.
Six months ended June 30
Increase
(in millions)
2021
2020
(decrease)
Primary reason(s)
Interest income
$
121
$
125
$
(4)
Average loan portfolio yields 32 basis points lower—impacted by the continued low interest rate environment as adjustable rate loans have repriced lower during the past year and new loan production yields continue to originate below their portfolio yields.
Average loan portfolio balances increased $24 million - commercial real estate and commercial loan portfolio balances increased by $213 million and $109 million, respectively. Home equity lines of credit and consumer loan portfolios decreased $181 million and $92 million, respectively - strategic decision to reduce production of these loans in the current economic environment.
Average investment securities portfolio balance increased $1.2 billion—excess liquidity from strong deposit growth invested in agency securities.
Average investment securities yields 71 basis points lower—impacted by the continued low interest rate environment as new investment security purchase yields were lower than the investment security portfolio yields.
Noninterest income
34
39
(5)
Lower gain on sale of investment securities - in 2020, ASB sold all of its Visa Class B restricted shares and $160 million of investment securities with no similar sales in 2021.
Lower mortgage banking income - lower residential loan sale profit margin in 2021 compared to 2020.
Higher customer fee income - lower fee income in 2020 was primarily due to ASB’s decision to waive overdraft and other deposit account fees to accommodate the hardships customers were experiencing during the COVID-19 pandemic.
79
Six months ended June 30
Increase
(in millions)
2021
2020
(decrease)
Primary reason(s)
Less: gain on sale of investment securities, net
(1)
(9)
8
Gain on sale of investment securities, net, which is included in Noninterest income above and in the Bank’s statements of income and comprehensive income in Note 4, is classified as gain on sale of investment securities, net in the condensed consolidated statements of income, and accordingly, is reflected after operating income as a separate line item and excluded from Revenues.
Revenues
154
155
(1)
The decrease in revenues for the six months ended June 30, 2021 compared to the same period in 2020 was primarily due to lower interest and noninterest income, partly offset by lower reclassification of gain on sale of investment securities.
Interest expense
3
7
(4)
Lower interest expense on deposits—lower term certificate balances due to runoff of government term certificates and lower deposit yields as a result of the continued low interest rate environment.
Average core deposit balances increased $666 million; average term certificate balances decreased $238 million.
Average deposit yields decreased from 20 basis points to 7 basis points.
Lower interest expense on other borrowings—primarily due to lower repurchase agreement yields as a result of the continued low interest rate environment.
Provision for credit losses
(21)
26
(47)
Negative provision for credit losses reflects improvement in economic outlook, strong credit results including lower net charge-offs and credit upgrades in commercial real estate and commercial loan portfolios.
Negative provision for credit losses also due to lower personal unsecured loan portfolio balances which had higher credit loss rates.
Delinquency rates have increased—from 0.38% at June 30, 2020 to 0.43% at June 30, 2021 due to higher residential 1-4 family loan delinquencies, partly offset by lower personal unsecured loan delinquencies.
Net charge-off to average loans have decreased—from 0.46% at June 30, 2020 to 0.11% at June 30, 2021 due to lower personal unsecured loan portfolio net charge-offs.
Noninterest expense
96
94
2
Higher compensation and benefits expenses—increase in incentive compensation payout for commission based employees and payment of the separation and release agreement with the former President and Chief Executive Officer.
Current year noninterest expense benefited from a one-time credit adjustment for a change in accounting for the ASB retirement plan.
Lower other expenses - 2020 expenses included higher direct and incremental COVID-19 related costs1 to enhance cleaning and sanitation of ASB’s facilities as well as incremental compensation expense.
Expenses
78
127
(49)
The decrease in expenses for the six months ended June 30, 2021 compared to the same period in 2020 was due to lower provision for credit losses and lower interest expense, partly offset by higher noninterest expenses.
Operating income
76
28
48
The increase in operating income for the six months ended June 30, 2021 compared to the same period in 2020 was primarily due to lower provision for credit losses and lower interest expense, partly offset by lower interest and noninterest income and higher noninterest expenses.
Gain on sale of investment securities, net
1
9
(8)
The decrease in gain on sale of investment securities - primarily due to the sale of ASB’s Visa Class B restricted shares in 2020 with no similar sales in 2021.
Net income
60
30
30
Net income for the six months ended June 30, 2021 was higher than the same period in 2020 due to higher operating income, partly offset by lower gain on sale of investment securities and higher income tax expense.
1 Higher operating expenses in 2020, which were considered direct and incremental COVID-19 related costs, included approximately $2.3 million of incremental compensation expense and $1.1 million of enhanced cleaning and sanitation costs.
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ASB’s return on average assets, return on average equity and net interest margin were as follows:
Three months ended June 30
Six months ended June 30
(%)
2021
2020
2021
2020
Return on average assets
1.38
0.72
1.39
0.79
Return on average equity
16.76
8.00
16.40
8.57
Net interest margin
2.98
3.21
2.97
3.46
Three months ended June 30
2021
2020
(dollars in thousands)
Average balance
Interest income/ expense
Yield/ rate (%)
Average balance
Interest income/ expense
Yield/ rate (%)
Assets:
Interest-earning deposits
$
69,987
$
19
0.11
$
239,186
$
60
0.10
FHLB stock
11,263
94
3.38
9,649
75
3.13
Investment securities
Taxable
2,748,382
10,770
1.57
1,346,145
5,978
1.78
Non-taxable
36,960
198
2.13
28,794
221
3.04
Total investment securities
2,785,342
10,968
1.57
1,374,939
6,199
1.80
Loans
Residential 1-4 family
2,146,078
19,473
3.63
2,175,756
21,635
3.98
Commercial real estate
1,153,578
9,541
3.29
937,990
8,298
3.52
Home equity line of credit
890,998
7,062
3.18
1,090,752
8,473
3.12
Residential land
17,840
204
4.57
13,326
184
5.53
Commercial
942,871
10,279
4.36
999,251
7,686
3.08
Consumer
140,001
4,504
12.91
232,360
7,286
12.61
Total loans 1,2
5,291,366
51,063
3.86
5,449,435
53,562
3.94
Total interest-earning assets 3
8,157,958
62,144
3.05
7,073,209
59,896
3.39
Allowance for credit losses
(91,329)
(80,083)
Noninterest-earning assets
724,767
783,826
Total assets
$
8,791,396
$
7,776,952
Liabilities and shareholder’s equity:
Savings
$
3,054,677
$
199
0.03
$
2,550,162
$
619
0.10
Interest-bearing checking
1,221,540
60
0.02
1,096,350
93
0.03
Money market
192,667
31
0.06
159,876
89
0.22
Time certificates
494,844
991
0.80
740,297
2,270
1.23
Total interest-bearing deposits
4,963,728
1,281
0.10
4,546,685
3,071
0.27
Advances from Federal Home Loan Bank
31,573
19
0.24
24,231
21
0.36
Securities sold under agreements to repurchase and federal funds purchased
85,330
4
0.02
87,631
54
0.25
Total interest-bearing liabilities
5,080,631
1,304
0.10
4,658,547
3,146
0.27
Noninterest bearing liabilities:
Deposits
2,831,273
2,273,656
Other
156,883
144,256
Shareholder’s equity
722,609
700,493
Total liabilities and shareholder’s equity
$
8,791,396
$
7,776,952
Net interest income
$
60,840
$
56,750
Net interest margin (%) 4
2.98
3.21
81
Six months ended June 30
2021
2020
(dollars in thousands)
Average balance
Interest income/ expense
Yield/ rate (%)
Average balance
Interest
income/
expense
Yield/ rate (%)
Assets:
Interest-earning deposits
$
58,597
$
31
0.11
$
132,920
$
152
0.23
FHLB stock
10,600
175
3.34
9,512
153
3.25
Investment securities
Taxable
2,551,569
19,136
1.50
1,367,306
14,997
2.19
Non-taxable
42,250
469
2.21
28,738
526
3.62
Total investment securities
2,593,819
19,605
1.51
1,396,044
15,523
2.22
Loans
Residential 1-4 family
2,147,923
39,061
3.64
2,177,118
43,557
4.00
Commercial real estate
1,131,338
18,546
3.27
918,076
17,807
3.86
Home equity line of credit
914,340
14,327
3.16
1,095,224
17,693
3.25
Residential land
17,152
414
4.83
13,688
381
5.57
Commercial
952,481
19,191
4.04
843,277
14,416
3.42
Consumer
149,413
9,491
12.81
241,138
15,275
12.74
Total loans 1,2
5,312,647
101,030
3.81
5,288,521
109,129
4.13
Total interest-earning assets 3
7,975,663
120,841
3.04
6,826,997
124,957
3.66
Allowance for credit losses
(96,492)
(76,292)
Noninterest-earning assets
745,690
753,029
Total assets
$
8,624,861
$
7,503,734
Liabilities and shareholder’s equity:
Savings
$
2,978,592
$
390
0.03
$
2,472,957
$
1,159
0.09
Interest-bearing checking
1,200,909
117
0.02
1,072,680
323
0.06
Money market
185,511
68
0.07
153,826
339
0.44
Time certificates
517,527
2,168
0.84
755,323
4,837
1.28
Total interest-bearing deposits
4,882,539
2,743
0.11
4,454,786
6,658
0.30
Advances from Federal Home Loan Bank
30,853
42
0.27
23,713
111
0.94
Securities sold under agreements to repurchase and federal funds purchased
80,358
8
0.02
91,822
277
0.61
Total interest-bearing liabilities
4,993,750
2,793
0.11
4,570,321
7,046
0.31
Noninterest bearing liabilities:
Deposits
2,738,967
2,094,215
Other
162,444
144,433
Shareholder’s equity
729,700
694,765
Total liabilities and shareholder’s equity
$
8,624,861
$
7,503,734
Net interest income
$
118,048
$
117,911
Net interest margin (%) 4
2.97
3.46
1 Includes loans held for sale, at lower of cost or fair value.
2 Includes recognition of net deferred loan fees of $4.6 million and $0.7 million for the three months ended June 30, 2021 and 2020, respectively, and $7.4 million and $0.7 million for the six months ended June 30, 2021 and 2020, respectively,
together with interest accrued prior to suspension of interest accrual on nonaccrual loans. Includes nonaccrual loans.
3 For the three and six months ended June 30, 2021 and 2020, 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 2020, the Federal
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Open Market Committee lowered its federal funds rate target range to 0% - 0.25% in response to the financial crisis caused by the COVID-19 pandemic, which resulted in a decrease in ASB’s net interest income and net interest margin. A prolonged low interest rate environment 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. The HELOC portfolio makes up 17% 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. 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 June 30, 2021, approximately 23% of the portfolio balances were amortizing loans under the Fixed Rate Loan Option. A HELOC loan is typically in a subordinate lien position to a borrower’s first mortgage loan, however, approximately 58% of ASB’s HELOC loan portfolio is in a first lien position.
Attention had been given by regulators and rating agencies to the potential for increased exposure to credit losses associated with HELOCs that were originated during the period of rapid home price appreciation between 2003 and 2007 as they have reached the end of their 10-year, interest-only payment periods. Once the interest only payment period has ended, payments are reset to include principal repayments along with interest. ASB does not have a large exposure to HELOCs originated between 2003 and 2007. Nearly all of ASB’s HELOC originations prior to 2008 consisted of amortizing equity lines that have structured principal payments during the draw period. These older equity lines represent 1% of the HELOC portfolio.
Loan portfolio risk elements. See Note 4 of the Condensed Consolidated Financial Statements.
Investment securities. ASB’s investment portfolio was comprised as follows:
June 30, 2021
December 31, 2020
(dollars in thousands)
Balance
% of total
Balance
% of total
U.S. Treasury and federal agency obligations
$
136,374
5
%
$
62,322
3
%
Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies
2,701,891
94
2,076,506
95
Corporate bonds
31,869
1
31,351
1
Mortgage revenue bonds
15,427
—
27,185
1
Total investment securities
$
2,885,561
100
%
$
2,197,364
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 increase in the investment securities portfolio was primarily due to the purchase of securities with excess liquidity.
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. While deposits have increased by $486 million year-to-date, in part due to PPP loan proceeds and consumer economic impact payments from the CARES Act stimulus program, deposit retention and sustained growth will remain challenging in the current environment due to competition for deposits and the low level of short-term interest rates. Advances from the FHLB of Des Moines, securities sold under agreements to repurchase and federal funds purchased continue to be additional sources of funds. As of June 30, 2021 ASB’s costing liabilities consisted of 98% deposits and 2% other borrowings compared to 99% deposits and 1% other borrowings as of December 31, 2020. The weighted average cost of deposits for the first six months of 2021 and 2020 was 0.07% and 0.20%, respectively.
Federal Home Loan Bank of Des Moines. As of June 30, 2021 and December 31, 2020, ASB had no advances outstanding at the FHLB of Des Moines. As of June 30, 2021, the unused borrowing capacity with the FHLB of Des Moines was $2.0 billion. The FHLB of Des Moines continues to be an important source of liquidity for ASB.
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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 June 30, 2021, ASB had an unrealized loss, net of taxes, on available-for-sale investment securities (including securities pledged for repurchase agreements) in AOCI of $8.8 million compared to an unrealized gain, net of taxes, of $20.0 million as of December 31, 2020. See “Item 3. Quantitative and qualitative disclosures about market risk” for a discussion of ASB’s interest rate risk sensitivity.
During the first six months of 2021, ASB recorded a negative provision for credit losses of $20.0 million in the allowance for credit losses primarily due to improvement in the economic outlook, strong credit results including lower net charge-offs and credit upgrades in commercial real estate and commercial loan portfolios and due to lower personal unsecured loan portfolio balances which had higher credit loss rates. During the first six months of 2020, ASB recorded a provision for credit losses of $20.7 million in the allowance for credit losses primarily due to increased loss reserves for the consumer loan portfolio, increased loss rates for the commercial and commercial real estate portfolios and reserves for forecasted deterioration due to the COVID-19 pandemic.
Six months ended June 30
Year ended
December 31, 2020
(in thousands)
2021
2020
Allowance for credit losses
$
101,201
$
53,355
$
53,355
Impact of adopting ASU No. 2016-13
—
19,441
19,441
Provision for credit losses
(19,992)
20,734
49,811
Less: net charge-offs
2,957
12,223
21,406
Allowance for credit losses, end of period
$
78,252
$
81,307
$
101,201
Ratio of net charge-offs during the period to average loans outstanding (annualized)
0.11
%
0.46
%
0.40
%
ASB maintains a reserve for credit losses that consists of two components, the allowance for credit losses and an allowance for loan commitments (unfunded reserve). The level of the reserve for unfunded loan commitments is adjusted by recording an expense or recovery in provision for credit losses. For the six months ended June 30, 2021 and 2020, ASB recorded a recovery in the provision for credit losses for unfunded commitments of $0.7 million and a provision for credit losses for unfunded commitments of $4.8 million, respectively. As of June 30, 2021 and December 31, 2020, the reserve for unfunded loan commitments was $3.7 million and $4.3 million, respectively.
Legislation and regulation. ASB is subject to extensive regulation, principally by the OCC and the FDIC. Depending on ASB’s level of regulatory capital and other considerations, these regulations could restrict the ability of ASB to compete with other institutions and to pay dividends to its shareholder. See the discussion below under “Liquidity and capital resources.”
Changes to Community Bank Leverage Ratio. In April 2020, the federal bank regulatory agencies issued two interim final rules to implement Section 4012 of the CARES Act, which requires the agencies to temporarily lower the community bank leverage ratio to 8 percent. The two rules modify the community bank leverage ratio framework so that:
•Beginning in the second quarter of 2020 and until the end of the year, a banking organization that has a leverage ratio of 8 percent or greater and meets certain other criteria may elect to use the community bank leverage ratio framework; and
•Community banking organizations will have until January 1, 2022 before the community bank leverage ratio requirement is re-established at greater than 9 percent.
Under the interim final rules, the community bank leverage ratio was 8 percent beginning in the second quarter of 2020 and for the remainder of calendar year 2020, 8.5 percent for calendar year 2021, and 9 percent thereafter. The interim final rules also maintain a two-quarter grace period for a qualifying community banking organization whose leverage ratio falls no more than 1 percent below the applicable community bank leverage ratio.
As of June 30, 2021, the bank was in compliance with all of the minimum capital requirements under OCC regulations, and was categorized as “well capitalized” under the regulatory framework for prompt corrective action. Beginning in the second quarter of 2020, ASB adopted the community bank leverage ratio framework, which allowed it to report only on the community bank leverage ratio, but does not change minimum capital requirements under OCC regulations. At June 30, 2021 and March
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31, 2021, ASB’s leverage ratio was below the 8.5 percent requirement to qualify for abbreviated reporting under the community bank leverage framework for 2021 and will begin reporting its risk-based capital ratios in the third quarter of 2021.
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. On April 1, 2021, the general counsel of the Board of Governors of the Federal Reserve System issued an opinion letter to John Deere Financial, F.S.B. (a corporate subsidiary of a unitary thrift holding company whose structure is similar to that of HEI and ASB) finding that if John Deere Financial, F.S.B. elected to operate as a covered savings association, its parent would no longer be able to hold John Deere Financial, F.S.B. per an exemption under HOLA. Although the Board of Governors has not issued any interpretation directly to ASB, at this point, ASB will not elect to operate as a covered savings association.
FINANCIAL CONDITION
Liquidity and capital resources.
(dollars in millions)
June 30, 2021
December 31, 2020
% change
Total assets
$
8,910
$
8,397
6
Investment securities
2,886
2,197
31
Loans held for investment, net
5,106
5,233
(2)
Deposit liabilities
7,873
7,387
7
Other bank borrowings
130
90
45
As of June 30, 2021, ASB was one of Hawaii’s largest financial institutions based on assets of $8.9 billion and deposits of $7.9 billion.
As of June 30, 2021, ASB’s unused FHLB borrowing capacity was approximately $2.0 billion. As of June 30, 2021, ASB had commitments to borrowers for loans and unused lines and letters of credit of $2.0 billion, of which, commitments to lend to borrowers whose loan terms have been modified in troubled debt restructurings were nil. Management believes ASB’s current sources of funds will enable it to meet these obligations while maintaining liquidity at satisfactory levels.
For the six months ended June 30, 2021, net cash provided by ASB’s operating activities was $63 million. Net cash used during the same period by ASB’s investing activities was $633 million, primarily due to purchases of available-for-sale securities of $1.1 billion, purchases of held-to-maturity securities of $187 million, additions to premises and equipment of $6 million, contributions to low income housing investments of $6 million and a net increase in stock from the Federal Home Loan Bank, partly offset by the receipt of investment security repayments and maturities of $359 million, proceeds from the sale of investment securities of $197 million, a net decrease in loans of $92 million, proceeds from the sale of residential loans of $17 million and proceeds from redemption of bank owned life insurance of $3 million. Net cash provided by financing activities during this period was $499 million, primarily due to increases in deposit liabilities of $486 million and a net increase in repurchase agreements of $40 million, partly offset by $28 million in common stock dividends to HEI (through ASB Hawaii).
For the six months ended June 30, 2020, net cash provided by ASB’s operating activities was $29 million. Net cash used during the same period by ASB’s investing activities was $440 million, primarily due to purchases of available-for-sale securities of $477 million, a net increase in loans of $328 million, additions to premises and equipment of $4 million and contributions to low income housing investments of $2 million, partly offset by the receipt of investment security repayments and maturities of $197 million, proceeds from the sale of investment securities of $169 million and proceeds from the sale of low income housing investments of $7 million. Net cash provided by financing activities during this period was $740 million, primarily due to increases in deposit liabilities of $758 million and proceeds from FHLB advances of $30 million, partly offset by a net decrease in repurchase agreements of $20 million and $28 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. Beginning in the second quarter of 2020, ASB has adopted the community bank leverage ratio framework and is required to report only its leverage ratio. As of June 30, 2021 and December 31, 2020, ASB was well-capitalized (well-capitalized ratio requirements noted in parentheses) with a Tier-1 leverage ratio of 8.0% (5.0%) and 8.4%
85
(5.0%), respectively. 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 2020 Form 10-K (pages 74 to 76).
ASB’s interest-rate risk sensitivity measures as of June 30, 2021 and December 31, 2020 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)
June 30, 2021
December 31, 2020
June 30, 2021
December 31, 2020
+300
5.4
%
7.0
%
18.6
%
31.4
%
+200
3.9
5.0
14.0
23.9
+100
2.2
2.7
8.3
14.0
-100
(2.4)
(1.9)
(16.5)
(25.2)
ASB’s net interest income (NII) sensitivity profile was less asset sensitive as of June 30, 2021 as compared to December 31, 2020, primarily driven by the increase in market rates, growth in the fixed rate portion of the HELOC portfolio and core deposit funded investment securities purchases. The increase in market rates decreased prepayment expectations in the bank’s fixed-rate mortgage and mortgage-backed investment portfolios, driving decreased asset sensitivity. In addition, the fixed rate portion of the HELOC portfolio grew, contributing to decreased asset sensitivity. Lastly, the deployment of strong core deposit growth into new fixed-rate investment purchases further contributed to decreased sensitivity.
Economic value of equity (EVE) sensitivity decreased as of June 30, 2021 compared to December 31, 2020 as the duration of assets lengthened. The steepening of the yield curve led to slower prepayment expectations and lengthened the duration of the fixed-rate mortgage and mortgage-backed investment portfolios.
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.
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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 second quarter of 2021 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 second quarter of 2021 that have materially affected, or are reasonably likely to materially affect, Hawaiian Electric’s internal control over financial reporting.
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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 2020 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 18 to 30 of HEI’s and Hawaiian Electric’s 2020 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 through vi 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 second quarter of 2021 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
April 1 to 30, 2021
23,560
$43.08
—
NA
May 1 to 31, 2021
21,172
$43.73
—
NA
June 1 to 30, 2021
158,234
$43.67
—
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,” 15,929 of the 23,560 shares, 16,232 of the 21,172 shares and 135,891 of the 158,234 shares were purchased for the DRIP; 6,635 of the 23,560 shares, 3,497 of the 21,172 shares and 18,372 of the 158,234 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.
Executive Separation and Release Agreement dated as of May 5, 2021 between Richard F. Wacker, American Savings Bank, F.S.B., and Hawaiian Electric Industries, Inc.
Third Amended and Restated Credit Agreement, dated as of May 14, 2021, among Hawaiian Electric Industries, Inc., as Borrower, the Lenders Party Hereto and Bank of America, N.A. and U.S. Bank National Association, as Co-Syndication Agent, and Wells Fargo Bank, National Association, MUFG Union Bank, N.A., Barclays Bank PLC, Bank of Hawaii and The Toronto-Dominion Bank, New York Branch, as Co-Documentation Agents, and JPMorgan Chase Bank, N.A., as Administrative Agent, Swingline Lender and Issuing Bank, JP Morgan Chase Bank, N.A. and Bank of America, N.A. as Sustainability Structuring Agents and JPMorgan Chase Bank, N.A., BofA Securities, Inc. and U.S. Bank National Association, as Joint Lead Arrangers and Joint Book Runners.
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
Third Amended and Restated Credit Agreement, dated as of May 14, 2021, among Hawaiian Electric Company, Inc., as Borrower, the Lenders Party Hereto and Bank of America, N.A. and U.S. Bank National Association, as Co-Syndication Agent, and Wells Fargo Bank, National Association, MUFG Union Bank, N.A., Barclays Bank PLC, Bank of Hawaii and The Toronto-Dominion Bank, New York Branch, as Co-Documentation Agents, and JPMorgan Chase Bank, N.A., as Administrative Agent, Swingline Lender and Issuing Bank, JP Morgan Chase Bank, N.A. and Bank of America, N.A. as Sustainability Structuring Agents and JPMorgan Chase Bank, N.A., BofA Securities, Inc. and U.S. Bank National Association, as Joint Lead Arrangers and Joint Book Runners.
Certification Pursuant to Rule 13a-14 promulgated under the Securities Exchange Act of 1934 of Scott W. H. Seu (Hawaiian Electric Chief Executive Officer)
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 Certification Pursuant to 18 U.S.C. Section 1350
* Schedules and exhibits have been omitted from this filing pursuant to Item 601(a) (5) of the Regulation S-K. We agree to furnish a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request.
89
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/ Scott W. H. Seu
Constance H. Lau
Scott W. H. Seu
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
Senior Vice President
and Chief Financial Officer
and Chief Financial Officer
(Principal Financial Officer of HEI)
(Principal Financial Officer of Hawaiian Electric)
