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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020March 31, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | | | | | | | | | | | | | |
| Exact Name of Registrant as Specified in Its Charter | | Commission File Number | | I.R.S. Employer Identification No. |
| HAWAIIAN ELECTRIC INDUSTRIES, INC. | | 1-8503 | | 99-0208097 |
| and Principal Subsidiary | | | | |
| HAWAIIAN ELECTRIC COMPANY, INC. | | 1-4955 | | 99-0040500 |
State of Hawaii
(State or other jurisdiction of incorporation or organization)
Hawaiian Electric Industries, Inc. – 1001 Bishop Street, Suite 2900, Honolulu, Hawaii 96813
Hawaiian Electric Company, Inc. – 1001 Bishop Street, Suite, 2500, Honolulu, Hawaii 96813
(Address of principal executive offices and zip code)
Hawaiian Electric Industries, Inc. – (808) 543-5662
Hawaiian Electric Company, Inc. – (808) 543-7771
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
| | | | | | | | | | | |
| Registrant | Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Hawaiian Electric Industries, Inc. | Common Stock, Without Par Value | HE | New York Stock Exchange
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Hawaiian Electric Industries, Inc. | Yes | ☒ | No | ☐ | | Hawaiian Electric Company, Inc. | Yes | ☒ | No | ☐ |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Hawaiian Electric Industries, Inc. | Yes | ☒ | No | ☐ | | Hawaiian Electric Company, Inc. | Yes | ☒ | No | ☐ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934.
| | | | | | | | | | | | | | | | | | | | | | | |
| Hawaiian Electric Industries, Inc.: | | | | Hawaiian Electric Company, Inc.: | | | |
| Large accelerated filer | ☒ | Smaller reporting company | ☐ | Large accelerated filer | ☐ | Smaller reporting company | ☐ |
| Accelerated filer | ☐ | Emerging growth company | ☐ | Accelerated filer | ☐ | Emerging growth company | ☐ |
| Non-accelerated filer | ☐ | | | Non-accelerated filer | ☒ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
| | | | | | | | | | | | | | |
| Hawaiian Electric Industries, Inc. | ☐ | | Hawaiian Electric Company, Inc. | ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Hawaiian Electric Industries, Inc. | Yes | ☐ | No | ☒ | | Hawaiian Electric Company, Inc. | Yes | ☐ | No | ☒ |
Securities registered pursuant to 12(b) of the Act:
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuers’ classes of common stock, as of the latest practicable date.
| | | | | | | | | | | |
| Class of Common Stock | | Outstanding July 24, 2020 | April 23, 2021 |
| Hawaiian Electric Industries, Inc. (Without Par Value) | | 109,181,124109,181,493 | | Shares |
| Hawaiian Electric Company, Inc. ($6-2/3 Par Value) | | 17,048,78317,324,376 | | Shares (not publicly traded) |
Hawaiian Electric Industries, Inc. (HEI) is the sole holder of Hawaiian Electric Company, Inc. (Hawaiian Electric) common stock.
This combined Form 10-Q is separately filed by HEI and Hawaiian Electric. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. No registrant makes any representation as to information relating to the other registrant, except that information relating to Hawaiian Electric is also attributed to HEI.
Hawaiian Electric Industries, Inc. and Subsidiaries
Hawaiian Electric Company, Inc. and Subsidiaries
Form 10-Q—Quarter ended June 30, 2020March 31, 2021
TABLE OF CONTENTS
Hawaiian Electric Industries, Inc. and Subsidiaries
Hawaiian Electric Company, Inc. and Subsidiaries
Form 10-Q—Quarter ended June 30, 2020March 31, 2021
GLOSSARY OF TERMS
| | | | | | | | |
| Terms | | Definitions |
| ACL | | Allowance for credit losses, which is the current credit loss standard, requires recording the allowance based on the expected loss model |
| AES Hawaii | | AES Hawaii, Inc. |
| AFS | | Available for sale |
| | |
| AMI | | Advanced Metering Infrastructure |
| AOCI | | Accumulated other comprehensive income/(loss) |
| ARA | | Annual revenue adjustment |
| ASB | | American Savings Bank, F.S.B., a wholly-ownedwholly owned subsidiary of ASB Hawaii, Inc. |
| ASB Hawaii | | ASB Hawaii, Inc. (formerly American Savings Holdings, Inc.), a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and the parent company of American Savings Bank, F.S.B. |
| | |
| ASU | | Accounting Standards Update |
| CARES Act | | The Coronavirus Aid, Relief, and Economic Security Act enacted March 27, 2020 |
| CBRE | | Community-based renewable energy |
| Company | | Hawaiian Electric Industries, Inc. and its direct and indirect subsidiaries, including, without limitation, Hawaiian Electric Company, Inc. and its subsidiaries (listed under Hawaiian Electric); ASB Hawaii, Inc. and its subsidiary, American Savings Bank, F.S.B.; Pacific Current, LLC and its subsidiaries, Hamakua Holdings, LLC (and its subsidiary, Hamakua Energy, LLC), Mauo, LLC and Mauo Holdings, LLC (and its subsidiary, Mauo, LLC);Ka‘ie‘ie Waho Company, LLC; and The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp.) |
| Consumer Advocate | | Division of Consumer Advocacy, Department of Commerce and Consumer Affairs of the State of Hawaii |
| D&O | | Decision and order from the PUC |
DER | | Distributed energy resources |
| Dodd-Frank Act | | Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 |
| DOH | | Department of Health of the State of Hawaii |
| DRIP | | HEI Dividend Reinvestment and Stock Purchase Plan |
| | |
| ECRC | | Energy cost recovery clause |
| EIP | | 2010 Equity and Incentive Plan, as amended and restated |
| EPA | | Environmental Protection Agency — federal |
| EPRM | | Exceptional Project Recovery Mechanism |
| EPS | | Earnings per share |
| ERP/EAM | | Enterprise Resource Planning/Enterprise Asset Management |
| ESG | | Environmental, Social & Governance |
| ESM | | Earnings Sharing Mechanism |
| EVE | | Economic value of equity |
| Exchange Act | | Securities Exchange Act of 1934 |
| FASB | | Financial Accounting Standards Board |
| FDIC | | Federal Deposit Insurance Corporation |
| federal | | U.S. Government |
| FHLB | | Federal Home Loan Bank |
| FHLMC | | Federal Home Loan Mortgage Corporation |
| FNMA | | Federal National Mortgage Association |
| FRB | | Federal Reserve Board |
| GAAP | | Accounting principles generally accepted in the United States of America |
| GNMA | | Government National Mortgage Association |
| Hamakua Energy | | Hamakua Energy, LLC, an indirect subsidiary of HEI and successor in interest to Hamakua Energy Partners, L.P., an affiliate of Arclight Capital Partners (a Boston-based private equity firm focused on energy infrastructure investments) and successor in interest to Encogen Hawaii, L.P. |
| Hawaii Electric Light | | Hawaii Electric Light Company, Inc., an electric utility subsidiary of Hawaiian Electric Company, Inc. |
GLOSSARY OF TERMS, continued
| | | | | | | | |
| Terms | | Definitions |
| Hawaiian Electric | | Hawaiian Electric Company, Inc., an electric utility subsidiary of Hawaiian Electric Industries, Inc. and parent company of Hawaii Electric Light Company, Inc., Maui Electric Company, Limited and Renewable Hawaii, Inc. Uluwehiokama Biofuels Corp. was dissolved effective as of July 14, 2020 |
| HEI | | Hawaiian Electric Industries, Inc., direct parent company of Hawaiian Electric Company, Inc., ASB Hawaii, Inc., Pacific Current, LLC and The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp.) |
| HEIRSP | | Hawaiian Electric Industries Retirement Savings Plan |
| HELOC | | Home equity line of credit |
| HPOWER | | City and County of Honolulu with respect to a power purchase agreement for a refuse-fired plant |
| IPP | | Independent power producer |
| Kalaeloa | | Kalaeloa Partners, L.P. |
| kWh | | Kilowatthour/s (as applicable) |
| LTIP | | Long-term incentive plan |
| Maui Electric | | Maui Electric Company, Limited, an electric utility subsidiary of Hawaiian Electric Company, Inc. |
| Mauo | | Mauo, LLC, an indirect subsidiary of HEI |
| MPIR | | Major Project Interim Recovery |
| MSR | | Mortgage servicing right |
| MW | | Megawatt/s (as applicable) |
| MRP | | Multi-year rate period |
| NII | | Net interest income |
| NPBC | | Net periodic benefit costs |
| NPPC | | Net periodic pension costs |
| O&M | | Other operation and maintenance |
| OCC | | Office of the Comptroller of the Currency |
| OPEB | | Postretirement benefits other than pensions |
| Pacific Current | | Pacific Current, LLC, a wholly owned subsidiary of HEI and parent company of Hamakua Holdings, LLC, Mauo, LLC, and Mauo Holdings,Ka‘ie‘ie Waho Company, LLC |
| PBR | | Performance-based regulation |
| PGV | | Puna Geothermal Venture |
| PIMs | | Performance incentive mechanisms |
| PPA | | Power purchase agreement |
| PPAC | | Purchased power adjustment clause |
| PUC | | Public Utilities Commission of the State of Hawaii |
| PV | | Photovoltaic |
| RAM | | Rate adjustment mechanism |
| RBA | | Revenue balancing account |
| REIP | | Renewable Energy Infrastructure Program |
| RFP | | Request for proposals |
| ROACE | | Return on average common equity |
| RORB | | Return on rate base |
| RPS | | Renewable portfolio standards |
| SEC | | Securities and Exchange Commission |
| See | | Means the referenced material is incorporated by reference |
| Tax Act | | 2017 Tax Cuts and Jobs Act (H.R. 1, An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018) |
| TDR | | Troubled debt restructuring |
| | |
| Utilities | | Hawaiian Electric Company, Inc., Hawaii Electric Light Company, Inc. and Maui Electric Company, Limited |
| VIE | | Variable interest entity |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report and other presentations made by Hawaiian Electric Industries, Inc. (HEI) and Hawaiian Electric Company, Inc. (Hawaiian Electric) and their subsidiaries contain “forward-looking statements,” which include statements that are predictive in nature, depend upon or refer to future events or conditions and usually include words such as “will,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “predicts,” “estimates” or similar expressions. In addition, any statements concerning future financial performance, ongoing business strategies or prospects or possible future actions are also forward-looking statements. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties and the accuracy of assumptions concerning HEI and its subsidiaries (collectively, the Company), the performance of the industries in which they do business and economic, political and market factors, among other things. These forward-looking statements are not guarantees of future performance and actual results and financial condition may differ materially from those indicated in the forward-looking statements.
Risks, uncertainties and other important factors that could cause actual results to differ materially from those described in forward-looking statements and from historical results include, but are not limited to, the following:
•international, national and local economic and political conditions—including the state of the Hawaii tourism, defense and construction industries; the strength or weakness of the Hawaii and continental U.S. real estate markets (including the fair value and/or the actual performance of collateral underlying loans held by ASB, which could result in higher loan loss provisions and write-offs); decisions concerning the extent of the presence of the federal government and military in Hawaii; the implications and potential impacts of future Federal government shutdowns, including the impact to our customers to pay their electric bills and/or bank loans and the impact on the state of Hawaii economy; the implications and potential impacts of U.S. and foreign capital and credit market conditions and federal, state and international responses to those conditions; the potential impacts of global and local developments (including global economic conditions and uncertainties, unrest, terrorist acts, wars, conflicts, political protests, deadly virus epidemic or other crisis); the effects of changes that have or may occur in U.S. policy, such as with respect to immigration and trade; and pandemics;
•the extent of the impact of the COVID-19 pandemic, including the duration, spread, severity and any recurrence of the COVID-19 pandemic, the duration and scope of related government orders and restrictions, the impact on our employees, customers and suppliers, and the impact of the COVID-19 pandemic on the overall demand for the Company’s goods and services;services, all of which could be affected by the pace of distribution, administration, and efficacy of COVID-19 vaccines over the short- and long-term, as well as the proportion of the population vaccinated;
•ability to adequately address risks and capitalize on opportunities related to our ESG priority areas, which currently include decarbonization, economic health and affordability, reliability and resilience, secure digitalization, diversity, equity and inclusion, employee engagement, and climate-related risks and opportunities;
•citizen activism, including civil unrest, especially in times of severe economic depression and social divisiveness, which could negatively impact customers and employees, impair the ability of the Company and the Utilities to operate and maintain its facilities in an effective and safe manner, and citizen activism and stakeholder activism could delay the construction, increase project costs or preclude the completion, of third-party or Utility projects that are required to meet electricity demand, reliability objectives and RPSrenewable portfolio standards (RPS) goals;
•the effects of future actions or inaction of the U.S. government or related agencies, including those related to the U.S. debt ceiling or budget funding, monetary policy, trade policy and tariffs, energy and environmental policy, and other policy and regulatory changes advanced or proposed by President TrumpBiden and his administration;
•weather, natural disasters (e.g., hurricanes, earthquakes, tsunamis, lightning strikes, lava flows and the increasing effects of climate change, such as more severe storms, flooding, droughts, heat waves, and rising sea levels) and wildfires, including their impact on the resilience and reliability of the Company’s and Utilities’ operations and the economy;
•the timing, speed and extent of changes in interest rates and the shape of the yield curve;curve, which could result in lower portfolio yields and net interest margin;
•the ability of the Company and the Utilities to access the credit and capital markets (e.g., to obtain commercial paper and other short-term and long-term debt financing, including lines of credit, and, in the case of HEI, to issue common stock) under volatile and challenging market conditions, and the cost of such financings, if available;
•the risks inherent in changes in the value of the Company’s pension and other retirement plan assets and ASB’s securities available for sale, and the risks inherent in changes in the value of the Company’s pension liabilities, including changes driven by interest rates;
•changes in laws, regulations (including tax regulations), market conditions, interest rates and other factors that result in changes in assumptions used to calculate retirement benefits costs and funding requirements;
•the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) and of the rules and regulations that the Dodd-Frank Act requires to be promulgated, as amended by the Economic Growth, Regulatory Relief and Consumer Protection Act;
•increasing competition in the banking industry (e.g., increased price competition for deposits, or an outflow of deposits to alternative investments, which may have an adverse impact on ASB’s cost of funds);
•the potential delay by the Public Utilities Commission of the State of Hawaii (PUC) in considering (and potential disapproval of actual or proposed) renewable energy proposals and related costs; reliance by the Utilities on outside parties such as the state, independent power producers (IPPs) and developers; and uncertainties surrounding technologies, solar power, wind power, biofuels, environmental assessments required to meet renewable portfolio standards (RPS) goals andRPS goals; the impacts of implementation of the renewable energy proposals on future costs of electricity;electricity and potential penalties imposed by the PUC for delays in the commercial operations of renewable energy projects;
•the ability of the Utilities to develop, implement and recover the costs of implementing the Utilities’ action plans included in their updated Power Supply Improvement Plans, Demand Response Portfolio Plan, Distributed Generation Interconnection
Plan, Grid Modernization Plans, and business model changes, which have been and are continuing to be developed and updated in response to the orders issued by the PUC, the PUC’s April 2014 statement of its inclinations on the future of Hawaii’s electric utilities and the vision, business strategies and regulatory policy changes required to align the Utilities’ business model with customer interests and the state’s public policy goals, and subsequent orders of the PUC;
•the ability of the Utilities to recover undepreciated cost of fossil fuel generating units, if they are retired before the end of their expected useful life;
•capacity and supply constraints or difficulties, especially if generating units (utility-owned or IPP-owned) fail or measures such as demand-side management, distributed generation, (DG), combined heat and power or other firm capacity supply-side resources fall short of achieving their forecasted benefits or are otherwise insufficient to reduce or meet peak demand;
•fuel oil price changes, delivery of adequate fuel by suppliers and the continued availability to the electric utilities of their energy cost recovery clauses (ECRCs);
•the continued availability to the electric utilities or modifications of other cost recovery mechanisms, including the purchased power adjustment clauses (PPACs), rate adjustment mechanisms (RAMs) and pension and postretirement benefits other than pensions (OPEB) tracking mechanisms, and the continued decoupling of revenues from sales to mitigate the effects of declining kilowatthour sales;
•the ability of the Utilities to recover increasing costs and earn a reasonable return on capital investments not covered by RAMs;the annual revenue adjustment (ARA);
•the ability of the Utilities to achieve performance incentive goals currently in place;
•the impact from the PUC’s implementation of performance-based ratemaking for the Utilities pursuant to Act 005, Session Laws 2018, including the potential addition of new performance incentive mechanisms (PIMs), third-party proposals adopted by the PUC in its implementation of performance-based regulation (PBR), and the implications of not achieving performance incentive goals;
•the impact of fuel price levels and volatility on customer satisfaction and political and regulatory support for the Utilities;
•the risks associated with increasing reliance on renewable energy, including the availability and cost of non-fossil fuel supplies for renewable energy generation and the operational impacts of adding intermittent sources of renewable energy to the electric grid;
•the growing risk that energy production from renewable generating resources may be curtailed and the interconnection of additional resources will be constrained as more generating resources are added to the Utilities’ electric systems and as customers reduce their energy usage;
•the ability of IPPs to deliver the firm capacity anticipated in their power purchase agreements (PPAs);
•the potential that, as IPP contracts near the end of their terms, there may be less economic incentive for the IPPs to make investments in their units to ensure the availability of their units;
•the ability of the Utilities to negotiate, periodically, favorable agreements for significant resources such as fuel supply contracts and collective bargaining agreements and avoid or mitigate labor disputes and work stoppages;
•new technological developments that could affect the operations and prospects of the Utilities and ASB or their competitors such as the commercial development of energy storage and microgrids and banking through alternative channels;
•cybersecurity risks and the potential for cyber incidents, including potential incidents at HEI, its third-party vendors, and its subsidiaries (including at ASB branches and electric utility plants) and incidents at data processing centers used, to the extent not prevented by intrusion detection and prevention systems, anti-virus software, firewalls and other general IT controls;
•failure to achieve remaining cost savings consistent withcommitment related to the minimum $246 million in Enterprise Resource Planning/Enterprise Asset Management (ERP/EAM) project-related benefits (including $150 million in operation and maintenance (O&M) benefits) to be delivered to customers over its 12-year estimated useful life and $25 million of annual cost reductions by the end of 2022 pursuant to a commitment made as a result of the management audit committed savings of Hawaiian Electric in its 2020 test year$33 million over the 2021 to 2025 multi-year rate case;period (MRP);
•federal, state, county and international governmental and regulatory actions, such as existing, new and changes in laws, rules and regulations applicable to HEI, the Utilities and ASB (including changes in taxation and tax rates, increases in capital requirements, regulatory policy changes, environmental laws and regulations (including resulting compliance costs and risks of fines and penalties and/or liabilities), the regulation of greenhouse gas emissions, governmental fees and assessments (such as Federal Deposit Insurance Corporation assessments), and potential carbon “cap and trade” legislation that may fundamentally alter costs to produce electricity and accelerate the move to renewable generation);
•developments in laws, regulations and policies governing protections for historic, archaeological and cultural sites, and plant and animal species and habitats, as well as developments in the implementation and enforcement of such laws, regulations and policies;
•discovery of conditions that may be attributable to historical chemical releases, including any necessary investigation and remediation, and any associated enforcement, litigation or regulatory oversight;
•decisions by the PUC in rate cases and other proceedings (including the risks of delays in the timing of decisions, adverse changes in final decisions from interim decisions and the disallowance of project costs as a result of adverse regulatory audit reports or otherwise);
•decisions by the PUC and by other agencies and courts on land use, environmental and other permitting issues (such as required corrective actions, restrictions and penalties that may arise, such as with respect to environmental conditions or RPS);
•potential enforcement actions by the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC) and/or other governmental authorities (such as consent orders, required
corrective actions, restrictions and penalties that may arise, for example, with respect to compliance deficiencies under existing or new banking and consumer protection laws and regulations or with respect to capital adequacy);
•the risks associated with the geographic concentration of HEI’s businesses and ASB’s loans, ASB’s concentration in a single product type (i.e., first mortgages) and ASB’s significant credit relationships (i.e., concentrations of large loans and/or credit lines with certain customers);
•changes in accounting principles applicable to HEI and its subsidiaries, including the adoption of new U.S. accounting standards, the potential discontinuance of regulatory accounting related to PBR or other regulatory changes, the effects of potentially required consolidation of variable interest entities (VIEs), or required capital/finance lease or on-balance-sheet operating lease accounting for PPAs with IPPs;
•downgrades by securities rating agencies in their ratings of the securities of HEI and Hawaiian Electric and their impact on results of financing efforts;
•faster than expected loan prepayments that can cause an acceleration of the amortization of premiums on loans and investments and the impairment of mortgage-servicing assets of ASB;
•changes in ASB’s loan portfolio credit profile and asset quality and/or mix, which may increase or decrease the required level of provision for credit losses, allowance for credit losses (ACL) and charge-offs;
•changes in ASB’s deposit cost or mix which may have an adverse impact on ASB’s cost of funds;
•unanticipated changes from the expected discontinuance of LIBOR and the transition to an alternative reference rate, which may include adverse impacts to the Company’s cost of capital, loan portfolio and interest income on loans;
•the final outcome of tax positions taken by HEI and its subsidiaries;
•the risks of suffering losses and incurring liabilities that are uninsured (e.g., damages to the Utilities’ transmission and distribution system and losses from business interruption) or underinsured (e.g., losses not covered as a result of insurance deductibles or other exclusions or exceeding policy limits);, and the risks associated with the operation of transmission and distribution assets and power generation facilities, including public and employee safety issues, and assets causing or contributing to wildfires;
•the ability of the Company’s non-regulated subsidiary, Pacific Current, LLC (Pacific Current), to achieve its performance and growth objectives, which in turn could affect its ability to service its non-recourse debt;
•the Company’s reliance on third parties and the risk of their non-performance, which has increased due to the impact from the COVID-19 pandemic; and
•other risks or uncertainties described elsewhere in this report and in other reports (e.g., “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K) previously and subsequently filed by HEI and/or Hawaiian Electric with the Securities and Exchange Commission.
Forward-looking statements speak only as of the date of the report, presentation or filing in which they are made. Except to the extent required by the federal securities laws, HEI, Hawaiian Electric, ASB, Pacific Current and their subsidiaries undertake no obligation to publicly update or revise any forward-looking statements, whether written or oral and whether as a result of new information, future events or otherwise.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Hawaiian Electric Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Income (unaudited)
| | | Three months ended June 30 | | | Six months ended June 30 | | | | | Three months ended March 31 |
| (in thousands, except per share amounts) | (in thousands, except per share amounts) | | 2020 | | 2019 | | 2020 | | 2019 | (in thousands, except per share amounts) | | | 2021 | | 2020 |
| Revenues | Revenues | | | | | | | | | Revenues | | | | | |
| Electric utility | Electric utility | | $ | 534,215 | | | $ | 633,784 | | | $ | 1,131,657 | | | $ | 1,212,279 | | Electric utility | | | $ | 564,864 | | | $ | 597,442 | |
| Bank | Bank | | 74,714 | | | 81,687 | | | 154,452 | | | 164,739 | | Bank | | | 77,131 | | | 79,738 | |
| Other | Other | | 16 | | | 14 | | | 22 | | | 82 | | Other | | | 951 | | | 6 | |
| Total revenues | Total revenues | | 608,945 | | | 715,485 | | | 1,286,131 | | | 1,377,100 | | Total revenues | | | 642,946 | | | 677,186 | |
| Expenses | Expenses | | | | | | | | | Expenses | | | | | |
| Electric utility | Electric utility | | 466,414 | | | 578,090 | | | 1,019,898 | | | 1,100,025 | | Electric utility | | | 495,750 | | | 553,484 | |
| Bank | Bank | | 66,221 | | | 60,435 | | | 126,556 | | | 117,365 | | Bank | | | 41,835 | | | 60,335 | |
| Other | Other | | 4,754 | | | 4,326 | | | 8,419 | | | 9,139 | | Other | | | 7,330 | | | 3,665 | |
| Total expenses | Total expenses | | 537,389 | | | 642,851 | | | 1,154,873 | | | 1,226,529 | | Total expenses | | | 544,915 | | | 617,484 | |
| Operating income (loss) | Operating income (loss) | | | | | | | | | Operating income (loss) | | | | | |
| Electric utility | Electric utility | | 67,801 | | | 55,694 | | | 111,759 | | | 112,254 | | Electric utility | | | 69,114 | | | 43,958 | |
| Bank | Bank | | 8,493 | | | 21,252 | | | 27,896 | | | 47,374 | | Bank | | | 35,296 | | | 19,403 | |
| Other | Other | | (4,738) | | | (4,312) | | | (8,397) | | | (9,057) | | Other | | | (6,379) | | | (3,659) | |
| Total operating income | Total operating income | | 71,556 | | | 72,634 | | | 131,258 | | | 150,571 | | Total operating income | | | 98,031 | | | 59,702 | |
| Retirement defined benefits expense—other than service costs | | (934) | | | (761) | | | (1,868) | | | (1,524) | | |
| Retirement defined benefits credit (expense)—other than service costs | | Retirement defined benefits credit (expense)—other than service costs | | | 2,435 | | | (934) | |
| Interest expense, net—other than on deposit liabilities and other bank borrowings | Interest expense, net—other than on deposit liabilities and other bank borrowings | | (22,613) | | | (23,533) | | | (44,388) | | | (46,656) | | Interest expense, net—other than on deposit liabilities and other bank borrowings | | | (23,736) | | | (21,775) | |
| Allowance for borrowed funds used during construction | Allowance for borrowed funds used during construction | | 752 | | | 1,179 | | | 1,440 | | | 2,257 | | Allowance for borrowed funds used during construction | | | 747 | | | 688 | |
| Allowance for equity funds used during construction | Allowance for equity funds used during construction | | 2,194 | | | 3,175 | | | 4,209 | | | 6,085 | | Allowance for equity funds used during construction | | | 2,191 | | | 2,015 | |
| Gain on sale of investment securities, net | Gain on sale of investment securities, net | | 9,275 | | | — | | | 9,275 | | | — | | Gain on sale of investment securities, net | | | 528 | | | 0 | |
| Income before income taxes | Income before income taxes | | 60,230 | | | 52,694 | | | 99,926 | | | 110,733 | | Income before income taxes | | | 80,196 | | | 39,696 | |
| Income taxes | Income taxes | | 10,870 | | | 9,709 | | | 16,673 | | | 21,587 | | Income taxes | | | 15,365 | | | 5,803 | |
| Net income | Net income | | 49,360 | | | 42,985 | | | 83,253 | | | 89,146 | | Net income | | | 64,831 | | | 33,893 | |
| Preferred stock dividends of subsidiaries | Preferred stock dividends of subsidiaries | | 473 | | | 473 | | | 946 | | | 946 | | Preferred stock dividends of subsidiaries | | | 473 | | | 473 | |
| Net income for common stock | Net income for common stock | | $ | 48,887 | | | $ | 42,512 | | | $ | 82,307 | | | $ | 88,200 | | Net income for common stock | | | $ | 64,358 | | | $ | 33,420 | |
| Basic earnings per common share | Basic earnings per common share | | $ | 0.45 | | | $ | 0.39 | | | $ | 0.75 | | | $ | 0.81 | | Basic earnings per common share | | | $ | 0.59 | | | $ | 0.31 | |
| Diluted earnings per common share | Diluted earnings per common share | | $ | 0.45 | | | $ | 0.39 | | | $ | 0.75 | | | $ | 0.81 | | Diluted earnings per common share | | | $ | 0.59 | | | $ | 0.31 | |
| | Weighted-average number of common shares outstanding | Weighted-average number of common shares outstanding | | 109,146 | | | 108,938 | | | 109,098 | | | 108,925 | | Weighted-average number of common shares outstanding | | | 109,221 | | | 109,051 | |
| Net effect of potentially dilutive shares | Net effect of potentially dilutive shares | | 159 | | | 317 | | | 276 | | | 399 | | Net effect of potentially dilutive shares | | | 271 | | | 314 | |
| Weighted-average shares assuming dilution | Weighted-average shares assuming dilution | | 109,305 | | | 109,255 | | | 109,374 | | | 109,324 | | Weighted-average shares assuming dilution | | | 109,492 | | | 109,365 | |
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 20192020 Form 10-K.
Hawaiian Electric Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (unaudited)
| | | | | Three months ended June 30 | | | Six months ended June 30 | | | | | Three months ended March 31 |
| (in thousands) | (in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | (in thousands) | | | 2021 | | 2020 |
| Net income for common stock | Net income for common stock | | $ | 48,887 | | | $ | 42,512 | | | $ | 82,307 | | | $ | 88,200 | | Net income for common stock | | | $ | 64,358 | | | $ | 33,420 | |
| Other comprehensive income (loss), net of taxes: | Other comprehensive income (loss), net of taxes: | | | | | | | | | Other comprehensive income (loss), net of taxes: | | | | | |
| Net unrealized gains on available-for-sale investment securities: | Net unrealized gains on available-for-sale investment securities: | | | | | | | | | Net unrealized gains on available-for-sale investment securities: | | | | | |
| Net unrealized gains on available-for-sale investment securities arising during the period, net of taxes of $356, $5,182, $7,476 and $8,637, respectively | | 973 | | | 14,154 | | | 20,421 | | | 23,593 | | |
| Reclassification adjustment for net realized gains included in net income, net of taxes of $(599), NaN, $(599) and NaN, respectively | | (1,638) | | | — | | | (1,638) | | | — | | |
| Net unrealized gains on available-for-sale investment securities arising during the period, net of taxes of $(16,616) and $7,120, respectively | | Net unrealized gains on available-for-sale investment securities arising during the period, net of taxes of $(16,616) and $7,120, respectively | | | (45,390) | | | 19,448 | |
| Reclassification adjustment for net realized gains included in net income, net of taxes of $(142) and NaN, respectively | | Reclassification adjustment for net realized gains included in net income, net of taxes of $(142) and NaN, respectively | | | (387) | | | 0 | |
| Derivatives qualifying as cash flow hedges: | Derivatives qualifying as cash flow hedges: | | | | | | | | | Derivatives qualifying as cash flow hedges: | | | | | |
| Unrealized interest rate hedging losses arising during the period, net of taxes of $(69), $(380), $(688) and $(520), respectively | | (198) | | | (660) | | | (1,982) | | | (1,063) | | |
| Unrealized interest rate hedging losses arising during the period, net of taxes of $542 and $(619), respectively | | Unrealized interest rate hedging losses arising during the period, net of taxes of $542 and $(619), respectively | | | 1,562 | | | (1,784) | |
| | Retirement benefit plans: | Retirement benefit plans: | | | | | | | | | Retirement benefit plans: | | | | | |
| Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of taxes of $1,981, $871, $3,967 and $1,741, respectively | | 5,690 | | | 2,503 | | | 11,396 | | | 5,006 | | |
| Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes of $(1,789), $(797), $(3,578) and $(1,594), respectively | | (5,159) | | | (2,298) | | | (10,317) | | | (4,596) | | |
| Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of taxes of $2,084 and $1,986, respectively | | Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of taxes of $2,084 and $1,986, respectively | | | 6,010 | | | 5,706 | |
| Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes of $(2,015) and $(1,789), respectively | | Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes of $(2,015) and $(1,789), respectively | | | (5,811) | | | (5,158) | |
| Other comprehensive income (loss), net of taxes | Other comprehensive income (loss), net of taxes | | (332) | | | 13,699 | | | 17,880 | | | 22,940 | | Other comprehensive income (loss), net of taxes | | | (44,016) | | | 18,212 | |
| Comprehensive income attributable to Hawaiian Electric Industries, Inc. | Comprehensive income attributable to Hawaiian Electric Industries, Inc. | | $ | 48,555 | | | $ | 56,211 | | | $ | 100,187 | | | $ | 111,140 | | Comprehensive income attributable to Hawaiian Electric Industries, Inc. | | | $ | 20,342 | | | $ | 51,632 | |
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 20192020 Form 10-K.
Hawaiian Electric Industries, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (unaudited)
| | (dollars in thousands) | (dollars in thousands) | | June 30, 2020 | | December 31, 2019 | (dollars in thousands) | | March 31, 2021 | | December 31, 2020 |
| Assets | Assets | | | | | Assets | | | | |
| Cash and cash equivalents | Cash and cash equivalents | | $ | 574,482 | | | $ | 196,813 | | Cash and cash equivalents | | $ | 277,579 | | | $ | 341,421 | |
| Restricted cash | Restricted cash | | 29,376 | | | 30,872 | | Restricted cash | | 14,067 | | | 17,558 | |
| Accounts receivable and unbilled revenues, net | Accounts receivable and unbilled revenues, net | | 271,314 | | | 300,794 | | Accounts receivable and unbilled revenues, net | | 273,197 | | | 281,216 | |
| Available-for-sale investment securities, at fair value | Available-for-sale investment securities, at fair value | | 1,389,633 | | | 1,232,826 | | Available-for-sale investment securities, at fair value | | 2,305,257 | | | 1,970,417 | |
| Held-to-maturity investment securities, at amortized cost | Held-to-maturity investment securities, at amortized cost | | 124,623 | | | 139,451 | | Held-to-maturity investment securities, at amortized cost | | 295,046 | | | 226,947 | |
| Stock in Federal Home Loan Bank, at cost | Stock in Federal Home Loan Bank, at cost | | 9,880 | | | 8,434 | | Stock in Federal Home Loan Bank, at cost | | 10,000 | | | 8,680 | |
| Loans held for investment, net | Loans held for investment, net | | 5,356,510 | | | 5,067,821 | | Loans held for investment, net | | 5,218,288 | | | 5,232,642 | |
| Loans held for sale, at lower of cost or fair value | Loans held for sale, at lower of cost or fair value | | 37,143 | | | 12,286 | | Loans held for sale, at lower of cost or fair value | | 23,637 | | | 28,275 | |
| Property, plant and equipment, net of accumulated depreciation of $2,840,462 and $2,765,569 at June 30, 2020 and December 31, 2019, respectively | | 5,181,427 | | | 5,109,628 | | |
| Property, plant and equipment, net of accumulated depreciation of $2,947,647 and $2,903,144 at March 31, 2021 and December 31, 2020, respectively | | Property, plant and equipment, net of accumulated depreciation of $2,947,647 and $2,903,144 at March 31, 2021 and December 31, 2020, respectively | | 5,283,768 | | | 5,265,735 | |
| Operating lease right-of-use assets | Operating lease right-of-use assets | | 184,759 | | | 199,171 | | Operating lease right-of-use assets | | 162,713 | | | 153,069 | |
| Regulatory assets | Regulatory assets | | 682,570 | | | 715,080 | | Regulatory assets | | 773,426 | | | 766,708 | |
| Other | Other | | 556,793 | | | 649,885 | | Other | | 639,505 | | | 629,149 | |
| Goodwill | Goodwill | | 82,190 | | | 82,190 | | Goodwill | | 82,190 | | | 82,190 | |
| Total assets | Total assets | | $ | 14,480,700 | | | $ | 13,745,251 | | Total assets | | $ | 15,358,673 | | | $ | 15,004,007 | |
| Liabilities and shareholders’ equity | Liabilities and shareholders’ equity | | | | | Liabilities and shareholders’ equity | | | | |
| Liabilities | Liabilities | | | | | Liabilities | | | | |
| Accounts payable | Accounts payable | | $ | 142,113 | | | $ | 220,633 | | Accounts payable | | $ | 164,936 | | | $ | 182,347 | |
| Interest and dividends payable | Interest and dividends payable | | 24,396 | | | 24,941 | | Interest and dividends payable | | 32,405 | | | 23,547 | |
| Deposit liabilities | Deposit liabilities | | 7,029,952 | | | 6,271,902 | | Deposit liabilities | | 7,745,294 | | | 7,386,957 | |
| Short-term borrowings—other than bank | Short-term borrowings—other than bank | | 131,180 | | | 185,710 | | Short-term borrowings—other than bank | | 100,242 | | | 129,379 | |
| Other bank borrowings | Other bank borrowings | | 124,975 | | | 115,110 | | Other bank borrowings | | 102,685 | | | 89,670 | |
| Long-term debt, net—other than bank | Long-term debt, net—other than bank | | 2,070,224 | | | 1,964,365 | | Long-term debt, net—other than bank | | 2,229,738 | | | 2,119,129 | |
| Deferred income taxes | Deferred income taxes | | 368,834 | | | 379,324 | | Deferred income taxes | | 380,365 | | | 395,089 | |
| Operating lease liabilities | Operating lease liabilities | | 191,058 | | | 199,571 | | Operating lease liabilities | | 175,334 | | | 160,432 | |
| Regulatory liabilities | Regulatory liabilities | | 977,780 | | | 972,310 | | Regulatory liabilities | | 956,139 | | | 959,786 | |
| | Defined benefit pension and other postretirement benefit plans liability | Defined benefit pension and other postretirement benefit plans liability | | 514,415 | | | 513,287 | | Defined benefit pension and other postretirement benefit plans liability | | 558,191 | | | 567,438 | |
| Other | Other | | 580,082 | | | 583,545 | | Other | | 557,758 | | | 618,438 | |
| Total liabilities | Total liabilities | | 12,155,009 | | | 11,430,698 | | Total liabilities | | 13,003,087 | | | 12,632,212 | |
| Preferred stock of subsidiaries - not subject to mandatory redemption | Preferred stock of subsidiaries - not subject to mandatory redemption | | 34,293 | | | 34,293 | | Preferred stock of subsidiaries - not subject to mandatory redemption | | 34,293 | | | 34,293 | |
| Commitments and contingencies (Notes 3 and 4) | Commitments and contingencies (Notes 3 and 4) | | Commitments and contingencies (Notes 3 and 4) | | 0 | | 0 |
| Shareholders’ equity | Shareholders’ equity | | | | | Shareholders’ equity | | | | |
| Preferred stock, 0 par value, authorized 10,000,000 shares; issued: NaN | Preferred stock, 0 par value, authorized 10,000,000 shares; issued: NaN | | — | | | — | | Preferred stock, 0 par value, authorized 10,000,000 shares; issued: NaN | | 0 | | | 0 | |
| Common stock, 0 par value, authorized 200,000,000 shares; issued and outstanding: 109,181,124 shares and 108,973,328 shares at June 30, 2020 and December 31, 2019, respectively | | 1,676,616 | | | 1,678,257 | | |
| Common stock, 0 par value, authorized 200,000,000 shares; issued and outstanding: 109,281,493 shares and 109,181,124 shares at March 31, 2021 and December 31, 2020, respectively | | Common stock, 0 par value, authorized 200,000,000 shares; issued and outstanding: 109,281,493 shares and 109,181,124 shares at March 31, 2021 and December 31, 2020, respectively | | 1,678,973 | | | 1,678,368 | |
| Retained earnings | Retained earnings | | 616,941 | | | 622,042 | | Retained earnings | | 687,600 | | | 660,398 | |
| Accumulated other comprehensive loss, net of tax benefits | Accumulated other comprehensive loss, net of tax benefits | | (2,159) | | | (20,039) | | Accumulated other comprehensive loss, net of tax benefits | | (45,280) | | | (1,264) | |
| Total shareholders’ equity | Total shareholders’ equity | | 2,291,398 | | | 2,280,260 | | Total shareholders’ equity | | 2,321,293 | | | 2,337,502 | |
| Total liabilities and shareholders’ equity | Total liabilities and shareholders’ equity | | $ | 14,480,700 | | | $ | 13,745,251 | | Total liabilities and shareholders’ equity | | $ | 15,358,673 | | | $ | 15,004,007 | |
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 20192020 Form 10-K.
Hawaiian Electric Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Shareholders’ Equity (unaudited)
| | | | | Common stock | | | Retained | | Accumulated
other
comprehensive | | | | | Common stock | | Retained | | Accumulated
other
comprehensive | | |
| (in thousands) | (in thousands) | | Shares | | Amount | | Earnings | | income (loss) | | Total | (in thousands) | | Shares | | Amount | | Earnings | | income (loss) | | Total |
| Balance, December 31, 2020 | | Balance, December 31, 2020 | | 109,181 | | | $ | 1,678,368 | | | $ | 660,398 | | | $ | (1,264) | | | $ | 2,337,502 | |
| Net income for common stock | | Net income for common stock | | — | | | — | | | 64,358 | | | — | | | 64,358 | |
| Other comprehensive income, net of taxes | | Other comprehensive income, net of taxes | | — | | | — | | | — | | | (44,016) | | | (44,016) | |
| Share-based expenses and other, net | | Share-based expenses and other, net | | 100 | | | 605 | | | — | | | — | | | 605 | |
| Common stock dividends (34¢ per share) | | Common stock dividends (34¢ per share) | | — | | | — | | | (37,156) | | | — | | | (37,156) | |
| Balance, March 31, 2021 | | Balance, March 31, 2021 | | 109,281 | | | $ | 1,678,973 | | | $ | 687,600 | | | $ | (45,280) | | | $ | 2,321,293 | |
| | Balance, December 31, 2019 | Balance, December 31, 2019 | | 108,973 | | | $ | 1,678,257 | | | $ | 622,042 | | | $ | (20,039) | | | $ | 2,280,260 | | Balance, December 31, 2019 | | 108,973 | | | $ | 1,678,257 | | | $ | 622,042 | | | $ | (20,039) | | | $ | 2,280,260 | |
Impact of adoption of ASU No. 2016-13 | Impact of adoption of ASU No. 2016-13 | | — | | | — | | | (15,372) | | | — | | | (15,372) | | Impact of adoption of ASU No. 2016-13 | | — | | | — | | | (15,372) | | | — | | | (15,372) | |
Balance, January 1, 2020 after adoption of
ASU No. 2016-13 | Balance, January 1, 2020 after adoption of
ASU No. 2016-13 | | 108,973 | | | 1,678,257 | | | 606,670 | | | (20,039) | | | 2,264,888 | | Balance, January 1, 2020 after adoption of
ASU No. 2016-13 | | 108,973 | | | 1,678,257 | | | 606,670 | | | (20,039) | | | 2,264,888 | |
| Net income for common stock | Net income for common stock | | — | | | — | | | 33,420 | | | — | | | 33,420 | | Net income for common stock | | — | | | — | | | 33,420 | | | — | | | 33,420 | |
| Other comprehensive income, net of taxes | Other comprehensive income, net of taxes | | — | | | — | | | — | | | 18,212 | | | 18,212 | | Other comprehensive income, net of taxes | | — | | | — | | | — | | | 18,212 | | | 18,212 | |
| Share-based expenses and other, net | Share-based expenses and other, net | | 172 | | | (3,996) | | | — | | | — | | | (3,996) | | Share-based expenses and other, net | | 172 | | | (3,996) | | | — | | | — | | | (3,996) | |
| Common stock dividends (33¢ per share) | Common stock dividends (33¢ per share) | | — | | | — | | | (36,019) | | | — | | | (36,019) | | Common stock dividends (33¢ per share) | | — | | | — | | | (36,019) | | | — | | | (36,019) | |
| Balance, March 31, 2020 | Balance, March 31, 2020 | | 109,145 | | | 1,674,261 | | | 604,071 | | | (1,827) | | | 2,276,505 | | Balance, March 31, 2020 | | 109,145 | | | $ | 1,674,261 | | | $ | 604,071 | | | $ | (1,827) | | | $ | 2,276,505 | |
| Net income for common stock | | — | | | — | | | 48,887 | | | — | | | 48,887 | | |
| Other comprehensive loss, net of tax benefits | | — | | | — | | | — | | | (332) | | | (332) | | |
| Share-based expenses and other, net | | 36 | | | 2,355 | | | — | | | — | | | 2,355 | | |
| Common stock dividends (33¢ per share) | | — | | | — | | | (36,017) | | | — | | | (36,017) | | |
| Balance, June 30, 2020 | | 109,181 | | | $ | 1,676,616 | | | $ | 616,941 | | | $ | (2,159) | | | $ | 2,291,398 | | |
| Balance, December 31, 2018 | | 108,879 | | | $ | 1,669,267 | | | $ | 543,623 | | | $ | (50,610) | | | $ | 2,162,280 | | |
| Net income for common stock | | — | | | — | | | 45,688 | | | — | | | 45,688 | | |
| Other comprehensive income, net of taxes | | — | | | — | | | — | | | 9,241 | | | 9,241 | | |
| Share-based expenses and other, net | | 58 | | | 1,166 | | | — | | | — | | | 1,166 | | |
| Common stock dividends 32¢ per share) | | — | | | — | | | (34,860) | | | — | | | (34,860) | | |
| Balance, March 31, 2019 | | 108,937 | | | 1,670,433 | | | 554,451 | | | (41,369) | | | 2,183,515 | | |
| Net income for common stock | | — | | | — | | | 42,512 | | | — | | | 42,512 | | |
| Other comprehensive income, net of taxes | | — | | | — | | | — | | | 13,699 | | | 13,699 | | |
| Share-based expenses and other, net | | 35 | | | 3,720 | | | — | | | — | | | 3,720 | | |
| Common stock dividends (32¢ per share) | | — | | | — | | | (34,860) | | | — | | | (34,860) | | |
| Balance, June 30, 2019 | | 108,972 | | | $ | 1,674,153 | | | $ | 562,103 | | | $ | (27,670) | | | $ | 2,208,586 | | |
| |
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 20192020 Form 10-K.
Hawaiian Electric Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
| | | Six months ended June 30 | | | Three months ended March 31 |
| (in thousands) | (in thousands) | | 2020 | | 2019 | (in thousands) | | 2021 | | 2020 |
| Cash flows from operating activities | Cash flows from operating activities | | | | | Cash flows from operating activities | | | | |
| Net income | Net income | | $ | 83,253 | | | $ | 89,146 | | Net income | | $ | 64,831 | | | $ | 33,893 | |
| Adjustments to reconcile net income to net cash provided by operating activities | Adjustments to reconcile net income to net cash provided by operating activities | | | | | Adjustments to reconcile net income to net cash provided by operating activities | | | | |
| Depreciation of property, plant and equipment | Depreciation of property, plant and equipment | | 119,367 | | | 114,863 | | Depreciation of property, plant and equipment | | 61,427 | | | 59,614 | |
| Other amortization | Other amortization | | 26,055 | | | 22,439 | | Other amortization | | 10,951 | | | 11,418 | |
| Provision for credit losses | Provision for credit losses | | 25,534 | | | 14,558 | | Provision for credit losses | | (8,435) | | | 10,401 | |
| Loans originated, held for sale | Loans originated, held for sale | | (277,738) | | | (96,033) | | Loans originated, held for sale | | (162,901) | | | (76,770) | |
| Proceeds from sale of loans, held for sale | Proceeds from sale of loans, held for sale | | 259,268 | | | 89,573 | | Proceeds from sale of loans, held for sale | | 170,862 | | | 72,533 | |
| Gain on sale of investment securities, net | Gain on sale of investment securities, net | | (9,275) | | | — | | Gain on sale of investment securities, net | | (528) | | | 0 | |
| Gain on sale of loans | Gain on sale of loans | | (8,252) | | | (1,589) | | Gain on sale of loans | | (4,300) | | | (2,000) | |
| Deferred income taxes | Deferred income taxes | | (21,565) | | | (6,662) | | Deferred income taxes | | (2,196) | | | (4,996) | |
| Share-based compensation expense | Share-based compensation expense | | 4,059 | | | 5,883 | | Share-based compensation expense | | 2,602 | | | 1,704 | |
| Allowance for equity funds used during construction | Allowance for equity funds used during construction | | (4,209) | | | (6,085) | | Allowance for equity funds used during construction | | (2,191) | | | (2,015) | |
| | Other | Other | | (3,854) | | | (4,929) | | Other | | (3,519) | | | 224 | |
| Changes in assets and liabilities | Changes in assets and liabilities | | | | | Changes in assets and liabilities | | | | |
| Decrease in accounts receivable and unbilled revenues, net | | 23,458 | | | 12,048 | | |
| Decrease (increase) in accounts receivable and unbilled revenues, net | | Decrease (increase) in accounts receivable and unbilled revenues, net | | 5,664 | | | (6,563) | |
| Decrease (increase) in fuel oil stock | Decrease (increase) in fuel oil stock | | 31,583 | | | (40,557) | | Decrease (increase) in fuel oil stock | | (16,400) | | | 2,566 | |
| Decrease in regulatory assets | | 9,432 | | | 25,392 | | |
| Decrease (increase) in regulatory assets | | Decrease (increase) in regulatory assets | | (14,869) | | | 1,171 | |
| Increase (decrease) in regulatory liabilities | Increase (decrease) in regulatory liabilities | | 1,717 | | | (3,403) | | Increase (decrease) in regulatory liabilities | | (4,716) | | | 16,586 | |
| Increase (decrease) in accounts, interest and dividends payable | | (48,336) | | | 3,926 | | |
| Increase in accounts, interest and dividends payable | | Increase in accounts, interest and dividends payable | | 7,677 | | | 8,935 | |
| Change in prepaid and accrued income taxes, tax credits and utility revenue taxes | Change in prepaid and accrued income taxes, tax credits and utility revenue taxes | | (12,306) | | | (45,977) | | Change in prepaid and accrued income taxes, tax credits and utility revenue taxes | | (25,513) | | | (45,205) | |
| Increase (decrease) in defined benefit pension and other postretirement benefit plans liability | | 16,312 | | | (1,774) | | |
| | Decrease in defined benefit pension and other postretirement benefit plans liability | | Decrease in defined benefit pension and other postretirement benefit plans liability | | (2,621) | | | (490) | |
| Change in other assets and liabilities | Change in other assets and liabilities | | (17,120) | | | (37,413) | | Change in other assets and liabilities | | (34,095) | | | (19,713) | |
| Net cash provided by operating activities | Net cash provided by operating activities | | 197,383 | | | 133,406 | | Net cash provided by operating activities | | 41,730 | | | 61,293 | |
| Cash flows from investing activities | Cash flows from investing activities | | | | | Cash flows from investing activities | | | | |
| Available-for-sale investment securities purchased | Available-for-sale investment securities purchased | | (476,582) | | | (4,530) | | Available-for-sale investment securities purchased | | (781,992) | | | (159,173) | |
| Principal repayments on available-for-sale investment securities | Principal repayments on available-for-sale investment securities | | 181,451 | | | 123,855 | | Principal repayments on available-for-sale investment securities | | 184,755 | | | 77,642 | |
| Proceeds from sale of available-for-sale investment securities | Proceeds from sale of available-for-sale investment securities | | 169,157 | | | — | | Proceeds from sale of available-for-sale investment securities | | 197,354 | | | 0 | |
| | Principal repayments of held-to-maturity investment securities | Principal repayments of held-to-maturity investment securities | | 15,093 | | | 4,774 | | Principal repayments of held-to-maturity investment securities | | 20,185 | | | 4,851 | |
| Purchases of held-to-maturity investment securities | | Purchases of held-to-maturity investment securities | | (88,262) | | | 0 | |
| Purchase of stock from Federal Home Loan Bank | Purchase of stock from Federal Home Loan Bank | | (22,966) | | | (53,115) | | Purchase of stock from Federal Home Loan Bank | | (22,296) | | | (20,766) | |
| Redemption of stock from Federal Home Loan Bank | Redemption of stock from Federal Home Loan Bank | | 21,520 | | | 54,640 | | Redemption of stock from Federal Home Loan Bank | | 20,976 | | | 19,440 | |
| Net increase in loans held for investment | Net increase in loans held for investment | | (328,356) | | | (173,546) | | Net increase in loans held for investment | | 23,922 | | | (65,544) | |
| | Proceeds from sale of low-income housing investments | Proceeds from sale of low-income housing investments | | 6,725 | | | — | | Proceeds from sale of low-income housing investments | | 0 | | | 6,725 | |
| Capital expenditures | Capital expenditures | | (197,816) | | | (229,282) | | Capital expenditures | | (74,079) | | | (125,554) | |
| | Contributions to low income housing investments | Contributions to low income housing investments | | (1,951) | | | (4,069) | | Contributions to low income housing investments | | (3,205) | | | (1,026) | |
| Other | Other | | 4,469 | | | 6,143 | | Other | | 4,622 | | | 2,942 | |
| Net cash used in investing activities | Net cash used in investing activities | | (629,256) | | | (275,130) | | Net cash used in investing activities | | (518,020) | | | (260,463) | |
| Cash flows from financing activities | Cash flows from financing activities | | | | | Cash flows from financing activities | | | | |
| Net increase in deposit liabilities | Net increase in deposit liabilities | | 758,050 | | | 98,531 | | Net increase in deposit liabilities | | 358,337 | | | 111,881 | |
| Net increase (decrease) in short-term borrowings with original maturities of three months or less | Net increase (decrease) in short-term borrowings with original maturities of three months or less | | (119,211) | | | 112,901 | | Net increase (decrease) in short-term borrowings with original maturities of three months or less | | 35,751 | | | (135,710) | |
| | Net increase (decrease) in other bank borrowings with original maturities of three months or less | | (20,135) | | | 1,445 | | |
| Net increase in other bank borrowings with original maturities of three months or less | | Net increase in other bank borrowings with original maturities of three months or less | | 13,015 | | | 42,495 | |
| Proceeds from issuance of short-term debt | Proceeds from issuance of short-term debt | | 165,000 | | | 25,000 | | Proceeds from issuance of short-term debt | | 0 | | | 50,000 | |
| Repayment of short-term debt | Repayment of short-term debt | | (100,000) | | | — | | Repayment of short-term debt | | (65,000) | | | 0 | |
| Proceeds from issuance of other bank borrowings | | 30,000 | | | — | | |
| | Proceeds from issuance of long-term debt | Proceeds from issuance of long-term debt | | 351,942 | | | 56,150 | | Proceeds from issuance of long-term debt | | 161,800 | | | 186,925 | |
| Repayment of long-term debt and funds transferred for repayment of long-term debt | | (177,245) | | | (52,489) | | |
| Repayment of long-term debt | | Repayment of long-term debt | | (50,699) | | | (909) | |
| Withheld shares for employee taxes on vested share-based compensation | Withheld shares for employee taxes on vested share-based compensation | | (5,700) | | | (996) | | Withheld shares for employee taxes on vested share-based compensation | | (1,997) | | | (5,700) | |
| | Common stock dividends | Common stock dividends | | (72,037) | | | (69,720) | | Common stock dividends | | (37,156) | | | (36,018) | |
| Preferred stock dividends of subsidiaries | Preferred stock dividends of subsidiaries | | (946) | | | (946) | | Preferred stock dividends of subsidiaries | | (473) | | | (473) | |
| Other | Other | | (1,672) | | | 1,189 | | Other | | (4,621) | | | (4,590) | |
| Net cash provided by financing activities | Net cash provided by financing activities | | 808,046 | | | 171,065 | | Net cash provided by financing activities | | 408,957 | | | 207,901 | |
| Net increase in cash, cash equivalents and restricted cash | | 376,173 | | | 29,341 | | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | | Net increase (decrease) in cash, cash equivalents and restricted cash | | (67,333) | | | 8,731 | |
| Cash, cash equivalents and restricted cash, beginning of period | Cash, cash equivalents and restricted cash, beginning of period | | 227,685 | | | 169,208 | | Cash, cash equivalents and restricted cash, beginning of period | | 358,979 | | | 227,685 | |
| Cash, cash equivalents and restricted cash, end of period | Cash, cash equivalents and restricted cash, end of period | | 603,858 | | | 198,549 | | Cash, cash equivalents and restricted cash, end of period | | 291,646 | | | 236,416 | |
| Less: Restricted cash | Less: Restricted cash | | (29,376) | | | — | | Less: Restricted cash | | (14,067) | | | (30,902) | |
| Cash and cash equivalents, end of period | Cash and cash equivalents, end of period | | $ | 574,482 | | | $ | 198,549 | | Cash and cash equivalents, end of period | | $ | 277,579 | | | $ | 205,514 | |
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 20192020 Form 10-K.
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidated Statements of Income (unaudited)
| | | Three months ended June 30 | | | Six months ended June 30 | | | | | Three months ended March 31 |
| (in thousands) | (in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | (in thousands) | | | 2021 | | 2020 |
| Revenues | Revenues | | $ | 534,215 | | | $ | 633,784 | | | $ | 1,131,657 | | | $ | 1,212,279 | | Revenues | | | $ | 564,864 | | | $ | 597,442 | |
| Expenses | Expenses | | | | | | | | | Expenses | | | | | |
| Fuel oil | Fuel oil | | 112,451 | | | 181,620 | | | 285,672 | | | 342,229 | | Fuel oil | | | 127,427 | | | 173,221 | |
| Purchased power | Purchased power | | 136,838 | | | 162,854 | | | 276,654 | | | 297,299 | | Purchased power | | | 142,296 | | | 139,816 | |
| Other operation and maintenance | Other operation and maintenance | | 110,041 | | | 119,260 | | | 237,588 | | | 237,390 | | Other operation and maintenance | | | 114,570 | | | 127,547 | |
| Depreciation | Depreciation | | 55,696 | | | 53,913 | | | 111,546 | | | 107,860 | | Depreciation | | | 57,355 | | | 55,850 | |
| Taxes, other than income taxes | Taxes, other than income taxes | | 51,388 | | | 60,443 | | | 108,438 | | | 115,247 | | Taxes, other than income taxes | | | 54,102 | | | 57,050 | |
| | Total expenses | Total expenses | | 466,414 | | | 578,090 | | | 1,019,898 | | | 1,100,025 | | Total expenses | | | 495,750 | | | 553,484 | |
| Operating income | Operating income | | 67,801 | | | 55,694 | | | 111,759 | | | 112,254 | | Operating income | | | 69,114 | | | 43,958 | |
| Allowance for equity funds used during construction | Allowance for equity funds used during construction | | 2,194 | | | 3,175 | | | 4,209 | | | 6,085 | | Allowance for equity funds used during construction | | | 2,191 | | | 2,015 | |
| Retirement defined benefits expense—other than service costs | | (382) | | | (701) | | | (763) | | | (1,404) | | |
| Retirement defined benefits credit (expense)—other than service costs | | Retirement defined benefits credit (expense)—other than service costs | | | 1,021 | | | (381) | |
| Interest expense and other charges, net | Interest expense and other charges, net | | (17,338) | | | (18,530) | | | (33,932) | | | (36,516) | | Interest expense and other charges, net | | | (17,983) | | | (16,594) | |
| Allowance for borrowed funds used during construction | Allowance for borrowed funds used during construction | | 752 | | | 1,179 | | | 1,440 | | | 2,257 | | Allowance for borrowed funds used during construction | | | 747 | | | 688 | |
| Income before income taxes | Income before income taxes | | 53,027 | | | 40,817 | | | 82,713 | | | 82,676 | | Income before income taxes | | | 55,090 | | | 29,686 | |
| Income taxes | Income taxes | | 10,199 | | | 7,744 | | | 15,481 | | | 16,978 | | Income taxes | | | 11,233 | | | 5,282 | |
| Net income | Net income | | 42,828 | | | 33,073 | | | 67,232 | | | 65,698 | | Net income | | | 43,857 | | | 24,404 | |
| Preferred stock dividends of subsidiaries | Preferred stock dividends of subsidiaries | | 229 | | | 229 | | | 458 | | | 458 | | Preferred stock dividends of subsidiaries | | | 229 | | | 229 | |
| Net income attributable to Hawaiian Electric | Net income attributable to Hawaiian Electric | | 42,599 | | | 32,844 | | | 66,774 | | | 65,240 | | Net income attributable to Hawaiian Electric | | | 43,628 | | | 24,175 | |
| Preferred stock dividends of Hawaiian Electric | Preferred stock dividends of Hawaiian Electric | | 270 | | | 270 | | | 540 | | | 540 | | Preferred stock dividends of Hawaiian Electric | | | 270 | | | 270 | |
| Net income for common stock | Net income for common stock | | $ | 42,329 | | | $ | 32,574 | | | $ | 66,234 | | | $ | 64,700 | | Net income for common stock | | | $ | 43,358 | | | $ | 23,905 | |
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 20192020 Form 10-K.
HEI owns all of the common stock of Hawaiian Electric. Therefore, per share data with respect to shares of common stock of Hawaiian Electric are not meaningful.
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (unaudited)
| | | | | Three months ended June 30 | | | Six months ended June 30 | | | | | Three months ended March 31 |
| (in thousands) | (in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | (in thousands) | | | 2021 | | 2020 |
| Net income for common stock | Net income for common stock | | $ | 42,329 | | | $ | 32,574 | | | $ | 66,234 | | | $ | 64,700 | | Net income for common stock | | | $ | 43,358 | | | $ | 23,905 | |
| Other comprehensive income (loss), net of taxes: | Other comprehensive income (loss), net of taxes: | | | | | | | | | Other comprehensive income (loss), net of taxes: | | | | | |
| | Retirement benefit plans: | Retirement benefit plans: | | | | | | | | | Retirement benefit plans: | | | | | |
| Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of taxes of $1,798, $805, $3,596 and $1,610, respectively | | 5,184 | | | 2,321 | | | 10,368 | | | 4,643 | | |
| Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes of $(1,789), $(797), $(3,578) and $(1,594), respectively | | (5,159) | | | (2,298) | | | (10,317) | | | (4,596) | | |
| Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of taxes of $2,027 and $1,798, respectively | | Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of taxes of $2,027 and $1,798, respectively | | | 5,845 | | | 5,184 | |
| Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes of $(2,015) and $(1,789), respectively | | Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes of $(2,015) and $(1,789), respectively | | | (5,811) | | | (5,158) | |
| Other comprehensive income, net of taxes | Other comprehensive income, net of taxes | | 25 | | | 23 | | | 51 | | | 47 | | Other comprehensive income, net of taxes | | | 34 | | | 26 | |
| Comprehensive income attributable to Hawaiian Electric Company, Inc. | Comprehensive income attributable to Hawaiian Electric Company, Inc. | | $ | 42,354 | | | $ | 32,597 | | | $ | 66,285 | | | $ | 64,747 | | Comprehensive income attributable to Hawaiian Electric Company, Inc. | | | $ | 43,392 | | | $ | 23,931 | |
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 20192020 Form 10-K.
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (unaudited)
| | (dollars in thousands, except par value) | (dollars in thousands, except par value) | | June 30, 2020 | | December 31, 2019 | (dollars in thousands, except par value) | | March 31, 2021 | | December 31, 2020 |
| Assets | Assets | | | | | Assets | | | | |
| Property, plant and equipment | Property, plant and equipment | | Property, plant and equipment | |
| Utility property, plant and equipment | Utility property, plant and equipment | | | | | Utility property, plant and equipment | | | | |
| Land | Land | | $ | 51,607 | | | $ | 51,816 | | Land | | $ | 51,611 | | | $ | 51,611 | |
| Plant and equipment | Plant and equipment | | 7,353,841 | | | 7,240,288 | | Plant and equipment | | 7,551,879 | | | 7,509,343 | |
| Less accumulated depreciation | Less accumulated depreciation | | (2,758,544) | | | (2,690,157) | | Less accumulated depreciation | | (2,859,719) | | | (2,819,079) | |
| Construction in progress | Construction in progress | | 214,487 | | | 193,074 | | Construction in progress | | 203,988 | | | 188,342 | |
| Utility property, plant and equipment, net | Utility property, plant and equipment, net | | 4,861,391 | | | 4,795,021 | | Utility property, plant and equipment, net | | 4,947,759 | | | 4,930,217 | |
| Nonutility property, plant and equipment, less accumulated depreciation of $113 and $111 as of June 30, 2020 and December 31, 2019, respectively | | 6,955 | | | 6,956 | | |
| Nonutility property, plant and equipment, less accumulated depreciation of $116 and $115 as of March 31, 2021 and December 31, 2020, respectively | | Nonutility property, plant and equipment, less accumulated depreciation of $116 and $115 as of March 31, 2021 and December 31, 2020, respectively | | 6,952 | | | 6,953 | |
| Total property, plant and equipment, net | Total property, plant and equipment, net | | 4,868,346 | | | 4,801,977 | | Total property, plant and equipment, net | | 4,954,711 | | | 4,937,170 | |
| Current assets | Current assets | | | | | Current assets | | | | |
| Cash and cash equivalents | Cash and cash equivalents | | 63,995 | | | 11,022 | | Cash and cash equivalents | | 51,743 | | | 47,360 | |
| Restricted cash | Restricted cash | | 29,376 | | | 30,872 | | Restricted cash | | 11,506 | | | 15,966 | |
| Customer accounts receivable, net | Customer accounts receivable, net | | 138,038 | | | 152,790 | | Customer accounts receivable, net | | 141,649 | | | 147,832 | |
| Accrued unbilled revenues, net | Accrued unbilled revenues, net | | 100,601 | | | 117,227 | | Accrued unbilled revenues, net | | 101,813 | | | 101,036 | |
| Other accounts receivable, net | Other accounts receivable, net | | 10,415 | | | 11,568 | | Other accounts receivable, net | | 5,073 | | | 7,673 | |
| Fuel oil stock, at average cost | Fuel oil stock, at average cost | | 60,479 | | | 91,937 | | Fuel oil stock, at average cost | | 74,688 | | | 58,238 | |
| Materials and supplies, at average cost | Materials and supplies, at average cost | | 66,244 | | | 60,702 | | Materials and supplies, at average cost | | 69,726 | | | 67,344 | |
| Prepayments and other | Prepayments and other | | 37,929 | | | 116,980 | | Prepayments and other | | 36,419 | | | 44,083 | |
| Regulatory assets | Regulatory assets | | 21,286 | | | 30,710 | | Regulatory assets | | 54,322 | | | 30,435 | |
| Total current assets | Total current assets | | 528,363 | | | 623,808 | | Total current assets | | 546,939 | | | 519,967 | |
| Other long-term assets | Other long-term assets | | | | | Other long-term assets | | | | |
| Operating lease right-of-use assets | Operating lease right-of-use assets | | 161,029 | | | 176,809 | | Operating lease right-of-use assets | | 138,534 | | | 127,654 | |
| Regulatory assets | Regulatory assets | | 661,284 | | | 684,370 | | Regulatory assets | | 719,104 | | | 736,273 | |
| | Other | Other | | 112,985 | | | 101,718 | | Other | | 135,620 | | | 136,309 | |
| Total other long-term assets | Total other long-term assets | | 935,298 | | | 962,897 | | Total other long-term assets | | 993,258 | | | 1,000,236 | |
| Total assets | Total assets | | $ | 6,332,007 | | | $ | 6,388,682 | | Total assets | | $ | 6,494,908 | | | $ | 6,457,373 | |
| Capitalization and liabilities | Capitalization and liabilities | | | | | Capitalization and liabilities | | | | |
| Capitalization | Capitalization | | | | | Capitalization | | | | |
Common stock ($6 2/3 par value, authorized 50,000,000 shares; outstanding 17,048,783 shares at June 30, 2020 and December 31, 2019) | | $ | 113,678 | | | $ | 113,678 | | |
Common stock ($6 2/3 par value, authorized 50,000,000 shares; outstanding 17,324,376 shares at March 31, 2021 and December 31, 2020) | | Common stock ($6 2/3 par value, authorized 50,000,000 shares; outstanding 17,324,376 shares at March 31, 2021 and December 31, 2020) | | $ | 115,515 | | | $ | 115,515 | |
| Premium on capital stock | Premium on capital stock | | 714,824 | | | 714,824 | | Premium on capital stock | | 746,987 | | | 746,987 | |
| Retained earnings | Retained earnings | | 1,232,795 | | | 1,220,129 | | Retained earnings | | 1,297,768 | | | 1,282,335 | |
| Accumulated other comprehensive loss, net of tax benefits-retirement benefit plans | Accumulated other comprehensive loss, net of tax benefits-retirement benefit plans | | (1,228) | | | (1,279) | | Accumulated other comprehensive loss, net of tax benefits-retirement benefit plans | | (2,885) | | | (2,919) | |
| Common stock equity | Common stock equity | | 2,060,069 | | | 2,047,352 | | Common stock equity | | 2,157,385 | | | 2,141,918 | |
| Cumulative preferred stock — not subject to mandatory redemption | Cumulative preferred stock — not subject to mandatory redemption | | 34,293 | | | 34,293 | | Cumulative preferred stock — not subject to mandatory redemption | | 34,293 | | | 34,293 | |
| Long-term debt, net | Long-term debt, net | | 1,560,955 | | | 1,401,714 | | Long-term debt, net | | 1,675,863 | | | 1,561,302 | |
| Total capitalization | Total capitalization | | 3,655,317 | | | 3,483,359 | | Total capitalization | | 3,867,541 | | | 3,737,513 | |
| Commitments and contingencies (Note 3) | Commitments and contingencies (Note 3) | | Commitments and contingencies (Note 3) | | 0 | | 0 |
| Current liabilities | Current liabilities | | | | | Current liabilities | | | | |
| Current portion of operating lease liabilities | Current portion of operating lease liabilities | | 64,534 | | | 63,707 | | Current portion of operating lease liabilities | | 66,301 | | | 64,730 | |
| Current portion of long-term debt, net | | 14,000 | | | 95,953 | | |
| | Short-term borrowings from non-affiliates | Short-term borrowings from non-affiliates | | 49,919 | | | 88,987 | | Short-term borrowings from non-affiliates | | 0 | | | 49,979 | |
| | Accounts payable | Accounts payable | | 107,078 | | | 187,770 | | Accounts payable | | 123,199 | | | 133,849 | |
| Interest and preferred dividends payable | Interest and preferred dividends payable | | 20,659 | | | 20,728 | | Interest and preferred dividends payable | | 28,172 | | | 20,350 | |
| Taxes accrued, including revenue taxes | Taxes accrued, including revenue taxes | | 193,851 | | | 207,992 | | Taxes accrued, including revenue taxes | | 155,125 | | | 192,524 | |
| Regulatory liabilities | Regulatory liabilities | | 26,067 | | | 30,724 | | Regulatory liabilities | | 30,370 | | | 37,301 | |
| Other | Other | | 71,691 | | | 67,305 | | Other | | 70,000 | | | 74,262 | |
| Total current liabilities | Total current liabilities | | 547,799 | | | 763,166 | | Total current liabilities | | 473,167 | | | 572,995 | |
| Deferred credits and other liabilities | Deferred credits and other liabilities | | | | | Deferred credits and other liabilities | | | | |
| Operating lease liabilities | Operating lease liabilities | | 102,570 | | | 113,400 | | Operating lease liabilities | | 84,102 | | | 69,494 | |
| Deferred income taxes | Deferred income taxes | | 371,052 | | | 377,150 | | Deferred income taxes | | 396,758 | | | 397,798 | |
| Regulatory liabilities | Regulatory liabilities | | 951,713 | | | 941,586 | | Regulatory liabilities | | 925,769 | | | 922,485 | |
| Unamortized tax credits | Unamortized tax credits | | 115,006 | | | 117,868 | | Unamortized tax credits | | 110,181 | | | 111,915 | |
| Defined benefit pension and other postretirement benefit plans liability | Defined benefit pension and other postretirement benefit plans liability | | 479,850 | | | 478,763 | | Defined benefit pension and other postretirement benefit plans liability | | 522,286 | | | 530,532 | |
| Other | Other | | 108,700 | | | 113,390 | | Other | | 115,104 | | | 114,641 | |
| Total deferred credits and other liabilities | Total deferred credits and other liabilities | | 2,128,891 | | | 2,142,157 | | Total deferred credits and other liabilities | | 2,154,200 | | | 2,146,865 | |
| | Total capitalization and liabilities | Total capitalization and liabilities | | $ | 6,332,007 | | | $ | 6,388,682 | | Total capitalization and liabilities | | $ | 6,494,908 | | | $ | 6,457,373 | |
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 20192020 Form 10-K.
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Common Stock Equity (unaudited)
| | | | | Common stock | | | Premium
on
capital | | Retained | | Accumulated
other
comprehensive | | | | | Common stock | | Premium
on
capital | | Retained | | Accumulated
other
comprehensive | | |
| (in thousands) | (in thousands) | | Shares | | Amount | | stock | | earnings | | income (loss) | | Total | (in thousands) | | Shares | | Amount | | stock | | earnings | | income (loss) | | Total |
| Balance, December 31, 2020 | | Balance, December 31, 2020 | | 17,324 | | | $ | 115,515 | | | $ | 746,987 | | | $ | 1,282,335 | | | $ | (2,919) | | | $ | 2,141,918 | |
| Net income for common stock | | Net income for common stock | | — | | | — | | | — | | | 43,358 | | | — | | | 43,358 | |
| Other comprehensive income, net of taxes | | Other comprehensive income, net of taxes | | — | | | — | | | — | | | — | | | 34 | | | 34 | |
| Common stock dividends | | Common stock dividends | | — | | | — | | | — | | | (27,925) | | | — | | | (27,925) | |
| | Balance, March 31, 2021 | | Balance, March 31, 2021 | | 17,324 | | | $ | 115,515 | | | $ | 746,987 | | | $ | 1,297,768 | | | $ | (2,885) | | | $ | 2,157,385 | |
| | Balance, December 31, 2019 | Balance, December 31, 2019 | | 17,048 | | | $ | 113,678 | | | $ | 714,824 | | | $ | 1,220,129 | | | $ | (1,279) | | | $ | 2,047,352 | | Balance, December 31, 2019 | | 17,048 | | | $ | 113,678 | | | $ | 714,824 | | | $ | 1,220,129 | | | $ | (1,279) | | | $ | 2,047,352 | |
| Net income for common stock | Net income for common stock | | — | | | — | | | — | | | 23,905 | | | — | | | 23,905 | | Net income for common stock | | — | | | — | | | — | | | 23,905 | | | — | | | 23,905 | |
| Other comprehensive income, net of taxes | Other comprehensive income, net of taxes | | — | | | — | | | — | | | — | | | 26 | | | 26 | | Other comprehensive income, net of taxes | | — | | | — | | | — | | | — | | | 26 | | | 26 | |
| Common stock dividends | Common stock dividends | | — | | | — | | | — | | | (26,784) | | | — | | | (26,784) | | Common stock dividends | | — | | | — | | | — | | | (26,784) | | | — | | | (26,784) | |
| | Balance, March 31, 2020 | Balance, March 31, 2020 | | 17,048 | | | 113,678 | | | 714,824 | | | 1,217,250 | | | (1,253) | | | 2,044,499 | | Balance, March 31, 2020 | | 17,048 | | | $ | 113,678 | | | $ | 714,824 | | | $ | 1,217,250 | | | $ | (1,253) | | | $ | 2,044,499 | |
| Net income for common stock | | — | | | — | | | — | | | 42,329 | | | — | | | 42,329 | | |
| Other comprehensive income, net of taxes | | — | | | — | | | — | | | — | | | 25 | | | 25 | | |
| Common stock dividends | | — | | | — | | | — | | | (26,784) | | | — | | | (26,784) | | |
| | Balance, June 30, 2020 | | 17,048 | | | $ | 113,678 | | | $ | 714,824 | | | $ | 1,232,795 | | | $ | (1,228) | | | $ | 2,060,069 | | |
| | Balance, December 31, 2018 | | 16,751 | | | $ | 111,696 | | | $ | 681,305 | | | $ | 1,164,541 | | | $ | 99 | | | $ | 1,957,641 | | |
| Net income for common stock | | — | | | — | | | — | | | 32,126 | | | — | | | 32,126 | | |
| Other comprehensive income, net of taxes | | — | | | — | | | — | | | — | | | 24 | | | 24 | | |
| Common stock dividends | | — | | | — | | | — | | | (25,313) | | | — | | | (25,313) | | |
| | Balance, March 31, 2019 | | 16,751 | | | 111,696 | | | 681,305 | | | 1,171,354 | | | 123 | | | 1,964,478 | | |
| Net income for common stock | | — | | | — | | | — | | | 32,574 | | | — | | | 32,574 | | |
| Other comprehensive income, net of taxes | | — | | | — | | | — | | | — | | | 23 | | | 23 | | |
| Common stock dividends | | — | | | — | | | — | | | (25,313) | | | — | | | (25,313) | | |
| | Balance, June 30, 2019 | | 16,751 | | | $ | 111,696 | | | $ | 681,305 | | | $ | 1,178,615 | | | $ | 146 | | | $ | 1,971,762 | | |
| |
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 20192020 Form 10-K.
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
| | | Six months ended June 30 | | | Three months ended March 31 |
| (in thousands) | (in thousands) | | 2020 | | 2019 | (in thousands) | | 2021 | | 2020 |
| Cash flows from operating activities | Cash flows from operating activities | | | | | Cash flows from operating activities | | | | |
| Net income | Net income | | $ | 67,232 | | | $ | 65,698 | | Net income | | $ | 43,857 | | | $ | 24,404 | |
| Adjustments to reconcile net income to net cash provided by operating activities | Adjustments to reconcile net income to net cash provided by operating activities | | | | | Adjustments to reconcile net income to net cash provided by operating activities | | | | |
| Depreciation of property, plant and equipment | Depreciation of property, plant and equipment | | 111,546 | | | 107,860 | | Depreciation of property, plant and equipment | | 57,355 | | | 55,850 | |
| Other amortization | Other amortization | | 16,275 | | | 13,661 | | Other amortization | | 6,577 | | | 7,704 | |
| Deferred income taxes | Deferred income taxes | | (16,237) | | | (6,611) | | Deferred income taxes | | (4,671) | | | (3,762) | |
| | State refundable credit | State refundable credit | | (5,060) | | | (4,192) | | State refundable credit | | (2,662) | | | (2,530) | |
| Bad debt expense | Bad debt expense | | 1,089 | | | 802 | | Bad debt expense | | 457 | | | 2,724 | |
| Allowance for equity funds used during construction | Allowance for equity funds used during construction | | (4,209) | | | (6,085) | | Allowance for equity funds used during construction | | (2,191) | | | (2,015) | |
| | Other | Other | | 116 | | | 639 | | Other | | (1) | | | 20 | |
| Changes in assets and liabilities | Changes in assets and liabilities | | | | | Changes in assets and liabilities | | | | |
| Decrease in accounts receivable | | 10,730 | | | 9,201 | | |
| Decrease in accrued unbilled revenues | | 15,780 | | | 2,581 | | |
| Decrease (increase) in accounts receivable | | Decrease (increase) in accounts receivable | | 6,078 | | | (9,020) | |
| Decrease (increase) in accrued unbilled revenues | | Decrease (increase) in accrued unbilled revenues | | (427) | | | 2,704 | |
| Decrease (increase) in fuel oil stock | Decrease (increase) in fuel oil stock | | 31,458 | | | (41,706) | | Decrease (increase) in fuel oil stock | | (16,450) | | | 2,410 | |
| Increase in materials and supplies | Increase in materials and supplies | | (5,542) | | | (5,890) | | Increase in materials and supplies | | (2,382) | | | (496) | |
| Decrease in regulatory assets | | 9,432 | | | 25,392 | | |
| Decrease (increase) in regulatory assets | | Decrease (increase) in regulatory assets | | (14,869) | | | 1,171 | |
| Increase (decrease) in regulatory liabilities | Increase (decrease) in regulatory liabilities | | 1,717 | | | (3,403) | | Increase (decrease) in regulatory liabilities | | (4,716) | | | 16,586 | |
| Decrease in accounts payable | | (48,209) | | | (45) | | |
| Increase (decrease) in accounts payable | | Increase (decrease) in accounts payable | | 6,254 | | | (7,153) | |
| Change in prepaid and accrued income taxes, tax credits and revenue taxes | Change in prepaid and accrued income taxes, tax credits and revenue taxes | | (14,700) | | | (45,785) | | Change in prepaid and accrued income taxes, tax credits and revenue taxes | | (24,802) | | | (43,919) | |
| Increase (decrease) in defined benefit pension and other postretirement benefit plans liability | | 14,968 | | | (1,899) | | |
| Decrease in defined benefit pension and other postretirement benefit plans liability | | Decrease in defined benefit pension and other postretirement benefit plans liability | | (1,434) | | | (1,017) | |
| Change in other assets and liabilities | Change in other assets and liabilities | | (4,918) | | | (9,402) | | Change in other assets and liabilities | | (14,012) | | | (4,520) | |
| Net cash provided by operating activities | Net cash provided by operating activities | | 181,468 | | | 100,816 | | Net cash provided by operating activities | | 31,961 | | | 39,141 | |
| Cash flows from investing activities | Cash flows from investing activities | | | | | Cash flows from investing activities | | | | |
| Capital expenditures | Capital expenditures | | (186,532) | | | (199,896) | | Capital expenditures | | (70,361) | | | (119,144) | |
| | Other | Other | | 5,441 | | | 2,510 | | Other | | 1,863 | | | 2,713 | |
| Net cash used in investing activities | Net cash used in investing activities | | (181,091) | | | (197,386) | | Net cash used in investing activities | | (68,498) | | | (116,431) | |
| Cash flows from financing activities | Cash flows from financing activities | | | | | Cash flows from financing activities | | | | |
| Common stock dividends | Common stock dividends | | (53,568) | | | (50,626) | | Common stock dividends | | (27,925) | | | (26,784) | |
| Preferred stock dividends of Hawaiian Electric and subsidiaries | Preferred stock dividends of Hawaiian Electric and subsidiaries | | (998) | | | (998) | | Preferred stock dividends of Hawaiian Electric and subsidiaries | | (499) | | | (499) | |
| Proceeds from issuance of short-term debt | Proceeds from issuance of short-term debt | | 100,000 | | | 25,000 | | Proceeds from issuance of short-term debt | | 0 | | | 50,000 | |
| Repayment of short-term debt | Repayment of short-term debt | | (100,000) | | | — | | Repayment of short-term debt | | (50,000) | | | 0 | |
| Proceeds from issuance of long-term debt | Proceeds from issuance of long-term debt | | 255,000 | | | 50,000 | | Proceeds from issuance of long-term debt | | 115,000 | | | 95,000 | |
| Repayment of long-term debt and funds transferred for repayment of long-term debt | | (109,000) | | | (51,546) | | |
| | Increase (decrease) in short-term borrowings from non-affiliates and affiliates with original maturities of three months or less | | (38,987) | | | 111,901 | | |
| Net decrease in short-term borrowings from non-affiliates and affiliates with original maturities of three months or less | | Net decrease in short-term borrowings from non-affiliates and affiliates with original maturities of three months or less | | 0 | | | (38,987) | |
| Other | Other | | (1,347) | | | 323 | | Other | | (116) | | | (23) | |
| Net cash provided by financing activities | Net cash provided by financing activities | | 51,100 | | | 84,054 | | Net cash provided by financing activities | | 36,460 | | | 78,707 | |
| Net increase (decrease) in cash and cash equivalents | Net increase (decrease) in cash and cash equivalents | | 51,477 | | | (12,516) | | Net increase (decrease) in cash and cash equivalents | | (77) | | | 1,417 | |
| Cash, cash equivalents and restricted cash, beginning of period | Cash, cash equivalents and restricted cash, beginning of period | | 41,894 | | | 35,877 | | Cash, cash equivalents and restricted cash, beginning of period | | 63,326 | | | 41,894 | |
| Cash, cash equivalents and restricted cash, end of period | Cash, cash equivalents and restricted cash, end of period | | 93,371 | | | 23,361 | | Cash, cash equivalents and restricted cash, end of period | | 63,249 | | | 43,311 | |
| Less: Restricted cash | Less: Restricted cash | | (29,376) | | | — | | Less: Restricted cash | | (11,506) | | | (30,902) | |
| Cash and cash equivalents, end of period | Cash and cash equivalents, end of period | | $ | 63,995 | | | $ | 23,361 | | Cash and cash equivalents, end of period | | $ | 51,743 | | | $ | 12,409 | |
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 20192020 Form 10-K.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 · Basis of presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) for interim financial information, the instructions to SEC Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In preparing the unaudited condensed consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenues and expenses for the period. Actual results could differ significantly from those estimates. The accompanying unaudited condensed consolidated financial statements and the following notes should be read in conjunction with the audited consolidated financial statements and the notes thereto in HEI’s and Hawaiian Electric’s Form 10-K for the year ended December 31, 2019.2020.
In the opinion of HEI’s and Hawaiian Electric’s management, the accompanying unaudited condensed consolidated financial statements contain all material adjustments required by GAAP to fairly state consolidated HEI’s and Hawaiian Electric’s financial positions as of June 30, 2020March 31, 2021 and December 31, 20192020 and the results of their operations for the three and six months ended June 30, 2020 and 2019 and cash flows for the sixthree months ended June 30, 2020March 31, 2021 and 2019.2020. All such adjustments are of a normal recurring nature, unless otherwise disclosed below or in other referenced material. Results of operations for interim periods are not necessarily indicative of results for the full year.
Recent accounting pronouncements.
Credit lossesIncome Taxes. In June 2016, theDecember 2019, Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments - Credit Losses2019-12, “Income Taxes (Topic 326)740): Measurement of Credit Losses on Financial Instruments,Simplifying the Accounting for Income Taxes,” which replacesremoves specific exceptions to the incurred loss methodology with an expected loss methodology. The new methodologygeneral principles in Topic 740, improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP under certain situations. ASU 2019-12 is referred to as the current expected credit loss (CECL) methodologyeffective for public business entities for fiscal years beginning after December 15, 2020, and applies to financial assets subject to credit losses and measured at amortized cost and certain off-balance sheet credit exposures. This includes, but is not limited to loans, loan commitments and held-to-maturity securities. In addition, ASU No. 2016-13 amends the accounting for credit losses on available-for-sale (AFS) debt securities and purchased financial assets with credit deterioration. The other-than-temporary impairment model of accounting for credit losses on AFS debt securities has been replaced with an estimate of expected credit losses only when the fair value is below the amortized cost of the asset. The length of time the fair value of an AFS debt security has been below the amortized cost will no longer impact the determination of whether a credit loss exists. The AFS debt security model requires the use of an allowance to record the estimated losses (and subsequent recoveries).
interim periods within those fiscal years. The Company adopted ASU No. 2016-13 on January 1, 2020 using the modified retrospective method with the cumulative effect of initially applying the amendments recognized in retained earningsASU as of January 1, 2020. The CECL models use a probability-of-default, loss given default and exposure at default methodology to estimate the expected credit losses. Within each model or calculation, loans are further segregated based on additional risk characteristics specific to that loan type, such as risk rating, FICO score, bankruptcy score, age of loan and collateral. The Company uses both internal and external historical data, as appropriate, and a blend of economic forecasts to estimate credit losses over a reasonable and supportable forecast period and then reverts to a longer-term historical loss experience to arrive at lifetime expected credit losses. The reversion period incorporates forward-looking expectations about repayments (including prepayments) as determined by the Company’s asset liability management system.
The allowance for credit losses (ACL) is a2021 with no material estimate of the Company. As a result of the change from an incurred loss model to a methodology that considers the credit loss over the expected life of the loan, on January 1, 2020, the Company recorded an adjustment of $21 million to increase the ACL, including a $2 million increase in the allowance for loan commitments, with a corresponding adjustment to reduce retained earnings by $15 million on an after-tax basis. The ACL is based on the composition, characteristics and quality of the loans and off balance sheet credit exposures as well as the prevailing economic conditions as of the adoption date. The increase in the ACL primarily relates to required reserves for residential mortgages and consumer loans, due to the requirement to estimate lifetime expected credit losses, with lower ACL requirements for commercial and commercial real estate loans due to their short-term nature. Based on the credit quality of the Company’s existing held-to-maturity and AFS investment securities portfolio, the Company did not recognize an ACL at adoption for those investments. The adoption of the new standard did not have a material impact to the Utilities’ customer and other accounts receivables and accrued unbilled revenue. Results for reporting periods beginning after January 1, 2020 are presented under ASU No. 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
The table below summarizes the impact of the Company’s adoption of ASU No. 2016-13.
| | | | | | | | | | | | | | | | | | | | |
| | January 1, 2020 | | | | |
| (in thousands) | | Pre-ASU No. 2016-13 adoption | | Impact of ASU No. 2016-13 | | As reported under ASU No. 2016-13 |
| HEI consolidated | | | | | | |
Loans held for investments, net1 | | $ | 5,067,821 | | | $ | (19,441) | | | $ | 5,048,380 | |
| Total assets | | $ | 13,745,251 | | | $ | (19,441) | | | $ | 13,725,810 | |
| Deferred income taxes | | $ | 379,324 | | | $ | (5,628) | | | $ | 373,696 | |
Other1 | | 583,545 | | | 1,559 | | | 585,104 | |
| Total liabilities | | 11,430,698 | | | (4,069) | | | 11,426,629 | |
| Retained earnings | | 622,042 | | | (15,372) | | | 606,670 | |
| Total shareholders’ equity | | 2,280,260 | | | (15,372) | | | 2,264,888 | |
| Total liabilities and shareholders’ equity | | $ | 13,745,251 | | | $ | (19,441) | | | $ | 13,725,810 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
1 The allowance for credit losses is classified in “Loans held for investments, net,” and the allowance for loan commitments is classified in “Other” liabilities in the Company’s condensed consolidated balance sheets.
Reference Rate Reform. In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 provides optional guidance for a limited period of time to ease the potential impacts of transitioning away from reference rates which are expected to be discontinued, such as the London Interbank Offered Rate (LIBOR). The amendments in this ASU apply only to contracts, hedging relationships, and other transactions which reference LIBOR or another reference rate expected to be discontinued. The guidance is effective upon issuance and generally can be applied through December 2022. The Company is evaluating the options provided by ASU 2020-04 and is evaluating the impact on its consolidated financial statements and related disclosures.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Note 2 · Segment financial information
| | (in thousands) | (in thousands) | | Electric utility | | Bank | | Other | | Total | (in thousands) | | Electric utility | | Bank | | Other | | Total |
| Three months ended June 30, 2020 | | | | | | | | | |
| | Three months ended March 31, 2021 | | Three months ended March 31, 2021 | | | | | | | | |
| Revenues from external customers | Revenues from external customers | | $ | 534,206 | | | $ | 74,714 | | | $ | 25 | | | $ | 608,945 | | Revenues from external customers | | $ | 564,855 | | | $ | 77,131 | | | $ | 960 | | | $ | 642,946 | |
| Intersegment revenues (eliminations) | Intersegment revenues (eliminations) | | 9 | | | — | | | (9) | | | — | | Intersegment revenues (eliminations) | | 9 | | | 0 | | | (9) | | | 0 | |
| Revenues | Revenues | | $ | 534,215 | | | $ | 74,714 | | | $ | 16 | | | $ | 608,945 | | Revenues | | $ | 564,864 | | | $ | 77,131 | | | $ | 951 | | | $ | 642,946 | |
| Income (loss) before income taxes | Income (loss) before income taxes | | $ | 53,027 | | | $ | 17,334 | | | $ | (10,131) | | | $ | 60,230 | | Income (loss) before income taxes | | $ | 55,090 | | | $ | 37,102 | | | $ | (11,996) | | | $ | 80,196 | |
| Income taxes (benefit) | Income taxes (benefit) | | 10,199 | | | 3,320 | | | (2,649) | | | 10,870 | | Income taxes (benefit) | | 11,233 | | | 7,546 | | | (3,414) | | | 15,365 | |
| Net income (loss) | Net income (loss) | | 42,828 | | | 14,014 | | | (7,482) | | | 49,360 | | Net income (loss) | | 43,857 | | | 29,556 | | | (8,582) | | | 64,831 | |
| Preferred stock dividends of subsidiaries | Preferred stock dividends of subsidiaries | | 499 | | | — | | | (26) | | | 473 | | Preferred stock dividends of subsidiaries | | 499 | | | 0 | | | (26) | | | 473 | |
| Net income (loss) for common stock | Net income (loss) for common stock | | $ | 42,329 | | | $ | 14,014 | | | $ | (7,456) | | | $ | 48,887 | | Net income (loss) for common stock | | $ | 43,358 | | | $ | 29,556 | | | $ | (8,556) | | | $ | 64,358 | |
| Six months ended June 30, 2020 | | | | | | | | | |
| Total assets (at March 31, 2021) | | Total assets (at March 31, 2021) | | $ | 6,494,908 | | | $ | 8,718,024 | | | $ | 145,741 | | | $ | 15,358,673 | |
| | Three months ended March 31, 2020 | | Three months ended March 31, 2020 | | | | | | | | |
| Revenues from external customers | Revenues from external customers | | $ | 1,131,636 | | | $ | 154,452 | | | $ | 43 | | | $ | 1,286,131 | | Revenues from external customers | | $ | 597,430 | | | $ | 79,738 | | | $ | 18 | | | $ | 677,186 | |
| Intersegment revenues (eliminations) | Intersegment revenues (eliminations) | | 21 | | | — | | | (21) | | | — | | Intersegment revenues (eliminations) | | 12 | | | 0 | | | (12) | | | 0 | |
| Revenues | Revenues | | $ | 1,131,657 | | | $ | 154,452 | | | $ | 22 | | | $ | 1,286,131 | | Revenues | | $ | 597,442 | | | $ | 79,738 | | | $ | 6 | | | $ | 677,186 | |
| Income (loss) before income taxes | Income (loss) before income taxes | | $ | 82,713 | | | $ | 36,303 | | | $ | (19,090) | | | $ | 99,926 | | Income (loss) before income taxes | | $ | 29,686 | | | $ | 18,969 | | | $ | (8,959) | | | $ | 39,696 | |
| Income taxes (benefit) | Income taxes (benefit) | | 15,481 | | | 6,528 | | | (5,336) | | | 16,673 | | Income taxes (benefit) | | 5,282 | | | 3,208 | | | (2,687) | | | 5,803 | |
| Net income (loss) | Net income (loss) | | 67,232 | | | 29,775 | | | (13,754) | | | 83,253 | | Net income (loss) | | 24,404 | | | 15,761 | | | (6,272) | | | 33,893 | |
| Preferred stock dividends of subsidiaries | Preferred stock dividends of subsidiaries | | 998 | | | — | | | (52) | | | 946 | | Preferred stock dividends of subsidiaries | | 499 | | | 0 | | | (26) | | | 473 | |
| Net income (loss) for common stock | Net income (loss) for common stock | | $ | 66,234 | | | $ | 29,775 | | | $ | (13,702) | | | $ | 82,307 | | Net income (loss) for common stock | | $ | 23,905 | | | $ | 15,761 | | | $ | (6,246) | | | $ | 33,420 | |
| Total assets (at June 30, 2020) | | $ | 6,332,007 | | | $ | 8,019,665 | | | $ | 129,028 | | | $ | 14,480,700 | | |
| Three months ended June 30, 2019 | | | | | | | | | |
| Revenues from external customers | | $ | 633,771 | | | $ | 81,687 | | | $ | 27 | | | $ | 715,485 | | |
| Intersegment revenues (eliminations) | | 13 | | | — | | | (13) | | | — | | |
| Revenues | | $ | 633,784 | | | $ | 81,687 | | | $ | 14 | | | $ | 715,485 | | |
| Income (loss) before income taxes | | $ | 40,817 | | | $ | 21,292 | | | $ | (9,415) | | | $ | 52,694 | | |
| Income taxes (benefit) | | 7,744 | | | 4,276 | | | (2,311) | | | 9,709 | | |
| Net income (loss) | | 33,073 | | | 17,016 | | | (7,104) | | | 42,985 | | |
| Preferred stock dividends of subsidiaries | | 499 | | | — | | | (26) | | | 473 | | |
| Net income (loss) for common stock | | $ | 32,574 | | | $ | 17,016 | | | $ | (7,078) | | | $ | 42,512 | | |
| Six months ended June 30, 2019 | | | | | | | | | |
| Revenues from external customers | | $ | 1,212,253 | | | $ | 164,739 | | | $ | 108 | | | $ | 1,377,100 | | |
| Intersegment revenues (eliminations) | | 26 | | | — | | | (26) | | | — | | |
| Revenues | | $ | 1,212,279 | | | $ | 164,739 | | | $ | 82 | | | $ | 1,377,100 | | |
| Income (loss) before income taxes | | $ | 82,676 | | | $ | 47,454 | | | $ | (19,397) | | | $ | 110,733 | | |
| Income taxes (benefit) | | 16,978 | | | 9,599 | | | (4,990) | | | 21,587 | | |
| Net income (loss) | | 65,698 | | | 37,855 | | | (14,407) | | | 89,146 | | |
| Preferred stock dividends of subsidiaries | | 998 | | | — | | | (52) | | | 946 | | |
| Net income (loss) for common stock | | $ | 64,700 | | | $ | 37,855 | | | $ | (14,355) | | | $ | 88,200 | | |
| Total assets (at December 31, 2019) | | $ | 6,388,682 | | | $ | 7,233,017 | | | $ | 123,552 | | | $ | 13,745,251 | | |
| Total assets (at December 31, 2020) | | Total assets (at December 31, 2020) | | $ | 6,457,373 | | | $ | 8,396,533 | | | $ | 150,101 | | | $ | 15,004,007 | |
Intercompany electricity sales of the Utilities to the bankASB and “other” segments are not eliminated because those segments would need to purchase electricity from another source if it were not provided by the Utilities and the profit on such sales is nominal.
Bank fees that ASB charges the Utilities and “other” segments are not eliminated because those segments would pay fees to another financial institution if they were to bank with another institution and the profit on such fees is nominal.
Hamakua Energy, LLC’s (Hamakua Energy’s) sales to Hawaii Electric Light (a regulated affiliate) are eliminated in consolidation.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Note 3 · Electric utility segment
Unconsolidated variable interest entities.
Power purchase agreements. As of June 30, 2020,March 31, 2021, the Utilities had 45 PPAs for firm capacity (excluding(including the Puna Geothermal VenturesVenture (PGV) PPA as PGV has beenwent offline sincein May 2018 due to lava flow on Hawaii Island)Island, but returned to service with firm capacity of 13 MW in the first quarter of 2021) and other PPAs with independent power producers (IPPs) and Schedule Q providers (i.e., customers with cogeneration and/or power production facilities who buy power from or sell power to the Utilities), none of which are currently required to be consolidated as VIEs.
Pursuant to the current accounting standards for VIEs, the Utilities are deemed to have a variable interest in Kalaeloa Partners, L.P. (Kalaeloa), AES Hawaii, Inc. (AES Hawaii) and Hamakua Energy by reason of the provisions of the PPA that the Utilities have with the 3 IPPs. However, management has concluded that the Utilities are not the primary beneficiary of Kalaeloa, AES Hawaii and Hamakua Energy because the Utilities do not have the power to direct the activities that most significantly impact the 3 IPPs’ economic performance nor the obligation to absorb their expected losses, if any, that could potentially be significant to the IPPs. Thus, the Utilities have not consolidated Kalaeloa, AES Hawaii and Hamakua Energy in its condensed consolidated financial statements. Hamakua Energy is an indirect subsidiary of Pacific Current and is consolidated in HEI’s condensed consolidated financial statements.
For the other PPAs with IPPs, the Utilities have concluded that the consolidation of the IPPs was not required because either the Utilities do not have variable interests in the IPPs due to the absence of an obligation in the PPAs for the Utilities to absorb any variability of the IPPs, or the IPP was considered a “governmental organization,” and thus excluded from the scope of accounting standards for VIEs. NaN IPPs of as-available energy declined to provide the information necessary for Utilities to determine the applicability of accounting standards for VIEs. If information is ultimately received from the IPPs, a possible outcome of future analyses of such information is the consolidation of 1 or both of such IPPs in the unaudited condensed consolidated financial statements. The consolidation of any significant IPP could have a material effect on the unaudited condensed consolidated financial statements, including the recognition of a significant amount of assets and liabilities and, if such a consolidated IPP were operating at a loss and had insufficient equity, the potential recognition of such losses. If the Utilities determine they are required to consolidate the financial statements of such an IPP and the consolidation has a material effect, the Utilities would retrospectively apply accounting standards for VIEs to the IPP.
Commitments and contingencies.
Contingencies. The Utilities are subject in the normal course of business to pending and threatened legal proceedings. Management does not anticipate that the aggregate ultimate liability arising out of these pending or threatened legal proceedings will be material to its financial position. However, the Utilities cannot rule out the possibility that such outcomes could have a material effect on the results of operations or liquidity for a particular reporting period in the future.
Power purchase agreements. Purchases from all IPPs were as follows:
| | | | | Three months ended June 30 | | | Six months ended June 30 | | | | | Three months ended March 31 | |
| (in millions) | (in millions) | | 2020 | | 2019 | | 2020 | | 2019 | | (in millions) | | | 2021 | | 2020 | |
| Kalaeloa | Kalaeloa | | $ | 34 | | | $ | 61 | | | $ | 72 | | | $ | 101 | | | Kalaeloa | | | $ | 37 | | | $ | 38 | | |
| AES Hawaii | AES Hawaii | | 32 | | | 32 | | | 63 | | | 64 | | | AES Hawaii | | | 30 | | | 31 | | |
| HPOWER | HPOWER | | 17 | | | 19 | | | 34 | | | 37 | | | HPOWER | | | 17 | | | 17 | | |
| | Hamakua Energy | Hamakua Energy | | 11 | | | 18 | | | 24 | | | 34 | | | Hamakua Energy | | | 11 | | | 13 | | |
| Puna Geothermal Venture | | Puna Geothermal Venture | | | 4 | | | 0 | | |
| Wind IPPs | Wind IPPs | | 25 | | | 23 | | | 53 | | | 43 | | | Wind IPPs | | | 29 | | | 28 | | |
| Solar IPPs | Solar IPPs | | 17 | | | 8 | | | 28 | | | 15 | | | Solar IPPs | | | 12 | | | 11 | | |
Other IPPs 1 | Other IPPs 1 | | 1 | | | 1 | | | 3 | | | 2 | | | Other IPPs 1 | | | 2 | | | 2 | | |
| Total IPPs | Total IPPs | | $ | 137 | | | $ | 162 | | | $ | 277 | | | $ | 296 | | | Total IPPs | | | $ | 142 | | | $ | 140 | | |
1Includes hydro power and other PPAs
Kalaeloa Partners, L.P. Under a 1988 PPA, as amended, Hawaiian Electric is committed to purchase 208 MW of firm capacity from Kalaeloa. Hawaiian Electric and Kalaeloa are currently incontinue negotiations to address the PPA term that ended on May 23, 2016. The PPA automatically extends on a month-to-month basis as long as the parties are still negotiating in good faith. Hawaiian Electric and Kalaeloa have agreed that neither party will terminate the PPA (which has been subject to automatic extension on a month-to-month basis) prior to November 20, 2020,May 31, 2021, to allow for a negotiated resolution and PUC approval.resolution.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
AES Hawaii, Inc. Under a PPA entered into in March 1988, as amended (through Amendment No. 2) for a period of 30 years ending September 2022, Hawaiian Electric agreed to purchase 180 MW of firm capacity from AES Hawaii. Hawaiian
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Electric and AES Hawaii have been in dispute over an additional 9 MW of capacity. In February 2018, Hawaiian Electric reached agreement with AES Hawaii on an amendment to the PPA. However, in June 2018, the PUC issued an order suspending review of the amendment pending a Department of Health of the State of Hawaii (DOH) decision on AES Hawaii’s request for approval of its Emission Reduction Plan and partnership with Hawaiian Electric. If approved by the PUC, the amendment will resolve AES Hawaii’s claims related to the additional capacity.
Hu Honua Bioenergy, LLC (Hu Honua). In May 2012, Hawaii Electric Light signed a PPA, which the PUC approved in December 2013, with Hu Honua for 21.5 MW of renewable, dispatchable firm capacity fueled by locally grown biomass from a facility on the island of Hawaii. Under the terms of the PPA, the Hu Honua plant was scheduled to be in service in 2016. However, Hu Honua encountered construction and litigation delays, which resulted in an amended and restated PPA between Hawaii Electric Light and Hu Honua dated May 9, 2017. In July 2017, the PUC approved the amended and restated PPA, which becomes effective once the PUC’s order is final and non-appealable. In August 2017, the PUC’s approval was appealed by a third party. On May 10, 2019, the Hawaii Supreme Court issued a decision remanding the matter to the PUC for further proceedings consistent with the court’s decision which must include express consideration of Green House Gasgreenhouse gas (GHG) emissions that would result from approving the PPA, whether the cost of energy under the PPA is reasonable in light of the potential for GHG emissions, and whether the terms of the PPA are prudent and in the public interest, in light of its potential hidden and long-term consequences. On June 20, 2019, the PUC issued an order reopening the docket for further proceedings, including re-examining all of the issues in the proceedings. On September 29, 2019, the PUC issued an order setting the procedural schedule for the matter and on December 20, 2019, issued an order modifying the procedural schedule. Pre-hearing matters were completed on March 6, 2020. On July 9, 2020, the PUC issued an order denying the Hawaii Electric Light’s request to waive the amended and restated PPA from the PUC’s competitive bidding requirements and therefore, dismissed the request for approval of the amended and restated PPA without prejudice to possible participation in any future competitive bidding process. On July 20, 2020, Hu Honua filed a motion for reconsideration of the PUC’s order which is currently pending reviewwas denied by the PUC.PUC on September 9, 2020. On September 16, 2020, Hu Honua filed its notice of appeal to the Hawaii Supreme Court of the PUC’s order denying Hu Honua’s motion for reconsideration. Oral arguments were held before the Supreme Court on April 22, 2021.
Molokai New Energy Partners (MNEP). In July 2018, the PUC approved Maui Electric’s PPA with MNEP to purchase solar energy from a photovoltaic (PV) plus battery storage project. The 4.88 MW PV and 3 MW Battery Energy Storage System project was to deliver no more than 2.64 MW at any time to the Molokai system. On March 25, 2020, MNEP filed a complaint in the United Stated District Court for the District of Hawaii against Maui Electric claiming breach of contract. On June 3, 2020, Maui Electric provided Notice of Default and Termination of the PPA to MNEP terminating the PPA with an effective date of July 10, 2020. Thereafter, MNEP filed an amended Complaint to include claims relating to the termination and Hawaiian Electric filed its Answer to the Amended Complaint on September 11, 2020, disputing the facts presented by MNEP and all claims within the original and amended complaint.
Utility projects. Many public utility projects require PUC approval and various permits from other governmental agencies. Difficulties in obtaining, or the inability to obtain, the necessary approvals or permits or community support can result in significantly increased project costs or even cancellation of projects. In the event a project does not proceed, or if it becomes probable the PUC will disallow cost recovery for all or part of a project, or if PUC-imposed caps on project costs are expected to be exceeded, project costs may need to be written off in amounts that could result in significant reductions in Hawaiian Electric’s consolidated net income.
Enterprise Resource Planning/Enterprise Asset Management (ERP/EAM) implementation project. The ERP/EAM Implementation Project went live in October 2018. Starting in January 2020, Hawaii Electric Light and Hawaiian Electric began to incorporate their portion of the deferred project costs in rate base and startstarted the amortization over a 12-year period. Asperiod in January 2020 and November 2020, respectively. The PUC required the benefit savings of June 30, 2020, the total deferred project costs and accrued carrying costs after the project went into service amounted to $59.4 million, which is net of the amortization of $0.3 million at Hawaii Electric Light.be passed on to customers.
In February 2019, the PUC approved a methodology for passing the future cost saving benefits of the new ERP/EAM system to customers developed by the Utilities in collaboration with the Consumer Advocate. The Utilities filed a benefits clarification document on June 10, 2019, reflecting $150 million in future net O&M expense reductions and cost avoidance, and $96 million in capital cost reductions and tax savings over the 12-year service life. To the extent the reduction in O&M expense relates to amounts reflected in electric rates, the Utilities would reduce future rates for such amounts. In October 2019, the PUC approved the Utilities and the Consumer Advocate’s Stipulated Performance Metrics and Tracking Mechanism. As of June 30, 2020,March 31, 2021, the Utilities’ regulatory liability was $7.2$11.2 million ($6.5 million for amountsHawaiian Electric, $1.9 million for Hawaii Electric Light and $2.8 million for Maui Electric) for the O&M expense savings that are being amortized or to be returnedincluded in future rates. As part of the settlement agreement approved in the Hawaiian Electric 2020 test year rate case, the regulatory liability for Hawaiian Electric will be amortized over five years, beginning in November 2020, and the O&M benefits for Hawaiian Electric will be considered flowed through to customers. As part of the PBR proceeding, the regulatory liability as of
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December 31, 2020 of approximately $1.6 million and $2.3 million, respectively, for Hawaii Electric Light and Maui Electric will be flowed to customers for reductionas part of the customer dividend in O&M expense includedthe annual revenue adjustment in rates.2021.
At the PUC’s direction, the Utilities have been filing Semi-Annual Enterprise System Benefits (SAESB) reports.reports on the achieved benefits savings. The most recent SAESB report was filed on February 26, 20202021 for the period July 1 through December 31, 2019.2020.
Environmental regulation. The Utilities are subject to environmental laws and regulations that regulate the operation of existing facilities, the construction and operation of new facilities and the proper cleanup and disposal of hazardous waste and toxic substances.
Hawaiian Electric, Hawaii Electric Light and Maui Electric, like other utilities, periodically encounter petroleum or other chemical releases associated with current or previous operations. The Utilities report and take action on these releases when and as required by applicable law and regulations. The Utilities believe the costs of responding to such releases identified to date will not have a material effect, individually or in the aggregate, on Hawaiian Electric’s consolidated results of operations, financial condition or liquidity.
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Former Molokai Electric Company generation site. In 1989, Maui Electric acquired Molokai Electric Company. Molokai Electric Company had sold its former generation site (Site) in 1983, but continued to operate at the Site under a lease until 1985. The federal Environmental Protection Agency (EPA) has since identified environmental impacts in the subsurface soil at the Site. In cooperation with the DOH and EPA, Maui Electric further investigated the Site and the Adjacent Parcel to determine the extent of impacts of polychlorinated biphenyls (PCBs), residual fuel oils and other subsurface contaminants. Maui Electric has a reserve balance of $2.7 million as of June 30, 2020,March 31, 2021, representing the probable and reasonably estimable undiscounted cost for remediation of the Site and the Adjacent Parcel; however, final costs of remediation will depend on the cleanup approach implemented.
Pearl Harbor sediment study. In July 2014, the U.S. Navy notified Hawaiian Electric of the Navy’s determination that Hawaiian Electric is a Potentially Responsible Party responsible for the costs of investigation and cleanup of PCBPCBs contamination in sediment in the area offshore of the Waiau Power Plant as part of the Pearl Harbor Superfund Site. Hawaiian Electric was also required by the EPA to assess potential sources and extent of PCB contamination onshore at Waiau Power Plant.
As of June 30, 2020,March 31, 2021, the reserve account balance recorded by Hawaiian Electric to address the PCB contamination was $4.8$9.8 million. The reserve balance represents the probable and reasonably estimable undiscounted cost for the onshore and offshore investigation and the remediation of PCB contamination in the offshore sediment.remediation. The final remediation costs will depend on the potentialactual onshore source control requirements and actual offshore cleanup costs.
Regulatory proceedings
DecouplingCurrent decoupling. Decoupling is a regulatory model that is intended to provide the Utilities with financial stability and facilitate meeting the State of Hawaii’s goals to transition to a clean energy economy and achieve an aggressive renewable portfolio standard. The current decoupling mechanism has the following major components: (1) monthly revenue balancing account (RBA) revenues or refunds for the difference between PUC-approved target revenues and recorded adjusted revenues, which delinks revenues from kilowatthourkWh sales, (2) rate adjustment mechanism (RAM) revenues for escalation in certain O&M expenses and rate base changes, (3) major project interim recovery (MPIR) component, (4) performance incentive mechanisms (PIMs), and (5) an earnings sharing mechanism, which would provide for a reduction of revenues between rate cases in the event the utility exceeds the return on average common equity (ROACE) allowed in its most recent rate case.
Performance-based regulation framework. On December 23, 2020, the PUC issued a D&O (PBR D&O) approving a new performance-based regulation framework (PBR Framework). Under the PBR Framework, the Utilities’ current decoupling will continue to be used with modifications, as described below. The requirement for triennial general rate cases underexisting cost recovery mechanisms will continue as currently implemented (e.g., the decoupling mechanism was terminatedEnergy Cost Recovery Clause (ECRC), Purchased Power Adjustment Clause (PPAC), Demand Side Management surcharge (DSM), Renewable Energy Infrastructure Program (REIP), Demand Response Adjustment Clause (DRAC), Pension and Other Post-Employment Benefits (OPEB) tracking mechanisms). In addition to annual revenues provided by the annual revenue adjustment (ARA), the Utilities may seek relief for extraordinary projects or programs through the Exceptional Project Recovery Mechanism (EPRM) (formerly known as the Major Project Interim Recovery (MPIR) adjustment mechanism) and earn financial rewards for exemplary performance as provided through a portfolio of Performance Incentive Mechanisms (PIMs) and Shared Savings Mechanisms (SSMs). The PBR Framework will incorporate a variety of other performance mechanisms, including Scorecards, Reported Metrics, and an expedited Pilot Process. The PBR Framework also contains a number of safeguards, including a symmetric Earnings Sharing Mechanism (ESM) which protects the Utilities and customers from excessive earnings or losses, as measured by the Utilities’ Return on Equity (ROE) and a Re-Opener
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mechanism, under which the PUC will open an examination, at its discretion, to determine if adjustments or modifications to specific PBR mechanisms are appropriate.
Subsequent to the issuance of the PBR D&O, the PUC has initiated a collaborative process during which working groups consisting of the PUC, the Utilities and other parties have addressed the development of the proposed PBR implementation tariffs and the final details of the Prioritized Performance Mechanisms (i.e., Interconnection Approval PIM, Low-to-Moderate Income (LMI) Energy Efficiency PIM, Advanced Metering Infrastructure (AMI) Utilization PIM and the portfolio of Scorecards and Reported Metrics). The Utilities and other parties filed their refined proposals addressing the Prioritized Performance Mechanisms on March 16, 2021 and April 29, 2020.9, 2021. An order addressing the Prioritized Performance Mechanisms is expected to be issued in May 2021. Written tariffs to implement the PBR Framework have been either approved (see below) or will be submitted for PUC approval in May 2021 and expected to go into effect June 1, 2021.
Rate adjustment mechanism. The existing RAM is based on the lesser of: a) an inflationary adjustment for certain O&M expenses and return on investment for certain rate base changes, or b) cumulative annual compounded increase in Gross Domestic Product Price Index applied to annualized target revenues (the RAM Cap). Annualized target revenues may be reset upon the issuance of an interim or final decision and order (D&O) in a rate case. All Utilities were limited to the RAM Cap in 2020. Under the new PBR Framework, the ARA mechanism will replace the RAM, effective on June 1, 2021. The transition to the new ARA includes the continuation of the 2020 RAM Revenue adjustment.
Annual revenue adjustment mechanism. The PBR Framework established a five-year multi-year rate period during which there will be no general rate cases. Target revenues will be adjusted according to an index-driven ARA based on (i) an inflation factor, (ii) a predetermined X-factor to encompass productivity, which is set at zero, (iii) a Z-factor to account for exceptional circumstances not in the Utilities’ control and (iv) a customer dividend consisting of a negative adjustment of 0.22% compounded annually and a flow through of the “pre-PBR” savings commitment from the management audit recommendations developed in a prior docket.
As a result of an Order issued by the PUC pursuant to a motion for partial reconsideration the customer dividend for “pre-PBR” savings commitment portion to be delivered to customers will be at a rate of $6.6 million per year from 2021 to 2025, and the Enterprise Resource Planning system benefits savings of $3.9 million, to be delivered to customers in 2021. The implementation of the ARA is scheduled to occur on June 1, 2021.
Earnings sharing mechanism. A symmetrical ESM for actual return on equity outside of a 300 basis points dead band above and below a target ROE of 9.5%, which is the current authorized ROE for the Utilities. There is a 50/50 sharing between customers and Utilities for the actual earnings falling within 150 basis points outside of the dead band in either direction, and a 90/10 sharing for any further difference.A reopening or review of the PBR terms will be triggered if the Utilities credit rating outlook indicates a potential credit downgrade below investment grade status, or if its earned ROE enters the outer most tier of the ESM.
Major project interim recovery. On April 27, 2017, the PUC issued an order that provided guidelines for interim recovery of revenues to support major projects placed in service between general rate cases.
Projects eligible for recovery through the MPIR adjustment mechanism are major projects (i.e., projects with capital expenditures net of customer contributions in excess of $2.5 million), including, but not restricted to, renewable energy, energy efficiency, utility scale generation, grid modernization and smaller qualifying projects grouped into programs for review. The MPIR adjustment mechanism provides the opportunity to recover revenues for approved costs of eligible projects placed in service between general rate cases wherein cost recovery is limited by a revenue cap and is not provided by other effective recovery mechanisms. The request for PUC approval must include a business case, and all costs that are allowed to be recovered through the MPIR adjustment mechanism must be offset by any related benefits. The guidelines provide for accrual of revenues approved for recovery upon in-service date to be collected from customers through the annual RBA tariff. Capital projects that are not recovered through the MPIR would be included in the RAM and be subject to the RAM Cap, until the next rate case when the Utilities would request recovery in base rates.
The 2019 approved MPIR amounts for Schofield Generating Station of $19.8 million (which accrued effective January 1, 2019), included the 2019 return on project amount (up to the capped amount) in rate base, depreciation and incremental O&M expenses, are collected from June 2020 through May 2021.
The PUC approved the Utilities’ requests for MPIR recovery of the cost of the Grid Modernization Strategy Phase 1 project and West Loch Photovoltaic (PV) project inOn March and December 2019, respectively. On June 5, 2020,31, 2021, the Utilities submitted 20202021 MPIR amounts totaling $23.6$21.8 million for the Schofield GenerationGenerating Station ($19.217.6 million), West Loch PV projectProject ($3.83.3 million), and Grid Modernization Strategy Phase 1 project ($0.60.9 million for all three utilities) for the accrual of revenues effective January 1, 2020,2021, that included the 20202021 return on project amount (up to the capped amount)(based on approved amounts) in rate base, depreciation and incremental O&M expenses, for collection fromexpenses. Subject to PUC approval, as part of the transition to the PBR framework, the Utilities will begin recovery of the annualized 2021 MPIR amounts effective June 1, 2021 through May 2022, subject to PUC review.the RBA rate adjustment.
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Performance incentive mechanisms. The PUC has established the following PIMs: (1) Service Quality performance incentives, (2) Phase 1 Request for proposal (RFP) PIM for procurement of low-cost renewable energy, (3) Phase 2 RFP PIMs for generation and generation plus storage project, and Grid Services and standalone storage.
•Service Quality performance incentives (ongoing). Service Quality performance incentives are measured on a calendar-year basis. The PIM tariff requires the performance targets, deadbands and the amount of maximum financial incentives used to determine the PIM financial incentive levels for each of the PIMs to be re-determined upon issuance of an interim or final order in a general rate case for each utility.
•Service Reliability Performance measured by System Average Interruption Duration and Frequency Indexes (penalties only). Target performance is based on each utility’s historical 10-year average performance with a deadband of one standard deviation. The maximum penalty for each performance index is 20 basis points applied to the common equity share of each respective utility’s approved rate base (or maximum penalties of approximately $6.8 million - for both indices in total for the three utilities).
•Call Center Performance measured by the percentage of calls answered within 30 seconds. Target performance is based on the annual average performance for each utility for the most recent 8 quarters with a deadband of 3% above and below the target. The maximum penalty or reward is 8 basis points applied to the common equity share of each respective utility’s approved rate base (or maximum penalties or rewards of approximately $1.4 million - in total for the three utilities).
•In December 2019,2020, the Utilities accrued $0.3$0.9 million in estimated rewards for call center performance, net of service reliability penalties, for 2019.2020. The net service quality performance rewards related to 20192020 was reflected in the 20202021 annual decoupling filing and increasedpending PUC’s approval, will increase customer rates in the periodeffective June 1, 2020 through May 31, 2021.
•Phase 1 RFP PIM. Procurement of low-cost variable renewable resources through the request for proposal process in 2018 is measured by comparison of the procurement price to target prices. The incentive is a percentage of the savings determined by comparing procured price to a target of 11.5 cents per kilowatt-hour for renewable projects with storage capability and 9.5 cents per kilowatt-hour for energy-only renewable projects. Half of the incentive was earned upon PUC approval of the PPAs and the other half is eligible to be earned in the year following the in-service date of the projects and is dependent on the amount of energy the Utilities receive from the facilities. The total amount of the incentive the Utilities are eligible for is capped at $3.5 million.PPAs. Based on the 7 PPAs approved in 2019, the Utilities recognized $1.7 million in 2019.2019 with the remaining award to be recognized in the year following the in-service date of the projects, which is estimated to occur from 2023 to 2024.
On•Phase 2 RFP PIMs. The PUC order issued on October 9, 2019 the PUC issued an order establishing PIMs for the Utilities with regards to the Variable Renewable Dispatchable Generation and Energy Storage requests for proposals (RFPs) as well as the Delivery of Grid Services via Customer-sited Distributed Energy Resources RFPs that were issued on August 22, 2019 for Oahu, Maui and Hawaii island. The order establishes pricing thresholds, timelines to complete contracting, and other performance criteria for the performance incentive eligibility. The PIMs provide incentives only without penalties. The earliest the Utilities would be eligible for a PIM pursuant to this order is upon PUC approval of executed contracts resulting from the Phase 2 RFPs. The order requires contracts under the Grid Service RFP be filed for approval by May 2020 (subsequently extended to July 9, 2020), and by September 2020 under the Renewable RFPs, with a declining PIM for projects that are not filed by these deadlines. On July 9, 2020, the Utilities filed 2 Grid Service Purchase Agreements for the Grid Service RFP, which qualify for PIMs, however, details of the incentive metrics will be determined by PUC. On September 15, 2020, the Utilities filed 8 power purchase agreements for the Phase 2 RFP. Of those 8, only 1 project qualified for a potential PIM incentive. On February 16, 2021, the Utilities filed 1 additional power purchase agreement that qualifies for the declining PIM. On December 31, 2020, the PUC approved the 2 Grid Services Purchase Agreements without further clarification regarding the PIM. The Utility has filed a letter to the PUC in January 2021 to seek guidance to the next step of defining the details of the incentive metrics.
Annual decoupling filings•. The net annual incremental amounts to be collected (refunded) fromPUC established the following 2 new PIMs in its PBR D&O, which were approved in an order issued on March 23, 2021. The effective date for these PIM tariffs is June 1, 2020 through May 31, 2021 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Total |
| 2020 Annual incremental RAM adjusted revenues | | $ | 20.6 | | | $ | 3.2 | | | $ | 5.7 | | | $ | 29.5 | |
| Annual change in accrued RBA balance as of December 31, 2019 (and associated revenue taxes) which incorporates MPIR recovery | | (46.5) | | | (9.9) | | | (11.0) | | | (67.4) | |
| Incremental Performance Incentive Mechanisms (net) | | 2.2 | | | (0.1) | | | (0.1) | | | 2.0 | |
| | | | | | | | |
| | | | | | | | |
| Net annual incremental amount to be collected (refunded) under the tariffs | | $ | (23.7) | | | $ | (6.8) | | | $ | (5.4) | | | $ | (35.9) | |
| | | | | | | | |
Performance-based regulation proceeding. •On April 18, 2018,Renewable portfolio standard (RPS)-A PIM that provides a financial reward for accelerating the PUC issued an order, institutingachievement of RPS goals. The Utilities may earn a proceedingreward for the amount of system generation above the interpolated statutory RPS goal at $20/MWh in 2021 and 2022, $15/MWh in 2023, and $10/MWh for the remainder of the multi-year rate period (MRP). Penalties are already prescribed in the RPS as $20/MWh for failing to investigate performance-based regulation (PBR).meet RPS targets in 2030, 2040 and 2045. The PUC stated that PBR seeks to utilize both revenue adjustment mechanisms and performance mechanisms to more strongly align utilities’ incentives with customer interests.evaluation period commenced on January 1, 2021.
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The order stated that, in general, the PUC is interested in ratemaking elements and/or mechanisms that result in:
•Greater cost controlGrid Services Procurement PIM that provides financial rewards for grid services acquired in 2021 and reduced rate volatility;2022. The Utilities can earn a total maximum reward of $1.5 million over 2021 and 2022. The evaluation period commenced on January 1, 2021.
•Efficient investment and allocation of resources regardless of classification as capital or operating expense;The PUC also established the following 3 new PIMs in its PBR D&O, which are subject to PUC final design approval anticipated by June 1, 2021.
•Fair distributionInterconnection Approval PIM that provides financial rewards and penalties for interconnection times for distributed energy resources systems <100 kW in size. The Utilities can earn a total annual maximum reward of risks between utilities and customers; and$3.0 million or a total annual maximum penalty of $0.9 million. The evaluation period commenced on January 1, 2021.
•FulfillmentLow-to-Moderate Income (LMI) Energy Efficiency PIM that provides financial rewards for collaboration between the Utilities and the third-party Public Benefits Fee Administrator to deliver energy savings for low- and moderate-income customers. The rewards for the PIM metrics will be collectively capped at $2.0 million. The PIM will initially have a duration of State policy goals.
three years and be subject to an annual review. The proceeding has two phases. Phase 1 examined the current regulatory framework and identified those areas of utility performance that are deserving of further focus in Phase 2. In May 2019, the PUC issued an order concluding Phase 1, which established guiding principles, regulatory goals, and priority outcomes to guide the developmentevaluation period will commence as of the PBR mechanisms in Phase 2. The PUC identified the following guiding principles, which will inform the developmentdate of the PBR framework: 1) a customer-centric approach, 2) administrative efficiencyeffective tariff.
•Advanced Metering Infrastructure (AMI) Utilization PIM that provides financial rewards for acceleration of the number of customers with advanced meters enabled to reduce regulatory burdens;support time-varying rates and 3) utility financial integrity to maintain the utility’s financial health. Priority goals (and priority outcomes) identified by the PUC were: enhance customer experience (affordability, reliability, interconnection experience, and customer engagement), improve utility performance (cost control,next generation distributed energy resources (DER) asset effectiveness, and grid investment efficiency), and advance societal outcomes (capital formation, customer equity, greenhouse gas reduction, electrificationprograms. The Utilities can earn a total annual maximum reward of transportation, and resilience).
$2.0 million. The order also outlined the PUC’s vision of a comprehensive PBR framework that would be further developed in Phase 2. The framework envisioned would include 1) a five-year multi-year rate plan with an index-driven annual revenue adjustment based on an inflation factor, an X-factor which would encompass productivity, a Z-factor to account for exceptional circumstances not in the utility’s control and a customer dividend, 2) a symmetric earnings sharing mechanism that would help ensure that utility earnings do not excessively benefit or suffer from external factors outside of utility control or unforeseen results of regulatory mechanisms, 3) off-ramp provisions, 4) continuationevaluation period will commence as of the RBA, MPIR adjustment mechanism, the pension and OPEB tracking mechanism, and other recovery mechanisms, and 5) a portfolio of performance incentive mechanisms for customer engagement and DER asset effectiveness (rewards only), and interconnection experience (both rewards and penalties), in addition to scorecards to track progress against targeted performance levels, shared savings mechanisms to apportion savings to the utility and customers, and reported metrics.
The Phase 2 schedule included working group meetings through the first half of 2020, followed by statements of positions that were filed in June 2020. The remainderdate of the Phase 2 schedule includes discovery, reply statements of positions in August 2020, an evidentiary hearing in September 2020 and anticipated decision ineffective tariff.
Annual decoupling filings. The Utilities filed annual decoupling filings on March 31, 2021, which are subject to PUC approval. The net annual incremental amounts proposed to be collected (refunded) from June 1, 2021 through December 2020. The latest procedural schedule includes steps after the Phase 2 D&O “to review and approve PBR tariffs.”31, 2021 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Total |
| 2021 Annual incremental RAM adjusted revenues and ARA revenues | | $ | (13.8) | | | $ | (2.0) | | | $ | (5.9) | | | $ | (21.7) | |
| Annual change in accrued RBA balance as of December 31, 2020 (and associated revenue taxes) | | 10.4 | | | 5.7 | | | 8.9 | | | 25.0 | |
| Incremental Performance Incentive Mechanisms (net) | | 0 | | | 0.2 | | | 0.5 | | | 0.7 | |
| Incremental MPIR/EPRM Revenue Adjustment | | 12.6 | | | 0.1 | | | 0.1 | | | 12.8 |
| Incremental Affiliate Transaction Refund/PUC Ordered Adjustment | | 0 | | | N/A | | 2.0 | | | 2.0 |
| | | | | | | | |
| | | | | | | | |
| Net annual incremental amount to be collected under the tariffs | | $ | 9.1 | | | $ | 4.0 | | | $ | 5.6 | | | $ | 18.7 | |
| | | | | | | | |
Note: Columns may not foot due to rounding.
Most recent rate proceedings.
Hawaiian Electric 2020 test year rate case. On May 27,October 22, 2020, Hawaiian Electric and the Consumer AdvocatePUC issued a final D&O approving the stipulated settlement agreement filed a Stipulated Settlement Letter, documenting a global settlement of all issues in this rate case. The Parties agreed that asthe proceeding. As a result, of this settlement agreement, there will be no increase in base electric revenues over the revenuesrates established in the 2017 test year rate case. The settlement agreement is subject to PUC approval.
On May 13, 2020,In the final D&O, the PUC issued its Final Reportapproved the capital structure that consists of a 58% total equity ratio, and a ROACE of 9.5% for the 2020 test year. The resulting return on rate base (RORB) is 7.37%. The D&O approved the agreement to implement the overall lower depreciation rates approved in the last depreciation study proceeding, effective January 1, 2020. See “Annual revenue adjustment mechanism” under “Performance-based regulation framework” above, regarding the PUC’s decision on the treatment of Hawaiian Electric’s Management Audit which recommended various operationalsavings commitment. Hawaiian Electric’s proposed RBA provision tariff and organizational changes intended to better manage costs and provide value to customers. The report also recommended a three-year timeframe to ramp up to a sustained $25 million in annual savingsECRC tariff submitted on November 6, 2020 were approved by the end of 2022, split between capital (approximately 80%)PUC on December 11, 2020 and O&M (approximately 20%). In its statement of positiontook effect on the management audit filed on June 17, 2020, Hawaiian Electric committed to deliver these savings to customers over time through a proposal it later submitted in its statement of position in the PBR proceeding. The PUC’s decisions on the settlement agreement and on the remaining procedural steps in this proceeding are pending.January 1, 2021.
Hawaii Electric Light 2019 test year rate case. On September 24, 2019, Hawaii Electric Light and the Consumer Advocate filed a Stipulated Partial Settlement Letter which documented agreements reached on all of the issues in the proceeding, except for the ROACE, capital structure, amortization period for the state investment tax credit, and automatic annual target heat rate adjustment. On November 13, 2019, the PUC issued an interim decision maintaining Hawaii Electric Light’s revenues at current effective rates based on an interim revenue requirement of $387 million, average rate base of $534 million, and a 7.52% return on rate base (RORB) that incorporates a ROACE of 9.5% and 58.0% total equity ratio, and tariffs became effective January 1, 2020 . On July 28, 2020, the PUC issued an order,a final D&O, approving the Stipulated Partial Settlement Letter in part and ordering final rates for the 2019 test year to remain at current effective rates such that there is a zero increase in rates. The PUC determined that an appropriate ROACE for the 2019 test year is 9.5%, approved a capital structure of 58% total equity and approved as fair a 7.52% RORB. In addition, the order, among others, (1) approved a 10-year amortization period for the state investment tax credit; and (2) approved a modification to Hawaii Electric Light’s ECRC to incorporate a 98%/2% risk-sharing split between customers and Hawaii Electric Light with an annual maximum exposure cap
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of +/- $600,000. Hawaii Electric Light is to submitThe proposed final tariffs and a revisedPIM tariffs took effect on November 1, 2020, and the ECRC tariff for the PUC’s review within 30 days of this order.
Maui Electric 2021 test year rate case. By an order issuedtook effect on April 29, 2020, the PUC terminated the requirement of a mandatory triennial rate case cycle that was established in the Decoupling final D&O, and indicated Maui Electric is not required to file a 2021 test year rate case. Maui Electric does not intend to file a 2021 test year rate case.January 1, 2021.
Regulatory assets for COVID-19 related expenses.costs. On April 22, 2020, the Utilities filed a request to the PUC for deferral treatment of COVID-19 related expenses, including higher bad debt expense and write-offs, higher financing costs and other expenses. On May 4, 2020, the PUC issued an order, authorizing all utilities, including the Utilities, to establish regulatory assets to record costs resulting from the suspension of disconnections of service during the
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
pendency of the Governor’s Emergency Proclamation and until otherwise ordered by the PUC. In future proceedings, the PUC will consider the reasonableness of the costs, the appropriate period of recovery, any amount of carrying costs thereon, and any savings directly attributable to suspension of disconnects, and other related matters. As part of the order, the PUC prohibits the Utilities from charging late payment fees on past due payments. On June 30, 2020, the PUC issued an order onapproving the UtilitiesUtilities’ request made in April 2020 for deferral treatment of COVID-19 related expensescosts through December 31, 2020, and allowed2020. On March 8, 2021, the UtilitiesPUC approved the Utilities’ request to file application to request an extension ofextend the deferral period beyond December 31, 2020. Beginning on July 31, 2020, theto June 30, 2021. The Utilities are required to file quarterly reports to update the Utilities’ financial condition, report measures in place to assist their customers during the COVID-19 emergency situation, identifyingidentify the planned deferred costs and details for the deferred costs, and identifyingidentify funds received or benefits received that have resulted from the COVID-19 emergency period. The recovery of the regulatory assets would be determined in a subsequent proceeding and management believes the deferred costs are probable of recovery. In addition, starting in December 2020 and monthly moving forward until otherwise ordered by the PUC, the Utilities are required to file information on, among other things, number of customers, arrears balances, payment arrangements entered into, and available assistance used to assists customer bill payment. The monthly report is intended to assist the PUC in determining next steps regarding appropriate regulatory measures. As of June 30, 2020,March 31, 2021, the Utilities recorded a total of $6.5$22.2 million in regulatory assets pursuant to the order.orders.
Condensed consolidating financial information. Condensed consolidating financial information for Hawaiian Electric and its subsidiaries are presented for the three and six month periods ended June 30,March 31, 2021 and 2020, and 2019, and as of June 30, 2020March 31, 2021 and December 31, 2019.2020.
Hawaiian Electric unconditionally guarantees Hawaii Electric Light’s and Maui Electric’s obligations (a) to the State of Hawaii for the repayment of principal and interest on Special Purpose Revenue Bonds issued for the benefit of Hawaii Electric Light and Maui Electric, and (b) under their respective private placement note agreements and the Hawaii Electric Light notes and Maui Electric notes issued thereunder. Hawaiian Electric is also obligated, after the satisfaction of its obligations on its own preferred stock, to make dividend, redemption and liquidation payments on Hawaii Electric Light’s and Maui Electric’s preferred stock if the respective subsidiary is unable to make such payments.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Income
Three months ended June 30, 2020March 31, 2021
| | (in thousands) | (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other subsidiaries | | Consolidating adjustments | | Hawaiian Electric Consolidated | (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other subsidiaries | | Consolidating adjustments | | Hawaiian Electric
Consolidated |
| Revenues | Revenues | | $ | 380,634 | | | 78,505 | | | 75,216 | | | — | | | (140) | | | $ | 534,215 | | Revenues | | $ | 400,554 | | | 85,149 | | | 79,181 | | | 0 | | | (20) | | | $ | 564,864 | |
| Expenses | Expenses | | Expenses | |
| Fuel oil | Fuel oil | | 77,290 | | | 16,254 | | | 18,907 | | | — | | | — | | | 112,451 | | Fuel oil | | 88,728 | | | 16,485 | | | 22,214 | | | 0 | | | 0 | | | 127,427 | |
| Purchased power | Purchased power | | 108,946 | | | 15,846 | | | 12,046 | | | — | | | — | | | 136,838 | | Purchased power | | 108,604 | | | 21,597 | | | 12,095 | | | 0 | | | 0 | | | 142,296 | |
| Other operation and maintenance | Other operation and maintenance | | 74,274 | | | 17,581 | | | 18,186 | | | — | | | — | | | 110,041 | | Other operation and maintenance | | 77,335 | | | 17,912 | | | 19,323 | | | 0 | | | 0 | | | 114,570 | |
| Depreciation | Depreciation | | 37,860 | | | 9,761 | | | 8,075 | | | — | | | — | | | 55,696 | | Depreciation | | 38,914 | | | 10,048 | | | 8,393 | | | 0 | | | 0 | | | 57,355 | |
| Taxes, other than income taxes | Taxes, other than income taxes | | 36,673 | | | 7,470 | | | 7,245 | | | — | | | — | | | 51,388 | | Taxes, other than income taxes | | 38,627 | | | 7,993 | | | 7,482 | | | 0 | | | 0 | | | 54,102 | |
| | Total expenses | Total expenses | | 335,043 | | | 66,912 | | | 64,459 | | | — | | | — | | | 466,414 | | Total expenses | | 352,208 | | | 74,035 | | | 69,507 | | | 0 | | | 0 | | | 495,750 | |
| Operating income | Operating income | | 45,591 | | | 11,593 | | | 10,757 | | | — | | | (140) | | | 67,801 | | Operating income | | 48,346 | | | 11,114 | | | 9,674 | | | 0 | | | (20) | | | 69,114 | |
| Allowance for equity funds used during construction | Allowance for equity funds used during construction | | 1,807 | | | 193 | | | 194 | | | — | | | — | | | 2,194 | | Allowance for equity funds used during construction | | 1,748 | | | 132 | | | 311 | | | 0 | | | 0 | | | 2,191 | |
| Equity in earnings of subsidiaries | Equity in earnings of subsidiaries | | 13,776 | | | — | | | — | | | — | | | (13,776) | | | — | | Equity in earnings of subsidiaries | | 12,510 | | | 0 | | | 0 | | | 0 | | | (12,510) | | | 0 | |
| Retirement defined benefits expense—other than service costs | Retirement defined benefits expense—other than service costs | | (546) | | | 193 | | | (29) | | | — | | | — | | | (382) | | Retirement defined benefits expense—other than service costs | | 886 | | | 168 | | | (33) | | | 0 | | | 0 | | | 1,021 | |
| Interest expense and other charges, net | Interest expense and other charges, net | | (12,499) | | | (2,533) | | | (2,446) | | | — | | | 140 | | | (17,338) | | Interest expense and other charges, net | | (12,832) | | | (2,581) | | | (2,590) | | | 0 | | | 20 | | | (17,983) | |
| Allowance for borrowed funds used during construction | Allowance for borrowed funds used during construction | | 626 | | | 62 | | | 64 | | | — | | | — | | | 752 | | Allowance for borrowed funds used during construction | | 591 | | | 44 | | | 112 | | | 0 | | | 0 | | | 747 | |
| Income before income taxes | Income before income taxes | | 48,755 | | | 9,508 | | | 8,540 | | | — | | | (13,776) | | | 53,027 | | Income before income taxes | | 51,249 | | | 8,877 | | | 7,474 | | | 0 | | | (12,510) | | | 55,090 | |
| Income taxes | Income taxes | | 6,156 | | | 2,196 | | | 1,847 | | | | | | | 10,199 | | Income taxes | | 7,621 | | | 2,051 | | | 1,561 | | | 0 | | | 0 | | | 11,233 | |
| Net income | Net income | | 42,599 | | | 7,312 | | | 6,693 | | | — | | | (13,776) | | | 42,828 | | Net income | | 43,628 | | | 6,826 | | | 5,913 | | | 0 | | | (12,510) | | | 43,857 | |
| Preferred stock dividends of subsidiaries | Preferred stock dividends of subsidiaries | | — | | | 133 | | | 96 | | | — | | | | | 229 | | Preferred stock dividends of subsidiaries | | 0 | | | 134 | | | 95 | | | 0 | | | 0 | | | 229 | |
| Net income attributable to Hawaiian Electric | Net income attributable to Hawaiian Electric | | 42,599 | | | 7,179 | | | 6,597 | | | — | | | (13,776) | | | 42,599 | | Net income attributable to Hawaiian Electric | | 43,628 | | | 6,692 | | | 5,818 | | | 0 | | | (12,510) | | | 43,628 | |
| Preferred stock dividends of Hawaiian Electric | Preferred stock dividends of Hawaiian Electric | | 270 | | | — | | | — | | | — | | | — | | | 270 | | Preferred stock dividends of Hawaiian Electric | | 270 | | | 0 | | | 0 | | | 0 | | | 0 | | | 270 | |
| Net income for common stock | Net income for common stock | | $ | 42,329 | | | 7,179 | | | 6,597 | | | — | | | (13,776) | | | $ | 42,329 | | Net income for common stock | | $ | 43,358 | | | 6,692 | | | 5,818 | | | 0 | | | (12,510) | | | $ | 43,358 | |
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Comprehensive Income
Three months ended June 30, 2020March 31, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other
subsidiaries | | Consolidating
adjustments | | Hawaiian Electric
Consolidated |
| Net income for common stock | | $ | 42,329 | | | 7,179 | | | 6,597 | | | — | | | (13,776) | | | $ | 42,329 | |
| Other comprehensive income (loss), net of taxes: | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Retirement benefit plans: | | | | | | | | | | | | |
| Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits | | 5,184 | | | 751 | | | 650 | | | — | | | (1,401) | | | 5,184 | |
| Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes | | (5,159) | | | (748) | | | (653) | | | — | | | 1,401 | | | (5,159) | |
| Other comprehensive income (loss), net of taxes | | 25 | | | 3 | | | (3) | | | — | | | — | | | 25 | |
| Comprehensive income attributable to common shareholder | | $ | 42,354 | | | 7,182 | | | 6,594 | | | — | | | (13,776) | | | $ | 42,354 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other subsidiaries | | Consolidating adjustments | | Hawaiian Electric Consolidated |
| Net income for common stock | | $ | 43,358 | | | 6,692 | | | 5,818 | | | 0 | | | (12,510) | | | $ | 43,358 | |
| Other comprehensive income (loss), net of taxes: | | | | | | | | | | | | |
| Retirement benefit plans: | | | | | | | | | | | | |
| Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of taxes | | 5,845 | | | 835 | | | 761 | | | 0 | | | (1,596) | | | 5,845 | |
| Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes | | (5,811) | | | (834) | | | (761) | | | 0 | | | 1,595 | | | (5,811) | |
| Other comprehensive income, net of taxes | | 34 | | | 1 | | | 0 | | | 0 | | | (1) | | | 34 | |
| Comprehensive income attributable to common shareholder | | $ | 43,392 | | | 6,693 | | | 5,818 | | | 0 | | | (12,511) | | | $ | 43,392 | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Income
Three months ended June 30, 2019March 31, 2020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other subsidiaries | | Consolidating adjustments | | Hawaiian Electric Consolidated |
| Revenues | | $ | 450,020 | | | 89,916 | | | 94,050 | | | — | | | (202) | | | $ | 633,784 | |
| Expenses | | | | | | | | | | | | |
| Fuel oil | | 125,431 | | | 19,941 | | | 36,248 | | | — | | | — | | | 181,620 | |
| Purchased power | | 126,871 | | | 24,029 | | | 11,954 | | | — | | | — | | | 162,854 | |
| Other operation and maintenance | | 78,551 | | | 18,031 | | | 22,678 | | | — | | | — | | | 119,260 | |
| Depreciation | | 35,868 | | | 10,453 | | | 7,592 | | | — | | | — | | | 53,913 | |
| Taxes, other than income taxes | | 42,590 | | | 8,706 | | | 9,147 | | | — | | | — | | | 60,443 | |
| | | | | | | | | | | | |
| Total expenses | | 409,311 | | | 81,160 | | | 87,619 | | | — | | | — | | | 578,090 | |
| Operating income | | 40,709 | | | 8,756 | | | 6,431 | | | — | | | (202) | | | 55,694 | |
| Allowance for equity funds used during construction | | 2,614 | | | 218 | | | 343 | | | — | | | — | | | 3,175 | |
| Equity in earnings of subsidiaries | | 8,086 | | | — | | | — | | | — | | | (8,086) | | | — | |
| Retirement defined benefits expense—other than service costs | | (567) | | | (105) | | | (29) | | | — | | | — | | | (701) | |
| Interest expense and other charges, net | | (13,390) | | | (2,920) | | | (2,422) | | | — | | | 202 | | | (18,530) | |
| Allowance for borrowed funds used during construction | | 962 | | | 91 | | | 126 | | | — | | | — | | | 1,179 | |
| Income before income taxes | | 38,414 | | | 6,040 | | | 4,449 | | | — | | | (8,086) | | | 40,817 | |
| Income taxes | | 5,570 | | | 1,241 | | | 933 | | | — | | | — | | | 7,744 | |
| Net income | | 32,844 | | | 4,799 | | | 3,516 | | | — | | | (8,086) | | | 33,073 | |
| Preferred stock dividends of subsidiaries | | — | | | 133 | | | 96 | | | — | | | — | | | 229 | |
| Net income attributable to Hawaiian Electric | | 32,844 | | | 4,666 | | | 3,420 | | | — | | | (8,086) | | | 32,844 | |
| Preferred stock dividends of Hawaiian Electric | | 270 | | | — | | | — | | | — | | | — | | | 270 | |
| Net income for common stock | | $ | 32,574 | | | 4,666 | | | 3,420 | | | — | | | (8,086) | | | $ | 32,574 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other subsidiaries | | Consolidating adjustments | | Hawaiian Electric
Consolidated |
| Revenues | | $ | 421,166 | | | 89,293 | | | 87,198 | | | 0 | | | (215) | | | $ | 597,442 | |
| Expenses | | | | | | | | | | | | |
| Fuel oil | | 120,535 | | | 22,432 | | | 30,254 | | | 0 | | | 0 | | | 173,221 | |
| Purchased power | | 107,951 | | | 19,521 | | | 12,344 | | | 0 | | | 0 | | | 139,816 | |
| Other operation and maintenance | | 85,637 | | | 19,104 | | | 22,806 | | | 0 | | | 0 | | | 127,547 | |
| Depreciation | | 38,011 | | | 9,760 | | | 8,079 | | | 0 | | | 0 | | | 55,850 | |
| Taxes, other than income taxes | | 40,501 | | | 8,342 | | | 8,207 | | | 0 | | | 0 | | | 57,050 | |
| | | | | | | | | | | | |
| Total expenses | | 392,635 | | | 79,159 | | | 81,690 | | | 0 | | | 0 | | | 553,484 | |
| Operating income | | 28,531 | | | 10,134 | | | 5,508 | | | 0 | | | (215) | | | 43,958 | |
| Allowance for equity funds used during construction | | 1,743 | | | 119 | | | 153 | | | 0 | | | 0 | | | 2,015 | |
| Equity in earnings of subsidiaries | | 8,804 | | | 0 | | | 0 | | | 0 | | | (8,804) | | | 0 | |
| Retirement defined benefits expense—other than service costs | | (546) | | | 194 | | | (29) | | | 0 | | | 0 | | | (381) | |
| Interest expense and other charges, net | | (12,002) | | | (2,484) | | | (2,323) | | | 0 | | | 215 | | | (16,594) | |
| Allowance for borrowed funds used during construction | | 602 | | | 36 | | | 50 | | | 0 | | | 0 | | | 688 | |
| Income before income taxes | | 27,132 | | | 7,999 | | | 3,359 | | | 0 | | | (8,804) | | | 29,686 | |
| Income taxes | | 2,957 | | | 1,798 | | | 527 | | | 0 | | 0 | | 5,282 | |
| Net income | | 24,175 | | | 6,201 | | | 2,832 | | | 0 | | | (8,804) | | | 24,404 | |
| Preferred stock dividends of subsidiaries | | 0 | | | 134 | | | 95 | | | 0 | | | 0 | | 229 | |
| Net income attributable to Hawaiian Electric | | 24,175 | | | 6,067 | | | 2,737 | | | 0 | | | (8,804) | | | 24,175 | |
| Preferred stock dividends of Hawaiian Electric | | 270 | | | 0 | | | 0 | | | 0 | | | 0 | | | 270 | |
| Net income for common stock | | $ | 23,905 | | | 6,067 | | | 2,737 | | | 0 | | | (8,804) | | | $ | 23,905 | |
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Comprehensive Income
Three months ended June 30, 2019March 31, 2020
| | (in thousands) | (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other
subsidiaries | | Consolidating
adjustments | | Hawaiian Electric
Consolidated | (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other subsidiaries | | Consolidating adjustments | | Hawaiian Electric Consolidated |
| Net income for common stock | Net income for common stock | | $ | 32,574 | | | 4,666 | | | 3,420 | | | — | | | (8,086) | | | $ | 32,574 | | Net income for common stock | | $ | 23,905 | | | 6,067 | | | 2,737 | | | 0 | | | (8,804) | | | $ | 23,905 | |
| Other comprehensive income (loss), net of taxes: | Other comprehensive income (loss), net of taxes: | | | | | | | | | | | | | Other comprehensive income (loss), net of taxes: | |
| | Retirement benefit plans: | Retirement benefit plans: | | | | | | | | | | | | | Retirement benefit plans: | |
| Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits | Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits | | 2,321 | | | 352 | | | 289 | | | — | | | (641) | | | 2,321 | | Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits | | 5,184 | | | 748 | | | 652 | | | 0 | | | (1,400) | | | 5,184 | |
| Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes | Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes | | (2,298) | | | (351) | | | (289) | | | — | | | 640 | | | (2,298) | | Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes | | (5,158) | | | (747) | | | (652) | | | 0 | | | 1,399 | | | (5,158) | |
| Other comprehensive income, net of taxes | Other comprehensive income, net of taxes | | 23 | | | 1 | | | — | | | — | | | (1) | | | 23 | | Other comprehensive income, net of taxes | | 26 | | | 1 | | | 0 | | | 0 | | | (1) | | | 26 | |
| Comprehensive income attributable to common shareholder | Comprehensive income attributable to common shareholder | | $ | 32,597 | | | 4,667 | | | 3,420 | | | — | | | (8,087) | | | $ | 32,597 | | Comprehensive income attributable to common shareholder | | $ | 23,931 | | | 6,068 | | | 2,737 | | | 0 | | | (8,805) | | | $ | 23,931 | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of IncomeBalance Sheet
Six months ended June 30, 2020March 31, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other subsidiaries | | Consolidating adjustments | | Hawaiian Electric
Consolidated |
| Revenues | | $ | 801,800 | | | 167,798 | | | 162,414 | | | — | | | (355) | | | $ | 1,131,657 | |
| Expenses | | | | | | | | | | | | |
| Fuel oil | | 197,825 | | | 38,686 | | | 49,161 | | | — | | | — | | | 285,672 | |
| Purchased power | | 216,897 | | | 35,367 | | | 24,390 | | | — | | | — | | | 276,654 | |
| Other operation and maintenance | | 159,911 | | | 36,685 | | | 40,992 | | | — | | | — | | | 237,588 | |
| Depreciation | | 75,871 | | | 19,521 | | | 16,154 | | | — | | | — | | | 111,546 | |
| Taxes, other than income taxes | | 77,174 | | | 15,812 | | | 15,452 | | | — | | | — | | | 108,438 | |
| | | | | | | | | | | | |
| Total expenses | | 727,678 | | | 146,071 | | | 146,149 | | | — | | | — | | | 1,019,898 | |
| Operating income | | 74,122 | | | 21,727 | | | 16,265 | | | — | | | (355) | | | 111,759 | |
| Allowance for equity funds used during construction | | 3,550 | | | 312 | | | 347 | | | — | | | — | | | 4,209 | |
| Equity in earnings of subsidiaries | | 22,580 | | | — | | | — | | | — | | | (22,580) | | | — | |
| Retirement defined benefits expense—other than service costs | | (1,092) | | | 387 | | | (58) | | | — | | | — | | | (763) | |
| Interest expense and other charges, net | | (24,501) | | | (5,017) | | | (4,769) | | | — | | | 355 | | | (33,932) | |
| Allowance for borrowed funds used during construction | | 1,228 | | | 98 | | | 114 | | | — | | | — | | | 1,440 | |
| Income before income taxes | | 75,887 | | | 17,507 | | | 11,899 | | | — | | | (22,580) | | | 82,713 | |
| Income taxes | | 9,113 | | | 3,994 | | | 2,374 | | | — | | | — | | | 15,481 | |
| Net income | | 66,774 | | | 13,513 | | | 9,525 | | | — | | | (22,580) | | | 67,232 | |
| Preferred stock dividends of subsidiaries | | — | | | 267 | | | 191 | | | — | | | — | | | 458 | |
| Net income attributable to Hawaiian Electric | | 66,774 | | | 13,246 | | | 9,334 | | | — | | | (22,580) | | | 66,774 | |
| Preferred stock dividends of Hawaiian Electric | | 540 | | | — | | | — | | | — | | | — | | | 540 | |
| Net income for common stock | | $ | 66,234 | | | 13,246 | | | 9,334 | | | — | | | (22,580) | | | $ | 66,234 | |
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Comprehensive Income
Six months ended June 30, 2020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other subsidiaries | | Consolidating adjustments | | Hawaiian Electric Consolidated |
| Net income for common stock | | $ | 66,234 | | | 13,246 | | | 9,334 | | | — | | | (22,580) | | | $ | 66,234 | |
| Other comprehensive income (loss), net of taxes: | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Retirement benefit plans: | | | | | | | | | | | | |
| Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits | | 10,368 | | | 1,499 | | | 1,302 | | | — | | | (2,801) | | | 10,368 | |
| Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes | | (10,317) | | | (1,495) | | | (1,305) | | | — | | | 2,800 | | | (10,317) | |
| Other comprehensive income (loss), net of taxes | | 51 | | | 4 | | | (3) | | | — | | | (1) | | | 51 | |
| Comprehensive income attributable to common shareholder | | $ | 66,285 | | | 13,250 | | | 9,331 | | | — | | | (22,581) | | | $ | 66,285 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other
subsi-
diaries | | Consoli-
dating
adjustments | | Hawaiian Electric
Consolidated |
| Assets | | | | | | | | | | | | |
| Property, plant and equipment | | | | | | | | | | | | |
| Utility property, plant and equipment | | | | | | | | | | | | |
| Land | | $ | 42,411 | | | 5,606 | | | 3,594 | | | 0 | | | 0 | | | $ | 51,611 | |
| Plant and equipment | | 4,986,417 | | | 1,358,367 | | | 1,207,095 | | | 0 | | | 0 | | | 7,551,879 | |
| Less accumulated depreciation | | (1,706,529) | | | (604,021) | | | (549,169) | | | 0 | | | 0 | | | (2,859,719) | |
| Construction in progress | | 160,331 | | | 13,927 | | | 29,730 | | | 0 | | | 0 | | | 203,988 | |
| Utility property, plant and equipment, net | | 3,482,630 | | | 773,879 | | | 691,250 | | | 0 | | | 0 | | | 4,947,759 | |
| Nonutility property, plant and equipment, less accumulated depreciation | | 5,305 | | | 115 | | | 1,532 | | | 0 | | | 0 | | | 6,952 | |
| Total property, plant and equipment, net | | 3,487,935 | | | 773,994 | | | 692,782 | | | 0 | | | 0 | | | 4,954,711 | |
| Investment in wholly owned subsidiaries, at equity | | 631,976 | | | 0 | | | 0 | | | 0 | | | (631,976) | | | 0 | |
| Current assets | | | | | | | | | | | | |
| Cash and cash equivalents | | 29,727 | | | 7,730 | | | 14,209 | | | 77 | | | 0 | | | 51,743 | |
| Restricted cash | | 11,506 | | | 0 | | | 0 | | | 0 | | | 0 | | | 11,506 | |
| | | | | | | | | | | | |
| Customer accounts receivable, net | | 101,605 | | | 21,358 | | | 18,686 | | | 0 | | | 0 | | | 141,649 | |
| Accrued unbilled revenues, net | | 72,784 | | | 14,911 | | | 14,118 | | | 0 | | | 0 | | | 101,813 | |
| Other accounts receivable, net | | 12,967 | | | 3,006 | | | 3,570 | | | 0 | | | (14,470) | | | 5,073 | |
| Fuel oil stock, at average cost | | 51,894 | | | 9,981 | | | 12,813 | | | 0 | | | 0 | | | 74,688 | |
| Materials and supplies, at average cost | | 40,395 | | | 9,873 | | | 19,458 | | | 0 | | | 0 | | | 69,726 | |
| Prepayments and other | | 29,769 | | | 3,534 | | | 3,791 | | | 0 | | | (675) | | | 36,419 | |
| Regulatory assets | | 42,852 | | | 2,840 | | | 8,630 | | | 0 | | | 0 | | | 54,322 | |
| Total current assets | | 393,499 | | | 73,233 | | | 95,275 | | | 77 | | | (15,145) | | | 546,939 | |
| Other long-term assets | | | | | | | | | | | | |
| Operating lease right-of-use assets | | 123,992 | | | 14,198 | | | 344 | | | 0 | | | 0 | | | 138,534 | |
| Regulatory assets | | 501,393 | | | 111,700 | | | 106,011 | | | 0 | | | 0 | | | 719,104 | |
| Other | | 102,767 | | | 18,591 | | | 20,424 | | | 0 | | | (6,162) | | | 135,620 | |
| Total other long-term assets | | 728,152 | | | 144,489 | | | 126,779 | | | 0 | | | (6,162) | | | 993,258 | |
| Total assets | | $ | 5,241,562 | | | 991,716 | | | 914,836 | | | 77 | | | (653,283) | | | $ | 6,494,908 | |
| Capitalization and liabilities | | | | | | | | | | | | |
| Capitalization | | | | | | | | | | | | |
| Common stock equity | | $ | 2,157,385 | | | 320,494 | | | 311,405 | | | 77 | | | (631,976) | | | $ | 2,157,385 | |
| Cumulative preferred stock—not subject to mandatory redemption | | 22,293 | | | 7,000 | | | 5,000 | | | 0 | | | 0 | | | 34,293 | |
| Long-term debt, net | | 1,176,229 | | | 246,310 | | | 253,324 | | | 0 | | | 0 | | | 1,675,863 | |
| Total capitalization | | 3,355,907 | | | 573,804 | | | 569,729 | | | 77 | | | (631,976) | | | 3,867,541 | |
| Current liabilities | | | | | | | | | | | | |
| Current portion of operating lease liabilities | | 64,423 | | | 1,844 | | | 34 | | | 0 | | | 0 | | | 66,301 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Accounts payable | | 87,437 | | | 16,037 | | | 19,725 | | | 0 | | | 0 | | | 123,199 | |
| Interest and preferred dividends payable | | 20,075 | | | 3,698 | | | 4,400 | | | 0 | | | (1) | | | 28,172 | |
| Taxes accrued, including revenue taxes | | 107,552 | | | 25,372 | | | 22,876 | | | 0 | | | (675) | | | 155,125 | |
| Regulatory liabilities | | 17,000 | | | 5,901 | | | 7,469 | | | 0 | | | 0 | | | 30,370 | |
| Other | | 55,478 | | | 11,951 | | | 17,189 | | | 0 | | | (14,618) | | | 70,000 | |
| Total current liabilities | | 351,965 | | | 64,803 | | | 71,693 | | | 0 | | | (15,294) | | | 473,167 | |
| Deferred credits and other liabilities | | | | | | | | | | | | |
| Operating lease liabilities | | 71,431 | | | 12,353 | | | 318 | | | 0 | | | 0 | | | 84,102 | |
| Deferred income taxes | | 282,513 | | | 53,582 | | | 60,663 | | | 0 | | | 0 | | | 396,758 | |
| Regulatory liabilities | | 658,584 | | | 174,820 | | | 92,365 | | | 0 | | | 0 | | | 925,769 | |
| Unamortized tax credits | | 81,297 | | | 15,126 | | | 13,758 | | | 0 | | | 0 | | | 110,181 | |
| Defined benefit pension and other postretirement benefit plans liability | | 373,376 | | | 76,357 | | | 78,566 | | | 0 | | | (6,013) | | | 522,286 | |
| Other | | 66,489 | | | 20,871 | | | 27,744 | | | 0 | | | 0 | | | 115,104 | |
| Total deferred credits and other liabilities | | 1,533,690 | | | 353,109 | | | 273,414 | | | 0 | | | (6,013) | | | 2,154,200 | |
| Total capitalization and liabilities | | $ | 5,241,562 | | | 991,716 | | | 914,836 | | | 77 | | | (653,283) | | | $ | 6,494,908 | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of IncomeBalance Sheet
Six months ended June 30, 2019December 31, 2020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other subsidiaries | | Consolidating adjustments | | Hawaiian Electric
Consolidated |
| Revenues | | $ | 855,689 | | | 177,121 | | | 179,703 | | | — | | | (234) | | | $ | 1,212,279 | |
| Expenses | | | | | | | | | | | | |
| Fuel oil | | 234,353 | | | 40,783 | | | 67,093 | | | — | | | — | | | 342,229 | |
| Purchased power | | 232,094 | | | 43,206 | | | 21,999 | | | — | | | — | | | 297,299 | |
| Other operation and maintenance | | 159,729 | | | 36,767 | | | 40,894 | | | — | | | — | | | 237,390 | |
| Depreciation | | 71,735 | | | 20,906 | | | 15,219 | | | — | | | — | | | 107,860 | |
| Taxes, other than income taxes | | 81,221 | | | 16,811 | | | 17,215 | | | — | | | — | | | 115,247 | |
| | | | | | | | | | | | |
| Total expenses | | 779,132 | | | 158,473 | | | 162,420 | | | — | | | — | | | 1,100,025 | |
| Operating income | | 76,557 | | | 18,648 | | | 17,283 | | | — | | | (234) | | | 112,254 | |
| Allowance for equity funds used during construction | | 5,061 | | | 350 | | | 674 | | | — | | | — | | | 6,085 | |
| Equity in earnings of subsidiaries | | 19,935 | | | — | | | — | | | — | | | (19,935) | | | — | |
| Retirement defined benefits expense—other than service costs | | (1,134) | | | (211) | | | (59) | | | — | | | — | | | (1,404) | |
| Interest expense and other charges, net | | (26,190) | | | (5,821) | | | (4,739) | | | — | | | 234 | | | (36,516) | |
| Allowance for borrowed funds used during construction | | 1,864 | | | 147 | | | 246 | | | — | | | — | | | 2,257 | |
| Income before income taxes | | 76,093 | | | 13,113 | | | 13,405 | | | — | | | (19,935) | | | 82,676 | |
| Income taxes | | 10,853 | | | 3,011 | | | 3,114 | | | — | | | — | | | 16,978 | |
| Net income | | 65,240 | | | 10,102 | | | 10,291 | | | — | | | (19,935) | | | 65,698 | |
| Preferred stock dividends of subsidiaries | | — | | | 267 | | | 191 | | | — | | | — | | | 458 | |
| Net income attributable to Hawaiian Electric | | 65,240 | | | 9,835 | | | 10,100 | | | — | | | (19,935) | | | 65,240 | |
| Preferred stock dividends of Hawaiian Electric | | 540 | | | — | | | — | | | — | | | — | | | 540 | |
| Net income for common stock | | $ | 64,700 | | | 9,835 | | | 10,100 | | | — | | | (19,935) | | | $ | 64,700 | |
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Comprehensive Income
Six months ended June 30, 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other subsidiaries | | Consolidating adjustments | | Hawaiian Electric Consolidated |
| Net income for common stock | | $ | 64,700 | | | 9,835 | | | 10,100 | | | — | | | (19,935) | | | $ | 64,700 | |
| Other comprehensive income (loss), net of taxes: | | | | | | | | | | | | |
| Retirement benefit plans: | | | | | | | | | | | | |
| Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits | | 4,643 | | | 704 | | | 578 | | | — | | | (1,282) | | | 4,643 | |
| Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes | | (4,596) | | | (702) | | | (578) | | | — | | | 1,280 | | | (4,596) | |
| Other comprehensive income, net of taxes | | 47 | | | 2 | | | — | | | — | | | (2) | | | 47 | |
| Comprehensive income attributable to common shareholder | | $ | 64,747 | | | 9,837 | | | 10,100 | | | — | | | (19,937) | | | $ | 64,747 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other
subsi-diaries | | Consoli-
dating
adjustments | | Hawaiian Electric
Consolidated |
| Assets | | | | | | | | | | | | |
| Property, plant and equipment | | | | | | | | | | | | |
| Utility property, plant and equipment | | | | | | | | | | | | |
| Land | | $ | 42,411 | | | 5,606 | | | 3,594 | | | 0 | | | 0 | | | $ | 51,611 | |
| Plant and equipment | | 4,960,470 | | | 1,352,885 | | | 1,195,988 | | | 0 | | | 0 | | | 7,509,343 | |
| Less accumulated depreciation | | (1,677,256) | | | (597,606) | | | (544,217) | | | 0 | | | 0 | | | (2,819,079) | |
| Construction in progress | | 143,616 | | | 13,043 | | | 31,683 | | | 0 | | | 0 | | | 188,342 | |
| Utility property, plant and equipment, net | | 3,469,241 | | | 773,928 | | | 687,048 | | | 0 | | | 0 | | | 4,930,217 | |
| Nonutility property, plant and equipment, less accumulated depreciation | | 5,306 | | | 115 | | | 1,532 | | | 0 | | | 0 | | | 6,953 | |
| Total property, plant and equipment, net | | 3,474,547 | | | 774,043 | | | 688,580 | | | 0 | | | 0 | | | 4,937,170 | |
Investment in wholly owned subsidiaries, at equity | | 626,890 | | | 0 | | | 0 | | | 0 | | | (626,890) | | | 0 | |
| Current assets | | | | | | | | | | | | |
| Cash and cash equivalents | | 42,205 | | | 3,046 | | | 2,032 | | | 77 | | | 0 | | | 47,360 | |
| Restricted cash | | 15,966 | | | 0 | | | 0 | | | 0 | | | 0 | | | 15,966 | |
| Advances to affiliates | | 26,700 | | | 0 | | | 0 | | | 0 | | | (26,700) | | | 0 | |
| Customer accounts receivable, net | | 102,736 | | | 23,989 | | | 21,107 | | | 0 | | | 0 | | | 147,832 | |
| Accrued unbilled revenues, net | | 73,628 | | | 13,631 | | | 13,777 | | | 0 | | | 0 | | | 101,036 | |
| Other accounts receivable, net | | 17,984 | | | 3,028 | | | 2,856 | | | 0 | | | (16,195) | | | 7,673 | |
| Fuel oil stock, at average cost | | 38,777 | | | 8,471 | | | 10,990 | | | 0 | | | 0 | | | 58,238 | |
| Materials and supplies, at average cost | | 38,786 | | | 9,896 | | | 18,662 | | | 0 | | | 0 | | | 67,344 | |
| Prepayments and other | | 34,306 | | | 5,197 | | | 4,580 | | | 0 | | | 0 | | | 44,083 | |
| Regulatory assets | | 22,095 | | | 1,954 | | | 6,386 | | | 0 | | | 0 | | | 30,435 | |
| Total current assets | | 413,183 | | | 69,212 | | | 80,390 | | | 77 | | | (42,895) | | | 519,967 | |
| Other long-term assets | | | | | | | | | | | | |
| Operating lease right-of-use assets | | 125,858 | | | 1,443 | | | 353 | | | 0 | | | 0 | | | 127,654 | |
| Regulatory assets | | 513,192 | | | 114,461 | | | 108,620 | | | 0 | | | 0 | | | 736,273 | |
| Other | | 98,307 | | | 17,992 | | | 20,010 | | | 0 | | | 0 | | | 136,309 | |
| Total other long-term assets | | 737,357 | | | 133,896 | | | 128,983 | | | 0 | | | 0 | | | 1,000,236 | |
| Total assets | | $ | 5,251,977 | | | 977,151 | | | 897,953 | | | 77 | | | (669,785) | | | $ | 6,457,373 | |
| Capitalization and liabilities | | | | | | | | | | | | |
| Capitalization | | | | | | | | | | | | |
| Common stock equity | | $ | 2,141,918 | | | 317,451 | | | 309,363 | | | 77 | | | (626,891) | | | $ | 2,141,918 | |
| Cumulative preferred stock—not subject to mandatory redemption | | 22,293 | | | 7,000 | | | 5,000 | | | 0 | | | 0 | | | 34,293 | |
| Long-term debt, net | | 1,116,426 | | | 216,447 | | | 228,429 | | | 0 | | | 0 | | | 1,561,302 | |
| Total capitalization | | 3,280,637 | | | 540,898 | | | 542,792 | | | 77 | | | (626,891) | | | 3,737,513 | |
| Current liabilities | | | | | | | | | | | | |
| Current portion of operating lease liabilities | | 64,599 | | | 98 | | | 33 | | | 0 | | | 0 | | | 64,730 | |
| | | | | | | | | | | | |
| Short-term borrowings-non-affiliate | | 49,979 | | | 0 | | | 0 | | | 0 | | | 0 | | | 49,979 | |
| Short-term borrowings-affiliate | | 0 | | | 18,800 | | | 7,900 | | | 0 | | | (26,700) | | | 0 | |
| Accounts payable | | 97,102 | | | 19,570 | | | 17,177 | | | 0 | | | 0 | | | 133,849 | |
| Interest and preferred dividends payable | | 14,480 | | | 3,138 | | | 2,790 | | | 0 | | | (58) | | | 20,350 | |
| Taxes accrued, including revenue taxes | | 135,018 | | | 29,869 | | | 27,637 | | | 0 | | | 0 | | | 192,524 | |
| Regulatory liabilities | | 20,224 | | | 8,785 | | | 8,292 | | | 0 | | | 0 | | | 37,301 | |
| Other | | 57,926 | | | 13,851 | | | 18,621 | | | 0 | | | (16,136) | | | 74,262 | |
| Total current liabilities | | 439,328 | | | 94,111 | | | 82,450 | | | 0 | | | (42,894) | | | 572,995 | |
| Deferred credits and other liabilities | | | | | | | | | | | | |
| Operating lease liabilities | | 67,824 | | | 1,344 | | | 326 | | | 0 | | | 0 | | | 69,494 | |
| Deferred income taxes | | 282,685 | | | 54,108 | | | 61,005 | | | 0 | | | 0 | | | 397,798 | |
| Regulatory liabilities | | 656,270 | | | 173,938 | | | 92,277 | | | 0 | | | 0 | | | 922,485 | |
| Unamortized tax credits | | 82,563 | | | 15,363 | | | 13,989 | | | 0 | | | 0 | | | 111,915 | |
| Defined benefit pension and other postretirement benefit plans liability | | 373,112 | | | 77,679 | | | 79,741 | | | 0 | | | 0 | | | 530,532 | |
| Other | | 69,558 | | | 19,710 | | | 25,373 | | | 0 | | | 0 | | | 114,641 | |
| Total deferred credits and other liabilities | | 1,532,012 | | | 342,142 | | | 272,711 | | | 0 | | | 0 | | | 2,146,865 | |
| Total capitalization and liabilities | | $ | 5,251,977 | | | 977,151 | | | 897,953 | | | 77 | | | (669,785) | | | $ | 6,457,373 | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Balance Sheet
June 30, 2020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other
subsi-
diaries | | Consoli-
dating
adjustments | | Hawaiian Electric
Consolidated |
| Assets | | | | | | | | | | | | |
| Property, plant and equipment | | | | | | | | | | | | |
| Utility property, plant and equipment | | | | | | | | | | | | |
| Land | | $ | 42,389 | | | 5,606 | | | 3,612 | | | — | | | — | | | $ | 51,607 | |
| Plant and equipment | | 4,859,373 | | | 1,321,091 | | | 1,173,377 | | | — | | | — | | | 7,353,841 | |
| Less accumulated depreciation | | (1,636,504) | | | (586,351) | | | (535,689) | | | — | | | — | | | (2,758,544) | |
| Construction in progress | | 170,655 | | | 20,181 | | | 23,651 | | | — | | | — | | | 214,487 | |
| Utility property, plant and equipment, net | | 3,435,913 | | | 760,527 | | | 664,951 | | | — | | | — | | | 4,861,391 | |
| Nonutility property, plant and equipment, less accumulated depreciation | | 5,308 | | | 115 | | | 1,532 | | | — | | | — | | | 6,955 | |
| Total property, plant and equipment, net | | 3,441,221 | | | 760,642 | | | 666,483 | | | — | | | — | | | 4,868,346 | |
| Investment in wholly owned subsidiaries, at equity | | 599,198 | | | — | | | — | | | — | | | (599,198) | | | — | |
| Current assets | | | | | | | | | | | | |
| Cash and cash equivalents | | 55,170 | | | 4,594 | | | 4,130 | | | 101 | | | — | | | 63,995 | |
| Restricted cash | | 29,376 | | | — | | | — | | | — | | | — | | | 29,376 | |
| Advances to affiliates | | 13,500 | | | — | | | — | | | — | | | (13,500) | | | — | |
| Customer accounts receivable, net | | 97,615 | | | 21,422 | | | 19,001 | | | — | | | — | | | 138,038 | |
| Accrued unbilled revenues, net | | 74,086 | | | 12,705 | | | 13,810 | | | — | | | — | | | 100,601 | |
| Other accounts receivable, net | | 19,409 | | | 3,592 | | | 4,358 | | | — | | | (16,944) | | | 10,415 | |
| Fuel oil stock, at average cost | | 30,477 | | | 14,965 | | | 15,037 | | | — | | | — | | | 60,479 | |
| Materials and supplies, at average cost | | 38,475 | | | 10,116 | | | 17,653 | | | — | | | — | | | 66,244 | |
| Prepayments and other | | 18,005 | | | 17,151 | | | 2,773 | | | — | | | — | | | 37,929 | |
| Regulatory assets | | 16,846 | | | 2,598 | | | 1,842 | | | — | | | — | | | 21,286 | |
| Total current assets | | 392,959 | | | 87,143 | | | 78,604 | | | 101 | | | (30,444) | | | 528,363 | |
| Other long-term assets | | | | | | | | | | | | |
| Operating lease right-of-use assets | | 159,169 | | | 1,490 | | | 370 | | | — | | | — | | | 161,029 | |
| Regulatory assets | | 460,493 | | | 104,707 | | | 96,084 | | | — | | | — | | | 661,284 | |
| Other | | 76,482 | | | 16,915 | | | 19,588 | | | — | | | — | | | 112,985 | |
| Total other long-term assets | | 696,144 | | | 123,112 | | | 116,042 | | | — | | | — | | | 935,298 | |
| Total assets | | $ | 5,129,522 | | | 970,897 | | | 861,129 | | | 101 | | | (629,642) | | | $ | 6,332,007 | |
| Capitalization and liabilities | | | | | | | | | | | | |
| Capitalization | | | | | | | | | | | | |
| Common stock equity | | $ | 2,060,069 | | | 304,088 | | | 295,009 | | | 101 | | | (599,198) | | | $ | 2,060,069 | |
| Cumulative preferred stock—not subject to mandatory redemption | | 22,293 | | | 7,000 | | | 5,000 | | | — | | | — | | | 34,293 | |
| Long-term debt, net | | 1,116,186 | | | 216,400 | | | 228,369 | | | — | | | — | | | 1,560,955 | |
| Total capitalization | | 3,198,548 | | | 527,488 | | | 528,378 | | | 101 | | | (599,198) | | | 3,655,317 | |
| Current liabilities | | | | | | | | | | | | |
| Current portion of operating lease liabilities | | 64,405 | | | 97 | | | 32 | | | — | | | — | | | 64,534 | |
| Current portion of long-term debt | | — | | | 14,000 | | | — | | | — | | | — | | | 14,000 | |
| Short-term borrowings from non-affiliates | | 49,919 | | | — | | | — | | | — | | | — | | | 49,919 | |
| Short-term borrowings from affiliate | | — | | | 12,000 | | | 1,500 | | | — | | | (13,500) | | | — | |
| Accounts payable | | 79,071 | | | 14,408 | | | 13,599 | | | — | | | — | | | 107,078 | |
| Interest and preferred dividends payable | | 14,580 | | | 3,349 | | | 2,736 | | | — | | | (6) | | | 20,659 | |
| Taxes accrued | | 133,321 | | | 32,526 | | | 28,004 | | | — | | | — | | | 193,851 | |
| Regulatory liabilities | | 11,467 | | | 7,401 | | | 7,199 | | | — | | | — | | | 26,067 | |
| Other | | 55,378 | | | 17,181 | | | 16,070 | | | — | | | (16,938) | | | 71,691 | |
| Total current liabilities | | 408,141 | | | 100,962 | | | 69,140 | | | — | | | (30,444) | | | 547,799 | |
| Deferred credits and other liabilities | | | | | | | | | | | | |
| Operating lease liabilities | | 100,833 | | | 1,394 | | | 343 | | | — | | | — | | | 102,570 | |
| Deferred income taxes | | 261,044 | | | 52,485 | | | 57,523 | | | — | | | — | | | 371,052 | |
| Regulatory liabilities | | 674,621 | | | 178,861 | | | 98,231 | | | — | | | — | | | 951,713 | |
| Unamortized tax credits | | 84,885 | | | 15,773 | | | 14,348 | | | — | | | — | | | 115,006 | |
| Defined benefit pension and other postretirement benefit plans liability | | 340,672 | | | 69,719 | | | 69,459 | | | — | | | — | | | 479,850 | |
| Other | | 60,778 | | | 24,215 | | | 23,707 | | | — | | | — | | | 108,700 | |
| Total deferred credits and other liabilities | | 1,522,833 | | | 342,447 | | | 263,611 | | | — | | | — | | | 2,128,891 | |
| | | | | | | | | | | | |
| Total capitalization and liabilities | | $ | 5,129,522 | | | 970,897 | | | 861,129 | | | 101 | | | (629,642) | | | $ | 6,332,007 | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Balance Sheet
December 31, 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other
subsi-diaries | | Consoli-
dating
adjustments | | Hawaiian Electric
Consolidated |
| Assets | | | | | | | | | | | | |
| Property, plant and equipment | | | | | | | | | | | | |
| Utility property, plant and equipment | | | | | | | | | | | | |
| Land | | $ | 42,598 | | | 5,606 | | | 3,612 | | | — | | | — | | | $ | 51,816 | |
| Plant and equipment | | 4,765,362 | | | 1,313,727 | | | 1,161,199 | | | — | | | — | | | 7,240,288 | |
| Less accumulated depreciation | | (1,591,241) | | | (574,615) | | | (524,301) | | | — | | | — | | | (2,690,157) | |
| Construction in progress | | 165,137 | | | 9,993 | | | 17,944 | | | — | | | — | | | 193,074 | |
| Utility property, plant and equipment, net | | 3,381,856 | | | 754,711 | | | 658,454 | | | — | | | — | | | 4,795,021 | |
| Nonutility property, plant and equipment, less accumulated depreciation | | 5,310 | | | 114 | | | 1,532 | | | — | | | — | | | 6,956 | |
| Total property, plant and equipment, net | | 3,387,166 | | | 754,825 | | | 659,986 | | | — | | | — | | | 4,801,977 | |
Investment in wholly owned subsidiaries, at equity | | 591,969 | | | — | | | — | | | — | | | (591,969) | | | — | |
| Current assets | | | | | | | | | | | | |
| Cash and cash equivalents | | 2,239 | | | 6,885 | | | 1,797 | | | 101 | | | — | | | 11,022 | |
| Restricted cash | | 30,749 | | | 123 | | | — | | | — | | | — | | | 30,872 | |
| Advances to affiliates | | 27,700 | | | 8,000 | | | — | | | — | | | (35,700) | | | — | |
| Customer accounts receivable, net | | 105,454 | | | 24,520 | | | 22,816 | | | — | | | — | | | 152,790 | |
| Accrued unbilled revenues, net | | 83,148 | | | 17,071 | | | 17,008 | | | — | | | — | | | 117,227 | |
| Other accounts receivable, net | | 18,396 | | | 1,907 | | | 1,960 | | | — | | | (10,695) | | | 11,568 | |
| Fuel oil stock, at average cost | | 69,003 | | | 8,901 | | | 14,033 | | | — | | | — | | | 91,937 | |
| Materials and supplies, at average cost | | 34,876 | | | 8,313 | | | 17,513 | | | — | | | — | | | 60,702 | |
| Prepayments and other | | 88,334 | | | 3,725 | | | 24,921 | | | — | | | — | | | 116,980 | |
| Regulatory assets | | 27,689 | | | 1,641 | | | 1,380 | | | — | | | — | | | 30,710 | |
| Total current assets | | 487,588 | | | 81,086 | | | 101,428 | | | 101 | | | (46,395) | | | 623,808 | |
| Other long-term assets | | | | | | | | | | | | |
| Operating lease right-of-use assets | | 174,886 | | | 1,537 | | | 386 | | | — | | | — | | | 176,809 | |
| Regulatory assets | | 476,390 | | | 109,163 | | | 98,817 | | | — | | | — | | | 684,370 | |
| | | | | | | | | | | | |
| Other | | 69,010 | | | 15,493 | | | 17,215 | | | — | | | — | | | 101,718 | |
| Total other long-term assets | | 720,286 | | | 126,193 | | | 116,418 | | | — | | | — | | | 962,897 | |
| Total assets | | $ | 5,187,009 | | | 962,104 | | | 877,832 | | | 101 | | | (638,364) | | | $ | 6,388,682 | |
| Capitalization and liabilities | | | | | | | | | | | | |
| Capitalization | | | | | | | | | | | | |
| Common stock equity | | $ | 2,047,352 | | | 298,998 | | | 292,870 | | | 101 | | | (591,969) | | | $ | 2,047,352 | |
| Cumulative preferred stock—not subject to mandatory redemption | | 22,293 | | | 7,000 | | | 5,000 | | | — | | | — | | | 34,293 | |
| Long-term debt, net | | 1,006,737 | | | 206,416 | | | 188,561 | | | — | | | — | | | 1,401,714 | |
| Total capitalization | | 3,076,382 | | | 512,414 | | | 486,431 | | | 101 | | | (591,969) | | | 3,483,359 | |
| Current liabilities | | | | | | | | | | | | |
| Current portion of operating lease liabilities | | 63,582 | | | 94 | | | 31 | | | — | | | — | | | 63,707 | |
| Current portion of long-term debt | | 61,958 | | | 13,995 | | | 20,000 | | | — | | | — | | | 95,953 | |
| Short-term borrowings-non-affiliate | | 88,987 | | | — | | | — | | | — | | | — | | | 88,987 | |
| Short-term borrowings-affiliate | | 8,000 | | | — | | | 27,700 | | | — | | | (35,700) | | | — | |
| Accounts payable | | 139,056 | | | 25,629 | | | 23,085 | | | — | | | — | | | 187,770 | |
| Interest and preferred dividends payable | | 14,759 | | | 3,115 | | | 2,900 | | | — | | | (46) | | | 20,728 | |
| Taxes accrued | | 143,522 | | | 32,541 | | | 31,929 | | | — | | | — | | | 207,992 | |
| Regulatory liabilities | | 13,363 | | | 9,454 | | | 7,907 | | | — | | | — | | | 30,724 | |
| Other | | 51,295 | | | 11,362 | | | 15,297 | | | — | | | (10,649) | | | 67,305 | |
| Total current liabilities | | 584,522 | | | 96,190 | | | 128,849 | | | — | | | (46,395) | | | 763,166 | |
| Deferred credits and other liabilities | | | | | | | | | | | | |
| Operating lease liabilities | | 111,598 | | | 1,442 | | | 360 | | | — | | | — | | | 113,400 | |
| Deferred income taxes | | 265,864 | | | 53,534 | | | 57,752 | | | — | | | — | | | 377,150 | |
| Regulatory liabilities | | 664,894 | | | 178,474 | | | 98,218 | | | — | | | — | | | 941,586 | |
| Unamortized tax credits | | 86,852 | | | 16,196 | | | 14,820 | | | — | | | — | | | 117,868 | |
| Defined benefit pension and other postretirement benefit plans liability | | 339,471 | | | 69,928 | | | 69,364 | | | — | | | — | | | 478,763 | |
| Other | | 57,426 | | | 33,926 | | | 22,038 | | | — | | | — | | | 113,390 | |
| Total deferred credits and other liabilities | | 1,526,105 | | | 353,500 | | | 262,552 | | | — | | | — | | | 2,142,157 | |
| | | | | | | | | | | | |
| Total capitalization and liabilities | | $ | 5,187,009 | | | 962,104 | | | 877,832 | | | 101 | | | (638,364) | | | $ | 6,388,682 | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Changes in Common Stock Equity
SixThree months ended June 30, 2020March 31, 2021
| | (in thousands) | (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other
subsidiaries | | Consolidating
adjustments | | Hawaiian Electric
Consolidated | (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other
subsidiaries | | Consolidating
adjustments | | Hawaiian Electric
Consolidated |
| Balance, December 31, 2019 | | $ | 2,047,352 | | | 298,998 | | | 292,870 | | | 101 | | | (591,969) | | | $ | 2,047,352 | | |
| Balance, December 31, 2020 | | Balance, December 31, 2020 | | $ | 2,141,918 | | | 317,451 | | | 309,363 | | | 77 | | | (626,891) | | | $ | 2,141,918 | |
| Net income for common stock | Net income for common stock | | 66,234 | | | 13,246 | | | 9,334 | | | — | | | (22,580) | | | 66,234 | | Net income for common stock | | 43,358 | | | 6,692 | | | 5,818 | | | — | | | (12,510) | | | 43,358 | |
| Other comprehensive income (loss), net of taxes | | 51 | | | 4 | | | (3) | | | — | | | (1) | | | 51 | | |
| Other comprehensive income, net of taxes | | Other comprehensive income, net of taxes | | 34 | | | 1 | | | — | | | — | | | (1) | | | 34 | |
| Common stock dividends | Common stock dividends | | (53,568) | | | (8,160) | | | (7,192) | | | — | | | 15,352 | | | (53,568) | | Common stock dividends | | (27,925) | | | (3,650) | | | (3,776) | | | — | | | 7,426 | | | (27,925) | |
| | Balance, June 30, 2020 | | $ | 2,060,069 | | | 304,088 | | | 295,009 | | | 101 | | | (599,198) | | | $ | 2,060,069 | | |
| | Balance, March 31, 2021 | | Balance, March 31, 2021 | | $ | 2,157,385 | | | 320,494 | | | 311,405 | | | 77 | | | (631,976) | | | $ | 2,157,385 | |
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Changes in Common Stock Equity
SixThree months ended June 30, 2019March 31, 2020
| | (in thousands) | (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other
subsidiaries | | Consolidating
adjustments | | Hawaiian Electric
Consolidated | (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other
subsidiaries | | Consolidating
adjustments | | Hawaiian Electric
Consolidated |
| Balance, December 31, 2018 | | $ | 1,957,641 | | | 295,874 | | | 280,863 | | | 101 | | | (576,838) | | | $ | 1,957,641 | | |
| Balance, December 31, 2019 | | Balance, December 31, 2019 | | $ | 2,047,352 | | | 298,998 | | | 292,870 | | | 101 | | | (591,969) | | | $ | 2,047,352 | |
| Net income for common stock | Net income for common stock | | 64,700 | | | 9,835 | | | 10,100 | | | — | | | (19,935) | | | 64,700 | | Net income for common stock | | 23,905 | | | 6,067 | | | 2,737 | | | — | | | (8,804) | | | 23,905 | |
| Other comprehensive income, net of taxes | Other comprehensive income, net of taxes | | 47 | | | 2 | | | — | | | — | | | (2) | | | 47 | | Other comprehensive income, net of taxes | | 26 | | | 1 | | | — | | | — | | | (1) | | | 26 | |
| Common stock dividends | Common stock dividends | | (50,626) | | | (5,090) | | | (7,534) | | | — | | | 12,624 | | | (50,626) | | Common stock dividends | | (26,784) | | | (4,080) | | | (3,596) | | | — | | | 7,676 | | | (26,784) | |
| Common stock issuance expenses | Common stock issuance expenses | | — | | | (2) | | | — | | | — | | | 2 | | | — | | Common stock issuance expenses | | — | | | — | | | (1) | | | — | | | 1 | | | 0 | |
| Balance, June 30, 2019 | | $ | 1,971,762 | | | 300,619 | | | 283,429 | | | 101 | | | (584,149) | | | $ | 1,971,762 | | |
| Balance, March 31, 2020 | | Balance, March 31, 2020 | | $ | 2,044,499 | | | 300,986 | | | 292,010 | | | 101 | | | (593,097) | | | $ | 2,044,499 | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Cash Flows
SixThree months ended June 30, 2020March 31, 2021
| | (in thousands) | (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other
subsidiaries | | Consolidating
adjustments | | Hawaiian Electric
Consolidated | (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other
subsidiaries | | Consolidating
adjustments | | Hawaiian Electric
Consolidated |
| | Net cash provided by operating activities | Net cash provided by operating activities | | $ | 154,967 | | | 20,307 | | | 21,601 | | | — | | | (15,407) | | | $ | 181,468 | | Net cash provided by operating activities | | $ | 18,764 | | | 9,635 | | | 10,988 | | | 0 | | | (7,426) | | | $ | 31,961 | |
| Cash flows from investing activities | Cash flows from investing activities | | | | | | | | | | | | | Cash flows from investing activities | | | | | | | | | | | | |
| Capital expenditures | Capital expenditures | | (129,829) | | | (30,785) | | | (25,918) | | | — | | | — | | | (186,532) | | Capital expenditures | | (45,293) | | | (12,728) | | | (12,340) | | | 0 | | | 0 | | | (70,361) | |
| | Advances from affiliates | Advances from affiliates | | 14,200 | | | 8,000 | | | — | | | — | | | (22,200) | | | — | | Advances from affiliates | | 26,700 | | | 0 | | | 0 | | | 0 | | | (26,700) | | | 0 | |
| Other | Other | | 4,354 | | | 552 | | | 480 | | | — | | | 55 | | | 5,441 | | Other | | 1,182 | | | 372 | | | 309 | | | 0 | | | 0 | | | 1,863 | |
| Net cash used in investing activities | Net cash used in investing activities | | (111,275) | | | (22,233) | | | (25,438) | | | — | | | (22,145) | | | (181,091) | | Net cash used in investing activities | | (17,411) | | | (12,356) | | | (12,031) | | | 0 | | | (26,700) | | | (68,498) | |
| Cash flows from financing activities | Cash flows from financing activities | | | | | | | | | | | | | Cash flows from financing activities | | | | | | | | | | | | |
| Common stock dividends | Common stock dividends | | (53,568) | | | (8,160) | | | (7,192) | | | — | | | 15,352 | | | (53,568) | | Common stock dividends | | (27,925) | | | (3,650) | | | (3,776) | | | 0 | | | 7,426 | | | (27,925) | |
| Preferred stock dividends of Hawaiian Electric and subsidiaries | Preferred stock dividends of Hawaiian Electric and subsidiaries | | (540) | | | (267) | | | (191) | | | — | | | — | | | (998) | | Preferred stock dividends of Hawaiian Electric and subsidiaries | | (270) | | | (134) | | | (95) | | | 0 | | | 0 | | | (499) | |
| Proceeds from issuance of short-term debt | | 100,000 | | | — | | | — | | | — | | | — | | | 100,000 | | |
| | Repayment of short-term debt | Repayment of short-term debt | | (100,000) | | | — | | | — | | | — | | | — | | | (100,000) | | Repayment of short-term debt | | (50,000) | | | 0 | | | 0 | | | 0 | | | 0 | | | (50,000) | |
| Proceeds from issuance of long-term debt | Proceeds from issuance of long-term debt | | 205,000 | | | 10,000 | | | 40,000 | | | — | | | — | | | 255,000 | | Proceeds from issuance of long-term debt | | 60,000 | | | 30,000 | | | 25,000 | | | 0 | | | 0 | | | 115,000 | |
| Repayment of long-term debt and funds transferred for repayment of long-term debt | | (95,000) | | | (14,000) | | | — | | | — | | | — | | | (109,000) | | |
| Net increase (decrease) in short-term borrowings from non-affiliates and affiliate with original maturities of three months or less | | (46,987) | | | 12,000 | | | (26,200) | | | — | | | 22,200 | | | (38,987) | | |
| | Net decrease in short-term borrowings from non-affiliates and affiliate with original maturities of three months or less | | Net decrease in short-term borrowings from non-affiliates and affiliate with original maturities of three months or less | | 0 | | | (18,800) | | | (7,900) | | | 0 | | | 26,700 | | | 0 | |
| Other | Other | | (1,039) | | | (61) | | | (247) | | | — | | | — | | | (1,347) | | Other | | (96) | | | (11) | | | (9) | | | 0 | | | 0 | | | (116) | |
| Net cash provided by financing activities | | 7,866 | | | (488) | | | 6,170 | | | — | | | 37,552 | | | 51,100 | | |
| Net cash provided by (used in) financing activities | | Net cash provided by (used in) financing activities | | (18,291) | | | 7,405 | | | 13,220 | | | 0 | | | 34,126 | | | 36,460 | |
| Net increase (decrease) in cash and cash equivalents | Net increase (decrease) in cash and cash equivalents | | 51,558 | | | (2,414) | | | 2,333 | | | — | | | — | | | 51,477 | | Net increase (decrease) in cash and cash equivalents | | (16,938) | | | 4,684 | | | 12,177 | | | 0 | | | 0 | | | (77) | |
| Cash, cash equivalents and restricted cash, beginning of period | Cash, cash equivalents and restricted cash, beginning of period | | 32,988 | | | 7,008 | | | 1,797 | | | 101 | | | — | | | 41,894 | | Cash, cash equivalents and restricted cash, beginning of period | | 58,171 | | | 3,046 | | | 2,032 | | | 77 | | | 0 | | | 63,326 | |
| Cash, cash equivalents and restricted cash, end of period | Cash, cash equivalents and restricted cash, end of period | | 84,546 | | | 4,594 | | | 4,130 | | | 101 | | | — | | | 93,371 | | Cash, cash equivalents and restricted cash, end of period | | 41,233 | | | 7,730 | | | 14,209 | | | 77 | | | 0 | | | 63,249 | |
| Less: Restricted cash | Less: Restricted cash | | (29,376) | | | — | | | — | | | — | | | — | | | (29,376) | | Less: Restricted cash | | (11,506) | | | 0 | | | 0 | | | 0 | | | 0 | | | (11,506) | |
| Cash and cash equivalents, end of period | Cash and cash equivalents, end of period | | $ | 55,170 | | | 4,594 | | | 4,130 | | | 101 | | | — | | | $ | 63,995 | | Cash and cash equivalents, end of period | | $ | 29,727 | | | 7,730 | | | 14,209 | | | 77 | | | 0 | | | $ | 51,743 | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Cash Flows
SixThree months ended June 30, 2019March 31, 2020
| | (in thousands) | (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other
subsidiaries | | Consolidating
adjustments | | Hawaiian Electric
Consolidated | (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other
subsidiaries | | Consolidating
adjustments | | Hawaiian Electric
Consolidated |
| | Net cash provided by operating activities | Net cash provided by operating activities | | $ | 84,427 | | | 16,406 | | | 12,607 | | | — | | | (12,624) | | | $ | 100,816 | | Net cash provided by operating activities | | $ | 29,004 | | | 9,478 | | | 7,931 | | | 0 | | | (7,272) | | | $ | 39,141 | |
| Cash flows from investing activities | Cash flows from investing activities | | | | | | | | | | | | | Cash flows from investing activities | | | | | | | | | | | | |
| Capital expenditures | Capital expenditures | | (150,945) | | | (18,083) | | | (30,868) | | | — | | | — | | | (199,896) | | Capital expenditures | | (83,191) | | | (18,181) | | | (17,772) | | | 0 | | | 0 | | | (119,144) | |
| | Advances to affiliates | | (25,300) | | | (5,000) | | | — | | | — | | | 30,300 | | | — | | |
| Advances from (to) affiliates | | Advances from (to) affiliates | | (17,000) | | | 8,000 | | | 0 | | | 0 | | | 9,000 | | | 0 | |
| Other | Other | | 2,821 | | | (280) | | | (31) | | | — | | | — | | | 2,510 | | Other | | 2,752 | | | 64 | | | 301 | | | 0 | | | (404) | | | 2,713 | |
| Net cash used in investing activities | Net cash used in investing activities | | (173,424) | | | (23,363) | | | (30,899) | | | — | | | 30,300 | | | (197,386) | | Net cash used in investing activities | | (97,439) | | | (10,117) | | | (17,471) | | | 0 | | | 8,596 | | | (116,431) | |
| Cash flows from financing activities | Cash flows from financing activities | | | | | | | | | | | | Cash flows from financing activities | | | | | | | | | | | |
| Common stock dividends | Common stock dividends | | (50,626) | | | (5,090) | | | (7,534) | | | — | | | 12,624 | | | (50,626) | | Common stock dividends | | (26,784) | | | (4,080) | | | (3,596) | | | 0 | | | 7,676 | | | (26,784) | |
| Preferred stock dividends of Hawaiian Electric and subsidiaries | Preferred stock dividends of Hawaiian Electric and subsidiaries | | (540) | | | (267) | | | (191) | | | — | | | — | | | (998) | | Preferred stock dividends of Hawaiian Electric and subsidiaries | | (270) | | | (134) | | | (95) | | | 0 | | | 0 | | | (499) | |
| | Proceeds from issuance of short-term debt | Proceeds from issuance of short-term debt | | 25,000 | | | — | | | — | | | — | | | — | | | 25,000 | | Proceeds from issuance of short-term debt | | 50,000 | | | 0 | | | 0 | | | 0 | | | 0 | | | 50,000 | |
| Proceeds from issuance of long-term debt | Proceeds from issuance of long-term debt | | 30,000 | | | 10,000 | | | 10,000 | | | — | | | — | | | 50,000 | | Proceeds from issuance of long-term debt | | 95,000 | | | 0 | | | 0 | | | 0 | | | 0 | | | 95,000 | |
| Repayment of long-term debt | | (31,546) | | | (10,000) | | | (10,000) | | | — | | | — | | | (51,546) | | |
| Net increase in short-term borrowings from non-affiliates and affiliate with original maturities of three months or less | | 116,901 | | | — | | | 25,300 | | | — | | | (30,300) | | | 111,901 | | |
| | Net increase (decrease) in short-term borrowings from non-affiliates and affiliate with original maturities of three months or less | | Net increase (decrease) in short-term borrowings from non-affiliates and affiliate with original maturities of three months or less | | (46,987) | | | 2,500 | | | 14,500 | | | 0 | | | (9,000) | | | (38,987) | |
| Other | Other | | 197 | | | 43 | | | 83 | | | — | | | — | | | 323 | | Other | | (21) | | | (1) | | | (1) | | | 0 | | | 0 | | | (23) | |
| Net cash provided by (used in) financing activities | Net cash provided by (used in) financing activities | | 89,386 | | | (5,314) | | | 17,658 | | | — | | | (17,676) | | | 84,054 | | Net cash provided by (used in) financing activities | | 70,938 | | | (1,715) | | | 10,808 | | | 0 | | | (1,324) | | | 78,707 | |
| Net increase (decrease) in cash and cash equivalents | Net increase (decrease) in cash and cash equivalents | | 389 | | | (12,271) | | | (634) | | | — | | | — | | | (12,516) | | Net increase (decrease) in cash and cash equivalents | | 2,503 | | | (2,354) | | | 1,268 | | | 0 | | | 0 | | | 1,417 | |
| Cash and cash equivalents, beginning of period | | 16,732 | | | 15,623 | | | 3,421 | | | 101 | | | — | | | 35,877 | | |
| Cash, cash equivalents and restricted cash, beginning of period | | Cash, cash equivalents and restricted cash, beginning of period | | 32,988 | | | 7,008 | | | 1,797 | | | 101 | | | 0 | | | 41,894 | |
| Cash, cash equivalents and restricted cash, end of period | | Cash, cash equivalents and restricted cash, end of period | | 35,491 | | | 4,654 | | | 3,065 | | | 101 | | | 0 | | | 43,311 | |
| Less: Restricted cash | | Less: Restricted cash | | (30,902) | | | 0 | | | 0 | | | 0 | | | 0 | | | (30,902) | |
| Cash and cash equivalents, end of period | Cash and cash equivalents, end of period | | $ | 17,121 | | | 3,352 | | | 2,787 | | | 101 | | | — | | | $ | 23,361 | | Cash and cash equivalents, end of period | | $ | 4,589 | | | 4,654 | | | 3,065 | | | 101 | | | 0 | | | $ | 12,409 | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Note 4 · Bank segment
Selected financial information
American Savings Bank, F.S.B.
Statements of Income and Comprehensive Income Data
| | | | | Three months ended June 30, | | | Six months ended June 30 | | | | | Three months ended March 31 |
| (in thousands) | (in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | (in thousands) | | | 2021 | | 2020 |
| Interest and dividend income | Interest and dividend income | | | | | | | | | Interest and dividend income | | | | | |
| Interest and fees on loans | Interest and fees on loans | | $ | 53,541 | | | $ | 58,620 | | | $ | 109,086 | | | $ | 116,480 | | Interest and fees on loans | | | $ | 49,947 | | | $ | 55,545 | |
| Interest and dividends on investment securities | Interest and dividends on investment securities | | 6,288 | | | 7,535 | | | 15,718 | | | 18,163 | | Interest and dividends on investment securities | | | 8,673 | | | 9,430 | |
| Total interest and dividend income | Total interest and dividend income | | 59,829 | | | 66,155 | | | 124,804 | | | 134,643 | | Total interest and dividend income | | | 58,620 | | | 64,975 | |
| Interest expense | Interest expense | | | | | | | | | Interest expense | | | | | |
| Interest on deposit liabilities | Interest on deposit liabilities | | 3,071 | | | 4,287 | | | 6,658 | | | 8,539 | | Interest on deposit liabilities | | | 1,462 | | | 3,587 | |
| Interest on other borrowings | Interest on other borrowings | | 75 | | | 411 | | | 388 | | | 939 | | Interest on other borrowings | | | 27 | | | 313 | |
| Total interest expense | Total interest expense | | 3,146 | | | 4,698 | | | 7,046 | | | 9,478 | | Total interest expense | | | 1,489 | | | 3,900 | |
| Net interest income | Net interest income | | 56,683 | | | 61,457 | | | 117,758 | | | 125,165 | | Net interest income | | | 57,131 | | | 61,075 | |
| Provision for credit losses | Provision for credit losses | | 15,133 | | | 7,688 | | | 25,534 | | | 14,558 | | Provision for credit losses | | | (8,435) | | | 10,401 | |
| Net interest income after provision for credit losses | Net interest income after provision for credit losses | | 41,550 | | | 53,769 | | | 92,224 | | | 110,607 | | Net interest income after provision for credit losses | | | 65,566 | | | 50,674 | |
| Noninterest income | Noninterest income | | | | | | | | | Noninterest income | | | | | |
| Fees from other financial services | Fees from other financial services | | 3,102 | | | 4,798 | | | 7,673 | | | 9,360 | | Fees from other financial services | | | 5,073 | | | 4,571 | |
| Fee income on deposit liabilities | Fee income on deposit liabilities | | 2,897 | | | 5,004 | | | 8,010 | | | 10,082 | | Fee income on deposit liabilities | | | 3,863 | | | 5,113 | |
| Fee income on other financial products | Fee income on other financial products | | 1,212 | | | 1,830 | | | 3,084 | | | 3,423 | | Fee income on other financial products | | | 2,442 | | | 1,872 | |
| Bank-owned life insurance | Bank-owned life insurance | | 1,673 | | | 2,390 | | | 2,467 | | | 4,649 | | Bank-owned life insurance | | | 2,561 | | | 794 | |
| Mortgage banking income | Mortgage banking income | | 6,252 | | | 976 | | | 8,252 | | | 1,590 | | Mortgage banking income | | | 4,300 | | | 2,000 | |
| Gain on sale of investment securities, net | Gain on sale of investment securities, net | | 9,275 | | | — | | | 9,275 | | | — | | Gain on sale of investment securities, net | | | 528 | | | 0 | |
| Other income, net | Other income, net | | (251) | | | 534 | | | 162 | | | 992 | | Other income, net | | | 272 | | | 413 | |
| Total noninterest income | Total noninterest income | | 24,160 | | | 15,532 | | | 38,923 | | | 30,096 | | Total noninterest income | | | 19,039 | | | 14,763 | |
| Noninterest expense | Noninterest expense | | | | | | | | | Noninterest expense | | | | | |
| Compensation and employee benefits | Compensation and employee benefits | | 25,079 | | | 25,750 | | | 50,856 | | | 51,262 | | Compensation and employee benefits | | | 28,037 | | | 25,777 | |
| Occupancy | Occupancy | | 5,442 | | | 5,479 | | | 10,709 | | | 10,149 | | Occupancy | | | 4,969 | | | 5,267 | |
| Data processing | Data processing | | 3,849 | | | 3,852 | | | 7,686 | | | 7,590 | | Data processing | | | 4,351 | | | 3,837 | |
| Services | Services | | 2,474 | | | 2,606 | | | 5,283 | | | 5,032 | | Services | | | 2,862 | | | 2,809 | |
| Equipment | Equipment | | 2,290 | | | 2,189 | | | 4,629 | | | 4,253 | | Equipment | | | 2,222 | | | 2,339 | |
| Office supplies, printing and postage | Office supplies, printing and postage | | 1,049 | | | 1,663 | | | 2,390 | | | 3,023 | | Office supplies, printing and postage | | | 1,044 | | | 1,341 | |
| Marketing | Marketing | | 379 | | | 1,323 | | | 1,181 | | | 2,313 | | Marketing | | | 648 | | | 802 | |
| FDIC insurance | FDIC insurance | | 751 | | | 628 | | | 853 | | | 1,254 | | FDIC insurance | | | 816 | | | 102 | |
Other expense1 | | 7,063 | | | 4,519 | | | 11,257 | | | 8,373 | | |
| Other expense | | Other expense | | | 2,554 | | | 4,194 | |
| Total noninterest expense | Total noninterest expense | | 48,376 | | | 48,009 | | | 94,844 | | | 93,249 | | Total noninterest expense | | | 47,503 | | | 46,468 | |
| Income before income taxes | Income before income taxes | | 17,334 | | | 21,292 | | | 36,303 | | | 47,454 | | Income before income taxes | | | 37,102 | | | 18,969 | |
| Income taxes | Income taxes | | 3,320 | | | 4,276 | | | 6,528 | | | 9,599 | | Income taxes | | | 7,546 | | | 3,208 | |
| Net income | Net income | | 14,014 | | | 17,016 | | | 29,775 | | | 37,855 | | Net income | | | 29,556 | | | 15,761 | |
| Other comprehensive income (loss), net of taxes | Other comprehensive income (loss), net of taxes | | (280) | | | 14,275 | | | 19,567 | | | 20,527 | | Other comprehensive income (loss), net of taxes | | | (45,754) | | | 19,847 | |
| Comprehensive income | | $ | 13,734 | | | $ | 31,291 | | | $ | 49,342 | | | $ | 58,382 | | |
| Comprehensive income (loss) | | Comprehensive income (loss) | | | $ | (16,198) | | | $ | 35,608 | |
1 The three- and six-month periods ended June 30, 2020 include approximately $3.7 million and $3.8 million, respectively, of certain significant direct and incremental COVID-19 related costs. These costs, which have been recorded in Other expense, include $2.3 million of compensation expense and $1.1 million of enhanced cleaning and sanitation costs.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Reconciliation to amounts per HEI Condensed Consolidated Statements of Income*:
| | | | | Three months ended June 30, | | | Six months ended June 30 | | | | | Three months ended March 31 |
| (in thousands) | (in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | (in thousands) | | | 2021 | | 2020 |
| Interest and dividend income | Interest and dividend income | | $ | 59,829 | | | $ | 66,155 | | | $ | 124,804 | | | $ | 134,643 | | Interest and dividend income | | | $ | 58,620 | | | $ | 64,975 | |
| Noninterest income | Noninterest income | | 24,160 | | | 15,532 | | | 38,923 | | | 30,096 | | Noninterest income | | | 19,039 | | | 14,763 | |
| Less: Gain on sale of investment securities, net | Less: Gain on sale of investment securities, net | | (9,275) | | | — | | | (9,275) | | | — | | Less: Gain on sale of investment securities, net | | | 528 | | | 0 | |
| *Revenues-Bank | *Revenues-Bank | | 74,714 | | | 81,687 | | | 154,452 | | | 164,739 | | *Revenues-Bank | | | 77,131 | | | 79,738 | |
| Total interest expense | Total interest expense | | 3,146 | | | 4,698 | | | 7,046 | | | 9,478 | | Total interest expense | | | 1,489 | | | 3,900 | |
| Provision for credit losses | Provision for credit losses | | 15,133 | | | 7,688 | | | 25,534 | | | 14,558 | | Provision for credit losses | | | (8,435) | | | 10,401 | |
| Noninterest expense | Noninterest expense | | 48,376 | | | 48,009 | | | 94,844 | | | 93,249 | | Noninterest expense | | | 47,503 | | | 46,468 | |
| Less: Retirement defined benefits gain (expense)—other than service costs | | (434) | | | 40 | | | (868) | | | 80 | | |
| Less: Retirement defined benefits expense (credit)—other than service costs | | Less: Retirement defined benefits expense (credit)—other than service costs | | | (1,278) | | | 434 | |
| *Expenses-Bank | *Expenses-Bank | | 66,221 | | | 60,435 | | | 126,556 | | | 117,365 | | *Expenses-Bank | | | 41,835 | | | 60,335 | |
| *Operating income-Bank | *Operating income-Bank | | 8,493 | | | 21,252 | | | 27,896 | | | 47,374 | | *Operating income-Bank | | | 35,296 | | | 19,403 | |
| Add back: Retirement defined benefits (gain) expense—other than service costs | | 434 | | | (40) | | | 868 | | | (80) | | |
| Add back: Retirement defined benefits expense (credit)—other than service costs | | Add back: Retirement defined benefits expense (credit)—other than service costs | | | (1,278) | | | 434 | |
| Add back: Gain on sale of investment securities, net | Add back: Gain on sale of investment securities, net | | (9,275) | | | — | | | (9,275) | | | — | | Add back: Gain on sale of investment securities, net | | | 528 | | | 0 | |
| Income before income taxes | Income before income taxes | | $ | 17,334 | | | $ | 21,292 | | | $ | 36,303 | | | $ | 47,454 | | Income before income taxes | | | $ | 37,102 | | | $ | 18,969 | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
American Savings Bank, F.S.B.
Balance Sheets Data
| | (in thousands) | (in thousands) | | June 30, 2020 | | | December 31, 2019 | | (in thousands) | | March 31, 2021 | | December 31, 2020 |
| Assets | Assets | | | | | | | | | Assets | | | | | | | | |
| Cash and due from banks | Cash and due from banks | | | | $ | 140,968 | | | | | $ | 129,770 | | Cash and due from banks | | | | $ | 113,698 | | | | | $ | 178,422 | |
| Interest-bearing deposits | Interest-bearing deposits | | 365,996 | | | 48,628 | | Interest-bearing deposits | | 110,365 | | | 114,304 | |
| Cash and cash equivalents | | Cash and cash equivalents | | 224,063 | | | 292,726 | |
| | Investment securities | Investment securities | | Investment securities | |
| Available-for-sale, at fair value | Available-for-sale, at fair value | | | | 1,389,633 | | | | | 1,232,826 | | Available-for-sale, at fair value | | | | 2,305,257 | | | | | 1,970,417 | |
| Held-to-maturity, at amortized cost (fair value of $131,131 and $143,467, respectively) | | 124,623 | | | 139,451 | | |
| Held-to-maturity, at amortized cost (fair value of $285,599 and $229,963, respectively) | | Held-to-maturity, at amortized cost (fair value of $285,599 and $229,963, respectively) | | 295,046 | | | 226,947 | |
| Stock in Federal Home Loan Bank, at cost | Stock in Federal Home Loan Bank, at cost | | | | 9,880 | | | | | 8,434 | | Stock in Federal Home Loan Bank, at cost | | | | 10,000 | | | | | 8,680 | |
| Loans held for investment | Loans held for investment | | | | 5,437,817 | | | | | 5,121,176 | | Loans held for investment | | | | 5,310,081 | | | | | 5,333,843 | |
| Allowance for credit losses | Allowance for credit losses | | | | (81,307) | | | | | (53,355) | | Allowance for credit losses | | | | (91,793) | | | | | (101,201) | |
| Net loans | Net loans | | | | 5,356,510 | | | | | 5,067,821 | | Net loans | | | | 5,218,288 | | | | | 5,232,642 | |
| Loans held for sale, at lower of cost or fair value | Loans held for sale, at lower of cost or fair value | | | | 37,143 | | | | | 12,286 | | Loans held for sale, at lower of cost or fair value | | | | 23,637 | | | | | 28,275 | |
| Other | Other | | | | 512,722 | | | | | 511,611 | | Other | | | | 559,543 | | | | | 554,656 | |
| Goodwill | Goodwill | | | | 82,190 | | | | | 82,190 | | Goodwill | | | | 82,190 | | | | | 82,190 | |
| Total assets | Total assets | | | | $ | 8,019,665 | | | | | $ | 7,233,017 | | Total assets | | | | $ | 8,718,024 | | | | | $ | 8,396,533 | |
| Liabilities and shareholder’s equity | Liabilities and shareholder’s equity | | | | | | | | | Liabilities and shareholder’s equity | | | | | | | | |
| Deposit liabilities—noninterest-bearing | Deposit liabilities—noninterest-bearing | | | | $ | 2,422,042 | | | | | $ | 1,909,682 | | Deposit liabilities—noninterest-bearing | | | | $ | 2,833,844 | | | | | $ | 2,598,500 | |
| Deposit liabilities—interest-bearing | Deposit liabilities—interest-bearing | | | | 4,607,910 | | | | | 4,362,220 | | Deposit liabilities—interest-bearing | | | | 4,911,450 | | | | | 4,788,457 | |
| Other borrowings | Other borrowings | | | | 124,975 | | | | | 115,110 | | Other borrowings | | | | 102,685 | | | | | 89,670 | |
| Other | Other | | | | 158,344 | | | | | 146,954 | | Other | | | | 154,418 | | | | | 183,731 | |
| Total liabilities | Total liabilities | | | | 7,313,271 | | | | | 6,533,966 | | Total liabilities | | | | 8,002,397 | | | | | 7,660,358 | |
| Commitments and contingencies | Commitments and contingencies | | | | | | Commitments and contingencies | | | | 0 | | | | 0 |
| Common stock | Common stock | | | | 1 | | | | | 1 | | Common stock | | | | 1 | | | | | 1 | |
| Additional paid-in capital | Additional paid-in capital | | 350,826 | | | 349,453 | | Additional paid-in capital | | 352,408 | | | 351,758 | |
| Retained earnings | Retained earnings | | | | 344,662 | | | | | 358,259 | | Retained earnings | | | | 394,026 | | | | | 369,470 | |
| Accumulated other comprehensive income (loss), net of taxes | Accumulated other comprehensive income (loss), net of taxes | | | | | | | | | Accumulated other comprehensive income (loss), net of taxes | | | | | | | | |
| Net unrealized gains on securities | | $ | 21,264 | | | | | $ | 2,481 | | | | |
| Net unrealized gains (losses) on securities | | Net unrealized gains (losses) on securities | | $ | (25,791) | | | | | $ | 19,986 | | |
| Retirement benefit plans | Retirement benefit plans | | (10,359) | | | 10,905 | | | (11,143) | | | (8,662) | | Retirement benefit plans | | (5,017) | | | (30,808) | | | (5,040) | | | 14,946 | |
| Total shareholder’s equity | Total shareholder’s equity | | | | 706,394 | | | | | 699,051 | | Total shareholder’s equity | | 715,627 | | | | | 736,175 | |
| Total liabilities and shareholder’s equity | Total liabilities and shareholder’s equity | | | | $ | 8,019,665 | | | | | $ | 7,233,017 | | Total liabilities and shareholder’s equity | | | | $ | 8,718,024 | | | | | 8,396,533 | |
| | Other assets | Other assets | | | | | | | | | Other assets | | | | | | | | |
| Bank-owned life insurance | Bank-owned life insurance | | | | $ | 159,951 | | | | | $ | 157,465 | | Bank-owned life insurance | | | | $ | 162,821 | | | | | $ | 163,265 | |
| Premises and equipment, net | Premises and equipment, net | | | | 203,217 | | | | | 204,449 | | Premises and equipment, net | | | | 206,247 | | | | | 206,134 | |
| | Accrued interest receivable | Accrued interest receivable | | | | 23,381 | | | | | 19,365 | | Accrued interest receivable | | | | 24,381 | | | | | 24,616 | |
| Mortgage-servicing rights | Mortgage-servicing rights | | | | 9,647 | | | | | 9,101 | | Mortgage-servicing rights | | | | 10,685 | | | | | 10,020 | |
| Low-income housing investments | Low-income housing investments | | 61,632 | | | 66,302 | | Low-income housing investments | | 80,791 | | | 83,435 | |
| Real estate acquired in settlement of loans, net | | | | 43 | | | | | — | | |
| | | Other | Other | | | | 54,851 | | | | | 54,929 | | Other | | | | 74,618 | | | | | 67,186 | |
| | | | | | $ | 512,722 | | | | | $ | 511,611 | | | | | | $ | 559,543 | | | | | $ | 554,656 | |
| Other liabilities | Other liabilities | | | | | | | | | Other liabilities | | | | | | | | |
| Accrued expenses | Accrued expenses | | | | $ | 40,382 | | | | | $ | 45,822 | | Accrued expenses | | | | $ | 55,073 | | | | | $ | 62,694 | |
| Federal and state income taxes payable | Federal and state income taxes payable | | | | 18,021 | | | | | 14,996 | | Federal and state income taxes payable | | | | 1,709 | | | | | 6,582 | |
| Cashier’s checks | Cashier’s checks | | | | 25,284 | | | | | 23,647 | | Cashier’s checks | | | | 29,363 | | | | | 38,011 | |
| Advance payments by borrowers | Advance payments by borrowers | | | | 10,458 | | | | | 10,486 | | Advance payments by borrowers | | | | 5,863 | | | | | 10,207 | |
| Other | Other | | | | 64,199 | | | | | 52,003 | | Other | | | | 62,410 | | | | | 66,237 | |
| | | | | | $ | 158,344 | | | | | $ | 146,954 | | | | | | $ | 154,418 | | | | | $ | 183,731 | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Bank-owned life insurance is life insurance purchased by ASB on the lives of certain key employees, with ASB as the beneficiary. The insurance is used to fund employee benefits through tax-free income from increases in the cash value of the policies and insurance proceeds paid to ASB upon an insured’s death.
Other borrowings consisted of securities sold under agreements to repurchase, federal funds purchased and advances from the Federal Home Loan Bank (FHLB) of $95.0$102.7 million, NaN and $30.0 million,NaN, respectively, as of June 30, 2020March 31, 2021 and $115$89.7 million, NaN and NaN, respectively, as of December 31, 2019.2020.
Investment securities. The major components of investment securities were as follows:
| | | | | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Estimated fair
value | | Gross unrealized losses | | | | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Estimated fair
value | | Gross unrealized losses |
| | | | | | | | | | | | Less than 12 months | | | 12 months or longer | | | Estimated fair
value | | Less than 12 months | | 12 months or longer |
| (dollars in thousands) | (dollars in thousands) | | | | | | | | | | Number of issues | | Fair
value | | Amount | | Number of issues | | Fair
value | | Amount | (dollars in thousands) | | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | | | | Fair
value | | Amount |
| June 30, 2020 | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | March 31, 2021 | | | | | | | | | | | | |
| Available-for-sale | Available-for-sale | | Available-for-sale | |
| U.S. Treasury and federal agency obligations | U.S. Treasury and federal agency obligations | | $ | 100,195 | | | $ | 2,219 | | | $ | — | | | $ | 102,414 | | | — | | | $ | — | | | $ | — | | | — | | | $ | — | | | $ | — | | U.S. Treasury and federal agency obligations | | $ | 55,969 | | | $ | 1,719 | | | $ | (41) | | | $ | 57,647 | | | 1 | | | $ | 4,908 | | | $ | (41) | | | 0 | | | $ | 0 | | | $ | 0 | |
| Mortgage-backed securities* | Mortgage-backed securities* | | 1,201,796 | | | 25,469 | | | (280) | | | 1,226,985 | | | 6 | | | 96,296 | | | (258) | | | 1 | | | 1,803 | | | (22) | | Mortgage-backed securities* | | 2,239,311 | | | 15,404 | | | (53,363) | | | 2,201,352 | | | 92 | | | 1,613,008 | | | (53,344) | | | 1 | | | 958 | | | (19) | |
| Corporate bonds | Corporate bonds | | 29,767 | | | 1,640 | | | — | | | 31,407 | | | — | | | — | | | — | | | — | | | — | | | — | | Corporate bonds | | 29,781 | | | 1,050 | | | 0 | | | 30,831 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Mortgage revenue bonds | Mortgage revenue bonds | | 28,827 | | | — | | | — | | | 28,827 | | | — | | | | | | | — | | | — | | | — | | Mortgage revenue bonds | | 15,427 | | | 0 | | | 0 | | | 15,427 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| | | | $ | 1,360,585 | | | $ | 29,328 | | | $ | (280) | | | $ | 1,389,633 | | | 6 | | | $ | 96,296 | | | $ | (258) | | | 1 | | | $ | 1,803 | | | $ | (22) | | | | $ | 2,340,488 | | | $ | 18,173 | | | $ | (53,404) | | | $ | 2,305,257 | | | 93 | | | $ | 1,617,916 | | | $ | (53,385) | | | 1 | | | $ | 958 | | | $ | (19) | |
| Held-to-maturity | Held-to-maturity | | Held-to-maturity | |
| Mortgage-backed securities* | Mortgage-backed securities* | | $ | 124,623 | | | $ | 6,508 | | | $ | — | | | $ | 131,131 | | | — | | | $ | — | | | $ | — | | | — | | | $ | — | | | $ | — | | Mortgage-backed securities* | | $ | 295,046 | | | $ | 2,812 | | | $ | (12,259) | | | $ | 285,599 | | | 16 | | | $ | 220,908 | | | $ | (12,259) | | | 0 | | | $ | 0 | | | $ | 0 | |
| | | | $ | 124,623 | | | $ | 6,508 | | | $ | — | | | $ | 131,131 | | | — | | | $ | — | | | $ | — | | | — | | | $ | — | | | $ | — | | | | $ | 295,046 | | | $ | 2,812 | | | $ | (12,259) | | | $ | 285,599 | | | 16 | | | $ | 220,908 | | | $ | (12,259) | | | 0 | | | $ | 0 | | | $ | 0 | |
| December 31, 2019 | | |
| December 31, 2020 | | December 31, 2020 | |
| Available-for-sale | Available-for-sale | | Available-for-sale | |
| U.S. Treasury and federal agency obligations | U.S. Treasury and federal agency obligations | | $ | 117,255 | | | $ | 652 | | | $ | (120) | | | $ | 117,787 | | | 2 | | | $ | 4,110 | | | $ | (11) | | | 3 | | | $ | 27,637 | | | $ | (109) | | U.S. Treasury and federal agency obligations | | $ | 60,260 | | | $ | 2,062 | | | $ | 0 | | | $ | 62,322 | | | 0 | | | $ | 0 | | | $ | 0 | | | 0 | | | $ | 0 | | | $ | 0 | |
| Mortgage-backed securities* | Mortgage-backed securities* | | 1,024,892 | | | 6,000 | | | (4,507) | | | 1,026,385 | | | 19 | | | 152,071 | | | (819) | | | 75 | | | 318,020 | | | (3,688) | | Mortgage-backed securities* | | 1,825,893 | | | 26,817 | | | (3,151) | | | 1,849,559 | | | 22 | | | 373,924 | | | (3,151) | | | 0 | | | 0 | | | 0 | |
| Corporate bonds | Corporate bonds | | 58,694 | | | 1,363 | | | — | | | 60,057 | | | — | | | — | | | — | | | — | | | — | | | — | | Corporate bonds | | 29,776 | | | 1,575 | | | 0 | | | 31,351 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Mortgage revenue bonds | Mortgage revenue bonds | | 28,597 | | | — | | | — | | | 28,597 | | | — | | | — | | | — | | | — | | | — | | | — | | Mortgage revenue bonds | | 27,185 | | | 0 | | | 0 | | | 27,185 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| | | | $ | 1,229,438 | | | $ | 8,015 | | | $ | (4,627) | | | $ | 1,232,826 | | | 21 | | | $ | 156,181 | | | $ | (830) | | | 78 | | | $ | 345,657 | | | $ | (3,797) | | | | $ | 1,943,114 | | | $ | 30,454 | | | $ | (3,151) | | | $ | 1,970,417 | | | 22 | | | $ | 373,924 | | | $ | (3,151) | | | 0 | | | $ | 0 | | | $ | 0 | |
| Held-to-maturity | Held-to-maturity | | Held-to-maturity | |
| Mortgage-backed securities* | Mortgage-backed securities* | | $ | 139,451 | | | $ | 4,087 | | | $ | (71) | | | $ | 143,467 | | | 1 | | | $ | 12,986 | | | $ | (71) | | | — | | | $ | — | | | $ | — | | Mortgage-backed securities* | | $ | 226,947 | | | $ | 3,846 | | | $ | (830) | | | $ | 229,963 | | | 7 | | | $ | 114,152 | | | $ | (830) | | | 0 | | | $ | 0 | | | $ | 0 | |
| | | | $ | 139,451 | | | $ | 4,087 | | | $ | (71) | | | $ | 143,467 | | | 1 | | | $ | 12,986 | | | $ | (71) | | | — | | | $ | — | | | $ | — | | | | $ | 226,947 | | | $ | 3,846 | | | $ | (830) | | | $ | 229,963 | | | 7 | | | $ | 114,152 | | | $ | (830) | | | 0 | | | $ | 0 | | | $ | 0 | |
* Issued or guaranteed by U.S. Government agencies or sponsored agencies
ASB does not believe that the investment securities that were in an unrealized loss position at June 30, 2020,March 31, 2021, represent a credit loss. Total gross unrealized losses were primarily attributable to change in market conditions. On a quarterly basis the investment securities are evaluated for changes in financial condition of the issuer. Based upon ASB’s evaluation, all securities held within the investment portfolio continue to be investment grade by one or more agencies. The contractual cash flows of the U.S. Treasury, federal agency obligations and agency mortgage-backed securities are backed by the full faith and credit guaranty of the United States government or an agency of the government. ASB does not intend to sell the securities before the recovery of its amortized cost basis and there have been no adverse changes in the timing of the contractual cash flows for the securities. ASB’s investment securities portfolio did not require an allowance for credit losses at June 30,March 31, 2021 and December 31, 2020.
U.S. Treasury, federal agency obligations, corporate bonds, and mortgage revenue bonds have contractual terms to maturity. Mortgage-backed securities have contractual terms to maturity, but require periodic payments to reduce principal. In addition, expected maturities will differ from contractual maturities because borrowers have the right to prepay the underlying mortgages.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
The contractual maturities of investment securities were as follows:
| | June 30, 2020 | | Amortized cost | | Fair value | |
| March 31, 2021 | | March 31, 2021 | | Amortized cost | | Fair value |
| (in thousands) | (in thousands) | | | | | (in thousands) | | | | |
| Available-for-sale | Available-for-sale | | Available-for-sale | |
| Due in one year or less | Due in one year or less | | $ | 65,330 | | | $ | 65,776 | | Due in one year or less | | $ | 11,996 | | | $ | 12,011 | |
| Due after one year through five years | Due after one year through five years | | 44,570 | | | 46,378 | | Due after one year through five years | | 43,530 | | | 45,180 | |
| Due after five years through ten years | Due after five years through ten years | | 33,462 | | | 35,067 | | Due after five years through ten years | | 30,224 | | | 31,287 | |
| Due after ten years | Due after ten years | | 15,427 | | | 15,427 | | Due after ten years | | 15,427 | | | 15,427 | |
| | | | 158,789 | | | 162,648 | | | | 101,177 | | | 103,905 | |
| Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies | Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies | | 1,201,796 | | | 1,226,985 | | Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies | | 2,239,311 | | | 2,201,352 | |
| Total available-for-sale securities | Total available-for-sale securities | | $ | 1,360,585 | | | $ | 1,389,633 | | Total available-for-sale securities | | $ | 2,340,488 | | | $ | 2,305,257 | |
| Held-to-maturity | Held-to-maturity | | Held-to-maturity | |
| Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies | Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies | | $ | 124,623 | | | $ | 131,131 | | Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies | | $ | 295,046 | | | $ | 285,599 | |
| Total held-to-maturity securities | Total held-to-maturity securities | | $ | 124,623 | | | $ | 131,131 | | Total held-to-maturity securities | | $ | 295,046 | | | $ | 285,599 | |
Proceeds from the sale of available-for-sale securities which also included the sale of ASB’s entire Visa Class B restricted stock holdings, were $169.2$197.4 million and NaN, respectively, for each of the three and six months ended June 30, 2020March 31, 2021 and NaN for each of the three and six months ended June 30, 2019.2020. Gross realized gains were $9.3 million for each of the three and six months ended June 30, 2020 and NaN for each of the three and six months ended June 30, 2019. Gross realized losses were NaN for each of the three and six months ended June 30, 2020 and 2019. Tax expense on realized gains were $2.5 million for the three and six months ended June 30, 2020.March 31, 2021 were $1.0 million and $0.5 million, respectively. Gross realized gains and losses for the three months ended March 31, 2020 were NaN.
Loans. The components of loans were summarized as follows:
| | | June 30, 2020 | | December 31, 2019 | | March 31, 2021 | | December 31, 2020 |
| (in thousands) | (in thousands) | | | | (in thousands) | | | |
| Real estate: | Real estate: | | | | Real estate: | | | |
| Residential 1-4 family | Residential 1-4 family | $ | 2,123,226 | | | $ | 2,178,135 | | Residential 1-4 family | $ | 2,107,537 | | | $ | 2,144,239 | |
| Commercial real estate | Commercial real estate | 855,566 | | | 824,830 | | Commercial real estate | 1,012,968 | | | 983,865 | |
| Home equity line of credit | Home equity line of credit | 1,065,264 | | | 1,092,125 | | Home equity line of credit | 901,462 | | | 963,578 | |
| Residential land | Residential land | 13,224 | | | 14,704 | | Residential land | 17,468 | | | 15,617 | |
| Commercial construction | Commercial construction | 92,904 | | | 70,605 | | Commercial construction | 114,455 | | | 121,424 | |
| Residential construction | Residential construction | 10,759 | | | 11,670 | | Residential construction | 13,365 | | | 11,022 | |
| Total real estate | Total real estate | 4,160,943 | | | 4,192,069 | | Total real estate | 4,167,255 | | | 4,239,745 | |
| Commercial | Commercial | 1,073,829 | | | 670,674 | | Commercial | 1,010,004 | | | 936,748 | |
| Consumer | Consumer | 216,030 | | | 257,921 | | Consumer | 148,511 | | | 168,733 | |
| Total loans | Total loans | 5,450,802 | | | 5,120,664 | | Total loans | 5,325,770 | | | 5,345,226 | |
| Deferred fees and discounts | Deferred fees and discounts | (12,985) | | | 512 | | Deferred fees and discounts | (15,689) | | | (11,383) | |
| Allowance for credit losses | Allowance for credit losses | (81,307) | | | (53,355) | | Allowance for credit losses | (91,793) | | | (101,201) | |
| Total loans, net | Total loans, net | $ | 5,356,510 | | | $ | 5,067,821 | | Total loans, net | $ | 5,218,288 | | | $ | 5,232,642 | |
ASB's policy is to require private mortgage insurance on all real estate loans when the loan-to-value ratio of the property exceeds 80% of the lower of the appraised value or purchase price at origination. For non-owner occupied residential property purchases, the loan-to-value ratio may not exceed 75% of the lower of the appraised value or purchase price at origination.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Allowance for credit losses. The allowance for credit losses (balances and changes) by portfolio segment were as follows:
| | (in thousands) | (in thousands) | | Residential
1-4 family | | Commercial real
estate | | Home
equity line of credit | | Residential land | | Commercial construction | | Residential construction | | Commercial loans | | Consumer loans | | | Total | (in thousands) | | Residential
1-4 family | | Commercial real
estate | | Home
equity line of credit | | Residential land | | Commercial construction | | Residential construction | | Commercial loans | | Consumer loans | | | Total |
| Three months ended June 30, 2020 | | | | | | | | | | | | | | | | | | | |
| | | | | Three months ended March 31, 2021 | | Three months ended March 31, 2021 | | | | | | | | | | | | | | | | | |
| Allowance for credit losses: | Allowance for credit losses: | | | | | | | | | | | | | | | | | | | | Allowance for credit losses: | | | | | | | | | | | | | | | | | | | |
| Beginning balance | Beginning balance | | $ | 4,476 | | | $ | 16,587 | | | $ | 6,225 | | | $ | 352 | | | $ | 3,446 | | | $ | 14 | | | $ | 12,977 | | | $ | 33,007 | | | | $ | 77,084 | | Beginning balance | | $ | 4,600 | | | $ | 35,607 | | | $ | 6,813 | | | $ | 609 | | | $ | 4,149 | | | $ | 11 | | | $ | 25,462 | | | $ | 23,950 | | | | $ | 101,201 | |
| Charge-offs | Charge-offs | | (7) | | | — | | | — | | | (343) | | | — | | | — | | | (699) | | | (6,331) | | | | (7,380) | | Charge-offs | | 0 | | | 0 | | | (50) | | | 0 | | | 0 | | | 0 | | | (771) | | | (2,860) | | | | (3,681) | |
| Recoveries | Recoveries | | 2 | | | — | | | — | | | 5 | | | — | | | — | | | 106 | | | 657 | | | | 770 | | Recoveries | | 3 | | | 0 | | | 15 | | | 10 | | | 0 | | | 0 | | | 273 | | | 1,007 | | | | 1,308 | |
| Provision | Provision | | (560) | | | 4,513 | | | (11) | | | 342 | | | 1,311 | | | — | | | 1,484 | | | 3,754 | | | | 10,833 | | Provision | | 658 | | | (1,262) | | | (877) | | | (46) | | | (2,696) | | | 5 | | | (460) | | | (2,357) | | | | (7,035) | |
| Ending balance | Ending balance | | $ | 3,911 | | | $ | 21,100 | | | $ | 6,214 | | | $ | 356 | | | $ | 4,757 | | | $ | 14 | | | $ | 13,868 | | | $ | 31,087 | | | | $ | 81,307 | | Ending balance | | $ | 5,261 | | | $ | 34,345 | | | $ | 5,901 | | | $ | 573 | | | $ | 1,453 | | | $ | 16 | | | $ | 24,504 | | | $ | 19,740 | | | | $ | 91,793 | |
| Three months ended June 30, 2019 | | | | | | | | | | | | | | | | | | | |
| Allowance for credit losses: | | | | | | | | | | | | | | | | | | | | |
| Beginning balance | | $ | 1,911 | | | $ | 14,825 | | | $ | 6,493 | | | $ | 425 | | | $ | 2,843 | | | $ | 3 | | | $ | 10,814 | | | $ | 16,983 | | | | $ | 54,297 | | |
| Charge-offs | | (5) | | | — | | | (19) | | | (4) | | | — | | | — | | | (494) | | | (5,102) | | | | (5,624) | | |
| Recoveries | | 8 | | | — | | | 4 | | | 7 | | | — | | | — | | | 1,281 | | | 764 | | | | 2,064 | | |
| Provision | | 101 | | | 986 | | | 403 | | | 109 | | | (797) | | | (1) | | | 1,472 | | | 5,415 | | | | 7,688 | | |
| Ending balance | | $ | 2,015 | | | $ | 15,811 | | | $ | 6,881 | | | $ | 537 | | | $ | 2,046 | | | $ | 2 | | | $ | 13,073 | | | $ | 18,060 | | | | $ | 58,425 | | |
| Six months ended June 30, 2020 | | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, 2020 | | Three months ended March 31, 2020 | | | | | | | | | | | | | | | | | |
| Allowance for credit losses: | Allowance for credit losses: | | | | | | | | | | | | | | | | | | | | Allowance for credit losses: | | | | | | | | | | | | | | | | | | | |
| Beginning balance, prior to adoption of ASU No. 2016-13 | Beginning balance, prior to adoption of ASU No. 2016-13 | | $ | 2,380 | | | $ | 15,053 | | | $ | 6,922 | | | $ | 449 | | | $ | 2,097 | | | $ | 3 | | | $ | 10,245 | | | $ | 16,206 | | | | $ | 53,355 | | Beginning balance, prior to adoption of ASU No. 2016-13 | | $ | 2,380 | | | $ | 15,053 | | | $ | 6,922 | | | $ | 449 | | | $ | 2,097 | | | $ | 3 | | | $ | 10,245 | | | $ | 16,206 | | | | $ | 53,355 | |
Impact of adopting ASU No. 2016-13 | Impact of adopting ASU No. 2016-13 | | 2,150 | | | 208 | | | (541) | | | (64) | | | 289 | | | 14 | | | 922 | | | 16,463 | | | | 19,441 | | Impact of adopting ASU No. 2016-13 | | 2,150 | | | 208 | | | (541) | | | (64) | | | 289 | | | 14 | | | 922 | | | 16,463 | | | | 19,441 | |
| Charge-offs | Charge-offs | | (7) | | | — | | | — | | | (351) | | | — | | | — | | | (1,068) | | | (12,585) | | | | (14,011) | | Charge-offs | | 0 | | | 0 | | | 0 | | | (8) | | | 0 | | | 0 | | | (369) | | | (6,254) | | | | (6,631) | |
| Recoveries | Recoveries | | 55 | | | — | | | 6 | | | 14 | | | — | | | — | | | 292 | | | 1,421 | | | | 1,788 | | Recoveries | | 53 | | | 0 | | | 6 | | | 9 | | | 0 | | | 0 | | | 186 | | | 764 | | | | 1,018 | |
| Provision | Provision | | (667) | | | 5,839 | | | (173) | | | 308 | | | 2,371 | | | (3) | | | 3,477 | | | 9,582 | | | | 20,734 | | Provision | | (107) | | | 1,326 | | | (162) | | | (34) | | | 1,060 | | | (3) | | | 1,993 | | | 5,828 | | | | 9,901 | |
| Ending balance | Ending balance | | $ | 3,911 | | | $ | 21,100 | | | $ | 6,214 | | | $ | 356 | | | $ | 4,757 | | | $ | 14 | | | $ | 13,868 | | | $ | 31,087 | | | | $ | 81,307 | | Ending balance | | $ | 4,476 | | | $ | 16,587 | | | $ | 6,225 | | | $ | 352 | | | $ | 3,446 | | | $ | 14 | | | $ | 12,977 | | | $ | 33,007 | | | | $ | 77,084 | |
| | Six months ended June 30, 2019 | | | | | | | | | | | | | | | | | | | |
| Allowance for credit losses: | | | | | | | | | | | | | | | | | | | | |
| Beginning balance | | $ | 1,976 | | | $ | 14,505 | | | $ | 6,371 | | | $ | 479 | | | $ | 2,790 | | | $ | 4 | | | $ | 9,225 | | | $ | 16,769 | | | | $ | 52,119 | | |
| Charge-offs | | (19) | | | — | | | (19) | | | (4) | | | — | | | — | | | (1,112) | | | (10,661) | | | | (11,815) | | |
| Recoveries | | 617 | | | — | | | 9 | | | 14 | | | — | | | — | | | 1,461 | | | 1,462 | | | | 3,563 | | |
| Provision | | (559) | | | 1,306 | | | 520 | | | 48 | | | (744) | | | (2) | | | 3,499 | | | 10,490 | | | | 14,558 | | |
| Ending balance | | $ | 2,015 | | | $ | 15,811 | | | $ | 6,881 | | | $ | 537 | | | $ | 2,046 | | | $ | 2 | | | $ | 13,073 | | | $ | 18,060 | | | | $ | 58,425 | | |
| December 31, 2019 | | | | |
| Ending balance: individually evaluated for impairment | | $ | 898 | | | $ | 2 | | | $ | 322 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,015 | | | $ | 454 | | | | $ | 2,691 | | |
| Ending balance: collectively evaluated for impairment | | $ | 1,482 | | | $ | 15,051 | | | $ | 6,600 | | | $ | 449 | | | $ | 2,097 | | | $ | 3 | | | $ | 9,230 | | | $ | 15,752 | | | | $ | 50,664 | | |
| Financing Receivables: | | | | | | | | | | | | | | | | | | | | |
| Ending balance | | $ | 2,178,135 | | | $ | 824,830 | | | $ | 1,092,125 | | | $ | 14,704 | | | $ | 70,605 | | | $ | 11,670 | | | $ | 670,674 | | | $ | 257,921 | | | | $ | 5,120,664 | | |
| Ending balance: individually evaluated for impairment | | $ | 15,600 | | | $ | 1,048 | | | $ | 12,073 | | | $ | 3,091 | | | $ | — | | | $ | — | | | $ | 8,418 | | | $ | 507 | | | | $ | 40,737 | | |
| Ending balance: collectively evaluated for impairment | | $ | 2,162,535 | | | $ | 823,782 | | | $ | 1,080,052 | | | $ | 11,613 | | | $ | 70,605 | | | $ | 11,670 | | | $ | 662,256 | | | $ | 257,414 | | | | $ | 5,079,927 | | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Allowance for loan commitments. The allowance for loan commitments by portfolio segment were as follows:
| | (in thousands) | (in thousands) | | Home equity
line of credit | | Commercial construction | | Commercial loans | | Total | | (in thousands) | | Home equity
line of credit | | Commercial construction | | Commercial loans | | Total | |
| Three months ended June 30, 2020 | | | |
| Three months ended March 31, 2021 | | Three months ended March 31, 2021 | | |
| Allowance for loan commitments: | Allowance for loan commitments: | | Allowance for loan commitments: | |
| Beginning balance | Beginning balance | | $ | 300 | | | $ | 3,191 | | | $ | 309 | | | $ | 3,800 | | | Beginning balance | | $ | 300 | | | $ | 3,000 | | | $ | 1,000 | | | $ | 4,300 | | |
| Provision | Provision | | — | | | 4,309 | | | (9) | | | 4,300 | | | Provision | | 100 | | | (1,700) | | | 200 | | | (1,400) | | |
| Ending balance | Ending balance | | $ | 300 | | | $ | 7,500 | | | $ | 300 | | | $ | 8,100 | | | Ending balance | | $ | 400 | | | $ | 1,300 | | | $ | 1,200 | | | $ | 2,900 | | |
| Six months ended June 30, 2020 | | | | |
| Three months ended March 31, 2020 | | Three months ended March 31, 2020 | | |
| Allowance for loan commitments: | Allowance for loan commitments: | | Allowance for loan commitments: | |
| Beginning balance, prior to adoption of ASU No. 2016-13 | Beginning balance, prior to adoption of ASU No. 2016-13 | | $ | 392 | | | $ | 931 | | | $ | 418 | | | $ | 1,741 | | | Beginning balance, prior to adoption of ASU No. 2016-13 | | $ | 392 | | | $ | 931 | | | $ | 418 | | | $ | 1,741 | | |
Impact of adopting ASU No. 2016-13 | Impact of adopting ASU No. 2016-13 | | (92) | | | 1,745 | | | (94) | | | 1,559 | | | Impact of adopting ASU No. 2016-13 | | (92) | | | 1,745 | | | (94) | | | 1,559 | | |
| Provision | Provision | | — | | | 4,824 | | | (24) | | | 4,800 | | | Provision | | 0 | | | 515 | | | (15) | | | 500 | | |
| Ending balance | Ending balance | | $ | 300 | | | $ | 7,500 | | | $ | 300 | | | $ | 8,100 | | | Ending balance | | $ | 300 | | | $ | 3,191 | | | $ | 309 | | | $ | 3,800 | | |
Credit quality. ASB performs an internal loan review and grading on an ongoing basis. The review provides management with periodic information as to the quality of the loan portfolio and effectiveness of its lending policies and procedures. The objectives of the loan review and grading procedures are to identify, in a timely manner, existing or emerging credit trends so that appropriate steps can be initiated to manage risk and avoid or minimize future losses. Loans subject to grading include commercial, commercial real estate and commercial construction loans.
Each commercial and commercial real estate loan is assigned an Asset Quality Rating (AQR) reflecting the likelihood of repayment or orderly liquidation of that loan transaction pursuant to regulatory credit classifications: Pass, Special Mention, Substandard, Doubtful, and Loss. The AQR is a function of the probability of default model rating, the loss given default, and possible non-model factors which impact the ultimate collectability of the loan such as character of the business owner/guarantor, interim period performance, litigation, tax liens and major changes in business and economic conditions. Pass exposures generally are well protected by the current net worth and paying capacity of the obligor or by the value of the asset or underlying collateral. Special Mention loans have potential weaknesses that, if left uncorrected, could jeopardize the liquidation of the debt. Substandard loans have well-defined weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that ASB may sustain some loss. An asset classified Doubtful has the weaknesses of those classified Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. An asset classified Loss is considered uncollectible and has such little value that its continuance as a bankable asset is not warranted.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
The credit risk profile by vintage date based on payment activity or internally assigned grade for loans was as follows:
| | | Term Loans by Origination Year | | | Revolving Loans | | | | Term Loans by Origination Year | | Revolving Loans | |
| (in thousands) | (in thousands) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Revolving | | Converted to term loans | | Total | (in thousands) | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Revolving | | Converted to term loans | | Total |
| June 30, 2020 | | |
| March 31, 2021 | | March 31, 2021 | |
| Residential 1-4 family | Residential 1-4 family | | Residential 1-4 family | |
| Current | Current | | $ | 176,536 | | | $ | 272,951 | | | $ | 165,584 | | | $ | 258,111 | | | $ | 215,920 | | | $ | 1,029,434 | | | $ | — | | | $ | — | | | $ | 2,118,536 | | Current | | $ | 150,713 | | | $ | 549,327 | | | $ | 184,339 | | | $ | 97,560 | | | $ | 179,131 | | | $ | 934,471 | | | $ | 0 | | | $ | 0 | | | $ | 2,095,541 | |
| 30-59 days past due | 30-59 days past due | | — | | | — | | | — | | | — | | | — | | | 2,192 | | | — | | | — | | | 2,192 | | 30-59 days past due | | 0 | | | 280 | | | 0 | | | 0 | | | 0 | | | 2,081 | | | 0 | | | 0 | | | 2,361 | |
| 60-89 days past due | 60-89 days past due | | — | | | — | | | — | | | — | | | — | | | 606 | | | — | | | — | | | 606 | | 60-89 days past due | | 0 | | | 0 | | | 3,018 | | | 431 | | | 0 | | | 1,954 | | | 0 | | | 0 | | | 5,403 | |
| Greater than 89 days past due | Greater than 89 days past due | | — | | | — | | | — | | | 353 | | | — | | | 1,539 | | | — | | | — | | | 1,892 | | Greater than 89 days past due | | 0 | | | 0 | | | 942 | | | 0 | | | 0 | | | 3,290 | | | 0 | | | 0 | | | 4,232 | |
| | 176,536 | | | 272,951 | | | 165,584 | | | 258,464 | | | 215,920 | | | 1,033,771 | | | — | | | — | | | 2,123,226 | | | 150,713 | | | 549,607 | | | 188,299 | | | 97,991 | | | 179,131 | | | 941,796 | | | 0 | | | 0 | | | 2,107,537 | |
| Home equity line of credit | Home equity line of credit | | Home equity line of credit | |
| Current | Current | | — | | | — | | | — | | | — | | | — | | | — | | | 1,027,589 | | | 33,797 | | | 1,061,386 | | Current | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 861,116 | | | 36,792 | | | 897,908 | |
| 30-59 days past due | 30-59 days past due | | — | | | — | | | — | | | — | | | — | | | — | | | 790 | | | 312 | | | 1,102 | | 30-59 days past due | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 659 | | | 473 | | | 1,132 | |
| 60-89 days past due | 60-89 days past due | | — | | | — | | | — | | | — | | | — | | | — | | | 408 | | | 175 | | | 583 | | 60-89 days past due | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 261 | | | 73 | | | 334 | |
| Greater than 89 days past due | Greater than 89 days past due | | — | | | — | | | — | | | — | | | — | | | — | | | 1,358 | | | 835 | | | 2,193 | | Greater than 89 days past due | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 1,243 | | | 845 | | | 2,088 | |
| | — | | | — | | | — | | | — | | | — | | | — | | | 1,030,145 | | | 35,119 | | | 1,065,264 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 863,279 | | | 38,183 | | | 901,462 | |
| Residential land | Residential land | | Residential land | |
| Current | Current | | 2,095 | | | 4,975 | | | 2,024 | | | 2,041 | | | 22 | | | 2,067 | | | — | | | — | | | 13,224 | | Current | | 2,794 | | | 8,354 | | | 2,884 | | | 1,290 | | | 855 | | | 292 | | | 0 | | | 0 | | | 16,469 | |
| 30-59 days past due | 30-59 days past due | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | 30-59 days past due | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 699 | | | 0 | | | 0 | | | 699 | |
| 60-89 days past due | 60-89 days past due | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | 60-89 days past due | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Greater than 89 days past due | Greater than 89 days past due | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Greater than 89 days past due | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 300 | | | 0 | | | 0 | | | 300 | |
| | 2,095 | | | 4,975 | | | 2,024 | | | 2,041 | | | 22 | | | 2,067 | | | — | | | — | | | 13,224 | | | 2,794 | | | 8,354 | | | 2,884 | | | 1,290 | | | 855 | | | 1,291 | | | 0 | | | 0 | | | 17,468 | |
| Residential construction | Residential construction | | Residential construction | |
| Current | Current | | 2,725 | | | 5,034 | | | 974 | | | 2,026 | | | — | | | — | | | — | | | — | | | 10,759 | | Current | | 1,114 | | | 7,865 | | | 3,344 | | | 383 | | | 659 | | | 0 | | | 0 | | | 0 | | | 13,365 | |
| 30-59 days past due | 30-59 days past due | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | 30-59 days past due | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| 60-89 days past due | 60-89 days past due | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | 60-89 days past due | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Greater than 89 days past due | Greater than 89 days past due | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Greater than 89 days past due | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| | 2,725 | | | 5,034 | | | 974 | | | 2,026 | | | — | | | — | | | — | | | — | | | 10,759 | | | 1,114 | | | 7,865 | | | 3,344 | | | 383 | | | 659 | | | 0 | | | 0 | | | 0 | | | 13,365 | |
| Consumer | Consumer | | Consumer | |
| Current | Current | | 25,186 | | | 87,908 | | | 53,640 | | | 14,851 | | | 1,602 | | | 505 | | | 21,691 | | | 3,062 | | | 208,445 | | Current | | 6,658 | | | 25,307 | | | 57,781 | | | 29,734 | | | 4,219 | | | 475 | | | 16,332 | | | 3,729 | | | 144,235 | |
| 30-59 days past due | 30-59 days past due | | 105 | | | 573 | | | 583 | | | 229 | | | 18 | | | — | | | 200 | | | 44 | | | 1,752 | | 30-59 days past due | | 125 | | | 164 | | | 577 | | | 452 | | | 90 | | | 1 | | | 106 | | | 125 | | | 1,640 | |
| 60-89 days past due | 60-89 days past due | | 83 | | | 741 | | | 792 | | | 209 | | | 24 | | | — | | | 248 | | | 67 | | | 2,164 | | 60-89 days past due | | 0 | | | 149 | | | 623 | | | 372 | | | 119 | | | 1 | | | 80 | | | 92 | | | 1,436 | |
| Greater than 89 days past due | Greater than 89 days past due | | 95 | | | 1,258 | | | 1,172 | | | 483 | | | 73 | | | — | | | 424 | | | 164 | | | 3,669 | | Greater than 89 days past due | | 0 | | | 218 | | | 356 | | | 280 | | | 56 | | | 1 | | | 199 | | | 90 | | | 1,200 | |
| | 25,469 | | | 90,480 | | | 56,187 | | | 15,772 | | | 1,717 | | | 505 | | | 22,563 | | | 3,337 | | | 216,030 | | | 6,783 | | | 25,838 | | | 59,337 | | | 30,838 | | | 4,484 | | | 478 | | | 16,717 | | | 4,036 | | | 148,511 | |
| Commercial real estate | Commercial real estate | | Commercial real estate | |
| Pass | Pass | | 89,882 | | | 77,350 | | | 78,115 | | | 29,390 | | | 56,246 | | | 172,941 | | | 17,219 | | | — | | | 521,143 | | Pass | | 23,091 | | | 274,952 | | | 69,384 | | | 60,627 | | | 28,174 | | | 222,617 | | | 11,000 | | | 0 | | | 689,845 | |
| Special Mention | Special Mention | | 9,684 | | | 41,662 | | | 54,791 | | | 35,400 | | | 69,418 | | | 60,098 | | | — | | | — | | | 271,053 | | Special Mention | | 0 | | | 4,914 | | | 29,597 | | | 57,489 | | | 51,586 | | | 97,247 | | | 0 | | | 0 | | | 240,833 | |
| Substandard | Substandard | | — | | | 488 | | | 1,930 | | | 605 | | | 3,669 | | | 56,678 | | | — | | | — | | | 63,370 | | Substandard | | 0 | | | 0 | | | 14,647 | | | 4,170 | | | 1,877 | | | 61,596 | | | 0 | | | 0 | | | 82,290 | |
| Doubtful | Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Doubtful | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| | 99,566 | | | 119,500 | | | 134,836 | | | 65,395 | | | 129,333 | | | 289,717 | | | 17,219 | | | — | | | 855,566 | | | 23,091 | | | 279,866 | | | 113,628 | | | 122,286 | | | 81,637 | | | 381,460 | | | 11,000 | | | 0 | | | 1,012,968 | |
| Commercial construction | Commercial construction | | Commercial construction | |
| Pass | Pass | | 6,933 | | | 13,458 | | | 29,873 | | | — | | | 7,472 | | | — | | | 14,060 | | | — | | | 71,796 | | Pass | | 0 | | | 21,414 | | | 39,513 | | | 26,990 | | | 0 | | | 2,917 | | | 20,972 | | | 0 | | | 111,806 | |
| Special Mention | Special Mention | | 819 | | | — | | | — | | | 18,000 | | | — | | | — | | | — | | | — | | | 18,819 | | Special Mention | | 245 | | | 2,404 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 2,649 | |
| Substandard | Substandard | | — | | | — | | | — | | | — | | | — | | | 2,289 | | | — | | | — | | | 2,289 | | Substandard | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Doubtful | Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Doubtful | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| | 7,752 | | | 13,458 | | | 29,873 | | | 18,000 | | | 7,472 | | | 2,289 | | | 14,060 | | | — | | | 92,904 | | | 245 | | | 23,818 | | | 39,513 | | | 26,990 | | | 0 | | | 2,917 | | | 20,972 | | | 0 | | | 114,455 | |
| Commercial | Commercial | | Commercial | |
| Pass | Pass | | 450,699 | | | 154,672 | | | 94,309 | | | 33,771 | | | 13,876 | | | 38,911 | | | 92,475 | | | 14,868 | | | 893,581 | | Pass | | 169,095 | | | 337,753 | | | 96,251 | | | 60,462 | | | 28,545 | | | 51,072 | | | 91,178 | | | 19,666 | | | 854,022 | |
| Special Mention | Special Mention | | 6,593 | | | 29,695 | | | 4,759 | | | 10,578 | | | 38,970 | | | 20,813 | | | 44,521 | | | 11,222 | | | 167,151 | | Special Mention | | 65 | | | 38,316 | | | 15,024 | | | 1,820 | | | 6,725 | | | 33,990 | | | 26,301 | | | 26 | | | 122,267 | |
| Substandard | Substandard | | 165 | | | 4,681 | | | 145 | | | 1,637 | | | 1,241 | | | 3,139 | | | 607 | | | 1,482 | | | 13,097 | | Substandard | | 0 | | | 275 | | | 7,921 | | | 2,004 | | | 3,765 | | | 11,276 | | | 6,665 | | | 1,809 | | | 33,715 | |
| Doubtful | Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Doubtful | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| | 457,457 | | | 189,048 | | | 99,213 | | | 45,986 | | | 54,087 | | | 62,863 | | | 137,603 | | | 27,572 | | | 1,073,829 | | | 169,160 | | | 376,344 | | | 119,196 | | | 64,286 | | | 39,035 | | | 96,338 | | | 124,144 | | | 21,501 | | | 1,010,004 | |
| Total loans | Total loans | | $ | 771,600 | | | $ | 695,446 | | | $ | 488,691 | | | $ | 407,684 | | | $ | 408,551 | | | $ | 1,391,212 | | | $ | 1,221,590 | | | $ | 66,028 | | | $ | 5,450,802 | | Total loans | | $ | 353,900 | | | $ | 1,271,692 | | | $ | 526,201 | | | $ | 344,064 | | | $ | 305,801 | | | $ | 1,424,280 | | | $ | 1,036,112 | | | $ | 63,720 | | | $ | 5,325,770 | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Term Loans by Origination Year | | Revolving Loans | | |
| (in thousands) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Revolving | | Converted to term loans | | Total |
| December 31, 2020 | | | | | | | | | | | | | | | | | | |
| Residential 1-4 family | | | | | | | | | | | | | | | | | | |
| Current | | $ | 567,282 | | | $ | 218,988 | | | $ | 111,243 | | | $ | 203,916 | | | $ | 184,888 | | | $ | 849,788 | | | $ | 0 | | | $ | 0 | | | $ | 2,136,105 | |
| 30-59 days past due | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 2,629 | | | 0 | | | 0 | | | 2,629 | |
| 60-89 days past due | | 0 | | | 476 | | | 0 | | | 0 | | | 0 | | | 2,314 | | | 0 | | | 0 | | | 2,790 | |
| Greater than 89 days past due | | 0 | | | 0 | | | 0 | | | 353 | | | 0 | | | 2,362 | | | 0 | | | 0 | | | 2,715 | |
| | 567,282 | | | 219,464 | | | 111,243 | | | 204,269 | | | 184,888 | | | 857,093 | | | 0 | | | 0 | | | 2,144,239 | |
| Home equity line of credit | | | | | | | | | | | | | | | | | | |
| Current | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 927,106 | | | 33,228 | | | 960,334 | |
| 30-59 days past due | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 552 | | | 298 | | | 850 | |
| 60-89 days past due | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 267 | | | 75 | | | 342 | |
| Greater than 89 days past due | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 1,463 | | | 589 | | | 2,052 | |
| | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 929,388 | | | 34,190 | | | 963,578 | |
| Residential land | | | | | | | | | | | | | | | | | | |
| Current | | 8,357 | | | 3,427 | | | 1,598 | | | 939 | | | 22 | | | 272 | | | 0 | | | 0 | | | 14,615 | |
| 30-59 days past due | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 702 | | | 0 | | | 0 | | | 702 | |
| 60-89 days past due | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Greater than 89 days past due | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 300 | | | 0 | | | 0 | | | 300 | |
| | 8,357 | | | 3,427 | | | 1,598 | | | 939 | | | 22 | | | 1,274 | | | 0 | | | 0 | | | 15,617 | |
| Residential construction | | | | | | | | | | | | | | | | | | |
| Current | | 6,919 | | | 3,093 | | | 385 | | | 625 | | | 0 | | | 0 | | | 0 | | | 0 | | | 11,022 | |
| 30-59 days past due | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| 60-89 days past due | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Greater than 89 days past due | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| | 6,919 | | | 3,093 | | | 385 | | | 625 | | | 0 | | | 0 | | | 0 | | | 0 | | | 11,022 | |
| Consumer | | | | | | | | | | | | | | | | | | |
| Current | | 28,818 | | | 67,159 | | | 37,072 | | | 7,207 | | | 293 | | | 348 | | | 18,351 | | | 3,758 | | | 163,006 | |
| 30-59 days past due | | 406 | | | 1,085 | | | 727 | | | 155 | | | 4 | | | 0 | | | 138 | | | 90 | | | 2,605 | |
| 60-89 days past due | | 191 | | | 549 | | | 427 | | | 165 | | | 3 | | | 0 | | | 97 | | | 59 | | | 1,491 | |
| Greater than 89 days past due | | 131 | | | 532 | | | 409 | | | 119 | | | 7 | | | 0 | | | 262 | | | 171 | | | 1,631 | |
| | 29,546 | | | 69,325 | | | 38,635 | | | 7,646 | | | 307 | | | 348 | | | 18,848 | | | 4,078 | | | 168,733 | |
| Commercial real estate | | | | | | | | | | | | | | | | | | |
| Pass | | 270,603 | | | 63,301 | | | 62,168 | | | 28,432 | | | 55,089 | | | 155,654 | | | 11,000 | | | 0 | | | 646,247 | |
| Special Mention | | 10,261 | | | 36,405 | | | 57,952 | | | 33,763 | | | 68,287 | | | 48,094 | | | 0 | | | 0 | | | 254,762 | |
| Substandard | | 0 | | | 14,720 | | | 4,181 | | | 1,892 | | | 4,423 | | | 57,640 | | | 0 | | | 0 | | | 82,856 | |
| Doubtful | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| | 280,864 | | | 114,426 | | | 124,301 | | | 64,087 | | | 127,799 | | | 261,388 | | | 11,000 | | | 0 | | | 983,865 | |
| Commercial construction | | | | | | | | | | | | | | | | | | |
| Pass | | 14,480 | | | 31,965 | | | 26,990 | | | 0 | | | 5,562 | | | 0 | | | 22,517 | | | 0 | | | 101,514 | |
| Special Mention | | 1,910 | | | 0 | | | 0 | | | 18,000 | | | 0 | | | 0 | | | 0 | | | 0 | | | 19,910 | |
| Substandard | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Doubtful | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| | 16,390 | | | 31,965 | | | 26,990 | | | 18,000 | | | 5,562 | | | 0 | | | 22,517 | | | 0 | | | 121,424 | |
| Commercial | | | | | | | | | | | | | | | | | | |
| Pass | | 392,088 | | | 117,791 | | | 75,533 | | | 29,211 | | | 12,520 | | | 35,770 | | | 74,520 | | | 11,004 | | | 748,437 | |
| Special Mention | | 37,836 | | | 23,087 | | | 1,920 | | | 6,990 | | | 30,264 | | | 13,250 | | | 31,362 | | | 11,218 | | | 155,927 | |
| Substandard | | 304 | | | 7,785 | | | 2,043 | | | 4,017 | | | 7,542 | | | 3,113 | | | 5,265 | | | 1,928 | | | 31,997 | |
| Doubtful | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 387 | | | 0 | | | 387 | |
| | 430,228 | | | 148,663 | | | 79,496 | | | 40,218 | | | 50,326 | | | 52,133 | | | 111,534 | | | 24,150 | | | 936,748 | |
| Total loans | | $ | 1,339,586 | | | $ | 590,363 | | | $ | 382,648 | | | $ | 335,784 | | | $ | 368,904 | | | $ | 1,172,236 | | | $ | 1,093,287 | | | $ | 62,418 | | | $ | 5,345,226 | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Revolving loans converted to term loans during the sixthree months ended June 30,March 31, 2021 in the commercial, home equity line of credit and consumer portfolios was $0.5 million, $6.2 million, and $0.7 million, respectively. Revolving loans converted to term loans during the three months ended March 31, 2020 in the commercial, home equity line of credit and consumer portfolios was $13.7$2.0 million, $8.7$1.8 million and $1.4$1.0 million, respectively.
The credit risk profile based on payment activity for loans was as follows:
| | (in thousands) | (in thousands) | | 30-59
days
past due | | 60-89
days
past due | | 90 days or more past due | | Total
past due | | Current | | Total
financing
receivables | | Amortized cost>
90 days and
accruing | (in thousands) | | 30-59
days
past due | | 60-89
days
past due | |
Greater than
90 days | | Total
past due | | Current | | Total
financing
receivables | | Amortized cost>
90 days and
accruing |
| June 30, 2020 | | | | | | | | | | | | | | | |
| March 31, 2021 | | March 31, 2021 | | | | | | | | | | | | | | |
| Real estate: | Real estate: | | | | | | | | | | | | | | | Real estate: | | | | | | | | | | | | | | |
| Residential 1-4 family | Residential 1-4 family | | $ | 2,192 | | | $ | 606 | | | $ | 1,892 | | | $ | 4,690 | | | $ | 2,118,536 | | | $ | 2,123,226 | | | $ | — | | Residential 1-4 family | | $ | 2,361 | | | $ | 5,403 | | | $ | 4,232 | | | $ | 11,996 | | | $ | 2,095,541 | | | $ | 2,107,537 | | | $ | 0 | |
| Commercial real estate | Commercial real estate | | 642 | | | — | | | — | | | 642 | | | 854,924 | | | 855,566 | | | — | | Commercial real estate | | 1,681 | | | 0 | | | 0 | | | 1,681 | | | 1,011,287 | | | 1,012,968 | | | 0 | |
| Home equity line of credit | Home equity line of credit | | 1,102 | | | 583 | | | 2,193 | | | 3,878 | | | 1,061,386 | | | 1,065,264 | | | — | | Home equity line of credit | | 1,132 | | | 334 | | | 2,088 | | | 3,554 | | | 897,908 | | | 901,462 | | | 0 | |
| Residential land | Residential land | | — | | | — | | | — | | | — | | | 13,224 | | | 13,224 | | | — | | Residential land | | 699 | | | 0 | | | 300 | | | 999 | | | 16,469 | | | 17,468 | | | 0 | |
| Commercial construction | Commercial construction | | — | | | — | | | 2,289 | | | 2,289 | | | 90,615 | | | 92,904 | | | — | | Commercial construction | | 0 | | | 0 | | | 0 | | | 0 | | | 114,455 | | | 114,455 | | | 0 | |
| Residential construction | Residential construction | | — | | | — | | | — | | | — | | | 10,759 | | | 10,759 | | | — | | Residential construction | | 0 | | | 0 | | | 0 | | | 0 | | | 13,365 | | | 13,365 | | | 0 | |
| Commercial | Commercial | | 461 | | | 575 | | | 452 | | | 1,488 | | | 1,072,341 | | | 1,073,829 | | | — | | Commercial | | 146 | | | 47 | | | 73 | | | 266 | | | 1,009,738 | | | 1,010,004 | | | 0 | |
| Consumer | Consumer | | 1,752 | | | 2,164 | | | 3,669 | | | 7,585 | | | 208,445 | | | 216,030 | | | — | | Consumer | | 1,640 | | | 1,436 | | | 1,200 | | | 4,276 | | | 144,235 | | | 148,511 | | | 0 | |
| Total loans | Total loans | | $ | 6,149 | | | $ | 3,928 | | | $ | 10,495 | | | $ | 20,572 | | | $ | 5,430,230 | | | $ | 5,450,802 | | | $ | — | | Total loans | | $ | 7,659 | | | $ | 7,220 | | | $ | 7,893 | | | $ | 22,772 | | | $ | 5,302,998 | | | $ | 5,325,770 | | | $ | 0 | |
| December 31, 2019 | | | | | | | | | | | | | | | |
| December 31, 2020 | | December 31, 2020 | | | | | | | | | | | | | | |
| Real estate: | Real estate: | | | | | | | | | | | | | | | Real estate: | | | | | | | | | | | | | | |
| Residential 1-4 family | Residential 1-4 family | | $ | 2,588 | | | $ | 290 | | | $ | 1,808 | | | $ | 4,686 | | | $ | 2,173,449 | | | $ | 2,178,135 | | | $ | — | | Residential 1-4 family | | $ | 2,629 | | | $ | 2,790 | | | $ | 2,715 | | | $ | 8,134 | | | $ | 2,136,105 | | | $ | 2,144,239 | | | $ | 0 | |
| Commercial real estate | Commercial real estate | | — | | | — | | | — | | | — | | | 824,830 | | | 824,830 | | | — | | Commercial real estate | | 0 | | | 488 | | | 0 | | | 488 | | | 983,377 | | | 983,865 | | | 0 | |
| Home equity line of credit | Home equity line of credit | | 813 | | | — | | | 2,117 | | | 2,930 | | | 1,089,195 | | | 1,092,125 | | | — | | Home equity line of credit | | 850 | | | 342 | | | 2,052 | | | 3,244 | | | 960,334 | | | 963,578 | | | 0 | |
| Residential land | Residential land | | — | | | — | | | 25 | | | 25 | | | 14,679 | | | 14,704 | | | — | | Residential land | | 702 | | | 0 | | | 300 | | | 1,002 | | | 14,615 | | | 15,617 | | | 0 | |
| Commercial construction | Commercial construction | | — | | | — | | | — | | | — | | | 70,605 | | | 70,605 | | | — | | Commercial construction | | 0 | | | 0 | | | 0 | | | 0 | | | 121,424 | | | 121,424 | | | 0 | |
| Residential construction | Residential construction | | — | | | — | | | — | | | — | | | 11,670 | | | 11,670 | | | — | | Residential construction | | 0 | | | 0 | | | 0 | | | 0 | | | 11,022 | | | 11,022 | | | 0 | |
| Commercial | Commercial | | 1,077 | | | 311 | | | 172 | | | 1,560 | | | 669,114 | | | 670,674 | | | — | | Commercial | | 608 | | | 300 | | | 132 | | | 1,040 | | | 935,708 | | | 936,748 | | | 0 | |
| Consumer | Consumer | | 4,386 | | | 3,257 | | | 2,907 | | | 10,550 | | | 247,371 | | | 257,921 | | | — | | Consumer | | 2,605 | | | 1,491 | | | 1,631 | | | 5,727 | | | 163,006 | | | 168,733 | | | 0 | |
| Total loans | Total loans | | $ | 8,864 | | | $ | 3,858 | | | $ | 7,029 | | | $ | 19,751 | | | $ | 5,100,913 | | | $ | 5,120,664 | | | $ | — | | Total loans | | $ | 7,394 | | | $ | 5,411 | | | $ | 6,830 | | | $ | 19,635 | | | $ | 5,325,591 | | | $ | 5,345,226 | | | $ | 0 | |
The credit risk profile based on nonaccrual loans were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | March 31, 2021 | | December 31, 2020 |
| | With a Related ACL | | Without a Related ACL | | Total | | With a Related ACL | | Without a Related ACL | | Total |
| Real estate: | | | | | | | | | | | | |
| Residential 1-4 family | | $ | 16,945 | | | $ | 2,987 | | | $ | 19,932 | | | $ | 8,991 | | | $ | 2,835 | | | $ | 11,826 | |
| Commercial real estate | | 15,634 | | | 2,828 | | | 18,462 | | | 15,847 | | | 2,875 | | | 18,722 | |
| Home equity line of credit | | 5,075 | | | 1,587 | | | 6,662 | | | 5,791 | | | 1,567 | | | 7,358 | |
| Residential land | | 107 | | | 300 | | | 407 | | | 108 | | | 300 | | | 408 | |
| Commercial construction | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Residential construction | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Commercial | | 1,763 | | | 2,918 | | | 4,681 | | | 1,819 | | | 3,328 | | | 5,147 | |
| Consumer | | 3,192 | | | 0 | | | 3,192 | | | 3,935 | | | 0 | | | 3,935 | |
| Total | | $ | 42,716 | | | $ | 10,620 | | | $ | 53,336 | | | $ | 36,491 | | | $ | 10,905 | | | $ | 47,396 | |
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
The credit risk profile based on nonaccrual loans were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | June 30, 2020 | | | | | | December 31, 2019 |
| | With a Related ACL | | Without a Related ACL | | Total | | Total |
| Real estate: | | | | | | | | |
| Residential 1-4 family | | $ | 7,584 | | | $ | 3,395 | | | $ | 10,979 | | | $ | 11,395 | |
| Commercial real estate | | 16,241 | | | — | | | 16,241 | | | 195 | |
| Home equity line of credit | | 6,249 | | | 1,616 | | | 7,865 | | | 6,638 | |
| Residential land | | — | | | 413 | | | 413 | | | 448 | |
| Commercial construction | | — | | | 2,289 | | | 2,289 | | | — | |
| Residential construction | | — | | | — | | | — | | | — | |
| Commercial | | 616 | | | 2,939 | | | 3,555 | | | 5,947 | |
| Consumer | | 5,637 | | | — | | | 5,637 | | | 5,113 | |
| Total nonaccrual loans | | $ | 36,327 | | | $ | 10,652 | | | $ | 46,979 | | | $ | 29,736 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
The credit risk profile based on loans whose terms have been modified and accruing interest were as follows:
| | (in thousands) | (in thousands) | | June 30, 2020 | | December 31, 2019 | (in thousands) | | March 31, 2021 | | December 31, 2020 |
| Real estate: | Real estate: | | | | | Real estate: | |
| Residential 1-4 family | Residential 1-4 family | | $ | 8,667 | | | $ | 9,869 | | Residential 1-4 family | | $ | 7,453 | | | $ | 7,932 | |
| Commercial real estate | Commercial real estate | | 1,016 | | | 853 | | Commercial real estate | | 3,254 | | | 3,281 | |
| Home equity line of credit | Home equity line of credit | | 9,430 | | | 10,376 | | Home equity line of credit | | 7,727 | | | 8,148 | |
| Residential land | Residential land | | 2,007 | | | 2,644 | | Residential land | | 1,738 | | | 1,555 | |
| Commercial construction | Commercial construction | | — | | | — | | Commercial construction | | 0 | | | 0 | |
| Residential construction | Residential construction | | — | | | — | | Residential construction | | 0 | | | 0 | |
| Commercial | Commercial | | 3,203 | | | 2,614 | | Commercial | | 5,737 | | | 6,108 | |
| Consumer | Consumer | | 55 | | | 57 | | Consumer | | 54 | | | 54 | |
| Total troubled debt restructured loans accruing interest | Total troubled debt restructured loans accruing interest | | $ | 24,378 | | | $ | 26,413 | | Total troubled debt restructured loans accruing interest | | $ | 25,963 | | | $ | 27,078 | |
ASB did not recognize interest on nonaccrual loans for the three and six months ended June 30,March 31, 2021 and 2020.
Troubled debt restructurings. A loan modification is deemed to be a TDR when the borrower is determined to be experiencing financial difficulties and ASB grants a concession it would not otherwise consider.
The allowance for credit losses on TDR loans that do not share risk characteristics are individually evaluated based on the present value of expected future cash flows discounted at the loan’s effective original contractual rate or based on the fair value of collateral less cost to sell. The financial impact of the estimated loss is an increase to the allowance associated with the modified loan. When available information confirms that specific loans or portions thereof are uncollectible (confirmed losses), these amounts are charged off against the allowance for credit losses.
Loan modifications that occurred during the first three months of 2021 and 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans modified as a TDR | | | | Three months ended March 31, 2021 |
| (dollars in thousands) | | | | | | | | Number
of contracts | | Outstanding recorded investment (as of period end)1 | | Related allowance (as of period end) |
| Troubled debt restructurings | | | | | | | | | | | | |
| Real estate: | | | | | | | | | | | | |
| Residential 1-4 family | | | | | | | | 12 | | | $ | 8,283 | | | $ | 298 | |
| Commercial real estate | | | | | | | | 1 | | | 482 | | | 0 | |
| Home equity line of credit | | | | | | | | 1 | | | 170 | | | 21 | |
| Residential land | | | | | | | | 1 | | | 271 | | | 11 | |
| Commercial construction | | | | | | | | 0 | | | 0 | | | 0 | |
| Residential construction | | | | | | | | 0 | | | 0 | | | 0 | |
| Commercial | | | | | | | | 2 | | | 59 | | | 19 | |
| Consumer | | | | | | | | 0 | | | 0 | | | 0 | |
| | | | | | | | | 17 | | | $ | 9,265 | | | $ | 349 | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Loan modifications that occurred during the first six months of 2020 and 2019 were as follows:
| | Loans modified as a TDR | | Three months ended June 30, 2020 | | | Six months ended June 30, 2020 | | |
| (dollars in thousands) | | Number
of contracts | | Outstanding recorded investment (as of period end)1 | | Related allowance (as of period end) | | Number
of contracts | | Outstanding recorded investment (as of period end)1 | | Related allowance (as of period end) | |
| Troubled debt restructurings | | | | | | | | | | |
| Real estate: | | | | | | | | | | |
| Residential 1-4 family | | — | | | $ | — | | | $ | — | | | 1 | | | $ | 147 | | | $ | 7 | | |
| Commercial real estate | | — | | | — | | | — | | | 2 | | | 16,430 | | | 4,301 | | |
| Home equity line of credit | | 2 | | | 19 | | | 3 | | | 2 | | | 19 | | | 3 | | |
| Residential land | | 2 | | | 330 | | | — | | | 2 | | | 330 | | | — | | |
| Commercial construction | | — | | | — | | | — | | | — | | | — | | | — | | |
| Residential construction | | — | | | — | | | — | | | — | | | — | | | — | | |
| Commercial | | — | | | — | | | — | | | 4 | | | 751 | | | 275 | | |
| Consumer | | — | | | — | | | — | | | — | | | — | | | — | | |
| | | 4 | | | $ | 349 | | | $ | 3 | | | 11 | | | $ | 17,677 | | | $ | 4,586 | | |
| | | Three months ended June 30, 2019 | | | Six months ended June 30, 2019 | | | | Three months ended March 31, 2020 |
| (dollars in thousands) | (dollars in thousands) | | Number
of contracts | | Outstanding recorded investment (as of period end)1 | | Related allowance (as of period end) | | Number
of contracts | | Outstanding recorded investment (as of period end)1 | | Related allowance (as of period end) | (dollars in thousands) | | | Number
of contracts | | Outstanding recorded investment (as of period end)1 | | Related allowance (as of period end) |
| Troubled debt restructurings | Troubled debt restructurings | | | | | | | | | | Troubled debt restructurings | | | | | | |
| Real estate: | Real estate: | | | | | | | | | | Real estate: | | | | | | |
| Residential 1-4 family | Residential 1-4 family | | 1 | | | $ | 469 | | | $ | 154 | | | 9 | | | $ | 1,501 | | | $ | 161 | | Residential 1-4 family | | | 1 | | | $ | 148 | | | $ | 8 | |
| Commercial real estate | Commercial real estate | | — | | | — | | | — | | | — | | | — | | | — | | Commercial real estate | | | 2 | | | 16,584 | | | 4,281 | |
| Home equity line of credit | Home equity line of credit | | 2 | | | 311 | | | 59 | | | 3 | | | 432 | | | 83 | | Home equity line of credit | | | 0 | | | 0 | | | 0 | |
| Residential land | Residential land | | 2 | | | 825 | | | — | | | 2 | | | 825 | | | — | | Residential land | | | 0 | | | 0 | | | 0 | |
| Commercial construction | Commercial construction | | — | | | — | | | — | | | — | | | — | | | — | | Commercial construction | | | 0 | | | 0 | | | 0 | |
| Residential construction | Residential construction | | — | | | — | | | — | | | — | | | — | | | — | | Residential construction | | | 0 | | | 0 | | | 0 | |
| Commercial | Commercial | | 2 | | | 1,317 | | | 133 | | | 3 | | | 1,507 | | | 150 | | Commercial | | | 4 | | | 756 | | | 278 | |
| Consumer | Consumer | | — | | | — | | | — | | | — | | | — | | | — | | Consumer | | | 0 | | | 0 | | | 0 | |
| | | | 7 | | | $ | 2,922 | | | $ | 346 | | | 17 | | | $ | 4,265 | | | $ | 394 | | | | | 7 | | | $ | 17,488 | | | $ | 4,567 | |
1 TheThe period end balances reflect all paydowns and charge-offs since the modification period. TDRs fully paid off, charged-off, or foreclosed upon by period end are not included.
There were no loans modified in TDRs that experienced a payment default of 90 days or more during the second quarter and first sixthree months of 20202021 and 2019.2020.
If a loan modified in a TDR subsequently defaults, ASB evaluates the loan for further impairment. Based on its evaluation, adjustments may be made in the allocation of the allowance or partial charge-offs may be taken to further write-down the carrying value of the loan. Commitments to lend additional funds to borrowers whose loan terms have been modified in a TDR totaled NaN at June 30, 2020March 31, 2021 and December 31, 2019.2020.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides that a financial institution may elect to suspend the requirements under GAAP for certain loan modifications that would otherwise be categorized as a TDR and any related impairment for accounting purposes.
In response to the COVID-19 pandemic, the Board of Governors of the FRB, the FDIC, the National Credit Union Administration, the OCC, and the Consumer Financial Protection Bureau, in consultation with the state financial regulators (collectively, the “agencies”) issued a joint interagency statement (issued March 22, 2020; revised statement issued April 7, 2020). Some of the provisions applicable to the Company include, but are not limited to accounting for loan modifications, past due reporting and nonaccrual status and charge-offs.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Loan modifications that do not meet the conditions of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. The agencies confirmed with the FASB staff that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or insignificant delays in payment. Financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral. A loan’s payment date is governed by the due date stipulated in the legal agreement. If a financial institution agrees to a payment deferral, these loans would not be considered past due during the period of the deferral. Lastly, during short-term COVID-19 modifications, these loans generally should not be reported as nonaccrual or as classified.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Collateral-dependent loans. A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment of the loan is expected to be provided substantially through the operation or sale of the collateral. Loans considered collateral-dependent were as follows:
| | | | | | | | | | | | | | |
June 30, 2020 | | Amortized cost | | Collateral type |
(in thousands) | | | | |
Real estate: | | | | |
Residential 1-4 family | | $ | 1,795 | | | Residential real estate property |
Home equity line of credit | | 1,387 | | | Residential real estate property |
Commercial construction | | 2,289 | | | Commercial real estate property |
Total real estate | | 5,471 | | | |
Commercial | | 90 | | | Business assets |
Total | | $ | 5,561 | | | |
| | | | | | | | | | | | | | | | | | | | |
| | March 31, 2021 | | December 31, 2020 | | |
| (in thousands) | | Amortized cost | | Amortized cost | | Collateral type |
| Real estate: | | | | | | |
| Residential 1-4 family | | $ | 2,782 | | | $ | 2,541 | | | Residential real estate property |
| Commercial real estate | | 2,828 | | | 2,875 | | | Commercial real estate property |
| Home equity line of credit | | 1,587 | | | 1,567 | | | Residential real estate property |
| Residential land | | 300 | | | 300 | | | Residential real estate property |
| Total real estate | | 7,497 | | | 7,283 | | | |
| Commercial | | 889 | | | 934 | | | Business assets |
| Total | | $ | 8,386 | | | $ | 8,217 | | | |
ASB had $3.0$3.8 million and $3.5 million of consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure at June 30, 2020March 31, 2021 and December 31, 2019, respectively.
The credit risk profile by internally assigned grade for loans was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | December 31, 2019 | | | | | | |
| (in thousands) | | | | | | | | | | Commercial
real estate | | Commercial
construction | | Commercial | | Total |
| Grade: | | | | | | | | | | | | | | | | |
| Pass | | | | | | | | | | $ | 756,747 | | | $ | 68,316 | | | $ | 621,657 | | | $ | 1,446,720 | |
| Special mention | | | | | | | | | | 4,451 | | | — | | | 29,921 | | | 34,372 | |
| Substandard | | | | | | | | | | 63,632 | | | 2,289 | | | 19,096 | | | 85,017 | |
| Doubtful | | | | | | | | | | — | | | — | | | — | | | — | |
| Loss | | | | | | | | | | — | | | — | | | — | | | — | |
| Total | | | | | | | | | | $ | 824,830 | | | $ | 70,605 | | | $ | 670,674 | | | $ | 1,566,109 | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
The total carrying amount and the total unpaid principal balance of impaired loans were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2019 | | | | | | Three months ended June 30, 2019 | | | | Six months ended June 30, 2019 | | |
| (in thousands) | | Recorded
investment | | Unpaid
principal
balance | | Related
allowance | | Average
recorded
investment | | Interest
income
recognized* | | Average
recorded
investment | | Interest
income
recognized* |
| With no related allowance recorded | | | | | | | | | | | | | | |
| Real estate: | | | | | | | | | | | | | | |
| Residential 1-4 family | | $ | 6,817 | | | $ | 7,207 | | | $ | — | | | $ | 8,993 | | | $ | 87 | | | $ | 8,492 | | | $ | 247 | |
| Commercial real estate | | 195 | | | 200 | | | — | | | — | | | — | | | — | | | — | |
| Home equity line of credit | | 1,984 | | | 2,135 | | | — | | | 1,940 | | | 54 | | | 2,238 | | | 66 | |
| Residential land | | 3,091 | | | 3,294 | | | — | | | 2,280 | | | 24 | | | 2,158 | | | 50 | |
| Commercial construction | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Residential construction | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Commercial | | 1,948 | | | 2,285 | | | — | | | 4,626 | | | — | | | 4,299 | | | — | |
| Consumer | | 2 | | | 2 | | | — | | | 31 | | | — | | | 31 | | | — | |
| | | $ | 14,037 | | | $ | 15,123 | | | $ | — | | | $ | 17,870 | | | $ | 165 | | | $ | 17,218 | | | $ | 363 | |
| With an allowance recorded | | | | | | | | | | | | | | |
| Real estate: | | | | | | | | | | | | | | |
| Residential 1-4 family | | $ | 8,783 | | | $ | 8,835 | | | $ | 898 | | | $ | 8,440 | | | $ | 96 | | | $ | 8,417 | | | $ | 179 | |
| Commercial real estate | | 853 | | | 853 | | | 2 | | | 894 | | | 9 | | | 900 | | | 19 | |
| Home equity line of credit | | 10,089 | | | 10,099 | | | 322 | | | 11,665 | | | 152 | | | 11,743 | | | 282 | |
| Residential land | | — | | | — | | | — | | | 79 | | | — | | | 54 | | | — | |
| Commercial construction | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Residential construction | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Commercial | | 6,470 | | | 6,470 | | | 1,015 | | | 10,997 | | | 30 | | | 7,874 | | | 56 | |
| Consumer | | 505 | | | 505 | | | 454 | | | 288 | | | 1 | | | 173 | | | 2 | |
| | | $ | 26,700 | | | $ | 26,762 | | | $ | 2,691 | | | $ | 32,363 | | | $ | 288 | | | $ | 29,161 | | | $ | 538 | |
| Total | | | | | | | | | | | | | | |
| Real estate: | | | | | | | | | | | | | | |
| Residential 1-4 family | | $ | 15,600 | | | $ | 16,042 | | | $ | 898 | | | $ | 17,433 | | | $ | 183 | | | $ | 16,909 | | | $ | 426 | |
| Commercial real estate | | 1,048 | | | 1,053 | | | 2 | | | 894 | | | 9 | | | 900 | | | 19 | |
| Home equity line of credit | | 12,073 | | | 12,234 | | | 322 | | | 13,605 | | | 206 | | | 13,981 | | | 348 | |
| Residential land | | 3,091 | | | 3,294 | | | — | | | 2,359 | | | 24 | | | 2,212 | | | 50 | |
| Commercial construction | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Residential construction | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Commercial | | 8,418 | | | 8,755 | | | 1,015 | | | 15,623 | | | 30 | | | 12,173 | | | 56 | |
| Consumer | | 507 | | | 507 | | | 454 | | | 319 | | | 1 | | | 204 | | | 2 | |
| | | $ | 40,737 | | | $ | 41,885 | | | $ | 2,691 | | | $ | 50,233 | | | $ | 453 | | | $ | 46,379 | | | $ | 901 | |
* Since loan was classified as impaired.2020.
Mortgage servicing rights (MSRs). In its mortgage banking business, ASB sells residential mortgage loans to government-sponsored entities and other parties, who may issue securities backed by pools of such loans. ASB retains no beneficial interests in these loans other than the servicing rights of certain loans sold.
ASB received proceeds from the sale of residential mortgages of $186.8$170.9 million and $64.7$72.5 million for the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively, and $259.3 million and $89.6 million for the six months ended June 30, 2020 and 2019, respectively, and recognized gains on such sales of $6.3$4.3 million and $1.0$2.0 million for the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively, and $8.3 million and $1.6 million for the six months ended June 30, 2020 and 2019, respectively.
There were no repurchased mortgage loans for the three and six months ended June 30, 2020March 31, 2021 and 2019.2020. The repurchase reserve was $0.1 million as of June 30, 2020March 31, 2021 and 2019.2020.
Mortgage servicing fees, a component of other income, net, were $0.9 million and $0.8 million for the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively and $1.6 million and $1.5 million for the six months ended June 30, 2020 and 2019, respectively.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Changes in the carrying value of MSRs were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Gross carrying amount1 | | Accumulated amortization | | Valuation allowance | | Net
carrying amount |
| June 30, 2020 | | $ | 23,904 | | | $ | (13,993) | | | $ | (264) | | | $ | 9,647 | |
| December 31, 2019 | | 21,543 | | | (12,442) | | | — | | | 9,101 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Gross carrying amount1 | | Accumulated amortization | | Valuation allowance | | Net
carrying amount |
| March 31, 2021 | | $ | 20,830 | | | $ | (10,141) | | | $ | (4) | | | $ | 10,685 | |
| December 31, 2020 | | 22,950 | | | (12,670) | | | (260) | | | 10,020 | |
1 Reflects impact of loans paid in full
Changes related to MSRs were as follows:
| | | Three months ended June 30, | | | Six months ended June 30 | | | | | Three months ended March 31 |
| (in thousands) | (in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | (in thousands) | | | 2021 | | 2020 |
| Mortgage servicing rights | Mortgage servicing rights | | Mortgage servicing rights | | |
| Beginning balance | Beginning balance | | $ | 9,120 | | | $ | 7,897 | | | $ | 9,101 | | | $ | 8,062 | | Beginning balance | | | $ | 10,280 | | | $ | 9,101 | |
| Amount capitalized | Amount capitalized | | 1,726 | | | 632 | | | 2,362 | | | 862 | | Amount capitalized | | | 1,547 | | | 636 | |
| Amortization | Amortization | | (935) | | | (426) | | | (1,552) | | | (821) | | Amortization | | | (1,138) | | | (617) | |
| Other-than-temporary impairment | Other-than-temporary impairment | | — | | | — | | | — | | | — | | Other-than-temporary impairment | | | 0 | | | 0 | |
| Carrying amount before valuation allowance | Carrying amount before valuation allowance | | 9,911 | | | 8,103 | | | 9,911 | | | 8,103 | | Carrying amount before valuation allowance | | | 10,689 | | | 9,120 | |
| Valuation allowance for mortgage servicing rights | Valuation allowance for mortgage servicing rights | | Valuation allowance for mortgage servicing rights | | |
| Beginning balance | Beginning balance | | — | | | — | | | — | | | — | | Beginning balance | | | 260 | | | 0 | |
| Provision (recovery) | | 264 | | | — | | | 264 | | | — | | |
| Provision | | Provision | | | (256) | | | 0 | |
| Other-than-temporary impairment | Other-than-temporary impairment | | — | | | — | | | — | | | — | | Other-than-temporary impairment | | | 0 | | | 0 | |
| Ending balance | Ending balance | | 264 | | | — | | | 264 | | | — | | Ending balance | | | 4 | | | 0 | |
| Net carrying value of mortgage servicing rights | Net carrying value of mortgage servicing rights | | $ | 9,647 | | | $ | 8,103 | | | $ | 9,647 | | | $ | 8,103 | | Net carrying value of mortgage servicing rights | | | $ | 10,685 | | | $ | 9,120 | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
ASB capitalizes MSRs acquired upon the sale of mortgage loans with servicing rights retained. On a monthly basis, ASB compares the net carrying value of the MSRs to its fair value to determine if there are any changes to the valuation allowance and/or other-than-temporary impairment for the MSRs.
ASB uses a present value cash flow model to estimate the fair value of MSRs. Impairment is recognized through a valuation allowance for each stratum when the carrying amount exceeds fair value, with any associated provision recorded as a component of loan servicing fees included in “Revenues - bank” in the consolidated statements of income. A direct write-down is recorded when the recoverability of the valuation allowance is deemed to be unrecoverable.
Key assumptions used in estimating the fair value of ASB’s MSRs used in the impairment analysis were as follows:
| | (dollars in thousands) | (dollars in thousands) | | June 30, 2020 | | December 31, 2019 | (dollars in thousands) | | March 31, 2021 | | December 31, 2020 |
| Unpaid principal balance | Unpaid principal balance | | $ | 1,360,920 | | | $ | 1,276,437 | | Unpaid principal balance | | $ | 1,505,963 | | | $ | 1,450,312 | |
| Weighted average note rate | Weighted average note rate | | 3.87 | % | | 3.96 | % | Weighted average note rate | | 3.57 | % | | 3.68 | % |
| Weighted average discount rate | Weighted average discount rate | | 9.3 | % | | 9.3 | % | Weighted average discount rate | | 9.25 | % | | 9.25 | % |
| Weighted average prepayment speed | Weighted average prepayment speed | | 16.9 | % | | 11.4 | % | Weighted average prepayment speed | | 12.0 | % | | 17.7 | % |
The sensitivity analysis of fair value of MSRs to hypothetical adverse changes of 25 and 50 basis points in certain key assumptions was as follows:
| | (dollars in thousands) | (dollars in thousands) | | June 30, 2020 | | December 31, 2019 | (dollars in thousands) | | March 31, 2021 | | December 31, 2020 |
| Prepayment rate: | Prepayment rate: | | Prepayment rate: | |
| 25 basis points adverse rate change | 25 basis points adverse rate change | | $ | (539) | | | $ | (950) | | 25 basis points adverse rate change | | $ | (659) | | | $ | (738) | |
| 50 basis points adverse rate change | 50 basis points adverse rate change | | (1,062) | | | (1,947) | | 50 basis points adverse rate change | | (1,376) | | | (1,445) | |
| Discount rate: | Discount rate: | | Discount rate: | |
| 25 basis points adverse rate change | 25 basis points adverse rate change | | (64) | | | (102) | | 25 basis points adverse rate change | | (110) | | | (68) | |
| 50 basis points adverse rate change | 50 basis points adverse rate change | | (128) | | | (202) | | 50 basis points adverse rate change | | (218) | | | (135) | |
The effect of a variation in certain assumptions on fair value is calculated without changing any other assumptions. This analysis typically cannot be extrapolated because the relationship of a change in one key assumption to the changes in the fair value of MSRs typically is not linear.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Other borrowings. As of June 30,March 31, 2021 and December 31, 2020, ASB had $30.0 million ofno FHLB advances outstanding.outstanding or federal funds purchased with the Federal Reserve Bank. ASB was in compliance with all Advances, Pledge and Security Agreement requirements as of June 30, 2020. ASB also had 0 federal funds purchased with the Federal Reserve Bank as of June 30, 2020. There were 0 FHLB advances or federal funds purchased with the Federal Reserve Bank as of DecemberMarch 31, 2019.2021.
Securities sold under agreements to repurchase are accounted for as financing transactions and the obligations to repurchase these securities are recorded as liabilities in the condensed consolidated balance sheets. ASB pledges investment securities as collateral for securities sold under agreements to repurchase. All such agreements are subject to master netting arrangements, which provide for a conditional right of set-off in case of default by either party; however, ASB presents securities sold under agreements to repurchase on a gross basis in the balance sheet. The following tables present information about the securities sold under agreements to repurchase, including the related collateral received from or pledged to counterparties:
| | (in millions) | (in millions) | | Gross amount
of recognized
liabilities | | Gross amount
offset in the
Balance Sheets | | Net amount of
liabilities presented
in the Balance Sheets | (in millions) | | Gross amount
of recognized
liabilities | | Gross amount
offset in the
Balance Sheets | | Net amount of
liabilities presented
in the Balance Sheets |
| Repurchase agreements | Repurchase agreements | | | | | | | Repurchase agreements | | | | | | |
| June 30, 2020 | | $ | 95 | | | $ | — | | | $ | 95 | | |
| December 31, 2019 | | 115 | | | — | | | 115 | | |
| March 31, 2021 | | March 31, 2021 | | $ | 103 | | | $ | 0 | | | $ | 103 | |
| December 31, 2020 | | December 31, 2020 | | 90 | | | 0 | | | 90 | |
| | | | | Gross amount not offset in the Balance Sheets | | | | Gross amount not offset in the Balance Sheets |
| (in millions) | (in millions) | | Net amount of liabilities presented
in the Balance Sheets | | Financial
instruments | | Cash
collateral
pledged | (in millions) | | Net amount of liabilities presented
in the Balance Sheets | | Financial
instruments | | Cash
collateral
pledged |
| Commercial account holders | Commercial account holders | | Commercial account holders | |
| | June 30, 2020 | | $ | 95 | | | $ | 143 | | | $ | — | | |
| March 31, 2021 | | March 31, 2021 | | $ | 103 | | | $ | 122 | | | $ | 0 | |
| | December 31, 2019 | | 115 | | | 130 | | | — | | |
| December 31, 2020 | | December 31, 2020 | | 90 | | | 92 | | | 0 | |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
The securities underlying the agreements to repurchase are book-entry securities and were delivered by appropriate entry into the counterparties’ accounts or into segregated tri-party custodial accounts at the FHLB. The securities underlying the agreements to repurchase continue to be reflected in ASB’s asset accounts.
Derivative financial instruments. ASB enters into interest rate lock commitments (IRLCs) with borrowers, and forward commitments to sell loans or to-be-announced mortgage-backed securities to investors to hedge against the inherent interest rate and pricing risks associated with selling loans.
ASB enters into IRLCs for residential mortgage loans, which commit ASB to lend funds to a potential borrower at a specific interest rate and within a specified period of time. IRLCs that relate to the origination of mortgage loans that will be held for sale are considered derivative financial instruments under applicable accounting guidance. Outstanding IRLCs expose ASB to the risk that the price of the mortgage loans underlying the commitments may decline due to increases in mortgage interest rates from inception of the rate lock to the funding of the loan. The IRLCs are free-standing derivatives which are carried at fair value with changes recorded in mortgage banking income.
ASB enters into forward commitments to hedge the interest rate risk for rate locked mortgage applications in process and closed mortgage loans held for sale. These commitments are primarily forward sales of to-be-announced mortgage backed securities. Generally, when mortgage loans are closed, the forward commitment is liquidated and replaced with a mandatory delivery forward sale of the mortgage to a secondary market investor. In some cases, a best-efforts forward sale agreement is utilized as the forward commitment. These commitments are free-standing derivatives which are carried at fair value with changes recorded in mortgage banking income.
Changes in the fair value of IRLCs and forward commitments subsequent to inception are based on changes in the fair value of the underlying loan resulting from the fulfillment of the commitment and changes in the probability that the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time.
The notional amount and fair value of ASB’s derivative financial instruments were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | June 30, 2020 | | | | December 31, 2019 | | |
| (in thousands) | | Notional amount | | Fair value | | Notional amount | | Fair value |
| Interest rate lock commitments | | $ | 70,190 | | | $ | 2,341 | | | $ | 23,171 | | | $ | 297 | |
| Forward commitments | | 57,750 | | | (287) | | | 29,383 | | | (42) | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | March 31, 2021 | | December 31, 2020 |
| (in thousands) | | Notional amount | | Fair value | | Notional amount | | Fair value |
| Interest rate lock commitments | | $ | 49,316 | | | $ | 438 | | | $ | 120,980 | | | $ | 4,536 | |
| Forward commitments | | 49,500 | | | 340 | | | 100,500 | | | (500) | |
ASB’s derivative financial instruments, their fair values and balance sheet location were as follows:
| Derivative Financial Instruments Not Designated as Hedging Instruments 1 | Derivative Financial Instruments Not Designated as Hedging Instruments 1 | | June 30, 2020 | | | December 31, 2019 | | Derivative Financial Instruments Not Designated as Hedging Instruments 1 | | March 31, 2021 | | December 31, 2020 |
| (in thousands) | (in thousands) | | Asset derivatives | | Liability
derivatives | | Asset derivatives | | Liability
derivatives | (in thousands) | | Asset derivatives | | Liability
derivatives | | Asset derivatives | | Liability
derivatives |
| Interest rate lock commitments | Interest rate lock commitments | | $ | 2,341 | | | $ | — | | | $ | 297 | | | $ | — | | Interest rate lock commitments | | $ | 456 | | | $ | (18) | | | $ | 4,536 | | | $ | 0 | |
| Forward commitments | Forward commitments | | — | | | 287 | | | 3 | | | 45 | | Forward commitments | | 340 | | | 0 | | | 0 | | | 500 | |
| | | | $ | 2,341 | | | $ | 287 | | | $ | 300 | | | $ | 45 | | | | $ | 796 | | | $ | (18) | | | $ | 4,536 | | | $ | 500 | |
1 Asset derivatives are included in other assets and liability derivatives are included in other liabilities in the balance sheets.
The following table presents ASB’s derivative financial instruments and the amount and location of the net gains or losses recognized in ASB’s statements of income:
| | Derivative Financial Instruments Not Designated as Hedging Instruments | Derivative Financial Instruments Not Designated as Hedging Instruments | | Location of net gains (losses) recognized in the Statements of Income | | Three months ended June 30, | | | Six months ended June 30 | | Derivative Financial Instruments Not Designated as Hedging Instruments | | Location of net gains (losses) recognized in the Statements of Income | | | Three months ended March 31 |
| (in thousands) | (in thousands) | | | | 2020 | | 2019 | | 2020 | | 2019 | (in thousands) | | Location of net gains (losses) recognized in the Statements of Income | | | 2021 | | 2020 |
| Interest rate lock commitments | Interest rate lock commitments | | Mortgage banking income | | $ | 489 | | | $ | 11 | | | $ | 2,044 | | | $ | 382 | | Interest rate lock commitments | | Mortgage banking income | | | $ | (4,098) | | | $ | 1,555 | |
| Forward commitments | Forward commitments | | Mortgage banking income | | 298 | | | 46 | | | (245) | | | (72) | | Forward commitments | | Mortgage banking income | | | 840 | | | (543) | |
| | | | $ | 787 | | | $ | 57 | | | $ | 1,799 | | | $ | 310 | | | | | | $ | (3,258) | | | $ | 1,012 | |
Low-Income Housing Tax Credit (LIHTC). ASB’s unfunded commitments to fund its LIHTC investment partnerships were $21.4$37.8 million and $23.4$41.0 million at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. These unfunded commitments were unconditional and legally binding and are recorded in other liabilities with a corresponding increase in other assets. As of June 30, 2020,March 31, 2021, ASB did not have any impairment losses resulting from forfeiture or ineligibility of tax credits or other circumstances related to its LIHTC investment partnerships.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Note 5 · Credit agreements and changes in debt
HEI and Hawaiian Electric each entered into a separate agreement with a syndicate of 8 financial institutions (the HEI Facility and Hawaiian Electric Facility, respectively, and together, the Credit Facilities), effective July 3, 2017, to amend and restate their respective previously existing revolving unsecured credit agreements. The $150 million HEI Facility and $200 million Hawaiian Electric Facility both will terminate on June 30, 2022. NaN amounts under the Credit Facilities were outstanding as of June 30, 2020 and December 31, 2019. NoneNeither of the facilities are collateralized. As of March 31, 2021 and December 31, 2020, 0 amounts were outstanding under the Credit Facilities.
The Credit Facilities will be maintained to support each company’s respective short-term commercial paper program, but may be drawn on to meet each company’s respective working capital needs and general corporate purposes.
Changes in debt. On April 20, 2020, HEI closed on a $65 million 364-day term loan from a syndicate of 2 banks. The loan bears interest at a floating rate at HEI’s option of either (i) a rate equal to an alternate base rate as defined in the agreement or (ii) a rate equal to an adjusted London interbank offered rate, as defined in the agreement, plus an applicable margin, and matures on April 19, 2021. The proceeds of the loan were used to pay down the balance on the HEI Facility, which increased the available borrowing capacity on the HEI Facility by $65 million. The loan contains provisions requiring the maintenance by HEI of certain financial ratios substantially consistent with those in HEI’s existing, amended and restated revolving unsecured credit agreement. The loan may be prepaid without penalty at any time, but proceeds from any debt capital market transactions over $50 million must first be applied to pay down the term loan.
On April 20, 2020, Hawaiian Electric closed onhas a $75 million 364-day revolving credit agreement (364-day Revolver) with a syndicate of 4 banks. Under the 364-day Revolver, draws bear interest0 amount outstanding at a floating rate at Hawaiian Electric’s option of either (i) a rate equal to an alternate base rate as defined in the agreement or (ii) a rate equal to an adjusted London interbank offered rate, as defined in the agreement, plus an applicable margin, requires annual fees for undrawn amounts, and terminates onMarch 31, 2021. On April 19, 2021. The 364-day Revolver includes substantially2021, the same financial covenant and customary representations and warranties, affirmative and negative covenants, and events of default (the occurrence of which may result in the loan outstanding becoming immediately due and payable) consistent with those in Hawaiian Electric’s existing, amended and restated revolving unsecured credit agreement. As of June 30, 2020, Hawaiian Electric had 0 amounts outstanding on this revolving credit agreement.
On May 14, 2020, the Utilities issued, through a private placement pursuant to separate Note Purchase Agreements (the Note Purchase Agreements), the following unsecured senior notes bearing taxable interest (the Notes):
| | | | | | | | | | | | | | | | | | | | |
| | Series 2020A | | Series 2020B | | Series 2020C |
| Aggregate principal amount | | $80 million | | $60 million | | $20 million |
| Fixed coupon interest rate | | | | | | |
| Hawaiian Electric | | 3.31% | | 3.31% | | 3.96% |
| Hawaii Electric Light | | 3.96% | | | | |
| Maui Electric | | 3.31% | | 3.96% | | |
| Maturity date | | | | | | |
| Hawaiian Electric | | 5/1/2030 | | 5/1/2030 | | 5/1/2050 |
| Hawaii Electric Light | | 5/1/2050 | | | | |
| Maui Electric | | 5/1/2030 | | 5/1/2050 | | |
| Principal amount by company: | | | | | | |
| Hawaiian Electric | | $50 million (Green Bond) | | $40 million | | $20 million |
| Hawaii Electric Light | | $10 million | | — | | — |
| Maui Electric | | $20 million | | 20 million | | — |
The Notes include substantially the same financial covenantsagreement terminated and customary conditions as Hawaiian Electric’s credit agreement.Hawaiian Electric is also a party as guarantor under the Note Purchase Agreements entered into by Hawaii Electric Light and Maui Electric.All of the proceeds of the Notes were used by Hawaiian Electric, Hawaii Electric Light and Maui Electric to finance their capital expenditures and/or to reimburse funds used for the payment of capital expenditures.The Notes may be prepaid in whole or in part at any time at the prepayment price of the principal amount plus a “Make-Whole Amount.”
On May 19, 2020, Hawaiian Electric paid off and terminated $100 million term loan credit agreement dated as of December 23, 2019. In addition, Hawaiian Electric entered into a 364-day, $50 million term loan credit agreement that matures
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
on April 19, 2021. The term loan credit agreement includes substantially the same financial covenant and customary representations and warranties, affirmative and negative covenants, and events of default (the occurrence of which may result in the loan outstanding becoming immediately due and payable) consistent with those in Hawaiian Electric’s existing, amended and restated revolving unsecured credit agreement. The loan may be prepaid without penalty at any time, but proceeds from any debt capital market transactions over $75 million must be first applied to pay down the term loan. Hawaiian Electric drew the full $50 million on May 19, 2020.was not renewed.
Note 6 · Shareholders’ equity
Accumulated other comprehensive income/(loss). Changes in the balances of each component of accumulated other comprehensive income/(loss) (AOCI) were as follows:
| | | HEI Consolidated | | | | Hawaiian Electric Consolidated | | | HEI Consolidated | | | Hawaiian Electric Consolidated | |
| (in thousands) | (in thousands) | Net unrealized gains (losses) on securities | | Unrealized gains (losses) on derivatives | | Retirement benefit plans | | AOCI | | | AOCI-Retirement benefit plans | | (in thousands) | Net unrealized gains (losses) on securities | | Unrealized gains (losses) on derivatives | | Retirement benefit plans | | AOCI | | | AOCI-Retirement benefit plans | |
| Balance, December 31, 2020 | | Balance, December 31, 2020 | $ | 19,986 | | | $ | (3,363) | | | $ | (17,887) | | | $ | (1,264) | | | | $ | (2,919) | | |
| Current period other comprehensive income (loss) | | Current period other comprehensive income (loss) | (45,777) | | | 1,562 | | | 199 | | | (44,016) | | | | 34 | | |
| Balance, March 31, 2021 | | Balance, March 31, 2021 | $ | (25,791) | | | $ | (1,801) | | | $ | (17,688) | | | $ | (45,280) | | | | $ | (2,885) | | |
| Balance, December 31, 2019 | Balance, December 31, 2019 | $ | 2,481 | | | $ | (1,613) | | | $ | (20,907) | | | $ | (20,039) | | | | $ | (1,279) | | | Balance, December 31, 2019 | $ | 2,481 | | | $ | (1,613) | | | $ | (20,907) | | | $ | (20,039) | | | | $ | (1,279) | | |
| Current period other comprehensive income (loss) | Current period other comprehensive income (loss) | 18,783 | | | (1,982) | | | 1,079 | | | 17,880 | | | | 51 | | | Current period other comprehensive income (loss) | 19,448 | | | (1,784) | | | 548 | | | 18,212 | | | | 26 | | |
| Balance, June 30, 2020 | $ | 21,264 | | | $ | (3,595) | | | $ | (19,828) | | | $ | (2,159) | | | | $ | (1,228) | | | |
| Balance, December 31, 2018 | $ | (24,423) | | | $ | (436) | | | $ | (25,751) | | | $ | (50,610) | | | | $ | 99 | | | |
| Current period other comprehensive income (loss) | 23,593 | | | (1,063) | | | 410 | | | 22,940 | | | | 47 | | | |
| Balance, June 30, 2019 | $ | (830) | | | $ | (1,499) | | | $ | (25,341) | | | $ | (27,670) | | | | $ | 146 | | | |
| Balance, March 31, 2020 | | Balance, March 31, 2020 | $ | 21,929 | | | $ | (3,397) | | | $ | (20,359) | | | $ | (1,827) | | | | $ | (1,253) | | |
Reclassifications out of AOCI were as follows:
| | | | | Amount reclassified from AOCI | | | | | | | Amount reclassified from AOCI | | Affected line item in the
Statements of Income / Balance Sheets |
| | | Three months ended June 30 | | | Six months ended June 30 | | | Affected line item in the | |
| Three months ended March 31 | | Three months ended March 31 | | 2021 | | 2020 | | Affected line item in the
Statements of Income / Balance Sheets |
| (in thousands) | (in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | | Statements of Income / Balance Sheets | (in thousands) | | | |
| HEI consolidated | HEI consolidated | | HEI consolidated | | | |
| Net realized gains on securities included in net income | Net realized gains on securities included in net income | | $ | (1,638) | | | $ | — | | | $ | (1,638) | | | $ | — | | | Gain on sale of investment securities, net | Net realized gains on securities included in net income | | | $ | (387) | | | $ | 0 | | | Gain on sale of investment securities, net |
| | Retirement benefit plans: | Retirement benefit plans: | | | | | | | | | | | Retirement benefit plans: | | | | | | | |
| Amortization of prior service credit and net losses recognized during the period in net periodic benefit cost | Amortization of prior service credit and net losses recognized during the period in net periodic benefit cost | | 5,690 | | | 2,503 | | | 11,396 | | | 5,006 | | | See Note 8 for additional details | Amortization of prior service credit and net losses recognized during the period in net periodic benefit cost | | | 6,010 | | | 5,706 | | | See Note 8 for additional details |
| Impact of D&Os of the PUC included in regulatory assets | Impact of D&Os of the PUC included in regulatory assets | | (5,159) | | | (2,298) | | | (10,317) | | | (4,596) | | | See Note 8 for additional details | Impact of D&Os of the PUC included in regulatory assets | | | (5,811) | | | (5,158) | | | See Note 8 for additional details |
| Total reclassifications | Total reclassifications | | $ | (1,107) | | | $ | 205 | | | $ | (559) | | | $ | 410 | | | | Total reclassifications | | | $ | (188) | | | $ | 548 | | | |
| Hawaiian Electric consolidated | Hawaiian Electric consolidated | | | Hawaiian Electric consolidated | | |
| | Retirement benefit plans: | Retirement benefit plans: | | | | | | | Retirement benefit plans: | | | | | | |
| Amortization of prior service credit and net losses recognized during the period in net periodic benefit cost | Amortization of prior service credit and net losses recognized during the period in net periodic benefit cost | | $ | 5,184 | | | $ | 2,321 | | | $ | 10,368 | | | $ | 4,643 | | | See Note 8 for additional details | Amortization of prior service credit and net losses recognized during the period in net periodic benefit cost | | | $ | 5,845 | | | $ | 5,184 | | | See Note 8 for additional details |
| Impact of D&Os of the PUC included in regulatory assets | Impact of D&Os of the PUC included in regulatory assets | | (5,159) | | | (2,298) | | | (10,317) | | | (4,596) | | | See Note 8 for additional details | Impact of D&Os of the PUC included in regulatory assets | | | (5,811) | | | (5,158) | | | See Note 8 for additional details |
| Total reclassifications | Total reclassifications | | $ | 25 | | | $ | 23 | | | $ | 51 | | | $ | 47 | | | | Total reclassifications | | | $ | 34 | | | $ | 26 | | | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Note 7 · Revenues
Revenue from contracts with customers. The following tables disaggregate revenues by major source, timing of revenue recognition, and segment:
| | | Three months ended June 30, 2020 | | | Six months ended June 30, 2020 | | | | Three months ended March 31, 2021 |
| (in thousands) | (in thousands) | | Electric utility | | Bank | | Other | | Total | | Electric utility | | Bank | | Other | | Total | (in thousands) | | | Electric utility | | Bank | | Other | | Total |
| Revenues from contracts with customers | Revenues from contracts with customers | | Revenues from contracts with customers | | | |
| Electric energy sales - residential | Electric energy sales - residential | | $ | 187,590 | | | $ | — | | | $ | — | | | $ | 187,590 | | | $ | 377,856 | | | $ | — | | | $ | — | | | $ | 377,856 | | Electric energy sales - residential | | | $ | 181,239 | | | $ | 0 | | | $ | 0 | | | $ | 181,239 | |
| Electric energy sales - commercial | Electric energy sales - commercial | | 159,874 | | | — | | | — | | | 159,874 | | | 356,979 | | | — | | | — | | | 356,979 | | Electric energy sales - commercial | | | 168,465 | | | 0 | | | 0 | | | 168,465 | |
| Electric energy sales - large light and power | Electric energy sales - large light and power | | 176,467 | | | — | | | — | | | 176,467 | | | 392,687 | | | — | | | — | | | 392,687 | | Electric energy sales - large light and power | | | 176,815 | | | 0 | | | 0 | | | 176,815 | |
| Electric energy sales - other | Electric energy sales - other | | 1,779 | | | — | | | — | | | 1,779 | | | 5,237 | | | — | | | — | | | 5,237 | | Electric energy sales - other | | | 2,479 | | | 0 | | | 0 | | | 2,479 | |
| Bank fees | Bank fees | | — | | | 7,211 | | | — | | | 7,211 | | | — | | | 18,767 | | | — | | | 18,767 | | Bank fees | | | 0 | | | 11,378 | | | 0 | | | 11,378 | |
| Other sales | | Other sales | | | 0 | | | 0 | | | 924 | | | 924 | |
| Total revenues from contracts with customers | Total revenues from contracts with customers | | 525,710 | | | 7,211 | | | — | | | 532,921 | | | 1,132,759 | | | 18,767 | | | — | | | 1,151,526 | | Total revenues from contracts with customers | | | 528,998 | | | 11,378 | | | 924 | | | 541,300 | |
| Revenues from other sources | Revenues from other sources | | Revenues from other sources | | | |
| Regulatory revenue | Regulatory revenue | | 2,826 | | | — | | | — | | | 2,826 | | | (12,478) | | | — | | | — | | | (12,478) | | Regulatory revenue | | | $ | 28,429 | | | $ | 0 | | | $ | 0 | | | $ | 28,429 | |
| Bank interest and dividend income | Bank interest and dividend income | | — | | | 59,829 | | | — | | | 59,829 | | | — | | | 124,804 | | | — | | | 124,804 | | Bank interest and dividend income | | | 0 | | | 58,620 | | | 0 | | | 58,620 | |
| Other bank noninterest income | Other bank noninterest income | | — | | | 7,674 | | | — | | | 7,674 | | | — | | | 10,881 | | | — | | | 10,881 | | Other bank noninterest income | | | 0 | | | 7,133 | | | 0 | | | 7,133 | |
| Other | Other | | 5,679 | | | — | | | 16 | | | 5,695 | | | 11,376 | | | — | | | 22 | | | 11,398 | | Other | | | 7,437 | | | 0 | | | 27 | | | 7,464 | |
| Total revenues from other sources | Total revenues from other sources | | 8,505 | | | 67,503 | | | 16 | | | 76,024 | | | (1,102) | | | 135,685 | | | 22 | | | 134,605 | | Total revenues from other sources | | | 35,866 | | | 65,753 | | | 27 | | | 101,646 | |
| Total revenues | Total revenues | | $ | 534,215 | | | $ | 74,714 | | | $ | 16 | | | $ | 608,945 | | | $ | 1,131,657 | | | $ | 154,452 | | | $ | 22 | | | $ | 1,286,131 | | Total revenues | | | $ | 564,864 | | | $ | 77,131 | | | $ | 951 | | | $ | 642,946 | |
| Timing of revenue recognition | Timing of revenue recognition | | Timing of revenue recognition | | | |
| Services/goods transferred at a point in time | Services/goods transferred at a point in time | | $ | — | | | $ | 7,211 | | | $ | — | | | $ | 7,211 | | | $ | — | | | $ | 18,767 | | | $ | — | | | $ | 18,767 | | Services/goods transferred at a point in time | | | $ | 0 | | | $ | 11,378 | | | $ | 0 | | | $ | 11,378 | |
| Services/goods transferred over time | Services/goods transferred over time | | 525,710 | | | — | | | — | | | 525,710 | | | 1,132,759 | | | — | | | — | | | 1,132,759 | | Services/goods transferred over time | | | 528,998 | | | 0 | | | 924 | | | 529,922 | |
| Total revenues from contracts with customers | Total revenues from contracts with customers | | $ | 525,710 | | | $ | 7,211 | | | $ | — | | | $ | 532,921 | | | $ | 1,132,759 | | | $ | 18,767 | | | $ | — | | | $ | 1,151,526 | | Total revenues from contracts with customers | | | $ | 528,998 | | | $ | 11,378 | | | $ | 924 | | | $ | 541,300 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three months ended March 31, 2020 |
| (in thousands) | | | | | | | | | | Electric utility | | Bank | | Other | | Total |
| Revenues from contracts with customers | | | | | | | | | | | | | | | | |
| Electric energy sales - residential | | | | | | | | | | $ | 190,266 | | | $ | 0 | | | $ | 0 | | | $ | 190,266 | |
| Electric energy sales - commercial | | | | | | | | | | 197,105 | | | 0 | | | 0 | | | 197,105 | |
| Electric energy sales - large light and power | | | | | | | | | | 216,220 | | | 0 | | | 0 | | | 216,220 | |
| Electric energy sales - other | | | | | | | | | | 3,458 | | | 0 | | | 0 | | | 3,458 | |
| Bank fees | | | | | | | | | | 0 | | | 11,556 | | | 0 | | | 11,556 | |
| | | | | | | | | | | | | | | | |
| Total revenues from contracts with customers | | | | | | | | | | 607,049 | | | 11,556 | | | 0 | | | 618,605 | |
| Revenues from other sources | | | | | | | | | | | | | | | | |
| Regulatory revenue | | | | | | | | | | (15,304) | | | 0 | | | 0 | | | (15,304) | |
| Bank interest and dividend income | | | | | | | | | | 0 | | | 64,975 | | | 0 | | | 64,975 | |
| Other bank noninterest income | | | | | | | | | | 0 | | | 3,207 | | | 0 | | | 3,207 | |
| Other | | | | | | | | | | 5,697 | | | 0 | | | 6 | | | 5,703 | |
| Total revenues from other sources | | | | | | | | | | (9,607) | | | 68,182 | | | 6 | | | 58,581 | |
| Total revenues | | | | | | | | | | $ | 597,442 | | | $ | 79,738 | | | $ | 6 | | | $ | 677,186 | |
| Timing of revenue recognition | | | | | | | | | | | | | | | | |
| Services/goods transferred at a point in time | | | | | | | | | | $ | 0 | | | $ | 11,556 | | | $ | 0 | | | $ | 11,556 | |
| Services/goods transferred over time | | | | | | | | | | 607,049 | | | 0 | | | 0 | | | 607,049 | |
| Total revenues from contracts with customers | | | | | | | | | | $ | 607,049 | | | $ | 11,556 | | | $ | 0 | | | $ | 618,605 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, 2019 | | | | | | | | Six months ended June 30, 2019 | | | | | | |
| (in thousands) | | Electric utility | | Bank | | Other | | Total | | Electric utility | | Bank | | Other | | Total |
| Revenues from contracts with customers | | | | | | | | | | | | | | | | |
| Electric energy sales - residential | | $ | 195,868 | | | $ | — | | | $ | — | | | $ | 195,868 | | | $ | 371,613 | | | $ | — | | | $ | — | | | $ | 371,613 | |
| Electric energy sales - commercial | | 217,278 | | | — | | | — | | | 217,278 | | | 404,686 | | | — | | | — | | | 404,686 | |
| Electric energy sales - large light and power | | 231,869 | | | — | | | — | | | 231,869 | | | 430,795 | | | — | | | — | | | 430,795 | |
| Electric energy sales - other | | 3,774 | | | — | | | — | | | 3,774 | | | 7,852 | | | — | | | — | | | 7,852 | |
| | | | | | | | | | | | | | | | |
| Bank fees | | — | | | 11,632 | | | — | | | 11,632 | | | — | | | 22,865 | | | — | | | 22,865 | |
| Total revenues from contracts with customers | | 648,789 | | | 11,632 | | | — | | | 660,421 | | | 1,214,946 | | | 22,865 | | | — | | | 1,237,811 | |
| Revenues from other sources | | | | | | | | | | | | | | | | |
| Regulatory revenue | | (20,360) | | | — | | | — | | | (20,360) | | | (14,153) | | | — | | | — | | | (14,153) | |
| Bank interest and dividend income | | — | | | 66,155 | | | — | | | 66,155 | | | — | | | 134,643 | | | — | | | 134,643 | |
| Other bank noninterest income | | — | | | 3,900 | | | — | | | 3,900 | | | — | | | 7,231 | | | — | | | 7,231 | |
| Other | | 5,355 | | | — | | | 14 | | | 5,369 | | | 11,486 | | | — | | | 82 | | | 11,568 | |
| Total revenues from other sources | | (15,005) | | | 70,055 | | | 14 | | | 55,064 | | | (2,667) | | | 141,874 | | | 82 | | | 139,289 | |
| Total revenues | | $ | 633,784 | | | $ | 81,687 | | | $ | 14 | | | $ | 715,485 | | | $ | 1,212,279 | | | $ | 164,739 | | | $ | 82 | | | $ | 1,377,100 | |
| Timing of revenue recognition | | | | | | | | | | | | | | | | |
| Services/goods transferred at a point in time | | $ | — | | | $ | 11,632 | | | $ | — | | | $ | 11,632 | | | $ | — | | | $ | 22,865 | | | $ | — | | | $ | 22,865 | |
| Services/goods transferred over time | | 648,789 | | | — | | | — | | | 648,789 | | | 1,214,946 | | | — | | | — | | | 1,214,946 | |
| Total revenues from contracts with customers | | $ | 648,789 | | | $ | 11,632 | | | $ | — | | | $ | 660,421 | | | $ | 1,214,946 | | | $ | 22,865 | | | $ | — | | | $ | 1,237,811 | |
There are no material contract assets or liabilities associated with revenues from contracts with customers existing at the beginning of the period or as of June 30, 2020.March 31, 2021. Accounts receivable and unbilled revenues related to contracts with customers represent an unconditional right to consideration since all performance obligations have been satisfied. These amounts are
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
disclosed as accounts receivable and unbilled revenues, net on HEI’s condensed consolidated balance sheets and customer accounts receivable, net and accrued unbilled revenues, net on Hawaiian Electric’s condensed consolidated balance sheets.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
As of June 30, 2020,March 31, 2021, the Company had no material remaining performance obligations due to the nature of the Company’s contracts with its customers. For the Utilities, performance obligations are fulfilled as electricity is delivered to customers. For ASB, fees are recognized when a transaction is completed.
Note 8 · Retirement benefits
Defined benefit pension and other postretirement benefit plans information. For the first sixthree months of 2020,2021, the Company contributed $17$9 million ($179 million by the Utilities) to its pension and other postretirement benefit plans, compared to $24$17 million ($2317 million by the Utilities) in the first sixthree months of 2019.2020. The Company’s current estimate of total contributions to its pension and other postretirement benefit plans in 20202021 is $52 million ($51 million by the Utilities, $1 million by HEI and NaN by ASB), compared to $71 million ($70 million by the Utilities, $1 million by HEI and NaN by ASB), compared to $49 million ($48 million by the Utilities, $1 million by HEI and NaN by ASB) in 2019.2020. In addition, the Company expects to pay directly $3 million ($1 million by the Utilities) of benefits in 2020,2021, compared to $2 million ($1 million by the Utilities) paid in 2019.2020.
The components of net periodic pension costs (NPPC) and net periodic benefit costs (NPBC) for HEI consolidated and Hawaiian Electric consolidated were as follows:
| | | Three months ended June 30 | | | Six months ended June 30 | | | | | Pension benefits | | Other benefits |
| | | Pension benefits | | | Other benefits | | | Pension benefits | | | Other benefits | | |
| Three months ended March 31 | | Three months ended March 31 | | 2021 | | 2020 | | 2021 | | 2020 |
| (in thousands) | (in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | (in thousands) | | | |
| HEI consolidated | HEI consolidated | | HEI consolidated | | | |
| Service cost | Service cost | | $ | 18,362 | | | $ | 15,382 | | | $ | 631 | | | $ | 542 | | | $ | 36,725 | | | $ | 30,764 | | | $ | 1,262 | | | $ | 1,083 | | Service cost | | | $ | 20,464 | | | $ | 18,363 | | | $ | 705 | | | $ | 631 | |
| Interest cost | Interest cost | | 20,164 | | | 21,033 | | | 1,856 | | | 1,997 | | | 40,327 | | | 42,066 | | | 3,711 | | | 3,994 | | Interest cost | | | 18,801 | | | 20,163 | | | 1,569 | | | 1,855 | |
| Expected return on plan assets | Expected return on plan assets | | (28,465) | | | (27,999) | | | (3,039) | | | (3,086) | | | (56,931) | | | (55,997) | | | (6,077) | | | (6,172) | | Expected return on plan assets | | | (33,067) | | | (28,466) | | | (3,233) | | | (3,038) | |
| | Amortization of net prior period (gain)/cost | Amortization of net prior period (gain)/cost | | 2 | | | (11) | | | (441) | | | (452) | | | 5 | | | (22) | | | (881) | | | (904) | | Amortization of net prior period (gain)/cost | | | 0 | | | 3 | | | (383) | | | (440) | |
| Amortization of net actuarial (gains)/losses | | 8,058 | | | 3,839 | | | 51 | | | (4) | | | 16,115 | | | 7,678 | | | 101 | | | (7) | | |
Amortization of net actuarial losses1 | | Amortization of net actuarial losses1 | | | 1,556 | | | 8,057 | | | 254 | | | 50 | |
| Net periodic pension/benefit cost (return) | Net periodic pension/benefit cost (return) | | 18,121 | | | 12,244 | | | (942) | | | (1,003) | | | 36,241 | | | 24,489 | | | (1,884) | | | (2,006) | | Net periodic pension/benefit cost (return) | | | 7,754 | | | 18,120 | | | (1,088) | | | (942) | |
| Impact of PUC D&Os | Impact of PUC D&Os | | 6,261 | | | 12,278 | | | 777 | | | 811 | | | 12,523 | | | 24,557 | | | 1,554 | | | 1,622 | | Impact of PUC D&Os | | | 11,167 | | | 6,262 | | | 970 | | | 777 | |
| Net periodic pension/benefit cost (adjusted for impact of PUC D&Os) | Net periodic pension/benefit cost (adjusted for impact of PUC D&Os) | | $ | 24,382 | | | $ | 24,522 | | | $ | (165) | | | $ | (192) | | | $ | 48,764 | | | $ | 49,046 | | | $ | (330) | | | $ | (384) | | Net periodic pension/benefit cost (adjusted for impact of PUC D&Os) | | | $ | 18,921 | | | $ | 24,382 | | | $ | (118) | | | $ | (165) | |
| Hawaiian Electric consolidated | Hawaiian Electric consolidated | | Hawaiian Electric consolidated | | | |
| Service cost | Service cost | | $ | 17,891 | | | $ | 15,001 | | | $ | 625 | | | $ | 538 | | | $ | 35,782 | | | $ | 30,002 | | | $ | 1,251 | | | $ | 1,075 | | Service cost | | | $ | 19,994 | | | $ | 17,891 | | | $ | 699 | | | $ | 626 | |
| Interest cost | Interest cost | | 18,715 | | | 19,414 | | | 1,781 | | | 1,918 | | | 37,430 | | | 38,828 | | | 3,563 | | | 3,835 | | Interest cost | | | 17,531 | | | 18,715 | | | 1,504 | | | 1,782 | |
| Expected return on plan assets | Expected return on plan assets | | (26,857) | | | (26,164) | | | (2,990) | | | (3,036) | | | (53,712) | | | (52,328) | | | (5,980) | | | (6,071) | | Expected return on plan assets | | | (31,368) | | | (26,855) | | | (3,182) | | | (2,990) | |
| | Amortization of net prior period (gain)/cost | Amortization of net prior period (gain)/cost | | 3 | | | 2 | | | (439) | | | (451) | | | 5 | | | 4 | | | (879) | | | (902) | | Amortization of net prior period (gain)/cost | | | 0 | | | 2 | | | (383) | | | (440) | |
| Amortization of net actuarial losses | | 7,369 | | | 3,576 | | | 51 | | | — | | | 14,737 | | | 7,152 | | | 102 | | | — | | |
Amortization of net actuarial losses1 | | Amortization of net actuarial losses1 | | | 2,559 | | | 7,368 | | | 250 | | | 51 | |
| Net periodic pension/benefit cost (return) | Net periodic pension/benefit cost (return) | | 17,121 | | | 11,829 | | | (972) | | | (1,031) | | | 34,242 | | | 23,658 | | | (1,943) | | | (2,063) | | Net periodic pension/benefit cost (return) | | | 8,716 | | | 17,121 | | | (1,112) | | | (971) | |
| Impact of PUC D&Os | Impact of PUC D&Os | | 6,261 | | | 12,278 | | | 777 | | | 811 | | | 12,523 | | | 24,557 | | | 1,554 | | | 1,622 | | Impact of PUC D&Os | | | 11,167 | | | 6,262 | | | 970 | | | 777 | |
| Net periodic pension/benefit cost (adjusted for impact of PUC D&Os) | Net periodic pension/benefit cost (adjusted for impact of PUC D&Os) | | $ | 23,382 | | | $ | 24,107 | | | $ | (195) | | | $ | (220) | | | $ | 46,765 | | | $ | 48,215 | | | $ | (389) | | | $ | (441) | | Net periodic pension/benefit cost (adjusted for impact of PUC D&Os) | | | $ | 19,883 | | | $ | 23,383 | | | $ | (142) | | | $ | (194) | |
1 Three months ended March 31, 2021 amounts include the one-time cumulative impact of the change in accounting principle for the plans’ fixed income securities from the calculated market-related value method to the fair value method, which was recorded in the first quarter of 2021.
HEI consolidated recorded retirement benefits expense of $31$11 million ($2912 million by the Utilities) in the first sixthree months of 20202021 and $29$15 million ($2914 million by the Utilities) in the first sixthree months of 20192020 and charged the remaining net periodic benefit cost primarily to electric utility plant.
Effective January 1, 2021, the Company adopted a change in accounting principle for the plans’ fixed income securities from the calculated market-related value method to the fair value method in the calculation of the expected return on plan assets component of NPPC and NPBC. The remaining plan assets continue to use the calculated market-related value methodology. The Company considers the fair value approach to be preferable for its fixed-income securities portfolio because it results in a current reflection of the changes in the value of plan assets in a way similar to the obligations it is intended to hedge. The Company evaluated the effect of this change in accounting principle and deemed it to be immaterial to the historical financial statements of the Company and Hawaiian Electric and, therefore, did not account for the change retrospectively and recorded the cumulative effects from the change in accounting principle in earnings for non-Utility businesses in the first quarter of 2021.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Amounts related to the Utilities were reflected as adjustments to regulatory assets as appropriate, consistent with the expected regulatory treatment as described in the following paragraph.
The Utilities have implemented pension and OPEB tracking mechanisms under which all of their retirement benefit expenses (except for executive life and nonqualified pension plan expenses) determined in accordance with GAAP are recovered over time. Under the tracking mechanisms, any actual costs determined in accordance with GAAP that are over/under
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
amounts allowed in rates are charged/credited to a regulatory asset/liability. The regulatory asset/liability for each utility will then be amortized over 5 years beginning with the respective utility’s next rate case.
Defined contribution plans information. For the first sixthree months of 20202021 and 2019,2020, the Company’s expenses for its defined contribution plans under the Hawaiian Electric Industries Retirement Savings Plan (HEIRSP) and the ASB 401(k) Plan were $3.7$1.7 million and $3.6$1.8 million, respectively, and cash contributions were $4.6$1.8 million and $4.9$3.2 million, respectively. For the first sixthree months of 20202021 and 2019,2020, the Utilities’ expenses and cash contributions for its defined contribution plan under the HEIRSP were $1.4$0.8 million and $1.3$0.7 million, respectively, and cash contributions were $1.4 million and $1.3 million, respectively.
Note 9 · Share-based compensation
Under the 2010 Equity and Incentive Plan, as amended, HEI can issue shares of common stock as incentive compensation to selected employees in the form of stock options, stock appreciation rights, restricted shares, restricted stock units, performance shares and other share-based and cash-based awards. The 2010 Equity and Incentive Plan (original EIP) was amended and restated effective March 1, 2014 (EIP) and an additional 1.5 million shares were added to the shares available for issuance under these programs.
As of June 30, 2020,March 31, 2021, approximately 3.02.9 million shares remained available for future issuance under the terms of the EIP, assuming recycling of shares withheld to satisfy minimum statutory tax liabilities relating to EIP awards, including an estimated 0.70.9 million shares that could be issued upon the vesting of outstanding restricted stock units and the achievement of performance goals for awards outstanding under long-term incentive plans (assuming that such performance goals are achieved at maximum levels).
Under the 2011 Nonemployee Director Stock Plan (2011 Director Plan), HEI can issue shares of common stock as compensation to nonemployee directors of HEI, Hawaiian Electric and ASB. In June 2019, an additional 300,000 shares were made available for issuance under the 2011 Director Plan. As of June 30, 2020,March 31, 2021, there were 274,163 shares remaining available for future issuance under the 2011 Director Plan.
Share-based compensation expense and the related income tax benefit were as follows:
| | | | | Three months ended June 30 | | | Six months ended June 30 | | | | | Three months ended March 31 |
| (in millions) | (in millions) | | 2020 | | 2019 | | 2020 | | 2019 | (in millions) | | | 2021 | | 2020 |
| HEI consolidated | HEI consolidated | | HEI consolidated | | |
Share-based compensation expense 1 | Share-based compensation expense 1 | | $ | 2.4 | | | $ | 3.7 | | | $ | 4.1 | | | $ | 5.9 | | Share-based compensation expense 1 | | | $ | 2.6 | | | $ | 1.7 | |
| Income tax benefit | Income tax benefit | | 0.4 | | | 0.7 | | | 0.7 | | | 0.9 | | Income tax benefit | | | 0.4 | | | 0.3 | |
| Hawaiian Electric consolidated | Hawaiian Electric consolidated | | Hawaiian Electric consolidated | | |
Share-based compensation expense 1 | Share-based compensation expense 1 | | 0.4 | | | 1.1 | | | 1.2 | | | 1.8 | | Share-based compensation expense 1 | | | 1.1 | | | 0.8 | |
| Income tax benefit | Income tax benefit | | 0.1 | | | 0.2 | | | 0.2 | | | 0.3 | | Income tax benefit | | | 0.3 | | | 0.1 | |
1 For the three and six months ended June 30,March 31, 2021 and 2020, and 2019, the Company has not capitalized any share-based compensation.
Stock awards. HEI granted HEI common stock to nonemployee directors under the 2011 Director Plan as follows:
| | | Three months ended June 30 | | | Six months ended June 30 | | | | | Three months ended March 31 |
| (dollars in millions) | | 2020 | | 2019 | | 2020 | | 2019 | |
| (dollars in thousands) | | (dollars in thousands) | | | 2021 | | 2020 |
| Shares granted | Shares granted | | 35,632 | | | 35,580 | | | 36,100 | | | 35,580 | | Shares granted | | | 0 | | | 468 | |
| Fair value | Fair value | | $ | 1.3 | | | $ | 1.5 | | | $ | 1.3 | | | $ | 1.5 | | Fair value | | | $ | 0 | | | $ | 23 | |
| Income tax benefit | Income tax benefit | | 0.3 | | | 0.4 | | | 0.3 | | | 0.4 | | Income tax benefit | | | 0 | | | 6 | |
The number of shares issued to each nonemployee director of HEI, Hawaiian Electric and ASB is determined based on the closing price of HEI common stock on the grant date.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Restricted stock units. Information about HEI’s grants of restricted stock units was as follows:
| | | Three months ended June 30 | | | Six months ended June 30 | | | | | Three months ended March 31 |
| | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | | | 2021 | | 2020 |
| | Shares | | (1) | | Shares | | (1) | | Shares | | (1) | | Shares | | (1) | | | | Shares | | (1) | | Shares | | (1) |
| Outstanding, beginning of period | Outstanding, beginning of period | 203,441 | | | $ | 40.67 | | | 211,225 | | | $ | 35.28 | | | 207,641 | | | $ | 35.36 | | | 200,358 | | | $ | 33.05 | | Outstanding, beginning of period | | | 193,939 | | | $ | 40.89 | | | 207,641 | | | $ | 35.36 | |
| Granted | Granted | 916 | | | 37.90 | | | — | | | — | | | 78,595 | | | 47.99 | | | 94,559 | | | 37.68 | | Granted | | | 127,598 | | | 33.98 | | | 77,679 | | | 48.11 | |
| Vested | Vested | — | | | — | | | — | | | — | | | (77,719) | | | 34.19 | | | (76,712) | | | 32.61 | | Vested | | | (78,988) | | | 38.51 | | | (77,719) | | | 34.19 | |
| Forfeited | Forfeited | — | | | — | | | (2,600) | | | 35.56 | | | (4,160) | | | 35.81 | | | (9,580) | | | 33.82 | | Forfeited | | | (6,358) | | | 42.20 | | | (4,160) | | | 35.81 | |
| Outstanding, end of period | Outstanding, end of period | 204,357 | | | $ | 40.65 | | | 208,625 | | | $ | 35.28 | | | 204,357 | | | $ | 40.65 | | | 208,625 | | | $ | 35.28 | | Outstanding, end of period | | | 236,191 | | | $ | 37.91 | | | 203,441 | | | $ | 40.67 | |
| Total weighted-average grant-date fair value of shares granted (in millions) | Total weighted-average grant-date fair value of shares granted (in millions) | $ | — | | | $ | — | | | $ | 3.8 | | | $ | 3.6 | | | Total weighted-average grant-date fair value of shares granted (in millions) | | | $ | 4.3 | | | $ | 3.7 | | |
(1) Weighted-average grant-date fair value per share based on the average price of HEI common stock on the date of grant.
For the first sixthree months ofended March 31, 2021 and 2020, and 2019, total restricted stock units and related dividends that vested had a fair value of $4.2$3.0 million and $3.2$4.2 million, respectively, and the related tax benefits were $0.7$0.6 million and $0.5$0.7 million, respectively.
As of June 30, 2020,March 31, 2021, there was $6.9$8.3 million of total unrecognized compensation cost related to the nonvested restricted stock units. The cost is expected to be recognized over a weighted-average period of 2.92.6 years.
Long-term incentive plan payable in stock. The 2018-2020, 2019-2021, 2020-2022 and 2020-20222021-2023 long-term incentive plans (LTIP) provide for performance awards under the EIP of shares of HEI common stock based on the satisfaction of performance goals, including a market condition goal. The number of shares of HEI common stock that may be awarded is fixed on the date the grants are made, subject to the achievement of specified performance levels and calculated dividend equivalents. The potential payout varies from 0% to 200% of the number of target shares, depending on the achievement of the goals. The market condition goal is based on HEI’s total shareholder return (TSR) compared to the Edison Electric Institute Index over the relevant three-yearthree-year period. The other performance condition goals relate to earnings per share (EPS)EPS growth, return on average common equity (ROACE), renewable portfolio standards, Hawaiian Electric’s net income growth, ASB’s efficiency ratio and strategic initiatives and Pacific Current’s EBITDA growth and return on average invested capital.
LTIP linked to TSR. Information about HEI’s LTIP grants linked to TSR was as follows:
| | | Three months ended June 30 | | | Six months ended June 30 | | | | | Three months ended March 31 |
| | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | | | 2021 | | 2020 |
| | Shares | | (1) | | Shares | | (1) | | Shares | | (1) | | Shares | | (1) | | | | Shares | | (1) | | Shares | | (1) |
| Outstanding, beginning of period | Outstanding, beginning of period | 90,616 | | | $ | 42.08 | | | 98,311 | | | $ | 39.61 | | | 96,402 | | | $ | 39.62 | | | 65,578 | | | $ | 38.81 | | Outstanding, beginning of period | | | 89,222 | | | $ | 42.10 | | | 96,402 | | | $ | 39.62 | |
| Granted | Granted | — | | | — | | | — | | | — | | | 24,630 | | | 48.62 | | | 34,647 | | | 41.07 | | Granted | | | 44,210 | | | 41.12 | | | 24,630 | | | 48.62 | |
| Vested (issued or unissued and cancelled) | Vested (issued or unissued and cancelled) | — | | | — | | | — | | | — | | | (29,409) | | | 39.51 | | | — | | | — | | Vested (issued or unissued and cancelled) | | | (32,355) | | | 38.20 | | | (29,409) | | | 39.51 | |
| Forfeited | Forfeited | — | | | — | | | — | | | — | | | (1,007) | | | 41.72 | | | (1,914) | | | 38.62 | | Forfeited | | | (1,024) | | | 45.89 | | | (1,007) | | | 41.72 | |
| Outstanding, end of period | Outstanding, end of period | 90,616 | | | $ | 42.08 | | | 98,311 | | | $ | 39.61 | | | 90,616 | | | $ | 42.08 | | | 98,311 | | | $ | 39.61 | | Outstanding, end of period | | | 100,053 | | | $ | 42.89 | | | 90,616 | | | $ | 42.08 | |
| Total weighted-average grant-date fair value of shares granted (in millions) | Total weighted-average grant-date fair value of shares granted (in millions) | $ | — | | | $ | — | | | $ | 1.2 | | | $ | 1.4 | | | Total weighted-average grant-date fair value of shares granted (in millions) | | | $ | 1.8 | | | $ | 1.2 | | |
(1) Weighted-average grant-date fair value per share determined using a Monte Carlo simulation model.
The grant date fair values of the shares were determined using a Monte Carlo simulation model utilizing actual information for the common shares of HEI and its peers for the period from the beginning of the performance period to the grant date and estimated future stock volatility and dividends of HEI and its peers over the remaining three-yearthree-year performance period. The expected stock volatility assumptions for HEI and its peer group were based on the three-yearthree-year historic stock volatility, and the annual dividend yield assumptions were based on dividend yields calculated on the basis of daily stock prices over the same three-yearthree-year historical period.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
The following table summarizes the assumptions used to determine the fair value of the LTIP awards linked to TSR and the resulting fair value of LTIP awards granted:
| | | 2020 | | 2019 | | 2021 | | 2020 |
| Risk-free interest rate | Risk-free interest rate | | 1.39 | % | | 2.48 | % | Risk-free interest rate | | 0.19 | % | | 1.39 | % |
| Expected life in years | Expected life in years | | 3 | | 3 | Expected life in years | | 3 | | 3 |
| Expected volatility | Expected volatility | | 13.1 | % | | 15.8 | % | Expected volatility | | 29.9 | % | | 13.1 | % |
| Range of expected volatility for Peer Group | Range of expected volatility for Peer Group | | 13.6% to 95.4% | | 15.0% to 73.2% | Range of expected volatility for Peer Group | | 25.6% to 102.9% | | 13.6% to 95.4% |
| Grant date fair value (per share) | Grant date fair value (per share) | | $48.62 | | $41.07 | Grant date fair value (per share) | | $41.12 | | $48.62 |
For the sixthree months ended June 30,March 31, 2021 and 2020, total vested LTIP awards linked to TSR and related dividends had a fair value of $0.8 million and $2.6 million, respectively, and the related tax benefits were $0.2 million and $0.4 million. There were no share-based LTIP awards linked to TSR with a vesting date in 2019.million, respectively.
As of June 30, 2020,March 31, 2021, there was $1.9$2.6 million of total unrecognized compensation cost related to the nonvested performance awards payable in shares linked to TSR. The cost is expected to be recognized over a weighted-average period of 1.41.9 years.
LTIP awards linked to other performance conditions. Information about HEI’s LTIP awards payable in shares linked to other performance conditions was as follows:
| | | Three months ended June 30 | | | Six months ended June 30 | | | | | Three months ended March 31 |
| | 2020 | | | 2019 | | | 2020 | | | 2019 | | | | | 2021 | | 2020 |
| | | Shares | | (1) | | Shares | | (1) | | Shares | | (1) | | Shares | | (1) | | | | Shares | | (1) | | Shares | | (1) |
| Outstanding, beginning of period | Outstanding, beginning of period | 336,344 | | | $ | 39.64 | | | 407,090 | | | $ | 35.12 | | | 403,768 | | | $ | 35.15 | | | 276,169 | | | $ | 33.80 | | Outstanding, beginning of period | | | 220,715 | | | $ | 41.03 | | | 403,768 | | | $ | 35.15 | |
| Granted | Granted | — | | | — | | | — | | | — | | | 98,522 | | | 48.10 | | | 138,580 | | | 37.68 | | Granted | | | 176,844 | | | 33.98 | | | 98,522 | | | 48.10 | |
| Vested | Vested | — | | | — | | | — | | | — | | | (135,804) | | | 33.48 | | | — | | | — | | Vested | | | (43,155) | | | 34.12 | | | (135,804) | | | 33.48 | |
| Increase above target (cancelled) | Increase above target (cancelled) | (38,821) | | | 34.12 | | | — | | | — | | | (64,932) | | | 34.12 | | | — | | | — | | Increase above target (cancelled) | | | (14,604) | | | 43.90 | | | (26,111) | | | 34.13 | |
| Forfeited | Forfeited | — | | | — | | | — | | | — | | | (4,031) | | | 39.67 | | | (7,659) | | | 33.91 | | Forfeited | | | (4,098) | | | 44.36 | | | (4,031) | | | 39.67 | |
| Outstanding, end of period | Outstanding, end of period | 297,523 | | | $ | 40.37 | | | 407,090 | | | $ | 35.12 | | | 297,523 | | | $ | 40.37 | | | 407,090 | | | $ | 35.12 | | Outstanding, end of period | | | 335,702 | | | $ | 38.04 | | | 336,344 | | | $ | 39.64 | |
| Total weighted-average grant-date fair value of shares granted (at target performance levels) (in millions) | Total weighted-average grant-date fair value of shares granted (at target performance levels) (in millions) | $ | — | | | $ | — | | | $ | 4.7 | | | $ | 5.2 | | | Total weighted-average grant-date fair value of shares granted (at target performance levels) (in millions) | | | $ | 6.0 | | | $ | 4.7 | | |
(1) Weighted-average grant-date fair value per share based on the average price of HEI common stock on the date of grant.
For the sixthree months ended June 30,March 31, 2021 and 2020, total vested LTIP awards linked to other performance conditions and related dividends had a fair value of $1.7 million and $7.6 million, respectively, and the related tax benefits were $0.4 million and $1.2 million. There were no share-based LTIP awards linked to other performance conditions with a vesting date in 2019.million, respectively.
As of June 30, 2020,March 31, 2021, there was $6.8$8.0 million of total unrecognized compensation cost related to the nonvested shares linked to performance conditions other than TSR. The cost is expected to be recognized over a weighted-average period of 1.62.0 years.
Note 10 · Income taxes
The Company’s and the Utilities’ effective tax rates (combined federal and state income tax rates) were 17%19% and 19%20%, respectively, for the sixthree months ended June 30, 2020.March 31, 2021. These rates differed from the combined statutory rates, due primarily to the Utilities’ amortization of excess deferred income taxes related to the provision in the Tax Act that lowered the federal income tax rate from 35% to 21%, the tax benefits derived from the low income housing tax credit investments and the non-taxability of the bank-owned life insurance income. The Company’s and the Utilities’ effective tax rates were 19%15% and 21%18%, respectively, for the sixthree months ended June 30, 2019.March 31, 2020.
In August 2020, the Internal Revenue Service notified the Company that its 2017 and 2018 income tax returns would be examined. The Company was previously audited every year through 2011, at which time the IRS changed their internal policies regarding audit frequency. The Company has received several initial requests for general tax return information and has responded or is in the process of responding to such requests.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Note 11 · Cash flows
| | Six months ended June 30 | | 2020 | | 2019 | |
| Three months ended March 31 | | Three months ended March 31 | | 2021 | | 2020 |
| (in millions) | (in millions) | | | | | (in millions) | | | | |
| Supplemental disclosures of cash flow information | Supplemental disclosures of cash flow information | | | | | Supplemental disclosures of cash flow information | | | | |
| HEI consolidated | HEI consolidated | | HEI consolidated | |
| Interest paid to non-affiliates, net of amounts capitalized | Interest paid to non-affiliates, net of amounts capitalized | | $ | 50 | | | $ | 53 | | Interest paid to non-affiliates, net of amounts capitalized | | $ | 15 | | | $ | 18 | |
| Income taxes paid (including refundable credits) | Income taxes paid (including refundable credits) | | — | | | 46 | | Income taxes paid (including refundable credits) | | 0 | | | 0 | |
| Income taxes refunded (including refundable credits) | Income taxes refunded (including refundable credits) | | — | | | 4 | | Income taxes refunded (including refundable credits) | | 0 | | | 0 | |
| Hawaiian Electric consolidated | Hawaiian Electric consolidated | | Hawaiian Electric consolidated | |
| Interest paid to non-affiliates | Interest paid to non-affiliates | | 32 | | | 34 | | Interest paid to non-affiliates | | 9 | | | 9 | |
| Income taxes paid (including refundable credits) | Income taxes paid (including refundable credits) | | — | | | 46 | | Income taxes paid (including refundable credits) | | 0 | | | 0 | |
| Income taxes refunded (including refundable credits) | Income taxes refunded (including refundable credits) | | — | | | 4 | | Income taxes refunded (including refundable credits) | | 0 | | | 0 | |
| Supplemental disclosures of noncash activities | Supplemental disclosures of noncash activities | | | | | Supplemental disclosures of noncash activities | | | | |
| HEI consolidated | | HEI consolidated | |
| | Property, plant and equipment unpaid invoices and accruals for capital expenditures, balance, end of period (investing) | | Property, plant and equipment unpaid invoices and accruals for capital expenditures, balance, end of period (investing) | | 28 | | | 32 | |
| Reduction of long-term debt from funds previously transferred for repayment (financing) | | Reduction of long-term debt from funds previously transferred for repayment (financing) | | 0 | | | 82 | |
| Right-of-use assets obtained in exchange for operating lease obligations (investing) | | Right-of-use assets obtained in exchange for operating lease obligations (investing) | | 28 | | | 19 | |
Common stock issued (gross) for director and executive/management compensation (financing)1 | | Common stock issued (gross) for director and executive/management compensation (financing)1 | | 6 | | | 14 | |
| | Hawaiian Electric consolidated | | Hawaiian Electric consolidated | |
| | HEI consolidated | | |
| Electric utility property, plant and equipment | | |
| Estimated fair value of noncash contributions in aid of construction (investing) | | 3 | | | 1 | | |
| Unpaid invoices and accruals for capital expenditures, balance, end of period (investing) | | 34 | | | 30 | | |
| | Electric utility property, plant and equipment unpaid invoices and accruals for capital expenditures, balance, end of period (investing) | | Electric utility property, plant and equipment unpaid invoices and accruals for capital expenditures, balance, end of period (investing) | | 24 | | | 27 | |
| Reduction of long-term debt from funds previously transferred for repayment (financing) | Reduction of long-term debt from funds previously transferred for repayment (financing) | | 82 | | | — | | Reduction of long-term debt from funds previously transferred for repayment (financing) | | 0 | | | 82 | |
| Right-of-use assets obtained in exchange for operating lease obligations (investing) | Right-of-use assets obtained in exchange for operating lease obligations (investing) | | 20 | | | 2 | | Right-of-use assets obtained in exchange for operating lease obligations (investing) | | 28 | | | 16 | |
Common stock issued (gross) for director and executive/management compensation (financing)1 | | 16 | | | 5 | | |
| Real estate transferred from property, plant and equipment to other assets held-for-sale (investing) | | — | | | 9 | | |
| Obligations to fund low income housing investments (investing) | | — | | | 6 | | |
| Hawaiian Electric consolidated | | |
| Electric utility property, plant and equipment | | |
| Estimated fair value of noncash contributions in aid of construction (investing) | | 3 | | | 1 | | |
| Unpaid invoices and accruals for capital expenditures, balance, end of period (investing) | | 30 | | | 27 | | |
| Reduction of long-term debt from funds previously transferred for repayment (financing) | | 82 | | | — | | |
| Right-of-use assets obtained in exchange for operating lease obligations (investing) | | 16 | | | 1 | | |
1 The amounts shown represent the market value of common stock issued for director and executive/management compensation and withheld to satisfy statutory tax liabilities.
Note 12 · Fair value measurements
Fair value measurement and disclosure valuation methodology. The following are descriptions of the valuation methodologies used for assets and liabilities recorded at fair value and for estimating fair value for financial instruments not carried at fair value:
Short-term borrowings—other than bank. The carrying amount of short-term borrowings approximated fair value because of the short maturity of these instruments.
Investment securities. The fair value of ASB’s investment securities is determined quarterly through pricing obtained from independent third-party pricing services or from brokers not affiliated with the trade. Non-binding broker quotes are infrequent and generally occur for new securities that are settled close to the month-end pricing date. The third-party pricing vendors ASB uses for pricing its securities are reputable firms that provide pricing services on a global basis and have processes in place to ensure quality and control. The third-party pricing services use a variety of methods to determine the fair value of securities that fall under Level 2 of ASB’s fair value measurement hierarchy. Among the considerations are quoted prices for similar securities in an active market, yield spreads for similar trades, adjustments for liquidity, size, collateral characteristics, historic and generic prepayment speeds, and other observable market factors.
To enhance the robustness of the pricing process, ASB will on a quarterly basis compare its standard third-party vendor’s price with that of another third-party vendor. If the prices are within an acceptable tolerance range, the price of the standard vendor will be accepted. If the variance is beyond the tolerance range, an evaluation will be conducted by ASB and a challenge to the price may be made. Fair value in such cases will be based on the value that best reflects the data and observable
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
characteristics of the security. In all cases, the fair value used will have been independently determined by a third-party pricing vendor or non-affiliated broker.
The fair value of the mortgage revenue bonds is estimated using a discounted cash flow model to calculate the present value of future principal and interest payments and, therefore is classified within Level 3 of the valuation hierarchy.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Loans held for sale. Residential and commercial loans are carried at the lower of cost or market and are valued using market observable pricing inputs, which are derived from third party loan sales and, therefore, are classified within Level 2 of the valuation hierarchy.
Loans held for investment. Fair value of loans held for investment is derived using a discounted cash flow approach which includes an evaluation of the underlying loan characteristics. The valuation model uses loan characteristics which includes product type, maturity dates and the underlying interest rate of the portfolio. This information is input into the valuation models along with various forecast valuation assumptions including prepayment forecasts, to determine the discount rate. These assumptions are derived from internal and third party sources. Since the valuation is derived from model-based techniques, ASB includes loans held for investment within Level 3 of the valuation hierarchy.
ImpairedCollateral dependent loans. At the timeCollateral dependent loans have been adjusted to fair value. When a loan is considered impaired, it is valued atidentified as collateral dependent, the lower of cost or fair value. Fair value is determined primarily byCompany measures the impairment using an income, cost or market approach and is normally provided through appraisals. Impaired loans carried atthe current fair value generally receive specific allocations withinof the allowance for credit losses. For collateral-dependent loans,collateral, less selling costs. Depending on the characteristics of a loan, the fair value of collateral is commonly based on recent real estate appraisals. Thesegenerally estimated by obtaining external appraisals, may utilize a single valuation approach or a combination of approaches including comparable sales andbut in some cases, the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments typically result in a Level 3 classificationvalue of the inputs for determining faircollateral may be estimated as having little or no value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Generally, impaired loans are evaluated quarterly for additionalIf it is determined that the value of the collateral dependent loan is less than its recorded investment, the Company recognizes this impairment and adjusted accordingly.adjusts the carrying value of the loan to fair value through the allowance for credit losses.
Real estate acquired in settlement of loans. Foreclosed assets are carried at fair value (less estimated costs to sell) and are generally based upon appraisals or independent market prices that are periodically updated subsequent to classification as real estate owned. Such adjustments typically result in a Level 3 classification of the inputs for determining fair value. ASB estimates the fair value of collateral-dependent loans and real estate owned using the sales comparison approach.
Mortgage servicing rights. MSRs are capitalized at fair value based on market data at the time of sale and accounted for in subsequent periods at the lower of amortized cost or fair value. MSRs are evaluated for impairment at each reporting date. ASB's MSRs are stratified based on predominant risk characteristics of the underlying loans including loan type and note rate. For each stratum, fair value is calculated by discounting expected net income streams using discount rates that reflect industry pricing for similar assets. Expected net income streams are estimated based on industry assumptions regarding prepayment expectations and income and expenses associated with servicing residential mortgage loans for others. Impairment is recognized through a valuation allowance for each stratum when the carrying amount exceeds fair value, with any associated provision recorded as a component of loan servicing fees included in "Revenues - bank" in the consolidated statements of income. A direct write-down is recorded when the recoverability of the valuation allowance is deemed to be unrecoverable. ASB compares the fair value of MSRs to an estimated value calculated by an independent third-party. The third-party relies on both published and unpublished sources of market related assumptions and its own experience and expertise to arrive at a value. ASB uses the third-party value only to assess the reasonableness of its own estimate.
Deposit liabilitiesTime deposits. The fair value of fixed-maturity certificates of deposit was estimated by discounting the future cash flows using the rates currently offered for FHLB advances of similar remaining maturities. Deposit liabilities are classified in Level 2 of the valuation hierarchy.
Other borrowings. For advances and repurchase agreements, fair value is estimated using quantitative discounted cash flow models that require the use of interest rate inputs that are currently offered for advances and repurchase agreements of similar remaining maturities. The majority of market inputs are actively quoted and can be validated through external sources, including broker market transactions and third party pricing services.
Long-term debt—other than bank. Fair value of fixed-rate long-term debt—other than bank was obtained from third-party financial services providers based on the current rates offered for debt of the same or similar remaining maturities and from discounting the future cash flows using the current rates offered for debt of the same or similar risks, terms, and remaining maturities. The carrying amount of floating rate long-term debt—other than bank approximated fair value because of the short-term interest reset periods. Long-term debt—other than bank is classified in Level 2 of the valuation hierarchy.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Interest rate lock commitments (IRLCs). The estimated fair value of commitments to originate residential mortgage loans for sale is based on quoted prices for similar loans in active markets. IRLCs are classified as Level 2 measurements.
Forward sales commitments. To be announced (TBA) mortgage-backed securities forward commitments are classified as Level 1, and consist of publicly-traded debt securities for which identical fair values can be obtained through quoted market prices in active exchange markets. The fair values of ASB’s best efforts and mandatory delivery loan sale commitments are determined using quoted prices in the market place that are observable and are classified as Level 2 measurements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
The following table presents the carrying or notional amount, fair value and placement in the fair value hierarchy of the Company’s financial instruments. For stock in Federal Home Loan Bank, the carrying amount is a reasonable estimate of fair value because it can only be redeemed at par.
| | | | | Estimated fair value | | | Estimated fair value |
| (in thousands) | (in thousands) | | Carrying or notional amount | | Quoted prices in
active markets
for identical assets
(Level 1) | | Significant
other observable
inputs
(Level 2) | | Significant
unobservable
inputs
(Level 3) | | Total | (in thousands) | | Carrying or notional amount | | Quoted prices in
active markets
for identical assets
(Level 1) | | Significant
other observable
inputs
(Level 2) | | Significant
unobservable
inputs
(Level 3) | | Total |
| June 30, 2020 | | | | | | | | | | | |
| March 31, 2021 | | March 31, 2021 | | | | | | | | | | |
| Financial assets | Financial assets | | | | | | | | | | | Financial assets | | | | | | | | | | |
| HEI consolidated | HEI consolidated | | HEI consolidated | |
| | Available-for-sale investment securities | Available-for-sale investment securities | | $ | 1,389,633 | | | $ | — | | | $ | 1,360,806 | | | $ | 28,827 | | | $ | 1,389,633 | | Available-for-sale investment securities | | $ | 2,305,257 | | | $ | 0 | | | $ | 2,289,830 | | | $ | 15,427 | | | $ | 2,305,257 | |
| Held-to-maturity investment securities | Held-to-maturity investment securities | | 124,623 | | | — | | | 131,131 | | | — | | | 131,131 | | Held-to-maturity investment securities | | 295,046 | | | 0 | | | 285,599 | | | 0 | | | 285,599 | |
| Stock in Federal Home Loan Bank | | 9,880 | | | — | | | 9,880 | | | — | | | 9,880 | | |
| | Loans, net | | Loans, net | | 5,241,925 | | | 0 | | | 23,637 | | | 5,352,496 | | | 5,376,133 | |
| Mortgage servicing rights | | Mortgage servicing rights | | 10,685 | | | 0 | | | 0 | | | 13,659 | | | 13,659 | |
| | Derivative assets | | Derivative assets | | 103,077 | | | 340 | | | 745 | | | 0 | | | 1,085 | |
| | Financial liabilities | | Financial liabilities | | | | | | | | | |
| HEI consolidated | | HEI consolidated | |
| Deposit liabilities | | Deposit liabilities | | 514,303 | | | 0 | | | 516,524 | | | 0 | | | 516,524 | |
| Short-term borrowings—other than bank | | Short-term borrowings—other than bank | | 100,242 | | | 0 | | | 100,242 | | | 0 | | | 100,242 | |
| Other bank borrowings | | Other bank borrowings | | 102,685 | | | 0 | | | 102,684 | | | 0 | | | 102,684 | |
| Long-term debt, net—other than bank | | Long-term debt, net—other than bank | | 2,229,738 | | | 0 | | | 2,492,539 | | | 0 | | | 2,492,539 | |
| Derivative liabilities | | Derivative liabilities | | 32,739 | | | 0 | | | 2,834 | | | 0 | | | 2,834 | |
| Hawaiian Electric consolidated | | Hawaiian Electric consolidated | |
| | Long-term debt, net | | Long-term debt, net | | 1,675,863 | | | 0 | | | 1,904,613 | | | 0 | | | 1,904,613 | |
| | December 31, 2020 | | December 31, 2020 | | | | | | | | | | |
| Financial assets | | Financial assets | | | | | | | | | | |
| HEI consolidated | | HEI consolidated | |
| | Available-for-sale investment securities | | Available-for-sale investment securities | | $ | 1,970,417 | | | $ | 0 | | | $ | 1,943,232 | | | $ | 27,185 | | | $ | 1,970,417 | |
| Held-to-maturity investment securities | | Held-to-maturity investment securities | | 226,947 | | | 0 | | | 229,963 | | | 0 | | | 229,963 | |
| | Loans, net | Loans, net | | 5,393,653 | | | — | | | 37,345 | | | 5,540,050 | | | 5,577,395 | | Loans, net | | 5,260,917 | | | 0 | | | 28,354 | | | 5,410,976 | | | 5,439,330 | |
| Mortgage servicing rights | Mortgage servicing rights | | 9,647 | | | — | | | — | | | 10,328 | | | 10,328 | | Mortgage servicing rights | | 10,020 | | | 0 | | | 0 | | | 10,705 | | | 10,705 | |
| | Derivative assets | Derivative assets | | 70,190 | | | — | | | 2,341 | | | — | | | 2,341 | | Derivative assets | | 120,980 | | | 0 | | | 4,536 | | | 0 | | | 4,536 | |
| | Financial liabilities | Financial liabilities | | | | | | | | | | Financial liabilities | | | | | | | | | |
| HEI consolidated | HEI consolidated | | HEI consolidated | |
| Deposit liabilities | Deposit liabilities | | 657,627 | | | — | | | 663,296 | | | — | | | 663,296 | | Deposit liabilities | | 548,830 | | | 0 | | | 552,800 | | | 0 | | | 552,800 | |
| Short-term borrowings—other than bank | Short-term borrowings—other than bank | | 131,180 | | | — | | | 131,180 | | | — | | | 131,180 | | Short-term borrowings—other than bank | | 129,379 | | | 0 | | | 129,379 | | | 0 | | | 129,379 | |
| Other bank borrowings | Other bank borrowings | | 124,975 | | | — | | | 124,966 | | | — | | | 124,966 | | Other bank borrowings | | 89,670 | | | 0 | | | 89,669 | | | 0 | | | 89,669 | |
| Long-term debt, net—other than bank | Long-term debt, net—other than bank | | 2,070,224 | | | — | | | 2,427,374 | | | — | | | 2,427,374 | | Long-term debt, net—other than bank | | 2,119,129 | | | 0 | | | 2,487,790 | | | 0 | | | 2,487,790 | |
| Derivative liabilities | Derivative liabilities | | 81,861 | | | 287 | | | 4,843 | | | — | | | 5,130 | | Derivative liabilities | | 137,500 | | | 500 | | | 4,530 | | | 0 | | | 5,030 | |
| Hawaiian Electric consolidated | Hawaiian Electric consolidated | | Hawaiian Electric consolidated | |
| Short-term borrowings | Short-term borrowings | | 49,919 | | | — | | | 49,919 | | | — | | | 49,919 | | Short-term borrowings | | 49,979 | | | 0 | | | 49,979 | | | 0 | | | 49,979 | |
| Long-term debt, net | Long-term debt, net | | 1,574,955 | | | — | | | 1,895,365 | | | — | | | 1,895,365 | | Long-term debt, net | | 1,561,302 | | | 0 | | | 1,890,490 | | | 0 | | | 1,890,490 | |
| | December 31, 2019 | | | | | | | | | | | |
| Financial assets | | | | | | | | | | | |
| HEI consolidated | | |
| | Available-for-sale investment securities | | $ | 1,232,826 | | | $ | — | | | $ | 1,204,229 | | | $ | 28,597 | | | $ | 1,232,826 | | |
| Held-to-maturity investment securities | | 139,451 | | | — | | | 143,467 | | | — | | | 143,467 | | |
| Stock in Federal Home Loan Bank | | 8,434 | | | — | | | 8,434 | | | — | | | 8,434 | | |
| Loans, net | | 5,080,107 | | | — | | | 12,295 | | | 5,145,242 | | | 5,157,537 | | |
| Mortgage servicing rights | | 9,101 | | | — | | | — | | | 12,379 | | | 12,379 | | |
| | Derivative assets | | 25,179 | | | — | | | 300 | | | — | | | 300 | | |
| | Financial liabilities | | | | | | | | | | |
| HEI consolidated | | |
| Deposit liabilities | | 769,825 | | | — | | | 765,976 | | | — | | | 765,976 | | |
| Short-term borrowings—other than bank | | 185,710 | | | — | | | 185,710 | | | — | | | 185,710 | | |
| Other bank borrowings | | 115,110 | | | — | | | 115,107 | | | — | | | 115,107 | | |
| Long-term debt, net—other than bank | | 1,964,365 | | | — | | | 2,156,927 | | | — | | | 2,156,927 | | |
| Derivative liabilities | | 51,375 | | | 33 | | | 2,185 | | | — | | | 2,218 | | |
| Hawaiian Electric consolidated | | |
| Short-term borrowings | | 88,987 | | | — | | | 88,987 | | | — | | | 88,987 | | |
| Long-term debt, net | | 1,497,667 | | | — | | | 1,670,189 | | | — | | | 1,670,189 | | |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Fair value measurements on a recurring basis. Assets and liabilities measured at fair value on a recurring basis were as follows:
| | | June 30, 2020 | | | December 31, 2019 | | | March 31, 2021 | | December 31, 2020 |
| | | | Fair value measurements using | | | Fair value measurements using | | | | Fair value measurements using | | Fair value measurements using |
| (in thousands) | (in thousands) | | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 | (in thousands) | | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 |
| | Available-for-sale investment securities (bank segment) | Available-for-sale investment securities (bank segment) | | | | | | | | | | | | | Available-for-sale investment securities (bank segment) | | | | | | | | | | | | |
| Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies | Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies | | $ | — | | | $ | 1,226,985 | | | $ | — | | | $ | — | | | $ | 1,026,385 | | | $ | — | | Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies | | $ | 0 | | | $ | 2,201,352 | | | $ | 0 | | | $ | 0 | | | $ | 1,849,559 | | | $ | 0 | |
| U.S. Treasury and federal agency obligations | U.S. Treasury and federal agency obligations | | — | | | 102,414 | | | — | | | — | | | 117,787 | | | — | | U.S. Treasury and federal agency obligations | | 0 | | | 57,647 | | | 0 | | | 0 | | | 62,322 | | | 0 | |
| Corporate bonds | Corporate bonds | | — | | | 31,407 | | | — | | | — | | | 60,057 | | | — | | Corporate bonds | | 0 | | | 30,831 | | | 0 | | | 0 | | | 31,351 | | | 0 | |
| Mortgage revenue bonds | Mortgage revenue bonds | | — | | | — | | | 28,827 | | | — | | | — | | | 28,597 | | Mortgage revenue bonds | | 0 | | | 0 | | | 15,427 | | | 0 | | | 0 | | | 27,185 | |
| | | | $ | — | | | $ | 1,360,806 | | | $ | 28,827 | | | $ | — | | | $ | 1,204,229 | | | $ | 28,597 | | | | $ | 0 | | | $ | 2,289,830 | | | $ | 15,427 | | | $ | 0 | | | $ | 1,943,232 | | | $ | 27,185 | |
| Derivative assets | Derivative assets | | | | | | | | | | | | | Derivative assets | | | | | | | | | | |
Interest rate lock commitments (bank segment)1 | Interest rate lock commitments (bank segment)1 | | $ | — | | | $ | 2,341 | | | $ | — | | | $ | — | | | $ | 297 | | | $ | — | | Interest rate lock commitments (bank segment)1 | | $ | 0 | | | $ | 456 | | | $ | 0 | | | $ | 0 | | | $ | 4,536 | | | $ | 0 | |
Forward commitments (bank segment)1 | Forward commitments (bank segment)1 | | — | | | — | | | — | | | — | | | 3 | | | — | | Forward commitments (bank segment)1 | | 340 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Interest rate swap (Other segment)2 | | Interest rate swap (Other segment)2 | | 0 | | | 289 | | | 0 | | | 0 | | | 0 | | | 0 | |
| | | | $ | — | | | $ | 2,341 | | | $ | — | | | $ | — | | | $ | 300 | | | $ | — | | | | $ | 340 | | | $ | 745 | | | $ | 0 | | | $ | 0 | | | $ | 4,536 | | | $ | 0 | |
| Derivative liabilities | Derivative liabilities | | Derivative liabilities | |
| Interest rate lock commitments (bank segment)1 | | Interest rate lock commitments (bank segment)1 | | $ | 0 | | | $ | 18 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
Forward commitments (bank segment)1 | Forward commitments (bank segment)1 | | $ | 287 | | | $ | — | | | $ | — | | | $ | 33 | | | $ | 12 | | | $ | — | | Forward commitments (bank segment)1 | | 0 | | | 0 | | | 0 | | | 500 | | | 0 | | | 0 | |
| Interest rate swap (Other segment)2 | Interest rate swap (Other segment)2 | | — | | | 4,843 | | | — | | | — | | | 2,173 | | | — | | Interest rate swap (Other segment)2 | | 0 | | | 2,816 | | | 0 | | | 0 | | | 4,530 | | | 0 | |
| | $ | 287 | | | $ | 4,843 | | | $ | — | | | $ | 33 | | | $ | 2,185 | | | $ | — | | | $ | 0 | | | $ | 2,834 | | | $ | 0 | | | $ | 500 | | | $ | 4,530 | | | $ | 0 | |
1 Derivatives are carried at fair value in other assets or other liabilities in the balance sheets with changes in value included in mortgage banking income.
2 Derivatives are included in other assets and other liabilities in the balance sheets.
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows:
| | | Three months ended June 30 | | | Six months ended June 30 | | | | | Three months ended March 31 |
| Mortgage revenue bonds | Mortgage revenue bonds | | 2020 | 2019 | | 2020 | 2019 | Mortgage revenue bonds | | | 2021 | 2020 |
| (in thousands) | (in thousands) | | (in thousands) | | |
| Beginning balance | Beginning balance | | $ | 28,726 | | $ | 27,970 | | | $ | 28,597 | | $ | 23,636 | | Beginning balance | | | $ | 27,185 | | $ | 28,597 | |
| Principal payments received | Principal payments received | | — | | — | | | — | | — | | Principal payments received | | | (11,758) | | 0 | |
| Purchases | Purchases | | 101 | | 196 | | | 230 | | 4,530 | | Purchases | | | 0 | | 129 | |
| Unrealized gain (loss) included in other comprehensive income | Unrealized gain (loss) included in other comprehensive income | | — | | — | | | — | | — | | Unrealized gain (loss) included in other comprehensive income | | | 0 | | 0 | |
| Ending balance | Ending balance | | $ | 28,827 | | $ | 28,166 | | | $ | 28,827 | | $ | 28,166 | | Ending balance | | | $ | 15,427 | | $ | 28,726 | |
ASB holds 2 mortgageMortgage revenue bonds are issued by the Department of Budget and Finance of the State of Hawaii. The Company estimates the fair value by using a discounted cash flow model to calculate the present value of estimated future principal and interest payments. The unobservable input used in the fair value measurement is the weighted average discount rate. As of June 30, 2020,March 31, 2021, the weighted average discount rate was 2.15%2.07%, which was derived by incorporating a credit spread over the one month LIBOR rate. Significant increases (decreases) in the weighted average discount rate could result in a significantly lower (higher) fair value measurement.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Fair value measurements on a nonrecurring basis. Certain assets and liabilities are measured at fair value on a nonrecurring basis and therefore are not included in the tables above. These measurements primarily result from assets carried at the lower of cost or fair value or from impairment of individual assets. The carrying value of assets measured at fair value on a nonrecurring basis were as follows:
| | | | | | | Fair value measurements using | | | | | | Fair value measurements using |
| (in thousands) | (in thousands) | | Balance | | Level 1 | | Level 2 | | Level 3 | (in thousands) | | Balance | | Level 1 | | Level 2 | | Level 3 |
| June 30, 2020 | | |
| March 31, 2021 | | March 31, 2021 | |
| Loans | | Loans | | $ | 69 | | | $ | 0 | | | $ | 0 | | | $ | 69 | |
| Mortgage servicing rights | | Mortgage servicing rights | | 61 | | | 0 | | | 0 | | | 61 | |
| | December 31, 2020 | | December 31, 2020 | |
| Loans | | Loans | | 387 | | | 0 | | | 0 | | | 387 | |
| Mortgage servicing rights | | Mortgage servicing rights | | 3,001 | | | 0 | | | 0 | | | 3,001 | |
| | Mortgage servicing rights | | $ | 5,419 | | | $ | — | | | $ | — | | | $ | 5,419 | | |
| December 31, 2019 | | |
| Loans | | 25 | | | — | | | — | | | 25 | | |
|
For the sixthree months ended June 30,March 31, 2021 and 2020, and 2019, there were 0 adjustments to fair value for ASB’s loans held for sale.
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Significant unobservable input value (1) | | |
| ($ in thousands) | | Fair value | | Valuation technique | | Significant unobservable input | | Range | | Weighted
Average |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| June 30, 2020 | | | | | | | | | | |
| Mortgage servicing rights | | $ | 5,419 | | | Discounted cash flow | | Prepayment Speed | | 13.9% - 18.4% | | 16.6 | % |
| | | | | | Discount rate | | 9.3 | % | | 9.3 | % |
| December 31, 2019 | | | | | | | | | | |
| Residential land | | $ | 25 | | | Fair value of property or collateral | | Appraised value less 7% selling cost | | N/A (2) | | N/A (2) |
| Total loans | | $ | 25 | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Significant unobservable input value (1) |
| ($ in thousands) | | Fair value | | Valuation technique | | Significant unobservable input | | Range | | Weighted
Average |
| March 31, 2021 | | | | | | | | | | |
| | | | | | | | | | |
| Home equity lines of credit | | $ | 69 | | | Fair value of collateral | | Appraised value less selling cost | | N/A (2) | | N/A (2) |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Mortgage servicing rights | | 61 | | | Discounted cash flow | | Prepayment speed | | 17% - 24% | | 17 | % |
| | | | | | Discount rate | | | | 9.3 | % |
| | | | | | | | | | |
| December 31, 2020 | | | | | | | | | | |
| Commercial loan | | $ | 387 | | | Fair value of collateral | | Appraised value less selling cost | | N/A (2) | | N/A (2) |
| | | | | | | | | | |
| Mortgage servicing rights | | 3,001 | | | Discounted cash flow | | Prepayment speed | | 15% - 22% | | 22 | % |
| | | | | | Discount rate | | | | 9.3 | % |
(1) Represents percent of outstanding principal balance.
(2) N/A - Not applicable. There is one asset in each fair value measurement type.
Significant increases (decreases) in any of those inputs in isolation would result in significantly higher (lower) fair value measurements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion updates “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in HEI’s and Hawaiian Electric’s 20192020 Form 10-K and should be read in conjunction with such discussion and the 20192020 annual consolidated financial statements of HEI and Hawaiian Electric and notes thereto included in HEI’s and Hawaiian Electric’s 20192020 Form 10-K, as well as the quarterly (as of and for the sixthree months ended June 30, 2020)March 31, 2021) condensed consolidated financial statements and notes thereto included in this Form 10-Q.
HEI consolidated
Recent developments—COVID-19.
On March 11,In 2020, the World Health Organization declared the virus strain severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2), and the resulting disease COVID-19, to be a pandemic. In response, the Governor of the State of Hawaii issuedCompany made significant progress on a number of emergencystrategic initiatives despite the ongoing impact of COVID-19 on the community, customers, and supplementary proclamationsemployees, including advancing the state’s renewable energy transition through Hawaii’s largest-ever renewable energy and storage procurements, preparing for and implementing the new PBR framework to limitfacilitate the spread ofrenewable energy transition and align the virus. These actionsregulatory framework with customer interests and policy goals, and accelerating the Bank’s digital Anytime, Anywhere Banking model.
In 2021, while economic conditions have significantly reducedimproved, the number of new cases, allowing the state to move toward a reopening of the Hawaii economy. Currently, generally all business activities have resumed, with the exception of activities related to large venues and clubs, and are allowed as long as social distancing and Safe Practices (as defined in the proclamations) are followed. Travelers from out of state are subject to a 14-day quarantine upon arrival; however, beginning September 1, 2020, travelers that test negative for COVID-19 within 72 hours of arrival and present valid documentation will not be subject to the mandatory 14-day quarantine. In addition to the restrictions imposed within Hawaii, due to the numerous other state and local jurisdictions around the world that have imposed “shelter-in-place” orders, quarantines, and similar government orders and restrictions, and in particular, travel restrictions that directly impact Hawaii tourism, economic activity in the state has been severely impacted. See “Economic Conditions” for further discussion.
The Company’s Incident Management Team, composed of senior executives across the Company, continues to monitor and manage the COVID-19 situation. Regular updates are provided to the boards of directors of the Company and its subsidiaries to discuss key focus areas, including employee and customer safety, operations, liquidity, cybersecurity, and internal controls over financial reporting. The Company’s top priority remains unchanged, which is to ensure the continued safety and well-being of our customers, our employees, their families and the community, while at the same time continuing to deliver essential electric and banking services. To protect its employees, customers and minimize community spread of the coronavirus, thecommunity. The Company’s moratorium on non-essential business travel and a mandatory work-from-home policy for all personnel that can perform their work remotely remains in effect. Such work-from-home mandates haveeffect through July 30, 2021 for certain employees and this policy has not impaired the Company’s ability to maintain effective internal controls over financial reporting and related disclosures.reporting. For personnel that cannot perform their work remotely, the Company has taken stepsmaintained safety protocols and policies to protect thesekeep employees including implementing practices related to employee and facilities hygiene, in order to ensuresafe, while at the same time ensuring the reliability and resilience of its operations. For example,
New COVID-19 cases in Hawaii have remained at a relatively low level, approximately 77 average daily new cases in the Utilities, plant operatorslast seven days per 100,000 residents as of April 27, 2021, and operations crewsnew cases have been separated into distinct teamson a downtrend since early April. Hawaii vaccinations have increased at a rapid pace, with no overlapapproximately 37% of personnelthe state’s population fully vaccinated as of April 27, 2021. On April 19, the City & County of Honolulu opened vaccinations to all persons age 16 and older, which is expected to further accelerate the pace and proportion of the population vaccinated.
In light of the ongoing global COVID-19 vaccination effort and the gradual reopening of economies, the Company expects that the Hawaii economy will begin to improve at an increasing pace. However, in order to mitigate transmission risk amongst critical personnel and to minimize the riskfirst quarter of not having appropriate backup personnel available to perform essential functions. Similarly, at ASB, branch operations2021, kWh sales continue to servebe impacted and decreased 4.8% compared to the community, butfirst quarter of 2020 as the numberdemand for electricity continues to remain lower than pre-pandemic levels. While the decrease in kWh sales does not affect Utility revenues due to decoupling, it may increase the price per kWh paid by customers. See “Current Decoupling” in Note 3 of open branches has been reduced to match reduced customer volumes, protect employees,the Condensed Consolidated Financial Statements for a discussion of decoupling. At the Bank, lower net charge offs, improved credit quality as a result of an overall strengthening of the Hawaii economy, and minimize community transmission risk.
The Company has extended various programs to support its customers andcredit upgrades within the community during this difficult and challenging time. For example, Hawaiian Electric has suspended, through September 1, 2020, customer disconnections for nonpayment and is working closely with impacted customers on payment plans. At ASB, borrowers that are experiencing financial hardship may be eligible to receivecommercial loan portfolio resulted in a loan forbearance, deferment or extension for up to three months. Additionally, late fee waivers may be granted for up to three months and ATM fees were waived through July 1, 2020. ASB has also secured loans totaling more than $370$8.4 million for affected businesses under the Paycheck Protection Program (PPP). Through the PPP, which was established under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and implemented by the United States Small Business Association, ASB has helped approximately 4,100 small businesses, which support roughly 40,000 jobs that contribute to economic activity in Hawaii. See “Recent Developments—COVID-19”provision reversal in the Bank sectionfirst quarter of 2021 to reduce the Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A).
allowance for credit losses. For further discussion of the impact of the COVID-19 pandemic on our subsidiaries see “Recent Developments—COVID-19” section in the Electric Utility and Bank MD&As.sections below. There has been no material impact on the “Other” segment and Pacific Current as a result of the COVID-19 pandemic.pandemic as the primary businesses of Pacific Current are supported by PPAs that provide for contractual cash flows with credit-worthy counterparties.
For a discussion regarding the impact of the economic conditions caused by the pandemic on the Company’s liquidity and capital resources, see discussion under “Financial Condition–Liquidity and capital resources,” contained in each of the “HEI Consolidated,” “Electric utility” and “Bank” sections of this MD&A.
Environmental, Social & Governance.
At HEI, Consolidated, Electric Utilityenvironmental, social and Bank MD&As.governance (ESG) principles and sustainability have long been fundamental values embedded within all aspects of the Company’s activities. With all of its operations in the middle of the Pacific Ocean, the Company’s long-term health, and ability to deliver sustainable value for all stakeholders—including shareholders—is inextricably linked to the well-being of its employees, communities, economy, and environment. That is why the Company sees its mission of being a catalyst for a better Hawaii as advancing the Company’s long-term financial sustainability. The Company has focused on ensuring ESG considerations are appropriately integrated into its governance structures, strategies and risk management. This includes:
•Robust ESG expertise among board members, including directors with direct experience in renewable energy, climate change policy and strategy, environmental management and sustainable investing.
•Expanded ESG goals as part of HEI and utility executive incentive compensation.
•ESG considerations explicitly woven into strategic planning efforts and enterprise risk management processes.
The Company is committed to transparency and providing information to allow customers, community leaders, investors and other stakeholders understand how the Company’s strategies and operations advance ESG objectives and contribute to long-term value creation.
The Company issued its first ESG report in September 2020. The report encompassed ESG policies, principles and results reported during 2019 across the Company’s two primary operating subsidiaries, Hawaiian Electric and ASB, and was aligned with Sustainability Accounting Standards Board (SASB) guidance—using the electric utilities standard for Hawaiian Electric, and the commercial banks, commercial finance, and mortgage finance standards for ASB. On April 22, 2021, the Company issued its second ESG report. This report continues to include SASB disclosures for Hawaiian Electric and ASB and incorporates disclosures regarding risks and opportunities related to climate change, as well as associated risk management and governance processes, based on recommendations from the Task Force on Climate-related Financial Disclosures. It also outlines key impacts for the Company under two climate scenarios, including a scenario targeted to limit global temperature rise to 2 degrees Celsius or lower. The Company’s ESG reports can be found at www.hei.com/esg.
RESULTS OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, 2020 | | | | % | | |
| (in thousands) | | 2020 | | 2019 | | change | | Primary reason(s)* |
| Revenues | | $ | 608,945 | | | $ | 715,485 | | | (15) | | | Decrease for the electric utility and bank segments |
| Operating income | | 71,556 | | | 72,634 | | | (1) | | | Decrease for the bank segment, partly offset by increase for electric utility segment |
| Net income for common stock | | 48,887 | | | 42,512 | | | 15 | | | Increase due to higher net income at electric utility segment, partly offset by lower net income at the bank segment |
| | | | | | | | |
| | | Six months ended June 30 | | | % | | | Three months ended March 31 | | % | |
| (in thousands) | (in thousands) | | 2020 | | 2019 | | change | | Primary reason(s)* | (in thousands) | | 2021 | | 2020 | | change | | Primary reason(s)* |
| Revenues | Revenues | | $ | 1,286,131 | | | $ | 1,377,100 | | | (7) | | | Decrease for the electric utility and bank segments | Revenues | | $ | 642,946 | | | $ | 677,186 | | | (5) | | | Decrease for the electric utility and bank segments |
| Operating income | Operating income | | 131,258 | | | 150,571 | | | (13) | | | Primarily due to decrease for the bank segment | Operating income | | 98,031 | | | 59,702 | | | 64 | | | Increase for the electric utility and bank segments, partly offset by higher operating losses at the other segment |
| Net income for common stock | Net income for common stock | | 82,307 | | | 88,200 | | | (7) | | | Decrease due to lower net income at the bank segment, partly offset by higher net income at electric utility segment and lower losses at the Other segment. See below for effective tax rate explanation | Net income for common stock | | 64,358 | | | 33,420 | | | 93 | | | Increase due to higher net income at the electric utility and bank segments, partly offset by higher net loss at the other segment. See below for effective tax rate explanation |
|
* Also, see segment discussions which follow.
The Company’s effective tax rate for the second quarters of 2020 and 2019 was 18% for both periods. The Company’s effective tax rates for the first sixthree months of 2021 and 2020 were 19% and 2019 were 17% and 19%15%, respectively. The effective tax rates were lowerhigher for the sixthree months ended June 30, 2020March 31, 2021 compared to the same period in 20192020 due primarily to higher amortization in 2020 of the Utilities’ regulatory liabilityexcess tax benefits related to certain excess deferred income taxes resulting from the Tax Act’s decreasevesting of share-based awards in federal income tax rate and an increase in excess tax benefits.2020.
Economic conditions.
Note: The statistical data in this section is from public third-party sources that management believes to be reliable (e.g., Department of Business, Economic Development and Tourism (DBEDT), University of Hawaii Economic Research Organization (UHERO), Department of Health of the State of Hawaii , U.S. Bureau of Labor Statistics, Department of Labor and Industrial Relations (DLIR), Hawaii Tourism Authority (HTA), Honolulu Board of REALTORS® and national and local newspapers)news media).
Hawaii’s economy began to weaken in the latter part of March 2020 due to the effects of the COVID-19 pandemic, which forced a statewide stay-at-home, work-from-home declaration that began March 25th, shuttered many businesses, including hotels, restaurants, bars, and other gathering places, led to an overwhelming surge in unemployment claims, and impacted the tourism industry with a significant reduction to visitor arrivals. Starting in June 2020, restrictions were gradually lifted and most business activities resumed (with operations modified as required under state guidelines), other than those related to clubs and large venues, but the mandatory 14-day quarantine for travelers entering the state remains in effect at least through August. The most recent interim forecast by UHERO, which was issued on May 28, 2020, forecasts full year 2020 real GDP contraction of 11.1%, decline in total visitor arrivals of 59.6%, decline in real personal income of 5.3%, and an unemployment rate of 18.2%. However, federal fiscal and monetary policy response is expected to cushion the economic impact of the pandemic.
The CARES Act was passed by Congress and signed into law by President Trump on March 27th,27, 2020. The economic relief package totals more than $2 trillion and provides direct economic support to businesses and individuals. On December 27, 2020, the President signed into law the $900 billion economic stimulus package that provides, among others, direct payments to qualifying individuals, extended unemployment benefits, and additional small business aid. On March 11, 2021, the President signed into law the $1.9 trillion coronavirus relief package. The plan will send direct payments of up to $1,400 to most Americans. The bill will also extend a $300 per week unemployment insurance boost until September 6 and expand the child tax credit for a year. It will also put nearly $20 billion into COVID-19 vaccinations, $25 billion into rental and utility assistance, and $350 billion into state, local and tribal relief. Hawaii has received more than $7 billiona significant amount of funds through these various federal assistance programs including the CARES Act, that will help attenuate the impact to Hawaii’s economy.
On April 8,In September 2020, the Governor issuedCity and County of Honolulu announced a proclamation appointing Alan Oshima, former CEO of the Utilities, to lead Hawaii’s efforts to develop and implement a planframework for economic recovery. The “Hawaii Economic and Community Recovery & Resiliency Plan” includes a concurrent three-part strategy to address both the economic and community impacts of COVID-19 in the areas of stabilization, recovery and resiliency. Under the plan, the Beyond Recovery: Reopening Hawaii strategy conveys Hawaii’s coordinated, statewide strategy to address the COVID-19 health and economic crisis. The reopening strategy outlines a phased approach to pivot from the COVID-19 public health emergency to renew and rebuild our communities into a stronger and more resilient Hawaii moving forward. However, due to the uncertainty surrounding the timing and effectiveness of efforts to containreducing the spread of the virus while reopening the economy, the pace andCOVID-19 on Oahu, which tracks metrics that dictate the extent of restrictions on businesses and activities. There are four tiers with Tier 1 being the recovery cannot be predicted at this time.most restrictive. The minimum amount of time spent in each tier is four weeks. In order to move to the next higher tier, the last two weeks of a tier must meet the higher tier’s criteria. If a lower tier’s average daily case count is realized for two weeks in a row, the county will move back to the lower tier for a minimum of four weeks. On February 25, 2021, the county of Honolulu moved from Tier 2 to Tier 3, which allows greater density for business and other social activities. Since that time,
case counts have increased modestly such that the 7-day average new case counts have fallen between 50-100, which is consistent with the Tier 2 level, but the governor and mayor agreed to remain in Tier 3 for the next four weeks as vaccinations are more widely administered. As of April 27, 2021, approximately 37% of the state’s population have been fully vaccinated.
See “Recent Developments—Developments—COVID-19” in the Electric Utility“Electric utility” and Bank MD&As“Bank” sections below for further discussion of the economic impact caused by the pandemic.
Hawaii’s tourism industry, a significant driver of Hawaii’s economy, suffered dramatically with a decline of 58.5%73.8% reduction in total visitor arrivals throughin 2020 compared with 2019. Starting October 15, 2020, the first six months of the year primarily duestate launched its Safe Travels Program that allows travelers to travel restrictions amid the COVID-19 pandemic. Effective March 26, 2020, a mandatory 14-day self-quarantine was ordered for all travelers, both residents and visitors, to the islands including inter-island travelers. The mandatory quarantine for inter-island travel was lifted on June 16, 2020, butavoid the mandatory 14-day quarantine remainsif they test negative for COVID-19 within 72 hours of departure. Since the launch of the program, the average daily passenger arrivals have gradually improved, but remain below pre-pandemic levels. For the first quarter of 2021, passenger counts were 56.2% lower than the comparable period in place at least through August for all visitorsthe prior year, which included pre-pandemic travel activity, and residents returning from outsideaveraged 11,018 passengers per day. However, with the State. As a result, between April 1, 2020ongoing vaccination efforts across the nation and June 30, 2020,the implementation of the Safe Travels Program, average daily passenger counts declined by over 97% to 876 passengershave steadily increased throughout the quarter, with March counts 117% above January counts and a new 2021 year-to-date high of 22,913 daily visitor arrivals was achieved on average per day compared to the same time period in 2019.April 3, 2021.
Due to the effects of the measures to contain the COVID-19 pandemic, Hawaii’s seasonally adjusted unemployment rate in June 2020March 2021 was 13.9%9.0%, which was substantially higher compared to the June 2019March 2020 rate of 2.7%2.1%. The national unemployment rate rose to 11.1% in June 2020March 2021 was 6.0% compared to 3.7%4.4% in June 2019.March 2020. Hawaii’s unemployment rate is expected to decrease asgradually improve now that restrictions are eased on travel. Year-to-date through July 25, 2020, there were 323,165 initial unemployment claims filed with the State compared to 37,598 initial claims, or an increase of 760%, during the same period in 2019.travel have been reduced significantly and vaccine distribution has progressed.
Hawaii real estate activity through June 2020,March 2021, as indicated by theOahu’s home resale market, resulted indrove an increase in the median sales price of 2.1%5.8% for condominiums and 1.3%17.3% for single family homes throughcompared to the same period in 2019.2020. The number of closed sales was down 22.0%up 32.5% for condominiums and 4.8%up 11.9% for single family residential homes through June 2020for the first three months of 2021 compared tothe same time period of 2019.in 2020.
Hawaii’s petroleum product prices reflect supply and demand in the Asia-Pacific region and the price of crude oil in international markets. The price of crude oil decreased dramaticallygradually increased during the 4th quarter of last year and the trend has continued during the first halftwo months of 2020 and has begun to stabilize at levels lower than lastthis year. Lower fuel prices will benefit customers in the form of lower bills given the high proportion of fuel cost in the cost per kWh, but the benefit will be realized over time as existing inventory levels procured at higher cost are drawn down.
At its June 10, 2020March 17, 2021 meeting, the Federal Open Market Committee (FOMC) decided to maintain the federal funds rate target range of 0%-0.25%. The FOMC indicated that it willplans to continue to monitormaintain an accommodative stance of monetary policy to achieve maximum employment and inflation at the implicationsrate of 2 percent over the COVID-19 pandemic and take further actions to support the flow of credit to households and businesses by addressing strains in the markets.long run. The Federal Reserve stated that it will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to supportsustain smooth market functioning and help foster accommodative financial conditions, thereby supporting the flow of credit to households and businessesbusinesses.
The most recent interim forecast by UHERO, which was issued on March 5, 2021, forecasts full year 2021 real GDP growth of 3.7%, increase in ordertotal visitor arrivals of 81.8%, decrease in real personal income of -1.1%, and an unemployment rate of 7.1%. This forecast reflects an acceleration of the pace of the recovery of the Hawaii economy as compared to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions.the prior forecast, but a full recovery is still several years out.
The Company expects that the negative trends and uncertainties in the multiple sectors described above will result in a significantif economic downturn that mayconditions worsen from current levels or remain depressed for an extended period of time, it could have a material unfavorable impact on the Company’s net revenues or income from continuing operations in 2020.
“Other” segment.
| | | | | Three months ended June 30, | | | Six months ended June 30 | | | | | | Three months ended March 31 | |
| (in thousands) | (in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | | Primary reason(s) | (in thousands) | | | 2021 | | 2020 | | Primary reason(s) |
| Revenues | Revenues | | $ | 16 | | | $ | 14 | | | $ | 22 | | | $ | 82 | | | Revenues | | | $ | 951 | | | $ | 6 | | | Increase in other sales at Pacific Current subsidiaries. |
| Operating loss | Operating loss | | (4,738) | | | (4,312) | | | (8,397) | | | (9,057) | | | The second quarters of 2020 and 2019 include $0.9 million and $1.2 million, respectively, of operating income from Pacific Current1. Second quarter 2020 corporate expense was comparable to the second quarter of 2019. The first six months of 2020 and 2019 include $1.8 million and $1.4 million, respectively, of operating income from Pacific Current1. The first six months of 2020 corporate expense was $0.3 million lower compared to the same period of 2019, primarily due to lower professional fees. | Operating loss | | | (6,379) | | | (3,659) | | | The operating income for the first three months of 2021 from Pacific Current1 was comparable to the same period in 2020. Corporate expenses for the first three months of 2021 was $2.5 million higher than the same period in 2020, primarily due to higher charitable donations and incentive compensation. |
| Net loss | Net loss | | (7,456) | | | (7,078) | | | (13,702) | | | (14,355) | | | The net loss for the second quarter of 2020 was higher than the net loss for the second quarter of 2019 due to the same factors cited for the change in operating loss. The net loss for the first six month of 2020 was lower than the net loss for the first six months of 2019 due to the same factors cited for the change in operating loss. | Net loss | | | (8,556) | | | (6,246) | | | The net loss for the first three months of 2021 was higher than the net loss for the first three months of 2020 due to the same factors cited for the change in operating loss. |
1 Hamakua Energy’s sales to Hawaii Electric Light (a regulated affiliate) are eliminated in consolidation.
The “other” business segment (loss)/incomeloss includes results of the stand-alone corporate operations of HEI (including eliminations of intercompany transactions) and ASB Hawaii, Inc. (ASB Hawaii), as well as the results of Pacific Current, a direct subsidiary of HEI focused on investing in clean energy and sustainable infrastructure projects; Pacific Current’s indirect subsidiary, Hamakua Energy, which owns a 60-MW combined cycle power plant that provides electricity to Hawaii Electric Light; Pacific Current’s indirect subsidiary,subsidiaries, Mauo, LLC (Mauo), which is currently constructing aowns solar-plus-storage projectprojects totaling 8.6 MW on five University of Hawaii campuses; and The Old Oahu Tug Service, Inc.,Ka‘ie‘ie Waho Company, LLC, which owns a subsidiary6 MW solar photovoltaic system that ceased operations in 1999;provides renewable energy to Kauai Island Utility Cooperative; as well as eliminations of intercompany transactions.
FINANCIAL CONDITION
Liquidity and capital resources. In the first quarter of 2020, the capital markets, including the commercial paper markets, experienced high levels of volatility, and in some cases, disruption. As a result, in March 2020, due to elevated concerns regarding corporate credit risk, the commercial paper markets experienced significantly less liquidity, particularly for tier-3 issuers. As a consequence, HEI and Hawaiian Electric were unable to place commercial paper at reasonable rates and instead borrowed under their respective backup revolving credit facilities (floating rate at an adjusted London interbank offered rate, as defined in the agreements, plus 137.5 basis points or an alternate base rate, as defined in the agreements, plus 37.5 basis points). In the second quarter of 2020, conditions gradually improved in the commercial paper market for tier-3 issuers, and as a result, HEI returned to the commercial paper markets for its short-term borrowings at average rates that are lower than the average rates before the pandemic. As of June 30, 2020, HEI and Hawaiian Electric had $16.5 million and nil in commercial paper outstanding, respectively.
As of June 30, 2020,March 31, 2021, there was no balance on HEI’s revolving credit facility and the available committed capacity under the revolving credit facility was $150 million. As of June 30, 2020, there was no balance onor Hawaiian Electric’s revolving credit facilities and the available committed capacity under the facilities was $150 million and $275 million, respectively. On April 19, 2021, Hawaiian Electric’s $75 million 364-day revolving credit facilitiesagreement terminated and was $275 million.not renewed. At the end of the quarter, HEI and Hawaiian Electric had approximately $100 million and nil of commercial paper outstanding, respectively. As of June 30, 2020,March 31, 2021, ASB’s unused FHLB borrowing capacity was approximately $2.2$2.0 billion and ASB had unpledged investment securities of $2.0 billion.
The Company expects that its liquidity will continue to be moderately impacted at the Utilities due to COVID-19. For the Utilities, the high level of unemployment in the state and the moratorium on customer disconnections (which moratorium is currently in place through September 1, 2020)May 31, 2021) are expected to result in higher accounts receivable balances, bad debt expense and write-offs. Additionally, lower kWh sales generally result in delayed timing of cash flows, resulting in higher working capital requirements (see “Recent Developments—COVID-19” in the Electric Utilityutility MD&A)section below). At ASB, liquidity remains at satisfactory levels.levels largely due to U.S. economic stimulus programs implemented as a result of COVID-19 that led to a substantial increase in customer deposits. ASB’s cash and cash equivalents was $507.0$224 million as of June 30, 2020, up from $178.4March 31, 2021, compared to $293 million as of December 31, 2019.2020. ASB remains well above the “well capitalized” level, butand while the economic outlook has improved, there continues to be significant uncertainty regarding COVID-19’s impact on loan performance and the allowance for credit losses (see “Recent Developments — COVID-19” in the Bank MD&A)section below).
To preserve and enhanceOn January 14, 2021, the Company’s liquidity position, in lightUtilities received $115 million of the significant and ongoing uncertainty regarding the potential scale and duration of the COVID-19 pandemic and its impact on the global economy, the Company tookproceeds using a number of steps. First, on April 20, 2020, HEI borrowed $65 milliondelayed draw feature under a 364-day term loan to refinance the outstanding amounts under its revolving credit facility and thereby increase the available committed borrowing capacity under its revolving credit facility. Additionally, on April 20, 2020, the Utilities added an incremental $75 million in committed revolving credit capacity at Hawaiian Electric with a 364-day revolving credit facility (see Note 5 of the Condensed Consolidated Financial Statements). The Utilities also launched and closed a $160 million private placement of taxable debtexecuted on May 14,October 29, 2020 and used the proceeds of which were usedfunds to finance capital expenditures, repay short-term debt used to finance or refinance capital expenditures and reimburse funds used for the payment of capital expenditures. In addition, $50
On January 28, 2021, HEI received $46 million of an existingproceeds using a delayed draw feature under a private placement executed on November 17, 2020. The proceeds were used to repay the remaining balance of $15 million on HEI’s $65 million 364-day term loan, with the remainder used to pay down commercial paper balances and prefund maturing debt. The second tranche of $29 million was refinanced with a new $50 million term loan maturing indrawn on April 2021. 16, 2021 and was used to pay down HEI’s commercial paper balances.
As of June 30,March 31, 2021 and December 31, 2020, the total amount of available borrowing capacity (net of commercial paper outstanding) under the Company’s committed lines of credit was approximately $408$325 million which was an increase of approximately $194and $360 million, compared to December 31, 2019. HEI and the Utilities have no remaining long-term debt maturities in 2020.
In addition to the foregoing financing transactions, in order to further enhance the Company’s liquidity position, the Company has deferred, pursuant to section 2302 of the CARES Act, the payment of the applicable employer portion of Old-Age, Survivors and Disability Insurance payroll tax deposits that are due in 2020, but arose subsequent to the enactment of the CARES Act, which is estimated to be approximately $10 million. Fifty percent of the deferred payroll taxes will be paid in each of December 2021 and December 2022. The Company is also deferring approximately $5.8 million per month in planned monthly pension contributions, to be paid later in the year, to further strengthen its liquidity position. If further liquidity is necessary, which is not contemplated at this time, the Utilities could also reduce the pace of capital spending related to non-essential projects. Additionally, the Company has the option to issue new shares rather than purchase currently outstanding shares on the open market to satisfy share issuances under its Dividend Reinvestment and Stock Purchase Plan (DRIP) program. The estimated amount of capital that could be preserved by issuing new shares, rather than utilizing open market purchases, is estimated to be approximately $30 million on an annual basis, based on historical demand, but such future amount is dependent on a number of factors, including, without limitation, future share prices, number of shares/participants in the DRIP program, and the amount of new investment in HEI’s stock by DRIP participants.respectively.
The Company believes that its ability to generate cash, both internally from electric utility and banking operations and externally from issuances of equity and debt securities, as well as bank borrowings, is adequate to maintain sufficient liquidity to fund its contractual obligations and commercial commitments, its forecasted capital expenditures and investments, its expected retirement benefit plan contributions and other cash requirements. However, the COVID-19 pandemic is a rapidlyan evolving situation, and the Company cannot predict the extent or duration of the outbreak, the future effects that it will have on the global, national or local economy, including the impact on the Company’s cost of capital and its ability to access additional capital, or the future impacts on the Company’s financial position, results of operations, and cash flows. See Item 1A. “Risk Factors” in Part II for further discussion of risks and uncertainties.
The consolidated capital structure of HEI (excluding deposit liabilities and other bank borrowings) was as follows:
| | (dollars in millions) | (dollars in millions) | | June 30, 2020 | | | December 31, 2019 | | (dollars in millions) | | March 31, 2021 | | December 31, 2020 |
| Short-term borrowings—other than bank | Short-term borrowings—other than bank | | $ | 131 | | | 3 | % | | $ | 186 | | | 4 | % | Short-term borrowings—other than bank | | $ | 100 | | | 2 | % | | $ | 129 | | | 3 | % |
| Long-term debt, net—other than bank | Long-term debt, net—other than bank | | 2,070 | | | 46 | | | 1,964 | | | 44 | | Long-term debt, net—other than bank | | 2,230 | | | 48 | | | 2,119 | | | 46 | |
| Preferred stock of subsidiaries | Preferred stock of subsidiaries | | 34 | | | 1 | | | 34 | | | 1 | | Preferred stock of subsidiaries | | 34 | | | 1 | | | 34 | | | 1 | |
| Common stock equity | Common stock equity | | 2,291 | | | 50 | | | 2,280 | | | 51 | | Common stock equity | | 2,321 | | | 49 | | | 2,338 | | | 50 | |
| | | | $ | 4,526 | | | 100 | % | | $ | 4,464 | | | 100 | % | | | $ | 4,685 | | | 100 | % | | $ | 4,620 | | | 100 | % |
HEI’s commercial paper borrowings and line of credit facility were as follows:
| | | | | Average balance | | Balance | | | | Average balance | | Balance |
| (in millions) | (in millions) | | Six months ended June 30, 2020 | | June 30, 2020 | | December 31, 2019 | (in millions) | | Three months ended March 31, 2021 | | March 31, 2021 | | December 31, 2020 |
| Commercial paper | Commercial paper | | $ | 35 | | | $ | 17 | | | $ | 97 | | Commercial paper | | $ | 47 | | | $ | 100 | | | $ | 65 | |
| Line of credit draws | Line of credit draws | | 13 | | | — | | | — | | Line of credit draws | | — | | | — | | | — | |
| Undrawn capacity under HEI’s line of credit facility | Undrawn capacity under HEI’s line of credit facility | | 150 | | | 150 | | Undrawn capacity under HEI’s line of credit facility | | 150 | | | 150 | |
Note: This table does not include Hawaiian Electric’s separate commercial paper issuances and line of credit facilities and draws, which are disclosed below under “Electric utility—Financial Condition—Liquidity and capital resources.” The maximum amount of HEI’s external short-term commercial paper borrowings during the first sixthree months of 20202021 was $99$100 million.
On March 17, 2021, Standard & Poor’s (S&P) revised HEI’s outlook to stable from positive and affirmed the “BBB-” issuer credit rating and “A-3” short-term and commercial paper ratings. On April 20, 2021, Moody’s Investor Service’s (Moody’s) upgraded HEI’s short-term rating for commercial paper to “P-2” from “P-3” and revised the outlook to stable from positive.
HEI has a $150 million line of credit facility with no amounts outstanding at June 30, 2020.March 31, 2021. See Note 5 of the Condensed Consolidated Financial Statements.
There were no new issuances of common stock through the DRIP,HEI Dividend Reinvestment and Stock Purchase Plan (DRIP), HEIRSP or the ASB 401(k) Plan in the sixthree months ended June 30,March 31, 2021 and 2020 and 2019 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 sixthree months of 2020,2021, net cash provided by operating activities of HEI consolidated was $197$42 million. Net cash used by investing activities for the same period was $629$518 million, primarily due to capital expenditures, ASB’s purchases of available-for-sale and held-to maturity investment securities, and ASB’s net increase in loans, partly offset by ASB’s receipt of repayments from investment securities, proceeds from the sale of investment securities and sales of available-for-sale investment securities.net decrease in loans. Net cash provided by financing activities during this period was $808$409 million as a result of several factors, including net increases in ASB’s deposit liabilities and other bank borrowings, and the issuances of short-term and long-term debt and net increases in short-term borrowings, partly offset by net decrease in short-term borrowings, repayment of short-term and long-term debt and funds transferred for repayment of long-term debt and payment of common stock dividends. During the first six
three months of 2020,2021, Hawaiian Electric and ASB (through ASB Hawaii) paid cash dividends to HEI of $54$28 million and $28$5 million, respectively.
Dividends. The payout ratios for the first sixthree months of 20202021 and full year 20192020 were 88%58% and 64%, respectively. On February 9, 2021, the HEI Board of Directors approved a 1 cent increase in the quarterly dividend from $0.33 per share to $0.34 per share, starting with the dividend in the first quarter of 2021. HEI currently expects to maintain its dividend at its present level; however, the HEI Board of Directors evaluates the dividend quarterly and considers many factors in the evaluation including, but not limited to, the Company’s results of operations, the long-term prospects for the Company and current and expected future economic conditions, including impacts from the COVID-19 pandemic.
MATERIAL ESTIMATES AND CRITICAL ACCOUNTING POLICIESFINANCIAL CONDITION
In preparing financial statements, management is required to make estimatesLiquidity and assumptions that affect the reported amountscapital resources. As of assets and liabilities, the disclosure of contingent assets and liabilitiesMarch 31, 2021, there was no balance on HEI’s revolving credit facility or Hawaiian Electric’s revolving credit facilities and the reported amounts of revenuesavailable committed capacity under the facilities was $150 million 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$275 million, respectively. On April 19, 2021, Hawaiian Electric’s $75 million 364-day revolving credit agreement terminated and was not renewed. At 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 portrayalend of the Company’s resultsquarter, HEI and Hawaiian Electric had approximately $100 million and nil of operationscommercial paper outstanding, respectively. As of March 31, 2021, ASB’s unused FHLB borrowing capacity was approximately $2.0 billion and financial condition, and currently require management’s most difficult, subjective or complex judgments.ASB had unpledged investment securities of $2.0 billion.
For information about these material estimates and critical accounting policies, see pages 38 to 39, 51 to 52, and 67 to 68 of HEI’s MD&A included in Part II, Item 7 of HEI’s 2019 Form 10-K.
Allowance for credit losses. The Company considers the policies related to the allowance for credit losses as critical to the financial statement presentation. The allowance for credit losses applies to financial assets subject to credit losses and measured at amortized cost and certain off-balance sheet credit exposures. This includes, but is not limited to loans, loan commitments and held-to-maturity securities. In addition, the accounting for credit losses on AFS debt securities and purchased financial assets with credit deterioration were amended. The other-than-temporary impairment model of accounting for credit losses on AFS debt securities was replaced with an estimate of expected credit losses only when the fair value is below the amortized cost of the asset. The credit loss models use a probability-of-default, loss given default and exposure at default methodology to estimate the expected credit losses. Within each model or calculation, loans are further segregated based on additional risk characteristics specific toexpects that loan type, such as risk rating, FICO score, bankruptcy score, age of loan and collateral. The Company uses both internal and external historical data, as appropriate, and a blend of economic forecasts to estimate credit losses over a reasonable and supportable forecast period and then reverts to a longer-term historical loss experience to arrive at lifetime expected credit losses. The reversion period incorporates forward-looking expectations about repayments (including prepayments) as determined by the Company’s asset liability management system. See “Recent Accounting Pronouncements” in Note 1 of the Condensed Consolidated Financial Statements for further discussion of the Company’s allowance for credit losses.
Following are discussions of the results of operations,its liquidity and capital resources of the electric utility and bank segments.
Electric utility
Recent developments—COVID-19
See also Recent developments—COVID-19 in HEI’s MD&A.
Economic conditions in Hawaiiwill continue to be severelymoderately impacted byat the COVID-19 pandemic. Statewide daily passenger counts remain depressed, and unemployment stood at 13.9% as of June 30, 2020. As a consequence of the significant decline in economic activity, the demand for electricity was adversely impacted. In the second quarter of 2020, kWh sales were down 11.6% compared with the same quarter in 2019.Utilities due to COVID-19. For the full year,Utilities, the Utilities expect thehigh level of kWh sales to be 6%-12% below sales levels achieved in 2019. Although the Utilities continue to expect lower sales due to COVID-19, the Utilities expect the RPS achievement to be closer to, but still above, the 30% statutory requirement by December 31, 2020.
While the Utilities do not expect electric energy revenues to be significantly impacted due to the decoupling mechanism, which allows recovery of the difference between PUC approved target revenues and recorded adjusted revenues regardless of the level of kWh sales, the timing of customer collections would be delayed (or accelerated) if the level of kWh sales decreases below (or increases above) the estimated kWh sales. See “Decoupling” in Note 3 of the Condensed Consolidated Financial Statements for a discussion of decoupling. Annually, the Utilities submit a decoupling filing to the PUC, which requests recovery by the utility (or refund to customers) of the difference between recorded adjusted revenues and target revenues under the RBA. The difference is collected or refunded through an adjustment to customer ratesunemployment in the following year based on estimated sales, starting on June 1st of that following year, which has an impact onstate and the timing of the Utilities’ cash flow. Additionally, although the Utilities’ decoupling mechanism allows for collection under the RBA, the RBA balance accrues interest only at the short-term debt rate from the last rate case (1.75% for Hawaiian Electric, 1.5% for Hawaii Electric Light and 3.0% for Maui Electric). As of June 30, 2020, the RBA credit balance related to decoupling revenues was approximately $17 million, a decrease in the credit balance by $7.8 million, or 32% since March 31, 2020. While the billed accounts receivable balances as of June 30, 2020 of $138 million is 9.7% lower than the billed accounts receivable balances as of December 31, 2019, due to lower fuel prices resulting in lower bills, the past due accounts receivable balance has increased by $6 million or 19% since December 31, 2019. The increase is primarily driven by the state mandated stay-at-home order, which was lifted on July 1, 2020, as well as the pandemic’s impact on the tourism industry resulting in higher unemployment rate, moratorium on customer disconnections (which moratorium is currently in place through September 1, 2020)May 31, 2021) are expected to result in higher accounts receivable balances, bad debt expense and for certain customers, the inability to make payment on their accounts. To address the financing requirement related to thewrite-offs. Additionally, lower kWh sales generally result in delayed timing of cash flows, collectedresulting in higher working capital requirements (see “Recent Developments—COVID-19” in the Electric utility section below). At ASB, liquidity remains at satisfactory levels largely due to U.S. economic stimulus programs implemented as a result of COVID-19 that led to a substantial increase in customer deposits. ASB’s cash and cash equivalents was $224 million as of March 31, 2021, compared to $293 million as of December 31, 2020. ASB remains well above the “well capitalized” level, and while the economic outlook has improved, there continues to be uncertainty regarding COVID-19’s impact on loan performance and the allowance for credit losses (see “Recent Developments — COVID-19” in the Bank section below).
On January 14, 2021, the Utilities received $115 million of proceeds using a delayed draw feature under a private placement executed on October 29, 2020 and used the funds to finance capital expenditures and reimburse funds used for the payment of capital expenditures.
On January 28, 2021, HEI received $46 million of proceeds using a delayed draw feature under a private placement executed on November 17, 2020. The proceeds were used to repay the remaining balance of $15 million on HEI’s $65 million 364-day term loan, with the remainder used to pay down commercial paper balances and prefund maturing debt. The second tranche of $29 million was drawn on April 16, 2021 and was used to pay down HEI’s commercial paper balances.
As of March 31, 2021 and December 31, 2020, the total amount of available borrowing capacity (net of commercial paper outstanding) under the decoupling mechanism throughCompany’s committed lines of credit was approximately $325 million and $360 million, respectively.
The Company believes that its ability to generate cash, both internally from electric utility and banking operations and externally from issuances of equity and debt securities, as well as bank borrowings, is adequate to maintain sufficient liquidity to fund its contractual obligations and commercial commitments, its forecasted capital expenditures and investments, its expected retirement benefit plan contributions and other cash requirements. However, the RBACOVID-19 pandemic is an evolving situation, and the modest slowingCompany cannot predict the extent or reduction in accounts receivable collections from customers, the Utilities have completed a number of steps to enhance their liquidity position. See “Financial Condition—Liquidity and capital resources” for additional information.
The Utilities provide an essential service to the State of Hawaii, and have continued to operate to protect the health and safety of employees and customers and to ensure system reliability, and have been following the Governor’s directive that the Utilities take necessary measures to ensure they can operate in the normal course. The Utilities have also implemented certain aspects of their business continuity plans, which includes the activation of its Incident Management Team to closely manage the response to the pandemic and have implemented practices related to employee and facilities hygiene in order to ensure the reliability and resilience of their operations. For example, plant operators and operations crews have been separated into distinct teams with no overlap of personnel in order to mitigate transmission risk amongst critical personnel and to minimize the risk of not having appropriate backup personnel available to perform essential functions. Plans have been developed in the event sequestration of critical personal is required. In the second quarter of 2020, the PUC approved the deferral of certain COVID-19 related expenses, such as higher bad debt expense, higher financing costs, non-collection of late payment fees, and sequestration costs for mission-critical employees. As of June 30, 2020, these costs, which have been deferred and recorded as a regulatory asset, totaled approximately $6.5 million (see also discussion under Item 1A. “Risk Factors” and “Regulatory assets for COVID-19 costs” in Note 3duration of the Condensed Consolidated Financial Statements). Looking forward,outbreak, the prolonged impact of COVID-19 could adversely affectfuture effects that it will have on the ability ofglobal, national or local economy, including the Utilities’ contractors, suppliers, IPPs, and other business partners to perform or fulfill their obligations, or require modifications to existing contracts, which could adversely affect the Utilities’ business, increase expenses, and impact the Utilities’ ability to achieve their RPS goals beyond 2020. Additionally, while the state’s aggressive response to the pandemic has dramatically reduced the spread of the coronavirus, the measures taken have had a severe economic impact on the state’s businessesCompany’s cost of capital and residents, which may influenceits ability to access additional capital, or the PUC’s actions regarding requested rate increases.future impacts on the Company’s financial position, results of operations, and cash flows. See “ItemItem 1A. Risk“Risk Factors” in Part II for additionalfurther discussion of risks.risks and uncertainties.
At this time, the Utilities are not able to predict what the full impactThe consolidated capital structure of the COVID-19 pandemic will have on its results of operations, financial positionHEI (excluding deposit liabilities and cash flows because it is uncertain the extent to which the virus can be contained and the extent to which protective measures to prevent the spread of the virus will be in place.other bank borrowings) was as follows:
For a discussion regarding the impact of economic conditions caused by the COVID-19 pandemic on the Utilities’ liquidity and capital resources, see discussion under “Financial Condition–Liquidity and capital resources.” | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (dollars in millions) | | March 31, 2021 | | December 31, 2020 |
| Short-term borrowings—other than bank | | $ | 100 | | | 2 | % | | $ | 129 | | | 3 | % |
| Long-term debt, net—other than bank | | 2,230 | | | 48 | | | 2,119 | | | 46 | |
| Preferred stock of subsidiaries | | 34 | | | 1 | | | 34 | | | 1 | |
| Common stock equity | | 2,321 | | | 49 | | | 2,338 | | | 50 | |
| | | $ | 4,685 | | | 100 | % | | $ | 4,620 | | | 100 | % |
RESULTS OF OPERATIONSHEI’s commercial paper borrowings and line of credit facility were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | | | Increase | | | | |
| 2020 | | 2019 | | (decrease) | | | | (dollars in millions, except per barrel amounts) |
| $ | 534 | | | $ | 634 | | | $ | (100) | | | | | Revenues. Net decrease largely due to: |
| | | | | | $ | (76) | | | lower fuel oil prices and lower kWh generated1 |
| | | | | | (29) | | | lower purchased power energy prices and lower kWh purchased2 |
| | | | | | (2) | | | higher cost savings from ERP system implementation to be returned to customers in future rates |
| | | | | | 5 | | | higher electric rates |
| | | | | | 1 | | | higher PIM revenue due to an adjustment made in 2019 related to 2018 reliability performance incentives |
| | | | | | 1 | | | higher MPIR revenue (increase for West Loch PV project and Grid Modernization project) |
| 112 | | | 182 | | | (70) | | | | | Fuel oil expense1. Decrease largely due to lower fuel oil prices coupled with lower kWh generated |
| 137 | | | 163 | | | (26) | | | | | Purchased power expense1, 2. Decrease largely due to lower purchased power energy price coupled with lower kWh purchased |
| 110 | | | 119 | | | (9) | | | | | Operation and maintenance expenses. Net decrease largely due to: |
| | | | | | (4) | | | less generating unit overhauls performed in 2020 |
| | | | | | (3) | | | PUC approval to defer COVID-19 related bad debt expenses recorded in the first quarter to a regulatory asset |
| | | | | | (2) | | | lower labor due to lower staffing and reduction in overtime |
| | | | | | (2) | | | less station maintenance work performed |
| | | | | | 1 | | | higher medical premium costs |
| | | | | | 1 | | | leased office demolition costs |
| 107 | | | 114 | | | (7) | | | | | Other expenses. Decrease due to lower revenue taxes offset in part by higher depreciation in 2020 for plant investment in 2019 |
| 68 | | | 56 | | | 12 | | | | | Operating income. Increase due to lower operation and maintenance, coupled with higher electric rates, PIM revenue and MPIR revenue, offset in part by higher depreciation expenses |
| 53 | | | 41 | | | 12 | | | | | Income before income taxes. Increase due to lower operation and maintenance expense, higher electric rates, higher PIM revenue, higher MPIR revenue, and lower interest expense related to the hybrid securities redemption replaced with lower cost debt (in May 2019) and refinancing of revenue bonds (in July 2019) at lower rates, offset in part by higher depreciation expense and lower AFUDC |
| 42 | | | 33 | | | 9 | | | | | Net income for common stock. Increase due to lower operating expenses, coupled with higher electric rates, higher PIM revenue and higher MPIR revenue |
| | | | | | | | |
| 1,874 | | | 2,119 | | | (245) | | | | | Kilowatthour sales (millions)3 |
| | | | | | | | |
| | | | | | | | |
| $ | 63.12 | | | $ | 88.38 | | | $ | (25.26) | | | | | Average fuel oil cost per barrel |
| | | | | | | | | | | | | | | | | | | | |
| | | Average balance | | Balance |
| (in millions) | | Three months ended March 31, 2021 | | March 31, 2021 | | December 31, 2020 |
| Commercial paper | | $ | 47 | | | $ | 100 | | | $ | 65 | |
| Line of credit draws | | — | | | — | | | — | |
| Undrawn capacity under HEI’s line of credit facility | | | | 150 | | | 150 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30 | | | | Increase | | | | |
| 2020 | | 2019 | | (decrease) | | | | (dollars in millions, except per barrel amounts) |
| $ | 1,132 | | | $ | 1,212 | | | $ | (80) | | | | | Revenues. Net decrease largely due to: |
| | | | | | $ | (63) | | | lower fuel oil prices and lower kWh generated1 |
| | | | | | (21) | | | lower purchased power energy prices and lower kWh purchased2 |
| | | | | | (4) | | | higher cost savings from ERP system implementation to be returned to customers in future rates |
| | | | | | 7 | | | higher electric rates |
| | | | | | 2 | | | higher MPIR revenue (increase for West Loch PV project and Grid Modernization project) |
| 286 | | | 342 | | | (56) | | | | | Fuel oil expense1. Decrease largely due to lower fuel oil prices coupled with lower kWh generated |
| 277 | | | 297 | | | (20) | | | | | Purchased power expense1 ,2. Decrease largely due to lower purchased power energy prices coupled with lower kWh purchased |
| 237 | | | 237 | | | — | | | | | Operation and maintenance expenses. |
| | | | | | (5) | | | less generating unit overhauls performed in 2020 |
| | | | | | (2) | | | lower labor due to lower staffing and reduction in overtime |
| | | | | | (2) | | | less station maintenance work performed |
| | | | | | 1 | | | higher medical premium costs |
| | | | | | 1 | | | leased office demolition costs |
| | | | | | 2 | | | higher outside services for system support (Interactive Voice Response, Customer Information System, Energy Management and development of portal for CBRE) |
| | | | | | 2 | | | increase in vegetation management work |
| | | | | | 3 | | | 2019 PUC approval of deferral treatment for previously-incurred expense to modify existing generating units on Maui to run at lower loads in order to accept more renewable generation |
| 220 | | | 223 | | | (3) | | | | | Other expenses. Decrease due to lower revenue taxes offset in part by higher depreciation expense in 2020 for plant investments in 2019 |
| 112 | | | 112 | | | — | | | | | Operating income. Higher electric rates and higher MPIR revenue offset by higher depreciation expense |
| 83 | | | 83 | | | — | | | | | Income before income taxes. Higher electric rates, higher MPIR revenue and lower interest expense due to the hybrid securities redemption replaced with lower cost debt (in May 2019) and refinancing of revenue bonds (in July 2019) at lower rates, offset by higher depreciation expense and lower AFUDC |
| 66 | | | 65 | | | 1 | | | | | Net income for common stock. Increase due to higher electric rate and MPIR revenue offset in part by higher depreciation expense. See below for effective tax rate explanation |
| 3,880 | | | 4,035 | | | (155) | | | | | Kilowatthour sales (millions)3 |
| $ | 72.77 | | | $ | 84.44 | | | $ | (11.67) | | | | | Average fuel oil cost per barrel |
| 465,953 | | | 464,281 | | | 1,672 | | | | | Customer accounts (end of period) |
1This table does not include Hawaiian Electric’s separate commercial paper issuances and line of credit facilities and draws, which are disclosed below under “Electric utility—Financial Condition—Liquidity and capital resources.” The rate schedulesmaximum amount of the electric utilities currently contain ECRCs through which changes in fuel oil prices and certain components of purchased energy costs are passed on to customers.
2The rate schedules of the electric utilities currently contain PPACs through which changes in purchase power expenses (except purchased energy costs) are passed on to customers.
3 kWh sales were lower when compared to the same periods in the prior year largely due to the effects of the COVID-19 pandemic. The enormous reduction to visitor arrivals due to the mandatory in-bound and inter-island travel quarantine has significantly impacted the tourism industry, led to record unemployment claims, and shuttered many businesses and hotels. As restrictions are lifted and visitors begin to arrive, sales are expected to slowly rebound but at lower levels than the prior year.
The Utilities’ effective tax rate for each of the second quarters of 2020 and 2019 was 19%. The Utilities’ effective tax rates forHEI’s short-term commercial paper borrowings during the first sixthree months of 20202021 was $100 million.
On March 17, 2021, Standard & Poor’s (S&P) revised HEI’s outlook to stable from positive and 2019 were at 19%affirmed the “BBB-” issuer credit rating and 21%, respectively. The effective tax rate was lower“A-3” short-term and commercial paper ratings. On April 20, 2021, Moody’s Investor Service’s (Moody’s) upgraded HEI’s short-term rating for commercial paper to “P-2” from “P-3” and revised the sixoutlook to stable from positive.
months ended June 30, 2020 compared to the same period in 2019 due primarily to higher 2020 amortization of the Utilities’ regulatory liability related to certain excess deferred income taxes resulting from the Tax Act’s decrease in federal income tax rate. The resulting benefit of lower tax expense is passed on to customers.
Hawaiian Electric’s consolidated ROACE was 7.9% and 7.8% for the twelve months ended June 30, 2020 and June 30, 2019, respectively.
The net book value (cost less accumulated depreciation) of utility property, plant and equipment (PPE) as of June 30, 2020 amounted to $4 billion, of which approximately 28% related to generation PPE, 63% related to transmission and distribution PPE, and 9% related to other PPE. Approximately 11% of the total net book value relates to generation PPE that has been deactivated or that the Utilities plan to deactivate or decommission.
See “Economic conditions” in the “HEI Consolidated” section above.
Executive overview and strategy. The Utilities provide electricity on all the principal islands in the state, other than Kauai, to approximately 95% of the state’s population and operate five separate grids. The Utilities’ mission is to provide innovative energy leadership for Hawaii, to meet the needs and expectations of customers and communities, and to empower them with affordable, reliable and clean energy. The goal is to create a modern, resilient, flexible and dynamic electric grid that enables an optimal mix of distributed energy resources, such as private rooftop solar, demand response and grid-scale resources to enable the creation of smart, sustainable, resilient communities and achieve the statutory goal of 100% renewable energy by 2045.
Transition to renewable energy. The Utilities are fully committed to a 100 percent renewable energy future for Hawaii and are partnering with the State of Hawaii in achieving their Renewable Portfolio Standard goal of 100% renewable energy by 2045. Hawaii’s RPS law requires electric utilities to meet an RPS of 30%, 40%, 70% and 100% by December 31, 2020, 2030, 2040 and 2045, respectively.
The Utilities have made significant progress on the path to clean energy and have been successful in adding significant amounts of renewable energy resources to their electric systems and exceeded the 2015 RPS goal two years early. The Utilities’ RPS for 2019 was approximately 28% and the Utilities are on track to achieve the 2020 RPS goal of 30%. The Utilities will continue to actively procure additional renewable energy post-2020 and expect to meet or exceed the next statutory RPS goal of 40% in advance of the 2030 compliance year. (See “Developments in renewable energy efforts” below).
If the Utilities are not successful in meeting the RPS targets as mandated by law, the PUC could assess a penalty of $20 for every MWh that an electric utility is deficient. Based on the level of electricity sales in 2019, a 1% shortfall in meeting the 2020 RPS requirement of 30% would translate into a penalty of approximately $1.75 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 Hawaiian Electric and Maui Electric to limited commodity fossil fuel price exposure under a fuel cost risk-sharing mechanism. Currently, the fuel cost risk-sharing mechanism apportions 2% of the fuel cost risk to the two utilities (and 98% to ratepayers) andHEI has a maximum exposure (or benefit)$150 million line of $3.1 million.
The Utilities are fully alignedcredit facility with and supportive of, state policy to achieve a 100% renewable energy future and have made significant progress in its transformation. 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 fuelsno amounts outstanding 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 is an environmental and social cost from the continued use of fossil fuels.
The State of Hawaii’s policy is supported by the regulatory framework and includes a number of mechanisms designed to provide the Utilities financial stability during the transition toward the State’s 100% renewable energy future. Under the sales decoupling mechanism, the Utilities are allowed to recover from customers, target test year revenues, independent of the level of kWh sales, which have generally declined (with the exception of 2019 and the first quarter of 2020), as privately-owned distributed energy resources have been added to the grid and energy efficiency measures have been put into place. Other regulatory mechanisms reduce regulatory lag, such as the rate adjustment mechanism to provide revenues for escalation in certain O&M expenses and rate base changes between rate cases, and the major project interim recovery mechanism, which allow the Utilities to recover and earn on certain approved major capital projects placed into service in between rate cases.March 31, 2021. See “Decoupling” in Note 3 of the Consolidated Financial Statements.
Integrated Grid Planning. Achieving 100% renewable energy will require modernizing the grid through coordinated energy system planning in partnership with local communities and stakeholders. To accomplish this, the Utilities filed their Integrated Grid Planning (IGP) Report with the PUC on March 1, 2018, which provides an innovative systems approach to energy planning intended to yield the most cost-effective renewable energy pathways that incorporates customer and stakeholder input.
The PUC opened a docket to review the IGP process that the Utilities had proposed, and the resulting plans. In March 2019, the PUC accepted the Utilities’ IGP Work plan submitted on December 14, 2018, which describes the timing and scope of major activities that will occur in the IGP process. The IGP utilizes an inclusive and transparent Stakeholder Engagement model to provide an avenue for interested parties to engage with the Utilities and contribute meaningful input throughout the IGP process. The IGP Stakeholder Council, Technical Advisor Panel and Working groups have been established and meet regularly to provide feedback and input on specific issues and process steps in the IGP. In March 2020, the Utilities launched a broad public engagement program, which consisted of a combination of in-person and online engagement. This provided customers opportunities to connect with the IGP team.
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.
In October 2017, the PUC approved the Utilities’ request made in December 2015 to defer and recover certain computer software and software development costs for a DR Management System in an amount not to exceed $3.9 million, exclusive of allowance for funds used during construction, through the Renewable Energy Infrastructure Program (REIP) Surcharge. The Utilities placed the DR Management System in service in the first quarter of 2019. On October 30, 2019, the Utilities filed the final cost report, reflecting total project costs of $3.7 million. On February 27, 2020, the PUC approved the Utilities’ request to recover deferred and other related costs of the DR Management System through the REIP Surcharge effective March 1, 2020 until such costs are included in determining base rates. On June 26, 2020, the Utilities submitted an updated REIP rate effective August 1, 2020 to the PUC.
On January 25, 2018, the PUC approved the Utilities’ revised DR Portfolio tariff structure. The PUC supported the approach of working with aggregators to implement the DR portfolio. In 2019, the Utilities signed a multi-year Grid Services Purchase Agreement (GSPA) with a third party aggregator. These contracts pay service providers to aggregate grid-supporting capabilities from customer-sited Distributed Energy Resources. The first of these five-year contracts has been executed (PUC approval obtained on August 9, 2019) and is expected to not only deliver benefits through efficient grid operations, but also avoided fuel costs over that 5-year period. The Utilities selected the next set of aggregators in the first quarter of 2020, commenced GSPA contract negotiations, and filed two executed contracts on July 9, 2020. This complements the Utilities’ transformation and supports customer choice.
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 expects that new technology will help triple private rooftop solar and make use of rapidly evolving products, including storage and advanced inverters. The Utilities have begun work to implement the Grid Modernization Strategy Phase 1, which received PUC approval on March 25, 2019. The estimated cost for this initial phase is approximately $86 million and is expected to be incurred over five years. The Utilities filed an application with the PUC on September 30, 2019 for an Advanced Distribution Management System as part of the second phase of their Grid Modernization Strategy implementation. The estimated cost for the implementation over five years of the Advanced Distribution Management System, which includes capital, deferred and O&M costs, is $46 million. Additional applications will be filed later to implement subsequent phases of the Grid Modernization Strategy. On December 30, 2019, the PUC suspended the Utilities’ application for the Advanced Distribution Management System pending the Utilities’ filing of a supplemental application for the broad deployment of field devices.
Community-based renewable energy. In December 2017, the PUC adopted a community-based renewable energy (CBRE) program framework which allows customers who cannot, or chose not to, take advantage of private rooftop solar to receive the benefits of renewable energy to help offset their monthly electric bills and support clean energy for Hawaii. The program has two phases.
The first phase, which commenced in July 2018, totals 8 MW of solar photovoltaic (PV) only with one credit rate for each island, closed on April 9, 2020.
By PUC order, CBRE Phase 2 commenced on April 9, 2020 with the goal to develop a robust CBRE market with competitive pricing anticipating that clean energy projects and programs, such as CBRE, can meaningfully contribute to the State’s recovery from the COVID-19 Emergency. CBRE Phase 2 capacity is substantially larger than Phase 1 and allows up to 235 MW across all Hawaiian Electric service territories. The capacities are allocated by island and allow for small and large system sizes to encourage a variety of system sizes. Projects will be selected through a competitive process with increased rigor around price and non-price criteria. 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. LMI projects do not have a size cap nor do they decrease the 235 MW capacity available to other projects. In addition to its administrative role, the Utilities and their affiliates are eligible to participate in the solicitations. The Utilities will also have opportunities to earn based on shared savings mechanisms for specific solicitations.
Microgrid services tariff proceeding. In July 2018, the PUC originally issued an order instituting a proceeding to investigate establishment of a microgrid services tariff, pursuant to Act 200 of 2018. The PUC granted motions to intervene in the docket by eight parties (there are currently four parties) and completed its initial procedural schedule in March 2019. In August 2019, the PUC issued an order stating that the focus for the remainder of the docket is to facilitate the ability of microgrids to disconnect from the grid and provide backup power to customers and critical energy uses during contingency events.
The PUC also required the parties to form two Working Groups: (1) a Market Facilitation Working Group to recommend draft tariff language for the Microgrid Services Tariff; and (2) an Interconnection Standards Working Group to develop a new section of Rule 14H specific to interconnection and islanding/reconnection of microgrids. The Utilities filed a Draft Microgrid Services Tariff and updated language for various DER Rules on March 30, 2020.Parties to the docket filed comments on and proposed revisions to the Draft Tariff on April 27, 2020.
Decoupling. See "Decoupling" in Note 3 of the Condensed Consolidated Financial Statements for a discussion of decoupling.
As part of decoupling, the Utilities also track their rate-making ROACEs as calculated under the earnings sharing mechanism, which includes only items considered in establishing rates. At year-end, each utility's rate-making ROACE is compared against its ROACE allowed by the PUC to determine whether earnings sharing has been triggered. Annual earnings of a utility over and above the ROACE allowed by the PUC are shared between the utility and its ratepayers on a tiered basis. Earnings sharing credits are included in the annual decoupling filing for the following year. Results for 2019, 2018 and 2017 did not trigger the earnings sharing mechanism for the Utilities.
Regulated returns. Actual and PUC-allowed returns, as of June 30, 2020, were as follows:
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| % | | Rate-making Return on rate base (RORB)* | | | | | | ROACE** | | | | | | Rate-making ROACE*** | | | | |
Twelve months ended June 30, 2020 | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric |
| Utility returns | | 6.76 | | | 6.68 | | | 6.32 | | | 7.90 | | | 8.01 | | | 7.46 | | | 8.73 | | | 8.39 | | | 8.22 | |
| PUC-allowed returns | | 7.57 | | | 7.52 | | | 7.43 | | | 9.50 | | | 9.50 | | | 9.50 | | | 9.50 | | | 9.50 | | | 9.50 | |
| Difference | | (0.81) | | | (0.84) | | | (1.11) | | | (1.60) | | | (1.49) | | | (2.04) | | | (0.77) | | | (1.11) | | | (1.28) | |
* 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 actually achieved is primarily due to: the consistent exclusion of certain expenses from rates (for example, incentive compensation and charitable contributions), the recognition of annual RAM revenues on June 1 annually rather than on January 1, and O&M increases and return on capital additions since the last rate case in excess of indexed escalations.
Most recent rate proceedings. As of June 30, 2020, the status of ongoing rate case for each utility was as follows:
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base | | Common
equity
% | | Stipulated agreement
reached with
Consumer Advocate |
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2020 1 | | | | | | | | | | | | | | | | |
| Request | | 8/21/19 | | $ | 77.6 | | | 4.1 | | | 10.50 | | | 7.97 | | | $ | 2,477 | | | 57.15 | | | Yes |
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2019 2 | | | | | | | | | | | | | | | | |
| Request | | 12/14/18 | | $ | 13.4 | | | 3.4 | | | 10.50 | | | 8.30 | | | $ | 537 | | | 56.91 | | | Yes |
| Interim increase | | 1/1/20 | | 0.0 | | 0.0 | | 9.50 | | 7.52 | | 534 | | 56.83 | | |
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Note: The “Request” date reflects the application filing date for the rate proceeding. The “Interim increase” and “Final increase” date reflects the effective date of the revised schedules and tariffs as a result of the PUC-approved increase.
1 On May 27, 2020, Hawaiian Electric and the Consumer Advocate filed a Stipulated Settlement Letter, agreeing to no base rate increase. PUC’s decision on the settlement agreement is pending.
2 The Interim D&O issued on November 13, 2019 approved an adjustment to base rates to maintain revenues at current effective rates.
See “Most recent rate proceedings” in Note 35 of the Condensed Consolidated Financial Statements.
Performance-based regulation. See “Performance incentive mechanisms”There were no new issuances of common stock through the HEI Dividend Reinvestment and “Performance-based regulation proceeding”Stock Purchase Plan (DRIP), HEIRSP or the ASB 401(k) Plan in Note 3the three months ended March 31, 2021 and 2020 and HEI satisfied the share purchase requirements of the Condensed Consolidated Financial Statements.DRIP, HEIRSP and ASB 401(k) Plan through open market purchases of its common stock.
DevelopmentsFor the first three months of 2021, net cash provided by operating activities of HEI consolidated was $42 million. Net cash used by investing activities for the same period was $518 million, primarily due to capital expenditures, ASB’s purchases of available-for-sale and held-to maturity investment securities, partly offset by ASB’sreceipt of repayments from investment securities, proceeds from the sale of investment securities and net decrease in renewable energy efforts. Developmentsloans. Net cash provided by financing activities during this period was $409 million as a result of several factors, including net increases in ASB’s deposit liabilities and other bank borrowings, the Utilities’ efforts to further their renewable energy strategy include renewable energy projects discussedissuances of long-term debt and net increases in Note 3short-term borrowings, partly offset by repayment of short-term and long-term debt and payment of common stock dividends. During the Condensed Consolidated Financial Statements and the following:
New renewable PPAs.
•In December 2014, the PUC approved a PPA for Renewable As-Available Energy dated October 3, 2013 betweenfirst three months of 2021, Hawaiian Electric and Na Pua Makani Power Partners, LLC (NPM)ASB (through ASB Hawaii) paid cash dividends to HEI of $28 million and $5 million, respectively.
Dividends. The payout ratios for a proposed 24-MW wind farm on Oahu. The NPM wind farm was expected to be placed into service by August 31, 2019, but has been delayed due to a contested case hearingthe first three months of 2021 and appeal offull year 2020 were 58% and 64%, respectively. On February 9, 2021, the HEI Board of LandDirectors approved a 1 cent increase in the quarterly dividend from $0.33 per share to $0.34 per share, starting with the dividend in the first quarter of 2021. HEI currently expects to maintain its dividend at its present level; however, the HEI Board of Directors evaluates the dividend quarterly and Natural Resources’ decisionconsiders many factors in the evaluation including, but not limited to, approve NPM’s Habitat Conservation Planthe Company’s results of operations, the long-term prospects for the Company and Incidental Take Permit/License. NPM received its Incidental Take Permitcurrent and expected future economic conditions, including impacts from the Department of Fish and Wildlife Service on September 7, 2018 and anticipates achieving commercial operations in late third quarter of 2020.COVID-19 pandemic.
Keep the North Shore Country (KNSC) has appealed this decision and the case has been transferred to the Hawaii Supreme Court. On June 17, 2020, KNSC filed a Motion for Stay Upon Appeal. No additional activity has occurred regarding KNSC’s 40-day Notice of Intent to Sue that was filed on November 15, 2019. The Notice alleges the NPM Final Environmental Impact Study did not adequately address certain project aspects related to the transport route and security provisions. KNSC and Kahuku Community Association have also petitioned to appeal NPM’s Conditional Use Permits. A hearing date for motions was scheduled for April 9, 2020 but was delayed and has not yet been rescheduled.
Life of the Land (LOL) filed a Motion for Relief to argue the PPA approval was invalid and should be revised. The Utilities and the Consumer Advocate filed an opposition to this motion for relief. A hearing on the motion for relief was held on November 22, 2019. On April 16, 2020, the PUC issued an order denying LOL’s Motion for Relief. On April 27, 2020, LOL filed a Notice of Appeal of the PUC’s order with the Supreme Court of the State of Hawaii.
•In July 2018, the PUC approved Maui Electric’s PPA with Molokai New Energy Partners (MNEP) to purchase solar energy from a PV plus battery storage project. The 4.88 MW PV and 3 MW Battery Energy Storage System (BESS) project was to deliver no more than 2.64 MW at any time to the Molokai system. On March 25, 2020, MNEP filed a complaint in the United Stated District Court for the District of Hawaii against Maui Electric claiming breach of contract. Management disputes the facts presented by MNEP and all claims within the complaint. On June 3, 2020, Maui Electric provided Notice of Default and Termination of the PPA to MNEP terminating the PPA with an effective date of July 10, 2020.
•On December 31, 2019, Hawaii Electric Light and PGV entered into an Amended and Restated Power Purchase Agreement (ARPPA), subject to approval by the PUC. The ARPPA extends the term of the existing PPA by 25 years to 2052, expands the firm capacity of the facility to 46 MW and delinks the pricing for energy delivered from the facility from fossil fuel prices to reduce cost to customers. The existing PPA (except for lower-tiered pricing for
certain energy dispatched above 30 MW) will remain in effect until it is superseded by the ARPPA when the expanded capacity is in commercial operation.
Tariffed renewable resources.
•As of June 30, 2020, there were approximately 493MW, 106 MW and 120 MW of installed distributed renewable energy technologies (mainly PV) at Hawaiian Electric, Hawaii Electric Light and Maui Electric, respectively, for tariff-based private customer generation programs, namely Standard Interconnection Agreement, Net Energy Metering, Net Energy Metering Plus, Customer Grid Supply, Customer Self Supply, Customer Grid Supply Plus and Interim Smart Export. As of June 30, 2020, an estimated 30% of single family homes on the islands of Oahu, Hawaii and Maui have installed private rooftop solar systems, and approximately 18% of the Utilities' total customers have solar systems.
•The Utilities began accepting energy from feed-in tariff projects in 2011. As of June 30, 2020, there were 40 MW, 2 MW and 5 MW of installed feed-in tariff capacity from renewable energy technologies at Hawaiian Electric, Hawaii Electric Light and Maui Electric, respectively.
Biofuel sources.
•In July 2018, the PUC approved Hawaiian Electric’s 3-year biodiesel supply contract with Pacific Biodiesel Technologies, LLC (PBT) to supply 2 million to 4 million gallons of biodiesel at Hawaiian Electric’s Schofield Generating Station and the Honolulu International Airport Emergency Power Facility (HIA Facility) and any other generating unit on Oahu, as necessary. The PBT contract became effective on November 1, 2018. Hawaiian Electric also has a spot buy contract with PBT to purchase additional quantities of biodiesel at or below the price of diesel. Some purchases of “at parity” biodiesel have been made under the spot purchase contract, which was extended through June 2021.
•Hawaiian Electric has a contingency supply contract with REG Marketing & Logistics Group, LLC to also supply biodiesel to any generating unit on Oahu in the event PBT is not able to supply necessary quantities. This contingency contract has been extended to November 2021, and will continue with no volume purchase requirements.
Requests for renewable proposals, expressions of interest, and information.
•Under a request for proposal process governed by the PUC and monitored by independent observers, in February 2018, the Utilities issued RFPs for 220 MW of renewable generation on Oahu, 50 MW of renewable generation on Hawaii Island, and 60 MW of renewable generation on Maui. The Utilities selected a final award group for Hawaii Island in August 2018 and for Maui and Oahu in September 2018.
In December 2018, the Utilities executed a total of seven renewable generation PPAs utilizing photovoltaic technology paired with a battery storage system for a total of 262 MW, of which six PPAs were approved by the PUC in March 2019 and one PPA for Maui Electric is still under PUC review. In February 2019, Hawaiian Electric filed an additional PPA for a proposed 12.5 MW PV plus battery storage project, which was approved by the PUC on August 20, 2019. Summarized information for a total of 8 PPAs, including one for Maui Electric that is pending PUC approval, is as follows:
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| Utilities | | Number of contracts | | Total photovoltaic size (MW) | | BESS Size (MW/MWh) | | Guaranteed commercial operation dates | | Contract term (years) | | Total projected annual payment (in millions) |
| Hawaiian Electric | | 4 | | 139.5 | | 139.5/558 | | 9/30/21 & 12/31/21 | | 20 & 25 | | $ | 30.9 | |
| Hawaii Electric Light | | 2 | | 60 | | 60/240 | | 7/20/21 & 6/30/22 | | 25 | | 14.1 | |
| Maui Electric | | 2 | | 75 | | 75/300 | | 7/20/21 & 6/30/22 | | 25 | | 17.6 | |
| Total | | 8 | | 274.5 | | 274.5/1,098 | | | | | | $ | 62.6 | |
In March 2019 and August 2019, the Utilities received PUC approval to recover the total projected annual payment of $57.8 million for 7 PPAs through the PPAC to the extent such costs are not included in base rates. The remaining $4.8 million of total projected annual payments for the remaining PPA is pending PUC approval.
•In continuation of its February 2018 request for proposal process, the Utilities issued its Stage 2 Renewable RFPs for Oahu, Maui and Hawaii Island and Grid Services RFP on August 22, 2019. This procurement plan sought approximately 900 MW of renewable energy, including 594 MW on Oahu, 135 MW on Maui and a range between 32 to 203 MW on Hawaii Island. This second phase, as approved by the PUC, was open to all renewable and storage resources, including efforts to add more renewable generation, renewable plus storage, standalone storage and grid services. The scope of these RFPs has been expanded to accelerate renewable energy procurement beyond the remainder of the 2022 targets identified in Stage 1 to include the energy requirement associated with the planned retirement of the Kahului Power Plant on Maui and the upcoming expiration of the agreement for the AES Hawaii
facility on Oahu. For the Grid Services RFP, the targets had been expanded in alignment with the Renewable RFPs Utility proposals were submitted on November 4, 2019. Proposals from third parties for these RFPs were submitted on November 5, 2019. Final awards for the renewable projects were made on May 8, 2020. Final awards for the grid services projects were made starting in January 2020. On Oahu, seven solar-plus-storage projects and one standalone storage project totaling approximately 281 MW of generation and 1.8 GWh of storage advanced were selected. On Maui Island, three solar-plus-storage projects and one standalone storage project totaling approximately 100 MW of generation and 560 MWh of storage were selected. On Hawaii Island, two solar-plus-storage projects and one standalone storage project totaling approximately 72 MW of generation and 492 MWh of storage were selected. Two Utility Self-Build projects were among those selected; a 40-MW, 160-MWh standalone energy storage system on Maui and a 12-MW, 12-MWh storage system on Hawaii Island. Contract negotiations are ongoing. Executed contracts are projected to be filed for PUC approval in the fourth quarter of 2020.
•On November 27, 2019, the Utilities issued RFPs for renewable generation paired with energy storage on the islands of Lanai and Molokai. Projects may come online as early as 2022. The Utilities are seeking PV paired with storage or small wind (specified as 100 kW turbines or smaller) on Molokai and PV paired with storage on Lanai. Proposals for the Molokai RFP were received on February 14, 2020, and are currently being evaluated by the Utilities. The Lanai RFP has been temporarily postponed, while the Utilities reevaluate the system needs. The Utilities filed an update to the Lanai RFP on March 10, 2020. In light of a PUC order issued on April 9, 2020 in the CBRE docket, the Utilities have proposed in their July 9, 2020 filing to combine the previously issued Lanai RFP with the CBRE RFP described in the order to optimize the benefits of procuring renewable energy, spurring development and increasing the likelihood of success of the CBRE program on Lanai.
Legislation and regulation. Congress and the Hawaii legislature periodically consider legislation that could have positive or negative effects on the Utilities and their customers. Also see “Environmental regulation” in Note 3 of the Condensed Consolidated Financial Statements.
Fuel contracts. The fuel contract entered into in January 2019, by the Utilities and PAR Hawaii Refining, LLC (PAR Hawaii), for the Utilities’ low sulfur fuel oil (LSFO), high sulfur fuel oil (HSFO), No. 2 diesel, and ultra-low sulfur diesel (ULSD) requirements was approved by the PUC, and became effective on April 28, 2019 and terminates on December 31, 2022. This contract is a requirement contract with no minimum purchases. If PAR 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. The contract will automatically renew upon the conclusion of the original term for successive terms of 1 year beginning on January 1, 2023 unless a party gives written termination notice at least 120 days before the beginning of an extension. The costs incurred under the contract with PAR Hawaii are recovered in the Utilities’ respective ECRCs.
On June 9, 2020, the Utilities and Par Hawaii entered into a First Amendment to the fuel contract. The First Amendment amends only the 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 at the established pricing, and purchases in excess of that volume (tier-2) either from PAR at the established pricing, or from an alternative supplier. On August 4, 2020, the PUC approved the First Amendment, which has an effective date of July 15, 2020, on an interim basis. The PUC’s approval order allows the recovery of such costs associated with the First Amendment through the ECRC to the extent that the costs are not recovered in base rates. The PUC intends to review whether the First Amendment is reasonable and in the public interest in the final decision, but it will not subject the recovery of the costs between the interim decision and the final decision to retroactive disallowances.
FINANCIAL CONDITION
Liquidity and capital resources. In response to the COVID-19 pandemic, many countries, states, and cities have imposed strict social distancing measures that have had a significant impact on global economic activity. As a result, the capital markets, including the commercial paper markets, have experienced high levels of volatility, and in some cases, disruption. However, in March 2020, the Commercial Paper Funding Facility was announced, and the program was launched in April 2020. As a result, commercial paper rates began to decrease and were back down to what they were before the start of the COVID-19 pandemic. Thus, there was a significant increase in liquidity in the commercial paper market as many companies found other sources of liquidity, however, Hawaiian Electric has not needed to access the commercial paper market since closing on its private placement transaction in May 2020 (see Note 5 of Condensed Consolidated Financial Statements). As of June 30, 2020, following financing transactions further discussed below, there were no amounts outstanding on Hawaiian Electric’s revolving credit facilities and the available committed capacity under the revolving credit facilities was $275 million.
To preserve and enhance the Utilities’ liquidity position, given the significant and ongoing uncertainty regarding the potential scale and duration of the COVID-19 pandemic, the Utilities have taken a number of steps. First, on April 20, 2020, Hawaiian Electric added an incremental $75 million in committed revolving credit capacity with a 364-day revolving credit facility (see Note 5 of the Condensed Consolidated Financial Statements). The Utilities also launched and closed on a $160 million private placement of taxable debt in May 2020, the proceeds of which were used to finance capital expenditures, repay
short-term debt used to finance or refinance capital expenditures and/or reimburse funds for payment of capital expenditures. In addition, $50 million of an existing 364-day term loan was refinanced with a new $50 million term loan maturing in April 2021. As of June 30, 2020, the total amount of available borrowing capacity under the Utilities’ committed lines of credit was $275 million. The Utilities had $14 million of long-term debt that was paid off when it matured on July 1, 2020.
In addition to the foregoing financing transactions, in order to further enhance the Utilities’ liquidity position, the Utilities are deferring, pursuant to section 2302 of the CARES Act, the payment of the applicable employer portion of Old-Age, Survivors and Disability Insurance payroll tax deposits that are due in 2020, but arose subsequent to the enactment of the CARES Act, which is estimated to be approximately $10 million. Fifty percent of the deferred payroll taxes will be paid in each of December 2021 and December 2022. The Utilities are also deferring approximately $5.7 million per month in planned monthly pension contributions, to be instead paid later in the year, to further strengthen is liquidity position. If further liquidity is necessary, the Utilities could also reduce the pace of capital spending related to non-essential projects.
The Utilities believe that their ability to generate cash, both internally from operations and externally from issuances of equity and debt securities, as well as bank borrowings, is adequate to maintain sufficient liquidity to fund their contractual obligations and commercial commitments, their forecasted capital expenditures and investments, their expected retirement benefit plan contributions and other cash requirements. However, the COVID-19 pandemic is a rapidly evolving situation, and the Utilities cannot predict the extent or duration of the outbreak, the future effects that it will have on the global, national or local economy, including the impacts on the Utilities’ ability, as well as the cost, to access additional capital, or the future impacts on the Utilities’ financial position, results of operations, and cash flows. See Item 1A. “Risk Factors” in Part II for further discussion of risks and uncertainties.
Hawaiian Electric’s consolidated capital structure was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (dollars in millions) | | June 30, 2020 | | | | December 31, 2019 | | |
| Short-term borrowings | | $ | 50 | | | 1 | % | | $ | 89 | | | 2 | % |
| Long-term debt, net | | 1,575 | | | 42 | | | 1,498 | | | 41 | |
| Preferred stock | | 34 | | | 1 | | | 34 | | | 1 | |
| Common stock equity | | 2,060 | | | 56 | | | 2,047 | | | 56 | |
| | $ | 3,719 | | | 100 | % | | $ | 3,668 | | | 100 | % |
Information about Hawaiian Electric’s commercial paper borrowings, borrowings from HEI and line of credit facility were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | Average balance | | Balance | | |
| (in millions) | | Six months ended June 30, 2020 | | June 30, 2020 | | December 31, 2019 |
Short-term borrowings 1 | | | | | | |
| Commercial paper | | $ | 36 | | | $ | — | | | $ | 39 | |
| Borrowings from HEI | | — | | | — | | | — | |
| Line of credit draws | | 32 | | | — | | | — | |
| Undrawn capacity under line of credit facilities | | — | | | 275 | | | 200 | |
1 The maximum amount of external short-term borrowings by Hawaiian Electric during the first six months of 2020 was approximately $210 million. As of June 30, 2020, Hawaii Electric Light and Maui Electric had short-term borrowings from Hawaiian Electric of $12 million and $1.5 million, respectively, which intercompany borrowings are eliminated in consolidation. In addition to the short-term borrowings above, on May 19, 2020, Hawaiian Electric paid off and terminated the $100 million term loan facility dated as of December 23, 2019 and entered into a 364-day, $50 million term loan facility as of May 19, 2020. Hawaiian Electric drew the full $50 million on May 19, 2020.
Hawaiian Electric has a $200 million line of credit facility and a $75 million 364-day revolving credit facility with no amounts outstanding at June 30, 2020. See Note 5 of the Condensed Consolidated Financial Statements.
SPRBs. Special purpose revenue bonds (SPRBs) have been issued by the Department of Budget and Finance of the State of Hawaii (DBF) to finance (and refinance) capital improvement projects of Hawaiian Electric and its subsidiaries, but the sources of their repayment are the non-collateralized obligations of Hawaiian Electric and its subsidiaries under loan agreements and notes issued to the DBF, including Hawaiian Electric’s guarantees of its subsidiaries’ obligations.
On May 24, 2019, the PUC approved the Utilities’ request to issue SPRBs in the amounts of up to $70 million, $2.5 million and $7.5 million for Hawaiian Electric, Hawaii Electric Light and Maui Electric, respectively, prior to June 30, 2020, to finance the Utilities’ capital improvement programs. Pursuant to this approval, on October 10, 2019, the DBF issued, at par, Series 2019 SPRBs in the aggregate principal amount of $80 million with a maturity of October 1, 2049. As of June 30, 2020,
Hawaiian Electric had $29 million of undrawn funds remaining with the trustee. Hawaii Electric Light and Maui Electric had no undrawn funds as of June 30, 2020.
On June 10, 2019, the Hawaii legislature authorized the issuance of up to $700 million of SPRBs ($400 million for Hawaiian Electric, $150 million for Hawaii Electric Light and $150 million for Maui Electric), with PUC approval, prior to June 30, 2024, to finance the Utilities’ multi-project capital improvement programs (2019 Legislative Authorization).
On May 4, 2020, the Utilities requested PUC approval to issue up to $700 million of SPRBs (under the 2019 Legislative Authorization) in the amounts of up to $400 million, $150 million and $150 million for Hawaiian Electric, Hawaii Electric Light and Maui Electric, respectively, prior to June 30, 2024 to finance the Utilities’ multi-project capital improvement programs.
Bank loans. On May 19, 2020, Hawaiian Electric paid off and terminated the $100 million term loan credit agreement dated as of December 23, 2019. In addition, Hawaiian Electric entered into a 364-day, $50 million term loan credit agreement that matures on April 19, 2021. Hawaiian Electric drew the full $50 million on May 19, 2020.
Taxable debt. On January 31, 2019, the Utilities received PUC approval (January 2019 Approval) to issue the remaining authorized amounts under the PUC approval received in April 2018 (April 2018 Approval) in 2019 through 2020 (Hawaiian Electric up to $205 million and Hawaii Electric Light up to $15 million of taxable debt), as well as a supplemental increase to authorize the issuance of additional taxable debt to finance capital expenditures, repay long-term and/or short term debt used to finance or refinance capital expenditures, and/or to reimburse funds used for payment of capital expenditures, and to refinance the Utilities’ 2004 junior subordinated deferrable interest debentures (QUIDS) prior to maturity. In addition, the January 2019 Approval authorized the Utilities to extend the period to issue additional taxable debt from December 31, 2021 to December 31, 2022. The new total “up to” amounts of taxable debt requested to be issued through December 31, 2022 are $410 million, $150 million and $130 million for Hawaiian Electric, Hawaii Electric Light and Maui Electric, respectively.
Pursuant to this approval, on May 14, 2020, the Utilities issued through a private placement, $160 million of unsecured senior notes bearing taxable interest ($110 million for Hawaiian Electric, $10 million for Hawaii Electric Light and $40 million for Maui Electric) to finance their capital expenditures and/or to reimburse funds used for the payment of capital expenditures. See Note 5 of the Condensed Consolidated Financial Statements.
As of June 30, 2020, Hawaiian Electric, Hawaii Electric Light, and Maui Electric have $195 million, $115 million, and $70 million, respectively, of remaining taxable debt to issue prior to December 31, 2022. See summary table below.
| | | | | | | | | | | |
| (in millions) | Hawaiian Electric | Hawaii Electric Light | Maui Electric |
| Total “up to” amounts of taxable debt authorized through 2022 | $ | 410 | | $ | 150 | | $ | 130 | |
| Less: | | | |
| Taxable debt authorized and issued in 2018 under April 2018 Approval | 75 | | 15 | | 10 | |
| Taxable debt issuance to refinance the 2004 QUIDS in 2019 | 30 | | 10 | | 10 | |
| Taxable debt issuance in 2020 | 110 | | 10 | | 40 | |
| Remaining authorized amounts | $ | 195 | | $ | 115 | | $ | 70 | |
In July 2020, the Utilities requested PUC approval to issue, prior to December 31, 2021, unsecured senior notes bearing taxable interest (Hawaiian Electric up to $60 million, Hawaii Electric Light up to $30 million and Maui Electric up to $25 million), with the proceeds expected to be used, as applicable, 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. In October 2018, the Utilities received PUC approval for the supplemental increase to issue and sell additional common stock in the amounts of up to $280 million for Hawaiian Electric and up to $100 million each for Hawaii Electric Light and Maui Electric, with the new total “up to” amounts of $430 million for Hawaiian Electric and $110 million each for Hawaii Electric Light and Maui Electric, and to extend the period authorized by the PUC to issue and sell common stock from December 31, 2021 to December 31, 2022. As of June 30, 2020, Hawaiian Electric, Hawaii Electric Light, and Maui Electric
have $309.8 million, $110 million, and $98.8, respectively, of remaining common stock to issue prior to December 31, 2022. See summary table below.
| | | | | | | | | | | |
| (in millions) | Hawaiian Electric | Hawaii Electric Light | Maui Electric |
| Total “up to” amounts of common stock authorized to issue and sell through 2021 | $ | 150.0 | | $ | 10.0 | | $ | 10.0 | |
| Supplemental increase authorized | 280.0 | | 100.0 | | 100.0 | |
| Total “up to” amounts of common stock authorized to issue and sell through 2022 | 430.0 | | 110.0 | | 110.0 | |
| Common stock authorized and issued in 2017, 2018 and 2019 | 120.2 | | — | | 11.2 | |
| Remaining authorized amounts | $ | 309.8 | | $ | 110.0 | | $ | 98.8 | |
Cash flows. The following table reflects the changes in cash flows for the six months ended June 30, 2020 compared to the six months ended June 30, 2019:
| | | | | | | | | | | | | | | | | |
| Six months ended June 30 | | | | |
| (in thousands) | 2020 | | 2019 | | Change |
| Net cash provided by operating activities | $ | 181,468 | | | $ | 100,816 | | | $ | 80,652 | |
| Net cash used in investing activities | (181,091) | | | (197,386) | | | 16,295 | |
| Net cash provided by financing activities | 51,100 | | | 84,054 | | | (32,954) | |
Net cash provided by operating activities. The increase in net cash provided by operating activities was primarily driven by lower cash paid for fuel oil stock largely due to lower fuel oil prices.
Net cash used in investing activities. The decrease in net cash used in investing activities was primarily driven by a decrease in capital expenditures related to construction activities.
Net cash provided by financing activities. The decrease in net cash provided by financing activities was primarily driven by higher net cash repayments for short-term borrowings.
Forecast capital expenditures. The Utilities continuously monitor the impact of COVID-19, and for the three-year period 2020 through 2022, the Utilities forecast up to $1.3 billion of net capital expenditures, which could change over time based upon external factors such as the timing and scope of environmental regulations, unforeseen delays in permitting and timing of PUC decisions. Proceeds from the issuance of equity and long-term debt, cash flows from operating activities, temporary increases in short-term borrowings and existing cash and cash equivalents are expected to provide the funds needed for the net capital expenditures, to pay down commercial paper or other short-term borrowings, as well as to fund any unanticipated expenditures not included in the 2020 to 2022 forecast (such as increases in the costs or acceleration of capital projects, or unanticipated capital expenditures that may be required by new environmental laws and regulations).
Management periodically reviews capital expenditure estimates and the timing of construction projects. These estimates may change significantly as a result of many considerations, including changes in economic conditions, changes in forecasts of kWh sales and peak load, the availability of purchased power and changes in expectations concerning the construction and ownership of future generation units, the availability of generating sites and transmission and distribution corridors, the need for fuel infrastructure investments, the ability to obtain adequate and timely rate increases, escalation in construction costs, the effects of opposition to proposed construction projects and requirements of environmental and other regulatory and permitting authorities.
Bank
Recent Developments—COVID-19
While the extent and duration of the economic slowdown caused by COVID-19 is difficult to predict, the significant disruption to the global financial markets, including impacts to the capital markets and lower interest rates across the curve has begun to impact ASB’s results. The bank’s net interest margin of 3.21% for the quarter ended June 30, 2020 was 51 basis points lower than the net interest margin for the prior quarter and 61 basis points lower than the net interest margin for the same period last year. The lower interest rate environment will continue to have a negative impact on ASB’s net interest income and net interest margin in future quarters and could have an impact on the inputs and assumptions used in significant accounting estimates, such as assessing goodwill and long-live assets for impairment. ASB’s funding of short-term loans at a fixed rate of 1% under the Paycheck Protection Program (PPP) had reduced net interest margin modestly, but the income impact will be partially offset by the receipt of processing fees under the program. The state and local responses to the COVID-19 pandemic included a statewide stay-at-home order and a mandatory 14-day self-quarantine for any person traveling to Hawaii, which had a severe adverse economic impact to businesses and residents. Although many businesses have begun to reopen on a modified basis in compliance with applicable government orders, the mandatory 14-day self-quarantine order will remain in effect until the end of August, which will continue to impact the tourism industry and the unemployment rate in the state of Hawaii. ASB’s provision for credit losses increased due to forecasted credit deterioration as a result of the COVID-19 pandemic. For the three months ended June 30, 2020, the provision for credit losses was $15.1 million, compared to $7.7 million for the three months ended June 30, 2019. In response to COVID-19, ASB made short-term loan modifications to borrowers who were generally payment current at the time of relief. As of the end of June 2020, short-term loan modifications were made to approximately 13% of the total loans outstanding. These loans were not classified as past due or as a TDR under various provisions of the regulatory framework, as further described below. In addition to lower net interest income and higher provision for credit losses, ASB collected lower fee income as fees were waived to accommodate the hardships facing its customers. ASB also had higher direct and incremental operating expenses related to COVID-19 throughout 2020 as the Bank had purchased additional safety protection equipment to ensure its employees were protected and cleaning supplies to sanitize its facilities. The bank also provided additional compensation to frontline employees that serviced customers in the open branches and accrued expenses to purchase excess paid leave that employees will not be able to use during the remainder of 2020. ASB did realize lower expenses in other areas such as marketing, travel, business development and entertainment due to the bank delaying or reducing marketing efforts while focusing on the PPP loan program and there were restrictions on travel and dining at restaurants as result of the COVID-19 pandemic. Through June 30, 2020, the higher operating expenses, which were considered direct and incremental COVID-19 related costs, were approximately $3.8 million. For the balance of the year, ASB expects that direct and incremental COVID-19 related operating expenses will moderate from the levels experienced in the first half of 2020. In April 2020, ASB had 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 reopened three of the branches that were temporarily closed and permanently closed four branches. Two additional branches will be permanently closed and further branch closures may occur if the negative impacts of COVID-19 accelerate. 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’s senior management team continues to meet on a regular basis to manage the response to the pandemic and discuss key focus areas such as the safety of the bank’s employees and customers as well as any impacts to the operations of the bank. Senior management also continues to meet weekly with ASB’s board of directors to keep them apprised of the impacts of the COVID-19 pandemic.
The CARES Act was signed into law by President Trump on March 27, 2020. The CARES Act provides over $2 trillion in economic assistance for American workers, families, and small businesses, and job preservation for American industries. The PPP was established under the CARES Act and implemented by the United States Small Business Administration (SBA) to provide a direct incentive for small businesses to keep their workers on the payroll as a result of the COVID-19 crisis. The Paycheck Protection Program Flexibility Act was signed into law on June 5, 2020, which amended some of the prior rules and guidelines of the CARES Act. Loans issued through the PPP are 100% federally guaranteed and have a maturity of 2-5 years, depending on when the loan was made, at a fixed interest rate of 1%. Loan payments will be deferred until the earlier of (a) the date that the forgiven amount is remitted to the lender by the SBA; or (b) 10 months from the date the covered period ends. The SBA will forgive all loan amounts to a particular small business if such small business is compliant with the terms and conditions of the PPP. Small businesses have the earlier of 24 weeks from disbursement of the loan or December 31, 2020 to incur allowable expenses such as payroll costs, interest on mortgages, rent and utility expenses that would be covered by the loan forgiveness rules, with 60% of the loan forgiveness needing to be for payroll costs. There is a partial forgiveness if less than 60% of the loan disbursement was spent on payroll costs. Employers will have until December 31, 2020 to restore their workforce. Lenders will process and approve the PPP loans under delegated authority of the SBA. As an existing SBA certified lender, ASB worked with a number of small businesses, both customers and non-customers, to complete the loan application forms so that these businesses could participate in the program. The bank has secured more than $370 million in PPP loans for approximately 4,100 small businesses that support over 40,000 jobs, ASB received processing fees totaling approximately $13 million and will recognize these fees over the life of the loans.
To bolster the effectiveness of the SBA’s PPP, the Federal Reserve supplied liquidity to participating financial institutions through term financing backed by PPP loans to small businesses. The Paycheck Protection Program Liquidity Facility (PPPLF), authorized under section 13(3) of the Federal Reserve Act, lends to eligible borrowers on a non-recourse basis, taking PPP loans as collateral. The maturity date of an extension of credit under this facility will equal the maturity date of the PPP loan pledged to secure the extension of credit. The maturity date of the facility’s extension of credit will be accelerated if the underlying PPP loan goes into default and ASB sells the loan to the SBA to realize on the SBA guarantee. The maturity date of the facility’s extension of credit also will be accelerated to the extent of any loan forgiveness reimbursement received by ASB from the SBA.
Other provisions of the CARES Act provides that a financial institution may elect to suspend the requirements under GAAP for certain loan modifications that would otherwise be categorized as a TDR and any related impairment for accounting purposes. See Note 4 of the Condensed Consolidated Financial Statements and “Economic conditions” in the “HEI Consolidated” section above.
ASB continues to maintain its low-risk profile, strong balance sheet and straightforward community banking business model.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | | | Increase | | |
| (in millions) | | 2020 | | 2019 | | (decrease) | | Primary reason(s) |
| Interest income | | $ | 60 | | | $ | 66 | | | $ | (6) | | | The decrease in interest income was primarily the result of lower earning asset yields partly offset by an increase in loan portfolio balances. ASB’s average loan portfolio balance for the three months ended June 30, 2020 increased by $506 million compared to the same period in 2019 due to increases in the average commercial, commercial real estate and home equity line of credit loan portfolios of $390 million, $88 million and $68 million, respectively. Included in the commercial loan portfolio growth are the PPP loans with an average balance of $268 million. The yield on the loan portfolio was 80 basis points lower than the yield on the loan portfolio in the prior year. The decrease was primarily due to the declining interest rate environment which started in the second half of 2019 and has continued this year. ASB’s average investment securities portfolio balance for the three months ended June 30, 2020 decreased by $102 million compared to the same period in 2019 as ASB used the investment portfolio repayments to fund the growth in the loan portfolio. The yield on the investment securities portfolio decreased by 22 basis points due to the lower interest rate environment. The average balance of interest-earning deposits increased by $230 million for the three months ended June 30, 2020 compared to the same period in 2019 as cash balances grew due to deposit growth, which outpaced loan growth. |
| Noninterest income | | 24 | | | 16 | | | 8 | | | Noninterest income increased for the three months ended June 30, 2020 compared to noninterest income for the three months ended June 30, 2019 primarily due to the gain on sale of securities and an increase in mortgage banking income, partly offset by lower fee income from other financial services and deposit liabilities. In the second quarter of 2020, ASB sold all of its Visa Class B restricted shares and $160 million of investment securities for a pretax gain of $9.3 million. The sale of the investment securities reduced yield volatility and credit risk within the investment portfolio. The increase in mortgage banking income was due to the increase in residential mortgage loan sales in the secondary market as a result of higher loan production volumes. The lower fee income from other financial services and deposit liabilities was due to ASB’s decision to waive overdraft and other deposit account fees to accommodate the hardships customers are experiencing during the COVID-19 pandemic. |
| Less: gain on sale of investment securities, net | | (9) | | | — | | | (9) | | | Gain on sale of investment securities, net, which is included in Noninterest income above and in the Bank’s statements of income and comprehensive income in Note 4, is classified as gain on sale of investment securities, net in the condensed consolidated statements of income, and accordingly, is reflected below following operating income as a separate line item and excluded from Revenues. |
| Revenues | | 75 | | | 82 | | | (7) | | | The decrease in revenues for the three months ended June 30, 2020 compared to the same period in 2019 was primarily due to lower interest income. |
| Interest expense | | 3 | | | 5 | | | (2) | | | The decrease in interest expense for the three months ended June 30, 2020 compared to the same period in 2019 was due to a decrease in term certificate balances and lower yields on costing liabilities. Average deposit balances for the three months ended June 30, 2020 increased by $638 million compared to the same period in 2019 due to an increase in core deposits of $712 million, partly offset by a decrease in average term certificate balances of $74 million. Average cost of deposits for the three months ended June 30, 2020 was 18 basis points, or 10 basis points lower than the cost of deposits for the same period in 2019. Average other borrowings for the three months ended June 30, 2020 was flat compared to the same period in 2019 and the rate was 121 basis points lower. The interest-bearing liability rate for the three months ended June 30, 2020 of 27 basis points decreased 15 basis points compared to the same period in 2019. |
| Provision for credit losses | | 15 | | | 8 | | | 7 | | | The provision for credit losses increased for the three months ended June 30, 2020 compared to the provision for loan losses for the three months ended June 30, 2019. The provision for loan losses for 2020 was primarily for additional loan loss reserves for the consumer loan portfolio, reserves for increases in commercial real estate loan commitments and increased reserves in the commercial, commercial real estate and consumer loan portfolios for expected credit deterioration due to the COVID-19 pandemic. The provision for loan losses for 2019 was primarily additional loan loss reserves for the consumer loan portfolio, increased reserves for an impaired commercial loan and growth in the loan portfolio, partly offset by the release of loan loss reserves for the payoff of a commercial real estate loan and the completion of a commercial real estate construction project. Delinquency rates have decreased from 0.51% at June 30, 2019 to 0.38% at June 30, 2020, which exclude loans that were modified due to COVID-19. These loans were generally payment current at the time of the modification and qualify to not be treated as past due or as a TDR under relevant regulatory relief. The annualized net charge-off ratio for the three months ended June 30, 2020 was 0.49% compared to an annualized net charge-off ratio of 0.29% for the same period in 2019. The annualized net charge-off for 2019 benefited from recoveries in the commercial loan portfolio. |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Noninterest expense | | 48 | | | 48 | | | — | | | Noninterest expense for the three months ended June 30, 2020 was flat compared to the same period in 2019. Higher expenses1 related to the COVID-19 pandemic, of approximately $3.7 million, were offset by lower compensation and benefits and marketing expenses. See Recent Developments-COVID-19 for a discussion of the additional expenses incurred due to the COVID-19 pandemic. |
| Expenses | | 66 | | | 61 | | | 5 | | | The increase in expenses for the three months ended June 30, 2020 compared to the same period in 2019 was due to higher provision for loan losses partly offset by lower interest expense. |
| Operating income | | 8 | | | 21 | | | (13) | | | The decrease in operating income for the three months ended June 30, 2020 compared to the same period in 2019 was primarily due to lower interest income and higher provision for credit losses, partly offset by lower interest expense. |
| Gain on sale of investment securities, net | | 9 | | | — | | | 9 | | | Increase was due to the sale of ASB’s Visa Class B restricted shares and other investment securities. |
| Net income | | 14 | | | 17 | | | (3) | | | The decrease in net income for the three months ended June 30, 2020 compared to the same period in 2019 was primarily due to lower operating income, partly offset by gain on sale of investment securities, net. |
1 Higher operating expenses, which were considered direct and incremental COVID-19 related costs, included approximately $2.3 million of incremental compensation expense and $1.1 million of enhanced cleaning and sanitation costs.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six months ended June 30 | | | | Increase | | |
| (in millions) | | 2020 | | 2019 | | (decrease) | | Primary reason(s) |
| Interest income | | $ | 125 | | | $ | 135 | | | $ | (10) | | | The decrease in interest income was primarily the result of a decrease in yield on earning assets and lower investment portfolio balances, partly offset by higher loan portfolio balances. ASB’s average loan portfolio balance for the six months ended June 30, 2020 increased by $382 million compared to the same period in 2019 due to increases in the average commercial, home equity line of credit, commercial real estate and residential loan portfolios of $244 million, $88 million, $70 million and $8 million, respectively. Included in the commercial loan portfolio growth are the PPP loans with an average balance of $134 million. The yield on loans was impacted by the declining interest rate environment which started during the last half of 2019 and has continued this year, resulting in a decrease in yields from the total loan portfolio of 63 basis points. The average investment portfolio balance for the six months ended June 30, 2020 decreased $112 million compared to the same period in 2019 due to repayments in the portfolio and the lack of new investment security purchases for most of 2019 as liquidity was used to fund the loan portfolio growth. The investment portfolio yield for 2020 was 17 basis points lower than the investment portfolio yield in the prior year. The average interest-earning deposit balance for the six months ended June 30, 2020 increased by $123 million compared to the same period in 2019 as cash balances grew due to deposit growth, which outpaced loan growth. |
| Noninterest income | | 39 | | | 30 | | | 9 | | | The increase in noninterest income for the six months ended June 30, 2020 compared to noninterest income for the six months ended June 30, 2019 was primarily due to gains on sales of investment securities and higher mortgage banking income, partly offset by lower fee income from financial services and deposit liabilities. ASB sold all of its Visa Class B restricted shares and $160 million of investment securities portfolio for a pretax gain of $9.3 million. The sale of the investment securities reduced yield volatility and credit risk within the investment portfolio. The higher mortgage banking income in 2020 was due to an increase in residential mortgage loans sold in the secondary market as a result of higher loan production volumes. The lower fee income from financial services and deposit liabilities was due to ASB’s decision to waive overdraft and other deposit account fees to accommodate the hardships customers are experiencing during the COVID-19 pandemic. |
| Less: gain on sale of investment securities, net | | (9) | | | — | | | (9) | | | Gain on sale of investment securities, net, which is included in Noninterest income above and in the Bank’s statements of income and comprehensive income in Note 4, is classified as gain on sale of investment securities, net in the condensed consolidated statements of income, and accordingly, is reflected below following operating income as a separate line item and excluded from Revenues. |
| Revenues | | 155 | | | 165 | | | (10) | | | The decrease in revenues for the six months ended June 30, 2020 compared to the same period in 2019 was primarily due to lower interest income. |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest expense | | 7 | | | 9 | | | (2) | | | The decrease in interest expense for the six months ended June 30, 2020 compared to the same period in 2019 was primarily due to lower term certificate balances and costing liability yields. Average deposit balances for the six months ended June 30, 2020 increased by $379 million compared to the same period in 2019 due to an increase in core deposits of $447 million, partly offset by a decrease in average term certificate balances of $68 million. Average cost of deposits for the six months ended June 30, 2020 was 20 basis points, or 8 basis points lower than the cost of deposits for the same period in 2019. Average other borrowings for the six months ended June 30, 2020 decreased by $7 million compared to the same period in 2019 due to a decrease in FHLB advances of $20 million, partly offset by an increase in repurchase agreements and federal funds purchased of $13 million. The interest-bearing liability rate for the six months ended June 30, 2020 of 31 basis points decreased by 12 basis points compared to the same period in 2019. |
| Provision for credit losses | | 26 | | | 15 | | | 11 | | | The provision for credit losses increased for the six months ended June 30, 2020 compared to the provision for credit losses for the six months ended June 30, 2019. The provision for credit losses for 2020 was primarily due to additional loss reserves for the consumer loan portfolio, reserves for increases in commercial real estate commitments and increased reserves for the commercial, commercial real estate and the consumer portfolios for expected credit deterioration due to the COVID-19 pandemic. The provision for credit losses for 2019 was primarily due to additional loss reserves for the consumer loan portfolio, increased reserves for an impaired commercial loan and a commercial real estate loan that was downgraded to substandard. Delinquency rates have decreased from 0.51% at June 30, 2019 to 0.38% at June 30, 2020, which exclude loans that were modified due to COVID-19. These loans were generally payment current at the time of the modification and qualify to not be treated as past due or as a TDR under relevant regulatory relief. The annualized net charge-off ratio for the six months ended June 30, 2020 was 0.46% compared to an annualized net charge-off ratio of 0.34% for the same period in 2019. The increase was due to higher net charge-offs in the consumer loan portfolio with risk-based pricing. |
| Noninterest expense | | 94 | | | 94 | | | — | | | Noninterest expense for the six months ended June 30 2020 was flat compared to the same period in 2019. Higher expenses1 related to the COVID-19 pandemic, of approximately $3.8 million, were partly offset by lower marketing expenses and 2019 expenses included higher occupancy expenses as the bank had the costs for the new campus and properties being vacated. See Recent Developments-COVID-19 for a discussion of the additional expenses incurred due to the COVID-19 pandemic. |
| Expenses | | 127 | | | 118 | | | 9 | | | The increase in expenses for the six months ended June 30, 2020 compared to the same period in 2019 was due to higher provision for credit losses, partly offset by lower interest expense. |
| Operating income | | 28 | | | 47 | | | (19) | | | The decrease in operating income for the six months ended June 30, 2020 compared to the same period in 2019 was primarily due to lower interest income and higher provision for credit losses, partly offset by lower interest expense. |
| Gain on sale of investment securities, net | | 9 | | | — | | | 9 | | | Increase was due to the sale of ASB’s Visa Class B restricted shares and other investment securities. |
| Net income | | 30 | | | 38 | | | (8) | | | Net income for the six months ended June 30, 2020 was lower than the same period in 2019 due to lower operating income, partly offset by gain on sale of investment securities, net. |
1 Higher operating expenses, which were considered direct and incremental COVID-19 related costs, included approximately $2.3 million of incremental compensation expense and $1.1 million of enhanced cleaning and sanitation costs.
ASB’s return on average assets, return on average equity and net interest margin were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30 | | | | Six months ended June 30 | | |
| (%) | | 2020 | | 2019 | | 2020 | | 2019 |
| Return on average assets | | 0.72 | | | 0.96 | | | 0.79 | | | 1.07 | |
| Return on average equity | | 8.00 | | | 10.46 | | | 8.57 | | | 11.76 | |
| Net interest margin | | 3.21 | | | 3.82 | | | 3.46 | | | 3.90 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | | | | | | | | | |
| | 2020 | | | | | | 2019 | | | | |
| (dollars in thousands) | | Average
balance | | Interest
income/
expense | | Yield/
rate (%) | | Average
balance | | Interest
income/
expense | | Yield/
rate (%) |
| Assets: | | | | | | | | | | | | |
| Interest-earning deposits | | $ | 239,186 | | | $ | 60 | | | 0.10 | | | $ | 9,212 | | | $ | 55 | | | 2.36 | |
| FHLB stock | | 9,649 | | | 75 | | | 3.13 | | | 9,785 | | | 89 | | | 3.62 | |
| Investment securities | | | | | | | | | | | | |
| Taxable | | 1,346,145 | | | 5,978 | | | 1.78 | | | 1,449,233 | | | 7,105 | | | 1.96 | |
| Non-taxable | | 28,794 | | | 221 | | | 3.04 | | | 28,096 | | | 362 | | | 5.09 | |
| Total investment securities | | 1,374,939 | | | 6,199 | | | 1.80 | | | 1,477,329 | | | 7,467 | | | 2.02 | |
| Loans | | | | | | | | | | | | |
| Residential 1-4 family | | 2,175,756 | | | 21,635 | | | 3.98 | | | 2,177,030 | | | 22,480 | | | 4.13 | |
| Commercial real estate | | 937,990 | | | 8,298 | | | 3.52 | | | 850,037 | | | 10,113 | | | 4.72 | |
| Home equity line of credit | | 1,090,752 | | | 8,473 | | | 3.12 | | | 1,022,479 | | | 9,841 | | | 3.86 | |
| Residential land | | 13,326 | | | 184 | | | 5.53 | | | 13,816 | | | 172 | | | 4.98 | |
| Commercial | | 999,251 | | | 7,686 | | | 3.08 | | | 609,285 | | | 7,022 | | | 4.60 | |
| Consumer | | 232,360 | | | 7,286 | | | 12.61 | | | 270,914 | | | 9,008 | | | 13.34 | |
Total loans 1,2 | | 5,449,435 | | | 53,562 | | | 3.94 | | | 4,943,561 | | | 58,636 | | | 4.74 | |
Total interest-earning assets 3 | | 7,073,209 | | | 59,896 | | | 3.39 | | | 6,439,887 | | | 66,247 | | | 4.11 | |
| Allowance for credit losses | | (80,083) | | | | | | | (55,068) | | | | | |
| Noninterest-earning assets | | 783,826 | | | | | | | 683,179 | | | | | |
| Total assets | | $ | 7,776,952 | | | | | | | $ | 7,067,998 | | | | | |
| Liabilities and shareholder’s equity: | | | | | | | | | | | | |
| Savings | | $ | 2,550,162 | | | $ | 619 | | | 0.10 | | | $ | 2,333,175 | | | $ | 486 | | | 0.08 | |
| Interest-bearing checking | | 1,096,350 | | | 93 | | | 0.03 | | | 1,040,865 | | | 266 | | | 0.10 | |
| Money market | | 159,876 | | | 89 | | | 0.22 | | | 146,726 | | | 255 | | | 0.69 | |
| Time certificates | | 740,297 | | | 2,270 | | | 1.23 | | | 814,518 | | | 3,280 | | | 1.62 | |
| Total interest-bearing deposits | | 4,546,685 | | | 3,071 | | | 0.27 | | | 4,335,284 | | | 4,287 | | | 0.40 | |
| Advances from Federal Home Loan Bank | | 24,231 | | | 21 | | | 0.36 | | | 33,791 | | | 222 | | | 2.63 | |
| Securities sold under agreements to repurchase and federal funds purchased | | 87,631 | | | 54 | | | 0.25 | | | 77,693 | | | 189 | | | 0.98 | |
| Total interest-bearing liabilities | | 4,658,547 | | | 3,146 | | | 0.27 | | | 4,446,768 | | | 4,698 | | | 0.42 | |
| Noninterest bearing liabilities: | | | | | | | | | | | | |
| Deposits | | 2,273,656 | | | | | | | 1,847,228 | | | | | |
| Other | | 144,256 | | | | | | | 123,371 | | | | | |
| Shareholder’s equity | | 700,493 | | | | | | | 650,631 | | | | | |
| Total liabilities and shareholder’s equity | | $ | 7,776,952 | | | | | | | $ | 7,067,998 | | | | | |
| Net interest income | | | | $ | 56,750 | | | | | | | $ | 61,549 | | | |
Net interest margin (%) 4 | | | | | | 3.21 | | | | | | | 3.82 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six months ended June 30 | | | | | | | | | | |
| | 2020 | | | | | | 2019 | | | | |
| (dollars in thousands) | | Average
balance | | Interest
income/
expense | | Yield/
rate (%) | | Average
balance | | Interest income/ expense | | Yield/
rate (%) |
| Assets: | | | | | | | | | | | | |
| Interest-earning deposits | | $ | 132,920 | | | $ | 152 | | | 0.23 | | | $ | 9,782 | | | $ | 117 | | | 2.39 | |
| FHLB stock | | 9,512 | | | 153 | | | 3.25 | | | 10,064 | | | 185 | | | 3.69 | |
| Investment securities | | | | | | | | | | | | |
| Taxable | | 1,367,306 | | | 14,997 | | | 2.19 | | | 1,481,400 | | | 17,315 | | | 2.34 | |
| Non-taxable | | 28,738 | | | 526 | | | 3.62 | | | 27,037 | | | 691 | | | 5.08 | |
| Total investment securities | | 1,396,044 | | | 15,523 | | | 2.22 | | | 1,508,437 | | | 18,006 | | | 2.39 | |
| Loans | | | | | | | | | | | | |
| Residential 1-4 family | | 2,177,118 | | | 43,557 | | | 4.00 | | | 2,168,703 | | | 44,730 | | | 4.13 | |
| Commercial real estate | | 918,076 | | | 17,807 | | | 3.86 | | | 847,689 | | | 20,286 | | | 4.77 | |
| Home equity line of credit | | 1,095,224 | | | 17,693 | | | 3.25 | | | 1,007,338 | | | 19,334 | | | 3.87 | |
| Residential land | | 13,688 | | | 381 | | | 5.57 | | | 13,311 | | | 355 | | | 5.33 | |
| Commercial | | 843,277 | | | 14,416 | | | 3.42 | | | 599,054 | | | 13,882 | | | 4.65 | |
| Consumer | | 241,138 | | | 15,275 | | | 12.74 | | | 270,569 | | | 17,909 | | | 13.35 | |
Total loans 1,2 | | 5,288,521 | | | 109,129 | | | 4.13 | | | 4,906,664 | | | 116,496 | | | 4.76 | |
Total interest-earning assets 3 | | 6,826,997 | | | 124,957 | | | 3.66 | | | 6,434,947 | | | 134,804 | | | 4.20 | |
| Allowance for credit losses | | (76,292) | | | | | | | (53,568) | | | | | |
| Noninterest-earning assets | | 753,029 | | | | | | | 682,718 | | | | | |
| Total assets | | $ | 7,503,734 | | | | | | | $ | 7,064,097 | | | | | |
| Liabilities and shareholder’s equity: | | | | | | | | | | | | |
| Savings | | $ | 2,472,957 | | | $ | 1,159 | | | 0.09 | | | $ | 2,334,106 | | | $ | 888 | | | 0.08 | |
| Interest-bearing checking | | 1,072,680 | | | 323 | | | 0.06 | | | 1,041,387 | | | 530 | | | 0.10 | |
| Money market | | 153,826 | | | 339 | | | 0.44 | | | 148,577 | | | 496 | | | 0.67 | |
| Time certificates | | 755,323 | | | 4,837 | | | 1.28 | | | 822,875 | | | 6,625 | | | 1.62 | |
| Total interest-bearing deposits | | 4,454,786 | | | 6,658 | | | 0.30 | | | 4,346,945 | | | 8,539 | | | 0.40 | |
| Advances from Federal Home Loan Bank | | 23,713 | | | 111 | | | 0.94 | | | 43,983 | | | 575 | | | 2.64 | |
| Securities sold under agreements to repurchase and federal funds purchased | | 91,822 | | | 277 | | | 0.61 | | | 78,232 | | | 364 | | | 0.94 | |
| Total interest-bearing liabilities | | 4,570,321 | | | 7,046 | | | 0.31 | | | 4,469,160 | | | 9,478 | | | 0.43 | |
| Noninterest bearing liabilities: | | | | | | | | | | | | |
| Deposits | | 2,094,215 | | | | | | | 1,822,574 | | | | | |
| Other | | 144,433 | | | | | | | 128,529 | | | | | |
| Shareholder’s equity | | 694,765 | | | | | | | 643,834 | | | | | |
| Total liabilities and shareholder’s equity | | $ | 7,503,734 | | | | | | | $ | 7,064,097 | | | | | |
| Net interest income | | | | $ | 117,911 | | | | | | | $ | 125,326 | | | |
Net interest margin (%) 4 | | | | | | 3.46 | | | | | | | 3.90 | |
1 Includes loans held for sale, at lower of cost or fair value.
2 Includes recognition of net deferred loan fees of $0.7 million and $0.1 million for the three months ended June 30, 2020 and 2019 and $0.7 million and $0.2 million for the six months ended June 30, 2020 and 2019, respectively, together with interest accrued prior to suspension of interest accrual on nonaccrual loans.
3 For the three and six months ended June 30, 2020 and 2019, the taxable-equivalent basis adjustments made to the table above were not material.
4 Defined as net interest income, on a fully taxable equivalent basis, as a percentage of average total interest-earning assets.
Earning assets, costing liabilities, contingencies and other factors. Earnings of ASB depend primarily on net interest income, which is the difference between interest earned on earning assets and interest paid on costing liabilities. The interest rate environment has been impacted by disruptions in the financial markets over a period of several years. In the prior year, interest rate increases had resulted in an increase in ASB’s net interest income and net interest margin. However, the recent interest rate reductions have negatively impacted ASB’s net interest income and net interest margin. Future interest reductions may continue to negatively impact ASB’s net interest income and net interest margin.
Loans and mortgage-backed securities are ASB’s primary earning assets.
Loan portfolio. ASB’s loan volumes and yields are affected by market interest rates, competition, demand for financing, availability of funds and management’s responses to these factors. See Note 4 of the Condensed Consolidated Financial Statements for the composition of ASB’s loans.
Home equity— key credit statistics. Attention has been given by regulators and rating agencies to the potential for increased exposure to credit losses associated with home equity lines of credit (HELOC) that were originated during the period of rapid home price appreciation between 2003 and 2007 as they have reached the end of their 10-year, interest-only payment periods. Once the interest-only payment period has ended, payments are reset to include principal repayments along with interest. ASB does not have a large exposure to HELOCs originated between 2003 and 2007. Nearly all of ASB’s HELOC originations prior to 2008 consisted of amortizing equity lines that have structured principal payments during the draw period. These older equity lines represent 1% of the HELOC portfolio and are included in the amortizing balances identified in the loan portfolio table below.
| | | | | | | | | | | | | | |
| | | June 30, 2020 | | December 31, 2019 |
| Outstanding balance of home equity loans (in thousands) | | $ | 1,065,264 | | | $ | 1,092,125 | |
| Percent of portfolio in first lien position | | 55.4 | % | | 53.7 | % |
| Annualized net charge-off ratio | | — | % | | 0.01 | % |
| Delinquency ratio | | 0.36 | % | | 0.27 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | End of draw period – interest only | | | | | | Current amortizing |
| June 30, 2020 | | Total | | Interest only | | 2020-2021 | | 2022-2024 | | Thereafter | | |
| Outstanding balance (in thousands) | | $1,065,264 | | $803,363 | | $29,096 | | $103,873 | | $670,394 | | $261,901 |
| % of total | | 100 | % | | 75 | % | | 2 | % | | 10 | % | | 63 | % | | 25 | % |
The HELOC portfolio makes up 20% 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. This product type comprises 77% of the total HELOC portfolio and is the current product offering. Borrowers also have a “Fixed Rate Loan Option” to convert a part of their available line of credit into a 5, 7 or 10-year fully amortizing fixed-rate loan with level principal and interest payments. As of June 30, 2020, approximately 22% of the portfolio balances were amortizing loans under the Fixed Rate Loan Option.
Loan portfolio risk elements. See Note 4 of the Condensed Consolidated Financial Statements.
Investment securities. ASB’s investment portfolio was comprised as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | June 30, 2020 | | | | December 31, 2019 | | |
| (dollars in thousands) | | Balance | | % of total | | Balance | | % of total |
| U.S. Treasury and federal agency obligations | | $ | 102,414 | | | 7 | % | | $ | 117,787 | | | 9 | % |
| Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies | | 1,351,608 | | | 89 | | | 1,165,836 | | | 85 | |
| Corporate bonds | | 31,407 | | | 2 | | | 60,057 | | | 4 | |
| Mortgage revenue bonds | | 28,827 | | | 2 | | | 28,597 | | | 2 | |
| Total investment securities | | $ | 1,514,256 | | | 100 | % | | $ | 1,372,277 | | | 100 | % |
Currently, ASB’s investment portfolio consists of U.S. Treasury and federal agency obligations, mortgage-backed securities, corporate bonds and mortgage revenue bonds. ASB owns mortgage-backed securities issued or guaranteed by the U.S. government agencies or sponsored agencies, including the Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC), Government National Mortgage Association (GNMA) and Small Business Administration (SBA). Principal and interest on mortgage-backed securities issued by FNMA, FHLMC, GNMA and SBA are guaranteed by the issuer and, in the case of GNMA and SBA, backed by the full faith and credit of the U.S. government. U.S. Treasury securities are also backed by the full faith of the U.S. government. The increase in the investment securities portfolio was primarily due to the purchase of securities with excess liquidity.
In June 2020, the bank sold all of its Visa Class B restricted shares resulting in a pretax gain of approximately $7.1 million. ASB also sold corporate bonds and mortgage-backed securities during the second quarter for $160 million, which resulted in a pretax gain of approximately $2.2 million. The sale of the investment securities reduced yield volatility and credit risk within the investment portfolio. The proceeds from the sales were reinvested into the investment portfolio at current market yields.
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. Deposit retention and growth will remain challenging in the current environment due to competition for deposits and the low level of short-term interest rates. Advances from the FHLB of Des Moines, securities sold under agreements to repurchase and federal funds purchased continue to be additional sources of funds. As of June 30, 2020 and December 31, 2019, ASB’s costing liabilities consisted of 98% deposits and 2% other borrowings. The weighted average cost of deposits for the first six months of 2020 and 2019 was 0.20% and 0.28%, respectively.
Federal Home Loan Bank of Des Moines. As of June 30, 2020 ASB had advances outstanding at the FHLB of Des Moines of $30 million compared to nil as of December 31, 2019. As of June 30, 2020, the unused borrowing capacity with the FHLB of Des Moines was $2.2 billion. The FHLB of Des Moines continues to be an important source of liquidity for ASB.
ASB had previously reported that in February 2020, the FHLB of Des Moines notified the bank that certain assets, which included high-quality home equity lines of credit, would no longer qualify as collateral for FHLB Advances, reducing ASB’s total FHLB borrowing capacity. In March 2020, the FHLB of Des Moines notified ASB that they have provisionally accepted the previously disqualified assets as collateral while they assess the eligibility of those assets. In July 2020, the FHLB of Des Moines announced the conclusion of their review of home equity lines of credit eligibility and effective October 1, 2020, the FHLB of Des Moines will no longer accept the fixed rate portion of any home equity lines of credit. If such an amendment were effective as of June 30, 2020, the amount of unused FHLB borrowing capacity would have been reduced by approximately $140 million. In addition, on June 12, 2020, the FHLB of Des Moines announced an update to their Loan to Value (LTV), a system-wide percentage applied to eligible pledged collateral to determine borrowing capacity, to reflect ongoing risks in the market due to COVID-19. Effective July 13, 2020, the LTV was lowered, which reduced the collateral value of the existing pledged loans and the borrowing capacity by $100 million. To increase the borrowing capacity at the FHLB of Des Moines, ASB pledged a portion of its commercial real estate loan portfolio in July 2020, which increased the borrowing capacity by $136 million. Additional collateral may be pledged in the third quarter of 2020 to increase the borrowing capacity.
Contingencies. ASB is subject in the normal course of business to pending and threatened legal proceedings. Management does not anticipate that the aggregate ultimate liability arising out of these pending or threatened legal proceedings will be material to its financial position. However, ASB cannot rule out the possibility that such outcomes could have a material adverse effect on the results of operations or liquidity for a particular reporting period in the future.
Other factors. Interest rate risk is a significant risk of ASB’s operations and also represents a market risk factor affecting the fair value of ASB’s investment securities. Increases and decreases in prevailing interest rates generally translate into decreases and increases in the fair value of the investment securities, respectively. In addition, changes in credit spreads also impact the fair values of the investment securities.
As of June 30, 2020, ASB had an unrealized gain, net of taxes, on available-for-sale investment securities (including securities pledged for repurchase agreements) in AOCI of $21.3 million compared to an unrealized gain, net of taxes, of $2.5 million as of December 31, 2019. See “Item 3. Quantitative and qualitative disclosures about market risk” for a discussion of ASB’s interest rate risk sensitivity.
During the first six months of 2020, ASB recorded a provision for credit losses of $25.5 million primarily due to additional loss reserves for the consumer loan portfolio, reserves for increases in commercial real estate commitments and increased reserves for the commercial, commercial real estate and consumer loan portfolios for expected credit deterioration due to the COVID-19 pandemic. During the first six months of 2019, ASB recorded a provision for credit losses of $14.6 million primarily due to increased loss reserves for the consumer loan portfolio and additional reserves for an impaired commercial loan and a commercial real estate loan that was downgraded.
| | | | | | | | | | | | | | | | | | | | |
| | | Six months ended June 30 | | | | Year ended
December 31, 2019 |
| (in thousands) | | 2020 | | 2019 | | |
| Allowance for credit losses, prior to adoption of ASU No. 2016-13 | | $ | 53,355 | | | $ | 52,119 | | | $ | 52,119 | |
| Impact of adopting ASU No. 2016-13 | | 19,441 | | | — | | | — | |
| Provision for credit losses | | 20,734 | | | 14,558 | | | 23,480 | |
| Less: net charge-offs | | 12,223 | | | 8,252 | | | 22,244 | |
| Allowance for credit losses, end of period | | $ | 81,307 | | | $ | 58,425 | | | $ | 53,355 | |
| Ratio of net charge-offs during the period to average loans outstanding (annualized) | | 0.46 | % | | 0.34 | % | | 0.45 | % |
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. As of June 30, 2020 and December 31, 2019, the reserve for unfunded loan commitments was $8.1 million and $1.7 million, respectively.
Legislation and regulation. ASB is subject to extensive regulation, principally by the OCC and the FDIC. Depending on ASB’s level of regulatory capital and other considerations, these regulations could restrict the ability of ASB to compete with other institutions and to pay dividends to its shareholder. See the discussion below under “Liquidity and capital resources.”
Changes to Community Bank Leverage Ratio. In April 2020, the federal bank regulatory agencies issued two interim final rules to implement Section 4012 of the CARES Act, which requires the agencies to temporarily lower the community bank leverage ratio to 8 percent. The two rules modify the community bank leverage ratio framework so that:
•Beginning in the second quarter of 2020 and until the end of the year, a banking organization that has a leverage ratio of 8 percent or greater and meets certain other criteria may elect to use the community bank leverage ratio framework; and
•Community banking organizations will have until January 1, 2022 before the community bank leverage ratio requirement is re-established at greater than 9 percent.
Under the interim final rules, the community bank leverage ratio will be 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 has adopted the community bank leverage ratio framework.
Covered Savings Associations. On May 24, 2019, the OCC issued a final rule to allow federal savings associations with total consolidated assets of $20 billion or less, as reported by the association to the OCC on its call report as of December 31, 2017, to elect to operate as covered savings associations. A covered savings association generally has the same rights and privileges as a national bank that has its main office situated in the same location as the home office of the covered savings association, with some exceptions. It is subject to the same duties, restrictions, penalties, liabilities, conditions, and limitations that apply to a national bank, with some exceptions, and must comply with certain rules and regulations applicable to the powers and investments of a national bank. A covered savings association is not required to comply with the lending and investment limits in HOLA and is not required to be a qualified thrift lender under HOLA. Finally, a covered savings association is not permitted to retain or engage in any subsidiaries, assets, or activities that are not permissible for a national bank. ASB has initiated a preliminary examination of the benefits and disadvantages of such an election with the preservation of being held by a unitary thrift holding company in mind. ASB is awaiting official FRB commentary, and has not reached a decision on the election.
FINANCIAL CONDITION
Liquidity and capital resources. As of March 31, 2021, there was no balance on HEI’s revolving credit facility or Hawaiian Electric’s revolving credit facilities and the available committed capacity under the facilities was $150 million and $275 million, respectively. On April 19, 2021, Hawaiian Electric’s $75 million 364-day revolving credit agreement terminated and was not renewed. At the end of the quarter, HEI and Hawaiian Electric had approximately $100 million and nil of commercial paper outstanding, respectively. As of March 31, 2021, ASB’s unused FHLB borrowing capacity was approximately $2.0 billion and ASB had unpledged investment securities of $2.0 billion.
The Company expects that its liquidity will continue to be moderately impacted at the Utilities due to COVID-19. For the Utilities, the high level of unemployment in the state and the moratorium on customer disconnections (which moratorium is currently in place through May 31, 2021) are expected to result in higher accounts receivable balances, bad debt expense and write-offs. Additionally, lower kWh sales generally result in delayed timing of cash flows, resulting in higher working capital requirements (see “Recent Developments—COVID-19” in the Electric utility section below). At ASB, liquidity remains at satisfactory levels largely due to U.S. economic stimulus programs implemented as a result of COVID-19 that led to a substantial increase in customer deposits. ASB’s cash and cash equivalents was $224 million as of March 31, 2021, compared to $293 million as of December 31, 2020. ASB remains well above the “well capitalized” level, and while the economic outlook has improved, there continues to be uncertainty regarding COVID-19’s impact on loan performance and the allowance for credit losses (see “Recent Developments — COVID-19” in the Bank section below).
On January 14, 2021, the Utilities received $115 million of proceeds using a delayed draw feature under a private placement executed on October 29, 2020 and used the funds to finance capital expenditures and reimburse funds used for the payment of capital expenditures.
On January 28, 2021, HEI received $46 million of proceeds using a delayed draw feature under a private placement executed on November 17, 2020. The proceeds were used to repay the remaining balance of $15 million on HEI’s $65 million 364-day term loan, with the remainder used to pay down commercial paper balances and prefund maturing debt. The second tranche of $29 million was drawn on April 16, 2021 and was used to pay down HEI’s commercial paper balances.
As of March 31, 2021 and December 31, 2020, the total amount of available borrowing capacity (net of commercial paper outstanding) under the Company’s committed lines of credit was approximately $325 million and $360 million, respectively.
The Company believes that its ability to generate cash, both internally from electric utility and banking operations and externally from issuances of equity and debt securities, as well as bank borrowings, is adequate to maintain sufficient liquidity to fund its contractual obligations and commercial commitments, its forecasted capital expenditures and investments, its expected retirement benefit plan contributions and other cash requirements. However, the COVID-19 pandemic is an evolving situation, and the Company cannot predict the extent or duration of the outbreak, the future effects that it will have on the global, national or local economy, including the impact on the Company’s cost of capital and its ability to access additional capital, or the future impacts on the Company’s financial position, results of operations, and cash flows. See Item 1A. “Risk Factors” in Part II for further discussion of risks and uncertainties.
The consolidated capital structure of HEI (excluding deposit liabilities and other bank borrowings) was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (dollars in millions) | | March 31, 2021 | | December 31, 2020 |
| Short-term borrowings—other than bank | | $ | 100 | | | 2 | % | | $ | 129 | | | 3 | % |
| Long-term debt, net—other than bank | | 2,230 | | | 48 | | | 2,119 | | | 46 | |
| Preferred stock of subsidiaries | | 34 | | | 1 | | | 34 | | | 1 | |
| Common stock equity | | 2,321 | | | 49 | | | 2,338 | | | 50 | |
| | | $ | 4,685 | | | 100 | % | | $ | 4,620 | | | 100 | % |
HEI’s commercial paper borrowings and line of credit facility were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | Average balance | | Balance |
| (in millions) | | Three months ended March 31, 2021 | | March 31, 2021 | | December 31, 2020 |
| Commercial paper | | $ | 47 | | | $ | 100 | | | $ | 65 | |
| Line of credit draws | | — | | | — | | | — | |
| Undrawn capacity under HEI’s line of credit facility | | | | 150 | | | 150 | |
Note:This table does not include Hawaiian Electric’s separate commercial paper issuances and line of credit facilities and draws, which are disclosed below under “Electric utility—Financial Condition—Liquidity and capital resources.” The maximum amount of HEI’s short-term commercial paper borrowings during the first three months of 2021 was $100 million.
On March 17, 2021, Standard & Poor’s (S&P) revised HEI’s outlook to stable from positive and affirmed the “BBB-” issuer credit rating and “A-3” short-term and commercial paper ratings. On April 20, 2021, Moody’s Investor Service’s (Moody’s) upgraded HEI’s short-term rating for commercial paper to “P-2” from “P-3” and revised the outlook to stable from positive.
HEI has a $150 million line of credit facility with no amounts outstanding at March 31, 2021. See Note 5 of the Condensed Consolidated Financial Statements.
There were no new issuances of common stock through the HEI Dividend Reinvestment and Stock Purchase Plan (DRIP), HEIRSP or the ASB 401(k) Plan in the three months ended March 31, 2021 and 2020 and HEI satisfied the share purchase requirements of the DRIP, HEIRSP and ASB 401(k) Plan through open market purchases of its common stock.
For the first three months of 2021, net cash provided by operating activities of HEI consolidated was $42 million. Net cash used by investing activities for the same period was $518 million, primarily due to capital expenditures, ASB’s purchases of available-for-sale and held-to maturity investment securities, partly offset by ASB’sreceipt of repayments from investment securities, proceeds from the sale of investment securities and net decrease in loans. Net cash provided by financing activities during this period was $409 million as a result of several factors, including net increases in ASB’s deposit liabilities and other bank borrowings, the issuances of long-term debt and net increases in short-term borrowings, partly offset by repayment of short-term and long-term debt and payment of common stock dividends. During the first three months of 2021, Hawaiian Electric and ASB (through ASB Hawaii) paid cash dividends to HEI of $28 million and $5 million, respectively.
Dividends. The payout ratios for the first three months of 2021 and full year 2020 were 58% and 64%, respectively. On February 9, 2021, the HEI Board of Directors approved a 1 cent increase in the quarterly dividend from $0.33 per share to $0.34 per share, starting with the dividend in the first quarter of 2021. HEI currently expects to maintain its dividend at its present level; however, the HEI Board of Directors evaluates the dividend quarterly and considers many factors in the evaluation including, but not limited to, the Company’s results of operations, the long-term prospects for the Company and current and expected future economic conditions, including impacts from the COVID-19 pandemic.
MATERIAL ESTIMATES AND CRITICAL ACCOUNTING POLICIES
In preparing financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ significantly from those estimates.
In accordance with SEC Release No. 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies,” management has identified the accounting policies it believes to be the most critical to the Company’s financial statements—that is, management believes that these policies are both the most important to the portrayal of the Company’s results of operations and financial condition, and currently require management’s most difficult, subjective or complex judgments.
For information about these material estimates and critical accounting policies, in addition to the critical policy discussed below, see pages 42 to 44, 58 to 59, and 72 to 74 of HEI’s MD&A included in Part II, Item 7 of HEI’s 2020 Form 10-K.
Following are discussions of the results of operations, liquidity and capital resources of the electric utility and bank segments.
Electric utility
Recent developments—COVID-19
See also Recent developments—COVID-19 in HEI’s MD&A.
Economic conditions in Hawaii have begun to improve in 2021 as vaccination efforts advance and businesses are allowed to operate with fewer restrictions. Statewide daily passenger counts have improved dramatically, reaching a year-to-date high of 22,913 passengers per day on April 3, 2021, but still 28% below the comparable Saturday in 2019. At the end of March, statewide unemployment improved to 9% from 10.3% at the end of the year. While economic activity has increased, the demand for electricity remains lower than pre-pandemic levels. In the first quarter of 2021, kWh sales were down 4.8% compared with the same quarter in 2020. The Utilities expect kWh sales to gradually improve throughout 2021 as the COVID-19 vaccine is more widely distributed and administered, which would allow the economy in Hawaii to fully reopen.
While the Utilities’ electric energy revenues have not been significantly impacted due to the decoupling mechanism, which allows recovery of the difference between PUC approved target revenues and recorded adjusted revenues regardless of the level of kWh sales, the timing of customer collections would be delayed (or accelerated) if the level of kWh sales decreases below (or increases above) the estimated kWh sales. See “Current Decoupling” in Note 3 of the Condensed Consolidated Financial Statements for a discussion of decoupling. Annually, the Utilities submit a decoupling filing to the PUC, which requests recovery by the utility (or refund to customers) of the difference between recorded adjusted revenues and target revenues under the RBA. The difference is collected or refunded through an adjustment to customer rates in the following year based on estimated sales, starting on June 1st of that following year, which has an impact on the timing of the Utilities’ cash flow. Additionally, although the Utilities’ decoupling mechanism allows for collection under the RBA, the RBA balance accrues interest only at the short-term debt rate from the last rate case (2.5% for Hawaiian Electric, 3.75% for Hawaii Electric Light and 3.0% for Maui Electric). As of March 31, 2021, the RBA balance related to decoupling revenues was approximately $25.9 million, compared to $7.6 million as of December 31, 2020. The billed accounts receivable balances, net of allowance for doubtful accounts, of $142 million and as of March 31, 2021 is 4.2% lower than the billed accounts receivable balances as of December 31, 2020, primarily driven by an improvement in economic conditions from reopening, application of available assistance from various government and community programs, including the Hawaii Utility Bill Assistance Program, which was launched in the first quarter of 2021 and provided funding to Hawaiian Electric customers and other utility companies. The past due accounts receivable balance has decreased by $8 million or 15% since December 31, 2020 with a corresponding decrease in the number of accounts past due by approximately 10% for the same period. While the moratorium on customer disconnections is currently in place through May 31, 2021, efforts are ongoing to continue working with customers on payment plans and other bill assistance for customers through funding from non-profit organizations, as well as state and county relief programs. To address the financing requirement related to the delayed timing of cash flows collected under the decoupling mechanism through the RBA and the modest slowing or reduction in accounts receivable collections from customers, the Utilities have completed a number of steps in 2020 to enhance their liquidity position. See “Financial Condition—Liquidity and capital resources” for additional information.
The Utilities provide an essential service to the State of Hawaii, and have continued to operate to protect the health and safety of employees and customers and to ensure system reliability, and have been following the Governor’s directive that the Utilities take necessary measures to ensure they can operate in the normal course. The Utilities have also implemented certain aspects of their business continuity plans, which includes the activation of its Incident Management Team to closely manage the response to the pandemic and have implemented practices related to employee and facilities hygiene in order to ensure the reliability and resilience of their operations.
In the second quarter of 2020, the PUC approved the deferral of certain COVID-19 related costs, such as higher bad debt expense, higher financing costs, non-collection of late payment fees, increased personal protective equipment costs, and sequestration costs for mission-critical employees. As of March 31, 2021, these costs, which have been deferred and recorded as a regulatory asset, totaled approximately $22.2 million (see also discussion under Item 1A. “Risk Factors” and “Regulatory assets for COVID-19 related costs” in Note 3 of the Condensed Consolidated Financial Statements). Looking forward, while the distribution and administration of the COVID vaccine is expected to hasten the reopening of the Hawaii economy, the prolonged impact of COVID-19 could adversely affect the ability of the Utilities’ contractors, suppliers, IPPs, and other business partners to perform or fulfill their obligations, or require modifications to existing contracts, which could adversely affect the Utilities’ business, increase expenses, and impact the Utilities’ ability to achieve their RPS goals. Additionally, while the state’s aggressive response to the pandemic has dramatically reduced the spread of the coronavirus, the measures taken have had a severe economic impact on the state’s businesses and residents, which may influence the PUC’s actions regarding future rate increases. See “Item 1A. Risk Factors” in Part II for additional discussion of risks.
For a discussion regarding the impact of the economic conditions caused by the COVID-19 pandemic on the Utilities’ liquidity and capital resources, see discussion under “Financial Condition–Liquidity and capital resources.”
RESULTS OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31 | | Increase | | |
| 2021 | | 2020 | | (decrease) | | (dollars in millions, except per barrel amounts) |
| $ | 565 | | | $ | 597 | | | $ | (33) | | | | | Revenues. Net decrease largely due to: |
| | | | | | $ | (51) | | | lower fuel oil prices and lower kWh generated1 |
| | | | | | 7 | | | higher revenues from annual RAM adjustments |
| | | | | | 6 | | | increase related solely to a change in the timing for revenue recognition within the year, which eliminates seasonality in recognizing target revenues and results in recognizing revenues evenly throughout the year with target revenues recognized on an annual basis remaining unchanged |
| | | | | | 2 | | | higher PPAC revenue2 |
| | | | | | 2 | | | lower ERP system implementation benefits to be passed on to customers in future rates |
| | | | | | 1 | | | higher kWh purchased2 |
| 127 | | | 173 | | | (46) | | | | | Fuel oil expense1. Decrease largely due to lower fuel oil prices and lower kWh generated |
| 142 | | | 140 | | | 2 | | | | | Purchased power expense1 ,2. Net increase largely due to higher kWh purchased and higher minimum charges |
| 115 | | | 128 | | | (13) | | | | | Operation and maintenance expenses. Net decrease largely due to: |
| | | | | | (3) | | | lower labor due to lower staffing and reduction in overtime |
| | | | | | (2) | | | higher bad debt expense in the first quarter of 2020 related to the economic impact of COVID-19 pandemic on customers (PUC’s approval of deferral to regulatory asset started in the second quarter of 2020) |
| | | | | | (2) | | | fewer generating facility overhauls due to timing but to be performed later in 2021 |
| | | | | | (2) | | | lower pension service cost due to reset of pension cost included in rates as part of Hawaiian Electric final rate case decision |
| | | | | | (2) | | | lower outside service costs |
| | | | | | (1) | | | increase in Pearl Harbor environmental reserves in 2020 |
| | | | | | (1) | | | lower medical premium costs due to lower staffing |
| 111 | | | 113 | | | (2) | | | | | Other expenses. Decrease due to lower revenue taxes offset in part by higher depreciation expense in 2021 for plant investment in 2020 |
| 69 | | | 44 | | | 25 | | | | | Operating income. Increase due to lower operation and maintenance expenses coupled with higher electric rates, offset in part by higher depreciation expense |
| 55 | | | 30 | | | 25 | | | | | Income before income taxes. Increase due to lower operation and maintenance expense, higher electric rates, and lower pension non-service costs, offset by higher interest expense related to new long term debt issued in May 2020 and January 2021 and higher depreciation expense |
| 43 | | | 24 | | | 19 | | | | | Net income for common stock. Increase due to lower operating expenses, coupled with higher electric rates |
| 1,909 | | | 2,006 | | | (97) | | | | | Kilowatthour sales (millions)3 |
| $ | 63.87 | | | $ | 80.78 | | | $ | (16.91) | | | | | Average fuel oil cost per barrel |
| 468,745 | | | 465,787 | | | 2,958 | | | | | Customer accounts (end of period) |
1The rate schedules of the electric utilities currently contain ECRCs through which changes in fuel oil prices and certain components of purchased energy costs are passed on to customers.
2The rate schedules of the electric utilities currently contain PPACs through which changes in purchased power expenses (except purchased energy costs) are passed on to customers.
3 kWh sales were lower when compared to the same periods last year largely due to the effects of the COVID-19 pandemic. The reduction to visitor arrivals due to the Safe Travels requirements significantly impacted the tourism industry. This combined with restrictions on business and activities, led to high unemployment, and shuttered many businesses and hotels. As restrictions are eased, vaccination rates increase and more visitors arrive, sales are expected to slowly rebound but remain lower than pre-pandemic levels.
The Utilities’ effective tax rates for the first three months of 2021 and 2020 were at 20% and 18%, respectively. The effective tax rate was higher for the three months ended March 31, 2021 compared to the same period in 2020 due primarily to higher excess tax benefits related to vesting of share-based awards in 2020.
Hawaiian Electric’s consolidated ROACE was 9.0% and 7.4% for the twelve months ended March 31, 2021 and March 31, 2020, respectively.
The net book value (cost less accumulated depreciation) of utility property, plant and equipment (PPE) as of March 31, 2021 amounted to $4.7 billion, of which approximately 27% related to generation PPE, 64% related to transmission and distribution PPE, and 9% related to other PPE. Approximately 9% of the total net book value relates to generation PPE that has been deactivated or that the Utilities plan to deactivate or decommission.
See “Economic conditions” in the “HEI Consolidated” section above.
Executive overview and strategy. The Utilities provide electricity on all the principal islands in the state, other than Kauai, to approximately 95% of the state’s population and operate five separate grids. The Utilities’ mission is to provide innovative energy leadership for Hawaii, to meet the needs and expectations of customers and communities, and to empower them with affordable, reliable and clean energy. The goal is to create a modern, resilient, flexible and dynamic electric grid that enables an optimal mix of distributed energy resources, such as private rooftop solar, demand response and grid-scale resources to enable the creation of smart, sustainable, resilient communities and achieve the statutory goal of 100% renewable energy by 2045.
Performance-based regulations. On December 23, 2020, the PUC issued a D&O (PBR D&O) approving a new performance-based regulation framework (PBR Framework). See “Regulatory proceedings” under “Commitments and contingencies” in Note 3 of the Condensed Consolidated Financial Statements.
Transition to renewable energy. The Utilities are fully committed to a 100 percent renewable energy future for Hawaii and are partnering with the State of Hawaii in achieving their Renewable Portfolio Standard goal of 100% renewable energy by 2045. Hawaii’s RPS law requires electric utilities to meet an RPS of 30%, 40%, 70% and 100% by December 31, 2020, 2030, 2040 and 2045, respectively.
The Utilities have made significant progress on the path to clean energy and have been successful in adding significant amounts of renewable energy resources to their electric systems and exceeded the 2015 RPS goal two years early. The Utilities’ RPS for 2020 was 34.5%, which was in excess of the statutory goal of 30%. The Utilities will continue to actively procure additional renewable energy post-2020 and expect to meet or exceed the next statutory RPS goal of 40% in advance of the 2030 compliance year. (See “Developments in renewable energy efforts” below).
If the Utilities are not successful in meeting the RPS targets as mandated by law, the PUC could assess a penalty of $20 for every MWh that an electric utility is deficient. Based on the level of electricity sales in 2020, a 1% shortfall in meeting the 2030 RPS requirement of 40% would translate into a penalty of approximately $1.6 million. The PUC has the discretion to reduce the penalty due to events or circumstances that are outside an electric utility’s reasonable control, to the extent the event or circumstance could not be reasonably foreseen and ameliorated. In addition to penalties under the RPS law, failure to meet the mandated RPS targets would be expected to result in a higher proportion of fossil fuel-based generation than if the RPS target had been achieved, which in turn would be expected to subject the Utilities to limited commodity fossil fuel price exposure under a fuel cost risk-sharing mechanism. The fuel cost risk-sharing mechanism apportions 2% of the fuel cost risk to the utilities (and 98% to ratepayers) and has a maximum exposure (or benefit) of $3.7 million.
The Utilities are fully aligned with, and supportive of, state policy to achieve a 100% renewable energy future and have made significant progress in its transformation. 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 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 is an environmental and social cost from the continued use of fossil fuels.
The State of Hawaii’s policy is supported by the regulatory framework and includes a number of mechanisms designed to maintain the Utilities’ financial stability during the transition toward the State’s 100% renewable energy future. Under the sales decoupling mechanism, the Utilities are allowed to recover from customers, target test year revenues, independent of the level of kWh sales, which have generally declined (with the exception of 2019 and the first quarter of 2020), as privately-owned distributed energy resources have been added to the grid and energy efficiency measures have been put into place. Other regulatory mechanisms reduce regulatory lag, such as the rate adjustment mechanism to provide revenues for escalation in certain O&M expenses and rate base changes between rate cases, and the major project interim recovery mechanism, which allow the Utilities to recover and earn on certain approved major capital projects placed into service in between rate cases. Certain mechanisms were replaced or modified under the new PBR framework. See “Regulatory proceedings” under “Commitments and contingencies” and “Current Decoupling” in Note 3 of the Condensed Consolidated Financial Statements.
Integrated Grid Planning. Achieving 100% renewable energy will require modernizing the grid through coordinated energy system planning in partnership with local communities and stakeholders. To accomplish this, the Utilities filed their Integrated Grid Planning (IGP) Report with the PUC on March 1, 2018, which provides an innovative systems approach to energy planning intended to yield the most cost-effective renewable energy pathways that incorporates customer and stakeholder input.
In March 2019, the PUC accepted the Utilities’ IGP Work plan submitted on December 14, 2018, which describes the timing and scope of major activities that will occur in the IGP process. The IGP utilizes an inclusive and transparent Stakeholder Engagement model to provide an avenue for interested parties to engage with the Utilities and contribute meaningful input throughout the IGP process. The IGP Stakeholder Council, Technical Advisory Panel and Working groups have been established and meet regularly to provide feedback and input on specific issues and process steps in the IGP. In March 2020, the Utilities launched a broad public engagement program, which consisted of a combination of in-person and online engagement. This provided customers opportunities to connect with the IGP team. The Utilities submitted an updated IGP work plan to the PUC in January 2021, marking the significant progress made through the stakeholder engagement phase of the IGP process. The Utilities will use the stakeholder feedback and input as it enters the next phase of the process which includes the development of long-range integrated grid plans and the acquisition of new resources.
Demand response programs. Pursuant to PUC orders, the Utilities are developing an integrated Demand Response (DR) Portfolio Plan that will enhance system operations and reduce costs to customers. The reduction in cost for the customer will take the form of either rates or incentive-based programs that will compensate customers for their participation individually, or by way of engagements with turnkey service providers that contract with the Utilities to aggregate and deliver various grid services on behalf of participating customers and their distributed assets.
In October 2017, the PUC approved the Utilities’ request made in December 2015 to defer and recover certain computer software and software development costs for a DR Management System in an amount not to exceed $3.9 million, exclusive of allowance for funds used during construction, through the REIP Surcharge. The Utilities placed the DR Management System in service in the first quarter of 2019. On October 30, 2019, the Utilities filed the final cost report, reflecting total project costs of $3.7 million. On February 27, 2020, the PUC approved the Utilities’ request to recover deferred and other related costs of the DR Management System through the REIP Surcharge effective March 1, 2020 until such costs are included in determining base rates. On June 26, 2020, the Utilities submitted an updated REIP rate effective August 1, 2020 to the PUC.
On January 25, 2018, the PUC approved the Utilities’ revised DR Portfolio tariff structure. The PUC supported the approach of working with aggregators to implement the DR portfolio. In 2019, the Utilities signed a multi-year Grid Services Purchase Agreement (GSPA) with a third party aggregator. These contracts pay service providers to aggregate grid-supporting capabilities from customer-sited Distributed Energy Resources. The first of these five-year contracts has been executed (PUC approval obtained on August 9, 2019) and is expected to deliver not only benefits through efficient grid operations, but also avoided fuel costs over that 5-year period. The Utilities selected the next set of aggregators in the first quarter of 2020, commenced GSPA contract negotiations, and filed two executed contracts on July 9, 2020. This complements the Utilities’ transformation and supports customer choice. The GSPA contracts were approved by the PUC on December 31, 2020.
Grid modernization. The overall goal of the Grid Modernization Strategy is to deploy modern grid investments at an appropriate priority, sequence and pace to cost-effectively maximize flexibility, minimize the risk of redundancy and obsolescence, deliver customer benefits and enable greater distributed energy resources and renewable energy integration. Under the Grid Modernization Strategy, the Utilities expect that new technology will help increase adoption of private rooftop solar and make use of rapidly evolving products, including storage and advanced inverters. The Utilities have begun work to implement the Grid Modernization Strategy Phase 1, which received PUC approval on March 25, 2019. The estimated cost for this initial phase is approximately $86 million and is expected to be incurred over five years. As of March 31, 2021, approximately $18 million has been incurred to date under Phase 1. The Utilities submitted a proportional advanced meter opt-out deployment filing on September 30, 2020 in an effort toward broader and faster deployment, which was approved by the PUC on March 4, 2021.
The Utilities filed an application with the PUC on September 30, 2019 for an Advanced Distribution Management System (ADMS) as part of the second phase of their Grid Modernization Strategy implementation. However, on December 30, 2019, the PUC suspended the Utilities’ application for the Advanced Distribution Management System pending the Utilities’ filing of a supplemental application for the broad deployment of field devices. This supplement and update to the Grid Mod Phase 2 field devices application was filed on March 31, 2021. The estimated cost for the implementation over five years of the ADMS and field devices, which includes capital, deferred and O&M costs, is $105 million. A PUC order resuming the proceeding is pending.
Community-based renewable energy. In December 2017, the PUC adopted a community-based renewable energy (CBRE) program framework which allows customers who cannot, or chose not to, take advantage of private rooftop solar to receive the
benefits of renewable energy to help offset their monthly electric bills and support clean energy for Hawaii. The program has two phases.
The first phase, which commenced in July 2018, totals 8 MW of solar photovoltaic (PV) only with one credit rate for each island, closed on April 9, 2020.
By PUC order, CBRE Phase 2 commenced on April 9, 2020 with the goal to develop a robust CBRE market with competitive pricing anticipating that clean energy projects and programs, such as CBRE, can meaningfully contribute to the State’s recovery from the COVID-19 emergency. CBRE Phase 2 capacity is substantially larger than Phase 1 and allows up to 235 MW across all Hawaiian Electric service territories in two tranches. The capacities are allocated by island and allow for small (under 250 kW) and large system sizes to encourage a variety of system sizes. In addition to the first-come, first-served process offered in Phase 1, the majority of the 235 MW will be awarded to projects selected through a competitive process. To provide opportunities for low- to moderate-income (LMI) customers to participate in the program, separate project proposals may be submitted specifically targeting LMI customers.
Eight RFPs were required by order: one each for Oahu, Maui, Hawaii Island, Molokai, and Lanai, and LMI-specific RFPs for Oahu, Maui, and Hawaii Island. Draft RFPs for the three LMI RFPs and the RFPs for Molokai, and Lanai were filed on July 9, 2020, along with a revised tariff and associated contract models. LMI projects do not have a size cap nor do they decrease the 235 MW capacity available to other projects. In addition to its administrative role, the Utilities and their affiliates are eligible to participate in the solicitations, with the exception of the LMI-specific RFPs, where the PUC will only consider a utility self-build option if there are no successful competitive bids for an LMI project on one island or more. The Utilities will also have opportunities to earn based on shared savings mechanisms for specific solicitations. Comments were received during and after a Technical Conference hosted by the PUC on July 28, 2020. Proposed final drafts of the LMI RFPs, Molokai and Lanai RFPs tariff, and contracts were filed on September 8, 2020.
For Lanai, the Utilities proposed to combine the previously issued Variable Renewable Dispatchable Generation Paired with Energy Storage RFP and the CBRE RFP to optimize the benefits of procuring renewable energy, spurring development and increasing the likelihood of success of the CBRE Program on Lanai. As proposed, the Lanai CBRE RFP allows the Utilities to continue collaborating with the majority landowner, Pulama Lanai, who has designated a new larger predetermined site to facilitate expeditious development of a renewable energy project that meets the objectives of both RFPs, while reducing the cost of a project by leveraging economies of scale and coordinating interconnection to the grid. On February 10, 2021, Pulama Lanai filed a letter requesting that the Final RFP be issued for Lanai, or, in the alternative, that separate proposals be allowed for CBRE and non-CBRE portions. On February 17, 2021, the Utilities filed comments in response requesting the PUC’s support of the combined RFP.
Drafts of the remaining RFPs on Oahu, Maui, and Hawaii Island were filed on October 9, 2020. A technical conference was held on October 28, 2020 and proposed final drafts were filed on December 1, 2020.
For small CBRE projects less than 250 kW in size, the Utilities are planning to accept projects over a four-month period on a first-come, first served basis as soon as the PUC approves the Utilities’ final tariff and contracts, filed on September 8, 2020. The PUC reserved 30 MW as well as a small amount of unallocated capacity from Phase 1 for small projects in Phase 2 on Oahu, Maui and Hawaii Island. If applications exceed the program capacity for that island, then a reverse auction process called Competitive Credit Rate Procurement will be triggered to allocate project capacity and determine the credit rate. The Utilities have developed a CBRE Portal where customers can subscribe to a project once the Subscriber Organization has added their project to the portal.
In January 2021, the PUC directed the Utilities to collaborate with the parties to develop recommended improvements to the interconnection process and certain other elements of the CBRE program within sixty days, or by March 30, 2021. Prior to this Order, the Utilities were already working on interconnection improvements and proposed several ways to potentially improve the time and cost of interconnection during the development of the CBRE Phase 2 tariff and RFPs. As directed by the Order, the Utilities increased their focus and attention on this area and worked with the parties, including the CBRE Independent Observer, to make the interconnection process more transparent, predictable and standardized, including interconnection costs, timelines and requirements in order to reduce costs and accelerate schedules. In addition, the Utilities researched interconnection solutions in other jurisdictions, and worked with the parties to identify additional improvements. The Utilities solicited from the parties a list of recommended improvements, and consolidated and adopted nearly all the near-term and continuous improvement recommendations from the parties. The Utilities filed these recommendations and associated updates to the previously filed RFPs, tariff, and contracts on March 30, 2021. These documents are pending review and approval by the PUC.
Microgrid services tariff proceeding. In July 2018, the PUC opened a proceeding to investigate establishment of a microgrid services tariff, pursuant to Act 200 of 2018. There are currently five intervenors in the docket, although initially there were eight. In August 2019, the PUC issued an order focusing for the remainder of the docket is to facilitate the ability of
microgrids to disconnect from the grid and provide backup power to customers and critical energy uses during contingency events.
Two Working Groups were formed: (1) a Market Facilitation Working Group to recommend draft tariff language for the Microgrid Services Tariff; and (2) an Interconnection Standards Working Group to develop a new section of Rule 14H specific to interconnection and islanding/reconnection of microgrids. The Utilities filed a Draft Microgrid Services Tariff and updated language for various distributed energy resources Rules on March 30, 2020.Parties to the docket filed comments on and proposed revisions to the Draft Tariff on April 27, 2020.
On November 30, 2020, the PUC held a technical conference to present its proposed redlines to Utilities’ Draft Microgrid Services Tariff and related documents. On February 1, 2021, the Working Group filed its Draft Microgrid Tariff. Members of the Working Group separately filed their positions on areas of disagreements and later commented on other parties’ positions on areas of disagreements on February 10, 2021 and February 17, 2021, respectively. This matter is pending a PUC decision and or guidance on how to proceed.
Decoupling. See "Current Decoupling" in Note 3 of the Condensed Consolidated Financial Statements for a discussion of decoupling.
As part of decoupling, the Utilities also track their rate-making ROACEs as calculated under the earnings sharing mechanism, which includes only items considered in establishing rates. At year-end, each utility’s rate-making ROACE is compared against its ROACE allowed by the PUC to determine whether earnings sharing has been triggered. The D&O in the PBR proceeding modified the earnings sharing mechanism to a symmetric arrangement. Effective with annual earnings for 2021, the earnings sharing will be triggered for actual ROACE outside of a 300 basis points dead band above and below a target ROE of 9.5%, which is the current authorized ROE for each of the Utilities. Earnings sharing credits or recoveries will be included in the annual decoupling filing for the following year. Results for 2020, 2019 and 2018 did not trigger the earnings sharing mechanism for the Utilities.
Regulated returns. Actual and PUC-allowed returns, as of March 31, 2021, were as follows:
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| % | | Rate-making Return on rate base (RORB)* | | ROACE** | | Rate-making ROACE*** |
Twelve months ended March 31, 2021 | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric |
| Utility returns | | 7.65 | | | 7.27 | | | 6.48 | | | 9.24 | | | 9.05 | | | 7.65 | | | 10.20 | | | 9.80 | | | 8.04 | |
| PUC-allowed returns | | 7.37 | | | 7.52 | | | 7.43 | | | 9.50 | | | 9.50 | | | 9.50 | | | 9.50 | | | 9.50 | | | 9.50 | |
| Difference | | 0.28 | | | (0.25) | | | (0.95) | | | (0.26) | | | (0.45) | | | (1.85) | | | 0.70 | | | 0.30 | | | (1.46) | |
* Based on recorded operating income and average rate base, both adjusted for items not included in determining electric rates.
** Recorded net income divided by average common equity.
*** ROACE adjusted to remove items not included by the PUC in establishing rates, such as incentive compensation.
The factors contributing to the difference between PUC-allowed ROACEs and the ROACEs actually achieved include the exclusion of certain expenses from rates (for example, incentive compensation and charitable contributions), the recognition of annual RAM revenues on June 1 annually rather than on January 1, and return on capital additions since the last rate case in excess of indexed escalations. For Hawaiian Electric and Hawaii Electric Light, the twelve months ended March 31, 2021 rate-making ROACEs reflect higher earnings due to timing differences in the first quarter of 2021, including overhaul expenses, and a change in the timing of the recognition of target revenues relative to 2020.
Most recent rate proceedings. As of March 31, 2021, the status of ongoing rate case for each utility was as follows:
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Test year
(dollars in millions) | | Date | | Amount | | % over
rates in
effect | | ROACE
(%) | | RORB
(%) | | Rate
base | | Common
equity
% | | Stipulated agreement
reached with
Consumer Advocate |
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2020 1 | | | | | | | | | | | | | | | | |
| Request | | 8/21/19 | | $ | 77.6 | | | 4.1 | | | 10.50 | | | 7.97 | | | $ | 2,477 | | | 57.15 | | | Yes |
| Final Decision and Order | | 10/22/20 | | 0.0 | | 0.0 | | 9.50 | | 7.37 | | NA | | 57.15 | | |
| Hawaii Electric Light | | | | | | | | | | | | | | | | |
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2019 2 | | | | | | | | | | | | | | | | |
| Request | | 12/14/18 | | $ | 13.4 | | | 3.4 | | | 10.50 | | | 8.30 | | | $ | 537 | | | 56.91 | | | Yes |
| Interim Decision and Order | | 11/13/19 | | 0.0 | | 0.0 | | 9.50 | | 7.52 | | 534 | | 56.83 | | |
| Final Decision and Order | | 7/28/20 | | 0.0 | | 0.0 | | 9.50 | | 7.52 | | 534 | | 56.83 | | |
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Note: The “Request” date reflects the application filing date for the rate proceeding. The date of “Interim Decision and Order” or “Final Decision and Order” reflects the issuance date of the PUC order.
1 A final D&O issued on October 22, 2020 ordered final rates for the 2020 test year to remain at current effective rates, which provides for no increase to base rates. Hawaiian Electric’s proposed RBA provision tariff and ECRC tariff submitted on November 6, 2020 were approved by the PUC on December 11, 2020. The proposed RBA provision tariff and ECRC tariff took effect on January 1, 2021.
2 A final D&O issued on July 28, 2020 ordered final rates for the 2019 test year to remain at current effective rates, such that there is a zero increase in rates. The proposed final tariffs and PIM tariffs took effect on November 1, 2020, and the ECRC tariff became effective on January 1, 2021.
See also “Most recent rate proceedings” in Note 3 of the Condensed Consolidated Financial Statements.
On December 23, 2020, the PBR D&O was issued, establishing a new PBR Framework. The PBR Framework implemented a five-year multi-year rate period (MRP), during which there will be no general rate case applications. In the fourth year of the MRP, the PUC will comprehensively review the PBR Framework to determine if any modifications or revisions are appropriate.
Developments in renewable energy efforts. Developments in the Utilities’ efforts to further their renewable energy strategy include renewable energy projects discussed in Note 3 of the Condensed Consolidated Financial Statements and the following:
New renewable PPAs.
•In December 2014, the PUC approved a PPA for Renewable As-Available Energy dated October 3, 2013 between Hawaiian Electric and Na Pua Makani Power Partners, LLC (NPM) for a proposed 24-MW wind farm on Oahu. In August 2020, the project was energized and commissioning of all wind turbines was completed. However, the project was paused due to a conductor deficiency. Hawaiian Electric reconductored the 46kV circuit and in December 2020, the project reached commercial operation.
NPM received its Incidental Take Permit from the Department of Fish and Wildlife Service on September 7, 2018. Keep the North Shore Country (KNSC) has appealed this decision and the case has been transferred to the Hawaii Supreme Court. On June 17, 2020, KNSC filed a Motion for Stay Upon Appeal. On August 10, 2020, KNSC’s Motion for Stay Upon Appeal was denied. KNSC and Kahuku Community Association (KCA) have also petitioned to appeal NPM’s Conditional Use Permits. On August 6, 2020, the Zoning Board of Appeals (ZBA) granted NPM’s Motions to Dismiss the Appeal Petitions of KNSC and KCA.
Life of the Land (LOL) filed a Motion for Relief to argue the PUC’s approval for NPM PPA was invalid and should be revised. Hawaiian Electric and the Consumer Advocate filed an opposition to this motion for relief. A hearing on the motion for relief was held on November 22, 2019. On April 16, 2020, the PUC issued an order denying LOL’s Motion for Relief. On April 27, 2020, LOL filed a Notice of Appeal of the PUC’s order with the Supreme Court of the State of Hawaii. Hawaiian Electric filed its Answering Brief with the Supreme Court of the State of Hawaii on November 12, 2020. Oral argument was held on May 7, 2021.
•On December 31, 2019, Hawaii Electric Light and PGV entered into an Amended and Restated Power Purchase Agreement (ARPPA), subject to approval by the PUC. The ARPPA extends the term of the existing PPA by 25 years to 2052, expands the firm capacity of the facility to 46 MW and delinks the pricing for energy delivered from the facility from fossil fuel prices to reduce cost to customers. The PUC suspended the docket pending the completion of a supplemental environmental review. On April 12, 2021, Hawaii Electric Light filed a motion for reconsideration and clarification in the proceeding.
Tariffed renewable resources.
•As of March 31, 2021, there were approximately 523 MW, 111 MW and 125 MW of installed distributed renewable energy technologies (mainly PV) at Hawaiian Electric, Hawaii Electric Light and Maui Electric, respectively, for tariff-based private customer generation programs, namely Standard Interconnection Agreement, Net Energy Metering, Net Energy Metering Plus, Customer Grid Supply, Customer Self Supply, Customer Grid Supply Plus and Interim Smart Export. As of March 31, 2021, an estimated 31% of single family homes on the islands of Oahu, Hawaii and Maui have installed private rooftop solar systems, and approximately 19% of the Utilities’ total customers have solar systems.
•The Utilities began accepting energy from feed-in tariff projects in 2011. As of March 31, 2021, there were 43 MW, 2 MW and 5 MW of installed feed-in tariff capacity from renewable energy technologies at Hawaiian Electric, Hawaii Electric Light and Maui Electric, respectively.
Biofuel sources.
•In July 2018, the PUC approved Hawaiian Electric’s three-year biodiesel supply contract with Pacific Biodiesel Technologies, LLC (PBT) to supply 2 million to 4 million gallons of biodiesel at Hawaiian Electric’s Schofield Generating Station and the Honolulu International Airport Emergency Power Facility (HIA Facility) and any other generating unit on Oahu, as necessary. The PBT contract became effective on November 1, 2018 and has been extended for one year through December 2022. Hawaiian Electric also has a spot buy contract with PBT to purchase additional quantities of biodiesel at or below the price of diesel. Some purchases of “at parity” biodiesel have been made under the spot purchase contract, which was extended through June 2022.
•Hawaiian Electric has a contingency supply contract with REG Marketing & Logistics Group, LLC to also supply biodiesel to any generating unit on Oahu in the event PBT is not able to supply necessary quantities. This contingency contract has been extended to November 2022, and will continue with no volume purchase requirements.
Requests for renewable proposals, expressions of interest, and information.
•Under a request for proposal process governed by the PUC and monitored by independent observers, in February 2018, the Utilities issued RFPs for 220 MW of renewable generation on Oahu, 50 MW of renewable generation on Hawaii Island, and 60 MW of renewable generation on Maui. As of March 31, 2021, summarized information for a total of 8 PPAs is as follows:
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| Utilities | | Number of contracts | | Total photovoltaic size (MW) | | BESS Size (MW/MWh) | | Guaranteed commercial operation dates | | Contract term (years) | | Total projected annual payment (in millions) |
| Hawaiian Electric | | 4 | | 139.5 | | 139.5/558 | | 9/30/21 & 12/31/21 | | 20 & 25 | | $ | 30.9 | |
| Hawaii Electric Light | | 2 | | 60 | | 60/240 | | 7/20/21 & 6/30/22 | | 25 | | 14.1 | |
| Maui Electric | | 2 | | 75 | | 75/300 | | 7/20/21 & 6/30/22 | | 25 | | 17.6 | |
| Total | | 8 | | 274.5 | | 274.5/1,098 | | | | | | $ | 62.6 | |
The Utilities have received PUC approvals to recover the total projected annual payment of $62.6 million for the eight PPAs through the PPAC to the extent such costs are not included in base rates.
•In continuation of their February 2018 request for proposal process, the Utilities issued their Stage 2 Renewable RFPs for Oahu, Maui and Hawaii Island and Grid Services RFP on August 22, 2019. This procurement plan sought approximately 900 MW of renewable energy, including 594 MW on Oahu, 135 MW on Maui and a range between 32 to 203 MW on Hawaii Island. This second phase, as approved by the PUC, was open to all renewable and storage resources, including efforts to add more renewable generation, renewable plus storage, standalone storage and grid services. The scope of these RFPs has been expanded to accelerate renewable energy procurement beyond the remainder of the 2022 targets identified in Stage 1 to include the energy requirement associated with the planned retirement of the Kahului Power Plant on Maui and the upcoming expiration of the agreement for the AES Hawaii facility on Oahu. For the Grid Services RFP, the targets had been expanded in alignment with the Renewable RFPs Utility proposals were submitted on November 4, 2019. Proposals from third parties for these RFPs were submitted on November 5, 2019. Final awards for the renewable projects were made on May 8, 2020. Final awards for the grid services projects were made starting in January 2020. On Oahu, seven solar-plus-storage projects and one standalone storage project totaling approximately 281 MW of generation and 1.8 GWh of storage were selected. On Maui Island, three solar-plus-storage projects and one standalone storage project totaling approximately 100 MW of generation and 560 MWh of storage were selected. On Hawaii Island, two solar-plus-storage projects and one standalone storage project totaling approximately 72 MW of generation and 492 MWh of storage were selected. Two Utility Self-Build projects were among those selected; a 40-MW, 160-MWh standalone energy storage system on Maui and a 12-MW,
12-MWh storage system on Hawaii Island. Since selection, three renewable plus storage projects have voluntarily withdrawn from the process for various reasons, including change in circumstances for the developer and a misunderstanding of contract requirements. To date, the Utilities have filed 10 PPAs, 2 grid services purchase agreements (GSPA) and 2 applications for commitments of funds for capital expenditures for approval of the utility self-build projects with the PUC.
A summary of the 10 PPAs that were filed with the PUC, is as follows:
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| Utilities | | Number of contracts | | Total photovoltaic size (MW) | | BESS Size (MW/MWh) | | Guaranteed commercial operation dates | | Contract term (years) | | Total projected annual payment (in millions) |
| Hawaiian Electric | | 5 | | 232 | | 232/1,055 | | 5/31/22, 5/17/23, 10/30/23, 12/29/23 & 12/31/23 | | 20 & 25 | | $ | 62.0 | |
| Hawaiian Electric | | 1 | * | N/A | | 185/565 | | 6/1/22 | | 20 | | 24.0 | |
| Hawaii Electric Light | | 1 | | 60 | | 60/240 | | 9/30/23 | | 25 | | 15.5 | |
| Maui Electric | | 3 | | 100 | | 100/400 | | 4/30/23 & 12/29/23 | | 25 | | 28.2 | |
| Total | | 10 | | 392 | | 577/2,260 | | | | | | $ | 129.7 | |
* See further discussion under “Review of Interconnection Process and Kapolei Energy Storage Power Purchase Agreement” below.
As of March 31, 2021, the PUC approved four solar-plus-storage PPAs for a total of 217 MW. On April 14, 2021, the PUC approved another solar-plus-storage PPA adding 40 MW. The total projected annual payment of $68 million for these PPAs will be recovered through the PPAC to the extent such costs are not included in base rates.
A summary of the GSPAs that were approved by PUC in December 2020 is as follows:
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| Utilities | | | | Fast Frequency Response - 1
(MW) | | Fast Frequency Response - 2
(MW) | | Capacity -
Load Build
(MW) | | Capacity -
Load Reduction
(MW) |
| Hawaiian Electric | | | | — | | 26.7 | | 14.5 | | 19.4 |
| Hawaii Electric Light | | | | 6.0 | | — | | 3.2 | | 4.0 |
| Maui Electric | | | | 6.1 | | — | | 1.9 | | 4.7 |
| Total | | | | 12.1 | | 26.7 | | 19.6 | | 28.1 |
A summary of the utility self-build projects that are pending PUC approval is as follows:
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| Utilities | | Number of contracts | | BESS Size (MW/MWh) | | Guaranteed commercial operation dates |
| Hawaii Electric Light | | 1 | | 12/12 | | 12/30/22 |
| Maui Electric | | 1 | | 40/160 | | 4/28/23 |
| Total | | 2 | | 52/172 | | |
•On November 27, 2019, the Utilities issued RFPs for renewable generation paired with energy storage on the islands of Lanai and Molokai. The Utilities were seeking PV paired with storage or small wind (specified as 100 kW turbines or smaller) on Molokai and PV paired with storage on Lanai. Proposals for the Molokai RFP were received on February 14, 2020. The Lanai RFP was temporarily postponed, while the Utilities reevaluated the system needs. The Utilities filed an update to the Lanai RFP on March 10, 2020. In light of a PUC order issued on April 9, 2020 in the CBRE docket, the Utilities proposed in their July 9, 2020 filing to combine the previously issued Lanai RFP with the CBRE RFP described in the order to optimize the benefits of procuring renewable energy, spurring development and increasing the likelihood of success of the CBRE program on Lanai. The proposed combined Lanai RFP is before the PUC for approval. On October 15, 2020, the Utilities selected one project from the Molokai RFP for a total of 4.5 MW of solar and 24 MWh of storage. The developer, however, declined to accept the award. The Utilities are currently evaluating next steps.
Review of Interconnection Process and Kapolei Energy Storage Power Purchase Agreement.
•In February 2021, the PUC initiated a docket for the purposes of reviewing the status and interconnection progress of various utility-related renewable projects (i.e. Stage 1 and Stage 2 RFP PPAs and CBRE) and the Utilities’ transition plans for the expiration of the AES power purchase agreement, the retirement of the Kahului Power Plant, and other
fossil fuel power plant transition plans, as needed. The Utilities filed initial status updates on the project timelines, steps needed for each of the renewable projects to achieve commercial operation and steps the Utilities are taking to address projected extensions of guaranteed commercial operation dates (GCOD) for renewable projects under development, which are due to a variety of factors, including those outside of the control of the Utilities. The PUC subsequently held status conferences on the Utilities’ updates. In April 2021, the PUC issued an Order directing the Utilities to establish regulatory liabilities for the difference between the on-peak avoided cost and the unit price included in the applications for approval of the renewable project PPAs, effective with the GCOD included in the applications (the earliest GCOD included in the applications is July 2021) or from the date of the Order for CBRE Phase 1 projects. The amount of regulatory liabilities to be recorded in future periods are not determinable at this time and would be affected by a number of factors, including the length of the GCOD extension period, the monthly on-peak avoided cost, as well as the factors described above. The Utilities filed a Motion for Reconsideration of the entire Order, or in the alternative to clarify that at most the PUC is directing the Utilities to track the information and not record the information at this time. The Utilities further requested a Stay of the Order pending resolution of the Motion. The Utilities maintain that extensions of GCODs are allowed under the PUC-approved contracts and that the Order has the unintended consequence of imposing penalties against the Utilities without due process. The full text of the Order, Motion for Reconsideration and request for a Stay of the Order can be found on the PUC website at dms.puc.hawaii.gov/dms (Docket No. 2021-0024).
•Also in April 2021, the PUC approved the Kapolei Energy Storage (KES) PPA (one of the PPAs as a result of the Stage 2 Renewable RFP process) (KES Decision and Order), subject to nine conditions, including the Utilities forgoing the second portion of the PIM rewards amounting up to $1.7 million for the Stage 1 RFP PPAs, removing grid constraints for the Utilities’ CBRE Phase 2 projects and for existing and new distributed energy programs, financial retirement of Hawaiian Electric generating units by specified dates and adjusting target revenues at the retirement dates for such retirements, and a requirement to charge the batteries in the project using significant levels of renewable energy generation. The financial retirement of the generating units described in the KES Decision and Order is contrary to the intent of Hawaii Revised Statutes §269-6(d), which encourages the recovery of stranded costs for the retirement of fossil fuel generation, and contrary to the regulatory compact under which in return for agreeing to commit capital necessary to allow utilities to meet their obligation to serve, utilities are assured recovery of their investment and a fair opportunity to earn a reasonable return on the capital prudently committed to the business. The undepreciated amount of the six generating units at the retirement dates noted in the KES Decision and Order is currently estimated to be approximately $55 million, and excludes certain asset retirement obligation costs, which are not determinable at this time. Hawaiian Electric plans to file a Motion for Reconsideration and Stay of the Decision and Order due to potentially significant financial and operational impacts. Depending on the PUC’s ruling on that motion, Hawaiian Electric would have the option of proceeding with the Decision and Order as may be amended, filing an appeal, or considering declaring the contract with KES null and void. The full text of the KES Decision and Order and, when filed, the Motion for Reconsideration and Stay with respect thereto, can be found on the PUC website at dms.puc.hawaii.gov/dms (Docket No. 2020-0136).
Legislation and regulation. Congress and the Hawaii legislature periodically consider legislation that could have positive or negative effects on the Utilities and their customers. Also see “Environmental regulation” in Note 3 of the Condensed Consolidated Financial Statements.
Fuel contracts. The fuel contract entered into in January 2019, by the Utilities and PAR Hawaii Refining, LLC (PAR Hawaii), for the Utilities’ low sulfur fuel oil (LSFO), high sulfur fuel oil (HSFO), No. 2 diesel, and ultra-low sulfur diesel (ULSD) requirements was approved by the PUC, and became effective on April 28, 2019 and terminates on December 31, 2022. This contract is a requirement contract with no minimum purchases. If PAR Hawaii is unable to provide LSFO, HSFO, diesel and/or ULSD the contract allows the Utilities to purchase LSFO, HSFO, diesel and/or ULSD from another supplier. The contract will automatically renew upon the conclusion of the original term for successive terms of 1 year beginning on January 1, 2023 unless a party gives written termination notice at least 120 days before the beginning of an extension. The costs incurred under the contract with PAR Hawaii are recovered in the Utilities’ respective ECRCs.
On June 9, 2020, the Utilities and PAR Hawaii entered into a First Amendment to the fuel contract. The First Amendment amends only the pricing to create a two-tiered structure based on volume, with all tier-1 LSFO up to the tier-1 maximum to be purchased exclusively from PAR Hawaii at the established pricing, and purchases in excess of that volume (tier-2) either from PAR Hawaii at the established pricing, or from an alternative supplier. On August 4, 2020, the PUC approved the First Amendment, which has an effective date of July 15, 2020, on an interim basis. The PUC’s approval order allows the recovery of such costs associated with the First Amendment through the ECRC to the extent that the costs are not recovered in base rates. The PUC intends to review whether the First Amendment is reasonable and in the public interest in the final decision, but it will not subject the recovery of the costs between the interim decision and the final decision to retroactive disallowances.
FINANCIAL CONDITION
Liquidity and capital resources.As of March 31, 2021, there were no amounts outstanding on Hawaiian Electric’s revolving credit facilities and no commercial paper borrowings by the Utilities.
On January 14, 2021, the Utilities received $115 million of proceeds using a delayed draw feature under a private placement executed on October 29, 2020. The proceeds were used to finance capital expenditures and reimburse funds used for the payment of capital expenditures.
The Utilities believe that their ability to generate cash, both internally from operations and externally from issuances of equity and debt securities, as well as bank borrowings, is adequate to maintain sufficient liquidity to fund their contractual obligations and commercial commitments, their forecasted capital expenditures and investments, their expected retirement benefit plan contributions and other cash requirements. However, the COVID-19 pandemic is an evolving situation, and the Utilities cannot predict the extent or duration of the outbreak, the future effects that it will have on the global, national or local economy, including the impacts on the Utilities’ ability, as well as the cost, to access additional capital, or the future impacts on the Utilities’ financial position, results of operations, and cash flows. See Item 1A. “Risk Factors” in Part II for further discussion of risks and uncertainties.
Hawaiian Electric’s consolidated capital structure was as follows:
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| (dollars in millions) | | March 31, 2021 | | December 31, 2020 |
| Short-term borrowings | | $ | — | | | — | % | | $ | 50 | | | 1 | % |
| Long-term debt, net | | 1,676 | | | 43 | | | 1,561 | | | 41 | |
| Preferred stock | | 34 | | | 1 | | | 34 | | | 1 | |
| Common stock equity | | 2,157 | | | 56 | | | 2,142 | | | 57 | |
| | $ | 3,867 | | | 100 | % | | $ | 3,787 | | | 100 | % |
Information about Hawaiian Electric’s commercial paper borrowings, borrowings from HEI and line of credit facility were as follows:
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| | | Average balance | | Balance |
| (in millions) | | Three months ended March 31, 2021 | | March 31, 2021 | | December 31, 2020 |
Short-term borrowings1 | | | | | | |
| Commercial paper | | $ | — | | | $ | — | | | $ | — | |
| Borrowings from HEI | | — | | | — | | | — | |
| Line of credit draws | | — | | | — | | | — | |
| Undrawn capacity under line of credit facilities | | — | | | 275 | | | 275 | |
1 The maximum amount of external short-term borrowings by Hawaiian Electric during the first three months of 2021 was approximately $50 million. As of March 31, 2021, Hawaii Electric Light and Maui Electric had no short-term borrowings from Hawaiian Electric. In addition to the short-term borrowings above, on January 15, 2021, Hawaiian Electric paid off and terminated the $50 million term loan facility dated as of May 19, 2020.
Hawaiian Electric has a $200 million line of credit facility and a $75 million 364-day revolving credit facility with no amounts outstanding at March 31, 2021. On April 19, 2021, Hawaiian Electric’s $75 million 364-day revolving credit agreement terminated and was not renewed. See Note 5 of the Condensed Consolidated Financial Statements.
Bank loans. On January 15, 2021, Hawaiian Electric paid off and terminated the $50 million term loan credit agreement dated as of May 19, 2020.
Credit ratings. On March 17, 2021, S&P upgraded Hawaiian Electric’s issuer credit rating to “BBB” from “BBB-”, upgraded the short-term and commercial paper ratings to “A-2” from “A-3” and revised the outlook to stable from positive. The rating upgrade was primarily based on Hawaiian Electric’s strong financial measures, strength of the cumulative value of the regulatory protections, and S&P’s assessment of its stand-alone credit profile as sufficient to rate Hawaiian Electric higher than HEI.
On April 20, 2021, Moody’s upgraded Hawaiian Electric’s senior unsecured rating and issuer rating to “Baa1” from “Baa2” and revised the outlook to stable from positive. The rating upgrade reflects Hawaiian Electric's considerable progress in adding renewable resources to its energy supply mix and the improving regulatory relationship with the PUC.
SPRBs. Special purpose revenue bonds (SPRBs) have been issued by the Department of Budget and Finance of the State of Hawaii (DBF) to finance (and refinance) capital improvement projects of Hawaiian Electric and its subsidiaries, but the
sources of their repayment are the non-collateralized obligations of Hawaiian Electric and its subsidiaries under loan agreements and notes issued to the DBF, including Hawaiian Electric’s guarantees of its subsidiaries’ obligations.
On May 24, 2019, the PUC approved the Utilities’ request to issue SPRBs in the amounts of up to $70 million, $2.5 million and $7.5 million for Hawaiian Electric, Hawaii Electric Light and Maui Electric, respectively, prior to June 30, 2020, to finance the Utilities’ capital improvement programs. Pursuant to this approval, on October 10, 2019, the DBF issued, at par, Series 2019 SPRBs in the aggregate principal amount of $80 million with a maturity of October 1, 2049. As of March 31, 2021, Hawaiian Electric had $12 million of undrawn funds remaining with the trustee. Hawaii Electric Light and Maui Electric had no undrawn funds as of March 31, 2021.
On June 10, 2019, the Hawaii legislature authorized the issuance of up to $700 million of SPRBs ($400 million for Hawaiian Electric, $150 million for Hawaii Electric Light and $150 million for Maui Electric), with PUC approval, prior to June 30, 2024, to finance the Utilities’ multi-project capital improvement programs (2019 Legislative Authorization).
On February 9, 2021, the PUC approved the Utilities’ request to issue SPRBs (up to $100 million, $35 million and $45 million for Hawaiian Electric, Hawaii Electric Light and Maui Electric, respectively) through 2022, with the proceeds to be used to finance the Utilities’ multi-project capital improvement programs. The PUC also approved the use of the expedited approval procedure to request the issuance and sale of the remaining/unused amount of SPRBs authorized by the 2019 Legislative Authorization (i.e., total not to exceed up to $400 million for Hawaiian Electric, up to $150 million for Hawaii Electric Light, and up to $150 million for Maui Electric) during the period January 1, 2023 through June 30, 2024.
Taxable debt. On January 31, 2019, the Utilities received PUC approval (January 2019 Approval) to issue the remaining authorized amounts under the PUC approval received in April 2018 (April 2018 Approval) in 2019 through 2020 (Hawaiian Electric up to $205 million and Hawaii Electric Light up to $15 million of taxable debt), as well as a supplemental increase to authorize the issuance of additional taxable debt to finance capital expenditures, repay long-term and/or short term debt used to finance or refinance capital expenditures, and/or to reimburse funds used for payment of capital expenditures, and to refinance the Utilities’ 2004 junior subordinated deferrable interest debentures (QUIDS) prior to maturity. In addition, the January 2019 Approval authorized the Utilities to extend the period to issue additional taxable debt from December 31, 2021 to December 31, 2022. The new total “up to” amounts of taxable debt requested to be issued through December 31, 2022 are $410 million, $150 million and $130 million for Hawaiian Electric, Hawaii Electric Light and Maui Electric, respectively.
As of March 31, 2021, Hawaiian Electric, Hawaii Electric Light, and Maui Electric have $135 million, $85 million, and $45 million, respectively, of remaining taxable debt to issue prior to December 31, 2022. See summary table below.
| | | | | | | | | | | |
| (in millions) | Hawaiian Electric | Hawaii Electric Light | Maui Electric |
| Total “up to” amounts of taxable debt authorized through 2022 | $ | 410 | | $ | 150 | | $ | 130 | |
| Less: | | | |
| Taxable debt authorized and issued in 2018 under April 2018 Approval | 75 | | 15 | | 10 | |
| Taxable debt issuance to refinance the 2004 QUIDS in 2019 | 30 | | 10 | | 10 | |
| Taxable debt issuance in May 2020 | 110 | | 10 | | 40 | |
| Taxable debt executed in October 2020, but issued on January 14, 2021 | 60 | | 30 | | 25 | |
| Remaining authorized amounts | $ | 135 | | $ | 85 | | $ | 45 | |
Equity. In October 2018, the Utilities received PUC approval for the supplemental increase to issue and sell additional common stock in the amounts of up to $280 million for Hawaiian Electric and up to $100 million each for Hawaii Electric Light and Maui Electric, with the new total “up to” amounts of $430 million for Hawaiian Electric and $110 million each for Hawaii Electric Light and Maui Electric, and to extend the period authorized by the PUC to issue and sell common stock from December 31, 2021 to December 31, 2022. As of March 31, 2021, Hawaiian Electric, Hawaii Electric Light, and Maui Electric have $275.8 million, $102.5 million, and $87.8, respectively, of remaining common stock to issue prior to December 31, 2022. See summary table below.
| | | | | | | | | | | |
| (in millions) | Hawaiian Electric | Hawaii Electric Light | Maui Electric |
| Total “up to” amounts of common stock authorized to issue and sell through 2021 | $ | 150.0 | | $ | 10.0 | | $ | 10.0 | |
| Supplemental increase authorized | 280.0 | | 100.0 | | 100.0 | |
| Total “up to” amounts of common stock authorized to issue and sell through 2022 | 430.0 | | 110.0 | | 110.0 | |
| Common stock authorized and issued in 2017, 2018, 2019 and 2020 | 154.2 | | 7.5 | | 22.2 | |
| Remaining authorized amounts | $ | 275.8 | | $ | 102.5 | | $ | 87.8 | |
Cash flows. The following table reflects the changes in cash flows for the three months ended March 31, 2021 compared to the three months ended March 31, 2020:
| | | | | | | | | | | | | | | | | |
| Three months ended March 31 | | |
| (in thousands) | 2021 | | 2020 | | Change |
| Net cash provided by operating activities | $ | 31,961 | | | $ | 39,141 | | | $ | (7,180) | |
| Net cash used in investing activities | (68,498) | | | (116,431) | | | 47,933 | |
| Net cash provided by financing activities | 36,460 | | | 78,707 | | | (42,247) | |
Net cash provided by operating activities. The decrease in net cash provided by operating activities was primarily driven by an increase in fuel oil stock due to less consumption.
Net cash used in investing activities. The decrease in net cash used in investing activities was primarily driven by a decrease in capital expenditures related to construction activities.
Net cash provided by financing activities. The decrease in net cash provided by financing activities was primarily driven by repayment of short-term debt.
Forecast capital expenditures. For the three-year period 2021 through 2023, the Utilities forecast up to $1.2 billion of net capital expenditures, which could change over time based upon external factors such as the timing and scope of environmental regulations and/or unforeseen delays in permitting and timing of PUC decisions. Proceeds from the issuance of equity and long-term debt, cash flows from operating activities, temporary increases in short-term borrowings and existing cash and cash equivalents are expected to provide the funds needed for the net capital expenditures, to pay down commercial paper or other short-term borrowings, as well as to fund any unanticipated expenditures not included in the 2021 to 2023 forecast (such as increases in the costs or acceleration of capital projects, or unanticipated capital expenditures that may be required by new environmental laws and regulations).
Management periodically reviews capital expenditure estimates and the timing of construction projects. These estimates may change significantly as a result of many considerations, including changes in economic conditions, changes in forecasts of kWh sales and peak load, the availability of purchased power and changes in expectations concerning the construction and ownership of future generation units, the availability of generating sites and transmission and distribution corridors, the need for fuel infrastructure investments, the ability to obtain adequate and timely rate increases, escalation in construction costs, the effects of opposition to proposed construction projects and requirements of environmental and other regulatory and permitting authorities.
Bank
Recent Developments—COVID-19
See also Recent developments—COVID-19 in HEI’s MD&A.
In the first quarter of 2021, economic conditions in Hawaii began to improve following the rollout of stimulus programs and the loosening of business restrictions, both of which boosted economic activity. Continued efforts to vaccinate a high proportion of the population quickly and the potential implementation of a “vaccine passport” is expected to further accelerate the economic recovery. With increased optimism regarding an acceleration of an economic recovery, long-term rates increased during the quarter. However, interest rates across the curve remain at relatively low levels, and continue to negatively impact net interest margin as new loan origination rates remain below existing portfolio yields. In the first quarter of 2021, the bank’s net interest margin was 2.95% compared to 3.12% and 3.72% for the quarters ended December 31, 2020 and March 31, 2020, respectively.
In response to COVID-19, ASB made short-term loan modifications to borrowers who were generally payment current at the time of relief. As of March 31, 2021, approximately $9 million of loans remained in their active deferral period. For the loans that have completed their short-term payment deferral period, approximately $17 million of loans required further assistance through repayment modifications and ASB reflected these loans as troubled debt restructured loans as of March 31, 2021. Approximately $13 million of loans were not able to resume their contractual payments and were considered delinquent as of March 31, 2021. As a result of an overall strengthening of the Hawaii economy and a corresponding improvement in the credit outlook in the first quarter of 2021, as reflected in upgrades in the commercial loan portfolio and overall lower net charge offs, ASB recorded an $8.4 million recovery of the provision for credit losses to reduce the allowance for credit losses. The provision for credit losses in future quarters will be dependent on future economic conditions and changes to borrower credit quality at that time.
In 2020, ASB temporarily closed 15 of its 49 branches and reduced banking hours at the branches that remained open in an effort to reduce social gathering and protect employees and customers. The bank has since reopened five of the branches that were temporarily closed and permanently closed eight branches. The reduction in ASB’s branch network should not have a significant impact to the bank’s customers as there are other branches nearby and other channels such as online and mobile banking. ASB continues to evaluate its branch network to determine whether further changes may be appropriate given its customers’ use of other banking channels.
ASB’s senior management team continues to meet on a regular basis to manage the response to the pandemic and discuss key focus areas such as the safety of the bank’s employees and customers as well as any impacts to the operations of the bank. Senior management also continues to meet regularly with ASB’s board of directors to keep them apprised of the impacts of the COVID-19 pandemic.
The CARES Act was signed into law on March 27, 2020. The CARES Act provided over $2 trillion in economic assistance for American workers, families, and small businesses, and job preservation for American industries. The PPP was established under the CARES Act and implemented by the United States Small Business Administration (SBA) to provide a direct incentive for small businesses to keep their workers on the payroll as a result of the COVID-19 crisis. The Paycheck Protection Program Flexibility Act was signed into law on June 5, 2020 and the Economic Aid Act was signed into law on December 27, 2020, which amended some of the prior rules and guidelines of the CARES Act. The Economic Aid Act established a second round of PPP, reopening the PPP for first-time borrowers and allowing for a second draw for businesses that meet more restrictive eligibility criteria to target businesses hardest hit by the pandemic. Loans issued through the PPP are 100% federally guaranteed and have a maturity of 2-5 years, depending on when the loan was made, at a fixed interest rate of 1%. Loan payments will be deferred until the earlier of (a) the date that the forgiven amount is remitted to the lender by the SBA; or (b) 10 months from the date the covered period ends. The SBA will forgive all loan amounts to a particular small business if such small business is compliant with the terms and conditions of the PPP. Small businesses had the earlier of 24 weeks from disbursement of the loan or December 31, 2020 to incur allowable expenses such as payroll costs, interest on mortgages, rent and utility expenses that would be covered by the loan forgiveness rules, with 60% of the loan forgiveness needing to be for payroll costs. There is a partial forgiveness if less than 60% of the loan disbursement was spent on payroll costs. Employers had until December 31, 2020 to restore their workforce. Lenders processed and approved the PPP loans under delegated authority of the SBA. As an existing SBA certified lender, ASB worked with a number of small businesses, both customers and non-customers, to complete the loan application forms so that these businesses could participate in the program. During the first round of PPP, the Bank secured more than $370 million in PPP loans for approximately 4,100 small businesses that supported over 40,000 jobs, ASB received processing fees totaling approximately $13 million and started recognizing these fees over the life of the loans. The Bank is participating in the second round of PPP which opened for submission by banks on January 19, 2021. As of April 7, 2021, ASB secured more than $160 million for approximately 2,000 small businesses that supported more than 18,000 jobs.
Other provisions of the CARES Act provides that a financial institution may elect to suspend the requirements under GAAP for certain loan modifications that would otherwise be categorized as a TDR and any related impairment for accounting purposes. See Note 4 of the Condensed Consolidated Financial Statements and “Economic conditions” in the “HEI Consolidated” section above.
ASB continues to maintain its low-risk profile, strong balance sheet and straightforward community banking business model.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended March 31 | | Increase | | |
| (in millions) | | 2021 | | 2020 | | (decrease) | | Primary reason(s) |
| Interest income | | $ | 59 | | | $ | 65 | | | $ | (6) | | | |
| | | | | | | | Average loan portfolio yields 57 basis points lower—impacted by the continued low interest rate environment as adjustable rate loans have repriced lower during the past year and new loan production yields continue to originate below their portfolio yields. |
| | | | | | | | Average loan portfolio balances increased $207 million - commercial and commercial real estate loan portfolio balances increased by $275 million and $211 million, respectively. Home equity lines of credit and consumer loan portfolios decreased $162 million and $91 million, respectively - strategic decision to reduce production of these loans in the current economic environment. |
| | | | | | | | Average investment securities portfolio balance increased $983 million—excess liquidity from strong deposit growth invested in agency securities. |
| | | | | | | | Average investment securities yields 119 basis points lower—impacted by the continued low interest rate environment as the amortization of premiums on investment securities have increased with faster prepayment assumptions and new investment security purchase yields continue to be lower than the investment security portfolio yields. |
| Noninterest income | | 19 | | | 15 | | | 4 | | | |
| | | | | | | | Higher mortgage banking income due to higher residential loan sale volume. |
| | | | | | | | Higher bank-owned life insurance income primarily due to proceeds from a death claim and higher fair market value adjustment on bank owned life insurance assets. |
| Less: gain on sale of investment securities, net | | (1) | | | — | | | (1) | | | Gain on sale of investment securities, net, which is included in Noninterest income above and in the Bank’s statements of income and comprehensive income in Note 4, is classified as gain on sale of investment securities, net in the condensed consolidated statements of income, and accordingly, is reflected after operating income as a separate line item and excluded from Revenues. |
| Revenues | | 77 | | | 80 | | | (3) | | | The decrease in revenues for the three months ended March 31, 2021 compared to the same period in 2020 was primarily due to lower interest income, partly offset by higher noninterest income. |
| Interest expense | | 1 | | | 4 | | | (3) | | | |
| | | | | | | | Lower interest expense on deposits—lower term certificate balances due to runoff of government term certificates and lower deposit yields as a result of the continued low interest rate environment. |
| | | | | | | | Average core deposit balances increased $1.4 billion; average term certificate balances decreased $230 million. |
| | | | | | | | Average deposit yields decreased from 15 basis points to 8 basis points. |
| | | | | | | | Lower interest expense on other borrowings—primarily due to lower repurchase agreement yields as a result of the continued low interest rate environment. |
| Provision for credit losses | | (8) | | | 10 | | | (18) | | | |
| | | | | | | | Negative provision for credit losses reflects improvement in economic outlook, strong credit results including lower net charge-offs and credit upgrades in commercial real estate and commercial loan portfolios. |
| | | | | | | | Negative provision for credit losses also due to lower personal unsecured loan portfolio balances which had higher credit loss rates. |
| | | | | | | | Delinquency rates have decreased—from 0.48% at March 31, 2020 to 0.43% at March 31, 2021. |
| | | | | | | | Net charge-off to average loans have decreased—from 0.44% at March 31, 2020 to 0.18% at March 31, 2021 due to lower personal unsecured loan portfolio net charge-offs. |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended March 31 | | Increase | | |
| (in millions) | | 2021 | | 2020 | | (decrease) | | Primary reason(s) |
| Noninterest expense | | 48 | | | 46 | | | 2 | | | |
| | | | | | | | Higher compensation and benefits expenses—increase in incentive compensation payout for commission based employees. |
| | | | | | | | One-time adjustment for change in accounting for ASB retirement plan. |
| Expenses | | 41 | | | 60 | | | (19) | | | The decrease in expenses for the three months ended March 31, 2021 compared to the same period in 2020 was due to lower provision for credit losses and lower interest expense, partly offset by higher noninterest expenses. |
| Operating income | | 36 | | | 19 | | | 17 | | | The increase in operating income for the three months ended March 31, 2021 compared to the same period in 2020 was primarily due to lower provision for credit losses, lower interest expense and higher noninterest income, partly offset by lower interest income and higher noninterest expenses. |
| Gain on sale of investment securities, net | | 1 | | | — | | | 1 | | | |
| Net income | | 30 | | | 16 | | | 14 | | | Net income for the three months ended March 31, 2021 was higher than the same period in 2020 due to higher operating income, partly offset by higher income tax expense. |
ASB’s return on average assets, return on average equity and net interest margin were as follows:
| | | | | | | | | | | | | | | | | | |
| | | | Three months ended March 31 |
| (%) | | | | | | 2021 | | 2020 |
| Return on average assets | | | | | | 1.40 | | | 0.87 | |
| Return on average equity | | | | | | 16.04 | | | 9.15 | |
| Net interest margin | | | | | | 2.95 | | | 3.72 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31 |
| | 2021 | | 2020 |
| (dollars in thousands) | | Average
balance | | Interest
income/
expense | | Yield/
rate (%) | | Average
balance | | Interest income/ expense | | Yield/
rate (%) |
| Assets: | | | | | | | | | | | | |
| Interest-earning deposits | | $ | 47,080 | | | $ | 12 | | | 0.10 | | | $ | 26,654 | | | $ | 92 | | | 1.36 | |
| FHLB stock | | 9,929 | | | 81 | | | 3.29 | | | 9,375 | | | 78 | | | 3.37 | |
| Investment securities | | | | | | | | | | | | |
| Taxable | | 2,352,570 | | | 8,366 | | | 1.42 | | | 1,388,466 | | | 9,019 | | | 2.60 | |
| Non-taxable | | 47,599 | | | 271 | | | 2.28 | | | 28,683 | | | 305 | | | 4.20 | |
| Total investment securities | | 2,400,169 | | | 8,637 | | | 1.44 | | | 1,417,149 | | | 9,324 | | | 2.63 | |
| Loans | | | | | | | | | | | | |
| Residential 1-4 family | | 2,149,788 | | | 19,588 | | | 3.64 | | | 2,178,480 | | | 21,922 | | | 4.03 | |
| Commercial real estate | | 1,108,851 | | | 9,005 | | | 3.26 | | | 898,162 | | | 9,509 | | | 4.21 | |
| Home equity line of credit | | 937,942 | | | 7,265 | | | 3.14 | | | 1,099,694 | | | 9,220 | | | 3.37 | |
| Residential land | | 16,457 | | | 210 | | | 5.11 | | | 14,050 | | | 197 | | | 5.60 | |
| Commercial | | 962,198 | | | 8,912 | | | 3.73 | | | 687,303 | | | 6,730 | | | 3.91 | |
| Consumer | | 158,930 | | | 4,987 | | | 12.72 | | | 249,917 | | | 7,989 | | | 12.86 | |
Total loans 1,2 | | 5,334,166 | | | 49,967 | | | 3.77 | | | 5,127,606 | | | 55,567 | | | 4.34 | |
Total interest-earning assets 3 | | 7,791,344 | | | 58,697 | | | 3.03 | | | 6,580,784 | | | 65,061 | | | 3.96 | |
| Allowance for credit losses | | (101,712) | | | | | | | (72,501) | | | | | |
| Noninterest-earning assets | | 766,844 | | | | | | | 722,233 | | | | | |
| Total assets | | $ | 8,456,476 | | | | | | | $ | 7,230,516 | | | | | |
| Liabilities and shareholder’s equity: | | | | | | | | | | | | |
| Savings | | $ | 2,901,661 | | | $ | 191 | | | 0.03 | | | $ | 2,395,751 | | | $ | 540 | | | 0.09 | |
| Interest-bearing checking | | 1,180,049 | | | 57 | | | 0.02 | | | 1,049,010 | | | 230 | | | 0.09 | |
| Money market | | 178,275 | | | 37 | | | 0.09 | | | 147,776 | | | 250 | | | 0.68 | |
| Time certificates | | 540,461 | | | 1,177 | | | 0.88 | | | 770,350 | | | 2,567 | | | 1.34 | |
| Total interest-bearing deposits | | 4,800,446 | | | 1,462 | | | 0.12 | | | 4,362,887 | | | 3,587 | | | 0.33 | |
| Advances from Federal Home Loan Bank | | 30,126 | | | 23 | | | 0.30 | | | 23,195 | | | 90 | | | 1.56 | |
| Securities sold under agreements to repurchase and federal funds purchased | | 75,332 | | | 4 | | | 0.02 | | | 96,013 | | | 223 | | | 0.93 | |
| Total interest-bearing liabilities | | 4,905,904 | | | 1,489 | | | 0.12 | | | 4,482,095 | | | 3,900 | | | 0.35 | |
| Noninterest bearing liabilities: | | | | | | | | | | | | |
| Deposits | | 2,645,636 | | | | | | | 1,914,774 | | | | | |
| Other | | 168,067 | | | | | | | 144,609 | | | | | |
| Shareholder’s equity | | 736,869 | | | | | | | 689,038 | | | | | |
| Total liabilities and shareholder’s equity | | $ | 8,456,476 | | | | | | | $ | 7,230,516 | | | | | |
| Net interest income | | | | $ | 57,208 | | | | | | | $ | 61,161 | | | |
Net interest margin (%) 4 | | | | | | 2.95 | | | | | | | 3.72 | |
1 Includes loans held for sale, at lower of cost or fair value.
2 Includes recognition of net deferred loan fees of $2.8 million and nil for the three months ended March 31, 2021 and 2020, respectively,
together with interest accrued prior to suspension of interest accrual on nonaccrual loans. Includes nonaccrual loans.
3 For the three months ended March 31, 2021 and 2020, the taxable-equivalent basis adjustments made to the table above were not material.
4 Defined as net interest income, on a fully taxable equivalent basis, as a percentage of average total interest-earning assets.
Earning assets, costing liabilities, contingencies and other factors. Earnings of ASB depend primarily on net interest income, which is the difference between interest earned on earning assets and interest paid on costing liabilities. The interest rate environment has been impacted by disruptions in the financial markets over a period of several years. In 2020, the Federal Open Market Committee lowered its federal funds rate target range to 0% - 0.25% in response to the financial crisis caused by the COVID-19 pandemic, which resulted in a decrease in ASB’s net interest income and net interest margin. A prolonged low interest rate environment may continue to negatively impact ASB’s net interest income and net interest margin.
Loans and mortgage-backed securities are ASB’s primary earning assets.
Loan portfolio. ASB’s loan volumes and yields are affected by market interest rates, competition, demand for financing, availability of funds and management’s responses to these factors. See Note 4 of the Condensed Consolidated Financial Statements for the composition of ASB’s loans.
Home equity— key credit statistics. The HELOC portfolio makes up 17% of the total loan portfolio and is generally an interest-only revolving loan for a 10-year period, after which time the HELOC outstanding balance converts to a fully amortizing variable-rate term loan with a 20-year amortization period. Borrowers also have a “Fixed Rate Loan Option” to convert a part of their available line of credit into a 5, 7 or 10-year fully amortizing fixed-rate loan with level principal and interest payments. As of March 31, 2021, approximately 21% 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.
Attention had been given by regulators and rating agencies to the potential for increased exposure to credit losses associated with HELOCs that were originated during the period of rapid home price appreciation between 2003 and 2007 as they have reached the end of their 10-year, interest-only payment periods. Once the interest only payment period has ended, payments are reset to include principal repayments along with interest. ASB does not have a large exposure to HELOCs originated between 2003 and 2007. Nearly all of ASB’s HELOC originations prior to 2008 consisted of amortizing equity lines that have structured principal payments during the draw period. These older equity lines represent 1% of the HELOC portfolio.
Loan portfolio risk elements. See Note 4 of the Condensed Consolidated Financial Statements.
Investment securities. ASB’s investment portfolio was comprised as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | March 31, 2021 | | December 31, 2020 |
| (dollars in thousands) | | Balance | | % of total | | Balance | | % of total |
| U.S. Treasury and federal agency obligations | | $ | 57,647 | | | 2 | % | | $ | 62,322 | | | 3 | % |
| Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies | | 2,496,398 | | | 96 | | | 2,076,506 | | | 95 | |
| Corporate bonds | | 30,831 | | | 1 | | | 31,351 | | | 1 | |
| Mortgage revenue bonds | | 15,427 | | | 1 | | | 27,185 | | | 1 | |
| Total investment securities | | $ | 2,600,303 | | | 100 | % | | $ | 2,197,364 | | | 100 | % |
Currently, ASB’s investment portfolio consists of U.S. Treasury and federal agency obligations, mortgage-backed securities, corporate bonds and mortgage revenue bonds. ASB owns mortgage-backed securities issued or guaranteed by the U.S. government agencies or sponsored agencies, including the Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC), Government National Mortgage Association (GNMA) and Small Business Administration (SBA). Principal and interest on mortgage-backed securities issued by FNMA, FHLMC, GNMA and SBA are guaranteed by the issuer and, in the case of GNMA and SBA, backed by the full faith and credit of the U.S. government. U.S. Treasury securities are also backed by the full faith of the U.S. government. The increase in the investment securities portfolio was primarily due to the purchase of securities with excess liquidity.
Deposits and other borrowings. Deposits continue to be the largest source of funds for ASB and are affected by market interest rates, competition and management’s responses to these factors. While deposits have increased by $358 million year-to-date, in part due to PPP loan proceeds and consumer economic impact payments from the CARES Act stimulus program, deposit retention and sustained growth will remain challenging in the current environment due to competition for deposits and the low level of short-term interest rates. Advances from the FHLB of Des Moines, securities sold under agreements to repurchase and federal funds purchased continue to be additional sources of funds. As of March 31, 2021 and December 31, 2020, ASB’s costing liabilities consisted of 99% deposits and 1% other borrowings. The weighted average cost of deposits for the first three months of 2021 and 2020 was 0.08% and 0.23%, respectively.
Federal Home Loan Bank of Des Moines. As of March 31, 2021 and December 31, 2020, ASB had no advances outstanding at the FHLB of Des Moines. As of March 31, 2021, the unused borrowing capacity with the FHLB of Des Moines was $2.0 billion. The FHLB of Des Moines continues to be an important source of liquidity for ASB.
Contingencies. ASB is subject in the normal course of business to pending and threatened legal proceedings. Management does not anticipate that the aggregate ultimate liability arising out of these pending or threatened legal proceedings will be material to its financial position. However, ASB cannot rule out the possibility that such outcomes could have a material adverse effect on the results of operations or liquidity for a particular reporting period in the future.
Other factors. Interest rate risk is a significant risk of ASB’s operations and also represents a market risk factor affecting the fair value of ASB’s investment securities. Increases and decreases in prevailing interest rates generally translate into
decreases and increases in the fair value of the investment securities, respectively. In addition, changes in credit spreads also impact the fair values of the investment securities.
As of March 31, 2021, ASB had an unrealized loss, net of taxes, on available-for-sale investment securities (including securities pledged for repurchase agreements) in AOCI of $25.8 million compared to an unrealized gain, net of taxes, of $20.0 million as of December 31, 2020. See “Item 3. Quantitative and qualitative disclosures about market risk” for a discussion of ASB’s interest rate risk sensitivity.
During the first three months of 2021, ASB recorded a negative provision for credit losses of $7.0 million in the allowance for credit losses primarily due to improvement in the economic outlook, strong credit results including lower net charge-offs and credit upgrades in commercial real estate and commercial loan portfolios and due to lower personal unsecured loan portfolio balances which had higher credit loss rates. During the first three months of 2020, ASB recorded a provision for credit losses of $9.9 million in the allowance for credit losses primarily due to increased loss reserves for the consumer loan portfolio, increased loss rates for the commercial and commercial real estate portfolios and reserves for forecasted deterioration due to the COVID-19 pandemic.
| | | | | | | | | | | | | | | | | | | | |
| | | Three months ended March 31 | | Year ended December 31, 2020 |
| (in thousands) | | 2021 | | 2020 | |
| Allowance for credit losses | | $ | 101,201 | | | $ | 53,355 | | | $ | 53,355 | |
| Impact of adopting ASU No. 2016-13 | | — | | | 19,441 | | | 19,441 | |
| Provision for credit losses | | (7,035) | | | 9,901 | | | 49,811 | |
| Less: net charge-offs | | 2,373 | | | 5,613 | | | 21,406 | |
| Allowance for credit losses, end of period | | $ | 91,793 | | | $ | 77,084 | | | $ | 101,201 | |
| Ratio of net charge-offs during the period to average loans outstanding (annualized) | | 0.18 | % | | 0.44 | % | | 0.40 | % |
ASB maintains a reserve for credit losses that consists of two components, the allowance for credit losses and an allowance for loan commitments (unfunded reserve). The level of the reserve for unfunded loan commitments is adjusted by recording an expense or recovery in provision for credit losses. For the three months ended March 31, 2021 and 2020, ASB recorded a recovery in the provision for credit losses for unfunded commitments of $1.4 million and a provision for credit losses for unfunded commitments of $0.5 million, respectively. As of March 31, 2021 and December 31, 2020, the reserve for unfunded loan commitments was $2.9 million and $3.8 million, respectively.
Legislation and regulation. ASB is subject to extensive regulation, principally by the OCC and the FDIC. Depending on ASB’s level of regulatory capital and other considerations, these regulations could restrict the ability of ASB to compete with other institutions and to pay dividends to its shareholder. See the discussion below under “Liquidity and capital resources.”
Changes to Community Bank Leverage Ratio. In April 2020, the federal bank regulatory agencies issued two interim final rules to implement Section 4012 of the CARES Act, which requires the agencies to temporarily lower the community bank leverage ratio to 8 percent. The two rules modify the community bank leverage ratio framework so that:
•Beginning in the second quarter of 2020 and until the end of the year, a banking organization that has a leverage ratio of 8 percent or greater and meets certain other criteria may elect to use the community bank leverage ratio framework; and
•Community banking organizations will have until January 1, 2022 before the community bank leverage ratio requirement is re-established at greater than 9 percent.
Under the interim final rules, the community bank leverage ratio was 8 percent beginning in the second quarter of 2020 and for the remainder of calendar year 2020, 8.5 percent for calendar year 2021, and 9 percent thereafter. The interim final rules also maintain a two-quarter grace period for a qualifying community banking organization whose leverage ratio falls no more than 1 percent below the applicable community bank leverage ratio.
As of March 31, 2021, the bank was in compliance with all of the minimum capital requirements under OCC regulations, and was categorized as “well capitalized” under the regulatory framework for prompt corrective action. Beginning in the second quarter of 2020, ASB adopted the community bank leverage ratio framework, which allowed it to report only on the community bank leverage ratio, but does not change minimum capital requirements under OCC regulations. At March 31, 2021, ASB’s leverage fell below the 8.5 percent requirement to qualify for abbreviated reporting under the community bank leverage framework for 2021. The bank will begin reporting its risk-based capital ratios if the community bank leverage ratio does not meet the 2021 requirement after the two-quarter grace period.
Covered Savings Associations. On May 24, 2019, the OCC issued a final rule to allow federal savings associations with total consolidated assets of $20 billion or less, as reported by the association to the OCC on its call report as of December 31, 2017, to elect to operate as covered savings associations. A covered savings association generally has the same rights and
privileges as a national bank that has its main office situated in the same location as the home office of the covered savings association, with some exceptions. It is subject to the same duties, restrictions, penalties, liabilities, conditions, and limitations that apply to a national bank, with some exceptions, and must comply with certain rules and regulations applicable to the powers and investments of a national bank. A covered savings association is not required to comply with the lending and investment limits in HOLA and is not required to be a qualified thrift lender under HOLA. Finally, a covered savings association is not permitted to retain or engage in any subsidiaries, assets, or activities that are not permissible for a national bank. ASB has initiated a preliminary examination of the benefits and disadvantages of such an election with the preservation of being held by a unitary thrift holding company in mind. On April 1, 2021, the general counsel of the Board of Governors of the Federal Reserve System issued an opinion letter to another institution regarding the preservation of the unitary thrift holding company status. ASB is now undertaking a review of that letter. The bank has not reached a decision on the election.
FINANCIAL CONDITION
Liquidity and capital resources.
| | (dollars in millions) | (dollars in millions) | | June 30, 2020 | | December 31, 2019 | | % change | (dollars in millions) | | March 31, 2021 | | December 31, 2020 | | % change |
| Total assets | Total assets | | $ | 8,020 | | | $ | 7,233 | | | 11 | | Total assets | | $ | 8,718 | | | $ | 8,397 | | | 4 | |
| Investment securities | Investment securities | | 1,514 | | | 1,372 | | | 10 | | Investment securities | | 2,600 | | | 2,197 | | | 18 | |
| Loans held for investment, net | Loans held for investment, net | | 5,357 | | | 5,068 | | | 6 | | Loans held for investment, net | | 5,218 | | | 5,233 | | | — | |
| Deposit liabilities | Deposit liabilities | | 7,030 | | | 6,272 | | | 12 | | Deposit liabilities | | 7,745 | | | 7,387 | | | 5 | |
| Other bank borrowings | Other bank borrowings | | 125 | | | 115 | | | 9 | | Other bank borrowings | | 103 | | | 90 | | | 15 | |
As of June 30, 2020,March 31, 2021, ASB was one of Hawaii’s largest financial institutions based on assets of $8.0$8.7 billion and deposits of $7.0$7.7 billion.
As of June 30, 2020,March 31, 2021, ASB’s unused FHLB borrowing capacity was approximately $2.2$2.0 billion. As of June 30, 2020,March 31, 2021, ASB had commitments to borrowers for loans and unused lines and letters of credit of $1.9 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 sixthree months ended June 30,March 31, 2021, net cash provided by ASB’s operating activities was $17 million. Net cash used during the same period by ASB’s investing activities was $448 million, primarily due to purchases of available-for-sale securities of $782 million, purchases of held-to-maturity securities of $88 million, additions to premises and equipment of $3 million, contributions to low income housing investments of $3 million and a net increase in stock from the Federal Home Loan Bank of $1 million, partly offset by the receipt of repayments from investment securities of $205 million, proceeds from the sale of investment securities of $197 million, a net decrease in loans of $24 million and proceeds from redemption of bank owned life insurance of $3 million. Net cash provided by financing activities during this period was $362 million, primarily due to increases in deposit liabilities of $358 million and a net increase in repurchase agreements of $13 million, partly offset by a net decrease in mortgage escrow deposits of $4 million and $5 million in common stock dividends to HEI (through ASB Hawaii).
For the three months ended March 31, 2020, net cash provided by ASB’s operating activities was $29 million. Net cash used during the same period by ASB’s investing activities was $440$140 million, primarily due to purchases of available-for-sale securities of $477$159 million, a net increase in loans of $328$66 million, additions to premises and equipment of $4$2 million and contributions to low income housing investments of $2$1 million, partly offset by the receipt of repayments from investment securities of $197 million, proceeds from the sale of investment securities of $169$82 million and proceeds from the sale of low income housing investments of $7 million. Net cash provided by financing activities during this period was $740$122 million, primarily due to increases in deposit liabilities of $758$112 million and proceeds from FHLB advancesa net increase in other bank borrowings with original maturities of $30three months or less of $42 million, partly offset by a net decrease in repurchase agreements of $20 million and $28 million in common stock dividends to HEI (through ASB Hawaii).
For the six months ended June 30, 2019, net cash provided by ASB’s operating activities was $41 million. Net cash used during the same period by ASB’s investing activities was $67 million, primarily due to a net increase in loans of $174 million, additions to premises and equipment of $20 million, purchases of available-for-sale investment securitiesmortgage escrow deposits of $5 million and contributions to low income housing investments of $4 million, partly offset by the receipt of repayments from available-for-sale investment securities of $124 million, proceeds from the redemption of bank owned life insurance policies of $6 million and the receipt of held-to-maturity investment securities of $5 million. Net cash provided by financing activities during this period was $68 million, primarily due to increases in deposit liabilities of $99 million, partly offset by $33$28 million in common stock dividends to HEI (through ASB Hawaii).
ASB believes that maintaining a satisfactory regulatory capital position provides a basis for public confidence, affords protection to depositors, helps to ensure continued access to capital markets on favorable terms and provides a foundation for growth. FDIC regulations restrict the ability of financial institutions that are not well-capitalized to compete on the same terms as well-capitalized institutions, such as by offering interest rates on deposits that are significantly higher than the rates offered by competing institutions. Beginning in the second quarter of 2020, ASB has adopted the community bank leverage ratio framework and will beis required to report only its leverage ratio. As of June 30,March 31, 2021 and December 31, 2020, ASB was well-capitalized (well-capitalized ratio requirements noted in parentheses) with a Tier-1 leverage ratio of 8.3% (5.0%) and 8.4% (5.0%). As of December 31, 2019, ASB was well-capitalized with a common equity Tier-1 ratio of 13.2%, Tier-1 capital ratio of 13.2%, a Total capital ratio of 14.3% and a Tier-1 leverage ratio of 9.1%.respectively. All dividends are subject to review by the OCC and FRB and receipt of a letter from the FRB
communicating the agencies’ non-objection to the payment of any dividend ASB proposes to declare and pay to HEI (through ASB Hawaii).
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company considers interest-rate risk (a non-trading market risk) to be a significant market risk for ASB as it could potentially have material impacts on the Company’s results of operations, financial condition and liquidity. For additional quantitative and qualitative information about the Company’s market risks, see HEI’s and Hawaiian Electric’s Quantitative and Qualitative Disclosures About Market Risk in Part II, Item 7A of HEI’s 20192020 Form 10-K (pages 6974 to 71)76).
ASB’s interest-rate risk sensitivity measures as of June 30, 2020March 31, 2021 and December 31, 20192020 constitute “forward-looking statements” and were as follows:
| | Change in interest rates | Change in interest rates | | Change in NII
(gradual change in interest rates) | | | Change in EVE
(instantaneous change in interest rates) | | Change in interest rates | | Change in NII
(gradual change in interest rates) | | Change in EVE
(instantaneous change in interest rates) |
| (basis points) | (basis points) | | June 30, 2020 | | December 31, 2019 | | June 30, 2020 | | December 31, 2019 | (basis points) | | March 31, 2021 | | December 31, 2020 | | March 31, 2021 | | December 31, 2020 |
| +300 | +300 | | 5.5 | % | | 2.8 | % | | 29.0 | % | | 15.3 | % | +300 | | 5.1 | % | | 7.0 | % | | 18.5 | % | | 31.4 | % |
| +200 | +200 | | 3.8 | | | 2.1 | | | 22.6 | | | 12.2 | | +200 | | 3.5 | | | 5.0 | | | 13.5 | | | 23.9 | |
| +100 | +100 | | 2.0 | | | 1.3 | | | 13.1 | | | 7.5 | | +100 | | 1.9 | | | 2.7 | | | 7.6 | | | 14.0 | |
| -100 | -100 | | (1.6) | | | (2.0) | | | (23.5) | | | (12.7) | | -100 | | (2.1) | | | (1.9) | | | (14.6) | | | (25.2) | |
ASB’s net interest income (NII) sensitivity profile was moreless asset sensitive as of June 30, 2020March 31, 2021 as compared to December 31, 2019. The decrease2020, primarily driven by the increase in long term market rates increasedand core deposit funded investment securities purchases. The increase in market rates decreased prepayment expectations resulting in higher reinvestment into lower yieldingthe bank’s fixed-rate mortgage and mortgage-backed investment portfolios.portfolios, driving decreased asset sensitivity. In addition, the bank had significantly more cash on hand asdeployment of June 30, 2020,strong core deposit growth into new fixed-rate investment purchases further increasing assetcontributed to decreased sensitivity.
Economic value of equity (EVE) sensitivity increaseddecreased as of June 30, 2020March 31, 2021 compared to December 31, 2019 primarily due to strong growth in long2020 as the duration core deposits. In addition, the downward shift inof assets lengthened. The steepening of the yield curve led to fasterslower prepayment expectations and shortenedlengthened the duration of the fixed-rate mortgage and mortgage-backed investment portfolios.
The computation of the prospective effects of hypothetical interest rate changes on the NII sensitivity and the percentage change in EVE is based on numerous assumptions, including relative levels of market interest rates, loan prepayments, balance changes and pricing strategies, and should not be relied upon as indications of actual results. To the extent market conditions and other factors vary from the assumptions used in the simulation analysis, actual results may differ materially from the simulation results. NII sensitivity analysis measures the change in ASB’s twelve-month, pretax NII in alternate interest rate scenarios, and is intended to help management identify potential exposures in ASB’s current balance sheet and formulate appropriate strategies for managing interest rate risk. The simulation does not contemplate any actions that ASB management might undertake in response to changes in interest rates. Further, the changes in NII vary in the twelve-month simulation period and are not necessarily evenly distributed over the period. These analyses are for analytical purposes only and do not represent management’s views of future market movements, the level of future earnings or the timing of any changes in earnings within the twelve month analysis horizon. The actual impact of changes in interest rates on NII will depend on the magnitude and speed with which rates change, actual changes in ASB’s balance sheet and management’s responses to the changes in interest rates.
Item 4. Controls and Procedures
HEI:
Disclosure Controls and Procedures
The Company maintains a set of disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and reported within the time periods specified in SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Exchange Act. Management, including the Company’s Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective, as of the end of the period covered by this report, at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting during the secondfirst quarter of 20202021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Hawaiian Electric:
Disclosure Controls and Procedures
Hawaiian Electric maintains a set of disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed by Hawaiian Electric in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC’s rules and forms, and that such information is accumulated and communicated to Hawaiian Electric’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
An evaluation was performed under the supervision and with the participation of Hawaiian Electric’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Hawaiian Electric’s disclosure controls and procedures, as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Exchange Act. Management, including Hawaiian Electric’s Chief Executive Officer and Chief Financial Officer, concluded that Hawaiian Electric’s disclosure controls and procedures were effective, as of the end of the period covered by this report, at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting during the secondfirst quarter of 20202021 that have materially affected, or are reasonably likely to materially affect, Hawaiian Electric’s internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The descriptions of legal proceedings (including judicial proceedings and proceedings before the PUC and environmental and other administrative agencies) in HEI’s and Hawaiian Electric’s 20192020 Form 10-K (see “Part I. Item 3. Legal Proceedings” and proceedings referred to therein) and this Form 10-Q (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Notes 3 and 4 of the Condensed Consolidated Financial Statements) are incorporated by reference in this Item 1. With regard to any pending legal proceeding, alternative dispute resolution, such as mediation or settlement, may be pursued where appropriate, with such efforts typically maintained in confidence unless and until a resolution is achieved. Certain HEI subsidiaries (including Hawaiian Electric and its subsidiaries, ASB and Pacific Current and its subsidiaries) may also be involved in ordinary routine PUC proceedings, environmental proceedings and litigation incidental to their respective businesses.
Item 1A. Risk Factors
Our business, financial condition, liquidity and results of operations could be adversely impacted by the ongoing effects of the COVID-19 pandemic. The COVID-19 pandemic has affected nearly all countries and all 50 states within the United States, including Hawaii. Due to the numerous country, state, city and local jurisdictions that have imposed “shelter-in-place” orders, including travel restrictions that directly impact the Hawaii economy, economic activity in the state has been adversely impacted. As a result of the swift economic contraction and reduction in tourism that has occurred in the state to date, the Utilities expect that demand for electricity will remain depressed and the provision for bad debt and write-offs at the Utilities will remain at an elevated level and impact liquidity as long as social-distancing measures that severely restrict economic activity remain in place. In the second quarter of 2020, overall kWh sales have declined 7% as compared to the first quarter of 2020. While the Utilities expect to recover the difference between PUC approved target revenues and recorded adjusted revenues (regardless of the level of kWh sales) through the revenue balancing account under the decoupling mechanism based on estimated sales, starting on June 1st of the following year, the collection occurs on a lagged basis. If the difference to be collected, which needs to be financed in the interim, exceeds the Utilities’ current liquidity sources, there can be no assurance that the Utilities will be able to secure additional liquidity sources at a reasonable cost, or at all, or if the difference becomes so large that it would result in a significant increase in customer bills, whether the PUC will allow recovery of such difference through the revenue balancing account. In addition to lower and lagged collections, the COVID-19 pandemic has also resulted in higher costs and expenses. While the Utilities have been granted deferral treatment of certain COVID-19 related costs, such as higher bad debt expense, non-collection of late payment fees, higher financing costs, sequestration costs for mission-critical employees and other costs and expenses,there can be no assurance that the PUC will grant recovery of such costs, and such costs could be material. Additionally, in light of the significant impact that economic conditions have had on residents and businesses in the state, a stipulated settlement between Hawaiian Electric and the Division of Consumer Advocacy of the Department of Commerce and Consumer Affairs, reflecting no base rate increase, was submitted in the Hawaiian Electric 2020 test year rate case to the PUC for approval. While the Utilities intend to offset the no base rate increase with corresponding cost decreases, such reduction of cost is not assured and, therefore, the inability to achieve targeted cost savings could adversely affect the Utilities’ results of operations.
ASB’s net interest income has also been adversely impacted by lower interest rates across the curve, which are influenced by economic conditions. Accordingly, an extended economic slowdown could have a significant continuing impact on its net interest income and its provision for credit losses.
While the Company believes that it has sufficient liquidity to operate through this crisis, there can be no assurance that sufficient liquidity will be available if the slowdown in economic activity continues for an extended period of time.
The Company is closely monitoring the situation and taking appropriate actions to operate its businesses and protect its workforce while serving customers and the community, but an extended slowdown of economic activity could have a material adverse effect on the Company. These effects could include, but are not limited to:
•Disruptions or restrictions on employees’ ability to work effectively due to illness, travel restrictions, quarantines, shelter-in-place orders or other limitations.
•The inability of customers, IPPs, contractors, suppliers, creditors and other business partners to fulfill their obligations. For example, several IPPs have declared force majeure as a protective measure, citing the pandemic, which could potentially result in significant project delays.
•Disruption and volatility in the global credit and financial markets, which may increase the cost of capital and could adversely impact access to capital for the Company and its customers and suppliers.
•Further deterioration in economic conditions, or an extension of slow economic activity, which negatively impacts the Company’s earnings and liquidity, could result in an impairment in the carrying value of goodwill or long-lived assets.
•Actions taken or may be taken, or decisions made or may be made by the Company, as a consequence of the COVID-19 pandemic, may result in legal claims or litigation against the Company.
Due to the unprecedented nature of the pandemic and the significant uncertainty it creates, including the unknown severity and duration of the pandemic and the resulting impact it may have on Hawaii businesses and residents of the state, the Company is unable to predict the full extent of the future impact on the Company’s businesses at this time, and those impacts could have a material adverse effect on the Company’s results of operations, financial position, and cash flows.
The Paycheck Protection Program is a guaranteed loan program and is subject to federal government regulations. The Paycheck Protection Program (PPP), established under the CARES Act and administered by the United States Small Business Administration (SBA), was created to provide a direct incentive for small businesses to keep their workers on the payroll as a result of the COVID-19 crisis. The Paycheck Protection Program Flexibility Act was signed into law on June 5, 2020, which amended some of the prior rules and guidelines of the CARES Act.Loans issued through the PPP are 100% federally guaranteed and have a maturity of 2-5 years, depending on when the loan was made, at a fixed interest rate of 1%. Loan payments will be deferred until the earlier of (a) the date that the forgiven amount is remitted to the lender by the SBA; or (b) 10 months from the date the covered period ends. The SBA will forgive all loan amounts to a particular small business if such small business is compliant with the terms and conditions of the PPP. Small businesses have the earlier of 24 weeks from disbursement of the loan or December 31, 2020 to incur allowable expenses such as payroll costs, interest on mortgages, rent and utility expenses that would be covered by the loan forgiveness rules, with 60% of the loan forgiveness needing to be for payroll costs. There is a partial forgiveness if less than 60% of the loan disbursement was spent on payroll costs. Employers will have until December 31, 2020 to restore their workforce. Lenders will process and approve the PPP loans under delegated authority of the SBA. The Lender assumes all obligations, responsibilities, and requirements associated with delegated processing of covered loans made under PPP. Any change in the terms or conditions stated in the loan authorization shall be made in accordance with PPP loan program requirements. For purposes of making covered loans to an eligible recipient under PPP, the lender is responsible, to the extent set forth in the PPP loan program requirements, for all decisions concerning eligibility of a borrower for a covered loan. Failure to comply with PPP loan program requirements may result in loans losing its 100% federally guaranteed status. In addition, in the event loan proceeds are not used in accordance with PPP loan program requirements, the covered loan will not be forgiven, resulting in ASB carrying the loan on its balance sheet longer than anticipated. Through June 30, 2020, ASB has secured more than $370 million in PPP loans, and due to changes surrounding certain program requirements resulting from the rapid rollout of the program, there may be a risk that certain loans may be ultimately deemed non-compliant, in which case ASB would be subject to the credit risk of those loans.
For additional information about Risk Factors, see pages 1718 to 2830 of HEI’s and Hawaiian Electric’s 20192020 Form 10-K and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures about Market Risk” and the Condensed Consolidated Financial Statements herein. Also, see “Cautionary Note Regarding Forward-Looking Statements” on pages iv through vi herein.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Purchases of HEI common shares were made on the open market during the secondfirst quarter of 20202021 to satisfy the requirements of certain plans as follows:
ISSUER PURCHASES OF EQUITY SECURITIES
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period* | |
Total Number of Shares Purchased ** | |
Average
Price Paid
per Share ** | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs |
| April 1 to 30, 2020 | | 24,160 | | $40.91 | | — | | NA |
| May 1 to 31, 2020 | | 24,677 | | $37.87 | | — | | NA |
| June 1 to 30, 2020 | | 187,389 | | $39.83 | | — | | NA |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period* | |
Total Number of Shares Purchased ** | |
Average
Price Paid
per Share ** | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs |
| January 1 to 31, 2021 | | 18,229 | | $34.08 | | — | | NA |
| February 1 to 28, 2021 | | 27,571 | | $34.29 | | — | | NA |
| March 1 to 31, 2021 | | 179,276 | | $38.47 | | — | | NA |
NA Not applicable.
* Trades (total number of shares purchased) are reflected in the month in which the order is placed.
**The purchases were made to satisfy the requirements of the DRIP, the HEIRSP and the ASB 401(k) Plan for shares purchased for cash or by the reinvestment of dividends by participants under those plans and none of the purchases were made under publicly announced repurchase plans or programs. Average prices per share are calculated exclusive of any commissions payable to the brokers making the purchases for the DRIP, the HEIRSP and the ASB 401(k) Plan. Of the “Total number of shares purchased,” 12,01112,139 of the 24,16018,229 shares, 12,26016,288 of the 24,67727,571 shares and 155,245154,919 of the 187,389179,276 shares were purchased
for the DRIP; 10,1884,740 of the 24,16018,229 shares, 9,8889,176 of the 24,67727,571 shares and 27,49719,319 of the 187,389179,276 shares were purchased for the HEIRSP; and the remainder was purchased for the ASB 401(k) Plan. The repurchased shares were issued for the accounts of the participants under registration statements registering the shares issued under these plans.
Item 6. Exhibits
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| | HEI’s AmendedForm of Restricted Stock Unit Agreement, pursuant to 2010 Equity and Restated Articles of Incorporation effective June 2, 2020Incentive Plan, as amended and restated February 5, 2021. |
| | |
| | HEI’s Amended and Restated Bylaws,effective June 2, 2020 (incorporated by reference to Exhibit 3.1 to HEI’s Current Report on Form 8-K dated June 2, 2020, File no. 1-8503) |
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| | Cooperation Agreement, dated asPreferability letter of February 12, 2020 by and between Hawaiian Electric Industries, Inc. and ValueAct Spring Master Fund , L.P. and certain of its affiliates (incorporated by reference to Exhibit 10.1 to HEI’s Current Report on Form 8-K dated February 12, 2020, File no.1-8503) |
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| | Joinder to Cooperation Agreement, dated July 22, 2020, by and between Hawaiian Electric Industries, Inc., and Inclusive Capital Partners, L.P. and ValueAct Capital Management, L.P.Deloitte & Touche LLP, Independent Registered Public Accounting Firm |
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| | Certification Pursuant to Rule 13a-14 promulgated under the Securities Exchange Act of 1934 of Constance H. Lau (HEI Chief Executive Officer) |
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| | Certification Pursuant to Rule 13a-14 promulgated under the Securities Exchange Act of 1934 of Gregory C. Hazelton (HEI Chief Financial Officer) |
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| | HEI Certification Pursuant to 18 U.S.C. Section 1350 |
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| HEI Exhibit 101.INS | | XBRL Instance Document - the instance document does not appear on the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
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| HEI Exhibit 101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
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| HEI Exhibit 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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| HEI Exhibit 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
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| HEI Exhibit 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
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| HEI Exhibit 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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| HEI Exhibit 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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| | First Amendment dated June 9, 2020 to Supply Contract for Low Sulfur Fuel Oil, High Sulfur Fuel Oil, No. 2 Diesel, and Ultra-Low Sulfur Diesel by and between Hawaiian Electric, Hawaii Electric Light, and Maui Electric and PAR Hawaii Refining, LLC dated January 21, 2019 (certain confidential information has been omitted)Preferability letter of Deloitte & Touche LLP, Independent Registered Public Accounting Firm. See Exhibit 18.1 herein |
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| | Certification Pursuant to Rule 13a-14 promulgated under the Securities Exchange Act of 1934 of Scott W. H. Seu (Hawaiian Electric Chief Executive Officer) |
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| | Certification Pursuant to Rule 13a-14 promulgated under the Securities Exchange Act of 1934 of Tayne S. Y. Sekimura (Hawaiian Electric Chief Financial Officer) |
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| | Hawaiian Electric Certification Pursuant to 18 U.S.C. Section 1350 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized. The signature of the undersigned companies shall be deemed to relate only to matters having reference to such companies and any subsidiaries thereof.
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| HAWAIIAN ELECTRIC INDUSTRIES, INC. | | | HAWAIIAN ELECTRIC COMPANY, INC. | |
| (Registrant) | | | (Registrant) | |
| | | | | |
| | | | |
| By | /s/ Constance H. Lau | | By | /s/ Scott W. H. Seu |
| | Constance H. Lau | | | Scott W. H. Seu |
| | President and Chief Executive Officer | | | President and Chief Executive Officer |
| | (Principal Executive Officer of HEI) | | | (Principal Executive Officer of Hawaiian Electric) |
| | | |
| | | |
| | | | | |
| By | /s/ Gregory C. Hazelton | | By | /s/ Tayne S. Y. Sekimura |
| | Gregory C. Hazelton | | | Tayne S. Y. Sekimura |
| | Executive Vice President | | | Senior Vice President |
| | and Chief Financial Officer | | | and Chief Financial Officer |
| | (Principal Financial Officer of HEI) | | | (Principal Financial Officer of Hawaiian Electric) |
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Date: August 6, 2020May 10, 2021 | | | Date: August 6, 2020May 10, 2021 | |