information related to
The following discussion should be read in conjunction with the Consolidated Financial Statements and the related Notes that appear in Item 8 of this report. For information on factors that may cause HEI's and
Hawaiian Electric'sactual future results to differ from those currently contemplated by the relevant forward-looking statements, see "Cautionary Note Regarding Forward-Looking Statements" at the front of this report and "Risk Factors" in Item 1A. The general discussion of HEI's consolidated results should be read in conjunction with the Electric utility and Bank segment discussions that follow.
Executive overview and strategy. HEI is a holding company with operations primarily focused on Hawaii's electric utility and banking sectors. In 2017, HEI formed Pacific Current to make investments in non-regulated renewable energy and sustainable infrastructure projects. HEI has three reportable segments-Electric utility, Bank, and Other. Electric utility.
Hawaiian Electric, Hawaii Electric Lightand Maui Electric(Utilities) are regulated operating electric public utilities engaged in the production, purchase, transmission, distribution and sale of electricity on the islands of Oahu; Hawaii; and Maui, Lanaiand Molokai, respectively.
Bank. ASB is a full-service community bank serving both consumer and commercial
customers in the
Other. The Other segment comprises the results of Pacific Current, which invests in non-regulated clean energy and sustainable infrastructure in the
State of Hawaiito help reach the state's sustainability goals, and HEI's corporate-level operating, general and administrative expenses. A major focus of HEI's financial strategy is to grow core earnings/profitability at the Utilities, Bank and Pacific Current in a controlled risk manner and optimize operating, capital and tax efficiencies in order to support its dividend and deliver shareholder value. Together, HEI's unique combination of power, sustainable investments, and financial services companies provides the Company with a strong balance sheet and the financial resources to invest in the strategic growth of its subsidiaries, while providing an attractive dividend for investors. Recent developments. New 7-day average daily COVID-19 case counts in Hawaiihave declined to low levels following peaks in the daily average case counts earlier in the year. The 7-day average daily case count remains relatively stable at 84 as of February 13, 2023. Hospitalizations have remained at low levels with approximately 79% of the state's population vaccinated with at least one dose and approximately 27% of the state's population received a booster in the last 12 months as of February 13, 2023. In March 2022, the state ended the Safe Travels program for domestic U.S.travelers and the indoor mask mandate. On June 12, 2022, the U.S. Centers for Disease Control and Preventionended the requirement that required air passengers traveling from a foreign country to the United Statesto show a negative COVID-19 test before boarding their flight. On October 11, 2022, Japaneliminated the daily entry cap into Japan, which had made travel to and from Hawaiimore difficult. The loosening of these COVID-19 restrictions has led to an improvement in economic conditions in Hawaiiover the past year. However, new variants could present potential risks to the ongoing economic recovery. At this time, the Company does not expect that COVID restrictions will be reinstated, but will continue to monitor the situation. In 2022, total tourism passenger counts increased 34% compared to 2021 as increased vaccination rates allowed for the elimination of COVID-19 restrictions in many of Hawaii'stourism markets. Domestic tourism has recovered significantly and exceeded pre-pandemic levels, with 9.6 million domestic passengers traveling to Hawaiiin 2022 compared to 8.7 million passengers in 2019. However, international passenger counts remain below pre-pandemic levels with 0.8 million international passengers traveling to Hawaiiin 2022 compared with 2.8 million passengers in 2019. However, with the recent lifting of travel restrictions in Japan, Hawaii'slargest international tourism market, international tourism counts are expected to continue to improve in 2023. With the improvement in tourism and economic activity in 2022, the Utilities' kWh sales in 2022 have increased 1.1% above 2021 levels, but were 4.4% below pre-pandemic levels. 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 Consolidated Financial Statements for a discussion of the decoupling mechanism.
At the Bank, an improving
supported stable credit trends. Loan growth in 2022 was broad based, driven by
the improvement in
36 -------------------------------------------------------------------------------- However, the additional provision was partially offset by the release of credit loss reserves as a result of improved credit quality, resulting in a
$2.0 millionprovision for credit losses in 2022, compared to a $25.8 millionnegative provision for credit losses in 2021. The higher interest rate environment and higher earning asset balances benefited net interest income, which increased $15.4 millionto $252.6 millionin 2022 compared to net interest income of $237.2 millionin 2021. The increase in net interest income was partially offset by higher other borrowings and higher cost of funds. Additional federal funds rate increases may not further increase the Bank's net interest margin if core deposit growth ceases and funding is replaced with other borrowings. The higher interest rate environment also reduced the fair value of the Bank's investment portfolio, which was recorded as an other comprehensive loss (see "Transfer of available-for-sale securities to held-to-maturity" in Note 4 of the Consolidated Financial Statements). In 2022, inflation increased rapidly as reflected in the U.S.Consumer Price Index (CPI). While inflationary pressures, as measured by CPI, appear to have peaked in June 2022, inflation remains elevated at 6.4% as of February 15, 2023. In addition, fuel costs have risen rapidly and remain at elevated levels. Fuel costs for 2022 were up 76.7% compared to 2021. Short-term interest rates have also increased significantly following the Federal Reserve'songoing rate increases to the federal funds target rate. These inflationary pressures are expected to continue into 2023 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. For further discussion of the impacts of the COVID-19 pandemic, fuel prices and other macro-economic factors impacting the Utilities and the Bank, see "Recent Developments" in the Electric Utility and Banksections below. There has been no material impact on the "Other" segment and Pacific Current as a result of the COVID-19 pandemic as the primary businesses of Pacific Current are supported by PPAs that provide for contractual cash flows with credit-worthy counterparties. Environmental, Social & Governance. At HEI, environmental, social and governance (ESG) principles and sustainability have long been embedded as applicable within the Company's activities and are integral to the Company's efforts to create value for all of its stakeholders. With all of its operations isolated in the middle of the Pacific Ocean, the Company's long-term health and financial performance is inextricably linked with the strength of the Hawaiieconomy, its communities, and the environment. That is why long-term shareholder and broader stakeholder value are both served by the Company's efforts to serve as a catalyst for a better Hawaii. In 2021, the Company identified a number of priorities that reflect the essential connection between the health of Hawaii'senvironment, economy and communities and HEI's long-term success. The key ESG priorities the Company is working to advance include:
•decarbonizing the Company’s operations and the broader
•ensuring reliability and resilience as the Company navigates the clean energy
transition and adapts to a changing climate;
•advancing digitalization of the Company’s operations to better serve customers
and increase efficiency while protecting against cyber-security challenges;
•promoting diversity, equity and inclusion both within the Company and in the
ways the Company interacts with and impacts external stakeholders;
•increasing employee engagement; and
•identifying and integrating climate-related risks and opportunities throughout
the Company’s planning and decision-making.
The Company has also focused on ensuring that ESG considerations are
appropriately integrated into governance structures, strategies and risk
management. This includes:
•Integration of Board oversight of important ESG matters into its existing governance structures and processes. This includes full Board review of ESG-related strategies,
Audit & Risk Committeeoversight of ESG risks, Compensation & Human Capital Management Committeeresponsibility for ESG-related compensation matters and human capital management and Nominating and Corporate Governance Committeeresponsibility for ensuring an appropriate board governance framework is in place with respect to ESG.
•Robust ESG expertise among board members, including directors with direct
experience in renewable energy, climate change policy and strategy and
•Expanded ESG goals as part of HEI and Utility executive incentive compensation.
•ESG considerations explicitly woven into strategic planning efforts and
enterprise risk management processes.
37 -------------------------------------------------------------------------------- The Company is committed to transparency and providing information to allow customers, community leaders, investors and other stakeholders to understand how the Company's strategies and operations advance ESG objectives and contribute to long-term stakeholder value creation. The Company issued its first ESG report in
September 2020. The report encompassed ESG policies, principles and results reported during 2019 across the Company's two primary operating subsidiaries, Hawaiian Electricand ASB, and was aligned with Sustainability Accounting Standards Board(SASB) guidance-using the electric utilities standard for Hawaiian Electric, and the commercial banks, commercial finance, and mortgage finance standards for ASB. In April 2021, the Company issued its second ESG report, including SASB disclosures for Hawaiian Electricand ASB and disclosures regarding risks and opportunities related to climate change, as well as associated risk management and governance processes, based on recommendations from the Task Force on Climate-related Financial Disclosures. It also outlined key impacts for the Company under two climate scenarios, including a scenario targeted to limit global temperature rise to 2 degrees Celsius or lower. In April 2022, the Company issued its third and most comprehensive ESG report. The report includes HEI's first enterprise-wide GHG emissions inventory, providing the basis to further guide the company's ESG strategies and enable greater transparency around its progress on climate issues. Net enterprise-wide GHG emissions in measured categories have decreased over time, driven largely by reductions in the utility's generation-related emissions The Company's ESG reports can be found at www.hei.com/esg.
HEI consolidated results of operations.
(dollars in millions, except per share amounts) 2022 % change 2021 % change 2020 Revenues
$ 3,74231 $ 2,85010 $ 2,580Operating income 381 (1) 386 24 311 Net income for common stock 241 (2) 246 24 198 Net income (loss) by segment: Electric utility $ 1896 $ 1785 $ 169Bank 80 (21) 101 76 58 Other (28) 15 (33) (12) (29) Net income for common stock $ 241(2) $ 24624 $ 198Basic earnings per share $ 2.20(2) $ 2.2524 $ 1.81Diluted earnings per share $ 2.20(2) $ 2.2524 $ 1.81Dividends per share $ 1.403 $ 1.363 $ 1.32Weighted-average number of common shares outstanding (millions) 109.4 - 109.3 - 109.1 Dividend payout ratio 64 % 60 % 73 % In 2022, net income for HEI common stock decreased (2)% to $241 million( $2.20diluted earnings per share), compared to $246 million( $2.25diluted earnings per share) in 2021, due to $21 millionlower net income at ASB, partly offset by $11 millionhigher net income at the Utilities and $5 millionlower net loss at the "other" segment. The decrease in ASB's 2022 net income compared to 2021 was primarily due to an increase in provision for credit losses in 2022 as compared to 2021 net income, which benefited from a negative provision of $25.8 millionas result of improved credit quality as the local economy improved significantly from 2020. The increase in the Utilities' 2022 net income compared to 2021 was principally due to higher ARA revenues, which included the customer dividend delivered to customers, partially offset by higher operating expenses. See "Electric utility," "Bank," and "HEI Consolidated-Other segment" sections below for additional information on year-to-year fluctuations.
The Company’s effective tax rate (combined federal and state income tax rates)
was comparable at 20% in 2022 and 2021.
For a discussion of 2020 results, please refer to the “HEI consolidated results
of operations” section in Item 7, “Management Discussion and Analysis of
Financial Condition and Results of Operations-
Company’s 2021 Form 10-K.
38 -------------------------------------------------------------------------------- Other segment. The "other" business segment (loss)/income includes results of the stand-alone corporate operations of HEI,
ASB Hawaii, and Pacific Current. Increase (in millions) 2022 2021 (decrease) Primary reason(s) Revenue1 $ 12 $ 4$
8 Increase in other sales at Pacific Current
Operating loss1 (20) (22) 2 Lower HEI corporate operating loss (
$22 millionin 2022 vs. $25 millionin 2021) primarily due to a decrease in incentive compensation and consulting expenses. Lower Pacific Current operating income ( $2 millionin 2022 vs $3million in 2021) primarily due to higher expenses. Interest expense & other (27) (22) (5) Interest expense & other in 2022 was higher than in 2021 primarily due to higher interest expense at corporate (higher balances and rate) and Pacific Current (higher balances). Gain on sales of 8 -
8 Gain on sale of an equity-method investment at
Pacific Current. Income tax benefit 11 11 - Lower pretax loss, partly offset by higher deductible executive compensation in 2022. Net loss
$ (28) $ (33)$ 5
1 Hamakua Energy’s sales to
eliminated in consolidation.
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), HonoluluBoard of REALTORS® and national and local news media). By the end of December 2022, the national and state COVID-19 restrictions were lifted and lower case counts across most states led to stronger demand for travel to Hawaiiin the fourth quarter of 2022. The average daily passenger count was 19.4% higher than the comparable period in the prior year, but remained 7.2% below 2019. The recovery in total passenger counts from the low levels in 2020 thus far has been driven by domestic travelers, with international travelers remaining at low levels, but gradually increasing. In December 2022, domestic passenger counts were up 3.3% compared to 2019 pre-COVID-19 levels, while international passenger counts were down 51% compared to 2019 pre-COVID-19 levels. On October 11, 2022, Japaneliminated the daily entry cap into Japan, which had made travel to and from Hawaiimore difficult. Since then, international visitor arrivals have increased. Hawaii'sseasonally adjusted unemployment rate in December 2022was 3.2%, which was lower compared to the December 2021rate of 4.3%. The national unemployment rate in December 2022was 3.5% compared to 3.9% in December 2021. Hawaii'sunemployment rate is expected to continue to improve now that restrictions have been lifted and non-farm jobs are expected to increase this year. Hawaiireal estate activity through December 2022, as indicated by Oahu'shome resale market, resulted in an increase in the median sales price of 3.6% for condominiums and a decrease of 0.05% for single-family homes compared to the same period in 2021, with the December median single-family home price of $1,049,500, below the record $1,153,500set in May. The number of closed sales decreased 11.8% for condominiums and 23.2% for single-family residential homes through the fourth quarter of 2022 compared to 2021. Hawaii'spetroleum product prices reflect supply and demand in the Asia-Pacific regionand the price of crude oil in international markets. The price of crude oil increased significantly from January 2022through July 2022, but started to decline in August 2022through November 2022. At its February 1, 2023meeting, the Federal Open Market Committee(FOMC) decided to raise the federal funds rate target range to 4.50%-4.75% and anticipates ongoing increases as appropriate. With inflation being above the longer-run goal of 2 percent, the FOMCraised the federal funds rate 25 basis points and intends to further reduce the Federal Reserve'sholdings of Treasurysecurities, agency debt, and agency mortgage-backed securities. The most recent forecast by UHERO, issued on December 16, 2022, forecasts full year 2022 real GDP growth of 2.0%, an increase in total visitor arrivals of 36.9%, a decrease in real personal income of 6.4%, and an unemployment rate of 3.8%. This forecast anticipates a potential slowdown in recovery due to rising inflation, interest rates, and supply chain issues despite the 39 -------------------------------------------------------------------------------- return of Japanese visitors. However, in the event of a U.S.recession, UHERO believes that Hawaiiis unlikely to suffer as severely compared to the U.S.mainland due to anticipated visitor arrivals and a surge in public sector construction. Downward risks are forecasted to include ongoing global economic fallout from Russia'sinvasion of Ukraine, possibility of a global recession, and uncertainties of international and domestic visitor arrivals due to higher travel costs. 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. The Company expects economic conditions in Hawaiito remain relatively stable going forward, supported by the expected recovery in the international tourism market and increased construction spending in the public sector; however, it is difficult to predict the future path of the pandemic. 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.
Liquidity and capital resources. As of
outstanding, respectively, and
December 31, 2022, there was no balance on HEI's revolving credit facility and the available committed capacity under the revolving credit facility was $175 million(see Note 5 of the Consolidated Financial Statements). As of December 31, 2022, there was no balance on Hawaiian Electric'srevolving credit facility and the available committed capacity under the revolving credit facility was $200 million. As of December 31, 2022, ASB's unused FHLB borrowing capacity was approximately $1.6 billionand ASB had unpledged investment securities of $1.6 billionthat were available to be used as collateral for additional borrowing capacity. As of 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 $237 million, which was a decrease of approximately $84 millioncompared to December 31, 2021. On September 29, 2021, HEI executed a $125 millionprivate placement, utilizing a delayed draw feature with two tranches. The first tranche of $75 millionwas drawn on December 29, 2021and the proceeds were primarily used to invest in the Utilities' equity to support its capital expenditure program and maintain the Utilities' equity capitalization ratio at approximately 58%. The second and final tranche of $50 millionwas drawn on October 26, 2022, to refinance a portion of $150 millionof debt that matured on November 20, 2022. On September 29, 2022, HEI executed a private placement under which HEI has authorized the issue and sale of $110 millionof unsecured senior notes. The proceeds, totaling $110 million, were drawn on November 1, 2022to refinance the remaining portion of the $150 millionof debt that matured on November 20, 2022. See Note 6 of the Consolidated Financial Statements for additional information. On October 20, 2022, HEI entered into a term loan facility in the aggregate principal amount of $100 million. The term loan facility allows HEI to draw down proceeds on a delayed basis through March 31, 2023, at which time the term loan commitment expires. On December 28, 2022, HEI drew $35 millionon the term loan. Any borrowings under the facility mature on November 30, 2023. Borrowings under the facility bear interest at Term SOFR, as defined in the agreement, plus an applicable margin and a SOFR spread adjustment. See Note 5 of the 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 twelve 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, the elevated fuel prices 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. The higher accounts receivable balance, which has increased by $101 millionsince December 31, 2021, has led to higher bad debt expense and may result in higher write-offs in the future. As of December 31, 2022, approximately $50 millionof the Utilities' accounts receivables were over 30 days past due. Of the over 30 days past due amounts, approximately 17% 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
40 -------------------------------------------------------------------------------- 2022, compared to
$251 millionas of December 31, 2021. ASB remains well above the "well capitalized" level under the FDIC Improvement Act prompt correction action capital category, and while the economic outlook has improved and is expected to continue to improve, there are emerging risks from inflation and the tightening of monetary policy that increase the risk of a recession, as well as ongoing COVID-19 risks, such as new variants, all of 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 $30 millionon 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. Forecasted HEI consolidated "net cash used in investing activities" (excluding "investing" cash flows from ASB) for 2023 through 2027 consists primarily of the net capital expenditures of the Utilities principally related to maintaining and modernizing the grid to allow for the integration of more renewable energy, improved customer reliability, greater system efficiency and enhanced resilience. The Utilities' capital expenditures are approximately $2.2 billionover the next five years and are expected to be funded primarily through a combination of retained earnings and proceeds from debt issuance, and if required, contributions of equity from HEI to maintain the Utilities' equity capitalization at approximately 58% (see also discussion regarding other material cash requirements under "Financial Condition-Liquidity and capital resources," contained in the "Electric utility" and "Bank" sections below). In addition to the funds required for the Utilities' construction programs and debt maturities, with respect to HEI, over the next five years, approximately $50 millionwill be required in 2023 and $50 millionin 2025 to repay maturing long-term debt. Debt maturities are expected to be repaid with the proceeds from the issuance of commercial paper, bank borrowings, other medium- or long-term debt, issuance of common stock and/or dividends from subsidiaries. Additional debt and/or equity financing may be utilized to invest in the Utilities, Bank or Pacific Current; to pay down commercial paper or other short-term borrowings; to pay interest costs; or to fund unanticipated expenditures not included in the 2023 through 2027 forecast, such as increases in the costs of, or an acceleration of, the construction of capital projects of the Utilities or unanticipated utility capital expenditures. In addition, existing debt may be refinanced prior to maturity with additional debt or equity financing (or both). 41 --------------------------------------------------------------------------------
Selected short-term and long-term contractual obligations and commitments.
Information about payments under the specified contractual obligations and
commercial commitments of HEI and its subsidiaries was as follows:
December 31, 2022Less than 1-3 3-5 More than (in millions) 1 year years years 5 years Total Contractual obligations Investment in qualifying affordable housing projects $ - $ 60 $ 9 $ 1 $ 70Time certificates 496 94 19 3 612 Short-term borrowings 173 - - - 173 Other bank borrowings 695 - - - 695 Long-term debt 172 122 248 1,858 2,400 Interest on CDs, other bank borrowings, short-term loan and long-term debt 100 179 162 780 1,221 Operating and finance leases PPAs classified as leases 11 22 22 104 159 Other leases 23 37 24 39 123 Service bureau contract, maintenance agreements and other 22 29 13 1 65 Hawaiian Electricopen purchase order obligations1 178 65 12 - 255 Hawaiian Electricfuel oil purchase obligations (estimate based on fuel oil price at December 31) 5 9 5 - 19 Hawaiian Electricpower purchase-minimum fixed capacity charges not classified as leases 80 160 160 521 921 Liabilities for uncertain tax positions - 8 13 - 21 Total (estimated) $ 1,955 $ 785 $ 687 $ 3,307 $ 6,734
1Includes contractual obligations and commitments for capital expenditures and
The table above does not include other categories of obligations and commitments, such as deferred taxes, certain trade payables, amounts that will become payable in future periods under collective bargaining and other employment agreements and employee benefit plans, and potential refunds of amounts collected from ratepayers (e.g., under the earnings sharing mechanism). As of
December 31, 2022, the fair value of the assets held in trusts to satisfy the obligations of the Company's retirement benefit plans did not exceed the retirement benefit plans' benefit obligation. Minimum funding requirements for retirement benefit plans have not been included in the tables above; however, see Note 10 of the Consolidated Financial Statements for 2023 estimated contributions.
See Note 3 of the Consolidated Financial Statements for a discussion of the
Utilities’ commitments. See Note 4 of the Consolidated Financial Statements for
a further discussion of ASB’s commitments.
Operating activities provided net cash of
$454 millionin 2022 and $376 millionin 2021. Investing activities used net cash of $1,129 millionin 2022 and $1,180 millionin 2021. In 2022, net cash used in investing activities was primarily due to net increase in loans receivable, purchases of available-for-sale investment securities, capital expenditures, purchases of loans held for investment and net purchases of stock from Federal Home Loan Bank, partly offset by receipt of repayments from available-for-sale and held-to-maturity investment securities. In 2021, net cash used in investing activities was primarily due to purchases of available-for-sale and held-to-maturity investment securities, capital expenditures, and purchases of stock from Federal Home Loan Bank, partly offset by receipt of repayments from available-for-sale and held-to-maturity investment securities, proceeds from sale of available-for-sale investment securities, net decrease in loans held for investment, proceeds from sale of residential loans and redemption of stock from Federal Home Loan Bank. Financing activities provided net cash of $568 millionin 2022 and $756 millionin 2021. In 2022, net cash provided by financing activities included net increases in other short-term borrowings and proceeds from issuance of short-term and long-term debt and net increases in short-term borrowings, partly offset by repayment of long-term debt and payment of common and preferred stock dividends. In 2021, net cash provided by financing activities included net increases in deposits and proceeds from issuance of long-term debt, partly offset by payment of common and preferred stock dividends, repayment of long-term debt, short-term debt and net decreases in short-term borrowings. For a discussion of 2020 operating, investing and financing activities, please refer to the "Liquidity and capital resources" section in Item 7, "Management Discussion and Analysis of Financial Condition and Results of Operations- HEI Consolidated," in the Company's 2021 Form 10-K.
Other than capital contributions from their parent company, intercompany
services (and related intercompany payables and receivables),
the payment of dividends
42 -------------------------------------------------------------------------------- to HEI, the electric utility and bank segments are largely autonomous in their operating, investing and financing activities. (See the electric utility and bank segments' discussions of their cash flows in their respective "Liquidity and capital resources" sections below.) During 2022,
Hawaiian Electricand ASB (through ASB Hawaii) paid cash dividends to HEI of $126 millionand $42 million, respectively. A portion of the net assets of Hawaiian Electricand ASB is not available for transfer to HEI in the form of dividends, loans or advances without regulatory approval. In the absence of an unexpected material adverse change in the financial condition of the electric utilities or ASB, such restrictions are not expected to significantly affect the operations of HEI, its ability to pay dividends on its common stock or its ability to meet its debt or other cash obligations. See Note 14 of the Consolidated Financial Statements. 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, tightening of monetary policy and the ongoing COVID-19 pandemic, 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. See Item 1A. "Risk Factors" in Part I for further discussion of risks and uncertainties.
The consolidated capital structure of HEI (excluding deposit liabilities and
other bank borrowings) was as follows:
December 31 2022
(dollars in millions) Short-term borrowings, net-other than bank
$ 1733 % $ 541 % Long-term debt, net-other than bank 2,385 50 2,322 48 Preferred stock of subsidiaries 34 1 34 1 Common stock equity 2,202 46 2,391 50 $ 4,794100 % $ 4,801100 % HEI's commercial paper borrowings and line of credit facility were as follows: Year ended December 31, 2022 Average End-of-period December 31, (in millions) balance balance 2021 Commercial paper $ 50 $ 50 $ 54 Line of credit draws on revolving credit facility - - - Note: This table does not include Hawaiian Electric'sseparate commercial paper issuances and line of credit facilities and draws, which are disclosed below under "Electric utility-Liquidity and capital resources" below. The maximum amount of HEI's short-term commercial paper borrowings in 2022 was $80 million. As of December 31, 2022, available committed capacity under HEI's line of credit facility was $175 million. HEI utilizes short-term debt, typically commercial paper, to support normal operations, to refinance commercial paper, to retire long-term debt, to pay dividends and for other temporary requirements, including short-term financing needs of its subsidiaries. HEI also periodically makes short-term loans to Hawaiian Electricto meet Hawaiian Electric'scash requirements, including the funding of loans by Hawaiian Electricto Hawaii Electric Lightand Maui Electric, but no such short-term loans to Hawaiian Electricwere outstanding as of December 31, 2022. HEI periodically utilizes long-term debt, historically unsecured indebtedness, to fund investments in and loans to its subsidiaries to support their capital improvement or other requirements, to repay long-term and short-term indebtedness and for other corporate purposes. As of December 31, 2022, HEI's debt maturities in 2023 include $50 millionof long-term debt that matures in March 2023. See Notes 5 and 6 of the Consolidated Financial Statements for a brief description of the Company's loans. 43 -------------------------------------------------------------------------------- The rating of HEI's commercial paper and debt securities could significantly impact the ability of HEI to sell its commercial paper and issue debt securities and/or the cost of such debt. As of February 13, 2023, the Fitch, Moody's and S&P ratings of HEI were as follows: Fitch Moody's S&P Long-term issuer default, long-term and issuer credit, respectively BBB WR* BBB- Commercial paper F3 P-2 A-3 Outlook Positive Stable Stable * Moody's long-term debt rating was withdrawn because HEI does not currently have any outstanding, publicly traded debt. Moody's continues to rate Hawaiian Electric'slong-term debt. See 'Electric utility-Liquidity and capital resources' below. Note: The above ratings reflect only the view, at the time the ratings are issued or affirmed, of the applicable rating agency, from whom an explanation of the significance of such ratings may be obtained. Such ratings are not recommendations to buy, sell or hold any securities; such ratings may be subject to revision or withdrawal at any time by the rating agencies; and each rating should be evaluated independently of any other rating.
There were no new issuances of common stock through the HEI DRIP, HEIRSP or the
ASB 401(k) Plan in 2022, 2021 or 2020 and HEI satisfied the share purchase
requirements of the DRIP, HEIRSP and ASB 401(k) Plan through open market
purchases of its common stock.
Off-balance sheet arrangements. Although the Company and the Utilities have certain off-balance sheet arrangements, management has determined that it has no off-balance sheet arrangements that either have, or are reasonably likely to have, a current or future effect on the Company's and the Utilities' financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors, including the following types of off-balance sheet arrangements:
1.obligations under guarantee contracts,
2.retained or contingent interests in assets transferred to an unconsolidated entity or similar arrangements that serve as credit, liquidity or market risk support to that entity for such assets,
3.obligations under derivative instruments, and
4.obligations under a material variable interest held by the Company or the Utilities in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company or the Utilities, or engages in leasing, hedging or research and development services with the Company or the Utilities. 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. Material estimates that are particularly susceptible to significant change include the amounts reported for pension and other postretirement benefit obligations; contingencies and litigation; income taxes; regulatory assets and liabilities; allowance for credit losses; fair value; and asset retirement obligations (AROs). Management considers an accounting estimate to be material if it requires assumptions to be made that were uncertain at the time the estimate was made and changes in the assumptions selected could have a material impact on the estimate and on the Company's results of operations or financial condition. 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 the policies discussed below 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. The policies affecting both of the Company's two principal segments are discussed below and the policies affecting just one segment are discussed in the respective segment's section of "Material estimates and critical accounting policies." Management has reviewed the material estimates and critical accounting policies with the
HEI Audit & Risk Committeeand, as applicable, the Hawaiian Electric Audit & Risk Committee. For additional discussion of the Company's accounting policies, see Note 1 of the Consolidated Financial Statements and for additional discussion of material estimates and critical accounting policies, see the electric utility and bank segment discussions below under the same heading. Pension and other postretirement benefits obligations. The Company's benefit obligations and reported costs of providing retirement benefits are dependent upon numerous factors resulting from actual plan experience and assumptions about future experience. For example, retirement benefits costs are impacted by actual employee demographics (including age and compensation levels), the level of contributions to the plans, earnings and realized and unrealized gains and losses on plan assets, and changes made to the provisions of the plans. Costs may also be significantly affected by changes in key actuarial assumptions, including the expected return on plan assets, the discount rate and mortality. The Company's accounting for 44 -------------------------------------------------------------------------------- retirement benefits under the plans in which the employees of the Utilities participate is also adjusted to account for the impact of decisions by the PUC. Changes in obligations associated with the factors noted above may not be immediately recognized as costs on the income statement, but generally are recognized in future years over the remaining average service period of plan participants. The discount rate used to calculate the Company's benefit obligations is a significant assumption that affects the Company's benefit obligations. As of December 31, 2022, the discount rates for HEI and the Utilities' pension and other benefits plans were 5.67% and 5.66%, respectively. Based on various assumptions in Note 10 of the Consolidated Financial Statements, sensitivities of the projected benefit obligation (PBO) and accumulated postretirement benefit obligation (APBO) as of December 31, 2022, associated with a change in the discount rate, were as follows and constitute "forward-looking statements": Impact on Consolidated Change in assumption Impact on HEI Consolidated Hawaiian Electric Actuarial assumption in basis points PBO or APBO PBO or APBO (dollars in millions) Pension benefits Discount rate +/-50 $(116)/ $130 $(109)/ $122Other benefits Discount rate +/-50 $(8)/ $9 $(8)/ $9
Also, see Notes 1 and 10 of the Consolidated Financial Statements.
Contingencies and litigation. The Company is subject to proceedings (including PUC proceedings), lawsuits and other claims. Management assesses the likelihood of any adverse judgments in or outcomes of these matters as well as potential ranges of probable losses, including costs of investigation. A determination of the amount of reserves required, if any, for these contingencies is based on an analysis of each individual case or proceeding often with the assistance of outside counsel. The required reserves may change in the future due to new developments in each matter or changes in approach in dealing with these matters, such as a change in settlement strategy. In general, environmental contamination treatment costs are charged to expense, unless it is probable that the PUC would allow such costs to be recovered through future rates, in which case such costs would be capitalized as regulatory assets. Also, environmental costs are capitalized if the costs extend the life, increase the capacity, or improve the safety or efficiency of property; the costs mitigate or prevent future environmental contamination; or the costs are incurred in preparing the property for sale.
See Notes 1, 3 and 4 of the Consolidated Financial Statements.
Income taxes. Deferred income tax assets and liabilities are established for the temporary differences between the financial reporting bases and the tax bases of the Company's assets and liabilities using tax rates expected to be in effect when such deferred tax assets or liabilities are realized or settled. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management evaluates its potential exposures from tax positions taken that have or could be challenged by taxing authorities. These potential exposures result because taxing authorities may take positions that differ from those taken by management in the interpretation and application of statutes, regulations and rules. Management considers the possibility of alternative outcomes based upon past experience, previous actions by taxing authorities (e.g., actions taken in other jurisdictions) and advice from its tax advisors. Management believes that the Company's provision for tax contingencies is reasonable. However, the ultimate resolution of tax treatments disputed by governmental authorities may adversely affect the Company's current and deferred income tax amounts.
See Note 12 of the Consolidated Financial Statements.
Following are discussions of the electric utility and bank segments. Additional segment information is shown in Note 2 of the Consolidated Financial Statements. The discussion concerning
Hawaiian Electricshould be read in conjunction with its consolidated financial statements and accompanying notes.
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 45 -------------------------------------------------------------------------------- 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.
Recent developments. See also Recent developments in HEI’s MD&A.
For the full year 2022, kWh sales volume increased 1.1% from 2021 levels;
however, the full year 2022 kWh sales are still 4.4% below the pre-pandemic
level of kWh sales in 2019. The increase in kWh sales in 2022 is primarily due
to an improvement in economic activity in
significant rebound in the domestic tourism market.
Fuel costs have risen rapidly in 2022 and average fuel prices have increased 76.7% compared to the prior year. Although the Utilities are able to pass through fuel costs to customers and have limited fuel cost exposure under a 2% fuel-cost risk sharing mechanism (approximately
$3.7 millionmaximum exposure annually, and the amount the Utilities have recognized as a penalty for 2022), 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. In December 2022, the consumer price index moderated to 6.5% from a peak of 9.1% in June 2022. In Hawaii, the November 2022Urban Hawaii ( Honolulu) Consumer Price Index (CPI) was modestly lower, with an increase of 5.8% over the last twelve 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 2021and 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.
Accounts receivable increased in 2022 by
$101 million, or 54% with the number of accounts past due remaining relatively flat since December 31, 2021. The increase in accounts receivables was primarily driven by higher customer bills impacted by the increase in fuel prices, offset by payments on installment plans and higher cash receipts associated with increased disconnection efforts. At this time, the delay in customer cash collections has 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. In the Utilities' Reply Statement of Position submitted to the PUC on November 30, 2022, the Utilities updated the estimated maximum COVID-19 total recovery request amount to $14.3 million. As of December 31, 2022, the Utilities have recorded $11.4 millionin regulatory assets for deferral of COVID-19 related costs. The updated amounts have been reflected in the Utilities' Supplemental Response to the PUC filed on January 12, 2023. 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. (See discussion under "Regulatory assets for COVID-19 related costs" in Note 3 of the Consolidated Financial Statements). Hawaii COVID-19 case counts and hospitalizations have declined following peaks earlier in the year; however, a worsening of COVID-19 cases driven by new variants or a reinstatement of COVID-19 restrictions could adversely affect the ability of the Utilities' contractors, suppliers, IPPs, and other business partners to perform or fulfill their obligations timely, or at all, or require modifications to existing contracts, which could adversely affect the Utilities' business, increase expenses, and impact the Utilities' ability to achieve their RPS and other climate related goals.
Regulatory Developments. See “Regulatory proceedings” in Note 3 of the
Consolidated Financial Statements for discussions related to recent regulatory
46 -------------------------------------------------------------------------------- Performance-based regulations. On
December 23, 2020, the PUC issued a D&O (PBR D&O) approving a new performance-based regulation framework (PBR Framework). See "Regulatory proceedings" under "Commitments and contingencies" in Note 3 of the 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
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 Electricand IPPs who sell electricity to the Utilities. The 2030 commitment would provide a significant portion of the reduction the entire Hawaiieconomy needs to meet the U.S.target of cutting carbon emissions by at least 50% economy-wide by 2030. Hawaiian Electrichas 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 HawaiiState 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'sgeneration, 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, the state's largest solar plus battery storage project to date, totaling 39 MW, reached commercial operations on July 31, 2022. 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'srenewable 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. Hawaiilaw has also established a target of sequestering more atmospheric carbon and greenhouse gases than emitted within the state by 2045. The Utilities' strategies and plans are fully aligned in meeting these targets. 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 Igesigned 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
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
47 -------------------------------------------------------------------------------- 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'spolicy 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" under "Commitments and contingencies" and "Decoupling" in Note 3 of the 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) 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 Paneland Working groups have been established and meet regularly to provide feedback and input on specific issues and process steps in the IGP. The Utilities submitted an updated IGP work plan to the PUC in January 2021. In August 2021, the Utilities submitted their Revised Inputs and Assumptions to the PUC for review and approval, marking the significant progress made through the stakeholder engagement phase of the IGP process. On March 31, 2022, the Utilities submitted the final Inputs and Assumptions approved by the PUC. On September 26, 2022, the PUC approved the Utilities' planning methodologies and criteria. The Grid Needs Assessment is now underway and is expected to be completed in the second quarter of 2023. 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 Oahuand 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 26, 2022, the Consumer Advocatefiled its Statement of Position not objecting to the PUC approving the GSPA if certain conditions are adopted. The Utilities responded to the Statement of Position on August 9, 2022to comment to the various conditions proposed by the Consumer Advocate. The procedural schedule steps are completed and the GSPA is ready for the PUC's decision. As of December 31, 2022, the PUC has not ruled on this GSPA approval request. 48 -------------------------------------------------------------------------------- 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 December 31, 2022, the Utilities have received and approved the applications totaling approximately 15 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 Mauiand received PUC approval on May 20, 2022. The EDRP on Mauibecame effective as of June 1, 2022. Subsequently, on June 23, 2022, the PUC approved the cost recovery of the additional incentives for both Oahuand Mauithrough the Demand-Side Management Surcharge. As of December 31, 2022, the Utilities have received and approved the applications totaling approximately 1.2 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 Mauiand is seeking 15 MW of grid services. Only one vendor provided comment recommending to not proceed with the RFP unless significant modifications were made to the RFP and GSPA. Comment was filed to the PUC on November 7, 2022. On December 22, 2022, the PUC issued an order approving Hawaiian Electricto proceed with the RFP with modifications. Hawaiian Electricsubmitted an update to the RFP per the order on January 16, 2023, and issued the RFP on February 1, 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 millionin capital and deferred software cost and is expected to be incurred over five years. As of December 31, 2022, approximately $72 millionof 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 December 31, 2022, the Utilities have deployed about 193,000 advanced meters, servicing approximately 41% of total customers. The Utilities filed an application with the PUC on September 30, 2019for 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. The estimated cost for the implementation over five years of the ADMS and field devices, which includes capital, deferred software costs and O&M costs, is $105 million. A PUC order was issued on April 27, 2021, unsuspending and resuming consideration of the Phase 2 Application. 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. 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 Mauiand 270 kW on Oahu) have been operational for two years, with four additional phase 1 projects expected to become operational in 2023 (second quarter: Oahu: 3,000kW, Hawaii Island: 750kW and Molokai: 250kW; third quarter: Oahu: 1,720kW). The second phase, which commenced on April 9, 2020and subsequently expanded on July 27, 2021, allows over 250 MW across all Hawaiian Electricservice 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 49 -------------------------------------------------------------------------------- the program, 23 MW of capacity for dedicated-LMI projects were awarded on November 15, 2022through three island specific RFPs for Oahu, Mauiand 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, Mauiand Hawaiion 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.
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
“Developments in renewable energy efforts-Requests for renewable proposals,
expressions of interest, and information” for additional information.
One CBRE proposal for
Lanaiwas 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 Lanaito 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, Mauiand 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 Organizationhas added their project to the portal. Microgrid services tariff proceeding. In enacting Act 200 of 2018, the Hawaiilegislature found that Hawaii'sresidents 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'scommunities, 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 Related Considerations; 4) Interconnection; and 5) Working Groupcoordination with related microgrid and resilience Initiatives at Hawaiian Electricand 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 Groupto prioritize discussion of the microgrid types in the following order: 1) Hybrid Microgrid - Third Party Developer using Utility lines/infrastructure; 2) Hybrid Microgrid - Utility Projectwith Partners; and 3) Customer Microgrid. Additionally, the PUC instructed the Working Groupto discuss microgrid compensation and continue the involvement of microgrid developers in working group meetings. The Working Groupmet from April 2022through October 2022to 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 Grouppropose a new timeline for the Report. The Utilities and the Consumer Advocatefiled a joint letter with a revised timeline on November 10, 50 --------------------------------------------------------------------------------
procedural schedule while it reviews the joint letter.
Decoupling. See “Decoupling” in Note 3 of the 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
% Rate-making Return on rate base (RORB)* ROACE** Rate-making ROACE*** Hawaii Electric Year ended
December 31, 2022 Hawaiian Electric Hawaii Electric Light Maui Electric Hawaiian ElectricLight Maui Electric Hawaiian Electric Hawaii Electric Light Maui ElectricUtility returns 7.32 5.76 6.53 8.76 6.44 7.33 9.67 6.87 8.23 PUC-allowed returns 7.37 7.52 7.43 9.50 9.50 9.50 9.50 9.50 9.50 Difference (0.05) (1.76) (0.90) (0.74) (3.06) (2.17) 0.17 (2.63) (1.27) * 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). 51 --------------------------------------------------------------------------------
Results of operations.
2022 vs. 2021
2022 2021 Increase (decrease) (dollars in millions, except per barrel amounts)
$ 3,409 $ 2,540 $ 869
Revenues. Net increase largely due to:
higher fuel oil prices and higher kWh generated1
higher purchased power energy prices, partially offset by lower
kWh purchased and lower PPAC revenue2
higher revenue from ARA adjustments, which included the customer
dividend delivered to customers
revenue in 2022 related to ownership of and responsibility for the
1, 2022 5 higher other fee revenue 4 higher MPIR revenue 1,266 644 622
Fuel oil expense.1 Net increase largely due to higher fuel oil
prices and higher kWh generated partially offset by lower
penalties for better fuel efficiency due to reset of heat rate
794 670 124
Purchased power expense1,2. Increase largely due to higher
purchased power energy prices, partially offset by lower kWh
purchased and lower AES charges due to its closure on
498 475 23
Operation and maintenance expense. Net increase largely due to:
more generating facility overhauls and maintenance work performed
expense in 2022 related to ownership of and responsibility for the
1, 2022 4 higher bad debt expense 3
higher transmission and distribution preventive and corrective
higher outside services for Information and Technology and
Services Support, Customer Interconnection/Installation, Demand
Response Management System, and Battery Bonus program
increase in workers’ compensation reserve
higher property damage and legal reserve for pending claims
expense due to decommissioning of combined heat and power unit on
Customer bill forgiveness and assistance in the fourth quarter of
553 470 83
Other expenses. Increase due to higher revenue taxes, coupled with
higher depreciation expense in 2022 for plant investments in 2021
299 280 19
Operating income. Increase largely due to higher ARA and MPIR
revenue, offset in part by higher operation and maintenance
expense and higher depreciation expense
241 224 17
Income before income taxes. Increase largely due to higher
operating income and higher AFUDC, partially offset by higher
interest expense due to higher rates and borrowings
189 178 11
Net income for common stock. Increase due to higher income before
income taxes. See below for effective tax rate explanation
8.2 % 8.1 % 0.1 % Return on average common equity
$ 141.49 $ 80.06 $ 61.43Average fuel oil cost per barrel $ 8,354 $ 8,261 $ 93
Kilowatt-hour sales (millions) 3
2,511 2,469 42
Number of full-time employees (at
1The rate schedules of the electric utilities currently contain ECRCs through which changes in fuel oil prices and certain components of purchased energy costs are passed on to customers. 2The rate schedules of the electric utilities currently contain PPACs through which changes in purchase power expenses (except purchased energy costs) are passed on to customers. 52 -------------------------------------------------------------------------------- 3kWh sales were higher when compared to prior year largely due to continued recovery from impacts of the COVID-19 pandemic. COVID-19 cases have continued to decrease in 2022 and, as a result, most restrictions have been lifted.
U.S.visitor arrivals continued to increase above 2021 levels and surpassed pre-pandemic levels, but international arrivals remain lower than pre-pandemic levels. Economic recovery is expected to continue as international visitors return, although uncertainties and downward risks are present due to global economic factors, such as the continued effects of the invasion of Ukraine, high inflation, the risk of a global recession, and surging COVID-19 cases in China. Hawaiian Electric'seffective tax rate (combined federal and state income tax rates) in 2022 was slightly higher at 21%, compared to 20% at 2021, primarily due to federal research and development tax claims in 2021. For a discussion of 2020 results, please refer to the "Results of operations" section in Item 7, "Management Discussion and Analysis of Financial Condition and Results of Operations-Electricutility," in the Company's 2021 Form 10-K. The net book value (cost less accumulated depreciation) of utility property, plant and equipment (PPE) as of December 31, 2022amounted to $4.9 billion, of which approximately 24% related to generation PPE, 67% related to transmission and distribution PPE, and 9% related to other PPE. Approximately 8% of the total net book value relates to generation PPE that has been deactivated or that the Utilities plan to deactivate or decommission. Regulatory proceedings. On December 23, 2020, the PBR D&O was issued, establishing the PBR Framework. The PBR Framework implemented a five-year multi-year rate period (MRP), during which there will be no general rate case applications. In the fourth year of the MRP, the PUC will comprehensively review the PBR Framework to determine if any modifications or revisions are appropriate. See also "Regulatory proceedings" in Note 3 of the Consolidated Financial Statements.
Developments in renewable energy efforts. Developments in the Utilities’
efforts to further their renewable energy strategy include renewable energy
projects discussed in Note 3 of the Consolidated Financial Statements and the
New renewable PPAs. •On
November 16, 2021, Hawaii Electric Lightand Hawi Renewable Development, LLC(HRD) entered into an Amended and Restated Power Purchase Agreement (ARPPA). Under the 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 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 Lightfiled an application for approval of the ARPPA, requesting a decision no later than June 15, 2022. On June 17, 2022, HRD notified the Utilities that the lead time for delivery and price of equipment needed for the repowering project had increased such that it would prevent HRD from achieving the required guaranteed commercial operation date. Additionally, HRD informed the Utilities that drastic changes in the market conditions had significantly impacted the financial viability of the project. On June 24, 2022, the Utilities requested that the PUC put the procedural schedule on hold to allow HRD time to re-evaluate its plans and determine what is needed to keep the project financially viable. On January 11, 2023, Hawaii Electric Lightand HRD entered into a First Amendment to the 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. On January 27, 2023, Hawaii Electric Lightrequested the PUC to resume the docket and on February 3, 2023, Hawaii Electric Lightand the Consumer Advocatesubmitted a proposed procedural schedule to accommodate additional steps to review the First Amendment. •On December 31, 2019, Hawaii Electric Lightand Puna Geothermal Venturesentered into an Amended and Restated Power Purchase Agreement (ARPPA). The ARPPA extends the term of the existing PPA by 25 years to 2052, expands the firm capacity of the facility to 46 MW and delinks the pricing for energy delivered from the facility from fossil fuel prices to reduce cost to customers. On March 31, 2021, the PUC suspended the docket pending the completion of a supplemental environmental review under the Hawaii Environmental Policy Act (HEPA). After the Office of Planning and Sustainable Developmentidentified the Planning Department for the County of Hawaiito be the accepting agency and approving authority for any required HEPA review, the PUC lifted the suspension of the docket stating that the docket was ready for decision-making. On March 16, 2022, the PUC issued a D&O, approving the ARPPA, subject to conditions, that include requiring completion of the final environmental review prior to construction. On March 28, 2022, Puna Pono Alliancefiled 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 has notified the Utilities that changes in market conditions have transpired since the terms of the ARPPA were negotiated and has indicated its desire to negotiate an amendment to the ARPPA to mitigate the impacts. The Utilities are in discussions regarding an amendment. 53 -------------------------------------------------------------------------------- •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: Total projected annual Total photovoltaic Guaranteed commercial payment (in Utilities Number of contracts size (MW) BESS Size (MW/MWh) operation dates Contract term (years) millions) 7/31/22, 1/11/23, Hawaiian Electric 4 139.5 139.5/558 1/20/23* & 8/31/23 20 & 25 $ 32.0Hawaii Electric Light 2 60 60/240 12/2/22* & 4/21/23 25 14.9 Maui Electric 2 75 75/300 4/28/23 & 10/27/23 25 17.6 Total 8 274.5 274.5/1,098 $ 64.5
* Project delays have resulted in Guaranteed Commercial Operations Date being
The Utilities have received PUC approvals to recover the total projected annual payment of
$64.5 millionfor the eight PPAs through the PPAC to the extent such costs are not included in base rates. To date, the Utilities filed six 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. The PUC has approved four amendments and two requests filed in February 2023are pending PUC approval. On July 31, 2022, the first Stage 1 solar-pus-storage project was placed into service. On January 11, 2023, Waiawa Solar project on Oahualso reached commercial operations. See also "Stage 1 renewable PPAs" in Note 3 of the Consolidated Financial Statements. •In continuation of their February 2018request for proposal process, the Utilities issued their Stage 2 Renewable RFPs for Oahu, Mauiand Hawaii Islandand Grid Services RFP on August 22, 2019. Final awards for the renewable projects were made on May 8, 2020. Final awards for the grid services projects were made starting in January 2020. 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. The majority of these projects were approved by the PUC in 2021. On March 23, 2022, the PUC approved one solar-plus-storage project on Oahufor 15 MW of generation and 60 MWh of storage. Of the 11 filed PPAs, five PPAs were declared null and void by the independent power producers and one PPA was mutually terminated. On May 25, 2022, the PUC denied the one Utility Self-Build project on Hawaii Island. In response, the Utilities filed a motion for reconsideration with the PUC. On June 24, 2022the Utilities filed Supplemental Request informing the PUC that the project might be eligible to receive funds under the federal Infrastructure Investmentand Jobs Act (IIJA). On July 27, 2022the PUC suspended the docket until after such time that the Utilities have received final disposition of its application for funding under the IIJA. The Utilities shall then properly request the PUC to lift the suspension and either issue a decision on the pending Motion, or take further action as appropriate. On February 23, 2023, the PUC lifted the suspension and reopened the docket to begin review of the application. On July 25, 2022, the PUC approved the final solar-plus-storage project on Oahufor 42 MW of generation and 168 MWh of storage. The Utility Self-Build project on Mauiis still pending PUC approval. On October 21, 2022, the Utilities filed a letter with the PUC requesting approval of an amendment to increase price and to change the guaranteed commercial operation date of a previously-approved PPA for Stage 2 on Maui. The PUC conditionally approved the amendment on December 2, 2022. On November 17, 2022, an approved Stage 2 project on Oahudeclared its PPA null and void; the Utilities filed a notice with the PUC on November 22, 2022. On December 23, 2022, the Utilities and developer of a Stage 2 project on Mauimutually terminated its PPA; the Utilities filed a noticed with the PUC on December 29, 2022.
A summary of the remaining five Stage 2 PPAs, is as follows:
Total projected annual Total photovoltaic Guaranteed commercial payment (in Utilities Number of contracts size (MW) BESS Size (MW/MWh) operation dates
Contract term (years) millions)
5/17/23, 10/30/23 & Hawaiian Electric 3 79 79 / 443 4/9/2024 20 & 25
$ 28.8Hawaiian Electric 1 * N/A 185 / 565 12/30/22 20 24.0 Maui Electric 1 40 40 / 160 12/31/2024 25 19.1 Total 5 119 304 / 1,168 $ 71.9
* See further discussion under “Review of Interconnection Process and Kapolei
Energy Storage Power Purchase Agreement” below.
The total projected annual payment of
recovered through the PPAC to the extent such costs are not included in base
A summary of the GSPAs that were approved by PUC in
December 2020is as follows: Fast Frequency Fast Frequency Capacity - Capacity - Response - 1 Response - 2 Load Build Load Reduction Utilities (MW) (MW) (MW) (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: Guaranteed commercial Utilities Number of contracts BESS Size (MW/MWh) 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
Utilities have filed a motion for reconsideration with the PUC.
•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 efforts 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.Customers 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 US Department of Commerceon March 28, 2022, in response to a request by Auxin Solar Inc.in regards to solar panel imports. On June 6, 2022, President Bidencreated 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 date for those projects in order to ensure their viability given the impact of these recent market conditions. The Inflation Reduction Act (IRA) was signed into law on August 16, 2022. The Utilities are working with the developers to determine if the IRA will provide any benefit for the issues currently being seen by projects. 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. Tariffed renewable resources. •As of December 31, 2022, there were approximately 573 MW, 125 MW and 137 MW of installed distributed renewable energy technologies (mainly PV) at Hawaiian Electric, Hawaii Electric Lightand 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 December 31, 2022, an estimated 34% of single-family homes on the islands of Oahu, Hawaiiand Mauihave installed private rooftop solar systems, and approximately 20% of the Utilities' total customers have solar systems. •The Utilities began accepting energy from feed-in tariff projects in 2011. As of December 31, 2022, there were 43 MW, 2 MW and 6 MW of installed feed-in tariff capacity from renewable energy technologies at Hawaiian Electric, Hawaii Electric Lightand Maui Electric, respectively.
July 2018, the PUC approved Hawaiian Electric'sthree-year biodiesel supply contract with Pacific Biodiesel Technologies, LLC(PBT) to supply 2 million to 4 million gallons of biodiesel at Hawaiian Electric'sSchofield 55 -------------------------------------------------------------------------------- Generating Station and the Honolulu International Airport Emergency PowerFacility (HIA Facility) and any other generating unit on Oahu, as necessary. The PBT contract became effective on November 1, 2018, and has been extended for one year through December 2022. Hawaiian Electricalso 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 2023. On June 30, 2021, the Utilities issued an RFP for all fuels, including biodiesel, for supply commencing January 1, 2023. The Utilities and PBT signed an agreement on December 13, 2021for supply of biodiesel on all islands commencing January 1, 2023, which was approved by the PUC on December 1, 2022. •Hawaiian Electric has a contingency supply contract with REG Marketing & Logistics Group, LLCto also supply biodiesel to any generating unit on Oahuin 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.
November 22, 2021, CBRE RFPs for Molokaiand Lanaiwere opened. The RFP for Lanaisought a single PV paired with storage project, which included a 3 MW portion, reserved for CBRE. The Lanai RFP closed on February 14, 2022and 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 Molokaisought 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, Mauiand Hawaiiwere opened and proposals were received, 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, Mauiand Hawaiion April 14, 2022and proposals are currently being evaluated. See "Transition to a decarbonized and sustainable energy future-Community-based renewable energy" for additional information. •The PUC issued a letter to the Utilities requesting development with a Stage 3 RFP on Hawaii Islandon January 21, 2021. In accordance with guidance provided by the PUC in a subsequent letter on April 20, 2021, the Utilities filed the Hawaii Island Grid Needs Assessment on July 15, 2021and the draft RFP, including model contracts for PV+BESS, wind+BESS, standalone storage, firm renewable generation, and DER aggregators on October 15, 2021. The requirements in the Stage 3 RFP are guided by the results of the Grid Needs Assessment. On March 18, 2022, the Utilities filed a second draft of the Stage 3 RFP for Hawaii Island, incorporating stakeholder and PUC feedback. On May 31, 2022, the Utilities filed its proposed final draft Stage 3 RFP for Hawaii Island. On June 30, 2022, the PUC issued an order approving with modifications the Stage 3 RFP for Hawaii Islandand providing guidance on the Oahuand Maui Stage 3 RFPs. On July 11, 2022, the Utilities filed a motion for partial reconsideration and/or clarification of the PUC's order. On July 20, 2022, the Utilities filed a Request for Extension to file the final Stage 3 RFP for Hawaii Island. On July 28, 2022, the PUC issued an order granting the Utilities' motion for an enlargement of time to file the final Stage 3 RFP for Hawaii Island. The Utilities' deadline to file the final Stage 3 RFP for Hawaii Islandis 15 days from the filing date of the PUC's decision on the Utilities' Motion for Reconsideration. On October 17, 2022, the PUC issued an order in response to the Utilities' Motion. The final Stage 3 RFP was filed on November 7, 2022and the RFP was issued on November 21, 2022. Proposals were due by February 24, 2023. •On February 18, 2022, the PUC sent a letter to the Utilities directing them to develop Stage 3 RFPs for Oahuand Maui. On March 10, 2022, the Utilities submitted its recommendations on plans to develop Stage 3 RFPs for Oahuand Maui, and on May 2, 2022, the Utilities filed draft RFPs for Oahuand Maui. Updated grid needs assessments for Oahuand Mauiwere filed on July 29, 2022. Thirty-three information requests were issued by the PUC for the near term grid needs assessments supporting the Oahuand Maui Stage 3 RFPs on September 28, 2022. On October 7, 2022, the Utilities requested an extension from October 19, 2022to November 16, 2022to respond. On October 17, 2022, the Utilities filed a letter in both the RFP and IGP dockets with updated schedules for the Stage 3 and IGP RFPs and requesting approval to issue the Stage 3 Hawaii RFP by October 31, 2022and the Stage 3 Maui and Oahu RFPs by November 30, 2022. The October 17, 2022Order also mandated a 30 day comment period on the grid needs assessments for Oahuand Maui, which started on October 20, 2022. Comments were received on November 21, 2022. The filing of the Utilities' letter crossed with the filing of the PUC order. As a result of the updated near term grid needs assessments for Oahuand Mauias well as the subsequent withdrawals of one Stage 2 project each on Oahuand Maui, the Stage 3 RFP energy targets were increased. 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 December 1, 2022, the PUC approved the Stage 3 RFPs for Oahuand Mauiwith modifications. On December 22, 56 --------------------------------------------------------------------------------
2022, the final RFPs were filed, and were automatically approved by the PUC on
November 17, 2021, the Utilities filed a request with the PUC to develop an RFP for firm renewable generation for Oahu. On December 22, 2021, the PUC issued guidance to the Utilities on proceeding with such RFP. The Utilities filed a draft RFP on February 28, 2022. Per the PUC's March 23, 2022letter, the Utilities will pursue firm renewable generation as a part of the Stage 3 Oahu RFP.
Review of Interconnection Process and Kapolei Energy Storage Power Purchase
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 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 Legislaturepassed SenateBill 2474 SD 2 HD 1 CD 1, which was signed into law on June 27, 2022as Act 201. The law requires that the PUC contract with a qualified consultant to conduct a study on the accessibility of Hawaii'selectric system and procedures for interconnection to Hawaii'selectric system, including but not limited to the timeliness and costs of interconnection. The PUC contracted with PA Consultingto 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, 2022and did not find any wrongdoing on the part of the utility. The report made minor recommendations for Hawaiian Electricto 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 Electricthrough various proceedings related to the interconnection process. Hawaiian Electricwill 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 millionfor 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 Electricgenerating 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 57 -------------------------------------------------------------------------------- investment and a fair opportunity to earn a reasonable return on the capital prudently committed to the business. Hawaiian Electricfiled 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'sMotion for Reconsideration and Stay. In this Order, the PUC addressed a number of Hawaiian Electric'sconcerns, 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'sMotion for Reconsideration can be found on the PUC website at dms.puc.hawaii.gov/dms (Docket No. 2020-0136). Legislation and regulation. Congressand the Hawaiilegislature periodically consider legislation that could have positive or negative effects on the Utilities and their customers. Also see "Environmental regulation" in "Item 1. Business" and Note 3 of the Consolidated Financial Statements. Fuel contracts. The fuel contract entered into in January 2019, by the Utilities and PAR Hawaii Refining, LLC(PAR Hawaii), for the Utilities' low sulfur fuel oil (LSFO), high sulfur fuel oil (HSFO), No. 2 diesel, and ultra-low sulfur diesel (ULSD) requirements was approved by the PUC, and became effective on April 28, 2019and terminated on December 31, 2022. This contract was a requirement contract with no minimum purchases. If PAR Hawaii is unable to provide LSFO, HSFO, diesel and/or ULSD the contract allows the Utilities to purchase LSFO, HSFO, diesel and/or ULSD from another supplier. On June 9, 2020, the Utilities and PAR Hawaii entered into a First Amendment to the fuel contract. The First Amendment amends only the LSFO pricing to create a two-tiered structure based on volume, with all tier-1 LSFO up to the tier-1 maximum to be purchased exclusively from PAR Hawaii at the established pricing, and purchases in excess of that volume (tier-2) either from PAR Hawaii at the established pricing, or from an alternative supplier. On August 4, 2020, the PUC approved the First Amendment, which has an effective date of July 15, 2020, on an interim basis. The PUC's approval order allows the recovery of such costs associated with the First Amendment through the ECRC to the extent that the costs are not recovered in base rates. The PUC intends to review whether the First Amendment is reasonable and in the public interest in the final decision, but it will not subject the recovery of the costs between the interim decision and the final decision to retroactive disallowances. On July 6, 2021, the PUC issued a D&O, approving the First Amendment and requiring the Utilities to meet certain conditions of approval (COA). The Utilities are currently addressing the COAs as required in the D&O. 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 entered into a fuel supply contract commencing January 1, 2023and Second Amendment to the existing fuel contract to amend tier-1 volumes. On September 1, 2022, the fuel supply contract with PAR Hawaii was approved by the PUC on an interim basis and the Second Amendment to the existing fuel contract received final approval from the PUC. On March 3, 2022, as part of economic sanctions amid the Russia- Ukrainewar, Par Hawaiiannounced that it is suspending all purchases of Russian crude oil, which accounts for at least 25% of Hawaii'ssupply. The average fuel oil cost per barrel has increased 77% over prior year. 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, 2022through June 30, 2023with annual extensions if mutually agreed by both parties. The PUC issued the final decision and order approving the both the PAR fuels contracts and the Vitol backup fuels supply contract on December 1, 2022. The costs incurred under the contract with PAR Hawaii and Vitol are recovered in the Utilities' respective ECRCs. Proposed modification to the pension tracking mechanism. On June 9, 2022, the Utilities filed an application with the PUC for approval to modify the pension tracking mechanism. The existing pension tracking mechanisms allows the Utilities to record the difference between actual NPPC and NPPC in rates to regulatory asset or liability. The proposed modification would allow the Utilities to also record to regulatory asset or liability the difference between the actual cash contributions made to the defined contribution plans and the contribution amounts included in rates. The Utilities also proposed in the application the accelerated return of pension tracking regulatory liability to the ratepayers during the current MRP. The PUC issued a D&O on January 13, 2023, denying the Utilities' proposal to modify the pension tracking mechanism at this time. The PUC clarified that it is open to re-visiting this issue in a comprehensive examination of the pension tracker, with a more holistic review of potential impacts and benefits to the customers. The pension tracker will continue to operate as it has been since each of the Utilities' last general rate cases. The Utilities are required to file their annual actuarial report showing the NPPC and pension plan's financial position in their most recent respective rate case dockets. 58 -------------------------------------------------------------------------------- Liquidity and capital resources. As of December 31, 2022, Hawaiian Electrichad $88 millionof 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 Electricexpects that its liquidity will continue to be moderately impacted at the Utilities due to higher fuel prices and lingering COVID-19 impacts to the local economy. As of December 31, 2022, fuel inventories have increased by $87 millioncompared to December 31, 2021. Elevated fuel prices billed to customers have also resulted in higher accounts receivable balances, which increased by $101 million, compared to the accounts receivable balances as of December 31, 2021. Higher accounts receivable balances and bad debt expense may result in higher write-offs in the future. 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 December 31, 2022, 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 $151 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.
December 31 2022 2021 (dollars in millions) Short-term borrowings, net
$ 882 % $ - - % Long-term debt, net 1,685 41 1,676 42 Preferred stock 34 1 34 1 Common stock equity 2,344 56 2,262 57 $ 4,151100 % $ 3,972100 %
from HEI, and line of credit facility were as follows:
Year ended December 31, 2022 Average End-of-period (in millions) balance balance December 31, 2021 Short-term borrowings1 Commercial paper $ 47 $ 88 $ - Borrowings from HEI 2 - - Line of credit draws on revolving credit facility - - - 1The maximum amount of external short-term borrowings by
Hawaiian Electricduring 2022 was approximately $106 million. At December 31, 2022, Hawaiian Electrichad short-term borrowings from Hawaii Electric Lightand Maui Electricof $5 millionand $22 million, respectively, which intercompany borrowings are eliminated in consolidation. Hawaiian Electricutilizes short-term debt, typically commercial paper, to support normal operations, to refinance short-term debt and for other temporary requirements. Hawaiian Electricalso borrows short-term from HEI for itself and on behalf of Hawaii Electric Lightand Maui Electric, and Hawaiian Electricmay borrow from or loan to Hawaii Electric Lightand Maui Electricon a short-term basis. The intercompany borrowings among the Utilities, but not the borrowings from HEI, are eliminated in the consolidation of Hawaiian Electric'sfinancial 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. Credit agreement. On February 18, 2022, the PUC approved Hawaiian Electric'srequest to extend the term of the $200 million Hawaiian Electricrevolving credit facility to May 14, 2026. In addition to extending the term, Hawaiian Electricreceived PUC approval to exercise its options of two one-year extensions of the commitment termination date and to increase its aggregate revolving commitment amount from $200 millionto $275 million, should there be a need. Hawaiian Electrichas a $200 millionline of credit facility with no amount outstanding at December 31, 2022. 59 --------------------------------------------------------------------------------
Credit ratings. As of
Fitch Moody's S&P Long-term issuer default, long-term and issuer credit, BBB+ Baa1 BBB
Commercial paper F2 P-2 A-2 Senior unsecured debt/special purpose revenue bonds A- Baa1 * Cumulative preferred stock (selected series) * Baa3 * Outlook Positive Stable Stable * Not rated. Note: The above ratings reflect only the view, at the time the ratings are issued or affirmed, of the applicable rating agency, from whom an explanation of the significance of such ratings may be obtained. Such ratings are not recommendations to buy, sell or hold any securities; such ratings may be subject to revision or withdrawal at any time by the rating agencies; and each rating should be evaluated independently of any other rating. SPRBs. SPRBs have been issued by the DBF to finance (and refinance) capital improvement projects of
Hawaiian Electricand its subsidiaries, but the sources of their repayment are the non-collateralized obligations of Hawaiian Electricand its subsidiaries under loan agreements and notes issued to the DBF, including Hawaiian Electric'sguarantees of its subsidiaries' obligations. On May 24, 2019, the PUC approved the Utilities' request to issue SPRBs in the amounts of up to $70 million, $2.5 millionand $7.5 millionfor Hawaiian Electric, Hawaii Electric Lightand Maui Electric, respectively, prior to June 30, 2020, to finance the Utilities' capital improvement programs. Pursuant to this approval, on October 10, 2019, the DBF issued, at par, Series 2019 SPRBs in the aggregate principal amount of $80 millionwith a maturity of October 1, 2049. As of December 31, 2022, Hawaiian Electric, Hawaii Electric Lightand Maui Electrichad no undrawn funds. On June 10, 2019, the Hawaiilegislature authorized the issuance of up to $700 millionof SPRBs ( $400 millionfor Hawaiian Electric, $150 millionfor Hawaii Electric Lightand $150 millionfor Maui Electric), with PUC approval, prior to June 30, 2024, to finance the Utilities' multi-project capital improvement programs (2019 Legislative Authorization). On February 9, 2021, the PUC approved the Utilities' request to issue SPRBs (up to $100 million, $35 millionand $45 millionfor Hawaiian Electric, Hawaii Electric Lightand Maui Electric, respectively) through 2022, with the proceeds to be used to finance the Utilities' multi-project capital improvement programs. The PUC also approved the use of the expedited approval procedure to request the issuance and sale of the remaining/unused amount of SPRBs authorized by the 2019 Legislative Authorization (i.e., total not to exceed up to $400 millionfor Hawaiian Electric, up to $150 millionfor Hawaii Electric Light, and up to $150 millionfor Maui Electric) during the period January 1, 2023through 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, 2023through June 30, 2024, and the certification and approval of supplemental projects eligible to be financed by the SPRB proceeds. Taxable debt. On January 31, 2019, the Utilities received PUC approval ( January 2019Approval) to issue the remaining authorized amounts under the PUC approval received in April 2018( April 2018Approval) in 2019 through 2020 ( Hawaiian Electricup to $205 millionand Hawaii Electric Lightup to $15 millionof taxable debt), as well as a supplemental increase to authorize the issuance of additional taxable debt to finance capital expenditures, repay long-term and/or short term debt used to finance or refinance capital expenditures, and/or to reimburse funds used for payment of capital expenditures, and to refinance the Utilities' 2004 junior subordinated deferrable interest debentures (QUIDS) prior to maturity. In addition, the January 2019Approval authorized the Utilities to extend the period to issue additional taxable debt from December 31, 2021to December 31, 2022. The new total "up to" amounts of taxable debt requested to be issued through December 31, 2022are $410 million, $150 millionand $130 millionfor Hawaiian Electric, Hawaii Electric Lightand Maui Electric, respectively. On May 3, 2022, the Utilities received PUC approval through the expedited approval process to issue taxable debt ( Hawaiian Electricup to $50 million, Hawaii Electric Lightup to $30 millionand Maui Electricup to $35 million) prior to December 31, 2022. Pursuant to the approval, on June 15, 2022, the Utilities drew $60 millionof proceeds using a delayed draw feature under a private placement executed on May 11, 2022. The proceeds of the notes were used by the Utilities 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. See Note 6 of the Consolidated Financial Statements.
remaining unused taxable debt authorization. See summary table below.
60 -------------------------------------------------------------------------------- Hawaiian
Hawaii Electric(in millions) Electric
Light Maui Electric
Total “up to” amounts of taxable debt authorized through
$ 410$ 150 $ 130 Less: Taxable debt authorized and issued in 2018 under April 2018 Approval 75 15 10 Taxable debt issuance to refinance the 2004 QUIDS in 2019 30 10 10 Taxable debt issuance in May 2020 110 10 40
Taxable debt executed in
60 30 25
Taxable debt executed in
40 10 10 Remaining unused authorized amounts that expired December 31, 2022 $ 95 $ 75 $ 35 On
December 20, 2022, the Utilities received PUC approval to issue, over a four-year period from January 1, 2023to December 31, 2026, unsecured obligations bearing taxable interest ( Hawaiian Electricup to $230 million, Hawaii Electric Lightup to $65 millionand Maui Electricup 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 millionin unsecured senior notes. See Note 6 of the Consolidated Financial Statements. See summary table below for new authorized amounts. Hawaiian Hawaii Electric (in millions) Electric
Light Maui Electric
Total “up to” amounts of taxable debt authorized from 2023
$ 230$ 65 $ 105
Taxable debt executed in
100 25 25 Remaining authorized amounts
$ 130$ 40 $ 80 Equity. In October 2018, the Utilities received PUC approval for the supplemental increase to issue and sell additional common stock in the amounts of up to $280 millionfor Hawaiian Electricand up to $100 millioneach for Hawaii Electric Lightand Maui Electric, with the new total "up to" amounts of $430 millionfor Hawaiian Electricand $110 millioneach for Hawaii Electric Lightand Maui Electric, and to extend the period authorized by the PUC to issue and sell common stock from December 31, 2021to December 31, 2022. As of December 31, 2022, Hawaiian Electric, Hawaii Electric Light, and Maui Electrichad $208.3 million, $87.7 million, and $60.2 million, respectively, of unused common stock authorization. See summary table below. Hawaiian Hawaii Electric (in millions) Electric
Light Maui Electric
Total “up to” amounts of common stock authorized to issue
and sell through 2021
$ 150.0 $ 10.0$ 10.0 Supplemental increase authorized 280.0 100.0 100.0
Total “up to” amounts of common stock authorized to issue
and sell through 2022
430.0 110.0 110.0
Less: Common stock authorized and issued from 2017 through
208.6 16.3 46.8 Less: Common stock authorized and issued in 2022 13.1 6.0 3.0
Remaining unused authorized amounts that expired
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, 2023through December 31, 2026( Hawaiian Electric'ssale/s to HEI of up to $75 million, Hawaii Electric Lightsale/s to Hawaiian Electricof up to $25 million, and Maui Electricsale/s to Hawaiian Electricof up to $55 million) and the purchase of Hawaii Electric Lightand Maui Electriccommon stock by Hawaiian Electricfrom 2023 through December 31, 2026. Cash flows. The following table reflects the changes in cash flows for the year ended December 31, 2022compared to the year ended December 31, 2021: Years ended December 31 (in thousands) 2022 2021 Change Net cash provided by operating activities $ 327,930 $ 273,133 $ 54,797Net cash used in investing activities (324,085)
Net cash provided by (used in) financing activities (19,861) 4,764 (24,625)
61 -------------------------------------------------------------------------------- Net cash provided by operating activities: The increase in net cash provided by operating activities was primarily driven by lower revenue taxes paid due to timing, and higher cash receipts due to increased disconnection efforts and receipts of payments on installment plans, partially offset by higher cash paid for fuel oil stock due to higher fuel oil prices and higher volume purchased, and increase in customer accounts receivable resulting from increase in fuel prices.
Net cash used in investing activities: The increase in net cash used in
investing activities was primarily driven by a 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 lower proceeds from issuance of long-term debts and common stock, and higher dividend payment, partially offset by net increase in short-term borrowing in 2022. For a discussion of 2020 operating, investing and financing activities, please refer to the "Liquidity and capital resources" section in Item 7, "Management Discussion and Analysis of Financial Condition and Results of
Operations-Electricutility," in the Company's 2021 Form 10-K. 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 ongoing 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. See Item 1A. "Risk Factors" in Part I for further discussion of risks and uncertainties. Forecast capital expenditures. For the five-year period 2023 through 2027, the Utilities forecast approximately $2.2 billionof 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 billionis related to replacement and modernization of generation, transmission and distribution assets; approximately $0.3 billionis 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 billionfor 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. 62 -------------------------------------------------------------------------------- Selected short-term and long-term contractual obligations and commitments. The following table presents aggregated information about total payments due from the Utilities during the indicated periods under the specified contractual obligations and commitments: December 31, 2022 Payments due by period Less than 1 1-3 3-5 More than (in millions) year years years 5 years Total Short-term borrowings $ 88$ - $ - $ - $ 88Long-term debt $ 100 $ 47 $ 225 $ 1,320 $ 1,692Interest on long-term debt 69 129 120 681 999 Operating and finance leases PPAs classified as leases 11 22 22 104 159 Other leases 18 27 18 25 88 Open purchase order obligations 1 178 65 12 - 255 Fuel oil purchase obligations (estimate based on fuel oil price at December 31) 5 9 5 - 19 Purchase power obligations-minimum fixed capacity charges not classified as leases 80 160 160 521 921 Liabilities for uncertain tax positions - 2 - - 2 Total (estimated) $ 549 $ 461 $ 562 $ 2,651 $ 4,223
1 Includes contractual obligations and commitments for capital expenditures
and expense amounts.
The table above does not include other categories of obligations and commitments, such as deferred taxes, trade payables, amounts that will become payable in future periods under collective bargaining and other employment agreements and employee benefit plans and potential refunds of amounts collected from ratepayers (e.g., under the earnings sharing mechanism). As of
December 31, 2022, the fair value of the assets held in trusts to satisfy the obligations of the Utilities' retirement benefit plans did not exceed the retirement benefit plans' benefit obligation. Minimum funding requirements for retirement benefit plans have not been included in the table above. See Note 10 of the Consolidated Financial Statements for retirement benefit plan obligations and estimated contributions for 2023. See "Biofuel sources" in the "Developments in renewable energy efforts" section above for additional information for fuel oil purchase obligation. See Notes 3 and 8 of the Consolidated Financial Statements for a discussion of power purchase commitments and operating leases obligations, respectively. Competition. Although competition in the generation sector in Hawaiiis moderated by the scarcity of generation sites, various permitting processes and lack of interconnections to other electric utilities, the PUC has promoted a more competitive electric industry environment through its decisions concerning competitive bidding and distributed generation. An increasing amount of generation is provided by IPPs and customer distributed generation. Competitive bidding. In December 2006, the PUC issued a decision that included a final competitive bidding framework, which became effective immediately. The final framework states, among other things, that: (1) a utility is required to use competitive bidding to acquire a future generation resource or a block of generation resources unless the PUC finds bidding to be unsuitable; (2) the framework does not apply in certain situations identified in the framework; (3) waivers from competitive bidding for certain circumstances will be considered; (4) the utility is required to select an independent observer from a list approved by the PUC whenever the utility or its affiliate seeks to advance a project proposal (i.e., in competition with those offered by bidders); (5) the utility may consider its own self-bid proposals in response to generation needs identified in its RFP; and (6) for any resource to which competitive bidding does not apply (due to waiver or exemption), the utility retains its traditional obligation to offer to purchase capacity and energy from a Qualifying Facility (QF) at avoided cost upon reasonable terms and conditions approved by the PUC. Technological developments. New emerging and breakthrough technological developments (e.g., the commercial development of long-duration energy storage, grid-forming and black starting inverters in low inertia power systems, microgrids, distributed generation, grid modernization, electrification of transportation, implement predictive analytics using artificial intelligence machine learning algorithms to help assess the state of health of utility assets and prevent premature failure, and the diversification of generation from renewable sources) may impact the Utilities' future competitive position, results of operations, financial condition and liquidity. The Utilities continue to seek prudent opportunities to develop, test, pilot, and implement technologies that align with their technical and business plans and support clean energy and decarbonized goals, while ensuring reliability and resilience as the Utilities adapt to a changing climate.
Environmental matters. See “Electric utility-Regulation-Environmental
regulation” under “Item 1. Business” and “Environmental regulation” in Note 3 of
the Consolidated Financial Statements.
Commitments and contingencies. See Item 1A. Risk Factors, and Note 3 of the
Consolidated Financial Statements for a discussion of important commitments and
Off-balance sheet arrangements. See “Off-balance sheet arrangements” above in
HEI Consolidated section.
Material estimates and critical accounting policies. Also see “Material
estimates and critical accounting policies” above in HEI Consolidated section.
Regulatory assets and liabilities. The Utilities are regulated by the PUC. In accordance with accounting standards for regulatory operations, the Company's and the Utilities' financial statements reflect assets, liabilities, revenues and costs of the Utilities based on current cost-based rate-making regulations. The actions of regulators, including the PBR Framework, can affect the timing of recognition of revenues, expenses, assets and liabilities. Regulatory liabilities represent amounts collected from customers for costs that are expected to be incurred in the future, or amounts collected in excess of costs incurred that are refundable to customers. Regulatory assets represent incurred costs that have been deferred because their recovery in future customer rates is probable. As of
December 31, 2022, the consolidated regulatory liabilities and regulatory assets of the Utilities amounted to $1,056 millionand $243 million, respectively, compared to $997 millionand $566 millionas of December 31, 2021, respectively. Regulatory liabilities and regulatory assets are itemized in Note 3 of the Consolidated Financial Statements. Management continually assesses whether the regulatory assets are probable of future recovery by considering factors such as changes in the applicable regulatory environment. Because current rates include the recovery of regulatory assets existing as of the last rate case and rates in effect allow the Utilities to earn a reasonable rate of return, management believes that the recovery of the regulatory assets as of December 31, 2022is probable. This determination assumes continuation of the current political and regulatory climate in Hawaiiand is subject to change in the future. Management believes that the operations of the Utilities, including the impact of the approved PBR Framework, currently satisfy the criteria for regulatory accounting. If events or circumstances should change so that those criteria are no longer satisfied, the Utilities expect that their regulatory assets, net of regulatory liabilities, would be charged to the statement of income in the period of discontinuance, which may result in a material adverse effect on the Company's and the Utilities' results of operations, financial condition and liquidity. Asset retirement obligations. The Utilities recognize AROs at present value of expected costs to retire long-lived assets from service, which is estimated using a discounted cash flow model that relies on significant estimates and assumptions about future decommissioning costs, inflationary rates, and the estimated date of decommissioning. The estimated future cash flows are discounted using a credit-adjusted risk-free rate to reflect the risk associated with decommissioning the assets. The Utilities have not recorded AROs for assets that are expected to operate indefinitely or where the Utilities cannot estimate a settlement date (or range of potential settlement dates.) As such, ARO liabilities are not recorded for certain asset retirement activities, including various Utility-owned generating facilities and certain electric transmission, distribution and telecommunication assets resulting from easements over property not owned by the Utilities. Changes in estimated costs, timing of decommissioning or other assumptions used in the calculation could cause material revision on the recorded liabilities. As of December 31, 2022and December 31, 2021, the Utilities' AROs totaled $11.5 millionand $11.1 million, respectively.
Executive overview and strategy. ASB, headquartered in
Honolulu, Hawaii, is a full-service community bank serving both consumer and commercial customers. ASB is one of the largest financial institutions in Hawaiiand ended 2022 with assets of $9.5 billionand net income of $80 million, compared to assets of $9.2 billionand net income of $101 millionin 2021. ASB provides a wide range of financial products and services, and in order to remain competitive and continue building core franchise value, ASB is focused on making banking easier for the customer and developing and introducing new products and services in order to meet market needs. Additionally, the banking industry is constantly changing and ASB is making the investments in people and technology necessary to adapt and remain competitive, facilitate process improvements in order to deliver a continuously better experience for its customers, and be a more efficient bank. ASB's continued focus has been on efficient growth to maximize profitability and capital efficiency, as well as control expenses. Key strategies to drive organic growth include:
1.deepening customer relationships through the redesign of branch-centric
approaches as transactions and engagement migrate to other channels;
2.building out product and service offerings to open new segments;
64 -------------------------------------------------------------------------------- 3.online and remotely-assisted account opening capabilities as there is a much more rapid and pervasive adoption of online and mobile banking by
Hawaiibanking customers; and
4.prioritizing efficiency actions to gain earnings leverage on organic growth.
The interest rate environment and the quality of ASB's assets will continue to influence its financial results. ASB has benefited from rising rates in the second half of 2022 as the
Federal Reserve Bankraised short-term interest rates to combat inflation, which has been driven by supply chain issues, the reopening of the economy and government stimulus assistance. The Federal Reserve Bank'sefforts to increase short-term rates to combat inflation could result in a recession and would compress ASB's net interest margin if interest rates reverse and decline to lower levels. As part of its interest rate risk management process, ASB uses simulation analysis to measure net interest income sensitivity to changes in interest rates (see "Item 7A. Quantitative and Qualitative Disclosures about Market Risk"). ASB then employs strategies to limit the impact of changes in interest rates on net interest income. ASB's key strategies to manage interest rate risk include:
1.attracting and retaining low-cost deposits, particularly those in non-interest
bearing transaction accounts;
2.diversifying the loan portfolio with higher-spread, shorter-maturity loans
and/or variable rate loans;
3.focusing investment growth in securities that exhibit less extension risk
(i.e., risk of longer average lives) as rates rise.
Recent Developments. See also Recent developments in HEI’s MD&A.
Hawaiieconomy continued to improve in 2022 as travel and other COVID-19 related business restrictions were lifted and as visitor arrivals increased, which have helped drive a growing labor market and tax collections. Domestic visitor arrivals exceeded pre-pandemic levels in 2022 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. Consistent with the improvement in the Hawaiieconomy in 2022, the bank's performance continued to improve in 2022, Net interest income before provision for credit losses improved to $252.6 millionfor the year ended December 31, 2022, compared to net interest income before provision for credit losses of 237.2 for the year ended December 31, 2021, The increase in net interest income was primarily due to higher earning asset balances and yields, partly offset by higher other borrowings and higher cost of funds. Net interest margin decreased slightly to 2.89% for the year ended December 31, 2022, compared to 2.91% for the year ended December 31, 2021. The lower net interest margin was primarily driven by higher funding costs partially offset by higher yields on earning assets as strong loan growth outpaced deposit growth and required ASB to use higher costing other borrowings as a funding source for the loan growth. At December 31, 2022, ASB's funding sources consisted of 92% deposits and 8% other borrowings compared to 99% deposits and 1% other borrowings at December 31, 2021. Lower Paycheck Protection Program (PPP) loan income also contributed to the lower net interest margin 2022 compared to 2021. The increase in interest rates had a positive impact on the yield on earning assets as adjustable rate earning assets repriced up and new loan production interest rates in the fourth quarter of 2022 were higher than their portfolio rates. In 2022 and into early 2023, the Federal Reserveraised the federal funds rate to a current target range of 4.50%-4.75% as of February 1, 2023, in response to surging inflationary pressures in the economy. The increase in interest rates have benefited ASB's net interest margin; however, 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, which have partially offset the benefit of a higher interest rate environment. ASB experienced strong loan growth in 2022 as total loans increased $784 millionor 15% compared to 2021 total loans. There was demand for commercial real estate, home equity line of credit, consumer and commercial market loan products. Residential loan portfolio growth was primarily due to ASB's decision to portfolio a larger portion of its residential loan production and the portfolio had lower prepayments. The consumer loan portfolio growth also included purchases of solar and sustainable home improvement loans from a third party. The commercial markets loan portfolio growth was partly due to the Bank's purchase of national syndicated credits. Deposit growth, which was used to fund loan growth and purchase investment securities, has slowed 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 deposit growth ceases and funding is replaced with other borrowings. ASB recorded a provision for credit losses of $2.0 million, compared with a $25.8 millionnegative provision for credit losses in 2021. The provision for credit losses in 2022 was for growth in the loan portfolio and also reflected the release of loss 65 -------------------------------------------------------------------------------- reserves for improving credit trends. The negative provision for credit losses in 2021 was due to an improving economy and credit quality as the state of Hawaiiwas recovering from the economic impact of the 2020 COVID-19 pandemic year. The provision for credit losses in future quarters will be dependent on future economic conditions and changes to borrower credit quality at that time. For the year ended December 31, 2022, the investment securities portfolio balance decreased approximately S415 million, or 13%, as slowing deposit growth resulted in lower excess liquidity and the need for other sources to fund the strong loan growth. Investment securities portfolio repayments were used as funding source for the loan growth and investment security purchases were reduced. In addition, the rise in interest rates caused higher unrealized losses in the available-for-sale investment securities portfolio which reduced the investment portfolio balance. In response to COVID-19, ASB made short-term loan modifications to borrowers who were generally payment current at the time of relief. As of December 31, 2022, no loans remained in their active deferral period. Approximately $1.9 millionof loans were not able to resume their contractual payments and were considered delinquent as of December 31, 2022. Since 2020 through 2022, ASB reduced its branch network from 49 branches to 38 branches as it focuses on optimizing its branch network. In addition to a new digital branch, ASB had converted three existing branches to digital branches, which provide digital solutions such as full-service ATMs and access to expert bankers through videoconferencing tools while allowing the Bank to have a more efficient physical footprint. In 2022 $1.6 millionin branch termination costs were offset by $1.8 milliongain on sale of real estate for closed branches. The reduction in ASB's branch network should not have a significant impact to the bank's customers as there are other branches nearby and other channels such as online and mobile banking. ASB continues to evaluate its branch network to determine whether further changes may be appropriate given its customers' use of other banking channels. The CARES Act was signed into law on March 27, 2020. The CARES Act provided over $2 trillionin economic assistance for American workers, families, and small businesses, and job preservation for American industries. The PPP was established under the CARES Act and implemented by the United States Small Business Administration(SBA) to provide a direct incentive for small businesses to keep their workers on the payroll as a result of the COVID-19 crisis. ASB worked with a number of small businesses, both customers and non-customers, to complete the loan application forms so that these businesses could participate in the program. During the first round of PPP, the Bank secured more than $370 millionin PPP loans for approximately 4,100 small businesses that supported over 40,000 jobs, ASB received processing fees totaling approximately $13 millionand started recognizing these fees over the life of the loans. During the second round of PPP, ASB secured more than $175 millionfor approximately 2,200 small businesses that supported more than 20,000 jobs; ASB received processing fees of approximately $9 million. The Bank's ASB CARES loan program continued to paydown and most of the fees from the program have been recognized as of December 31, 2022. The remaining PPP loans outstanding as of December 31, 2022was $5 million. Other provisions of the CARES Act provides that a financial institution may elect to suspend the requirements under accounting principles generally accepted in the United States of America(GAAP) for certain loan modifications that would otherwise be categorized as a TDR and any related impairment for accounting purposes. See Note 4 of the Consolidated Financial Statements and "Economic conditions" in the "HEI Consolidated" section above.
ASB continues to maintain its low-risk profile, strong balance sheet and
straightforward community banking business model.
Results of operations. •2022 vs. 2021 Increase (in millions) 2022 2021 (decrease) Primary reason(s) Interest income
$ 266 $ 242$
24 Higher average earning asset balances and yields. Average loan portfolio balances increased
$217million - residential, commercial real estate and home equity lines of credit loan portfolio average balances increased $164 million, $137 millionand $33 million, respectively, primarily due to increased demand for these loan products. Average residential loan portfolio growth was also the result of ASB's decision to portfolio a larger portion of the residential loan production rather than sell them on the secondary market. Average consumer loans portfolio balance increased $26million primarily due to purchases of solar and sustainable home improvement loans. Average commercial loans portfolio balances decreased $146million due to repayments in the ASB Cares loan portfolio, which was the Bank's PPP loan product. Average loan portfolio yields 2 basis points higher - loan yields benefited from the rising interest rate environment. Current new loan production yields are now higher than the portfolio yields. Average investment securities portfolio balance increased $394 million- excess liquidity from strong deposit growth was invested in agency securities. Average investment securities portfolio yield 24 basis points higher - investment security purchase yields benefited from lower premium amortization as the rising interest rate environment slowed prepayment rates. Noninterest income 57 65 (8) Lower mortgage banking income and lower bank owned life insurance income were partly offset by higher customer fee income and higher gain on sale of real estate. Lower mortgage banking income - lower residential loan sales volume primarily due to lower demand for residential loans and ASB's decision to portfolio a larger portion of its residential loan production in 2022. Loan sale profit margins were also lower in 2022 compared to 2021. Lower bank-owned life insurance income - lower returns from insurance policies in 2022 and 2021 bank-owned life insurance income included higher proceeds from life insurance policies. Higher customer fee income - higher fee income due to increased activity in customer accounts and higher fee income from investment and insurance services. Higher gain on sale of real estate - two closed branch properties were sold in 2022 with no similar sales in 2021. Less: gain on sale of real (2) - (2) Gain on sale of real estate, which is included in estate Noninterest income above and in the Bank's statements of income and comprehensive income in Note 4 of the Consolidated Financial Statements, is included in Bank expenses in the consolidated statements of income, and accordingly, is reflected in operating expenses below as a
separate line item and excluded from Revenues.
Less: gain on sale of
1 Gain on sale of investment securities, net, which
investment securities, net
is included in Noninterest income above and in the Bank's statements of income and comprehensive income in Note 4 of the Consolidated Financial Statements, is classified as gain on sale of investment securities, net in the consolidated statements of income, and accordingly, is reflected below following operating income as a
separate line item and excluded from Revenues.
321 306 15 The increase in revenues was primarily due to higher interest income partly offset by lower noninterest income. Interest expense 13 5 8 Higher interest expense on deposits and other borrowings. Higher interest expense on deposits - higher deposit yields due to the rising interest rate environment, which increased the yield on interest bearing deposits. Average core deposit balances increased
$444million; average term certificate balances decreased $13 million. Average deposit yields increased from 6 basis points to 9 basis points. 67
-------------------------------------------------------------------------------- Increase (in millions) 2022 2021 (decrease) Primary reason(s) Higher interest expense on other borrowings - primarily due to higher other borrowing balances and yields. Average FHLB advance balances increased
$121million as wholesale borrowings were used to fund the strong loan growth. The average yield on FHLB advances increased 318 basis points due to the rising interest rate environment. Average repurchase agreements balances increased $39 millionand the average yield increased 97 basis points. Provision for credit 2 (26) 28
Increase in provision for credit losses was
primarily due to a negative provision for credit losses being recorded in 2021. 2022 provision for credit losses was primarily due to additional credit loss reserves for growth in the loan portfolio as ASB's loan portfolio grew
$784 millionduring 2022. Improvements in the credit trends for the commercial real estate, commercial markets, residential and consumer loan portfolios enabled ASB to release reserves in those loan portfolios to partially offset the additional reserves for loan portfolio growth. 2021 negative provision for credit losses reflected favorable credit trends with continued improvement in the economic environment as the economy recovered from the effects of the COVID-19 pandemic. Negative provision for credit losses was also due to a shift in loan portfolio mix - a decrease in personal unsecured loan portfolio balances, which had higher credit loss rates replaced with higher residential and commercial real estate loan portfolio balances with lower credit loss rates. The personal unsecured loan portfolio also experienced improved net charge-off trends. Delinquency rates have decreased - from 0.33% at December 31, 2021 to 0.23% at December 31, 2022 due to lower residential 1-4 family loan delinquencies. Net charge-offs to average loans have decreased - from 0.07% at December 31, 2021 to 0.03% at December 31, 2022 due to lower personal unsecured loan portfolio net charge-offs. Noninterest expense 205 197 8 Higher occupancy and higher other expenses. Compensation and benefit expenses - increase in base compensation, higher incentive compensation payout for commission based employees and higher performance-based compensation were offset by the fair value adjustment related to the deferred compensation plan in 2022 and the separation agreement for an executive officer that was paid in 2021 with no similar payment in 2022. Higher occupancy expenses - primarily due to the write-off of remaining leases for closed branches. Higher other expenses - 2021 expenses included a one-time credit adjustment for a change in accounting for the ASB retirement plan with no similar adjustment in 2022. Gain on sale of real (2) - (2)
Expenses 218 176 42 The increase in expenses was primarily due to higher provision for credit losses, higher interest expense and an increase in noninterest expenses. Operating income 103 130 (27) Higher provision for credit losses, higher interest expense, higher noninterest expenses and lower noninterest income, partly offset by higher interest income. Gain on sale of investment - 1 (1) securities, net Net income
$ 80 $ 101 $ (21)The decrease in net income was the result of lower operating income partly offset by lower income tax expense and lower gain on sale of investment securities. Return on average equity1 14.1 % 13.8 % 0.3 % 1 Calculated using the average daily balance. 68
-------------------------------------------------------------------------------- For a discussion of 2020 results, please refer to the "Results of operations" section in Item 7, "Management Discussion and Analysis of Financial Condition and Results of Operations-Bank," in the Company's 2021 Form 10-K.
See Note 4 of the Consolidated Financial Statements for further information
Average balance sheet and net interest margin. The following table provides a
summary of average balances, including major categories of interest-earning
assets and interest-bearing liabilities:
2022 2021 2020 Interest Yield/ Interest Yield/ Interest Yield/ Average income/ rate Average income/ rate Average income/ rate (dollars in thousands) balance expense (%) balance expense (%) balance expense (%)
$ 59,277 $ 5000.84 $ 69,930 $ 930.13 $ 153,879 $ 2410.16 FHLB stock 15,465 702 4.54 10,298 327 3.17 9,481 306 3.23 Investment securities Taxable 3,171,771 55,529 1.75 2,792,255 42,114 1.51 1,554,812 29,213 1.88 Non-taxable 69,099 1,662 2.40 54,646 1,177 2.15 32,080 974 3.04 Total investment securities 3,240,870 57,191 1.76 2,846,901 43,291 1.52 1,586,892 30,187 1.90
Residential 1-4 family 2,353,764 83,016 3.53 2,189,680 78,672 3.59 2,180,013 85,769 3.93 Commercial real estate 1,294,777 49,152 3.80 1,157,987 38,255 3.30 954,836 34,596 3.62 Home equity line of credit 918,563 28,506 3.10 885,759 27,669 3.12 1,060,444 33,731 3.18 Residential land 21,442 1,309 6.10 18,227 924 5.07 13,799 754 5.46 Commercial 710,658 29,295 4.12 856,226 36,178 4.23 935,663 31,642 3.38 Consumer 161,722 16,898 10.45 135,609 17,284 12.75 215,994 27,728 12.84 Total loans 1,2 5,460,926 208,176 3.81 5,243,488 198,982 3.79 5,360,749 214,220 4.00 Total interest-earning assets 3 8,776,538 266,569 3.04 8,170,617 242,693 2.97 7,111,001 244,954 3.44 Allowance for credit losses (70,071) (86,691) (81,193) Noninterest-earning assets 567,106 742,174 762,746 Total Assets
$ 9,273,573 $ 8,826,100 $ 7,792,554Liabilities and Shareholder's Equity: Savings $ 3,275,089860 0.03 $ 3,069,615802 0.03 $ 2,620,3111,774 0.07 Interest-bearing checking 1,345,627 765 0.06 1,237,969 242 0.02 1,106,563 471 0.04 Money market 208,015 330 0.16 192,044 132 0.07 161,084 465 0.29 Time certificates 470,189 5,372 1.14 483,353 3,805 0.79 664,578 7,944 1.20 Total interest-bearing deposits 5,298,920 7,327 0.14 4,982,981 4,981 0.10 4,552,536 10,654 0.23 Advances from Federal Home Loan Bank136,630 4,716 3.45 15,319 42 0.27 21,490 146 0.68
Securities sold under agreements to repurchase and
federal funds purchased
127,170 1,258 0.99 88,405 17 0.02 76,360 314 0.41 Total interest-bearing liabilities 5,562,720 13,301 0.24 5,086,705 5,040 0.10 4,650,386 11,114 0.24 Noninterest bearing liabilities: Deposits 2,948,679 2,833,886 2,276,722 Other 193,942 169,967 155,589 Shareholder's equity 568,232 735,542 709,857 Total Liabilities and Shareholder's Equity
$ 9,273,573 $ 8,826,100 $ 7,792,554Net interest income $ 253,268 $ 237,653 $ 233,840Net interest margin (%)4 2.89 2.91 3.29 1Includes loans held for sale, at lower of cost or fair value, of $4.0 million, $23.0 millionand $20.5 millionas of December 31, 2022, 2021 and 2020, respectively. 2Includes recognition of net deferred loan fees of $5.3 million, $14.3 millionand $4.9 millionfor 2022, 2021 and 2020 respectively, together with interest accrued prior to suspension of interest accrual on nonaccrual loans. 3For 2022, 2021 and 2020, the taxable-equivalent basis adjustments made to the table above were not material. 4Defined as net interest income, on a fully taxable equivalent basis, as a percentage of average total interest-earning assets. 69 -------------------------------------------------------------------------------- The following table shows the effect on net interest income of (1) changes in interest rates (change in weighted-average interest rate multiplied by prior year average balance) and (2) changes in volume (change in average balance multiplied by prior period weighted-average interest rate). Any remaining change is allocated to the above two categories on a pro rata basis. 2022 vs. 2021 2021 vs. 2020 (in thousands) Rate Volume Total Rate Volume Total Interest income Interest-earning deposits $ 423 $ (16)$
174 201 375 (6) 27 21 Investment securities Taxable 7,260 6,155 13,415 (6,655) 19,556 12,901 Non-taxable 148 337 485 (343) 546 203 Total investment securities 7,408 6,492 13,900 (6,998) 20,102 13,104
Residential 1-4 family (1,357) 5,701 4,344 (7,473) 376 (7,097) Commercial real estate 6,123 4,774 10,897 (3,243) 6,902 3,659 Home equity line of credit (178) 1,015 837 (623) (5,439) (6,062) Residential land 207 178 385 (57) 227 170 Commercial 13,111 (19,994) (6,883) 7,118 (2,582) 4,536 Consumer 435 (821) (386) (193) (10,251) (10,444) Total loans 18,341 (9,147) 9,194 (4,471) (10,767) (15,238) Total increase (decrease) in interest income 26,346 (2,470) 23,876 (11,513) 9,252 (2,261) Interest expense Savings - (58) (58) 1,234 (262) 972 Interest-bearing checking (501) (22) (523) 271 (42) 229 Money market (186) (12) (198) 409 (76) 333 Time certificates (1,672) 105 (1,567) 2,302 1,837 4,139 Advances from Federal Home Loan Bank (2,793) (1,881) (4,674) 70 34 104 Securities sold under agreements to repurchase and federal funds purchased (1,230) (11) (1,241) 339 (42) 297 Total decrease (increase) in interest expense (6,382) (1,879) (8,261) 4,625 1,449 6,074 Increase (decrease) in net interest income
$ 19,964 $ (4,349)$
Earning assets, costing liabilities, contingencies and other factors. Earnings of ASB depend primarily on net interest income, which is the difference between interest earned on earning assets and interest paid on costing liabilities. The interest rate environment has been impacted by disruptions in the financial markets over a period of several years. In 2022, the
Federal Open Market Committeeincreased its federal funds rate target range to 4.25% - 4.50% throughout the year to combat signs of inflation. ASB's net interest income and net interest margin has started to increase but still remains at lower levels. A return to the recent low interest rate environment may negatively impact ASB's net interest income and net interest margin.
Loans and mortgage-backed securities are ASB’s primary earning assets.
Loan portfolio. ASB's loan volumes and yields are affected by market interest rates, competition, demand for financing, availability of funds and management's responses to these factors. See "Loans" in Note 4 of the Consolidated Financial Statements for a composition of ASB's loan portfolio. The increase in the loan portfolio balance in 2022 was primarily due to growth in residential, commercial real estate, home equity line of credit and consumer loan portfolios. The growth in the residential loan portfolio was due to ASB's decision to portfolio a larger portion of the residential mortgage loan production and reduce the amount of residential loans sold in the secondary market. Higher interest rates also slowed refinance activity and prepayments in the residential mortgage loan portfolio. The growth in the commercial real estate, home equity line of credit and consumer loan portfolios was due to increased demand for these loan products. The decrease in the commercial loan portfolio was due to the continued paydown of the PPP loans which decreased from
$69 millionat December 31, 2021to $5 millionat December 31, 2022. The increase in the loan portfolio balance in 2021 was primarily due to growth in the residential and commercial real estate loan portfolio balances. The growth in the residential loan portfolio balance was due to ASB's decision to portfolio a larger portion of the residential mortgage loan production and reduce the amount of residential loans sold in the secondary market. The growth in the commercial real estate loan portfolio was due to ASB's continued effort to diversify its loan portfolio with 70 -------------------------------------------------------------------------------- higher-spread, shorter-maturity loans and/or variable rate loans. The decrease in the commercial loan portfolio was due to paydown of the PPP loans which decreased from $300 millionat December 31, 2020to $69 millionat December 31, 2021. The following table summarizes loans held for investment based upon contractually scheduled principal payments allocated to the indicated maturity categories: December 31 2022 In After 1 year After 5 years 1 year through through After Due or less 5 years 15 years 15 years Total (in millions) Residential 1-4 family - Fixed $ 75$ 314
Residential 1-4 family – Adjustable 14
53 128 24 219 Total residential 1-4 family 89 367 950 1,073 2,479 Commercial real estate - Fixed 92 208 525 1 826 Commercial real estate - Adjustable 94 247 191 - 532 Total commercial real estate 186 455 716 1 1,358 Home equity line of credit- Fixed 30 112 232 25 399 Home equity line of credit - Adjustable 3 13 136 452 604 Total home equity line of credit 33 125 368 477 1,003 Residential land- Fixed 4 17 - - 21 Residential land - Adjustable - - - - - Total residential land 4 17 - - 21 Commercial construction - Fixed 24 6 - 1 31 Commercial construction - Adjustable 7 8 - 42 57 Total commercial construction 31 14 - 43 88 Residential construction - Fixed 21 - - - 21 Residential construction - Adjustable - - - - - Total residential construction 21 - - - 21 Commercial - Fixed 75 187 50 1 313 Commercial - Adjustable 90 362 15 - 467 Total commercial 165 549 65 1 780 Consumer - Fixed 45 87 10 101 243 Consumer - Adjustable 3 8 1 - 12 Total consumer 48 95 11 101 255 Total loans - Fixed 366 931 1,639 1,178 4,114 Total loans - Adjustable 211 691 471 518 1,891 Total loans
$ 577 $ 1,622 $ 2,110 $ 1,696 $ 6,005Home equity lines of credit. The HELOC portfolio makes up 17% of the total loan portfolio and is generally an interest-only revolving loan for a 10-year period, after which time the HELOC outstanding balance converts to a fully amortizing variable-rate term loan with a 20-year amortization period. Borrowers also have a "Fixed Rate Loan Option" to convert a part of their available line of credit into a 5, 7 or 10-year fully amortizing fixed-rate loan with level principal and interest payments. As of December 31, 2022, 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 56% of ASB's HELOC loan portfolio is in a first lien position. Loan portfolio risk elements. When a borrower fails to make a required payment on a loan and does not cure the delinquency promptly, the loan is classified as delinquent. If delinquencies are not cured promptly, ASB normally commences a collection action, including foreclosure proceedings in the case of real estate secured loans. In a foreclosure action, the property collateralizing the delinquent debt is sold at a public auction in which ASB may participate as a bidder to protect its interest. If ASB is the successful bidder, the property is classified as real estate owned until it is sold. As of December 31, 2022and 2021, ASB had $115,000and nil, respectively, of real estate acquired in settlement of loans. In addition to delinquent loans, other significant lending risk elements include: (1) loans which accrue interest and are 90 days or more past due as to principal or interest, (2) loans accounted for on a nonaccrual basis (nonaccrual loans), and (3) loans 71 -------------------------------------------------------------------------------- on which various concessions are made with respect to interest rate, maturity, or other terms due to the inability of the borrower to service the obligation under the original terms of the agreement (troubled debt restructured loans). ASB loans that were 90 days or more past due on which interest was being accrued as of December 31, 2022and 2021 were immaterial or nil. The following table sets forth certain information with respect to nonaccrual loans: December 31 2022 2021 (dollars in thousands) Real estate: Residential 1-4 family $ 7,179 $ 19,748Commercial real estate - 15,325 Home equity line of credit 5,096 5,521 Residential land 420 397 Commercial construction - - Residential construction - - Total real estate 12,695 40,991 Commercial 2,183 2,138 Consumer 1,588 1,845 Total nonaccrual loans $ 16,466 $ 44,974Loans receivable, net $ 5,978,906 $ 5,211,114Allowance for credit losses $ 72,216 $ 71,130Nonaccrual loans to loans receivable, net 0.28 % 0.86 % Allowance for credit losses to nonaccrual loans 4.39x
In 2022, nonaccrual loans decreased
$28.5 millionprimarily due to decreases in commercial real estate and residential 1-4 family nonaccrual loans of $15.3 millionand $12.6 million, respectively. The decrease in commercial real estate nonaccrual loans was due to the reclassification of one commercial real estate loan to accrual status. The decrease in the residential nonaccrual loans was due to the reclassification of residential loans to accrual status based on payment performance. In 2021, nonaccrual loans decreased $2.4 millionprimarily due to decreases in commercial real estate, commercial, consumer and HELOC nonaccrual loans of $3.4 million, $3.0 million, $2.1 millionand $1.8 million, respectively, partly offset by an increase in residential 1-4 family nonaccrual loans of $7.9 million. The increase in residential nonaccrual loans was attributed to customers that could not resume contractual payments after their deferral period was completed.
See “Allowance for credit losses” in Note 4 of the Consolidated Financial
Statements for information with respect to nonperforming assets.
Allowance for credit losses. See "Allowance for credit losses" in Note 4 of the Consolidated Financial Statements for the tables which sets forth the allocation of ASB's allowance for credit losses. On
January 1, 2020, ASB adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments - Measurement of Current Expected Credit Losses on Financial Instruments, modifying the accounting for the allowance for credit losses from an incurred loss model to an expected loss model (see Note 1, "Summary of Significant Accounting Policies" of the Consolidated Financial Statements). With the adoption of ASU 2016-13, ASB added $19.4 millionto the allowance for credit losses on January 1, 2020. During 2022, ASB recorded a provision for credit losses related to the allowance for credit losses of $2.0 millionprimarily due to loan loss reserves for growth in the loan portfolio partly offset by the release loss reserves for improved credit trends. 72
-------------------------------------------------------------------------------- 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. With the adoption of ASU 2016-13, ASB added
$1.6 millionto the reserve for unfunded loan commitments on January 1, 2020. For 2022, ASB recorded a negative provision for credit losses for unfunded commitments of $0.5 millioncompared to a provision for credit losses for unfunded commitments of $0.6 millionfor 2021. As of December 31, 2022and December 31, 2021, the reserve for unfunded loan commitments was $4.4 millionand $4.9 million, respectively.
The following table sets forth the allocation of ASB’s allowance for credit
losses and the percentage of loans in each category to total loans:
December 31 2022 2021 Allowance Loan Allowance Loan Allowance to loan receivable Allowance to loan receivable (dollars in thousands) balance receivable % % of total balance receivable % % of total Real estate: Residential 1-4 family
$ 6,2700.25 41.3 $ 6,5450.28 44.0 Commercial real estate 21,898 1.62 22.6 24,696 2.34 20.3 Home equity line of credit 6,125 0.61 16.7 5,657 0.68 16.0 Residential land 717 3.48 0.3 646 3.25 0.4 Commercial construction 1,195 1.36 1.5 2,186 2.40 1.7 Residential construction 46 0.22 0.4 18 0.16 0.2 Total real estate 36,251 0.73 82.8 39,748 0.92 82.6 Commercial 12,426 1.60 13.0 15,798 1.99 15.2 Consumer 23,539 9.92 4.2 15,584 13.67 2.2 Total allowance for credit losses $ 72,2161.21 100.0 $ 71,1301.36
In 2022, ASB's allowance for credit losses increased by
$1.1 millionprimarily due to increases in the loan loss reserves for the consumer and home equity line of credit loan portfolios as a result of growth in those loan portfolios. The decreases in the allowance for credit losses for the commercial, commercial real estate and residential loan portfolios were primarily due to the release of reserves in those loan portfolios as a result of improved credit trends. Total delinquencies of $13.9 millionat December 31, 2022was a decrease of $3.3 millioncompared to total delinquencies of $17.2 millionat December 31, 2021primarily due to a decrease in residential loan delinquencies, partly offset by increases in consumer and home equity line of credit loan portfolio delinquencies. The ratio of delinquent loans to total loans decreased from 0.33% of total outstanding loans at December 31, 2021to 0.23% of total outstanding loans at December 31, 2022. Net charge-offs for 2022 were $1.4 million, a decrease of $2.2 millioncompared to $3.6 millionin 2021 primarily due to a decrease in consumer loan portfolio net charge-offs. In 2021, ASB's allowance for credit losses decreased by $30.1 millionprimarily due to decreases in loan loss reserves for the commercial real estate, commercial and consumer loan portfolios for improved credit quality. The decrease in the consumer loan portfolio was also due to the decrease in the personal unsecured loan portfolio outstanding balance. Total delinquencies of $17.2 millionat December 31, 2021was a decrease of $2.4 millioncompared to total delinquencies of $19.6 millionat December 31, 2020primarily due to decreases in delinquent consumer, HELOC and residential land loans, partly offset by an increase in residential 1-4 family delinquent loans. The ratio of delinquent loans to total loans decreased from 0.37% of total outstanding loans at December 31, 2020to 0.33% of total outstanding loans at December 31, 2021. Net charge-offs for 2021 were $3.6 million, a decrease of $17.8 millioncompared to $21.4 millionin 2020 primarily due to a decrease in consumer loan portfolio net charge-offs. Investment securities. Currently, ASB's investment portfolio consists of U.S. Treasuryand 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). The weighted-average yield on investments during 2022, 2021 and 2020 was 1.76%, 1.52% and 1.90%, respectively. ASB did not maintain a portfolio of securities held for trading during 2022 and 2021. As of December 31, 2022and 2021, ASB had $1.3 billionand $522.3 million, respectively, of investment securities that were purchased and classified as held-to-maturity. In October 2022, ASB transferred 66 available-for-sale investment securities with a fair value of $755 millionto the held-to-maturity category. The investment securities were classified as held-to-maturity 73 -------------------------------------------------------------------------------- to enhance ASB's capital management in a rising rate environment. ASB considers the held-to-maturity classification of these investment securities to be appropriate as ASB has the positive intent and ability to hold these securities to maturity. 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. Treasurysecurities are also backed by the full faith of the U.S.government. The increase in the investment securities portfolio was primarily due to the purchase of agency mortgage-backed and credit securities with excess liquidity. The net unrealized gains and losses on ASB's investment securities were primarily caused by movements in interest rates. All contractual cash flows of those investments are guaranteed by an agency of the U.S.government. Based upon ASB's evaluation at December 31, 2022and 2021, there was no indicated impairment as ASB expects to collect the contractual cash flows for these investments. See "Investment securities" in Note 1 of the Consolidated Financial Statements for a discussion of securities impairment assessment. As of December 31, 2022and 2021, ASB did not have any private-issue mortgage-backed securities. ASB does not have any exposure to securities backed by subprime mortgages. See "Investment securities" in Note 4 of the Consolidated Financial Statements for a discussion of the allowance for credit losses for the investment securities portfolio. The following table summarizes the current amortized cost of ASB's investment portfolio (excluding stock of the FHLB of Des Moines, which has no contractual maturity) and weighted average yields as of December 31, 2022. Mortgage-backed securities are shown separately because they are typically paid in monthly installments over a number of years. In 1 year After 1 year After 5 years After Mortgage-backed (dollars in millions) or less through 5 years through 10 years 10 years securities Total1 U.S. Treasuryand federal agency obligations $ 1$ 62 $ 85 $ - $ - $ 148Mortgage-backed securities - issued or guaranteed by U.S. Governmentagencies or sponsored agencies - - - - 2,723 2,723 Corporate bonds - 44 - - - 44 Mortgage revenue bonds1 - - 15 - - 15 $ 1$ 106 $ 100 $ - $ 2,723 $ 2,930Weighted average yield 1.64 % 2.17 % 1.91 % - % 1.72 % 1.74 %
1 Weighted average yield on the mortgage revenue bonds is computed on a tax
equivalent basis using a federal statutory tax rate of 21%.
Stock in FHLB. As of
December 31, 2022and 2021, ASB's stock in FHLB of Des Moineswas $26.6 millionand $10.0 million, respectively, was carried at cost because it can only be redeemed at par. The amount that ASB is required to invest in FHLB stock is determined by FHLB requirements. In 2022, 2021 and 2020, ASB received cash dividends of $702,000, $327,000and $306,000, respectively, on its FHLB Stock. 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 2022, deposits decreased by $2.5 millionas an outflow of core deposits was replaced with time certificates. Core deposit retention and sustained growth will remain challenging in the current rising interest rate environment. Advances from the FHLB of Des Moines, securities sold under agreements to repurchase and federal funds purchased continue to be additional sources of funds. As of December 31, 2022, ASB's costing liabilities consisted of 92% deposits and 8% borrowings compared to costing liabilities of 99% deposits and 1% borrowings as of December 31, 2021.
ASB’s deposits are obtained primarily from residents of
inflow or outflow, measured as the year-over-year difference in year-end
deposits, was an outflow of
The following table presents the amount of time certificates of deposit of
Amount Three months or less
Greater than three months through six months 149,081
Greater than six months through twelve months 9,465
Greater than twelve months
74 -------------------------------------------------------------------------------- Other borrowings consist of advances from the FHLB and securities sold under agreements to repurchases. See "Other borrowings" in Note 4 of the Consolidated Financial Statements. ASB may obtain advances from the FHLB of
Des Moinesprovided that certain standards related to creditworthiness have been met. Advances are collateralized by a blanket pledge of certain notes held by ASB and the mortgages securing them. To the extent that advances exceed the amount of mortgage loan collateral pledged to the FHLB of Des Moines, the excess must be covered by qualified marketable securities held under the control of and at the FHLB of Des Moinesor at an approved third-party custodian. FHLB advances generally are available to meet seasonal and other withdrawals of deposit accounts, to expand lending and to assist in the effort to improve asset and liability management. FHLB advances are made pursuant to several different credit programs offered from time to time by the FHLB of Des Moines. 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 consolidated balance sheets. ASB pledges investment securities as collateral for securities sold under agreements to repurchase. All such agreements are subject to master netting arrangements, which provide for 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 increase in other borrowings in 2022 was due to increases in FHLB advances and business retail repurchase agreements, which were sources of funding for the loan portfolio growth as deposit growth slowed in 2022. The decrease in other borrowings in 2021 was due to a decrease in business repurchase agreements. As of December 31, 2022, the unused borrowing capacity with the FHLB of Des Moineswas $1.6 billion. The FHLB of Des Moinescontinues to be an important source of liquidity for ASB. See "Liquidity and capital resources" below for changes in the unused borrowing capacity with the FHLB of Des Moines. Other factors. Interest rate risk is a significant risk of ASB's operations and also represents a market risk factor affecting the fair value of ASB's investment securities. Increases and decreases in prevailing interest rates generally translate into decreases and increases in the fair value of the investment securities, respectively. In addition, changes in credit spreads also impact the fair values of the investment securities. As of December 31, 2022, ASB had an unrealized loss, net of taxes, on available-for-sale investment securities (including securities pledged for repurchase agreements) in accumulated other comprehensive income (AOCI) of $181.9 millioncompared to an unrealized loss, net of taxes, of $32.0 millionas of December 31, 2021. See "Quantitative and Qualitative Disclosures About Market Risk." 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." Also see " Federal Deposit Insurance Corporationassessment" in Note 4 of the Consolidated Financial Statements. Final Capital Rules. On July 2, 2013, the FRB finalized its rule implementing the Basel III regulatory capital framework. The final rules applied to banking organizations of all sizes and types regulated by the FRB and the OCC, except bank holding companies subject to the FRB's Small Bank Holding Company PolicyStatement and Savings & Loan Holding Companies (SLHCs) substantially engaged in insurance underwriting or commercial activities. HEI currently meets the requirements of the exemption as a top-tier grandfathered unitary SLHC that derived, as of June 30of the previous calendar year, either 50% or more of its total consolidated assets or 50% or more of its total revenues on an enterprise-wide basis (calculated under GAAP) from activities that are not financial in nature pursuant to Section 4(k) of the Bank Holding Company Act. The FRB is temporarily excluding these SLHCs from the final rule while it considers a proposal relating to capital and other requirements for SLHC intermediate holding companies (such as ASB Hawaii). The FRB indicated that it would release a proposal on intermediate holding companies that would specify the criteria for establishing and transferring activities to intermediate holding companies and propose to apply the FRB's capital requirements to such intermediate holding companies. The FRB has not yet issued such a proposal, or a proposal on how to apply the Basel III capital rules to SLHCs that are substantially engaged in commercial or insurance underwriting activities, such as grandfathered unitary SLHCs like HEI. Pursuant to the final rule and consistent with the proposals, all banking organizations, including covered holding companies, would initially be subject to the following minimum regulatory capital requirements: a common equity Tier 1 capital ratio of 4.5%, a Tier 1 capital ratio of 6%, a total capital ratio of 8% of risk-weighted assets and a Tier 1 leverage ratio of 4%, and these requirements would increase in subsequent years. In order to avoid restrictions on capital distributions and discretionary bonus payments to executive officers, the final rule requires a banking organization to hold a buffer of common equity Tier 1 capital above its minimum capital requirements in an amount greater than 2.5% of total risk-weighted assets (capital conservation buffer). Subject to the timing and final outcome of the FRB's SLHC intermediate holding company proposal, HEI anticipates that the capital requirements in the final rule will eventually be effective for HEI or ASB Hawaiias well. If the capital 75 -------------------------------------------------------------------------------- requirements were currently applicable to HEI, management believes HEI would satisfy the capital requirements, including the capital conservation buffer. Management cannot predict what final rule the FRB may adopt concerning intermediate holding companies or their impact on ASB Hawaii, if any. With Tier 1 leverage, common equity, Tier 1 capital and total capital ratios of 7.8%, 12.2%, 12.2% and 13.1%, respectively as of December 31, 2022, ASB's regulatory capital ratios exceeded the minimum regulatory capital requirements of 4.0%, 4.5%, 6.0% and 8.0%, respectively. See Bank- Regulation in HEI's "Item 1. Business" for a description of the changes to the community bank leverage ratio framework.
Liquidity and capital resources.
December 31 2022 % change 2021 % change (dollars in millions) Total assets
$ 9,5464 $ 9,1829 Investment securities 2,681 (13) 3,097 41 Loans held for investment, net 5,907 15 5,140 (2) Deposit liabilities 8,170 - 8,172 11 Other bank borrowings 695 687 88 (2)
based on assets of
ASB's principal sources of liquidity are customer deposits, other borrowings and the maturity and repayment of portfolio loans and securities. The Bank's liquidity remains at satisfactory levels as deposits decreased slightly. ASB used investment security portfolio repayments and other borrowings to fund its strong loan production. ASB's deposits as of
December 31, 2022were $3 millionlower than December 31, 2021. ASB's sources of borrowings include advances from the FHLB and securities sold under agreements to repurchase from broker/dealers and commercial account holders. As of December 31, 2022, ASB had $414 millionof FHLB borrowings outstanding. ASB is approved to borrow from the FHLB up to 45% of ASB's assets to the extent it provides qualifying collateral and holds sufficient FHLB stock. As of December 31, 2022, ASB's unused FHLB borrowing capacity was approximately $1.6 billion.
December 31, 2022, ASB had commitments to borrowers for loans and unused lines and letters of credit of $2.1 billion, of which, commitments to lend to borrowers whose loan terms have been modified in troubled debt restructurings were nil. Management believes ASB's current sources of funds will enable it to meet these obligations while maintaining liquidity at satisfactory levels. As of December 31, 2022and 2021, ASB had $16.5 millionand $45.0 millionof loans on nonaccrual status, respectively, or 0.3% and 0.9%, respectively, of net loans outstanding. As of December 31, 2022and 2021, ASB had $0.1 millionand nil, respectively, of real estate acquired in settlement of loans. In 2022, operating activities provided cash of $121 million. Net cash of $778 millionwas used by investing activities primarily due to a net increase in loans receivable of $661 million, purchases of available-for-sale investment securities of $366 million, purchases of loans held for investment of $103 million, net purchases of stock from the FHLB of $17 million, purchases of bank-owned life insurance of $5 millionand additions to premises and equipment of $5 million, partly offset by receipt of repayments from available-for-sale investment securities of $342 million, repayments from held-to-maturity investment securities of $29 million, proceeds from the sale of real estate of $4 million, proceeds from the redemption of bank-owned life insurance of $2 millionand proceeds from the sale of premises and equipment of $1 million. Financing activities provided net cash of $562 millionprimarily due to a net increase in short-term borrowings of $414 millionand a net increase in repurchase agreements of $193 million, partly offset by a net decrease in deposit liabilities of $3 millionand common stock dividends to HEI (through ASB Hawaii) of $42 million. 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. FDICregulations 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 December 31, 2022, ASB was well-capitalized (see Note 4 of the Consolidated Financial Statements for ASB's capital ratios).
For a discussion of ASB dividends, see “Common stock equity” in Note 4 of the
Consolidated Financial Statements.
See “Commitments” in Note 4 of the Consolidated Financial Statements for a
discussion of commitments and contingencies and off-balance sheet arrangements.
Material estimates and critical accounting policies. Also see “Material
estimates and critical accounting policies” for Consolidated HEI above.
Allowance for credit losses. The Company considers the policies related to the allowance for credit losses as critical to the financial statement presentation. The allowance for credit losses applies to financial assets subject to credit losses and measured at amortized cost and certain off-balance sheet credit exposures. This includes, but is not limited to loans, loan commitments and held-to-maturity securities. In addition, the accounting for credit losses on available-for-sale (AFS) debt securities and purchased financial assets with credit deterioration were amended. The other-than-temporary impairment model of accounting for credit losses on AFS debt securities was replaced with an estimate of expected credit losses only when the fair value is below the amortized cost of the asset. The credit loss models use a probability-of-default, loss given default and exposure at default methodology to estimate the expected credit losses. Within each model or calculation, loans are further segregated based on additional risk characteristics specific to that loan type, such as risk rating, Fair Isaac Corporation (FICO) score, bankruptcy score, age of loan and collateral. The Company uses both internal and external historical data, as appropriate, and a blend of economic forecasts to estimate credit losses over a reasonable and supportable forecast period and then reverts to a longer-term historical loss experience to arrive at lifetime expected credit losses. The reversion period incorporates forward-looking expectations about repayments (including prepayments) as determined by the Company's asset liability management system. See "Recent Accounting Pronouncements" in Note 1 of the Consolidated Financial Statements for further discussion of the Company's allowance for credit losses. ASB disaggregates the loan portfolio into loan segments for purposes of determining the allowance for credit losses. Commercial, commercial real estate, and commercial construction loans are defined as non-homogeneous loans. ASB utilizes a risk rating system for evaluating the credit quality of such loans. Loans are rated based on the degree of risk at origination and periodically thereafter, as appropriate. Values are applied separately to the probability of default (borrower risk) and loss given default (transaction risk). ASB utilizes a numerical-based, risk rating "PD Model" that takes into consideration fiscal year-end financial information of the borrower and identified financial attributes including retained earnings, operating cash flows, interest coverage, liquidity and leverage that demonstrate a strong correlation with default to assign default probabilities at the borrower level. In addition, a loss given default value is assigned to each loan to measure loss in the event of default based on loan specific features such as collateral that mitigates the amount of loss in the event of default. Together the PD Model and loss given default construct provide a quantitative, data driven and consistent framework for measuring risk within the portfolio, on a loan by loan basis and for the ultimate collectability of each loan. Residential, consumer and credit scored business loans are considered homogeneous loans, which are typically underwritten based on common, uniform standards. For the homogeneous portfolio, the quality of the loan is best indicated by the repayment performance of an individual borrower. ASB supplements performance data with external credit bureau data and credit scores such as the FICO score on a quarterly basis. ASB has built portfolio loss models for each major segment based on the combination of internal and external data to predict the probability of default at the loan level. ASB also considers qualitative factors in determining the allowance for credit losses. These include but are not limited to adjustments for changes in policies and procedures in underwriting, monitoring or collections, economic conditions, portfolio mix, lending and risk management personnel, results of internal audit and quality control reviews, collateral values and any concentrations of credit. The reserve for unfunded commitments is maintained at a level believed by management to be sufficient to cover expected losses related to unfunded credit facilities and is included in accounts payable and other liabilities in the consolidated balance sheets. The determination of the adequacy of the reserve is based upon an evaluation of the unfunded credit facilities, including an assessment of historical commitment utilization experience, credit risk grading and historical loss rates. This process takes into consideration the same risk elements that are analyzed in the determination of the adequacy of the allowance for credit losses, as discussed above. Net adjustments to the reserve for unfunded commitments are included in the provision for credit losses in the consolidated statements of income. Management believes its allowance for credit losses is adequate to cover expected credit losses in the loan portfolio. However, such estimates are based on currently available information and historical experience, and future adjustments may be required from time to time to the allowance for credit losses based on new information and changes that occur (e.g., due to changes in economic conditions, particularly in
Hawaii). Actual losses could differ from management's estimates, and these differences and subsequent adjustments could be material. Fair value. Fair value estimates are based on the price that would be received to sell an asset, or paid upon the transfer of a liability, in an orderly transaction between market participants at the measurement date. The fair value estimates are generally 77 -------------------------------------------------------------------------------- determined based on assumptions that market participants would use in pricing the asset or liability and are based on market data obtained from independent third party sources. However, in certain cases, ASB uses its own assumptions based on the best information available in certain circumstances. These valuations are estimates at a specific point in time, based on relevant market information, information about the financial instrument and judgments regarding future expected loss experience, economic conditions, risk characteristics of various financial instruments and other factors. These estimates do not reflect any premium or discount that could result if ASB were to sell its entire holdings of a particular financial instrument at one time. Because no active trading market exists for a portion of its financial instruments, fair value estimates cannot be determined with precision. Changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the estimates. In addition, the tax ramifications related to the realization of the unrealized gains and losses could have a significant effect on fair value estimates, but have not been considered in making such estimates. ASB classifies its financial assets and liabilities that are measured at fair value in accordance with the three-level valuation hierarchy. Level 1 valuations are based on quoted prices, unadjusted for identical instruments traded in active markets. Level 2 valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active or model-based techniques for which all significant assumptions are observable in the market. Level 3 valuations are based on model-based techniques that use at least one significant assumption not observable in the market or significant management judgment or estimation. See "Fair value measurements" in Note 1 of the Consolidated Financial Statements). Significant assets measured at fair value on a recurring basis include ASB's mortgage-backed securities available for sale. These instruments are priced using an external pricing service and are classified as Level 2 within the fair value hierarchy. The third-party pricing services use a variety of methods to determine fair value including 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 compares 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 the investment manager 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. Fair value is also used on a nonrecurring basis to evaluate certain assets for impairment or for disclosure purposes. Examples of nonrecurring uses of fair value include mortgage servicing rights accounted for by the amortization method, loan impairments for certain loans, real estate acquired in settlement of loans and goodwill.
See “Investment securities” and “Derivative financial instruments” in Note 4 and
Note 16 of the Consolidated Financial Statements for additional information
regarding ASB’s fair value measurements.
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