The following discussion updates "Management's Discussion and Analysis of Financial Condition and Results of Operations" included inHEI's andHawaiian Electric's 2021 Form 10-K and should be read in conjunction with such discussion and the 2021 annual consolidated financial statements ofHEI andHawaiian Electric and notes thereto included inHEI's andHawaiian Electric's 2021 Form 10-K, as well as the quarterly (as of and for the nine months endedSeptember 30, 2022 ) condensed consolidated financial statements and notes thereto included in this Form 10-Q.
HEI consolidated
Recent developments. During the third quarter of 2022, Hawaii's 7-day average daily COVID-19 case counts continued to decrease and currently remain relative stable, recently averaging below 200 cases per day (7-day daily average). Hospitalizations have remained at low levels with approximately 86% of the state's population with at least one dose, and approximately 46% of the state's population received the first booster shot as ofOctober 26, 2022 . While economic conditions have improved significantly over the past year as theHawaii economy fully reopened, new variants 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 and remains focused on the continued safety and well-being of customers, employees, their families and the community. In the third quarter of 2022, driven by increased economic activity as the tourism industry continues its recovery, the Utility's kWh sales improved modestly, increasing 1.0% compared to the third quarter of 2021. While the level of kWh sales does not affect Utility revenues due to decoupling, it may increase or decrease the price per kWh paid by customers. See "Decoupling" in Note 3 of the Condensed Consolidated Financial Statements for a discussion of the decoupling mechanism. At the Bank, an improvingHawaii economy helped fuel loan growth and has supported stable credit trends. Loan growth was broad based and required additional provision for credit losses. However, the additional provision was more than offset by the release of credit loss reserves as a result of improved credit quality, resulting in a$0.2 million negative provision for credit losses in the third quarter of 2022. The higher interest rate environment and higher earning asset balances benefited net interest income, which increased$5.4 million to$65.7 million in the third quarter of 2022 compared to net interest income in the third quarter of 2021. The increase in net interest income was partially offset by lower PPP fees and higher cost of funds. The higher interest rate environment also reduced the fair value of the Bank's investment portfolio, which was recorded as an other comprehensive loss (see "Transfer of available-for sale securities to held-to-maturity- subsequent event" in Note 4 of the Condensed Consolidated Financial Statements). Over the past few months, inflation has rapidly increased as reflected in theU.S. Consumer Price Index, which remained elevated at 8.2% inSeptember 2022 . In addition, fuel costs have risen rapidly in the first half of the year. More recently, fuel prices have moderated; however, they remain at elevated levels, with fuel costs more than 90% higher than the prior year's quarter. Short-term interest rates have also increased significantly following theFederal Reserve's ongoing rate increases to the federal funds target rate. These inflationary pressures are expected to continue over the near- to medium-term and have led to higher costs for O&M and capital projects and higher interest expense at the Utility and HEI, as well as higher compensation and benefits cost at the bank. For further discussion of the impacts of the COVID-19 pandemic, fuel prices and other macro-economic factors impacting the Utilities and the Bank, see "Recent Developments" in theElectric Utility and Bank sections below. RESULTS OF OPERATIONS Three months ended September 30 % (in thousands) 2022 2021 change Primary reason(s)* Revenues$ 1,042,197 $ 756,904 38 Primarily increase for the electric utility segment Operating income 102,115 97,316 5 Increases for electric utility and bank segments, partly offset by higher losses for the "other" segment Net income for common stock 62,082 63,415 (2) Higher net loss for the "other" segment and slightly lower net income at the electric utility segment, partly offset by higher net income at the bank segment. See below for effective tax rate explanation. 63
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Nine months ended September 30 % (in thousands) 2022 2021 change Primary reason(s)* Revenues$ 2,722,872 $ 2,080,107 31 Primarily increase for the electric utility segment Operating income 288,059 297,203 (3) Decrease for bank segment, partially offset by increase for the electric utility segment Net income for common stock 183,790 191,645 (4) Lower net income at the bank segment, partly offset by higher net income at the electric utility segment and lower net loss for the "other" segment. See below for effective tax rate explanation. * Also, see segment discussions which follow. The Company's effective tax rates for the third quarters of 2022 and 2021 were 22% and 18%, respectively. The Company's effective tax rates for the first nine months of 2022 and 2021 were comparable at 21% and 20%, respectively. The effective tax rates were higher for the third quarter and the first nine months of 2022 primarily due to higher non-taxable bank owned life insurance in 2021 and federal research and development tax credit claims in 2021.
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 ofSeptember 2022 , the majority of national and state COVID-19 restrictions were lifted and lower case counts across most states led to stronger demand for travel toHawaii in the third quarter of 2022. The average daily passenger count was 14.9% higher than the comparable period in the prior year, but remained 7.1% 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 due to higher restrictions for international travelers, depending on country of origin. InSeptember 2022 , domestic passenger counts were up 18.9% compared to 2019 pre-COVID-19 levels, while international passenger counts were down 63.9% 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.Hawaii's seasonally adjusted unemployment rate inSeptember 2022 was 3.5%, which was lower compared to theSeptember 2021 rate of 4.8%. The national unemployment rate inSeptember 2022 was 3.5% compared to 4.7% inSeptember 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 throughSeptember 2022 , as indicated byOahu's home resale market, increased in the median sales price of 5.1% for condominiums and 4.8% for single-family homes compared to the same period in 2021, with the September median single-family home price of$1,100,000 , slightly below the record$1,150,000 set in March. The number of closed sales decreased 3.3% for condominiums and 15.8% for single-family residential homes through the third 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 declined inAugust 2022 . At itsSeptember 21, 2022 meeting, theFederal Open Market Committee (FOMC) decided to raise the federal funds rate target range to 3%-3.25% and anticipates ongoing increases as appropriate. TheFOMC is still assessing with plans to adjust their stance on monetary policy depending on the economic outlook to achieve maximum employment and inflation at the rate of 2 percent over the long run. TheFederal Reserve stated that it will continue to reduce its holdings ofTreasury securities and agency mortgage-backed securities. The most recent forecast by UHERO, issued onSeptember 23, 2022 , forecasts full year 2022 real GDP growth of 4.4%, an increase in total visitor arrivals of 35.9%, a decrease in real personal income of 5.4%, and an unemployment rate of 4.2%. This forecast anticipates a potential slowdown in recovery due to rising inflation, fuel costs, and supply chain issues despite the 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. 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. While the Company expects economic conditions to remain relatively stable going forward, it is difficult to predict the future path of the pandemic and global economy. If economic conditions worsen from current levels or 64 --------------------------------------------------------------------------------
remain depressed for an extended period of time, it could have a material unfavorable impact on the Company's financial position or results of operations.
See also "Recent Developments" in the "Electric utility" and "Bank" sections below for further discussion of the economic impact caused by the pandemic.
"Other" segment.
Three months ended September 30 Nine months ended September 30 (in thousands) 2022 2021 2022 2021 Primary reason(s) Revenues$ 4,815 $ 1,197 $ 7,386 $ 3,266 Increase in other sales at Pacific Current subsidiaries. Operating loss (4,034) (2,933) (14,792) (14,946) The third quarters of 2022 and 2021 include$0.9 million and$1.3 million , respectively, of operating income from Pacific Current1. Corporate expenses for the third quarter 2022 were$0.6 million higher than the same period in 2021, primarily due to lower charges to subsidiaries. The first nine months of 2022 and 2021 include$2.3 million and$2.6 million, respectively, of operating income from Pacific Current1. Corporate expenses for the first nine months of 2022 were$0.4 million lower than the same period in 2021, primarily due to a settlement agreement with the former President and Chief Executive Officer of the Bank in 2021 and higher charitable donations in 2021, due to timing of contributions, partly offset by higher general and administrative expenses. Gain on sale of - - 8,123 - Gain on sale of an equity-method investment equity-method investment at Pacific Current. Net loss (8,438) (6,192) (18,610) (23,061) The net loss for the third quarter of 2022 was higher than the net loss for the third quarter of 2021 due to the same factors cited for the change in operating loss and higher interest expense primarily due to higher average borrowings and higher average short-term rate. The net loss for the first nine months of 2022 was lower than the net loss for the first nine months of 2021 due to the gain on sale of an equity-method investment by Pacific Current and the same factors cited for the change in operating loss, partly offset by higher interest expense primarily due to higher average borrowings and higher average short-term rate.
1 Hamakua Energy's sales to
The "other" business segment loss includes results of the stand-alone corporate operations of HEI (including eliminations of intercompany transactions) andASB Hawaii, Inc. (ASB Hawaii ), as well as the results of Pacific Current, a direct subsidiary of HEI focused on investing in clean energy and sustainable infrastructure projects; Pacific Current's indirect subsidiary, Hamakua Energy, which owns a 60 MW combined cycle power plant that provides electricity toHawaii Electric Light ; Pacific Current's subsidiaries,Mauo, LLC (Mauo), which owns solar-plus-storage projects totaling 8.6 MW on fiveUniversity of Hawaii campuses, Mahipapa, which owns a 7.5 MW nameplate biomass facility onKauai ,Alenuihaha Developments, LLC , which owns a collection of renewable energy assets, Ka'ie'ieWaho Company, LLC , which owns a 6 MW solar photovoltaic system that provides renewable energy toKauai Island Utility Cooperative , and Ka'aipua'a, LLC, which is constructing a wastewater treatment and energy recovery facility onHawaii island; as well as eliminations of intercompany transactions. FINANCIAL CONDITION Liquidity and capital resources. As ofSeptember 30, 2022 , there was no balance on HEI's revolving credit facility orHawaiian Electric's revolving credit facility and the available committed capacities under the facilities were$175 million and$200 million , respectively. At the end of the quarter,HEI andHawaiian Electric had approximately$74 million and$98 million of commercial paper outstanding, respectively. As ofSeptember 30, 2022 , ASB's unused FHLB borrowing capacity was approximately$1.9 billion and ASB had unpledged investment securities of$2.2 billion that were available to be used as collateral for additional borrowing capacity. As ofSeptember 30, 2022 andDecember 31, 2021 , the total amount of available borrowing capacity (net of commercial paper outstanding) under the Company's committed lines of credit was approximately$204 million and$321 million , 65 --------------------------------------------------------------------------------
respectively.
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 a Utilities' equity capitalization ratio of 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 matures 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 a portion of the$150 million of debt that matures onNovember 20, 2022 . See Note 5 of the Condensed 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. 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. The term loan was entered into to prefund$50 million of maturing debt inMarch 2023 as well as enhance HEI's liquidity position. See Note 5 of the Condensed Consolidated Financial Statements for additional information. The Company believes that its cash and cash equivalents, expected operating cash flow from subsidiaries, existing credit facilities, and access to the capital markets will be sufficient to meet the Company's cash requirements over the next 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 due to 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$72 million sinceDecember 31, 2021 , has led to higher bad debt expense and may result in higher write-offs in the future. As ofSeptember 30, 2022 , approximately$30 million of the Utilities' accounts receivables were over 30 days past due. Of the over 30 days past due amounts, approximately 20% were on payment plans. The Company commenced its disconnection process on a tiered basis, starting in the third quarter of 2021, targeting the oldest and largest balances first, which has reduced the older balances in arrears over time as payments were made, as well as decreasing the number of customers in arrears. 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. 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$150 million as ofSeptember 30, 2022 , compared to$251 million as ofDecember 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 increases 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. HEI material cash requirements. HEI's material cash requirements include: capital expenditures, labor and benefit costs, O&M expenses, fuel and purchase power costs, and debt and interest payments at the Utilities; 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. 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. 66 -------------------------------------------------------------------------------- The consolidated capital structure of HEI (excluding deposit liabilities and other bank borrowings) was as follows: (dollars in millions) September 30, 2022 December 31, 2021 Short-term borrowings-other than bank, net of discount$ 171 3 %$ 54 1 % Long-term debt, net-other than bank 2,430 51 2,322 48 Preferred stock of subsidiaries 34 1 34 1 Common stock equity 2,163 45 2,391 50$ 4,798 100 %$ 4,801 100 % HEI's commercial paper borrowings and line of credit facility were as follows: Average balance Balance Nine months ended September 30, September 30, (in millions) 2022 2022 December 31, 2021 Commercial paper $ 51 $ 74 $ 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-Financial Condition-Liquidity and capital resources." The maximum amount of HEI's short-term commercial paper borrowings during the first nine months of 2022 was$80 million . As ofSeptember 30, 2022 , available committed capacity under HEI's line of credit facility was$175 million . OnJune 27, 2022 , Fitch revised HEI's outlook to "Positive" from "Stable" and affirmed the "BBB" long-term issuer default rating and "F3" short-term issuer default rating. There were no new issuances of common stock through the HEI Dividend Reinvestment and Stock Purchase Plan (DRIP), HEIRSP or the ASB 401(k) Plan in the nine months endedSeptember 30, 2022 and 2021 and HEI satisfied the share purchase requirements of the DRIP, HEIRSP and ASB 401(k) Plan through open market purchases of its common stock. For the first nine months of 2022, net cash provided by operating activities of HEI consolidated was$213 million . Net cash used by investing activities for the same period was$795 million , primarily due to capital expenditures, ASB's net increase in loans held for investment, purchases of available-for-sale investment securities and purchases of loans held for investment, partly offset by ASB's receipt of investment security repayments and maturities. Net cash provided by financing activities during this period was$449 million as a result of several factors, including net increases in ASB's other bank borrowings and deposit liabilities, net increases in short-term borrowings and issuances of long-term debt, partly offset by repayment of long-term debt and payment of common stock dividends. During the first nine months of 2022,Hawaiian Electric and ASB (throughASB Hawaii ) paid cash dividends to HEI of$94 million and$32 million , respectively. Dividends. The payout ratios for the first nine months of 2022 and full year 2021 were 63% and 60%, respectively. OnFebruary 11, 2022 , the HEI Board of Directors approved a1 cent increase in the quarterly dividend from$0.34 per share to$0.35 per share, starting with the dividend in the first quarter of 2022. HEI currently expects to maintain its dividend at its present level; however, the HEI Board of Directors evaluates the dividend quarterly and considers many factors in the evaluation including, but not limited to, the Company's results of operations, the long-term prospects for the Company, current and expected future economic conditions, including impacts from the COVID-19 pandemic, and capital investment alternatives. MATERIAL ESTIMATES AND CRITICAL ACCOUNTING POLICIES
In preparing financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ significantly from those estimates.
In accordance with SEC Release No. 33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies," management has identified the accounting policies it believes to be the most critical to the Company's financial statements-that is, management believes that these policies are both the most important to the portrayal of the Company's results of operations and financial condition, and currently require management's most difficult, subjective or complex judgments. For information about these material estimates and critical accounting policies, in addition to the critical policy discussed below, see pages 45 to 46, 62 to 63, and 76 to 77 of HEI's MD&A included in Part II, Item 7 of HEI's 2021 Form 10-K.
Following are discussions of the results of operations, liquidity and capital resources of the electric utility and bank segments.
67 --------------------------------------------------------------------------------
Electric utility
Recent developments
See also Recent developments in HEI's MD&A.
In the third quarter and first nine months of 2022, kWh sales volume increased 1.0% and 1.2% compared to the same periods in 2021, respectively. The increase in kWh sales is primarily due to continued recovery of the economy and tourism activity. Fuel costs have risen rapidly and have increased 92% over prior year's quarter. Although the Utilities are able to pass through fuel costs to customers and have limited fuel cost exposure through a 2% fuel-cost sharing mechanism (approximately$3.7 million exposure annually, and the amount the Utilities have forecasted 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. InSeptember 2022 , the consumer price index moderated to 8.2% from a 40-year high of 9.1% inJune 2022 . InHawaii , theSeptember 2022 Urban Hawaii (Honolulu ) Consumer Price Index (CPI) was modestly lower, with an increase of 6.6% 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 of 3.68% (net of the 0.22% customer dividend), measured inOctober 2022 , will be 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.
Although accounts receivable increased in the third quarter, past due accounts receivable balances decreased by$15.7 million , or 23% with a corresponding decrease in the number of accounts past due decreased by approximately 13% 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, higher cash receipts associated with increased disconnection efforts and application of the$2 million Kokua bill credit, all of which contributed to the decrease in the number of customers in arrears. 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, which is currently pending, to seek recovery of the COVID-19 deferred costs, not to exceed the amount of$27.8 million . (See discussion under "Regulatory assets for COVID-19 related costs" in Note 3 of the Condensed Consolidated Financial Statements). In the most recent quarter, case counts and hospitalizations have declined; however, a worsening of COVID-19 case counts with 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. OnJune 17, 2022 , the PUC issued a D&O approving (1) a new (penalty-only) Performance Incentive Mechanism (PIM) to incentivize achievement of generation-based reliability targets, with an annual maximum penalty of$1 million , (2) a new (penalty/reward) PIM to incentivize the timely completion of the interconnection requirements study process for large-scale renewable energy projects, the penalty/reward will depend on the specifics of the upcoming procurement, (3) a new (reward-only) Collective Shared Savings Mechanism to incentivize cost control over the Utilities' fuel, 68 -------------------------------------------------------------------------------- purchased power, and Exceptional Project Recovery Mechanism costs (collectively, non-Annual Revenue Adjustment-related costs), and (4) a modification and extension of the existing interim (reward-only) Grid Services PIM with a maximum reward of$1.5 million throughDecember 31, 2023 . The effective date for the changes has not yet been established. See "Regulatory proceedings" in Note 3 of the Condensed Consolidated Financial Statements for additional discussions.
For a discussion regarding the impact of the economic conditions caused by the COVID-19 pandemic on the Utilities' liquidity and capital resources, see discussion under "Financial Condition-Liquidity and capital resources."
RESULTS OF OPERATIONS
Three months ended September
30 Increase 2022 2021 (decrease) (dollars in millions, except per barrel amounts)$ 956 $ 679 $ 277
Revenues. Net increase largely due to:
$ 223 higher
fuel oil prices and higher kWh generated1
43 higher
purchased power energy prices, partially offset by
lower
kWh purchased and lower PPAC revenues2
9 higher
revenue from ARA adjustments, which included an
offset
of management audit savings delivered to customers
2
revenue in 2022 related to ownership of and responsibility
for
the
startingMarch 1, 2022 1 higher MPIR revenue (2) lower
revenue related solely to a change in the timing for
revenue recognition within the year, which eliminates
seasonality in recognizing target revenues and results in
recognizing revenues evenly throughout the year with target
revenues recognized on an annual basis remaining unchanged
384 181 203 Fuel
oil expense1. 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
225 186 39
Purchased power expense1, 2. Net increase largely due to
higher
purchased power energy prices, partially offset by
lower
kWh purchased and lower capacity charges
121 116 5
Operation and maintenance expenses. Net increase largely
due
to:
3 more
generating facility maintenance work performed
2 higher
transmission and distribution preventive and
corrective maintenance expense
2
expense in 2022 related to ownership of and responsibility
for
the
starting March, 1, 2022 1 higher bad debt expense (3)
increased scope of generating facility overhauls performed
in
2021
147 121 26 Other
expenses. Increase due to higher revenue taxes,
coupled with higher depreciation expense in 2022 for plant
investments in 2021
79 75 4
Operating income. Increase largely due to higher ARA and
MPIR
revenue, offset in part by higher operation and
maintenance expense and higher depreciation expense
64 61 3 Income
before income taxes. Increase largely due to higher
operating income, partially offset by higher interest
expense due to higher rates and balances
50 50 - Net
income for common stock. See below for effective tax
rate
explanation
2,212 2,191 21 Kilowatthour sales (millions)3$ 166.79 $ 86.77 $ 80.02
Average fuel oil cost per barrel
69 -------------------------------------------------------------------------------- Nine months ended September 30 Increase 2022 2021 (decrease) (dollars in millions, except per barrel amounts)$ 2,484 $ 1,846 $ 638
Revenues. Net increase largely due to:
$ 470 higher
fuel oil prices and higher kWh generated1
128 higher
purchased power energy prices, partially offset by lower kWh
purchased and lower PPAC revenues2
28 higher
revenue from ARA adjustments, which included an offset of
management audit savings delivered to customers
5
revenue in 2022 related to ownership of and responsibility for the
Army's
electrical distribution system on
3 higher
MPIR revenue
1 higher
revenue related solely to a change in the timing for revenue
recognition within the year, which eliminates seasonality in recognizing
target
revenues and results in recognizing revenues evenly throughout the
year
with target revenues recognized on an annual basis remaining
unchanged
875 447 428 Fuel
oil expense1. 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
607 491 116
Purchased power expense1, 2. Net increase largely due to higher purchased
power
energy prices, partially offset by lower kWh purchased and lower
capacity charges
371 349 22
Operation and maintenance expenses. Net increase largely due to:
9 more
generating facility maintenance work performed
5 higher
transmission and distribution preventive and corrective maintenance
expense
4
expense in 2022 related to ownership of and responsibility for the
Army's
electrical distribution system on
3 higher
bad debt expense
2 higher
outside services for Information Technology and Services support,
Customer Interconnection/Installation, Demand Response Management System,
and
Battery Bonus program
1 higher
property damage and legal reserve for pending claims
(1)
expense due to decommissioning of combined heat and power unit on
2021 (1) higher
407 347 60 Other
expenses. Increase due to higher revenue taxes, coupled with higher
depreciation expense in 2022 for plant investments in 2021
224 212 12
Operating income. Increase largely due to higher ARA and MPIR revenue,
offset
in part by higher operation and maintenance expense and higher
depreciation expense
180 170 10 Income
before income taxes. Increase largely due to higher operating
income, partially offset by higher interest expense due to higher rates
and
balances
140 136 4 Net
income for common stock. Increase largely due to higher income before
income
taxes. See below for effective tax rate explanation
6,200 6,126 74 Kilowatthour sales (millions)3$ 137.23 $ 74.93 $ 62.30
Average fuel oil cost per barrel
471,026 470,013 1,013
Customer accounts (end of period)
1The rate schedules of the electric utilities currently contain ECRCs through which changes in fuel oil prices and certain components of purchased energy costs are passed on to customers.
2The rate schedules of the electric utilities currently contain PPACs through which changes in purchased power expenses (except purchased energy costs) are passed on to customers. 3 In the third quarter of 2022, kWh sales were higher when compared to the same periods last year largely due to continued recovery from the impacts of the COVID-19 pandemic. COVID-19 cases have continued to decrease in the third quarter of 2022 and, as a result, a majority of restrictions have been lifted.U.S. visitor arrivals continued to increase above the third quarter of 2021 levels and surpassed pre- 70 -------------------------------------------------------------------------------- pandemic levels, but international arrivals remain lower than pre-pandemic levels. The economic recovery is expected to continue this year as international visitors return and sales are expected to rebound, although uncertainties and downward risks are present due to global economic factors such as the continued effects of the invasion ofUkraine , increasing inflation, supply chain issues, the risk of a global recession, and lingering impacts from the pandemic. The Utilities' effective tax rate for the third quarters of 2022 and 2021 were 21% and 17%, respectively. The Utilities' effective tax rate for the first nine months of 2022 and 2021 were 21% and 19%, respectively. The effective rates were higher for the third quarter and the first nine months of 2022 primarily due to federal research and development tax credit claims in 2021.
The net book value (cost less accumulated depreciation) of utility property, plant and equipment (PPE) as ofSeptember 30, 2022 amounted to$4.9 billion , of which approximately 25% related to generation PPE, 66% 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.
See "Economic conditions" in the "HEI Consolidated" section above.
Executive overview and strategy. The Utilities provide electricity on all the principal islands in the state, other 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 (DER), such as private rooftop solar, demand response and grid-scale resources to enable the creation of smart, sustainable, resilient communities and achieve the statutory goal of 100% renewable energy by 2045. Performance-based regulations. OnDecember 23, 2020 , the PUC issued a D&O (PBR D&O) approving a new performance-based regulation framework (PBR Framework). See "Regulatory proceedings" under "Commitments and contingencies" in Note 3 of the Condensed Consolidated Financial Statements.
Transition to a decarbonized and sustainable energy future. The Utilities are
fully committed to leading and enabling pathways to a decarbonized and
sustainable energy future for
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 in 2022 which 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 by Hawaii State law. See "Forecast of capital expenditures-Liquidity and capital resources" for a discussion of potential capital expenditures related to decarbonization efforts.
On
Prior to 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, including sustaining provisional and elevated levels of maintenance for internal generation to support the capacity needs from the coal-fired IPP plant retirement prior to renewable energy/storage projects coming online, future events, including 71 --------------------------------------------------------------------------------
unexpected issues with existing generation, or supply chain issues and inflationary pressures, as well as federal policies related to solar panel imports, among other factors, and delay in the commercial operation of new generation resources, 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 40%, 70% and 100% byDecember 31, 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%. In 2021, the Utilities achieved an RPS of 38.4%. The Utilities will continue to actively procure additional renewable energy post-2021 and expect to meet or exceed the next statutory RPS goal of 40% in advance of the 2030 compliance year. 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 2021 RPS achieved under the revised RPS calculation would have been 31.5% versus 38.4% under the prior method. The change in the definition is to be applied prospectively to future milestone measurements and will require that the Utilities acquire more renewable energy than under the previous RPS calculation to comply with the RPS milestones; however, the Utilities expect to continue to meet the RPS milestones under the amended RPS law. (See "Developments in renewable energy efforts" below). If the Utilities are not successful in meeting the RPS targets as mandated by law, the PUC could assess a penalty of$20 for every MWh that an electric utility is deficient. Based on the level of total generation in 2021, a 1% shortfall in meeting the 2030 RPS requirement of 40% would translate into a penalty of approximately$2 million . The PUC has the discretion to reduce the penalty due to events or circumstances that are outside an electric utility's reasonable control, to the extent the event or circumstance could not be reasonably foreseen and ameliorated. In addition to penalties under the RPS law, failure to meet the mandated RPS targets would be expected to result in a higher proportion of fossil fuel-based generation than if the RPS target had been achieved, which in turn would be expected to subject the Utilities to limited commodity fossil fuel price exposure under a fuel cost risk-sharing mechanism. The fuel cost risk-sharing mechanism apportions 2% of the fuel cost risk to the utilities (and 98% to ratepayers) and has a maximum exposure (or benefit) of$3.7 million . Conversely, the Utilities have incentives under PIMs that provide a financial reward for accelerating the achievement of renewable generation as a percentage of total generation, including customer supplied generation. The Utilities may earn a reward for the amount of system generation above the interpolated statutory RPS goal at$20 /MWh in 2022,$15 /MWh in 2023, and$10 /MWh for the remainder of the multi-year rate period. The Utilities are fully aligned with, and supportive of, state policy to achieve a decarbonized future and have made significant progress in reducing emissions through renewable energy and electrification. This alignment with state policy is reflected in management compensation programs and the Utilities' long-range plans, which include aspirational targets in order to catalyze action and accelerate the transition away from fossil fuels throughout its operations at a pace more rapid than dictated by current law. The long-range plans, including aspirational targets, serve as guiding principles in the Utilities' continued transformation, and are updated regularly to adapt to changing technology, costs, and other factors. While there is no financial penalty for failure to achieve the Utilities' long-range aspirational objectives, the Utilities recognize that there are environmental and social costs from the continued use of fossil fuels. TheState 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 new 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 Condensed Consolidated Financial Statements. Integrated Grid Planning. Achieving high levels of renewable energy and a carbon free electric system will require modernizing the grid through coordinated energy system planning in partnership with local communities and stakeholders. To accomplish this, the Utilities are implementing an innovative systems approach to energy planning intended to yield the most cost-effective renewable energy and decarbonization pathways that incorporates customer and stakeholder input. 72 -------------------------------------------------------------------------------- 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 inJanuary 2021 . InAugust 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. OnMarch 31, 2022 , the Utilities submitted the final Inputs and Assumptions approved by the PUC. OnSeptember 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. OnJune 9, 2021 , the PUC issued an order providing guidance to the third Grid Service RFP filed onFebruary 23, 2021 . The proposed Grid Service RFP focused only onOahu 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 scheduled onSeptember 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 onMarch 16, 2022 . The Utilities are currently going through the procedural schedule where they answered a set of information requests. OnJuly 26, 2022 , theConsumer 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 onAugust 9, 2022 to comment to the various conditions proposed by theConsumer Advocate . The procedural schedule steps are completed and the GSPA is ready for the PUC's decision. OnJune 8, 2021 , the PUC approved the new program, Emergency Demand Response Program (EDRP), a battery storage incentive program to dispatch electricity between6 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 ofSeptember 30, 2022 , the Utilities have received and approved the applications totaling approximately 10.9 MW onOahu . OnMarch 30, 2022 , the Utilities filed with the PUC to request expanding the EDRP for up to 15 MW on the island ofMaui and received PUC approval onMay 20, 2022 . The EDRP onMaui became effective as ofJune 1, 2022 . Subsequently onJune 23, 2022 , the PUC approved the cost recovery of the additional incentives for bothOahu andMaui through the DSM Surcharge. As ofSeptember 30, 2022 , the Utilities have received and approved 25 applications totaling approximately 0.4 MW onMaui . OnOctober 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 onJune 30, 2022 . The proposed Draft Grid Services RFP focused only onMaui and is seeking 15 MW of grid services. Upon review of the comments, the PUC intends to provide its guidance on the Maui Draft Grid Services RFP. 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. OnMarch 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). OnFebruary 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 ofSeptember 30, 2022 , approximately$56 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. OnJune 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 ofSeptember 30, 2022 , the Utilities have deployed about 152,000 advanced meters, servicing approximately 32% of total customers. The Utilities filed an application with the PUC onSeptember 30, 2019 for an Advanced Distribution Management System (ADMS) as part of Phase 2 of their Grid Modernization Strategy implementation. However, onDecember 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 onMarch 31, 2021 . The estimated cost for the implementation over five years of the ADMS and field devices, which 73 -------------------------------------------------------------------------------- includes capital, deferred software costs and O&M costs, is$105 million . A PUC order was issued onApril 27, 2021 , unsuspending and resuming consideration of the Phase 2 Application. The Utilities filed the reply statement of position onOctober 15, 2021 , completing the discovery phase of the docket. OnNovember 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. InDecember 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 forHawaii . The program has two phases. The first phase, which commenced inJuly 2018 , totaling 8 MW of solar photovoltaic (PV) only with one credit rate for each island, closed onApril 9, 2020 . Two phase 1 projects (28.32 kW onMaui and 270 kW onOahu ) have been operational for over a year, with four additional phase 1 projects expected to become operational in 2023. The second phase, which commenced onApril 9, 2020 and subsequently expanded onJuly 27, 2021 , allows over 250 MW across allHawaiian Electric service territories in two tranches for small (under 250 kW), mid-tier and large system sizes to encourage a variety of system sizes. To provide opportunities for Low-to-Moderate Income (LMI) customers to participate in the program, separate project proposals may be submitted specifically targeting LMI customers.
Eight RFPs were required by order: one each for
ForLanai , the Utilities proposed to combine the previously issued Variable Renewable Dispatchable Generation Paired with Energy Storage RFP and the CBRE RFP to optimize the benefits of procuring renewable energy, spurring development and increasing the likelihood of success of the CBRE Program onLanai . See "Developments in renewable energy efforts-Requests for renewable proposals, expressions of interest, and information" for additional information. 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 recent 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. CBRE LMI proposals forOahu ,Maui andHawaii were issued and are currently being evaluated. The Utilities issued the CBRE Tranche 1 RFPs forOahu ,Maui andHawaii onApril 14, 2022 . The RFPs closed onAugust 17, 2022 , and proposals are also currently being evaluated. 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 portal to 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. 74 -------------------------------------------------------------------------------- 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 has been meeting fromApril 2022 and will continue untilmid-November 2022 to meet the PUC's objectives and respond to the Phase 2 priority issues. All discussions and final recommendations will be detailed in the Working Group Report which will be filed byNovember 23, 2022 and presented at theTechnical Conference onDecember 8, 2022 per the PUC's procedural schedule.
Decoupling. See "Decoupling" in Note 3 of the Condensed Consolidated Financial Statements for a discussion of decoupling.
Regulated returns. As part of the PBR Framework's annual review cycle, the Utilities track their rate-making ROACEs as calculated under the earnings sharing mechanism, which includes only items considered in establishing rates. At year-end, each utility's rate-making ROACE is compared against its ROACE allowed by the PUC to determine whether earnings sharing has been triggered. The D&O in the PBR proceeding modified the earnings sharing mechanism to a symmetric arrangement. Effective with annual earnings for 2021, the earnings sharing will be triggered for achieved rate-making ROACE outside of a 300 basis points dead band above and below the current authorized rate-making ROACE of 9.5% for each of the Utilities. Earnings sharing credits or recoveries will be included in the biannual report (formally known as annual decoupling filing) to be filed with the PUC in the spring of the following year. Results for 2021, 2020 and 2019 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*** Twelve months ended Hawaii ElectricSeptember 30, 2022 Hawaiian Electric Hawaii Electric Light Maui Electric Hawaiian Electric LightMaui Electric Hawaiian Electric Hawaii Electric Light Maui Electric Utility returns 7.23 5.96 6.61 8.56 6.64 7.37 9.58 7.38 8.48 PUC-allowed returns 7.37 7.52 7.43 9.50 9.50 9.50 9.50 9.50 9.50 Difference (0.14) (1.56) (0.82) (0.94) (2.86) (2.13) 0.08 (2.12) (1.02) * Based on recorded operating income and average rate base, both adjusted for items not included in determining electric rates. ** Recorded net income divided by average common equity. *** ROACE adjusted to remove items not included by the PUC in establishing rates, such as incentive compensation. The gap between PUC-allowed ROACEs and the ROACEs achieved is primarily due to the exclusion of certain expenses from rates (for example, incentive compensation and charitable contributions), and depreciation, O&M expense and return on rate base that are in excess of what is currently being recovered through rates (the last rate case plus authorized RAM adjustments and ARA revenues). Regulatory proceedings. OnDecember 23, 2020 , the PBR D&O was issued, establishing a new PBR Framework. The PBR Framework implemented a five-year MRP, during which there will be no general rate case applications. In the fourth year of the MRP, the PUC will comprehensively review the PBR Framework to determine if any modifications or revisions are appropriate. See also "Regulatory proceedings" in Note 3 of the Condensed Consolidated Financial Statements.
Developments in renewable energy efforts. Developments in the Utilities' efforts to further their renewable energy strategy include renewable energy projects discussed in Note 3 of the Condensed Consolidated Financial Statements and the following:
75 --------------------------------------------------------------------------------
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. The Utilities and HRD are currently in discussions regarding the project. •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 reviewing PGV's request. •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, 9/30/22*, Hawaiian Electric 4 139.5 139.5/558 1/20/23 & 8/31/23 20 & 25$ 32.2 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$ 64.7
* 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$64.7 million for the eight PPAs through the PPAC to the extent such costs are not included in base rates. OnMarch 29, 2022 , the Utilities filed a letter with the PUC requesting approval of an amendment requesting a price and guaranteed commercial operation date change to a previously-approved PPA for Stage 1 onOahu to resolve a force majeure condition. OnMay 6, 2022 , the PUC conditionally approved this PPA amendment. OnMay 26, 2022 , the Utilities filed a letter with the PUC requesting approval of an amendment requesting a price increase, a guaranteed commercial operation date change, and provisions to allow partial commissioning to a previously-approved PPA for Stage 1 onHawaii Island to resolve a force majeure condition. OnJune 29, 2022 , the PUC approved this PPA amendment. OnJuly 31, 2022 , the first Stage 1 solar-pus-storage project (39 MW solar/156 MWh storage) was placed into service. See also "Stage 1 renewable PPAs" in Note 3 of the Condensed 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, including 4 PPAs declared null and void by the independent power producers, 2 GSPAs and 2 applications for commitments of funds for capital expenditures for approval of the utility self-build projects 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. OnMay 25 , 76 -------------------------------------------------------------------------------- 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. 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. A summary of the seven PPAs that are approved and still under active development, 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 4 94 94 / 50312/29/23 &4/9/2024 20 & 25$ 32.9 Hawaiian Electric 1 * N/A 185 / 565 12/30/22 20 24.0 Maui Electric 2 60 60 / 240 7/25/23 & 12/29/23 25 18.2 Total 7 154 339 / 1,308$ 75.1
* See further discussion under "Review of Interconnection Process and Kapolei Energy Storage Power Purchase Agreement" below.
The total projected annual payment of$75.1 million for these PPAs will be recovered through the PPAC to the extent such costs are not included in base rates. OnFebruary 15, 2022 , the Utilities filed letters with the PUC requesting approval of amendments to two of the previously-approved PPAs for Stage 2, one onOahu and one onMaui , that address delays and price increase due to the COVID-19 pandemic and the global supply-chain crisis, as well as other market conditions that have arisen during the development of these projects. OnMarch 2, 2022 , the PUC declined to approve both amendments. OnMarch 14, 2022 , both the developer of the project and the Utilities filed a motion for reconsideration for one project, and the developer also filed a motion for reconsideration for the second project. OnMay 5, 2022 , the developer withdrew its motions for reconsideration for both projects and onMay 6, 2022 , the Utilities withdrew their motion for reconsideration and filed the developer's notices declaring PPAs for the projects null and void. OnMay 6, 2022 , after the developer declared the PPAs null and void, the PUC granted the Utilities' motion for reconsideration, approving the amendment to theMaui based project. However, the PUC's order did not change the developer's null and void declaration of the PPA for theMaui based project. 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 . 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 and four Stage 2 projects have been declared null and void by the independent power producers due to a number of issues, including supply chain disruptions caused by impacts from the COVID-19 pandemic, solar 77 -------------------------------------------------------------------------------- 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. 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 ofSeptember 30, 2022 , there were approximately 564 MW, 123 MW and 135 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 ofSeptember 30, 2022 , an estimated 33% 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 ofSeptember 30, 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 Generating Station and theHonolulu International Airport Emergency Power 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 , subject to PUC approval. •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 2023 , 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 are currently being evaluated. 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, 78 -------------------------------------------------------------------------------- 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 will be deemed approved and issued onNovember 17, 2022 unless the PUC directs otherwise. •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 . ForOahu , the Utilities are seeking 500 to 700 MW of renewable firm capacity, and at least 475 GWh of renewable dispatchable energy annually. ForMaui , the Utilities are procuring at least 40 MW of renewable firm capacity, and at least 180 GWh of renewable dispatchable energy annually. 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 andOahu 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 . The filing of the Utilities' letter crossed with the filing of the PUC order. •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 guaranteed commercial operation dates (GCOD) for renewable projects under development, which are due to a variety of factors, including those outside of the control of the Utilities. The PUC subsequently held status conferences on the Utilities' updates. 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). •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 79 -------------------------------------------------------------------------------- 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 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 Note 3 of the Condensed 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 terminates onDecember 31, 2022 . This contract is a requirement contract with no minimum purchases. If PAR Hawaii is unable to provide LSFO, HSFO, diesel and/or ULSD the contract allows the Utilities to purchase LSFO, HSFO, diesel and/or ULSD from another supplier. 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. The costs incurred under the contract with PARHawaii are recovered in the Utilities' respective ECRCs. 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 92% over prior year's quarter. The Utilities are expecting bills to fluctuate until global oil market stabilizes. Proposed modification to the pension tracking mechanisms. OnJune 9, 2022 , the Utilities filed an application with the PUC for approval to modify the pension tracking mechanisms. The existing pension tracking mechanisms allow 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. FINANCIAL CONDITION 80 -------------------------------------------------------------------------------- Liquidity and capital resources. As ofSeptember 30, 2022 , there were no amounts outstanding onHawaiian Electric's revolving credit facility and$98 million of commercial paper borrowings outstanding by the Utilities. 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 ofSeptember 30, 2022 , fuel inventories have increased by$126 million compared toDecember 31, 2021 . Elevated fuel prices billed to customers have also resulted in higher accounts receivable balances, which increased by$72 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 ofSeptember 30, 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$123 million .
The Utilities are continuing the disconnection process on a tiered basis, expanding the targeted balances, which is expected to reduce delinquent accounts receivable balances and accelerate cash collections.
September 30, 2022 December 31, 2021 Short-term borrowings, net of discount$ 97 2 % $ - - % Long-term debt, net 1,737 42 1,676 42 Preferred stock 34 1 34 1 Common stock equity 2,308 55 2,262 57$ 4,176 100 %$ 3,972 100 %
Information about
Average balance Balance Nine months ended (in millions) September 30, 2022 September 30, 2022 December 31, 2021
Short-term borrowings1 Commercial paper $ 45 $ 98 $ - Borrowings from HEI - - - Line of credit draws on revolving credit facility - - - 1 The maximum amount of external short-term borrowings byHawaiian Electric during the first nine months of 2022 was approximately$106 million . As ofSeptember 30, 2022 ,Hawaiian Electric had short-term borrowings fromHawaii Electric Light of$2 million and had short-term borrowings fromMaui Electric of$16 million , which intercompany borrowings are eliminated in consolidation. Credit agreement. OnFebruary 18, 2022 , the PUC approvedHawaiian Electric's request to extend the term of the$200 million Hawaiian Electric revolving credit facility toMay 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 atSeptember 30, 2022 . Credit ratings. OnJune 27, 2022 , Fitch revisedHawaiian Electric's outlook to "Positive" from "Stable" and affirmed the "BBB+" long-term issuer default rating and "F-2" short-term issuer default rating. SPRBs. Special purpose revenue bonds (SPRBs) have been issued by theDepartment of Budget and Finance of the State of Hawaii (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 ofSeptember 30, 2022 ,Hawaiian Electric ,Hawaii Electric Light , andMaui Electric had no undrawn funds. 81 -------------------------------------------------------------------------------- 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 . The Utilities filed their expedited letter request onJuly 29, 2022 , followed by their expedited letter request for supplemental project approval and certification onSeptember 30, 2022 . 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 5 of the Condensed Consolidated Financial Statements. As ofSeptember 30, 2022 ,Hawaiian Electric ,Hawaii Electric Light , andMaui Electric have$95 million ,$75 million , and$35 million , respectively, of remaining taxable debt to issue prior toDecember 31, 2022 . See summary table below. Hawaiian Hawaii Electric (in millions) Electric Light Maui Electric Total "up to" amounts of taxable debt authorized through 2022$ 410 $ 150 $ 130 Less: Taxable debt authorized and issued in 2018 underApril 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
10 10 Remaining authorized amounts$ 95 $ 75 $ 35 OnApril 29, 2022 , the Utilities requested PUC approval to issue, over a four-year period fromJanuary 1, 2023 toDecember 31, 2026 , unsecured obligations bearing taxable interest (Hawaiian Electric up to$230 million ,Hawaii Electric Light up to$65 million andMaui 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. Equity. InOctober 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 forHawaiian Electric and up to$100 million each forHawaii Electric Light andMaui Electric , with the new total "up to" amounts of$430 million forHawaiian Electric and$110 million each forHawaii Electric Light andMaui Electric , and to extend the period authorized by the PUC to issue and sell common stock fromDecember 31, 2021 toDecember 31, 2022 . As ofSeptember 30, 2022 ,Hawaiian Electric ,Hawaii Electric Light , andMaui Electric have$221.4 million ,$93.7 million , and$63.2 million , respectively, of remaining common stock to issue prior toDecember 31, 2022 . See summary table below. 82 -------------------------------------------------------------------------------- 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 in 2017, 2018, 2019, 2020 and 2021
208.6 16.3 46.8 Remaining authorized amounts$ 221.4
OnApril 29, 2022 , the Utilities requested 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$55 million ) and the purchase ofHawaii Electric Light andMaui Electric common stock byHawaiian Electric from 2023 throughDecember 31, 2026 . Cash flows. The following table reflects the changes in cash flows for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 : Nine months ended September 30 (in thousands) 2022 2021 Change Net cash provided by operating activities$ 124,167 $ 198,256 $ (74,089) Net cash used in investing activities (219,126) (197,589) (21,537) Net cash provided by financing activities 61,005 (21,213) 82,218 Net cash provided by operating activities. The decrease in net cash provided by operating activities was driven by higher cash paid for fuel oil stock due to higher fuel oil prices and higher volume purchased in preparation of end of service of AES Hawaii coal plant, as well as increase in customer accounts receivable resulting from increase in fuel prices, partially offset by payments on installment plans, higher cash receipts associated with increased disconnection efforts, and lower cash paid for accounts payable due to timing.
Net cash used in investing activities. The increase in net cash used in investing activities was primarily driven by an increase in capital expenditures related to construction activities.
Net cash provided by financing activities. The increase in net cash provided by financing activities was primarily driven by net increase in short-term borrowing in 2022 and repayment of short-term debt in 2021, partially offset by lower net cash from long-term debts. Material cash requirements. Material cash requirements of the Utilities include O&M expenses, including labor and benefit costs, fuel and purchase power costs, repayment of debt and interest payments, operating lease obligations, its forecasted capital expenditures and investments, its expected retirement benefit plan contributions and other short-term and long-term material cash requirements. The cash requirements for O&M, fuel and purchase power costs, debt and interest payments, and operating lease obligations are generally funded through the collection of the Utilities' revenue requirement established in the last rate case and other mechanisms established under the regulatory framework. The cash requirements for capital expenditures are generally funded through retained earnings, the issuance of debt, and contributions of equity from HEI and generally recovered through the Utilities' revenue requirement or other capital recovery mechanisms over time. The Utilities believe that their ability to generate cash is adequate to maintain sufficient liquidity to fund their material cash requirements. However, the economic impact of higher fuel prices, inflation, higher interest rates, tightening of monetary policy, and the ongoing COVID-19 pandemic, create significant uncertainty, and the Utilities cannot predict the extent or duration of the outbreak, the future effects that it will have on the global, national or local economy, including the impacts on the Utilities' ability, as well as the cost, to access additional capital, or the future impacts on the Utilities' financial position, results of operations, and cash flows. Forecast capital expenditures. For the five-year period 2022 through 2026, the Utilities forecast up to$2.0 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$1.2 billion is related to replacement and modernization of generation, transmission and distribution assets; approximately$0.5 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 2022 to 2026 forecast (such as increases in the 83 --------------------------------------------------------------------------------
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. 84 --------------------------------------------------------------------------------
Bank
Recent Developments. See also Recent developments in HEI's MD&A.
TheHawaii economy continued to improve in the third quarter of 2022 as an increase in visitor arrivals have helped drive a growing labor market and tax collections. Domestic visitor arrivals exceeded pre-pandemic levels inSeptember 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 is gradually increasing as certain Asian countries have started to loosen travel restrictions. Other COVID-related mandates have also been lifted such as the indoor mask mandate and capacity limits for indoor and outdoor events. COVID cases caused by the new variants have decreased and remain relatively stable at low levels along with hospitalization rates. In the first nine months in 2022, theFederal Reserve raised its federal funds rate to a target range of 3.0%-3.25% in response to surging inflationary pressures in the economy. The increase in interest rates have increased 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's net interest margin for the quarter endedSeptember 30, 2022 of 2.96% was higher than the net interest margin for linked quarter endedJune 30, 2022 of 2.85% and the net interest margin for the quarter endedSeptember 30, 2021 of 2.90%. 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. The Bank's ASB CARES loan program continued to paydown and most of the fees from the program have been recognized as ofSeptember 30, 2022 . Net interest income was$65.7 million for the quarter endedSeptember 30, 2022 compared to$60.3 million for the quarter endedSeptember 30, 2021 . For the quarter endedSeptember 30, 2022 , ASB recorded a 0.2 million negative provision for credit losses, primarily driven by lower loss ratios for the loan portfolio due to improved credit quality, partly offset by additional reserves required for loan portfolio growth, including reserves established for consumer loans purchased. The provision for credit losses in future quarters will be dependent on future economic conditions and changes to borrower credit quality at that time. In response to COVID-19, ASB made short-term loan modifications to borrowers who were generally payment current at the time of relief. As ofSeptember 30, 2022 , no loans remained in their active deferral period. Approximately$4.1 million of loans were not able to resume their contractual payments and were considered delinquent as ofSeptember 30, 2022 . In 2020, ASB temporarily closed 15 of its 49 branches and reduced banking hours at the branches that remained open in an effort to reduce social gathering and protect employees and customers. The bank has since reopened seven of the branches that were temporarily closed and permanently closed eight branches. Three of the reopened branches are now digital branches, which provides digital solutions such as full-service ATMs and access to expert bankers through videoconferencing tools while allowing ASB to have a more efficient physical footprint. 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 remaining PPP loans outstanding as ofSeptember 30, 2022 was approximately$5 million and the remaining fees to be recognized over the life of the loans was approximately$0.1 million .
Other provisions of the CARES Act provides that a financial institution may elect to suspend the requirements under GAAP for certain loan modifications that would otherwise be categorized as a TDR and any related impairment for accounting purposes. See Note 4 of the Condensed Consolidated Financial Statements and "Economic conditions" in the "HEI Consolidated" section above.
ASB continues to maintain its low-risk profile, strong balance sheet and straightforward community banking business model.
85 -------------------------------------------------------------------------------- Three months ended September 30 Increase (in millions) 2022 2021 (decrease) Primary reason(s) Interest and dividend$ 68 $ 61 $ 7 income Average loan portfolio yields were 2 basis points higher-yield benefited from the rising interest rate environment. New loan production yields are now higher than the portfolio yields. Average loan portfolio balances increased$367 million - commercial real estate, residential, home equity line of credit and consumer loan portfolio average balances increased$176 million,$150 million ,$86 million and$56 million , respectively. The increase in the commercial real estate, home equity line of credit and consumer loan portfolios were due to increased demand for these loan products. The growth in consumer loans included purchases of solar and sustainable home improvement loans. The increase in the residential loan portfolio was due to the Bank's decision to portfolio a larger portion of the residential loan production. The commercial loan average balance decreased$102 million due to repayments in the ASB Cares loan portfolio. Average investment securities portfolio balance increased$230 million-excess liquidity was invested in agency securities. Average investment securities portfolio yield was 25 basis point higher due to lower investment portfolio premium amortizations. Average other investments decreased$61 million - decrease in interest earning deposits due to excess liquidity being used to
fund loan production and purchase investment securities. Noninterest income
13 15 (2) Lower mortgage banking income - lower residential loan sale volume due to lower production volume and ASB's decision to portfolio a larger portion of the residential loan production. In addition, the residential loan sale profit margin was lower in 2022 compared to 2021. Lower bank owned life insurance income - lower returns from insurance policies. Revenues 81 76 5 The increase in revenues for the three months ended September 30, 2022 compared to the same period in 2021 was primarily due to higher interest and dividend income partly offset by lower noninterest income. Interest expense 3 1 2 Increase in interest expense on deposits and other borrowings was due to an increase in term certificate and other borrowing balances which were required to fund the loan portfolio growth, and higher yields due to the increase in the interest rate environment. Average core deposit balances increased$346 million ; average term certificate balances increased$6 million . Average deposit yields increased from 6 basis points to 8 basis points. Average other borrowings increased$191 million and average yields increased 145 basis points. Provision for credit - (2) 2
losses
2022 negative provision for credit losses was primarily due to the release of credit loss reserves for improved credit trends in the residential, home equity line of credit and consumer loan portfolios, partly offset by additional credit loss reserves for growth in the consumer loan portfolio which included purchases of solar and sustainable home improvement loans. 2022 negative provision for credit losses also included the release of credit loss reserves for unfunded commercial construction loan commitments. 2021 negative provision for credit losses reflected credit upgrades in the commercial real estate and commercial loan portfolios, partly offset by additional provision for credit losses for the retail loan portfolios based on the recent surge in COVID-19 infections and a delay inHawaii's economic recovery. 2021 negative provision for credit losses was also due to a shift in asset mix - lower personal unsecured loan portfolio balances which had higher credit loss rates were replaced with residential and commercial real estate loan portfolios with lower credit loss rates. Delinquency rates have decreased-from 0.37% atSeptember 30, 2021 to 0.27% atSeptember 30, 2022 primarily due to lower residential 1-4 family loan delinquencies, partly offset by higher commercial markets loan delinquencies. Net charge-off to average loans was flat-0.03% atSeptember 30, 2022 and 2021. 86
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Three months ended September 30 Increase (in millions) 2022 2021 (decrease) Primary reason(s) Noninterest expense 52 52 - Included in compensation and benefits were higher base compensation, incentive compensation and employee benefit costs for the three months ended September 30, 2022 compared to the same period in 2021 that were offset by the fair value adjustment related to the deferred compensation plan. Expenses 55 51 4 The increase in expenses for the three months ended September 30, 2022 compared to the same period in 2021 was due to higher interest expenses and lower negative provision for credit losses. Operating income 26 25 1 The increase in operating income for the three months ended September 30, 2022 compared to the same period in 2021 was primarily due to higher interest income in 2022 partly offset by lower noninterest income, higher interest expenses and lower negative provision for credit losses. Net income 21 19 2 Net income for the three months ended September 30, 2022 was higher than the same period in 2021 due to higher operating income partly offset by higher income tax expense. Nine months ended September 30 Increase (in millions) 2022 2021 (decrease) Primary reason(s) Interest and dividend$ 191 $ 182 $ 9 income Average loan portfolio yields were 12 basis points lower-impacted by the continued low interest rate environment in 2021 and the beginning of 2022 as adjustable rate loans had repriced lower during the past year and new loan production yields were below their portfolio yields. 2022 loan yields were also impacted by lower PPP loan fees recognized in 2022 compared to 2021 as the PPP loan portfolio has paid down significantly over the past year. Average loan portfolio balances increased$69 million - residential loan average balances increased$156 million due to the Bank's decision to portfolio a larger portion of the residential loan production. Commercial real estate average loan balances increased$104 million due to demand for this loan type. Commercial loan average balances decreased$190 million due to repayments in the PPP loan portfolio. Average investment securities portfolio balances increased$524 million-excess liquidity from strong deposit growth had been invested in agency securities. Average investment securities portfolio yields were 23 basis points higher-benefited from lower amortization of premiums in the investment portfolio. Noninterest income 42 49 (7) Lower mortgage banking income - lower residential loan sale volume due to lower production volume and ASB's decision to portfolio a larger portion of the residential loan production. In addition, the residential loan sale profit margin was lower in 2022 compared to 2021. Lower bank owned life insurance income - lower returns from insurance policies and lower insurance policy claim proceeds in 2022 compared to 2021. Higher fee income on deposit liabilities due to fees from increased deposit account activity. Higher gain on sale of real estate - due to the sale of a branch property owned by ASB. The branch was closed in January 2022. No similar sale in 2021. Less: gain on sale of (1) - (1)
Gain on sale of real estate, which is included in Noninterest real estate
income above and in the Bank's statements of income and comprehensive income in Note 4, is classified as gain on sale of real estate in the condensed consolidated statements of income, and accordingly, is reflected in operating expenses
below as a separate line item and excluded from Revenues. Less: gain on sale of
- (1) 1
Gain on sale of investment securities, net, which is included investment securities,
in Noninterest income above and in the Bank's statements of net income and comprehensive income in Note 4, is classified as gain on sale of investment securities, net in the condensed consolidated statements of income, and accordingly, is reflected below following operating income as a separate line item and excluded from Revenues. Revenues 232 230 2 The increase in revenues for the nine months ended September 30, 2022 compared to the same period in 2021 was primarily due to higher interest and dividend income partly offset by lower noninterest income. 87
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Nine months ended September 30 Increase (in millions) 2022 2021 (decrease) Primary reason(s) Interest expense 5 4 1 Interest expense on deposits and other borrowings increased in 2022 compared to 2021 due to an increase in balances and yields of FHLB advances partly offset by lower term certificate balances and yields. Average core deposit balances increased$603 million ; average term certificate balances decreased$76 million . Average deposit yields decreased from 7 basis points to 6 basis points. Average other borrowings increased$65 million and average yields increased 87 basis points. Provision for credit (1) (22) 21 losses 2022 negative provision for credit losses reflected improved credit trends, credit regrades and lower credit loss rates in the commercial real estate and commercial, loan portfolios. 2022 negative provision for credit losses also included additional credit loss reserves for growth in the commercial real estate and consumer loan portfolios, which included loss reserves established for the solar and sustainable home improvement loans purchased during the year. 2021 negative provision for credit losses reflected improvement in economic outlook, strong credit results including lower net charge-offs and improved credit loss rates which included credit upgrades in the commercial real estate and commercial loan portfolios. 2021 negative provision for credit losses was also due to lower personal unsecured loan portfolio balances which had higher credit loss rates and improving net charge-off trends in the loan portfolio. Delinquency rates have decreased-from 0.37% at September 30, 2021 to 0.27% at September 30, 2022 due to lower residential 1-4 family loan delinquencies, partly offset by higher commercial markets loan delinquencies. Net charge-off to average loans have decreased-from 0.08% at September 30, 2021 to 0.01% at September 30, 2022 primarily due to lower personal unsecured loan portfolio net charge-offs. Noninterest expense 149 147 2 Lower compensation and benefits expenses offset by higher occupancy and retirement plan expenses. Higher base compensation and employee benefit costs were more than 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. 2021 noninterest expense benefited from a one-time credit adjustment for a change in accounting for the ASB retirement plan with no similar credit in 2022. Gain on sale of real (1) - (1) estate Expenses 152 129 23 The increase in expenses for the nine months ended September 30, 2022 compared to the same period in 2021 was due to lower negative provision for credit losses in 2022, higher noninterest expenses and higher interest expenses, partly offset by higher gain on sale of real estate in 2022. Operating income 80 101 (21) The decrease in operating income for the nine months ended September 30, 2022 compared to the same period in 2021 was primarily due to higher negative provision for credit losses in 2021 and lower noninterest income in 2022, partly offset by higher interest income in 2022. Gain on sale of - 1 (1) The decrease in gain on sale of investment securities - investment securities, primarily due to the sale of investment securities in 2021 with net no similar sales in 2022. Net income 62 79 (17) Net income for the nine months ended September 30, 2022 was lower than the same period in 2021 due to lower operating income and lower gain on sale of investment securities, partly offset by lower income tax expense. 88
-------------------------------------------------------------------------------- ASB's return on average assets, return on average equity and net interest margin were as follows: Three months ended September 30 Nine months ended September 30 (%) 2022 2021 2022 2021 Return on average assets 0.89 0.86 0.90 1.21 Return on average equity 15.11 10.26 13.65 14.31 Net interest margin 2.96 2.90 2.87 2.94 Three months ended September 30 2022 2021 Interest Interest Average income/ Yield/ Average income/ Yield/ (dollars in thousands) balance expense rate (%) balance expense rate (%) Assets: Interest-earning deposits$ 16,598 $ 83 1.96$ 77,991 $ 30 0.15 FHLB stock 15,858 175 4.39 10,002 76 3.01 Investment securities Taxable 3,183,928 14,453 1.82 2,959,102 11,625 1.57 Non-taxable 68,938 432 2.48 63,823 336 2.10 Total investment securities 3,252,866 14,885 1.83 3,022,925 11,961 1.58 Loans Residential 1-4 family 2,348,214 20,721 3.53 2,198,089 19,531 3.55 Commercial real estate 1,370,993 13,535 3.88 1,194,776 9,846 3.24 Home equity line of credit 952,298 7,459 3.11 866,755 6,791 3.11 Residential land 21,253 256 4.84 19,020 269 5.66 Commercial 671,175 6,945 4.08 773,548 8,988 4.62 Consumer 182,503 4,541 9.88 126,821 4,078 12.76 Total loans 1,2 5,546,436 53,457 3.82 5,179,009 49,503 3.80 Total interest-earning assets 3 8,831,758 68,600 3.09 8,289,927 61,570 2.96 Allowance for credit losses (70,685) (78,258) Noninterest-earning assets 544,651 739,522 Total assets$ 9,305,724 $ 8,951,191 Liabilities and shareholder's equity: Savings$ 3,296,229 $ 219 0.03$ 3,129,166 $ 204 0.03 Interest-bearing checking 1,339,002 150 0.04 1,240,159 61 0.02 Money market 214,706 55 0.10 202,073 31 0.06 Time certificates 472,425 1,280 1.08 466,343 880 0.75 Total interest-bearing deposits 5,322,362 1,704 0.13 5,037,741 1,176
0.09
Advances from Federal Home Loan Bank 146,462 951 2.54 54 -
0.30
Securities sold under agreements to repurchase and federal funds purchased 134,458 104 0.31 89,540 5
0.02
Total interest-bearing liabilities 5,603,282 2,759 0.19 5,127,335 1,181
0.09
Noninterest bearing liabilities: Deposits 2,966,148 2,899,005 Other 186,840 173,842 Shareholder's equity 549,454 751,009 Total liabilities and shareholder's equity$ 9,305,724 $ 8,951,191 Net interest income$ 65,841 $ 60,389 Net interest margin (%) 4 2.96 2.90 89
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Nine months ended September 30 2022 2021 Interest Interest Average income/ Yield/ Average income/ Yield/ (dollars in thousands) balance expense rate (%) balance expense rate (%) Assets: Interest-earning deposits$ 69,813 $ 230 0.43$ 65,133 $ 61 0.12 FHLB stock 12,396 343 3.70 10,398 251 3.23 Investment securities Taxable 3,192,967 42,220 1.76 2,688,906 30,761 1.53 Non-taxable 69,265 1,185 2.27 49,520 805 2.16 Total investment securities 3,262,232 43,405 1.77 2,738,426 31,566 1.54 Loans Residential 1-4 family 2,320,414 60,904 3.50 2,164,829 58,592 3.61 Commercial real estate 1,256,402 33,485 3.53 1,152,716 28,392 3.26 Home equity line of credit 894,685 20,163 3.01 898,304 21,118 3.14 Residential land 21,529 1,044 6.47 17,782 683 5.12 Commercial 702,489 20,350 3.85 892,181 28,179 4.21 Consumer 140,735 11,798 11.21 141,800 13,569 12.79 Total loans 1,2 5,336,254 147,744 3.69 5,267,612 150,533 3.81 Total interest-earning assets 3 8,680,695 191,722 2.94 8,081,569 182,411 3.01 Allowance for credit losses (69,811) (90,347) Noninterest-earning assets 608,240 743,611 Total assets$ 9,219,124 $ 8,734,833 Liabilities and shareholder's equity: Savings$ 3,284,235 $ 638 0.03$ 3,029,335 $ 594 0.03 Interest-bearing checking 1,347,378 295 0.03 1,214,136 178 0.02 Money market 210,899 124 0.08 191,092 99 0.07 Time certificates 423,779 2,515 0.79 500,278 3,048 0.81 Total interest-bearing deposits 5,266,291 3,572 0.09 4,934,841 3,919
0.11
Advances from Federal Home Loan Bank 59,903 1,085 2.39 20,474 42
0.27
Securities sold under agreements to repurchase and federal funds purchased 109,028 114 0.14 83,453 13
0.02
Total interest-bearing liabilities 5,435,222 4,771 0.12 5,038,768 3,974
0.11
Noninterest bearing liabilities: Deposits 2,988,191 2,792,899 Other 189,318 166,285 Shareholder's equity 606,393 736,881 Total liabilities and shareholder's equity$ 9,219,124 $ 8,734,833 Net interest income$ 186,951 $ 178,437 Net interest margin (%) 4 2.87 2.94 1 Includes loans held for sale, at lower of cost or fair value. 2 Includes recognition of net deferred loan fees of$0.9 million and$3.9 million for the three months endedSeptember 30, 2022 and 2021, respectively, and$4.5 million and$11.3 million for the nine months endedSeptember 30, 2022 and 2021, respectively, together with interest accrued prior to suspension of interest accrual on nonaccrual loans. Includes nonaccrual loans.
3 For the three and nine months ended
4 Defined as net interest income, on a fully taxable equivalent basis, as a percentage of average total interest-earning assets.
Earning assets, costing liabilities, contingencies and other factors. Earnings of ASB depend primarily on net interest income, which is the difference between interest earned on earning assets and interest paid on costing liabilities. The interest rate environment has been impacted by disruptions in the financial markets over a period of several years. The Federal Open 90 -------------------------------------------------------------------------------- Market Committee increased its federal funds rate target range to 3.00% - 3.25% in 2022 due to signs of inflation and ASB's net interest income and net interest margin has started to increase but still remains at lower levels. A return of 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 Note 4 of the Condensed Consolidated Financial Statements for a composition of ASB's loan portfolio. Home equity - key credit statistics. The HELOC portfolio makes up 17% of the total loan portfolio and is generally an interest-only revolving loan for a 10-year period, after which time the HELOC outstanding balance converts to a fully amortizing variable-rate term loan with a 20-year amortization period. Borrowers also have a "Fixed Rate Loan Option" to convert a part of their available line of credit into a 5, 7 or 10-year fully amortizing fixed-rate loan with level principal and interest payments. As ofSeptember 30, 2022 , approximately 40% 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 57% of ASB's HELOC loan portfolio is in a first lien position. Loan portfolio risk elements. See Note 4 of the Condensed Consolidated Financial Statements. Investment securities. ASB's investment portfolio was comprised as follows: September 30, 2022 December 31, 2021 (dollars in thousands) Balance % of total Balance % of total U.S. Treasury and federal agency obligations $ 156,301 6 % $ 149,961
5 %
Mortgage-backed securities - issued or guaranteed by
2,531,946 92 2,900,322 94 Corporate bonds 39,935 1 31,178 1 Mortgage revenue bonds 15,033 1 15,427 - Total investment securities$ 2,743,215 100 %$ 3,096,888 100 % ASB continues to invest in high-grade 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). 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 decrease in the investment securities portfolio was primarily due to an increase in unrealized losses in the available-for-sale investment securities portfolio. Deposits and other borrowings. Deposits continue to be the largest source of funds for ASB and are affected by market interest rates, competition and management's responses to these factors. While deposits have increased by$87 million year-to-date, deposit retention and sustained growth will remain challenging in the current environment due to the rising interest rate environment and the level of core deposit rates. Advances from the FHLB ofDes Moines , securities sold under agreements to repurchase and federal funds purchased continue to be additional sources of funds. As ofSeptember 30, 2022 ASB's costing liabilities consisted of 95% deposits and 5% other borrowings compared to 99% deposits and 1% other borrowings as ofDecember 31, 2021 . The weighted average cost of deposits for the first nine months of 2022 and 2021 was 0.06% and 0.07%, respectively. As ofSeptember 30, 2022 andDecember 31, 2021 , ASB had approximately$1.3 billion and$1.4 billion , respectively, of deposits that were uninsured.
Contingencies. ASB is subject in the normal course of business to pending and threatened legal proceedings. Management does not anticipate that the aggregate ultimate liability arising out of these pending or threatened legal proceedings will be material to its financial position. However, ASB cannot rule out the possibility that such outcomes could have a material adverse effect on the results of operations or liquidity for a particular reporting period in the future. 91 -------------------------------------------------------------------------------- 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 ofSeptember 30, 2022 , ASB had an unrealized loss, net of taxes, on available-for-sale investment securities (including securities pledged for repurchase agreements) in AOCI of$340.3 million compared to an unrealized loss, net of taxes, of$32.0 million as ofDecember 31, 2021 . The unrealized losses were due to changes in interest rates and did not affect regulatory capital ratios. See "Item 3. Quantitative and qualitative disclosures about market risk" for a discussion of ASB's interest rate risk sensitivity. During the first nine months of 2022, ASB recorded a negative provision for credit losses of$0.2 million in the allowance for credit losses reflecting improved credit trends, credit regrades and lower credit loss rates in the commercial real estate and commercial loan portfolios, partly offset by credit loss reserves for growth in the commercial real estate and consumer loan portfolios, which included loss reserves for solar and sustainable home improvement loans purchased during the year. During the first nine months of 2021, ASB recorded a negative provision for credit losses of$22.0 million in the allowance for credit losses primarily due to improvement in the economic outlook, strong credit results including lower net charge-offs and credit upgrades in the commercial real estate and commercial loan portfolios and a decrease in personal unsecured loan portfolio balances which had higher credit loss rates. Nine months ended September 30 Year ended (in thousands) 2022 2021 December 31, 2021 Allowance for credit losses, beginning of period$ 71,130 $ 101,201 $ 101,201 Provision for credit losses (192) (21,967) (26,425) Less: net charge-offs 532 3,290 3,646 Allowance for credit losses, end of period$ 70,406 $ 75,944 $ 71,130
Ratio of net charge-offs during the period to average loans outstanding (annualized)
0.01 % 0.08 % 0.07 % ASB maintains a reserve for credit losses that consists of two components, the allowance for credit losses and an allowance for loan commitments (unfunded reserve). The level of the reserve for unfunded loan commitments is adjusted by recording an expense or recovery in provision for credit losses. For the nine months endedSeptember 30, 2022 and 2021, ASB recorded a recovery in the provision for credit losses for unfunded commitments of$0.5 million and$0.4 million , respectively. As ofSeptember 30, 2022 andDecember 31, 2021 , the reserve for unfunded loan commitments was$4.4 million and$4.9 million , respectively. Legislation and regulation. ASB is subject to extensive regulation, principally by the OCC and theFDIC . Depending on ASB's level of regulatory capital and other considerations, these regulations could restrict the ability of ASB to compete with other institutions and to pay dividends to its shareholder. See the discussion below under "Liquidity and capital resources." Changes to Community Bank Leverage Ratio. InApril 2020 , the federal bank regulatory agencies issued two interim final rules to implement Section 4012 of the CARES Act, which requires the agencies to temporarily lower the community bank leverage ratio to 8 percent. The two rules modify the community bank leverage ratio framework so that: •Beginning in the second quarter of 2020 and until the end of the year, a banking organization that has a leverage ratio of 8 percent or greater and meets certain other criteria may elect to use the community bank leverage ratio framework; and •Community banking organizations had untilJanuary 1, 2022 before the community bank leverage ratio requirement is re-established at greater than 9 percent. Under the interim final rules, the community bank leverage ratio was 8 percent beginning in the second quarter of 2020 and for the remainder of calendar year 2020, 8.5 percent for calendar year 2021, and 9 percent thereafter. The interim final rules also maintain a two-quarter grace period for a qualifying community banking organization whose leverage ratio falls no more than 1 percent below the applicable community bank leverage ratio. Beginning in the second quarter of 2020, ASB adopted the community bank leverage ratio framework, which allowed it to report only on the community bank leverage ratio, but does not change minimum capital requirements under OCC regulations. AtMarch 31, 2021 , ASB's leverage ratio was below the 8.5 percent requirement to qualify for abbreviated reporting under the community bank leverage framework for 2021 and started reporting its risk-based capital ratios in the third quarter of 2021. As ofSeptember 30, 2022 , the bank was in compliance with all of the minimum capital requirements under OCC regulations, and was categorized as "well capitalized" under the regulatory framework for prompt corrective action. 92 -------------------------------------------------------------------------------- FINANCIAL CONDITION Liquidity and capital resources. (dollars in millions) September 30, 2022 December 31, 2021 % change Total assets $ 9,316 $ 9,182 1 Investment securities 2,743 3,097 (11) Loans held for investment, net 5,617 5,140 9 Deposit liabilities 8,259 8,172 1 Other bank borrowings 409 88 363
As of
As ofSeptember 30, 2022 , ASB's unused FHLB borrowing capacity was approximately$1.9 billion . As ofSeptember 30, 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. For the nine months endedSeptember 30, 2022 , net cash provided by ASB's operating activities was$82 million . Net cash used during the same period by ASB's investing activities was$553 million , primarily due to a net increase in loans receivable of$395 million , purchases of available-for-sale securities of$366 million , purchases of loans held for investment of$77 million , bank owned life insurance purchases of$5 million , additions to premises and equipment of$3 million and a net increase in FHLB stock of$5 million , partly offset by the receipt of investment security repayments and maturities of$296 million , proceeds from redemption of bank owned life insurance of$2 million and proceeds from the sale of real estate of$1 million . Net cash provided by financing activities during this period was$370 million , primarily due to increases in deposit liabilities of$87 million , a net increase in short-term borrowings of$125 million and a net increase in repurchase agreements of$196 million , partly offset by a net decrease in mortgage escrow deposits of$6 million and$32 million in common stock dividends to HEI (throughASB Hawaii ). For the nine months endedSeptember 30, 2021 , net cash provided by ASB's operating activities was$93 million . Net cash used during the same period by ASB's investing activities was$780 million , primarily due to purchases of available-for-sale securities of$1.3 billion , purchases of held-to-maturity securities of$314 million , contributions to low income housing investments of$12 million , additions to premises and equipment of$9 million and a net increase in stock from theFederal Home Loan Bank of$1 million , partly offset by the receipt of investment security repayments and maturities of$499 million , proceeds from the sale of investment securities of$197 million , a net decrease in loans of$159 million , proceeds from the sale of residential loans of$17 million and proceeds from redemption of bank owned life insurance of$3 million . Net cash provided by financing activities during this period was$584 million , primarily due to increases in deposit liabilities of$590 million and a net increase in repurchase agreements of$40 million , partly offset by a net decrease in mortgage escrow deposits of$5 million and$40 million in common stock dividends to HEI (throughASB Hawaii ). ASB believes that maintaining a satisfactory regulatory capital position provides a basis for public confidence, affords protection to depositors, helps to ensure continued access to capital markets on favorable terms and provides a foundation for growth.FDIC regulations restrict the ability of financial institutions that are not well-capitalized to compete on the same terms as well-capitalized institutions, such as by offering interest rates on deposits that are significantly higher than the rates offered by competing institutions. As ofSeptember 30, 2022 , ASB was well-capitalized (well-capitalized ratio requirements noted in parentheses) with a Tier-1 leverage ratio of 7.7% (5.0%), common equity Tier-1 ratio of 12.5% (6.5%), Tier-1 capital ratio of 12.5% (8.0%) and total capital ratio of 13.5% (10.0%). As ofDecember 31, 2021 , ASB was well-capitalized (well-capitalized ratio requirements noted in parentheses) with a Tier-1 leverage ratio of 7.9% (5.0%), common equity Tier-1 ratio of 13.3% (6.5%), Tier-1 capital ratio of 13.3% (8.0%) and total capital ratio of 14.3% (10.0%). All dividends are subject to review by the OCC and FRB and receipt of a letter from the FRB communicating the agencies' non-objection to the payment of any dividend ASB proposes to declare and pay to HEI (throughASB Hawaii ). 93
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