HAWAIIAN ELECTRIC COMPANY, INC. HEI and
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 andHawaiian Electric's actual 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.
HEI Consolidated
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 Light andMaui Electric (Utilities) are regulated operating electric public utilities engaged in the production, purchase, transmission, distribution and sale of electricity on the islands ofOahu ;Hawaii ; andMaui ,Lanai andMolokai , 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 theState of Hawaii to 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 inHawaii have 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 ofFebruary 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 ofFebruary 13, 2023 . InMarch 2022 , the state ended the Safe Travels program for domesticU.S. travelers and the indoor mask mandate. OnJune 12, 2022 , theU.S. Centers for Disease Control and Prevention ended the requirement that required air passengers traveling from a foreign country tothe United States to show a negative COVID-19 test before boarding their flight. OnOctober 11, 2022 ,Japan eliminated the daily entry cap intoJapan , which had made travel to and fromHawaii more difficult. The loosening of these COVID-19 restrictions has led to an improvement in economic conditions inHawaii over 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 ofHawaii's tourism markets. Domestic tourism has recovered significantly and exceeded pre-pandemic levels, with 9.6 million domestic passengers traveling toHawaii in 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 toHawaii in 2022 compared with 2.8 million passengers in 2019. However, with the recent lifting of travel restrictions inJapan ,Hawaii's largest 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
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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
million provision for credit losses in 2022, compared to a $25.8 million
negative provision for credit losses in 2021. The higher interest rate
environment and higher earning asset balances benefited net interest income,
which increased $15.4 million to $252.6 million in 2022 compared to net interest
income of $237.2 million in 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's ongoing 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 Bank sections below. There has been no
material impact on the "Other" segment and Pacific Current as a result of the
COVID-19 pandemic as the primary businesses of Pacific Current are supported by
PPAs that provide for contractual cash flows with credit-worthy counterparties.
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 Hawaii economy, 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's environment, 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
•promoting
•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 Committee oversight of ESG risks,Compensation & Human Capital Management Committee responsibility for ESG-related compensation matters and human capital management andNominating and Corporate Governance Committee responsibility 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 environmental management.
•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.
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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 Electric and ASB, and was
aligned with Sustainability Accounting Standards Board (SASB) guidance-using the
electric utilities standard for Hawaiian Electric , and the commercial banks,
commercial finance, and mortgage finance standards for ASB. In April 2021 , the
Company issued its second ESG report, including SASB disclosures for Hawaiian
Electric and 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$ 3,742 31$ 2,850 10$ 2,580 Operating income 381 (1) 386 24 311 Net income for common stock 241 (2) 246 24 198 Net income (loss) by segment: Electric utility$ 189 6$ 178 5$ 169 Bank 80 (21) 101 76 58 Other (28) 15 (33) (12) (29) Net income for common stock$ 241 (2)$ 246 24$ 198 Basic earnings per share$ 2.20 (2)$ 2.25 24$ 1.81 Diluted earnings per share$ 2.20 (2)$ 2.25 24$ 1.81 Dividends per share$ 1.40 3$ 1.36 3$ 1.32 Weighted-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 ($2.20 diluted earnings per share), compared to$246 million ($2.25 diluted earnings per share) in 2021, due to$21 million lower net income at ASB, partly offset by$11 million higher net income at the Utilities and$5 million lower 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 million as 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-
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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
subsidiaries.
Operating loss1 (20) (22) 2 Lower HEI corporate operating loss ($22 million in 2022 vs.$25 million in 2021) primarily due to a decrease in incentive compensation and consulting expenses. Lower Pacific Current operating income ($2 million in 2022 vs$3 million 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 equity-method investment
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
Economic conditions.
Note: The statistical data in this section is from public third-party sources that management believes to be reliable (e.g.,Department of Business, Economic Development and Tourism (DBEDT),University of Hawaii Economic Research Organization (UHERO),U.S. Bureau of Labor Statistics ,Department of Labor and Industrial Relations (DLIR),Hawaii Tourism Authority (HTA),Honolulu Board of REALTORS® and national and local news media). By the end ofDecember 2022 , the national and state COVID-19 restrictions were lifted and lower case counts across most states led to stronger demand for travel toHawaii in 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. InDecember 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. OnOctober 11, 2022 ,Japan eliminated the daily entry cap intoJapan , which had made travel to and fromHawaii more difficult. Since then, international visitor arrivals have increased.Hawaii's seasonally adjusted unemployment rate inDecember 2022 was 3.2%, which was lower compared to theDecember 2021 rate of 4.3%. The national unemployment rate inDecember 2022 was 3.5% compared to 3.9% inDecember 2021 .Hawaii's unemployment rate is expected to continue to improve now that restrictions have been lifted and non-farm jobs are expected to increase this year.Hawaii real estate activity throughDecember 2022 , as indicated byOahu's home 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$1,153,500 set 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's petroleum product prices reflect supply and demand in theAsia-Pacific region and the price of crude oil in international markets. The price of crude oil increased significantly fromJanuary 2022 throughJuly 2022 , but started to decline inAugust 2022 throughNovember 2022 . At itsFebruary 1, 2023 meeting, theFederal 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, theFOMC raised the federal funds rate 25 basis points and intends to further reduce theFederal Reserve's holdings ofTreasury securities, agency debt, and agency mortgage-backed securities. The most recent forecast by UHERO, issued onDecember 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 aU.S. recession, UHERO believes thatHawaii is unlikely to suffer as severely compared to theU.S. mainland due to anticipated visitor arrivals and a surge in public sector construction. Downward risks are forecasted to include ongoing global economic fallout fromRussia's invasion ofUkraine , 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 inHawaii to 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
As ofDecember 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 ofDecember 31, 2022 , there was no balance onHawaiian Electric's revolving credit facility and the available committed capacity under the revolving credit facility was$200 million . As ofDecember 31, 2022 , ASB's unused FHLB borrowing capacity was approximately$1.6 billion and ASB had unpledged investment securities of$1.6 billion that were available to be used as collateral for additional borrowing capacity. As ofDecember 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 million compared toDecember 31, 2021 . OnSeptember 29, 2021 , HEI executed a$125 million private placement, utilizing a delayed draw feature with two tranches. The first tranche of$75 million was drawn onDecember 29, 2021 and 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 million was drawn onOctober 26, 2022 , to refinance a portion of$150 million of debt that matured onNovember 20, 2022 . OnSeptember 29, 2022 , HEI executed a private placement under which HEI has authorized the issue and sale of$110 million of unsecured senior notes. The proceeds, totaling$110 million , were drawn onNovember 1, 2022 to refinance the remaining portion of the$150 million of debt that matured onNovember 20, 2022 . See Note 6 of the Consolidated Financial Statements for additional information. OnOctober 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 throughMarch 31, 2023 , at which time the term loan commitment expires. OnDecember 28, 2022 , HEI drew$35 million on the term loan. Any borrowings under the facility mature onNovember 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 million sinceDecember 31, 2021 , has led to higher bad debt expense and may result in higher write-offs in the future. As ofDecember 31, 2022 , approximately$50 million of 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
equivalents was
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2022, compared to $251 million as 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 million on an annual basis, based on historical demand, but
such future amount is dependent on a number of factors, including, without
limitation, future share prices, number of shares and participants in the DRIP
program, and the amount of new investment in HEI's stock by DRIP participants.
HEI material cash requirements. HEI's material cash requirements include:
Utility capital expenditures, labor and benefit costs, O&M expenses, fuel and
purchase power costs, and debt and interest payments; investments in loans and
investment securities at the Bank; labor and benefits costs, shareholder
dividends and debt and interest payments at HEI; and HEI equity contributions to
support Pacific Current's sustainable infrastructure investments. 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 billion over 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
million will be required in 2023 and $50 million in 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).
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--------------------------------------------------------------------------------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, 2022 Less 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 $ 70 Time 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 65Hawaiian Electric open purchase order obligations1 178 65 12 - 255Hawaiian Electric fuel oil purchase obligations (estimate based on fuel oil price at December 31) 5 9 5 - 19Hawaiian Electric power 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 expense amounts.
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 ofDecember 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 million in 2022 and$376 million in 2021. Investing activities used net cash of$1,129 million in 2022 and$1,180 million in 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 fromFederal 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 fromFederal 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 fromFederal Home Loan Bank . Financing activities provided net cash of$568 million in 2022 and$756 million in 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),
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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 Electric and ASB
(through ASB Hawaii ) paid cash dividends to HEI of $126 million and $42 million ,
respectively.
A portion of the net assets of Hawaiian Electric and ASB is not available for
transfer to HEI in the form of dividends, loans or advances without regulatory
approval. In the absence of an unexpected material adverse change in the
financial condition of the electric utilities or ASB, such restrictions are not
expected to significantly affect the operations of HEI, its ability to pay
dividends on its common stock or its ability to meet its debt or other cash
obligations. See Note 14 of the Consolidated Financial Statements.
The Company believes that its ability to generate cash, both internally from
electric utility and banking operations and externally from issuances of equity
and debt securities, as well as bank borrowings, is adequate to maintain
sufficient liquidity to fund its contractual obligations and commercial
commitments, its forecasted capital expenditures and investments, its expected
retirement benefit plan contributions and other short-term and long-term
material cash requirements. However, the economic impact of higher fuel prices,
inflation, higher interest rates, tightening of monetary policy and the ongoing
COVID-19 pandemic, create significant uncertainty, and the Company cannot
predict the future effects that these factors will have on the global, national
or local economy, including the impact on the Company's cost of capital and its
ability to access additional capital, or the future impacts on the Company's
financial position, results of operations, and cash flows. See Item 1A. "Risk
Factors" in Part I for further discussion of risks and uncertainties.
The consolidated capital structure of HEI (excluding deposit liabilities and other bank borrowings) was as follows:
December 31 2022
2021
(dollars in millions) Short-term borrowings, net-other than bank$ 173 3 %$ 54 1 % 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$ 4,794 100 %$ 4,801 100 % 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 includeHawaiian Electric's separate 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 ofDecember 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 toHawaiian Electric to meetHawaiian Electric's cash requirements, including the funding of loans byHawaiian Electric toHawaii Electric Light andMaui Electric , but no such short-term loans toHawaiian Electric were outstanding as ofDecember 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 ofDecember 31, 2022 , HEI's debt maturities in 2023 include$50 million of long-term debt that matures inMarch 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 ofFebruary 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 rateHawaiian Electric's long-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 theHEI Audit & Risk Committee and, as applicable, theHawaiian 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 ofDecember 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 ofDecember 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) /$122 Other benefits Discount rate +/-50$(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 concerningHawaiian Electric should be read in conjunction with its consolidated financial statements and accompanying notes.
Electric utility
Executive overview and strategy. The Utilities provide electricity on all the principal islands in the state, other thanKauai , to approximately 95% of the state's population, and operate five separate grids. The Utilities' mission is to provide innovative energy leadership forHawaii , 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
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 million maximum 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. InDecember 2022 , the consumer price index moderated to 6.5% from a peak of 9.1% inJune 2022 . InHawaii , theNovember 2022 Urban 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) inOctober 2021 and was effective in rates onJanuary 1, 2022 . For the 2023 calendar year, the forecasted 2023 GDPPI was 3.68% (net of the 0.22% customer dividend), measured inOctober 2022 , and became effective in rates onJanuary 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 sinceDecember 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 onDecember 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 onNovember 30, 2022 , the Utilities updated the estimated maximum COVID-19 total recovery request amount to$14.3 million . As ofDecember 31, 2022 , the Utilities have recorded$11.4 million in regulatory assets for deferral of COVID-19 related costs. The updated amounts have been reflected in the Utilities' Supplemental Response to the PUC filed onJanuary 12, 2023 . OnJanuary 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 developments.
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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
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 byHawaiian Electric and IPPs who sell electricity to the Utilities. The 2030 commitment would provide a significant portion of the reduction the entireHawaii economy needs to meet theU.S. target of cutting carbon emissions by at least 50% economy-wide by 2030.Hawaiian Electric has also committed to achieving net zero carbon emissions from power generation by 2045 or sooner. Key elements of the 2030 plan include the closure of the state's last coal-fired IPP plant that occurred inSeptember 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 byHawaii State law. See "Forecast of capital expenditures-Liquidity and capital resources" for a discussion of potential capital expenditures related to decarbonization efforts. OnSeptember 1, 2022 , the last coal-fired IPP plant in the state, providing approximately 10% ofOahu's generation, ceased operations, removing a significant source of GHG emissions from the Utilities' generation mix. In advance of the retirement of the coal-fired IPP plant, the Utilities developed plans, including contingency plans, to ensure reliable service through the transition period. These plans include the anticipated addition of renewable energy/storage projects, reserve capacity from existing generation sources, the acceleration of maintenance work during periods with anticipated higher reserve levels, and multiple demand response/DER programs. For example, the state's largest solar plus battery storage project to date, totaling 39 MW, reached commercial operations onJuly 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's renewable portfolio standard law requires electric utilities to meet an RPS of 30%, 40%, 70% and 100% byDecember 31, 2020 , 2030, 2040 and 2045, respectively.Hawaii law has also established a target of sequestering more atmospheric carbon and greenhouse gases than emitted within the state by 2045. The Utilities' 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%. InJuly 2022 ,Governor Ige signed Act 240 (H.B.2089), that amended the RPS calculation from renewable energy as a percentage of sales to renewable energy as a percentage of total generation. The amended RPS calculation results in a lower calculated percentage than the amount calculated under the previous methodology. For example, the 2022 RPS achieved under the revised RPS calculation would have been 31.8% versus 39.1% under the prior method. The change in the definition is to be applied prospectively to future milestone measurements and will require that the Utilities acquire more renewable energy than under the previous RPS calculation to comply with the RPS milestones; however, the Utilities expect to continue to meet the RPS milestones under the amended RPS law. (See "Developments in renewable energy efforts" below).
If the Utilities are not successful in meeting the RPS targets as mandated by
law, the PUC could assess a penalty of
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penalty due to events or circumstances that are outside an electric utility's
reasonable control, to the extent the event or circumstance could not be
reasonably foreseen and ameliorated. In addition to penalties under the RPS law,
failure to meet the mandated RPS targets would be expected to result in a higher
proportion of fossil fuel-based generation than if the RPS target had been
achieved, which in turn would be expected to subject the Utilities to limited
commodity fossil fuel price exposure under a fuel cost risk-sharing mechanism.
The fuel cost risk-sharing mechanism apportions 2% of the fuel cost risk to the
utilities (and 98% to ratepayers) and has a maximum exposure (or benefit) of
$3.7 million . Conversely, the Utilities have incentives under PIMs that provide
a financial reward for accelerating the achievement of renewable generation as a
percentage of total generation, including customer supplied generation. The
Utilities may earn a reward for the amount of system generation above the
interpolated statutory RPS goal at $20 /MWh in 2022, $15 /MWh in 2023, and $10 /MWh
for the remainder of the multi-year rate period.
The Utilities are fully aligned with, and supportive of, state policy to achieve
a decarbonized future and have made significant progress in reducing emissions
through renewable energy and electrification. This alignment with state policy
is reflected in management compensation programs and the Utilities' long-range
plans, which include aspirational targets in order to catalyze action and
accelerate the transition away from fossil fuels throughout its operations at a
pace more rapid than dictated by current law. The long-range plans, including
aspirational targets, serve as guiding principles in the Utilities' continued
transformation, and are updated regularly to adapt to changing technology, costs
and other factors. While there is no financial penalty for failure to achieve
the Utilities' long-range aspirational objectives, the Utilities recognize that
there are environmental and social costs from the continued use of fossil fuels.
The State of Hawaii's policy is supported by the regulatory framework and
includes a number of mechanisms designed to maintain the Utilities' financial
stability during the transition toward the State's decarbonized future. Under
the sales decoupling mechanism, the Utilities are allowed to recover from
customers, target test year revenues, independent of the level of kWh sales,
which have generally trended lower over time as privately-owned DER have been
added to the grid and energy efficiency measures have been put into place. Other
regulatory mechanisms under the PBR framework reduce some of the regulatory lag
during the multi-year rate plan (MRP), such as the annual revenue adjustment to
provide annual changes in utility revenues, including inflationary adjustments,
and the exceptional project recovery mechanism, which allows the Utilities to
recover and earn on certain approved eligible projects placed into service. See
"Regulatory proceedings" 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 Panel and 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 Oahu and is seeking 132 MW of grid services with focus on capacity
reduction (60 MW) similarly in response to the potential reserve shortfall from
the AES coal plant retirement that occurred on September 1, 2022 . The Utilities
executed a GSPA for a total grid services amount of 97.4 MW and filed with the
PUC to request approval on March 16, 2022 . On July 26, 2022 , the Consumer
Advocate filed 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, 2022 to 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.
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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 Maui and received PUC approval on May 20,
2022 . The EDRP on Maui became effective as of June 1, 2022 . Subsequently, on
June 23, 2022 , the PUC approved the cost recovery of the additional incentives
for both Oahu and Maui through the Demand-Side Management Surcharge. As of
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 Maui and 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 Electric to proceed with the RFP with modifications. Hawaiian Electric
submitted 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 million in capital and deferred
software cost and is expected to be incurred over five years. As of December 31,
2022 , approximately $72 million of capital and deferred software cost has been
incurred to date under Phase 1 and is currently being recovered under the MPIR
mechanism until such costs are included in base rates. On June 24, 2022 , the PUC
approved with certain conditions the Utilities' request to aggregate the
per-meter and network cost caps and to recover O&M costs associated with
full-service territory AMI deployment under the MPIR mechanism. As of
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, 2019 for an
Advanced Distribution Management System (ADMS) as part of Phase 2 of their Grid
Modernization Strategy implementation. However, on December 30, 2019 , the PUC
suspended the Utilities' application for the ADMS pending the Utilities' filing
of a supplemental application for the broad deployment of field devices. This
supplement and update to the Grid Modernization Strategy Phase 2 field devices
application was filed on March 31, 2021 . 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 Maui and 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, 2020 and subsequently expanded on
July 27, 2021 , allows over 250 MW across all Hawaiian Electric service
territories in two tranches for small (under 250 kW), mid-tier and large system
sizes to encourage a variety of system sizes. To provide opportunities for
Low-to-Moderate Income (LMI) customers to participate in
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the program, 23 MW of capacity for dedicated-LMI projects were awarded on
November 15, 2022 through three island specific RFPs for Oahu , Maui and Hawaii
Island . LMI projects do not have a size cap nor do they decrease the 250 MW
capacity available to other projects. The dedicated-LMI projects are expected to
become operational in 2025.
The Utilities issued the CBRE Tranche 1 RFPs for Oahu , Maui and Hawaii on April
14, 2022 . The RFPs closed on August 17, 2022 , and proposals were evaluated.
Tranche 1 projects, which are greater than or equal to 250 kW, were awarded on
February 22, 2023 .
For
One CBRE proposal forLanai was selected but negotiations were terminated onJune 15, 2022 . With the concurrence of theIndependent Observer , a replacement proposal was selected onJuly 1, 2022 . OnJuly 25, 2022 , the Utilities announced the selection of a new developer for the Lanai CBRE RFP. OnSeptember 21, 2022 , the Utilities were informed by Pulama Lanai of a project being planned onLanai to remove the two large resorts from the grid, which represent approximately 40% of the load of the island and raises great uncertainty around the future energy needs forLanai . OnSeptember 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. OnMolokai , 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 onSeptember 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 ofMolokai . Discussions are ongoing. The Utilities CBRE Phase 2 Rule 29 became effective onMarch 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 onOahu ,Maui andHawaii 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 theSubscriber Organization has added their project to the portal. Microgrid services tariff proceeding. In enacting Act 200 of 2018, theHawaii legislature found thatHawaii's residents and businesses were vulnerable to disruptions in the islands' energy systems caused by extreme weather events or other disasters, and stated its belief that the use of microgrids would build energy resiliency intoHawaii's communities, thereby increasing public safety and security. The purpose of Act 200 was therefore to encourage and facilitate the development and use of microgrids through the establishment of a standard microgrid services tariff. InJuly 2018 , pursuant to Act 200, the PUC opened a proceeding to investigate the establishment of a microgrid services tariff. InAugust 2019 , the PUC issued an order prioritizing items for resolution in the docket and directed the Parties to establish working groups (theWorking Group ) to address issues identified by the PUC. OnMay 27, 2021 , the Utilities filed the Microgrid Service Tariff. OnSeptember 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 byOctober 21, 2021 . OnApril 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 Group coordination with related microgrid and resilience Initiatives atHawaiian Electric and government agencies. Furthermore, the PUC established a procedural schedule to consist of quarterly status conference meetings with the PUC, a Phase 2 Working Group Report, draft of a revised Microgrid Service Tariff, Party comments to the proposed Microgrid Service Tariff, followed by a PUC D&O. OnJune 30, 2022 , the PUC provided further guidance to theWorking Group to prioritize discussion of the microgrid types in the following order: 1) Hybrid Microgrid - Third Party Developer using Utility lines/infrastructure; 2) Hybrid Microgrid -Utility Project with Partners; and 3) Customer Microgrid. Additionally, the PUC instructed theWorking Group to discuss microgrid compensation and continue the involvement of microgrid developers in working group meetings.The Working Group met fromApril 2022 throughOctober 2022 to discuss the PUC's objectives and respond to the Phase 2 priority issues. OnOctober 31, 2022 , the PUC issued a guidance letter and advised that theWorking Group propose a new timeline for the Report. The Utilities and theConsumer Advocate filed a joint letter with a revised timeline onNovember 10 , 50 --------------------------------------------------------------------------------
2022. On
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 Electric Light Maui Electric Hawaiian Electric Hawaii Electric Light Maui Electric
Utility 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:
$ 683
higher fuel oil prices and higher kWh generated1
135 higher purchased power energy prices, partially offset by lower
kWh purchased and lower PPAC revenue2
37 higher revenue from ARA adjustments, which included the customer
dividend delivered to customers
6 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
2022
498 475 23 Operation and maintenance expense. Net increase largely due to:
11 more generating facility overhauls and maintenance work performed
4 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
maintenance expense
2 higher outside services for Information and Technology and
Services Support, Customer Interconnection/Installation, Demand
Response Management System, and Battery Bonus program
2 increase in workers' compensation reserve
1 higher property damage and legal reserve for pending claims
(1) expense due to decommissioning of combined heat and power unit on
(1)
higher
(2) Customer bill forgiveness and assistance in the fourth quarter of
2021
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 $ 61.43 Average 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
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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's effective 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-Electric utility," 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, 2022 amounted 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 following:
New renewable PPAs. •OnNovember 16, 2021 ,Hawaii Electric Light andHawi 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. OnDecember 17, 2021 ,Hawaii Electric Light filed an application for approval of the ARPPA, requesting a decision no later thanJune 15, 2022 . OnJune 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. OnJune 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. OnJanuary 11, 2023 ,Hawaii Electric Light and 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. OnJanuary 27, 2023 ,Hawaii Electric Light requested the PUC to resume the docket and onFebruary 3, 2023 ,Hawaii Electric Light and theConsumer Advocate submitted a proposed procedural schedule to accommodate additional steps to review the First Amendment. •OnDecember 31, 2019 ,Hawaii Electric Light andPuna Geothermal Ventures entered 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. OnMarch 31, 2021 , the PUC suspended the docket pending the completion of a supplemental environmental review under the Hawaii Environmental Policy Act (HEPA). After theOffice of Planning and Sustainable Development identified thePlanning Department for the County of Hawaii to 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. OnMarch 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. OnMarch 28, 2022 ,Puna Pono Alliance filed a Motion for Reconsideration seeking reconsideration, modification and/or vacation of the D&O. OnJune 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, inFebruary 2018 , the Utilities issued Stage 1 Renewable RFPs for 220 MW of renewable generation onOahu , 50 MW of renewable generation onHawaii Island , and 60 MW of renewable generation onMaui . 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$ 32.0 Hawaii 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 missed.
The Utilities have received PUC approvals to recover the total projected annual payment of$64.5 million for 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 inFebruary 2023 are pending PUC approval. OnJuly 31, 2022 , the first Stage 1 solar-pus-storage project was placed into service. OnJanuary 11, 2023 , Waiawa Solar project onOahu also reached commercial operations. See also "Stage 1 renewable PPAs" in Note 3 of the Consolidated Financial Statements. •In continuation of theirFebruary 2018 request for proposal process, the Utilities issued their Stage 2 Renewable RFPs forOahu ,Maui andHawaii Island and Grid Services RFP onAugust 22, 2019 . Final awards for the renewable projects were made onMay 8, 2020 . Final awards for the grid services projects were made starting inJanuary 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. OnMarch 23, 2022 , the PUC approved one solar-plus-storage project onOahu for 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. OnMay 25, 2022 , the PUC denied the one Utility Self-Build project onHawaii Island . In response, the Utilities filed a motion for reconsideration with the PUC. OnJune 24, 2022 the Utilities filed Supplemental Request informing the PUC that the project might be eligible to receive funds under the federalInfrastructure Investment and Jobs Act (IIJA). OnJuly 27, 2022 the 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. OnFebruary 23, 2023 , the PUC lifted the suspension and reopened the docket to begin review of the application. OnJuly 25, 2022 , the PUC approved the final solar-plus-storage project onOahu for 42 MW of generation and 168 MWh of storage. The Utility Self-Build project onMaui is still pending PUC approval. OnOctober 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 onMaui . The PUC conditionally approved the amendment onDecember 2, 2022 . OnNovember 17, 2022 , an approved Stage 2 project onOahu declared its PPA null and void; the Utilities filed a notice with the PUC onNovember 22, 2022 . OnDecember 23, 2022 , the Utilities and developer of a Stage 2 project onMaui mutually terminated its PPA; the Utilities filed a noticed with the PUC onDecember 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 $ 28.8
Hawaiian 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.
54
--------------------------------------------------------------------------------
The total projected annual payment of
A summary of the GSPAs that were approved by PUC inDecember 2020 is 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
•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 atU.S. ports of entry ordered by theU.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 theUS Department of Commerce onMarch 28, 2022 , in response to a request byAuxin Solar Inc. in regards to solar panel imports. OnJune 6, 2022 ,President Biden created a bridge to temporarily facilitateU.S. solar deployers' ability to source certain imported solar modules and cells free of certain duties for 24 months in order to ensure theU.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 onAugust 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 ofDecember 31, 2022 , there were approximately 573 MW, 125 MW and 137 MW of installed distributed renewable energy technologies (mainly PV) atHawaiian Electric ,Hawaii Electric Light andMaui 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 ofDecember 31, 2022 , an estimated 34% of single-family homes on the islands ofOahu, Hawaii andMaui have 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 ofDecember 31, 2022 , there were 43 MW, 2 MW and 6 MW of installed feed-in tariff capacity from renewable energy technologies atHawaiian Electric ,Hawaii Electric Light andMaui Electric , respectively.
Biofuel sources.
•InJuly 2018 , the PUC approvedHawaiian Electric's three-year biodiesel supply contract withPacific Biodiesel Technologies, LLC (PBT) to supply 2 million to 4 million gallons of biodiesel atHawaiian Electric's Schofield 55 -------------------------------------------------------------------------------- Generating Station and theHonolulu International Airport Emergency Power Facility (HIA Facility) and any other generating unit onOahu , as necessary. The PBT contract became effective onNovember 1, 2018 , and has been extended for one year throughDecember 2022 .Hawaiian Electric also has a spot buy contract with PBT to purchase additional quantities of biodiesel at or below the price of diesel. Some purchases of "at parity" biodiesel have been made under the spot purchase contract, which was extended throughJune 2023 . OnJune 30, 2021 , the Utilities issued an RFP for all fuels, including biodiesel, for supply commencingJanuary 1, 2023 . The Utilities and PBT signed an agreement onDecember 13, 2021 for supply of biodiesel on all islands commencingJanuary 1, 2023 , which was approved by the PUC onDecember 1, 2022 . •Hawaiian Electric has a contingency supply contract withREG Marketing & Logistics Group, LLC to also supply biodiesel to any generating unit onOahu in the event PBT is not able to supply necessary quantities. This contingency contract has been extended toNovember 2024 , and will continue with no volume purchase requirements.
Requests for renewable proposals, expressions of interest, and information.
•OnNovember 22, 2021 , CBRE RFPs forMolokai andLanai were opened. The RFP forLanai sought a single PV paired with storage project, which included a 3 MW portion, reserved for CBRE. The Lanai RFP closed onFebruary 14, 2022 and the Molokai RFP closed onMarch 1, 2022 . A project was selected in the Lanai RFP but negotiations were terminated. OnJuly 1, 2022 , a replacement project was selected and negotiations commenced. The RFP forMolokai sought 2.75 MW of new PV paired with storage projects for CBRE generation. No projects were selected in the Molokai RFP. However, with the concurrence of the independent observer, the Utilities are working with the lone bidder outside of the RFP process. •OnMarch 17, 2022 , the CBRE LMI RFPs forOahu ,Maui andHawaii were opened and proposals were received, Seven projects were selected consisting of one standalone PV project onOahu , three paired PV with storage projects onMaui , and three paired PV with storage projects onHawaii Island . The Utilities opened the CBRE Tranche 1 RFPs forOahu ,Maui andHawaii onApril 14, 2022 and 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 onHawaii Island onJanuary 21, 2021 . In accordance with guidance provided by the PUC in a subsequent letter onApril 20, 2021 , the Utilities filed the Hawaii Island Grid Needs Assessment onJuly 15, 2021 and the draft RFP, including model contracts for PV+BESS, wind+BESS, standalone storage, firm renewable generation, and DER aggregators onOctober 15, 2021 . The requirements in the Stage 3 RFP are guided by the results of the Grid Needs Assessment. OnMarch 18, 2022 , the Utilities filed a second draft of the Stage 3 RFP forHawaii Island , incorporating stakeholder and PUC feedback. OnMay 31, 2022 , the Utilities filed its proposed final draft Stage 3 RFP forHawaii Island . OnJune 30, 2022 , the PUC issued an order approving with modifications the Stage 3 RFP forHawaii Island and providing guidance on theOahu and Maui Stage 3 RFPs. OnJuly 11, 2022 , the Utilities filed a motion for partial reconsideration and/or clarification of the PUC's order. OnJuly 20, 2022 , the Utilities filed a Request for Extension to file the final Stage 3 RFP forHawaii Island . OnJuly 28, 2022 , the PUC issued an order granting the Utilities' motion for an enlargement of time to file the final Stage 3 RFP forHawaii Island . The Utilities' deadline to file the final Stage 3 RFP forHawaii Island is 15 days from the filing date of the PUC's decision on the Utilities' Motion for Reconsideration. OnOctober 17, 2022 , the PUC issued an order in response to the Utilities' Motion. The final Stage 3 RFP was filed onNovember 7, 2022 and the RFP was issued onNovember 21, 2022 . Proposals were due byFebruary 24, 2023 . •OnFebruary 18, 2022 , the PUC sent a letter to the Utilities directing them to develop Stage 3 RFPs forOahu andMaui . OnMarch 10, 2022 , the Utilities submitted its recommendations on plans to develop Stage 3 RFPs forOahu andMaui , and onMay 2, 2022 , the Utilities filed draft RFPs forOahu andMaui . Updated grid needs assessments forOahu andMaui were filed onJuly 29, 2022 . Thirty-three information requests were issued by the PUC for the near term grid needs assessments supporting theOahu and Maui Stage 3 RFPs onSeptember 28, 2022 . OnOctober 7, 2022 , the Utilities requested an extension fromOctober 19, 2022 toNovember 16, 2022 to respond. OnOctober 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 byOctober 31, 2022 and the Stage 3 Maui and Oahu RFPs byNovember 30, 2022 . TheOctober 17, 2022 Order also mandated a 30 day comment period on the grid needs assessments forOahu andMaui , which started onOctober 20, 2022 . Comments were received onNovember 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 forOahu andMaui as well as the subsequent withdrawals of one Stage 2 project each onOahu andMaui , the Stage 3 RFP energy targets were increased. ForOahu , the Utilities are seeking 500 to 700 MW of renewable firm capacity, and at least 965 GWh of renewable dispatchable energy annually. ForMaui , the Utilities are procuring at least 40 MW of renewable firm capacity, and at least 425 GWh of renewable dispatchable energy annually. OnDecember 1, 2022 , the PUC approved the Stage 3 RFPs forOahu andMaui with modifications. OnDecember 22 , 56 --------------------------------------------------------------------------------
2022, the final RFPs were filed, and were automatically approved by the PUC on
•OnNovember 17, 2021 , the Utilities filed a request with the PUC to develop an RFP for firm renewable generation forOahu . OnDecember 22, 2021 , the PUC issued guidance to the Utilities on proceeding with such RFP. The Utilities filed a draft RFP onFebruary 28, 2022 . Per the PUC'sMarch 23, 2022 letter, 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 Agreement.
• InFebruary 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. InApril 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 isJuly 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. InMay 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, theHawaii State Legislature passedSenate Bill 2474 SD 2 HD 1 CD 1, which was signed into law onJune 27, 2022 as Act 201. The law requires that the PUC contract with a qualified consultant to conduct a study on the accessibility ofHawaii's electric system and procedures for interconnection toHawaii's electric system, including but not limited to the timeliness and costs of interconnection. The PUC contracted withPA Consulting to conduct the study as well as act as the Independent Engineer for the Stage 3 Request for Proposal procurement. The report was submitted to the PUC onDecember 28, 2022 and did not find any wrongdoing on the part of the utility. The report made minor recommendations forHawaiian Electric to review interconnection related tariff/rules and revise, if necessary, to provide technical clarity in terms of interconnection requirements, to establish a database for the purpose of centralizing all information related to all interconnection projects they manage, including their self-build and IPP-built projects, and to develop comparable interconnection cost metrics for self-build and IPP-built projects so that interconnection costs can be directly compared. The PUC stated its intent to address the recommendations that are directed toHawaiian Electric through various proceedings related to the interconnection process.Hawaiian Electric will be working on these recommendations. The contracted consultant is also planning a second phase of the study, to be completed in 2023, which will include the assessment and recommendation of remaining issues listed in Act 201 that are not covered in Phase 1. • Also inApril 2021 , the PUC approved the Kapolei Energy Storage (KES) PPA (one of the PPAs as a result of the Stage 2 Renewable RFP process) (KES Decision and Order), subject to nine conditions, including the Utilities forgoing the second portion of the PIM rewards amounting up to$1.7 million for the Stage 1 RFP PPAs, removing grid constraints for the Utilities' CBRE Phase 2 projects and for existing and new distributed energy programs, financial retirement ofHawaiian Electric generating units by specified dates and adjusting target revenues at the retirement dates for such retirements, and a requirement to charge the batteries in the project using significant levels of renewable energy generation. The financial retirement of the generating units described in the KES Decision and Order is contrary to the intent of Hawaii Revised Statutes §269-6(d), which encourages the recovery of stranded costs for the retirement of fossil fuel generation, and contrary to the regulatory compact under which in return for agreeing to commit capital necessary to allow utilities to meet their obligation to serve, utilities are assured recovery of their 57 -------------------------------------------------------------------------------- investment and a fair opportunity to earn a reasonable return on the capital prudently committed to the business.Hawaiian Electric filed a Motion for Reconsideration and Stay of the Decision and Order due to potentially significant financial and operational impacts. InMay 2021 , the PUC granted, in part,Hawaiian Electric's Motion for Reconsideration and Stay. In this Order, the PUC addressed a number ofHawaiian Electric's concerns, including removing the condition of the Utilities foregoing the PIM award from Stage 1 RFP projects, agreeing to address grid constraint concerns in respective DER and CBRE dockets and not in the KES docket, removing the minimum thresholds of charging energy coming from renewable energy generation and corresponding deadlines associated with these thresholds and modifying the condition on financial retirement of generating units. The PUC indicated the net book value of generating assets would be addressed at the time of retirement. The full text of the KES Decision and Order and the Motion for Reconsideration and Stay with respect thereto, and the Order granting, in part,Hawaiian Electric's Motion for Reconsideration can be found on the PUC website at dms.puc.hawaii.gov/dms (Docket No. 2020-0136). Legislation and regulation.Congress and theHawaii legislature 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 inJanuary 2019 , by the Utilities andPAR 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 onApril 28, 2019 and terminated onDecember 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. OnJune 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. OnAugust 4, 2020 , the PUC approved the First Amendment, which has an effective date ofJuly 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. OnJuly 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. OnJune 30, 2021 , the Utilities issued two RFPs for all fuels for supply commencingJanuary 1, 2023 . OnFebruary 1, 2022 , the Utilities and PAR Hawaii entered into a fuel supply contract commencingJanuary 1, 2023 and Second Amendment to the existing fuel contract to amend tier-1 volumes. OnSeptember 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. OnMarch 3, 2022 , as part of economic sanctions amid theRussia -Ukraine war, ParHawaii announced that it is suspending all purchases of Russian crude oil, which accounts for at least 25% ofHawaii's supply. 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 withVitol Inc. (Vitol) commencing onDecember 1, 2022 throughJune 30, 2023 with 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 onDecember 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. OnJune 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 onJanuary 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 ofDecember 31, 2022 ,Hawaiian Electric had$88 million of commercial paper outstanding, no amount outstanding on its revolving credit facility, and the total amount of available borrowing capacity under the Utilities' committed line of credit was$200 million .Hawaiian Electric expects that its liquidity will continue to be moderately impacted at the Utilities due to higher fuel prices and lingering COVID-19 impacts to the local economy. As ofDecember 31, 2022 , fuel inventories have increased by$87 million compared toDecember 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 ofDecember 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 ofDecember 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$151 million .
The Utilities are continuing the disconnection process on a tiered basis, expanding the targeted balances, which is expected to further reduce delinquent accounts receivable balances and accelerate cash collections.
December 31 2022 2021 (dollars in millions) Short-term borrowings, net$ 88 2 % $ - - % 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$ 4,151 100 %$ 3,972 100 %
Information about
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 Electric
during 2022 was approximately $106 million . At December 31, 2022 , Hawaiian
Electric had short-term borrowings from Hawaii Electric Light and Maui Electric
of $5 million and $22 million , respectively, which intercompany borrowings are
eliminated in consolidation.
Hawaiian Electric utilizes short-term debt, typically commercial paper, to
support normal operations, to refinance short-term debt and for other temporary
requirements. Hawaiian Electric also borrows short-term from HEI for itself and
on behalf of Hawaii Electric Light and Maui Electric , and Hawaiian Electric may
borrow from or loan to Hawaii Electric Light and Maui Electric on a short-term
basis. The intercompany borrowings among the Utilities, but not the borrowings
from HEI, are eliminated in the consolidation of Hawaiian Electric's financial
statements. The Utilities periodically utilize long-term debt, borrowings of the
proceeds of special purpose revenue bonds (SPRBs) issued by the State of Hawaii
Department of Budget and Finance (DBF) and the issuance of privately placed
unsecured senior notes bearing taxable interest, to finance the Utilities'
capital improvement projects, or to repay short-term borrowings used to finance
such projects. The PUC must approve issuances, if any, of equity and long-term
debt securities by the Utilities.
Credit agreement. On February 18, 2022 , the PUC approved Hawaiian Electric's
request to extend the term of the $200 million Hawaiian Electric revolving
credit facility to May 14, 2026 . In addition to extending the term, Hawaiian
Electric received 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 million to $275 million , should there be a
need. Hawaiian Electric has a $200 million line of credit facility with no
amount outstanding at December 31, 2022 .
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Credit ratings. As of
Fitch Moody's S&P
Long-term issuer default, long-term and issuer credit, BBB+ Baa1 BBB
respectively
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 ofHawaiian Electric and its subsidiaries, but the sources of their repayment are the non-collateralized obligations ofHawaiian Electric and its subsidiaries under loan agreements and notes issued to the DBF, includingHawaiian Electric's guarantees of its subsidiaries' obligations. OnMay 24, 2019 , the PUC approved the Utilities' request to issue SPRBs in the amounts of up to$70 million ,$2.5 million and$7.5 million forHawaiian Electric ,Hawaii Electric Light andMaui Electric , respectively, prior toJune 30, 2020 , to finance the Utilities' capital improvement programs. Pursuant to this approval, onOctober 10, 2019 , the DBF issued, at par, Series 2019 SPRBs in the aggregate principal amount of$80 million with a maturity ofOctober 1, 2049 . As ofDecember 31, 2022 ,Hawaiian Electric ,Hawaii Electric Light andMaui Electric had no undrawn funds. OnJune 10, 2019 , theHawaii legislature authorized the issuance of up to$700 million of SPRBs ($400 million forHawaiian Electric ,$150 million forHawaii Electric Light and$150 million forMaui Electric ), with PUC approval, prior toJune 30, 2024 , to finance the Utilities' multi-project capital improvement programs (2019 Legislative Authorization). OnFebruary 9, 2021 , the PUC approved the Utilities' request to issue SPRBs (up to$100 million ,$35 million and$45 million forHawaiian Electric ,Hawaii Electric Light andMaui Electric , respectively) through 2022, with the proceeds to be used to finance the Utilities' multi-project capital improvement programs. The PUC also approved the use of the expedited approval procedure to request the issuance and sale of the remaining/unused amount of SPRBs authorized by the 2019 Legislative Authorization (i.e., total not to exceed up to$400 million forHawaiian Electric , up to$150 million forHawaii Electric Light , and up to$150 million forMaui Electric ) during the periodJanuary 1, 2023 throughJune 30, 2024 . OnJanuary 31, 2023 , the PUC approved the Utilities' requests to issue the remaining unused amounts of the SPRBs during the periodJanuary 1, 2023 throughJune 30, 2024 , and the certification and approval of supplemental projects eligible to be financed by the SPRB proceeds. Taxable debt. OnJanuary 31, 2019 , the Utilities received PUC approval (January 2019 Approval) to issue the remaining authorized amounts under the PUC approval received inApril 2018 (April 2018 Approval) in 2019 through 2020 (Hawaiian Electric up to$205 million andHawaii Electric Light up to$15 million of taxable debt), as well as a supplemental increase to authorize the issuance of additional taxable debt to finance capital expenditures, repay long-term and/or short term debt used to finance or refinance capital expenditures, and/or to reimburse funds used for payment of capital expenditures, and to refinance the Utilities' 2004 junior subordinated deferrable interest debentures (QUIDS) prior to maturity. In addition, theJanuary 2019 Approval authorized the Utilities to extend the period to issue additional taxable debt fromDecember 31, 2021 toDecember 31, 2022 . The new total "up to" amounts of taxable debt requested to be issued throughDecember 31, 2022 are$410 million ,$150 million and$130 million forHawaiian Electric ,Hawaii Electric Light andMaui Electric , respectively. OnMay 3, 2022 , the Utilities received PUC approval through the expedited approval process to issue taxable debt (Hawaiian Electric up to$50 million ,Hawaii Electric Light up to$30 million andMaui Electric up to$35 million ) prior toDecember 31, 2022 . Pursuant to the approval, onJune 15, 2022 , the Utilities drew$60 million of proceeds using a delayed draw feature under a private placement executed onMay 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.
As of
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Hawaiian Hawaii Electric
(in millions) Electric Light Maui Electric Total "up to" amounts of taxable debt authorized through 2022
$ 410 $ 150 $ 130 Less: Taxable debt authorized and issued in 2018 under April 2018 Approval 75 15 10 Taxable debt issuance to refinance the 2004 QUIDS in 2019 30 10 10 Taxable debt issuance in May 2020 110 10 40
Taxable debt executed in
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, 2023 to December 31, 2026 , unsecured
obligations bearing taxable interest (Hawaiian Electric up to $230 million ,
Hawaii Electric Light up to $65 million and Maui Electric up to $105 million ),
to finance capital expenditures, repay long-term and/or short-term debt used to
finance or refinance capital expenditures, and/or to reimburse funds used for
payment of capital expenditures. Pursuant to the approval, on January 10, 2023 ,
the Utilities executed through a private placement, $150 million in unsecured
senior notes. 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 through 2026
$ 230 $ 65 $ 105
Less:
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 million for Hawaiian Electric and up to $100 million each for
Hawaii Electric Light and Maui Electric , with the new total "up to" amounts of
$430 million for Hawaiian Electric and $110 million each for Hawaii Electric
Light and Maui Electric , and to extend the period authorized by the PUC to issue
and sell common stock from December 31, 2021 to December 31, 2022 . As of
December 31, 2022 , Hawaiian Electric , Hawaii Electric Light , and Maui Electric
had $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 2021
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
$ 208.3
OnDecember 20, 2022 , the Utilities received PUC approval to issue and sell each utility's common stock over a four-year period fromJanuary 1, 2023 throughDecember 31, 2026 (Hawaiian Electric's sale/s to HEI of up to$75 million ,Hawaii Electric Light sale/s toHawaiian Electric of up to$25 million , andMaui Electric sale/s toHawaiian Electric of up to$55 million ) and the purchase ofHawaii Electric Light andMaui Electric common stock byHawaiian Electric from 2023 throughDecember 31, 2026 . Cash flows. The following table reflects the changes in cash flows for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 : Years ended December 31 (in thousands) 2022 2021 Change Net cash provided by operating activities$ 327,930 $ 273,133 $ 54,797 Net cash used in investing activities (324,085)
(285,965) (38,120) Net cash provided by (used in) financing activities (19,861) 4,764 (24,625)
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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 ofOperations-Electric utility," 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 billion of net capital expenditures, which could change over time based upon external factors such as the timing and scope of environmental regulations and/or unforeseen delays in permitting and timing of PUC decisions. Approximately$1.6 billion is related to replacement and modernization of generation, transmission and distribution assets; approximately$0.3 billion is related to climate-related projects to transition to renewable energy or mitigate climate impacts by increasing the resilience of the system, and approximately$0.3 billion for targeted efforts to improve reliability. Proceeds from the issuance of equity and long-term debt, cash flows from operating activities, temporary increases in short-term borrowings and existing cash and cash equivalents are expected to provide the funds needed for the net capital expenditures, to pay down commercial paper or other short-term borrowings, as well as to fund any unanticipated expenditures not included in the 2023 to 2027 forecast (such as increases in the costs or acceleration of capital projects, or unanticipated capital expenditures that may be required by new environmental laws and regulations). Management periodically reviews capital expenditure estimates and the timing of construction projects. These estimates may change significantly as a result of many considerations, including changes in economic conditions, changes in forecasts of kWh sales and peak load, the availability of purchased power and changes in expectations concerning the construction and ownership of future generation units, the availability of generating sites and transmission and distribution corridors, the need for fuel infrastructure investments, the ability to obtain adequate and timely rate increases, escalation in construction costs, the effects of opposition to proposed construction projects and requirements of environmental and other regulatory and permitting authorities. 62 -------------------------------------------------------------------------------- Selected short-term and long-term contractual obligations and commitments. The following table presents aggregated information about total payments due from the Utilities during the indicated periods under the specified contractual obligations and commitments: December 31, 2022 Payments due by period Less than 1 1-3 3-5 More than (in millions) year years years 5 years Total Short-term borrowings$ 88 $ - $ - $ -$ 88 Long-term debt$ 100 $ 47 $ 225 $ 1,320 $ 1,692 Interest 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 ofDecember 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 inHawaii is 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. InDecember 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.
63
--------------------------------------------------------------------------------Commitments and contingencies. See Item 1A. Risk Factors, and Note 3 of the Consolidated Financial Statements for a discussion of important commitments and contingencies.
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 ofDecember 31, 2022 , the consolidated regulatory liabilities and regulatory assets of the Utilities amounted to$1,056 million and$243 million , respectively, compared to$997 million and$566 million as ofDecember 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 ofDecember 31, 2022 is probable. This determination assumes continuation of the current political and regulatory climate inHawaii and 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 ofDecember 31, 2022 andDecember 31, 2021 , the Utilities' AROs totaled$11.5 million and$11.1 million , respectively.
Bank
Executive overview and strategy. ASB, headquartered inHonolulu, Hawaii , is a full-service community bank serving both consumer and commercial customers. ASB is one of the largest financial institutions inHawaii and ended 2022 with assets of$9.5 billion and net income of$80 million , compared to assets of$9.2 billion and net income of$101 million in 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;
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3.online and remotely-assisted account opening capabilities as there is a much
more rapid and pervasive adoption of online and mobile banking by Hawaii banking
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 theFederal Reserve Bank raised short-term interest rates to combat inflation, which has been driven by supply chain issues, the reopening of the economy and government stimulus assistance. TheFederal Reserve Bank's efforts 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.
TheHawaii economy 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 theHawaii economy in 2022, the bank's performance continued to improve in 2022, Net interest income before provision for credit losses improved to$252.6 million for the year endedDecember 31, 2022 , compared to net interest income before provision for credit losses of 237.2 for the year endedDecember 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 endedDecember 31, 2022 , compared to 2.91% for the year endedDecember 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. AtDecember 31, 2022 , ASB's funding sources consisted of 92% deposits and 8% other borrowings compared to 99% deposits and 1% other borrowings atDecember 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, theFederal Reserve raised the federal funds rate to a current target range of 4.50%-4.75% as ofFebruary 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 million or 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 million negative 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 ofHawaii was 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 endedDecember 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 ofDecember 31, 2022 , no loans remained in their active deferral period. Approximately$1.9 million of loans were not able to resume their contractual payments and were considered delinquent as ofDecember 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 million in branch termination costs were offset by$1.8 million gain 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 onMarch 27, 2020 . The CARES Act provided over$2 trillion in economic assistance for American workers, families, and small businesses, and job preservation for American industries. The PPP was established under the CARES Act and implemented by theUnited 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 million in PPP loans for approximately 4,100 small businesses that supported over 40,000 jobs, ASB received processing fees totaling approximately$13 million and started recognizing these fees over the life of the loans. During the second round of PPP, ASB secured more than$175 million for 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 ofDecember 31, 2022 . The remaining PPP loans outstanding as ofDecember 31, 2022 was$5 million . Other provisions of the CARES Act provides that a financial institution may elect to suspend the requirements under accounting principles generally accepted inthe 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.
66
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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 $217
million - residential, commercial real estate and
home equity lines of credit loan portfolio average
balances increased $164 million , $137 million and
$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 $26
million primarily due to purchases of solar and
sustainable home improvement loans. Average
commercial loans portfolio balances decreased $146
million 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) 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. 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 $444
million; average term certificate balances
decreased $13 million .
Average deposit yields increased from 6 basis
points to 9 basis points.
67
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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 $121
million 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 million and the average yield increased 97
basis points.
Provision for credit 2 (26) 28 Increase in provision for credit losses was losses
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 million during 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)
estate
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 about ASB.
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 (%)
Assets:
Interest-earning deposits$ 59,277 $ 500 0.84$ 69,930 $ 93 0.13$ 153,879 $ 241 0.16 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
Loans
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 $ 7,792,554 Liabilities and Shareholder's Equity: Savings$ 3,275,089 860 0.03$ 3,069,615 802 0.03$ 2,620,311 1,774 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 fromFederal Home Loan Bank 136,630 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 $ 7,792,554
Net interest income $ 253,268 $ 237,653 $ 233,840
Net 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 million and $20.5 million as of December 31, 2022 , 2021 and 2020,
respectively.
2Includes recognition of net deferred loan fees of $5.3 million , $14.3 million
and $4.9 million for 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
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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) $
407
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
Loans
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) $
15,615
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, theFederal Open Market Committee increased 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 million atDecember 31, 2021 to$5 million atDecember 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 million atDecember 31, 2020 to$69 million atDecember 31, 2021 . The following table summarizes loans held for investment based upon contractually scheduled principal payments allocated to the indicated maturity categories: December 31 2022 In After 1 year After 5 years 1 year through through After Due or less 5 years 15 years 15 years Total (in millions) Residential 1-4 family - Fixed$ 75 $ 314
$ 822
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 $ 6,005
Home 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, 2022 and
2021, ASB had $115,000 and 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
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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, 2022 and 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 $ 19,748
Commercial 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 $ 44,974
Loans receivable, net $ 5,978,906 $ 5,211,114
Allowance for credit losses $ 72,216 $ 71,130
Nonaccrual loans to loans receivable, net 0.28 % 0.86 %
Allowance for credit losses to nonaccrual loans 4.39x 1.58x
In 2022, nonaccrual loans decreased$28.5 million primarily due to decreases in commercial real estate and residential 1-4 family nonaccrual loans of$15.3 million and$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 million primarily due to decreases in commercial real estate, commercial, consumer and HELOC nonaccrual loans of$3.4 million ,$3.0 million ,$2.1 million and$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. OnJanuary 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 million to the allowance for credit losses onJanuary 1, 2020 . During 2022, ASB recorded a provision for credit losses related to the allowance for credit losses of$2.0 million primarily 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 million to the reserve for unfunded loan commitments onJanuary 1, 2020 . For 2022, ASB recorded a negative provision for credit losses for unfunded commitments of$0.5 million compared to a provision for credit losses for unfunded commitments of$0.6 million for 2021. As ofDecember 31, 2022 andDecember 31, 2021 , the reserve for unfunded loan commitments was$4.4 million and$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 $ 6,270 0.25 41.3 $ 6,545 0.28 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 $ 72,216 1.21 100.0 $ 71,130 1.36 100.0
In 2022, ASB's allowance for credit losses increased by$1.1 million primarily 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 million atDecember 31, 2022 was a decrease of$3.3 million compared to total delinquencies of$17.2 million atDecember 31, 2021 primarily 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 atDecember 31, 2021 to 0.23% of total outstanding loans atDecember 31, 2022 . Net charge-offs for 2022 were$1.4 million , a decrease of$2.2 million compared to$3.6 million in 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 million primarily 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 million atDecember 31, 2021 was a decrease of$2.4 million compared to total delinquencies of$19.6 million atDecember 31, 2020 primarily 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 atDecember 31, 2020 to 0.33% of total outstanding loans atDecember 31, 2021 . Net charge-offs for 2021 were$3.6 million , a decrease of$17.8 million compared to$21.4 million in 2020 primarily due to a decrease in consumer loan portfolio net charge-offs. Investment securities. Currently, ASB's investment portfolio consists ofU.S. Treasury and federal agency obligations, mortgage-backed securities, corporate bonds and mortgage revenue bonds. ASB owns mortgage-backed securities issued or guaranteed by theU.S. government agencies or sponsored agencies, including the Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC),Government National Mortgage Association (GNMA) andSmall 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 ofDecember 31, 2022 and 2021, ASB had$1.3 billion and$522.3 million , respectively, of investment securities that were purchased and classified as held-to-maturity. InOctober 2022 , ASB transferred 66 available-for-sale investment securities with a fair value of$755 million to 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 byFNMA , 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 theU.S. government.U.S. Treasury securities are also backed by the full faith of theU.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 theU.S. government. Based upon ASB's evaluation atDecember 31, 2022 and 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 ofDecember 31, 2022 and 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 ofDes Moines , which has no contractual maturity) and weighted average yields as ofDecember 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 Total1U.S. Treasury and federal agency obligations$ 1 $ 62 $ 85 $ - $ -$ 148 Mortgage-backed securities - issued or guaranteed byU.S. Government agencies or sponsored agencies - - - - 2,723 2,723 Corporate bonds - 44 - - - 44 Mortgage revenue bonds1 - - 15 - - 15$ 1 $ 106 $ 100 $ - $ 2,723$ 2,930 Weighted 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 ofDecember 31, 2022 and 2021, ASB's stock in FHLB ofDes Moines was$26.6 million and$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 ,$327,000 and$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 million as 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 ofDes Moines , securities sold under agreements to repurchase and federal funds purchased continue to be additional sources of funds. As ofDecember 31, 2022 , ASB's costing liabilities consisted of 92% deposits and 8% borrowings compared to costing liabilities of 99% deposits and 1% borrowings as ofDecember 31, 2021 .
ASB's deposits are obtained primarily from residents of
The following table presents the amount of time certificates of deposit of
Amount
Three months or less $ 176,859 Greater than three months through six months 149,081 Greater than six months through twelve months 9,465 Greater than twelve months
11,518
$ 346,923 As of
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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 Moines
provided 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 Moines or 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
Moines was $1.6 billion . The FHLB of Des Moines continues 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 million compared to an unrealized loss, net of taxes, of $32.0 million as
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 Corporation assessment" 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 Policy
Statement 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 30 of 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 Hawaii as well. If the capital
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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$ 9,546 4$ 9,182 9 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)
As 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 ofDecember 31, 2022 were$3 million lower thanDecember 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 ofDecember 31, 2022 , ASB had$414 million of 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 ofDecember 31, 2022 , ASB's unused FHLB borrowing capacity was approximately$1.6 billion .
As of
As ofDecember 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 ofDecember 31, 2022 and 2021, ASB had$16.5 million and$45.0 million of loans on nonaccrual status, respectively, or 0.3% and 0.9%, respectively, of net loans outstanding. As ofDecember 31, 2022 and 2021, ASB had$0.1 million and nil, respectively, of real estate acquired in settlement of loans. In 2022, operating activities provided cash of$121 million . Net cash of$778 million was 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 million and 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 million and proceeds from the sale of premises and equipment of$1 million . Financing activities provided net cash of$562 million primarily due to a net increase in short-term borrowings of$414 million and a net increase in repurchase agreements of$193 million , partly offset by a net decrease in deposit liabilities of$3 million and common stock dividends to HEI (throughASB 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.FDIC regulations restrict the ability of financial institutions that are not well-capitalized to compete on the same terms as well-capitalized institutions, such as by offering interest rates on deposits that are significantly higher than the rates offered by competing institutions. As ofDecember 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.
76
--------------------------------------------------------------------------------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 inHawaii ). 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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