☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2023
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. – 1099 Alakea Street, Suite 2200, 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 18, 2023
Hawaiian Electric Industries, Inc. (Without Par Value)
109,611,599
Shares
Hawaiian Electric Company, Inc. ($6-2/3 Par Value)
17,854,278
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, 2023
GLOSSARY OF TERMS
Terms
Definitions
ABR
Alternate Base Rate
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
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. and Pacific Current, LLC and its subsidiaries (listed under Pacific Current). The Old Oahu Tug Service, Inc. was dissolved in March 2022.
Consumer Advocate
Division of Consumer Advocacy, Department of Commerce and Consumer Affairs of the State of Hawaii
CSSM
Collective Shared Savings Mechanism
D&O
Decision and order from the PUC
DER
Distributed energy resources
DRIP
HEI Dividend Reinvestment and Stock Purchase Plan
ECRC
Energy cost recovery clause
EIP
2010 Equity and Incentive Plan, as amended and restated
EPA
Environmental Protection Agency — federal
EPRM
Exceptional Project Recovery Mechanism
EPS
Earnings per share
ESM
Earnings Sharing Mechanism
EVE
Economic value of equity
Exchange Act
Securities Exchange Act of 1934
FDIC
Federal Deposit Insurance Corporation
federal
U.S. Government
FHLB
Federal Home Loan Bank
FHLMC
Federal Home Loan Mortgage Corporation
FNMA
Federal National Mortgage Association
FRB
Federal Reserve Board
GAAP
Accounting principles generally accepted in the United States of America
GHG
Greenhouse gas
GNMA
Government National Mortgage Association
GSPA
Grid Services Purchase Agreement
Hamakua Energy
Hamakua Energy, LLC, an indirect subsidiary of Pacific Current
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.
HEI
Hawaiian Electric Industries, Inc., direct parent company of Hawaiian Electric Company, Inc., ASB Hawaii, Inc. and Pacific Current, LLC. The Old Oahu Tug Service, Inc. was dissolved in March 2022.
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
IIJA
Infrastructure Investment and Jobs Act
IPP
Independent power producer
IRLCs
Interest rate lock commitments
Kalaeloa
Kalaeloa Partners, L.P.
kWh
Kilowatthour/s (as applicable)
LIBOR
London Inter-Bank Offered Rate
LMI
Low-to-moderate income
LTIP
Long-term incentive plan
Mahipapa
Mahipapa, LLC, a subsidiary of Pacific Current
Maui Electric
Maui Electric Company, Limited, an electric utility subsidiary of Hawaiian Electric Company, Inc.
Mauo
Mauo, LLC, a subsidiary of Pacific Current
MPIR
Major Project Interim Recovery
MRP
Multi-year rate period
MSRs
Mortgage servicing rights
MW
Megawatt/s (as applicable)
NII
Net interest income
NPBC
Net periodic benefit costs
NPPC
Net periodic pension costs
O&M
Other operation and maintenance
OCC
Office of the Comptroller of the Currency
OPEB
Postretirement benefits other than pensions
Pacific Current
Pacific Current, LLC, a wholly owned subsidiary of HEI and parent company of Hamakua Holdings, LLC, Mauo, LLC, Alenuihaha Developments, LLC, Kaʻieʻie Waho Company, LLC, Kaʻaipuaʻa, LLC, Upena, LLC and Mahipapa, LLC
PBR
Performance-based regulation
PIMs
Performance incentive mechanisms
PPA
Power purchase agreement
PPAC
Purchased power adjustment clause
PUC
Public Utilities Commission of the State of Hawaii
PV
Photovoltaic
RAM
Revenue adjustment mechanism
RBA
Revenue balancing account
RFP
Request for proposals
ROACE
Return on average common equity
RORB
Return on rate base
RPS
Renewable portfolio standards
SBA
Small Business Administration
SEC
Securities and Exchange Commission
See
Means the referenced material is incorporated by reference
SOFR
Secured Overnight Financing Rate
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’ ability 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 lingering impact of the COVID-19 pandemic, including any recurrence of the COVID-19 pandemic due to new variants and the potential reinstatement of related government orders and restrictions, and the resulting impact on our employees, customers and suppliers;
•ability to adequately address risks and capitalize on opportunities related to our environmental, social and governance 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 their facilities in an effective and safe manner, and citizen or stakeholder activism that could delay the construction, increase project costs or preclude the completion of third-party or Utility projects that are required to meet electricity demand, resilience and reliability objectives and renewable portfolio standards (RPS) and other climate-related 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 and cost of the Company’s and Utilities’ operations, collateral underlying ASB loans 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, or higher borrowing costs;
•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 potential higher 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 and mortality improvements;
•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;
•increasing competition in the banking industry from traditional financial institutions as well as from non-traditional providers of financial services, including financial service subsidiaries of commercial and manufacturing companies (e.g., increased price competition for loans and deposits, or an outflow of deposits to alternative investments or platforms, which may have an adverse impact on ASB’s net interest margin and portfolio growth);
•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 or resilience proposals, among others, and related costs; reliance by the Utilities on outside parties such as the state, independent power producers (IPPs) and developers; supply-chain challenges; and
iv
uncertainties surrounding technologies, solar power, wind power, biofuels, environmental assessments required to meet RPS and other climate-related goals; the impacts of implementation of the renewable energy and resilience 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 required to be 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;
•high and/or volatile fuel prices, which increases working capital requirements and customer bills, or delivery of adequate fuel by suppliers (including as a result of the Russia-Ukraine war), which could affect the reliability of utility operations, 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), annual revenue adjustment (ARA) 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 kilowatt-hour sales;
•the ability of the Utilities to recover increasing costs and earn a reasonable return on capital investments not covered by the ARA, while providing the customer dividend required by performance-based regulation (PBR);
•the impact from the PUC’s implementation of PBR 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 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;
•unfavorable changes in economic conditions, such as sustained inflation, higher interest rates or recession, may negatively impact the ability of the Company’s customers to pay their utility bills or loan payments, reduce loan production, and increase operating costs of the Utilities or Bank that cannot be passed on to, or recovered, from customers;
•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 and related cost 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 subsidiaries (including at ASB branches and electric utility plants), its third-party service providers, contractors and customers with whom they have shared data (IPPs, distributed energy resources (DER) aggregators and customers enrolled under DER programs) 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 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 pricing or “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 a decrease in net interest income and portfolio yields, 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 levels, 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 supply chain issues; 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)
2023
2022
2023
2022
Revenues
Electric utility
$
794,191
$
818,873
$
1,624,552
$
1,527,665
Bank
96,885
75,324
190,742
150,439
Other
4,609
1,410
8,628
2,571
Total revenues
895,685
895,607
1,823,922
1,680,675
Expenses
Electric utility
720,566
747,719
1,475,052
1,382,916
Bank
72,017
53,401
142,354
98,486
Other
10,123
7,819
20,019
13,329
Total expenses
802,706
808,939
1,637,425
1,494,731
Operating income (loss)
Electric utility
73,625
71,154
149,500
144,749
Bank
24,868
21,923
48,388
51,953
Other
(5,514)
(6,409)
(11,391)
(10,758)
Total operating income
92,979
86,668
186,497
185,944
Retirement defined benefits credit—other than service costs
1,153
1,246
2,305
2,489
Interest expense, net—other than on deposit liabilities and other bank borrowings
(29,832)
(24,965)
(58,630)
(49,314)
Allowance for borrowed funds used during construction
1,295
798
2,426
1,576
Allowance for equity funds used during construction
3,772
2,470
7,073
4,879
Gain on sales of equity-method investment
—
—
—
8,123
Income before income taxes
69,367
66,217
139,671
153,697
Income taxes
14,284
13,203
29,394
31,043
Net income
55,083
53,014
110,277
122,654
Preferred stock dividends of subsidiaries
473
473
946
946
Net income for common stock
$
54,610
$
52,541
$
109,331
$
121,708
Basic earnings per common share
$
0.50
$
0.48
$
1.00
$
1.11
Diluted earnings per common share
$
0.50
$
0.48
$
1.00
$
1.11
Weighted-average number of common shares outstanding
109,573
109,432
109,544
109,397
Net effect of potentially dilutive shares (share-based compensation programs)
207
230
326
317
Weighted-average shares assuming dilution
109,780
109,662
109,870
109,714
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2022 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)
2023
2022
2023
2022
Net income for common stock
$
54,610
$
52,541
$
109,331
$
121,708
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 $(4,021), $(32,529), $2,058 and $(76,608), respectively
(10,984)
(88,857)
5,621
(209,264)
Amortization of unrealized holding losses on held-to-maturity securities, net of taxes of $1,350, nil, $2,696 and nil, respectively
3,689
—
7,366
—
Derivatives qualifying as cash flow hedges:
Unrealized interest rate hedging gains (losses) arising during the period, net of taxes of $(117), $273, $(52) and $1,319, respectively
(335)
786
(149)
3,803
Reclassification adjustment to net income, net of taxes of $(16), $18, $(33) and $37, respectively
(48)
53
(96)
108
Retirement benefit plans:
Adjustment for amortization of prior service credit and net losses (gains) recognized during the period in net periodic benefit cost, net of taxes of $(122), $44, $(244) and $1,606, respectively
(357)
122
(714)
4,623
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes of $148, $19, $295 and $(1,481), respectively
426
56
851
(4,269)
Other comprehensive income (loss), net of taxes
(7,609)
(87,840)
12,879
(204,999)
Comprehensive income (loss) attributable to Hawaiian Electric Industries, Inc.
$
47,001
$
(35,299)
$
122,210
$
(83,291)
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2022 Form 10-K.
2
Hawaiian Electric Industries, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (unaudited)
(dollars in thousands)
June 30, 2023
December 31, 2022
Assets
Cash and cash equivalents
$
314,284
$
199,877
Restricted cash
5,104
5,050
Accounts receivable and unbilled revenues, net
409,314
511,903
Available-for-sale investment securities, at fair value
1,368,037
1,429,667
Held-to-maturity investment securities, at amortized cost
1,224,917
1,251,747
Stock in Federal Home Loan Bank, at cost
18,000
26,560
Loans held for investment, net
6,069,114
5,906,690
Loans held for sale, at lower of cost or fair value
6,910
824
Property, plant and equipment, net of accumulated depreciation of $3,292,930 and $3,192,545 at June 30, 2023 and December 31, 2022, respectively
5,868,408
5,687,003
Operating lease right-of-use assets
105,030
115,684
Regulatory assets
252,787
242,513
Other
795,214
824,536
Goodwill
82,190
82,190
Total assets
$
16,519,309
$
16,284,244
Liabilities and shareholders’ equity
Liabilities
Accounts payable
$
253,954
$
251,460
Interest and dividends payable
33,294
21,333
Deposit liabilities
8,163,235
8,169,696
Short-term borrowings—other than bank
46,212
172,568
Other bank borrowings
750,000
695,120
Long-term debt, net—other than bank
2,572,375
2,384,980
Deferred income taxes
272,988
262,462
Operating lease liabilities
114,827
126,604
Finance lease liabilities
123,240
48,709
Regulatory liabilities
1,087,356
1,055,650
Defined benefit pension and other postretirement benefit plans liability
70,979
71,813
Other
747,179
787,057
Total liabilities
14,235,639
14,047,452
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: 109,611,599 shares and 109,470,795 shares at June 30, 2023 and December 31, 2022, respectively
1,696,258
1,692,697
Retained earnings
876,268
845,830
Accumulated other comprehensive loss, net of tax benefits
(323,149)
(336,028)
Total shareholders’ equity
2,249,377
2,202,499
Total liabilities and shareholders’ equity
$
16,519,309
$
16,284,244
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2022 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, 2022
109,471
$
1,692,697
$
845,830
$
(336,028)
$
2,202,499
Net income for common stock
—
—
54,721
—
54,721
Other comprehensive income, net of taxes
—
—
—
20,488
20,488
Share-based expenses and other, net
101
(307)
—
—
(307)
Common stock dividends (36¢ per share)
—
—
(39,446)
—
(39,446)
Balance, March 31, 2023
109,572
1,692,390
861,105
(315,540)
2,237,955
Net income for common stock
—
—
54,610
—
54,610
Other comprehensive loss, net of tax benefits
—
—
—
(7,609)
(7,609)
Share-based expenses and other, net
40
3,868
—
—
3,868
Common stock dividends (36¢ per share)
—
—
(39,447)
—
(39,447)
Balance, June 30, 2023
109,612
$
1,696,258
$
876,268
$
(323,149)
$
2,249,377
Balance, December 31, 2021
109,312
$
1,685,496
$
757,921
$
(52,533)
$
2,390,884
Net income for common stock
—
—
69,167
—
69,167
Other comprehensive loss, net of tax benefits
—
—
—
(117,159)
(117,159)
Share-based expenses and other, net
119
(949)
—
—
(949)
Common stock dividends (35¢ per share)
—
—
(38,301)
—
(38,301)
Balance, March 31, 2022
109,431
1,684,547
788,787
(169,692)
2,303,642
Net income for common stock
—
—
52,541
—
52,541
Other comprehensive loss, net of tax benefits
—
—
—
(87,840)
(87,840)
Share-based expenses and other, net
36
3,462
—
—
3,462
Common stock dividends (35¢ per share)
—
—
(38,301)
—
(38,301)
Balance, June 30, 2022
109,467
$
1,688,009
$
803,027
$
(257,532)
$
2,233,504
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2022 Form 10-K.
4
Hawaiian Electric Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30
(in thousands)
2023
2022
Cash flows from operating activities
Net income
$
110,277
$
122,654
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation of property, plant and equipment
133,232
126,112
Other amortization
21,609
19,134
Provision for credit losses
1,218
(506)
Loans originated, held for sale
(14,912)
(108,695)
Proceeds from sale of loans, held for sale
14,596
114,299
Gain on sales of investment securities, net and equity-method investment
—
(8,123)
Gain on sale of loans, net
(360)
(1,449)
Deferred income taxes
(1,309)
(14,683)
Share-based compensation expense
5,919
5,593
Allowance for equity funds used during construction
(7,073)
(4,879)
Other
(3,710)
(3,858)
Changes in assets and liabilities
Decrease (increase) in accounts receivable and unbilled revenues, net
103,695
(101,641)
Decrease (increase) in fuel oil stock
47,963
(119,890)
Decrease (increase) in regulatory assets
(10,620)
12,956
Increase in regulatory liabilities
22,782
11,288
Increase in accounts, interest and dividends payable
34,946
62,115
Change in prepaid and accrued income taxes, tax credits and utility revenue taxes
(45,171)
22,173
Decrease in defined benefit pension and other postretirement benefit plans liability
Principal repayments on available-for-sale investment securities
68,279
209,094
Proceeds from repayments or maturities of held-to-maturity investment securities
35,604
7,932
Purchase of stock from Federal Home Loan Bank
(62,400)
(18,720)
Redemption of stock from Federal Home Loan Bank
70,960
15,520
Net increase in loans held for investment
(208,042)
(212,744)
Proceeds from sale of commercial loans
66,655
—
Purchase of loans held for investment
(26,195)
—
Capital expenditures
(235,875)
(147,749)
Other
8,160
15,813
Net cash used in investing activities
(282,854)
(497,031)
(continued)
5
Hawaiian Electric Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)(continued)
Six months ended June 30
(in thousands)
2023
2022
Cash flows from financing activities
Net increase (decrease) in deposit liabilities
(104,771)
81,324
Net increase (decrease) in short-term borrowings with original maturities of three months or less
(91,438)
70,019
Net increase (decrease) in other bank borrowings with original maturities of three months or less
(596,810)
153,305
Proceeds from issuance of short-term debt
65,000
—
Repayment of short-term debt
(100,000)
—
Proceeds from issuance of other bank borrowings
1,000,000
—
Repayment of other bank borrowings
(250,000)
—
Proceeds from issuance of long-term debt
250,000
67,312
Repayment of long-term debt
(62,426)
(15,030)
Withheld shares for employee taxes on vested share-based compensation
(2,356)
(3,079)
Common stock dividends
(78,893)
(76,602)
Preferred stock dividends of subsidiaries
(946)
(946)
Other
(1,662)
(318)
Net cash provided by financing activities
25,698
275,985
Net increase (decrease) in cash, cash equivalents and restricted cash
114,461
(146,404)
Cash, cash equivalents and restricted cash, beginning of period
204,927
311,462
Cash, cash equivalents and restricted cash, end of period
319,388
165,058
Less: Restricted cash
(5,104)
(5,386)
Cash and cash equivalents, end of period
$
314,284
$
159,672
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2022 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)
2023
2022
2023
2022
Revenues
$
794,191
$
818,873
$
1,624,552
$
1,527,665
Expenses
Fuel oil
280,157
269,655
614,254
490,941
Purchased power
168,434
218,085
321,195
381,618
Other operation and maintenance
136,360
124,892
264,676
250,149
Depreciation
60,689
58,739
121,616
117,210
Taxes, other than income taxes
74,926
76,348
153,311
142,998
Total expenses
720,566
747,719
1,475,052
1,382,916
Operating income
73,625
71,154
149,500
144,749
Allowance for equity funds used during construction
3,772
2,470
7,073
4,879
Retirement defined benefits credit—other than service costs
1,048
991
2,095
1,981
Interest expense and other charges, net
(20,872)
(18,800)
(41,118)
(37,126)
Allowance for borrowed funds used during construction
1,295
798
2,426
1,576
Income before income taxes
58,868
56,613
119,976
116,059
Income taxes
13,070
11,979
26,670
24,517
Net income
45,798
44,634
93,306
91,542
Preferred stock dividends of subsidiaries
229
229
458
458
Net income attributable to Hawaiian Electric
45,569
44,405
92,848
91,084
Preferred stock dividends of Hawaiian Electric
270
270
540
540
Net income for common stock
$
45,299
$
44,135
$
92,308
$
90,544
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2022 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)
2023
2022
2023
2022
Net income for common stock
$
45,299
$
44,135
$
92,308
$
90,544
Other comprehensive income (loss), net of taxes:
Retirement benefit plans:
Adjustment for amortization of prior service credit and net losses (gains) recognized during the period in net periodic benefit cost, net of taxes of $(163), $(2), $(326) and $1,516, respectively
(470)
(5)
(940)
4,371
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes of $148, $19, $295 and $(1,481), respectively
426
56
851
(4,269)
Other comprehensive income (loss), net of taxes
(44)
51
(89)
102
Comprehensive income attributable to Hawaiian Electric Company, Inc.
$
45,255
$
44,186
$
92,219
$
90,646
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2022 Form 10-K.
7
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (unaudited)
(dollars in thousands, except par value)
June 30, 2023
December 31, 2022
Assets
Property, plant and equipment
Utility property, plant and equipment
Land
$
52,098
$
52,060
Plant and equipment
8,122,766
7,979,510
Right-of-use assets - finance lease
124,372
48,371
Less accumulated depreciation
(3,178,967)
(3,086,499)
Construction in progress
338,052
275,353
Utility property, plant and equipment, net
5,458,321
5,268,795
Nonutility property, plant and equipment, less accumulated depreciation of $65 and $63 as of June 30, 2023 and December 31, 2022, respectively
Common stock ($6 2/3 par value, authorized 50,000,000 shares; outstanding 17,854,278 shares at June 30, 2023 and December 31, 2022)
$
119,048
$
119,048
Premium on capital stock
810,955
810,955
Retained earnings
1,439,114
1,411,306
Accumulated other comprehensive income, net of taxes-retirement benefit plans
2,772
2,861
Common stock equity
2,371,889
2,344,170
Cumulative preferred stock — not subject to mandatory redemption
34,293
34,293
Long-term debt, net
1,734,530
1,584,854
Total capitalization
4,140,712
3,963,317
Commitments and contingencies (Note 3)
Current liabilities
Current portion of operating lease liabilities
17,709
19,095
Current portion of long-term debt, net
99,985
99,962
Short-term borrowings from non-affiliates
—
87,967
Accounts payable
210,632
202,492
Interest and preferred dividends payable
21,367
17,176
Taxes accrued, including revenue taxes
252,937
289,902
Regulatory liabilities
25,938
31,475
Other
90,295
85,596
Total current liabilities
718,863
833,665
Deferred credits and other liabilities
Operating lease liabilities
70,465
78,715
Finance lease liabilities
119,006
46,048
Deferred income taxes
385,350
384,430
Regulatory liabilities
1,061,418
1,024,175
Unamortized tax credits
91,590
95,300
Defined benefit pension liability
49,016
49,748
Other
125,173
122,069
Total deferred credits and other liabilities
1,902,018
1,800,485
Total capitalization and liabilities
$
6,761,593
$
6,597,467
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2022 Form 10-K.
9
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, 2022
17,854
$
119,048
$
810,955
$
1,411,306
$
2,861
$
2,344,170
Net income for common stock
—
—
—
47,009
—
47,009
Other comprehensive loss, net of taxes
—
—
—
—
(45)
(45)
Common stock dividends
—
—
—
(32,250)
—
(32,250)
Balance, March 31, 2023
17,854
119,048
810,955
1,426,065
2,816
2,358,884
Net income for common stock
—
—
—
45,299
—
45,299
Other comprehensive loss, net of taxes
—
—
—
—
(44)
(44)
Common stock dividends
—
—
(32,250)
—
(32,250)
Balance, June 30, 2023
17,854
$
119,048
$
810,955
$
1,439,114
$
2,772
$
2,371,889
Balance, December 31, 2021
17,753
$
118,376
$
798,526
$
1,348,277
$
(3,280)
$
2,261,899
Net income for common stock
—
—
—
46,409
—
46,409
Other comprehensive income, net of taxes
—
—
—
—
51
51
Common stock dividends
—
—
—
(31,475)
—
(31,475)
Balance, March 31, 2022
17,753
118,376
798,526
1,363,211
(3,229)
2,276,884
Net income for common stock
—
—
—
44,135
—
44,135
Other comprehensive income, net of taxes
—
—
—
—
51
51
Common stock dividends
—
—
—
(31,475)
—
(31,475)
Balance, June 30, 2022
17,753
$
118,376
$
798,526
$
1,375,871
$
(3,178)
$
2,289,595
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2022 Form 10-K.
10
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30
(in thousands)
2023
2022
Cash flows from operating activities
Net income
$
93,306
$
91,542
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation of property, plant and equipment
121,616
117,210
Other amortization
13,017
12,703
Deferred income taxes
(6,164)
(15,964)
State refundable credit
(5,750)
(5,517)
Bad debt expense
2,813
3,128
Allowance for equity funds used during construction
(7,073)
(4,879)
Other
381
(4)
Changes in assets and liabilities
Decrease (increase) in accounts receivable
76,219
(51,927)
Decrease (increase) in accrued unbilled revenues
28,797
(49,711)
Decrease (increase) in fuel oil stock
47,730
(119,709)
Increase in materials and supplies
(11,587)
(2,704)
Decrease (increase) in regulatory assets
(10,620)
12,956
Increase in regulatory liabilities
22,782
11,288
Increase in accounts payable
26,984
59,850
Change in prepaid and accrued income taxes, tax credits and revenue taxes
(44,941)
10,016
Decrease in defined benefit pension and other postretirement benefit plans liability
(3,926)
(2,515)
Change in other assets and liabilities
(7,439)
(21,613)
Net cash provided by operating activities
336,145
44,150
Cash flows from investing activities
Capital expenditures
(230,149)
(140,245)
Other
4,056
6,685
Net cash used in investing activities
(226,093)
(133,560)
Cash flows from financing activities
Common stock dividends
(64,500)
(62,950)
Preferred stock dividends of Hawaiian Electric and subsidiaries
(998)
(998)
Proceeds from issuance of long-term debt
150,000
60,000
Net increase (decrease) in short-term borrowings from non-affiliates and affiliates with original maturities of three months or less
(87,967)
54,987
Payments of obligations under finance leases
(1,339)
—
Other
(843)
(255)
Net cash provided by (used in) financing activities
(5,647)
50,784
Net increase (decrease) in cash, cash equivalents and restricted cash
104,405
(38,626)
Cash, cash equivalents and restricted cash, beginning of period
39,242
55,258
Cash, cash equivalents and restricted cash, end of period
143,647
16,632
Less: Restricted cash
—
(1,129)
Cash and cash equivalents, end of period
$
143,647
$
15,503
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2022 Form 10-K.
11
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, 2022.
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, 2023 and December 31, 2022 and the results of their operations for the three and six months ended June 30, 2023 and 2022 and cash flows for the six months ended June 30, 2023 and 2022. 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.
Credit Losses. In March 2022, Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2022-02, “Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures,” which eliminates the accounting guidance for Troubled Debt Restructurings (TDRs) by creditors in Subtopic 310-40, Receivables-Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and restructuring guidance in paragraphs 310-20-35-9 through 35-11 to determine whether a modification results in a new loan or a continuation of an existing loan. The amendments in this update also require that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, “Financial Instruments-Credit Losses-Measured at Amortized Cost.” Gross write-off information must be included in the vintage disclosures required for public business entities in accordance with paragraph 325-20-50-6, which requires that an entity disclose the amortized cost basis of financing receivables by credit-quality indicator and class of financing receivable by year of origination. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. ASB updated the accounting for certain loan refinancings and restructurings, and included the required disclosures in the Notes herein in accordance with ASU No. 2022-02.
12
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, 2023
Revenues
$
794,191
$
96,885
$
4,609
$
895,685
Income (loss) before income taxes
$
58,868
$
25,055
$
(14,556)
$
69,367
Income taxes (benefit)
13,070
4,851
(3,637)
14,284
Net income (loss)
45,798
20,204
(10,919)
55,083
Preferred stock dividends of subsidiaries
499
—
(26)
473
Net income (loss) for common stock
$
45,299
$
20,204
$
(10,893)
$
54,610
Six months ended June 30, 2023
Revenues
$
1,624,552
$
190,742
$
8,628
$
1,823,922
Income (loss) before income taxes
$
119,976
$
48,762
$
(29,067)
$
139,671
Income taxes (benefit)
26,670
9,996
(7,272)
29,394
Net income (loss)
93,306
38,766
(21,795)
110,277
Preferred stock dividends of subsidiaries
998
—
(52)
946
Net income (loss) for common stock
$
92,308
$
38,766
$
(21,743)
$
109,331
Total assets (at June 30, 2023)
$
6,761,593
$
9,620,691
$
137,025
$
16,519,309
Three months ended June 30, 2022
Revenues
$
818,873
$
75,324
$
1,410
$
895,607
Income (loss) before income taxes
$
56,613
$
22,109
$
(12,505)
$
66,217
Income taxes (benefit)
11,979
4,643
(3,419)
13,203
Net income (loss)
44,634
17,466
(9,086)
53,014
Preferred stock dividends of subsidiaries
499
—
(26)
473
Net income (loss) for common stock
$
44,135
$
17,466
$
(9,060)
$
52,541
Six months ended June 30, 2022
Revenues from external customers and other sources
$
1,527,661
$
150,439
$
2,575
$
1,680,675
Intersegment revenues (eliminations)
4
—
(4)
—
Revenues
$
1,527,665
$
150,439
$
2,571
$
1,680,675
Income (loss) before income taxes
$
116,059
$
52,324
$
(14,686)
$
153,697
Income taxes (benefit)
24,517
10,988
(4,462)
31,043
Net income (loss)
91,542
41,336
(10,224)
122,654
Preferred stock dividends of subsidiaries
998
—
(52)
946
Net income (loss) for common stock
$
90,544
$
41,336
$
(10,172)
$
121,708
Total assets (at December 31, 2022)
$
6,597,467
$
9,545,970
$
140,807
$
16,284,244
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.
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Note 3 ·Electric utility segment
Unconsolidated variable interest entities.
Power purchase agreements. As of June 30, 2023, the Utilities had four power purchase agreements (PPAs) for firm capacity 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) and Hamakua Energy by reason of the provisions of the PPA that the Utilities have with the two IPPs. However, management has concluded that the Utilities are not the primary beneficiary of Kalaeloa and Hamakua Energy because the Utilities do not have the power to direct the activities that most significantly impact the two 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 and Hamakua Energy in its condensed consolidated financial statements. However, 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 legal, regulatory and environmental 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. The Utilities record loss contingencies when the outcome of such proceedings is probable and when the amount of the loss is reasonably estimable. The Utilities also evaluate, on a continuous basis, whether developments in such proceedings could cause these assessments or estimates to change. Assessment regarding future events is required when evaluating whether a loss is probable or reasonably possible, and as to whether such loss or a range of such loss is estimable. Management is often unable to estimate a reasonably possible loss, or a range of loss, particularly in cases in which: (i) the damages sought are indeterminate or the basis for the damages claimed is not clear; (ii) proceedings are in early stages; (iii) discovery is not complete; (iv) the matters involve novel or unsettled legal theories; (v) significant facts are in dispute; (vi) a large number of parties are represented (including circumstances in which it is uncertain how liability, if any, would be shared among multiple defendants); (vii) a lower court or administrative agency’s decision or ruling has been appealed; and/or (vii) a wide range of potential outcomes exist. In such cases, there may be considerable uncertainty regarding the timing or ultimate resolution, including any possible loss, fine, penalty, or business impact.
Power purchase agreements.Purchases from all IPPs were as follows:
Three months ended June 30
Six months ended June 30
(in millions)
2023
2022
2023
2022
Kalaeloa
$
67
$
83
$
134
$
143
AES Hawaii 1
—
34
—
61
HPOWER
16
19
34
38
Hamakua Energy
19
14
39
30
Puna Geothermal Venture
9
14
17
24
Wind IPPs
33
38
57
56
Solar IPPs
22
13
36
26
Other IPPs 2
2
3
4
4
Total IPPs
$
168
$
218
$
321
$
382
1 The term of the PPA with AES Hawaii expired on September 1, 2022 and the AES Hawaii coal plant ceased operations.
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
2 Includes hydro power and other PPAs.
Kalaeloa Partners, L.P. Under a 1988 PPA, as amended, Hawaiian Electric is committed to purchase 208 MW of firm capacity from Kalaeloa. In October 2021, Hawaiian Electric and Kalaeloa signed the Amended and Restated Power Purchase Agreement for Firm Dispatchable Capacity and Energy (Amended and Restated PPA) to extend the PPA for an additional term of 10 years. The Amended and Restated PPA was approved by the PUC on November 23, 2022. The new pricing provisions in the Amended and Restated PPA took effect on January 1, 2023.
Stage 1 Renewable PPAs. In February 2018, the Utilities issued their Stage 1 renewable request for proposals and have procured eight renewable PPAs with a total of 274.5 MW capacity. The total annual payments to be made by the Utilities under the eight renewable PPAs are estimated at $70.8 million. The Utilities have received PUC approvals to recover the total projected annual payments under the eight renewable PPAs through the purchased power adjustment clause (PPAC) to the extent such costs are not included in base rates. The Utilities have accounted for the battery portion of three PPAs that were placed in service, including the AES Waikoloa Solar project that began commercial operation on April 21, 2023, which has a capacity of 30 MW with 120 MWh batteries, as finance leases and recorded lease liabilities with corresponding right-of-use assets of $124 million. The timing of the Utilities’ recognition of the expense conforms to ratemaking treatment for the Utilities’ recovery of the cost of electricity and is included in purchased power for the interest and amortization of financing leases related to PPAs. Any material differences between expense recognition and timing of payments are deferred as a regulatory asset or liability in order to match what is being recovered for ratemaking purposes.
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 the termination of the original PPA. Following the termination, Hu Honua filed a lawsuit in the U.S. District Court for the District of Hawaii. The parties reached a settlement that provided that they would execute an amended and restated PPA dated May 9, 2017, provided that the amended and restated PPA was still subject to PUC approval. On May 23, 2022, the PUC issued a decision and order denying the amended and restated PPA, based on, among other things, findings that: (1) the project will result in significant greenhouse gas (GHG) emissions, (2) Hu Honua’s proposed carbon commitment to sequester more GHG emissions than produced by the project are speculative and unsupported, (3) the amended and restated PPA is likely to result in high costs to customers through its relatively high cost of electricity and through potential displacement of other, lower cost, renewable resources, and (4) based on the foregoing, approving the amended and restated PPA is not prudent or in the public interest. On June 2, 2022, Hawaii Electric Light and Hu Honua filed their separate motions for reconsideration, which were denied by the PUC on June 24, 2022. On June 29, 2022, Hu Honua filed its notice of appeal to the Hawaii Supreme Court of the PUC’s May 23, 2022 decision and order denying the amended and restated PPA. On March 13, 2023, the Hawaii Supreme Court affirmed the PUC’s decision denying the amended and restated PPA between Hu Honua and Hawaii Electric Light and entered its judgment on appeal on April 12, 2023. On June 7, 2023, Hu Honua filed a status report with the U.S. District Court for the District of Hawaii, stating, among other things, that because settlement of the underlying federal lawsuit was contingent on timely, non-appealable, final approval of the amended and restated PPA by the PUC, that the Hawaii Supreme Court’s opinion made fulfillment of the condition impossible, and therefore the settlement agreement between the Hawaiian Electric defendants (HEI, Hawaiian Electric, and Hawaii Electric Light) and Hu Honua is null and void and of no further effect. Furthermore, Hu Honua indicated that it intends to reassert its federal antitrust and other claims against the Hawaiian Electric defendants. Hu Honua also stated that to take into account the numerous relevant events which have occurred since its filing of its second amended complaint on January 29, 2018, Hu Honua intends to move for leave to file an amended and supplemental complaint. Hu Honua has yet to file a motion for leave.
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 a 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. Currently, the discovery phase is ongoing.
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
15
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
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 a minimum of $246 million ERP/EAM project-related benefit to be delivered to customers over the system’s 12-year service life.
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 other operation and maintenance (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, 2023, the Utilities’ regulatory liability was $11.5 million ($3.3 million for Hawaiian Electric, $3.3 million for Hawaii Electric Light and $4.9 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 was considered flowed through to customers.
At the PUC’s direction, the Utilities have been filing Annual Enterprise System Benefits (AESB) report on the achieved benefits savings. The most recent AESB report was filed on February 14, 2023 for the period January 1 through December 31, 2022.
Waena Switchyard/Synchronous Condenser Project. In October 2020, to support efforts to increase renewable energy generation and reduce fossil fuel consumption by deactivating current generating units, Maui Electric filed a PUC application to construct a switchyard, which includes the extension of two69 kV transmission lines and the relocation of another 69 kV transmission line; and the conversion of two generating units to synchronous condensers at Kahului Power Plant in central Maui. In November 2021, the PUC approved Maui Electric’s request to commit funds estimated at $38.8 million for the project, and to recover capital expenditures for the project under Exceptional Project Recovery Mechanism (EPRM) not to exceed $38.8 million, which shall be further reduced to reflect the total project cost exclusive of overhead costs not directly attributable to the project. The Waena Switchyard project is expected to be placed in service in the fourth quarter of 2023, while the conversion of the two generating units will be performed after the retirement of Kahului Power Plant Units 3 and 4.
In approving the project, the PUC recognized that the project will facilitate the ability to accommodate increased renewable energy, as contemplated under the EPRM guidelines. As of June 30, 2023, $21.2 million has been incurred for the project.
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 and left the property in 1987. The federal Environmental Protection Agency (EPA) has since identified environmental impacts in the subsurface soil at the Site. In cooperation with the Department of Health of State of Hawaii 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 $2.6 million as of June 30, 2023, representing the probable and reasonably estimable undiscounted cost for remediation of the Site and the adjacent parcel based on presently available information; however, final costs of remediation will depend on the cleanup approach implemented.
Additionally, on November 24, 2021, the current landowners of the Site, Misaki’s, Inc., filed a lawsuit against Hawaiian Electric (as alleged successor in interest to Molokai Electric, the prior owner of the Site) in the Circuit Court of the Second Circuit of the State of Hawaii (removed to the U.S. District Court for the District of Hawaii). The complaint, which was
16
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
subsequently amended to include Maui Electric, alleges that Hawaiian Electric is responsible for remediation of the Site based on the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), and the Hawaii Environmental Response Law under Hawaii Revised Statutes Chapter 128D, as well as being liable on contractual claims related to a short leaseback period during the transition of ownership from Molokai Electric. The amended complaint was dismissed and a new complaint may be filed subject to the parties attempt to enter into settlement negotiations, but the Utilities intend to vigorously defend the action if necessary. At this time, the Utilities are unable to determine the ultimate outcome of the lawsuit or the amount of any possible loss. As of June 30, 2023, the reserve balance recorded by the Utilities to address the lawsuit was not material.
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 under CERCLA responsible for the costs of investigation and cleanup of PCB contamination in sediment in the area offshore of the Waiau Power Plant as part of the Pearl Harbor Superfund Site. Hawaiian Electric was also required by the EPA to assess potential sources and extent of PCB contamination onshore at Waiau Power Plant.
As of June 30, 2023, the reserve account balance recorded by Hawaiian Electric to address the PCB contamination was $9.7 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.
Kapolei pipeline. James Campbell Company (JCC) through its wholly owned subsidiary, Aina Nui Corporation discovered petroleum contamination in ground water during construction of a project in Kapolei in late 2022 and incurred approximately $0.8 million in remediation costs. JCC made a joint demand for these costs in June 2023 to the two companies, including Hawaiian Electric, that have pipelines in the area of the contamination. Based on the nature of the contamination, it is not clear whether it is consistent with what was in the Utilities’ pipelines or is wholly or partially the responsibility of the other pipeline owner. At this time, the Utilities are unable to determine the ultimate outcome or the amount of any possible loss.
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. Decoupling delinks the utility’s revenues from the utility’s sales, removing the disincentive to promote energy efficiency and accept more renewable energy. Decoupling continues under the PBR Framework.
Performance-based regulation framework. On December 23, 2020, the PUC issued a decision and order (PBR D&O) establishing the PBR Framework to govern the Utilities. The PBR Framework incorporates an annual revenue adjustment (ARA) and a suite of new regulatory mechanisms in addition to previously established regulatory mechanisms. Under the PBR Framework, the decoupling mechanism (i.e., the Revenue Balancing Account (RBA)) established by the previous regulatory framework will continue. The existing cost recovery mechanisms will continue as currently implemented (e.g., the Energy Cost Recovery Clause, PPAC, Demand Side Management surcharge, Renewable Energy Infrastructure Program, Demand Response Adjustment Clause, Pension and Other Post-Employment Benefits (OPEB) tracking mechanisms). In addition to annual revenues provided by the ARA, the Utilities may seek relief for extraordinary projects or programs through the Exceptional Project Recovery Mechanism (EPRM) (formerly known as the Major Project Interim Recovery adjustment mechanism) and earn financial rewards for exemplary performance as provided through a portfolio of Performance Incentive Mechanisms (PIMs) and Shared Savings Mechanisms (SSMs). The PBR Framework incorporates a variety of additional performance mechanisms, including Scorecards, Reported Metrics, and an expedited Pilot Process. The PBR Framework also contains a number of safeguards, including a symmetric Earnings Sharing Mechanism (ESM) which protects the Utilities and customers from excessive earnings or losses, as measured by the Utilities’ achieved rate-making ROACE 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. The PBR Framework became fully effective on June 1, 2021.
On June 17, 2022, the PUC issued a decision and order (June 2022 D&O) establishing additional PIMs under the PBR Framework for the Utilities. The June 2022 D&O approved two new PIMs, a new SSM, and extended the timeframe for an existing PIM. Specifically, the PUC approved (1) a new (penalty-only) generation-caused interruption reliability PIM, (2) a new (penalty/reward) interconnection requirements study (IRS) PIM, (3) a new (reward-only) Collective Shared Savings Mechanism (CSSM), and (4) a modification and extension of the existing Interim Grid Services PIM (reward-only). On November 23, 2022, the PUC approved the Utilities’ proposed tariffs to implement the aforementioned PIMs with an effective date of January 1, 2023.
17
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
In addition, the June 2022 D&O instructed the Utilities to prepare and submit: a detailed fossil fuel retirement report (FF Retirement Report) outlining necessary steps to safely and reliably retire certain existing fossil fuel power plants during the first multi-year rate period (MRP); and a functional integration plan (FIP) for distributed energy resources (DER) to increase transparency into the Utilities’ plans and progress for utilizing cost-effective grid services from DERs and ensure that the necessary functionalities and requisite technologies are in place to do so. The PUC also instructed the PBR Working Group to continue its ongoing collaborative efforts to consider other potential new incentive mechanisms and to address other issues raised during the proceeding. On March 30, 2023, the PUC held a PBR Working Group coordination meeting to initiate subgroups on the Long-Term Grid Services PIM, modification/evaluation of existing PIMs, and comprehensive PBR Framework review priority topics.
In accordance with the June 2022 D&O, the Utilities filed their FIP on September 30, 2022, FF Retirement Report on April 17, 2023, and Long-Term Grid Services PIM proposal on July 3, 2023.
Revenue adjustment mechanism. Prior to the implementation of the PBR Framework, the revenue adjustment mechanism (RAM) was a major component of the previously established regulatory framework. The RAM was 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). Under the PBR Framework, the ARA mechanism replaced the RAM, and became effective on June 1, 2021. RAM revenue adjustments approved by the PUC in 2020 will continue to be included in the RBA provision’s target revenue and RBA rate adjustment unless modified with PUC approval.
Annual revenue adjustment mechanism. The PBR Framework established a five-year MRP 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% of adjusted revenue requirements compounded annually and a flow through of the “pre-PBR” savings commitment from the management audit recommendations developed in a prior docket at a rate of $6.6 million per year from 2021 to 2025. The implementation of the ARA occurred on June 1, 2021.
Earnings sharing mechanism. The PBR Framework established a symmetrical ESM for achieved rate-making ROACE outside of a 300 basis points dead band above or below the current authorized ROACE of 9.5% for each of the Utilities. There is a 50/50 sharing between customers and Utilities for the achieved rate-making ROACE 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 achieved rate-making ROACE enters the outer most tier of the ESM.
Exceptional project recovery mechanism. Prior to the implementation of the PBR Framework, the PUC established the Major Project Interim Recovery (MPIR) adjustment mechanism and MPIR Guidelines. The MPIR mechanism provides the opportunity to recover revenues for net costs of approved eligible projects placed in service between general rate cases. In establishing the PBR Framework, the MPIR Guidelines were terminated and replaced with the EPRM Guidelines. Although the MPIR Guidelines were terminated and replaced by the EPRM Guidelines, the MPIR mechanism will continue within the PBR Framework to provide recovery of project costs previously approved for recovery under the MPIR. The established EPRM Guidelines 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. Deferred and O&M expense projects are also eligible for EPRM recovery under the EPRM Guidelines. EPRM recoverable costs will be limited to the lesser of actual incurred project costs or PUC‑approved amounts, net of savings.
As of June 30, 2023, the Utilities annualized MPIR and EPRM revenue amounts totaled $26.2 million, including revenue taxes, for the Schofield Generating Station ($16.5 million), West Loch PV project ($3.5 million), Grid Modernization Strategy (GMS) Phase 1 project ($6.1 million for all three utilities) and Waiawa UFLS project ($0.1 million) that included the 2022 return on project amount (based on approved amounts) in rate base, depreciation and incremental O&M expenses. The PUC approved the Utilities’ recovery of the annualized 2022 MPIR amounts for the Schofield Generating Station, West Loch PV, and GMS Phase 1 projects effective June 1, 2022 through the RBA rate adjustment. Recovery of the incremental change to the West Loch PV project and Waiawa UFLS project were approved on December 7, 2022 and December 5, 2022, respectively.
As of June 30, 2023, the PUC approved two EPRM applications for projects totaling $41 million to the extent that the project costs are not included in rates. Currently, the Utilities are seeking EPRM recovery for five projects with total project costs up to $488 million, subject to PUC approval.
18
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Pilot process. As part of the PBR Framework, the PUC approved a Pilot Process to foster innovation by establishing an expedited implementation process for pilots that tests new technologies, programs, business models, and other arrangements. Under the Pilot Process, the Utilities submit specific pilot proposals (Pilot Notices) that are within the scope of the approved Workplan to the PUC for their expedited review. The PUC will strive to issue an order addressing a proposed pilot within 45 days of the filing date of a Pilot Notice. If the PUC does not take affirmative action on a Pilot Notice by the end of the 45-day period, the Pilot Notice shall be considered approved as submitted. The PUC may modify the pilot as originally proposed, and the Utilities shall have 15 days to notify the PUC whether the Utilities accept the modification, propose further modification, or withdraw the Pilot Notice. The PUC may also, where necessary, suspend the Pilot Notice for further investigation.
The approved Pilot Process includes a cost recovery process that generally allows the Utilities to defer and recover total annual expenditures of approved pilot projects net of revenues, subject to an annual cap of $10 million, over 12 months beginning June 1 of the year following pilot implementation through the RBA rate adjustment, although the PUC may determine on a case-by-case basis that a particular project’s deferred costs should be amortized over a period greater than 12 months.
On February 28, 2023, the Utilities filed their annual Pilot Update report covering pilot projects that were active during 2022, including reporting on pilot projects that were initiated prior to the commencement of the Pilot Process. The Pilot Update reported on approximately $0.4 million of 2022 recorded pilot project costs including revenue taxes for the Utilities. The 2022 recorded pilot project costs were included in the Utilities’ proposed adjustments to target revenue in the 2023 spring revenue report filed on March 28, 2023.
On February 2, 2023, the Utilities filed a Pilot Notice to commence an EV Telematics Pilot project in April 2023. On March 22, 2023, the PUC issued an order approving the Utilities’ EV Telematics Pilot project. The order also temporarily suspended the filing of Pilot Notices, pending a stakeholder meeting which was convened on June 15, 2023, to discuss potential improvements to the Pilot Process.
On July 28, 2023, the PUC issued an order providing additional guidance on the Pilot Process, specifying expectations for future Pilot Notices submitted pursuant to the Pilot Process. The order lifts the temporary suspension on submitting Pilot Notices and the Utilities may file Pilot Notices consistent with the approved Workplan.
Performance incentive mechanisms. The PUC has established the following PIMs and SSMs: (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, (4) new PIMs established in the PBR D&O and (5) new PIMs and a SSM established in the June 2022 D&O.
•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 remain constant in interim periods, unless otherwise amended by order of the PUC.
•Service Reliability Performance measured by Transmission and Distribution-caused 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). For the 2022 evaluation period, the Utilities incurred $0.1 million in penalties.
•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 eight 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).
•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. The first portion 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 2025.
•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
19
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
without penalties. On July 9, 2020, the Utilities filed two Grid Services Purchase Agreements (GSPA) 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 one PPA that qualified for a PIM incentive and on February 16, 2021, the Utilities filed one additional PPA that qualified for a declining PIM incentive. The PUC approved two PPAs in September 2021 and November 2021 and two GSPAs on December 31, 2020. Based on the two approved PPAs, the Utilities recognized $0.1 million in rewards in 2021. In December 2022 and March 2023, these two PPAs were terminated or declared null and void.
•The PUC previously established the following two PIMs in its PBR D&O, which were approved in an order issued on March 23, 2021 and became effective on June 1, 2021. In its June 2022 D&O, the PUC modified and extended the Interim Grid Services PIM.
•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 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.
•Interim Grid Services - A PIM that provides financial rewards on a $/kW basis for the acquisition of eligible grid services. The eligibility period for this PIM initially commenced on January 1, 2021 and was scheduled to end on December 31, 2022. However, the June 2022 D&O extended the eligibility period for this PIM through December 31, 2023. The June 2022 D&O also increased the incentive rate for the acquisition of load reduction grid services. During the PIM performance period, newly acquired committed capacity in the Oahu Scheduled Dispatch Program (SDP), the Oahu Fast DR program (up to the 7 MW cap), and the Maui SDP program shall qualify for the incentive. The Utilities can earn a maximum reward of $1.5 million from 2021 through 2023. In 2022, the Utilities earned $0.04 million in rewards.
•The PUC also previously established the following three 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 DER 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. In 2022, the Utilities earned $3.0 million in rewards.
•Low-to-Moderate Income (LMI) Energy Efficiency PIM that provides financial rewards 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. The Utilities earned $0.5 million in rewards for the program period ending 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.
•The PUC established the following new PIMs and SSM in its June 2022 D&O, which became effective on January 1, 2023.
•Generation-caused System Average Interruption Duration and Frequency Indexes PIMs to incentivize achievement of generation-based reliability targets, measured by Generation 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 3 basis points applied to the common equity share of each respective utility’s approved rate base (or maximum penalties of approximately $1 million - for both indices in total for the three utilities).
•An IRS PIM to incentivize the timely completion of the IRS process for large-scale renewable energy projects (rewards and penalties) measured by the number of months between final model checkout and delivery of IRS results to the developer. Target performance is ten months with an asymmetrical deadband of two-months for penalties and no deadband for rewards. The maximum penalty and reward will depend on the specifics of the upcoming procurement.
20
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
•A CSSM to incentivize cost control over the Utilities’ fuel, purchased power, and EPRM/MPIR costs (collectively, non-ARA costs). This is a reward only incentive where the Utilities retain 20% share of savings when non-ARA costs in a performance year are lower than target year non-ARA costs, which are adjusted for changes in fuel prices, inflation, and system generation from a base year (calendar year 2021). The CSSM does not have a potential penalty and does not have a cap for maximum reward.
For the 2022 evaluation period, the Utilities earned $3.4 million ($2.5 million for Hawaiian Electric, $0.4 million for Hawaii Electric Light and $0.5 million for Maui Electric) in rewards net of penalties. The net rewards related to 2022 were reflected in the 2023 PIMs annual report and 2023 spring revenue report filings.
Annual review cycle. PBR D&O established an annual review cycle for revenue adjustments under the PBR Framework, including the biannual submission of the revenue reports. The Utilities’ spring revenue report filed on March 28, 2023 was approved by the PUC on May 23, 2023.
The net incremental amounts between the 2022 fall and 2023 spring revenue reports are shown in the following table. The amounts are to be collected (refunded) from June, 1, 2023 through May 31, 2024 under the RBA rate tariffs, which were included in the 2023 spring revenue report filing.
Net incremental amount to be collected under the RBA rate tariffs
$
2.5
$
1.5
$
1.1
$
5.1
Note: Columns may not foot due to rounding.
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. As the moratorium on customer disconnections ended on May 31, 2021, the Utilities have resumed charging late payment fees in July 2021. Pursuant to PUC orders, the deferral of COVID-19 related costs by the Utilities ended on December 31, 2020. On October 1, 2021, the PUC approved the Utilities’ request to extend the deferral period to December 31, 2021. In December 2021, to keep customers connected and provide some relief to customers experiencing financial difficulty during the pandemic, the Utilities committed to issuing $2 million in bill credits to qualified customers. The Utilities will not seek recovery for the issued bill credits, resulting in a reduction to the cumulative deferred costs. On June 9, 2022, the Utilities filed an application with the PUC, requesting recovery of a portion of the COVID-19 related deferral costs, net of cost savings realized, not to exceed the amount of $27.8 million over three years, from June 2023 through May 2026. Annual requests will be limited to actual costs incurred. On January 25, 2023, the PUC issued an order to modify the procedural schedule to allow more time for more discovery and consideration of the application. As of June 30, 2023, the Utilities have recorded $9.1 million in regulatory assets for deferral of COVID-19 related costs. The updated amounts have been reflected in the Utilities’ Second Supplemental Report to the PUC filed on July 31, 2023.
Army privatization. On October 30, 2020, the PUC approved Hawaiian Electric’s 50-year contract with the U.S. Army to own, operate and maintain the electric distribution system serving the U.S. Army’s 12 installations on Oahu, including Schofield Barracks, Wheeler Army Airfield, Tripler Army Medical Center, Fort Shafter, and Army housing areas. On March 1, 2022, Hawaiian Electric acquired the Army’s existing distribution system for a purchase price of $14.5 million, and will pay the Army in the form of a monthly credit against the monthly utility services charge over the 50-year term of the contract. The acquisition of additional assets contemplated in the contract, with an estimated value of $4 million, is planned for 2024.
Hawaiian Electric took ownership and all responsibilities for operation and maintenance of the system on March 1, 2022 for a 50-year term after a one-year transition period. Under the contract, Hawaiian Electric will make initial capital upgrades over the first six years of the contract and replace aging infrastructure over the 50-year term. In addition to its regular monthly electricity bill, the Army will pay Hawaiian Electric a monthly utility services charge to cover operations and maintenance expenses and provide recovery for capital upgrades, capital replacements, and the existing distribution system based on a rate of return determined by the PUC for regulated utility investments, as well as depreciation expense. The PUC requires Hawaiian Electric to file regular periodic reports on the activities and investments in fulfillment of the contract and will review the major
21
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
projects planned on behalf of the Army. The annual impact on Hawaiian Electric’s earnings is not expected to be material and will depend on a number of factors, including the amount and timing of capital upgrades and capital replacement.
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, 2023 and 2022, and as of June 30, 2023 and December 31, 2022.
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.
22
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Income
Three months ended June 30, 2023
(in thousands)
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Other subsidiary
Consolidating adjustments
Hawaiian Electric
Consolidated
Revenues
$
570,689
112,074
111,428
—
—
$
794,191
Expenses
Fuel oil
213,471
20,471
46,215
—
—
280,157
Purchased power
119,460
37,246
11,728
—
—
168,434
Other operation and maintenance
88,967
21,666
25,727
—
—
136,360
Depreciation
40,800
10,636
9,253
—
—
60,689
Taxes, other than income taxes
54,046
10,389
10,491
—
—
74,926
Total expenses
516,744
100,408
103,414
—
—
720,566
Operating income
53,945
11,666
8,014
—
—
73,625
Allowance for equity funds used during construction
2,959
354
459
—
—
3,772
Equity in earnings of subsidiaries
11,414
—
—
—
(11,414)
—
Retirement defined benefits credit (expense)—other than service costs
905
168
(25)
—
—
1,048
Interest expense and other charges, net
(14,742)
(2,975)
(3,155)
—
—
(20,872)
Allowance for borrowed funds used during construction
1,030
113
152
—
—
1,295
Income before income taxes
55,511
9,326
5,445
—
(11,414)
58,868
Income taxes
9,942
2,118
1,010
—
—
13,070
Net income
45,569
7,208
4,435
—
(11,414)
45,798
Preferred stock dividends of subsidiaries
—
133
96
—
—
229
Net income attributable to Hawaiian Electric
45,569
7,075
4,339
—
(11,414)
45,569
Preferred stock dividends of Hawaiian Electric
270
—
—
—
—
270
Net income for common stock
$
45,299
7,075
4,339
—
(11,414)
$
45,299
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Comprehensive Income
Three months ended June 30, 2023
(in thousands)
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Other subsidiary
Consolidating adjustments
Hawaiian Electric Consolidated
Net income for common stock
$
45,299
7,075
4,339
—
(11,414)
$
45,299
Other comprehensive loss, net of taxes:
Retirement benefit plans:
Adjustment for amortization of prior service credit and net gains recognized during the period in net periodic benefit cost, net of taxes
(470)
(55)
(66)
—
121
(470)
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes
426
53
57
—
(110)
426
Other comprehensive loss, net of taxes
(44)
(2)
(9)
—
11
(44)
Comprehensive income attributable to common shareholder
$
45,255
7,073
4,330
—
(11,403)
$
45,255
23
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Income
Three months ended June 30, 2022
(in thousands)
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Other subsidiary
Consolidating adjustments
Hawaiian Electric
Consolidated
Revenues
$
576,472
124,502
117,928
—
(29)
$
818,873
Expenses
Fuel oil
184,297
33,065
52,293
—
—
269,655
Purchased power
165,202
38,735
14,148
—
—
218,085
Other operation and maintenance
82,707
21,331
20,854
—
—
124,892
Depreciation
39,501
10,352
8,886
—
—
58,739
Taxes, other than income taxes
54,025
11,378
10,945
—
—
76,348
Total expenses
525,732
114,861
107,126
—
—
747,719
Operating income
50,740
9,641
10,802
—
(29)
71,154
Allowance for equity funds used during construction
1,946
217
307
—
—
2,470
Equity in earnings of subsidiaries
12,237
—
—
—
(12,237)
—
Retirement defined benefits credit (expense)—other than service costs
856
167
(32)
—
—
991
Interest expense and other charges, net
(13,519)
(2,642)
(2,668)
—
29
(18,800)
Allowance for borrowed funds used during construction
637
67
94
—
—
798
Income before income taxes
52,897
7,450
8,503
—
(12,237)
56,613
Income taxes
8,492
1,659
1,828
—
—
11,979
Net income
44,405
5,791
6,675
—
(12,237)
44,634
Preferred stock dividends of subsidiaries
—
133
96
—
—
229
Net income attributable to Hawaiian Electric
44,405
5,658
6,579
—
(12,237)
44,405
Preferred stock dividends of Hawaiian Electric
270
—
—
—
—
270
Net income for common stock
$
44,135
5,658
6,579
—
(12,237)
$
44,135
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Comprehensive Income
Three months ended June 30, 2022
(in thousands)
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Other subsidiary
Consolidating adjustments
Hawaiian Electric Consolidated
Net income for common stock
$
44,135
5,658
6,579
—
(12,237)
$
44,135
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
(5)
(72)
603
—
(531)
(5)
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes
56
74
(602)
—
528
56
Other comprehensive income, net of taxes
51
2
1
—
(3)
51
Comprehensive income attributable to common shareholder
$
44,186
5,660
6,580
—
(12,240)
$
44,186
24
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Income
Six months ended June 30, 2023
(in thousands)
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Other subsidiary
Consolidating adjustments
Hawaiian Electric Consolidated
Revenues
$
1,172,219
227,362
225,101
—
(130)
$
1,624,552
Expenses
Fuel oil
467,298
48,231
98,725
—
—
614,254
Purchased power
229,739
71,332
20,124
—
—
321,195
Other operation and maintenance
172,200
43,016
49,460
—
—
264,676
Depreciation
81,838
21,271
18,507
—
—
121,616
Taxes, other than income taxes
110,999
21,126
21,186
—
—
153,311
Total expenses
1,062,074
204,976
208,002
—
—
1,475,052
Operating income
110,145
22,386
17,099
—
(130)
149,500
Allowance for equity funds used during construction
5,599
638
836
—
—
7,073
Equity in earnings of subsidiaries
22,955
—
—
—
(22,955)
—
Retirement defined benefits credit (expense)—other than service costs
1,809
337
(51)
—
—
2,095
Interest expense and other charges, net
(29,299)
(5,806)
(6,143)
—
130
(41,118)
Allowance for borrowed funds used during construction
1,948
204
274
—
—
2,426
Income before income taxes
113,157
17,759
12,015
—
(22,955)
119,976
Income taxes
20,309
4,027
2,334
—
—
26,670
Net income
92,848
13,732
9,681
—
(22,955)
93,306
Preferred stock dividends of subsidiaries
—
267
191
—
—
458
Net income attributable to Hawaiian Electric
92,848
13,465
9,490
—
(22,955)
92,848
Preferred stock dividends of Hawaiian Electric
540
—
—
—
—
540
Net income for common stock
$
92,308
13,465
9,490
—
(22,955)
$
92,308
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Comprehensive Income
Six months ended June 30, 2023
(in thousands)
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Other subsidiary
Consolidating adjustments
Hawaiian Electric Consolidated
Net income for common stock
$
92,308
13,465
9,490
—
(22,955)
$
92,308
Other comprehensive loss, net of taxes:
Retirement benefit plans:
Adjustment for amortization of prior service credit and net gains recognized during the period in net periodic benefit cost, net of taxes
(940)
(111)
(129)
—
240
(940)
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes
851
103
114
—
(217)
851
Other comprehensive loss, net of taxes
(89)
(8)
(15)
—
23
(89)
Comprehensive income attributable to common shareholder
$
92,219
13,457
9,475
—
(22,932)
$
92,219
25
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Income
Six months ended June 30, 2022
(in thousands)
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Other subsidiary
Consolidating adjustments
Hawaiian Electric Consolidated
Revenues
$
1,076,714
233,030
217,956
—
(35)
$
1,527,665
Expenses
Fuel oil
338,722
58,316
93,903
—
—
490,941
Purchased power
289,385
69,447
22,786
—
—
381,618
Other operation and maintenance
166,363
41,545
42,241
—
—
250,149
Depreciation
78,985
20,703
17,522
—
—
117,210
Taxes, other than income taxes
101,299
21,410
20,289
—
—
142,998
Total expenses
974,754
211,421
196,741
—
—
1,382,916
Operating income
101,960
21,609
21,215
—
(35)
144,749
Allowance for equity funds used during construction
3,936
410
533
—
—
4,879
Equity in earnings of subsidiaries
25,898
—
—
—
(25,898)
—
Retirement defined benefits credit (expense)—other than service costs
1,711
334
(64)
—
—
1,981
Interest expense and other charges, net
(26,612)
(5,251)
(5,298)
—
35
(37,126)
Allowance for borrowed funds used during construction
1,288
127
161
—
—
1,576
Income before income taxes
108,181
17,229
16,547
—
(25,898)
116,059
Income taxes
17,097
3,927
3,493
—
—
24,517
Net income
91,084
13,302
13,054
—
(25,898)
91,542
Preferred stock dividends of subsidiaries
—
267
191
—
—
458
Net income attributable to Hawaiian Electric
91,084
13,035
12,863
—
(25,898)
91,084
Preferred stock dividends of Hawaiian Electric
540
—
—
—
—
540
Net income for common stock
$
90,544
13,035
12,863
—
(25,898)
$
90,544
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Comprehensive Income
Six months ended June 30, 2022
(in thousands)
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Other subsidiary
Consolidating adjustments
Hawaiian Electric Consolidated
Net income for common stock
$
90,544
13,035
12,863
—
(25,898)
$
90,544
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
4,371
598
1,206
—
(1,804)
4,371
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes
(4,269)
(596)
(1,205)
—
1,801
(4,269)
Other comprehensive income, net of taxes
102
2
1
—
(3)
102
Comprehensive income attributable to common shareholder
$
90,646
13,037
12,864
—
(25,901)
$
90,646
26
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Balance Sheet
June 30, 2023
(in thousands)
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Other subsi- diary
Consoli- dating adjustments
Hawaiian Electric Consolidated
Assets
Property, plant and equipment
Utility property, plant and equipment
Land
$
42,859
5,645
3,594
—
—
$
52,098
Plant and equipment
5,370,111
1,436,118
1,316,537
—
—
8,122,766
Right-of-use assets - finance lease
88,297
36,075
—
—
—
124,372
Less accumulated depreciation
(1,921,855)
(657,127)
(599,985)
—
—
(3,178,967)
Construction in progress
256,266
33,118
48,668
—
—
338,052
Utility property, plant and equipment, net
3,835,678
853,829
768,814
—
—
5,458,321
Nonutility property, plant and equipment, less accumulated depreciation
5,297
115
1,532
—
—
6,944
Total property, plant and equipment, net
3,840,975
853,944
770,346
—
—
5,465,265
Investment in wholly owned subsidiaries, at equity
708,465
—
—
—
(708,465)
—
Current assets
Cash and cash equivalents
70,235
35,894
37,441
77
—
143,647
Customer accounts receivable, net
147,065
32,293
29,836
—
—
209,194
Accrued unbilled revenues, net
113,069
20,474
20,812
—
—
154,355
Other accounts receivable, net
26,535
5,602
6,143
—
(20,555)
17,725
Fuel oil stock, at average cost
106,515
17,069
20,216
—
—
143,800
Materials and supplies, at average cost
53,681
12,304
25,170
—
—
91,155
Prepayments and other
32,621
5,082
4,475
—
(298)
41,880
Regulatory assets
70,932
2,789
3,516
—
—
77,237
Total current assets
620,653
131,507
147,609
77
(20,853)
878,993
Other long-term assets
Operating lease right-of-use assets
38,675
30,903
10,927
—
—
80,505
Regulatory assets
146,918
16,686
11,946
—
—
175,550
Other
114,318
33,129
30,740
—
(16,907)
161,280
Total other long-term assets
299,911
80,718
53,613
—
(16,907)
417,335
Total assets
$
5,470,004
1,066,169
971,568
77
(746,225)
$
6,761,593
Capitalization and liabilities
Capitalization
Common stock equity
$
2,371,889
349,227
359,161
77
(708,465)
$
2,371,889
Cumulative preferred stock—not subject to mandatory redemption
22,293
7,000
5,000
—
—
34,293
Long-term debt, net
1,226,714
249,370
258,446
—
—
1,734,530
Total capitalization
3,620,896
605,597
622,607
77
(708,465)
4,140,712
Current liabilities
Current portion of operating lease liabilities
8,128
6,861
2,720
—
—
17,709
Current portion of long-term debt
49,992
19,997
29,996
—
—
99,985
Accounts payable
158,400
23,919
28,313
—
—
210,632
Interest and preferred dividends payable
15,126
3,271
2,970
—
—
21,367
Taxes accrued, including revenue taxes
180,089
37,077
36,069
—
(298)
252,937
Regulatory liabilities
9,325
7,599
9,014
—
—
25,938
Other
66,765
22,001
22,084
—
(20,555)
90,295
Total current liabilities
487,825
120,725
131,166
—
(20,853)
718,863
Deferred credits and other liabilities
Operating lease liabilities
37,657
24,343
8,465
—
—
70,465
Finance lease liabilities
83,642
35,364
—
—
—
119,006
Deferred income taxes
272,556
50,433
62,361
—
—
385,350
Regulatory liabilities
758,970
196,235
106,213
—
—
1,061,418
Unamortized tax credits
66,632
12,657
12,301
—
—
91,590
Defined benefit pension liability
65,923
—
—
—
(16,907)
49,016
Other
75,903
20,815
28,455
—
—
125,173
Total deferred credits and other liabilities
1,361,283
339,847
217,795
—
(16,907)
1,902,018
Total capitalization and liabilities
$
5,470,004
1,066,169
971,568
77
(746,225)
$
6,761,593
27
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Balance Sheet
December 31, 2022
(in thousands)
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Other subsi-diary
Consoli- dating adjustments
Hawaiian Electric Consolidated
Assets
Property, plant and equipment
Utility property, plant and equipment
Land
$
42,860
5,606
3,594
—
—
$
52,060
Plant and equipment
5,260,685
1,425,442
1,293,383
—
—
7,979,510
Finance lease right-of-use assets
48,371
—
—
—
—
48,371
Less accumulated depreciation
(1,855,150)
(644,457)
(586,892)
—
—
(3,086,499)
Construction in progress
215,560
23,989
35,804
—
—
275,353
Utility property, plant and equipment, net
3,712,326
810,580
745,889
—
—
5,268,795
Nonutility property, plant and equipment, less accumulated depreciation
5,298
115
1,532
—
—
6,945
Total property, plant and equipment, net
3,717,624
810,695
747,421
—
—
5,275,740
Investment in wholly owned subsidiaries,at equity
701,833
—
—
—
(701,833)
—
Current assets
Cash and cash equivalents
27,579
5,092
6,494
77
—
39,242
Advances to affiliates
—
4,500
21,700
—
(26,200)
—
Customer accounts receivable, net
216,802
39,339
32,197
—
—
288,338
Accrued unbilled revenues, net
136,508
23,839
22,933
—
—
183,280
Other accounts receivable, net
23,746
5,519
6,686
—
(22,384)
13,567
Fuel oil stock, at average cost
153,342
16,964
21,224
—
—
191,530
Materials and supplies, at average cost
48,130
9,783
21,655
—
—
79,568
Prepayments and other
24,040
6,346
4,137
—
(1,041)
33,482
Regulatory assets
46,504
2,435
3,334
—
—
52,273
Total current assets
676,651
113,817
140,360
77
(49,625)
881,280
Other long-term assets
Operating lease right-of-use assets
42,752
34,283
12,283
—
—
89,318
Regulatory assets
154,040
21,816
14,384
—
—
190,240
Other
115,028
32,654
29,495
—
(16,288)
160,889
Total other long-term assets
311,820
88,753
56,162
—
(16,288)
440,447
Total assets
$
5,407,928
1,013,265
943,943
77
(767,746)
$
6,597,467
Capitalization and liabilities
Capitalization
Common stock equity
$
2,344,170
344,720
357,036
77
(701,833)
$
2,344,170
Cumulative preferred stock—not subject to mandatory redemption
22,293
7,000
5,000
—
—
34,293
Long-term debt, net
1,126,915
224,439
233,500
—
—
1,584,854
Total capitalization
3,493,378
576,159
595,536
77
(701,833)
3,963,317
Current liabilities
Current portion of operating lease liabilities
9,775
6,690
2,630
—
—
19,095
Current portion of long-term debt
49,981
19,992
29,989
—
—
99,962
Short-term borrowings-non-affiliate
87,967
—
—
—
—
87,967
Short-term borrowings-affiliate
26,200
—
—
—
(26,200)
—
Accounts payable
143,253
32,113
27,126
—
—
202,492
Interest and preferred dividends payable
12,398
2,576
2,282
—
(80)
17,176
Taxes accrued, including revenue taxes
207,798
42,436
40,709
—
(1,041)
289,902
Regulatory liabilities
13,145
8,553
9,777
—
—
31,475
Other
64,659
20,856
22,385
—
(22,304)
85,596
Total current liabilities
615,176
133,216
134,898
—
(49,625)
833,665
Deferred credits and other liabilities
Operating lease liabilities
41,049
27,817
9,849
—
—
78,715
Finance lease liabilities
46,048
—
—
—
—
46,048
Deferred income taxes
271,234
50,615
62,581
—
—
384,430
Regulatory liabilities
729,683
194,222
100,270
—
—
1,024,175
Unamortized tax credits
69,614
13,150
12,536
—
—
95,300
Defined benefit pension and other postretirement benefit plans liability
65,907
129
—
—
(16,288)
49,748
Other
75,839
17,957
28,273
—
—
122,069
Total deferred credits and other liabilities
1,299,374
303,890
213,509
—
(16,288)
1,800,485
Total capitalization and liabilities
$
5,407,928
1,013,265
943,943
77
(767,746)
$
6,597,467
28
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, 2023
(in thousands)
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Other subsidiary
Consolidating adjustments
Hawaiian Electric Consolidated
Balance, December 31, 2022
$
2,344,170
344,720
357,036
77
(701,833)
$
2,344,170
Net income for common stock
92,308
13,465
9,490
—
(22,955)
92,308
Other comprehensive loss, net of taxes
(89)
(8)
(15)
—
23
(89)
Common stock dividends
(64,500)
(8,950)
(7,350)
—
16,300
(64,500)
Balance, June 30, 2023
$
2,371,889
349,227
359,161
77
(708,465)
$
2,371,889
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Changes in Common Stock Equity
Six months ended June 30, 2022
(in thousands)
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Other subsidiary
Consolidating adjustments
Hawaiian Electric Consolidated
Balance, December 31, 2021
$
2,261,899
332,900
343,260
77
(676,237)
$
2,261,899
Net income for common stock
90,544
13,035
12,863
—
(25,898)
90,544
Other comprehensive income, net of taxes
102
2
1
—
(3)
102
Common stock dividends
(62,950)
(8,200)
(7,600)
—
15,800
(62,950)
Balance, June 30, 2022
$
2,289,595
337,737
348,524
77
(686,338)
$
2,289,595
29
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, 2023
(in thousands)
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Other subsidiary
Consolidating adjustments
Hawaiian Electric Consolidated
Net cash provided by operating activities
$
274,412
43,352
34,681
—
(16,300)
$
336,145
Cash flows from investing activities
Capital expenditures
(152,823)
(33,512)
(43,814)
—
—
(230,149)
Advances to affiliates
—
4,500
21,700
—
(26,200)
—
Other
2,086
912
1,058
—
—
4,056
Net cash used in investing activities
(150,737)
(28,100)
(21,056)
—
(26,200)
(226,093)
Cash flows from financing activities
Common stock dividends
(64,500)
(8,950)
(7,350)
—
16,300
(64,500)
Preferred stock dividends of Hawaiian Electric and subsidiaries
(540)
(267)
(191)
—
—
(998)
Proceeds from issuance of long-term debt
100,000
25,000
25,000
—
—
150,000
Net decrease in short-term borrowings from non-affiliates and affiliate with original maturities of three months or less
(114,167)
—
—
—
26,200
(87,967)
Payments of obligations under finance leases
(1,241)
(98)
(1,339)
Other
(571)
(135)
(137)
—
—
(843)
Net cash provided by (used in) financing activities
(81,019)
15,550
17,322
—
42,500
(5,647)
Net increase in cash and cash equivalents
42,656
30,802
30,947
—
—
104,405
Cash and cash equivalents, beginning of period
27,579
5,092
6,494
77
—
39,242
Cash and cash equivalents, end of period
$
70,235
35,894
37,441
77
—
$
143,647
30
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, 2022
(in thousands)
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Other subsidiary
Consolidating adjustments
Hawaiian Electric Consolidated
Net cash provided by operating activities
$
25,367
19,742
14,841
—
(15,800)
$
44,150
Cash flows from investing activities
Capital expenditures
(87,892)
(23,638)
(28,715)
—
—
(140,245)
Advances to affiliates
(2,000)
—
(10,000)
—
12,000
—
Other
4,471
834
1,380
—
—
6,685
Net cash used in investing activities
(85,421)
(22,804)
(37,335)
—
12,000
(133,560)
Cash flows from financing activities
Common stock dividends
(62,950)
(8,200)
(7,600)
—
15,800
(62,950)
Preferred stock dividends of Hawaiian Electric and subsidiaries
(540)
(267)
(191)
—
—
(998)
Proceeds from issuance of long-term debt
40,000
10,000
10,000
—
—
60,000
Net increase in short-term borrowings from non-affiliates and affiliate with original maturities of three months or less
64,987
2,000
—
—
(12,000)
54,987
Other
(169)
(43)
(43)
—
—
(255)
Net cash provided by financing activities
41,328
3,490
2,166
—
3,800
50,784
Net increase (decrease) in cash and cash equivalents
(18,726)
428
(20,328)
—
—
(38,626)
Cash, cash equivalents and restricted cash, beginning of period
26,433
5,326
23,422
77
—
55,258
Cash, cash equivalents and restricted cash, end of period
7,707
5,754
3,094
77
—
16,632
Less: Restricted cash
(1,129)
—
—
—
—
(1,129)
Cash and cash equivalents, end of period
$
6,578
5,754
3,094
77
—
$
15,503
31
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)
2023
2022
2023
2022
Interest and dividend income
Interest and fees on loans
$
67,966
$
48,129
$
132,808
$
94,134
Interest and dividends on investment securities
13,775
14,693
28,412
28,677
Total interest and dividend income
81,741
62,822
161,220
122,811
Interest expense
Interest on deposit liabilities
9,661
921
16,498
1,868
Interest on other borrowings
8,852
139
16,573
144
Total interest expense
18,513
1,060
33,071
2,012
Net interest income
63,228
61,762
128,149
120,799
Provision for credit losses
43
2,757
1,218
(506)
Net interest income after provision for credit losses
63,185
59,005
126,931
121,305
Noninterest income
Fees from other financial services
5,009
4,716
9,688
10,303
Fee income on deposit liabilities
4,504
4,552
9,103
9,243
Fee income on other financial products
2,768
2,529
5,512
5,247
Bank-owned life insurance
1,955
(142)
3,380
539
Mortgage banking income
230
372
360
1,449
Gain on sale of real estate
495
—
495
1,002
Other income, net
678
475
1,479
847
Total noninterest income
15,639
12,502
30,017
28,630
Noninterest expense
Compensation and employee benefits
29,394
27,666
59,598
54,881
Occupancy
5,539
5,467
11,127
11,419
Data processing
5,095
4,484
10,107
8,635
Services
2,689
2,522
5,284
4,961
Equipment
2,957
2,402
5,603
4,731
Office supplies, printing and postage
1,109
1,073
2,274
2,133
Marketing
834
934
1,850
1,952
Other expense
6,152
4,850
12,343
8,899
Total noninterest expense
53,769
49,398
108,186
97,611
Income before income taxes
25,055
22,109
48,762
52,324
Income taxes
4,851
4,643
9,996
10,988
Net income
20,204
17,466
38,766
41,336
Other comprehensive income (loss), net of taxes
(7,210)
(88,835)
11,220
(211,276)
Comprehensive income (loss)
$
12,994
$
(71,369)
$
49,986
$
(169,940)
32
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)
2023
2022
2023
2022
Interest and dividend income
$
81,741
$
62,822
$
161,220
$
122,811
Noninterest income
15,639
12,502
30,017
28,630
Less: Gain on sale of real estate
495
—
495
1,002
*Revenues-Bank
96,885
75,324
190,742
150,439
Total interest expense
18,513
1,060
33,071
2,012
Provision for credit losses
43
2,757
1,218
(506)
Noninterest expense
53,769
49,398
108,186
97,611
Less: Gain on sale of real estate
495
—
495
1,002
Less: Retirement defined benefits credit—other than service costs
(187)
(186)
(374)
(371)
*Expenses-Bank
72,017
53,401
142,354
98,486
*Operating income-Bank
24,868
21,923
48,388
51,953
Add back: Retirement defined benefits credit—other than service costs
(187)
(186)
(374)
(371)
Income before income taxes
$
25,055
$
22,109
$
48,762
$
52,324
33
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
American Savings Bank, F.S.B.
Balance Sheets Data
(in thousands)
June 30, 2023
December 31, 2022
Assets
Cash and due from banks
$
158,170
$
153,042
Interest-bearing deposits
9,958
3,107
Cash and cash equivalents
168,128
156,149
Investment securities
Available-for-sale, at fair value
1,368,037
1,429,667
Held-to-maturity, at amortized cost (fair value of $1,121,995 and $1,150,971, respectively)
1,224,917
1,251,747
Stock in Federal Home Loan Bank, at cost
18,000
26,560
Loans held for investment
6,138,182
5,978,906
Allowance for credit losses
(69,068)
(72,216)
Net loans
6,069,114
5,906,690
Loans held for sale, at lower of cost or fair value
6,910
824
Other
683,395
692,143
Goodwill
82,190
82,190
Total assets
$
9,620,691
$
9,545,970
Liabilities and shareholder’s equity
Deposit liabilities—noninterest-bearing
$
2,683,725
$
2,811,077
Deposit liabilities—interest-bearing
5,479,510
5,358,619
Other borrowings
750,000
695,120
Other
212,268
212,269
Total liabilities
9,125,503
9,077,085
Common stock
1
1
Additional paid-in capital
357,123
355,806
Retained earnings
463,459
449,693
Accumulated other comprehensive loss, net of tax benefits
Net unrealized losses on securities
$
(315,917)
$
(328,904)
Retirement benefit plans
(9,478)
(325,395)
(7,711)
(336,615)
Total shareholder’s equity
495,188
468,885
Total liabilities and shareholder’s equity
$
9,620,691
$
9,545,970
Other assets
Bank-owned life insurance
$
183,833
$
182,986
Premises and equipment, net
192,070
195,324
Accrued interest receivable
27,136
25,077
Mortgage-servicing rights
8,495
9,047
Low-income housing investments
107,164
106,978
Deferred tax asset
112,345
116,441
Real estate acquired in settlement of loans, net
—
115
Other
52,352
56,175
$
683,395
$
692,143
Other liabilities
Accrued expenses
$
98,664
$
97,295
Federal and state income taxes payable
187
863
Cashier’s checks
32,634
36,401
Advance payments by borrowers
10,800
9,637
Other
69,983
68,073
$
212,268
$
212,269
34
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 FHLB advances and borrowings from the Federal Reserve Bank.
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, 2023
Available-for-sale
U.S. Treasury and federal agency obligations
$
84,728
$
—
$
(6,981)
$
77,747
—
$
—
$
—
14
$
77,747
$
(6,981)
Mortgage-backed securities*
1,465,232
—
(230,718)
1,234,514
8
36,332
(3,863)
175
1,198,182
(226,855)
Corporate bonds
44,307
—
(3,161)
41,146
—
—
—
5
41,146
(3,161)
Mortgage revenue bonds
14,630
—
—
14,630
—
—
—
—
—
—
$
1,608,897
$
—
$
(240,860)
$
1,368,037
8
$
36,332
$
(3,863)
194
$
1,317,075
$
(236,997)
Held-to-maturity
U.S. Treasury and federal agency obligations
$
59,906
$
—
$
(8,207)
$
51,699
—
$
—
$
—
3
$
51,699
$
(8,207)
Mortgage-backed securities*
1,165,011
2,449
(97,164)
1,070,296
33
322,971
(6,521)
40
403,177
(90,643)
$
1,224,917
$
2,449
$
(105,371)
$
1,121,995
33
$
322,971
$
(6,521)
43
$
454,876
$
(98,850)
December 31, 2022
Available-for-sale
U.S. Treasury and federal agency obligations
$
88,344
$
—
$
(7,281)
$
81,063
12
$
41,201
$
(2,120)
4
$
39,862
$
(5,161)
Mortgage-backed securities*
1,530,582
—
(237,614)
1,292,968
113
455,836
(56,999)
70
837,132
(180,615)
Corporate bonds
44,377
—
(3,643)
40,734
4
29,644
(2,028)
1
11,090
(1,615)
Mortgage revenue bonds
14,902
—
—
14,902
—
—
—
—
—
—
$
1,678,205
$
—
$
(248,538)
$
1,429,667
129
$
526,681
$
(61,147)
75
$
888,084
$
(187,391)
Held-to-maturity
U.S. Treasury and federal agency obligations
$
59,894
$
—
$
(8,478)
$
51,416
1
$
16,874
$
(3,222)
2
$
34,542
$
(5,256)
Mortgage-backed securities*
1,191,853
2,670
(94,968)
1,099,555
22
183,629
(10,593)
51
567,250
(84,375)
$
1,251,747
$
2,670
$
(103,446)
$
1,150,971
23
$
200,503
$
(13,815)
53
$
601,792
$
(89,631)
* 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, 2023 and December 31, 2022, 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 rated 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, 2023 and December 31, 2022.
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.
35
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
In addition, expected maturities will differ from contractual maturities because borrowers have the right to prepay the underlying mortgages.
The contractual maturities of investment securities were as follows:
June 30, 2023
Amortized cost
Fair value
(in thousands)
Available-for-sale
Due in one year or less
$
2,213
$
2,177
Due after one year through five years
126,822
116,716
Due after five years through ten years
14,630
14,630
Due after ten years
—
—
143,665
133,523
Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies
1,465,232
1,234,514
Total available-for-sale securities
$
1,608,897
$
1,368,037
Held-to-maturity
Due in one year or less
$
—
$
—
Due after one year through five years
19,966
17,403
Due after five years through ten years
39,940
34,296
Due after ten years
—
—
59,906
51,699
Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies
1,165,011
1,070,296
Total held-to-maturity securities
$
1,224,917
$
1,121,995
There were no sales of available-for-sale securities for the three months and six months ended June 30, 2023 and 2022.
The components of loans were summarized as follows:
June 30, 2023
December 31, 2022
(in thousands)
Real estate:
Residential 1-4 family
$
2,548,160
$
2,479,637
Commercial real estate
1,382,376
1,358,123
Home equity line of credit
1,035,099
1,002,905
Residential land
21,226
20,679
Commercial construction
128,748
88,489
Residential construction
14,536
20,788
Total real estate
5,130,145
4,970,621
Commercial
747,343
779,691
Consumer
290,918
254,709
Total loans
6,168,406
6,005,021
Less: Deferred fees and discounts
(30,224)
(26,115)
Allowance for credit losses
(69,068)
(72,216)
Total loans, net
$
6,069,114
$
5,906,690
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 property purchases, the loan-to-value ratio may not exceed 75% of the lower of the appraised value or purchase price at origination.
36
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
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, 2023
Allowance for credit losses:
Beginning balance
$
4,612
$
22,701
$
6,053
$
620
$
735
$
28
$
11,936
$
24,611
$
71,296
Charge-offs
(181)
—
(297)
—
—
—
(157)
(2,568)
(3,203)
Recoveries
2
—
17
3
—
—
206
904
1,132
Provision
275
(2,423)
1,366
30
1,814
(2)
(627)
(590)
(157)
Ending balance
$
4,708
$
20,278
$
7,139
$
653
$
2,549
$
26
$
11,358
$
22,357
$
69,068
Three months ended June 30, 2022
Allowance for credit losses:
Beginning balance
$
7,874
$
20,176
$
5,650
$
697
$
2,340
$
31
$
14,314
$
16,129
$
67,211
Charge-offs
—
—
—
—
—
—
(148)
(1,369)
(1,517)
Recoveries
3
—
31
96
—
—
399
976
1,505
Provision
643
724
415
(116)
294
15
(2,152)
2,434
2,257
Ending balance
$
8,520
$
20,900
$
6,096
$
677
$
2,634
$
46
$
12,413
$
18,170
$
69,456
Six months ended June 30, 2023
Allowance for credit losses:
Beginning balance
$
6,270
$
21,898
$
6,125
$
717
$
1,195
$
46
$
12,426
$
23,539
$
72,216
Charge-offs
(990)
—
(360)
—
—
—
(384)
(4,891)
(6,625)
Recoveries
6
—
34
3
—
—
604
1,812
2,459
Provision
(578)
(1,620)
1,340
(67)
1,354
(20)
(1,288)
1,897
1,018
Ending balance
$
4,708
$
20,278
$
7,139
$
653
$
2,549
$
26
$
11,358
$
22,357
$
69,068
Six months ended June 30, 2022
Allowance for credit losses:
Beginning balance
$
6,545
$
24,696
$
5,657
$
646
$
2,186
$
18
$
15,798
$
15,584
$
71,130
Charge-offs
—
—
—
—
—
—
(224)
(2,851)
(3,075)
Recoveries
11
—
42
101
—
—
752
2,001
2,907
Provision
1,964
(3,796)
397
(70)
448
28
(3,913)
3,436
(1,506)
Ending balance
$
8,520
$
20,900
$
6,096
$
677
$
2,634
$
46
$
12,413
$
18,170
$
69,456
37
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, 2023
Allowance for loan commitments:
Beginning balance
$
400
$
2,600
$
1,400
$
4,400
Provision
200
1,200
(1,200)
200
Ending balance
$
600
$
3,800
$
200
$
4,600
Three months ended June 30, 2022
Allowance for loan commitments:
Beginning balance
$
400
$
3,600
$
1,400
$
5,400
Provision
—
500
—
500
Ending balance
$
400
$
4,100
$
1,400
$
5,900
Six months ended June 30, 2023
Allowance for loan commitments:
Beginning balance
$
400
$
2,600
$
1,400
$
4,400
Provision
200
1,200
(1,200)
200
Ending balance
$
600
$
3,800
$
200
$
4,600
Six months ended June 30, 2022
Allowance for loan commitments:
Beginning balance
$
400
$
3,700
$
800
$
4,900
Provision
—
400
600
1,000
Ending balance
$
400
$
4,100
$
1,400
$
5,900
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.
38
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)
2023
2022
2021
2020
2019
Prior
Revolving
Converted to term loans
Total
June 30, 2023
Residential 1-4 family
Current
$
145,486
$
418,635
$
748,251
$
413,204
$
109,756
$
710,451
$
—
$
—
$
2,545,783
30-59 days past due
—
—
—
—
—
223
—
—
223
60-89 days past due
—
—
—
—
—
236
—
—
236
Greater than 89 days past due
—
—
—
—
—
1,918
—
—
1,918
145,486
418,635
748,251
413,204
109,756
712,828
—
—
2,548,160
Current YTD period
Gross charge-offs
—
—
—
—
—
990
—
—
990
Home equity line of credit
Current
—
—
—
—
—
—
981,266
51,857
1,033,123
30-59 days past due
—
—
—
—
—
—
773
—
773
60-89 days past due
—
—
—
—
—
—
485
120
605
Greater than 89 days past due
—
—
—
—
—
—
342
256
598
—
—
—
—
—
—
982,866
52,233
1,035,099
Current YTD period
Gross charge-offs
—
—
—
—
—
—
77
283
360
Residential land
Current
3,073
5,231
8,270
3,664
—
988
—
—
21,226
30-59 days past due
—
—
—
—
—
—
—
—
—
60-89 days past due
—
—
—
—
—
—
—
—
—
Greater than 89 days past due
—
—
—
—
—
—
—
—
—
3,073
5,231
8,270
3,664
—
988
—
—
21,226
Current YTD period
Gross charge-offs
—
—
—
—
—
—
—
—
—
Residential construction
Current
1,370
9,967
3,199
—
—
—
—
—
14,536
30-59 days past due
—
—
—
—
—
—
—
—
—
60-89 days past due
—
—
—
—
—
—
—
—
—
Greater than 89 days past due
—
—
—
—
—
—
—
—
—
1,370
9,967
3,199
—
—
—
—
—
14,536
Current YTD period
Gross charge-offs
—
—
—
—
—
—
—
—
—
Consumer
Current
75,489
175,654
14,671
3,209
2,207
256
10,274
4,069
285,829
30-59 days past due
249
1,577
244
67
72
1
58
69
2,337
60-89 days past due
74
922
85
40
65
1
88
57
1,332
Greater than 89 days past due
40
908
69
31
79
5
96
192
1,420
75,852
179,061
15,069
3,347
2,423
263
10,516
4,387
290,918
Current YTD period
Gross charge-offs
460
2,976
643
106
283
35
142
246
4,891
Commercial real estate
Pass
50,165
391,965
177,687
276,039
51,699
335,469
8,358
—
1,291,382
Special Mention
—
—
11,250
3,403
29,784
21,069
—
—
65,506
Substandard
5,421
—
—
—
11,354
8,713
—
—
25,488
Doubtful
—
—
—
—
—
—
—
—
—
55,586
391,965
188,937
279,442
92,837
365,251
8,358
—
1,382,376
39
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Term Loans by Origination Year
Revolving Loans
(in thousands)
2023
2022
2021
2020
2019
Prior
Revolving
Converted to term loans
Total
Current YTD period
Gross charge-offs
—
—
—
—
—
—
—
—
—
Commercial construction
Pass
1,980
14,970
60,602
65
—
—
51,131
—
128,748
Special Mention
—
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
—
—
—
—
Doubtful
—
—
—
—
—
—
—
—
—
1,980
14,970
60,602
65
—
—
51,131
—
128,748
Current YTD period
Gross charge-offs
—
—
—
—
—
—
—
—
—
Commercial
Pass
60,151
223,817
131,123
84,694
46,411
85,210
76,926
13,197
721,529
Special Mention
—
—
989
—
2,434
—
9,784
—
13,207
Substandard
—
3,144
1,128
329
1,248
4,635
928
1,195
12,607
Doubtful
—
—
—
—
—
—
—
—
—
60,151
226,961
133,240
85,023
50,093
89,845
87,638
14,392
747,343
Current YTD period
Gross charge-offs
—
—
51
—
—
—
124
209
384
Total loans
$
343,498
$
1,246,790
$
1,157,568
$
784,745
$
255,109
$
1,169,175
$
1,140,509
$
71,012
$
6,168,406
40
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Term Loans by Origination Year
Revolving Loans
(in thousands)
2022
2021
2020
2019
2018
Prior
Revolving
Converted to term loans
Total
December 31, 2022
Residential 1-4 family
Current
$
432,707
$
755,056
$
423,455
$
113,096
$
51,860
$
698,354
$
—
$
—
$
2,474,528
30-59 days past due
—
—
—
—
448
1,098
—
—
1,546
60-89 days past due
—
—
268
—
—
90
—
—
358
Greater than 89 days past due
—
—
—
—
809
2,396
—
—
3,205
432,707
755,056
423,723
113,096
53,117
701,938
—
—
2,479,637
Home equity line of credit
Current
—
—
—
—
—
—
959,131
40,814
999,945
30-59 days past due
—
—
—
—
—
—
1,103
209
1,312
60-89 days past due
—
—
—
—
—
—
209
226
435
Greater than 89 days past due
—
—
—
—
—
—
587
626
1,213
—
—
—
—
—
—
961,030
41,875
1,002,905
Residential land
Current
5,245
9,010
5,222
203
522
477
—
—
20,679
30-59 days past due
—
—
—
—
—
—
—
—
—
60-89 days past due
—
—
—
—
—
—
—
—
—
Greater than 89 days past due
—
—
—
—
—
—
—
—
—
5,245
9,010
5,222
203
522
477
—
—
20,679
Residential construction
Current
7,986
11,624
1,178
—
—
—
—
—
20,788
30-59 days past due
—
—
—
—
—
—
—
—
—
60-89 days past due
—
—
—
—
—
—
—
—
—
Greater than 89 days past due
—
—
—
—
—
—
—
—
—
7,986
11,624
1,178
—
—
—
—
—
20,788
Consumer
Current
199,574
21,330
5,543
7,580
527
140
10,810
4,782
250,286
30-59 days past due
1,110
287
65
239
30
—
81
167
1,979
60-89 days past due
756
163
88
137
19
—
45
107
1,315
Greater than 89 days past due
621
105
37
176
28
—
20
142
1,129
202,061
21,885
5,733
8,132
604
140
10,956
5,198
254,709
Commercial real estate
Pass
390,206
177,130
283,321
51,542
63,084
278,280
8,235
—
1,251,798
Special Mention
—
11,250
3,446
40,423
—
24,466
—
—
79,585
Substandard
—
—
665
11,357
—
14,718
—
—
26,740
Doubtful
—
—
—
—
—
—
—
—
—
390,206
188,380
287,432
103,322
63,084
317,464
8,235
—
1,358,123
Commercial construction
Pass
15,094
47,478
44
—
—
—
25,873
—
88,489
Special Mention
—
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
—
—
—
—
Doubtful
—
—
—
—
—
—
—
—
—
15,094
47,478
44
—
—
—
25,873
—
88,489
Commercial
Pass
239,852
185,013
85,220
68,161
46,142
53,192
60,871
13,964
752,415
Special Mention
—
—
—
2,374
—
645
9,005
8
12,032
Substandard
3,322
2,305
401
1,304
1,346
3,849
1,664
1,053
15,244
Doubtful
—
—
—
—
—
—
—
—
—
243,174
187,318
85,621
71,839
47,488
57,686
71,540
15,025
779,691
Total loans
$
1,296,473
$
1,220,751
$
808,953
$
296,592
$
164,815
$
1,077,705
$
1,077,634
$
62,098
$
6,005,021
41
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Revolving loans converted to term loans during the six months ended June 30, 2023 in the commercial, home equity line of credit and consumer portfolios were $2.0 million, $14.9 million and $0.9 million, respectively. Revolving loans converted to term loans during the six months ended June 30, 2022 in the commercial, home equity line of credit and consumer portfolios were $1.0 million, $10.0 million and $1.7 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, 2023
Real estate:
Residential 1-4 family
$
223
$
236
$
1,918
$
2,377
$
2,545,783
$
2,548,160
$
—
Commercial real estate
472
—
—
472
1,381,904
1,382,376
—
Home equity line of credit
773
605
598
1,976
1,033,123
1,035,099
—
Residential land
—
—
—
—
21,226
21,226
—
Commercial construction
—
—
—
—
128,748
128,748
—
Residential construction
—
—
—
—
14,536
14,536
—
Commercial
45
351
380
776
746,567
747,343
—
Consumer
2,337
1,332
1,420
5,089
285,829
290,918
—
Total loans
$
3,850
$
2,524
$
4,316
$
10,690
$
6,157,716
$
6,168,406
$
—
December 31, 2022
Real estate:
Residential 1-4 family
$
1,546
$
358
$
3,205
$
5,109
$
2,474,528
$
2,479,637
$
—
Commercial real estate
508
217
—
725
1,357,398
1,358,123
—
Home equity line of credit
1,312
435
1,213
2,960
999,945
1,002,905
—
Residential land
—
—
—
—
20,679
20,679
—
Commercial construction
—
—
—
—
88,489
88,489
—
Residential construction
—
—
—
—
20,788
20,788
—
Commercial
614
18
77
709
778,982
779,691
—
Consumer
1,979
1,315
1,129
4,423
250,286
254,709
—
Total loans
$
5,959
$
2,343
$
5,624
$
13,926
$
5,991,095
$
6,005,021
$
—
The credit risk profile based on nonaccrual loans were as follows:
(in thousands)
June 30, 2023
December 31, 2022
With a Related ACL
Without a Related ACL
Total
With a Related ACL
Without a Related ACL
Total
Real estate:
Residential 1-4 family
$
2,016
$
2,550
$
4,566
$
4,198
$
2,981
$
7,179
Commercial real estate
—
—
—
—
—
—
Home equity line of credit
4,528
740
5,268
3,654
1,442
5,096
Residential land
107
—
107
420
—
420
Commercial construction
—
—
—
—
—
—
Residential construction
—
—
—
—
—
—
Commercial
1,241
—
1,241
2,183
—
2,183
Consumer
2,086
—
2,086
1,588
—
1,588
Total
$
9,978
$
3,290
$
13,268
$
12,043
$
4,423
$
16,466
ASB did not recognize interest on nonaccrual loans for the six months ended June 30, 2023 and 2022.
42
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Modifications Made to Borrowers Experiencing Financial Difficulty. The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon origination. The starting point for the estimate of the allowance for credit losses is historical loan information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. ASB uses a probability of default/loss given default model to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made at the time of the modification.
Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses, a change to the allowance for credit losses is generally not recorded upon modification.
Modifications may include interest rate reductions, interest only payments for an extended period of time, protracted terms such as amortization and maturity beyond the customary length of time found in the normal marketplace, and other actions intended to minimize economic loss and to provide alternatives to foreclosure or repossession of collateral.
During the first half of 2023, no loans received a material modification based on borrower financial difficulty.
Troubled debt restructurings. Prior to January 1, 2023, a loan modification was 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. With the adoption of ASU No. 2022-02, accounting guidance for TDRs by creditors is eliminated. Loan refinancing and restructuring guidance is applied to determine whether a modification results in a new loan or a continuation of an existing loan. ASB will continue TDR disclosures for years prior to the adoption of ASU No. 2022-02.
The credit risk profile based on loans whose terms have been modified and accruing interest were as follows:
(in thousands)
December 31, 2022
Real estate:
Residential 1-4 family
$
8,821
Commercial real estate
9,477
Home equity line of credit
4,404
Residential land
782
Commercial construction
—
Residential construction
—
Commercial
6,596
Consumer
50
Total troubled debt restructured loans accruing interest
$
30,130
Loans modified as a TDR. Loan modifications that occurred during the three and six months ended June 30, 2022.
Three months ended June 30, 2022
Six months ended June 30, 2022
(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
$
381
$
135
1
$
381
$
135
Commercial real estate
—
—
—
—
—
—
Home equity line of credit
—
—
—
—
—
—
Residential land
—
—
—
—
—
—
Commercial construction
—
—
—
—
—
—
Residential construction
—
—
—
—
—
—
Commercial
—
—
—
—
—
—
Consumer
—
—
—
—
—
—
1
$
381
$
135
1
$
381
$
135
1The 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.
43
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
There were no loans modified in TDRs that experienced a payment default of 90 days or more during the second quarter and first six months of 2022.
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 December 31, 2022.
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. Loans considered collateral-dependent were as follows:
Amortized cost
(in thousands)
June 30, 2023
December 31, 2022
Collateral type
Real estate:
Residential 1-4 family
$
2,712
$
3,959
Residential real estate property
Home equity line of credit
740
1,425
Residential real estate property
Total real estate
3,452
5,384
Commercial
380
—
Business assets
Total
$
3,832
$
5,384
ASB had $3.3 million and $4.2 million of consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure at June 30, 2023 and December 31, 2022, respectively.
Mortgage servicing rights (MSRs).In its mortgage banking business, ASB sells residential mortgage loans to government-sponsored entities and other parties, who may issue securities backed by pools of such loans. ASB retains no beneficial interests in these loans other than the servicing rights of certain loans sold.
ASB received proceeds from the sale of residential mortgages of $8.9 million and $38.7 million for the three months ended June 30, 2023 and 2022, respectively, and recognized gains on such sales of $0.3 million for the three months ended June 30, 2023 and 2022. ASB received proceeds from the sale of residential mortgages of $14.6 million and $114.3 million for the six months ended June 30, 2023 and 2022, respectively, and recognized gains on such sales of $0.4 million and $1.4 million for the six months ended June 30, 2023 and 2022, respectively.
There were no repurchased mortgage loans for the six months ended June 30, 2023 and 2022.
Mortgage servicing fees, a component of other income, net, were $0.9 million for the three months ended June 30, 2023 and 2022 and $1.8 million for the six months ended June 30, 2023 and 2022.
Changes in the carrying value of MSRs were as follows:
(in thousands)
Gross carrying amount
Accumulated amortization
Valuation allowance
Net carrying amount
June 30, 2023
$
17,953
$
(9,458)
$
—
$
8,495
December 31, 2022
19,544
(10,497)
—
9,047
44
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)
2023
2022
2023
2022
Mortgage servicing rights
Beginning balance
$
8,745
$
10,024
$
9,047
$
9,950
Amount capitalized
84
204
135
923
Amortization
(334)
(532)
(687)
(1,177)
Other-than-temporary impairment
—
—
—
—
Carrying amount before valuation allowance
8,495
9,696
8,495
9,696
Valuation allowance for mortgage servicing rights
Beginning balance
—
—
—
—
Provision
—
—
—
—
Other-than-temporary impairment
—
—
—
—
Ending balance
—
—
—
—
Net carrying value of mortgage servicing rights
$
8,495
$
9,696
$
8,495
$
9,696
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, 2023
December 31, 2022
Unpaid principal balance
$
1,414,845
$
1,451,322
Weighted average note rate
3.40
%
3.38
%
Weighted average discount rate
10.00
%
10.00
%
Weighted average prepayment speed
6.28
%
6.56
%
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, 2023
December 31, 2022
Prepayment rate:
25 basis points adverse rate change
$
(72)
$
(92)
50 basis points adverse rate change
(169)
(214)
Discount rate:
25 basis points adverse rate change
(191)
(182)
50 basis points adverse rate change
(378)
(361)
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, 2023 and December 31, 2022, ASB had $200.0 million and $414.0 million of FHLB advances outstanding, respectively, and borrowings with the Federal Reserve Bank of $550.0 million and nil, respectively. As of June 30, 2023, ASB was in compliance with all FHLB Advances, Pledge and Security Agreement requirements and all requirements to borrow at the Federal Reserve Discount Window Primary Credit Facility under 12 CFR 201.4(a) guidelines.
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
45
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
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 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, 2023
$
—
$
—
$
—
December 31, 2022
281
—
281
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, 2023
$
—
$
—
$
—
December 31, 2022
281
327
—
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, 2023
December 31, 2022
(in thousands)
Notional amount
Fair value
Notional amount
Fair value
Interest rate lock commitments
$
11,810
$
88
$
1,720
$
9
Forward commitments
9,500
51
1,500
18
46
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, 2023
December 31, 2022
(in thousands)
Asset derivatives
Liability derivatives
Asset derivatives
Liability derivatives
Interest rate lock commitments
$
88
$
—
$
9
$
—
Forward commitments
51
—
18
—
$
139
$
—
$
27
$
—
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)
2023
2022
2023
2022
Interest rate lock commitments
Mortgage banking income
$
62
$
62
$
79
$
(593)
Forward commitments
Mortgage banking income
46
(141)
33
37
$
108
$
(79)
$
112
$
(556)
Low-Income Housing Tax Credit (LIHTC). ASB’s unfunded commitments to fund its LIHTC investment partnerships were $77.1 million and $70.1 million at June 30, 2023 and December 31, 2022, 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, 2023, ASB did not have any impairment losses resulting from forfeiture or ineligibility of tax credits or other circumstances related to its LIHTC investment partnerships.
Note 5 · Credit agreements and changes in debt
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 Credit Facilities) to amend and restate their respective previously existing revolving unsecured credit agreements. The $175 million HEI Facility’s initial termination date was May 14, 2026. The $200 million Hawaiian Electric Facility’s initial termination date was May 13, 2022, but on February 18, 2022, the PUC approved Hawaiian Electric’s request to extend the term of the $200 million Hawaiian Electric Facility to May 14, 2026. In addition to extending the term, Hawaiian Electric also received 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.
On April 21, 2023, HEI and Hawaiian Electric executed Amendment No. 1 to the Credit Facilities (Amendment). The Amendment was executed to reflect the transition from the London Inter-Bank Offered Rate (LIBOR) to the Term Secured Overnight Financing Rate (SOFR) as the benchmark interest rate for non-Alternate Base Rate (ABR) Loans under the Credit Facilities.
On May 14, 2023, HEI and Hawaiian Electric exercised their first of two, one-year extensions to the commitment termination date with eight financial institutions to extend the Credit Facilities to May 14, 2027. The committed capacities under the HEI Facility and Hawaiian Electric Facility are $175 million and $200 million, respectively, through May 14, 2026, and step down to approximately $157 million and $180 million, respectively, through May 14, 2027.
None of the facilities are collateralized. As of June 30, 2023 and December 31, 2022, 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.
47
Changes in debt.
HEI private placement. On March 16, 2023, HEI entered into a note purchase agreement (HEI NPA) under which HEI has authorized the issue and sale of $100 million of unsecured senior notes that were drawn on May 30, 2023. The proceeds of the notes were used to repay the $100 million term loan facility on May 31, 2023. The terms of the notes are as follows:
HEI Series 2023A
HEI Series 2023B
Aggregate principal amount
$39 million
$61 million
Fixed coupon interest rate
6.04%
6.10%
Maturity date
6/15/2028
6/15/2033
Interest on the notes is paid semiannually on June 15th and December 15th. The HEI NPA contains certain restrictive financial covenants that are substantially the same as the financial covenants contained in HEI’s revolving unsecured credit facility, as amended. The HEI notes may be prepaid in whole or in part at any time at the prepayment price of the principal amount, together with interest accrued to the date of prepayment plus a “Make-Whole Amount,” as defined in the agreements.
HEI term loan. On October 20, 2022, HEI entered into a term loan facility in the aggregate principal amount of $100 million. On December 28, 2022, HEI drew $35 million on the term loan, and on March 31, 2023, HEI drew the remaining $65 million at an initial interest rate of 5.81% for an initial one month interest period. On May 31, 2023, HEI fully repaid the term loan facility at which time it was terminated. Borrowings under the facility bore interest at Term Secured Overnight Financing Rate (SOFR), as defined in the agreement, plus an applicable margin and a SOFR spread adjustment. The term loan facility contained certain restrictive financial covenants that were substantially the same as the financial covenants contained in the HEI Facility.
Utilities private placement. On January 10, 2023, the Utilities executed through a private placement pursuant to separate Note Purchase Agreements (the NPAs), the following unsecured senior notes bearing taxable interest (2023 Notes).The 2023 Notes had a delayed draw feature and the Utilities drew down all the proceeds on February 9, 2023.
Series 2023A
Series 2023B
Series 2023C
Aggregate principal amount
$90 million
$40 million
$20 million
Fixed coupon interest rate
Hawaiian Electric
6.11%
6.25%
6.70%
Hawaii Electric Light
6.25%
—
—
Maui Electric
6.25%
—
—
Maturity date
Hawaiian Electric
2/9/2030
2/9/2033
2/9/2053
Hawaii Electric Light
2/9/2033
—
—
Maui Electric
2/9/2033
—
—
Principal amount by company
Hawaiian Electric
$40 million
$40 million
$20 million
Hawaii Electric Light
$25 million
—
—
Maui Electric
$25 million
—
—
The 2023 Notes include substantially the same financial covenants and customary conditions as Hawaiian Electric’s credit agreement. Hawaiian Electric is also a party as guarantor under the NPAs entered into by Hawaii Electric Light and Maui Electric. The Utilities did not obtain any of the proceeds at execution and instead drew down all the proceeds on February 9, 2023. The proceeds were used to finance their respective capital expenditures, repay short-term debt used to finance or refinance capital expenditures and/or reimburse funds used for the payment of capital expenditures. The 2023 Notes may be prepaid in whole or in part at any time at the prepayment price of the principal amount plus a “Make-Whole Amount” as defined in the NPAs.
48
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, 2022
$
(328,904)
$
1,991
$
(9,115)
$
(336,028)
$
2,861
Current period other comprehensive income (loss)
12,987
(245)
137
12,879
(89)
Balance, June 30, 2023
$
(315,917)
$
1,746
$
(8,978)
$
(323,149)
$
2,772
Balance, December 31, 2021
$
(32,037)
$
(3,638)
$
(16,858)
$
(52,533)
$
(3,280)
Current period other comprehensive income (loss)
(209,264)
3,911
354
(204,999)
102
Balance, June 30, 2022
$
(241,301)
$
273
$
(16,504)
$
(257,532)
$
(3,178)
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
(in thousands)
2023
2022
2023
2022
HEI consolidated
Net unrealized gains (losses) on available-for sale investment securities - amortization of unrealized holding losses on held-to-maturity securities
$
3,689
$
—
$
7,366
$
—
Bank revenues
Net realized losses (gains) on derivatives qualifying as cash flow hedges
(48)
53
(96)
108
Interest expense
Retirement benefit plans:
Amortization of prior service credit and net losses (gains) recognized during the period in net periodic benefit cost
(357)
122
(714)
4,623
See Note 8 for additional details
Impact of D&Os of the PUC included in regulatory assets
426
56
851
(4,269)
See Note 8 for additional details
Total reclassifications
$
3,710
$
231
$
7,407
$
462
Hawaiian Electric consolidated
Retirement benefit plans:
Amortization of prior service credit and net losses (gains) recognized during the period in net periodic benefit cost
$
(470)
$
(5)
$
(940)
$
4,371
See Note 8 for additional details
Impact of D&Os of the PUC included in regulatory assets
426
56
851
(4,269)
See Note 8 for additional details
Total reclassifications
$
(44)
$
51
$
(89)
$
102
49
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, 2023
Six months ended June 30, 2023
(in thousands)
Electric utility
Bank
Other
Total
Electric utility
Bank
Other
Total
Revenues from contracts with customers
Electric energy sales - residential
$
239,867
$
—
$
—
$
239,867
$
495,417
$
—
$
—
$
495,417
Electric energy sales - commercial
250,108
—
—
250,108
504,578
—
—
504,578
Electric energy sales - large light and power
279,811
—
—
279,811
570,789
—
—
570,789
Electric energy sales - other
4,483
—
—
4,483
9,940
—
—
9,940
Bank fees
—
12,281
—
12,281
—
24,303
—
24,303
Other sales
—
—
4,438
4,438
—
—
8,345
8,345
Total revenues from contracts with customers
774,269
12,281
4,438
790,988
1,580,724
24,303
8,345
1,613,372
Revenues from other sources
Regulatory revenue
9,039
—
—
9,039
24,643
—
—
24,643
Bank interest and dividend income
—
81,741
—
81,741
—
161,220
—
161,220
Other bank noninterest income
—
2,863
—
2,863
—
5,219
—
5,219
Other
10,883
—
171
11,054
19,185
—
283
19,468
Total revenues from other sources
19,922
84,604
171
104,697
43,828
166,439
283
210,550
Total revenues
$
794,191
$
96,885
$
4,609
$
895,685
$
1,624,552
$
190,742
$
8,628
$
1,823,922
Timing of revenue recognition
Services/goods transferred at a point in time
$
—
$
12,281
$
—
$
12,281
$
—
$
24,303
$
—
$
24,303
Services/goods transferred over time
774,269
—
4,438
778,707
1,580,724
—
8,345
1,589,069
Total revenues from contracts with customers
$
774,269
$
12,281
$
4,438
$
790,988
$
1,580,724
$
24,303
$
8,345
$
1,613,372
Three months ended June 30, 2022
Six months ended June 30, 2022
(in thousands)
Electric utility
Bank
Other
Total
Electric utility
Bank
Other
Total
Revenues from contracts with customers
Electric energy sales - residential
$
259,433
$
—
$
—
$
259,433
$
484,007
$
—
$
—
$
484,007
Electric energy sales - commercial
264,701
—
—
264,701
484,298
—
—
484,298
Electric energy sales - large light and power
293,847
—
—
293,847
534,970
—
—
534,970
Electric energy sales - other
4,873
—
—
4,873
6,299
—
—
6,299
Bank fees
—
11,797
—
11,797
—
24,793
—
24,793
Other sales
—
—
1,333
1,333
—
—
2,448
2,448
Total revenues from contracts with customers
822,854
11,797
1,333
835,984
1,509,574
24,793
2,448
1,536,815
Revenues from other sources
Regulatory revenue
(11,428)
—
—
(11,428)
1,458
—
—
1,458
Bank interest and dividend income
—
62,822
—
62,822
—
122,811
—
122,811
Other bank noninterest income
—
705
—
705
—
2,835
—
2,835
Other
7,447
—
77
7,524
16,633
—
123
16,756
Total revenues from other sources
(3,981)
63,527
77
59,623
18,091
125,646
123
143,860
Total revenues
$
818,873
$
75,324
$
1,410
$
895,607
$
1,527,665
$
150,439
$
2,571
$
1,680,675
Timing of revenue recognition
Services/goods transferred at a point in time
$
—
$
11,797
$
—
$
11,797
$
—
$
24,793
$
—
$
24,793
Services/goods transferred over time
822,854
—
1,333
824,187
1,509,574
—
2,448
1,512,022
Total revenues from contracts with customers
$
822,854
$
11,797
$
1,333
$
835,984
$
1,509,574
$
24,793
$
2,448
$
1,536,815
50
There are no material contract assets or liabilities associated with revenues from contracts with customers existing at December 31, 2022 or as of June 30, 2023. Accounts receivable and unbilled revenues related to contracts with customers represent an unconditional right to consideration since all performance obligations have been satisfied. These amounts are disclosed as accounts receivable and unbilled revenues, net on HEI’s condensed consolidated balance sheets and customer accounts receivable, net and accrued unbilled revenues, net on Hawaiian Electric’s condensed consolidated balance sheets.
As of June 30, 2023, 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 2023, the Company contributed $4 million ($4 million by the Utilities) to its pension and other postretirement benefit plans, compared to $21 million ($20 million by the Utilities) in the first six months of 2022. The Company’s current estimate of total contributions to its pension and other postretirement benefit plans in 2023 is $8 million ($8 million by the Utilities), compared to $43 million ($42 million by the Utilities) in 2022. In addition, the Company expects to pay directly $3 million ($1 million by the Utilities) of benefits in 2023, compared to $2 million ($1 million by the Utilities) paid in 2022.
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
(in thousands)
2023
2022
2023
2022
2023
2022
2023
2022
HEI consolidated
Service cost
$
11,396
$
19,823
$
343
$
657
$
22,792
$
39,647
$
687
$
1,313
Interest cost
25,622
19,810
2,157
1,638
51,243
39,621
4,314
3,275
Expected return on plan assets
(35,197)
(35,331)
(3,405)
(3,398)
(70,392)
(70,664)
(6,810)
(6,795)
Amortization of net prior period gain
—
—
(219)
(232)
—
—
(438)
(464)
Amortization of net actuarial (gain)/losses
189
6,297
(449)
(3)
377
12,594
(898)
(6)
Net periodic pension/benefit cost (return)
2,010
10,599
(1,573)
(1,338)
4,020
21,198
(3,145)
(2,677)
Impact of PUC D&Os
18,133
9,552
1,424
1,217
36,266
19,103
2,849
2,436
Net periodic pension/benefit cost (return) (adjusted for impact of PUC D&Os)
$
20,143
$
20,151
$
(149)
$
(121)
$
40,286
$
40,301
$
(296)
$
(241)
Hawaiian Electric consolidated
Service cost
$
11,018
$
19,317
$
340
$
649
$
22,037
$
38,635
$
680
$
1,298
Interest cost
23,699
18,461
2,063
1,572
47,397
36,923
4,126
3,145
Expected return on plan assets
(32,971)
(33,545)
(3,354)
(3,345)
(65,943)
(67,091)
(6,707)
(6,692)
Amortization of net prior period gain
—
—
(218)
(231)
—
—
(436)
(462)
Amortization of net actuarial (gain)/losses
18
6,125
(433)
—
37
12,250
(867)
—
Net periodic pension/benefit cost (return)
1,764
10,358
(1,602)
(1,355)
3,528
20,717
(3,204)
(2,711)
Impact of PUC D&Os
18,133
9,552
1,424
1,217
36,266
19,103
2,849
2,436
Net periodic pension/benefit cost (return) (adjusted for impact of PUC D&Os)
$
19,897
$
19,910
$
(178)
$
(138)
$
39,794
$
39,820
$
(355)
$
(275)
HEI consolidated recorded retirement benefits expense of $22 million ($22 million by the Utilities) in the first six months of 2023 and $24 million ($23 million by the Utilities) in the first six months of 2022 and charged the remaining net periodic benefit cost primarily to electric utility plant.
The Utilities have implemented pension and OPEB tracking mechanisms under which all of their retirement benefit expenses (except for executive life and nonqualified pension plan expenses) determined in accordance with GAAP are recovered over time. Under the tracking mechanisms, 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 five years beginning with the respective utility’s next rate case.
51
Defined contribution plans information. For the first six months of 2023 and 2022, 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 $4.2 million and $4.1 million, respectively, and cash contributions were $5.0 million and $3.5 million, respectively. For the first six months of 2023 and 2022, the Utilities’ expenses and cash contributions for its defined contribution plan under the HEIRSP were $2.6 million and $1.8 million, respectively.
Note 9 ·Share-based compensation
Under the 2010 Equity and Incentive Plan, as amended and restated effective March 1, 2014 (EIP), 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 original 2010 Equity and Incentive Plan was amended and restated effective March 1, 2014 and an additional 1.5 million shares were added to the shares available for issuance under these programs.
As of June 30, 2023, approximately 2.7 million shares remained available for future issuance under the terms of the EIP, assuming recycling of shares withheld to satisfy statutory tax liabilities relating to EIP awards, including an estimated 0.7 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. As of June 30, 2023, there were 168,177 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)
2023
2022
2023
2022
HEI consolidated
Share-based compensation expense 1
$
3.9
$
3.5
$
5.9
$
5.6
Income tax benefit
0.8
0.8
1.1
1.1
Hawaiian Electric consolidated
Share-based compensation expense 1
1.1
1.0
1.7
1.6
Income tax benefit
0.2
0.3
0.4
0.4
1 For the three and six months ended June 30, 2023 and 2022, the Company has not capitalized any share-based compensation.
Stock awards. HEI granted HEI common stock to nonemployee directors under the 2011 Director Plan as follows:
Three months ended June 30
Six months ended June 30
(dollars in millions)
2023
2022
2023
2022
Shares granted
38,941
34,755
40,450
34,755
Fair value
$
1.4
$
1.4
$
1.5
$
1.4
Income tax benefit
0.4
0.4
0.4
0.4
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.
52
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
2023
2022
2023
2022
Shares
(1)
Shares
(1)
Shares
(1)
Shares
(1)
Outstanding, beginning of period
202,133
$
41.25
208,345
$
39.71
182,528
$
39.75
233,448
$
38.10
Granted
—
—
2,008
42.15
100,088
42.41
98,463
41.31
Vested
(1,035)
44.31
(1,034)
44.31
(81,112)
39.37
(91,414)
37.65
Forfeited
(1,968)
42.49
(366)
38.07
(2,374)
41.79
(31,544)
38.77
Outstanding, end of period
199,130
$
41.22
208,953
$
39.71
199,130
$
41.22
208,953
$
39.71
Total weighted-average grant-date fair value of shares granted (in millions)
$
—
$
0.1
$
4.2
$
4.1
(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, 2023 and 2022, total restricted stock units and related dividends that vested had a fair value of $3.7 million and $4.0 million, respectively, and the related tax benefits were $0.8 million and $0.6 million, respectively.
As of June 30, 2023, there was $6.5 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 2.0 years.
Long-term incentive plan payable in stock. The 2021-23, 2022-24 and 2023-25 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 Peer Group (Edison Electric Institute Index (EEI Index) for the 2021-23 and 2022-24 performance periods, and compared to the Company's compensation peer group consisting of companies in the EEI Index and approved by the Company's Compensation and Human Capital Management Committee for the 2023-25 performance period), in each case over the relevant three-year period. The other performance condition goals relate to EPS growth, cumulative EPS, return on average common equity (ROACE), renewable portfolio standards, carbon emissions reduction, 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
2023
2022
2023
2022
Shares
(1)
Shares
(1)
Shares
(1)
Shares
(1)
Outstanding, beginning of period
80,006
$
50.27
76,340
$
47.70
71,574
$
47.67
90,974
$
42.86
Granted
—
—
390
54.92
27,123
55.98
26,469
54.92
Vested (issued or unissued and cancelled)
—
—
—
—
(18,691)
48.62
(29,042)
41.07
Forfeited
(722)
48.92
—
—
(722)
48.92
(11,671)
42.60
Outstanding, end of period
79,284
$
50.28
76,730
$
47.74
79,284
$
50.28
76,730
$
47.74
Total weighted-average grant-date fair value of shares granted (in millions)
$
—
$
—
$
1.5
$
1.5
(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 the Peer Group for the period from the beginning of the performance period to the grant date and estimated future stock volatility of HEI and the Peer Group over the remaining three-year performance period. The expected stock volatility assumptions for HEI and the 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.
53
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:
2023
2022
Risk-free interest rate
4.19
%
1.71
%
Expected life in years
3
3
Expected volatility
33.1
%
31.0
%
Range of expected volatility for Peer Group
28.7% to 38.8%
25.4% to 76.7%
Grant date fair value (per share)
$55.98
$54.92
There were no share-based LTIP awards linked to TSR with a vesting date in 2023. For the six months ended June 30, 2022, total vested LTIP awards linked to TSR and related dividends had a fair value of $0.8 million and the related tax benefits were $0.1 million.
As of June 30, 2023, 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 1.5 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
2023
2022
2023
2022
Shares
(1)
Shares
(1)
Shares
(1)
Shares
(1)
Outstanding, beginning of period
355,310
$
38.87
292,151
$
39.89
309,589
$
39.50
306,342
$
38.42
Granted
—
—
1,560
42.37
108,499
42.41
105,860
41.31
Vested
—
—
—
—
(62,778)
48.07
(71,807)
37.68
Increase above target
6,001
36.08
—
—
6,001
36.08
—
—
Forfeited
(3,834)
43.53
—
—
(3,834)
43.53
(46,684)
36.77
Outstanding, end of period
357,477
$
38.78
293,711
$
39.91
357,477
$
38.78
293,711
$
39.91
Total weighted-average grant-date fair value of shares granted (at target performance levels) (in millions)
$
—
$
0.1
$
4.6
$
4.4
(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, 2023 and 2022, total vested LTIP awards linked to other performance conditions and related dividends had a fair value of $2.9 million and $3.2 million, respectively, and the related tax benefits were $0.6 million and $0.4 million, respectively.
As of June 30, 2023, there was $6.5 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 1.4 years.
Note 10 · Income taxes
The Company’s and the Utilities’ effective tax rates (combined federal and state income tax rates) for the six months ended June 30, 2023 were 21% and 22%, respectively. 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 2017 Tax Cuts and Jobs Act that lowered the federal income tax rate from 35% to 21% and the tax benefits derived from the low income housing tax credit investments.
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 audit is still in progress. The Company has not been notified of any material audit adjustments to date.
The Inflation Reduction Act of 2022 (IRA) was signed by President Biden on August 16, 2022. Key provisions under the IRA include a 15% corporate alternative minimum tax (CAMT) imposed on certain large corporations and a 1% excise tax on stock repurchases after December 31, 2022. Based on current interpretation of the law and current guidance available we do not believe HEI will be impacted by the CAMT or stock repurchase excise tax provisions.
54
The IRA also creates new tax credits and enhances others to stimulate investment in renewable energy sources. Certain provisions of the IRA became effective beginning tax year 2023. The Company continues to monitor guidance and assess related tax planning opportunities.
Note 11 ·Cash flows
Six months ended June 30
2023
2022
(in millions)
Supplemental disclosures of cash flow information
HEI consolidated
Interest paid to non-affiliates, net of amounts capitalized
$
75
$
47
Income taxes paid (including refundable credits)
28
14
Income taxes refunded (including refundable credits)
1
2
Hawaiian Electric consolidated
Interest paid to non-affiliates
33
34
Income taxes paid (including refundable credits)
38
27
Income taxes refunded (including refundable credits)
2
—
Supplemental disclosures of noncash activities
HEI consolidated
Property, plant and equipment
Estimated fair value of noncash contributions in aid of construction (investing)
6
1
Unpaid invoices and accruals for capital expenditures, balance, end of period (investing)
50
25
Increase related to an acquisition (investing)
—
15
Right-of-use assets obtained in exchange for finance lease obligations (financing)
76
—
Right-of-use assets obtained in exchange for operating lease obligations (investing)
1
40
Common stock issued (gross) for director and executive/management compensation (financing)1
8
9
Obligations to fund low income housing investments (investing)
7
—
Loans transferred from held for investment to held for sale (investing)
72
—
Transfer of retail repurchase agreements to deposit liabilities (financing)
98
—
Hawaiian Electric consolidated
Electric utility property, plant and equipment
Estimated fair value of noncash contributions in aid of construction (investing)
6
1
Unpaid invoices and accruals for capital expenditures, balance, end of period (investing)
49
22
Increase related to an acquisition (investing)
—
15
Right-of-use assets obtained in exchange for finance lease obligations (financing)
76
—
Right-of-use assets obtained in exchange for operating lease obligations (investing)
—
37
1The amounts shown represent the market value of common stock issued for director and executive/management compensation and withheld to satisfy statutory tax liabilities.
55
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 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 initially measured at fair value (less estimated costs to sell) and subsequently measured at the lower of the carrying value or fair value less selling costs. Fair values 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
56
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.
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.
Interest rate swaps. The Company measures its interest rate swaps at fair value. The fair values of the Company's interest rate swaps are based on the estimated amounts that the Company would receive or pay to terminate the contracts at the reporting date and are determined using interest rate pricing models and interest rate related observable inputs. The fair values of the Company's interest rate swaps are classified as a Level 2 measurements.
57
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, 2023
Financial assets
HEI consolidated
Available-for-sale investment securities
$
1,368,037
$
—
$
1,353,407
$
14,630
$
1,368,037
Held-to-maturity investment securities
1,224,917
—
1,121,995
—
1,121,995
Loans, net
6,076,024
—
6,906
5,627,774
5,634,680
Mortgage servicing rights
8,495
—
—
18,127
18,127
Derivative assets
31,944
51
1,291
—
1,342
Financial liabilities
HEI consolidated
Deposit liabilities
815,538
—
799,873
—
799,873
Short-term borrowings—other than bank
46,212
—
46,212
—
46,212
Other bank borrowings
750,000
—
741,357
—
741,357
Long-term debt, net—other than bank
2,572,375
—
2,351,288
—
2,351,288
Derivative liabilities
22,949
—
540
—
540
Hawaiian Electric consolidated
Long-term debt, net
1,834,515
—
1,671,739
—
1,671,739
December 31, 2022
Financial assets
HEI consolidated
Available-for-sale investment securities
$
1,429,667
$
—
$
1,414,765
$
14,902
$
1,429,667
Held-to-maturity investment securities
1,251,747
—
1,150,971
—
1,150,971
Loans, net
5,907,514
—
821
5,453,381
5,454,202
Mortgage servicing rights
9,047
—
—
17,646
17,646
Derivative assets
16,220
18
1,330
—
1,348
Financial liabilities
HEI consolidated
Deposit liabilities
611,718
—
597,617
—
597,617
Short-term borrowings—other than bank
172,568
—
172,568
—
172,568
Other bank borrowings
695,120
—
695,095
—
695,095
Long-term debt, net—other than bank
2,384,980
—
2,122,605
—
2,122,605
Derivative liabilities
22,949
—
472
—
472
Hawaiian Electric consolidated
Short-term borrowings
87,967
—
87,967
—
87,967
Long-term debt, net
1,684,816
—
1,487,496
—
1,487,496
58
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
$
—
$
1,234,514
$
—
$
—
$
1,292,968
$
—
U.S. Treasury and federal agency obligations
—
77,747
—
—
81,063
—
Corporate bonds
—
41,146
—
—
40,734
—
Mortgage revenue bonds
—
—
14,630
—
—
14,902
$
—
$
1,353,407
$
14,630
$
—
$
1,414,765
$
14,902
Derivative assets
Interest rate lock commitments (bank segment)1
$
—
$
88
$
—
$
—
$
9
$
—
Forward commitments (bank segment)1
51
—
—
18
—
—
Interest rate swap (Other segment)2
—
1,203
—
—
1,321
—
$
51
$
1,291
$
—
$
18
$
1,330
$
—
Derivative liabilities
Interest rate swap (Other segment)2
$
—
$
540
$
—
$
—
$
472
$
—
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.
There were no transfers of financial assets and liabilities between Level 1 and Level 2 of the fair value hierarchy during the six months ended June 30, 2023 and 2022.
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
2023
2022
2023
2022
(in thousands)
Beginning balance
$
14,766
$
15,296
$
14,902
$
15,427
Principal payments received
(136)
(131)
(272)
(262)
Purchases
—
—
—
—
Unrealized gain (loss) included in other comprehensive income
—
—
—
—
Ending balance
$
14,630
$
15,165
$
14,630
$
15,165
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, 2023, the weighted average discount rate was 5.48%, which was derived by incorporating a credit spread over the one month London Inter-Bank Offered Rate (LIBOR). Significant increases (decreases) in the weighted average discount rate could result in a significantly lower (higher) fair value measurement.
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. As of June 30, 2023 and December 31, 2022, there were no financial instruments measured at fair value on a nonrecurring basis.
For the six months ended June 30, 2023 and 2022, there were no adjustments to fair value for ASB’s loans held for sale.
59
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 2022 Form 10-K and should be read in conjunction with such discussion and the 2022 annual consolidated financial statements of HEI and Hawaiian Electric and notes thereto included in HEI’s and Hawaiian Electric’s 2022 Form 10-K, as well as the quarterly condensed consolidated financial statements and notes thereto included in Item 1 of this Form 10-Q.
HEI consolidated
Recent developments. In the second quarter of 2023, economic conditions in Hawaii remained stable with seasonally adjusted unemployment rate at 3.0% for June 2023 and total passenger counts higher by 3.4% and 10.8% for the quarter and six months ended June 30, 2023, as compared to the prior quarter and year ended June 30, 2022, respectively. While economic conditions remained stable during the quarter, the Utility’s kWh sales in the second quarter of 2023 were down by 1.8%, compared to the second quarter of 2022 due to the continued adoption of energy efficiency measures and distributed energy resources. 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 the decoupling mechanism.
At the Bank, due to an increase in wholesale borrowings and term certificates, which was driven primarily by strong loan growth in 2022 coupled with an outflow of core deposits which started in the latter half of 2022 and continued through the first half of 2023, the Bank’s net interest margin for the second quarter of 2023 decreased to 2.75%, compared to net interest margin of 2.85% for the prior quarters ended March 31, 2023 and June 30, 2022.
In March 2023, the banking industry experienced significant turmoil with the failures of Silicon Valley Bank and Signature Bank. The failures of these banks were in part due to a significant concentration of deposits in certain industries that contributed to a significant amount of deposit withdrawals that occurred in a short period of time. Both banks had a significant amount of uninsured deposits that exceeded the FDIC insured limits, totaling 88% and 90% for Silicon Valley Bank and Signature Bank, respectively, as of December 31, 2022, which contributed to the “run” on these institutions as depositors became concerned about their bank’s solvency.
As of June 30, 2023, approximately 86% of ASB’s deposits are FDIC insured or fully collateralized. Additionally, ASB’s total deposit base is primarily composed of retail deposits, which represented 85% of the total deposit base as of June 30, 2023. Retail deposits are generally less rate sensitive and less volatile compared to commercial deposits. ASB also remains “well capitalized” and has approximately $3 billion in liquidity, which is nearly three times the amount of uninsured deposits as of June 30, 2023.
ASB’s funding cost, which impacts its net interest margin, is driven by the mix of its funding sources, with the lowest cost source of funding provided by its core deposits. At June 30, 2023, ASB’s year-to-date average core deposits were down approximately 2.9% from year end 2022 balances, which resulted in an increase in ASB’s wholesale borrowings and term certificates to fund loan growth and an in increase in its overall cost of funds. Looking forward, ASB expects that its deposit base will remain relatively flat to down, given the higher interest rate environment, as well as inflationary pressures on customers that may drive increased spending. ASB also expects that the higher interest rate environment will continue to pressure funding costs and its deposit mix, which in turn will affect net interest income and net interest margin.
Since its peak in June of last year, monthly inflation rates have steadily decreased as reflected in the U.S. Consumer Price Index (CPI). Although the inflation rate, as measured by CPI, appears to be cooling off, the rate is still at a moderately-high level of 3% as of June 2023 and inflationary pressures are expected to continue over the near- to medium-term and have led to higher costs for O&M and capital projects and higher interest expense at the Utility and HEI, as well as higher compensation and benefits cost at the bank.
Short-term interest rates have also increased significantly as a result of the Federal Reserve’s ongoing rate increases to the federal funds target rate. The higher interest rate environment has impacted the fair value of the Bank’s investment portfolio, which declined and was recorded as an other comprehensive loss. Unrealized losses on held-to-maturity (HTM) securities are not recorded to other comprehensive loss because ASB has the positive intent and ability to hold the securities till maturity and recover its full investment. At June 30, 2023, the unrealized losses on HTM securities not recorded to other comprehensive losses was approximately $75 million after tax.
For further discussion of the impacts of inflation and other macro-economic factors impacting the Utilities and the Bank, see “Recent Developments” in the Electric Utility and Bank sections below.
60
RESULTS OF OPERATIONS
Three months ended June 30
%
(in thousands)
2023
2022
change
Primary reason(s)*
Revenues
$
895,685
$
895,607
—
Increase for the bank and “other” segments, offset by electric utility segment
Operating income
92,979
86,668
7
Increases for electric utility and bank segments and lower losses for the “other” segment
Net income for common stock
54,610
52,541
4
Higher net income at the electric utility and bank segments, partly offset by higher net loss for the “other” segment. See below for effective tax rate explanation
Six months ended June 30
%
(in thousands)
2023
2022
change
Primary reason(s)*
Revenues
$
1,823,922
$
1,680,675
9
Increase for all segments.
Operating income
186,497
185,944
—
Higher operating income for the electric utility segment, offset by lower operating income for bank segment and increase in operating losses for “other” segment
Net income for common stock
109,331
121,708
(10)
Lower net income at the bank segment and higher net loss for the “other” segment, partly offset by higher net income for the electric utility 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 2023 and 2022 were 21% and 20%, respectively. The Company’s effective tax rates for the first six months of 2023 and 2022 were 21% and 20%, respectively. The effective tax rates were higher for the first three and six months of 2023 primarily due to lower amortization in 2023 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, partially offset by higher nontaxable bank owned life insurance and low-income housing tax credit benefits in 2023.
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), 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).
In the second quarter, the average daily passenger count was 3.4% higher than the comparable period in the prior year, but down 2.7% compared to 2019. The recovery in total passenger counts from the low levels in 2020 thus far has been driven by domestic travelers, with international travelers, primarily Japan, remaining at lower levels, but activity is increasing compared to 2022. In the second quarter, international visitor arrivals (excluding Japan) have continued to increase at a modest pace, but is still 18% below 2019 levels, whereas Japanese visitors are 58% below 2019 levels.
Hawaii’s preliminary seasonally adjusted unemployment rate in June 2023 was 3.0%, which was lower compared to the June 2022 rate of 3.4%. The national unemployment rate in June 2023 was 3.6% compared to 3.6% in June 2022. According to the most recent forecast by UHERO, issued on May 12, 2023, Hawaii’s job sectors are seeing a softening in labor demand, reducing the worker shortage, but are still experiencing hiring challenges. The unemployment rate in Hawaii may rise above 4% by the beginning of 2024 according to UHERO.
Hawaii real estate activity through June 2023, as indicated by Oahu’s home resale market, resulted in a 4.5% decrease in the median sales price ($510,000) for condominiums, and a decrease of 4.5% for single-family homes compared to the same period in 2022, with the June median single-family home price of $1,050,000. The number of closed sales decreased 35.8% for condominiums and 34.6% for single-family residential homes through the second quarter of 2023 compared to 2022.
Hawaii’s petroleum product prices relate to the price of crude oil in international markets. The price of crude oil declined in August 2022 through December 2022 and has remained relatively flat during January 2023 – June 2023.
At its June 14, 2023 meeting, the Federal Open Market Committee (FOMC) decided to raise the federal funds rate target range to 5.0%-5.25% and anticipates ongoing increases as appropriate. With inflation being above the longer-run goal of 2 percent, the FOMC raised the federal funds rate 25 basis points and intends to further reduce the Federal Reserve’s holdings of Treasury securities.
61
UHERO forecasts full year 2023 real GDP growth of 2.6%, an increase in total visitor arrivals of 6.4%, an increase in real personal income of 3.0%, and an unemployment rate of 3.9%. This forecast anticipates the Hawaii economy will avoid an outright recession despite a U.S. recession later in the year looking more likely. Later in the year, domestic travel is expected to weaken due to economic headwinds, while the Japanese market may continue to fall short of expectations. Other risks remain and is dependent on how aggressive the Fed will be at combating inflation now that it is declining, but UHERO expects that Hawaii is likely to avoid a recession.
The Company expects economic conditions in Hawaii to remain relatively stable going forward, supported by a gradual recovery in the international tourism market and increased construction spending in the public sector. 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 financial position or results of operations.
See also “Recent Developments” in the “Electric utility” and “Bank” sections below for further discussion of the economic impact caused by the pandemic.
“Other” segment.
Three months ended June 30
Six months ended June 30
(in thousands)
2023
2022
2023
2022
Primary reason(s)
Revenues
$
4,609
$
1,410
$
8,628
$
2,571
Increase in other sales at Pacific Current subsidiaries.
Operating loss
(5,514)
(6,409)
(11,391)
(10,758)
The second quarters of 2023 and 2022 include $0.6 million and $0.7 million, respectively, of operating income from Pacific Current1. Corporate expenses for the second quarter of 2023 were $1.0 million lower than the same period in 2022, primarily due to lower general and administrative expenses. The first six months of 2023 and 2022 include $0.5 million of operating losses and $1.5 million of operating income, respectively, from Pacific Current1. The higher operating loss is primarily due to lower Pacific Current asset performance. Corporate expenses for the first six months of 2023 were $1.4 million lower than the same period in 2022, primarily due to lower general and administrative expenses.
Gain on sale of equity-method investment
—
—
—
8,123
Gain on sale of an equity-method investment at Pacific Current in first quarter of 2022.
Net loss
(10,893)
(9,060)
(21,743)
(10,172)
The net loss for the second quarter of 2023 was higher than the net loss for the second quarter of 2022 due to the same factors cited for the change in operating loss and higher interest expense due to higher average borrowings. The net loss for the first six months of 2023 was higher than the net loss for the first six months of 2022 due to the first quarter of 2022 gain on sale of an equity-method investment by Pacific Current, higher interest expense primarily due to higher average borrowings and higher average rates and 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, Mahipapa, which owns a 7.5 MW nameplate biomass facility on Kauai, Alenuihaha Developments, LLC, which owns a collection of renewable energy assets on Oahu and Kauai, Ka‘ie‘ie Waho Company, LLC, which owns a 6 MW solar photovoltaic system that provides renewable energy to Kauai Island Utility Cooperative, and Ka‘aipua‘a, LLC, which is constructing a wastewater treatment and energy recovery facility on Hawaii island; as well as eliminations of intercompany transactions.
62
FINANCIAL CONDITION
Liquidity and capital resources. As of June 30, 2023, there was no balance on HEI’s revolving credit facility or Hawaiian Electric’s revolving credit facility and the available committed capacities under the facilities were $175 million and $200 million, respectively. At the end of the quarter, HEI and Hawaiian Electric had approximately $46 million and nil of commercial paper outstanding, respectively. As of June 30, 2023, ASB’s unused FHLB borrowing capacity was approximately $1.8 billion and ASB had unpledged investment securities of $1.1 billion that were available to be used as collateral for additional borrowing capacity.
As of June 30, 2023 and December 31, 2022, the total amount of available borrowing capacity (net of commercial paper outstanding) under the Company’s committed lines of credit was approximately $329 million and $237 million, respectively.
On October 20, 2022, HEI entered into a term loan facility in the aggregate principal amount of $100 million. On December 28, 2022, HEI drew $35 million on the term loan and on March 31, 2023, HEI drew the remaining $65 million. On May 31, 2023, HEI fully repaid the term loan facility at which time it was terminated. Borrowings under the facility bore interest at Term SOFR, as defined in the agreement, plus an applicable margin and a SOFR spread adjustment. See Note 5 of the Condensed Consolidated Financial Statements for additional information.
On March 16, 2023, HEI executed a private placement under which HEI authorized the issue and sale of $100 million of unsecured senior notes that were fully drawn on May 30, 2023. The proceeds of the notes, HEI Series 2023A for $39 million and HEI Series 2023B for $61 million, were used to repay the $100 million term loan facility on May 31, 2023. The HEI Series 2023A and 2023B bear interest at 6.04% and 6.10%, respectively and are due June 15, 2028 and June 15, 2033, respectively. See Note 5 of the Condensed Consolidated Financial Statements for additional information.
The Company believes that its cash and cash equivalents, expected operating cash flow from subsidiaries, existing credit facilities, and access to the capital markets will be sufficient to meet the Company’s cash requirements over the next 12 months and beyond based on its current business plans. However, the Company expects that its liquidity will continue to be moderately impacted at the Utilities due to higher working capital requirements resulting from lingering COVID-19 impacts to the local economy and elevated fuel prices. For the Utilities, while fuel prices have moderated from its highs in 2022, they remain elevated and have increased the cost of carrying fuel inventory and have also resulted in higher customer accounts receivable balances as fuel is consumed and billed to customers. While the accounts receivable balance has decreased since December 2022, it remains elevated coming out of the pandemic and has led to higher bad debt expense and higher write-offs in 2022 and year-to-date June 2023, following the end of the moratorium on disconnections. The higher bad debt expense is expected to continue until the Utilities return to pre-pandemic collection practices for delinquent accounts. As of June 30, 2023, approximately $24.3 million of the Utilities’ accounts receivables were over 30 days past due. Of the over 30 days past due amounts, approximately 53% were on payment plans. In addition to the cash flow impact from delayed collection of accounts receivable, lower kWh sales relative to the level of kWh sales approved in the last rate case generally result in delayed timing of cash flows, resulting in higher working capital requirements (see “Recent Developments” in the Electric utility section below). At this time, the delay in customer cash collections has not significantly affected the Company’s liquidity. The Company is prepared to address, if needed, the potential financing requirement related to the delayed timing of customer collections.
At ASB, liquidity remains at satisfactory levels. ASB’s cash and cash equivalents was $168 million as of June 30, 2023, compared to $156 million as of December 31, 2022. ASB remains well above the “well capitalized” level under the FDIC Improvement Act prompt correction action capital category, and while the Hawaii economic outlook remains stable, there are emerging risks from potential continued turmoil in the banking industry, inflation, and the tightening of monetary policy that increase the risk of a recession, which could create increased uncertainty regarding the impact on loan performance and the allowance for credit losses (see “Recent Developments” in the Bank section below).
If further liquidity is deemed necessary, which is not contemplated at this time, the Utilities could also reduce the pace of capital spending related to non-essential projects. Additionally, the Company has the option to issue new shares rather than purchase currently outstanding shares on the open market to satisfy share issuances under its Dividend Reinvestment and Stock Purchase Plan program. The estimated amount of equity capital that could be raised by issuing new shares, rather than utilizing open market purchases, is estimated to be approximately $25 million to $30 million on an annual basis, based on historical demand, but such future amount is dependent on a number of factors, including, without limitation, future share prices, number of shares and participants in the DRIP program, and the amount of new investment in HEI’s stock by DRIP participants.
HEI material cash requirements. HEI’s material cash requirements include: Utility capital expenditures, labor and benefit costs, O&M expenses, fuel and purchase power costs, and debt and interest payments; investments in loans and investment securities at the Bank; labor and benefits costs, shareholder dividends and debt and interest payments at HEI; and HEI equity contributions to support Pacific Current’s sustainable infrastructure investments.
63
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 short-term and long-term material cash requirements. However, the economic impact of higher fuel prices, inflation, higher interest rates and tightening of monetary policy create significant uncertainty, and the Company cannot predict the future effects that these factors 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, 2023
December 31, 2022
Short-term borrowings—other than bank, net of discount
$
46
1
%
$
173
3
%
Long-term debt, net—other than bank
2,572
52
2,385
50
Preferred stock of subsidiaries
34
1
34
1
Common stock equity
2,249
46
2,202
46
$
4,901
100
%
$
4,794
100
%
HEI’s commercial paper borrowings and line of credit facility were as follows:
Average balance
Balance
(in millions)
Six months ended June 30, 2023
June 30, 2023
December 31, 2022
Commercial paper
$
39
$
46
$
50
Line of credit draws on revolving credit facility
—
—
—
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 2023 was $99 million. As of June 30, 2023, available committed capacity under HEI’s line of credit facility was $175 million.
On July 28, 2023, Fitch Ratings, Inc. upgraded HEI’s long-term issuer default rating to “BBB+” from “BBB”, its short-term issuer default rating and short-term senior unsecured rating to “F2” from “F3”, and revised HEI’s outlook to “Stable” from “Positive”. These ratings are not recommendations to buy, sell or hold any securities. See “Credit and Capital Market Risk” in Item 1A. Risk Factors in HEI’s and Hawaiian Electric’s 2022 Form 10-K.
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, 2023 and 2022 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 2023, net cash provided by operating activities of HEI consolidated was $372 million. Net cash used by investing activities for the same period was $283 million, primarily due to capital expenditures, ASB’s net increase in loans receivable and purchases of loans held for investment, partly offset by ASB’s receipt of investment security repayments and maturities, proceeds from the sale of commercial loans and a net decrease in FHLB stock. Net cash provided by financing activities during this period was $26 million as a result of several factors, including net increase in ASB’s other bank borrowings and long-term debt, partly offset by net decreases in ASB’s deposit liabilities and short-term borrowings, repayment of long-term debt and payment of common stock dividends. During the first six months of 2023, Hawaiian Electric and ASB (through ASB Hawaii) paid cash dividends to HEI of $65 million and $25 million, respectively.
Dividends. The payout ratios for the first six months of 2023 and full year 2022 were 72% and 64%, respectively. On February 10, 2023, the HEI Board of Directors approved a 1 cent increase in the quarterly dividend from $0.35 per share to $0.36 per share, starting with the dividend in the first quarter of 2023. 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, 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.
64
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 44 to 45, 64, and 77 to 78 of the MD&A included in Part II, Item 7 of HEI’s and Hawaiian Electric’s 2022 Form 10-K.
Following are discussions of the results of operations, liquidity and capital resources of the electric utility and bank segments.
65
Electric utility
Recent developments. See also “Recent developments” in HEI’s MD&A.
In the second quarter of 2023, kWh sales volume decreased 1.8% compared to the same period in 2022. Although electricity prices have decreased since the end of 2022, elevated prices over the past year have continued to impact electricity consumption. Additionally, the continued adoption of energy efficiency measures and distributed energy resources contributed to the reduction of kWh sales.
Fuel costs have risen rapidly beginning in 2022 and have decreased year-to-date through June 30, 2023, but remain elevated. Although the Utilities are able to pass through fuel costs to customers and have limited fuel cost exposure through a 2% fuel-cost risk sharing mechanism (approximately $3.7 million maximum exposure annually), higher customer bills could reduce customers’ ability to pay timely or increase the risk of non-payment. In addition, the higher customer bills may lead the PUC to consider other actions to limit or delay any proposed increase in rates in order to mitigate the overall bill impact of rising fuel prices. The rising fuel costs are not expected to materially impact the Utilities’ financial position at this time.
In June 2023, the consumer price index moderated to 3% from a peak of 9.1% in June 2022. In Hawaii, the May 2023 Urban Hawaii (Honolulu) Consumer Price Index (CPI) also declined from its peak, with an increase of 2% over the last 12 months. Under the PBR framework, inflation risk for the Utilities is mitigated by an Annual Rate Adjustment (ARA), which is based on a formula that includes a compounded and non-compounded portion.
•The compounded portion of the ARA adjustment includes an adjustment for inflation based on the estimated change in Gross Domestic Product Price Index (GDPPI) for the upcoming year, less a predetermined annual productivity factor (currently set at zero), less a 0.22% customer dividend, applied to a basis equal to test year target revenues plus the RAM Revenue adjustments in effect prior to the implementation of PBR, plus the prior adjustment year’s compounded portion of the ARA adjustment. The GDPPI adjustment is determined using the forecasted GDPPI in October, which is effective for the following calendar year. For the 2022 calendar year, GDPPI was measured at 2.78% (net of the 0.22% customer dividend) in October 2021 and was effective in rates on January 1, 2022. For the 2023 calendar year, the forecasted 2023 GDPPI was 3.68% (net of the 0.22% customer dividend), measured in October 2022, and became effective in rates on January 1, 2023.
•The non-compounded portion of the ARA adjustment includes a subtractive component, representing the management audit savings commitment, or refund to customers, which was approved by the PUC for the years 2021 through 2025.
Operation and maintenance expenses in the second quarter of 2023 were higher by approximately $11 million or 9% as compared to the same period in 2022. The increase was partly due to higher transmission and distribution (T&D) preventive and corrective maintenance resulting primarily from more trouble calls. Higher costs due to inclement weather related issues, higher outside consulting costs on various customer service and information technology projects, and higher labor and employee benefits also contributed to the increase. The Utilities expect T&D costs to moderate for the remainder of the year and continue to focus on managing overall operation and maintenance costs efficiently.
Customer accounts receivable decreased in 2023 by $79.1 million, or 27% with the number of accounts past due decreasing by 14% since December 31, 2022. The decrease in accounts receivables was primarily driven by payment on a large delinquent commercial customer account, payments on installment plans, receipt of government and other program assistance, and higher cash receipts associated with increased disconnection efforts. At this time, while accounts receivable balances remain elevated compared to pre-pandemic levels, the higher balances have not significantly affected the Utilities’ liquidity. The Utilities are prepared to address, if needed, the financing requirement related to the delayed timing of cash flows collected under the decoupling mechanism through the Revenue Balancing Account and the impact of higher fuel prices on accounts receivable balances. See “Financial Condition—Liquidity and capital resources” for additional information.
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. The Utilities deferred COVID-19 related costs through a PUC approved period that ended on December 31, 2021. In the second quarter of 2022, the Utilities filed an application to seek recovery of the COVID-19 deferred costs, not to exceed the amount of $27.8 million. On July 31, 2023, the Utilities submitted their most recent Supplemental Report to the PUC, reflecting the updated request amount of $9.1 million, which was a decrease from the original requested amount due to cash collections on past due accounts.(See discussion under “Regulatory assets for COVID-19 related costs” in Note 3 of the Condensed Consolidated Financial Statements).
Regulatory Developments. On November 15, 2021, President Biden signed into law the $1.2 trillion Infrastructure Investment and Jobs Act (IIJA), which includes approximately $550 billion of new federal spending to be allocated over the next five years through various programs. The funding will help our state achieve its sustainability goals, including renewable energy, resilience, decarbonization, while also prioritizing economic development, equity and affordability. The Utilities are
66
pursuing potential grant funding of projects under various programs including, but not limited to, in partnership with other organizations. To date, the Utilities have three full applications that are pending decisions and are the primary applicants for two of the submissions. If all three applications are awarded, it would allow for reduction up to $151 million in the Utilities’ recovery under the Exceptional Project Recovery Mechanism (EPRM) and cost to customers. See “Regulatory proceedings” in Note 3 of the Condensed Consolidated Financial Statements for additional discussions.
On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (IRA) that provides for $258 billion in energy-related provisions over a 10-year period. The provisions of the IRA are intended to, among other things, lower gasoline and electricity prices, incentivize clean energy investment and promote reductions in carbon emissions. The Utilities are exploring clean energy tax incentives included in the IRA that may further reduce the Utilities’ recovery under the EPRM and cost to customers.
The Utilities cannot predict the ultimate timing and success of securing funding from any federal government programs.
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.”
67
RESULTS OF OPERATIONS
Three months ended June 30
Increase
2023
2022
(decrease)
(dollars in millions, except per barrel amounts)
$
794
$
819
$
(25)
Revenues. Net decrease largely due to:
$
(55)
lower purchased power energy prices, lower kWh purchased, and lower PPAC revenues1
1
higher MPIR revenue
1
one-time true-up of billable costs
1
higher investment interest income
3
higher fuel-cost risk sharing adjustment
10
higher revenue from ARA adjustments
12
higher kWh generated, partially offset by lower fuel oil prices2
280
270
10
Fuel oil expense2. Net increase largely due to higher kWh generated, partially offset by lower fuel oil prices
168
218
(50)
Purchased power expense1, 2. Net decrease largely due to lower kWh purchased, lower purchased power energy prices, and lower charges due to the AES plant closure on September 1, 2022, offset in part by the addition of Mililani I and Waiawa solar-plus-storage projects
136
125
11
Operation and maintenance expenses. Net increase largely due to:
4
higher transmission and distribution operation and maintenance expense
2
higher outside costs for Customer Service Support Improvement and Information and Technology Services support
2
increased labor and employee benefits costs
1
increased storm costs due to inclement weather
1
higher legal and other fees associated with environmental matters
1
higher facilities expenses
(2)
fewer generating facility overhauls performed
136
135
1
Other expenses. Increase due to higher depreciation expense due to increasing investments to integrate more renewable energy and improve customer reliability and system efficiency and higher payroll taxes due to higher unemployment tax rate, partially offset by lower revenue taxes
74
71
3
Operating income. Increase largely due to higher ARA and MPIR revenue, and higher AFUDC, offset in part by higher operation and maintenance expenses, higher depreciation expense, and higher payroll taxes
59
57
2
Income before income taxes. Increase largely due to higher operating income, partially offset by higher interest expense due to increased borrowings
45
44
1
Net income for common stock. See below for effective tax rate explanation
1,994
2,031
(37)
Kilowatthour sales (millions)3
$
122.69
$
139.51
$
(16.82)
Average fuel oil cost per barrel
68
Six months ended June 30
Increase
2023
2022
(decrease)
(dollars in millions, except per barrel amounts)
$
1,625
$
1,528
$
97
Revenues. Net increase largely due to:
$
135
higher fuel oil prices and higher kWh generated2
20
higher revenue from ARA adjustments
3
higher MPIR revenue
3
higher fuel-cost risk sharing adjustment
2
higher investment interest income
1
one-time true-up of billable costs
(66)
lower kWh purchased and lower PPAC revenues, partially offset by higher purchased power energy prices1
614
491
123
Fuel oil expense2. Net increase largely due to higher fuel oil prices and higher kWh generated
321
382
(61)
Purchased power expense1, 2. Net decrease largely due to lower kWh purchased and lower charges due to the AES plant closure on September 1, 2022, partially offset by higher purchased power energy prices
265
250
15
Operation and maintenance expenses. Net increase largely due to:
6
increased labor and employee benefits costs
4
higher transmission and distribution operation and maintenance expense
3
increased storm costs due to inclement weather
3
higher outside costs for Customer Service Support Improvement and Information and Technology Services support
1
higher facilities expenses
(3)
fewer generating facility overhauls performed
275
260
15
Other expenses. Increase due to higher revenue taxes, coupled with higher depreciation expense due to increasing investments to integrate more renewable energy and improve customer reliability and system efficiency and higher payroll taxes due to higher unemployment tax rate
150
145
5
Operating income. Increase largely due to higher ARA and MPIR revenue, and higher AFUDC, offset in part by higher operation and maintenance expenses, higher depreciation expense, and higher payroll taxes
120
116
4
Income before income taxes. Increase largely due to higher operating income, partially offset by higher interest expense due to higher rates and increased borrowings
92
91
1
Net income for common stock. Increase due to higher income before income taxes. See below for effective tax rate explanation
3,930
3,988
(58)
Kilowatthour sales (millions)3
$
131.48
$
120.54
$
10.94
Average fuel oil cost per barrel
472,482
470,812
1,670
Customer accounts (end of period)
1The 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.
2The rate schedules of the electric utilities currently contain energy cost recovery clauses (ECRCs) through which changes in fuel oil prices and certain components of purchased energy costs are passed on to customers.
3 kWh sales were lower compared to the same quarter in prior year primarily due to elevated prices over the past year which continued to impact electricity consumption. In addition, the continued adoption of energy efficiency measures and distributed energy resources contributed to the reduction in kWh sales.
The Utilities’ effective tax rates for the second quarters of 2023 and 2022 were 22% and 21%, respectively. The Utilities’ effective tax rates for the first six months of 2023 and 2022 were 22% and 21%, respectively. The effective rates were higher for the first three and six months of 2023 primarily due to lower amortization in 2023 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 8.2% for the twelve months ended June 30, 2023 and June 30, 2022.
69
The net book value (cost less accumulated depreciation) of utility property, plant and equipment (PPE) as of June 30, 2023 amounted to $5.1 billion, of which approximately 24% related to generation PPE, 67% related to transmission and distribution PPE, and 9% related to other PPE. Approximately 7% 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 its decarbonization goals that are aligned with 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” 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’ decarbonization and renewable energy commitments, facilitating and promoting beneficial electrification, and deploying carbon removal and offsets among other levers to reduce statewide emissions.
In the fourth quarter of 2021, the Utilities outlined their Climate Action Plan to cut carbon emissions from power generation 70% by 2030, compared to a 2005 baseline. The emissions covered by this goal include stack emissions from generation owned by Hawaiian Electric and IPPs who sell electricity to the Utilities. The 2030 commitment would provide a significant portion of the reduction the entire Hawaii economy needs to meet the U.S. target of cutting carbon emissions by at least 50% economy-wide by 2030. Hawaiian Electric has also committed to achieving net zero carbon emissions from power generation by 2045 or sooner. Key elements of the 2030 plan include the closure of the state’s last coal-fired IPP plant that occurred in September 2022, increasing rooftop solar by more than 50% over 2021 levels, retiring six fossil fuel generating units, adding at least 1 GW of renewable generation to what was already in place in 2021, increasing grid-scale and customer-owned storage, expanding geothermal resources, and creating customer incentives for using clean, lower-cost energy at certain times of the day and using less fossil-fueled energy at night. The retirement of fossil-fueled generating units to achieve the Utilities’ 70% decarbonization goal is consistent with state policy and supported by Hawaii State law. See “Forecast of capital expenditures—Liquidity and capital resources” for a discussion of potential capital expenditures related to decarbonization efforts.
On September 1, 2022, the last coal-fired IPP plant in the state, providing approximately 10% of Oahu’s generation, ceased operations, removing a significant source of GHG emissions from the Utilities’ generation mix. In advance of the retirement of the coal-fired IPP plant, the Utilities developed plans, including contingency plans, to ensure reliable service through the transition period. These plans include the anticipated addition of renewable energy/storage projects, reserve capacity from existing generation sources, the acceleration of maintenance work during periods with anticipated higher reserve levels, and multiple demand response/DER programs. For example, a 39 MW solar-plus-storage project from Stage 1 renewable PPAs reached commercial operations in mid-2022 and a 36 MW Stage 1 solar-plus-storage project reached commercial operations in early 2023. It is expected that a 185 MW standalone storage facility from Stage 2 renewable PPAs will reach commercial operations by the end of August 2023.
While the Utilities continue to execute on their plans, delays and cancellations in the commercial operation of new renewable third-party generation resources and higher costs as a result of supply chain issues and inflationary pressures, as well as federal policies related to solar panel imports, have slowed the pace of progress toward achieving the Utilities’ 70% GHG emissions reduction goal. Despite these headwinds, the Utilities currently believe that the 70% GHG emissions reduction target remains achievable; however, additional renewable energy procurements and timely construction of significant generating capacity beyond the Stage 3 RFPs are required. Future events that impact the pace and amount of newly installed renewable variable and firm generation, including unexpected issues with existing generation, among other factors, could disrupt the ability of the Utilities to deliver reliable service. Also, see the “Developments in renewable energy efforts—New renewable PPAs” section below.
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
70
atmospheric carbon and greenhouse gases than emitted within the state by 2045. The Utilities’ strategies and plans are fully aligned in meeting these targets (see also Integrated Grid Planningbelow).
The Utilities have made significant progress on the path to clean energy and have been successful in achieving RPS goals. To date the Utilities have met all of the statutory RPS goals, including exceeding the last milestone RPS target of 30% for 2020, where it achieved an RPS of 34.5%. In July 2022, Governor Ige signed Act 240 (H.B.2089), that amended the RPS calculation from renewable energy as a percentage of sales to renewable energy as a percentage of total generation. The amended RPS calculation results in a lower calculated percentage than the amount calculated under the previous methodology. For example, the 2022 RPS achieved under the revised RPS calculation would have been 31.8% versus 39.1% under the prior method. The change in the definition is to be applied prospectively to future milestone measurements and will require that the Utilities acquire more renewable energy than under the previous RPS calculation to comply with the RPS milestones; however, the Utilities expect to continue to meet the RPS milestones under the amended RPS law. (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 total generation in 2022, a 1% shortfall in meeting the 2030 RPS requirement of 40% would translate into a penalty of approximately $2.1 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. Conversely, the Utilities have incentives under PIMs that provide a financial reward for accelerating the achievement of renewable generation as a percentage of total generation, including customer supplied generation. The Utilities may earn a reward for the amount of system generation above the interpolated statutory RPS goal at $20/MWh in 2022, $15/MWh in 2023, and $10/MWh for the remainder of the multi-year rate period.
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.
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 trended lower over time as privately-owned DER have been added to the grid and energy efficiency measures have been put into place. Other regulatory mechanisms under the PBR framework reduce some of the regulatory lag during the multi-year rate plan (MRP), such as the annual revenue adjustment to provide annual changes in utility revenues, including inflationary adjustments, and the exceptional project recovery mechanism, which allows the Utilities to recover and earn on certain approved eligible projects placed into service. See “Regulatory proceedings” in Note 3 of the Condensed Consolidated Financial Statements.
Integrated Grid Planning. Achieving high levels of renewable energy and a carbon free electric system will require modernizing the grid through coordinated energy system planning in partnership with local communities and stakeholders. To accomplish this, the Utilities are implementing an innovative systems approach to energy planning intended to yield the most cost-effective renewable energy and decarbonization pathways that incorporates customer and stakeholder input.
The Integrated Grid Planning (IGP) process 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. On May 12, 2023, the Utilities submitted their final Integrated Grid Plan: A pathway to a clean energy future for stakeholder and public comments. The Integrated Grid Plan proposes actionable steps to decarbonize the electric grid on the State of Hawaii’s timeline, with a flexible framework that can adapt to future technologies. The Integrated Grid Plan is the culmination of more than five years of partnership with stakeholders and community members across the islands. Together, they forecasted future energy needs and identified strategies to meet Hawaii’s growing energy demand with 100% renewable resources.
71
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 132 MW of grid services with focus on capacity reduction (60 MW) similarly in response to the potential reserve shortfall from the AES coal plant retirement that occurred on September 1, 2022. The Utilities executed a GSPA for a total grid services amount of 97.4 MW and filed with the PUC to request approval on March 16, 2022. On July 12, 2023, the PUC approved the GSPA with modifications. The Utilities will work with an aggregator to amend the GSPA and submit to the PUC for approval by the fourth quarter of 2023.
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. As of June 30, 2023, the Utilities have received and approved the applications totaling approximately 26.5 MW on Oahu.
On March 30, 2022, the Utilities filed with the PUC to request expanding the EDRP for up to 15 MW on the island of Maui and received PUC approval on May 20, 2022. The EDRP on Maui became effective as of June 1, 2022. Subsequently on June 23, 2022, the PUC approved the cost recovery of the additional incentives for both Oahu and Maui through the Demand Side Management Surcharge. As of June 30, 2023, the Utilities have received and approved the applications totaling approximately 3.9 MW on Maui.
On October 31, 2022, the PUC issued an order, directing the Utilities to solicit comments from all interested parties and stakeholders on the Utilities’ Draft Grid Services RFP filed on June 30, 2022. The proposed Draft Grid Services RFP focused only on Maui and is seeking 15 MW of grid services. Hawaiian Electric issued the RFP on February 1, 2023 and bids are due on August 31, 2023.
Grid modernization. The overall goal of the Grid Modernization Strategy is to deploy modern grid investments at an appropriate priority, sequence and pace to cost-effectively maximize flexibility, minimize the risk of redundancy and obsolescence, deliver customer benefits and enable greater DER and renewable energy integration. Under the Grid Modernization Strategy, 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. On March 25, 2019, the PUC approved a plan for the Utilities to implement Phase 1 of their Grid Modernization Strategy, which is the proportional deployment of advanced metering infrastructure (AMI). On February 28, 2022, the PUC expanded the scope of Phase 1 to the full service territory with a completion date set for the third quarter of 2024. The estimated cost of full deployment (including proportional deployment) is approximately $143 million in capital and deferred software cost and is expected to be incurred over five years. As of June 30, 2023, approximately $101 million of capital and deferred software cost has been incurred to date under Phase 1 and is currently being recovered under the MPIR mechanism until such costs are included in base rates. On June 24, 2022, the PUC approved with certain conditions the Utilities’ request to aggregate the per-meter and network cost caps and to recover O&M costs associated with full-service territory AMI deployment under the MPIR mechanism. As of June 30, 2023, the Utilities have deployed about 277,000 advanced meters, servicing approximately 60% of total customers.
The Utilities filed an application with the PUC on September 30, 2019 for an Advanced Distribution Management System (ADMS) as part of Phase 2 of their Grid Modernization Strategy implementation. However, on December 30, 2019, the PUC suspended the Utilities’ application for the ADMS pending the Utilities’ filing of a supplemental application for the broad deployment of field devices. This supplement and update to the Grid Modernization Strategy Phase 2 field devices application was filed on March 31, 2021. A PUC order was issued on April 27, 2021, unsuspending and resuming consideration of the Phase 2 Application. The Utilities filed the reply statement of position on October 15, 2021, completing the discovery phase of the docket. On November 16, 2021, the PUC suspended the Utilities’ ADMS and Phase 2 field device application to focus the Utilities’ attention on completing Phase 1. The Utilities filed a Motion for Reconsideration with the PUC in response to the suspension, but the motion was denied. The PUC subsequently clarified that the Utilities may resume the Phase 2 docket no earlier than six months before Phase 1 is scheduled to be completed in the third quarter of 2024. Resumption of the Phase 2 proceeding would likely commence six months prior to the scheduled completion date selected by the PUC. On April 17, 2023, the Utilities filed a motion with the PUC, requesting the suspended docket to be reopened and to allow the Utilities to file an updated and supplemented application for updated project costs. The estimated cost for the implementation of Phase 2 over six years, which includes capital, deferred software costs and O&M costs, is $113 million. On May 3, 2023, the PUC granted the motion to resume the docket, and hosted a technical conference on the updated application on May 19, 2023.
72
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, totaling 8 MW of solar photovoltaic (PV) only with one credit rate for each island, closed on April 9, 2020. Two phase 1 projects (28.32 kW on Maui and 270 kW on Oahu) have been operational for two years, with four additional phase 1 projects expected to become operational in 2023 (third quarter: Oahu: 3,000kW; fourth quarter: Hawaii Island: 750kW and Molokai: 250kW) and 2024 (fourth quarter: Oahu: 1,720kW).
The second phase, which commenced on April 9, 2020 and subsequently expanded on July 27, 2021, allows over 250 MW across all Hawaiian Electric service territories in two tranches for small (under 250 kW), mid-tier 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, 23 MW of capacity for dedicated-LMI projects were awarded on November 15, 2022 through three island specific RFPs for Oahu, Maui and Hawaii Island. LMI projects do not have a size cap nor do they decrease the 250 MW capacity available to other projects. The dedicated-LMI projects are expected to become operational in 2025.
The Utilities issued the CBRE Tranche 1 RFPs for Oahu, Maui and Hawaii on April 14, 2022. The RFPs closed on August 17, 2022, and proposals were evaluated. Tranche 1 projects, which are greater than or equal to 250 kW, were awarded on February 22, 2023. The Tranche 1 projects are expected to become operational in 2025 or 2026.
For Lanai, the Utilities combined the previously issued Variable Renewable Dispatchable Generation Paired with Energy Storage RFP and the CBRE RFP to optimize the benefits of procuring renewable energy, spur development and increase 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.
One CBRE proposal for Lanai was selected but negotiations were terminated on June 15, 2022. With the concurrence of the Independent Observer, a replacement proposal was selected on July 1, 2022. On July 25, 2022, the Utilities announced the selection of a new developer for the Lanai CBRE RFP. On September 21, 2022, the Utilities were informed by Pulama Lanai of a project being planned on Lanai to remove the two large resorts from the grid, which represent approximately 40% of the load of the island and raises great uncertainty around the future energy needs for Lanai. On September 28, 2022, the Utilities notified the PUC that ongoing negotiations for the Lanai CBRE project will continue, but that the Utilities will not execute a PPA at this time given the uncertainty due to the Pulama Lanai notification. On Molokai, proposals were only received from a single community co-op group. After evaluation of these proposals and with concurrence of the independent observer, the Utilities filed a letter on September 9, 2022, proposing to close the Molokai CBRE RFP and to work with the lone bidder to improve certain aspects of its two proposed projects outside of the RFP process for the benefit of the residents of Molokai. Discussions are ongoing.
The Utilities CBRE Phase 2 Rule 29 became effective on March 10, 2022. The Utilities are currently accepting project applications for small CBRE projects less than 250 kW in size. The PUC reserved 45 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. The Utilities have developed a CBRE Portal where Subscriber Organizations can apply for small project capacity and manage subscribers for all CBRE projects in the program. Customers can also use the CBRE Portal to solicit quotes, compare, and subscribe to a project once the Subscriber Organization has added their project to the portal.
Microgrid services tariff proceeding. In enacting Act 200 of 2018, the Hawaii legislature found that Hawaii’s residents and businesses were vulnerable to disruptions in the islands’ energy systems caused by extreme weather events or other disasters, and stated its belief that the use of microgrids would build energy resiliency into Hawaii’s communities, thereby increasing public safety and security. The purpose of Act 200 was therefore to encourage and facilitate the development and use of microgrids through the establishment of a standard microgrid services tariff. In July 2018, pursuant to Act 200, the PUC opened a proceeding to investigate the establishment of a microgrid services tariff. In August 2019, the PUC issued an order prioritizing items for resolution in the docket and directed the Parties to establish working groups (the Working Group) to address issues identified by the PUC.
On May 27, 2021, the Utilities filed the Microgrid Service Tariff. On September 21, 2021, the PUC provided guidance for Phase 2 of the Microgrid Tariff proceeding, specifically identifying the objective for Phase 2 to promote self-sufficiency and resilience among microgrid project operators, as well as to further streamline the Microgrid Services Tariff where applicable. Furthermore, the PUC instructed Parties to recommend priority topics, along with supporting rationale to better inform the topics that will be discussed during this phase of the proceeding, which the parties submitted by October 21, 2021.
On April 1, 2022, the PUC established its Prioritized Issues for Resolution for Phase 2 of the Microgrid proceeding, which includes the following: 1) Microgrid Compensation and Grid Services; 2) Utility Compensation; 3) Customer Protection and
73
Related Considerations; 4) Interconnection; and 5) Working Group coordination with related microgrid and resilience Initiatives at Hawaiian Electric and government agencies. Furthermore, the PUC established a procedural schedule to consist of quarterly status conference meetings with the PUC, a Phase 2 Working Group Report, draft of a revised Microgrid Service Tariff, Party comments to the proposed Microgrid Service Tariff, followed by a PUC D&O.
On June 30, 2022, the PUC provided further guidance to the Working Group to prioritize discussion of the microgrid types in the following order: 1) Hybrid Microgrid - Third Party Developer using Utility lines/infrastructure; 2) Hybrid Microgrid - Utility Project with Partners; and 3) Customer Microgrid. Additionally, the PUC instructed the Working Group to discuss microgrid compensation and continue the involvement of microgrid developers in working group meetings.
The Working Group met from April 2022 through October 2022 to discuss the PUC’s objectives and respond to the Phase 2 priority issues. On October 31, 2022, the PUC issued a guidance letter and advised that the Working Group propose a new timeline for the Report. The Utilities and the Consumer Advocate filed a joint letter with a revised timeline on November 10, 2022. On November 21, 2022, the PUC issued an order to suspend the Phase 2 procedural schedule while it reviews the joint letter.
Decoupling. See “Decoupling” in Note 3 of the Condensed Consolidated Financial Statements for a discussion of decoupling.
Regulated returns. As part of the PBR Framework’s annual review cycle, the Utilities 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 achieved rate-making ROACE outside of a 300 basis points dead band above and below the current authorized rate-making ROACE of 9.5% for each of the Utilities. Earnings sharing credits or recoveries will be included in the biannual report (formally known as annual decoupling filing) to be filed with the PUC in the spring of the following year. Results for 2022, 2021 and 2020 did not trigger the earnings sharing mechanism for the Utilities.
Actual and PUC-allowed returns, as of June 30, 2023, were as follows:
%
Rate-making Return on rate base (RORB)*
ROACE**
Rate-making ROACE***
Twelve months ended
June 30, 2023
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Utility returns
7.36
5.83
5.82
8.95
6.48
6.30
9.77
7.06
7.06
PUC-allowed returns
7.37
7.52
7.43
9.50
9.50
9.50
9.50
9.50
9.50
Difference
(0.01)
(1.69)
(1.61)
(0.55)
(3.02)
(3.20)
0.27
(2.44)
(2.44)
* Based on recorded operating income and average rate base, both adjusted for items not included in determining electric rates.
** Recorded net income divided by average common equity.
*** ROACE adjusted to remove items not included by the PUC in establishing rates, such as incentive compensation.
The gap between PUC-allowed ROACEs and the ROACEs achieved is primarily due to the exclusion of certain expenses from rates (for example, incentive compensation and charitable contributions), and depreciation, O&M expense and return on rate base that are in excess of what is currently being recovered through rates (the last rate case plus authorized RAM adjustments and ARA revenues).
Regulatory proceedings. On December 23, 2020, the PBR D&O was issued, establishing the PBR Framework. The PBR Framework implemented a five-year 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. See also “Regulatory proceedings” in Note 3 of the Condensed Consolidated Financial Statements.
Developments in renewable energy efforts.The Utilities’ renewable energy goals depend, in large part, on the success of renewable projects developed and operated by independent power producers. Beginning in 2017, the Utilities embarked on an ambitious procurement effort, selecting multiple solar plus storage projects to help reach the Utilities renewable portfolio standards goals as well as to assist the Utilities in retiring fossil fuel generation. Several of the recently procured projects have experienced delays as a result of supply chain disruptions caused by impacts from the COVID-19 pandemic, solar product detentions at U.S. ports of entry ordered by the U.S. Customs and Border Protection agency, and unforeseen site conditions which resulted in unanticipated project costs or in some cases the inability to effectively use previously identified project sites. These impacts have resulted in five Stage 2 projects declared null and void by the independent power producers and one Stage 2 project mutually terminating its PPA with the Utilities. Projects have also indicated potential impacts from the investigation launched by the U.S. Department of Commerce on March 28, 2022, in response to a request by Auxin Solar Inc. in regard to
74
solar panel imports. On June 6, 2022, President Biden created a bridge to temporarily facilitate U.S. solar deployers’ ability to source certain imported solar modules and cells free of certain duties for 24 months in order to ensure the U.S. has access to a sufficient supply of solar modules to meet electricity generation needs. The Utilities are in discussions with several project developers regarding requests to increase previously approved prices and extend guaranteed commercial operations dates for those projects in order to ensure their viability given the impact of these recent market conditions. Significant project delays or failures of these projects increase the risk of the Utilities not meeting the renewable portfolio standards or other climate related goals, eligibility for performance incentive mechanisms associated with the speed of increasing renewable generation, and the ability to retire fossil fuel units. 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.
•On November 16, 2021, Hawaii Electric Light and Hawi Renewable Development, LLC (HRD) entered into an Amended and Restated Power Purchase Agreement (HRD ARPPA). Under the HRD ARPPA, HRD would make modifications to upgrade and repower the existing wind facility to enable it to continue to provide up to 10.56 MW of energy at a cost savings for customers. The HRD ARPPA is delinked from the price of fossil fuel and extends the term of the existing PPA by 20 years following the commercial operations date. On December 17, 2021, Hawaii Electric Light filed an application for approval of the HRD ARPPA, requesting a decision no later than June 15, 2022. On January 11, 2023, Hawaii Electric Light and HRD entered into a First Amendment to the HRD ARPPA (First Amendment). The First Amendment includes an extension of the Guaranteed Commercial Operations Date (GCOD) by 26 months to accommodate the delayed delivery of components, and a temporary price increase until HRD recovers its estimated increased costs specified in the First Amendment. The Amendment was conditionally approved by the PUC on July 12, 2023.
•On December 31, 2019, Hawaii Electric Light and Puna Geothermal Ventures entered into an Amended and Restated Power Purchase Agreement (PGV ARPPA). The PGV 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. On March 16, 2022, the PUC issued a D&O, approving the PGV ARPPA, subject to conditions, that include requiring completion of a final environmental review prior to construction. On March 28, 2022, Puna Pono Alliance filed a Motion for Reconsideration seeking reconsideration, modification and/or vacation of the D&O. On June 6, the PUC denied Puna Pono’s Motion for Reconsideration. PGV notified the Utilities that changes in market conditions that transpired since the terms of the PGV ARPPA were negotiated impacted the financial viability of the Project, and that an amendment to the PGV ARPPA was necessary to mitigate the impacts. On March 27, 2023, the Utilities and PGV executed the First Amendment to the PGV ARPPA which increases the capacity payment and extends the GCOD. An application requesting approval of the First Amendment to the PGV ARPPA was filed on April 4, 2023. On June 13, 2023, PGV notified the Utilities of concerns of its ability to timely deliver on the terms of the ARPPA. PGV has been working to re-establish its capacity generation and has continued drilling and plans to drill additional wells, however, this process has taken longer than anticipated and PGV has become increasingly concerned about timely achieving the Contract Firm Capacity of 46 MW. In light of receiving this information and to allow the Utilities and PGV to determine the best path forward, on July 6, 2023 the Utilities asked the PUC to put the procedural schedule on hold for approval of the First Amendment.
•Under a request for proposal process governed by the PUC and monitored by independent observers, in February 2018, the Utilities issued Stage 1 Renewable 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. To date, summarized information for a total of eight 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
7/31/22, 1/11/23, 1/20/23* & 10/31/24
20 & 25
$
34.0
Hawaii Electric Light
2
60
60/240
10/11/24 & 4/21/23
25
19.2
Maui Electric
2
75
75/300
4/28/23* & 10/27/23**
25
17.6
Total
8
274.5
274.5/1,098
$
70.8
* Project delays have resulted in Guaranteed Commercial Operations Date being missed.
** Dates would change upon PUC approval of a PPA amendment.
The Utilities have received PUC approvals to recover the total projected annual payment of $70.8 million for the eight PPAs through the PPAC to the extent such costs are not included in base rates. To date, the Utilities filed seven requests with the PUC for approval of amendments related to previously-approved PPAs for changes in pricing and/or guaranteed commercial operations dates to support completion of the projects while maintaining system reliability.
75
The PUC has approved six amendments and one request filed on July 18, 2023 for Maui is pending PUC approval. On July 31, 2022, Mililani I Solar on Oahu, the first Stage 1 solar-plus-storage project, was placed into service. Waiawa Solar project on Oahu and the AES Waikoloa Solar project on Hawaii Island also reached commercial operations on January 11, 2023 and April 21, 2023, respectively. See also “Stage 1 renewable PPAs” in Note 3 of the Condensed Consolidated Financial Statements.
•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. To date, the Utilities had filed 11 PPAs. Additionally, two GSPAs and two applications for commitments of funds for capital expenditures for approval of the utility self-build projects were filed with the PUC. Of the 11 filed PPAs, six PPAs were declared null and void by the independent power producers and one PPA was mutually terminated. The most recent of these six PPAs was declared null and void by the developer on March 10, 2023; the Utilities filed a notice with the PUC on March 15, 2023. The four remaining projects have received PUC approval. On May 2, and July 31, 2023, the Utilities filed letters with the PUC requesting approval of an amendment to increase price and to change the guaranteed commercial operation date of previously-approved PPAs for Stage 2 on Oahu. One request was approved by the PUC on August 1, 2023, and one request is still pending PUC approval. On July 19, 2023, the PUC approved the second amendment to a previously approved energy storage PPA for Stage 2 on Oahu to allow for partial commissioning. The two GSPAs were approved by the PUC in December 2020. The two utility Self-Build projects are still pending PUC approval.
A summary of the remaining four approved Stage 2 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
3
79
79
/
443
5/17/23**, 9/1/2024, & 4/9/2024
20 & 25
$
30.9
Hawaiian Electric
1
*
N/A
185
/
565
12/30/2022***
20
24.0
Total
4
79
264
/
1,008
$
54.9
* See further discussion under “Review of Interconnection Process and Kapolei Energy Storage Power Purchase Agreement” below.
** Dates would change upon PUC approval of a PPA amendment.
*** Project delays have resulted in Guaranteed Commercial Operations Date being missed.
The total projected annual payment of $54.9 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
* The Utility Self-Build project was denied by the PUC on May 25, 2022 and the Utilities have filed a motion for reconsideration with the PUC.
Tariffed renewable resources.
•As of June 30, 2023, there were approximately 590 MW, 130 MW and 142 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, 2023, an estimated 37% of single family homes on the islands of Oahu, Hawaii and Maui have installed private rooftop solar systems, and approximately 21% of the Utilities’ total customers have solar systems.
76
•The Utilities began accepting energy from feed-in tariff projects in 2011. As of June 30, 2023, there were 44 MW, 2 MW and 6 MW of installed feed-in tariff capacity from renewable energy technologies at Hawaiian Electric, Hawaii Electric Light and Maui Electric, respectively.
Biofuel sources.
•On June 30, 2021, the Utilities issued an RFP for all fuels, including biodiesel, for supply commencing January 1, 2023. The Utilities and Pacific Biodiesel Technologies, LLC (PBT) signed an agreement on December 13, 2021 for supply of biodiesel on all islands commencing January 1, 2023, which was approved by the PUC on December 1, 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 2024.
•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 2024, and will continue with no volume purchase requirements.
Requests for renewable proposals, expressions of interest, and information.
•On November 22, 2021, CBRE RFPs for Molokai and Lanai were opened. The RFP for Lanai sought a single PV paired with storage project, which included a 3 MW portion, reserved for CBRE. The Lanai RFP closed on February 14, 2022 and the Molokai RFP closed on March 1, 2022. A project was selected in the Lanai RFP but negotiations were terminated. On July 1, 2022, a replacement project was selected and negotiations commenced. The RFP for Molokai sought 2.75 MW of new PV paired with storage projects for CBRE generation. No projects were selected in the Molokai RFP. However, with the concurrence of the independent observer, the Utilities are working with the lone bidder outside of the RFP process.
•On March 17, 2022, the CBRE LMI RFPs for Oahu, Maui and Hawaii were opened and proposals were received. In November 2022, seven projects were selected consisting of one standalone PV project on Oahu, three paired PV with storage projects on Maui, and three paired PV with storage projects on Hawaii Island. The Utilities opened the CBRE Tranche 1 RFPs for Oahu, Maui and Hawaii on April 14, 2022. In March 2023, five projects were selected consisting of one paired PV with storage project on Oahu and four standalone PV projects on Hawaii Island. See “Transition to a decarbonized and sustainable energy future—Community-based renewable energy” for additional information.
•The Hawaii Island Stage 3 RFP, seeking 325 GWh per year of energy and 65 MW of renewable firm capacity, was filed on November 7, 2022 and was issued on November 21, 2022. Proposals were received on April 20, 2023. The Stage 3 RFPs for Oahu and Maui opened for bids on January 20, 2023. For Oahu, the Utilities are seeking 500 to 700 MW of renewable firm capacity, and at least 965 GWh of renewable dispatchable energy annually. For Maui, the Utilities are procuring at least 40 MW of renewable firm capacity, and at least 425 GWh of renewable dispatchable energy annually. On March 15, 2023, the PUC denied the Utility’s request to not advance its own proposal to meet the Maui firm capacity need as required under the Framework for Competitive Bidding, and on April 5, 2023, denied the Utility’s motion to modify the Maui RFP to allow a self-build, ordering the Utility to submit a proposal for the firm capacity need, or in the alternative, file a request to suspend the firm generation portion of the Maui RFP to make adjustments as ordered by the PUC, including an extension of the bidding period for firm generation proposals. The Utility filed its request on April 12, 2023, which the PUC granted on April 14, 2023. The updated Maui RFP was filed on April 27, 2023. Proposals for the Oahu RFP and the variable generation portion of the Maui RFP were received on April 20, 2023. The Utility submitted a proposal that is consistent with the reliability requirements under the competitive bidding framework as directed by the PUC. Priority List selections were announced on July 6, 2023 and best and final offers for the Oahu and Hawaii RFPs and the variable generation portion of the Maui RFP were due on July 14, 2023. Final award selection is in October 2023, with negotiations of the PPAs expected to be completed in the later part of 2024. Proposals for the firm generation portion of the Maui Stage 3 RFP are due on August 17, 2023.
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 taking to address projected extensions of GCODs 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
77
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 Utilities report the tracked cost on a monthly basis. The full text of the Order, Motion for Reconsideration and request for a Stay of the Order, and clarification Order as well as the tracked costs can be found on the PUC website at dms.puc.hawaii.gov/dms (Docket No. 2021-0024).
•During the 2022 Legislative Session, the Hawaii State Legislature passed Senate Bill 2474 SD 2 HD 1 CD 1, which was signed into law on June 27, 2022 as Act 201. The law requires that the PUC contract with a qualified consultant to conduct a study on the accessibility of Hawaii’s electric system and procedures for interconnection to Hawaii’s electric system, including but not limited to the timeliness and costs of interconnection. The PUC contracted with PA Consulting to conduct the study as well as act as the Independent Engineer for the Stage 3 Request for Proposal procurement. The report was submitted to the PUC on December 28, 2022 and did not find any wrongdoing on the part of the utility. The report made minor recommendations for Hawaiian Electric to review interconnection related tariff/rules and revise, if necessary, to provide technical clarity in terms of interconnection requirements, to establish a database for the purpose of centralizing all information related to all interconnection projects they manage, including their self-build and IPP-built projects, and to develop comparable interconnection cost metrics for self-build and IPP-built projects so that interconnection costs can be directly compared. The PUC stated its intent to address the recommendations that are directed to Hawaiian Electric through various proceedings related to the interconnection process. Hawaiian Electric will be working on these recommendations. The contracted consultant is also planning a second phase of the study, to be completed in 2023, which will include the assessment and recommendation of remaining issues listed in Act 201 that are not covered in Phase 1.
•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. On June 30, 2021, the Utilities issued two RFPs for all fuels for supply commencing January 1, 2023. On February 1, 2022, the Utilities and PAR Hawaii Refining, LLC (PAR Hawaii) entered into a fuel supply contract commencing
78
January 1, 2023. On December 1, 2022, the PUC issued a decision and order (D&O) approving the PAR Hawaii fuels contract and recovery of associated costs through ECRC.
On March 3, 2022, as part of economic sanctions amid the Russia-Ukraine war, PAR Hawaii announced that it is suspending all purchases of Russian crude oil, which accounts for at least 25% of Hawaii’s supply. The Utilities are taking additional measure to ensure adequate supply of fuel by entering into a backup fuel supply contract with Vitol Inc. (Vitol) commencing on December 1, 2022 through June 30, 2024 with annual extensions if mutually agreed by both parties. The PUC issued the final D&O approving the Vitol backup fuels supply contract on December 1, 2022 and the costs incurred under the contract with Vitol are recovered in the Utilities’ respective ECRCs.
FINANCIAL CONDITION
Liquidity and capital resources. As of June 30, 2023, Hawaiian Electric had no commercial paper outstanding, no amount outstanding on its revolving credit facility and the total amount of available borrowing capacity under the Utilities’ committed line of credit was $200 million.
Hawaiian Electric expects that its liquidity will be adequate as fuel prices are moderating and lingering COVID-19 impacts are dissipating as the local economy is beginning to return to pre-pandemic levels. However, accounts receivable balances remain elevated coming out of the pandemic and has led to higher bad debt expense and higher write-offs in 2022 and 2023. As of June 30, 2023, approximately $24.3 million of the accounts receivables were over 30 days past due. Of the over 30 days past due amounts, approximately 53% were on payment plans. In addition to the cash flow impact from delayed collection of accounts receivable, lower kWh sales relative to the level of kWh sales approved in the last rate case generally result in delayed timing of cash flows, resulting in higher working capital requirements. However, the Utilities’ liquidity and access to capital remains adequate and is expected to remain adequate. As of June 30, 2023, the total amount of available borrowing capacity (net of commercial paper outstanding) under the Utilities’ committed lines of credit and cash and cash equivalents was approximately $344 million.
The Utilities are continuing the disconnection process on a tiered basis, expanding the targeted balances, which is expected to further reduce delinquent accounts receivable balances and accelerate cash collections.
Hawaiian Electric’s consolidated capital structure was as follows:
(dollars in millions)
June 30, 2023
December 31, 2022
Short-term borrowings, net
$
—
—
%
$
88
2
%
Long-term debt, net
1,835
43
1,685
41
Preferred stock
34
1
34
1
Common stock equity
2,372
56
2,344
56
$
4,241
100
%
$
4,151
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, 2023
June 30, 2023
December 31, 2022
Short-term borrowings1
Commercial paper
$
12
$
—
$
88
Borrowings from HEI
—
—
—
Line of credit draws on revolving credit facility
—
—
—
1 The maximum amount of external short-term borrowings by Hawaiian Electric during the first six months of 2023 was approximately $96 million. At June 30, 2023, Hawaiian Electric had no short-term borrowings from Hawaii Electric Light and Maui Electric.
Hawaiian Electric utilizes short-term debt, typically commercial paper, to support normal operations, to refinance short-term debt and for other temporary requirements. Hawaiian Electric also borrows short-term from HEI for itself and on behalf of Hawaii Electric Light and Maui Electric, and Hawaiian Electric may borrow from or loan to Hawaii Electric Light and Maui Electric on a short-term basis. The intercompany borrowings among the Utilities, but not the borrowings from HEI, are eliminated in the consolidation of Hawaiian Electric’s financial statements. The Utilities periodically utilize long-term debt, borrowings of the proceeds of special purpose revenue bonds (SPRBs) issued by the State of Hawaii Department of Budget and Finance (DBF) and the issuance of privately placed unsecured senior notes bearing taxable interest, to finance the Utilities’ capital improvement projects, or to repay short-term borrowings used to finance such projects. The PUC must approve issuances, if any, of equity and long-term debt securities by the Utilities.
79
Credit agreement. Hawaiian Electric has a $200 million line of credit facility with no amount outstanding at June 30, 2023. See Note 5 of the Condensed Consolidated Financial Statements for additional information.
Credit ratings. On July 28, 2023, Fitch Ratings, Inc. upgraded Hawaiian Electric’s long-term issuer default rating to “A-” from “BBB+”, long-term senior unsecured rating to “A” from “A-”, affirmed its short-term issuer default rating and short-term senior unsecured rating at “F2”, and revised the outlook to "Stable” from “Positive”. These ratings are not recommendations to buy, sell or hold any securities. See “Credit and Capital Market Risk” in item 1A. Risk Factors in HEI’s and Hawaiian Electric’s 2022 Form 10-K.
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 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 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. On January 31, 2023, the PUC approved the Utilities’ requests to issue the remaining unused amounts of the SPRBs during the period January 1, 2023 through June 30, 2024, and the certification and approval of supplemental projects eligible to be financed by the SPRB proceeds.
Taxable debt. On December 20, 2022, the Utilities received PUC approval to issue, over a four-year period from January 1, 2023 to December 31, 2026, unsecured obligations bearing taxable interest (Hawaiian Electric up to $230 million, Hawaii Electric Light up to $65 million and Maui Electric up to $105 million), 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. Pursuant to the approval, on January 10, 2023, the Utilities executed through a private placement, $150 million in unsecured senior notes (2023 Notes). The 2023 Notes had a delayed draw feature and the Utilities drew down all the proceeds on February 9, 2023. See Note 5 of the Condensed Consolidated Financial Statements for additional information and see summary table below for remaining authorized amounts.
(in millions)
Hawaiian Electric
Hawaii Electric Light
Maui Electric
Total “up to” amounts of taxable debt authorized from 2023 through 2026
$
230
$
65
$
105
Less:
Taxable debt executed on January 10, 2023, but issued on February 9, 2023
100
25
25
Remaining authorized amounts
$
130
$
40
$
80
As of June 30, 2023, Hawaiian Electric, Hawaii Electric Light, and Maui Electric have $130 million, $40 million, and $80 million, respectively of remaining taxable debt authorization.
Equity. On December 20, 2022, the Utilities received PUC approval to issue and sell each utility’s common stock over a four-year period from January 1, 2023 through December 31, 2026 (Hawaiian Electric’s sale/s to HEI of up to $75 million, Hawaii Electric Light sale/s to Hawaiian Electric of up to $25 million, and Maui Electric sale/s to Hawaiian Electric of up to $55 million) and the purchase of Hawaii Electric Light and Maui Electric common stock by Hawaiian Electric from 2023 through December 31, 2026. As of June 30, 2023, Hawaiian Electric, Hawaii Electric Light, and Maui Electric have $75 million, $25 million, and $55 million, respectively, of unused common stock authorization.
Cash flows. The following table reflects the changes in cash flows for the six months ended June 30, 2023 compared to the six months ended June 30, 2022:
Six months ended June 30
(in thousands)
2023
2022
Change
Net cash provided by operating activities
$
336,145
$
44,150
$
291,995
Net cash used in investing activities
(226,093)
(133,560)
(92,533)
Net cash provided by (used in) financing activities
(5,647)
50,784
(56,431)
Net cash provided by operating activities. The increase in net cash provided by operating activities was primarily driven by lower cash paid for fuel oil stock due to lower fuel oil prices, as well as higher cash receipts from large delinquent
80
commercial customer accounts, receipts from customers associated with increased disconnection efforts, receipts of payments on installment plans, and receipt of government and other program assistance, partially offset by higher cash paid for accounts payable due to timing.
Net cash used in investing activities. The increase in net cash used in investing activities was primarily driven by an increase in capital expenditures related to construction activities.
Net cash provided by financing activities. The decrease in net cash provided by financing activities was driven by net increase in repayment of short-term borrowings, partially offset by higher proceeds from issuance of long-term debts.
Material cash requirements. Material cash requirements of the Utilities include O&M expenses, including labor and benefit costs, fuel and purchase power costs, repayment of debt and interest payments, operating lease obligations, its forecasted capital expenditures and investments, its expected retirement benefit plan contributions and other short-term and long-term material cash requirements. The cash requirements for O&M, fuel and purchase power costs, debt and interest payments, and operating lease obligations are generally funded through the collection of the Utilities’ revenue requirement established in the last rate case and other mechanisms established under the regulatory framework. The cash requirements for capital expenditures are generally funded through retained earnings, the issuance of debt, and contributions of equity from HEI and generally recovered through the Utilities’ revenue requirement or other capital recovery mechanisms over time. The Utilities believe that their ability to generate cash is adequate to maintain sufficient liquidity to fund their material cash requirements. However, the economic impact of higher fuel prices, inflation, higher interest rates, tightening of monetary policy, the lingering COVID-19 pandemic and geopolitical situations, create significant uncertainty, and the Utilities cannot predict the extent or duration of these conditions, 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.
Forecast capital expenditures. For the five-year period 2023 through 2027, the Utilities forecast approximately $2.2 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. Approximately $1.6 billion is related to replacement and modernization of generation, transmission and distribution assets; approximately $0.3 billion is related to climate-related projects to transition to renewable energy or mitigate climate impacts by increasing the resilience of the system, and approximately $0.3 billion for targeted efforts to improve reliability. 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 2023 to 2027 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.
81
Bank
Recent Developments. See also “Recent developments” in HEI’s MD&A.
The Hawaii economy continued to improve in the second quarter of 2023 as visitor arrivals increased, which have helped drive a growing labor market and tax collections. Domestic visitor arrivals exceeded pre-pandemic levels in 2022 and continued to remain strong into 2023 due to pent up demand from leisure travelers. The state and county governments have also lifted all COVID-related travel restrictions for arriving domestic passengers. International visitor arrivals continued to lag significantly behind pre-pandemic levels but have gradually increased as certain Asian countries began loosening travel restrictions. COVID cases caused by the new variants remain relatively stable at low levels along with hospitalization rates.
As of June 30, 2023, the Federal Reserve federal funds rate target range was 5.00%-5.25% in response to continued inflationary pressures in the economy. The increase in interest rates has impacted ASB’s net interest margin as higher yields on earning assets were more than offset by an increase in yields on deposits and other borrowings. The higher interest rates have also reduced mortgage refinance and purchase activity, negatively impacting mortgage banking income. Additionally, the tight labor market and inflationary pressures have increased compensation and benefit expenses.
ASB experienced continued loan growth in 2023 as total loans increased $163 million compared to total loans at the end of 2022. There was demand for commercial real estate, home equity line of credit and consumer loan products. The consumer loan portfolio growth also included purchases of solar and sustainable home improvement loans from a third party. The residential loan portfolio also grew due to ASB’s decision to portfolio a larger portion of its residential loan production.
Deposit growth driven by federal stimulus, which had previously funded loan growth and investment security purchases, has ceased and required ASB to increase its other borrowings to fund the loan portfolio growth, thereby increasing the Bank’s funding costs and reducing its balance sheet sensitivity. Additional federal funds rate increases may not further increase the Bank’s net interest margin if core deposits continue to flow out and funding is replaced with other borrowings.
For the quarter ended June 30, 2023, ASB recorded a provision for credit losses of $0.04 million as the release of reserves for lower loss rates due to improved credit quality were offset by additional reserves required for loan portfolio growth. The provision for credit losses in future quarters will be dependent on future economic conditions and changes to borrower credit quality at that time.
At June 30, 2023, the investment securities portfolio balance decreased approximately $88 million as investment securities portfolio repayments were used as a funding source for the loan growth and ASB did not purchase any investment securities. The lack of deposit growth resulted in lower excess liquidity and the need for other sources to fund the loan growth. The change in interest rates in the first half of 2023 resulted in lower unrealized losses in the available-for-sale investment securities portfolio, which increased the investment portfolio balance.
In 2023, the increase in interest rates and the collapse of a few financial institutions had caused turmoil in the banking industry. Due to the failure of these financial institutions, the focus on the banking industry has been around capital levels, uninsured deposits and liquidity. At June 30, 2023, ASB’s regulatory capital ratios were above the “well-capitalized” and regulatory requirements, including the conservation buffers. Approximately 86% of the Bank’s deposits are FDIC insured or fully collateralized. ASB has access to approximately $3 billion in funding sources to meet its liquidity needs.
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)
2023
2022
(decrease)
Primary reason(s)
Interest and dividend income
$
82
$
63
$
19
Average loan portfolio yields were 81 basis points higher—yield benefited from the rising interest rate environment and new loan production yields were higher than the portfolio yields.
Average loan portfolio balances increased $811 million - commercial real estate, home equity line of credit and commercial loan portfolio average balances increased $225 million, $145 million and $101 million, respectively, due to increased demand for these loan products. Residential loan average balances increased $207 million due to the Bank’s decision to portfolio a larger portion of the residential loan production. Consumer loan portfolio average balance increased $135 million due to purchases of solar and sustainable home improvement loans.
82
Three months ended June 30
Increase
(in millions)
2023
2022
(decrease)
Primary reason(s)
Average investment securities portfolio balances decreased $276 million—investment security portfolio repayments were used to fund loan growth. Average investment securities portfolio yields were 3 basis points lower due to higher investment portfolio premium amortizations.
Average other investments decreased $22 million - decrease in interest earning deposits due to excess liquidity being used to fund loan production.
Noninterest income
16
13
3
Higher bank owned life insurance income - higher returns from insurance policies.
Revenues
98
76
22
The increase in revenues for the three months ended June 30, 2023 compared to the same period in 2022 was primarily due to higher interest and dividend income and higher noninterest income.
Interest expense
19
1
18
Increase in interest expense on deposits and other borrowings was due to an increase in term certificate and other borrowing balances which were required to fund the loan portfolio growth, higher yields due to the increase in the interest rate environment and a shift in costing liability mix.
Average core deposit balances decreased $647 million; average term certificate balances increased $430 million.
Average cost of funds increased from 5 basis points to 83 basis points due to a shift in funding from low cost core deposits to higher costing term certificates and other borrowings.
Average deposit yields increased from 4 basis points to 48 basis points due to a shift in mix of deposits and higher yields from the increase in the interest rate environment.
Average other borrowings increased $682 million and average yields increased 394 basis points.
Provision for credit losses
—
3
(3)
2023 provision for credit losses included credit loss reserves for growth in the loan portfolio and additional credit loss reserves for the home equity line of credit loan portfolio, offset by the release of credit loss reserves due to improved credit trends in the commercial real estate and consumer loan portfolios.
2022 provision for credit losses was primarily due to additional reserves for growth in the commercial real estate and consumer loan portfolios, and higher loss rates for the residential and consumer loan portfolios. In addition, loan loss reserves were established for the solar and sustainable home improvement loans purchased during the quarter.
2022 provision for credit losses also included the release of loss reserves for the commercial and commercial real estate loan portfolios due to improved credit trends in those loan portfolios and reduction in the commercial loan portfolio.
Delinquency rates have decreased—from 0.27% at June 30, 2022 to 0.17% at June 30, 2023 primarily due to lower residential 1-4 family loan delinquencies, partly offset by higher consumer loan delinquencies.
Net charge-off to average loans increased from nil at June 30, 2022 to 0.14% at June 30, 2023 primarily due to an increase in consumer loan net charge-offs.
Noninterest expense
54
49
5
The increase in noninterest expenses was primarily due to higher compensation and benefits as a result of higher base compensation and the fair value adjustment related to the deferred compensation plan, and higher FDIC insurance assessments.
Expenses
73
53
20
The increase in expenses for the three months ended June 30, 2023 compared to the same period in 2022 was due to higher interest expenses and higher noninterest expenses, partly offset by lower provision for credit losses.
Operating income
25
23
2
The increase in operating income for the three months ended June 30, 2023 compared to the same period in 2022 was primarily due to higher interest and noninterest income and lower provision for credit losses, partly offset by higher interest and noninterest expenses.
Net income
20
17
3
Net income for the three months ended June 30, 2023 was higher than the same period in 2022 due to higher operating income and lower income tax expense.
83
Six months ended June 30
Increase
(in millions)
2023
2022
(decrease)
Primary reason(s)
Interest and dividend income
$
161
$
123
$
38
Average loan portfolio yields were 79 basis points higher—loan yields continued to increase in 2023 due to the interest rate environment as adjustable rate loan yields repriced with rising interest rates and new loan production yields were higher than the portfolio rates.
Average loan portfolio balances increased $826 million - commercial real estate, home equity line of credit and commercial loan portfolio average balances increased $273 million, $163 million and $62 million, respectively, due to demand for these loan types. Residential loan portfolio average balances increased $196 million due to the Bank’s decision to portfolio a larger portion of the residential loan production. Consumer loan portfolio average balances increased $133 million primarily due to the purchase of solar and sustainable home improvement loans.
Average investment securities portfolio balances decreased $184 million—repayments in the investment securities portfolio were used to fund the loan portfolio growth.
Average investment securities portfolio yields increased 2 basis points.
Noninterest income
30
29
1
Higher bank-owned life insurance income - higher returns from insurance policies.
Lower mortgage banking income - lower residential loan sale volume due to lower production volume as the higher interest rate environment has reduced the demand for residential mortgage loans. ASB’s decision to portfolio a larger portion of the residential loan production also reduced the amount of loans sold on the secondary market.
Less: gain on sale of real estate
—
(1)
1
Gain on sale of real estate, 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 real estate in the condensed consolidated statements of income, and accordingly, is reflected in operating expenses below as a separate line item and excluded from Revenues.
Revenues
191
151
40
The increase in revenues for the six months ended June 30, 2023 compared to the same period in 2022 was primarily due to higher interest and dividend income and higher noninterest income.
Interest expense
33
2
31
Interest expense on deposits and other borrowings increased in 2023 compared to 2022 due to an increase in term certificate and other borrowing balances which were required to fund the loan portfolio growth, higher yields due to the increase in the interest rate environment and a shift in deposit mix.
Average core deposit balances decreased $500 million; average term certificate balances increased $379 million.
Average deposit yields increased from 5 basis points to 41 basis points. The increase was primarily due to the increase in term certificate yields of 255 basis points and the shift in mix of deposits from low cost core deposits to term certificates.
Average other borrowings increased $653 million and average yields increased 408 basis points. Other borrowings were used to fund the growth in the loan portfolio. The higher yields was reflective of the higher interest rate environment.
Provision for credit losses
1
(1)
2
2023 provision for credit losses was primarily for the growth in the loan portfolio.
2023 provision for credit losses also included the release of credit loss reserves for improved credit loss rates in the commercial real estate and consumer loan portfolios.
2022 negative provision for credit losses reflected good credit trends including lower net charge-offs and improved credit loss rates which included credit upgrades in the commercial real estate and commercial loan portfolios.
2022 negative provision for credit losses also included additional reserves for growth in the commercial real estate loan portfolio and loss reserves established for the solar and sustainable home improvement loans purchased during the year.
Delinquency rates have decreased—from 0.27% at June 30, 2022 to 0.17% at June 30, 2023 due to lower residential 1-4 family loan delinquencies, partly offset by higher consumer loan delinquencies.
84
Six months ended June 30
Increase
(in millions)
2023
2022
(decrease)
Primary reason(s)
Net charge-off to average loans have increased—from 0.01% at June 30, 2022 to 0.14% at June 30, 2023 primarily due to an increase in consumer loan portfolio net charge-offs and the charge-off of a residential loan.
Noninterest expense
108
98
10
The increase in noninterest expenses were due to higher compensation and benefits expenses, an increase in FDIC insurance assessments and higher deposit account expenses.
Higher compensation and benefits expenses included higher base compensation as a result of merit increases, market adjustments and the fair value adjustment related to the deferred compensation plan.
Gain on sale of real estate
—
(1)
1
Expenses
142
98
44
The increase in expenses for the six months ended June 30, 2023 compared to the same period in 2022 was due to higher interest expenses, higher provision for credit losses and higher noninterest expense partly offset by higher gain on sale of real estate in 2022.
Operating income
49
53
(4)
The decrease in operating income for the six months ended June 30, 2023 compared to the same period in 2022 was primarily due to higher interest expenses, higher noninterest expenses and higher provision for credit losses, partly offset by higher interest income and higher noninterest income.
Net income
39
41
(2)
Net income for the six months ended June 30, 2023 was lower than the same period in 2022 due to lower operating income partly offset by lower income tax expense.
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
(%)
2023
2022
2023
2022
Return on average assets
0.84
0.76
0.81
0.90
Return on average equity
16.20
12.17
15.87
13.01
Net interest margin
2.75
2.85
2.80
2.82
85
Three months ended June 30
2023
2022
(dollars in thousands)
Average balance
Interest income/ expense
Yield/ rate (%)
Average balance
Interest income/ expense
Yield/ rate (%)
Assets:
Interest-earning deposits
$
36,891
$
488
5.23
$
59,306
$
81
0.54
FHLB stock
15,660
237
6.07
11,265
94
3.34
Investment securities
Taxable
2,988,483
12,645
1.69
3,262,914
14,213
1.74
Non-taxable
67,912
513
3.01
69,264
386
2.22
Total investment securities
3,056,395
13,158
1.72
3,332,178
14,599
1.75
Loans
Residential 1-4 family
2,515,753
23,111
3.67
2,309,091
20,070
3.48
Commercial real estate
1,483,566
18,373
4.91
1,258,349
10,739
3.39
Home equity line of credit
1,034,785
9,657
3.74
889,560
6,481
2.92
Residential land
20,235
269
5.32
22,507
531
9.43
Commercial
777,028
10,854
5.56
675,760
6,593
3.90
Consumer
260,437
5,843
8.99
125,120
3,798
12.18
Total loans 1,2
6,091,804
68,107
4.46
5,280,387
48,212
3.65
Total interest-earning assets 3
9,200,750
81,990
3.56
8,683,136
62,986
2.90
Allowance for credit losses
(71,191)
(67,620)
Noninterest-earning assets
471,600
572,869
Total assets
$
9,601,159
$
9,188,385
Liabilities and shareholder’s equity:
Savings
$
3,006,949
$
313
0.04
$
3,297,511
$
212
0.03
Interest-bearing checking
1,298,399
769
0.24
1,372,035
81
0.02
Money market
268,744
1,738
2.59
212,527
36
0.07
Time certificates
816,772
6,841
3.36
386,869
592
0.61
Total interest-bearing deposits
5,390,864
9,661
0.72
5,268,942
921
0.07
Advances from Federal Home Loan Bank
141,506
1,605
4.49
31,638
134
1.68
Borrowings from Federal Reserve Bank
567,857
6,207
4.38
—
—
—
Securities sold under agreements to repurchase and federal funds purchased
105,691
1,040
3.95
101,861
5
0.02
Total interest-bearing liabilities
6,205,918
18,513
1.20
5,402,441
1,060
0.08
Noninterest bearing liabilities:
Deposits
2,685,828
3,024,910
Other
210,698
186,749
Shareholder’s equity
498,715
574,285
Total liabilities and shareholder’s equity
$
9,601,159
$
9,188,385
Net interest income
$
63,477
$
61,926
Net interest margin (%) 4
2.75
2.85
86
Six months ended June 30
2023
2022
(dollars in thousands)
Average balance
Interest income/ expense
Yield/ rate (%)
Average balance
Interest
income/
expense
Yield/ rate (%)
Assets:
Interest-earning deposits
$
23,626
$
609
5.13
$
96,862
$
147
0.30
FHLB stock
22,835
663
5.85
10,636
168
3.18
Investment securities
Taxable
3,015,220
26,341
1.75
3,197,561
27,767
1.74
Non-taxable
68,094
1,011
2.96
69,431
753
2.17
Total investment securities
3,083,314
27,352
1.77
3,266,992
28,520
1.75
Loans
Residential 1-4 family
2,502,551
45,726
3.65
2,306,284
40,183
3.48
Commercial real estate
1,471,079
35,620
4.83
1,198,157
19,950
3.32
Home equity line of credit
1,028,076
18,685
3.67
865,401
12,704
2.96
Residential land
20,266
546
5.39
21,669
788
7.27
Commercial
780,859
21,251
5.45
718,406
13,405
3.74
Consumer
252,883
11,236
8.94
119,504
7,257
12.25
Total loans 1,2
6,055,714
133,064
4.40
5,229,421
94,287
3.61
Total interest-earning assets 3
9,185,489
161,688
3.52
8,603,911
123,122
2.87
Allowance for credit losses
(71,649)
(69,368)
Noninterest-earning assets
468,958
640,563
Total assets
$
9,582,798
$
9,175,106
Liabilities and shareholder’s equity:
Savings
$
3,074,650
$
535
0.04
$
3,278,139
$
419
0.03
Interest-bearing checking
1,315,213
1,399
0.21
1,351,635
145
0.02
Money market
233,083
2,324
2.01
208,965
69
0.07
Time certificates
778,441
12,240
3.17
399,053
1,235
0.62
Total interest-bearing deposits
5,401,387
16,498
0.62
5,237,792
1,868
0.07
Advances from Federal Home Loan Bank
320,867
7,475
4.63
15,906
134
1.68
Borrowings from Federal Reserve Bank
318,674
6,926
4.38
—
—
—
Securities sold under agreements to repurchase
125,917
2,172
3.48
96,102
10
0.02
Total interest-bearing liabilities
6,166,845
33,071
1.08
5,349,800
2,012
0.08
Noninterest bearing liabilities:
Deposits
2,715,408
2,999,395
Other
211,852
190,577
Shareholder’s equity
488,693
635,334
Total liabilities and shareholder’s equity
$
9,582,798
$
9,175,106
Net interest income
$
128,617
$
121,110
Net interest margin (%) 4
2.80
2.82
1 Includes loans held for sale, at lower of cost or fair value.
2 Includes recognition of net deferred loan fees of $0.7 million and $1.7 million for the three months ended June 30, 2023 and 2022, respectively, and $1.4 million and $3.6 million for the six months ended June 30, 2023 and 2022, respectively, together with interest accrued prior to suspension of interest accrual on nonaccrual loans. Includes nonaccrual loans.
3 For the six months ended June 30, 2023 and 2022, 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. The Federal Open
87
Market Committee federal funds rate target range was 5.00% - 5.25% at June 30, 2023 to combat inflation. ASB’s net interest income and net interest margin has been impacted by the higher interest rates as the Bank has used higher costing other borrowings and term certificates to fund its loan growth.
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 a composition of ASB’s loan portfolio.
Home equity— key credit statistics. The home equity line of credit (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, 2023, approximately 39% 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 54% of ASB’s HELOC loan portfolio is in a first lien position.
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, 2023
December 31, 2022
(dollars in thousands)
Balance
% of total
Balance
% of total
U.S. Treasury and federal agency obligations
$
137,653
5
%
$
140,957
5
%
Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies
2,399,525
92
2,484,821
92
Corporate bonds
41,146
2
40,734
2
Mortgage revenue bonds
14,630
1
14,902
1
Total investment securities
$
2,592,954
100
%
$
2,681,414
100
%
Currently, ASB’s investment portfolio consists of high-grade investment securities, including 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.
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. In 2023, deposits decreased by $6.5 million, as an outflow of core deposits was replaced with time certificates. Core deposit retention will remain challenging in the current rising interest rate environment. Advances from the FHLB of Des Moines, securities sold under agreements to repurchase, borrowings from the Federal Reserve Bank and federal funds purchased continue to be additional sources of funds. As of June 30, 2023 and December 31, 2022, ASB’s costing liabilities consisted of 92% deposits and 8% borrowings. The weighted average cost of deposits for the first six months of 2023 and 2022 was 0.41% and 0.05%, respectively. As of June 30, 2023 and December 31, 2022, ASB had approximately $1.2 billion of deposits that were uninsured.
Federal Home Loan Bank of Des Moines and Federal Reserve Bank. As of June 30, 2023 and December 31, 2022, ASB had $200 million and $414 million of advances outstanding at the FHLB of Des Moines, respectively. As of June 30, 2023, the unused borrowing capacity with the FHLB of Des Moines was $1.8 billion. As of June 30, 2023 and December 31, 2022, ASB had $550 million and nil borrowings from the Federal Reserve Bank, respectively. The FHLB of Des Moines and Federal Reserve Bank are important sources of liquidity for ASB.
Contingencies. ASB is subject in the normal course of business to pending and threatened legal proceedings. Management does not anticipate that the aggregate ultimate liability arising out of these pending or threatened legal proceedings will be material to its financial position. However, ASB cannot rule out the possibility that such outcomes could have a material adverse effect on the results of operations or liquidity for a particular reporting period in the future.
Other factors. Interest rate risk is a significant risk of ASB’s operations and also represents a market risk factor affecting the fair value of ASB’s investment securities. Increases and decreases in prevailing interest rates generally translate into
88
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, 2023, ASB had an unrealized loss, net of taxes, on investment securities (including securities pledged for repurchase agreements) in AOCI of $315.9 million compared to an unrealized loss, net of taxes, of $328.9 million as of December 31, 2022. The unrealized losses were due to changes in interest rates and did not affect regulatory capital ratios. 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 2023, ASB recorded a provision for credit losses of $1.0 million in the allowance for credit losses for growth in the loan portfolio partly offset by the release of credit loss reserves for improved credit trends and lower credit loss rates. During the first six months of 2022, ASB recorded a negative provision for credit losses of $1.5 million in the allowance for credit losses reflecting good credit trends including lower net charge-offs and credit upgrades in the commercial real estate and commercial loan portfolios, partly offset by loan reserves for growth in the commercial real estate loan portfolio and solar and sustainable home improvement loans purchased during the year.
Six months ended June 30
Year ended
December 31, 2022
(in thousands)
2023
2022
Allowance for credit losses, beginning of period
$
72,216
$
71,130
$
71,130
Provision for credit losses
1,018
(1,506)
2,537
Less: net charge-offs
4,166
168
1,451
Allowance for credit losses, end of period
$
69,068
$
69,456
$
72,216
Ratio of net charge-offs during the period to average loans outstanding (annualized)
0.14
%
0.01
%
0.03
%
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, 2023 and 2022, ASB recorded a provision for credit losses for unfunded commitments of $0.2 million and $1.0 million, respectively. As of June 30, 2023 and December 31, 2022, the reserve for unfunded loan commitments was $4.6 million and $4.4 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.”
FINANCIAL CONDITION
Liquidity and capital resources.
(dollars in millions)
June 30, 2023
December 31, 2022
% change
Total assets
$
9,621
$
9,546
1
Investment securities
2,593
2,681
(3)
Loans held for investment, net
6,069
5,907
3
Deposit liabilities
8,163
8,170
—
Other bank borrowings
750
695
8
As of June 30, 2023, ASB was one of Hawaii’s largest financial institutions based on assets of $9.6 billion and deposits of $8.2 billion.
As of June 30, 2023, ASB’s unused FHLB borrowing capacity was approximately $1.8 billion. As of June 30, 2023, ASB had commitments to borrowers for loans and unused lines and letters of credit of $2.0 billion. 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, 2023, net cash provided by ASB’s operating activities was $43 million. Net cash used during the same period by ASB’s investing activities was $56 million, primarily due to a net increase in loans receivable of $208 million, purchases of loans held for investment of $26 million and additions to premises and equipment of $4 million, partly offset by the receipt of investment security repayments and maturities of $104 million, proceeds from the sale of commercial loans of $67 million, a net decrease in FHLB stock of $9 million and proceeds from the redemption of bank owned life insurance of $3 million. Net cash provided by financing activities during this period was $25 million, primarily due to a net increase in other borrowings of $336 million and a net increase in mortgage escrow deposits of $1 million, partly offset by a net
89
decrease in repurchase agreements of $183 million, decreases in deposit liabilities of $105 million and $25 million in common stock dividends to HEI (through ASB Hawaii).
For the six months ended June 30, 2022, net cash provided by ASB’s operating activities was $53 million. Net cash used during the same period by ASB’s investing activities was $371 million, primarily due to purchases of available-for-sale securities of $366 million, a net increase in loans receivables of $188 million, purchases of loans held for investment of $25 million, bank owned life insurance purchases of $5 million, additions to premises and equipment of $4 million and a net increase in FHLB stock of $3 million, partly offset by the receipt of investment security repayments and maturities of $217 million, proceeds from the redemption of bank owned life insurance of $2 million and proceeds from the sale of real estate of $1 million. Net cash provided by financing activities during this period was $208 million, primarily due to increases in deposit liabilities of $81 million, a net increase in short-term borrowings of $80 million and a net increase in repurchase agreements of $73 million, partly offset by $27 million in common stock dividends to HEI (through ASB Hawaii).
ASB believes that maintaining a satisfactory regulatory capital position provides a basis for public confidence, affords protection to depositors, helps to ensure continued access to capital markets on favorable terms and provides a foundation for growth. FDIC regulations restrict the ability of financial institutions that are not well-capitalized to compete on the same terms as well-capitalized institutions, such as by offering interest rates on deposits that are significantly higher than the rates offered by competing institutions. As of June 30, 2023, ASB was well-capitalized (well-capitalized ratio requirements noted in parentheses) with a Tier-1 leverage ratio of 7.8% (5.0%), common equity Tier-1 ratio of 12.2% (6.5%), Tier-1 capital ratio of 12.2% (8.0%) and total capital ratio of 13.2% (10.0%). As of December 31, 2022, ASB was well-capitalized (well-capitalized ratio requirements noted in parentheses) with a Tier-1 leverage ratio of 7.8% (5.0%), common equity Tier-1 ratio of 12.2% (6.5%), Tier-1 capital ratio of 12.2% (8.0%) and total capital ratio of 13.1% (10.0%). 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 2022 Form 10-K (pages 78 to 80).
ASB’s interest-rate risk sensitivity measures as of June 30, 2023 and December 31, 2022 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, 2023
December 31, 2022
June 30, 2023
December 31, 2022
+300
0.6
%
(0.1
%)
6.0
%
5.1
%
+200
0.4
—
4.8
3.8
+100
0.2
—
2.8
2.1
-100
(0.6)
(0.3)
(3.6)
(3.4)
-200
(1.3)
(0.9)
(7.9)
(7.8)
-300
(2.0)
(1.7)
(13.6)
(13.8)
ASB’s net interest income (NII) sensitivity profile was more asset sensitive as of June 30, 2023 compared to December 31, 2022, primarily driven by a shift in the bank’s liability mix as ASB extended the term of wholesale funding and new retail term certificates replaced shorter-term public fund term certificates.
Economic value of equity (EVE) sensitivity increased as of June 30, 2023 compared to December 31, 2022 due to a shift in the bank’s liability mix as ASB extended the term of wholesale funding and new retail term certificates replaced shorter-term public fund term certificates.
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
90
management’s views of future market movements, the level of future earnings or the timing of any changes in earnings within the twelve month analysis horizon. The actual impact of changes in interest rates on NII will depend on the magnitude and speed with which rates change, actual changes in ASB’s balance sheet and management’s responses to the changes in interest rates.
Item 4. Controls and Procedures
HEI:
Disclosure Controls and Procedures
The Company maintains a set of disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and reported within the time periods specified in SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Exchange Act. Management, including the Company’s Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective, as of the end of the period covered by this report, at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting during the second quarter of 2023 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 2023 that have materially affected, or are reasonably likely to materially affect, Hawaiian Electric’s internal control over financial reporting.
91
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 2022 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 20 to 33 of HEI’s and Hawaiian Electric’s 2022 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 2023 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, 2023
23,331
$38.97
—
NA
May 1 to 31, 2023
27,385
$36.98
—
NA
June 1 to 30, 2023
179,989
$38.00
—
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,” 17,764 of the 23,331 shares, 14,550 of the 27,385 shares and 154,142 of the 179,989 shares were purchased for the DRIP; 4,501 of the 23,331 shares, 4,918 of the 27,385, shares and 21,571 of the 179,898 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.
92
Item 5. Other Information
On August 3, Bruce Tamashiro (53) was designated as the Company’s Principal Accounting Officer (PAO). Mr. Tamashiro was appointed as the Company’s Controller effective July 1, 2023. Mr. Tamashiro previously worked with the Company’s subsidiary, Hawaiian Electric, as Director, Corporate and Property Accounting where he managed Hawaiian Electric’s daily accounting operations and financial reporting functions. Mr. Tamashiro served as Financial Reporting Manager for Shidler Pacific Advisors, LLC from 2012-2019, where he was responsible for all SEC financial reporting. Most recently, Mr. Tamashiro served as Director of Corporate Accounting and Controller of The Gas Company, LLC (dba Hawaii Gas) from 2019-2023, where he managed Hawaii Gas’s daily accounting operations, oversaw all aspects of financial reporting to the SEC and the Hawaii Public Utilities Commission as well as to Hawaii Gas’s owners, creditors and other stakeholders, and managed all aspects of Hawaii Gas’s internal controls.
There are no arrangements or understandings between Mr. Tamashiro and any other person pursuant to which he was selected as an officer, no family relationships between Mr. Tamashiro and any other executive officer or director, and no related person transactions within the meaning of Item 404(a) of Regulation S-K between Mr. Tamashiro and HEI.
Effective concurrently with Mr. Tamashiro’s designation as PAO, Paul Ito, the Company’s Chief Financial Officer, resigned as the Company’s PAO. Mr. Ito will remain the Company’s Principal Financial Officer.
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
Certification Pursuant to Rule 13a-14 promulgated under the Securities Exchange Act of 1934 of Shelee M. T. Kimura (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 Regulation S-K. We agree to furnish a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request.
93
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/ Scott W. H. Seu
By
/s/ Shelee M. T. Kimura
Scott W. H. Seu
Shelee M. T. Kimura
President and Chief Executive Officer
President and Chief Executive Officer
(Principal Executive Officer of HEI)
(Principal Executive Officer of Hawaiian Electric)
By
/s/ Paul K. Ito
By
/s/ Tayne S. Y. Sekimura
Paul K. Ito
Tayne S. Y. Sekimura
Executive Vice President,
Senior Vice President,
Chief Financial Officer and Treasurer
Chief Financial Officer and Treasurer
(Principal Financial Officer of HEI)
(Principal Financial Officer of Hawaiian Electric)
