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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
ý☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20172020
OR
o☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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| Exact Name of Registrant as | | Commission | | I.R.S. Employer |
| 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. – 900 Richards1001 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)
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| 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
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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.
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Hawaiian Electric Industries, Inc. Yes x No o | Yes | ☒ | No | ☐ | | Hawaiian Electric Company, Inc. | Yesx | ☒ | Noo | ☐ |
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). |
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Hawaiian Electric Industries, Inc. Yes x No o | Yes | ☒ | No | ☐ | | Hawaiian Electric Company, Inc. | Yesx | ☒ | Noo | ☐ |
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.
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| Hawaiian Electric Industries, Inc.: | | Large accelerated filer x
| | Hawaiian Electric Company, Inc.: | |
Large accelerated filero |
| ☒ | Accelerated filer o
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| | Non-accelerated filer o
| | | | Non-accelerated filer x
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| | (Do not check if a smaller reporting company) | | | | (Do not check if a smaller reporting company) |
| | Smaller reporting companyo | ☐ | Large accelerated filer | ☐ | Smaller reporting companyo | ☐ |
| Accelerated filer | ☐ | Emerging growth companyo | ☐ | Accelerated filer | ☐ | Emerging growth companyo | ☐ |
| 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.
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Hawaiian Electric Industries, Inc.o | ☐ | | Hawaiian Electric Company, Inc.o | ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). |
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Hawaiian Electric Industries, Inc. Yes o No x | Yes | ☐ | No | ☒ | | Hawaiian Electric Company, Inc. | Yeso | ☐ | Nox | ☒ |
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.
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| Class of Common Stock | | Outstanding October 27, 201723, 2020 |
| Hawaiian Electric Industries, Inc. (Without Par Value) | | 108,785,978 109,181,124 | | Shares |
| Hawaiian Electric Company, Inc. ($6-2/3 Par Value) | | 16,019,785 17,048,783 | | 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 September 30, 20172020
TABLE OF CONTENTS
Hawaiian Electric Industries, Inc. and Subsidiaries
Hawaiian Electric Company, Inc. and Subsidiaries
Form 10-Q—Quarter ended September 30, 20172020
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| 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 |
| | |
TermsAOCI | | Definitions |
AES Hawaii | | AES Hawaii, Inc. |
AFUDC | | Allowance for funds used during construction |
AOCI | | Accumulated other comprehensive income/(loss) |
| 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 | | |
| ASU | | Accounting Standards Update |
CIP CT-1CARES Act | | Campbell Industrial Park 110 MW combustion turbine No. 1The Coronavirus Aid, Relief, and Economic Security Act enacted March 27, 2020 |
CompanyCBRE | | 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.; HEI Properties, Inc. (dissolved in 2015Pacific Current, LLC and wound up in 2017);its subsidiaries, Hamakua Holdings, LLC (and its subsidiary, Hamakua Energy, LLC), Mauo Holdings, LLC (and its subsidiary, Mauo, LLC) and Ka‘ie‘ie Waho Company, LLC; and The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp.); and Pacific Current, LLC and its subsidiary, Hamakua Holdings, LLC and its subsidiary, Hamakua Energy, LLC |
| Consumer Advocate | | Division of Consumer Advocacy, Department of Commerce and Consumer Affairs of the State of Hawaii |
CBRED&O | | Community-based renewable energy |
DER | | Distributed energy resources |
D&O | | Decision and order from the PUC |
DGDER | | Distributed generationenergy 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 |
DSM | | Demand-side management |
ECACECRC | | Energy cost adjustmentrecovery clause |
| EIP | | 2010 Equity and Incentive Plan, as amended and restated |
| EPA | | Environmental Protection Agency — federal |
| EPS | | Earnings per share |
| ERP/EAM | | Enterprise Resource Planning/Enterprise Asset Management |
EVEESG | | Environmental, Social & Governance |
| 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 |
GLOSSARY OF TERMS, continued
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| GNMA | | |
Terms | | Definitions |
GNMA | | Government National Mortgage Association |
| Hamakua Energy | | Hamakua Energy, LLC, an indirect subsidiary of HEI |
| Hawaii Electric Light | | Hawaii Electric Light Company, Inc., an electric utility subsidiary of Hawaiian Electric Company, Inc. |
GLOSSARY OF TERMS, continued
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| 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 HECO Capital Trust III (unconsolidated financing subsidiary),and Renewable Hawaii, Inc. and Uluwehiokama Biofuels Corp. was dissolved effective as of July 14, 2020 |
HEPHEI | | 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. |
HEI | | Hawaiian Electric Industries, Inc., direct parent company of Hawaiian Electric Company, Inc., ASB Hawaii, Inc., HEI Properties, Inc. (dissolved in 2015Pacific Current, LLC and wound up in 2017), The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp.) and Pacific Current, LLC |
| 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. |
KWHkWh | | Kilowatthour/s (as applicable) |
LNGLTIP | | Liquefied natural gas |
LTIP | | Long-term incentive plan |
| Maui Electric | | Maui Electric Company, Limited, an electric utility subsidiary of Hawaiian Electric Company, Inc. |
MergerMauo | | As provided in the Merger Agreement (see below), merger of NEE Acquisition Sub II, Inc. with and into HEI, with HEI surviving, and then mergerMauo, LLC, an indirect subsidiary of HEI with and into NEE Acquisition Sub I, LLC, with NEE Acquisition Sub I, LLC surviving as a wholly owned subsidiary of NextEra Energy, Inc. |
Merger AgreementMPIR | | Agreement and Plan of Merger by and among HEI, NextEra Energy, Inc., NEE Acquisition Sub II, Inc. and NEE Acquisition Sub I, LLC, dated December 3, 2014 and terminated July 16, 2016 |
MPIR | | Major Project Interim Recovery |
MWMSR | | Mortgage servicing right |
| MW | | Megawatt/s (as applicable) |
NEENII | | NextEra Energy, Inc. |
NEM | | Net energy metering |
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 |
PPAPacific Current | | Pacific Current, LLC, a wholly owned subsidiary of HEI and parent company of Hamakua Holdings, LLC, Mauo Holdings, LLC, and 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 |
PSIPsPUC | | Power Supply Improvement Plans |
PUC | | Public Utilities Commission of the State of Hawaii |
| PV | | Photovoltaic |
| RAM | | Rate adjustment mechanism |
| RBA | | Revenue balancing account |
| RFP | | Request for proposals |
| ROACE | | Return on average common equity |
| RORB | | Return on rate base |
| RPS | | Renewable portfolio standards |
| SEC | | Securities and Exchange Commission |
| See | | Means the referenced material is incorporated by reference |
Spin-OffTax Act | | The previously planned distribution2017 Tax Cuts and Jobs Act (H.R. 1, An Act to HEI shareholders of allprovide for reconciliation pursuant to titles II and V of the common stock of ASB Hawaii immediately prior toconcurrent resolution on the Merger, which was terminatedbudget for fiscal year 2018) |
| TDR | | Troubled debt restructuring |
Trust III | | HECO Capital Trust III |
| 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.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; and the potential impacts of global and local developments (including global economic conditions and uncertainties; the effects of the United Kingdom’s referendum to withdraw from the European Union; unrest; the conflict in Syria;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; terrorist acts by ISISand 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;
•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 could delay the construction, increase project costs or others; potential conflictpreclude the completion, of third-party or crisis with North Korea;Utility projects that are required to meet electricity demand, reliability objectives and potential pandemics);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, andtrade policy and regulationtariffs, energy and environmental policy, and other policy and regulatory changes advanced or proposed by President Trump and his administration;administration, or resulting from the outcome of the U.S. presidential election;
•weather, and natural disasters (e.g., hurricanes, earthquakes, tsunamis, lightning strikes, lava flows and the potentialincreasing effects of climate change, such as more severe storms, flooding, droughts, heat waves, and rising sea levels), and wildfires, including their impact on the Company'sCompany’s and Utilities'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;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;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 impacts of the termination of the Merger with NextEra Energy, Inc. (NEE) and the resulting loss of NEE’s resources, expertise and support (e.g., financial and technological), including potentially higher costs and longer lead times to increase levels of renewable energy and to complete projects like Enterprise Resource Planning/Enterprise Asset Management (ERP/EAM) and smart grids, and a higher cost of capital;
•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 and the impacts of implementation of the renewable energy proposals on future costs of electricity;
•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, (PSIPs), 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, inthe PUC’s April 2014 statement of its April 2014 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;
•capacity and supply constraints or difficulties, especially if generating units (utility-owned or IPP-owned) fail or measures such as demand-side management, (DSM), 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 adjustmentrecovery clauses (ECACs)(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 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'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;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;
new technological developments,competitors such as the commercial development of energy storage and microgrids that could affect the operations of the Utilities;and banking through alternative channels;
cyber security•cybersecurity risks and the potential for cyber incidents, including potential incidents at HEI, ASBits third-party vendors, and the Utilitiesits subsidiaries (including at ASB branches and electric utility plants) and incidents at data processing centers they use,used, to the extent not prevented by intrusion detection and prevention systems, anti-virus software, firewalls and other general information technologyIT controls;
•failure to achieve cost savings consistent with 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 of Hawaiian Electric in its 2020 test year rate case;
•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 ability of the Utilities to recover increasing costs and earn a reasonable return on capital investments not covered by RAMs;
•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 the Utilities and ASB,its subsidiaries, including the adoption of new U.S. accounting standards, the potential discontinuance of regulatory accounting andrelated to PBR or other regulatory changes, the effects of potentially required consolidation of variable interest entities (VIEs), or required capitalfinance lease or on-balance-sheet operating lease accounting for PPAs with IPPs;
changes•downgrades by securities rating agencies in their ratings of the securities of HEI and Hawaiian Electric and thetheir 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 loancredit losses, allowance for loancredit 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 the Utilities and ASB;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);
•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 (SEC).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 September 30 | | Nine months ended September 30 | | Three months ended September 30 | | Nine months ended September 30 |
| (in thousands, except per share amounts) | | 2017 | | 2016 | | 2017 | | 2016 | (in thousands, except per share amounts) | | 2020 | | 2019 | | 2020 | | 2019 |
| Revenues | | |
| | |
| | |
| | |
| Revenues | | | | | | | | |
| Electric utility | | $ | 598,769 |
| | $ | 572,253 |
| | $ | 1,674,255 |
| | $ | 1,549,700 |
| Electric utility | | $ | 562,568 | | | $ | 688,330 | | | $ | 1,694,225 | | | $ | 1,900,609 | |
| Bank | | 74,289 |
| | 73,708 |
| | 222,474 |
| | 213,297 |
| Bank | | 78,644 | | | 82,548 | | | 233,096 | | | 247,287 | |
| Other | | 127 |
| | 94 |
| | 299 |
| | 262 |
| Other | | 215 | | | 4 | | | 237 | | | 86 | |
| Total revenues | | 673,185 |
| | 646,055 |
| | 1,897,028 |
| | 1,763,259 |
| Total revenues | | 641,427 | | | 770,882 | | | 1,927,558 | | | 2,147,982 | |
| Expenses | | |
| | |
| | |
| | |
| Expenses | | | | | | | | |
| Electric utility | | 511,693 |
| | 482,441 |
| | 1,483,194 |
| | 1,333,876 |
| Electric utility | | 474,050 | | | 616,537 | | | 1,493,948 | | | 1,716,562 | |
| Bank | | 47,525 |
| | 50,981 |
| | 146,754 |
| | 150,752 |
| Bank | | 63,144 | | | 54,240 | | | 189,700 | | | 171,605 | |
| Other | | 4,422 |
| | 7,191 |
| | 13,777 |
| | 18,883 |
| Other | | 4,672 | | | 3,450 | | | 13,091 | | | 12,589 | |
| Total expenses | | 563,640 |
| | 540,613 |
| | 1,643,725 |
| | 1,503,511 |
| Total expenses | | 541,866 | | | 674,227 | | | 1,696,739 | | | 1,900,756 | |
| Operating income (loss) | | |
| | |
| | |
| | |
| Operating income (loss) | | | | | | | | |
| Electric utility | | 87,076 |
| | 89,812 |
| | 191,061 |
| | 215,824 |
| Electric utility | | 88,518 | | | 71,793 | | | 200,277 | | | 184,047 | |
| Bank | | 26,764 |
| | 22,727 |
| | 75,720 |
| | 62,545 |
| Bank | | 15,500 | | | 28,308 | | | 43,396 | | | 75,682 | |
| Other | | (4,295 | ) | | (7,097 | ) | | (13,478 | ) | | (18,621 | ) | Other | | (4,457) | | | (3,446) | | | (12,854) | | | (12,503) | |
| Total operating income | | 109,545 |
| | 105,442 |
| | 253,303 |
| | 259,748 |
| Total operating income | | 99,561 | | | 96,655 | | | 230,819 | | | 247,226 | |
| Merger termination fee | | — |
| | 90,000 |
| | — |
| | 90,000 |
| |
| Retirement defined benefits expense—other than service costs | | Retirement defined benefits expense—other than service costs | | (1,102) | | | (648) | | | (2,970) | | | (2,172) | |
| Interest expense, net—other than on deposit liabilities and other bank borrowings | | (19,227 | ) | | (19,365 | ) | | (59,235 | ) | | (56,792 | ) | Interest expense, net—other than on deposit liabilities and other bank borrowings | | (22,086) | | | (22,425) | | | (66,474) | | | (69,081) | |
| Allowance for borrowed funds used during construction | | 1,339 |
| | 854 |
| | 3,371 |
| | 2,276 |
| Allowance for borrowed funds used during construction | | 801 | | | 1,208 | | | 2,241 | | | 3,465 | |
| Allowance for equity funds used during construction | | 3,482 |
| | 2,274 |
| | 8,908 |
| | 6,010 |
| Allowance for equity funds used during construction | | 2,347 | | | 3,250 | | | 6,556 | | | 9,335 | |
| Gain on sale of investment securities, net | | Gain on sale of investment securities, net | | 0 | | | 653 | | | 9,275 | | | 653 | |
| Income before income taxes | | 95,139 |
| | 179,205 |
| | 206,347 |
| | 301,242 |
| Income before income taxes | | 79,521 | | | 78,693 | | | 179,447 | | | 189,426 | |
| Income taxes | | 34,595 |
| | 51,592 |
| | 72,003 |
| | 96,203 |
| Income taxes | | 14,018 | | | 14,803 | | | 30,691 | | | 36,390 | |
| Net income | | 60,544 |
| | 127,613 |
| | 134,344 |
| | 205,039 |
| Net income | | 65,503 | | | 63,890 | | | 148,756 | | | 153,036 | |
| Preferred stock dividends of subsidiaries | | 471 |
| | 471 |
| | 1,417 |
| | 1,417 |
| Preferred stock dividends of subsidiaries | | 471 | | | 471 | | | 1,417 | | | 1,417 | |
| Net income for common stock | | $ | 60,073 |
| | $ | 127,142 |
| | $ | 132,927 |
| | $ | 203,622 |
| Net income for common stock | | $ | 65,032 | | | $ | 63,419 | | | $ | 147,339 | | | $ | 151,619 | |
| Basic earnings per common share | | $ | 0.55 |
| | $ | 1.17 |
| | $ | 1.22 |
| | $ | 1.89 |
| Basic earnings per common share | | $ | 0.60 | | | $ | 0.58 | | | $ | 1.35 | | | $ | 1.39 | |
| Diluted earnings per common share | | $ | 0.55 |
| | $ | 1.17 |
| | $ | 1.22 |
| | $ | 1.88 |
| Diluted earnings per common share | | $ | 0.59 | | | $ | 0.58 | | | $ | 1.35 | | | $ | 1.39 | |
| Dividends declared per common share | | $ | 0.31 |
| | $ | 0.31 |
| | $ | 0.93 |
| | $ | 0.93 |
| |
| | Weighted-average number of common shares outstanding | | 108,786 |
| | 108,268 |
| | 108,737 |
| | 107,951 |
| Weighted-average number of common shares outstanding | | 109,181 | | | 108,973 | | | 109,126 | | | 108,941 | |
| Net effect of potentially dilutive shares | | 79 |
| | 204 |
| | 172 |
| | 220 |
| Net effect of potentially dilutive shares | | 155 | | | 390 | | | 261 | | | 437 | |
| Weighted-average shares assuming dilution | | 108,865 |
| | 108,472 |
| | 108,909 |
| | 108,171 |
| Weighted-average shares assuming dilution | | 109,336 | | | 109,363 | | | 109,387 | | | 109,378 | |
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 20162019 Form 10-K.
Hawaiian Electric Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (unaudited)
|
| | | | | | | | | | | | | | | | |
| | | Three months ended September 30 | | Nine months ended September 30 |
| (in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
| Net income for common stock | | $ | 60,073 |
| | $ | 127,142 |
| | $ | 132,927 |
| | $ | 203,622 |
|
| Other comprehensive income (loss), net of taxes: | | |
| | |
| | |
| | |
|
| Net unrealized gains (losses) on available-for-sale investment securities: | | |
| | |
| | |
| | |
|
| Net unrealized gains (losses) on available-for-sale investment securities arising during the period, net of (taxes) benefits of $(137), $1,417, $(1,619) and $(5,413), respectively | | 208 |
| | (2,147 | ) | | 2,452 |
| | 8,197 |
|
| Reclassification adjustment for net realized gains included in net income, net of taxes of nil, nil, nil and $238, respectively | | — |
| | — |
| | — |
| | (360 | ) |
| Derivatives qualifying as cash flow hedges: | | |
| | |
| | |
| | |
|
| Effective portion of foreign currency hedge net unrealized gains arising during the period, net of taxes of nil, $205, nil and $368, respectively | | — |
| | 321 |
| | — |
| | 578 |
|
| Reclassification adjustment to net income, net of (taxes) benefits of nil, $(110), $289 and $(75), respectively | | — |
| | (173 | ) | | 454 |
| | (119 | ) |
| 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 of $2,516, $2,324, $7,526 and $6,943, respectively | | 3,942 |
| | 3,641 |
| | 11,793 |
| | 10,877 |
|
| Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes of $2,290, $2,109, $6,872 and $6,327, respectively | | (3,596 | ) | | (3,311 | ) | | (10,790 | ) | | (9,934 | ) |
| Other comprehensive income (loss), net of taxes | | 554 |
| | (1,669 | ) | | 3,909 |
| | 9,239 |
|
| Comprehensive income attributable to Hawaiian Electric Industries, Inc. | | $ | 60,627 |
| | $ | 125,473 |
| | $ | 136,836 |
| | $ | 212,861 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended September 30 | | Nine months ended September 30 |
| (in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
| Net income for common stock | | $ | 65,032 | | | $ | 63,419 | | | $ | 147,339 | | | $ | 151,619 | |
| 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 arising during the period, net of taxes of $360, $1,557, $7,836 and $10,194, respectively | | 984 | | | 4,253 | | | 21,405 | | | 27,846 | |
| Reclassification adjustment for net realized gains included in net income, net of taxes of NaN, (175), $(599) and (175), respectively | | 0 | | | (478) | | | (1,638) | | | (478) | |
| Derivatives qualifying as cash flow hedges: | | | | | | | | |
| Unrealized interest rate hedging losses arising during the period, net of taxes of $(51), $(208), $(739) and $(577), respectively | | (147) | | | (600) | | | (2,129) | | | (1,663) | |
| | | | | | | | |
| 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 $2,202, $741, $6,169 and $2,482, respectively | | 6,324 | | | 2,615 | | | 17,720 | | | 7,621 | |
| Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes of $(1,985), $(865), $(5,563) and $(2,459), respectively | | (5,721) | | | (2,493) | | | (16,038) | | | (7,089) | |
| Other comprehensive income, net of taxes | | 1,440 | | | 3,297 | | | 19,320 | | | 26,237 | |
| Comprehensive income attributable to Hawaiian Electric Industries, Inc. | | $ | 66,472 | | | $ | 66,716 | | | $ | 166,659 | | | $ | 177,856 | |
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 20162019 Form 10-K.
Hawaiian Electric Industries, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (unaudited)
| | | (dollars in thousands) | | September 30, 2017 | | December 31, 2016 | (dollars in thousands) | | September 30, 2020 | | December 31, 2019 |
| Assets | | |
| | |
| Assets | | | | |
| Cash and cash equivalents | | $ | 202,173 |
| | $ | 278,452 |
| Cash and cash equivalents | | $ | 193,126 | | | $ | 196,813 | |
| Restricted cash | | Restricted cash | | 21,881 | | | 30,872 | |
| Accounts receivable and unbilled revenues, net | | 264,426 |
| | 237,950 |
| Accounts receivable and unbilled revenues, net | | 276,299 | | | 300,794 | |
| Available-for-sale investment securities, at fair value | | 1,320,110 |
| | 1,105,182 |
| Available-for-sale investment securities, at fair value | | 1,747,658 | | | 1,232,826 | |
| Held-to-maturity investment securities, at amortized cost | | Held-to-maturity investment securities, at amortized cost | | 133,858 | | | 139,451 | |
| Stock in Federal Home Loan Bank, at cost | | 9,706 |
| | 11,218 |
| Stock in Federal Home Loan Bank, at cost | | 10,920 | | | 8,434 | |
| Loans receivable held for investment, net | | 4,623,234 |
| | 4,683,160 |
| |
| Loans held for investment, net | | Loans held for investment, net | | 5,389,443 | | | 5,067,821 | |
| Loans held for sale, at lower of cost or fair value | | 15,728 |
| | 18,817 |
| Loans held for sale, at lower of cost or fair value | | 16,806 | | | 12,286 | |
| Property, plant and equipment, net of accumulated depreciation of $2,537,320 and $2,444,348 at September 30, 2017 and December 31, 2016, respectively | | 4,813,875 |
| | 4,603,465 |
| |
| Property, plant and equipment, net of accumulated depreciation of $2,873,348 and $2,765,569 at September 30, 2020 and December 31, 2019, respectively | | Property, plant and equipment, net of accumulated depreciation of $2,873,348 and $2,765,569 at September 30, 2020 and December 31, 2019, respectively | | 5,232,177 | | | 5,109,628 | |
| Operating lease right-of-use assets | | Operating lease right-of-use assets | | 169,062 | | | 199,171 | |
| Regulatory assets | | 936,964 |
| | 957,451 |
| Regulatory assets | | 677,683 | | | 715,080 | |
| Other | | 474,444 |
| | 447,621 |
| Other | | 591,258 | | | 649,885 | |
| Goodwill | | 82,190 |
| | 82,190 |
| Goodwill | | 82,190 | | | 82,190 | |
| Total assets | | $ | 12,742,850 |
| | $ | 12,425,506 |
| Total assets | | $ | 14,542,361 | | | $ | 13,745,251 | |
| Liabilities and shareholders’ equity | | |
| | |
| Liabilities and shareholders’ equity | | | | |
| Liabilities | | |
| | |
| Liabilities | | | | |
| Accounts payable | | $ | 160,897 |
| | $ | 143,279 |
| Accounts payable | | $ | 158,292 | | | $ | 220,633 | |
| Interest and dividends payable | | 26,484 |
| | 25,225 |
| Interest and dividends payable | | 34,271 | | | 24,941 | |
| Deposit liabilities | | 5,752,326 |
| | 5,548,929 |
| Deposit liabilities | | 7,038,137 | | | 6,271,902 | |
| Short-term borrowings—other than bank | | 24,498 |
| | — |
| Short-term borrowings—other than bank | | 137,783 | | | 185,710 | |
| Other bank borrowings | | 153,552 |
| | 192,618 |
| Other bank borrowings | | 151,875 | | | 115,110 | |
| Long-term debt, net—other than bank | | 1,618,446 |
| | 1,619,019 |
| Long-term debt, net—other than bank | | 2,068,852 | | | 1,964,365 | |
| Deferred income taxes | | 756,814 |
| | 728,806 |
| Deferred income taxes | | 376,356 | | | 379,324 | |
| Operating lease liabilities | | Operating lease liabilities | | 176,258 | | | 199,571 | |
| Regulatory liabilities | | 466,216 |
| | 410,693 |
| Regulatory liabilities | | 967,846 | | | 972,310 | |
| Contributions in aid of construction | | 565,118 |
| | 543,525 |
| |
| | Defined benefit pension and other postretirement benefit plans liability | | 620,788 |
| | 638,854 |
| Defined benefit pension and other postretirement benefit plans liability | | 488,314 | | | 513,287 | |
| Other | | 460,396 |
| | 473,512 |
| Other | | 586,853 | | | 583,545 | |
| Total liabilities | | 10,605,535 |
| | 10,324,460 |
| Total liabilities | | 12,184,837 | | | 11,430,698 | |
| 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) | |
| Shareholders’ equity | | |
| | |
| Shareholders’ equity | | | | |
| Preferred stock, no par value, authorized 10,000,000 shares; issued: none | | — |
| | — |
| |
| Common stock, no par value, authorized 200,000,000 shares; issued and outstanding: 108,785,978 shares and 108,583,413 shares at September 30, 2017 and December 31, 2016, respectively | | 1,661,492 |
| | 1,660,910 |
| |
| 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 September 30, 2020 and December 31, 2019, respectively | | Common stock, 0 par value, authorized 200,000,000 shares; issued and outstanding: 109,181,124 shares and 108,973,328 shares at September 30, 2020 and December 31, 2019, respectively | | 1,678,007 | | | 1,678,257 | |
| Retained earnings | | 470,750 |
| | 438,972 |
| Retained earnings | | 645,943 | | | 622,042 | |
| Accumulated other comprehensive loss, net of tax benefits | | (29,220 | ) | | (33,129 | ) | Accumulated other comprehensive loss, net of tax benefits | | (719) | | | (20,039) | |
| Total shareholders’ equity | | 2,103,022 |
| | 2,066,753 |
| Total shareholders’ equity | | 2,323,231 | | | 2,280,260 | |
| Total liabilities and shareholders’ equity | | $ | 12,742,850 |
| | $ | 12,425,506 |
| Total liabilities and shareholders’ equity | | $ | 14,542,361 | | | $ | 13,745,251 | |
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 20162019 Form 10-K.
Hawaiian Electric Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Shareholders’ Equity (unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| | | Common stock | | Retained | | Accumulated other comprehensive | | |
| (in thousands) | | Shares | | Amount | | Earnings | | income (loss) | | Total |
| Balance, December 31, 2016 | | 108,583 |
| | $ | 1,660,910 |
| | $ | 438,972 |
| | $ | (33,129 | ) | | $ | 2,066,753 |
|
| Net income for common stock | | — |
| | — |
| | 132,927 |
| | — |
| | 132,927 |
|
| Other comprehensive income, net of taxes | | — |
| | — |
| | — |
| | 3,909 |
| | 3,909 |
|
| Issuance of common stock, net of expenses | | 203 |
| | 582 |
| | — |
| | — |
| | 582 |
|
| Common stock dividends | | — |
| | — |
| | (101,149 | ) | | — |
| | (101,149 | ) |
| Balance, September 30, 2017 | | 108,786 |
| | $ | 1,661,492 |
| | $ | 470,750 |
| | $ | (29,220 | ) | | $ | 2,103,022 |
|
| Balance, December 31, 2015 | | 107,460 |
| | $ | 1,629,136 |
| | $ | 324,766 |
| | $ | (26,262 | ) | | $ | 1,927,640 |
|
| Net income for common stock | | — |
| | — |
| | 203,622 |
| | — |
| | 203,622 |
|
| Other comprehensive income, net of taxes | | — |
| | — |
| | — |
| | 9,239 |
| | 9,239 |
|
| Issuance of common stock, net of expenses | | 1,043 |
| | 28,285 |
| | — |
| | — |
| | 28,285 |
|
| Common stock dividends | | — |
| | — |
| | (100,398 | ) | | — |
| | (100,398 | ) |
| Balance, September 30, 2016 | | 108,503 |
| | $ | 1,657,421 |
| | $ | 427,990 |
| | $ | (17,023 | ) | | $ | 2,068,388 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common stock | | Retained | | Accumulated
other
comprehensive | | |
| (in thousands) | | Shares | | Amount | | Earnings | | income (loss) | | Total |
| Balance, December 31, 2019 | | 108,973 | | | $ | 1,678,257 | | | $ | 622,042 | | | $ | (20,039) | | | $ | 2,280,260 | |
Impact of adoption of ASU No. 2016-13 | | — | | | — | | | (15,372) | | | — | | | (15,372) | |
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 | | — | | | — | | | 33,420 | | | — | | | 33,420 | |
| Other comprehensive income, net of taxes | | — | | | — | | | — | | | 18,212 | | | 18,212 | |
| Share-based expenses and other, net | | 172 | | | (3,996) | | | — | | | — | | | (3,996) | |
| Common stock dividends (33¢ per share) | | — | | | — | | | (36,019) | | | — | | | (36,019) | |
| 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 | |
| Net income for common stock | | — | | | — | | | 65,032 | | | — | | | 65,032 | |
| Other comprehensive income, net of taxes | | — | | | — | | | — | | | 1,440 | | | 1,440 | |
| Share-based expenses and other, net | | — | | | 1,391 | | | — | | | — | | | 1,391 | |
| Common stock dividends (33¢ per share) | | — | | | — | | | (36,030) | | | — | | | (36,030) | |
| Balance, September 30, 2020 | | 109,181 | | | $ | 1,678,007 | | | $ | 645,943 | | | $ | (719) | | | $ | 2,323,231 | |
| 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 | |
| Net income for common stock | | — | | | — | | | 63,419 | | | — | | | 63,419 | |
| Other comprehensive income, net of taxes | | — | | | — | | | — | | | 3,297 | | | 3,297 | |
| Share-based expenses and other, net | | 1 | | | 2,258 | | | — | | | — | | | 2,258 | |
| Common stock dividends (32¢ per share) | | — | | | — | | | (34,871) | | | — | | | (34,871) | |
| Balance, September 30, 2019 | | 108,973 | | | $ | 1,676,411 | | | $ | 590,651 | | | $ | (24,373) | | | $ | 2,242,689 | |
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 20162019 Form 10-K.
Hawaiian Electric Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited) | | | | | Nine months ended September 30 | | Nine months ended September 30 |
| (in thousands) | | 2017 | | 2016 | (in thousands) | | 2020 | | 2019 |
| Cash flows from operating activities | | |
| | |
| Cash flows from operating activities | | | | |
| Net income | | $ | 134,344 |
| | $ | 205,039 |
| Net income | | $ | 148,756 | | | $ | 153,036 | |
| 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 | | 150,123 |
| | 145,684 |
| Depreciation of property, plant and equipment | | 178,674 | | | 172,307 | |
| Other amortization | | 15,362 |
| | 7,368 |
| Other amortization | | 39,580 | | | 35,553 | |
| Provision for loan losses | | 7,231 |
| | 15,266 |
| |
| Loans receivable originated and purchased, held for sale | | (105,816 | ) | | (172,657 | ) | |
| Proceeds from sale of loans receivable, held for sale | | 119,731 |
| | 168,490 |
| |
| Provision for credit losses | | Provision for credit losses | | 39,504 | | | 17,873 | |
| Loans originated, held for sale | | Loans originated, held for sale | | (380,864) | | | (190,700) | |
| Proceeds from sale of loans, held for sale | | Proceeds from sale of loans, held for sale | | 387,247 | | | 177,345 | |
| Gain on sale of investment securities, net | | Gain on sale of investment securities, net | | (9,275) | | | (653) | |
| Gain on sale of loans | | Gain on sale of loans | | (15,933) | | | (3,080) | |
| Deferred income taxes | | 21,397 |
| | 30,667 |
| Deferred income taxes | | (14,464) | | | 265 | |
| Share-based compensation expense | | 4,383 |
| | 3,581 |
| Share-based compensation expense | | 5,449 | | | 8,142 | |
| Allowance for equity funds used during construction | | (8,908 | ) | | (6,010 | ) | Allowance for equity funds used during construction | | (6,556) | | | (9,335) | |
| | Other | | (1,350 | ) | | 3,234 |
| Other | | (4,773) | | | (6,157) | |
| Changes in assets and liabilities | | |
| | |
| Changes in assets and liabilities | | | | |
| Increase in accounts receivable and unbilled revenues, net | | (26,250 | ) | | (12,104 | ) | |
| Decrease in fuel oil stock | | 6,177 |
| | 6,736 |
| |
| Decrease (increase) in regulatory assets | | 3,922 |
| | (2,251 | ) | |
| Decrease in accounts receivable and unbilled revenues, net | | Decrease in accounts receivable and unbilled revenues, net | | 11,252 | | | 10,723 | |
| Decrease (increase) in fuel oil stock | | Decrease (increase) in fuel oil stock | | 31,899 | | | (3,438) | |
| Decrease in regulatory assets | | Decrease in regulatory assets | | 10,012 | | | 54,274 | |
| Increase (decrease) in regulatory liabilities | | Increase (decrease) in regulatory liabilities | | (15,755) | | | 2,494 | |
| Increase (decrease) in accounts, interest and dividends payable | | (10,390 | ) | | 3,399 |
| Increase (decrease) in accounts, interest and dividends payable | | (20,794) | | | 215 | |
| Change in prepaid and accrued income taxes, tax credits and utility revenue taxes | | 2,828 |
| | 52,558 |
| Change in prepaid and accrued income taxes, tax credits and utility revenue taxes | | (32,750) | | | (32,436) | |
| Increase in defined benefit pension and other postretirement benefit plans liability | | 670 |
| | 150 |
| |
| Decrease in defined benefit pension and other postretirement benefit plans liability | | Decrease in defined benefit pension and other postretirement benefit plans liability | | (1,398) | | | (2,794) | |
| | Change in other assets and liabilities | | (22,311 | ) | | (39,850 | ) | Change in other assets and liabilities | | (37,543) | | | (42,206) | |
| Net cash provided by operating activities | | 291,143 |
| | 409,300 |
| Net cash provided by operating activities | | 312,268 | | | 341,428 | |
| Cash flows from investing activities | | |
| | |
| Cash flows from investing activities | | | | |
| Available-for-sale investment securities purchased | | (369,467 | ) | | (354,165 | ) | Available-for-sale investment securities purchased | | (985,874) | | | (4,823) | |
| Principal repayments on available-for-sale investment securities | | 155,026 |
| | 172,829 |
| Principal repayments on available-for-sale investment securities | | 331,238 | | | 194,845 | |
| Proceeds from sale of available-for-sale investment securities | | — |
| | 16,423 |
| Proceeds from sale of available-for-sale investment securities | | 169,157 | | | 19,810 | |
| | Principal repayments of held-to-maturity investment securities | | Principal repayments of held-to-maturity investment securities | | 34,740 | | | 9,183 | |
| Purchases of held-to-maturity investment securities | | Purchases of held-to-maturity investment securities | | (28,602) | | | 0 | |
| Purchase of stock from Federal Home Loan Bank | | (2,868 | ) | | (2,773 | ) | Purchase of stock from Federal Home Loan Bank | | (24,006) | | | (80,475) | |
| Redemption of stock from Federal Home Loan Bank | | 4,380 |
| | 2,233 |
| Redemption of stock from Federal Home Loan Bank | | 21,520 | | | 80,480 | |
| Net decrease (increase) in loans held for investment | | 13,188 |
| | (175,303 | ) | |
| Proceeds from sale of commercial loans | | 31,427 |
| | 37,946 |
| |
| Proceeds from sale of real estate acquired in settlement of loans | | 411 |
| | 829 |
| |
| Proceeds from sale of real estate held-for-sale | | — |
| | 1,764 |
| |
| Net increase in loans held for investment | | Net increase in loans held for investment | | (374,307) | | | (258,064) | |
| | Proceeds from sale of low-income housing investments | | Proceeds from sale of low-income housing investments | | 6,725 | | | 0 | |
| Capital expenditures | | (314,404 | ) | | (259,207 | ) | Capital expenditures | | (296,172) | | | (332,273) | |
| Contributions in aid of construction | | 40,603 |
| | 23,568 |
| |
| | Contributions to low income housing investments | | Contributions to low income housing investments | | (3,951) | | | (5,612) | |
| Other | | 1,345 |
| | 112 |
| Other | | 4,899 | | | 3,495 | |
| Net cash used in investing activities | | (440,359 | ) | | (535,744 | ) | Net cash used in investing activities | | (1,144,633) | | | (373,434) | |
| Cash flows from financing activities | | |
| | |
| Cash flows from financing activities | | | | |
| Net increase in deposit liabilities | | 203,397 |
| | 355,467 |
| Net increase in deposit liabilities | | 766,235 | | | 37,371 | |
| Net increase (decrease) in short-term borrowings with original maturities of three months or less | | 24,498 |
| | (103,063 | ) | Net increase (decrease) in short-term borrowings with original maturities of three months or less | | (112,710) | | | 64,844 | |
| Net increase (decrease) in retail repurchase agreements | | 24,469 |
| | (21,121 | ) | |
| Proceeds from other bank borrowings | | 59,500 |
| | 55,835 |
| |
| Repayments of other bank borrowings | | (123,034 | ) | | (97,902 | ) | |
| | 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 | | 6,765 | | | 19,150 | |
| Proceeds from issuance of short-term debt | | Proceeds from issuance of short-term debt | | 165,000 | | | 25,000 | |
| Repayment of short-term debt | | Repayment of short-term debt | | (100,000) | | | 0 | |
| Proceeds from issuance of other bank borrowings | | Proceeds from issuance of other bank borrowings | | 30,000 | | | 0 | |
| Proceeds from issuance of long-term debt | | 265,000 |
| | 75,000 |
| Proceeds from issuance of long-term debt | | 365,146 | | | 208,970 | |
| Repayment of long-term debt and funds transferred for redemption of special purpose revenue bonds | | (265,000 | ) | | (75,000 | ) | |
| Repayment of long-term debt and funds transferred for repayment of long-term debt | | Repayment of long-term debt and funds transferred for repayment of long-term debt | | (178,291) | | | (204,278) | |
| Withheld shares for employee taxes on vested share-based compensation | | (3,796 | ) | | (2,398 | ) | Withheld shares for employee taxes on vested share-based compensation | | (5,700) | | | (997) | |
| Net proceeds from issuance of common stock | | — |
| | 10,901 |
| |
| | Common stock dividends | | (101,149 | ) | | (83,620 | ) | Common stock dividends | | (108,066) | | | (104,591) | |
| Preferred stock dividends of subsidiaries | | (1,417 | ) | | (1,417 | ) | Preferred stock dividends of subsidiaries | | (1,417) | | | (1,417) | |
| Other | | (9,531 | ) | | (2,361 | ) | Other | | (7,275) | | | (4,266) | |
| Net cash provided by financing activities | | 72,937 |
| | 110,321 |
| Net cash provided by financing activities | | 819,687 | | | 39,786 | |
| Net decrease in cash and cash equivalents | | (76,279 | ) | | (16,123 | ) | |
| Cash and cash equivalents, beginning of period | | 278,452 |
| | 300,478 |
| |
| Net increase (decrease) in cash, cash equivalents and restricted cash | | Net increase (decrease) in cash, cash equivalents and restricted cash | | (12,678) | | | 7,780 | |
| 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, end of period | | Cash, cash equivalents and restricted cash, end of period | | 215,007 | | | 176,988 | |
| Less: Restricted cash | | Less: Restricted cash | | (21,881) | | | 0 | |
| Cash and cash equivalents, end of period | | $ | 202,173 |
| | $ | 284,355 |
| Cash and cash equivalents, end of period | | $ | 193,126 | | | $ | 176,988 | |
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 20162019 Form 10-K.
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidated Statements of Income (unaudited)
| | | | | Three months ended September 30 | | Nine months ended September 30 | | Three months ended September 30 | | Nine months ended September 30 |
| (in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | (in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
| Revenues | | $ | 598,769 |
| | $ | 572,253 |
| | $ | 1,674,255 |
| | $ | 1,549,700 |
| Revenues | | $ | 562,568 | | | $ | 688,330 | | | $ | 1,694,225 | | | $ | 1,900,609 | |
| Expenses | | |
| | |
| | |
| | |
| Expenses | | | | | | | | |
| Fuel oil | | 146,258 |
| | 128,624 |
| | 431,787 |
| | 334,263 |
| Fuel oil | | 105,042 | | | 199,093 | | | 390,714 | | | 541,322 | |
| Purchased power | | 160,347 |
| | 157,750 |
| | 440,538 |
| | 412,667 |
| Purchased power | | 149,025 | | | 175,037 | | | 425,679 | | | 472,336 | |
| Other operation and maintenance | | 100,102 |
| | 94,789 |
| | 306,716 |
| | 298,260 |
| Other operation and maintenance | | 111,243 | | | 124,415 | | | 348,831 | | | 361,805 | |
| Depreciation | | 48,206 |
| | 46,759 |
| | 144,578 |
| | 140,300 |
| Depreciation | | 55,689 | | | 53,935 | | | 167,235 | | | 161,795 | |
| Taxes, other than income taxes | | 56,780 |
| | 54,519 |
| | 159,575 |
| | 148,386 |
| Taxes, other than income taxes | | 53,051 | | | 64,057 | | | 161,489 | | | 179,304 | |
| | Total expenses | | 511,693 |
| | 482,441 |
| | 1,483,194 |
| | 1,333,876 |
| Total expenses | | 474,050 | | | 616,537 | | | 1,493,948 | | | 1,716,562 | |
| Operating income | | 87,076 |
| | 89,812 |
| | 191,061 |
| | 215,824 |
| Operating income | | 88,518 | | | 71,793 | | | 200,277 | | | 184,047 | |
| Allowance for equity funds used during construction | | 3,482 |
| | 2,274 |
| | 8,908 |
| | 6,010 |
| Allowance for equity funds used during construction | | 2,347 | | | 3,250 | | | 6,556 | | | 9,335 | |
| Retirement defined benefits expense—other than service costs | | Retirement defined benefits expense—other than service costs | | (432) | | | (723) | | | (1,195) | | | (2,127) | |
| Interest expense and other charges, net | | (16,907 | ) | | (17,323 | ) | | (52,625 | ) | | (49,734 | ) | Interest expense and other charges, net | | (16,836) | | | (17,429) | | | (50,768) | | | (53,945) | |
| Allowance for borrowed funds used during construction | | 1,339 |
| | 854 |
| | 3,371 |
| | 2,276 |
| Allowance for borrowed funds used during construction | | 801 | | | 1,208 | | | 2,241 | | | 3,465 | |
| Income before income taxes | | 74,990 |
| | 75,617 |
| | 150,715 |
| | 174,376 |
| Income before income taxes | | 74,398 | | | 58,099 | | | 157,111 | | | 140,775 | |
| Income taxes | | 27,005 |
| | 28,145 |
| | 54,623 |
| | 64,682 |
| Income taxes | | 13,835 | | | 10,822 | | | 29,316 | | | 27,800 | |
| Net income | | 47,985 |
| | 47,472 |
| | 96,092 |
| | 109,694 |
| Net income | | 60,563 | | | 47,277 | | | 127,795 | | | 112,975 | |
| Preferred stock dividends of subsidiaries | | 228 |
| | 228 |
| | 686 |
| | 686 |
| Preferred stock dividends of subsidiaries | | 228 | | | 228 | | | 686 | | | 686 | |
| Net income attributable to Hawaiian Electric | | 47,757 |
| | 47,244 |
| | 95,406 |
| | 109,008 |
| Net income attributable to Hawaiian Electric | | 60,335 | | | 47,049 | | | 127,109 | | | 112,289 | |
| Preferred stock dividends of Hawaiian Electric | | 270 |
| | 270 |
| | 810 |
| | 810 |
| Preferred stock dividends of Hawaiian Electric | | 270 | | | 270 | | | 810 | | | 810 | |
| Net income for common stock | | $ | 47,487 |
| | $ | 46,974 |
| | $ | 94,596 |
| | $ | 108,198 |
| Net income for common stock | | $ | 60,065 | | | $ | 46,779 | | | $ | 126,299 | | | $ | 111,479 | |
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 20162019 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 September 30 | | Nine months ended September 30 | | | Three months ended September 30 | | Nine months ended September 30 |
| (in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | (in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
| Net income for common stock | | $ | 47,487 |
| | $ | 46,974 |
| | $ | 94,596 |
| | $ | 108,198 |
| Net income for common stock | | $ | 60,065 | | | $ | 46,779 | | | $ | 126,299 | | | $ | 111,479 | |
| Other comprehensive income (loss), net of taxes: | | |
| | |
| | |
| | |
| Other comprehensive income (loss), net of taxes: | | | | | | | | |
| Derivatives qualifying as cash flow hedges: | | | | | | | | | |
| Effective portion of foreign currency hedge net unrealized gains arising during the period, net of taxes of nil, $205, nil and $368, respectively | | — |
| | 321 |
| | — |
| | 578 |
| |
| Reclassification adjustment to net income, net of (taxes) benefits of nil, $(110), $289 and $(110), respectively | | — |
| | (173 | ) | | 454 |
| | (173 | ) | |
| | 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 of $2,306, $2,110, $6,916 and $6,331, respectively | | 3,618 |
| | 3,314 |
| | 10,857 |
| | 9,941 |
| |
| Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes of $2,290, $2,109, $6,872 and $6,327, respectively | | (3,596 | ) | | (3,311 | ) | | (10,790 | ) | | (9,934 | ) | |
| Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of taxes of $2,001, $874, $5,597 and $2,484, respectively | | Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of taxes of $2,001, $874, $5,597 and $2,484, respectively | | 5,769 | | | 2,519 | | | 16,137 | | | 7,162 | |
| Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes of $(1,985), $(865), $(5,563) and $(2,459), respectively | | Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes of $(1,985), $(865), $(5,563) and $(2,459), respectively | | (5,721) | | | (2,493) | | | (16,038) | | | (7,089) | |
| Other comprehensive income, net of taxes | | 22 |
| | 151 |
| | 521 |
| | 412 |
| Other comprehensive income, net of taxes | | 48 | | | 26 | | | 99 | | | 73 | |
| Comprehensive income attributable to Hawaiian Electric Company, Inc. | | $ | 47,509 |
| | $ | 47,125 |
| | $ | 95,117 |
| | $ | 108,610 |
| Comprehensive income attributable to Hawaiian Electric Company, Inc. | | $ | 60,113 | | | $ | 46,805 | | | $ | 126,398 | | | $ | 111,552 | |
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 20162019 Form 10-K.
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (unaudited) | | | (dollars in thousands, except par value) | | September 30, 2017 |
| | December 31, 2016 |
| (dollars in thousands, except par value) | | September 30, 2020 | | December 31, 2019 |
| Assets | | |
| | |
| Assets | | | | |
| Property, plant and equipment | | | | | Property, plant and equipment | |
| Utility property, plant and equipment | | |
| | |
| Utility property, plant and equipment | | | | |
| Land | | $ | 53,913 |
| | $ | 53,153 |
| Land | | $ | 51,589 | | | $ | 51,816 | |
| Plant and equipment | | 6,778,254 |
| | 6,605,732 |
| Plant and equipment | | 7,422,908 | | | 7,240,288 | |
| Less accumulated depreciation | | (2,460,429 | ) | | (2,369,282 | ) | Less accumulated depreciation | | (2,789,917) | | | (2,690,157) | |
| Construction in progress | | 307,492 |
| | 211,742 |
| Construction in progress | | 212,537 | | | 193,074 | |
| Utility property, plant and equipment, net | | 4,679,230 |
| | 4,501,345 |
| Utility property, plant and equipment, net | | 4,897,117 | | | 4,795,021 | |
| Nonutility property, plant and equipment, less accumulated depreciation of $1,233 as of September 30, 2017 and $1,232 as of December 31, 2016 | | 7,409 |
| | 7,407 |
| |
| Nonutility property, plant and equipment, less accumulated depreciation of $114 and $111 as of September 30, 2020 and December 31, 2019, respectively | | Nonutility property, plant and equipment, less accumulated depreciation of $114 and $111 as of September 30, 2020 and December 31, 2019, respectively | | 6,954 | | | 6,956 | |
| Total property, plant and equipment, net | | 4,686,639 |
| | 4,508,752 |
| Total property, plant and equipment, net | | 4,904,071 | | | 4,801,977 | |
| Current assets | | |
| | |
| Current assets | | | | |
| Cash and cash equivalents | | 9,987 |
| | 74,286 |
| Cash and cash equivalents | | 29,800 | | | 11,022 | |
| Restricted cash | | Restricted cash | | 20,458 | | | 30,872 | |
| Customer accounts receivable, net | | 133,135 |
| | 123,688 |
| Customer accounts receivable, net | | 137,936 | | | 152,790 | |
| Accrued unbilled revenues, net | | 109,707 |
| | 91,693 |
| Accrued unbilled revenues, net | | 106,415 | | | 117,227 | |
| Other accounts receivable, net | | 4,097 |
| | 5,233 |
| Other accounts receivable, net | | 7,074 | | | 11,568 | |
| Fuel oil stock, at average cost | | 60,253 |
| | 66,430 |
| Fuel oil stock, at average cost | | 60,443 | | | 91,937 | |
| Materials and supplies, at average cost | | 55,959 |
| | 53,679 |
| Materials and supplies, at average cost | | 68,794 | | | 60,702 | |
| Prepayments and other | | 29,871 |
| | 23,100 |
| Prepayments and other | | 39,644 | | | 116,980 | |
| Regulatory assets | | 72,773 |
| | 66,032 |
| Regulatory assets | | 25,462 | | | 30,710 | |
| Total current assets | | 475,782 |
| | 504,141 |
| Total current assets | | 496,026 | | | 623,808 | |
| Other long-term assets | | |
| | |
| Other long-term assets | | | | |
| Operating lease right-of-use assets | | Operating lease right-of-use assets | | 144,740 | | | 176,809 | |
| Regulatory assets | | 864,191 |
| | 891,419 |
| Regulatory assets | | 652,221 | | | 684,370 | |
| Unamortized debt expense | | 661 |
| | 208 |
| |
| | Other | | 80,228 |
| | 70,908 |
| Other | | 125,246 | | | 101,718 | |
| Total other long-term assets | | 945,080 |
| | 962,535 |
| Total other long-term assets | | 922,207 | | | 962,897 | |
| Total assets | | $ | 6,107,501 |
| | $ | 5,975,428 |
| Total assets | | $ | 6,322,304 | | | $ | 6,388,682 | |
| Capitalization and liabilities | | |
| | |
| Capitalization and liabilities | | | | |
| Capitalization | | |
| | |
| Capitalization | | | | |
| Common stock ($6 2/3 par value, authorized 50,000,000 shares; outstanding 16,019,785 shares at September 30, 2017 and December 31, 2016) | | $ | 106,818 |
| | $ | 106,818 |
| |
Common stock ($6 2/3 par value, authorized 50,000,000 shares; outstanding 17,048,783 shares at September 30, 2020 and December 31, 2019) | | Common stock ($6 2/3 par value, authorized 50,000,000 shares; outstanding 17,048,783 shares at September 30, 2020 and December 31, 2019) | | $ | 113,678 | | | $ | 113,678 | |
| Premium on capital stock | | 601,487 |
| | 601,491 |
| Premium on capital stock | | 714,824 | | | 714,824 | |
| Retained earnings | | 1,120,571 |
| | 1,091,800 |
| Retained earnings | | 1,266,076 | | | 1,220,129 | |
| Accumulated other comprehensive income (loss), net of taxes | | 199 |
| | (322 | ) | |
| Accumulated other comprehensive loss, net of tax benefits-retirement benefit plans | | Accumulated other comprehensive loss, net of tax benefits-retirement benefit plans | | (1,180) | | | (1,279) | |
| Common stock equity | | 1,829,075 |
| | 1,799,787 |
| Common stock equity | | 2,093,398 | | | 2,047,352 | |
| 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 | | 1,318,623 |
| | 1,319,260 |
| Long-term debt, net | | 1,561,128 | | | 1,401,714 | |
| Total capitalization | | 3,181,991 |
| | 3,153,340 |
| Total capitalization | | 3,688,819 | | | 3,483,359 | |
| Commitments and contingencies (Note 3) | |
|
| |
|
| Commitments and contingencies (Note 3) | |
| Current liabilities | | |
| | |
| Current liabilities | | | | |
| Current portion of operating lease liabilities | | Current portion of operating lease liabilities | | 64,906 | | | 63,707 | |
| Current portion of long-term debt, net | | Current portion of long-term debt, net | | 0 | | | 95,953 | |
| Short-term borrowings from non-affiliates | | 6,000 |
| | — |
| Short-term borrowings from non-affiliates | | 49,948 | | | 88,987 | |
| | Accounts payable | | 124,240 |
| | 117,814 |
| Accounts payable | | 118,480 | | | 187,770 | |
| Interest and preferred dividends payable | | 25,261 |
| | 22,838 |
| Interest and preferred dividends payable | | 30,244 | | | 20,728 | |
| Taxes accrued | | 183,365 |
| | 172,730 |
| |
| Taxes accrued, including revenue taxes | | Taxes accrued, including revenue taxes | | 183,744 | | | 207,992 | |
| Regulatory liabilities | | 3,399 |
| | 3,762 |
| Regulatory liabilities | | 36,555 | | | 30,724 | |
| Other | | 59,611 |
| | 55,221 |
| Other | | 75,050 | | | 67,305 | |
| Total current liabilities | | 401,876 |
| | 372,365 |
| Total current liabilities | | 558,927 | | | 763,166 | |
| Deferred credits and other liabilities | | |
| | |
| Deferred credits and other liabilities | | | | |
| Operating lease liabilities | | Operating lease liabilities | | 86,175 | | | 113,400 | |
| Deferred income taxes | | 767,611 |
| | 733,659 |
| Deferred income taxes | | 381,535 | | | 377,150 | |
| Regulatory liabilities | | 462,817 |
| | 406,931 |
| Regulatory liabilities | | 931,291 | | | 941,586 | |
| Unamortized tax credits | | 88,827 |
| | 88,961 |
| Unamortized tax credits | | 113,516 | | | 117,868 | |
| Defined benefit pension and other postretirement benefit plans liability | | 581,713 |
| | 599,726 |
| Defined benefit pension and other postretirement benefit plans liability | | 454,150 | | | 478,763 | |
| Other | | 57,548 |
| | 76,921 |
| Other | | 107,891 | | | 113,390 | |
| Total deferred credits and other liabilities | | 1,958,516 |
| | 1,906,198 |
| Total deferred credits and other liabilities | | 2,074,558 | | | 2,142,157 | |
| Contributions in aid of construction | | 565,118 |
| | 543,525 |
| |
| | Total capitalization and liabilities | | $ | 6,107,501 |
| | $ | 5,975,428 |
| Total capitalization and liabilities | | $ | 6,322,304 | | | $ | 6,388,682 | |
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 20162019 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) | | Shares | | Amount | | stock | | earnings | | income (loss) | | Total | (in thousands) | | Shares | | Amount | | stock | | earnings | | income (loss) | | Total |
| Balance, December 31, 2016 | | 16,020 |
| | $ | 106,818 |
| | $ | 601,491 |
| | $ | 1,091,800 |
| | $ | (322 | ) | | $ | 1,799,787 |
| |
| Balance, December 31, 2019 | | Balance, December 31, 2019 | | 17,048 | | | $ | 113,678 | | | $ | 714,824 | | | $ | 1,220,129 | | | $ | (1,279) | | | $ | 2,047,352 | |
| Net income for common stock | | — |
| | — |
| | — |
| | 94,596 |
| | — |
| | 94,596 |
| Net income for common stock | | — | | | — | | | — | | | 23,905 | | | — | | | 23,905 | |
| Other comprehensive income, net of taxes | | — |
| | — |
| | — |
| | — |
| | 521 |
| | 521 |
| Other comprehensive income, net of taxes | | — | | | — | | | — | | | — | | | 26 | | | 26 | |
| Common stock dividends | | — |
| | — |
| | — |
| | (65,825 | ) | | — |
| | (65,825 | ) | Common stock dividends | | — | | | — | | | — | | | (26,784) | | | — | | | (26,784) | |
| Common stock issuance expenses | | — |
| | — |
| | (4 | ) | | — |
| | — |
| | (4 | ) | |
| Balance, September 30, 2017 | | 16,020 |
| | $ | 106,818 |
| | $ | 601,487 |
| | $ | 1,120,571 |
| | $ | 199 |
| | $ | 1,829,075 |
| |
| Balance, December 31, 2015 | | 15,805 |
| | $ | 105,388 |
| | $ | 578,930 |
| | $ | 1,043,082 |
| | $ | 925 |
| | $ | 1,728,325 |
| |
| | Balance, March 31, 2020 | | Balance, March 31, 2020 | | 17,048 | | | 113,678 | | | 714,824 | | | 1,217,250 | | | (1,253) | | | 2,044,499 | |
| Net income for common stock | | — |
| | — |
| | — |
| | 108,198 |
| | — |
| | 108,198 |
| Net income for common stock | | — | | | — | | | — | | | 42,329 | | | — | | | 42,329 | |
| Other comprehensive income, net of taxes | | — |
| | — |
| | — |
| | — |
| | 412 |
| | 412 |
| Other comprehensive income, net of taxes | | — | | | — | | | — | | | — | | | 25 | | | 25 | |
| Common stock dividends | | — |
| | — |
| | — |
| | (70,199 | ) | | — |
| | (70,199 | ) | Common stock dividends | | — | | | — | | | — | | | (26,784) | | | — | | | (26,784) | |
| Common stock issuance expenses | | — |
| | — |
| | (9 | ) | | — |
| | — |
| | (9 | ) | |
| Balance, September 30, 2016 | | 15,805 |
| | $ | 105,388 |
| | $ | 578,921 |
| | $ | 1,081,081 |
| | $ | 1,337 |
| | $ | 1,766,727 |
| |
| Balance, June 30, 2020 | | Balance, June 30, 2020 | | 17,048 | | | $ | 113,678 | | | 714,824 | | | 1,232,795 | | | (1,228) | | | 2,060,069 | |
| Net income for common stock | | Net income for common stock | | — | | | — | | | — | | | 60,065 | | | — | | | 60,065 | |
| Other comprehensive income, net of taxes | | Other comprehensive income, net of taxes | | — | | | — | | | — | | | — | | | 48 | | | 48 | |
| Common stock dividends | | Common stock dividends | | — | | | — | | | — | | | (26,784) | | | — | | | (26,784) | |
| Balance, September 30, 2020 | | Balance, September 30, 2020 | | 17,048 | | | $ | 113,678 | | | $ | 714,824 | | | $ | 1,266,076 | | | $ | (1,180) | | | $ | 2,093,398 | |
| Balance, December 31, 2018 | | Balance, December 31, 2018 | | 16,751 | | | $ | 111,696 | | | $ | 681,305 | | | $ | 1,164,541 | | | $ | 99 | | | $ | 1,957,641 | |
| Net income for common stock | | Net income for common stock | | — | | | — | | | — | | | 32,126 | | | — | | | 32,126 | |
| Other comprehensive income, net of taxes | | Other comprehensive income, net of taxes | | — | | | — | | | — | | | — | | | 24 | | | 24 | |
| Common stock dividends | | Common stock dividends | | — | | | — | | | — | | | (25,313) | | | — | | | (25,313) | |
| | Balance, March 31, 2019 | | Balance, March 31, 2019 | | 16,751 | | | 111,696 | | | 681,305 | | | 1,171,354 | | | 123 | | | 1,964,478 | |
| Net income for common stock | | Net income for common stock | | — | | | — | | | — | | | 32,574 | | | — | | | 32,574 | |
| Other comprehensive income, net of taxes | | Other comprehensive income, net of taxes | | — | | | — | | | — | | | — | | | 23 | | | 23 | |
| Common stock dividends | | Common stock dividends | | — | | | — | | | — | | | (25,313) | | | — | | | (25,313) | |
| | Balance, June 30, 2019 | | Balance, June 30, 2019 | | 16,751 | | | 111,696 | | | 681,305 | | | $ | 1,178,615 | | | $ | 146 | | | $ | 1,971,762 | |
| Net income for common stock | | Net income for common stock | | — | | | — | | | — | | | 46,779 | | | — | | | 46,779 | |
| Other comprehensive income, net of taxes | | Other comprehensive income, net of taxes | | — | | | — | | | — | | | — | | | 26 | | | 26 | |
| Common stock dividends | | Common stock dividends | | — | | | — | | | — | | | (25,313) | | | — | | | (25,313) | |
| Balance, September 30, 2019 | | Balance, September 30, 2019 | | 16,751 | | | $ | 111,696 | | | $ | 681,305 | | | $ | 1,200,081 | | | $ | 172 | | | $ | 1,993,254 | |
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 20162019 Form 10-K.
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
| | | | | Nine months ended September 30 | | Nine months ended September 30 |
| (in thousands) | | 2017 | | 2016 | (in thousands) | | 2020 | | 2019 |
| Cash flows from operating activities | | |
| | |
| Cash flows from operating activities | | | | |
| Net income | | $ | 96,092 |
|
| $ | 109,694 |
| Net income | | $ | 127,795 | | | $ | 112,975 | |
| 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 | | 144,578 |
|
| 140,300 |
| Depreciation of property, plant and equipment | | 167,235 | | | 161,795 | |
| Other amortization | | 6,118 |
|
| 5,380 |
| Other amortization | | 24,929 | | | 21,476 | |
| Deferred income taxes | | 29,537 |
|
| 55,648 |
| Deferred income taxes | | (9,827) | | | (1,386) | |
| | State refundable credit | | State refundable credit | | (7,589) | | | (6,242) | |
| Bad debt expense | | Bad debt expense | | 1,401 | | | 1,650 | |
| Allowance for equity funds used during construction | | (8,908 | ) |
| (6,010 | ) | Allowance for equity funds used during construction | | (6,556) | | | (9,335) | |
| | Other | | 526 |
| | 3,234 |
| Other | | 1,614 | | | 613 | |
| Changes in assets and liabilities | | |
|
| |
| Changes in assets and liabilities | | | | |
| Increase in accounts receivable | | (8,087 | ) |
| (655 | ) | |
| Increase in accrued unbilled revenues | | (18,014 | ) |
| (10,658 | ) | |
| Decrease in fuel oil stock | | 6,177 |
|
| 6,736 |
| |
| Decrease in accounts receivable | | Decrease in accounts receivable | | 7,076 | | | 12,706 | |
| Decrease (increase) in accrued unbilled revenues | | Decrease (increase) in accrued unbilled revenues | | 9,842 | | | (2,101) | |
| Decrease (increase) in fuel oil stock | | Decrease (increase) in fuel oil stock | | 31,494 | | | (4,608) | |
| Increase in materials and supplies | | (2,280 | ) |
| (2,927 | ) | Increase in materials and supplies | | (8,092) | | | (5,606) | |
| Decrease (increase) in regulatory assets | | 3,922 |
|
| (2,251 | ) | |
| Decrease in regulatory assets | | Decrease in regulatory assets | | 10,012 | | | 54,274 | |
| Increase (decrease) in regulatory liabilities | | Increase (decrease) in regulatory liabilities | | (15,755) | | | 2,494 | |
| Decrease in accounts payable | | (22,841 | ) |
| (676 | ) | Decrease in accounts payable | | (34,874) | | | (9,261) | |
| Change in prepaid and accrued income taxes, tax credits and revenue taxes | | 5,291 |
|
| (9,595 | ) | Change in prepaid and accrued income taxes, tax credits and revenue taxes | | (34,768) | | | (32,094) | |
| Increase in defined benefit pension and other postretirement benefit plans liability | | 453 |
|
| 360 |
| |
| Decrease in defined benefit pension and other postretirement benefit plans liability | | Decrease in defined benefit pension and other postretirement benefit plans liability | | (3,064) | | | (2,837) | |
| Change in other assets and liabilities | | (2,662 | ) |
| (13,309 | ) | Change in other assets and liabilities | | (15,918) | | | (11,895) | |
| Net cash provided by operating activities | | 229,902 |
|
| 275,271 |
| Net cash provided by operating activities | | 244,955 | | | 282,618 | |
| Cash flows from investing activities | | |
| | |
| Cash flows from investing activities | | | | |
| Capital expenditures | | (278,004 | ) | | (250,704 | ) | Capital expenditures | | (267,482) | | | (297,807) | |
| Contributions in aid of construction | | 40,603 |
| | 23,568 |
| |
| | Other | | 8,114 |
| | 1,100 |
| Other | | 7,295 | | | 2,662 | |
| Net cash used in investing activities | | (229,287 | ) | | (226,036 | ) | Net cash used in investing activities | | (260,187) | | | (295,145) | |
| Cash flows from financing activities | | |
| | |
| Cash flows from financing activities | | | | |
| Common stock dividends | | (65,825 | ) | | (70,199 | ) | Common stock dividends | | (80,352) | | | (75,939) | |
| Preferred stock dividends of Hawaiian Electric and subsidiaries | | (1,496 | ) | | (1,496 | ) | Preferred stock dividends of Hawaiian Electric and subsidiaries | | (1,496) | | | (1,496) | |
| Proceeds from issuance of special purpose revenue bonds | | 265,000 |
| | — |
| |
| Funds transferred for redemption of special purpose revenue bonds | | (265,000 | ) | | — |
| |
| Net increase in short-term borrowings from non-affiliates and affiliate with original maturities of three months or less | | 6,000 |
| | 21,000 |
| |
| Proceeds from issuance of short-term debt | | Proceeds from issuance of short-term debt | | 100,000 | | | 25,000 | |
| Repayment of short-term debt | | Repayment of short-term debt | | (100,000) | | | 0 | |
| Proceeds from issuance of long-term debt | | Proceeds from issuance of long-term debt | | 255,000 | | | 200,000 | |
| Repayment of long-term debt and funds transferred for repayment of long-term debt | | Repayment of long-term debt and funds transferred for repayment of long-term debt | | (109,000) | | | (201,546) | |
| | Net Increase (decrease) in short-term borrowings from non-affiliates and affiliates with original maturities of three months or less | | Net Increase (decrease) in short-term borrowings from non-affiliates and affiliates with original maturities of three months or less | | (38,987) | | | 62,353 | |
| Other | | (3,593 | ) | | (12 | ) | Other | | (1,569) | | | 785 | |
| Net cash used in financing activities | | (64,914 | ) | | (50,707 | ) | |
| Net decrease in cash and cash equivalents | | (64,299 | ) | | (1,472 | ) | |
| Cash and cash equivalents, beginning of period | | 74,286 |
| | 24,449 |
| |
| Net cash provided by financing activities | | Net cash provided by financing activities | | 23,596 | | | 9,157 | |
| Net increase (decrease) in cash and cash equivalents | | Net increase (decrease) in cash and cash equivalents | | 8,364 | | | (3,370) | |
| 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, end of period | | Cash, cash equivalents and restricted cash, end of period | | 50,258 | | | 32,507 | |
| Less: Restricted cash | | Less: Restricted cash | | (20,458) | | | 0 | |
| Cash and cash equivalents, end of period | | $ | 9,987 |
| | $ | 22,977 |
| Cash and cash equivalents, end of period | | $ | 29,800 | | | $ | 32,507 | |
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 20162019 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, 2016.2019.
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 September 30, 20172020 and December 31, 2016,2019 and the results of their operations for the three and nine months ended September 30, 20172020 and 20162019 and their cash flows for the nine months ended September 30, 20172020 and 2016.2019. 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.
Stock compensationCredit losses. In MarchJune 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which simplifies several aspects of the accounting for share-based payment transactions.
The Company adopted ASU No. 2016-09 in the first quarter of 2017. From January 1, 2017, all excess tax benefits and tax deficiencies are recognized as income tax expense or benefit in the income statement. From January 1, 2017, no excess tax benefits or deficiencies are included in determining the assumed proceeds under the treasury stock method of calculating diluted EPS. As of January 1, 2017, HEI adopted an accounting policy to account for forfeitures when they occur.
From January 1, 2017, HEI retrospectively applied the cashflow guidance for taxes paid (equivalent to the value of withheld shares for tax withholding purposes) and excess tax benefits. Excess tax benefits are classified along with other income tax cash flows as an operating activity and the cash payments made to taxing authorities on the employees’ behalf for withheld shares are classified as financing activities on the HEI unaudited condensed consolidated statements of cash flows for all periods that are presented.
Goodwill impairment. In January 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” Prior to the adoption of ASU No. 2017-04, an entity was required to perform a two-step test to determine the amount, if any, of goodwill impairment. In Step 1, an entity compared the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeded its fair value, the entity performed Step 2 and compared the implied fair value of goodwill with the carrying amount of that goodwill for that reporting unit. An impairment charge equal to the amount by which the carrying amount of goodwill for the reporting unit exceeded the implied fair value of that goodwill would then be recorded. ASU No. 2017-04 removes the second step of the test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value. ASU No. 2017-04 does not amend the optional qualitative assessment of goodwill impairment.
The Company plans to adopt ASU No. 2017-04 prospectively in the fourth quarter of 2017 and believes the impact of adoption will not be material to the Company’s and Hawaiian Electric’s consolidated financial statements.
Revenues from contracts with customers. In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” The core principle of the guidance in ASU No. 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should: (1) identify the contract/s with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when, or as, the entity satisfies a performance obligation. ASU No. 2014-09 also requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
As of September 30, 2017, the Company has identified its revenue streams from, and performance obligations related to, contracts with customers and has performed an analysis of these revenue streams for the impacts of Topic 606. The revenue
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
subject to Topic 606 is largely the Utilities’ electric sales revenue and the Utilities’ and ASB’s fee income. The Company and Hawaiian Electric do not expect a material impact on the timing or pattern of revenue recognition upon adoption of ASU No. 2014-09, but do expect to provide expanded disclosures around the amount, timing, nature and uncertainty of our revenues from contracts with customers. The Company plans to adopt ASU No. 2014-09 (and subsequently issued revenue-related ASUs) in the first quarter of 2018 using the modified retrospective approach.
Financial instruments. In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which, among other things:
Requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income.
Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.
Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables).
Eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost.
The Company plans to adopt ASU No. 2016-01 in the first quarter of 2018 and expects changes to disclosures, but otherwise believes the impact of adoption will not be material to the Company’s and Hawaiian Electric’s consolidated financial statements.
Cash Flows. In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which provides guidance on eight specific cash flow issues - debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies), distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle.
The Company plans to adopt ASU No. 2016-15 in the first quarter of 2018 using a retrospective transition method and believes the impact of adoption will not be material to the Company’s and Hawaiian Electric’s consolidated statements of cash flows.
Restricted cash. In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.
The Company plans to adopt ASU No. 2016-18 in the first quarter of 2018 using a retrospective transition method and believes the impact of adoption will not be material to the Company’s and Hawaiian Electric’s consolidated statements of cash flows.
Net periodic pension cost and net periodic postretirement benefit cost. In March 2017, the FASB issued ASU No. 2017-07, “Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. It also requires the other components of net periodic pension cost (NPPC) and net periodic postretirement benefit cost (NPBC) as defined in paragraphs 715-30-35-4 and 715-60-35-9 to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. Additionally, only the service cost component is eligible for capitalization under GAAP, when applicable.
The Company plans to adopt ASU No. 2017-07 in the first quarter of 2018 and has not yet determined the impact of adoption. HEI and ASB do not capitalize pension and OPEB costs. The Utilities are seeking recovery of their defined benefit costs as reflected under the requirements of ASU No. 2017-07 (i.e., only the service cost components of NPPC and NPBC will be eligible for capitalization) in their rate cases.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
The Hawaii Electric Light 2016 test year and the Hawaiian Electric consolidated 2014 and 2017 test year revenue requirements were based on their current accounting for retirement benefits, and reflect the capitalization of a portion of the total pension and OPEB costs and the amortization of the pension and OPEB regulatory assets or liabilities (based on the difference between total pension and OPEB costs and the pension and OPEB costs included in rates). In Hawaii Electric Light’s (2016 test year) and Hawaiian Electric’s (consolidated 2014 and 2017 test years) on-going rate cases, each utility proposed that for 2018 and until its next rate case, the non-service cost portion of the test year pension and OPEB costs that are estimated to be capitalized, be deferred and included in the pension and OPEB tracking mechanisms, and amortized beginning with the next rate case. Maui Electric proposed in its consolidated 2015 and 2018 test year rate case filing to adopt the accounting prescribed by ASU No. 2017-07.
The impact of adoption will largely be dependent on the PUC's decisions.
Leases. In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which requires that lessees recognize a liability to make lease payments (the lease liability) and a right-of-use asset, representing its right to use the underlying asset for the lease term, for all leases (except short-term leases) at the commencement date. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election and recognize lease expense for such leases generally on a straight-line basis over the lease term. For finance leases, a lessee is required to recognize interest on the lease liability separately from amortization of the right-of-use asset in the condensed consolidated statement of income. For operating leases, a lessee is required to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis.
The Company plans to adopt ASU No. 2016-02 in the first quarter of 2019 and has not yet determined the method or impact of adoption.
Credit Losses. In June 2016, the FASB issued ASU No. 2016-13, “Financial“Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,,” which replaces the incurred loss methodology with an expected loss methodology. The new methodology is intendedreferred to improveas the current expected credit loss (CECL) methodology and applies to financial reporting by requiring timelier recording ofassets subject to credit losses onand measured at amortized cost and certain off-balance sheet credit exposures. This includes, but is not limited to loans, loan commitments and other financial instruments held by financial institutions and other organizations.held-to-maturity securities. In addition, ASU No. 2016-13requires the measurement of all expected credit losses for financial assets held at the reporting date (based on historical experience, current conditions and reasonable and supportable forecasts) and enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. 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 will behas 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 will also requirerequires the use of an allowance to record the estimated losses (and subsequent recoveries).
The accounting forCompany adopted ASU No. 2016-13 on January 1, 2020 using the initial recognitionmodified retrospective method with the cumulative effect of initially applying the estimatedamendments recognized in retained earnings 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 for purchased financial assets withover a reasonable and supportable forecast period and then reverts to a longer-term historical loss experience to arrive at lifetime expected credit deterioration would be recognized through anlosses. 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 a 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 offsetafter-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 cost basisrequirement 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 related financial assetCompany’s existing held-to-maturity and AFS investment securities portfolio, the Company did not recognize an ACL at acquisition (i.e., there is noadoption for those investments. The adoption of the new standard did not have a material impact to net income at initial recognition).
The Company plans to adopt 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 the first quarter of 2020 and has not yet determined the impact of adoption.
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 that 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.
Reclassifications. Certain reclassifications of prior year amounts were made to conform to the current-year financial statement presentation. Reclassifications did not affect previously reported cash flows, net income or retained earnings.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Note 2 · Segment financial information
| | | (in thousands) | | Electric utility | | Bank | | Other | | Total | (in thousands) | | Electric utility | | Bank | | Other | | Total |
| Three months ended September 30, 2017 | | |
| | |
| | |
| | |
| |
| Three months ended September 30, 2020 | | Three months ended September 30, 2020 | | | | | | | | |
| Revenues from external customers | | $ | 598,756 |
| | $ | 74,289 |
| | $ | 140 |
| | $ | 673,185 |
| Revenues from external customers | | $ | 562,559 | | | $ | 78,644 | | | $ | 224 | | | $ | 641,427 | |
| Intersegment revenues (eliminations) | | 13 |
| | — |
| | (13 | ) | | — |
| Intersegment revenues (eliminations) | | 9 | | | 0 | | | (9) | | | 0 | |
| Revenues | | $ | 598,769 |
| | $ | 74,289 |
| | $ | 127 |
| | $ | 673,185 |
| Revenues | | $ | 562,568 | | | $ | 78,644 | | | $ | 215 | | | $ | 641,427 | |
| Income (loss) before income taxes | | $ | 74,990 |
| | $ | 26,764 |
| | $ | (6,615 | ) | | $ | 95,139 |
| Income (loss) before income taxes | | $ | 74,398 | | | $ | 15,027 | | | $ | (9,904) | | | $ | 79,521 | |
| Income taxes (benefit) | | 27,005 |
| | 9,172 |
| | (1,582 | ) | | 34,595 |
| Income taxes (benefit) | | 13,835 | | | 2,877 | | | (2,694) | | | 14,018 | |
| Net income (loss) | | 47,985 |
| | 17,592 |
| | (5,033 | ) | | 60,544 |
| Net income (loss) | | 60,563 | | | 12,150 | | | (7,210) | | | 65,503 | |
| Preferred stock dividends of subsidiaries | | 498 |
| | — |
| | (27 | ) | | 471 |
| Preferred stock dividends of subsidiaries | | 498 | | | 0 | | | (27) | | | 471 | |
| Net income (loss) for common stock | | $ | 47,487 |
| | $ | 17,592 |
| | $ | (5,006 | ) | | $ | 60,073 |
| Net income (loss) for common stock | | $ | 60,065 | | | $ | 12,150 | | | $ | (7,183) | | | $ | 65,032 | |
| Nine months ended September 30, 2017 | | |
| | |
| | |
| | |
| |
| Nine months ended September 30, 2020 | | Nine months ended September 30, 2020 | | | | | | | | |
| Revenues from external customers | | $ | 1,674,158 |
| | $ | 222,474 |
| | $ | 396 |
| | $ | 1,897,028 |
| Revenues from external customers | | $ | 1,694,195 | | | $ | 233,096 | | | $ | 267 | | | $ | 1,927,558 | |
| Intersegment revenues (eliminations) | | 97 |
| | — |
| | (97 | ) | | — |
| Intersegment revenues (eliminations) | | 30 | | | 0 | | | (30) | | | 0 | |
| Revenues | | $ | 1,674,255 |
| | $ | 222,474 |
| | $ | 299 |
| | $ | 1,897,028 |
| Revenues | | $ | 1,694,225 | | | $ | 233,096 | | | $ | 237 | | | $ | 1,927,558 | |
| Income (loss) before income taxes | | $ | 150,715 |
| | $ | 75,720 |
| | $ | (20,088 | ) | | $ | 206,347 |
| Income (loss) before income taxes | | $ | 157,111 | | | $ | 51,330 | | | $ | (28,994) | | | $ | 179,447 | |
| Income taxes (benefit) | | 54,623 |
| | 25,582 |
| | (8,202 | ) | | 72,003 |
| Income taxes (benefit) | | 29,316 | | | 9,405 | | | (8,030) | | | 30,691 | |
| Net income (loss) | | 96,092 |
| | 50,138 |
| | (11,886 | ) | | 134,344 |
| Net income (loss) | | 127,795 | | | 41,925 | | | (20,964) | | | 148,756 | |
| Preferred stock dividends of subsidiaries | | 1,496 |
| | — |
| | (79 | ) | | 1,417 |
| Preferred stock dividends of subsidiaries | | 1,496 | | | 0 | | | (79) | | | 1,417 | |
| Net income (loss) for common stock | | $ | 94,596 |
| | $ | 50,138 |
| | $ | (11,807 | ) | | $ | 132,927 |
| Net income (loss) for common stock | | $ | 126,299 | | | $ | 41,925 | | | $ | (20,885) | | | $ | 147,339 | |
| Total assets (at September 30, 2017) | | $ | 6,107,501 |
| | $ | 6,618,907 |
| | $ | 16,442 |
| | $ | 12,742,850 |
| |
| Three months ended September 30, 2016 | | |
| | |
| | |
| | |
| |
| Total assets (at September 30, 2020) | | Total assets (at September 30, 2020) | | $ | 6,322,304 | | | $ | 8,075,745 | | | $ | 144,312 | | | $ | 14,542,361 | |
| Three months ended September 30, 2019 | | Three months ended September 30, 2019 | | | | | | | | |
| Revenues from external customers | | $ | 572,208 |
| | $ | 73,708 |
| | $ | 139 |
| | $ | 646,055 |
| Revenues from external customers | | $ | 688,299 | | | $ | 82,548 | | | $ | 35 | | | $ | 770,882 | |
| Intersegment revenues (eliminations) | | 45 |
| | — |
| | (45 | ) | | — |
| Intersegment revenues (eliminations) | | 31 | | | 0 | | | (31) | | | 0 | |
| Revenues | | $ | 572,253 |
| | $ | 73,708 |
| | $ | 94 |
| | $ | 646,055 |
| Revenues | | $ | 688,330 | | | $ | 82,548 | | | $ | 4 | | | $ | 770,882 | |
| Income before income taxes | | $ | 75,617 |
| | $ | 22,727 |
| | $ | 80,861 |
| | $ | 179,205 |
| |
| Income taxes | | 28,145 |
| | 7,623 |
| | 15,824 |
| | 51,592 |
| |
| Net income | | 47,472 |
| | 15,104 |
| | 65,037 |
| | 127,613 |
| |
| Income (loss) before income taxes | | Income (loss) before income taxes | | $ | 58,099 | | | $ | 29,157 | | | $ | (8,563) | | | $ | 78,693 | |
| Income taxes (benefit) | | Income taxes (benefit) | | 10,822 | | | 6,269 | | | (2,288) | | | 14,803 | |
| Net income (loss) | | Net income (loss) | | 47,277 | | | 22,888 | | | (6,275) | | | 63,890 | |
| Preferred stock dividends of subsidiaries | | 498 |
| | — |
| | (27 | ) | | 471 |
| Preferred stock dividends of subsidiaries | | 498 | | | 0 | | | (27) | | | 471 | |
| Net income for common stock | | $ | 46,974 |
| | $ | 15,104 |
| | $ | 65,064 |
| | $ | 127,142 |
| |
| Nine months ended September 30, 2016 | | |
| | |
| | |
| | |
| |
| Net income (loss) for common stock | | Net income (loss) for common stock | | $ | 46,779 | | | $ | 22,888 | | | $ | (6,248) | | | $ | 63,419 | |
| Nine months ended September 30, 2019 | | Nine months ended September 30, 2019 | | | | | | | | |
| Revenues from external customers | | $ | 1,549,602 |
| | $ | 213,297 |
| | $ | 360 |
| | $ | 1,763,259 |
| Revenues from external customers | | $ | 1,900,552 | | | $ | 247,287 | | | $ | 143 | | | $ | 2,147,982 | |
| Intersegment revenues (eliminations) | | 98 |
| | — |
| | (98 | ) | | — |
| Intersegment revenues (eliminations) | | 57 | | | 0 | | | (57) | | | 0 | |
| Revenues | | $ | 1,549,700 |
| | $ | 213,297 |
| | $ | 262 |
| | $ | 1,763,259 |
| Revenues | | $ | 1,900,609 | | | $ | 247,287 | | | $ | 86 | | | $ | 2,147,982 | |
| Income before income taxes | | $ | 174,376 |
| | $ | 62,545 |
| | $ | 64,321 |
| | $ | 301,242 |
| |
| Income taxes | | 64,682 |
| | 21,483 |
| | 10,038 |
| | 96,203 |
| |
| Net income | | 109,694 |
| | 41,062 |
| | 54,283 |
| | 205,039 |
| |
| Income (loss) before income taxes | | Income (loss) before income taxes | | $ | 140,775 | | | $ | 76,611 | | | $ | (27,960) | | | $ | 189,426 | |
| Income taxes (benefit) | | Income taxes (benefit) | | 27,800 | | | 15,868 | | | (7,278) | | | 36,390 | |
| Net income (loss) | | Net income (loss) | | 112,975 | | | 60,743 | | | (20,682) | | | 153,036 | |
| Preferred stock dividends of subsidiaries | | 1,496 |
| | — |
| | (79 | ) | | 1,417 |
| Preferred stock dividends of subsidiaries | | 1,496 | | | 0 | | | (79) | | | 1,417 | |
| Net income for common stock | | $ | 108,198 |
| | $ | 41,062 |
| | $ | 54,362 |
| | $ | 203,622 |
| |
| Total assets (at December 31, 2016) | | $ | 5,975,428 |
| | $ | 6,421,357 |
| | $ | 28,721 |
| | $ | 12,425,506 |
| |
| Net income (loss) for common stock | | Net income (loss) for common stock | | $ | 111,479 | | | $ | 60,743 | | | $ | (20,603) | | | $ | 151,619 | |
| Total assets (at December 31, 2019) | | Total assets (at December 31, 2019) | | $ | 6,388,682 | | | $ | 7,233,017 | | | $ | 123,552 | | | $ | 13,745,251 | |
Intercompany electricity sales of the Utilities to the bank 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.
Pending acquisition of Hamakua power plant. In September 2017, HEI formed new 100% owned subsidiaries--Pacific Current, LLC and its subsidiary Hamakua Holdings, LLC and its subsidiary, Hamakua Energy, LLC. Hamakua Energy, LLC has agreedLLC’s (Hamakua Energy’s) sales to acquire Hamakua Energy Partners, L.P.’s (HEP’s) 60-megawatt power plant from an affiliate of ArcLight Capital Partners, a Boston-based private equity firm focused on energy infrastructure investments. The plant sells power to Hawaii
Electric Light (a regulated affiliate) are eliminated in consolidation.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
Electric Light under an existing power purchase agreement (PPA) that expires in 2030, the terms of which will remain the same upon completion of the acquisition. Closing of the transaction is expected later in 2017.
Note 3 · Electric utility segment
Revenue taxes. The Utilities’ revenues include amounts for the recovery of various Hawaii state revenue taxes. Revenue taxes are generally recorded as an expense in the period the related revenues are recognized. However, the Utilities’ revenue tax payments to the taxing authorities in the period are based on the prior year’s billed revenues (in the case of public service company taxes and PUC fees) or on the current year’s cash collections from electric sales (in the case of franchise taxes). The Utilities included in the third quarters of 2017 and 2016 and nine months ended September 30, 2017 and 2016 approximately $54 million, $51 million, $150 million and $138 million, respectively, of revenue taxes in “revenues” and in “taxes, other than income taxes” expense, in the unaudited condensed consolidated statements of income.
Unconsolidated variable interest entities.
HECO Capital Trust IIIPower purchase agreements. HECO Capital Trust III (Trust III) was created and exists for the exclusive purposes of (i) issuing in March 2004 2,000,000 6.50% Cumulative Quarterly Income Preferred Securities, Series 2004 (2004 Trust Preferred Securities) ($50 million aggregate liquidation preference) to the public and trust common securities ($1.5 million aggregate liquidation preference) to Hawaiian Electric, (ii) investing the proceeds of these trust securities in 2004 Debentures issued by Hawaiian Electric in the principal amount of $31.5 million and issued by Hawaii Electric Light and Maui Electric each in the principal amount of $10 million, (iii) making distributions on these trust securities and (iv) engaging in only those other activities necessary or incidental thereto. The 2004 Trust Preferred Securities are mandatorily redeemable at the maturity of the underlying debt on March 18, 2034, which maturity may be extended to no later than March 18, 2053; and are currently redeemable at the issuer’s option without premium. The 2004 Debentures, together with the obligations of the Utilities under an expense agreement and Hawaiian Electric’s obligations under its trust guarantee and its guarantee of the obligations of Hawaii Electric Light and Maui Electric under their respective debentures, are the sole assets of Trust III. Taken together, Hawaiian Electric’s obligations under the Hawaiian Electric debentures, the Hawaiian Electric indenture, the subsidiary guarantees, the trust agreement, the expense agreement and trust guarantee provide, in the aggregate, a full, irrevocable and unconditional guarantee of payments of amounts due on the Trust Preferred Securities. Trust III has at all times been an unconsolidated subsidiary of Hawaiian Electric. Since Hawaiian Electric, as the holder of 100% of the trust common securities, does not absorb the majority of the variability of Trust III, Hawaiian Electric is not the primary beneficiary and does not consolidate Trust III in accordance with accounting rules on the consolidation of VIEs. Trust III’s balance sheets as As of September 30, 2017 and December 31, 2016 each consisted of $51.5 million of 2004 Debentures; $50.0 million of 2004 Trust Preferred Securities; and $1.5 million of trust common securities. Trust III’s income statements for the nine months ended September 30, 2017 consisted of $2.5 million of interest income received from the 2004 Debentures; $2.4 million of distributions to holders of the Trust Preferred Securities; and $75,000 of common dividends on the trust common securities to Hawaiian Electric. As long as the 2004 Trust Preferred Securities are outstanding, Hawaiian Electric is not entitled to receive any funds from Trust III other than pro-rata distributions, subject to certain subordination provisions, on the trust common securities. In the event of a default by Hawaiian Electric in the performance of its obligations under the 2004 Debentures or under its Guarantees, or in the event any of the Utilities elect to defer payment of interest on any of their respective 2004 Debentures, then Hawaiian Electric will be subject to a number of restrictions, including a prohibition on the payment of dividends on its common stock.
Power purchase agreements. As of September 30, 2017,2020, the Utilities had five4 PPAs for firm capacity (excluding the Puna Geothermal Ventures (PGV) PPA as PGV has been offline since May 2018 due to lava flow on Hawaii Island) and other PPAs with independent power producers (IPPs) and Schedule Q providers (e.g.(i.e., customers with cogeneration and/or power production facilities who buy power from or sell power to the Utilities), none of which isare 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 HEPHamakua Energy by reason of the provisions of the PPAsPPA that the Utilities have with the three3 IPPs. However, management has concluded that the Utilities are not the primary beneficiary of Kalaeloa, AES Hawaii or HEPand Hamakua Energy because the Utilities do not have the power to direct the activities that most significantly impact the three3 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 or HEPand Hamakua Energy in its unauditedcondensed 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 IPPs were eitherIPP was considered a “business” or “governmental organization,” and thus excluded from the scope of accounting standards for VIEs. TwoNaN 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
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
outcome of future analyses of such information is the consolidation of one1 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.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 September 30 | | Nine months ended September 30 | | | Three months ended September 30 | | Nine months ended September 30 | |
| (in millions) | | 2017 | | 2016 | | 2017 | | 2016 | (in millions) | | 2020 | | 2019 | | 2020 | | 2019 | |
| Kalaeloa | | $ | 48 |
| | $ | 44 |
| | $ | 136 |
| | $ | 109 |
| Kalaeloa | | $ | 39 | | | $ | 58 | | | $ | 111 | | | $ | 159 | | |
| AES Hawaii | | 39 |
| | 38 |
| | 103 |
| | 112 |
| AES Hawaii | | 33 | | | 38 | | | 96 | | | 102 | | |
| HPOWER | | 18 |
| | 19 |
| | 51 |
| | 52 |
| HPOWER | | 18 | | | 20 | | | 52 | | | 57 | | |
| Puna Geothermal Venture | | 10 |
| | 7 |
| | 28 |
| | 19 |
| |
| HEP | | 8 |
| | 8 |
| | 25 |
| | 23 |
| |
| | Hamakua Energy | | Hamakua Energy | | 12 | | | 17 | | | 36 | | | 51 | | |
| Wind IPPs | | Wind IPPs | | 30 | | | 30 | | | 83 | | | 73 | | |
| Solar IPPs | | Solar IPPs | | 17 | | | 11 | | | 45 | | | 26 | | |
Other IPPs 1 | | 38 |
| | 42 |
| | 98 |
| | 98 |
| Other IPPs 1 | | 0 | | | 2 | | | 3 | | | 4 | | |
| Total IPPs | | $ | 161 |
| | $ | 158 |
| | $ | 441 |
| | $ | 413 |
| Total IPPs | | $ | 149 | | | $ | 176 | | | $ | 426 | | | $ | 472 | | |
| |
1
| Includes wind power, solar power, feed-in tariff projects and other PPAs. |
1Includes hydro power and other PPAs
Kalaeloa Partners, L.P. In October Under a 1988 PPA, as amended, Hawaiian Electric entered into a PPA with Kalaeloa, subsequently approved by the PUC, which provided that Hawaiian Electric wouldis committed to purchase 180 megawatts (MW)208 MW of firm capacity for a period of 25 years beginning in May 1991. In October 2004,from Kalaeloa. Hawaiian Electric and Kalaeloa entered into amendments to the PPA, subsequently approved by the PUC, which together effectively increased the firm capacity from 180 MW to 208 MW. The energy payments that Hawaiian Electric makes to Kalaeloa include: (1) a fuel component, with a fuel price adjustment based on the cost of low sulfur fuel oil, (2) a fuel additives cost component and (3) a non-fuel component, with an adjustment based on changes in the Gross National Product Implicit Price Deflator. The capacity payments that Hawaiian Electric makes to Kalaeloa are fixed in accordance with the PPA. Kalaeloa also has a steam delivery cogeneration contract with another customer, the term of which coincides with the PPA. The facility has been certified by the Federal Energy Regulatory Commission as a Qualifying Facility under the Public Utility Regulatory Policies Act of 1978.
Hawaiian Electric and Kalaeloa are 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, but would end 60 days after either party notifies the other in writing that negotiations have terminated.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 October 31, 2018.November 20, 2020, to allow for a negotiated resolution and PUC approval.
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 beginningending September 1992,2022, Hawaiian Electric agreed to purchase 180 MW of firm capacity from AES Hawaii. In August 2012, Hawaiian Electric filed an application with the PUC seeking an exemption from the PUC’s Competitive Bidding Framework to negotiate an amendment to the PPA to purchase 186 MW of firm capacity, and amend the energy pricing formula in the PPA. The PUC approved the exemption in April 2013, but Hawaiian Electric and AES Hawaii were not able to reachhave been in dispute over an agreement on the amendment. In June 2015, AES Hawaii filed an arbitration demand regarding a dispute about whether Hawaiian Electric was obligated to buy up toadditional 9 MW of additional capacity based on a 1992 letter.capacity. In February 2018, Hawaiian Electric responded to the arbitration demand and in October 2015,reached agreement with AES Hawaii and Hawaiian Electric entered into a Settlement Agreement to stay the arbitration proceeding. The Settlement Agreement included certain conditions precedent which, if satisfied, would have released the parties from the claims under the arbitration proceeding. Among the conditions precedent was the successful negotiation and PUC approval ofon an amendment to the existing PPA.
In November 2015, Hawaiian Electric entered into Amendment No. 3 for which However, in June 2018, the PUC approval was requested and subsequently denied in January 2017. Approval of Amendment No. 3 would have satisfied the final condition for effectiveness
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
issued an order suspending review of the Settlement Agreement and resolved AES Hawaii's claims. Following the PUC's decision, the parties agreed to extend the stayamendment pending a Department of Health of the arbitration proceeding, while settlement discussions continue.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. LLC (Hu Honua).In May 2012, Hawaii Electric Light signed a PPA, which the PUC approved in December 2013, with Hu Honua Bioenergy, LLC (Hu Honua) for 21.5 MW of renewable, dispatchable firm capacity fueled by locally grown biomass from a facility on the island of Hawaii. PerUnder 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, failed to meet its obligations under the PPA and failed to provide adequate assurances that it could perform or had the financial means to perform. Hawaii Electric Light terminated the PPA on March 1, 2016. On November 30, 2016, Hu Honua filed a civil complaintwhich resulted in the United States District Court for the District of Hawaii that included claims purportedly arising out of the termination of Hu Honua’s PPA. On May 26, 2017, Hawaii Electric Light and Hu Honua entered into a settlement agreement that will settle all claims related to the termination of the original PPA. The settlement agreement was contingent on the PUC’s approval of an amended and restated PPA between Hawaii Electric Light and Hu Honua dated May 5,9, 2017. In July 2017, the PUC approved the amended and restated PPA. OnPPA, which becomes effective once the PUC’s order is final and non-appealable. In August 25, 2017, the PUC’s approval was appealed by a third party. The appealOn 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 Gas (GHG) emissions that would result from approving the PPA, whether the cost of energy under the PPA is still pending.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 is expected to be on-linefiled a motion for reconsideration of the PUC’s order which was denied by the endPUC on September 9, 2020. On September 16 2020, Hu Honua filed its notice of 2018.appeal to the Hawaii Supreme Court of the PUC’s order denying Hu Honua’s motion for reconsideration.
Molokai New Energy Partners (MNEP). In July 2018, the PUC approved Maui Electric’s PPA with MNEP to purchase solar energy from a 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 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 imposedPUC-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. On August 11, 2016,Project went live in October 2018. Hawaii Electric Light and Hawaiian Electric began to incorporate their portion of the deferred project costs in rate base and started the amortization over a 12-year period in January 2020 and November 2020, respectively. As of September 30, 2020, the total deferred project costs and accrued carrying costs after the project went into service amounted to $59.5 million, which is net of the amortization of $0.5 million at Hawaii Electric Light.
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’ request to commenceUtilities and the ERP/EAM Implementation Project, subject to certain conditions, including a $77.6 million cap on cost recovery as well as a requirement that the Utilities pass onto customers a minimum of $244 million in savings associated with the system over its 12-year service life. The decisionConsumer Advocate’s Stipulated Performance Metrics and order (D&O) approved the deferral of certain project costs and allowed the accrual of allowance for funds used during construction (AFUDC), but limited the AFUDC rate to 1.75%. Pursuant to the D&O and subsequent orders, in September 2017, the Utilities filed a bottom-up, low-level analysis of the project’s benefits and performance metrics and tracking mechanism for passing the project’s benefits on to customers. Monthly reports on the status and costs of the project continue to be filed.
The ERP/EAM Implementation Project is on schedule. The project is expected to go live by October 1, 2018.Tracking Mechanism. As of September 30, 2017,2020, the Project incurred costsUtilities’ regulatory liability was $9.7 million for amounts to be returned to customers for reduction in O&M expense included in rates. As part of $23.6 million of which $4.6 million were charged to other operation and maintenance (O&M) expense, $1.4 million relate to capital costs and $17.6 million are deferred costs.
Schofield Generating Station Project. In August 2012, the PUCsettlement agreement approved a waiver fromin the competitive bidding framework to allow Hawaiian Electric to negotiate with the U.S. Army2020 test year rate case, O&M benefits for the construction of a 50 MW utility owned and operated firm, renewable and dispatchable generation facility at Schofield Barracks. In September 2015, the PUC approved Hawaiian Electric’s application to expend $167 million for the project. In approving the project, the PUC placed a cost cap of $167 million for the project, stated 90% of the cap is allowed for cost recovery through cost recovery mechanisms other than base rates, and stated the $167 million cap will be adjusted downward due to any reduction in the cost of the engine contract due to a reduction in the foreign exchange rate. Hawaiian Electric was requiredhave been flowed through to take all necessary steps to lock in the lowest possible exchange rate. On January 5, 2016, Hawaiian Electric executed window forward contracts, which lowered the cost of the engine contract by $9.7 million, resulting in a revised project cost cap of $157.3 million. Hawaiian Electric has received all of the major permits for the project, including a 35 year site lease from the U.S. Army. Construction of the facility began in October 2016, and the facility is expected to be placed in service in the second quarter of 2018. A request to recover the costs of the project and related operations and maintenance expense through the newly-established Major Project Interim Recovery (MPIR) adjustment mechanism is pending PUC approval. (See “Decoupling” section below for MPIR guidelines and capital cost recovery discussion.) Project costs incurredcustomers as of September 30, 2017 amounted to $105.7 million.
West Loch PV Project. In July 2016, Hawaiian Electric announced plans to build, own and operate a utility-owned, grid-tied 20-MW (ac) solar facility in conjunction with the Department of the Navy at a Navy/Air Force joint base. In June 2017, the PUC approved the expenditure of funds for the project, including Hawaiian Electric’s proposed project cost cap of $67 million and a performance guarantee to provide energy at 9.56 cents/KWH or less. Project costs incurred as of September 30, 2017 amounted to $0.7 million.
In approving the project, the PUC agreed that the project is eligible for recovery of costs offset by related net benefits under the newly-established MPIR adjustment mechanism. (See “Decoupling” section below for MPIR guidelines and capital
October 2020.
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cost recovery discussion.) Hawaiian Electric provided supplemental materials inAt the PUC’s direction, the Utilities have been filing Semi-Annual Enterprise System Benefits (SAESB) reports. The most recent SAESB report was filed on August 2017, as requested by the PUC, to support meeting the MPIR guidelines, accompanied by system performance guarantee and cost savings sharing mechanisms.
Hawaiian Telcom. The Utilities each have separate agreements31, 2020 for the joint ownership and maintenance of utility poles with Hawaiian Telcom, Inc. (Hawaiian Telcom), the respective county or counties in which each utility operates and other third parties, such as the State of Hawaii. The agreements set forth various circumstances requiring pole removal/installation/replacement and the sharing of costs among the joint pole owners. The agreements allow for the cost of work done by one joint pole owner to be shared by the other joint pole owners based on the apportionment of costs in the agreements. The Utilities have maintained, replaced and installed the majority of the jointly-owned poles in each of the respective service territories, and have billed the other joint pole owners for their respective share of the costs. The counties and the State have been reimbursing the Utilities for their share of the costs. However, Hawaiian Telcom has been delinquent in reimbursing the Utilities for its share of the costs.period January 1 through June 30, 2020.
Hawaiian Electric has initiated a dispute resolution process to collect the unpaid amounts from Hawaiian Telcom as specified by the joint pole agreement. This dispute resolution process is stayed pending settlement negotiations. For Hawaii Electric Light, the agreement does not specify an alternative dispute resolution process, and thus a complaint for payment was filed with the Circuit Court in June 2016. This complaint is stayed pending settlement negotiations. Maui Electric has not yet commenced any legal action to recover the delinquent amounts. The Utilities and Hawaiian Telcom have entered into a non-binding memorandum of understanding to endeavor to negotiate agreements, subject to PUC approval, for purchase by the Utilities of Hawaiian Telcom’s interest in all the joint poles, with payment of the purchase price of such interest in the poles to be offset in part by the receivables owed by Hawaiian Telcom to the Utilities. As of September 30, 2017, total receivables under the joint pole agreement, including interest, from Hawaiian Telcom are $22.2 million ($14.9 million at Hawaiian Electric, $6.0 million at Hawaii Electric Light, and $1.3 million at Maui Electric). Management expects to prevail on these claims but has reserved for the accrued interest of $4.9 million on the receivables.
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 into the environment associated with current or previous operations. The Utilities report and take action on these releases when and as required by applicable law and regulations. The Utilities believe the costs of responding to such releases identified to date will not have a material effect, individually or in the aggregate, on Hawaiian Electric’s consolidated results of operations, financial condition or liquidity.
Former Molokai Electric Company generation site. In 1989, Maui Electric acquired by merger 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 Environmental Protection Agency (EPA) has since identified environmental impacts in the subsurface soil at the Site. Although Maui Electric never operated at the Site or owned the Site property, after discussions with the EPA and the Hawaii Department of Health (DOH), Maui Electric agreed to undertake additional investigations at the Site and an adjacent parcel that Molokai Electric Company had used for equipment storage (the Adjacent Parcel) to determine the extent of environmental contamination. A 2011 assessment by a Maui Electric contractor of the Adjacent Parcel identified environmental impacts, including elevated polychlorinated biphenyls (PCBs) in the subsurface soils. In cooperation with the DOH and EPA, Maui Electric is further investigatinginvestigated the Site and the Adjacent Parcel to determine the extent of impacts of PCBs,polychlorinated biphenyls (PCBs), residual fuel oils and other subsurface contaminants. Maui Electric has a reserve balance of $3.1$2.7 million as of September 30, 2017,2020, representing the probable and reasonably estimatedestimable undiscounted cost to complete the additional investigation and estimated cleanup costs atfor remediation of the Site and the Adjacent Parcel; however, final costs of remediation will depend on the results of continued investigation.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 PCB contamination in sediment in the area offshore of the Waiau Power Plant as part of the Pearl Harbor Superfund Site. The Navy has also requested that Hawaiian Electric reimburse the costs incurredwas also required by the Navy to investigate the area. The Navy has completed a remedial investigation and a feasibility study (FS) for the remediation of contaminated sediment at several locations in Pearl Harbor and issued its Final FS Report on June 29, 2015. On February 2, 2016, the Navy released the Proposed Plan for Pearl Harbor Sediment Remediation and Hawaiian Electric submitted comments. The extent of the contamination, the appropriate remedial measures to address it and Hawaiian Electric’s potential responsibility for any associated costs have not been determined.
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On March 23, 2015, Hawaiian Electric received a letter from the EPA requesting that Hawaiian Electric submit a work plan to assess potential sources and extent of PCB contamination onshore at the Waiau Power Plant. Hawaiian Electric submitted a sampling and analysis (SAP) work plan to the EPA and the DOH. Onshore sampling at the Waiau Power Plant was completed in two phases in December 2015 and June 2016. The extent of the onshore contamination, the appropriate remedial measures to address it and any associated costs have not yet been determined.
As of September 30, 2017,2020, the reserve account balance recorded by Hawaiian Electric to address the PCB contamination was $4.9$4.6 million. The reserve balance represents the probable and reasonably estimable undiscounted cost to completefor the onshore and offshore investigationsinvestigation and the remediation of PCB contamination in the offshore sediment. The final remediation costs will depend on the results of thepotential onshore investigation and assessment of potential source control requirements as well as the further investigation of contaminated sedimentand actual offshore from the Waiau Power Plant.
Asset retirement obligations. The Utilities recorded Asset Retirement Obligations (AROs) related to removing retired generating units at Hawaiian Electric’s Honolulu and Waiau power plants and removing certain types of transformers. The transformer removal projects are on-going. The retired generating unit removal projects are expected to be completed by the end of 2017, and the related AROs have been reassessed. Hawaiian Electric has determined that the AROs for the retired generating units should be minimal, and thus $24.4 million of the remaining AROs related to those projects were reversed in the third quarter of 2017 to reflect the revision in estimated cash flows (with no impact on the Utilities’ net income). The ARO balances as of September 30, 2017 and 2016, amounted to $0.7 million and $26.2 million, respectively. cleanup costs.
Regulatory proceedings
Decoupling.Decoupling is a regulatory model that is intended to provide the Utilities with financial stability and facilitate meeting the State of Hawaii’s goals to transition to a clean energy economy and achieve an aggressive renewable portfolio standard. The decoupling model implemented in Hawaiimechanism 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 kilowatthour sales, and includes annual rate adjustments. The decoupling mechanism has three components: (1) a sales decoupling component via a revenue balancing account (RBA), (2) a revenue escalation component via a 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. Decoupling provides for more timely cost recovery and earning on investments.
For the RAM years 2014 - 2016, Hawaiian Electric was allowed to record RAM revenue beginning on January 1 and to bill such amounts from June 1 of the applicable year through May 31 of the following year. Subsequent to 2016, Hawaiian Electric reverted to the RAM provisions initially approved in March 2011—i.e.,Rate adjustment mechanism. The RAM is both accrued and billed from June 1 of each year through May 31 of the following year.
2015 decoupling order. On March 31, 2015, the PUC issued an Order (the 2015 Decoupling Order) that modified the RAM portion of the decoupling mechanism to be capped atbased on the lesser of the RAM revenue adjustment as then determined (based onof: a) an inflationary adjustment for certain O&M expenses and return on investment for certain rate base changes) and a RAM revenue adjustment calculated based on thechanges, or b) cumulative annual compounded increase in Gross Domestic Product Price Index applied to annualized target revenues (the RAM Cap). The 2015 Decoupling Order provided a specific basis for calculating theAnnualized target revenues until the next rate case, at which time the target revenues willmay be reset upon the issuance of an interim or final D&Odecision and order (D&O) in a rate case. The triennial rate case cycle required under the decoupling mechanism continues to serve as the maximum period between the filing of general rate cases.
The RAM Cap impacted the Utilities' recovery of capital investments as follows:
Hawaiian Electric's RAM revenuesAll Utilities were limited to the RAM Cap in 2015, 2016 and 2017.2020.
Maui Electric's RAM revenues were limited to the RAM Cap in 2015 and 2016; however, the 2017 RAM revenues were below the RAM Cap.
Hawaii Electric Light’s RAM revenues were below the RAM Cap in 2015, 2016 and 2017.
2017 decoupling orderMajor project interim recovery. On April 27, 2017, the PUC issued an Order (the 2017 Decoupling Order)order that requires the establishment of specific performance incentive mechanisms and providesprovided guidelines for interim recovery of revenues to support major projects placed in service between general rate cases.
In May 2017, the Utilities filed their proposed initial tariffs to implement conventional stand-alone performance incentive mechanisms, namely for:
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
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standard deviation. The maximum penalty for each performance index is 20 basis points applied to the common equity share of each respective utility’s rate base (or approximately $6 million penalty for both 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 incentive is 8 basis points applied to the common equity share of each respective utility’s rate base (or approximately $1.2 million penalty or incentive in total for the three utilities).
The 2017 Decoupling Order also established guidelines for MPIR. 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 netapproved costs of approved 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 shallmust 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
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projects whichthat are not recovered through the MPIR would be included in the RAM and be subject to the RAM cap,Cap, until the next rate case when the utilitiesUtilities would request recovery in base rates.
InThe 2019 approved MPIR amounts for Schofield Generating Station of $19.8 million (which accrued effective January 1, 2019), included the 2017 Decoupling Order,2019 return on project amount (based on the 90% cap on cost recovery of the project through any mechanism other than base rates) in rate base, depreciation and incremental O&M expenses, are collected from June 2020 through May 2021.
The PUC indicated thatapproved the Utilities’ requests for MPIR recovery of the cost of the Grid Modernization Strategy Phase 1 project and West Loch Photovoltaic (PV) project in pendingMarch and subsequent rate cases, the PUC intends to require all fuel expenses and purchased energy expenses be recovered through an appropriately modified energy cost adjustment mechanism rather than through base rates, and will consider adopting processes to periodically reset fuel efficiency measures embedded in the energy cost adjustment mechanism to account for changes in the generating system.
Annual decoupling filings.December 2019, respectively. On March 31, 2017,June 5, 2020, the Utilities submitted 2020 MPIR amounts totaling $23.6 million for the Schofield Generation Station ($19.2 million), West Loch PV project ($3.8 million) and Grid Modernization Strategy Phase 1 project ($0.6 million for all three utilities) for the accrual of revenues effective January 1, 2020, that included the 2020 return on project amount (based on the capped amount) in rate base, depreciation and incremental O&M expenses, for collection from June 2021 through May 2022.
On October 22, 2020, the PUC issued the final D&O in Hawaiian Electric’s 2020 test year rate case approving the parties’ settlement agreement, including the parties’ agreement to remove the 90% cap on cost recovery for the Schofield Generating Station, such that 100% of the allowed project costs will flow through the MPIR mechanism. The 2020 MPIR amounts will be revised to reflect the new lower depreciation rates effective January 1, 2020 as approved in the Hawaiian Electric 2020 test year rate case, and for the removal of the 90% cap on cost recovery and revised rate of return effective November 1, 2020.
Performance incentive mechanisms. The PUC has established the following PIMs: (1) Service Quality performance incentives, (2) Phase 1 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 PUC, theircommon 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 decoupling filings. Maui Electric amended itsaverage 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, the Utilities accrued $0.3 million in estimated rewards for call center performance, net of service reliability penalties, for 2019. The net service quality performance rewards related to 2019 was reflected in the 2020 annual decoupling filing on May 22, 2017, to update and revise certain cost information. On May 31, 2017,increased customer rates in the PUC approved the annual decoupling filings for tariffed rates that will be effective fromperiod June 1, 20172020 through May 31, 2018.2021.
•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. Based on the 7 PPAs approved in 2019, the Utilities recognized $1.7 million in 2019.
•Phase 2 RFP PIMs. 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
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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 payout. The Utilities do not anticipate that any of the remaining projects from the Phase 2 RFP will qualify for PIM payouts.
Annual decoupling filings. The net annual incremental amounts to be collected (refunded) from 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) | |
| | | | | | | | |
|
| | | | | | | | | | | | |
| ($ in millions) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric |
| 2017 Annual incremental RAM adjusted revenues | | $ | 12.7 |
| | $ | 3.2 |
| | $ | 1.6 |
|
| Annual change in accrued earnings sharing credits | | $ | — |
| | $ | — |
| | $ | — |
|
| Annual change in accrued RBA balance as of December 31, 2016 (and associated revenue taxes) (refunded) | | $ | (2.4 | ) | | $ | (2.5 | ) | | $ | (0.2 | ) |
| Net annual incremental amount to be collected under the tariffs | | $ | 10.3 |
| | $ | 0.7 |
| | $ | 1.4 |
|
Performance-based regulation proceeding. On April 18, 2018, the PUC issued an order, instituting a proceeding to investigate performance-based regulation (PBR). The PUC stated that PBR seeks to utilize both revenue adjustment mechanisms and performance mechanisms to more strongly align utilities’ incentives with customer interests.
The order stated that, in general, the PUC is interested in ratemaking elements and/or mechanisms that result in:
•Greater cost control and reduced rate volatility;
•Efficient investment and allocation of resources regardless of classification as capital or operating expense;
•Fair distribution of risks between utilities and customers; and
•Fulfillment of State policy goals.
The proceeding has two phases. Phase 1 concluded in May 2019 with the issuance of a PUC order, which established guiding principles, regulatory goals, and priority outcomes to guide the development of the PBR mechanisms in Phase 2. The PUC identified the following guiding principles, which will inform the development of the PBR framework: 1) a customer-centric approach, 2) administrative efficiency to reduce regulatory burdens; 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, distributed energy resources (DER) asset effectiveness, and grid investment efficiency), and advance societal outcomes (capital formation, customer equity, greenhouse gas reduction, electrification of transportation, and resilience).
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) continuation 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. In August 2020, the Parties filed their respective Phase 2 Reply Statement of Positions. In September 2020, the PUC held its hearing, and the Parties filed the post-hearing briefs in October 2020. The PUC’s decision is expected in December 2020.
Most recent rate proceedings.
Hawaiian Electric consolidated 20142020 test year abbreviatedrate case. On May 27, 2020, Hawaiian Electric and the Consumer Advocate filed a Stipulated Settlement Letter, documenting a global settlement of all issues in this rate case. The Parties agreed that as a result of this settlement agreement, there will be no increase in electric revenues over the revenues established in the 2017 test year rate cases. On December 16, 2016, Hawaiian Electric filed an application with the PUC for a general rate increase of $106.4 million over revenues at current effective rates (for a 6.9% increase in revenues), based on a 2017 test year and an 8.28% rate of return (which incorporates a ROACE of 10.6% and a capital structure that includes a 57.4% common equity capitalization) on a $2.0 billion rate base. The requested increase is primarily to pay for operating costs and for system upgrades to increase reliability, improve customer service and integrate more renewable energy. In its application, Hawaiian Electric is also proposing implementation of performance based regulation (PBR) mechanisms related to its performance in the areas of customer service, reliability and communication relating to the private rooftop solar interconnection process. Hawaiian Electric proposed an expansion of the range of fuel usage efficiencies under which fuel costs would be fully passed through to customers, and an additional trigger that would allow a re-establishment of fuel usage efficiency targets under certain conditions.case.
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On December 23, 2016,May 13, 2020, the PUC issued an order consolidatingits Final Report on the Management Audit, which recommended various operational 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 savings by the end of 2022, split between capital (approximately 80%) and O&M (approximately 20%). In its statement of position on the management audit filed on June 17, 2020, Hawaiian Electric filings forcommitted to deliver these savings to customers over time through a proposal it later submitted in its statement of position in the 2014 test year abbreviated rate case andPBR proceeding.
On October 22, 2020, the PUC issued a final D&O approving the stipulated settlement agreement filed in the proceeding. As a result, there will be no increase in base electric rates established in the 2017 test year rate case. In the final D&O, the PUC approved the capital structure that consists of a 58% total equity ratio, and a ROACE of 9.5% for the 2020 test year. The order also foundresulting 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. While the PUC generally approved the amount and concluded thattreatment of Hawaiian Electric's abbreviated 2014 rate case filing did not comply with: (1) the Mandatory Triennial Rate Case Cycle requirementManagement Audit savings commitment reflected in the decoupling ordersettlement agreement as reasonable, the PUC clarified that it is not bound in the Performance-Based Regulation proceeding to accept the proposed implementation details identified in the settlement agreement and retains full discretion in that proceeding as to the scope, nature, and treatment of Hawaiian Electric’s savings commitment. Hawaiian Electric is required to file an application for a general rate case every three years and (2)revised tariff sheets within fifteen days of this final D&O. The effective date of the requirement that Hawaiianfinal tariffs is subject to PUC approval.
Hawaii Electric file its 2014 calendarLight 2019 test year rate case application by June 27, 2014. The order then stated that: “[T]he determination and disposition of any rates, accounts, adjustment mechanisms, and practices that would have been subject to review in the context of a 2014 test year rate case proceeding are subject to appropriate adjustment based on evidence and findings in the consolidated rate case proceeding.”
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On January 4, 2017, Hawaiian Electric filed a motion for clarification and/or partial reconsideration of the PUC’s order. On March 14, 2017, the PUC issued an order to address Hawaiian Electric’s motion, stating that the PUC is not initiating an investigation/enforcement proceeding against Hawaiian Electric regarding its compliance with the decoupling order, and the transfer and consolidation of Hawaiian Electric’s 2014 abbreviated rate case with the 2017 rate case is intended to ensure that ratepayers receive the attendant benefits of Hawaiian Electric’s decision to voluntarily forgo a general rate increase in base rates for its mandated 2014 test year. As directed, on April 12, 2017, Hawaiian Electric filed a supplement to its 2017 rate case filing, addressing the items raised in the order and explaining why Hawaiian Electric’s forgoing of a general rate increase in the 2014 test year should not result in any further adjustments to Hawaiian Electric’s revenue requirement in the 2017 test year.
On April 26, 2017, the PUC issued an Order regarding the supplement to Hawaiian Electric’s 2017 rate case filing, requesting updated pension and OPEB regulatory asset and liability schedules, by May 12, 2017, to reflect the use of the 2014 net periodic pension cost (NPPC) and net periodic benefits costs (NPBC) for the pension and OPEB tracking mechanisms and with amortization of such regulatory assets and liabilities beginning May 1, 2015. On May 12, 2017, Hawaiian Electric filed these schedules and on May 31, 2017, supplemented its May 12, 2017 filing to show the cumulative impact of the 2015-2017 change in employee benefits transferred to capital as a result of the change in the amortization of the pension and OPEB regulatory assets and liabilities.
On June 28, 2017, the PUC issued an order designating the filing date of Hawaiian Electric’s completed rate case application to be May 31, 2017 (the date that supplemental pension-related information described above was filed) rather than December 16, 2016, (the date of the filing of the rate case application). On July 28, 2017, the PUC issued a procedural schedule that includes Hawaiian Electric and the Consumer Advocate submitting statements of probable entitlement on November 17, 2017, an interim D&O tentatively scheduled for December 15, 2017, and an evidentiary hearing in early March 2018.
Maui Electric consolidated 2015 test year abbreviated and 2018 test year rate cases. On June 9, 2017, Maui Electric filed a notice of intent with the PUC to file a general rate case application by December 30, 2017 for a 2018 test year. On August 4, 2017, the PUC issued an order consolidating the Maui Electric filings for the 2015 test year abbreviated rate case and the 2018 test year rate case. Similar to the PUC’s conclusion regarding Hawaiian Electric’s 2014 abbreviated rate case filing, the order also found and concluded that Maui Electric’s 2015 test year abbreviated rate case filing did not comply with the Mandatory Triennial Rate Case Cycle requirement in the decoupling order that Maui Electric file an application for a general rate case every three years. The order further stated that the PUC is not initiating an investigation/enforcement proceeding against Maui Electric regarding its compliance with the decoupling order, and the transfer and consolidation of Maui Electric’s 2015 abbreviated rate case with the 2018 rate case is intended to ensure that ratepayers receive the attendant benefits of Maui Electric’s decision to voluntarily forgo a general rate increase in base rates for its mandated 2015 test year. The order stated that: “[T]he determination and disposition of any rates, accounts, adjustment mechanisms, and practices that would have been subject to review in the context of a 2015 test year rate case proceeding are subject to appropriate adjustment based on evidence and findings in the consolidated rate case proceeding.”
On October 12, 2017, Maui Electric filed its 2018 test year rate case application with the PUC for a general rate increase of $30.1 million over revenues at current effective rates (for a 9.3% increase in revenues) based on a 2018 test year and an 8.05% rate of return (which incorporates a ROACE of 10.6% and a capital structure that includes a 56.9% common equity capitalization) on a $473 million rate base. The requested rate increase is primarily to pay for operating costs, including system upgrades to increase reliability, integrate more renewable energy, and improve customer service. Further, Maui Electric requested that if a decision in a docket (filed in December 2016) seeking approval of new depreciation rates is rendered prior to new rates being established in the Maui Electric 2018 test year rate case, the new electric rates be based on the depreciation rates as a result of that docket. If the proposed depreciation rates are used to calculate Maui Electric’s 2018 test year revenue requirement, the requested revenue increase would be $46.6 million (14.3%) over revenues at current effective rates. Maui Electric filed an exhibit with information responding to the PUC’s consolidation order. Similar to Hawaiian Electric’s response, Maui Electric explained why its forgoing of a general rate increase in the 2015 test year should not result in any further adjustments to Maui Electric’s revenue requirement in the 2018 test year.
Hawaii Electric Light 2016 test year rate case. On September 19, 2016, Hawaii Electric Light filed an application with the PUC for a general rate increase of $19.3 million over revenues at current effective rates (for a 6.5% increase in revenues), based on an 8.44% rate of return (which incorporates a ROACE of 10.60%). The last rate increase in base rates for Hawaii Electric Light was in January 2011. The requested increase is to cover higher operating costs (including expanded vegetation management focusing on albizia tree removal and increased pension costs) and system upgrades to increase reliability, improve customer service and integrate more renewable energy. In its application, Hawaii Electric Light is also proposing implementation of PBR mechanisms similar to those proposed by Hawaiian Electric. In addition, Hawaii Electric Light proposed an equal sharing of fuel expenses outside the fuel usage efficiency target range.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
On July 11, 2017,24, 2019, Hawaii Electric Light and the Consumer Advocate filed a Stipulated Partial Settlement Letter which documented agreements reached with the Consumer Advocate on all of the issues in the proceeding, except for whether the stipulated ROACE, should be reduced from 9.75% (by upcapital 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% 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 a final D&O, approving the Stipulated Partial Settlement Letter in part and ordering final rates for the 2019 test year to 25 basis points) based solelyremain 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 of +/- $600,000. Hawaii Electric Light’s proposed final tariffs, PIM tariffs and ECRC tariff submitted on August 27, 2020 were approved by the impact of decoupling, considering current circumstancesPUC on October 26, 2020. The proposed final tariffs and relevant precedents. PIM tariffs took effect on November 1, 2020, and the ECRC tariff will take effect on January 1, 2021.
Regulatory assets for COVID-19 related expenses. On August 21, 2017,May 4, 2020, the PUC issued an order, grantingauthorizing all utilities, including the Utilities, to establish regulatory assets to record costs resulting from the suspension of disconnections of service during the pendency of the Governor’s Emergency Proclamation and until otherwise ordered by the PUC. In future proceedings, the PUC will consider the reasonableness of the costs, the appropriate period of recovery, any amount of carrying costs thereon, and any savings directly attributable to suspension of disconnects, and other related matters. As part of the order, the PUC prohibits the Utilities from charging late payment fees on past due payments. On June 30, 2020, the PUC issued an interim rate increaseorder approving the Utilities’ request made in April 2020 for deferral treatment of $9.9 million, based onCOVID-19 related expenses through December 31, 2020, and allowed the Stipulated SettlementUtilities to file application to request an extension of the deferral period beyond December 31, 2020. The Utilities are required to file quarterly reports to update the Utilities’ financial condition, measures in place to assist their customers during the COVID-19 emergency situation, identifying the planned deferred costs and an ROACEdetails for the deferred costs, and identifying funds received or benefits received that have resulted from the COVID-19 emergency period. The recovery of 9.5% and subject to refund, with interest, if it exceeds amounts allowedthe regulatory assets would be determined in a final order. The interim rate increase was implemented on August 31, 2017.subsequent proceeding. As of September 30, 2020, the Utilities recorded a total of $12.4 million in regulatory assets pursuant to the orders.
Condensed consolidating financial information. Hawaiian Electric is not required to provide separateCondensed consolidating financial statements or other disclosures concerning Hawaii Electric Light and Maui Electric to holders of the 2004 Debentures issued by Hawaii Electric Light and Maui Electric to Trust III since all of their voting capital stock is owned, and their obligations with respect to these securities have been fully and unconditionally guaranteed, on a subordinated basis, by Hawaiian Electric. Consolidating information is provided below for Hawaiian Electric and each of its subsidiaries are presented for the three and nine month periods ended September 30, 2020 and 2019, and as of the dates indicated.September 30, 2020 and December 31, 2019.
Hawaiian Electric also 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 and (c) relating to the trust preferred securities of Trust III.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 September 30, 20172020
| | | (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 | | $ | 429,267 |
| | 84,334 |
| | 85,198 |
| | — |
| | (30 | ) | | $ | 598,769 |
| Revenues | | $ | 398,877 | | | 82,172 | | | 81,629 | | | 0 | | | (110) | | | $ | 562,568 | |
| Expenses | | | | | | | | | | | | | Expenses | |
| Fuel oil | | 103,959 |
| | 15,754 |
| | 26,545 |
| | — |
| | — |
| | 146,258 |
| Fuel oil | | 70,557 | | | 17,047 | | | 17,438 | | | 0 | | | 0 | | | 105,042 | |
| Purchased power | | 123,893 |
| | 21,332 |
| | 15,122 |
| | — |
| | — |
| | 160,347 |
| Purchased power | | 116,249 | | | 17,665 | | | 15,111 | | | 0 | | | 0 | | | 149,025 | |
| Other operation and maintenance | | 66,221 |
| | 16,593 |
| | 17,288 |
| | — |
| | — |
| | 100,102 |
| Other operation and maintenance | | 71,179 | | | 17,565 | | | 22,499 | | | 0 | | | 0 | | | 111,243 | |
| Depreciation | | 32,722 |
| | 9,685 |
| | 5,799 |
| | — |
| | — |
| | 48,206 |
| Depreciation | | 37,853 | | | 9,760 | | | 8,076 | | | 0 | | | 0 | | | 55,689 | |
| Taxes, other than income taxes | | 40,824 |
| | 7,928 |
| | 8,028 |
| | — |
| | — |
| | 56,780 |
| Taxes, other than income taxes | | 38,005 | | | 7,512 | | | 7,534 | | | 0 | | | 0 | | | 53,051 | |
| | Total expenses | | 367,619 |
| | 71,292 |
| | 72,782 |
| | — |
| | — |
| | 511,693 |
| Total expenses | | 333,843 | | | 69,549 | | | 70,658 | | | 0 | | | 0 | | | 474,050 | |
| Operating income | | 61,648 |
| | 13,042 |
| | 12,416 |
| | — |
| | (30 | ) | | 87,076 |
| Operating income | | 65,034 | | | 12,623 | | | 10,971 | | | 0 | | | (110) | | | 88,518 | |
| Allowance for equity funds used during construction | | 3,108 |
| | 167 |
| | 207 |
| | — |
| | — |
| | 3,482 |
| Allowance for equity funds used during construction | | 1,902 | | | 208 | | | 237 | | | 0 | | | 0 | | | 2,347 | |
| Equity in earnings of subsidiaries | | 12,767 |
| | — |
| | — |
| | — |
| | (12,767 | ) | | — |
| Equity in earnings of subsidiaries | | 14,912 | | | 0 | | | 0 | | | 0 | | | (14,912) | | | 0 | |
| Retirement defined benefits expense—other than service costs | | Retirement defined benefits expense—other than service costs | | (591) | | | 194 | | | (35) | | | 0 | | | 0 | | | (432) | |
| Interest expense and other charges, net | | (11,786 | ) | | (2,899 | ) | | (2,252 | ) | | — |
| | 30 |
| | (16,907 | ) | Interest expense and other charges, net | | (11,970) | | | (2,519) | | | (2,457) | | | 0 | | | 110 | | | (16,836) | |
| Allowance for borrowed funds used during construction | | 1,173 |
| | 72 |
| | 94 |
| | — |
| | — |
| | 1,339 |
| Allowance for borrowed funds used during construction | | 659 | | | 65 | | | 77 | | | 0 | | | 0 | | | 801 | |
| Income before income taxes | | 66,910 |
| | 10,382 |
| | 10,465 |
| | — |
| | (12,767 | ) | | 74,990 |
| Income before income taxes | | 69,946 | | | 10,571 | | | 8,793 | | | 0 | | | (14,912) | | | 74,398 | |
| Income taxes | | 19,153 |
| | 3,815 |
| | 4,037 |
| | — |
| | — |
| | 27,005 |
| Income taxes | | 9,611 | | | 2,378 | | | 1,846 | | | 13,835 | |
| Net income | | 47,757 |
| | 6,567 |
| | 6,428 |
| | — |
| | (12,767 | ) | | 47,985 |
| Net income | | 60,335 | | | 8,193 | | | 6,947 | | | 0 | | | (14,912) | | | 60,563 | |
| Preferred stock dividends of subsidiaries | | — |
| | 133 |
| | 95 |
| | — |
| | — |
| | 228 |
| Preferred stock dividends of subsidiaries | | 0 | | | 133 | | | 95 | | | 0 | | | 228 | |
| Net income attributable to Hawaiian Electric | | 47,757 |
| | 6,434 |
| | 6,333 |
| | — |
| | (12,767 | ) | | 47,757 |
| Net income attributable to Hawaiian Electric | | 60,335 | | | 8,060 | | | 6,852 | | | 0 | | | (14,912) | | | 60,335 | |
| 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 | | $ | 47,487 |
| | 6,434 |
| | 6,333 |
| | — |
| | (12,767 | ) | | $ | 47,487 |
| Net income for common stock | | $ | 60,065 | | | 8,060 | | | 6,852 | | | 0 | | | (14,912) | | | $ | 60,065 | |
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Comprehensive Income
Three months ended September 30, 2017
|
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other subsidiaries | | Consolidating adjustments | | Hawaiian Electric
Consolidated |
| Net income for common stock | | $ | 47,487 |
| | 6,434 |
| | 6,333 |
| | — |
| | (12,767 | ) | | $ | 47,487 |
|
| 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 | | 3,618 |
| | 476 |
| | 404 |
| | — |
| | (880 | ) | | 3,618 |
|
| Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes | | (3,596 | ) | | (476 | ) | | (404 | ) | | — |
| | 880 |
| | (3,596 | ) |
| Other comprehensive income, net of taxes | | 22 |
| | — |
| | — |
| | — |
| | — |
| | 22 |
|
| Comprehensive income attributable to common shareholder | | $ | 47,509 |
| | 6,434 |
| | 6,333 |
| | — |
| | (12,767 | ) | | $ | 47,509 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Income
Three months ended September 30, 2016
|
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other subsidiaries | | Consolidating adjustments | | Hawaiian Electric
Consolidated |
| Revenues | | $ | 404,352 |
| | 83,105 |
| | 84,831 |
| | — |
| | (35 | ) | | $ | 572,253 |
|
| Expenses | | | | | | | | | | | | |
| Fuel oil | | 88,676 |
| | 14,603 |
| | 25,345 |
| | — |
| | — |
| | 128,624 |
|
| Purchased power | | 118,751 |
| | 22,728 |
| | 16,271 |
| | — |
| | — |
| | 157,750 |
|
| Other operation and maintenance | | 64,683 |
| | 15,017 |
| | 15,089 |
| | — |
| | — |
| | 94,789 |
|
| Depreciation | | 31,520 |
| | 9,449 |
| | 5,790 |
| | — |
| | — |
| | 46,759 |
|
| Taxes, other than income taxes | | 38,666 |
| | 7,836 |
| | 8,017 |
| | — |
| | — |
| | 54,519 |
|
| Total expenses | | 342,296 |
| | 69,633 |
| | 70,512 |
| | — |
| | — |
| | 482,441 |
|
| Operating income | | 62,056 |
| | 13,472 |
| | 14,319 |
| | — |
| | (35 | ) | | 89,812 |
|
| Allowance for equity funds used during construction | | 1,806 |
| | 238 |
| | 230 |
| | — |
| | — |
| | 2,274 |
|
| Equity in earnings of subsidiaries | | 14,729 |
| | — |
| | — |
| | — |
| | (14,729 | ) | | — |
|
| Interest expense and other charges, net | | (11,903 | ) | | (2,972 | ) | | (2,483 | ) | | — |
| | 35 |
| | (17,323 | ) |
| Allowance for borrowed funds used during construction | | 669 |
| | 91 |
| | 94 |
| | — |
| | — |
| | 854 |
|
| Income before income taxes | | 67,357 |
| | 10,829 |
| | 12,160 |
| | — |
| | (14,729 | ) | | 75,617 |
|
| Income taxes | | 20,113 |
| | 3,392 |
| | 4,640 |
| | — |
| | — |
| | 28,145 |
|
| Net income | | 47,244 |
| | 7,437 |
| | 7,520 |
| | — |
| | (14,729 | ) | | 47,472 |
|
| Preferred stock dividends of subsidiaries | | — |
| | 133 |
| | 95 |
| | — |
| | — |
| | 228 |
|
| Net income attributable to Hawaiian Electric | | 47,244 |
| | 7,304 |
| | 7,425 |
| | — |
| | (14,729 | ) | | 47,244 |
|
| Preferred stock dividends of Hawaiian Electric | | 270 |
| | — |
| | — |
| | — |
| | — |
| | 270 |
|
| Net income for common stock | | $ | 46,974 |
| | 7,304 |
| | 7,425 |
| | — |
| | (14,729 | ) | | $ | 46,974 |
|
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Comprehensive Income
Three months ended September 30, 20162020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other
subsidiaries | | Consolidating
adjustments | | Hawaiian Electric
Consolidated |
| Net income for common stock | | $ | 60,065 | | | 8,060 | | | 6,852 | | | 0 | | | (14,912) | | | $ | 60,065 | |
| 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 | | 5,769 | | | 885 | | | 770 | | | 0 | | | (1,655) | | | 5,769 | |
| Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes | | (5,721) | | | (887) | | | (767) | | | 0 | | | 1,654 | | | (5,721) | |
| Other comprehensive income (loss), net of taxes | | 48 | | | (2) | | | 3 | | | 0 | | | (1) | | | 48 | |
| Comprehensive income attributable to common shareholder | | $ | 60,113 | | | 8,058 | | | 6,855 | | | 0 | | | (14,913) | | | $ | 60,113 | |
|
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other subsidiaries | | Consolidating adjustments | | Hawaiian Electric
Consolidated |
Net income for common stock | | $ | 46,974 |
| | 7,304 |
| | 7,425 |
| | — |
| | (14,729 | ) | | $ | 46,974 |
|
| Other comprehensive income (loss), net of taxes: | | |
| | |
| | |
| | |
| | |
| | |
|
| Derivatives qualified as cash flow hedges: | | | | | | | | | | | | |
| Effective portion of foreign currency hedge net unrealized loss, net of tax benefits | | 321 |
| | — |
| | — |
| | — |
| | — |
| | 321 |
|
| Reclassification adjustment to net income, net of taxes | | (173 | ) | | — |
| | — |
| | — |
| | — |
| | (173 | ) |
| 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 | | 3,314 |
| | 429 |
| | 387 |
| | — |
| | (816 | ) | | 3,314 |
|
| Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes | | (3,311 | ) | | (429 | ) | | (389 | ) | | — |
| | 818 |
| | (3,311 | ) |
| Other comprehensive income (loss), net of taxes | | 151 |
| | — |
| | (2 | ) | | — |
| | 2 |
| | 151 |
|
| Comprehensive income attributable to common shareholder | | $ | 47,125 |
| | 7,304 |
| | 7,423 |
| | — |
| | (14,727 | ) | | $ | 47,125 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Income
Three months ended September 30, 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other subsidiaries | | Consolidating adjustments | | Hawaiian Electric Consolidated |
| Revenues | | $ | 491,723 | | | 93,576 | | | 103,236 | | | 0 | | | (205) | | | $ | 688,330 | |
| Expenses | | | | | | | | | | | | |
| Fuel oil | | 139,747 | | | 21,427 | | | 37,919 | | | 0 | | | 0 | | | 199,093 | |
| Purchased power | | 135,447 | | | 24,342 | | | 15,248 | | | 0 | | | 0 | | | 175,037 | |
| Other operation and maintenance | | 80,582 | | | 19,868 | | | 23,965 | | | 0 | | | 0 | | | 124,415 | |
| Depreciation | | 35,867 | | | 10,453 | | | 7,615 | | | 0 | | | 0 | | | 53,935 | |
| Taxes, other than income taxes | | 46,433 | | | 8,359 | | | 9,265 | | | 0 | | | 0 | | | 64,057 | |
| | | | | | | | | | | | |
| Total expenses | | 438,076 | | | 84,449 | | | 94,012 | | | 0 | | | 0 | | | 616,537 | |
| Operating income | | 53,647 | | | 9,127 | | | 9,224 | | | 0 | | | (205) | | | 71,793 | |
| Allowance for equity funds used during construction | | 2,685 | | | 229 | | | 336 | | | 0 | | | 0 | | | 3,250 | |
| Equity in earnings of subsidiaries | | 11,048 | | | 0 | | | 0 | | | 0 | | | (11,048) | | | 0 | |
| Retirement defined benefits expense—other than service costs | | (582) | | | (105) | | | (36) | | | 0 | | | 0 | | | (723) | |
| Interest expense and other charges, net | | (12,771) | | | (2,524) | | | (2,339) | | | 0 | | | 205 | | | (17,429) | |
| Allowance for borrowed funds used during construction | | 990 | | | 95 | | | 123 | | | 0 | | | 0 | | | 1,208 | |
| Income before income taxes | | 55,017 | | | 6,822 | | | 7,308 | | | 0 | | | (11,048) | | | 58,099 | |
| Income taxes | | 7,968 | | | 1,420 | | | 1,434 | | | 0 | | | 0 | | | 10,822 | |
| Net income | | 47,049 | | | 5,402 | | | 5,874 | | | 0 | | | (11,048) | | | 47,277 | |
| Preferred stock dividends of subsidiaries | | 0 | | | 133 | | | 95 | | | 0 | | | 0 | | | 228 | |
| Net income attributable to Hawaiian Electric | | 47,049 | | | 5,269 | | | 5,779 | | | 0 | | | (11,048) | | | 47,049 | |
| Preferred stock dividends of Hawaiian Electric | | 270 | | | 0 | | | 0 | | | 0 | | | 0 | | | 270 | |
| Net income for common stock | | $ | 46,779 | | | 5,269 | | | 5,779 | | | 0 | | | (11,048) | | | $ | 46,779 | |
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Comprehensive Income
Three months ended September 30, 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other
subsidiaries | | Consolidating
adjustments | | Hawaiian Electric
Consolidated |
| Net income for common stock | | $ | 46,779 | | | 5,269 | | | 5,779 | | | 0 | | | (11,048) | | | $ | 46,779�� | |
| 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 | | 2,519 | | | 387 | | | 309 | | | 0 | | | (696) | | | 2,519 | |
| Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes | | (2,493) | | | (387) | | | (309) | | | 0 | | | 696 | | | (2,493) | |
| Other comprehensive income, net of taxes | | 26 | | | 0 | | | 0 | | | 0 | | | 0 | | | 26 | |
| Comprehensive income attributable to common shareholder | | $ | 46,805 | | | 5,269 | | | 5,779 | | | 0 | | | (11,048) | | | $ | 46,805 | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Income
Nine months ended September 30, 20172020
| | | (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 | | $ | 1,186,524 |
| | 245,026 |
| | 242,756 |
| | — |
| | (51 | ) | | $ | 1,674,255 |
| Revenues | | $ | 1,200,677 | | | 249,970 | | | 244,043 | | | 0 | | | (465) | | | $ | 1,694,225 | |
| Expenses | | | | | | | | | | | | | Expenses | |
| Fuel oil | | 301,774 |
| | 47,486 |
| | 82,527 |
| | — |
| | — |
| | 431,787 |
| Fuel oil | | 268,382 | | | 55,733 | | | 66,599 | | | 0 | | | 0 | | | 390,714 | |
| Purchased power | | 340,498 |
| | 63,403 |
| | 36,637 |
| | — |
| | — |
| | 440,538 |
| Purchased power | | 333,146 | | | 53,032 | | | 39,501 | | | 0 | | | 0 | | | 425,679 | |
| Other operation and maintenance | | 204,460 |
| | 49,667 |
| | 52,589 |
| | — |
| | — |
| | 306,716 |
| Other operation and maintenance | | 231,090 | | | 54,250 | | | 63,491 | | | 0 | | | 0 | | | 348,831 | |
| Depreciation | | 98,167 |
| | 29,056 |
| | 17,355 |
| | — |
| | — |
| | 144,578 |
| Depreciation | | 113,724 | | | 29,281 | | | 24,230 | | | 0 | | | 0 | | | 167,235 | |
| Taxes, other than income taxes | | 113,483 |
| | 23,080 |
| | 23,012 |
| | — |
| | — |
| | 159,575 |
| Taxes, other than income taxes | | 115,179 | | | 23,324 | | | 22,986 | | | 0 | | | 0 | | | 161,489 | |
| | Total expenses | | 1,058,382 |
| | 212,692 |
| | 212,120 |
| | — |
| | — |
| | 1,483,194 |
| Total expenses | | 1,061,521 | | | 215,620 | | | 216,807 | | | 0 | | | 0 | | | 1,493,948 | |
| Operating income | | 128,142 |
| | 32,334 |
| | 30,636 |
| | — |
| | (51 | ) | | 191,061 |
| Operating income | | 139,156 | | | 34,350 | | | 27,236 | | | 0 | | | (465) | | | 200,277 | |
| Allowance for equity funds used during construction | | 7,823 |
| | 416 |
| | 669 |
| | — |
| | — |
| | 8,908 |
| Allowance for equity funds used during construction | | 5,452 | | | 520 | | | 584 | | | 0 | | | 0 | | | 6,556 | |
| Equity in earnings of subsidiaries | | 29,306 |
| | — |
| | — |
| | — |
| | (29,306 | ) | | — |
| Equity in earnings of subsidiaries | | 37,492 | | | 0 | | | 0 | | | 0 | | | (37,492) | | | 0 | |
| Retirement defined benefits expense—other than service costs | | Retirement defined benefits expense—other than service costs | | (1,683) | | | 581 | | | (93) | | | 0 | | | 0 | | | (1,195) | |
| Interest expense and other charges, net | | (36,405 | ) | | (8,899 | ) | | (7,372 | ) | | — |
| | 51 |
| | (52,625 | ) | Interest expense and other charges, net | | (36,471) | | | (7,536) | | | (7,226) | | | 0 | | | 465 | | | (50,768) | |
| Allowance for borrowed funds used during construction | | 2,910 |
| | 172 |
| | 289 |
| | — |
| | — |
| | 3,371 |
| Allowance for borrowed funds used during construction | | 1,887 | | | 163 | | | 191 | | | 0 | | | 0 | | | 2,241 | |
| Income before income taxes | | 131,776 |
| | 24,023 |
| | 24,222 |
| | — |
| | (29,306 | ) | | 150,715 |
| Income before income taxes | | 145,833 | | | 28,078 | | | 20,692 | | | 0 | | | (37,492) | | | 157,111 | |
| Income taxes | | 36,370 |
| | 8,973 |
| | 9,280 |
| | — |
| | — |
| | 54,623 |
| Income taxes | | 18,724 | | | 6,372 | | | 4,220 | | | 0 | | | 0 | | | 29,316 | |
| Net income | | 95,406 |
| | 15,050 |
| | 14,942 |
| | — |
| | (29,306 | ) | | 96,092 |
| Net income | | 127,109 | | | 21,706 | | | 16,472 | | | 0 | | | (37,492) | | | 127,795 | |
| Preferred stock dividends of subsidiaries | | — |
| | 400 |
| | 286 |
| | — |
| | — |
| | 686 |
| Preferred stock dividends of subsidiaries | | 0 | | | 400 | | | 286 | | | 0 | | | 0 | | | 686 | |
| Net income attributable to Hawaiian Electric | | 95,406 |
| | 14,650 |
| | 14,656 |
| | — |
| | (29,306 | ) | | 95,406 |
| Net income attributable to Hawaiian Electric | | 127,109 | | | 21,306 | | | 16,186 | | | 0 | | | (37,492) | | | 127,109 | |
| Preferred stock dividends of Hawaiian Electric | | 810 |
| | — |
| | — |
| | — |
| | — |
| | 810 |
| Preferred stock dividends of Hawaiian Electric | | 810 | | | 0 | | | 0 | | | 0 | | | 0 | | | 810 | |
| Net income for common stock | | $ | 94,596 |
| | 14,650 |
| | 14,656 |
| | — |
| | (29,306 | ) | | $ | 94,596 |
| Net income for common stock | | $ | 126,299 | | | 21,306 | | | 16,186 | | | 0 | | | (37,492) | | | $ | 126,299 | |
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Comprehensive Income
Nine months ended September 30, 2017
|
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other subsidiaries | | Consolidating adjustments | | Hawaiian Electric
Consolidated |
| Net income for common stock | | $ | 94,596 |
| | 14,650 |
| | 14,656 |
| | — |
| | (29,306 | ) | | $ | 94,596 |
|
| Other comprehensive income (loss), net of taxes: | | |
| | |
| | |
| | |
| | |
| | |
|
| Derivatives qualifying as cash flow hedges: | | | | | | | | | | | | |
| Reclassification adjustment to net income, net of tax benefits | | 454 |
| | — |
| | — |
| | — |
| | — |
| | 454 |
|
| 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 | | 10,857 |
| | 1,428 |
| | 1,214 |
| | — |
| | (2,642 | ) | | 10,857 |
|
| Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes | | (10,790 | ) | | (1,427 | ) | | (1,214 | ) | | — |
| | 2,641 |
| | (10,790 | ) |
| Other comprehensive income, net of taxes | | 521 |
| | 1 |
| | — |
| | — |
| | (1 | ) | | 521 |
|
| Comprehensive income attributable to common shareholder | | $ | 95,117 |
| | 14,651 |
| | 14,656 |
| | — |
| | (29,307 | ) | | $ | 95,117 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Income
Nine months ended September 30, 2016
|
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other subsidiaries | | Consolidating adjustments | | Hawaiian Electric
Consolidated |
| Revenues | | $ | 1,088,537 |
| | 229,940 |
| | 231,295 |
| | — |
| | (72 | ) | | $ | 1,549,700 |
|
| Expenses | | | | | | | | | | | | |
| Fuel oil | | 224,995 |
| | 40,725 |
| | 68,543 |
| | — |
| | — |
| | 334,263 |
|
| Purchased power | | 313,730 |
| | 58,885 |
| | 40,052 |
| | — |
| | — |
| | 412,667 |
|
| Other operation and maintenance | | 202,438 |
| | 46,574 |
| | 49,248 |
| | — |
| | — |
| | 298,260 |
|
| Depreciation | | 94,564 |
| | 28,347 |
| | 17,389 |
| | — |
| | — |
| | 140,300 |
|
| Taxes, other than income taxes | | 104,764 |
| | 21,632 |
| | 21,990 |
| | — |
| | — |
| | 148,386 |
|
| Total expenses | | 940,491 |
| | 196,163 |
| | 197,222 |
| | — |
| | — |
| | 1,333,876 |
|
| Operating income | | 148,046 |
| | 33,777 |
| | 34,073 |
| | — |
| | (72 | ) | | 215,824 |
|
| Allowance for equity funds used during construction | | 4,771 |
| | 571 |
| | 668 |
| | — |
| | — |
| | 6,010 |
|
| Equity in earnings of subsidiaries | | 33,541 |
| | — |
| | — |
| | — |
| | (33,541 | ) | | — |
|
| Interest expense and other charges, net | | (34,113 | ) | | (8,606 | ) | | (7,087 | ) | | — |
| | 72 |
| | (49,734 | ) |
| Allowance for borrowed funds used during construction | | 1,785 |
| | 219 |
| | 272 |
| | — |
| | — |
| | 2,276 |
|
| Income before income taxes | | 154,030 |
| | 25,961 |
| | 27,926 |
| | — |
| | (33,541 | ) | | 174,376 |
|
| Income taxes | | 45,022 |
| | 9,075 |
| | 10,585 |
| | — |
| | — |
| | 64,682 |
|
| Net income | | 109,008 |
| | 16,886 |
| | 17,341 |
| | — |
| | (33,541 | ) | | 109,694 |
|
| Preferred stock dividends of subsidiaries | | — |
| | 400 |
| | 286 |
| | — |
| | — |
| | 686 |
|
| Net income attributable to Hawaiian Electric | | 109,008 |
| | 16,486 |
| | 17,055 |
| | — |
| | (33,541 | ) | | 109,008 |
|
| Preferred stock dividends of Hawaiian Electric | | 810 |
| | — |
| | — |
| | — |
| | — |
| | 810 |
|
| Net income for common stock | | $ | 108,198 |
| | 16,486 |
| | 17,055 |
| | — |
| | (33,541 | ) | | $ | 108,198 |
|
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Comprehensive Income
Nine months ended September 30, 20162020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other subsidiaries | | Consolidating adjustments | | Hawaiian Electric Consolidated |
| Net income for common stock | | $ | 126,299 | | | 21,306 | | | 16,186 | | | 0 | | | (37,492) | | | $ | 126,299 | |
| 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 | | 16,137 | | | 2,384 | | | 2,072 | | | 0 | | | (4,456) | | | 16,137 | |
| Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes | | (16,038) | | | (2,382) | | | (2,072) | | | 0 | | | 4,454 | | | (16,038) | |
| Other comprehensive income, net of taxes | | 99 | | | 2 | | | 0 | | | 0 | | | (2) | | | 99 | |
| Comprehensive income attributable to common shareholder | | $ | 126,398 | | | 21,308 | | | 16,186 | | | 0 | | | (37,494) | | | $ | 126,398 | |
|
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other subsidiaries | | Consolidating adjustments | | Hawaiian Electric
Consolidated |
Net income for common stock | | $ | 108,198 |
| | 16,486 |
| | 17,055 |
| | — |
| | (33,541 | ) | | $ | 108,198 |
|
| Other comprehensive income (loss), net of taxes: | | |
| | |
| | |
| | |
| | |
| | |
|
| Derivatives qualifying as cash flow hedges: | | | | | | | | | | | | |
| Effective portion of foreign currency hedge net unrealized gain, net of taxes | | 578 |
| | — |
| | — |
| | — |
| | — |
| | 578 |
|
| Reclassification adjustment to net income, net of taxes | | (173 | ) | | — |
| | — |
| | — |
| | — |
| | (173 | ) |
| 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 | | 9,941 |
| | 1,288 |
| | 1,162 |
| | — |
| | (2,450 | ) | | 9,941 |
|
| Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes | | (9,934 | ) | | (1,289 | ) | | (1,166 | ) | | — |
| | 2,455 |
| | (9,934 | ) |
| Other comprehensive income (loss), net of taxes | | 412 |
| | (1 | ) | | (4 | ) | | — |
| | 5 |
| | 412 |
|
| Comprehensive income attributable to common shareholder | | $ | 108,610 |
| | 16,485 |
| | 17,051 |
| | — |
| | (33,536 | ) | | $ | 108,610 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Income
Nine months ended September 30, 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other subsidiaries | | Consolidating adjustments | | Hawaiian Electric
Consolidated |
| Revenues | | $ | 1,347,412 | | | 270,697 | | | 282,939 | | | 0 | | | (439) | | | $ | 1,900,609 | |
| Expenses | | | | | | | | | | | | |
| Fuel oil | | 374,100 | | | 62,210 | | | 105,012 | | | 0 | | | 0 | | | 541,322 | |
| Purchased power | | 367,541 | | | 67,548 | | | 37,247 | | | 0 | | | 0 | | | 472,336 | |
| Other operation and maintenance | | 240,311 | | | 56,635 | | | 64,859 | | | 0 | | | 0 | | | 361,805 | |
| Depreciation | | 107,602 | | | 31,359 | | | 22,834 | | | 0 | | | 0 | | | 161,795 | |
| Taxes, other than income taxes | | 127,654 | | | 25,170 | | | 26,480 | | | 0 | | | 0 | | | 179,304 | |
| | | | | | | | | | | | |
| Total expenses | | 1,217,208 | | | 242,922 | | | 256,432 | | | 0 | | | 0 | | | 1,716,562 | |
| Operating income | | 130,204 | | | 27,775 | | | 26,507 | | | 0 | | | (439) | | | 184,047 | |
| Allowance for equity funds used during construction | | 7,746 | | | 579 | | | 1,010 | | | 0 | | | 0 | | | 9,335 | |
| Equity in earnings of subsidiaries | | 30,983 | | | 0 | | | 0 | | | 0 | | | (30,983) | | | 0 | |
| Retirement defined benefits expense—other than service costs | | (1,716) | | | (316) | | | (95) | | | 0 | | | 0 | | | (2,127) | |
| Interest expense and other charges, net | | (38,961) | | | (8,345) | | | (7,078) | | | 0 | | | 439 | | | (53,945) | |
| Allowance for borrowed funds used during construction | | 2,854 | | | 242 | | | 369 | | | 0 | | | 0 | | | 3,465 | |
| Income before income taxes | | 131,110 | | | 19,935 | | | 20,713 | | | 0 | | | (30,983) | | | 140,775 | |
| Income taxes | | 18,821 | | | 4,431 | | | 4,548 | | | 0 | | | 0 | | | 27,800 | |
| Net income | | 112,289 | | | 15,504 | | | 16,165 | | | 0 | | | (30,983) | | | 112,975 | |
| Preferred stock dividends of subsidiaries | | 0 | | | 400 | | | 286 | | | 0 | | | 0 | | | 686 | |
| Net income attributable to Hawaiian Electric | | 112,289 | | | 15,104 | | | 15,879 | | | 0 | | | (30,983) | | | 112,289 | |
| Preferred stock dividends of Hawaiian Electric | | 810 | | | 0 | | | 0 | | | 0 | | | 0 | | | 810 | |
| Net income for common stock | | $ | 111,479 | | | 15,104 | | | 15,879 | | | 0 | | | (30,983) | | | $ | 111,479 | |
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Comprehensive Income
Nine months ended September 30, 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other subsidiaries | | Consolidating adjustments | | Hawaiian Electric Consolidated |
| Net income for common stock | | $ | 111,479 | | | 15,104 | | | 15,879 | | | 0 | | | (30,983) | | | $ | 111,479 | |
| 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 | | 7,162 | | | 1,091 | | | 887 | | | 0 | | | (1,978) | | | 7,162 | |
| Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes | | (7,089) | | | (1,089) | | | (887) | | | 0 | | | 1,976 | | | (7,089) | |
| Other comprehensive income, net of taxes | | 73 | | | 2 | | | 0 | | | 0 | | | (2) | | | 73 | |
| Comprehensive income attributable to common shareholder | | $ | 111,552 | | | 15,106 | | | 15,879 | | | 0 | | | (30,985) | | | $ | 111,552 | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Balance Sheet
| | | (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other subsidiaries | | Consoli- dating adjustments | | Hawaiian Electric
Consolidated | (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other
subsi-
diaries | | Consoli-
dating
adjustments | | Hawaiian Electric
Consolidated |
| Assets | | |
| | |
| | |
| | |
| | |
| | |
| Assets | | | | | | | | | | | | |
| Property, plant and equipment | | | | | | | | | | | | | Property, plant and equipment | |
| Utility property, plant and equipment | | |
| | |
| | |
| | |
| | |
| | |
| Utility property, plant and equipment | | | | | | | | | | | | |
| Land | | $ | 44,706 |
| | 6,191 |
| | 3,016 |
| | — |
| | — |
| | $ | 53,913 |
| Land | | $ | 42,389 | | | 5,606 | | | 3,594 | | | 0 | | | 0 | | | $ | 51,589 | |
| Plant and equipment | | 4,368,428 |
| | 1,278,884 |
| | 1,130,942 |
| | — |
| | — |
| | 6,778,254 |
| Plant and equipment | | 4,910,344 | | | 1,331,934 | | | 1,180,630 | | | 0 | | | 0 | | | 7,422,908 | |
| Less accumulated depreciation | | (1,441,963 | ) | | (524,759 | ) | | (493,707 | ) | | — |
| | — |
| | (2,460,429 | ) | Less accumulated depreciation | | (1,656,533) | | | (592,461) | | | (540,923) | | | 0 | | | 0 | | | (2,789,917) | |
| Construction in progress | | 262,098 |
| | 16,459 |
| | 28,935 |
| | — |
| | — |
| | 307,492 |
| Construction in progress | | 163,757 | | | 20,975 | | | 27,805 | | | 0 | | | 0 | | | 212,537 | |
| Utility property, plant and equipment, net | | 3,233,269 |
| | 776,775 |
| | 669,186 |
| | — |
| | — |
| | 4,679,230 |
| Utility property, plant and equipment, net | | 3,459,957 | | | 766,054 | | | 671,106 | | | 0 | | | 0 | | | 4,897,117 | |
| Nonutility property, plant and equipment, less accumulated depreciation | | 5,762 |
| | 115 |
| | 1,532 |
| | — |
| | — |
| | 7,409 |
| Nonutility property, plant and equipment, less accumulated depreciation | | 5,307 | | | 115 | | | 1,532 | | | 0 | | | 0 | | | 6,954 | |
| Total property, plant and equipment, net | | 3,239,031 |
| | 776,890 |
| | 670,718 |
| | — |
| | — |
| | 4,686,639 |
| Total property, plant and equipment, net | | 3,465,264 | | | 766,169 | | | 672,638 | | | 0 | | | 0 | | | 4,904,071 | |
| Investment in wholly owned subsidiaries, at equity | | 559,671 |
| | — |
| | — |
| | — |
| | (559,671 | ) | | — |
| Investment in wholly owned subsidiaries, at equity | | 606,411 | | | 0 | | | 0 | | | 0 | | | (606,411) | | | 0 | |
| Current assets | | |
| | |
| | |
| | |
| | |
| | |
| Current assets | | | | | | | | | | | | |
| Cash and cash equivalents | | 3,454 |
| | 4,714 |
| | 1,718 |
| | 101 |
| | — |
| | 9,987 |
| Cash and cash equivalents | | 23,525 | | | 4,363 | | | 1,835 | | | 77 | | | 0 | | | 29,800 | |
| Restricted cash | | Restricted cash | | 20,458 | | | 0 | | | 0 | | | 0 | | | 0 | | | 20,458 | |
| Advances to affiliates | | — |
| | 6,600 |
| | 4,000 |
| | — |
| | (10,600 | ) | | — |
| Advances to affiliates | | 28,500 | | | 0 | | | 0 | | | 0 | | | (28,500) | | | 0 | |
| Customer accounts receivable, net | | 92,961 |
| | 20,830 |
| | 19,344 |
| | — |
| | — |
| | 133,135 |
| Customer accounts receivable, net | | 95,884 | | | 23,322 | | | 18,730 | | | 0 | | | 0 | | | 137,936 | |
| Accrued unbilled revenues, net | | 80,644 |
| | 15,145 |
| | 13,918 |
| | — |
| | — |
| | 109,707 |
| Accrued unbilled revenues, net | | 77,981 | | | 14,633 | | | 13,801 | | | 0 | | | 0 | | | 106,415 | |
| Other accounts receivable, net | | 7,402 |
| | 2,797 |
| | 1,244 |
| | — |
| | (7,346 | ) | | 4,097 |
| Other accounts receivable, net | | 18,878 | | | 2,625 | | | 2,191 | | | 0 | | | (16,620) | | | 7,074 | |
| Fuel oil stock, at average cost | | 40,460 |
| | 8,034 |
| | 11,759 |
| | — |
| | — |
| | 60,253 |
| Fuel oil stock, at average cost | | 38,716 | | | 10,216 | | | 11,511 | | | 0 | | | 0 | | | 60,443 | |
| Materials and supplies, at average cost | | 28,865 |
| | 8,960 |
| | 18,134 |
| | — |
| | — |
| | 55,959 |
| Materials and supplies, at average cost | | 39,549 | | | 10,954 | | | 18,291 | | | 0 | | | 0 | | | 68,794 | |
| Prepayments and other | | 22,197 |
| | 4,183 |
| | 3,647 |
| | — |
| | (156 | ) | | 29,871 |
| Prepayments and other | | 30,400 | | | 4,056 | | | 5,509 | | | 0 | | | (321) | | | 39,644 | |
| Regulatory assets | | 63,608 |
| | 4,341 |
| | 4,824 |
| | — |
| | — |
| | 72,773 |
| Regulatory assets | | 19,095 | | | 2,502 | | | 3,865 | | | 0 | | | 0 | | | 25,462 | |
| Total current assets | | 339,591 |
| | 75,604 |
| | 78,588 |
| | 101 |
| | (18,102 | ) | | 475,782 |
| Total current assets | | 392,986 | | | 72,671 | | | 75,733 | | | 77 | | | (45,441) | | | 496,026 | |
| Other long-term assets | | |
| | |
| | |
| | |
| | |
| | |
| Other long-term assets | | | | | | | | | | | | |
| Operating lease right-of-use assets | | Operating lease right-of-use assets | | 142,912 | | | 1,466 | | | 362 | | | 0 | | | 0 | | | 144,740 | |
| Regulatory assets | | 639,689 |
| | 118,655 |
| | 105,847 |
| | — |
| | — |
| | 864,191 |
| Regulatory assets | | 453,384 | | | 103,556 | | | 95,281 | | | 0 | | | 0 | | | 652,221 | |
| Unamortized debt expense | | 472 |
| | 83 |
| | 106 |
| | — |
| | — |
| | 661 |
| |
| Other | | 50,424 |
| | 14,981 |
| | 14,823 |
| | — |
| | — |
| | 80,228 |
| Other | | 87,024 | | | 17,515 | | | 20,707 | | | 0 | | | 0 | | | 125,246 | |
| Total other long-term assets | | 690,585 |
| | 133,719 |
| | 120,776 |
| | — |
| | — |
| | 945,080 |
| Total other long-term assets | | 683,320 | | | 122,537 | | | 116,350 | | | 0 | | | 0 | | | 922,207 | |
| Total assets | | $ | 4,828,878 |
| | 986,213 |
| | 870,082 |
| | 101 |
| | (577,773 | ) | | $ | 6,107,501 |
| Total assets | | $ | 5,147,981 | | | 961,377 | | | 864,721 | | | 77 | | | (651,852) | | | $ | 6,322,304 | |
| Capitalization and liabilities | | |
| | |
| | |
| | |
| | |
| | |
| Capitalization and liabilities | | | | | | | | | | | | |
| Capitalization | | |
| | |
| | |
| | |
| | |
| | |
| Capitalization | | | | | | | | | | | | |
| Common stock equity | | $ | 1,829,075 |
| | 294,319 |
| | 265,251 |
| | 101 |
| | (559,671 | ) | | $ | 1,829,075 |
| Common stock equity | | $ | 2,093,398 | | | 308,066 | | | 298,268 | | | 77 | | | (606,411) | | | $ | 2,093,398 | |
| Cumulative preferred stock—not subject to mandatory redemption | | 22,293 |
| | 7,000 |
| | 5,000 |
| | — |
| | — |
| | 34,293 |
| Cumulative preferred stock—not subject to mandatory redemption | | 22,293 | | | 7,000 | | | 5,000 | | | 0 | | | 0 | | | 34,293 | |
| Long-term debt, net | | 915,097 |
| | 213,658 |
| | 189,868 |
| | — |
| | — |
| | 1,318,623 |
| Long-term debt, net | | 1,116,305 | | | 216,424 | | | 228,399 | | | 0 | | | 0 | | | 1,561,128 | |
| Total capitalization | | 2,766,465 |
| | 514,977 |
| | 460,119 |
| | 101 |
| | (559,671 | ) | | 3,181,991 |
| Total capitalization | | 3,231,996 | | | 531,490 | | | 531,667 | | | 77 | | | (606,411) | | | 3,688,819 | |
| Current liabilities | | |
| | |
| | |
| | |
| | |
| | |
| Current liabilities | | | | | | | | | | | | |
| Current portion of operating lease liabilities | | Current portion of operating lease liabilities | | 64,776 | | | 98 | | | 32 | | | 0 | | | 0 | | | 64,906 | |
| Current portion of long-term debt | | Current portion of long-term debt | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Short-term borrowings from non-affiliates | | 6,000 |
| | — |
| | — |
| | — |
| | — |
| | 6,000 |
| Short-term borrowings from non-affiliates | | 49,948 | | | 0 | | | 0 | | | 0 | | | 0 | | | 49,948 | |
| Short-term borrowings from affiliate | | 10,600 |
| | — |
| | — |
| | — |
| | (10,600 | ) | | — |
| Short-term borrowings from affiliate | | 0 | | | 26,500 | | | 2,000 | | | 0 | | | (28,500) | | | 0 | |
| Accounts payable | | 94,618 |
| | 15,291 |
| | 14,331 |
| | — |
| | — |
| | 124,240 |
| Accounts payable | | 88,867 | | | 13,730 | | | 15,883 | | | 0 | | | 0 | | | 118,480 | |
| Interest and preferred dividends payable | | 17,870 |
| | 3,973 |
| | 3,429 |
| | — |
| | (11 | ) | | 25,261 |
| Interest and preferred dividends payable | | 21,681 | | | 3,950 | | | 4,653 | | | 0 | | | (40) | | | 30,244 | |
| Taxes accrued | | 134,935 |
| | 27,571 |
| | 25,919 |
| | — |
| | (5,060 | ) | | 183,365 |
| |
| Taxes accrued, including revenue taxes | | Taxes accrued, including revenue taxes | | 127,948 | | | 29,187 | | | 26,930 | | | 0 | | | (321) | | | 183,744 | |
| Regulatory liabilities | | 576 |
| | 1,029 |
| | 1,794 |
| | — |
| | — |
| | 3,399 |
| Regulatory liabilities | | 22,943 | | | 9,304 | | | 4,308 | | | 0 | | | 0 | | | 36,555 | |
| Other | | 45,662 |
| | 8,173 |
| | 13,111 |
| | — |
| | (7,335 | ) | | 59,611 |
| Other | | 57,763 | | | 14,285 | | | 19,582 | | | 0 | | | (16,580) | | | 75,050 | |
| Total current liabilities | | 310,261 |
| | 56,037 |
| | 58,584 |
| | — |
| | (23,006 | ) | | 401,876 |
| Total current liabilities | | 433,926 | | | 97,054 | | | 73,388 | | | 0 | | | (45,441) | | | 558,927 | |
| Deferred credits and other liabilities | | |
| | |
| | |
| | |
| | |
| | |
| Deferred credits and other liabilities | | | | | | | | | | | | |
| Operating lease liabilities | | Operating lease liabilities | | 84,471 | | | 1,369 | | | 335 | | | 0 | | | 0 | | | 86,175 | |
| Deferred income taxes | | 540,857 |
| | 113,277 |
| | 108,573 |
| | — |
| | 4,904 |
| | 767,611 |
| Deferred income taxes | | 269,635 | | | 52,682 | | | 59,218 | | | 0 | | | 0 | | | 381,535 | |
| Regulatory liabilities | | 328,530 |
| | 100,973 |
| | 33,314 |
| | — |
| | — |
| | 462,817 |
| Regulatory liabilities | | 661,649 | | | 174,919 | | | 94,723 | | | 0 | | | 0 | | | 931,291 | |
| Unamortized tax credits | | 57,577 |
| | 16,048 |
| | 15,202 |
| | — |
| | — |
| | 88,827 |
| Unamortized tax credits | | 83,626 | | | 15,502 | | | 14,388 | | | 0 | | | 0 | | | 113,516 | |
| Defined benefit pension and other postretirement benefit plans liability | | 431,191 |
| | 72,366 |
| | 78,156 |
| | — |
| | — |
| | 581,713 |
| Defined benefit pension and other postretirement benefit plans liability | | 321,768 | | | 66,237 | | | 66,145 | | | 0 | | | 0 | | | 454,150 | |
| Other | | 27,097 |
| | 14,383 |
| | 16,068 |
| | — |
| | — |
| | 57,548 |
| Other | | 60,910 | | | 22,124 | | | 24,857 | | | 0 | | | 0 | | | 107,891 | |
| Total deferred credits and other liabilities | | 1,385,252 |
| | 317,047 |
| | 251,313 |
| | — |
| | 4,904 |
| | 1,958,516 |
| Total deferred credits and other liabilities | | 1,482,059 | | | 332,833 | | | 259,666 | | | 0 | | | 0 | | | 2,074,558 | |
| Contributions in aid of construction | | 366,900 |
| | 98,152 |
| | 100,066 |
| | — |
| | — |
| | 565,118 |
| |
| | Total capitalization and liabilities | | $ | 4,828,878 |
| | 986,213 |
| | 870,082 |
| | 101 |
| | (577,773 | ) | | $ | 6,107,501 |
| Total capitalization and liabilities | | $ | 5,147,981 | | | 961,377 | | | 864,721 | | | 77 | | | (651,852) | | | $ | 6,322,304 | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Balance Sheet
December 31, 20162019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (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 | | | 0 | | | 0 | | | $ | 51,816 | |
| Plant and equipment | | 4,765,362 | | | 1,313,727 | | | 1,161,199 | | | 0 | | | 0 | | | 7,240,288 | |
| Less accumulated depreciation | | (1,591,241) | | | (574,615) | | | (524,301) | | | 0 | | | 0 | | | (2,690,157) | |
| Construction in progress | | 165,137 | | | 9,993 | | | 17,944 | | | 0 | | | 0 | | | 193,074 | |
| Utility property, plant and equipment, net | | 3,381,856 | | | 754,711 | | | 658,454 | | | 0 | | | 0 | | | 4,795,021 | |
| Nonutility property, plant and equipment, less accumulated depreciation | | 5,310 | | | 114 | | | 1,532 | | | 0 | | | 0 | | | 6,956 | |
| Total property, plant and equipment, net | | 3,387,166 | | | 754,825 | | | 659,986 | | | 0 | | | 0 | | | 4,801,977 | |
Investment in wholly owned subsidiaries, at equity | | 591,969 | | | 0 | | | 0 | | | 0 | | | (591,969) | | | 0 | |
| Current assets | | | | | | | | | | | | |
| Cash and cash equivalents | | 2,239 | | | 6,885 | | | 1,797 | | | 101 | | | 0 | | | 11,022 | |
| Restricted cash | | 30,749 | | | 123 | | | 0 | | | 0 | | | 0 | | | 30,872 | |
| Advances to affiliates | | 27,700 | | | 8,000 | | | 0 | | | 0 | | | (35,700) | | | 0 | |
| Customer accounts receivable, net | | 105,454 | | | 24,520 | | | 22,816 | | | 0 | | | 0 | | | 152,790 | |
| Accrued unbilled revenues, net | | 83,148 | | | 17,071 | | | 17,008 | | | 0 | | | 0 | | | 117,227 | |
| Other accounts receivable, net | | 18,396 | | | 1,907 | | | 1,960 | | | 0 | | | (10,695) | | | 11,568 | |
| Fuel oil stock, at average cost | | 69,003 | | | 8,901 | | | 14,033 | | | 0 | | | 0 | | | 91,937 | |
| Materials and supplies, at average cost | | 34,876 | | | 8,313 | | | 17,513 | | | 0 | | | 0 | | | 60,702 | |
| Prepayments and other | | 88,334 | | | 3,725 | | | 24,921 | | | 0 | | | 0 | | | 116,980 | |
| Regulatory assets | | 27,689 | | | 1,641 | | | 1,380 | | | 0 | | | 0 | | | 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 | | | 0 | | | 0 | | | 176,809 | |
| Regulatory assets | | 476,390 | | | 109,163 | | | 98,817 | | | 0 | | | 0 | | | 684,370 | |
| | | | | | | | | | | | |
| Other | | 69,010 | | | 15,493 | | | 17,215 | | | 0 | | | 0 | | | 101,718 | |
| Total other long-term assets | | 720,286 | | | 126,193 | | | 116,418 | | | 0 | | | 0 | | | 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 | | | 0 | | | 0 | | | 34,293 | |
| Long-term debt, net | | 1,006,737 | | | 206,416 | | | 188,561 | | | 0 | | | 0 | | | 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 | | | 0 | | | 0 | | | 63,707 | |
| Current portion of long-term debt | | 61,958 | | | 13,995 | | | 20,000 | | | 0 | | | 0 | | | 95,953 | |
| Short-term borrowings-non-affiliate | | 88,987 | | | 0 | | | 0 | | | 0 | | | 0 | | | 88,987 | |
| Short-term borrowings-affiliate | | 8,000 | | | 0 | | | 27,700 | | | 0 | | | (35,700) | | | 0 | |
| Accounts payable | | 139,056 | | | 25,629 | | | 23,085 | | | 0 | | | 0 | | | 187,770 | |
| Interest and preferred dividends payable | | 14,759 | | | 3,115 | | | 2,900 | | | 0 | | | (46) | | | 20,728 | |
| Taxes accrued, including revenue taxes | | 143,522 | | | 32,541 | | | 31,929 | | | 0 | | | 0 | | | 207,992 | |
| Regulatory liabilities | | 13,363 | | | 9,454 | | | 7,907 | | | 0 | | | 0 | | | 30,724 | |
| Other | | 51,295 | | | 11,362 | | | 15,297 | | | 0 | | | (10,649) | | | 67,305 | |
| Total current liabilities | | 584,522 | | | 96,190 | | | 128,849 | | | 0 | | | (46,395) | | | 763,166 | |
| Deferred credits and other liabilities | | | | | | | | | | | | |
| Operating lease liabilities | | 111,598 | | | 1,442 | | | 360 | | | 0 | | | 0 | | | 113,400 | |
| Deferred income taxes | | 265,864 | | | 53,534 | | | 57,752 | | | 0 | | | 0 | | | 377,150 | |
| Regulatory liabilities | | 664,894 | | | 178,474 | | | 98,218 | | | 0 | | | 0 | | | 941,586 | |
| Unamortized tax credits | | 86,852 | | | 16,196 | | | 14,820 | | | 0 | | | 0 | | | 117,868 | |
| Defined benefit pension and other postretirement benefit plans liability | | 339,471 | | | 69,928 | | | 69,364 | | | 0 | | | 0 | | | 478,763 | |
| Other | | 57,426 | | | 33,926 | | | 22,038 | | | 0 | | | 0 | | | 113,390 | |
| Total deferred credits and other liabilities | | 1,526,105 | | | 353,500 | | | 262,552 | | | 0 | | | 0 | | | 2,142,157 | |
| | | | | | | | | | | | |
| Total capitalization and liabilities | | $ | 5,187,009 | | | 962,104 | | | 877,832 | | | 101 | | | (638,364) | | | $ | 6,388,682 | |
|
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other subsidiaries | | Consoli- dating adjustments | | Hawaiian Electric
Consolidated |
| Assets | | |
| | |
| | |
| | |
| | |
| | |
|
| Property, plant and equipment | | | | | | | | | | | | |
| Utility property, plant and equipment | | |
| | |
| | |
| | |
| | |
| | |
|
| Land | | $ | 43,956 |
| | 6,181 |
| | 3,016 |
| | — |
| | — |
| | $ | 53,153 |
|
| Plant and equipment | | 4,241,060 |
| | 1,255,185 |
| | 1,109,487 |
| | — |
| | — |
| | 6,605,732 |
|
| Less accumulated depreciation | | (1,382,972 | ) | | (507,666 | ) | | (478,644 | ) | | — |
| | — |
| | (2,369,282 | ) |
| Construction in progress | | 180,194 |
| | 12,510 |
| | 19,038 |
| | — |
| | — |
| | 211,742 |
|
| Utility property, plant and equipment, net | | 3,082,238 |
| | 766,210 |
| | 652,897 |
| | — |
| | — |
| | 4,501,345 |
|
| Nonutility property, plant and equipment, less accumulated depreciation | | 5,760 |
| | 115 |
| | 1,532 |
| | — |
| | — |
| | 7,407 |
|
| Total property, plant and equipment, net | | 3,087,998 |
| | 766,325 |
| | 654,429 |
| | — |
| | — |
| | 4,508,752 |
|
Investment in wholly owned subsidiaries, at equity | | 550,946 |
| | — |
| | — |
| | — |
| | (550,946 | ) | | — |
|
| Current assets | | |
| | |
| | |
| | |
| | |
| | |
|
| Cash and cash equivalents | | 61,388 |
| | 10,749 |
| | 2,048 |
| | 101 |
| | — |
| | 74,286 |
|
| Advances to affiliates | | — |
| | 3,500 |
| | 10,000 |
| | — |
| | (13,500 | ) | | — |
|
| Customer accounts receivable, net | | 86,373 |
| | 20,055 |
| | 17,260 |
| | — |
| | — |
| | 123,688 |
|
| Accrued unbilled revenues, net | | 65,821 |
| | 13,564 |
| | 12,308 |
| | — |
| | — |
| | 91,693 |
|
| Other accounts receivable, net | | 7,652 |
| | 2,445 |
| | 1,416 |
| | — |
| | (6,280 | ) | | 5,233 |
|
| Fuel oil stock, at average cost | | 47,239 |
| | 8,229 |
| | 10,962 |
| | — |
| | — |
| | 66,430 |
|
| Materials and supplies, at average cost | | 29,928 |
| | 7,380 |
| | 16,371 |
| | — |
| | — |
| | 53,679 |
|
| Prepayments and other | | 16,502 |
| | 5,352 |
| | 2,179 |
| | — |
| | (933 | ) | | 23,100 |
|
| Regulatory assets | | 60,185 |
| | 3,483 |
| | 2,364 |
| | — |
| | — |
| | 66,032 |
|
| Total current assets | | 375,088 |
| | 74,757 |
| | 74,908 |
| | 101 |
| | (20,713 | ) | | 504,141 |
|
| Other long-term assets | | |
| | |
| | |
| | |
| | |
| | |
|
| Regulatory assets | | 662,232 |
| | 120,863 |
| | 108,324 |
| | — |
| | — |
| | 891,419 |
|
| Unamortized debt expense | | 151 |
| | 23 |
| | 34 |
| | — |
| | — |
| | 208 |
|
| Other | | 43,743 |
| | 13,573 |
| | 13,592 |
| | — |
| | — |
| | 70,908 |
|
| Total other long-term assets | | 706,126 |
| | 134,459 |
| | 121,950 |
| | — |
| | — |
| | 962,535 |
|
| Total assets | | $ | 4,720,158 |
| | 975,541 |
| | 851,287 |
| | 101 |
| | (571,659 | ) | | $ | 5,975,428 |
|
| Capitalization and liabilities | | |
| | |
| | |
| | |
| | |
| | |
|
| Capitalization | | |
| | |
| | |
| | |
| | |
| | |
|
| Common stock equity | | $ | 1,799,787 |
| | 291,291 |
| | 259,554 |
| | 101 |
| | (550,946 | ) | | $ | 1,799,787 |
|
| Cumulative preferred stock—not subject to mandatory redemption | | 22,293 |
| | 7,000 |
| | 5,000 |
| | — |
| | — |
| | 34,293 |
|
| Long-term debt, net | | 915,437 |
| | 213,703 |
| | 190,120 |
| | — |
| | — |
| | 1,319,260 |
|
| Total capitalization | | 2,737,517 |
| | 511,994 |
| | 454,674 |
| | 101 |
| | (550,946 | ) | | 3,153,340 |
|
| Current liabilities | | |
| | |
| | |
| | |
| | |
| | |
| Short-term borrowings from affiliate | | 13,500 |
| | — |
| | — |
| | — |
| | (13,500 | ) | | — |
|
| Accounts payable | | 86,369 |
| | 18,126 |
| | 13,319 |
| | — |
| | — |
| | 117,814 |
|
| Interest and preferred dividends payable | | 15,761 |
| | 4,206 |
| | 2,882 |
| | — |
| | (11 | ) | | 22,838 |
|
| Taxes accrued | | 120,176 |
| | 28,100 |
| | 25,387 |
| | — |
| | (933 | ) | | 172,730 |
|
| Regulatory liabilities | | — |
| | 2,219 |
| | 1,543 |
| | — |
| | — |
| | 3,762 |
|
| Other | | 41,352 |
| | 7,637 |
| | 12,501 |
| | — |
| | (6,269 | ) | | 55,221 |
|
| Total current liabilities | | 277,158 |
| | 60,288 |
| | 55,632 |
| | — |
| | (20,713 | ) | | 372,365 |
|
| Deferred credits and other liabilities | | |
| | |
| | |
| | |
| | |
| | |
| Deferred income taxes | | 524,433 |
| | 108,052 |
| | 100,911 |
| | — |
| | 263 |
| | 733,659 |
|
| Regulatory liabilities | | 281,112 |
| | 93,974 |
| | 31,845 |
| | — |
| | — |
| | 406,931 |
|
| Unamortized tax credits | | 57,844 |
| | 15,994 |
| | 15,123 |
| | — |
| | — |
| | 88,961 |
|
| Defined benefit pension and other postretirement benefit plans liability | | 444,458 |
| | 75,005 |
| | 80,263 |
| | — |
| | — |
| | 599,726 |
|
| Other | | 49,191 |
| | 13,024 |
| | 14,969 |
| | — |
| | (263 | ) | | 76,921 |
|
| Total deferred credits and other liabilities | | 1,357,038 |
| | 306,049 |
| | 243,111 |
| | — |
| | — |
| | 1,906,198 |
|
| Contributions in aid of construction | | 348,445 |
| | 97,210 |
| | 97,870 |
| | — |
| | — |
| | 543,525 |
|
| Total capitalization and liabilities | | $ | 4,720,158 |
| | 975,541 |
| | 851,287 |
| | 101 |
| | (571,659 | ) | | $ | 5,975,428 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Changes in Common Stock Equity
Nine months ended September 30, 20172020
| | | (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, 2016 | | $ | 1,799,787 |
| | 291,291 |
| | 259,554 |
| | 101 |
| | (550,946 | ) | | $ | 1,799,787 |
| |
| 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 | | 94,596 |
| | 14,650 |
| | 14,656 |
| | — |
| | (29,306 | ) | | 94,596 |
| Net income for common stock | | 126,299 | | | 21,306 | | | 16,186 | | | — | | | (37,492) | | | 126,299 | |
| Other comprehensive income, net of taxes | | 521 |
| | 1 |
| | — |
| | — |
| | (1 | ) | | 521 |
| Other comprehensive income, net of taxes | | 99 | | | 2 | | | 0 | | | — | | | (2) | | | 99 | |
| Common stock dividends | | (65,825 | ) | | (11,622 | ) | | (8,959 | ) | | — |
| | 20,581 |
| | (65,825 | ) | Common stock dividends | | (80,352) | | | (12,240) | | | (10,788) | | | — | | | 23,028 | | | (80,352) | |
| Common stock issuance expenses | | (4 | ) | | (1 | ) | | — |
| | — |
| | 1 |
| | (4 | ) | |
| Balance, September 30, 2017 | | $ | 1,829,075 |
| | 294,319 |
| | 265,251 |
| | 101 |
| | (559,671 | ) | | $ | 1,829,075 |
| |
| Dissolution of subsidiary | | Dissolution of subsidiary | | — | | | — | | | — | | | (24) | | | 24 | | | 0 | |
| | Balance, September 30, 2020 | | Balance, September 30, 2020 | | $ | 2,093,398 | | | 308,066 | | | 298,268 | | | 77 | | | (606,411) | | | $ | 2,093,398 | |
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Changes in Common Stock Equity
Nine months ended September 30, 20162019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (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 | |
| Net income for common stock | | 111,479 | | | 15,104 | | | 15,879 | | | — | | | (30,983) | | | 111,479 | |
| Other comprehensive income, net of taxes | | 73 | | | 2 | | | — | | | — | | | (2) | | | 73 | |
| Common stock dividends | | (75,939) | | | (7,635) | | | (11,301) | | | — | | | 18,936 | | | (75,939) | |
| Common stock issuance expenses | | — | | | — | | | (1) | | | — | | | 1 | | | 0 | |
| Balance, September 30, 2019 | | $ | 1,993,254 | | | 303,345 | | | 285,440 | | | 101 | | | (588,886) | | | $ | 1,993,254 | |
|
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other subsidiaries | | Consolidating adjustments | | Hawaiian Electric
Consolidated |
| Balance, December 31, 2015 | | $ | 1,728,325 |
| | 292,702 |
| | 263,725 |
| | 101 |
| | (556,528 | ) | | $ | 1,728,325 |
|
| Net income for common stock | | 108,198 |
| | 16,486 |
| | 17,055 |
| | — |
| | (33,541 | ) | | 108,198 |
|
| Other comprehensive income (loss), net of taxes | | 412 |
| | (1 | ) | | (4 | ) | | — |
| | 5 |
| | 412 |
|
| Common stock dividends | | (70,199 | ) | | (9,906 | ) | | (9,795 | ) | | — |
| | 19,701 |
| | (70,199 | ) |
| Common stock issuance expenses | | (9 | ) | | (5 | ) | | — |
| | — |
| | 5 |
| | (9 | ) |
| Balance, September 30, 2016 | | $ | 1,766,727 |
| | 299,276 |
| | 270,981 |
| | 101 |
| | (570,358 | ) | | $ | 1,766,727 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Cash Flows
Nine months ended September 30, 2017
|
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other subsidiaries | | Consolidating adjustments | | Hawaiian Electric
Consolidated |
| Cash flows from operating activities | | |
| | |
| | |
| | |
| | |
| | |
|
| Net income | | $ | 95,406 |
| | 15,050 |
| | 14,942 |
| | — |
| | (29,306 | ) | | $ | 96,092 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | |
| | |
| | |
| | |
| | |
| | |
| Equity in earnings of subsidiaries | | (29,381 | ) | | — |
| | — |
| | — |
| | 29,306 |
| | (75 | ) |
| Common stock dividends received from subsidiaries | | 20,656 |
| | — |
| | — |
| | — |
| | (20,581 | ) | | 75 |
|
| Depreciation of property, plant and equipment | | 98,167 |
| | 29,056 |
| | 17,355 |
| | — |
| | — |
| | 144,578 |
|
| Other amortization | | 2,168 |
| | 1,718 |
| | 2,232 |
| | — |
| | — |
| | 6,118 |
|
| Deferred income taxes | | 12,166 |
| | 5,237 |
| | 7,493 |
| | — |
| | 4,641 |
| | 29,537 |
|
| Allowance for equity funds used during construction | | (7,823 | ) | | (416 | ) | | (669 | ) | | — |
| | — |
| | (8,908 | ) |
| Other | | 216 |
| | 566 |
| | (256 | ) | | — |
| | — |
| | 526 |
|
| Changes in assets and liabilities: | | |
| | |
| | |
| | |
| | |
| | |
|
| Increase in accounts receivable | | (6,114 | ) | | (1,127 | ) | | (1,912 | ) | | — |
| | 1,066 |
| | (8,087 | ) |
| Increase in accrued unbilled revenues | | (14,823 | ) | | (1,581 | ) | | (1,610 | ) | | — |
| | — |
| | (18,014 | ) |
| Decrease (increase) in fuel oil stock | | 6,779 |
| | 195 |
| | (797 | ) | | — |
| | — |
| | 6,177 |
|
| Decrease (increase) in materials and supplies | | 1,063 |
| | (1,580 | ) | | (1,763 | ) | | — |
| | — |
| | (2,280 | ) |
| Decrease (increase) in regulatory assets | | 9,471 |
| | (2,935 | ) | | (2,614 | ) | | — |
| | — |
| | 3,922 |
|
| Increase (decrease) in accounts payable | | (22,224 | ) | | (2,955 | ) | | 2,338 |
| | — |
| | — |
| | (22,841 | ) |
| Change in prepaid and accrued income taxes, tax credits and revenue taxes | | 10,920 |
| | (758 | ) | | 210 |
| | — |
| | (5,081 | ) | | 5,291 |
|
| Increase (decrease) in defined benefit pension and other postretirement benefit plans liability | | 532 |
| | 39 |
| | (118 | ) | | — |
| | — |
| | 453 |
|
| Change in other assets and liabilities | | (2,709 | ) | | 1,059 |
| | 54 |
| | — |
| | (1,066 | ) | | (2,662 | ) |
| Net cash provided by operating activities | | 174,470 |
| | 41,568 |
| | 34,885 |
| | — |
| | (21,021 | ) | | 229,902 |
|
| Cash flows from investing activities | | |
| | |
| | |
| | |
| | |
| | |
|
| Capital expenditures | | (207,493 | ) | | (36,405 | ) | | (34,106 | ) | | — |
| | — |
| | (278,004 | ) |
| Contributions in aid of construction | | 34,787 |
| | 3,460 |
| | 2,356 |
| | — |
| | — |
| | 40,603 |
|
| Other | | 6,089 |
| | 871 |
| | 714 |
| | — |
| | 440 |
| | 8,114 |
|
| Advances from affiliates | | — |
| | (3,100 | ) | | 6,000 |
| | — |
| | (2,900 | ) | | — |
|
| Net cash used in investing activities | | (166,617 | ) | | (35,174 | ) | | (25,036 | ) | | — |
| | (2,460 | ) | | (229,287 | ) |
| Cash flows from financing activities | | |
| | |
| | |
| | |
| | |
| | |
|
| Common stock dividends | | (65,825 | ) | | (11,622 | ) | | (8,959 | ) | | — |
| | 20,581 |
| | (65,825 | ) |
| Preferred stock dividends of Hawaiian Electric and subsidiaries | | (810 | ) | | (400 | ) | | (286 | ) | | — |
| | — |
| | (1,496 | ) |
| Proceeds from issuance of special purpose revenue bonds | | 162,000 |
| | 28,000 |
| | 75,000 |
| | — |
| |
|
| | 265,000 |
|
| Funds transferred for redemption of special purpose revenue bonds | | (162,000 | ) | | (28,000 | ) | | (75,000 | ) | | — |
| | — |
| | (265,000 | ) |
| Net increase in short-term borrowings from non-affiliates and affiliate with original maturities of three months or less | | 3,100 |
| | — |
| | — |
| | — |
| | 2,900 |
| | 6,000 |
|
| Other | | (2,252 | ) | | (407 | ) | | (934 | ) | | — |
| | — |
| | (3,593 | ) |
| Net cash used in financing activities | | (65,787 | ) | | (12,429 | ) | | (10,179 | ) | | — |
| | 23,481 |
| | (64,914 | ) |
| Net decrease in cash and cash equivalents | | (57,934 | ) | | (6,035 | ) | | (330 | ) | | — |
| | — |
| | (64,299 | ) |
| Cash and cash equivalents, beginning of period | | 61,388 |
| | 10,749 |
| | 2,048 |
| | 101 |
| | — |
| | 74,286 |
|
| Cash and cash equivalents, end of period | | $ | 3,454 |
| | 4,714 |
| | 1,718 |
| | 101 |
| | — |
| | $ | 9,987 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Cash Flows
Nine months ended September 30, 20162020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other
subsidiaries | | Consolidating
adjustments | | Hawaiian Electric
Consolidated |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Net cash provided by operating activities | | $ | 205,645 | | | 27,256 | | | 34,678 | | | 0 | | | (22,624) | | | $ | 244,955 | |
| Cash flows from investing activities | | | | | | | | | | | | |
| Capital expenditures | | (180,088) | | | (48,750) | | | (38,644) | | | 0 | | | 0 | | | (267,482) | |
| | | | | | | | | | | | |
| Advances from (to) affiliates | | (800) | | | 8,000 | | | 0 | | | 0 | | | (7,200) | | | 0 | |
| Other | | 5,636 | | | 1,056 | | | 1,031 | | | (24) | | | (404) | | | 7,295 | |
| Net cash used in investing activities | | (175,252) | | | (39,694) | | | (37,613) | | | (24) | | | (7,604) | | | (260,187) | |
| Cash flows from financing activities | | | | | | | | | | | | |
| Common stock dividends | | (80,352) | | | (12,240) | | | (10,788) | | | 0 | | | 23,028 | | | (80,352) | |
| Preferred stock dividends of Hawaiian Electric and subsidiaries | | (810) | | | (400) | | | (286) | | | 0 | | | 0 | | | (1,496) | |
| Proceeds from issuance of short-term debt | | 100,000 | | | 0 | | | 0 | | | 0 | | | 0 | | | 100,000 | |
| Repayment of short-term debt | | (100,000) | | | 0 | | | 0 | | | 0 | | | 0 | | | (100,000) | |
| Proceeds from issuance of long-term debt | | 205,000 | | | 10,000 | | | 40,000 | | | 0 | | | 0 | | | 255,000 | |
| Repayment of long-term debt | | (95,000) | | | (14,000) | | | 0 | | | 0 | | | 0 | | | (109,000) | |
| Net increase (decrease) in short-term borrowings from non-affiliates and affiliate with original maturities of three months or less | | (46,987) | | | 26,500 | | | (25,700) | | | 0 | | | 7,200 | | | (38,987) | |
| Other | | (1,249) | | | (67) | | | (253) | | | 0 | | | 0 | | | (1,569) | |
| Net cash provided by financing activities | | (19,398) | | | 9,793 | | | 2,973 | | | 0 | | | 30,228 | | | 23,596 | |
| Net increase (decrease) in cash and cash equivalents | | 10,995 | | | (2,645) | | | 38 | | | (24) | | | 0 | | | 8,364 | |
| 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 | | 43,983 | | | 4,363 | | | 1,835 | | | 77 | | | 0 | | | 50,258 | |
| Less: Restricted cash | | (20,458) | | | 0 | | | 0 | | | 0 | | | 0 | | | (20,458) | |
| Cash and cash equivalents, end of period | | $ | 23,525 | | | 4,363 | | | 1,835 | | | 77 | | | 0 | | | $ | 29,800 | |
|
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other
subsidiaries | | Consolidating
adjustments | | Hawaiian Electric
Consolidated |
| Cash flows from operating activities | | |
| | �� |
| | |
| | |
| | |
| | |
|
| Net income | | $ | 109,008 |
| | 16,886 |
| | 17,341 |
| | — |
| | (33,541 | ) | | $ | 109,694 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | |
| | |
| | |
| | |
| | |
| | |
|
| Equity in earnings of subsidiaries | | (33,616 | ) | | — |
| | — |
| | — |
| | 33,541 |
| | (75 | ) |
| Common stock dividends received from subsidiaries | | 19,776 |
| | — |
| | — |
| | — |
| | (19,701 | ) | | 75 |
|
| Depreciation of property, plant and equipment | | 94,564 |
| | 28,347 |
| | 17,389 |
| | — |
| | — |
| | 140,300 |
|
| Other amortization | | 2,462 |
| | 1,366 |
| | 1,552 |
| | — |
| | — |
| | 5,380 |
|
| Deferred income taxes | | 41,005 |
| | 4,529 |
| | 10,085 |
| | — |
| | 29 |
| | 55,648 |
|
| Allowance for equity funds used during construction | | (4,771 | ) | | (571 | ) | | (668 | ) | | — |
| | — |
| | (6,010 | ) |
| Other | | 2,925 |
| | 162 |
| | 147 |
| | — |
| | — |
| | 3,234 |
|
| Changes in assets and liabilities: | | | | | | | | | | | | |
| Decrease (increase) in accounts receivable | | 328 |
| | (2,716 | ) | | (1,313 | ) | | — |
| | 3,046 |
| | (655 | ) |
| Increase in accrued unbilled revenues | | (9,673 | ) | | (373 | ) | | (612 | ) | | — |
| | — |
| | (10,658 | ) |
| Decrease in fuel oil stock | | 4,157 |
| | 1,425 |
| | 1,154 |
| | — |
| | — |
| | 6,736 |
|
| Decrease (increase) in materials and supplies | | (1,755 | ) | | (1,559 | ) | | 387 |
| | — |
| | — |
| | (2,927 | ) |
| Decrease (increase) in regulatory assets | | (2,474 | ) | | (150 | ) | | 373 |
| | — |
| | — |
| | (2,251 | ) |
| Increase (decrease) in accounts payable | | (2,628 | ) | | 143 |
| | 1,809 |
| | — |
| | — |
| | (676 | ) |
| Change in prepaid and accrued income taxes, tax credits and revenue taxes | | (7,324 | ) | | 2,230 |
| | (4,472 | ) | | — |
| | (29 | ) | | (9,595 | ) |
| Increase (decrease) in defined benefit pension and other postretirement benefit plans liability | | 449 |
| | 40 |
| | (129 | ) | | — |
| | — |
| | 360 |
|
| Change in other assets and liabilities | | (10,548 | ) | | 2,856 |
| | (2,571 | ) | | — |
| | (3,046 | ) | | (13,309 | ) |
| Net cash provided by operating activities | | 201,885 |
| | 52,615 |
| | 40,472 |
| | — |
| | (19,701 | ) | | 275,271 |
|
| Cash flows from investing activities | | |
| | |
| | |
| | |
| | |
| | |
|
| Capital expenditures | | (188,415 | ) | | (37,835 | ) | | (24,454 | ) | | — |
| | — |
| | (250,704 | ) |
| Contributions in aid of construction | | 18,181 |
| | 2,691 |
| | 2,696 |
| | — |
| | — |
| | 23,568 |
|
| Other | | 901 |
| | 169 |
| | 30 |
| | — |
| | — |
| | 1,100 |
|
| Advances from affiliates | | — |
| | (3,000 | ) | | (8,000 | ) | | — |
| | 11,000 |
| | — |
|
| Net cash used in investing activities | | (169,333 | ) | | (37,975 | ) | | (29,728 | ) | | — |
| | 11,000 |
| | (226,036 | ) |
| Cash flows from financing activities | | |
| | |
| | |
| | |
| | |
| | |
| Common stock dividends | | (70,199 | ) | | (9,906 | ) | | (9,795 | ) | | — |
| | 19,701 |
| | (70,199 | ) |
| Preferred stock dividends of Hawaiian Electric and subsidiaries | | (810 | ) | | (400 | ) | | (286 | ) | | — |
| | — |
| | (1,496 | ) |
| Net increase in short-term borrowings from non-affiliates and affiliate with original maturities of three months or less | | 32,000 |
| | — |
| | — |
| | — |
| | (11,000 | ) | | 21,000 |
|
| Other | | (3 | ) | | (8 | ) | | (1 | ) | | — |
| | — |
| | (12 | ) |
| Net cash used in financing activities | | (39,012 | ) | | (10,314 | ) | | (10,082 | ) | | — |
| | 8,701 |
| | (50,707 | ) |
| Net increase (decrease) in cash and cash equivalents | | (6,460 | ) | | 4,326 |
| | 662 |
| | — |
| | — |
| | (1,472 | ) |
| Cash and cash equivalents, beginning of period | | 16,281 |
| | 2,682 |
| | 5,385 |
| | 101 |
| | — |
| | 24,449 |
|
| Cash and cash equivalents, end of period | | $ | 9,821 |
| | 7,008 |
| | 6,047 |
| | 101 |
| | — |
| | $ | 22,977 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Cash Flows
Nine months ended September 30, 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other
subsidiaries | | Consolidating
adjustments | | Hawaiian Electric
Consolidated |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Net cash provided by operating activities | | $ | 223,733 | | | 41,694 | | | 36,126 | | | 0 | | | (18,935) | | | $ | 282,618 | |
| Cash flows from investing activities | | | | | | | | | | | | |
| Capital expenditures | | (223,803) | | | (29,119) | | | (44,885) | | | 0 | | | 0 | | | (297,807) | |
| | | | | | | | | | | | |
| Advances to affiliates | | (22,200) | | | (15,000) | | | 0 | | | 0 | | | 37,200 | | | 0 | |
| Other | | 2,975 | | | (283) | | | (30) | | | 0 | | | 0 | | | 2,662 | |
| Net cash used in investing activities | | (243,028) | | | (44,402) | | | (44,915) | | | 0 | | | 37,200 | | | (295,145) | |
| Cash flows from financing activities | | | | | | | | | | | | |
| Common stock dividends | | (75,939) | | | (7,635) | | | (11,301) | | | 0 | | | 18,936 | | | (75,939) | |
| Preferred stock dividends of Hawaiian Electric and subsidiaries | | (810) | | | (400) | | | (286) | | | 0 | | | 0 | | | (1,496) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Proceeds from issuance of short-term debt | | 25,000 | | | 0 | | | 0 | | | 0 | | | 0 | | | 25,000 | |
| Proceeds from issuance of long-term debt | | 120,000 | | | 70,000 | | | 10,000 | | | 0 | | | 0 | | | 200,000 | |
| Repayment of long-term debt and funds transferred for repayment of long-term debt | | (121,546) | | | (70,000) | | | (10,000) | | | 0 | | | 0 | | | (201,546) | |
| Net increase in short-term borrowings from non-affiliates and affiliate with original maturities of three months or less | | 77,353 | | | 0 | | | 22,200 | | | 0 | | | (37,200) | | | 62,353 | |
| Other | | 578 | | | 123 | | | 85 | | | 0 | | | (1) | | | 785 | |
| Net cash provided by (used in) financing activities | | 24,636 | | | (7,912) | | | 10,698 | | | 0 | | | (18,265) | | | 9,157 | |
| Net increase (decrease) in cash and cash equivalents | | 5,341 | | | (10,620) | | | 1,909 | | | 0 | | | 0 | | | (3,370) | |
| Cash and cash equivalents, beginning of period | | 16,732 | | | 15,623 | | | 3,421 | | | 101 | | | 0 | | | 35,877 | |
| Cash and cash equivalents, end of period | | $ | 22,073 | | | 5,003 | | | 5,330 | | | 101 | | | 0 | | | $ | 32,507 | |
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 September 30 | | Nine months ended September 30 | | | Three months ended September 30 | | Nine months ended September 30 |
| (in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | (in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
| Interest and dividend income | | |
| | |
| | |
| | |
| Interest and dividend income | | | | | | | | |
| Interest and fees on loans | | $ | 52,210 |
| | $ | 50,444 |
| | $ | 155,269 |
| | $ | 148,571 |
| Interest and fees on loans | | $ | 52,419 | | | $ | 59,260 | | | $ | 161,505 | | | $ | 175,740 | |
| Interest and dividends on investment securities | | 6,850 |
| | 4,759 |
| | 20,593 |
| | 14,219 |
| Interest and dividends on investment securities | | 7,221 | | | 7,599 | | | 22,939 | | | 25,762 | |
| Total interest and dividend income | | 59,060 |
| | 55,203 |
| | 175,862 |
| | 162,790 |
| Total interest and dividend income | | 59,640 | | | 66,859 | | | 184,444 | | | 201,502 | |
| Interest expense | | |
| | |
| | |
| | |
| Interest expense | | | | | | | | |
| Interest on deposit liabilities | | 2,444 |
| | 1,871 |
| | 6,858 |
| | 5,154 |
| Interest on deposit liabilities | | 2,287 | | | 4,384 | | | 8,945 | | | 12,923 | |
| Interest on other borrowings | | 470 |
| | 1,464 |
| | 2,110 |
| | 4,416 |
| Interest on other borrowings | | 61 | | | 422 | | | 449 | | | 1,361 | |
| Total interest expense | | 2,914 |
| | 3,335 |
| | 8,968 |
| | 9,570 |
| Total interest expense | | 2,348 | | | 4,806 | | | 9,394 | | | 14,284 | |
| Net interest income | | 56,146 |
| | 51,868 |
| | 166,894 |
| | 153,220 |
| Net interest income | | 57,292 | | | 62,053 | | | 175,050 | | | 187,218 | |
| Provision for loan losses | | 490 |
| | 5,747 |
| | 7,231 |
| | 15,266 |
| |
| Net interest income after provision for loan losses | | 55,656 |
| | 46,121 |
| | 159,663 |
| | 137,954 |
| |
| Provision for credit losses | | Provision for credit losses | | 13,970 | | | 3,315 | | | 39,504 | | | 17,873 | |
| Net interest income after provision for credit losses | | Net interest income after provision for credit losses | | 43,322 | | | 58,738 | | | 135,546 | | | 169,345 | |
| Noninterest income | | |
| | |
| | |
| | |
| Noninterest income | | | | | | | | |
| Fees from other financial services | | 5,635 |
| | 5,599 |
| | 17,055 |
| | 16,799 |
| Fees from other financial services | | 4,233 | | | 5,085 | | | 11,906 | | | 14,445 | |
| Fee income on deposit liabilities | | 5,533 |
| | 5,627 |
| | 16,526 |
| | 16,045 |
| Fee income on deposit liabilities | | 3,832 | | | 5,320 | | | 11,842 | | | 15,402 | |
| Fee income on other financial products | | 1,904 |
| | 2,151 |
| | 5,741 |
| | 6,563 |
| Fee income on other financial products | | 1,524 | | | 1,706 | | | 4,608 | | | 5,129 | |
| Bank-owned life insurance | | 1,257 |
| | 1,616 |
| | 4,165 |
| | 3,620 |
| Bank-owned life insurance | | 1,965 | | | 1,660 | | | 4,432 | | | 6,309 | |
| Mortgage banking income | | 520 |
| | 2,347 |
| | 1,896 |
| | 5,096 |
| Mortgage banking income | | 7,681 | | | 1,490 | | | 15,933 | | | 3,080 | |
| Gains on sale of investment securities, net | | — |
| | — |
| | — |
| | 598 |
| |
| Gain on sale of investment securities, net | | Gain on sale of investment securities, net | | 0 | | | 653 | | | 9,275 | | | 653 | |
| Other income, net | | 380 |
| | 1,165 |
| | 1,229 |
| | 1,786 |
| Other income, net | | (231) | | | 428 | | | (69) | | | 1,420 | |
| Total noninterest income | | 15,229 |
| | 18,505 |
| | 46,612 |
| | 50,507 |
| Total noninterest income | | 19,004 | | | 16,342 | | | 57,927 | | | 46,438 | |
| Noninterest expense | | |
| | |
| | |
| | |
| Noninterest expense | | | | | | | | |
| Compensation and employee benefits | | 23,724 |
| | 22,844 |
| | 71,703 |
| | 67,197 |
| Compensation and employee benefits | | 26,431 | | | 25,364 | | | 77,287 | | | 76,626 | |
| Occupancy | | 4,284 |
| | 3,991 |
| | 12,623 |
| | 12,244 |
| Occupancy | | 5,693 | | | 5,694 | | | 16,402 | | | 15,843 | |
| Data processing | | 3,262 |
| | 3,150 |
| | 9,749 |
| | 9,599 |
| Data processing | | 3,366 | | | 3,763 | | | 11,052 | | | 11,353 | |
| Services | | 2,863 |
| | 2,427 |
| | 7,989 |
| | 8,093 |
| Services | | 2,624 | | | 2,829 | | | 7,907 | | | 7,861 | |
| Equipment | | 1,814 |
| | 1,759 |
| | 5,333 |
| | 5,193 |
| Equipment | | 2,001 | | | 2,163 | | | 6,630 | | | 6,416 | |
| Office supplies, printing and postage | | 1,444 |
| | 1,483 |
| | 4,506 |
| | 4,431 |
| Office supplies, printing and postage | | 1,187 | | | 1,297 | | | 3,577 | | | 4,320 | |
| Marketing | | 934 |
| | 747 |
| | 2,290 |
| | 2,507 |
| Marketing | | 727 | | | 1,142 | | | 1,908 | | | 3,455 | |
| FDIC insurance | | 746 |
| | 907 |
| | 2,296 |
| | 2,704 |
| FDIC insurance | | 714 | | | (5) | | | 1,567 | | | 1,249 | |
| Other expense | | 5,050 |
| | 4,591 |
| | 14,066 |
| | 13,948 |
| |
Other expense1 | | Other expense1 | | 4,556 | | | 3,676 | | | 15,813 | | | 12,049 | |
| Total noninterest expense | | 44,121 |
| | 41,899 |
| | 130,555 |
| | 125,916 |
| Total noninterest expense | | 47,299 | | | 45,923 | | | 142,143 | | | 139,172 | |
| Income before income taxes | | 26,764 |
| | 22,727 |
| | 75,720 |
| | 62,545 |
| Income before income taxes | | 15,027 | | | 29,157 | | | 51,330 | | | 76,611 | |
| Income taxes | | 9,172 |
| | 7,623 |
| | 25,582 |
| | 21,483 |
| Income taxes | | 2,877 | | | 6,269 | | | 9,405 | | | 15,868 | |
| Net income | | $ | 17,592 |
| | $ | 15,104 |
| | $ | 50,138 |
| | $ | 41,062 |
| Net income | | 12,150 | | | 22,888 | | | 41,925 | | | 60,743 | |
| Other comprehensive income, net of taxes | | Other comprehensive income, net of taxes | | 1,393 | | | 3,809 | | | 20,960 | | | 24,336 | |
| Comprehensive income | | Comprehensive income | | $ | 13,543 | | | $ | 26,697 | | | $ | 62,885 | | | $ | 85,079 | |
1 The three and nine-month periods ended September 30, 2020 include approximately $0.7 million and $4.5 million, respectively, of certain direct and incremental COVID-19 related costs. For the nine months ended September 30, 2020, these costs, which have been recorded in Other expense, include $2.4 million of compensation expense and $1.7 million of enhanced cleaning and sanitation costs.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
American Savings Bank, F.S.B.
Reconciliation to amounts per HEI Condensed Consolidated Statements of Comprehensive Income DataIncome*:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended September 30, | | Nine months ended September 30 |
| (in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
| Interest and dividend income | | $ | 59,640 | | | $ | 66,859 | | | $ | 184,444 | | | $ | 201,502 | |
| Noninterest income | | 19,004 | | | 16,342 | | | 57,927 | | | 46,438 | |
| Less: Gain on sale of investment securities, net | | 0 | | | (653) | | | (9,275) | | | (653) | |
| *Revenues-Bank | | 78,644 | | | 82,548 | | | 233,096 | | | 247,287 | |
| Total interest expense | | 2,348 | | | 4,806 | | | 9,394 | | | 14,284 | |
| Provision for credit losses | | 13,970 | | | 3,315 | | | 39,504 | | | 17,873 | |
| Noninterest expense | | 47,299 | | | 45,923 | | | 142,143 | | | 139,172 | |
| Less: Retirement defined benefits gain (expense)—other than service costs | | (473) | | | 196 | | | (1,341) | | | 276 | |
| *Expenses-Bank | | 63,144 | | | 54,240 | | | 189,700 | | | 171,605 | |
| *Operating income-Bank | | 15,500 | | | 28,308 | | | 43,396 | | | 75,682 | |
| Add back: Retirement defined benefits (gain) expense—other than service costs | | 473 | | | (196) | | | 1,341 | | | (276) | |
| Add back: Gain on sale of investment securities, net | | 0 | | | (653) | | | (9,275) | | | (653) | |
| Income before income taxes | | $ | 15,027 | | | $ | 29,157 | | | $ | 51,330 | | | $ | 76,611 | |
|
| | | | | | | | | | | | | | | | |
| | | Three months ended September 30 | | Nine months ended September 30 |
| (in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
| Net income | | $ | 17,592 |
| | $ | 15,104 |
| | $ | 50,138 |
| | $ | 41,062 |
|
| Other comprehensive income (loss), net of taxes: | | |
| | |
| | |
| | |
|
| Net unrealized gains (losses) on available-for-sale investment securities: | | |
| | |
| | |
| | |
|
| Net unrealized gains (losses) on available-for-sale investment securities arising during the period, net of (taxes) benefits of $(137), $1,417, $(1,619) and $(5,413), respectively | | 208 |
| | (2,147 | ) | | 2,452 |
| | 8,197 |
|
| Reclassification adjustment for net realized gains included in net income, net of taxes of nil, nil, nil and $238, respectively | | — |
| | — |
| | — |
| | (360 | ) |
| 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 of $138, $144, $675 and $421, respectively | | 209 |
| | 219 |
| | 1,023 |
| | 638 |
|
| Other comprehensive income (loss), net of taxes | | 417 |
| | (1,928 | ) | | 3,475 |
| | 8,475 |
|
| Comprehensive income | | $ | 18,009 |
| | $ | 13,176 |
| | $ | 53,613 |
| | $ | 49,537 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
American Savings Bank, F.S.B.
Balance Sheets Data
| | | (in thousands) | | September 30, 2017 | | December 31, 2016 | (in thousands) | | September 30, 2020 | | December 31, 2019 |
| Assets | | |
| | |
| | |
| | |
| Assets | | | | | | | | |
| Cash and due from banks | | |
| | $ | 120,492 |
| | |
| | $ | 137,083 |
| Cash and due from banks | | | | $ | 150,087 | | | | | $ | 129,770 | |
| Interest-bearing deposits | | | | 69,223 |
| | | | 52,128 |
| Interest-bearing deposits | | 10,918 | | | 48,628 | |
| Restricted cash | | | | — |
| | | | 1,764 |
| |
| Available-for-sale investment securities, at fair value | | |
| | 1,320,110 |
| | |
| | 1,105,182 |
| |
| | Investment securities | | Investment securities | |
| Available-for-sale, at fair value | | Available-for-sale, at fair value | | | | 1,747,658 | | | | | 1,232,826 | |
| Held-to-maturity, at amortized cost (fair value of $138,622 and $143,467, respectively) | | Held-to-maturity, at amortized cost (fair value of $138,622 and $143,467, respectively) | | 133,858 | | | 139,451 | |
| Stock in Federal Home Loan Bank, at cost | | |
| | 9,706 |
| | |
| | 11,218 |
| Stock in Federal Home Loan Bank, at cost | | | | 10,920 | | | | | 8,434 | |
| Loans receivable held for investment | | |
| | 4,676,281 |
| | |
| | 4,738,693 |
| |
| Allowance for loan losses | | |
| | (53,047 | ) | | |
| | (55,533 | ) | |
| Loans held for investment | | Loans held for investment | | | | 5,480,902 | | | | | 5,121,176 | |
| Allowance for credit losses | | Allowance for credit losses | | | | (91,459) | | | | | (53,355) | |
| Net loans | | |
| | 4,623,234 |
| | |
| | 4,683,160 |
| Net loans | | | | 5,389,443 | | | | | 5,067,821 | |
| Loans held for sale, at lower of cost or fair value | | |
| | 15,728 |
| | |
| | 18,817 |
| Loans held for sale, at lower of cost or fair value | | | | 16,806 | | | | | 12,286 | |
| Other | | |
| | 378,224 |
| | |
| | 329,815 |
| Other | | | | 533,865 | | | | | 511,611 | |
| Goodwill | | |
| | 82,190 |
| | |
| | 82,190 |
| Goodwill | | | | 82,190 | | | | | 82,190 | |
| Total assets | | |
| | $ | 6,618,907 |
| | |
| | $ | 6,421,357 |
| Total assets | | | | $ | 8,075,745 | | | | | $ | 7,233,017 | |
| | | | | | | | | | |
| Liabilities and shareholder’s equity | | |
| | |
| | |
| | |
| Liabilities and shareholder’s equity | | | | | | | | |
| Deposit liabilities—noninterest-bearing | | |
| | $ | 1,710,698 |
| | |
| | $ | 1,639,051 |
| Deposit liabilities—noninterest-bearing | | | | $ | 2,424,539 | | | | | $ | 1,909,682 | |
| Deposit liabilities—interest-bearing | | |
| | 4,041,628 |
| | |
| | 3,909,878 |
| Deposit liabilities—interest-bearing | | | | 4,613,598 | | | | | 4,362,220 | |
| Other borrowings | | |
| | 153,552 |
| | |
| | 192,618 |
| Other borrowings | | | | 151,875 | | | | | 115,110 | |
| Other | | |
| | 107,558 |
| | |
| | 101,635 |
| Other | | | | 165,300 | | | | | 146,954 | |
| Total liabilities | | |
| | 6,013,436 |
| | |
| | 5,843,182 |
| Total liabilities | | | | 7,355,312 | | | | | 6,533,966 | |
| Commitments and contingencies | | |
| |
|
| | |
| |
|
| Commitments and contingencies | | | | | |
| Common stock | | |
| | 1 |
| | |
| | 1 |
| Common stock | | | | 1 | | | | | 1 | |
| Additional paid in capital | | | | 344,512 |
| | | | 342,704 |
| |
| Additional paid-in capital | | Additional paid-in capital | | 351,322 | | | 349,453 | |
| Retained earnings | | |
| | 279,956 |
| | |
| | 257,943 |
| Retained earnings | | | | 356,812 | | | | | 358,259 | |
| Accumulated other comprehensive loss, net of tax benefits | | |
| | |
| | |
| | |
| |
| Net unrealized losses on securities | | $ | (5,479 | ) | | |
| | $ | (7,931 | ) | | |
| |
| Accumulated other comprehensive income (loss), net of taxes | | Accumulated other comprehensive income (loss), net of taxes | | | | | | | | |
| Net unrealized gains on securities | | Net unrealized gains on securities | | $ | 22,248 | | | | | $ | 2,481 | | | |
| Retirement benefit plans | | (13,519 | ) | | (18,998 | ) | | (14,542 | ) | | (22,473 | ) | Retirement benefit plans | | (9,950) | | | 12,298 | | | (11,143) | | | (8,662) | |
| Total shareholder’s equity | | |
| | 605,471 |
| | |
| | 578,175 |
| Total shareholder’s equity | | | | 720,433 | | | | | 699,051 | |
| Total liabilities and shareholder’s equity | | |
| | $ | 6,618,907 |
| | |
| | $ | 6,421,357 |
| Total liabilities and shareholder’s equity | | | | $ | 8,075,745 | | | | | $ | 7,233,017 | |
| | | | | | | | | | |
| Other assets | | |
| | |
| | |
| | |
| Other assets | | | | | | | | |
| Bank-owned life insurance | | |
| | $ | 147,391 |
| | |
| | $ | 143,197 |
| Bank-owned life insurance | | | | $ | 161,206 | | | | | $ | 157,465 | |
| Premises and equipment, net | | |
| | 123,326 |
| | |
| | 90,570 |
| Premises and equipment, net | | | | 206,190 | | | | | 204,449 | |
| Prepaid expenses | | |
| | 5,356 |
| | |
| | 3,348 |
| |
| | Accrued interest receivable | | |
| | 17,488 |
| | |
| | 16,824 |
| Accrued interest receivable | | | | 24,770 | | | | | 19,365 | |
| Mortgage-servicing rights | | |
| | 9,070 |
| | |
| | 9,373 |
| Mortgage-servicing rights | | | | 9,553 | | | | | 9,101 | |
| Low-income housing equity investments | | | | 54,515 |
| | | | 47,081 |
| |
| Low-income housing investments | | Low-income housing investments | | 71,467 | | | 66,302 | |
| Real estate acquired in settlement of loans, net | | |
| | 1,183 |
| | |
| | 1,189 |
| Real estate acquired in settlement of loans, net | | | | 42 | | | | | 0 | |
| | Other | | |
| | 19,895 |
| | |
| | 18,233 |
| Other | | | | 60,637 | | | | | 54,929 | |
| | | |
| | $ | 378,224 |
| | |
| | $ | 329,815 |
| | | | | $ | 533,865 | | | | | $ | 511,611 | |
| Other liabilities | | |
| | |
| | |
| | |
| Other liabilities | | | | | | | | |
| Accrued expenses | | |
| | $ | 41,698 |
| | |
| | $ | 36,754 |
| Accrued expenses | | | | $ | 52,170 | | | | | $ | 45,822 | |
| Federal and state income taxes payable | | |
| | 6,829 |
| | |
| | 4,728 |
| Federal and state income taxes payable | | | | 9,750 | | | | | 14,996 | |
| Cashier’s checks | | |
| | 27,448 |
| | |
| | 24,156 |
| Cashier’s checks | | | | 28,638 | | | | | 23,647 | |
| Advance payments by borrowers | | |
| | 4,867 |
| | |
| | 10,335 |
| Advance payments by borrowers | | | | 5,413 | | | | | 10,486 | |
| Other | | |
| | 26,716 |
| | |
| | 25,662 |
| Other | | | | 69,329 | | | | | 52,003 | |
| | | |
| | $ | 107,558 |
| | |
| | $ | 101,635 |
| | | | | $ | 165,300 | | | | | $ | 146,954 | |
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 $104$95.9 million, NaN and $50 million, respectively, as of September 30, 2017 and $93 million and $100$56.0 million, respectively, as of September 30, 2020 and $115.0 million, NaN and NaN, respectively, as of December 31, 2016.2019.
Available-for-sale investmentInvestment securities. The major components of investment securities were as follows: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Estimated fair value | | Gross unrealized losses |
| | | | | | | Less than 12 months | | 12 months or longer |
| (dollars in thousands) | | | | | | Number of issues | | Fair value | | Amount | | Number of issues | | Fair value | | Amount |
| September 30, 2017 | | |
| | |
| | |
| | |
| | | | |
| | |
| | | | |
| | |
|
| Available-for-sale | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury and federal agency obligations | | $ | 182,535 |
| | $ | 882 |
| | $ | (1,299 | ) | | $ | 182,118 |
| | 15 |
| | $ | 91,203 |
| | $ | (1,064 | ) | | 2 |
| | $ | 13,072 |
| | $ | (235 | ) |
| Mortgage-related securities- FNMA, FHLMC and GNMA | | 1,131,245 |
| | 2,127 |
| | (10,807 | ) | | 1,122,565 |
| | 84 |
| | 686,186 |
| | (7,709 | ) | | 29 |
| | 138,051 |
| | (3,098 | ) |
| Mortgage revenue bond | | 15,427 |
| | — |
| | — |
| | 15,427 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | | $ | 1,329,207 |
| | $ | 3,009 |
| | $ | (12,106 | ) | | $ | 1,320,110 |
| | 99 |
| | $ | 777,389 |
| | $ | (8,773 | ) | | 31 |
| | $ | 151,123 |
| | $ | (3,333 | ) |
| December 31, 2016 | | | | | | | | | | | | | | | | | | | | |
| Available-for-sale | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury and federal agency obligations | | $ | 193,515 |
| | $ | 920 |
| | $ | (2,154 | ) | | $ | 192,281 |
| | 18 |
| | $ | 123,475 |
| | $ | (2,010 | ) | | 1 |
| | $ | 3,485 |
| | $ | (144 | ) |
| Mortgage-related securities- FNMA, FHLMC and GNMA | | 909,408 |
| | 1,742 |
| | (13,676 | ) | | 897,474 |
| | 88 |
| | 709,655 |
| | (12,143 | ) | | 13 |
| | 47,485 |
| | (1,533 | ) |
| Mortgage revenue bond | | 15,427 |
| | — |
| | — |
| | 15,427 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | | $ | 1,118,350 |
| | $ | 2,662 |
| | $ | (15,830 | ) | | $ | 1,105,182 |
| | 106 |
| | $ | 833,130 |
| | $ | (14,153 | ) | | 14 |
| | $ | 50,970 |
| | $ | (1,677 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Estimated fair
value | | Gross unrealized losses |
| | | | | | | Less than 12 months | | 12 months or longer |
| (dollars in thousands) | | | | | | Number of issues | | Fair
value | | Amount | | Number of issues | | Fair
value | | Amount |
| September 30, 2020 | | | | | | | | | | | | | | | | | | | | |
| Available-for-sale | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury and federal agency obligations | | $ | 61,359 | | | $ | 2,229 | | | $ | 0 | | | $ | 63,588 | | | 0 | | | $ | 0 | | | $ | 0 | | | 0 | | | $ | 0 | | | $ | 0 | |
| Mortgage-backed securities* | | 1,598,949 | | | 27,580 | | | (981) | | | 1,625,548 | | | 17 | | | 304,930 | | | (981) | | | 0 | | | 0 | | | 0 | |
| Corporate bonds | | 29,772 | | | 1,565 | | | 0 | | | 31,337 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Mortgage revenue bonds | | 27,185 | | | 0 | | | 0 | | | 27,185 | | | 0 | | | | | | | 0 | | | 0 | | | 0 | |
| | | $ | 1,717,265 | | | $ | 31,374 | | | $ | (981) | | | $ | 1,747,658 | | | 17 | | | $ | 304,930 | | | $ | (981) | | | 0 | | | $ | 0 | | | $ | 0 | |
| Held-to-maturity | | | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities* | | $ | 133,858 | | | $ | 4,878 | | | $ | (114) | | | $ | 138,622 | | | 2 | | | $ | 28,486 | | | $ | (114) | | | 0 | | | $ | 0 | | | $ | 0 | |
| | | $ | 133,858 | | | $ | 4,878 | | | $ | (114) | | | $ | 138,622 | | | 2 | | | $ | 28,486 | | | $ | (114) | | | 0 | | | $ | 0 | | | $ | 0 | |
| December 31, 2019 | | | | | | | | | | | | | | | | | | | | |
| Available-for-sale | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury and federal agency obligations | | $ | 117,255 | | | $ | 652 | | | $ | (120) | | | $ | 117,787 | | | 2 | | | $ | 4,110 | | | $ | (11) | | | 3 | | | $ | 27,637 | | | $ | (109) | |
| Mortgage-backed securities* | | 1,024,892 | | | 6,000 | | | (4,507) | | | 1,026,385 | | | 19 | | | 152,071 | | | (819) | | | 75 | | | 318,020 | | | (3,688) | |
| Corporate bonds | | 58,694 | | | 1,363 | | | 0 | | | 60,057 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Mortgage revenue bonds | | 28,597 | | | 0 | | | 0 | | | 28,597 | | | 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) | |
| Held-to-maturity | | | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities* | | $ | 139,451 | | | $ | 4,087 | | | $ | (71) | | | $ | 143,467 | | | 1 | | | $ | 12,986 | | | $ | (71) | | | 0 | | | $ | 0 | | | $ | 0 | |
| | | $ | 139,451 | | | $ | 4,087 | | | $ | (71) | | | $ | 143,467 | | | 1 | | | $ | 12,986 | | | $ | (71) | | | 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 September 30, 2017,2020, represent an other-than-temporary impairment (OTTI).a credit loss. Total gross unrealized losses were primarily attributable to rising interest rates relative to whenchange in market conditions. On a quarterly basis the investment securities were purchased and not due to the credit qualityare evaluated for changes in financial condition of the issuer. Based upon ASB’s evaluation, all securities held within the investment securities.portfolio continue to be investment grade by one or more agencies. The contractual cash flows of the U.S. Treasury, federal agency obligations and mortgage-relatedagency 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. ASBASB’s investment securities portfolio did not recognize OTTIrequire an allowance for the quarters and nine month periods endedcredit losses at September 30, 2017 and 2016.2020.
U.S. Treasury, federal agency obligations, corporate bonds, and the mortgage revenue bondbonds have contractual terms to maturity. Mortgage-relatedMortgage-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.
The contractual maturities of available-for-sale investment securities were as follows: |
| | | | | | | | |
| September 30, 2017 | | Amortized cost | | Fair value |
| (in thousands) | | | | |
| Due in one year or less | | $ | 9,998 |
| | $ | 9,999 |
|
| Due after one year through five years | | 77,138 |
| | 77,331 |
|
| Due after five years through ten years | | 81,464 |
| | 81,170 |
|
| Due after ten years | | 29,362 |
| | 29,045 |
|
| | | 197,962 |
| | 197,545 |
|
| Mortgage-related securities-FNMA, FHLMC and GNMA | | 1,131,245 |
| | 1,122,565 |
|
| Total available-for-sale securities | | $ | 1,329,207 |
| | $ | 1,320,110 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
The contractual maturities of investment securities were as follows:
| | | | | | | | | | | | | | |
| September 30, 2020 | | Amortized cost | | Fair value |
| (in thousands) | | | | |
| Available-for-sale | | | | |
| Due in one year or less | | $ | 16,952 | | | $ | 17,193 | |
| Due after one year through five years | | 41,941 | | | 43,735 | |
| Due after five years through ten years | | 32,238 | | | 33,997 | |
| Due after ten years | | 27,185 | | | 27,185 | |
| | | 118,316 | | | 122,110 | |
| Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies | | 1,598,949 | | | 1,625,548 | |
| Total available-for-sale securities | | $ | 1,717,265 | | | $ | 1,747,658 | |
| Held-to-maturity | | | | |
| Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies | | $ | 133,858 | | | $ | 138,622 | |
| Total held-to-maturity securities | | $ | 133,858 | | | $ | 138,622 | |
Proceeds from the sale of available-for-sale securities, which also included the sale of ASB’s entire Visa Class B restricted stock holdings in the second quarter of 2020, were nilNaN and $169.2 million for both the three and nine month period ended September 30, 2020, respectively, and $19.8 million for each of the three and nine month periods ended September 30, 20172019. Gross realized gains were NaN and 2016 and nil and $16.4$9.3 million for the three and nine months ended September 30, 20172020, respectively, and 2016, respectively. Gross realized gains were nil$0.7 million for botheach of the three month periods ended September 30, 2017 and 2016, and nil and $0.6 million for the nine months ended September 30, 2017 and 2016, respectively.2019. Gross realized losses were nil or not materialNaN for all periods presented.the three and nine months ended September 30, 2020 and 2019. Tax expense on realized gains were NaN and $2.5 million for the three and nine months ended September 30, 2020, respectively and $0.2 million for each of the three and nine months ended September 30, 2019.
Loans receivable. Loans. The components of loans receivable were summarized as follows:
| | | | September 30, 2017 | | December 31, 2016 | | September 30, 2020 | | December 31, 2019 |
| (in thousands) | |
| | |
| (in thousands) | | | |
| Real estate: | |
| | |
| Real estate: | | | |
| Residential 1-4 family | $ | 2,066,023 |
| | $ | 2,048,051 |
| Residential 1-4 family | $ | 2,195,093 | | | $ | 2,178,135 | |
| Commercial real estate | 745,583 |
| | 800,395 |
| Commercial real estate | 900,912 | | | 824,830 | |
| Home equity line of credit | 905,249 |
| | 863,163 |
| Home equity line of credit | 1,028,011 | | | 1,092,125 | |
| Residential land | 18,611 |
| | 18,889 |
| Residential land | 14,310 | | | 14,704 | |
| Commercial construction | 128,407 |
| | 126,768 |
| Commercial construction | 112,930 | | | 70,605 | |
| Residential construction | 13,031 |
| | 16,080 |
| Residential construction | 10,281 | | | 11,670 | |
| Total real estate | 3,876,904 |
| | 3,873,346 |
| Total real estate | 4,261,537 | | | 4,192,069 | |
| Commercial | 589,669 |
| | 692,051 |
| Commercial | 1,042,435 | | | 670,674 | |
| Consumer | 211,571 |
| | 178,222 |
| Consumer | 190,138 | | | 257,921 | |
| Total loans | 4,678,144 |
| | 4,743,619 |
| Total loans | 5,494,110 | | | 5,120,664 | |
| Less: Deferred fees and discounts | (1,863 | ) | | (4,926 | ) | |
| Allowance for loan losses | (53,047 | ) | | (55,533 | ) | |
| Deferred fees and discounts | | Deferred fees and discounts | (13,208) | | | 512 | |
| Allowance for credit losses | | Allowance for credit losses | (91,459) | | | (53,355) | |
| Total loans, net | $ | 4,623,234 |
| | $ | 4,683,160 |
| Total loans, net | $ | 5,389,443 | | | $ | 5,067,821 | |
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 properties,property purchases, the loan-to-value ratio may not exceed 80%75% of the lower of the appraised value or purchase price at origination. ASB is subject to the risk that the insurance company cannot satisfy the bank's claim on policies.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
Allowance for loancredit losses.The allowance for loancredit losses (balances and changes) and financing receivablesby portfolio segment were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Residential
1-4 family | | Commercial real
estate | | Home
equity line of credit | | Residential land | | Commercial construction | | Residential construction | | Commercial loans | | Consumer loans | | | | Total |
| Three months ended September 30, 2020 | | | | | | | | | | | | | | | | | | |
| Allowance for credit losses: | | | | | | | | | | | | | | | | | | | | |
| Beginning balance | | $ | 3,911 | | | $ | 21,100 | | | $ | 6,214 | | | $ | 356 | | | $ | 4,757 | | | $ | 14 | | | $ | 13,868 | | | $ | 31,087 | | | | | $ | 81,307 | |
| Charge-offs | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | (1,727) | | | (3,881) | | | | | (5,608) | |
| Recoveries | | 12 | | | 0 | | | 50 | | | 12 | | | 0 | | | 0 | | | 211 | | | 1,005 | | | | | 1,290 | |
| Provision | | (286) | | | 11,049 | | | (390) | | | 178 | | | 1,282 | | | (3) | | | 5,840 | | | (3,200) | | | | | 14,470 | |
| Ending balance | | $ | 3,637 | | | $ | 32,149 | | | $ | 5,874 | | | $ | 546 | | | $ | 6,039 | | | $ | 11 | | | $ | 18,192 | | | $ | 25,011 | | | | | $ | 91,459 | |
| Three months ended September 30, 2019 | | | | | | | | | | | | | | | | | | |
| Allowance for credit losses: | | | | | | | | | | | | | | | | | | | | |
| Beginning balance | | $ | 2,015 | | | $ | 15,811 | | | $ | 6,881 | | | $ | 537 | | | $ | 2,046 | | | $ | 2 | | | $ | 13,073 | | | $ | 18,060 | | | | | $ | 58,425 | |
| Charge-offs | | (7) | | | 0 | | | (13) | | | 0 | | | 0 | | | 0 | | | (4,900) | | | (5,311) | | | | | (10,231) | |
| Recoveries | | 27 | | | 0 | | | 4 | | | 28 | | | 0 | | | 0 | | | 726 | | | 746 | | | | | 1,531 | |
| Provision | | (56) | | | (396) | | | 135 | | | (104) | | | 196 | | | 1 | | | (517) | | | 4,056 | | | | | 3,315 | |
| Ending balance | | $ | 1,979 | | | $ | 15,415 | | | $ | 7,007 | | | $ | 461 | | | $ | 2,242 | | | $ | 3 | | | $ | 8,382 | | | $ | 17,551 | | | | | $ | 53,040 | |
| Nine months ended September 30, 2020 | | | | | | | | | | | | | | | | | | |
| Allowance for credit losses: | | | | | | | | | | | | | | | | | | | | |
| 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 | | 2,150 | | | 208 | | | (541) | | | (64) | | | 289 | | | 14 | | | 922 | | | 16,463 | | | | | 19,441 | |
| Charge-offs | | (7) | | | 0 | | | 0 | | | (351) | | | 0 | | | 0 | | | (2,795) | | | (16,466) | | | | | (19,619) | |
| Recoveries | | 67 | | | 0 | | | 56 | | | 26 | | | 0 | | | 0 | | | 503 | | | 2,426 | | | | | 3,078 | |
| Provision | | (953) | | | 16,888 | | | (563) | | | 486 | | | 3,653 | | | (6) | | | 9,317 | | | 6,382 | | | | | 35,204 | |
| Ending balance | | $ | 3,637 | | | $ | 32,149 | | | $ | 5,874 | | | $ | 546 | | | $ | 6,039 | | | $ | 11 | | | $ | 18,192 | | | $ | 25,011 | | | | | $ | 91,459 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 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 | | (26) | | | 0 | | | (32) | | | (4) | | | 0 | | | 0 | | | (6,012) | | | (15,972) | | | | | (22,046) | |
| Recoveries | | 644 | | | 0 | | | 13 | | | 42 | | | 0 | | | 0 | | | 2,187 | | | 2,208 | | | | | 5,094 | |
| Provision | | (615) | | | 910 | | | 655 | | | (56) | | | (548) | | | (1) | | | 2,982 | | | 14,546 | | | | | 17,873 | |
| Ending balance | | $ | 1,979 | | | $ | 15,415 | | | $ | 7,007 | | | $ | 461 | | | $ | 2,242 | | | $ | 3 | | | $ | 8,382 | | | $ | 17,551 | | | | | $ | 53,040 | |
| December 31, 2019 | | | | | | | | | | | | | | | | | | | | |
| Ending balance: individually evaluated for impairment | | $ | 898 | | | $ | 2 | | | $ | 322 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 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 | | | $ | 0 | | | $ | 0 | | | $ | 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 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Residential 1-4 family | | Commercial real estate | | Home
equity line of credit | | Residential land | | Commercial construction | | Residential construction | | Commercial loans | | Consumer loans | | Unallo-cated | | Total |
| Three months ended September 30, 2017 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Allowance for loan losses: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Beginning balance | | $ | 3,130 |
| | $ | 18,840 |
| | $ | 5,527 |
| | $ | 1,264 |
| | $ | 4,706 |
| | $ | 9 |
| | $ | 14,552 |
| | $ | 8,328 |
| | $ | — |
| | $ | 56,356 |
|
| Charge-offs | | (522 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (1,215 | ) | | (3,160 | ) | | — |
| | (4,897 | ) |
| Recoveries | | 33 |
| | — |
| | 164 |
| | 259 |
| | — |
| | — |
| | 326 |
| | 316 |
| | — |
| | 1,098 |
|
| Provision | | 347 |
| | (2,800 | ) | | (36 | ) | | (141 | ) | | 370 |
| | 2 |
| | (595 | ) | | 3,343 |
| | — |
| | 490 |
|
| Ending balance | | $ | 2,988 |
| | $ | 16,040 |
| | $ | 5,655 |
| | $ | 1,382 |
| | $ | 5,076 |
| | $ | 11 |
| | $ | 13,068 |
| | $ | 8,827 |
| | $ | — |
| | $ | 53,047 |
|
| Three months ended September 30, 2016 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Allowance for loan losses: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Beginning balance | | $ | 4,384 |
| | $ | 13,561 |
| | $ | 7,836 |
| | $ | 1,689 |
| | $ | 6,993 |
| | $ | 12 |
| | $ | 17,085 |
| | $ | 3,771 |
| | $ | — |
| | $ | 55,331 |
|
| Charge-offs | | (373 | ) | | — |
| | (108 | ) | | — |
| | — |
| | — |
| | (833 | ) | | (1,879 | ) | | — |
| | (3,193 | ) |
| Recoveries | | 92 |
| | — |
| | 15 |
| | 187 |
| | — |
| | — |
| | 347 |
| | 211 |
| | — |
| | 852 |
|
| Provision | | 154 |
| | 1,289 |
| | (248 | ) | | 23 |
| | 179 |
| | (2 | ) | | 2,457 |
| | 1,895 |
| | — |
| | 5,747 |
|
| Ending balance | | $ | 4,257 |
| | $ | 14,850 |
| | $ | 7,495 |
| | $ | 1,899 |
| | $ | 7,172 |
| | $ | 10 |
| | $ | 19,056 |
| | $ | 3,998 |
| | $ | — |
| | $ | 58,737 |
|
| Nine months ended September 30, 2017 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Allowance for loan losses: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Beginning balance | | $ | 2,873 |
| | $ | 16,004 |
| | $ | 5,039 |
| | $ | 1,738 |
| | $ | 6,449 |
| | $ | 12 |
| | $ | 16,618 |
| | $ | 6,800 |
| | $ | — |
| | $ | 55,533 |
|
| Charge-offs | | (528 | ) | | — |
| | (14 | ) | | (92 | ) | | — |
| | — |
| | (3,477 | ) | | (8,360 | ) | | — |
| | (12,471 | ) |
| Recoveries | | 91 |
| | — |
| | 294 |
| | 477 |
| | — |
| | — |
| | 922 |
| | 970 |
| | — |
| | 2,754 |
|
| Provision | | 552 |
| | 36 |
| | 336 |
| | (741 | ) | | (1,373 | ) | | (1 | ) | | (995 | ) | | 9,417 |
| | — |
| | 7,231 |
|
| Ending balance | | $ | 2,988 |
| | $ | 16,040 |
| | $ | 5,655 |
| | $ | 1,382 |
| | $ | 5,076 |
| | $ | 11 |
| | $ | 13,068 |
| | $ | 8,827 |
| | $ | — |
| | $ | 53,047 |
|
| September 30, 2017 | | | | | | | | | | | | | | | | | | | | |
| Ending balance: individually evaluated for impairment | | $ | 1,317 |
| | $ | 72 |
| | $ | 409 |
| | $ | 373 |
| | $ | — |
| | $ | — |
| | $ | 667 |
| | $ | 30 |
| | | | $ | 2,868 |
|
| Ending balance: collectively evaluated for impairment | | $ | 1,671 |
| | $ | 15,968 |
| | $ | 5,246 |
| | $ | 1,009 |
| | $ | 5,076 |
| | $ | 11 |
| | $ | 12,401 |
| | $ | 8,797 |
| | $ | — |
| | $ | 50,179 |
|
| Financing Receivables: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Ending balance | | $ | 2,066,023 |
| | $ | 745,583 |
| | $ | 905,249 |
| | $ | 18,611 |
| | $ | 128,407 |
| | $ | 13,031 |
| | $ | 589,669 |
| | $ | 211,571 |
| | | | $ | 4,678,144 |
|
| Ending balance: individually evaluated for impairment | | $ | 19,757 |
| | $ | 1,281 |
| | $ | 7,078 |
| | $ | 2,385 |
| | $ | — |
| | $ | — |
| | $ | 5,486 |
| | $ | 67 |
| | | | $ | 36,054 |
|
| Ending balance: collectively evaluated for impairment | | $ | 2,046,266 |
| | $ | 744,302 |
| | $ | 898,171 |
| | $ | 16,226 |
| | $ | 128,407 |
| | $ | 13,031 |
| | $ | 584,183 |
| | $ | 211,504 |
| | | | $ | 4,642,090 |
|
| Nine months ended September 30, 2016 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Allowance for loan losses: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Beginning balance | | $ | 4,186 |
| | $ | 11,342 |
| | $ | 7,260 |
| | $ | 1,671 |
| | $ | 4,461 |
| | $ | 13 |
| | $ | 17,208 |
| | $ | 3,897 |
| | $ | — |
| | $ | 50,038 |
|
| Charge-offs | | (433 | ) | | — |
| | (108 | ) | | — |
| | — |
| | — |
| | (3,138 | ) | | (4,977 | ) | | — |
| | (8,656 | ) |
| Recoveries | | 144 |
| | — |
| | 46 |
| | 306 |
| | — |
| | — |
| | 907 |
| | 686 |
| | — |
| | 2,089 |
|
| Provision | | 360 |
| | 3,508 |
| | 297 |
| | (78 | ) | | 2,711 |
| | (3 | ) | | 4,079 |
| | 4,392 |
| | — |
| | 15,266 |
|
| Ending balance | | $ | 4,257 |
| | $ | 14,850 |
| | $ | 7,495 |
| | $ | 1,899 |
| | $ | 7,172 |
| | $ | 10 |
| | $ | 19,056 |
| | $ | 3,998 |
| | $ | — |
| | $ | 58,737 |
|
| December 31, 2016 | | | | | | | | | | | | | | | | | | | | |
| Ending balance: individually evaluated for impairment | | $ | 1,352 |
| | $ | 80 |
| | $ | 215 |
| | $ | 789 |
| | $ | — |
| | $ | — |
| | $ | 1,641 |
| | $ | 6 |
| | | | $ | 4,083 |
|
| Ending balance: collectively evaluated for impairment | | $ | 1,521 |
| | $ | 15,924 |
| | $ | 4,824 |
| | $ | 949 |
| | $ | 6,449 |
| | $ | 12 |
| | $ | 14,977 |
| | $ | 6,794 |
| | $ | — |
| | $ | 51,450 |
|
| Financing Receivables: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Ending balance | | $ | 2,048,051 |
| | $ | 800,395 |
| | $ | 863,163 |
| | $ | 18,889 |
| | $ | 126,768 |
| | $ | 16,080 |
| | $ | 692,051 |
| | $ | 178,222 |
| | | | $ | 4,743,619 |
|
| Ending balance: individually evaluated for impairment | | $ | 19,854 |
| | $ | 1,569 |
| | $ | 6,158 |
| | $ | 3,629 |
| | $ | — |
| | $ | — |
| | $ | 20,539 |
| | $ | 10 |
| | | | $ | 51,759 |
|
| Ending balance: collectively evaluated for impairment | | $ | 2,028,197 |
| | $ | 798,826 |
| | $ | 857,005 |
| | $ | 15,260 |
| | $ | 126,768 |
| | $ | 16,080 |
| | $ | 671,512 |
| | $ | 178,212 |
| | | | $ | 4,691,860 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
Allowance for loan commitments.The allowance for loan commitments by portfolio segment were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Home equity
line of credit | | Commercial construction | | Commercial loans | | Total | |
| Three months ended September 30, 2020 | | | | | | | | | |
| Allowance for loan commitments: | | | | | | | | | |
| Beginning balance | | $ | 300 | | | $ | 7,500 | | | $ | 300 | | | $ | 8,100 | | |
| Provision | | 0 | | | (800) | | | 300 | | | (500) | | |
| Ending balance | | $ | 300 | | | $ | 6,700 | | | $ | 600 | | | $ | 7,600 | | |
| Nine months ended September 30, 2020 | | | | | | | | | |
| Allowance for loan commitments: | | | | | | | | | |
| Beginning balance, prior to adoption of ASU No. 2016-13 | | $ | 392 | | | $ | 931 | | | $ | 418 | | | $ | 1,741 | | |
Impact of adopting ASU No. 2016-13 | | (92) | | | 1,745 | | | (94) | | | 1,559 | | |
| Provision | | 0 | | | 4,024 | | | 276 | | | 4,300 | | |
| Ending balance | | $ | 300 | | | $ | 6,700 | | | $ | 600 | | | $ | 7,600 | | |
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 the BankASB 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:
| | | | | September 30, 2017 | | December 31, 2016 | | Term Loans by Origination Year | | Revolving Loans | |
| (in thousands) | | Commercial real estate | | Commercial construction | | Commercial | | Commercial real estate | | Commercial construction | | Commercial | (in thousands) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Revolving | | Converted to term loans | | Total |
| Grade: | | |
| | |
| | |
| | |
| | |
| | |
| |
| September 30, 2020 | | September 30, 2020 | |
| Residential 1-4 family | | Residential 1-4 family | |
| Current | | Current | | $ | 425,930 | | | $ | 242,811 | | | $ | 138,155 | | | $ | 233,944 | | | $ | 201,532 | | | $ | 947,343 | | | $ | 0 | | | $ | 0 | | | $ | 2,189,715 | |
| 30-59 days past due | | 30-59 days past due | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 2,461 | | | 0 | | | 0 | | | 2,461 | |
| 60-89 days past due | | 60-89 days past due | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 1,028 | | | 0 | | | 0 | | | 1,028 | |
| Greater than 89 days past due | | Greater than 89 days past due | | 0 | | | 0 | | | 0 | | | 353 | | | 0 | | | 1,536 | | | 0 | | | 0 | | | 1,889 | |
| | | 425,930 | | | 242,811 | | | 138,155 | | | 234,297 | | | 201,532 | | | 952,368 | | | 0 | | | 0 | | | 2,195,093 | |
| Home equity line of credit | | Home equity line of credit | |
| Current | | Current | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 991,199 | | | 33,800 | | | 1,024,999 | |
| 30-59 days past due | | 30-59 days past due | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 419 | | | 349 | | | 768 | |
| 60-89 days past due | | 60-89 days past due | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 158 | | | 0 | | | 158 | |
| Greater than 89 days past due | | Greater than 89 days past due | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 1,287 | | | 799 | | | 2,086 | |
| | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 993,063 | | | 34,948 | | | 1,028,011 | |
| Residential land | | Residential land | |
| Current | | Current | | 4,606 | | | 4,433 | | | 1,598 | | | 1,600 | | | 22 | | | 1,751 | | | 0 | | | 0 | | | 14,010 | |
| 30-59 days past due | | 30-59 days past due | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 300 | | | 0 | | | 0 | | | 300 | |
| 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 | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| | | 4,606 | | | 4,433 | | | 1,598 | | | 1,600 | | | 22 | | | 2,051 | | | 0 | | | 0 | | | 14,310 | |
| Residential construction | | Residential construction | |
| Current | | Current | | 4,368 | | | 4,897 | | | 386 | | | 630 | | | 0 | | | 0 | | | 0 | | | 0 | | | 10,281 | |
| 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 | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Greater than 89 days past due | | Greater than 89 days past due | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| | | 4,368 | | | 4,897 | | | 386 | | | 630 | | | 0 | | | 0 | | | 0 | | | 0 | | | 10,281 | |
| Consumer | | Consumer | |
| Current | | Current | | 25,661 | | | 77,454 | | | 45,485 | | | 10,916 | | | 764 | | | 423 | | | 19,906 | | | 3,221 | | | 183,830 | |
| 30-59 days past due | | 30-59 days past due | | 387 | | | 981 | | | 723 | | | 239 | | | 13 | | | 0 | | | 467 | | | 131 | | | 2,941 | |
| 60-89 days past due | | 60-89 days past due | | 95 | | | 717 | | | 674 | | | 152 | | | 5 | | | 0 | | | 70 | | | 87 | | | 1,800 | |
| Greater than 89 days past due | | Greater than 89 days past due | | 32 | | | 507 | | | 411 | | | 156 | | | 18 | | | 0 | | | 359 | | | 84 | | | 1,567 | |
| | | 26,175 | | | 79,659 | | | 47,293 | | | 11,463 | | | 800 | | | 423 | | | 20,802 | | | 3,523 | | | 190,138 | |
| Commercial real estate | | Commercial real estate | |
| Pass | | $ | 647,599 |
| | $ | 103,892 |
| | $ | 539,336 |
| | $ | 701,657 |
| | $ | 102,955 |
| | $ | 614,139 |
| Pass | | 161,130 | | | 73,086 | | | 63,082 | | | 28,685 | | | 55,742 | | | 154,297 | | | 11,000 | | | 0 | | | 547,022 | |
| Special mention | | 44,088 |
| | 22,500 |
| | 25,053 |
| | 65,541 |
| | — |
| | 25,229 |
| |
| Special Mention | | Special Mention | | 9,634 | | | 38,908 | | | 65,840 | | | 33,921 | | | 68,502 | | | 65,431 | | | 0 | | | 0 | | | 282,236 | |
| Substandard | | 53,896 |
| | 2,015 |
| | 23,130 |
| | 33,197 |
| | 23,813 |
| | 52,683 |
| Substandard | | 0 | | | 3,165 | | | 4,193 | | | 1,896 | | | 4,461 | | | 57,939 | | | 0 | | | 0 | | | 71,654 | |
| Doubtful | | — |
| | — |
| | 2,150 |
| | — |
| | — |
| | — |
| Doubtful | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Loss | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Total | | $ | 745,583 |
| | $ | 128,407 |
| | $ | 589,669 |
| | $ | 800,395 |
| | $ | 126,768 |
| | $ | 692,051 |
| |
| | | 170,764 | | | 115,159 | | | 133,115 | | | 64,502 | | | 128,705 | | | 277,667 | | | 11,000 | | | 0 | | | 900,912 | |
| Commercial construction | | Commercial construction | |
| Pass | | Pass | | 11,122 | | | 21,322 | | | 30,655 | | | 0 | | | 5,999 | | | 0 | | | 24,200 | | | 0 | | | 93,298 | |
| Special Mention | | Special Mention | | 1,632 | | | 0 | | | 0 | | | 18,000 | | | — | | | 0 | | | 0 | | | 0 | | | 19,632 | |
| Substandard | | Substandard | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Doubtful | | Doubtful | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| | | 12,754 | | | 21,322 | | | 30,655 | | | 18,000 | | | 5,999 | | | 0 | | | 24,200 | | | 0 | | | 112,930 | |
| Commercial | | Commercial | |
| Pass | | Pass | | 454,219 | | | 131,481 | | | 91,147 | | | 30,680 | | | 13,067 | | | 37,580 | | | 76,449 | | | 13,397 | | | 848,020 | |
| Special Mention | | Special Mention | | 36,029 | | | 23,458 | | | 3,681 | | | 7,176 | | | 30,864 | | | 15,105 | | | 32,494 | | | 11,221 | | | 160,028 | |
| Substandard | | Substandard | | 132 | | | 9,420 | | | 371 | | | 4,402 | | | 8,547 | | | 3,742 | | | 6,943 | | | 830 | | | 34,387 | |
| Doubtful | | Doubtful | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| | | 490,380 | | | 164,359 | | | 95,199 | | | 42,258 | | | 52,478 | | | 56,427 | | | 115,886 | | | 25,448 | | | 1,042,435 | |
| Total loans | | Total loans | | $ | 1,134,977 | | | $ | 632,640 | | | $ | 446,401 | | | $ | 372,750 | | | $ | 389,536 | | | $ | 1,288,936 | | | $ | 1,164,951 | | | $ | 63,919 | | | $ | 5,494,110 | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
Revolving loans converted to term loans during the nine months ended September 30, 2020 in the commercial, home equity line of credit and consumer portfolios was $13.8 million, $10.0 million, and $2.0 million, respectively.
The credit risk profile based on payment activity for loans was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | 30-59
days
past due | | 60-89
days
past due | | 90 days or more past due | | Total
past due | | Current | | Total
financing
receivables | | Amortized cost>
90 days and
accruing |
| September 30, 2020 | | | | | | | | | | | | | | |
| Real estate: | | | | | | | | | | | | | | |
| Residential 1-4 family | | $ | 2,461 | | | $ | 1,028 | | | $ | 1,889 | | | $ | 5,378 | | | $ | 2,189,715 | | | $ | 2,195,093 | | | $ | 0 | |
| Commercial real estate | | 0 | | | 0 | | | 0 | | | 0 | | | 900,912 | | | 900,912 | | | 0 | |
| Home equity line of credit | | 768 | | | 158 | | | 2,086 | | | 3,012 | | | 1,024,999 | | | 1,028,011 | | | 0 | |
| Residential land | | 300 | | | 0 | | | 0 | | | 300 | | | 14,010 | | | 14,310 | | | 0 | |
| Commercial construction | | 0 | | | 0 | | | 0 | | | 0 | | | 112,930 | | | 112,930 | | | 0 | |
| Residential construction | | 0 | | | 0 | | | 0 | | | 0 | | | 10,281 | | | 10,281 | | | 0 | |
| Commercial | | 1,702 | | | 326 | | | 105 | | | 2,133 | | | 1,040,302 | | | 1,042,435 | | | 0 | |
| Consumer | | 2,941 | | | 1,800 | | | 1,567 | | | 6,308 | | | 183,830 | | | 190,138 | | | 0 | |
| Total loans | | $ | 8,172 | | | $ | 3,312 | | | $ | 5,647 | | | $ | 17,131 | | | $ | 5,476,979 | | | $ | 5,494,110 | | | $ | 0 | |
| December 31, 2019 | | | | | | | | | | | | | | |
| Real estate: | | | | | | | | | | | | | | |
| Residential 1-4 family | | $ | 2,588 | | | $ | 290 | | | $ | 1,808 | | | $ | 4,686 | | | $ | 2,173,449 | | | $ | 2,178,135 | | | $ | 0 | |
| Commercial real estate | | 0 | | | 0 | | | 0 | | | 0 | | | 824,830 | | | 824,830 | | | 0 | |
| Home equity line of credit | | 813 | | | 0 | | | 2,117 | | | 2,930 | | | 1,089,195 | | | 1,092,125 | | | 0 | |
| Residential land | | 0 | | | 0 | | | 25 | | | 25 | | | 14,679 | | | 14,704 | | | 0 | |
| Commercial construction | | 0 | | | 0 | | | 0 | | | 0 | | | 70,605 | | | 70,605 | | | 0 | |
| Residential construction | | 0 | | | 0 | | | 0 | | | 0 | | | 11,670 | | | 11,670 | | | 0 | |
| Commercial | | 1,077 | | | 311 | | | 172 | | | 1,560 | | | 669,114 | | | 670,674 | | | 0 | |
| Consumer | | 4,386 | | | 3,257 | | | 2,907 | | | 10,550 | | | 247,371 | | | 257,921 | | | 0 | |
| Total loans | | $ | 8,864 | | | $ | 3,858 | | | $ | 7,029 | | | $ | 19,751 | | | $ | 5,100,913 | | | $ | 5,120,664 | | | $ | 0 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | 30-59 days past due | | 60-89 days past due | | Greater than 90 days | | Total past due | | Current | | Total financing receivables | | Recorded investment> 90 days and accruing |
| September 30, 2017 | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Real estate: | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Residential 1-4 family | | $ | 3,905 |
| | $ | 1,513 |
| | $ | 4,452 |
| | $ | 9,870 |
| | $ | 2,056,153 |
| | $ | 2,066,023 |
| | $ | — |
|
| Commercial real estate | | 5,414 |
| | — |
| | — |
| | 5,414 |
| | 740,169 |
| | 745,583 |
| | — |
|
| Home equity line of credit | | 1,936 |
| | 177 |
| | 1,367 |
| | 3,480 |
| | 901,769 |
| | 905,249 |
| | — |
|
| Residential land | | 498 |
| | 984 |
| | 497 |
| | 1,979 |
| | 16,632 |
| | 18,611 |
| | — |
|
| Commercial construction | | — |
| | — |
| | — |
| | — |
| | 128,407 |
| | 128,407 |
| | — |
|
| Residential construction | | — |
| | — |
| | — |
| | — |
| | 13,031 |
| | 13,031 |
| | — |
|
| Commercial | | 1,095 |
| | 218 |
| | 648 |
| | 1,961 |
| | 587,708 |
| | 589,669 |
| | — |
|
| Consumer | | 2,508 |
| | 1,465 |
| | 1,178 |
| | 5,151 |
| | 206,420 |
| | 211,571 |
| | — |
|
| Total loans | | $ | 15,356 |
| | $ | 4,357 |
| | $ | 8,142 |
| | $ | 27,855 |
| | $ | 4,650,289 |
| | $ | 4,678,144 |
| | $ | — |
|
| December 31, 2016 | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Real estate: | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Residential 1-4 family | | $ | 5,467 |
| | $ | 2,338 |
| | $ | 3,505 |
| | $ | 11,310 |
| | $ | 2,036,741 |
| | $ | 2,048,051 |
| | $ | — |
|
| Commercial real estate | | 2,416 |
| | — |
| | — |
| | 2,416 |
| | 797,979 |
| | 800,395 |
| | — |
|
| Home equity line of credit | | 1,263 |
| | 381 |
| | 1,342 |
| | 2,986 |
| | 860,177 |
| | 863,163 |
| | — |
|
| Residential land | | — |
| | — |
| | 255 |
| | 255 |
| | 18,634 |
| | 18,889 |
| | — |
|
| Commercial construction | | — |
| | — |
| | — |
| | — |
| | 126,768 |
| | 126,768 |
| | — |
|
| Residential construction | | — |
| | — |
| | — |
| | — |
| | 16,080 |
| | 16,080 |
| | — |
|
| Commercial | | 413 |
| | 510 |
| | 1,303 |
| | 2,226 |
| | 689,825 |
| | 692,051 |
| | — |
|
| Consumer | | 1,945 |
| | 1,001 |
| | 963 |
| | 3,909 |
| | 174,313 |
| | 178,222 |
| | — |
|
| Total loans | | $ | 11,504 |
| | $ | 4,230 |
| | $ | 7,368 |
| | $ | 23,102 |
| | $ | 4,720,517 |
| | $ | 4,743,619 |
| | $ | — |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
The credit risk profile based on nonaccrual loans accruing loans 90 days or more past due and TDR loans was as follows:
|
| | | | | | | | |
| (in thousands) | | September 30, 2017 | | December 31, 2016 |
| Real estate: | | |
| | |
|
| Residential 1-4 family | | $ | 12,853 |
| | $ | 11,154 |
|
| Commercial real estate | | — |
| | 223 |
|
| Home equity line of credit | | 4,000 |
| | 3,080 |
|
| Residential land | | 1,022 |
| | 878 |
|
| Commercial construction | | — |
| | — |
|
| Residential construction | | — |
| | — |
|
| Commercial | | 3,691 |
| | 6,708 |
|
| Consumer | | 1,791 |
| | 1,282 |
|
| Total nonaccrual loans | | $ | 23,357 |
| | $ | 23,325 |
|
| Real estate: | | | | |
| Residential 1-4 family | | $ | — |
| | $ | — |
|
| Commercial real estate | | — |
| | — |
|
| Home equity line of credit | | — |
| | — |
|
| Residential land | | — |
| | — |
|
| Commercial construction | | — |
| | — |
|
| Residential construction | | — |
| | — |
|
| Commercial | | — |
| | — |
|
| Consumer | | — |
| | — |
|
| Total accruing loans 90 days or more past due | | $ | — |
| | $ | — |
|
| Real estate: | | | | |
| Residential 1-4 family | | $ | 11,592 |
| | $ | 14,450 |
|
| Commercial real estate | | 1,281 |
| | 1,346 |
|
| Home equity line of credit | | 5,250 |
| | 4,934 |
|
| Residential land | | 1,555 |
| | 2,751 |
|
| Commercial construction | | — |
| | — |
|
| Residential construction | | — |
| | — |
|
| Commercial | | 2,052 |
| | 14,146 |
|
| Consumer | | 67 |
| | 10 |
|
| Total troubled debt restructured loans not included above | | $ | 21,797 |
| | $ | 37,637 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
The total carrying amount and the total unpaid principal balance of impaired loans were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | September 30, 2020 | | December 31, 2019 |
| | With a Related ACL | | Without a Related ACL | | Total | | Total |
| Real estate: | | | | | | | | |
| Residential 1-4 family | | $ | 8,271 | | | $ | 1,919 | | | $ | 10,190 | | | $ | 11,395 | |
| Commercial real estate | | 15,965 | | | 0 | | | 15,965 | | | 195 | |
| Home equity line of credit | | 6,246 | | | 1,555 | | | 7,801 | | | 6,638 | |
| Residential land | | 410 | | | 0 | | | 410 | | | 448 | |
| Commercial construction | | 0 | | | 0 | | | 0 | | | 0 | |
| Residential construction | | 0 | | | 0 | | | 0 | | | 0 | |
| Commercial | | 758 | | | 2,552 | | | 3,310 | | | 5,947 | |
| Consumer | | 4,304 | | | 0 | | | 4,304 | | | 5,113 | |
| Total nonaccrual loans | | $ | 35,954 | | | $ | 6,026 | | | $ | 41,980 | | | $ | 29,736 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2017 | | Three months ended September 30, 2017 | | Nine months ended September 30, 2017 |
| (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 | | $ | 9,987 |
| | $ | 10,541 |
| | $ | — |
| | $ | 9,650 |
| | $ | 70 |
| | $ | 9,503 |
| | $ | 230 |
|
| Commercial real estate | | — |
| | — |
| | — |
| | — |
| | — |
| | 121 |
| | 11 |
|
| Home equity line of credit | | 1,565 |
| | 1,889 |
| | — |
| | 1,918 |
| | 32 |
| | 2,108 |
| | 97 |
|
| Residential land | | 1,134 |
| | 1,425 |
| | — |
| | 1,209 |
| | 73 |
| | 1,080 |
| | 107 |
|
| Commercial construction | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Residential construction | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Commercial | | 2,901 |
| | 6,257 |
| | — |
| | 1,808 |
| | 29 |
| | 2,888 |
| | 37 |
|
| Consumer | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | | $ | 15,587 |
| | $ | 20,112 |
| | $ | — |
| | $ | 14,585 |
| | $ | 204 |
| | $ | 15,700 |
| | $ | 482 |
|
| With an allowance recorded | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Real estate: | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Residential 1-4 family | | $ | 9,770 |
| | $ | 9,972 |
| | $ | 1,317 |
| | $ | 9,788 |
| | $ | 97 |
| | $ | 9,963 |
| | $ | 333 |
|
| Commercial real estate | | 1,281 |
| | 1,281 |
| | 72 |
| | 1,284 |
| | 13 |
| | 1,292 |
| | 41 |
|
| Home equity line of credit | | 5,513 |
| | 5,543 |
| | 409 |
| | 5,076 |
| | 68 |
| | 4,670 |
| | 164 |
|
| Residential land | | 1,251 |
| | 1,251 |
| | 373 |
| | 1,251 |
| | 12 |
| | 1,620 |
| | 73 |
|
| Commercial construction | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Residential construction | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Commercial | | 2,585 |
| | 2,595 |
| | 667 |
| | 2,482 |
| | 225 |
| | 4,104 |
| | 694 |
|
| Consumer | | 67 |
| | 67 |
| | 30 |
| | 67 |
| | 1 |
| | 55 |
| | 2 |
|
| | | $ | 20,467 |
| | $ | 20,709 |
| | $ | 2,868 |
| | $ | 19,948 |
| | $ | 416 |
| | $ | 21,704 |
| | $ | 1,307 |
|
| Total | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Real estate: | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Residential 1-4 family | | $ | 19,757 |
| | $ | 20,513 |
| | $ | 1,317 |
| | $ | 19,438 |
| | $ | 167 |
| | $ | 19,466 |
| | $ | 563 |
|
| Commercial real estate | | 1,281 |
| | 1,281 |
| | 72 |
| | 1,284 |
| | 13 |
| | 1,413 |
| | 52 |
|
| Home equity line of credit | | 7,078 |
| | 7,432 |
| | 409 |
| | 6,994 |
| | 100 |
| | 6,778 |
| | 261 |
|
| Residential land | | 2,385 |
| | 2,676 |
| | 373 |
| | 2,460 |
| | 85 |
| | 2,700 |
| | 180 |
|
| Commercial construction | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Residential construction | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Commercial | | 5,486 |
| | 8,852 |
| | 667 |
| | 4,290 |
| | 254 |
| | 6,992 |
| | 731 |
|
| Consumer | | 67 |
| | 67 |
| | 30 |
| | 67 |
| | 1 |
| | 55 |
| | 2 |
|
| | | $ | 36,054 |
| | $ | 40,821 |
| | $ | 2,868 |
| | $ | 34,533 |
| | $ | 620 |
| | $ | 37,404 |
| | $ | 1,789 |
|
The credit risk profile based on loans whose terms have been modified and accruing interest were as follows:
| | | | | | | | | | | | | | |
| (in thousands) | | September 30, 2020 | | December 31, 2019 |
| Real estate: | | | | |
| Residential 1-4 family | | $ | 8,224 | | | $ | 9,869 | |
| Commercial real estate | | 997 | | | 853 | |
| Home equity line of credit | | 8,809 | | | 10,376 | |
| Residential land | | 1,891 | | | 2,644 | |
| Commercial construction | | 0 | | | 0 | |
| Residential construction | | 0 | | | 0 | |
| Commercial | | 2,531 | | | 2,614 | |
| Consumer | | 54 | | | 57 | |
| Total troubled debt restructured loans accruing interest | | $ | 22,506 | | | $ | 26,413 | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
ASB did not recognize interest on nonaccrual loans for the three and nine months ended September 30, 2020.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2016 | | Three months ended September 30, 2016 | | Nine months ended September 30, 2016 |
| (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 | | $ | 9,571 |
| | $ | 10,400 |
| | $ | — |
| | $ | 10,069 |
| | $ | 65 |
| | $ | 10,378 |
| | $ | 268 |
|
| Commercial real estate | | 223 |
| | 228 |
| | — |
| | 1,206 |
| | — |
| | 1,177 |
| | — |
|
| Home equity line of credit | | 1,500 |
| | 1,900 |
| | — |
| | 1,220 |
| | 6 |
| | 1,035 |
| | 15 |
|
| Residential land | | 1,218 |
| | 1,803 |
| | — |
| | 1,521 |
| | 16 |
| | 1,532 |
| | 47 |
|
| Commercial construction | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Residential construction | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Commercial | | 6,299 |
| | 8,869 |
| | — |
| | 14,352 |
| | 141 |
| | 9,240 |
| | 154 |
|
| Consumer | | — |
| | — |
| | — |
| | 10 |
| | — |
| | 3 |
| | — |
|
| | | $ | 18,811 |
| | $ | 23,200 |
| | $ | — |
| | $ | 28,378 |
| | $ | 228 |
| | $ | 23,365 |
| | $ | 484 |
|
| With an allowance recorded | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Real estate: | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Residential 1-4 family | | $ | 10,283 |
| | $ | 10,486 |
| | $ | 1,352 |
| | $ | 11,800 |
| | $ | 119 |
| | $ | 11,933 |
| | $ | 356 |
|
| Commercial real estate | | 1,346 |
| | 1,346 |
| | 80 |
| | 2,444 |
| | — |
| | 1,939 |
| | — |
|
| Home equity line of credit | | 4,658 |
| | 4,712 |
| | 215 |
| | 4,165 |
| | 36 |
| | 3,470 |
| | 91 |
|
| Residential land | | 2,411 |
| | 2,411 |
| | 789 |
| | 2,915 |
| | 44 |
| | 3,090 |
| | 165 |
|
| Commercial construction | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Residential construction | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Commercial | | 14,240 |
| | 14,240 |
| | 1,641 |
| | 11,433 |
| | 65 |
| | 15,075 |
| | 275 |
|
| Consumer | | 10 |
| | 10 |
| | 6 |
| | 11 |
| | — |
| | 12 |
| | — |
|
| | | $ | 32,948 |
| | $ | 33,205 |
| | $ | 4,083 |
| | $ | 32,768 |
| | $ | 264 |
| | $ | 35,519 |
| | $ | 887 |
|
| Total | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Real estate: | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Residential 1-4 family | | $ | 19,854 |
| | $ | 20,886 |
| | $ | 1,352 |
| | $ | 21,869 |
| | $ | 184 |
| | $ | 22,311 |
| | $ | 624 |
|
| Commercial real estate | | 1,569 |
| | 1,574 |
| | 80 |
| | 3,650 |
| | — |
| | 3,116 |
| | — |
|
| Home equity line of credit | | 6,158 |
| | 6,612 |
| | 215 |
| | 5,385 |
| | 42 |
| | 4,505 |
| | 106 |
|
| Residential land | | 3,629 |
| | 4,214 |
| | 789 |
| | 4,436 |
| | 60 |
| | 4,622 |
| | 212 |
|
| Commercial construction | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Residential construction | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Commercial | | 20,539 |
| | 23,109 |
| | 1,641 |
| | 25,785 |
| | 206 |
| | 24,315 |
| | 429 |
|
| Consumer | | 10 |
| | 10 |
| | 6 |
| | 21 |
| | — |
| | 15 |
| | — |
|
| | | $ | 51,759 |
| | $ | 56,405 |
| | $ | 4,083 |
| | $ | 61,146 |
| | $ | 492 |
| | $ | 58,884 |
| | $ | 1,371 |
|
| |
* | Since loan was classified as impaired. |
Troubled debt restructurings. A loan modification is deemed to be a troubled debt restructuring (TDR)TDR when the borrower is determined to be experiencing financial difficulties and ASB grants a concession it would not otherwise consider were it notconsider.
The allowance for the borrower’s financial difficulty. When a borrower experiencing financial difficulty fails to make a required paymentcredit losses on a loan or is in imminent default, ASB takes a number of steps to improve the collectibility of the loan and maximize the likelihood of full repayment. At times, ASB may modify or restructure a loan to help a distressed borrower improve its financial position to eventually be able to fully repay the loan, provided the borrower has demonstrated both the willingness and the ability to fulfill the modified terms. TDR loans that do not share risk characteristics are considered an alternative to foreclosure or liquidation with the goal of minimizing losses to ASB and maximizing recovery.
ASB may consider various types of concessions in granting a TDR including maturity date extensions, extended amortization of principal, temporary deferral of principal payments and temporary interest rate reductions. ASB rarely grants principal forgiveness in its TDR modifications. Residential loan modifications generally involve interest rate reduction,
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
extending the amortization period, or capitalizing certain delinquent amounts owed not to exceed the original loan balance. Land loans at origination are typically structured as a three-year term, interest-only monthly payment with a balloon payment due at maturity. Land loan TDR modifications typically involve extending the maturity date up to five years and converting the payments from interest-only to principal and interest monthly, at the same or higher interest rate. Commercial loan modifications generally involve extensions of maturity dates, extending the amortization period and temporary deferral or reduction of principal payments. ASB generally does not reduce the interest rate on commercial loan TDR modifications. Occasionally, additional collateral and/or guaranties are obtained.
All TDR loans are classified as impaired and are segregated and reviewed separately when assessing the adequacy of the allowance for loan lossesindividually evaluated based on the appropriate method of measuring impairment: (1) present value of expected future cash flows discounted at the loan’s effective original contractual rate (2)or based on the fair value of collateral less cost to sell or (3) observable market price.sell. The financial impact of the calculated impairment amountestimated 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 loancredit losses.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Loan modifications that occurred during the third quarters and first nine months of 20172020 and 2016 and the impact on the allowance for loan losses2019 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans modified as a TDR | | Three months ended September 30, 2020 | | Nine months ended September 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 | | 0 | | | $ | 0 | | | $ | 0 | | | 1 | | | $ | 146 | | | $ | 7 | |
| Commercial real estate | | 0 | | | 0 | | | 0 | | | 2 | | | 16,149 | | | 4,019 | |
| Home equity line of credit | | 0 | | | 0 | | | 0 | | | 2 | | | 22 | | | 1 | |
| Residential land | | 0 | | | 0 | | | 0 | | | 2 | | | 228 | | | 15 | |
| Commercial construction | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Residential construction | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Commercial | | 2 | | | 52 | | | 45 | | | 5 | | | 207 | | | 180 | |
| Consumer | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| | | 2 | | | $ | 52 | | | $ | 45 | | | 12 | | | $ | 16,752 | | | $ | 4,222 | |
| | | | | | | | | | | | |
| | Three months ended September 30, 2019 | | Nine months ended September 30, 2019 |
| (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 | | | $ | 324 | | | $ | 0 | | | 10 | | | $ | 1,563 | | | $ | 165 | |
| Commercial real estate | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Home equity line of credit | | 0 | | | 0 | | | 0 | | | 3 | | | 429 | | | 85 | |
| Residential land | | 1 | | | 350 | | | 0 | | | 3 | | | 1,169 | | | 0 | |
| Commercial construction | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Residential construction | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Commercial | | 3 | | | 275 | | | 58 | | | 6 | | | 1,761 | | | 218 | |
| Consumer | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| | | 5 | | | $ | 949 | | | $ | 58 | | | 22 | | | $ | 4,922 | | | $ | 468 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended September 30, 2017 | | Nine months ended September 30, 2017 |
| | | Number of contracts | | Outstanding recorded investment1 | | Net increase in allowance | | Number of contracts | | Outstanding recorded investment1 | | Net increase in allowance |
| (dollars in thousands) | | | Pre-modification | | Post-modification | | (as of period end) | | | Pre-modification | | Post-modification | | (as of period end) |
| Troubled debt restructurings | | |
| | |
| | |
| | | | |
| | |
| | |
| | |
| Real estate: | | |
| | |
| | |
| | | | |
| | |
| | |
| | |
| Residential 1-4 family | | 2 |
| | $ | 83 |
| | $ | 83 |
| | $ | — |
| | 7 |
| | $ | 955 |
| | $ | 963 |
| | $ | 45 |
|
| Commercial real estate | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Home equity line of credit | | 15 |
| | 862 |
| | 862 |
| | 184 |
| | 28 |
| | 1,386 |
| | 1,372 |
| | 277 |
|
| Residential land | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Commercial construction | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Residential construction | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Commercial | | 1 |
| | 330 |
| | 330 |
| | 38 |
| | 2 |
| | 672 |
| | 672 |
| | 38 |
|
| Consumer | | — |
| | — |
| | — |
| | — |
| | 1 |
| | 59 |
| | 59 |
| | 27 |
|
| | | 18 |
| | $ | 1,275 |
| | $ | 1,275 |
| | $ | 222 |
| | 38 |
| | $ | 3,072 |
| | $ | 3,066 |
| | $ | 387 |
|
1 The 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. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended September 30, 2016 | | Nine months ended September 30, 2016 |
| | | Number of contracts | | Outstanding recorded
investment1 | | Net increase in allowance | | Number of contracts | | Outstanding recorded
investment1 | | Net increase in allowance |
| (dollars in thousands) | | | Pre-modification | | Post-modification | | (as of period end) | | | Pre-modification | | Post-modification | | (as of period end) |
| Troubled debt restructurings | | |
| | |
| | |
| | | | | | |
| | |
| | |
| Real estate: | | |
| | |
| | |
| | | | | | |
| | |
| | |
| Residential 1-4 family | | 2 |
| | $ | 251 |
| | $ | 251 |
| | $ | 46 |
| | 11 |
| | $ | 2,239 |
| | $ | 2,351 |
| | $ | 305 |
|
| Commercial real estate | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Home equity line of credit | | 12 |
| | 1,268 |
| | 1,268 |
| | 237 |
| | 30 |
| | 2,705 |
| | 2,705 |
| | 492 |
|
| Residential land | | — |
| | — |
| | — |
| | — |
| | 1 |
| | 120 |
| | 121 |
| | — |
|
| Commercial construction | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Residential construction | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Commercial | | 6 |
| | 3,462 |
| | 3,462 |
| | 53 |
| | 14 |
| | 20,119 |
| | 20,119 |
| | 723 |
|
| Consumer | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | | 20 |
| | $ | 4,981 |
| | $ | 4,981 |
| | $ | 336 |
| | 56 |
| | $ | 25,183 |
| | $ | 25,296 |
| | $ | 1,520 |
|
| |
1
| The reported balances include loans that became TDR during the period, and were fully paid-off, charged-off, or sold prior to period end. |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
LoansThere were no loans modified in TDRs that experienced a payment default of 90 days or more during the third quartersquarter and first nine months of 20172020 and 2016, and for which the payment of default occurred within one year of the modification, were as follows:2019.
|
| | | | | | | | | | | | |
| | | Three months ended September 30, 2017 | | Nine months ended September 30, 2017 |
| (dollars in thousands) | | Number of contracts | | Recorded investment | | Number of contracts | | Recorded investment |
Troubled debt restructurings that subsequently defaulted | | | | | | | | |
| Real estate: | | | | |
| | | | |
|
| Residential 1-4 family | | — | | $ | — |
| | 1 | | $ | 222 |
|
| Commercial real estate | | — | | — |
| | — | | — |
|
| Home equity line of credit | | — | | — |
| | — | | — |
|
| Residential land | | — | | — |
| | — | | — |
|
| Commercial construction | | — | | — |
| | — | | — |
|
| Residential construction | | — | | — |
| | — | | — |
|
| Commercial | | — | | — |
| | — | | — |
|
| Consumer | | — | | — |
| | — | | — |
|
| | | — | | $ | — |
| | 1 | | $ | 222 |
|
|
| | | | | | | | | | | | |
| | | Three months ended September 30, 2016 | | Nine months ended September 30, 2016 |
| (dollars in thousands) | | Number of contracts | | Recorded investment | | Number of contracts | | Recorded investment |
Troubled debt restructurings that
subsequently defaulted | | | | | | | | |
| Real estate: | | | | |
| | | | |
|
| Residential 1-4 family | | 1 | | $ | 239 |
| | 1 | | $ | 239 |
|
| Commercial real estate | | — | | — |
| | — | | — |
|
| Home equity line of credit | | — | | — |
| | — | | — |
|
| Residential land | | — | | — |
| | — | | — |
|
| Commercial construction | | — | | — |
| | — | | — |
|
| Residential construction | | — | | — |
| | — | | — |
|
| Commercial | | — | | — |
| | 1 | | 25 |
|
| Consumer | | — | | — |
| | — | | — |
|
| | | 1 | | $ | 239 |
| | 2 | | $ | 264 |
|
If loansa loan modified in a TDR subsequently default,defaults, ASB evaluates the loan for further impairment. Based on its evaluation, adjustments may be made in the allocation of the allowance or partial charge-offs may be taken to further write-down the carrying value of the loan. Commitments to lend additional funds to borrowers whose loan terms have been modified in a TDR totaled nil and $2.6 millionNaN at September 30, 20172020 and December 31, 2016, respectively.2019.
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.
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:
| | | | | | | | | | | | | | |
| September 30, 2020 | | Amortized cost | | Collateral type |
| (in thousands) | | | | |
| Real estate: | | | | |
| Residential 1-4 family | | $ | 2,057 | | | Residential real estate property |
| Home equity line of credit | | 1,555 | | | Residential real estate property |
| Commercial construction | | 0 | | | |
| Total real estate | | 3,612 | | | |
| Commercial | | 0 | | | |
| Total | | $ | 3,612 | | | |
ASB had $4.9$3.0 million and $3.9$3.5 million of consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure at September 30, 20172020 and December 31, 2016,2019, 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 | | | 0 | | | 29,921 | | | 34,372 | |
| Substandard | | | | | | | | | | 63,632 | | | 2,289 | | | 19,096 | | | 85,017 | |
| Doubtful | | | | | | | | | | 0 | | | 0 | | | 0 | | | 0 | |
| Loss | | | | | | | | | | 0 | | | 0 | | | 0 | | | 0 | |
| 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 September 30, 2019 | | Nine months ended September 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 | | | $ | — | | | $ | 8,562 | | | $ | 175 | | | $ | 8,515 | | | $ | 422 | |
| Commercial real estate | | 195 | | | 200 | | | — | | | 0 | | | 0 | | | 0 | | | 0 | |
| Home equity line of credit | | 1,984 | | | 2,135 | | | — | | | 1,797 | | | 12 | | | 2,091 | | | 78 | |
| Residential land | | 3,091 | | | 3,294 | | | — | | | 3,205 | | | 40 | | | 2,507 | | | 90 | |
| Commercial construction | | 0 | | | 0 | | | — | | | 0 | | | 0 | | | 0 | | | 0 | |
| Residential construction | | 0 | | | 0 | | | — | | | 0 | | | 0 | | | 0 | | | 0 | |
| Commercial | | 1,948 | | | 2,285 | | | — | | | 4,812 | | | 239 | | | 4,470 | | | 239 | |
| Consumer | | 2 | | | 2 | | | — | | | 21 | | | 4 | | | 27 | | | 4 | |
| | | $ | 14,037 | | | $ | 15,123 | | | $ | — | | | $ | 18,397 | | | $ | 470 | | | $ | 17,610 | | | $ | 833 | |
| With an allowance recorded | | | | | | | | | | | | | | |
| Real estate: | | | | | | | | | | | | | | |
| Residential 1-4 family | | $ | 8,783 | | | $ | 8,835 | | | $ | 898 | | | $ | 8,296 | | | $ | 86 | | | $ | 8,377 | | | $ | 265 | |
| Commercial real estate | | 853 | | | 853 | | | 2 | | | 881 | | | 9 | | | 894 | | | 28 | |
| Home equity line of credit | | 10,089 | | | 10,099 | | | 322 | | | 11,332 | | | 143 | | | 11,606 | | | 425 | |
| Residential land | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 36 | | | 0 | |
| Commercial construction | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Residential construction | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Commercial | | 6,470 | | | 6,470 | | | 1,015 | | | 8,330 | | | 38 | | | 8,026 | | | 94 | |
| Consumer | | 505 | | | 505 | | | 454 | | | 556 | | | 12 | | | 301 | | | 14 | |
| | | $ | 26,700 | | | $ | 26,762 | | | $ | 2,691 | | | $ | 29,395 | | | $ | 288 | | | $ | 29,240 | | | $ | 826 | |
| Total | | | | | | | | | | | | | | |
| Real estate: | | | | | | | | | | | | | | |
| Residential 1-4 family | | $ | 15,600 | | | $ | 16,042 | | | $ | 898 | | | $ | 16,858 | | | $ | 261 | | | $ | 16,892 | | | $ | 687 | |
| Commercial real estate | | 1,048 | | | 1,053 | | | 2 | | | 881 | | | 9 | | | 894 | | | 28 | |
| Home equity line of credit | | 12,073 | | | 12,234 | | | 322 | | | 13,129 | | | 155 | | | 13,697 | | | 503 | |
| Residential land | | 3,091 | | | 3,294 | | | 0 | | | 3,205 | | | 40 | | | 2,543 | | | 90 | |
| Commercial construction | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Residential construction | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Commercial | | 8,418 | | | 8,755 | | | 1,015 | | | 13,142 | | | 277 | | | 12,496 | | | 333 | |
| Consumer | | 507 | | | 507 | | | 454 | | | 577 | | | 16 | | | 328 | | | 18 | |
| | | $ | 40,737 | | | $ | 41,885 | | | $ | 2,691 | | | $ | 47,792 | | | $ | 758 | | | $ | 46,850 | | | $ | 1,659 | |
* Since loan was classified as impaired.
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 $39.8$128.0 million and $70.0$87.8 million for the three months ended September 30, 20172020 and 20162019, respectively, and $119.7$387.2 million and $168.5$177.3 million for the nine months ended September 30, 20172020 and 2016,2019, respectively, and recognized gains on such sales of $0.5$7.7 million and $2.4$1.5 million for the three months ended September 30, 20172020 and 20162019, respectively, and $1.9$15.9 million and $5.1$3.1 million for the nine months ended September 30, 20172020 and 2016,2019, respectively.
There were no repurchased mortgage loans for the three and nine months ended September 30, 20172020 and 2016.2019. The repurchase reserve was $0.1 million as of September 30, 20172020 and 2016.
2019.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
Mortgage servicing fees, a component of other income, net, were $0.8$0.9 million and $0.7$0.8 million for the three months ended September 30, 20172020 and 2016,2019, respectively, and $2.3$2.5 million and $2.1$2.2 million for the nine months ended September 30, 20172020 and 2016,2019, respectively.
Changes in the carrying value of mortgage servicing rightsMSRs were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Gross carrying amount1 | | Accumulated amortization | | Valuation allowance | | Net
carrying amount |
| September 30, 2020 | | $ | 25,024 | | | $ | (15,089) | | | $ | (382) | | | $ | 9,553 | |
| December 31, 2019 | | 21,543 | | | (12,442) | | | 0 | | | 9,101 | |
|
| | | | | | | | | | | | | | | | |
| (in thousands) | | Gross
carrying amount1 | | Accumulated amortization1 | | Valuation allowance | | Net
carrying amount |
| September 30, 2017 | | $ | 18,463 |
| | $ | (9,393 | ) | | $ | — |
| | $ | 9,070 |
|
| December 31, 2016 | | 17,271 |
| | (7,898 | ) | | — |
| | 9,373 |
|
1Reflects the impact of loans paid in full.
full
Changes related to mortgage servicing rightsMSRs were as follows:
| | | | | Three months ended September 30 | | Nine months ended September 30 | | Three months ended September 30, | | Nine months ended September 30 |
| (in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | (in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
| Mortgage servicing rights | | | | | | | | | Mortgage servicing rights | |
| Beginning balance | | $ | 9,181 |
| | $ | 9,016 |
| | $ | 9,373 |
| | $ | 8,884 |
| Beginning balance | | $ | 9,911 | | | $ | 8,103 | | | $ | 9,101 | | | $ | 8,062 | |
| Amount capitalized | | 394 |
| | 824 |
| | 1,192 |
| | 1,944 |
| Amount capitalized | | 1,119 | | | 995 | | | 3,481 | | | 1,857 | |
| Amortization | | (505 | ) | | (649 | ) | | (1,495 | ) | | (1,637 | ) | Amortization | | (1,095) | | | (531) | | | (2,647) | | | (1,352) | |
| Other-than-temporary impairment | | — |
| | — |
| | — |
| | — |
| Other-than-temporary impairment | | 0 | | | 0 | | | 0 | | | 0 | |
| Carrying amount before valuation allowance | | 9,070 |
| | 9,191 |
| | 9,070 |
| | 9,191 |
| Carrying amount before valuation allowance | | 9,935 | | | 8,567 | | | 9,935 | | | 8,567 | |
| Valuation allowance for mortgage servicing rights | | | | | | | | | Valuation allowance for mortgage servicing rights | |
| Beginning balance | | — |
| | — |
| | — |
| | — |
| Beginning balance | | 264 | | | 0 | | | 0 | | | 0 | |
| Provision (recovery) | | — |
| | — |
| | — |
| | — |
| |
| Provision | | Provision | | 118 | | | 0 | | | 382 | | | 0 | |
| Other-than-temporary impairment | | — |
| | — |
| | — |
| | — |
| Other-than-temporary impairment | | 0 | | | 0 | | | 0 | | | 0 | |
| Ending balance | | — |
| | — |
| | — |
| | — |
| Ending balance | | 382 | | | 0 | | | 382 | | | 0 | |
| Net carrying value of mortgage servicing rights | | $ | 9,070 |
| | $ | 9,191 |
| | $ | 9,070 |
| | $ | 9,191 |
| Net carrying value of mortgage servicing rights | | $ | 9,553 | | | $ | 8,567 | | | $ | 9,553 | | | $ | 8,567 | |
ASB capitalizes mortgage servicing rightsMSRs acquired through either the purchase or upon the sale of mortgage loans with servicing rights retained. On a monthly basis, ASB compares the net carrying value of the mortgage servicing rightsMSRs to its fair value to determine if there are any changes to the valuation allowance and/or other-than-temporary impairment for the mortgage servicing rights. ASB’s MSRs are stratified based on predominant risk characteristics of the underlying loans including loan type such as fixed-rate 15 and 30 year mortgages and note rate in bands of 50 to 100 basis points. For each stratum, fair value is calculated by discounting expected net income streams using discount rates that reflect industry pricing for similar assets. Changes in mortgage interest rates impact the value of ASB’s mortgage servicing rights. Rising interest rates typically result in slower prepayment speeds in the loans being serviced for others, which increases the value of mortgage servicing rights, whereas declining interest rates typically result in faster prepayment speeds which decrease the value of mortgage servicing rights and increase the amortization of the mortgage servicing rights. 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.MSRs.
ASB uses a present value cash flow model using techniques described above 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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
Key assumptions used in estimating the fair value of ASB’s mortgage servicing rightsMSRs used in the impairment analysis were as follows:
| | | | | | | | | | | | | | |
| (dollars in thousands) | | September 30, 2020 | | December 31, 2019 |
| Unpaid principal balance | | $ | 1,456,434 | | | $ | 1,276,437 | |
| Weighted average note rate | | 3.77 | % | | 3.96 | % |
| Weighted average discount rate | | 9.3 | % | | 9.3 | % |
| Weighted average prepayment speed | | 17.8 | % | | 11.4 | % |
|
| | | | | | | | |
| (dollars in thousands) | | September 30, 2017 |
| | December 31, 2016 |
|
| Unpaid principal balance | | $ | 1,212,730 |
| | $ | 1,188,380 |
|
| Weighted average note rate | | 3.94 | % | | 3.96 | % |
| Weighted average discount rate | | 10.0 | % | | 9.4 | % |
| Weighted average prepayment speed | | 9.2 | % | | 8.5 | % |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
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) | | September 30, 2017 |
| | December 31, 2016 |
| (dollars in thousands) | | September 30, 2020 | | December 31, 2019 |
| Prepayment rate: | | | | | Prepayment rate: | |
| 25 basis points adverse rate change | | $ | (878 | ) | | $ | (567 | ) | 25 basis points adverse rate change | | $ | (826) | | | $ | (950) | |
| 50 basis points adverse rate change | | (1,847 | ) | | (1,154 | ) | 50 basis points adverse rate change | | (1,524) | | | (1,947) | |
| Discount rate: | | | | | Discount rate: | |
| 25 basis points adverse rate change | | (111 | ) | | (128 | ) | 25 basis points adverse rate change | | (65) | | | (102) | |
| 50 basis points adverse rate change | | (220 | ) | | (254 | ) | 50 basis points adverse rate change | | (129) | | | (202) | |
The effect of a variation in certain assumptions on fair value is calculated without changing any other assumptions. This analysis typically cannot be extrapolated because the relationship of a change in one key assumption to the changes in the fair value of MSRs typically is not linear.
Other borrowings. As of September 30, 2020, ASB had $56.0 million of FHLB advances outstanding. ASB was in compliance with all Advances, Pledge and Security Agreement requirements as of September 30, 2020. ASB also had 0 federal funds purchased with the Federal Reserve Bank as of September 30, 2020. There were 0 FHLB advances or federal funds purchased with the Federal Reserve Bank as of December 31, 2019.
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) | | Gross amount of recognized liabilities | | Gross amount offset in the Balance Sheet | | Net amount of liabilities presented in the Balance Sheet | (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 | | | | | | |
| September 30, 2017 | | $104 | | $— | | $104 | |
| December 31, 2016 | | 93 | | — | | 93 | |
| September 30, 2020 | | September 30, 2020 | | $ | 96 | | | $ | 0 | | | $ | 96 | |
| December 31, 2019 | | December 31, 2019 | | 115 | | | 0 | | | 115 | |
|
| | | | | | | | | | | | |
| | | Gross amount not offset in the Balance Sheet |
| (in millions) | | Net amount of liabilities presented in the Balance Sheet | | Financial instruments | | Cash collateral pledged |
| September 30, 2017 | | |
| | |
| | |
|
| Financial institution | | $ | — |
| | $ | — |
| | $ | — |
|
| Government entities | | — |
| | — |
| | — |
|
| Commercial account holders | | 104 |
| | 165 |
| | — |
|
| Total | | $ | 104 |
| | $ | 165 |
| | $ | — |
|
| December 31, 2016 | | |
| | |
| | |
|
| Financial institution | | $ | — |
| | $ | — |
| | $ | — |
|
| Government entities | | 14 |
| | 15 |
| | — |
|
| Commercial account holders | | 79 |
| | 101 |
| | — |
|
| Total | | $ | 93 |
| | $ | 116 |
| | $ | — |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
| | | | | | | | | | | | | | | | | | | | |
| | | Gross amount not offset in the Balance Sheets |
| (in millions) | | Net amount of liabilities presented
in the Balance Sheets | | Financial
instruments | | Cash
collateral
pledged |
| Commercial account holders | | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| September 30, 2020 | | $ | 96 | | | $ | 116 | | | $ | 0 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| December 31, 2019 | | 115 | | | 130 | | | 0 | |
| | | | | | |
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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
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:
| | | | | September 30, 2017 | | December 31, 2016 | | | September 30, 2020 | | December 31, 2019 |
| (in thousands) | | Notional amount | | Fair value | | Notional amount | | Fair value | (in thousands) | | Notional amount | | Fair value | | Notional amount | | Fair value |
| Interest rate lock commitments | | $ | 385 |
| | $ | 7 |
| | $ | 25,883 |
| | $ | 421 |
| Interest rate lock commitments | | $ | 129,806 | | | $ | 5,271 | | | $ | 23,171 | | | $ | 297 | |
| Forward commitments | | 500 |
| | (2 | ) | | 30,813 |
| | (177 | ) | Forward commitments | | 104,500 | | | (243) | | | 29,383 | | | (42) | |
ASB’s derivative financial instruments, their fair values and balance sheet location were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivative Financial Instruments Not Designated as Hedging Instruments 1 | | September 30, 2020 | | December 31, 2019 |
| (in thousands) | | Asset derivatives | | Liability
derivatives | | Asset derivatives | | Liability
derivatives |
| Interest rate lock commitments | | $ | 5,271 | | | $ | 0 | | | $ | 297 | | | $ | 0 | |
| Forward commitments | | 0 | | | 243 | | | 3 | | | 45 | |
| | | $ | 5,271 | | | $ | 243 | | | $ | 300 | | | $ | 45 | |
|
| | | | | | | | | | | | | | | | |
Derivative Financial Instruments Not Designated as Hedging Instruments 1 | | September 30, 2017 | | December 31, 2016 |
| (in thousands) | | Asset derivatives | | Liability derivatives | | Asset derivatives | | Liability
derivatives |
| Interest rate lock commitments | | $ | 7 |
| | $ | — |
| | $ | 445 |
| | $ | 24 |
|
| Forward commitments | | — |
| | 2 |
| | 8 |
| | 185 |
|
| | | $ | 7 |
| | $ | 2 |
| | $ | 453 |
| | $ | 209 |
|
1 Asset derivatives are included in other assets and liability derivatives are included in other liabilities in the balance sheets.
The following table presents ASB’s derivative financial instruments and the amount and location of the net gains or losses recognized in ASB’s statements of income:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivative Financial Instruments Not Designated as Hedging Instruments | | Location of net gains (losses) recognized in the Statements of Income | | Three months ended September 30, | | Nine months ended September 30 |
| (in thousands) | | | 2020 | | 2019 | | 2020 | | 2019 |
| Interest rate lock commitments | | Mortgage banking income | | $ | 2,930 | | | $ | (3) | | | $ | 4,974 | | | $ | 379 | |
| Forward commitments | | Mortgage banking income | | 44 | | | 39 | | | (201) | | | (33) | |
| | | | | $ | 2,974 | | | $ | 36 | | | $ | 4,773 | | | $ | 346 | |
|
| | | | | | | | | | | | | | | | | | |
| Derivative Financial Instruments Not Designated as Hedging Instruments | | Location of net gains (losses) recognized in the Statement of Income | | Three months ended September 30 | | Nine months ended September 30 |
| (in thousands) | | | 2017 | | 2016 | | 2017 | | 2016 |
| Interest rate lock commitments | | Mortgage banking income | | $ | (119 | ) | | $ | 48 |
| | $ | (414 | ) | | $ | 459 |
|
| Forward commitments | | Mortgage banking income | | (90 | ) | | 103 |
| | 175 |
| | (134 | ) |
| | | | | $ | (209 | ) | | $ | 151 |
| | $ | (239 | ) | | $ | 325 |
|
Low-Income Housing Tax Credit (LIHTC). ASB’s unfunded commitments to fund its LIHTC investment partnerships were $18.6$31.3 million and $14.0$23.4 million at September 30, 20172020 and December 31, 2016,2019, respectively. These unfunded commitments
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
were unconditional and legally binding and are recorded in other liabilities with a corresponding increase in other assets. As of September 30, 2017,2020, ASB did not have any impairment losses resulting from forfeiture or ineligibility of tax credits or other circumstances related to its LIHTC investment partnerships.
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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Note 5 · Credit agreements and long-termchanges in debt
Credit agreements. HEI and Hawaiian Electric each entered into a separate agreement with a syndicate of eight8 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 extended the term of the facility to June 30, 2022. Theand $200 million Hawaiian Electric Facility has an initial term that expiresboth will terminate on June 29, 2018, but its term will extend to June 30, 2022 upon approval by2022. None of the PUC during the initial term, which approval is currently being requested.facilities are collateralized. As of September 30, 20172020 and December 31, 2016, no2019, 0 amounts were outstanding under the Facilities or previously existing facilities.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 long-term debt. On June 29, 2017,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 Department of Budgetagreement or (ii) a rate equal to an adjusted London interbank offered rate, as defined in the agreement, plus an applicable margin, and Financematures on April 19, 2021. The proceeds of the Stateloan 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 Hawaii (Department) for the benefit of the Utilities, issued,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 par:
|
| | |
| | Refunding Series 2017A Special Purpose Revenue Bonds | Refunding Series 2017B Special Purpose Revenue Bonds |
| Aggregate principal amount | $125 million | $140 million |
| Fixed coupon interest rate | 3.10% | 4.00% |
| Maturity date | May 1, 2026 | March 1, 2037 |
| Department loaned the proceeds to: | | |
| Hawaiian Electric | $62 million | $100 million |
| Hawaii Electric Light | $8 million | $20 million |
| Maui Electric | $55 million | $20 million |
Proceedsany time, but proceeds from the sale wereany debt capital market transactions over $50 million must first be applied to redeem at par bonds previously issued bypay down the Department for the benefit of the Utilities:term loan.
|
| | |
| | Refunding Series 2007B Special Purpose Revenue Bonds | Series 2007A Special Purpose Revenue Bonds |
| Aggregate principal amount | $125 million | $140 million |
| Fixed coupon interest rate | 4.60% | 4.65% |
| Maturity date | May 1, 2026 | March 1, 2037 |
Subsequent event - changes in debt.
October 2017 loan. On October 6, 2017,September 11, 2020, HEI entered into a $50 million note purchase agreement (HEI NPA) with The Prudential Insurance Company of America and several of its affiliates under which HEI has authorized the issue and sale of $50 million of unsecured senior notes (HEI Notes). Under the HEI NPA, HEI plans to draw $50 million on or before December 29, 2020. The HEI Notes bear interest at a fixed rate of 2.98%, require semi-annual interest payments, and mature December 15, 2030. The HEI Notes include substantially the same financial covenants and customary conditions as the HEI Facility. The proceeds from the HEI Notes will be used to refinance short-term borrowings and for general corporate purposes. The HEI Notes may be prepaid in whole or in part at any time at the prepayment price of the principal amount, together with interest accrued to the date of prepayment plus a “Make-Whole Amount,” as defined in the agreement.
On September 28, 2020, Ka‘ie‘ie Waho Company, LLC (KWCL), a wholly owned indirect subsidiary of HEI, entered into a $13 million non-recourse term loan agreement with The Bank of Tokyo-Mitsubishi UFJ, Ltd.Hawaii. The proceeds of the loan were used to acquire a 6-MW solar photovoltaic facility on Kauai, which serves as collateral for the loan. The loan bears interest at a rate equal to LIBOR, as defined in the agreement, plus 2.00%, matures September 28, 2031, and requires the maintenance of a minimum debt service coverage ratio equal to at least 1.10 to 1.0. The loan requires quarterly principal and monthly interest payments, which total approximately $0.4 million per quarter.
On April 20, 2020, Hawaiian Electric closed on a $75 million 364-day revolving credit agreement (364-day Revolver) with a syndicate of 4 banks. Under the 364-day Revolver, draws bear interest 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 on April 19, 2021. The 364-day Revolver 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. As of September 30, 2020, Hawaiian Electric had 0 amounts outstanding on this revolving credit agreement.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
On May 14, 2020, the Utilities issued, through a private placement pursuant to separate note purchase agreements (NPAs), the following unsecured senior notes bearing taxable interest (May 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 May Notes include substantially the same financial covenants and customary conditions as Hawaiian Electric’s credit agreement. Hawaiian Electric is also a party as guarantor under the NPAs entered into by Hawaii Electric Light and Maui Electric. All of the proceeds of the May 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 May Notes may be prepaid in whole or in part at any time at the prepayment price of the principal amount, together with interest accrued to the date of prepayment plus a “Make-Whole Amount,” as defined in the agreement.
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. 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.
Changes in debt-subsequent event. On October 29, 2020, the Utilities executed, through a private placement pursuant to separate NPAs, unsecured senior notes bearing taxable interest (October Notes) as shown in the table below. Funding for this transaction will occur on or before January 15, 2021, with a written notice to each purchaser at least seven business days prior to receiving funds.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Series 2020B | | Series 2020C | | Series 2020D | | Series 2020E |
| Aggregate principal amount | | $15 million | | $40 million | | $30 million | | $30 million |
| Fixed coupon interest rate | | | | | | | | |
| Hawaiian Electric | | | | | | 3.28% | | 3.51% |
| Hawaii Electric Light | | 3.28% | | 3.51% | | | | |
| Maui Electric | | | | 3.51% | | | | |
| Maturity date (from funding) | | | | | | | | |
| Hawaiian Electric | | | | | | 20 years | | 30 years |
| Hawaii Electric Light | | 20 years | | 30 years | | | | |
| Maui Electric | | | | 30 years | | | | |
| Principal amount by company: | | | | | | | | |
| Hawaiian Electric | | — | | — | | $30 million | | $30 million |
| Hawaii Electric Light | | $15 million | | $15 million | | — | | — |
| Maui Electric | | — | | $25 million | | — | | — |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
The October Notes include substantially the same financial covenants and customary conditions as Hawaiian Electric’s credit agreement. Hawaiian Electric is also a party as guarantor under the loan agreement withNPAs entered into by Hawaii Electric Light and Maui Electric. The BankUtilities did not obtain any of Tokyo-Mitsubishi UFJ, Ltd.the proceeds at execution and U.S. Bank, National Association that maturedintend to obtain funding at a later date, on the same date. On October 6, 2017, HEI drew a $125 million Eurodollar loan for a term of 364 daysor prior to January 15, 2021, at resetting interest rates. The initial Eurodollar Borrowing was for a one month interest period at an annualized interest rate of 1.99%. The proceeds from this loan werewhich time it will be used to pay offfinance their capital expenditures and/or to reimburse funds used for the $125 million maturing loan.payment of capital expenditures. The October 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.”
Note 6 · Shareholders’ equity
Accumulated other comprehensive income/(loss).Changes in the balances of each component of accumulated other comprehensive income/(loss) (AOCI) were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| HEI Consolidated | | | | Hawaiian Electric Consolidated | | |
| (in thousands) | Net unrealized gains (losses) on securities | | Unrealized gains (losses) on derivatives | | Retirement benefit plans | | AOCI | | | | AOCI-Retirement benefit plans | | |
| Balance, December 31, 2019 | $ | 2,481 | | | $ | (1,613) | | | $ | (20,907) | | | $ | (20,039) | | | | | $ | (1,279) | | | |
| Current period other comprehensive income (loss) | 19,767 | | | (2,129) | | | 1,682 | | | 19,320 | | | | | 99 | | | |
| Balance, September 30, 2020 | $ | 22,248 | | | $ | (3,742) | | | $ | (19,225) | | | $ | (719) | | | | | $ | (1,180) | | | |
| Balance, December 31, 2018 | $ | (24,423) | | | $ | (436) | | | $ | (25,751) | | | $ | (50,610) | | | | | $ | 99 | | | |
| Current period other comprehensive income (loss) | 27,368 | | | (1,663) | | | 532 | | | 26,237 | | | | | 73 | | | |
| Balance, September 30, 2019 | $ | 2,945 | | | $ | (2,099) | | | $ | (25,219) | | | $ | (24,373) | | | | | $ | 172 | | | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | HEI Consolidated | | Hawaiian Electric Consolidated |
| (in thousands) | Net unrealized gains (losses) on securities | | Unrealized gains (losses) on derivatives | | Retirement benefit plans | | AOCI | | Unrealized gains (losses) on derivatives | | Retirement benefit plans | | AOCI |
| Balance, December 31, 2016 | $ | (7,931 | ) | | $ | (454 | ) | | $ | (24,744 | ) | | $ | (33,129 | ) | | $ | (454 | ) | | $ | 132 |
| | $ | (322 | ) |
| Current period other comprehensive income | 2,452 |
| | 454 |
| | 1,003 |
| | 3,909 |
| | 454 |
| | 67 |
| | 521 |
|
| Balance, September 30, 2017 | $ | (5,479 | ) | | $ | — |
| | $ | (23,741 | ) | | $ | (29,220 | ) | | $ | — |
| | $ | 199 |
| | $ | 199 |
|
| Balance, December 31, 2015 | $ | (1,872 | ) | | $ | (54 | ) | | $ | (24,336 | ) | | $ | (26,262 | ) | | $ | — |
| | $ | 925 |
| | $ | 925 |
|
| Current period other comprehensive income | 7,837 |
| | 459 |
| | 943 |
| | 9,239 |
| | 405 |
| | 7 |
| | 412 |
|
| Balance, September 30, 2016 | $ | 5,965 |
| | $ | 405 |
| | $ | (23,393 | ) | | $ | (17,023 | ) | | $ | 405 |
| | $ | 932 |
| | $ | 1,337 |
|
Reclassifications out of AOCI were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Amount reclassified from AOCI | | |
| | | Three months ended September 30 | | Nine months ended September 30 | | Affected line item in the
Statements of Income / Balance Sheets |
| (in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | |
| HEI consolidated | | | | | | | | | | |
| Net realized gains on securities included in net income | | $ | 0 | | | $ | (478) | | | $ | (1,638) | | | $ | (478) | | | Gain on sale of investment securities, net |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Retirement benefit plans: | | | | | | | | | | |
| Amortization of prior service credit and net losses recognized during the period in net periodic benefit cost | | 6,324 | | | 2,615 | | | 17,720 | | | 7,621 | | | See Note 8 for additional details |
| Impact of D&Os of the PUC included in regulatory assets | | (5,721) | | | (2,493) | | | (16,038) | | | (7,089) | | | See Note 8 for additional details |
| Total reclassifications | | $ | 603 | | | $ | (356) | | | $ | 44 | | | $ | 54 | | | |
| Hawaiian Electric consolidated | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Retirement benefit plans: | | | | | | | | | | |
| Amortization of prior service credit and net losses recognized during the period in net periodic benefit cost | | $ | 5,769 | | | $ | 2,519 | | | $ | 16,137 | | | $ | 7,162 | | | See Note 8 for additional details |
| Impact of D&Os of the PUC included in regulatory assets | | (5,721) | | | (2,493) | | | (16,038) | | | (7,089) | | | See Note 8 for additional details |
| Total reclassifications | | $ | 48 | | | $ | 26 | | | $ | 99 | | | $ | 73 | | | |
|
| | | | | | | | | | | | | | | | | | |
| | | Amount reclassified from AOCI | | |
| | | Three months ended September 30 | | Nine months ended September 30 | | Affected line item in the |
| (in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | | Statements of Income / Balance Sheets |
| HEI consolidated | | | | | | | | | | |
| Net realized gains on securities included in net income | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (360 | ) | | Revenues-bank (net gains on sales of securities) |
| Derivatives qualifying as cash flow hedges: | | |
| | |
| | |
| | |
| | |
| Window forward contracts | | — |
| | (173 | ) | | 454 |
| | (173 | ) | | Property, plant and equipment-electric utilities |
| Interest rate contracts (settled in 2011) | | — |
| | — |
| | — |
| | 54 |
| | Interest expense |
| Retirement benefit plans: | | |
| | |
| | |
| | |
| | |
| Amortization of prior service credit and net losses recognized during the period in net periodic benefit cost | | 3,942 |
| | 3,641 |
| | 11,793 |
| | 10,877 |
| | See Note 7 for additional details |
| Impact of D&Os of the PUC included in regulatory assets | | (3,596 | ) | | (3,311 | ) | | (10,790 | ) | | (9,934 | ) | | See Note 7 for additional details |
| Total reclassifications | | $ | 346 |
| | $ | 157 |
| | $ | 1,457 |
| | $ | 464 |
| | |
| Hawaiian Electric consolidated | | | | | | | | | | |
| Derivatives qualifying as cash flow hedges: | | | | | | | | | | |
| Window forward contracts | | $ | — |
| | $ | (173 | ) | | $ | 454 |
| | $ | (173 | ) | | Construction in progress |
| Retirement benefit plans: | | | | |
| | | | |
| | |
| Amortization of prior service credit and net losses recognized during the period in net periodic benefit cost | | 3,618 |
| | 3,314 |
| | 10,857 |
| | 9,941 |
| | See Note 7 for additional details |
| Impact of D&Os of the PUC included in regulatory assets | | (3,596 | ) | | (3,311 | ) | | (10,790 | ) | | (9,934 | ) | | See Note 7 for additional details |
| Total reclassifications | | $ | 22 |
| | $ | (170 | ) | | $ | 521 |
| | $ | (166 | ) | | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
Note 7 · Revenues
7Revenue from contracts with customers. The following tables disaggregate revenues by major source, timing of revenue recognition, and segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2020 | | Nine months ended September 30, 2020 |
| (in thousands) | | Electric utility | | Bank | | Other | | Total | | Electric utility | | Bank | | Other | | Total |
| Revenues from contracts with customers | | | | | | | | | | | | | | | | |
| Electric energy sales - residential | | $ | 191,321 | | | $ | 0 | | | $ | 0 | | | $ | 191,321 | | | $ | 569,177 | | | $ | 0 | | | $ | 0 | | | $ | 569,177 | |
| Electric energy sales - commercial | | 171,156 | | | 0 | | | 0 | | | 171,156 | | | 528,135 | | | 0 | | | 0 | | | 528,135 | |
| Electric energy sales - large light and power | | 176,200 | | | 0 | | | 0 | | | 176,200 | | | 568,887 | | | 0 | | | 0 | | | 568,887 | |
| Electric energy sales - other | | 1,935 | | | 0 | | | 0 | | | 1,935 | | | 7,172 | | | 0 | | | 0 | | | 7,172 | |
| Bank fees | | 0 | | | 9,589 | | | 0 | | | 9,589 | | | 0 | | | 28,356 | | | 0 | | | 28,356 | |
| Solar energy sales | | 0 | | | 0 | | | 211 | | | 211 | | | 0 | | | 0 | | | 240 | | | 240 | |
| Total revenues from contracts with customers | | 540,612 | | | 9,589 | | | 211 | | | 550,412 | | | 1,673,371 | | | 28,356 | | | 240 | | | 1,701,967 | |
| Revenues from other sources | | | | | | | | | | | | | | | | |
| Regulatory revenue | | 15,457 | | | 0 | | | 0 | | | 15,457 | | | 2,979 | | | 0 | | | 0 | | | 2,979 | |
| Bank interest and dividend income | | 0 | | | 59,640 | | | 0 | | | 59,640 | | | 0 | | | 184,444 | | | 0 | | | 184,444 | |
| Other bank noninterest income | | 0 | | | 9,415 | | | 0 | | | 9,415 | | | 0 | | | 20,296 | | | 0 | | | 20,296 | |
| Other | | 6,499 | | | 0 | | | 4 | | | 6,503 | | | 17,875 | | | 0 | | | (3) | | | 17,872 | |
| Total revenues from other sources | | 21,956 | | | 69,055 | | | 4 | | | 91,015 | | | 20,854 | | | 204,740 | | | (3) | | | 225,591 | |
| Total revenues | | $ | 562,568 | | | $ | 78,644 | | | $ | 215 | | | $ | 641,427 | | | $ | 1,694,225 | | | $ | 233,096 | | | $ | 237 | | | $ | 1,927,558 | |
| Timing of revenue recognition | | | | | | | | | | | | | | | | |
| Services/goods transferred at a point in time | | $ | 0 | | | $ | 9,589 | | | $ | 0 | | | $ | 9,589 | | | $ | 0 | | | $ | 28,356 | | | $ | 0 | | | $ | 28,356 | |
| Services/goods transferred over time | | 540,612 | | | 0 | | | 211 | | | 540,823 | | | 1,673,371 | | | 0 | | | 240 | | | 1,673,611 | |
| Total revenues from contracts with customers | | $ | 540,612 | | | $ | 9,589 | | | $ | 211 | | | $ | 550,412 | | | $ | 1,673,371 | | | $ | 28,356 | | | $ | 240 | | | $ | 1,701,967 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2019 | | Nine months ended September 30, 2019 |
| (in thousands) | | Electric utility | | Bank | | Other | | Total | | Electric utility | | Bank | | Other | | Total |
| Revenues from contracts with customers | | | | | | | | | | | | | | | | |
| Electric energy sales - residential | | $ | 230,051 | | | $ | 0 | | | $ | 0 | | | $ | 230,051 | | | $ | 601,664 | | | $ | 0 | | | $ | 0 | | | $ | 601,664 | |
| Electric energy sales - commercial | | 230,411 | | | 0 | | | 0 | | | 230,411 | | | 635,097 | | | 0 | | | 0 | | | 635,097 | |
| Electric energy sales - large light and power | | 248,457 | | | 0 | | | 0 | | | 248,457 | | | 679,252 | | | 0 | | | 0 | | | 679,252 | |
| Electric energy sales - other | | 4,081 | | | 0 | | | 0 | | | 4,081 | | | 11,933 | | | 0 | | | 0 | | | 11,933 | |
| | | | | | | | | | | | | | | | |
| Bank fees | | 0 | | | 12,111 | | | 0 | | | 12,111 | | | 0 | | | 34,976 | | | 0 | | | 34,976 | |
| Total revenues from contracts with customers | | 713,000 | | | 12,111 | | | 0 | | | 725,111 | | | 1,927,946 | | | 34,976 | | | 0 | | | 1,962,922 | |
| Revenues from other sources | | | | | | | | | | | | | | | | |
| Regulatory revenue | | (30,800) | | | 0 | | | 0 | | | (30,800) | | | (44,953) | | | 0 | | | 0 | | | (44,953) | |
| Bank interest and dividend income | | 0 | | | 66,859 | | | 0 | | | 66,859 | | | 0 | | | 201,502 | | | 0 | | | 201,502 | |
| Other bank noninterest income | | 0 | | | 3,578 | | | 0 | | | 3,578 | | | 0 | | | 10,809 | | | 0 | | | 10,809 | |
| Other | | 6,130 | | | 0 | | | 4 | | | 6,134 | | | 17,616 | | | 0 | | | 86 | | | 17,702 | |
| Total revenues from other sources | | (24,670) | | | 70,437 | | | 4 | | | 45,771 | | | (27,337) | | | 212,311 | | | 86 | | | 185,060 | |
| Total revenues | | $ | 688,330 | | | $ | 82,548 | | | $ | 4 | | | $ | 770,882 | | | $ | 1,900,609 | | | $ | 247,287 | | | $ | 86 | | | $ | 2,147,982 | |
| Timing of revenue recognition | | | | | | | | | | | | | | | | |
| Services/goods transferred at a point in time | | $ | 0 | | | $ | 12,111 | | | $ | 0 | | | $ | 12,111 | | | $ | 0 | | | $ | 34,976 | | | $ | 0 | | | $ | 34,976 | |
| Services/goods transferred over time | | 713,000 | | | 0 | | | 0 | | | 713,000 | | | 1,927,946 | | | 0 | | | 0 | | | 1,927,946 | |
| Total revenues from contracts with customers | | $ | 713,000 | | | $ | 12,111 | | | $ | 0 | | | $ | 725,111 | | | $ | 1,927,946 | | | $ | 34,976 | | | $ | 0 | | | $ | 1,962,922 | |
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 September 30, 2020. Accounts receivable and unbilled revenues related to contracts with
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
customers represent an unconditional right to consideration since all performance obligations have been satisfied. These amounts are disclosed as accounts receivable and unbilled revenues, net on HEI’s condensed consolidated balance sheets and customer accounts receivable, net and accrued unbilled revenues, net on Hawaiian Electric’s condensed consolidated balance sheets.
As of September 30, 2020, 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 nine months of 2017,2020, the Company contributed $50$53 million ($4952 million by the Utilities) to its pension and other postretirement benefit plans, compared to $49$36 million ($4836 million by the Utilities) in the first nine months of 2016.2019. The Company’s current estimate of total contributions to its pension and other postretirement benefit plans in 20172020 is $67$71 million ($6670 million by the Utilities, $1 million by HEI and nilNaN by ASB), compared to $65$49 million ($6448 million by the Utilities, $1$1 million by HEI and nilNaN by ASB) in 2016.2019. In addition, the Company expects to pay directly $2 million ($1 million by the Utilities) of benefits in 2017, comparable2020, compared to benefits$2 million ($1 million by the Utilities) paid directly in 2016.2019.
The components of NPPCnet periodic pension costs (NPPC) and NPBCnet periodic benefit costs (NPBC) for HEI consolidated and Hawaiian Electric consolidated were as follows: | | | | | Three months ended September 30 | | Nine months ended September 30 | | Three months ended September 30 | | Nine months ended September 30 |
| | | Pension benefits | | Other benefits | | Pension benefits | | Other benefits | | | Pension benefits | | Other benefits | | Pension benefits | | Other benefits |
| (in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | (in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| HEI consolidated | | | | | | | | | | | | | | | | | HEI consolidated | |
| Service cost | | $ | 16,271 |
| | $ | 15,126 |
| | $ | 843 |
| | $ | 831 |
| | $ | 48,635 |
| | $ | 45,430 |
| | $ | 2,530 |
| | $ | 2,499 |
| Service cost | | $ | 18,341 | | | $ | 15,800 | | | $ | 641 | | | $ | 573 | | | $ | 55,066 | | | $ | 46,564 | | | $ | 1,903 | | | $ | 1,656 | |
| Interest cost | | 20,304 |
| | 20,396 |
| | 2,363 |
| | 2,417 |
| | 60,881 |
| | 61,154 |
| | 7,089 |
| | 7,254 |
| Interest cost | | 20,660 | | | 21,150 | | | 1,842 | | | 2,006 | | | 60,987 | | | 63,216 | | | 5,553 | | | 6,000 | |
| Expected return on plan assets | | (25,689 | ) | | (24,640 | ) | | (3,078 | ) | | (3,064 | ) | | (77,056 | ) | | (73,920 | ) | | (9,248 | ) | | (9,207 | ) | Expected return on plan assets | | (28,422) | | | (27,991) | | | (3,023) | | | (3,101) | | | (85,353) | | | (83,988) | | | (9,100) | | | (9,273) | |
| Amortization of net prior service gain | | (14 | ) | | (15 | ) | | (448 | ) | | (449 | ) | | (41 | ) | | (43 | ) | | (1,345 | ) | | (1,345 | ) | |
| Amortization of net actuarial loss | | 6,638 |
| | 6,228 |
| | 283 |
| | 200 |
| | 19,858 |
| | 18,605 |
| | 848 |
| | 603 |
| |
| Net periodic pension/benefit cost | | 17,510 |
| | 17,095 |
| | (37 | ) | | (65 | ) | | 52,277 |
| | 51,226 |
| | (126 | ) | | (196 | ) | |
| | Amortization of net prior period (gain)/cost | | Amortization of net prior period (gain)/cost | | 2 | | | (10) | | | (474) | | | (451) | | | 7 | | | (32) | | | (1,355) | | | (1,355) | |
| Amortization of net actuarial (gains)/losses | | Amortization of net actuarial (gains)/losses | | 8,944 | | | 3,989 | | | 53 | | | (3) | | | 25,059 | | | 11,667 | | | 154 | | | (10) | |
| Net periodic pension/benefit cost (return) | | Net periodic pension/benefit cost (return) | | 19,525 | | | 12,938 | | | (961) | | | (976) | | | 55,766 | | | 37,427 | | | (2,845) | | | (2,982) | |
| Impact of PUC D&Os | | (4,534 | ) | | (4,653 | ) | | 346 |
| | 336 |
| | (14,557 | ) | | (13,464 | ) | | 1,019 |
| | 1,008 |
| Impact of PUC D&Os | | 4,976 | | | 11,554 | | | 835 | | | 821 | | | 17,499 | | | 36,111 | | | 2,389 | | | 2,443 | |
| Net periodic pension/benefit cost (adjusted for impact of PUC D&Os) | | $ | 12,976 |
| | $ | 12,442 |
| | $ | 309 |
| | $ | 271 |
| | $ | 37,720 |
| | $ | 37,762 |
| | $ | 893 |
| | $ | 812 |
| Net periodic pension/benefit cost (adjusted for impact of PUC D&Os) | | $ | 24,501 | | | $ | 24,492 | | | $ | (126) | | | $ | (155) | | | $ | 73,265 | | | $ | 73,538 | | | $ | (456) | | | $ | (539) | |
| Hawaiian Electric consolidated | | | | | | | | | | | | | | | | | Hawaiian Electric consolidated | |
| Service cost | | $ | 15,764 |
| | $ | 14,699 |
| | $ | 839 |
| | $ | 821 |
| | $ | 47,294 |
| | $ | 44,097 |
| | $ | 2,515 |
| | $ | 2,463 |
| Service cost | | $ | 17,921 | | | $ | 15,344 | | | $ | 635 | | | $ | 568 | | | $ | 53,703 | | | $ | 45,346 | | | $ | 1,886 | | | $ | 1,643 | |
| Interest cost | | 18,659 |
| | 18,702 |
| | 2,279 |
| | 2,334 |
| | 55,974 |
| | 56,106 |
| | 6,837 |
| | 7,003 |
| Interest cost | | 19,183 | | | 19,560 | | | 1,764 | | | 1,920 | | | 56,613 | | | 58,388 | | | 5,327 | | | 5,755 | |
| Expected return on plan assets | | (23,973 | ) | | (22,908 | ) | | (3,037 | ) | | (3,023 | ) | | (71,919 | ) | | (68,725 | ) | | (9,110 | ) | | (9,072 | ) | Expected return on plan assets | | (26,815) | | | (26,146) | | | (2,986) | | | (3,064) | | | (80,527) | | | (78,474) | | | (8,966) | | | (9,135) | |
| Amortization of net prior service loss (gain) | | 2 |
| | 3 |
| | (451 | ) | | (451 | ) | | 6 |
| | 10 |
| | (1,353 | ) | | (1,353 | ) | |
| Amortization of net actuarial loss | | 6,098 |
| | 5,674 |
| | 275 |
| | 198 |
| | 18,294 |
| | 17,020 |
| | 826 |
| | 595 |
| |
| Net periodic pension/benefit cost | | 16,550 |
| | 16,170 |
| | (95 | ) | | (121 | ) | | 49,649 |
| | 48,508 |
| | (285 | ) | | (364 | ) | |
| | Amortization of net prior period (gain)/cost | | Amortization of net prior period (gain)/cost | | 1 | | | 2 | | | (474) | | | (451) | | | 6 | | | 6 | | | (1,353) | | | (1,353) | |
| Amortization of net actuarial losses | | Amortization of net actuarial losses | | 8,188 | | | 3,841 | | | 53 | | | 0 | | | 22,925 | | | 10,993 | | | 155 | | | 0 | |
| Net periodic pension/benefit cost (return) | | Net periodic pension/benefit cost (return) | | 18,478 | | | 12,601 | | | (1,008) | | | (1,027) | | | 52,720 | | | 36,259 | | | (2,951) | | | (3,090) | |
| Impact of PUC D&Os | | (4,534 | ) | | (4,653 | ) | | 346 |
| | 336 |
| | (14,557 | ) | | (13,464 | ) | | 1,019 |
| | 1,008 |
| Impact of PUC D&Os | | 4,976 | | | 11,554 | | | 835 | | | 821 | | | 17,499 | | | 36,111 | | | 2,389 | | | 2,443 | |
| Net periodic pension/benefit cost (adjusted for impact of PUC D&Os) | | $ | 12,016 |
| | $ | 11,517 |
| | $ | 251 |
| | $ | 215 |
| | $ | 35,092 |
| | $ | 35,044 |
| | $ | 734 |
| | $ | 644 |
| Net periodic pension/benefit cost (adjusted for impact of PUC D&Os) | | $ | 23,454 | | | $ | 24,155 | | | $ | (173) | | | $ | (206) | | | $ | 70,219 | | | $ | 72,370 | | | $ | (562) | | | $ | (647) | |
HEI consolidated recorded retirement benefits expense of $25$46 million ($22 million by the Utilities) and $26 million ($2343 million by the Utilities) in the first nine months of 20172020 and 2016, respectively,$44 million ($43 million by the Utilities) in the first nine months of 2019 and charged the remaining net periodic benefit cost primarily to electric utility plant.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
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, these retirement benefitany actual costs determined in accordance with GAAP that are over/under amounts allowed in rates are charged/credited to a regulatory asset/liability. The regulatory asset/liability for each utility will then be amortized over 5 years beginning with the issuance of the PUC’s D&O in the respective utility’s next rate case.
Defined contribution plans information. For the first nine months of 20172020 and 2016,2019, the Company’s expenses for its defined contribution pension plans under the Hawaiian Electric Industries Retirement Savings Plan (HEIRSP) and the ASB 401(k) Plan were $5.1$5.5 million and $4.1$5.1 million,, respectively, and cash contributions were $5.0$6.0 million and $4.6$6.0 million,, respectively. For the first nine months of 20172020 and 2016,2019, the Utilities’ expenses for its defined contribution pension plan under the HEIRSP were $1.4$2.1 million and $1.2$1.9 million, respectively, and cash contributions were $1.4$2.1 million and $1.2$1.9 million, respectively.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
8 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 waswere added to the shares available for issuance under these programs.
As of September 30, 2017,2020, approximately 3.33.0 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 0.40.7 million shares that could be issued upon the vesting of outstanding restricted stock units and the achievement of performance goals for awards outstanding under long-term incentive plans (assuming that such performance goals are achieved at maximum levels).
Under the 2011 Nonemployee Director Stock Plan (2011 Director Plan), HEI can issue shares of common stock as compensation to nonemployee directors of HEI, Hawaiian Electric and ASB. In June 2019, an additional 300,000 shares were made available for issuance under the 2011 Director Plan. As of September 30, 2017,2020, there were 85,428274,163 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 September 30 | | Nine months ended September 30 |
| (in millions) | | 2017 | | 2016 | | 2017 | | 2016 |
| HEI consolidated | | | | | | | | |
Share-based compensation expense 1 | | $ | 1.1 |
| | $ | 1.6 |
| | $ | 4.4 |
| | $ | 3.6 |
|
| Income tax benefit | | 0.4 |
| | 0.5 |
| | 1.5 |
| | 1.2 |
|
| Hawaiian Electric consolidated | | | | | | | | |
Share-based compensation expense 1 | | 0.4 |
| | 0.5 |
| | 1.6 |
| | 1.0 |
|
| Income tax benefit | | 0.2 |
| | 0.2 |
| | 0.6 |
| | 0.4 |
|
| |
1
| For the three months and nine months ended September 30, 2017 and 2016, the Company has not capitalized any share-based compensation. |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended September 30 | | Nine months ended September 30 |
| (in millions) | | 2020 | | 2019 | | 2020 | | 2019 |
| HEI consolidated | | | | | | | | |
Share-based compensation expense 1 | | $ | 1.4 | | | $ | 2.3 | | | $ | 5.4 | | | $ | 8.1 | |
| Income tax benefit | | 0.2 | | | 0.3 | | | 0.9 | | | 1.2 | |
| Hawaiian Electric consolidated | | | | | | | | |
Share-based compensation expense 1 | | 0 | | | 0.8 | | | 1.2 | | | 2.6 | |
| Income tax benefit | | 0 | | | 0.1 | | | 0.3 | | | 0.5 | |
1 For the three and nine months ended September 30, 2020 and 2019, the Company has not capitalized any share-based compensation.
Stock awards. No nonemployee director stock grants were awarded from January 1 to September 29, 2016. Nonemployee director awards totaling $0.2 million were paid in cash in July 2016. HEI granted HEI common stock to nonemployee directors of HEI, Hawaiian Electric and ASB under the 2011 Director Plan as follows:
| | | | | | | | | | | | Three months ended September 30 | | Nine months ended September 30 |
| | | Three months ended September 30 | | Nine months ended September 30 | |
| ($ in millions) | | 2017 | | 2016 | | 2017 | | 2016 | |
| (dollars in millions) | | (dollars in millions) | | 2020 | | 2019 | | 2020 | | 2019 |
| Shares granted | | — |
| | 19,846 |
| | 35,770 |
| | 19,846 |
| Shares granted | | 0 | | | 0 | | | 36,100 | | | 35,580 | |
| Fair value | | $ | — |
| | $ | 0.6 |
| | $ | 1.2 |
| | $ | 0.6 |
| Fair value | | $ | 0 | | | $ | 0 | | | $ | 1.3 | | | $ | 1.5 | |
| Income tax benefit | | — |
| | 0.2 |
| | 0.5 |
| | 0.2 |
| Income tax benefit | | 0 | | | 0 | | | 0.3 | | | 0.4 | |
The number of shares issued to each nonemployee directorsdirector of HEI, Hawaiian Electric and ASB is determined based on the closing price of HEI Common Stockcommon 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 September 30 | | Nine months ended September 30 |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Shares | | (1) | | Shares | | (1) | | Shares | | (1) | | Shares | | (1) |
| Outstanding, beginning of period | 204,357 | | | $ | 40.65 | | | 208,625 | | | $ | 35.28 | | | 207,641 | | | $ | 35.36 | | | 200,358 | | | $ | 33.05 | |
| Granted | 0 | | | 0 | | | 1,006 | | | 44.16 | | | 78,595 | | | 47.99 | | | 95,565 | | | 37.75 | |
| Vested | 0 | | | 0 | | | (101) | | | 36.27 | | | (77,719) | | | 34.19 | | | (76,813) | | | 32.61 | |
| Forfeited | 0 | | | 0 | | | (2,889) | | | 35.44 | | | (4,160) | | | 35.81 | | | (12,469) | | | 34.20 | |
| Outstanding, end of period | 204,357 | | | $ | 40.65 | | | 206,641 | | | $ | 35.32 | | | 204,357 | | | $ | 40.65 | | | 206,641 | | | $ | 35.32 | |
| Total weighted-average grant-date fair value of shares granted (in millions) | $ | 0 | | | | | $ | 0 | | | | | $ | 3.8 | | | | | $ | 3.6 | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30 | | Nine months ended September 30 |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | Shares | | (1) | | Shares | | (1) | | Shares | | (1) | | Shares | | (1) |
| Outstanding, beginning of period | 206,483 |
| | $ | 31.50 |
| | 225,752 |
| | $ | 29.59 |
| | 220,683 |
| | $ | 29.57 |
| | 210,634 |
| | $ | 28.82 |
|
| Granted | — |
|
| — |
| | 766 |
| | 30.65 |
| | 97,873 |
|
| 33.47 |
| | 95,048 |
|
| 29.91 |
|
| Vested | (687 | ) | | 24.48 |
| | (4,419 | ) | | 27.26 |
| | (89,681 | ) | | 28.84 |
| | (83,583 | ) | | 27.88 |
|
| Forfeited | — |
| | — |
| | (2,352 | ) | | 29.69 |
| | (23,079 | ) | | 31.50 |
| | (2,352 | ) | | 29.69 |
|
| Outstanding, end of period | 205,796 |
| | $ | 31.53 |
| | 219,747 |
| | $ | 29.64 |
| | 205,796 |
| | $ | 31.53 |
| | 219,747 |
| | $ | 29.64 |
|
| Total weighted-average grant-date fair value of shares granted ($ millions) | $ | — |
| | | | $ | — |
| | | | $ | 3.3 |
| | | | $ | 2.8 |
| | |
| |
(1) | (1) Weighted-average grant-date fair value per share based on the average price of HEI common stock on the date of grant. |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
For the first nine months of 20172020 and 2016,2019, total restricted stock units that vested and related dividends that vested had a fair value of $3.4$4.2 million and $2.7$3.2 million,, respectively, and the related tax benefits were $1.1$0.7 million and $0.9$0.5 million,, respectively.
As of September 30, 2017,2020, there was $4.8$6.2 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 2.62.7 years.
Long-term incentive plan payable in stock. The 2017-20192018-2020, 2019-2021 and 2020-2022 long-term incentive planplans (LTIP) providesprovide 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-year period. The other performance condition goals relate to EPSearnings per share (EPS) growth, return on average common equity (ROACE) and, renewable portfolio standards, Hawaiian Electric’s net income growth, ASB’s efficiency ratio. The 2015-2017ratio and 2016-2018 LTIPs provide for performance awards payable in cash,Pacific Current’s EBITDA growth and thus are not included in the tables below.return on average invested capital.
LTIP linked to TSR. Information about HEI’s LTIP grants linked to TSR was as follows: | | | | Three months ended September 30 | | Nine months ended September 30 | | Three months ended September 30 | | Nine months ended September 30 |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2020 | | 2019 | | 2020 | | 2019 |
| | Shares | | (1) | | Shares | | (1) | | Shares | | (1) | | Shares | | (1) | | Shares | | (1) | | Shares | | (1) | | Shares | | (1) | | Shares | | (1) |
| Outstanding, beginning of period | 33,770 |
| | $ | 39.51 |
| | 83,947 |
| | $ | 22.95 |
| | 83,106 |
| | $ | 22.95 |
| | 162,500 |
| | $ | 27.66 |
| Outstanding, beginning of period | 90,616 | | | $ | 42.08 | | | 98,311 | | | $ | 39.61 | | | 96,402 | | | $ | 39.62 | | | 65,578 | | | $ | 38.81 | |
| Granted (target level) | — |
| | — |
| | — |
| | — |
| | 37,204 |
| | 39.51 |
| | — |
|
| — |
| |
| Granted | | Granted | 0 | | | 0 | | | 568 | | | 41.07 | | | 24,630 | | | 48.62 | | | 35,215 | | | 41.07 | |
| Vested (issued or unissued and cancelled) | — |
| | — |
| | — |
| | — |
| | (83,106 | ) | | 22.95 |
| | (78,553 | ) | | 32.69 |
| Vested (issued or unissued and cancelled) | 0 | | | 0 | | | 0 | | | 0 | | | (29,409) | | | 39.51 | | | 0 | | | 0 | |
| Forfeited | — |
| | — |
| | (175 | ) | | 22.95 |
| | (3,434 | ) | | 39.51 |
| | (175 | ) | | 22.95 |
| Forfeited | 0 | | | 0 | | | (2,477) | | | 39.64 | | | (1,007) | | | 41.72 | | | (4,391) | | | 39.19 | |
| Outstanding, end of period | 33,770 |
| | $ | 39.51 |
| | 83,772 |
| | $ | 22.95 |
| | 33,770 |
| | $ | 39.51 |
| | 83,772 |
| | $ | 22.95 |
| Outstanding, end of period | 90,616 | | | $ | 42.08 | | | 96,402 | | | $ | 39.62 | | | 90,616 | | | $ | 42.08 | | | 96,402 | | | $ | 39.62 | |
| Total weighted-average grant-date fair value of shares granted ($ millions) | $ | — |
| | | | $ | — |
| | | | $ | 1.5 |
| | | | $ | — |
| | | |
| Total weighted-average grant-date fair value of shares granted (in millions) | | Total weighted-average grant-date fair value of shares granted (in millions) | $ | 0 | | | $ | 0 | | | $ | 1.2 | | | $ | 1.4 | | |
| |
(1) | Weighted-average grant-date fair value per share determined using a Monte Carlo simulation model. |
(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-year performance period. The expected stock volatility assumptions for HEI and its peer group were based on the three-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-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 |
| Risk-free interest rate | | 1.39 | % | | 2.48 | % |
| Expected life in years | | 3 | | 3 |
| Expected volatility | | 13.1 | % | | 15.8 | % |
| Range of expected volatility for Peer Group | | 13.6% to 95.4% | | 15.0% to 73.2% |
| Grant date fair value (per share) | | $48.62 | | $41.07 |
|
| | | |
| | 2017 |
|
Risk-free interest rate | | 1.46 | % |
Expected life in years | | 3 |
|
Expected volatility | | 20.1 | % |
Range of expected volatility for Peer Group | | 15.4% to 26.0% |
|
Grant date fair value (per share) | | $39.51 |
For the nine months ended September 30, 2017,2020, total vested LTIP awards linked to TSR and related dividends had a fair value of $1.9$2.6 million and the related tax benefits were $0.7$0.4 million. For the nine months ended September 30, 2016, all vested sharesThere were no share-based LTIP awards linked to TSR with a vesting date in the table above were unissued and cancelled (i.e., lapsed) because the TSR goal was not met.2019.
As of September 30, 2017,2020, there was $1.0$1.6 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 2.3 years.1.2 years.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
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 September 30 | | Nine months ended September 30 | | Three months ended September 30 | | Nine months ended September 30 |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2020 | | 2019 | | 2020 | | 2019 |
| | Shares | | (1) | | Shares | | (1) | | Shares | | (1) | | Shares | | (1) | | Shares | | (1) | | Shares | | (1) | | Shares | | (1) | | Shares | | (1) |
| Outstanding, beginning of period | 135,078 |
| | $ | 33.47 |
| | 113,550 |
| | $ | 25.18 |
| | 109,816 |
| | $ | 25.18 |
| | 222,647 |
| | $ | 26.02 |
| Outstanding, beginning of period | 297,523 | | | $ | 40.37 | | | 407,090 | | | $ | 35.12 | | | 403,768 | | | $ | 35.15 | | | 276,169 | | | $ | 33.80 | |
| Granted (target level) | — |
| | — |
| | — |
|
| — |
| | 148,818 |
| | 33.47 |
| | — |
|
| — |
| |
| Vested (issued) | — |
| | — |
| | — |
| | — |
| | (109,816 | ) | | 25.18 |
| | (109,097 | ) | | 26.89 |
| |
| Granted | | Granted | 0 | | | 0 | | | 2,275 | | | 44.05 | | | 98,522 | | | 48.10 | | | 140,855 | | | 37.78 | |
| Vested | | Vested | 0 | | | 0 | | | 0 | | | 0 | | | (135,804) | | | 33.48 | | | 0 | | | 0 | |
| Increase above target (cancelled) | | Increase above target (cancelled) | (21,807) | | | 34.11 | | | 11,131 | | | 33.49 | | | (86,739) | | | 34.12 | | | 11,131 | | | 33.49 | |
| Forfeited | — |
| | — |
| | (699 | ) | | 25.19 |
| | (13,740 | ) | | 33.48 |
| | (699 | ) | | 25.19 |
| Forfeited | 0 | | | 0 | | | (9,911) | | | 35.24 | | | (4,031) | | | 39.67 | | | (17,570) | | | 34.66 | |
| Outstanding, end of period | 135,078 |
| | $ | 33.47 |
| | 112,851 |
| | $ | 25.18 |
| | 135,078 |
| | $ | 33.47 |
| | 112,851 |
| | $ | 25.18 |
| Outstanding, end of period | 275,716 | | | $ | 40.86 | | | 410,585 | | | $ | 35.12 | | | 275,716 | | | $ | 40.86 | | | 410,585 | | | $ | 35.12 | |
| Total weighted-average grant-date fair value of shares granted (at target performance levels) ($ millions) | $ | — |
| | | | $ | — |
| | | | $ | 5.0 |
| | | | $ | — |
| | | |
| 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) | $ | 0 | | | $ | 0.1 | | | $ | 4.7 | | | $ | 5.3 | | |
| |
(1) | Weighted-average grant-date fair value per share based on the average price of HEI common stock on the date of grant. |
(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 nine months ended September 30, 2017 and 2016,2020, total vested LTIP awards linked to other performance conditions and related dividends had a fair value of $4.2 million and $3.6$7.6 million and the related tax benefits were $1.6 million and $1.4 million, respectively.$1.2 million. There were no share-based LTIP awards linked to other performance conditions with a vesting date in 2019.
As of September 30, 2017,2020, there was $3.4$5.8 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 2.3 years.1.4 years.
9 Note 10 · Income taxes
The Company’s ETRsand the Utilities’ effective tax rates (combined federal and state income tax rates) for the third quarters of 2017were 17% and 2016 were 36% and 29%19%, respectively, and for the first nine months of 2017 and 2016 were 35% and 32%, respectively. The ETR was higher for the three months and nine months ended September 30, 2017 compared to2020. These rates differed from the same periods in 2016combined statutory rates, due primarily to 2016 tax benefits recognized on previously nondeductible merger- and spin-off-related expenses and higher tax benefits recognized for the Domestic Production Activities Deduction (DPAD) in 2016Utilities’ amortization of excess deferred income taxes related to the Utilities’ generation activities whenprovision in the Utilities were in a consolidated net operating loss position.
Hawaiian Electric’s ETRs forTax Act that lowered the third quarters of 2017 and 2016 were 36% and 37%federal income tax rate from 35% to 21%, respectively, and for the first nine months of 2017 and 2016 were 36% and 37%, respectively. The lower ETR was due in part to the tax benefits recognizedderived 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% and 20%, respectively, for the DPAD as a result of moving out of a federal net operating loss position in 2017.nine months ended September 30, 2019.
Recent
In August 2020, the Internal Revenue Service notified the Company that its 2017 and 2018 income tax developments. returns will be examined. The extension of bonus depreciation underCompany was previously audited every year through 2011, at which time the “Protecting Americans from Tax Hikes (PATH) Act of 2015” continues to be the most significant recentIRS changed their internal policies regarding audit frequency. The Company has received several initial requests for general tax change. The PATH Act provides 50% bonus depreciation through 2017, phases down the percentage to 40% in 2018return information and 30% in 2019 and then terminates bonus depreciation thereafter. Tax depreciationhas responded or is expected to increase by approximately $120 million in 2017 due to bonus depreciation, which has the effect of increasing accumulated deferred tax liabilities. However, the rate of growth of accumulated deferred tax liabilities is decreasing over time as book depreciation “catches up” with the tax depreciation taken in the past.process of responding to such requests.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
10Note 11 · Cash flows
| | | | | | | | | | | | | | |
| Nine months ended September 30 | | 2020 | | 2019 |
| (in millions) | | | | |
| Supplemental disclosures of cash flow information | | | | |
| HEI consolidated | | | | |
| Interest paid to non-affiliates, net of amounts capitalized | | $ | 64 | | | $ | 75 | |
| Income taxes paid (including refundable credits) | | 23 | | | 55 | |
| Income taxes refunded (including refundable credits) | | 0 | | | 4 | |
| Hawaiian Electric consolidated | | | | |
| Interest paid to non-affiliates | | 39 | | | 45 | |
| Income taxes paid (including refundable credits) | | 29 | | | 55 | |
| Income taxes refunded (including refundable credits) | | 0 | | | 4 | |
| Supplemental disclosures of noncash activities | | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| HEI consolidated | | | | |
| Electric utility property, plant and equipment | | | | |
| Estimated fair value of noncash contributions in aid of construction (investing) | | 9 | | | 7 | |
| Unpaid invoices and accruals for capital expenditures, balance, end of period (investing) | | 32 | | | 37 | |
| Reduction of long-term debt from funds previously transferred for repayment (financing) | | 82 | | | 0 | |
| Right-of-use assets obtained in exchange for operating lease obligations (investing) | | 22 | | | 5 | |
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) | | 0 | | | 9 | |
| Obligations to fund low income housing investments (investing) | | 10 | | | 6 | |
| Hawaiian Electric consolidated | | | | |
| Electric utility property, plant and equipment | | | | |
| Estimated fair value of noncash contributions in aid of construction (investing) | | 9 | | | 7 | |
| Unpaid invoices and accruals for capital expenditures, balance, end of period (investing) | | 28 | | | 34 | |
| Reduction of long-term debt from funds previously transferred for repayment (financing) | | 82 | | | 0 | |
| Right-of-use assets obtained in exchange for operating lease obligations (investing) | | 16 | | | 1 | |
|
| | | | | | | | |
| Nine months ended September 30 | | 2017 | | 2016 |
| (in millions) | | | | |
| Supplemental disclosures of cash flow information | | |
| | |
|
| HEI consolidated | | | | |
| Interest paid to non-affiliates | | $ | 62 |
| | $ | 61 |
|
| Income taxes paid (including refundable credits) | | 32 |
| | 19 |
|
| Income taxes refunded (including refundable credits) | | — |
| | 45 |
|
| Hawaiian Electric consolidated | | | | |
| Interest paid to non-affiliates | | 45 |
| | 43 |
|
| Income taxes paid (including refundable credits) | | 9 |
| | — |
|
| Income taxes refunded (including refundable credits) | | — |
| | 20 |
|
| Supplemental disclosures of noncash activities | | |
| | |
|
| HEI consolidated | | | | |
| Property, plant and equipment | | | | |
| Estimated fair value of noncash contributions in aid of construction (investing) | | 3 |
| | 12 |
|
| Unpaid invoices and accruals for capital expenditures (investing) | | | | |
| Change during the period | | 31 |
| | (6 | ) |
| Balance, end of period | | 116 |
| | 64 |
|
Common stock dividends reinvested in HEI common stock (financing)1 | | — |
| | 17 |
|
| Loans transferred from held for investment to held for sale (investing) | | 41 |
| | 14 |
|
Common stock issued (gross) for director and executive/management compensation (financing)2 | | 11 |
| | 7 |
|
| Obligations to fund low income housing investments (investing) | | 10 |
| | — |
|
| Hawaiian Electric consolidated | | | | |
| Electric utility property, plant and equipment | | | | |
| Estimated fair value of noncash contributions in aid of construction (investing) | | 3 |
| | 12 |
|
| Unpaid invoices and accruals for capital expenditures (investing) | | | | |
| Change during the period | | 29 |
| | (7 | ) |
| Balance, end of period | | 113 |
| | 63 |
|
1The amounts shown represent common stock dividends reinvested in HEI common stock under the HEI Dividend Reinvestment and Stock Purchase Plan (DRIP) in noncash transactions.
2The amounts shown represent the market value of common stock issued for director and executive/management compensation and withheld to satisfy statutory tax liabilities.
11Note 12 ·Fair value measurements
Fair value estimates are estimates of the price that would be received to sell an asset or paid upon the transfer of a liability in an orderly transaction between market participants at the measurement date. The fair value estimates are generally determined based on assumptions that market participants would use in pricing the asset or liability and are based on market data obtained from independent sources. However, in certain cases, the Company and the Utilities use their own assumptions based on the best information available in the circumstances. These valuations are estimates at a specific point in time, based on relevant market information, information about the financial instrument and judgments regarding future expected loss experience, economic conditions, risk characteristics of various financial instruments and other factors. These estimates do not reflect any premium or discount that could result if the Company or the Utilities were to sell its entire holdings of a particular financial instrument at one time. Because no active trading market exists for a portion of the Company’s and the Utilities’ financial instruments, fair value estimates cannot be determined with precision. Changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the estimates. In addition, the tax ramifications related to the realization of the unrealized gains and losses could have a significant effect on fair value estimates but have not been considered in making such estimates.
The Company and the Utilities group their financial assets measured at fair value in three levels outlined as follows:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
Level 1:Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and is used to measure fair value whenever available.
Level 2:Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by observable market data by correlation or other means.
Level 3:Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
Classification in the hierarchy is based upon the lowest level input that is significant to the fair value measurement of the asset or liability. For instruments classified in Level 1 and 2 where inputs are primarily based upon observable market data, there is less judgment applied in arriving at the fair value. For instruments classified in Level 3, management judgment is more significant due to the lack of observable market data.
Fair value is also used on a nonrecurring basis to evaluate certain assets for impairment or for disclosure purposes. Examples of nonrecurring uses of fair value include mortgage servicing rights accounted for by the amortization method, loan impairments for certain loans and goodwill.
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 the 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 bondbonds is estimated using a discounted cash flow model to calculate the present value of future principal and interest payments and, therefore is classified within Level 3 of the valuation hierarchy.
Loans held for sale. Residential and commercial loans are carried at the lower of cost or market and are valued using market observable pricing inputs, which are derived from third party loan sales and, securitizations and, therefore, are classified within Level 2 of the valuation hierarchy. Commercial loans are valued at quoted market prices determined in the active market in which the loans are traded.
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. NotingSince the valuation is derived from model-based techniques, ASB includes loans held for investment within Level 3 of the valuation hierarchy.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
Impaired loans. At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Fair value is determined primarily by using an income, cost or market approach and is normally provided through appraisals. Impaired loans carried at fair value generally receive specific allocations within the allowance for loancredit losses. For collateral-dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and 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 classification of the inputs for determining fair 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 additional impairment and adjusted accordingly.
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. Mortgage servicing rights (MSRs)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. Mortgage servicing rightsMSRs 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 theirits own experience and expertise to arrive at a value. ASB uses the third-party value only to assess the reasonableness of its own estimate.
Time depositsDeposit liabilities. The fair value of fixed-maturity certificates of deposit was estimated by discounting the future cash flows using the rates currently offered for depositsFHLB advances of similar remaining maturities. Deposit liabilities are classified in Level 2 of the valuation hierarchy.
Other borrowings. For fixed-rate 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 of HEI and the Utilitiesdebt—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.
Window forward contracts. The estimated fair value of the Utilities’ window forward contracts was obtained from a third-party financial services provider based on the effective exchange rate offered for the foreign currency denominated transaction. Window forward contracts are classified as Level 2 measurements.
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.For bank-owned life insurance, the carrying amount is the cash surrender value of the insurance policies, which is a reasonable estimate of fair value. For financial liabilities such as noninterest-bearing demand, interest-bearing demand, and savings and money market deposits, the carrying amount is a reasonable estimate of fair value as
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Estimated fair value |
| (in thousands) | | Carrying or notional amount | | Quoted prices in
active markets
for identical assets
(Level 1) | | Significant
other observable
inputs
(Level 2) | | Significant
unobservable
inputs
(Level 3) | | Total |
| September 30, 2020 | | | | | | | | | | |
| Financial assets | | | | | | | | | | |
| HEI consolidated | | | | | | | | | | |
| | | | | | | | | | |
| Available-for-sale investment securities | | $ | 1,747,658 | | | $ | 0 | | | $ | 1,720,473 | | | $ | 27,185 | | | $ | 1,747,658 | |
| Held-to-maturity investment securities | | 133,858 | | | 0 | | | 138,622 | | | 0 | | | 138,622 | |
| Stock in Federal Home Loan Bank | | 10,920 | | | 0 | | | 10,920 | | | 0 | | | 10,920 | |
| Loans, net | | 5,406,249 | | | 0 | | | 16,806 | | | 5,574,616 | | | 5,591,422 | |
| Mortgage servicing rights | | 9,553 | | | 0 | | | 0 | | | 10,102 | | | 10,102 | |
| | | | | | | | | | |
| Derivative assets | | 129,806 | | | 0 | | | 5,271 | | | 0 | | | 5,271 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Financial liabilities | | | | | | | | | | |
| HEI consolidated | | | | | | | | | | |
| Deposit liabilities | | 558,177 | | | 0 | | | 563,169 | | | 0 | | | 563,169 | |
| Short-term borrowings—other than bank | | 137,783 | | | 0 | | | 137,783 | | | 0 | | | 137,783 | |
| Other bank borrowings | | 151,875 | | | 0 | | | 151,874 | | | 0 | | | 151,874 | |
| Long-term debt, net—other than bank | | 2,068,852 | | | 0 | | | 2,440,950 | | | 0 | | | 2,440,950 | |
| Derivative liabilities | | 141,611 | | | 243 | | | 5,041 | | | 0 | | | 5,284 | |
| Hawaiian Electric consolidated | | | | | | | | | | |
| Short-term borrowings | | 49,948 | | | 0 | | | 49,948 | | | 0 | | | 49,948 | |
| Long-term debt, net | | 1,561,128 | | | 0 | | | 1,895,820 | | | 0 | | | 1,895,820 | |
| | | | | | | | | | |
| | | | | | | | | | |
| December 31, 2019 | | | | | | | | | | |
| Financial assets | | | | | | | | | | |
| HEI consolidated | | | | | | | | | | |
| | | | | | | | | | |
| Available-for-sale investment securities | | $ | 1,232,826 | | | $ | 0 | | | $ | 1,204,229 | | | $ | 28,597 | | | $ | 1,232,826 | |
| Held-to-maturity investment securities | | 139,451 | | | 0 | | | 143,467 | | | 0 | | | 143,467 | |
| Stock in Federal Home Loan Bank | | 8,434 | | | 0 | | | 8,434 | | | 0 | | | 8,434 | |
| Loans, net | | 5,080,107 | | | 0 | | | 12,295 | | | 5,145,242 | | | 5,157,537 | |
| Mortgage servicing rights | | 9,101 | | | 0 | | | 0 | | | 12,379 | | | 12,379 | |
| | | | | | | | | | |
| Derivative assets | | 25,179 | | | 0 | | | 300 | | | 0 | | | 300 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Financial liabilities | | | | | | | | | | |
| HEI consolidated | | | | | | | | | | |
| Deposit liabilities | | 769,825 | | | 0 | | | 765,976 | | | 0 | | | 765,976 | |
| Short-term borrowings—other than bank | | 185,710 | | | 0 | | | 185,710 | | | 0 | | | 185,710 | |
| Other bank borrowings | | 115,110 | | | 0 | | | 115,107 | | | 0 | | | 115,107 | |
| Long-term debt, net—other than bank | | 1,964,365 | | | 0 | | | 2,156,927 | | | 0 | | | 2,156,927 | |
| Derivative liabilities | | 51,375 | | | 33 | | | 2,185 | | | 0 | | | 2,218 | |
| Hawaiian Electric consolidated | | | | | | | | | | |
| Short-term borrowings | | 88,987 | | | 0 | | | 88,987 | | | 0 | | | 88,987 | |
| Long-term debt, net | | 1,497,667 | | | 0 | | | 1,670,189 | | | 0 | | | 1,670,189 | |
| | | | | | | | | | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
these liabilities have no stated maturity. |
| | | | | | | | | | | | | | | | | | | | |
| | | | | Estimated fair value |
| | | Carrying or notional amount | | Quoted prices in active markets for identical assets | | Significant other observable inputs | | Significant unobservable inputs | | |
| (in thousands) | | | (Level 1) | | (Level 2) | | (Level 3) | | Total |
| September 30, 2017 | | |
| | |
| | |
| | |
| | |
|
| Financial assets | | |
| | |
| | |
| | |
| | |
|
| HEI consolidated | | | | | | | | | | |
| Available-for-sale investment securities | | $ | 1,320,110 |
| | $ | — |
| | $ | 1,304,683 |
| | $ | 15,427 |
| | $ | 1,320,110 |
|
| Stock in Federal Home Loan Bank | | 9,706 |
| | — |
| | 9,706 |
| | — |
| | 9,706 |
|
| Loans receivable, net | | 4,638,962 |
| | 13,260 |
| | 2,468 |
| | 4,791,209 |
| | 4,806,937 |
|
| Mortgage servicing rights | | 9,070 |
| | — |
| | — |
| | 12,091 |
| | 12,091 |
|
| Bank-owned life insurance | | 147,391 |
| | — |
| | 147,391 |
| | — |
| | 147,391 |
|
| Derivative assets | | 8,399 |
| | — |
| | 591 |
| | — |
| | 591 |
|
| Hawaiian Electric consolidated | | | | | | | | | | |
| Derivative assets-window forward contracts | | 8,014 |
| | — |
| | 584 |
| | — |
| | 584 |
|
| Financial liabilities | | |
| | |
| | |
| | |
| | |
| HEI consolidated | | | | | | | | | | |
| Deposit liabilities | | 5,752,326 |
| | — |
| | 5,748,858 |
| | — |
| | 5,748,858 |
|
| Short-term borrowings—other than bank | | 24,498 |
| | — |
| | 24,498 |
| | — |
| | 24,498 |
|
| Other bank borrowings | | 153,552 |
| | — |
| | 153,717 |
| | — |
| | 153,717 |
|
| Long-term debt, net—other than bank | | 1,618,446 |
| | — |
| | 1,747,972 |
| | — |
| | 1,747,972 |
|
| Derivative liabilities | | 500 |
| | 2 |
| | — |
| | — |
| | 2 |
|
| Hawaiian Electric consolidated | | | | | | | | | | |
| Short-term borrowings | | 6,000 |
| | — |
| | 6,000 |
| | — |
| | 6,000 |
|
| Long-term debt, net | | 1,318,623 |
| | — |
| | 1,441,855 |
| | — |
| | 1,441,855 |
|
| December 31, 2016 | | |
| | |
| | |
| | |
| | |
|
| Financial assets | | |
| | |
| | |
| | |
| | |
|
| HEI consolidated | | | | | | | | | | |
| Money market funds | | $ | 13,085 |
| | $ | — |
| | $ | 13,085 |
| | $ | — |
| | $ | 13,085 |
|
| Available-for-sale investment securities | | 1,105,182 |
| | — |
| | 1,089,755 |
| | 15,427 |
| | 1,105,182 |
|
| Stock in Federal Home Loan Bank | | 11,218 |
| | — |
| | 11,218 |
| | — |
| | 11,218 |
|
| Loans receivable, net | | 4,701,977 |
| | — |
| | 13,333 |
| | 4,839,493 |
| | 4,852,826 |
|
| Mortgage servicing rights | | 9,373 |
| | — |
| | — |
| | 13,216 |
| | 13,216 |
|
| Bank-owned life insurance | | 143,197 |
| | — |
| | 143,197 |
| | — |
| | 143,197 |
|
| Derivative assets | | 23,578 |
| | — |
| | 453 |
| | — |
| | 453 |
|
| Financial liabilities | | |
| | |
| | |
| | |
| | |
| HEI consolidated | | | | | | | | | | |
| Deposit liabilities | | 5,548,929 |
| | — |
| | 5,546,644 |
| | — |
| | 5,546,644 |
|
| Other bank borrowings | | 192,618 |
| | — |
| | 193,991 |
| | — |
| | 193,991 |
|
| Long-term debt, net—other than bank | | 1,619,019 |
| | — |
| | 1,704,717 |
| | — |
| | 1,704,717 |
|
| Derivative liabilities | | 53,852 |
| | 129 |
| | 823 |
| | — |
| | 952 |
|
| Hawaiian Electric consolidated | | | | | | | | | | |
| Long-term debt, net | | 1,319,260 |
| | — |
| | 1,399,490 |
| | — |
| | 1,399,490 |
|
| Derivative liabilities-window forward contracts | | 20,734 |
| | — |
| | 743 |
| | — |
| | 743 |
|
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:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2017 | | December 31, 2016 |
| | | Fair value measurements using | | Fair value measurements using |
| (in thousands) | | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 |
| Money market funds (“other” segment) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 13,085 |
| | $ | — |
|
| Available-for-sale investment securities (bank segment) | | |
| | |
| | |
| | |
| | |
| | |
|
| Mortgage-related securities-FNMA, FHLMC and GNMA | | $ | — |
| | $ | 1,122,565 |
| | $ | — |
| | $ | — |
| | $ | 897,474 |
| | $ | — |
|
| U.S. Treasury and federal agency obligations | | — |
| | 182,118 |
| | — |
| | — |
| | 192,281 |
| | — |
|
| Mortgage revenue bond | | — |
| | — |
| | 15,427 |
| | — |
| | — |
| | 15,427 |
|
| | | $ | — |
| | $ | 1,304,683 |
| | $ | 15,427 |
| | $ | — |
| | $ | 1,089,755 |
| | $ | 15,427 |
|
| Derivative assets | | |
| | |
| | |
| | |
| | |
| | |
|
Interest rate lock commitments (bank segment) 1 | | $ | — |
| | $ | 7 |
| | $ | — |
| | $ | — |
| | $ | 445 |
| | $ | — |
|
Forward commitments (bank segment) 1 | | — |
| | — |
| | — |
| | — |
| | 8 |
| | — |
|
Window forward contracts (electric utility segment)2 | | — |
| | 584 |
| | — |
| | — |
| | — |
| | — |
|
| | | $ | — |
| | $ | 591 |
| | $ | — |
| | $ | — |
| | $ | 453 |
| | $ | — |
|
| Derivative liabilities | | | | | | | | | | | | |
Interest rate lock commitments (bank segment) 1 | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 24 |
| | $ | — |
|
Forward commitments (bank segment) 1 | | 2 |
| | — |
| | — |
| | 129 |
| | 56 |
| | — |
|
Window forward contracts (electric utility segment)2 | | — |
| | — |
| | — |
| | — |
| | 743 |
| | — |
|
| | | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | 129 |
| | $ | 823 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
| | | Fair value measurements using | | Fair value measurements using |
| (in thousands) | | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | | | | | |
| Available-for-sale investment securities (bank segment) | | | | | | | | | | | | |
| Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies | | $ | 0 | | | $ | 1,625,548 | | | $ | 0 | | | $ | 0 | | | $ | 1,026,385 | | | $ | 0 | |
| U.S. Treasury and federal agency obligations | | 0 | | | 63,588 | | | 0 | | | 0 | | | 117,787 | | | 0 | |
| Corporate bonds | | 0 | | | 31,337 | | | 0 | | | 0 | | | 60,057 | | | 0 | |
| Mortgage revenue bonds | | 0 | | | 0 | | | 27,185 | | | 0 | | | 0 | | | 28,597 | |
| | | $ | 0 | | | $ | 1,720,473 | | | $ | 27,185 | | | $ | 0 | | | $ | 1,204,229 | | | $ | 28,597 | |
| Derivative assets | | | | | | | | | | | | |
Interest rate lock commitments (bank segment)1 | | $ | 0 | | | $ | 5,271 | | | $ | 0 | | | $ | 0 | | | $ | 297 | | | $ | 0 | |
Forward commitments (bank segment)1 | | 0 | | | 0 | | | 0 | | | 0 | | | 3 | | | 0 | |
| | | | | | | | | | | | |
| | | $ | 0 | | | $ | 5,271 | | | $ | 0 | | | $ | 0 | | | $ | 300 | | | $ | 0 | |
| Derivative liabilities | | | | | | | | | | | | |
| | | | | | | | | | | | |
Forward commitments (bank segment)1 | | $ | 243 | | | $ | 0 | | | $ | 0 | | | $ | 33 | | | $ | 12 | | | $ | 0 | |
| | | | | | | | | | | | |
Interest rate swap (Other segment)2 | | 0 | | | 5,041 | | | 0 | | | 0 | | | 2,173 | | | 0 | |
| | $ | 243 | | | $ | 5,041 | | | $ | 0 | | | $ | 33 | | | $ | 2,185 | | | $ | 0 | |
1 Derivatives are carried at fair value with changes in value reflected in the balance sheet in other assets or other liabilities andin the balance sheets with changes in value included in mortgage banking income.
2 Derivatives are included in noncurrent regulatory assets and/orother liabilities in the balance sheets.
There were no transfers of financial assets and liabilities between Level 1 and Level 2 of the fair value hierarchy during the nine months ended September 30, 2017.
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows: | | | | | | | | | | | | Three months ended September 30 | | Nine months ended September 30 |
| | | Three months ended September 30 | | Nine months ended September 30 | |
| Mortgage revenue bond | | 2017 | 2016 | | 2017 | 2016 | |
| Mortgage revenue bonds | | Mortgage revenue bonds | | 2020 | 2019 | | 2020 | 2019 |
| (in thousands) | | | | | (in thousands) | |
| Beginning balance | | $ | 15,427 |
| $ | — |
| | $ | 15,427 |
| $ | — |
| Beginning balance | | $ | 28,827 | | $ | 28,166 | | | $ | 28,597 | | $ | 23,636 | |
| Principal payments received | | — |
| — |
| | — |
| — |
| Principal payments received | | (1,642) | | 0 | | | (1,642) | | 0 | |
| Purchases | | — |
| — |
| | — |
| — |
| Purchases | | 0 | | 293 | | | 230 | | 4,823 | |
| Unrealized gain (loss) included in other comprehensive income | | — |
| — |
| | — |
| — |
| Unrealized gain (loss) included in other comprehensive income | | 0 | | 0 | | | 0 | | 0 | |
| Ending balance | | $ | 15,427 |
| $ | — |
| | $ | 15,427 |
| $ | — |
| Ending balance | | $ | 27,185 | | $ | 28,459 | | | $ | 27,185 | | $ | 28,459 | |
ASB holds one2 mortgage revenue bondbonds 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 September 30, 2017,2020, the weighted average discount rate was 2.826%2.13%, 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 |
| (in thousands) | | Balance | | Level 1 | | Level 2 | | Level 3 |
| September 30, 2020 | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Mortgage servicing rights | | $ | 6,260 | | | $ | 0 | | | $ | 0 | | | $ | 6,260 | |
| December 31, 2019 | | | | | | | | |
| Loans | | 25 | | | 0 | | | 0 | | | 25 | |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | | | Fair value measurements |
| (in thousands) | | Balance | | Level 1 | | Level 2 | | Level 3 |
| September 30, 2017 | | | | | | | | |
| Loans | | $ | 2,881 |
| | $ | — |
| | $ | — |
| | $ | 2,881 |
|
| Real estate acquired in settlement of loans | | 93 |
| | — |
| | — |
| | 93 |
|
| December 31, 2016 | | | | | | | | |
| Loans | | 2,767 |
| | — |
| | — |
| | 2,767 |
|
| Real estate acquired in settlement of loans | | 1,189 |
| | — |
| | — |
| | 1,189 |
|
For the nine months ended September 30,2017 2020 and 2016,2019, there were no0 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 |
| September 30, 2017 | | | | | | | | | | |
| Residential loans | | $ | 731 |
| | Fair value of collateral | | Appraised value less 7% selling cost | | 50-91% | | 69% |
| Commercial loans | | 2,150 |
| | Fair value of collateral | | Appraised value | | 72-76% | | 76% |
| Total loans | | $ | 2,881 |
| | | | | | | | |
| Real estate acquired in settlement of loans | | $ | 93 |
| | Sales price | | Sales price less 7% selling cost | |
| | N/A (2) |
| | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | | |
| Residential loans | | $ | 2,468 |
| | Sales price | | Sales price | | 95-100% | | 97% |
| Residential loans | | 287 |
| | Fair value of property or collateral | | Appraised value less 7% selling cost | | 42-65% | | 61% |
| Home equity lines of credit | | 12 |
| | Fair value of property or collateral | | Appraised value less 7% selling cost | | | | N/A (2) |
| Total loans | | $ | 2,767 |
| | | | | | | | |
| Real estate acquired in settlement of loans | | $ | 1,189 |
| | Fair value of property or collateral | | Appraised value less 7% selling cost | | 100% | | 100% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Significant unobservable input value (1) |
| ($ in thousands) | | Fair value | | Valuation technique | | Significant unobservable input | | Range | | Weighted
Average |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| September 30, 2020 | | | | | | | | | | |
| Mortgage servicing rights | | $ | 6,260 | | | Discounted cash flow | | Prepayment Speed | | 11.2% - 21.3% | | 17.5 | % |
| | | | | | 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 | | | | | | | | | |
| | | | | | | | | | |
(1) RepresentRepresents percent of outstanding principal balance.
(2) N/A - Not applicable. There is one loan or propertyasset 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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued(Unaudited)
12 · Termination of proposed merger and other matters
On December 3, 2014, HEI, NextEra Energy, Inc. (NEE) and two subsidiaries of NEE entered into an Agreement and Plan of Merger (the Merger Agreement), under which Hawaiian Electric was to become a subsidiary of NEE. The Merger Agreement contemplated that, prior to the Merger, HEI would distribute to its shareholders all of the common stock of ASB Hawaii, Inc. (ASB Hawaii), the parent company of ASB (such distribution referred to as the Spin-Off).
The closing of the Merger was subject to various conditions, including receipt of regulatory approval from the PUC. In July 2016: (1) the PUC dismissed NEE and Hawaiian Electric’s application requesting approval of the proposed Merger, (2) NEE terminated the Merger Agreement and (3) pursuant to the terms of the Merger Agreement, NEE paid HEI a $90 million termination fee and $5 million for the reimbursement of expenses associated with the transaction. In 2016, the Company recognized $60 million of net income ($2 million of net loss in each of the first and second quarters and $64 million of net income in the third quarter), comprised of the termination fee ($55 million), reimbursements of expenses from NEE and insurance ($3 million), and additional tax benefits on the previously non-tax-deductible merger- and Spin-Off-related expenses incurred through June 30, 2016 ($8 million), less merger- and Spin-Off-related expenses incurred in 2016 ($6 million) (all net of income tax impacts). The Spin-Off of ASB Hawaii was cancelled as it was cross-conditioned on the merger consummation.
In May 2016, the Utilities had filed an application for approval of an liquefied natural gas (LNG) supply and transport agreement and LNG-related capital equipment, which application was conditioned on the PUC’s approval of the proposed Merger. Subsequently, the Utilities terminated the LNG agreement and withdrew the application. In 2016, Hawaiian Electric recognized expenses related to the terminated LNG agreement of $1 million, net of tax benefits, in each of the first and second quarters.
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 20162019 Form 10-K and should be read in conjunction with such discussion and the 20162019 annual consolidated financial statements of HEI and Hawaiian Electric and notes thereto included in HEI’s and Hawaiian Electric’s 20162019 Form 10-K, as well as the quarterly (as of and for the three and nine months ended September 30, 2017)2020) condensed consolidated financial statements and notes thereto included in this Form 10-Q.
HEI consolidated
Recent developments—COVID-19.
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 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 and customers and minimize community spread of the coronavirus, 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 have not impaired the Company’s ability to maintain effective internal controls over financial reporting and related disclosures. For personnel that cannot perform their work remotely, the Company has taken steps to protect these employees, including implementing practices related to employee and facilities hygiene, in order to ensure the reliability and resilience of its operations. For example, at the Utilities, 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. Similarly, at ASB, branch operations continue to serve the community, but the number of open branches has been reduced to match reduced customer volumes, protect employees, and minimize community transmission risk.
The Company has extended various programs to support its customers and the community during this difficult and challenging time. For example, Hawaiian Electric has suspended, through December 31, 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 receive a loan forbearance, deferment or extension. 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 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” in the Bank section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A).
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. There has been no material impact on the “Other” segment and Pacific Current as a result of the COVID-19 pandemic.
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 MD&As.
Environmental, Social & Governance.
At HEI, environmental, social and 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 is inextricably linked with the strength of the economy, communities, and environment of the State of Hawaii. This is why the Company’s mission is to be a catalyst for a better Hawaii.
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. This report encompasses ESG policies, principles and results reported during 2019 across the Company’s two primary operating subsidiaries, Hawaiian Electric and ASB. This report is aligned with Sustainability Accounting Standards Board guidance—using the electric utilities standard for Hawaiian Electric, and the commercial banks, commercial finance, and mortgage finance standards for ASB. In future reports, the Company
intends to incorporate disclosures relating to climate change based on recommendations from the Task Force on Climate-related Financial Disclosures. The Company’s ESG report can be found at www.hei.com/esg.
RESULTS OF OPERATIONS
|
| | | | | | | | | | | | | |
| (in thousands, except per | | Three months ended September 30 | | % | | |
| share amounts) | | 2017 | | 2016 | | change | | Primary reason(s)* |
| Revenues | | $ | 673,185 |
| | $ | 646,055 |
| | 4 |
| | Increases for the electric utility and bank segments |
| Operating income | | 109,545 |
| | 105,442 |
| | 4 |
| | Increase for the bank segment and lower losses for the “other” segment, partly offset by a decrease at the electric utility segment |
| Merger termination fee | | — |
| | 90,000 |
| | (100 | ) | | See Note 12 of the Condensed Consolidated Financial Statements |
| Net income for common stock | | 60,073 |
| | 127,142 |
| | (53 | ) | | Merger termination fee at corporate in 2016 (in the “other” segment), partly offset by higher bank net income in 2017 |
| Basic earnings per common share | | $ | 0.55 |
| | $ | 1.17 |
| | (53 | ) | | Lower net income |
| Weighted-average number of common shares outstanding | | 108,786 |
| | 108,268 |
| | — |
| | Issuances of shares under the HEI Dividend Reinvestment and Stock Purchase Plan and other plans |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30 | | % | | |
| (in thousands) | | 2020 | | 2019 | | change | | Primary reason(s)* |
| Revenues | | $ | 641,427 | | | $ | 770,882 | | | (17) | | | Decrease for the electric utility and bank segments |
| Operating income | | 99,561 | | | 96,655 | | | 3 | | | Increase for electric utility segment, partly offset by decrease for the bank segment |
| Net income for common stock | | 65,032 | | | 63,419 | | | 3 | | | Increase due to higher net income at electric utility segment, partly offset by lower net income at the bank segment |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30 | | % | | |
| (in thousands) | | 2020 | | 2019 | | change | | Primary reason(s)* |
| Revenues | | $ | 1,927,558 | | | $ | 2,147,982 | | | (10) | | | Decrease for the electric utility and bank segments |
| Operating income | | 230,819 | | | 247,226 | | | (7) | | | Decrease for the bank segment, partly offset by increase for electric utility segment |
| Net income for common stock | | 147,339 | | | 151,619 | | | (3) | | | Decrease due to lower net income at the bank segment, partly offset by higher net income at electric utility segment. See below for effective tax rate explanation |
| | | | | | | | |
| | | | | | | | |
* Also, see segment discussions which follow. |
| | | | | | | | | | | | | |
| (in thousands, except per | | Nine months ended September 30 | | % | | |
| share amounts) | | 2017 | | 2016 | | change | | Primary reason(s)* |
| Revenues | | $ | 1,897,028 |
| | $ | 1,763,259 |
| | 8 |
| | Increases for the electric utility and bank segments |
| Operating income | | 253,303 |
| | 259,748 |
| | (2 | ) | | Decrease for the electric utility segment, partly offset by an increase at the bank segment and lower losses for the “other” segment |
| Merger termination fee | | — |
| | 90,000 |
| | (100 | ) | | See Note 12 of the Condensed Consolidated Financial Statements |
| Net income for common stock | | 132,927 |
| | 203,622 |
| | (35 | ) | | Merger termination fee at corporate in 2016 (in the “other” segment) and lower net income at the electric utility segment, partly offset by higher net income at the bank segment |
| Basic earnings per common share | | $ | 1.22 |
| | $ | 1.89 |
| | (35 | ) | | Lower net income |
| Weighted-average number of common shares outstanding | | 108,737 |
| | 107,951 |
| | 1 |
| | Issuances of shares under the HEI Dividend Reinvestment and Stock Purchase Plan and other plans |
| |
* | Also, see segment discussions which follow. |
HEI’s consolidated ROACE was 8.5%The Company’s effective tax rates for the twelve months ended September 30, 2017third quarters of 2020 and 12.3% for the twelve months ended September 30, 2016.2019 were 18% and 19%, respectively. The higher ROACE for the twelve months ended September 30, 2016 was primarily due to the merger termination fee received in July 2016.
Dividends. The payout ratiosCompany’s effective tax rates for the first nine months of 20172020 and full year 20162019 were 76%17% and 54%19%, respectively. HEI currently expectsThe effective tax rates were lower for the nine months ended September 30, 2020 compared to maintain its dividend at its present level; however, the HEI Boardsame period in 2019 due primarily to higher amortization in 2020 of Directors evaluates the dividend quarterly and considers many factorsUtilities’ regulatory liability related to certain excess deferred income taxes resulting from the Tax Act’s decrease in the evaluation, including but not limited to the Company’s results of operations, the long-term prospects for the Companyfederal income tax rate and current and expected future economic conditions.an increase in excess tax benefits.
Economic conditions.
Note: The statistical data in this section is from public third-party sources that management believes to be reliable (e.g., Department of Business, Economic Development and Tourism (DBEDT), University of Hawaii Economic Research Organization (UHERO), U.S. Bureau of Labor Statistics, Department of Labor and Industrial Relations (DLIR), Hawaii Tourism Authority (HTA), Honolulu Board of REALTORS® and national and local newspapers)news media).
After three quartersOn March 11, 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 2017, the State of Hawaii issued a number of emergency and supplementary proclamations to limit the spread of the virus. Hawaii’s economy began to weaken in the latter part of March 2020, due to a forced statewide stay-at-home, work-from-home declaration that began on March 25, 2020. The restrictions shuttered many businesses, including hotels, restaurants, bars, and other gathering places, and 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). However, due to an increase in new case counts starting in late July, certain restrictions to minimize the spread of the virus were reinstituted and the mandatory 14-day quarantine requirement for travelers entering the state was extended to be in effect through October 14, 2020. Beginning on October 15, 2020 travelers to Oahu are no longer subject to the mandatory 14-day quarantine if they test negative for COVID-19 within 72 hours of arrival and present valid documentation. Inter-island travel to Hawaii island requires a second test, while a second test is optional for inter-island travel to Maui and Kauai.
The most recent interim forecast by UHERO, which was issued on September 25, 2020, forecasts full year 2020 real GDP contraction of 11.8%, decline in total visitor arrivals of 73.7%, decline in real personal income of 4.9%, and an unemployment rate of 12.4%. 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 27, 2020. The economic relief package totals more than $2 trillion and provides direct economic support to businesses and individuals. Hawaii has received more than $7 billion through various federal assistance programs, including the CARES Act, that will help attenuate the impact to Hawaii’s economy.
On April 8, 2020, the Governor issued a proclamation appointing Alan Oshima, former CEO of the Utilities, to lead Hawaii’s efforts to develop and implement a plan 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.
In September 2020, the City and County of Honolulu announced a framework for reducing the spread of COVID-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 most restrictive and Tier 4 being the most relaxed. 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 October 22, 2020, the county of Honolulu moved from Tier 1 to Tier 2, which relaxes certain restrictions. However, due to the uncertainty surrounding the timing and effectiveness of efforts to contain the spread of the virus while reopening the economy, the pace and the extent of the recovery cannot be predicted at this time.
See “Recent Developments—COVID-19” in the Electric Utility and Bank MD&As for further discussion of the economic impact caused by the pandemic.
Hawaii’s tourism industry, a significant driver of Hawaii’sHawaii���s economy, endedsuffered dramatically with strong growtha decline of 71.6% in visitor arrivals through the first nine months of the year primarily due to travel restrictions amid the COVID-19 pandemic. Effective March 26, 2020, a mandatory 14-day self-quarantine was ordered for all travelers, both visitor spendingresidents and arrivals. Visitor expenditures increased 7.1%visitors, to the islands including inter-island travelers. The mandatory quarantine for inter-island travel was lifted on June 16, 2020, but on August 20, 2020, a mandatory 14-day quarantine for travelers arriving on islands other than Oahu was reinstated. The mandatory 14-day quarantine for all travelers from outside the state was lifted, effective October 15, 2020, provided travelers test negative for COVID-19 within 72 hours of arrival and arrivals increased 4.9%present valid documentation (additional restrictions apply to travel to Hawaii island). As a result of these restrictions, between April 1, 2020 and September 30, 2020, daily passenger counts declined by over 95% to 1,406 passengers on average per day compared to the same time period in 2016. Looking ahead,2019. On October 15, 2020, the Hawaii Tourism Authority expects scheduled nonstop seatsfirst day the 14-day mandatory quarantine was no longer in effect if travelers tested negative for COVID-19 within 72 hours of arrival, the daily passenger count increased 333%, compared to Hawaiithe average daily passenger count for the fourth quarterpreceding seven days.
Due to the effects of 2017the measures to increase by 4.7% overcontain the fourth quarterCOVID-19 pandemic, Hawaii’s seasonally adjusted unemployment rate in September 2020 was 15.1%, which was substantially higher compared to the September 2019 rate of 2016 driven primarily by an increase2.7%. The national unemployment rate in seats from Asia, Canada and the West Coast.
September 2020 was 7.9% compared to 3.5% in September 2019. Hawaii’s unemployment rate continuedis expected to declinedecrease now that restrictions on travel have been reduced significantly. Year-to-date through October 24, 2020, there were 399,049 initial unemployment claims filed with the State compared to 2.5%52,332 initial claims, or an increase of 663%, during the same period in September 2017 which was lower than the 3.0% rate a year ago in September 2016 and lower than the national unemployment rate of 4.2% in September 2017. It was the second lowest unemployment rate in the nation along with Colorado.2019.
Hawaii real estate activity through September 2020, as indicated by the home resale market, experienced growthresulted in an increase in the median sales pricesprice of 1.2% for condominiums and 3.3% for single family homes through the same period in 2017. Median2019. The number of closed sales priceswas down 18.9% for condominiums and 1.4% for single family residential homes and condominiums on Oahu through September 2017 were higher by 3.4% and 5.4%, respectively, over the same time period in 2016. The number of closed sales for both single family residential homes and condominiums through September of 2017 were also up2020 compared to same time period of 2016 by 5.0% and 5.8%, respectively.2019.
Hawaii’s petroleum product prices reflect supply and demand in the Asia-Pacific region and the price of crude oil in international markets. Following steady price increases through 2016, theThe price of crude oil decreased dramatically since the first quarter of 2020 and has remained relatively stable throughat levels lower than last year. Lower fuel prices will benefit customers in the first three quartersform of 2017.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 September 201716, 2020 meeting, the Federal Open Market Committee (FOMC) decided to maintain the federal funds rate target range of “1.0% to 1.25%” in view of its expected labor market conditions and inflation.0%-0.25%. The FOMC will continue to assess economic conditions relativemaintain an accommodative stance of monetary policy to its objectives ofachieve maximum employment and 2% inflation in determiningat the sizerate of 2 percent over the long run. The Federal Reserve stated that it will increase its holdings of Treasury securities and timingagency mortgage-backed securities at least at the current pace to sustain smooth market functioning and help foster accommodative financial conditions, thereby supporting the flow of future adjustmentscredit to households and businesses.
The Company expects that the target range.
Overall, Hawaii’s economynegative trends and uncertainties in the near term is expected to be buoyed bymultiple sectors described above have contributed and will result in a strong tourism industry. Tourism continues to fare well however, future gainssignificant economic downturn for the full year 2020 that may be hindered by capacity constraints in visitor accommodations. The growth in the number of jobs is anticipated to decline as construction activity eases and unemployment remains low. Risks remain stemming from geopolitical uncertainty and itshave a material unfavorable impact on tourism andthe Company’s net revenues or income from the impact of the financial markets on real estate development and sales.continuing operations in 2020.
| | | | | Three months ended September 30 | | Nine months ended September 30 | | | | Three months ended September 30 | | Nine months ended September 30 | |
| (in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | | Primary reason(s) | (in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | | Primary reason(s) |
| Revenues | | $ | 127 |
| | $ | 94 |
| | $ | 299 |
| | $ | 262 |
| | Revenues | | $ | 215 | | | $ | 4 | | | $ | 237 | | | $ | 86 | | | Increase in revenues due to solar energy sales at Mauo, LLC. |
| Operating loss | | (4,295 | ) | | (7,097 | ) | | (13,478 | ) | | (18,621 | ) | | Third quarter and first nine months of 2016 merger and spin-off-related expenses (see below) and lower other administrative and general expenses in the third quarter and first nine months of 2017 | Operating loss | | (4,457) | | | (3,446) | | | (12,854) | | | (12,503) | | | The third quarters of 2020 and 2019 include $0.2 million and $1.0 million, respectively, of operating income from Pacific Current1. Third quarter 2020 corporate expense was $0.3 million higher compared to the third quarter of 2019, primarily due to higher professional fees. The first nine months of 2020 and 2019 include $2.0 million and $2.3 million, respectively, of operating income from Pacific Current1. The first nine months of 2020 corporate expense was comparable to the same period in 2019. |
| Merger termination fee | | — |
| | 90,000 |
| | — |
| | 90,000 |
| | See Note 12 of the Condensed Consolidated Financial Statements | |
| Net income (loss) | | (5,006 | ) | | 65,064 |
| | (11,807 | ) | | 54,362 |
| | Third quarter of 2016 merger termination fee and $8 million of tax benefits on previously non-deductible expenses related to the previously proposed merger with NEE and spin-off of ASBH and tax benefits recognized for the Domestic Production Activities Deduction in 2016 (see Note 9 of the Condensed Consolidated Financial Statements) | |
| Net loss | | Net loss | | (7,183) | | | (6,248) | | | (20,885) | | | (20,603) | | | The net loss for the third quarter of 2020 was higher than the net loss for the third quarter of 2019 due to the same factors cited for the change in operating loss. The net loss for the first nine month of 2020 was lower than the net loss for the first nine months of 2019 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)/income includes results of the stand-alone corporate operations of HEI (including eliminations of intercompany transactions) and ASB Hawaii, Inc. (ASBH)(ASB Hawaii), both holding companies;as well as the results of Pacific Current, a direct subsidiary of HEI Properties, Inc.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, Mauo, LLC (Mauo), which is currently constructing a companysolar-plus-storage project totaling 8.6 MW on five University of Hawaii campuses; and Pacific Current’s subsidiary, Ka‘ie‘ie Waho Company, LLC, which held passive, venture capital investments (all of which have been sold or abandoned priorowns a 6 MW solar photovoltaic system that provides renewable energy to its dissolution in December 2015 and final winding up in June 2017); and The Old Oahu Tug Service, Inc., a maritime freight transportation company that ceased operations in 1999, but has remaining employee benefit payments;Kauai Island Utility Cooperative; as well as eliminations of intercompany transactions. For the third quarter and first nine months of 2016, merger and spin-off related expenses (net of $6 million of reimbursements from NEE and insurers) recorded at HEI
contributed $2 million and $5 million to operating losses, respectively. See Note 12, “Termination of proposed merger and other matters,” of the Condensed Consolidated Financial Statements.
FINANCIAL CONDITIONRESULTS OF OPERATIONS
Liquidity and capital resources.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30 | | % | | |
| (in thousands) | | 2020 | | 2019 | | change | | Primary reason(s)* |
| Revenues | | $ | 641,427 | | | $ | 770,882 | | | (17) | | | Decrease for the electric utility and bank segments |
| Operating income | | 99,561 | | | 96,655 | | | 3 | | | Increase for electric utility segment, partly offset by decrease for the bank segment |
| Net income for common stock | | 65,032 | | | 63,419 | | | 3 | | | Increase due to higher net income at electric utility segment, partly offset by lower net income at the bank segment |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30 | | % | | |
| (in thousands) | | 2020 | | 2019 | | change | | Primary reason(s)* |
| Revenues | | $ | 1,927,558 | | | $ | 2,147,982 | | | (10) | | | Decrease for the electric utility and bank segments |
| Operating income | | 230,819 | | | 247,226 | | | (7) | | | Decrease for the bank segment, partly offset by increase for electric utility segment |
| Net income for common stock | | 147,339 | | | 151,619 | | | (3) | | | Decrease due to lower net income at the bank segment, partly offset by higher net income at electric utility segment. See below for effective tax rate explanation |
| | | | | | | | |
| | | | | | | | |
* Also, see segment discussions which follow.
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, commercial paper and 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 requirementsCompany’s effective tax rates for the foreseeable future.
third quarters of 2020 and 2019 were 18% and 19%, respectively. The consolidated capital structure of HEI (excluding deposit liabilities and other bank borrowings) was as follows: |
| | | | | | | | | | | | | | |
| (dollars in millions) | | September 30, 2017 | | December 31, 2016 |
| Short-term borrowings—other than bank | | $ | 25 |
| | — | % | | $ | — |
| | — | % |
| Long-term debt, net—other than bank | | 1,618 |
| | 43 |
| | 1,619 |
| | 43 |
|
| Preferred stock of subsidiaries | | 34 |
| | 1 |
| | 34 |
| | 1 |
|
| Common stock equity | | 2,103 |
| | 56 |
| | 2,067 |
| | 56 |
|
| | | $ | 3,780 |
| | 100 | % | | $ | 3,720 |
| | 100 | % |
HEI’s short-term borrowings and HEI’s line of credit facility were as follows:
|
| | | | | | | | | | | | |
| | | Average balance | | Balance |
| (in millions) | | Nine months ended September 30, 2017 | | September 30, 2017 | | December 31, 2016 |
Short-term borrowings 1 | | |
| | |
| | |
|
| Commercial paper | | $ | 3 |
| | $ | 19 |
| | $ | — |
|
| Line of credit draws | | — |
| | — |
| | — |
|
| Undrawn capacity under HEI’s line of credit facility | | | | 150 |
| | 150 |
|
1 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 borrowings duringCompany’s effective tax rates for the first nine months of 20172020 and 2019 were 17% and 19%, respectively. The effective tax rates were lower for the nine months ended September 30, 2020 compared to the same period in 2019 due primarily to higher amortization in 2020 of the Utilities’ regulatory liability related to certain excess deferred income taxes resulting from the Tax Act’s decrease in the federal income tax rate and an increase in excess tax benefits.
Economic conditions.
Note: The statistical data in this section is from public third-party sources that management believes to be reliable (e.g., Department of Business, Economic Development and Tourism (DBEDT), University of Hawaii Economic Research Organization (UHERO), U.S. Bureau of Labor Statistics, Department of Labor and Industrial Relations (DLIR), Hawaii Tourism Authority (HTA), Honolulu Board of REALTORS® and national and local news media).
On March 11, 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 issued a number of emergency and supplementary proclamations to limit the spread of the virus. Hawaii’s economy began to weaken in the latter part of March 2020, due to a forced statewide stay-at-home, work-from-home declaration that began on March 25, 2020. The restrictions shuttered many businesses, including hotels, restaurants, bars, and other gathering places, and 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). However, due to an increase in new case counts starting in late July, certain restrictions to minimize the spread of the virus were reinstituted and the mandatory 14-day quarantine requirement for travelers entering the state was $18.5 million. As ofextended to be in effect through October 27, 2017, HEI had $17.5 million of outstanding commercial paper, and its line of credit facility was undrawn.
HEI has a $150 million line of credit facility and refinanced a $125 million loan14, 2020. Beginning on October 6, 2017. See Note 515, 2020 travelers to Oahu are no longer subject to the mandatory 14-day quarantine if they test negative for COVID-19 within 72 hours of arrival and present valid documentation. Inter-island travel to Hawaii island requires a second test, while a second test is optional for inter-island travel to Maui and Kauai.
The most recent interim forecast by UHERO, which was issued on September 25, 2020, forecasts full year 2020 real GDP contraction of 11.8%, decline in total visitor arrivals of 73.7%, decline in real personal income of 4.9%, and an unemployment rate of 12.4%. However, federal fiscal and monetary policy response is expected to cushion the economic impact of the Condensed Consolidated Financial Statements.pandemic.
From December 7, 2016The CARES Act was passed by Congress and signed into law by President Trump on March 27, 2020. The economic relief package totals more than $2 trillion and provides direct economic support to date, HEI satisfiedbusinesses and individuals. Hawaii has received more than $7 billion through various federal assistance programs, including the share purchase requirementsCARES Act, that will help attenuate the impact to Hawaii’s economy.
On April 8, 2020, the Governor issued a proclamation appointing Alan Oshima, former CEO of the HEI Dividend ReinvestmentUtilities, to lead Hawaii’s efforts to develop and Stock Purchase Plan (DRIP), HEIRSPimplement a plan for economic recovery. The “Hawaii Economic and ASB 401(k) Plan through open market purchasesCommunity Recovery & Resiliency Plan” includes a concurrent three-part strategy to address both the economic and community impacts of its common stock rather than through new issuances.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.
In December 2014, HEI filed an omnibus registration statement to register an indeterminateSeptember 2020, the City and County of Honolulu announced a framework for reducing the spread of COVID-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 most restrictive and Tier 4 being the most relaxed. The minimum amount of debttime 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 October 22, 2020, the county of Honolulu moved from Tier 1 to Tier 2, which relaxes certain restrictions. However, due to the uncertainty surrounding the timing and equity securities.effectiveness of efforts to contain the spread of the virus while reopening the economy, the pace and the extent of the recovery cannot be predicted at this time.
ForSee “Recent Developments—COVID-19” in the Electric Utility and Bank MD&As 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 71.6% in visitor arrivals through the first nine months of 2017, net cashthe year primarily due 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, but on August 20, 2020, a mandatory 14-day quarantine for travelers arriving on islands other than Oahu was reinstated. The mandatory 14-day quarantine for all travelers from outside the state was lifted, effective October 15, 2020, provided travelers test negative for COVID-19 within 72 hours of arrival and present valid documentation (additional restrictions apply to travel to Hawaii island). As a result of these restrictions, between April 1, 2020 and September 30, 2020, daily passenger counts declined by operating activitiesover 95% to 1,406 passengers on average per day compared to the same time period in 2019. On October 15, 2020, the first day the 14-day mandatory quarantine was no longer in effect if travelers tested negative for COVID-19 within 72 hours of HEI consolidatedarrival, the daily passenger count increased 333%, compared to the average daily passenger count for the preceding seven days.
Due to the effects of the measures to contain the COVID-19 pandemic, Hawaii’s seasonally adjusted unemployment rate in September 2020 was $291 million. Net cash used by investing activities for15.1%, which was substantially higher compared to the September 2019 rate of 2.7%. The national unemployment rate in September 2020 was 7.9% compared to 3.5% in September 2019. Hawaii’s unemployment rate is expected to decrease now that restrictions on travel have been reduced significantly. Year-to-date through October 24, 2020, there were 399,049 initial unemployment claims filed with the State compared to 52,332 initial claims, or an increase of 663%, during the same period was $440 million, primarily due to Hawaiian Electric’s consolidated capital expenditures and ASB’s purchases of investment securities, partly offset by ASB’s receipt of repayments from investment securities, proceeds from the sale of commercial loans and net decrease in loans held for investment and Hawaiian Electric’s contributions in aid of construction. Net cash provided by financing activities during this period was $73 million2019.
Hawaii real estate activity through September 2020, as a result of several factors, including increases in short-term borrowings and ASB’s deposit liabilities, proceeds from other bank borrowings and net increases in ASB’s retail purchase agreements, partly offsetindicated by the paymenthome resale market, resulted in an increase in the median sales price of common stock dividends1.2% for condominiums and repayments3.3% for single family homes through the same period in 2019. The number of other bank borrowings. Also includedclosed sales was down 18.9% for condominiums and 1.4% for single family residential homes through September 2020 compared to same time period of 2019.
Hawaii’s petroleum product prices reflect supply and demand in cash provided by financing activities were proceeds from the issuanceAsia-Pacific region and the price of special purpose revenue bonds (SPRBs), which were offset bycrude oil in international markets. The price of crude oil decreased dramatically since the transferfirst quarter of 2020 and has remained at levels lower than last 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 September 16, 2020 meeting, the Federal Open Market Committee (FOMC) decided to maintain the federal funds rate target range of 0%-0.25%. The FOMC will continue to maintain an accommodative stance of monetary policy to achieve maximum employment and inflation at the rate of 2 percent over the long run. The Federal Reserve stated that it will increase its holdings of Treasury securities and agency mortgage-backed securities at least at the current pace to sustain smooth market functioning and help foster accommodative financial conditions, thereby supporting the flow of credit to households and businesses.
The Company expects that the negative trends and uncertainties in the multiple sectors described above have contributed and will result in a trusteesignificant economic downturn for the redemptionfull year 2020 that may have a material unfavorable impact on the Company’s net revenues or income from continuing operations in 2020.
“Other” segment.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended September 30 | | Nine months ended September 30 | | |
| (in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | | Primary reason(s) |
| Revenues | | $ | 215 | | | $ | 4 | | | $ | 237 | | | $ | 86 | | | Increase in revenues due to solar energy sales at Mauo, LLC. |
| Operating loss | | (4,457) | | | (3,446) | | | (12,854) | | | (12,503) | | | The third quarters of 2020 and 2019 include $0.2 million and $1.0 million, respectively, of operating income from Pacific Current1. Third quarter 2020 corporate expense was $0.3 million higher compared to the third quarter of 2019, primarily due to higher professional fees. The first nine months of 2020 and 2019 include $2.0 million and $2.3 million, respectively, of operating income from Pacific Current1. The first nine months of 2020 corporate expense was comparable to the same period in 2019. |
| Net loss | | (7,183) | | | (6,248) | | | (20,885) | | | (20,603) | | | The net loss for the third quarter of 2020 was higher than the net loss for the third quarter of 2019 due to the same factors cited for the change in operating loss. The net loss for the first nine month of 2020 was lower than the net loss for the first nine months of 2019 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)/income includes results of previously issued SPRBs. Other than capital contributions from their parent company,the stand-alone corporate operations of HEI (including eliminations of intercompany services (and related intercompany payables and receivables), Hawaiian Electric’s periodic short-term borrowings from HEI (and related interest) and the payment of dividends to HEI, the electric utility and bank segments are largely autonomous in their operating, investing and financing activities. (See the electric utility and bank segments’ discussions of their cash flows in their respective “Financial condition—Liquidity and capital resources” sections below.) During the first nine months of 2017, Hawaiian Electrictransactions) and ASB (through ASBHawaii, Inc. (ASB Hawaii) paid cash dividends to HEI of $66 million and $28 million, respectively.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
The Company’s results of operations and financial condition can be affected by numerous factors, many of which are beyond the Company’s control and could cause future results of operations to differ materially from historical results. For information about certain of these factors, see pages 47, 62 to 64, and 73 to 75 of HEI’s MD&A included in Part II, Item 7 of HEI’s 2016 Form 10-K.
Additional factors that may affect future results and financial condition are described on pages iv and v under “Cautionary Note Regarding Forward-Looking Statements.”
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, see pages 48 to 49, 64 to 65, and 75 to 78 of HEI’s MD&A included in Part II, Item 7 of HEI’s 2016 Form 10-K.
Following are discussions of, as well as the results of operations, liquidityPacific Current, a direct subsidiary of HEI focused on investing in clean energy and capital resourcessustainable 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, Mauo, LLC (Mauo), which is currently constructing a solar-plus-storage project totaling 8.6 MW on five University of the electric utilityHawaii campuses; and bank segments.Pacific Current’s subsidiary, Ka‘ie‘ie Waho Company, LLC, which owns a 6 MW solar photovoltaic system that provides renewable energy to Kauai Island Utility Cooperative; as well as eliminations of intercompany transactions.
Electric utility
RESULTS OF OPERATIONS
|
| | | | | | | | | | | | | | | | |
| Three months ended September 30 | | Increase | | |
| 2017 | | 2016 | | (decrease) | | (dollars in millions, except per barrel amounts) |
| $ | 599 |
| | $ | 572 |
| | $ | 27 |
| | | | Revenues. Net increase largely due to: |
| | | | | | | $ | 25 |
| | higher fuel oil prices1 |
| | | | | | | 5 |
| | higher RAM revenues |
| | | | | | | 2 |
| | higher purchased power energy costs2 |
| | | | | | | (5 | ) | | lower KWH generated |
| 146 |
| | 129 |
| | 17 |
| | | | Fuel oil expense. Increase due to higher fuel oil prices, partially offset by lower KWH generated |
| 160 |
| | 158 |
| | 2 |
| | | | Purchased power expense. Increase due to higher fuel oil prices |
| 100 |
| | 95 |
| | 5 |
| | | | Operation and maintenance expenses. Net increase due to: |
| | | | | | | 6 |
| | higher overhaul costs due to more overhauls being performed in 2017 |
| | | | | | | 2 |
| | ERP project costs commencing in 2017 |
| | | | | | | (1 | ) | | lower production operating and maintenance cost |
| | | | | | | (1 | ) | | PSIP consulting costs incurred in 2016 |
| 105 |
| | 101 |
| | 4 |
| | | | Other expenses. Increase due to higher revenue taxes from higher revenue, coupled with higher depreciation expense for plant investments in 2016 |
| 87 |
| | 90 |
| | (3 | ) | | | | Operating income. Decrease due to higher O&M and other expenses |
| 47 |
| | 47 |
| | — |
| | | | Net income for common stock. Lower operating income, offset by higher AFUDC in 2017 due to larger capital projects, primarily Schofield generating station |
| | | | | | | | | |
| 2,340 |
| | 2,372 |
| | (32 | ) | | | | Kilowatthour sales (millions)4 |
| $ | 66.73 |
| | $ | 57.72 |
| | $ | 9.01 |
| | | | Average fuel oil cost per barrel1 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30 | | % | | |
| (in thousands) | | 2020 | | 2019 | | change | | Primary reason(s)* |
| Revenues | | $ | 641,427 | | | $ | 770,882 | | | (17) | | | Decrease for the electric utility and bank segments |
| Operating income | | 99,561 | | | 96,655 | | | 3 | | | Increase for electric utility segment, partly offset by decrease for the bank segment |
| Net income for common stock | | 65,032 | | | 63,419 | | | 3 | | | Increase due to higher net income at electric utility segment, partly offset by lower net income at the bank segment |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30 | | % | | |
| (in thousands) | | 2020 | | 2019 | | change | | Primary reason(s)* |
| Revenues | | $ | 1,927,558 | | | $ | 2,147,982 | | | (10) | | | Decrease for the electric utility and bank segments |
| Operating income | | 230,819 | | | 247,226 | | | (7) | | | Decrease for the bank segment, partly offset by increase for electric utility segment |
| Net income for common stock | | 147,339 | | | 151,619 | | | (3) | | | Decrease due to lower net income at the bank segment, partly offset by higher net income at electric utility segment. See below for effective tax rate explanation |
| | | | | | | | |
| | | | | | | | |
* Also, see segment discussions which follow.
|
| | | | | | | | | | | | | | | | |
| Nine months ended September 30 | | Increase | | |
| 2017 | | 2016 | | (decrease) | | (dollars in millions, except per barrel amounts) |
| $ | 1,674 |
| | $ | 1,550 |
| | $ | 124 |
| | | | Revenues. Net increase largely due to: |
| | | | | | | $ | 114 |
| | higher fuel oil prices1 |
| | | | | | | 35 |
| | higher purchased power energy costs2 |
| | | | | | | (20 | ) | | lower RAM revenues due to expiration of 2013 settlement agreement that allowed the accrual of RAM revenues on January 1 (vs. June 1) for years 2014 to 2016 at Hawaiian Electric |
| | | | | | | (7 | ) | | lower KWH generated |
| 432 |
| | 334 |
| | 98 |
| | | | Fuel oil expense. Increase due to higher fuel oil prices, partially offset by lower KWH generated |
| 441 |
| | 413 |
| | 28 |
| | | | Purchased power expense. Increase due to higher fuel oil prices |
| 307 |
| | 298 |
| | 9 |
| | | | Operation and maintenance expenses. Net increase due to: |
| | | | | | | 6 |
| | higher overhaul costs due to more overhauls being performed in 2017 |
| | | | | | | 4 |
| | ERP project costs commencing in 2017 |
| | | | | | | 2 |
| | higher transmission and distribution operating and maintenance costs
|
| | | | | | | 1 |
| | Grid modernization consultant costs
|
| | | | | | | 1 |
| | write off of portion of deferred Geothermal RFP costs
|
| | | | | | | 1 |
| | additional reserves for environmental costs in 20173 |
| | | | | | | (4 | ) | | PSIP consulting costs incurred in 2016 |
| | | | | | | (3 | ) | | LNG consulting costs incurred in 2016 to negotiate an LNG contract that was subsequently terminated following HEI/NextEra merger termination |
| 304 |
| | 289 |
| | 15 |
| | | | Other expenses. Increase due to higher revenue taxes from higher revenue, coupled with higher depreciation expense for plant investments in 2016 |
| 191 |
| | 216 |
| | (25 | ) | | | | Operating income. Decrease due to lower RAM revenues and higher O&M and other expenses |
| 95 |
| | 108 |
| | (13 | ) | | | | Net income for common stock. Decrease due to lower operating income, partially offset by resulting lower income taxes |
| | | | | | | | | |
| 6,528 |
| | 6,613 |
| | (85 | ) | | | | Kilowatthour sales (millions)4 |
| $ | 67.42 |
| | $ | 52.06 |
| | $ | 15.36 |
| | | | Average fuel oil cost per barrel1 |
| 461,408 |
| | 459,590 |
| | 1,818 |
| | | | Customer accounts (end of period) |
| |
1 | The rate schedules of the electric utilities currently contain energy cost adjustment clauses (ECACs) through which changes in fuel oil prices and certain components of purchased energy costs are passed on to customers. |
| |
2 | The rate schedules of the electric utilities currently contain purchase power adjustment clauses (PPACs) through which changes in purchase power expenses (except purchased energy costs) are passed on to customers. |
| |
3 | Increase reserve for additional costs for investigation of PCB contamination onshore and offshore of Waiau Power Plant |
| |
4 | KWH sales were lower when compared to the same quarter in the prior year due largely to continued energy efficiency and conservation efforts by customers and increasing levels of private customer-sited renewable generation. |
Hawaiian Electric’s consolidated ROACE was 7.2%The Company’s effective tax rates for the twelvethird quarters of 2020 and 2019 were 18% and 19%, respectively. The Company’s effective tax rates for the first nine months of 2020 and 2019 were 17% and 19%, respectively. The effective tax rates were lower for the nine months ended September 30, 2017, and 8.1% for2020 compared to the twelve months ended September 30, 2016.
The Utilities’ consolidated KWH sales have declined each year since 2007. Based on expectations of additional customer renewable self-generation and energy-efficiency installations, the Utilities’ full year 2017 KWH sales are expectedsame period in 2019 due primarily to be below the 2016 level.
The net book value (cost less accumulated depreciation) of utility property, plant and equipment (PPE) as of September 30, 2017 amounted to $4 billion, of which approximately 25% related to production PPE, 67% related to transmission and distribution PPE, and 8% 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 “Adequacy of supply” below.
See “Economic conditions”higher amortization 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 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, 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 achieve the statutory goal of 100% renewable energy by 2045.
Transition to renewable energy. The Utilities are committed to assisting the State of Hawaii in achieving its Renewable Portfolio Standard goal of 100% renewable energy by 2045. Hawaii’s Renewable Portfolio Standards (RPS) law was revised in the 2015 Legislature and requires electric utilities to meet an RPS of 15%, 30%, 40%, 70% and 100% by December 31, 2015, 2020 2030, 2040 and 2045, respectively. The Utilities have been successful in adding significant amounts of renewable energy resources to their electric systems and exceeded the 2015 RPS goal. The Utilities' RPS for 2016 was about 26% and on its way to achieving the 2020 RPS goal of 30%. (See "Developments in renewable energy efforts” below).
In April 2014, the PUC issued orders that collectively address certain key policy, resource planning and operational issues for the Utilities. The April 2014 regulatory orders were to address: (1) Integrated Resource Planning and Power Supply Improvement Plans (PSIPs), (2) Reliability Standards Working Group, and (3) Policy Statement and Order Regarding Demand Response Programs, which are described below. The PUC also provided its inclinations on the future of Hawaii’s electric utilities in one of the orders. The PUC provided its perspectives on the vision, business strategies and regulatory policy changes required to align the Utilities' business model with customers’ interests and the state’s public policy goals.
Integrated Resource Planning and Power Supply Improvement Plans. The PUC did not accept the Utilities’ Integrated Resource Plan and Action Plans submission, and, in lieu of an approved plan, commenced other initiatives to enable resource planning. As required by the PUC orders, the Utilities filed proposed PSIPs with the PUC in August 2014. Updated PSIPs were filed in April 2016 and December 2016 in response to PUC orders. The PSIPs provided plans to achieve 100% renewable energy using a diverse mix of energy resources by 2045. Under these plans, the Utilities support sustainable growth of private rooftop solar, expand use of energy storage systems, empower customers by developing smart grids and offer new products and services to customers (e.g., community solar, microgrids and voluntary “demand response” programs).
In the December 2016 PSIP Update Report, the updated plans describe greater and faster expansion of the Utilities’ renewable energy portfolio thanregulatory liability related to certain excess deferred income taxes resulting from the Tax Act’s decrease in the plans filed in April 2016. The plans include the continued growth of private rooftop solar and describe the grid and generation modernization work needed to reliably integrate an estimated total of 165,000 private systems by 2030, and additional grid-scale renewable energy resources. The Utilities already have the highest percentage of customers using private rooftop solar of any utility in the U.S. and customer-sited resources are seen as a key contributor to the growth of the renewable portfolio on every island. In addition, the plans forecast the addition of 360 MW of grid-scale solar and 157 MW of grid-scale wind, with 32 MW derived from community-based renewable energy (CBRE). The plans also include 115 MW from Demand Response (DR) programs, which can shift customer use of electricity to times when more renewable energy is available, potentially making room to add even more renewable resources. Unlike the April 2016 updated PSIPs, the December 2016 update does not include the use of LNG to generate power in the near-term or the Kahe 3x1 Combined Cycle Plant. While LNG remains a potential lower-cost bridge fuel to be evaluated, the Utilities’ priority is to continue replacing fossil fuel generation with renewables over the next five years as federal income tax incentives for renewables begin to phase out. An interisland cable is not in the near-term plan, which states that its costs and benefits should continue to be evaluated. The December 2016 Update Report emphasizes work that is in progress or planned over the next five years on each of the five islands the Utilities serve.
On July 14, 2017, the PUC accepted the Utilities’ PSIP December 2016 Update Report and closed the proceeding. In its order, the PUC provided guidance regarding the implementation of the Utilities’ near-term action plan and future planning activities, requiring the Utilities to file a report that details an updated resource planning approach and schedule by March 1, 2018. The PUC order stated that it intends to use the PSIPs in conjunction with its evaluation of specific filings for approval of capital and other projects.
Reliability standards working group. In April 2014, the PUC ordered the Utilities to take timely actions intended to lower energy costs, improve system reliability and address emerging challenges to integrate additional renewable energy. In addition to the PSIPs mentioned above, the PUC ordered certain filing requirements, including a Distributed Generation Interconnection Plan, which the Utilities filed in August 2014.
The PUC also stated it would be opening new dockets to address (1) reliability standards, (2) the technical, economic and policy issues associated with distributed energy resources (DER) and (3) the Hawaii electricity reliability administrator, which is a third-party position that the legislature has authorized the PUC to create by contract to provide support for the PUC in developing and periodically updating local grid reliability standards and procedures and interconnection requirements and overseeing grid access and operation. The PUC has not yet opened new dockets to address the first and third topics above. To
address DER, the second topic, the PUC opened an investigative proceeding on August 21, 2014 (see “DER investigative proceeding” below).
Policy statement and order regarding demand response programs. The PUC provided guidance concerning the objectives and goals for DR programs, and ordered the Utilities to develop an integrated DR Portfolio Plan that will enhance system operations and reduce costs to customers. The Utilities’ Plan was filed in July 2014. Subsequently, the Utilities submitted status updatesrate and an update and supplemental report to the Plan. In July 2015, the PUC issued an order appointing a special adviser to guide, monitor and review the Utility’s Plan design and implementation. In December 2015, the Utilities filed an application with the PUC for approval of their proposed DR Portfolio Tariff Structure, Reporting Schedule and Cost Recovery of Program Costs. The Utilities filed an updated DR Portfolio Plan in February 2017. In May 2017, the Utilities filed their reply to the statements of position submitted by the other parties and are awaiting a PUC decision.
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 AFUDC, through the Renewable Energy Infrastructure Program (REIP) Surcharge. The Utilities expect the DR Management System to be in service by the end of 2018.
DER investigative proceeding. In March 2015, the PUC issued an order to address DER issues.
In June 2015, the Utilities submitted their final Statement of Position in the DER proceeding, which included new pricing provisions for future private rooftop photovoltaic (PV) systems, technical standards for advanced inverters, new options for customers including battery-equipped private rooftop PV systems, a pilot time-of-use rate, an improved method of calculating the amount of private rooftop PV that can be safely installed, and a streamlined and standardized PV application process.
In October 2015, the PUC issued a D&O establishing DER reforms that: (1) promote rapid adoption of the next generation of solar PV and other distributed energy technologies; (2) encourage more competitive pricing of distributed energy resource systems; (3) lower overall energy supply costs for all customers; and (4) help to manage DER in terms of each island’s limited grid capacity. The D&O capped the Utilities Net Energy Metering (NEM) programs at “existing” levels (i.e., for existing NEM customers and customers who already applied and were waiting for approval), closed the NEM programs to new participants, and approved new interim options for customers to interconnect DER to the utility electric grids, including Self Supply and Grid Supply tariff options and modified interconnection standards. The PUC placed caps on the availability of the Grid Supply program. The Self Supply Program is designed for customers who do not export to the grid.
On October 20, 2017, the PUC issued a D&O which further revises interconnection requirements, creates a Smart Export program, modifies the customer-grid supply program (Controllable Customer Grid Supply), clarifies that non-export customer systems can be added to the existing NEM program, and provides guidance and reporting requirements regarding hosting capacity analyses. The Smart Export program is designed for PV systems with battery storage and features zero compensation during mid-day, but enhanced compensation at other times of the day to reflect the value of the energy to the grid at different times of the day. The Controllable Customer Grid Supply program allows PV systems without battery storage to deliver energy to the grid on an as-available basis except when system-wide technical conditions require reduction of output. The D&O specified island-specific pricing and program caps for the Smart Export and Controllable Customer Grid Supply programs. Customers currently under the customer-grid supply program are grandfathered under existing rates for the next five years. The D&O also authorizes activation of new advanced inverter functions in PV and storage systems, which will provide support to the electric grid during different types of grid disturbances. The utilities must file tariffs consistent with the programs described in the D&O.
Grid modernization. After launching a smart grid customer engagement plan during the second quarter of 2014, Hawaiian Electric replaced approximately 5,200 residential and commercial meters with smart meters, 160 direct load control switches, fault circuit indicators and remote controlled switches in selected areas across Oahu as part of the Smart Grid Initial Phase implementation. Also under the Initial Phase a grid efficiency measure called Volt/Var Optimization (or Conservation Voltage Reduction) was enabled, customer energy portals were launched and are available for customer use and a PrePay Application was launched. The Initial Phase implementation was completed in 2015. The smart grid provides benefits such as customer tools to manage their electric bills, potentially shortening outages and enabling the Utilities to integrate more low-cost renewable energy, like wind and solar, which will reduce Hawaii’s dependence on imported oil.
In March 2016, the Utilities sought PUC approval to commit funds for an expansion of the smart grid project. The proposed smart grid project was estimated to cost $340 million and to be implemented over 5 years. On January 4, 2017, the PUC issued an order dismissing the application without prejudice and directing the Utilities to submit a Grid Modernization Strategy.
The PUC indicated that 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. On June 30, 2017, the Utilities filed an initial draft of the Grid Modernization Strategy describing how new technology will help triple private rooftop solar and make use of rapidly evolving products including storage and advanced inverters. The cost of the first segment of the modernization is estimated at about $205 million over six years. The Utilities filed their final Grid Modernization Strategy on August 29, 2017. The PUC will set forth any next steps after reviewing the final Strategy and public comments.
Community-Based Renewable Energy. On October 1, 2015, the Utilities filed a proposed CBRE program and tariff with the PUC that would allow 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. In November 2015, the PUC suspended the tariff submittal and opened an investigatory docket. In February 2017, the PUC issued a proposed CBRE Program Framework and a Proposed Model Tariff Language, which significantly increased the scope of the program. Under the proposed CBRE Program Framework, the CBRE program will utilize a phased approach. The Program Framework proposes a Phase 1 with an 80 MW capacity statewide with 73 MW allocated to the Utilities' service territories. During Tranche A of the CBRE Phase 1 Program, the Utilities' primary role is to serve as the program administrator. In Tranche B, the Utilities are allowed to develop 9 MW in the service territories, 75% of the capacity is reserved for low-to-moderate income subscribers. In March 2017, the Utilities submitted comments to the Program Framework, which identified certain concerns should the proposed CBRE Program Framework be adopted and requested a technical conference before a decision is issued. In June 2017, a technical conference with the PUC was completed with the Utilities, the Consumer Advocate and industry stakeholders. The Utilities are awaiting the PUC’s decision on the CBRE program.
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. Results for 2016 and 2015 did not trigger the earnings sharing mechanism for the Utilities. For 2014, the earnings sharing mechanism was triggered for Maui Electric, and Maui Electric credited $0.5 million to its customers for their portion of the earnings sharing during the period between June 2015 to May 2016. Earnings sharing credits are included in the annual decoupling filing for the following year.
Regulated returns.Actual and PUC-allowed (as of September 30, 2017) returns were as follows: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| % | | Rate-making Return on rate base (RORB)* | | ROACE** | | Rate-making ROACE*** |
| Twelve months ended September 30, 2017 | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric |
| Utility returns | | 6.77 |
| | 6.71 |
| | 6.83 |
| | 7.35 |
| | 6.54 |
| | 6.99 |
| | 7.99 |
| | 7.54 |
| | 7.96 |
|
| PUC-allowed returns | | 8.11 |
| | 7.80 |
| | 7.34 |
| | 10.00 |
| | 9.50 |
| | 9.00 |
| | 10.00 |
| | 9.50 |
| | 9.00 |
|
| Difference | | (1.34 | ) | | (1.09 | ) | | (0.51 | ) | | (2.65 | ) | | (2.96 | ) | | (2.01 | ) | | (2.01 | ) | | (1.96 | ) | | (1.04 | ) |
* 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, the low RBA interest rate (currently a short-term debt rate rather than the actual cost of capital), O&M increases and return on capital additions since the last rate caseincrease in excess of indexed escalations, and the portion of the pension regulatory asset not earning a return due to pension contributions and pension costs in excess of the pension amount in rates.tax benefits.
Most recent rate proceedings. Unless otherwise agreed or ordered, each electric utility is currently required by PUC order to initiate a rate proceeding every third year (on a staggered basis) to allow the PUC and the Consumer Advocate to regularly evaluate decoupling and to allow the utility to request electric rate increases to cover rising operating costs and the cost of plant and equipment, including the cost of new capital projects to maintain and improve service reliability and integrate more renewable energy. The PUC may grant an interim increase within 10 to 11 months following the filing of an application, but there is no guarantee of such an interim increase and interim amounts collected are refundable, with interest, to the extent they exceed the amount approved in the PUC’s final D&O. The timing and amount of any final increase is determined at the discretion of the PUC. The adoption of revenue, expense, rate base and cost of capital amounts (including the ROACE and
RORB) for purposes of an interim rate increase does not commit the PUC to accept any such amounts in its final D&O. |
| | | | | | | | | | | | | | | | | | | | | | | | |
Test year (dollars in millions) | | Date (filed/ implemented) | | Amount | | % over rates in effect | | ROACE (%) | | RORB (%) | | Rate base | | Common equity % | | Stipulated agreement reached with Consumer Advocate |
| Hawaiian Electric | | | | |
| | |
| | |
| | |
| | |
| | |
| | |
| 2014 | | | | | | | | | | | | | | | | |
| Request | | 6/27/14 | | | | | | | | | | | | | | |
| 2017 | | | | |
| | |
| | |
| | |
| | |
| | |
| | |
| Request | | 12/16/16 | | $ | 106.4 |
| | 6.9 |
| | 10.60 |
| | 8.28 |
| | $ | 2,002 |
| | 57.36 |
| | |
| Hawaii Electric Light | | | | |
| | |
| | |
| | |
| | |
| | |
| | |
| 2016 | | | | | | | | | | | | | | | | |
| Request | | 9/19/16 | | $ | 19.3 |
| | 6.5 |
| | 10.60 |
| | 8.44 |
| | $ | 479 |
| | 57.12 |
| | Yes |
| Interim increase | | 8/31/17 | | 9.9 |
| | 3.4 |
| | 9.50 |
| | 7.80 |
| | 482 |
| | 56.69 |
| | |
| Maui Electric | | | | |
| | |
| | |
| | |
| | |
| | |
| | |
2015 | | | | | | | | | | | | | | | | |
| Request | | 12/30/14 | | | | | | | | | | | | | | |
2018 | | | | | | | | | | | | | | | | |
| Request | | 10/12/17 | | $ | 30.1 |
| | 9.3 |
| | 10.60 |
| | 8.05 |
| | $ | 473 |
| | 56.94 |
| | |
Note: The “Request” date reflectsstatistical data in this section is from public third-party sources that management believes to be reliable (e.g., Department of Business, Economic Development and Tourism (DBEDT), University of Hawaii Economic Research Organization (UHERO), U.S. Bureau of Labor Statistics, Department of Labor and Industrial Relations (DLIR), Hawaii Tourism Authority (HTA), Honolulu Board of REALTORS® and national and local news media).
On March 11, 2020, the application filing date forWorld Health Organization declared the rate proceeding. The “Interim increase” date reflects the effective date of the revised schedules and tariffs as a result of the PUC-approved increase.
See “Most recent rate proceedings” in Note 3 of the Condensed Consolidated Financial Statements.
Performance-based regulation. In the Hawaii Electric Light 2016 test year rate casevirus strain severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2), and the Hawaiian Electric 2017 test year rate case, the Utilities recommended that a separate investigatory docket be opened to evaluate PBR on a broader scale that can be implemented across the Utilities, and to fully develop a comprehensive PBR Framework. PBR refers to different ways in which regulators have modified their regulatory approach in an attempt to strengthen financial incentives for Utilities to achieve desired outcomes. In the its April 27, 2017 order in the Decoupling Investigative proceeding, the PUC stated that it would initiate a separate investigative docket to examine a full range of Performance Incentive Mechanism and PBR options.
Depreciation docket. In December 2016, the Utilities filed an application with the PUC for approval of changes in the depreciation and amortization rates and amortization period for contributions in aid of construction (CIAC). The proposed depreciation rates are higher than the existing depreciation rates, based on a depreciation study which reviewed the average service lives, net salvage, retirement dispersion and retirement dates of the Utilities’ assets. The application requests that the effective date of implementation of the change in depreciation and amortization rates and revised CIAC amortization period, as recommended by the 2015 Book Depreciation Study, coincide with the effective date of interim base rates (that include the increased expenses resulting from the new depreciation and amortization rates and change in CIAC amortization period)disease COVID-19, to be established in each of the Utilities’ next general rate cases or the effective date of the decoupling RBA Rate Adjustment that incorporates the new depreciation and amortization rates for each utility, whichever is sooner.
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 July 2015, the PUC approved the PPA for the 27.6 MW Waianae Solar project that was developed by Eurus Energy America. The project achieved commercial operations in January 2017 and is now the largest solar project in Hawaii.
In July 2015, Maui Electric signed two PPAs, with Kuia Solar and South Maui Renewable Resources (which subsequently assigned its PPA to SSA Solar of HI 2, LLC and SSA Solar of HI 3, LLC, respectively), each for a 2.87-MW solar facility. In February 2016, the PUC approved both PPAs, subject to certain conditions and modifications. The guaranteed commercial operations date for the facilities was December 31, 2016, however both projects are experiencing delays and are now expected to be completed by the end of the fourth quarter in 2017.
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 September 2016, Hawaiian Electric filed an Amended and Restated PPA, dated August 12, 2016, which reflects the completion of an interconnection requirements study. In October 2017, the PUC approved the construction of an
overhead 46 kV sub-transmission line to accommodate the interconnection of the NPM wind farm, which is expected to be placed into service by August 31, 2019.
Hawaiian Electric had PPAs to purchase solar energy with three affiliates of SunEdison. In February 2016, as a result of the project entities missing contract milestones, Hawaiian Electric terminated the original PPAs for the three projects. SunEdison filed Chapter 11 bankruptcy proceedings and during those proceedings, the three SunEdison affiliates were acquired by an affiliate of NRG Energy, Inc. (NRG). Hawaiian Electric then negotiated with NRG and its newly acquired affiliates and has entered into amended and restated PPAs for solar energy on Oahu with Waipio PV, LLC for 45.9 MW, Lanikuhana Solar, LLC for 14.7 MW and Kawailoa Solar, LLC for 49.0 MW. On July 27, 2017, the PUC approved the three NRG PPAs, subject to modifications and conditions. The three projects are expected to be in service by the end of 2019.
Tariffed renewable resources.
As of September 30, 2017, there were approximately 330 MW, 77 MW and 88 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 NEM, Customer Grid Supply and Customer Self Supply. As of September 30, 2017, an estimated 27% of single family homes on the islands of Oahu, Hawaii, and Maui have installed private rooftop solar systems, and an estimated 29% of single family homes have installed, or have been approved to install, private rooftop solar systems. As of September 30, 2017, approximately 16% of the Utilities' total customers have solar systems.
The Utilities began accepting energy from feed-in tariff projects in 2011. As of September 30, 2017, there were 30 MW, 3 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 September 2015, the PUC approved Hawaiian Electric’s 2-year biodiesel supply contract with Pacific Biodiesel Technologies, LLC (PBT) to supply 2 million to 3 million gallons of biodiesel at Campbell Industrial Park combustion turbine No. 1 (CIP CT-1) and the Honolulu International Airport Emergency Power Facility beginning in November 2015. The PBT contract is set to expire on November 2, 2018. PBT also has a spot buy contract with Hawaiian Electric 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 recently extended through June 2018. REG Marketing & Logistics Group, LLC has a contingency supply contract with Hawaiian Electric to also supply biodiesel to CIP CT-1 in the event PBT is not able to supply necessary quantities. This contingency contract has been extended to November 2018, and will continue with no volume purchase requirements.
On April 28, 2017 Hawaiian Electric issued a Biofuel Supply Request for Proposal for 3.1 million gallons of biofuel per year for three years, to commence as early as November 2018 to be used as fuel for power generation at Hawaiian Electric’s Schofield Generating Station, the Honolulu International Airport Emergency Power Facility and any other generating unit on Oahu, as necessary. Hawaiian Electric is in negotiations with a bidder.
Requests for renewable proposals, expressions of interest, and information.
pandemic. In response, to requests filed by the utilities, on October 6, 2017, the PUC opened a docket to receive filings, review approval requests, and resolve disputes, if necessary, related to the Utilities' plan to proceed with a competitive bidding process of dispatchable firm renewable generation on the island of Maui and variable renewable generation on the islands of Oahu, Hawaii, Maui, Molokai, and Lanai. The PUC also indicated that it will appoint an independent observer to monitor the competitive bidding process. On October 23, 2017, the Utilities filed draft requests for proposals for 220 megawatts (MW) of renewable generation on Oahu, 50 MW of renewable generation on Hawaii Island, and 100 MW of renewable generation on Maui, including 40 MW of firm renewable generation (all resources to be in service by the end of 2022). With this filing, the Utilities also filed proposed model power purchase agreements and timelines for each proposed procurement. Maui Electric proposed to suspend its request to issue variable renewable dispatchable generation RFPs for Molokai and Lanai as Maui Electric is already in discussions on such islands regarding renewable generation.
On January 5, 2017, Hawaiian Electric issued an Onshore Wind Expression of Interest requesting expressions of interest from independent power producers that are capable of developing utility scale onshore wind projects that are eligible to capture the federal Investment Tax Credit for Large Wind on the island of Oahu. Responses have been accepted and Hawaiian Electric is in non-binding confidential discussions regarding such responses.
On December 12, 2016, the Utilities issued a request for information asking interested landowners to provide information about properties available for utility-scale renewable energy projects or for growing biofuel feedstock on
the islands of Oahu, Hawaii, Maui, Molokai and Lanai. Responses have been made available to developers interested in developing renewable energy projects in these five islands.
Adequacy of supply.
Hawaiian Electric. In January 2017, Hawaiian Electric filed its 2017 Adequacy of Supply (AOS) letter, which indicated that based on its October 2016 sales and peak forecast for the 2017 - 2021 time period, Hawaiian Electric's generation capacity will be sufficient to meet reasonably expected demands for service and provide reasonable reserves for emergencies through 2018, but may have shortfalls in meeting the Utilities’ generating system reliability guideline. The calculated reliability guideline shortfalls are relatively small and Hawaiian Electric can implement mitigation measures.
In accordance to its planning criteria, Hawaiian Electric deactivated two fossil fuel generating units from active service at its Honolulu Power Plant in January 2014 and anticipates deactivating two additional fossil fuel units at its Waiau Power Plant in the 2022 timeframe. Hawaiian Electric acquired new firm capacity with the commissioningGovernor of the State of Hawaii Departmentissued a number of Transportation’s emergency power facilityand supplementary proclamations to limit the spread of the virus. Hawaii’s economy began to weaken in the latter part of March 2020, due to a forced statewide stay-at-home, work-from-home declaration that began on March 25, 2020. The restrictions shuttered many businesses, including hotels, restaurants, bars, and other gathering places, and led to an overwhelming surge in unemployment claims and impacted the tourism industry with a significant reduction to visitor arrivals. Starting in June 2017. Hawaiian Electric is proceeding with a future firm capacity addition with2020, restrictions were gradually lifted and most business activities resumed (with operations modified as required under state guidelines). However, due to an increase in new case counts starting in late July, certain restrictions to minimize the U.S. Departmentspread of the Armyvirus were reinstituted and the mandatory 14-day quarantine requirement for travelers entering the state was extended to be in effect through October 14, 2020. Beginning on October 15, 2020 travelers to Oahu are no longer subject to the mandatory 14-day quarantine if they test negative for COVID-19 within 72 hours of arrival and present valid documentation. Inter-island travel to Hawaii island requires a utility ownedsecond test, while a second test is optional for inter-island travel to Maui and operated renewable, dispatchable, including black start capabilities, generation security projectKauai.
The most recent interim forecast by UHERO, which was issued on September 25, 2020, forecasts full year 2020 real GDP contraction of 11.8%, decline in total visitor arrivals of 73.7%, decline in real personal income of 4.9%, and an unemployment rate of 12.4%. However, federal lands, whichfiscal and monetary policy response is expected to be in servicecushion the economic impact of the pandemic.
The CARES Act was passed by Congress and signed into law by President Trump on March 27, 2020. The economic relief package totals more than $2 trillion and provides direct economic support to businesses and individuals. Hawaii has received more than $7 billion through various federal assistance programs, including the CARES Act, that will help attenuate the impact to Hawaii’s economy.
On April 8, 2020, the Governor issued a proclamation appointing Alan Oshima, former CEO of the Utilities, to lead Hawaii’s efforts to develop and implement a plan 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 secondareas 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.
In September 2020, the City and County of Honolulu announced a framework for reducing the spread of COVID-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 most restrictive and Tier 4 being the most relaxed. 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 October 22, 2020, the county of Honolulu moved from Tier 1 to Tier 2, which relaxes certain restrictions. However, due to the uncertainty surrounding the timing and effectiveness of efforts to contain the spread of the virus while reopening the economy, the pace and the extent of the recovery cannot be predicted at this time.
See “Recent Developments—COVID-19” in the Electric Utility and Bank MD&As 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 71.6% in visitor arrivals through the first nine months of the year primarily due 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, but on August 20, 2020, a mandatory 14-day quarantine for travelers arriving on islands other than Oahu was reinstated. The mandatory 14-day quarantine for all travelers from outside the state was lifted, effective October 15, 2020, provided travelers test negative for COVID-19 within 72 hours of arrival and present valid documentation (additional restrictions apply to travel to Hawaii island). As a result of these restrictions, between April 1, 2020 and September 30, 2020, daily passenger counts declined by over 95% to 1,406 passengers on average per day compared to the same time period in 2019. On October 15, 2020, the first day the 14-day mandatory quarantine was no longer in effect if travelers tested negative for COVID-19 within 72 hours of arrival, the daily passenger count increased 333%, compared to the average daily passenger count for the preceding seven days.
Due to the effects of the measures to contain the COVID-19 pandemic, Hawaii’s seasonally adjusted unemployment rate in September 2020 was 15.1%, which was substantially higher compared to the September 2019 rate of 2.7%. The national unemployment rate in September 2020 was 7.9% compared to 3.5% in September 2019. Hawaii’s unemployment rate is expected to decrease now that restrictions on travel have been reduced significantly. Year-to-date through October 24, 2020, there were 399,049 initial unemployment claims filed with the State compared to 52,332 initial claims, or an increase of 663%, during the same period in 2019.
Hawaii real estate activity through September 2020, as indicated by the home resale market, resulted in an increase in the median sales price of 1.2% for condominiums and 3.3% for single family homes through the same period in 2019. The number of closed sales was down 18.9% for condominiums and 1.4% for single family residential homes through September 2020 compared to same time period of 2019.
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 dramatically since the first quarter of 2018. Hawaiian Electric is2020 and has remained at levels lower than last 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 September 16, 2020 meeting, the Federal Open Market Committee (FOMC) decided to maintain the federal funds rate target range of 0%-0.25%. The FOMC will continue to maintain an accommodative stance of monetary policy to achieve maximum employment and inflation at the rate of 2 percent over the long run. The Federal Reserve stated that it will increase its holdings of Treasury securities and agency mortgage-backed securities at least at the current pace to sustain smooth market functioning and help foster accommodative financial conditions, thereby supporting the flow of credit to households and businesses.
The Company expects that the negative trends and uncertainties in the multiple sectors described above have contributed and will result in a significant economic downturn for the full year 2020 that may have a material unfavorable impact on the Company’s net revenues or income from continuing negotiations with firm capacity IPPs on Oahu. On August 31, 2017, Hawaiian Electric and Kalaeloa entered into an agreement that neither party will give written notice of termination of the Kalaeloa PPA prioroperations in 2020.
“Other” segment.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended September 30 | | Nine months ended September 30 | | |
| (in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | | Primary reason(s) |
| Revenues | | $ | 215 | | | $ | 4 | | | $ | 237 | | | $ | 86 | | | Increase in revenues due to solar energy sales at Mauo, LLC. |
| Operating loss | | (4,457) | | | (3,446) | | | (12,854) | | | (12,503) | | | The third quarters of 2020 and 2019 include $0.2 million and $1.0 million, respectively, of operating income from Pacific Current1. Third quarter 2020 corporate expense was $0.3 million higher compared to the third quarter of 2019, primarily due to higher professional fees. The first nine months of 2020 and 2019 include $2.0 million and $2.3 million, respectively, of operating income from Pacific Current1. The first nine months of 2020 corporate expense was comparable to the same period in 2019. |
| Net loss | | (7,183) | | | (6,248) | | | (20,885) | | | (20,603) | | | The net loss for the third quarter of 2020 was higher than the net loss for the third quarter of 2019 due to the same factors cited for the change in operating loss. The net loss for the first nine month of 2020 was lower than the net loss for the first nine months of 2019 due to the same factors cited for the change in operating loss. |
1 Hamakua Energy’s sales to October 31, 2018. The PPA with AES Hawaii is scheduled to expire in 2022.
Hawaii Electric Light. In January 2017, Hawaii Electric Light filed its 2017 AOS letter,(a regulated affiliate) are eliminated in consolidation.
The “other” business segment (loss)/income 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 indicatedowns a 60-MW combined cycle power plant that provides electricity to Hawaii Electric Light’s generation capacity through 2019Light; Pacific Current’s indirect subsidiary, Mauo, LLC (Mauo), which is sufficient to meet reasonably expected demands for service and provide for reasonable reserves for emergencies. Additional generation from other renewable resources could be added in the 2018-2025 timeframe.
Maui Electric. In January 2017, Maui Electric filed its 2017 AOS letter, which indicated that Maui Electric’s generation capacity for the islands of Lanai and Molokai for the next three years is sufficiently large to meet all reasonably expected demands for service and provide reasonable reserves for emergencies. The 2017 AOS letter also indicated that without the peak reduction benefits of demand response but with the equivalent firm capacity value of wind generation, Maui Electric expects to havecurrently constructing a small reserve capacity shortfall from 2017 to 2022solar-plus-storage project totaling 8.6 MW on the island of Maui. Maui Electric is evaluating several measures to mitigate the anticipated reserve capacity shortfall. Maui Electric anticipates needing a significant amount of additional firm capacity on Maui in the 2022 timeframe after the planned retirement of the Kahului Power Plant.
In February 2014, Maui Electric deactivated two fossil fuel generating units, with a combined rating of 11.4 MW-net, at its Kahului Power Plant. Due to various system conditions including lack of wind generation, approaching storms and scheduled and unscheduled outages of generating units, transmission lines and independent power producers, the two deactivated units at Kahului Power Plant were reactivated for several days in 2015 and 2016. Due to the frequency of reactivations of Kahului Units 1 and 2 to meet system requirements, these units were removed from deactivated status and designated as reactivated in September 2016. Considering the time needed to acquire replacement firm generating capacity, Maui Electric now anticipates the retirement of all generating units at the Kahului Power Plant, which have a combined rating of 32.3 MW, in the 2022 timeframe. A capacity planning analysis is in progress to better define generating needs and timing. Maui Electric plans to issue one or more RFPs for energy storage, demand response and firm generating capacity, and to make system improvements needed to ensure reliability and voltage support in this timeframe. In May 2016, Maui Electric requested that the PUC open a new docket for Maui Electric’s competitive bidding process for additional firm capacity resources. In September 2016, Maui Electric submitted an application to purchase and install three temporary mobile distributed generation diesel engines to address increasing reserve capacity shortfalls on the island of Maui; Maui Electric has since requested the PUC to suspend the proceeding until the end of 2017 to evaluate contingency measures and permanent solutions to minimize or eliminate the risk of near-term capacity shortfalls on the island of Maui.
Legislation and regulation. Congress and the Hawaii legislature periodically consider legislation that could have positive or negative effects on the Utilities and their customers. See “Recent tax developments” in Note 9 of the Condensed Consolidated Financial Statements. Also, in recent years, legislative, regulatory and governmental activities related to the environment, including proposals and rulemaking under the Clean Air Act and Clean Water Act (CWA), have increased significantly.
Clean Water Act Section 316(b). On August 14, 2014, the EPA published in the Federal Register the final regulations required by section 316(b) of the CWA designed to protect aquatic organisms from adverse impacts associated with existing power plant cooling water intake structures. The regulations were effective October 14, 2014 and apply to the cooling water systems for the steam generating units at three of Hawaiian Electric’s power plants on the island of Oahu. The regulations prescribe a process, including a number of required site-specific studies, for states to develop facility-specific entrainment and impingement controls to be incorporated in each facility’s National Pollutant Discharge Elimination System permit. Hawaiian
Electric submitted the final site specific studies to the DOH in December 2016 for the Honolulu and Waiau power plants and in September 2017 for the Kahe power plant. Hawaiian Electric will work with the DOH to identify the appropriate compliance methods for the 316(b) rule.
Mercury Air Toxics Standards. On February 16, 2012, the EPA published the final rule establishing the National Emission Standards for Hazardous Air Pollutants for fossil-fuel fired steam electrical generating units (EGUs) in the Federal Register. The final rule, known as the Mercury and Air Toxics Standards (MATS), applies to the 14 EGUs at Hawaiian Electric’s power plants. MATS established the Maximum Achievable Control Technology standards for the control of hazardous air pollutants emissions from new and existing EGUs. Hawaiian Electric initially selected a MATS compliance strategy based on switching to lower emission fuels, but has since continued developing and refining its emission control strategy. Hawaiian Electric’s liquid oil-fired steam generating units that are subject to the MATS limits are able to comply with the new standards without a significant fuel switch in combination with a suite of operational changes.
Hawaiian Electric has proceeded with the implementation of its MATS Compliance Plan and has met all compliance requirements to date.
PUC Commissioner. The Governor’s appointment of James Griffin as PUC Commissioner was confirmed by the State Senate on August 31, 2017. Mr. Griffin was a researcher and a faculty member at the Hawaii Natural Energy Institute at thefive University of Hawaii at Manoa. He also previously servedcampuses; and Pacific Current’s subsidiary, Ka‘ie‘ie Waho Company, LLC, which owns a 6 MW solar photovoltaic system that provides renewable energy to Kauai Island Utility Cooperative; as Chiefwell as eliminations of Policy and Research at the PUC. His term on the PUC ends June 30, 2022.intercompany transactions.
FINANCIAL CONDITION
Liquidity and capital resources. Management believes that Hawaiian Electric’s ability, and that of its subsidiaries, to generate cash, both internally from operations and externally from issuances of equity and debt securities and commercial paper and draws on lines of credit, is adequate to maintain sufficient liquidity to fund their respective capital expenditures and investments and to cover debt, retirement benefits and other cash requirements in the foreseeable future.
Hawaiian Electric’s consolidated capital structure was as follows: |
| | | | | | | | | | | | | | |
| (dollars in millions) | | September 30, 2017 | | December 31, 2016 |
| Short-term borrowings | | $ | 6 |
| | — | % | | $ | — |
| | — | % |
| Long-term debt, net | | 1,319 |
| | 41 |
| | 1,319 |
| | 42 |
|
| Preferred stock | | 34 |
| | 1 |
| | 34 |
| | 1 |
|
| Common stock equity | | 1,829 |
| | 58 |
| | 1,800 |
| | 57 |
|
| | | $ | 3,188 |
| | 100 | % | | $ | 3,153 |
| | 100 | % |
Information about Hawaiian Electric’s short-term borrowings (other than from Hawaii Electric Light and Maui Electric) and Hawaiian Electric’s line of credit facility were as follows: |
| | | | | | | | | | | | |
| | | Average balance | | Balance |
| (in millions) | | Nine months ended September 30, 2017 | | September 30, 2017 | | December 31, 2016 |
Short-term borrowings 1 | | |
| | |
| | |
|
| Commercial paper | | $ | 6 |
| | $ | 6 |
| | $ | — |
|
| Line of credit draws | | — |
| | — |
| | — |
|
| Borrowings from HEI | | 2 |
| | — |
| | — |
|
| Undrawn capacity under line of credit facility | | | | 200 |
| | 200 |
|
1 The maximum amount of external short-term borrowings by Hawaiian Electric during the first nine months of 2017 was $48 million. As of September 30, 2017, Hawaiian Electric had short-term borrowings from Hawaii Electric Light and Maui Electric of $6.6 million and $4.0 million, respectively. As of October 27, 2017, Hawaiian Electric had $2 million of outstanding commercial paper, no draws under its line of credit facility and no borrowings from HEI. Also, as of October 27, 2017, Hawaiian Electric had short-term borrowings from Hawaii Electric Light and Maui Electric of $13.1 million and $7.0 million, respectively, which intercompany borrowings are eliminated in consolidation.
Hawaiian Electric has a $200 million line of credit facility. See Note 5 of the Condensed Consolidated Financial Statements.
In May 2015, up to $80 million of SPRBs ($70 million for Hawaiian Electric, $2.5 million for Hawaii Electric Light and $7.5 million for Maui Electric) were authorized by the Hawaii legislature for issuance, with PUC approval, prior to June 30, 2020 to finance the Utilities’ capital improvement programs.
On January 26, 2017, Hawaiian Electric, Hawaii Electric Light and Maui Electric obtained PUC approval to issue, on or before December 31, 2017, unsecured obligations bearing taxable interest (Hawaiian Electric up to $100 million, Hawaii Electric Light up to $10 million and Maui Electric up to $30 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.
In March 2017 and amended in April 2017, the Utilities requested PUC approval to issue and sell each utility’s common stock through December 31, 2021 (Hawaiian Electric’s sale/s to HEI of up to $150 million and Hawaii Electric Light’s and Maui Electric’s sale/s to Hawaiian Electric of up to $10 million each) and the purchase of Hawaii Electric Light and Maui Electric common stock by Hawaiian Electric through December 31, 2021. On October 31, 2017, the PUC issued a D&O approving the issue and sale of each utility’s common stock as requested in the application.
In September 2017, the Utilities requested PUC approval to issue, over a four-year period from 2018 to December 31, 2021, unsecured obligations bearing taxable interest (Hawaiian Electric up to $280 million, Hawaii Electric Light up to $30 million and Maui Electric up to $10 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.
Cash flows. The following table reflects the changes in cash flows for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016: |
| | | | | | | | | | | |
| | Nine months ended September 30, | | |
| (in thousands) | 2017 | | 2016 | | Change |
| Net cash provided by operating activities | $ | 229,902 |
| | $ | 275,271 |
| | $ | (45,369 | ) |
| Net cash used in investing activities | (229,287 | ) | | (226,036 | ) | | (3,251 | ) |
| Net cash used in financing activities | (64,914 | ) | | (50,707 | ) | | (14,207 | ) |
Net cash provided by operating activities. Cash flows from operating activities generally relate to the amount and timing of cash received from customers and payments made to third parties. Using the indirect method of determining cash flows from operating activities, noncash expense items such as depreciation and amortization, as well as changes in certain assets and liabilities, are added to (or deducted from) net income.
The decrease in net cash provided by operating activities was impacted by the following:
Lower cash from an increase in accounts receivable due to timing and an increase in fuel prices.
Lower cash from a decrease in accounts payable due to timing on payments of invoices related to fuel and capital projects.
Lower cash from an increase in unbilled revenues due to higher fuel prices.
Lower cash due to refund of federal income taxes in 2016 based on bonus depreciation enacted in the fourth quarter of 2015 (similar treatment was not granted in the fourth quarter of 2016).
Net cash used in investing activities. The increase in net cash used in investing activities was driven primarily by an increase in capital expenditures related to construction activities, offset by higher contributions in aid of construction and capital good tax credits.
Net cash used in financing activities. Financing activities provide supplemental cash for both day-to-day operations and capital requirements as needed. The increase in net cash used in financing activities primarily reflects lower short-term borrowings.
2017 forecast capital expenditures. For 2017, the Utilities forecast $400 million 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 in 2017, to pay down commercial paper or other short-term borrowings, as well as to fund any unanticipated expenditures not included in the 2017 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).
Bank
|
| | | | | | | | | | | | | | |
| | | Three months ended September 30 | | Increase | | |
| (in millions) | | 2017 | | 2016 | | (decrease) | | Primary reason(s) |
| Interest income | | $ | 59 |
| | $ | 55 |
| | $ | 4 |
| | The increase in interest income was the result of a higher average investment securities portfolio balance and an increase in yields on earning assets. ASB’s average loan portfolio balance for the three months ended September 30, 2017 decreased by $68 million compared to the same period in 2016 as increases in average consumer and home equity lines of credit balances of $54 million and $31 million, respectively, were more than offset by a decrease in commercial loan balances of $132 million. The decrease in the average commercial loan balance was primarily due to a decrease in the syndicated national credit loan portfolio and paydowns in the commercial loan portfolio. The yield on earning assets increased by 8 basis points due to the repricing of the adjustable rate loans with the increase in the interest rate environment and a shift in the mix of the loan portfolio with the growth in the consumer loan portfolio, which resulted in an increase in the loan portfolio yield of 20 basis points. The average investment securities portfolio balance increased by $378 million due to the use of excess liquidity to purchase investments. The yield on the investment securities portfolio increased by 8 basis points as new investment purchase yields were higher due to the increase in short-term interest rates. |
| Noninterest income | | 15 |
| | 19 |
| | (4 | ) | | Noninterest income decreased for the three months ended September 30, 2017 compared to noninterest income for the three months ended September 30, 2016 due to lower mortgage banking income. Prior year’s noninterest income included a gain on sale of real estate with no similar sale in 2017. |
| Revenues | | 74 |
| | 74 |
| | — |
| | |
| Interest expense | | 3 |
| | 3 |
| | — |
| | Interest expense was flat for the three months ended September 30, 2017 compared to the same period in 2016 as higher interest expense from the growth in term certificates was offset by lower interest expense on other borrowings as a result of lower repurchase agreements and FHLB advances. Average deposit balances for the three months ended September 30, 2017 increased by $392 million compared to the same period in 2016 due to an increase in core deposits and term certificates of $303 million and $89 million, respectively. Other borrowings decreased by $105 million primarily due to a decrease in repurchase agreements and FHLB advances of $72 million and $33 million, respectively. The interest-bearing liability rate for the three months ended September 30, 2017 decreased by 5 basis points compared to the same period in 2016. |
| Provision for loan losses | | 1 |
| | 6 |
| | (5 | ) | | The provision for loan losses decreased by $5.3 million for the three months ended September 30, 2017 compared to the provision for loan losses for the three months ended September 30, 2016. The provision for loan losses for 2017 was primarily due to increased loan loss reserves for the consumer loan portfolio partly offset by the release of reserves for the commercial real estate and syndicated national credit loan portfolios due to loan paydowns and sales as the Bank strategically worked to improve commercial asset quality. The provision for loan losses for 2016 was primarily due to increased reserves for growth in the loan portfolio, additional loan loss reserves for the consumer loan portfolio and loan loss reserves for commercial loans due to downgrades of specific commercial credits. Delinquency rates have increased from 0.51% at September 30, 2016 to 0.60% at September 30, 2017. The annualized net charge-off ratio for the three months ended September 30, 2017 was 0.32% compared to an annualized net charge-off ratio of 0.20% for the same period in 2016. The increase in net charge-offs were due to an increase in consumer loan portfolio charge-offs as a result of ASB’s strategic expansion of its unsecured consumer loan product offering with risk-based pricing. |
| Noninterest expense | | 44 |
| | 42 |
| | 2 |
| | The increase in noninterest expense for the three months ended September 30, 2017 compared to the same period in 2016 was primarily due to higher compensation and employee benefits expenses as a result of higher performance-based compensation costs and higher employee benefit costs. |
| Expenses | | 48 |
| | 51 |
| | (3 | ) | | |
| Operating income | | 26 |
| | 23 |
| | 3 |
| | Higher net interest income and lower provision for loan losses was partly offset by higher noninterest expenses and lower noninterest income. |
| Net income | | 18 |
| | 15 |
| | 3 |
| | |
|
| | | | | | | | | | | | | | |
| | | Nine months ended September 30 | | Increase | | |
| (in millions) | | 2017 | | 2016 | | (decrease) | | Primary reason(s) |
| Interest income | | $ | 176 |
| | $ | 163 |
| | $ | 13 |
| | The increase in interest income was the result of higher average earning asset balances and an increase in yields on earning assets. ASB’s average loan portfolio balance for the nine months ended September 30, 2017 increased by $17 million compared to the same period in 2016 as average consumer, commercial real estate and home equity lines of credit balances increased by $58 million, $48 million and $23 million, respectively. The growth in these loan portfolios was reflective of ASB’s portfolio mix target and loan growth strategy. The average commercial loan balance decreased by $103 million primarily due to a decrease in the syndicated national credit loan portfolio. The yield on earning assets increased by 7 basis points due to a shift in the mix of the loan portfolio with the growth in the commercial real estate and consumer loan portfolios and repricing of the adjustable rate loans with the increase in the interest rate environment, which resulted in an increase in loan portfolio yields of 17 basis points. The average investment securities portfolio balance increased by $358 million due to the use of excess liquidity to purchase investments. The yield on the investment securities portfolio increased by 9 basis points as new investment purchase yields were higher due to the increase in short-term interest rates. |
| Noninterest income | | 47 |
| | 50 |
| | (3 | ) | | Noninterest income decreased slightly for the nine months ended September 30, 2017 compared to noninterest income for the nine months ended September 30, 2016 due to lower mortgage banking income. Prior year’s noninterest income included gains on sales of securities and a gain on sale of real estate with no similar sales in 2017. |
| Revenues | | 223 |
| | 213 |
| | 10 |
| | |
| Interest expense | | 9 |
| | 10 |
| | (1 | ) | | Interest expense was lower for the nine months ended September 30, 2017 compared to the same period in 2016 as higher interest expense from the growth in term certificates was more than offset by lower interest expense on other borrowings as a result of lower repurchase agreements and FHLB advances. Average deposit balances for the nine months ended September 30, 2017 increased by $471 million compared to the same period in 2016 due to an increase in core deposits and term certificates of $334 million and $137 million, respectively. Other borrowings decreased by $102 million primarily due to a decrease in repurchase agreements. The interest-bearing liability rate for the nine months ended September 30, 2017 decreased by 3 basis points compared to the same period in 2016. |
| Provision for loan losses | | 7 |
| | 15 |
| | (8 | ) | | The provision for loan losses decreased by $8.0 million for the nine months ended September 30, 2017 compared to the provision for loan losses for the nine months ended September 30, 2016. The provision for loan losses for the first nine months of 2017 was primarily due to increased loan loss reserves for the consumer loan portfolio partly offset by the release of reserves for the commercial real estate and syndicated national credit loan portfolios due to lower outstanding balances and improved credit quality. The provision for loan losses for the first nine months of 2016 was primarily due to increased reserves for growth in the loan portfolio, additional loan loss reserves for the consumer loan portfolio and loan loss reserves for commercial loans due to downgrades of specific commercial credits. Delinquency rates have increased from 0.51% at September 30, 2016 to 0.60% at September 30, 2017. The annualized net charge-off ratio for the nine months ended September 30, 2017 was 0.27% compared to an annualized net charge-off ratio of 0.19% for the same period in 2016. The increase in net charge-offs for the first nine months of 2017 was due to an increase in consumer loan portfolio charge-offs as a result of ASB’s strategic expansion of its unsecured consumer loan product offering with risk-based pricing. |
| Noninterest expense | | 131 |
| | 126 |
| | 5 |
| | The increase in noninterest expense for the nine months ended September 30, 2017 compared to the same period in 2016 was primarily due to higher compensation and employee benefits expenses as a result of higher performance-based compensation costs and higher employee benefit costs. Prior year’s noninterest expense included costs related to the replacement and upgrade of the electronic banking platform. |
| Expenses | | 147 |
| | 151 |
| | (4 | ) | | |
| Operating income | | 76 |
| | 62 |
| | 14 |
| | Higher net interest income and lower provision for loan losses was partly offset by higher noninterest expenses and lower noninterest income. |
| Net income | | 50 |
| | 41 |
| | 9 |
| | |
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.
ASB’s return on average assets, return on average equity and net interest margin were as follows: |
| | | | | | | | | | | | |
| | | Three months ended September 30 | | Nine months ended September 30 |
| (percent) | | 2017 | | 2016 | | 2017 | | 2016 |
| Return on average assets | | 1.07 |
| | 0.97 |
| | 1.02 |
| | 0.89 |
|
| Return on average equity | | 11.64 |
| | 10.36 |
| | 11.24 |
| | 9.50 |
|
| Net interest margin | | 3.69 |
| | 3.57 |
| | 3.68 |
| | 3.59 |
|
Average balance sheet and net interest margin. The following tables provide a summary of average balances including major categories of interest-earning assets and interest-bearing liabilities: |
| | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended September 30 |
| | | 2017 | | 2016 |
| (dollars in thousands) | | Average
balance | | Interest1
income/
expense | | Yield/
rate (%) | | Average
balance | | Interest1
income/
expense | | Yield/
rate (%) |
| Assets: | | |
| | |
| | |
| | |
| | |
| | |
|
| Interest-earning deposits | | $ | 54,598 |
| | $ | 172 |
| | 1.23 |
| | $ | 97,885 |
| | $ | 124 |
| | 0.50 |
|
| FHLB stock | | 10,401 |
| | 45 |
| | 1.70 |
| | 11,218 |
| | 54 |
| | 1.89 |
|
| Available-for-sale investment securities | | | | | | | | | | | | |
| Taxable | | 1,291,604 |
| | 6,521 |
| | 2.02 |
| | 928,698 |
| | 4,581 |
| | 1.97 |
|
| Non-taxable | | 15,427 |
| | 171 |
| | 4.33 |
| | — |
| | — |
| | — |
|
| Total available-for-sale investment securities | | 1,307,031 |
| | 6,692 |
| | 2.05 |
| | 928,698 |
| | 4,581 |
| | 1.97 |
|
| Loans | | | | | | | | | | | | |
| Residential 1-4 family | | 2,066,648 |
| | 21,383 |
| | 4.14 |
| | 2,077,135 |
| | 22,044 |
| | 4.24 |
|
| Commercial real estate | | 880,304 |
| | 9,542 |
| | 4.26 |
| | 888,886 |
| | 9,113 |
| | 4.08 |
|
| Home equity line of credit | | 895,224 |
| | 7,714 |
| | 3.42 |
| | 864,589 |
| | 7,204 |
| | 3.31 |
|
| Residential land | | 16,340 |
| | 296 |
| | 7.26 |
| | 18,764 |
| | 282 |
| | 6.00 |
|
| Commercial | | 618,708 |
| | 6,863 |
| | 4.39 |
| | 750,366 |
| | 7,327 |
| | 3.87 |
|
| Consumer | | 213,619 |
| | 6,412 |
| | 11.91 |
| | 159,226 |
| | 4,474 |
| | 11.18 |
|
Total loans 2,3 | | 4,690,843 |
| | 52,210 |
| | 4.42 |
| | 4,758,966 |
| | 50,444 |
| | 4.22 |
|
Total interest-earning assets 2 | | 6,062,873 |
| | 59,119 |
| | 3.88 |
| | 5,796,767 |
| | 55,203 |
| | 3.80 |
|
| Allowance for loan losses | | (55,881 | ) | | |
| | |
| | (55,480 | ) | | |
| | |
|
| Non-interest-earning assets | | 558,736 |
| | |
| | |
| | 514,120 |
| | |
| | |
|
| Total assets | | $ | 6,565,728 |
| | |
| | |
| | $ | 6,255,407 |
| | |
| | |
|
| Liabilities and shareholder’s equity: | | |
| | |
| | |
| | |
| | |
| | |
|
| Savings | | $ | 2,292,341 |
| | $ | 400 |
| | 0.07 |
| | $ | 2,139,863 |
| | $ | 358 |
| | 0.07 |
|
| Interest-bearing checking | | 901,645 |
| | 61 |
| | 0.03 |
| | 837,480 |
| | 43 |
| | 0.02 |
|
| Money market | | 138,151 |
| | 41 |
| | 0.12 |
| | 161,149 |
| | 52 |
| | 0.13 |
|
| Time certificates | | 686,638 |
| | 1,942 |
| | 1.12 |
| | 597,537 |
| | 1,418 |
| | 0.94 |
|
| Total interest-bearing deposits | | 4,018,775 |
| | 2,444 |
| | 0.24 |
| | 3,736,029 |
| | 1,871 |
| | 0.20 |
|
| Advances from Federal Home Loan Bank | | 66,848 |
| | 436 |
| | 2.59 |
| | 100,000 |
| | 792 |
| | 3.10 |
|
| Securities sold under agreements to repurchase | | 90,011 |
| | 34 |
| | 0.15 |
| | 161,652 |
| | 672 |
| | 1.63 |
|
| Total interest-bearing liabilities | | 4,175,634 |
| | 2,914 |
| | 0.28 |
| | 3,997,681 |
| | 3,335 |
| | 0.33 |
|
| Non-interest bearing liabilities: | | |
| | |
| | |
| | |
| | |
| | |
|
| Deposits | | 1,681,774 |
| | |
| | |
| | 1,572,821 |
| | |
| | |
|
| Other | | 103,695 |
| | |
| | |
| | 101,759 |
| | |
| | |
|
| Shareholder’s equity | | 604,625 |
| | |
| | |
| | 583,146 |
| | |
| | |
|
| Total liabilities and shareholder’s equity | | $ | 6,565,728 |
| | |
| | |
| | $ | 6,255,407 |
| | |
| | |
|
| Net interest income | | |
| | $ | 56,205 |
| | |
| | |
| | $ | 51,868 |
| | |
|
Net interest margin (%) 4 | | |
| | |
| | 3.69 |
| | |
| | |
| | 3.57 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Nine months ended September 30 |
| | | 2017 | | 2016 |
| (dollars in thousands) | | Average
balance | | Interest1
income/
expense | | Yield/
rate (%) | | Average
balance | | Interest1
income/
expense | | Yield/
rate (%) |
| Assets: | | |
| | |
| | |
| | |
| | |
| | |
|
| Interest-earning deposits | | $ | 64,426 |
| | $ | 479 |
| | 0.98 |
| | $ | 80,738 |
| | $ | 304 |
| | 0.50 |
|
| FHLB stock | | 11,128 |
| | 150 |
| | 1.80 |
| | 11,094 |
| | 142 |
| | 1.71 |
|
| Available-for-sale investment securities | | | | | | | | | | | | |
| Taxable | | 1,235,029 |
| | 19,651 |
| | 2.12 |
| | 892,726 |
| | 13,773 |
| | 2.06 |
|
| Non-taxable | | 15,427 |
| | 481 |
| | 4.11 |
| | — |
| | — |
| | — |
|
| Total available-for-sale investment securities | | 1,250,456 |
| | 20,132 |
| | 2.15 |
| | 892,726 |
| | 13,773 |
| | 2.06 |
|
| Loans | | | | | | | | | | | | |
| Residential 1-4 family | | 2,070,150 |
| | 65,172 |
| | 4.20 |
| | 2,076,308 |
| | 66,565 |
| | 4.27 |
|
| Commercial real estate | | 902,605 |
| | 28,676 |
| | 4.20 |
| | 854,977 |
| | 25,993 |
| | 4.04 |
|
| Home equity line of credit | | 880,472 |
| | 22,078 |
| | 3.35 |
| | 857,652 |
| | 21,058 |
| | 3.28 |
|
| Residential land | | 16,816 |
| | 791 |
| | 6.28 |
| | 18,577 |
| | 843 |
| | 6.05 |
|
| Commercial | | 650,554 |
| | 21,108 |
| | 4.32 |
| | 753,783 |
| | 22,294 |
| | 3.93 |
|
| Consumer | | 201,379 |
| | 17,444 |
| | 11.58 |
| | 143,514 |
| | 11,818 |
| | 11.00 |
|
Total loans 2,3 | | 4,721,976 |
| | 155,269 |
| | 4.38 |
| | 4,704,811 |
| | 148,571 |
| | 4.21 |
|
Total interest-earning assets 2 | | 6,047,986 |
| | 176,030 |
| | 3.88 |
| | 5,689,369 |
| | 162,790 |
| | 3.81 |
|
| Allowance for loan losses | | (56,276 | ) | | |
| | |
| | (52,902 | ) | | |
| | |
|
| Non-interest-earning assets | | 537,894 |
| | |
| | |
| | 505,014 |
| | |
| | |
|
| Total assets | | $ | 6,529,604 |
| | |
| | |
| | $ | 6,141,481 |
| | |
| | |
|
| Liabilities and shareholder’s equity: | | |
| | |
| | |
| | |
| | |
| | |
|
| Savings | | $ | 2,271,926 |
| | $ | 1,160 |
| | 0.07 |
| | $ | 2,095,975 |
| | $ | 1,034 |
| | 0.07 |
|
| Interest-bearing checking | | 898,794 |
| | 175 |
| | 0.03 |
| | 831,412 |
| | 127 |
| | 0.02 |
|
| Money market | | 146,864 |
| | 133 |
| | 0.12 |
| | 164,596 |
| | 157 |
| | 0.13 |
|
| Time certificates | | 676,083 |
| | 5,390 |
| | 1.07 |
| | 539,314 |
| | 3,836 |
| | 0.95 |
|
| Total interest-bearing deposits | | 3,993,667 |
| | 6,858 |
| | 0.23 |
| | 3,631,297 |
| | 5,154 |
| | 0.19 |
|
| Advances from Federal Home Loan Bank | | 89,273 |
| | 1,999 |
| | 2.99 |
| | 101,232 |
| | 2,363 |
| | 3.07 |
|
| Securities sold under agreements to repurchase | | 93,128 |
| | 111 |
| | 0.16 |
| | 182,671 |
| | 2,053 |
| | 1.48 |
|
| Total interest-bearing liabilities | | 4,176,068 |
| | 8,968 |
| | 0.29 |
| | 3,915,200 |
| | 9,570 |
| | 0.32 |
|
| Non-interest bearing liabilities: | | |
| | |
| | |
| | |
| | |
| | |
|
| Deposits | | 1,658,238 |
| | |
| | |
| | 1,549,467 |
| | |
| | |
|
| Other | | 100,499 |
| | |
| | |
| | 100,210 |
| | |
| | |
|
| Shareholder’s equity | | 594,799 |
| | |
| | |
| | 576,604 |
| | |
| | |
|
| Total liabilities and shareholder’s equity | | $ | 6,529,604 |
| | |
| | |
| | $ | 6,141,481 |
| | |
| | |
|
| Net interest income | | |
| | $ | 167,062 |
| | |
| | |
| | $ | 153,220 |
| | |
|
Net interest margin (%) 4 | | |
| | |
| | 3.68 |
| | |
| | |
| | 3.59 |
|
| |
1
| Interest income includes taxable equivalent basis adjustments, based upon a federal statutory tax rate of 35%, of $0.06 million and nil for the three months ended September 30, 2017 and 2016, respectively and $0.2 million and nil for the nine months ended September 30, 2017 and 2016, respectively. |
2 Includes loans held for sale, at lower of cost or fair value.
| |
3
| Includes recognition of deferred loan fees of $0.3 million and $0.6 million for the three months ended September 30, 2017 and 2016 and $1.4 million and $2.1 million for the nine months ended September 30, 2017 and 2016, respectively, together with interest accrued prior to suspension of interest accrual on nonaccrual loans. |
| |
4
| Defined as net interest income as a percentage of average total interest-earning assets. |
Earning assets, costing liabilities 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. These conditions have begun to moderate with the interest rate increases in the past year which resulted in an increase in ASB’s net interest income and net interest margin.
Loan originations and mortgage-related 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. The composition of ASB’s loans receivable was as follows: |
| | | | | | | | | | | | | | |
| | | September 30, 2017 | | December 31, 2016 |
| (dollars in thousands) | | Balance | | % of total | | Balance | | % of total |
| Real estate: | | |
| | |
| | |
| | |
|
| Residential 1-4 family | | $ | 2,066,023 |
| | 44.2 |
| | $ | 2,048,051 |
| | 43.2 |
|
| Commercial real estate | | 745,583 |
| | 15.9 |
| | 800,395 |
| | 16.9 |
|
| Home equity line of credit | | 905,249 |
| | 19.4 |
| | 863,163 |
| | 18.2 |
|
| Residential land | | 18,611 |
| | 0.4 |
| | 18,889 |
| | 0.4 |
|
| Commercial construction | | 128,407 |
| | 2.7 |
| | 126,768 |
| | 2.7 |
|
| Residential construction | | 13,031 |
| | 0.3 |
| | 16,080 |
| | 0.3 |
|
| Total real estate | | 3,876,904 |
| | 82.9 |
| | 3,873,346 |
| | 81.7 |
|
| Commercial | | 589,669 |
| | 12.6 |
| | 692,051 |
| | 14.6 |
|
| Consumer | | 211,571 |
| | 4.5 |
| | 178,222 |
| | 3.7 |
|
| | | 4,678,144 |
| | 100.0 |
| | 4,743,619 |
| | 100.0 |
|
| Less: Deferred fees and discounts | | (1,863 | ) | | |
| | (4,926 | ) | | |
|
| Allowance for loan losses | | (53,047 | ) | | |
| | (55,533 | ) | | |
|
| Total loans, net | | $ | 4,623,234 |
| | |
| | $ | 4,683,160 |
| | |
|
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, or are starting to reach, 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 the 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 portfolio and are included in the amortizing balances identified in the loan portfolio table below.
|
| | | | | | | | |
| | | September 30, 2017 | | December 31, 2016 |
| Outstanding balance of home equity loans (in thousands) | | $ | 905,249 |
| | $ | 863,163 |
|
| Percent of portfolio in first lien position | | 47.2 | % | | 45.1 | % |
| Annualized net charge-off (recovery) ratio | | (0.04 | )% | | 0.01 | % |
| Delinquency ratio | | 0.38 | % | | 0.35 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | End of draw period – interest only | | Current |
| September 30, 2017 | | Total | | Interest only | | 2017-2018 | | 2019-2021 | | Thereafter | | amortizing |
| Outstanding balance (in thousands) | | $ | 905,249 |
| | $ | 718,843 |
| | $ | 55,842 |
| | $ | 97,061 |
| | $ | 565,940 |
| | $ | 186,406 |
|
| % of total | | 100 | % | | 79 | % | | 6 | % | | 11 | % | | 62 | % | | 21 | % |
The HELOC portfolio comprised 19% 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 79% 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 September 30, 2017, approximately 20% 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.
Available-for-sale investment securities. ASB’s investment portfolio was comprised as follows: |
| | | | | | | | | | | | | | |
| | | September 30, 2017 | | December 31, 2016 |
| (dollars in thousands) | | Balance | | % of total | | Balance | | % of total |
| U.S. Treasury and federal agency obligations | | $ | 182,118 |
| | 14 | % | | $ | 192,281 |
| | 18 | % |
| Mortgage-related securities — FNMA, FHLMC and GNMA | | 1,122,565 |
| | 85 |
| | 897,474 |
| | 81 |
|
| Mortgage revenue bond | | 15,427 |
| | 1 |
| | 15,427 |
| | 1 |
|
| Total available-for-sale investment securities | | $ | 1,320,110 |
| | 100 | % | | $ | 1,105,182 |
| | 100 | % |
Principal and interest on mortgage-related securities issued by Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and Government National Mortgage Association (GNMA) are guaranteed by the issuer and, in the case of GNMA, backed by the full faith and credit of the U.S. government.
Deposits and other borrowings. Deposits continue to be the largest source of funds for ASB and are affected by market interest rates, competition and management’s responses to these factors. 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 and securities sold under agreements to repurchase continue to be additional sources of funds. As of September 30, 2017 and December 31, 2016, ASB’s costing liabilities consisted of 97% deposits and 3% other borrowings. The weighted average cost of deposits for the first nine months of 2017 and 2016 was 0.16% and 0.13%, respectively.
Federal Home Loan Bank of Des Moines. As of September 30, 2017 and December 31, 2016, ASB had $50 million and $100 million of advances outstanding at the FHLB of Des Moines. The decrease in advances outstanding was due to the payoff of a maturing FHLB advance. As of September 30, 2017, the unused borrowing capacity with the FHLB of Des Moines was $1.9 billion. The FHLB of Des Moines continues to be an important source of liquidity for ASB.
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 September 30, 2017, ASB had an unrealized loss, net of taxes, on available-for-sale investment securities (including securities pledged for repurchase agreements) in AOCI of $5.5 million compared to an unrealized loss, net of taxes, of $7.9 million at December 31, 2016. See “Item 3. Quantitative and qualitative disclosures about market risk” for a discussion of ASB’s interest rate risk sensitivity.
During the first nine months of 2017, ASB recorded a provision for loan losses of $7.2 million primarily due to increased loan loss reserves for the consumer loan portfolio partly offset by the release of reserves for the commercial real estate and syndicated national credit loan portfolios due to lower outstanding balances and improved credit quality. During the first nine months of 2016, ASB recorded a provision for loan losses of $15.3 million primarily due to increased loss reserves for growth in the loan portfolio, additional loan loss reserves for the consumer loan portfolio and loan loss reserves for commercial loans due to downgrades of specific commercial credits. Financial stress on ASB’s customers may result in higher levels of delinquencies and losses. |
| | | | | | | | | | | | |
| | | Nine months ended September 30 | | Year ended December 31, |
| (in thousands) | | 2017 | | 2016 | | 2016 |
| Allowance for loan losses, January 1 | | $ | 55,533 |
| | $ | 50,038 |
| | $ | 50,038 |
|
| Provision for loan losses | | 7,231 |
| | 15,266 |
| | 16,763 |
|
| Less: net charge-offs | | 9,717 |
| | 6,567 |
| | 11,268 |
|
| Allowance for loan losses, end of period | | $ | 53,047 |
| | $ | 58,737 |
| | $ | 55,533 |
|
| Ratio of net charge-offs during the period to average loans outstanding (annualized) | | 0.27 | % | | 0.19 | % | | 0.24 | % |
We maintain a reserve for credit losses that consists of two components, the allowance for loan losses and a reserve for unfunded loan commitments (unfunded reserve). The level of the reserve for unfunded loan commitments is adjusted by recording an expense or recovery in other noninterest expense. As of September 30, 2017 and December 31, 2016, the reserve for unfunded loan commitments was $1.7 million.
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.”
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Regulation of the financial services industry, including regulation of HEI, ASB Hawaii and ASB, has changed and will continue to change as a result of the enactment of the Dodd-Frank Act, which became law in July 2010. Importantly for HEI, ASB Hawaii and ASB, under the Dodd-Frank Act all of the functions of the Office of Thrift Supervision transferred on July 21, 2011 to the OCC, the FDIC, the FRB and the Consumer Financial Protection Bureau (Bureau). Supervision and regulation of HEI and ASB Hawaii, as thrift holding companies, moved to the FRB, and supervision and regulation of ASB, as a federally chartered savings bank, moved to the OCC. While the laws and regulations applicable to HEI and ASB did not generally change, the applicable laws and regulations are being interpreted, and new and amended regulations may be adopted, by the FRB, the OCC and the Bureau. In addition, HEI will continue to be required to serve as a source of strength to ASB in the event of its financial distress. The Dodd-Frank Act also imposed new restrictions on the ability of a savings bank to pay dividends should it fail to remain a qualified thrift lender.
More stringent affiliate transaction rules now apply to ASB in the securities lending, repurchase agreement and derivatives areas. Standards were raised with respect to the ability of ASB to merge with or acquire another institution. In reviewing a potential merger or acquisition, the approving federal agency will need to consider the extent to which the proposed transaction will result in “greater or more concentrated risks to the stability of the U.S. banking or financial system.”
The Dodd-Frank Act established the Bureau. It has authority to prohibit practices it finds to be unfair, deceptive or abusive, and it may also issue rules requiring specified disclosures and the use of new model forms. On January 10, 2013, the Bureau issued the Ability-to-Repay rule which closed for comment on February 25, 2013. For mortgages, among other things, (i) potential borrowers have to supply financial information, and lenders must verify it, (ii) to qualify for a particular loan, a consumer has to have sufficient assets or income to pay back the loan and (iii) lenders have to determine the consumer’s ability to repay both the principal and the interest over the long term - not just during an introductory period when the rate may be lower.
ASB may also be subject to new state regulation because of a provision in the Dodd-Frank Act that acknowledges that a federal savings bank may be subject to state regulation and allows federal law to preempt a state consumer financial law on a “case by case” basis only when (1) the state law would have a discriminatory effect on the bank compared to that on a bank chartered in that state, (2) the state law prevents or significantly interferes with a bank’s exercise of its power or (3) the state law is preempted by another federal law.
The Dodd-Frank Act also adopts a number of provisions that impact the mortgage industry, including the imposition of new specific duties on the part of mortgage originators (such as ASB) to act in the best interests of consumers and to take steps to ensure that consumers will have the capability to repay loans they may obtain, as well as provisions imposing new disclosure requirements and requiring appraisal reforms.
Also, the Dodd-Frank Act directs the Bureau to publish rules and forms that combine certain disclosures that consumers receive in connection with applying for and closing on a mortgage loan under the Truth in Lending Act and the Real Estate Settlement Procedures Act. Consistent with this requirement, the Bureau amended Regulation X (Real Estate Settlement Procedures Act) and Regulation Z (Truth in Lending) to establish new disclosure requirements and forms in Regulation Z for most closed-end consumer credit transactions secured by real property. In addition to combining the existing disclosure requirements and implementing new requirements, the final rule provides extensive guidance regarding compliance with those requirements. This rule was effective October 3, 2015.
The “Durbin Amendment” to the Dodd-Frank Act required the FRB to issue rules to ensure that debit card interchange fees are “reasonable and proportional” to the processing costs incurred. In June 2011, the FRB issued a final rule establishing standards for debit card interchange fees and prohibiting network exclusivity arrangements and routing restrictions. Under the final rule, effective October 1, 2011, the maximum permissible interchange fee that an issuer may receive for an electronic debit transaction is 21-24 cents, depending on certain components. Financial institutions and their affiliates that have less than $10 billion in assets are exempt from this Amendment; however, on July 1, 2013, ASB became non-exempt as the consolidated assets of HEI exceeded $10 billion. The debit card interchange fees received by ASB have been lower as a result of the application of this Amendment.
Final Capital Rules. On July 2, 2013, the FRB finalized its rule implementing the Basel III regulatory capital framework. The final rule would apply to banking organizations of all sizes and types regulated by the FRB and the OCC, except bank holding companies subject to the FRB’s Small Bank Holding Company Policy Statement and Savings & Loan Holding Companies (SLHCs) substantially engaged in insurance underwriting or commercial activities. HEI currently meets the requirements of the exemption as a top-tier grandfathered unitary SLHC that derived, as of June 30 of the previous calendar year, either 50% or more of its total consolidated assets or 50% or more of its total revenues on an enterprise-wide basis (calculated under GAAP) from activities that are not financial in nature pursuant to Section 4(k) of the Bank Holding Company Act. The FRB is temporarily excluding these SLHCs from the final rule while it considers a proposal relating to capital and other requirements for SLHC intermediate holding companies (such as ASB Hawaii). The FRB indicated that it would release a proposal on intermediate holding companies that would specify the criteria for establishing and transferring activities to intermediate holding
companies and propose to apply the FRB’s capital requirements to such intermediate holding companies. The FRB has not yet issued such a proposal, or a proposal on how to apply the Basel III capital rules to SLHCs that are substantially engaged in commercial or insurance underwriting activities, such as grandfathered unitary SLHCs like HEI.
Pursuant to the final rule and consistent with the proposals, all banking organizations, including covered holding companies, would initially be subject to the following minimum regulatory capital requirements: a common equity Tier 1 capital ratio of 4.5%, a Tier 1 capital ratio of 6%, a total capital ratio of 8% of risk-weighted assets and a tier 1 leverage ratio of 4%, and these requirements would increase in subsequent years. In order to avoid restrictions on capital distributions and discretionary bonus payments to executive officers, the final rule requires a banking organization to hold a buffer of common equity tier 1 capital above its minimum capital requirements in an amount greater than 2.5% of total risk-weighted assets (capital conservation buffer). In addition, a countercyclical capital buffer would expand the capital conservation buffer by up to 2.5% of a banking organization’s total risk-weighted assets for advanced approaches banking organizations. The final rule would establish qualification criteria for common equity, additional tier 1 and tier 2 capital instruments that help to ensure their ability to absorb losses. All banking organizations would be required to calculate risk-weighted assets under the standardized approach, which harmonizes the banking agencies’ calculation of risk-weighted assets and address shortcomings in capital requirements identified by the agencies. The phased-in effective dates of the capital requirements under the final rule are:
Minimum Capital Requirements |
| | | | | | | | | | | | | | | |
| Effective dates | | 1/1/2015 | | 1/1/2016 | | 1/1/2017 | | 1/1/2018 | | 1/1/2019 |
| Capital conservation buffer | | |
| | 0.625 | % | | 1.25 | % | | 1.875 | % | | 2.50 | % |
| Common equity Tier-1 ratio + conservation buffer | | 4.50 | % | | 5.125 | % | | 5.75 | % | | 6.375 | % | | 7.00 | % |
| Tier-1 capital ratio + conservation buffer | | 6.00 | % | | 6.625 | % | | 7.25 | % | | 7.875 | % | | 8.50 | % |
| Total capital ratio + conservation buffer | | 8.00 | % | | 8.625 | % | | 9.25 | % | | 9.875 | % | | 10.50 | % |
| Tier-1 leverage ratio | | 4.00 | % | | 4.00 | % | | 4.00 | % | | 4.00 | % | | 4.00 | % |
| Countercyclical capital buffer — not applicable to ASB | | |
| | 0.625 | % | | 1.25 | % | | 1.875 | % | | 2.50 | % |
The final rule was effective January 1, 2015 for ASB. As of September 30, 2017, ASB met the new capital requirements with a Common equity Tier-1 ratio of 12.7%, a Tier-1 capital ratio of 12.7%, a Total capital ratio of 13.9% and a Tier-1 leverage ratio of 8.7%.
Subject to the timing and final outcome of the FRB’s SLHC intermediate holding company proposal, HEI anticipates that the capital requirements in the final rule will eventually be effective for HEI or ASB Hawaii as well. If the fully phased-in capital requirements were currently applicable to HEI, management believes HEI would satisfy the capital requirements, including the fully phased-in capital conservation buffer. Management cannot predict what final rule the FRB may adopt concerning intermediate holding companies or their impact on ASB Hawaii, if any.
Military Lending Act. The Department of Defense (DOD) amended its regulation that implements the Military Lending Act (MLA), which became effective on October 3, 2016. The DOD amended its regulation primarily for the purpose of extending the protections of the MLA to a broader range of closed-end and open-end credit products. It initially applied to three narrowly-defined “consumer credit” products: closed-end payday loans; closed-end auto title loans; and closed-end tax refund anticipation loans. The DOD revised the scope of the definition of ‘‘consumer credit’’ to be generally consistent with the credit products that have been subject to the requirements of the Regulation Z, namely: credit offered or extended to a covered borrower primarily for personal, family or household purposes and that is (i) subject to a finance charge or (ii) payable by a written agreement in more than four installments.
Additionally, the DOD elected to exercise its discretion by generally requiring any fees for credit insurance products or for credit-related ancillary products to be included in the Military Annual Percentage Rate. The DOD also modified the disclosures that a creditor must provide to a covered borrower and implemented the enforcement provisions of the MLA. ASB has modified certain products, practices and associated training to conform to these changes.
Overtime Rules. The Secretary of Labor updated the overtime regulations of the Fair Labor Standards Act to simplify and modernize them. The Department of Labor issued final rules that will raise the salary threshold indicating eligibility from $455/week to $913/week ($47,476 per year), and update automatically the salary threshold every three years, based on wage growth over time, increasing predictability. The final rule was to become effective on December 1, 2016. In late-November 2016 however, the U.S. District Court in the Eastern District of Texas granted a nationwide preliminary injunction that blocked the final rule, saying the Department of Labor's rule exceeds the authority the agency was delegated by Congress. Despite this block, ASB modified its salaries in the fourth quarter of 2016 such that it is in voluntary compliance with the final rule. On July 26, 2017, the Department of Labor published a Request for Information Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees. On August 31, 2017, U.S. District Court in the Eastern District of Texas
granted summary judgment against the Department of Labor in consolidated cases challenging the final rule published on May 23, 2016. The court held that the final rule’s salary level exceeded the Department of Labor’s authority and concluded that the final rule was invalid.
Arbitration Agreements. Pursuant to section 1028(b) of the Dodd-Frank Act, on July 19, 2017, the Bureau issued a final rule to regulate arbitration agreements in contracts for specified consumer financial product and services. First, the final rule prohibits covered providers of certain consumer financial products and services from using an agreement with a consumer that provides for arbitration of any future dispute between the parties to bar the consumer from filing or participating in a class action concerning the covered consumer financial product or service. Second, the final rule requires covered providers that are involved in arbitration pursuant to a pre-dispute arbitration agreement to submit specified arbitral records to the Bureau and also to submit specified court records. The compliance date for this regulation is March 19, 2018. Under the Congressional Review Act, the U.S. House of Representatives voted to overturn the final rule on July 25, 2017, and the U.S. Senate did the same on October 24, 2017. On November 1, 2017, the President signed the repeal of the final rule. ASB is currently evaluating the impact of these events on its affected agreements.
FINANCIAL CONDITION
Liquidity and capital resources. |
| | | | | | | | | | | |
| (dollars in millions) | | September 30, 2017 | | December 31, 2016 | | % change |
| Total assets | | $ | 6,619 |
| | $ | 6,421 |
| | 3 |
|
| Available-for-sale investment securities | | 1,320 |
| | 1,105 |
| | 19 |
|
| Loans receivable held for investment, net | | 4,623 |
| | 4,683 |
| | (1 | ) |
| Deposit liabilities | | 5,752 |
| | 5,549 |
| | 4 |
|
| Other bank borrowings | | 154 |
| | 193 |
| | (20 | ) |
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 were lower than the average rates before the pandemic. As of September 30, 2020, HEI and Hawaiian Electric had approximately $23 million and nil of commercial paper outstanding, respectively.
As of September 30, 2020, 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 September 30, 2020, there was no balance on Hawaiian Electric’s revolving credit facilities and the available committed capacity under the revolving credit facilities was $275 million. As of September 30, 2020, ASB’s unused FHLB borrowing capacity was approximately $2.0 billion.
The Company expects that its liquidity will continue to be moderately impacted 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 December 31, 2020) 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 MD&A). At ASB, liquidity remains at satisfactory levels. ASB’s cash and cash equivalents was $161.0 million as of September 30, 2020, compared to $178.4 million as of December 31, 2019. ASB remains well above the “well capitalized” level, but 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).
To preserve and enhance the Company’s liquidity position, in light of the significant and ongoing uncertainty regarding the potential scale and duration of the COVID-19 pandemic and its impact on the global, national and local economy, the Company took a number of steps. First, on April 20, 2020, HEI borrowed $65 million 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. Secondly, 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). Thirdly, the Utilities also launched and closed on a $160 million private placement of taxable debt on May 14, 2020, the proceeds of which were used to finance capital expenditures, repay short-term debt used to finance or refinance capital expenditures, and reimburse funds for payment of capital expenditures. In addition, the Utilities executed a $115 million private placement of taxable debt on October 29, 2020 to finance their capital expenditures and/or to reimburse funds used for the payment of capital expenditures. The private placement has a delayed draw feature, which allows the Utilities to draw the funds at any time on or before January 15, 2021. Finally, $50 million of an existing 364-day term loan was refinanced with a new $50 million term loan maturing in April 2021. On September 11, 2020, HEI executed a $50 million private placement utilizing a delayed draw feature, which allows HEI to draw the funds at any time on or before December 29, 2020. Proceeds from the notes will be ultimately used to refinance HEI’s $50 million long-term notes maturing in March of 2021, but will provide additional liquidity in the interim period. The notes bear interest at 2.98% and mature on December 15, 2030. As of September 30, 2020 the total amount of available borrowing capacity (net of commercial paper outstanding) under the Company’s committed lines of credit was approximately $402 million, which was an increase of approximately $188 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 has also deferred approximately $5.8 million per month in planned monthly pension contributions through August 2020 to further strengthen its liquidity position, but elected to fund such deferred contributions in September 2020 in order to deduct the contributions on its 2019 tax return. 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.
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 rapidly 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) | | September 30, 2020 | | December 31, 2019 |
| Short-term borrowings—other than bank | | $ | 138 | | | 3 | % | | $ | 186 | | | 4 | % |
| Long-term debt, net—other than bank | | 2,069 | | | 45 | | | 1,964 | | | 44 | |
| Preferred stock of subsidiaries | | 34 | | | 1 | | | 34 | | | 1 | |
| Common stock equity | | 2,323 | | | 51 | | | 2,280 | | | 51 | |
| | | $ | 4,564 | | | 100 | % | | $ | 4,464 | | | 100 | % |
HEI’s commercial paper borrowings and line of credit facility were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | Average balance | | Balance |
| (in millions) | | Nine months ended September 30, 2020 | | September 30, 2020 | | December 31, 2019 |
| Commercial paper | | $ | 26 | | | $ | 23 | | | $ | 97 | |
| Line of credit draws | | 9 | | | — | | | — | |
| 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 borrowings during the first nine months of 2020 was $99 million.
HEI has a $150 million line of credit facility with no amounts outstanding at September 30, 2020. See Note 5 of the Condensed Consolidated Financial Statements.
There were no new issuances of common stock through the DRIP, HEIRSP or the ASB 401(k) Plan in the nine months ended September 30, 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 nine months of 2020, net cash provided by operating activities of HEI consolidated was $312 million. Net cash used by investing activities for the same period was $1,145 million, primarily due to capital expenditures, ASB’s purchases of available-for-sale investment securities and ASB’s net increase in loans, partly offset by ASB’sreceipt of repayments from and sales of available-for-sale investment securities. Net cash provided by financing activities during this period was $820 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, partly offset by net decrease in short-term borrowings, repayment of short-term and long-term debt and payment of common stock dividends. During the first nine months of 2020, Hawaiian Electric and ASB (through ASB Hawaii) paid cash dividends to HEI of $80 million and $28 million, respectively.
Dividends. The payout ratios for the first nine months of 2020 and full year 2019 were 73% and 64%, respectively. 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 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 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. See “Recent Accounting Pronouncements” in Note 1 of the Condensed Consolidated Financial Statements for further discussion of the Company’s allowance for credit losses.
Goodwill. Goodwill is initially recorded as the excess of the purchase price over the fair value of the net assets acquired in a business combination and is subsequently evaluated at least annually for impairment during the fourth quarter. The goodwill relates to ASB, which is the only reporting unit in the Company’s reportable Bank segment, and is the Company’s only intangible asset with an indefinite useful life. At September 30, 2020 the amount of goodwill was $82.2 million. In the third quarter of 2020, the combination of economic impacts from COVID-19 and the resulting reductions in market interest rates led ASB to determine that a triggering event existed, which required an assessment to determine whether goodwill was impaired. To determine if there was an impairment to the book value of goodwill, the fair value of ASB was estimated using a valuation method based on the market and income approaches. The market approach considers publicly traded financial institutions and measures the institutions’ market values as a multiple to (1) net income and (2) tangible book equity. The market approach also looks at sale transactions to determine the fair value under this approach. The mean market value multiples for net income and tangible book equity from the selected institutions were applied to ASB’s last twelve months’ net income, next year’s net income and tangible book equity to calculate ASB’s fair value using the market approach. Industry sale transactions for 2019 and 2020 were reviewed and used to calculate the market approach fair value. The income approach uses a discounted cash flow method to value a company on a going concern basis and is based on the concept that the future benefits derived from a particular company can be measured by its sustainable after-tax cash flows in the future. ASB used its forecasted net income and estimated cost savings if the bank were acquired and applied a discount rate to calculate its discounted cash flows. A capitalization of earnings method was used to calculate a terminal value for the discounted cash flow method. The income approach was weighted 75%, the publicly traded company valuation method was weighted 20% and the sale transaction valuation method was weighted 5%. More weight was given to the income approach as this approach uses the projected performance of ASB in the stressed environment and would be more indicative of the current fair value of the Bank. The impairment test for ASB as of the third quarter of 2020 resulted in no goodwill impairment, since the estimated fair value of the reporting unit exceeded its carrying value by more than 35%. The calculation of fair value of the reporting unit requires significant estimates and assumptions by management, including but not limited to, forecasted net income, tangible assets, cost savings, control premiums and discount rate. Should the estimates and assumptions regarding the fair value of the reporting unit prove to be incorrect, the Company may be required to record impairments to goodwill in future periods and such impairments could be material.
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 continue to be severely impacted by the COVID-19 pandemic. Statewide daily passenger counts remain depressed, and unemployment stood at 15.1% as of September 30, 2020. As a consequence of the significant decline in economic activity, the demand for electricity was adversely impacted. In the third quarter of 2020, kWh sales were down 13.1% compared with the same quarter in 2019. For the nine months ended September 30, 2020, sales were down 7.3% compared to the same period last year. For the full year, the Utilities expect the level of kWh sales to be 6%-12% below sales levels achieved in 2019. The Utilities expect continued lower sales due to COVID-19 and that the RPS achievement will exceed the 30% statutory requirement as of 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 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 (1.75% for Hawaiian Electric, 1.5% for Hawaii Electric Light and 3.0% for Maui Electric). As of September 30, 2020, the RBA credit balance related to decoupling revenues was approximately $0.5 million, a decrease in the credit balance by $16.5 million, or 97% since June 30, 2020. While the billed accounts receivable balances as of September 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 $10 million or 32% since December 31, 2019. The increase is primarily driven by the state mandated stay-at-home order, which was lifted on July 1, 2020, reinstated on August 27, 2020, and lifted again on September 24, 2020, the pandemic’s impact on the tourism industry, resulting in a higher unemployment rate, the moratorium on customer disconnections (which moratorium is currently in place through December 31, 2020) and, for certain customers, the inability to make payment on their accounts. 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 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, increased personal protective equipment costs, and sequestration costs for mission-critical employees. As of September 30, 2020, these costs, which have been deferred and recorded as a regulatory asset, totaled approximately $12.4 million (see also discussion under Item 1A. “Risk Factors” and “Regulatory assets for COVID-19 costs” in Note 3 of the Condensed Consolidated Financial Statements). Looking forward, 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 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 businesses and residents, which may influence the PUC’s actions regarding requested rate increases. See “Item 1A. Risk Factors” in Part II for additional discussion of risks.
At this time, the Utilities are not able to predict what the full impact of the COVID-19 pandemic will have on its results of operations, financial position 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 effective.
For a discussion regarding the impact of the economic conditions caused by the COVID-19 pandemic on the Utilities’ liquidity and capital resources, see discussion under “Financial Condition–Liquidity and capital resources.”
RESULTS OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30 | | Increase | | |
| 2020 | | 2019 | | (decrease) | | (dollars in millions, except per barrel amounts) |
| $ | 563 | | | $ | 688 | | | $ | (126) | | | | | Revenues. Net decrease largely due to: |
| | | | | | $ | (104) | | | lower fuel oil prices and lower kWh generated1 |
| | | | | | (24) | | | lower purchased power energy prices and lower kWh purchased2 |
| | | | | | (4) | | | lower PPAC revenue2 |
| | | | | | (2) | | | higher cost savings from ERP system implementation to be returned to customers in future rates |
| | | | | | 1 | | | higher MPIR revenue (increase for West Loch PV project and Grid Modernization project) |
| | | | | | 7 | | | higher electric rates |
| 105 | | | 199 | | | (94) | | | | | Fuel oil expense1. Decrease largely due to lower fuel oil prices and lower kWh generated, offset in part by higher fuel handling costs |
| 149 | | | 175 | | | (26) | | | | | Purchased power expense1, 2. Decrease largely due to lower purchased power energy prices, lower kWh purchased and lower capacity and non-fuel O&M charges |
| 111 | | | 124 | | | (13) | | | | | Operation and maintenance expenses. Net decrease largely due to: |
| | | | | | (7) | | | fewer generating unit overhauls performed in 2020 |
| | | | | | (3) | | | lower labor due to lower staffing and reduction in overtime |
| | | | | | (1) | | | lower vegetation management costs |
| | | | | | (1) | | | lower outside services for system support (Distribution Node Mapping and development of portal for CBRE) |
| | | | | | (1) | | | less substation and meter maintenance work performed |
| 109 | | | 118 | | | (9) | | | | | Other expenses. Decrease due to lower revenue taxes offset in part by higher depreciation in 2020 for plant investment in 2019 |
| 89 | | | 72 | | | 17 | | | | | Operating income. Increase due to lower operation and maintenance expense, coupled with higher electric rates and higher MPIR revenue, offset in part by higher depreciation expenses |
| 74 | | | 58 | | | 16 | | | | | Income before income taxes. Increase due to lower operation and maintenance expense, higher electric rates, higher MPIR revenue, and lower interest expense due to refinancing of revenue bonds in July 2019 at lower rates, offset in part by higher depreciation expense and lower AFUDC |
| 60 | | | 47 | | | 13 | | | | | Net income for common stock. Increase due to lower operating expenses, coupled with higher electric rates and higher MPIR revenue |
| | | | | | | | |
| 2,099 | | | 2,414 | | | (315) | | | | | Kilowatthour sales (millions)3 |
| | | | | | | | |
| | | | | | | | |
| $ | 49.71 | | | $ | 82.30 | | | $ | (32.59) | | | | | Average fuel oil cost per barrel |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30 | | Increase | | |
| 2020 | | 2019 | | (decrease) | | (dollars in millions, except per barrel amounts) |
| $ | 1,694 | | | $ | 1,901 | | | $ | (207) | | | | | Revenues. Net decrease largely due to: |
| | | | | | $ | (167) | | | lower fuel oil prices and lower kWh generated1 |
| | | | | | (45) | | | lower purchased power energy prices and lower kWh purchased2 |
| | | | | | (6) | | | lower PPAC revenue2 |
| | | | | | (6) | | | higher cost savings from ERP system implementation to be returned to customers in future rates |
| | | | | | 3 | | | higher MPIR revenue (increase for West Loch PV project and Grid Modernization project) |
| | | | | | 14 | | | higher electric rates |
| 391 | | | 541 | | | (150) | | | | | Fuel oil expense1. Decrease largely due to lower fuel oil prices and lower kWh generated, offset in part by higher fuel handling costs |
| 426 | | | 472 | | | (46) | | | | | Purchased power expense1 ,2. Decrease largely due to lower purchased power energy prices, lower kWh purchased and lower capacity and non-fuel O&M charges |
| 349 | | | 362 | | | (13) | | | | | Operation and maintenance expenses. Net decrease largely due to: |
| | | | | | (12) | | | fewer generating unit overhauls performed in 2020 |
| | | | | | (5) | | | lower labor due to lower staffing and reduction in overtime |
| | | | | | (3) | | | less station maintenance work performed |
| | | | | | 1 | | | higher medical premium costs |
| | | | | | 1 | | | demolition costs for leased office space |
| | | | | | 1 | | | higher consulting costs for Electrification of Transportation initiatives |
| | | | | | 1 | | | increase in Pearl Harbor environmental and general liability reserves |
| | | | | | 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 |
| 329 | | | 341 | | | (12) | | | | | Other expenses. Decrease due to lower revenue taxes offset in part by higher depreciation expense in 2020 for plant investments in 2019 |
| 200 | | | 184 | | | 16 | | | | | Operating income. Increase due to lower operation and maintenance expenses, coupled with higher electric rates and higher MPIR revenue, offset in part by higher depreciation expense |
| 157 | | | 141 | | | 16 | | | | | Income before income taxes. Increase due to lower operation and maintenance expense, 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 |
| 126 | | | 111 | | | 15 | | | | | Net income for common stock. Increase due to lower operating expenses, coupled with higher electric rate and higher MPIR revenue. See below for effective tax rate explanation |
| 5,979 | | | 6,449 | | | (470) | | | | | Kilowatthour sales (millions)3 |
| $ | 64.70 | | | $ | 83.64 | | | $ | (18.94) | | | | | Average fuel oil cost per barrel |
| 466,943 | | | 464,892 | | | 2,051 | | | | | 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 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 the third quarters of 2020 and 2019 was 19% for both periods. The Utilities’ effective tax rates for the first nine months of 2020 and 2019 were at 19% and 20%, respectively. The effective tax rate was lower for the nine months ended September 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 8.4% and 7.6% for the twelve months ended September 30, 2020 and September 30, 2019, respectively.
The net book value (cost less accumulated depreciation) of utility property, plant and equipment (PPE) as of September 30, 2020 amounted to $4.7 billion, of which approximately 28% related to generation PPE, 64% related to transmission and distribution PPE, and 8% related to other PPE. Approximately 10% 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 utilities (and 98% to ratepayers) and has a maximum exposure (or benefit) of $3.1 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. 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 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.
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 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 September 30, 2020, approximately $13.5 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.
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. 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. 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 Phase 2 field devices application will be filed at the end of first quarter of 2021, at which time the ADMS filing could be resumed and unsuspended.
The Utilities acquired spectrum licenses in the Federal Communications Commission Citizens Broadband Radio Service Auction which concluded in August. The licenses represent the first step in facilitating the development of a Private LTE (PLTE) communications network that provides another option for the growing demand of connectivity to all parts of the electric grid in order to better serve our customers, and facilitate Grid Modernization and our renewable goals. Use cases for an PLTE
network include backhaul for advanced metering infrastructure, switches, monitoring devices, falling conductor protection systems, surveillance equipment, mobile radios, and supervisory control and data acquisition systems. With respect to the Grid Modernization strategy, PLTE provides optionality to ubiquitously connect devices that are in less densely congregated service areas and/or not accessible with existing telecommunications infrastructure.
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 RFPs, tariff, and contracts were filed on September 8, 2020. Depending on the timing of PUC approval, the Utilities may issue these RFPs before the end of the year.
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.
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 are due on December 1, 2020. Pending PUC approval, the Utilities anticipate issuing these RFPs during the first quarter of 2021.
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.
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 September 30, 2020, were as follows:
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| % | | Rate-making Return on rate base (RORB)* | | ROACE** | | Rate-making ROACE*** |
Twelve months ended September 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 | | 7.10 | | | 7.18 | | | 6.58 | | | 8.44 | | | 8.84 | | | 7.76 | | | 9.25 | | | 9.14 | | | 8.53 | |
| PUC-allowed returns | | 7.57 | | | 7.52 | | | 7.43 | | | 9.50 | | | 9.50 | | | 9.50 | | | 9.50 | | | 9.50 | | | 9.50 | |
| Difference | | (0.47) | | | (0.34) | | | (0.85) | | | (1.06) | | | (0.66) | | | (1.74) | | | (0.25) | | | (0.36) | | | (0.97) | |
* 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 September 30, 2020, 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 |
| Hawaiian Electric | | | | | | | | | | | | | | | | |
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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 is required to file revised tariff sheets within fifteen days of this final D&O. The effective date of the final tariffs is subject to PUC approval.
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 will take effect on January 1, 2021.
See also “Most recent rate proceedings” in Note 3 of the Condensed Consolidated Financial Statements.
Performance-based regulation. See “Performance incentive mechanisms” and “Performance-based regulation proceeding” in Note 3 of the Condensed Consolidated Financial Statements.
Developments in renewable energy efforts. Developments in the Utilities’ efforts to further their renewable energy strategy include renewable energy projects discussed in Note 3 of the Condensed Consolidated Financial Statements and the following:
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. Reconductoring work is in progress and the Utilities are evaluating if further testing can continue.
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. The parties are presently briefing the matter before the Supreme Court, but the Court has yet to set a date for oral arguments.
•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 September 30, 2020, there were approximately 504MW, 108 MW and 122 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 September 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 19% of the Utilities’ total customers have solar systems.
•The Utilities began accepting energy from feed-in tariff projects in 2011. As of September 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 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 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 was approved on October 5, 2020. 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 the one most recently approved for Maui Electric, 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 was approved on October 5, 2020.
•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. Since selection, four renewable plus storage projects have voluntarily withdrawn from the process 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 8 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. Contract negotiations continue for the remaining projects.
A summary of the 8 PPAs that were filed with the PUC, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Utilities | | Number of contracts | | Total photovoltaic size (MW) | | BESS Size (MW/MWh) | | Guaranteed commercial operation dates | | Contract term (years) | | Total projected annual payment (in millions) |
| Hawaiian Electric | | 5 | | 232 | | 232/1,055 | | 5/31/2022, 5/17/2023, 10/30/2023, 12/29/2023 & 12/31/2023 | | 20 & 25 | | $ | 62.0 | |
| Hawaiian Electric | | 1 | | N/A | | 185/565 | | 06/01/2022 | | 20 | | 24.0 | |
| Maui Electric | | 2 | | 60 | | 60/240 | | 4/30/2023 & 12/29/2023 | | 25 | | 16.7 | |
| Total | | 8 | | 292 | | 477/1,860 | | | | | | $ | 102.7 | |
A summary of the GSPAs that were filed with the PUC is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Utilities | | | | Fast Frequency Response - 1
(MW) | | Fast Frequency Response - 2
(MW) | | Capacity -
Load Build
(MW) | | Capacity -
Load Reduction
(MW) |
| Hawaiian Electric | | | | — | | 26.7 | | 14.5 | | 19.4 |
| Hawaii Electric Light | | | | 6.0 | | — | | 3.2 | | 4.0 |
| Maui Electric | | | | 6.1 | | — | | 1.9 | | 4.7 |
| Total | | | | 12.1 | | 26.7 | | 19.6 | | 28.1 |
A summary of the utility self-build projects that were filed with the PUC is as follows:
| | | | | | | | | | | | | | | | | | | | |
| Utilities | | Number of contracts | | BESS Size (MW/MWh) | | Guaranteed commercial operation dates |
| Hawaii Electric Light | | 1 | | 12/12 | | 12/30/2022 |
| Maui Electric | | 1 | | 40/160 | | 4/28/2023 |
| 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. Projects may come online as early as 2023. 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. 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. 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.
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.
Army privatization. On October 30, 2020, the PUC approved Hawaiian Electric’s 50-year contract with the U.S. Army to own, operate and maintain the electric distribution system serving the U.S. Army’s 12 installations on Oahu, including Schofield Barracks, Wheeler Army Airfield, Tripler Army Medical Center, Fort Shafter, and Army housing areas. Hawaiian Electric will acquire the Army’s existing distribution system for a purchase price of $16.3 million and will pay the Army in the form of a monthly credit against the monthly utility services charge over the 50-year term of the contract.
Hawaiian Electric will take ownership and all responsibilities for operation and maintenance of the system in late 2021 for a 50-year term after a one-year transition period. Under the contract, Hawaiian Electric will make initial capital upgrades over
the first six years of the contract and replacements of aging infrastructure over the 50-year term. In addition to its regular monthly electricity bill, the Army will pay Hawaiian Electric a monthly utility services charge to cover operations and maintenance expenses and provide recovery for capital upgrades, capital replacements, and the existing distribution system based on a rate of return determined by the PUC for regulated utility investments, as well as depreciation expense. A preliminary assessment estimated the capital needs of approximately $40 million in the first six years of the contract. The PUC requires Hawaiian Electric to file regular periodic reports on the activities and investments in fulfillment of the contract and will review the major projects planned on behalf of the Army. The annual impact on Hawaiian Electric’s earnings is not expected to be material and will depend on a number of factors, including the amount and timing of capital upgrades and capital
replacement.
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 by the Federal Reserve Board, and the program was launched in April 2020. As a result, commercial paper rates began to decrease and returned to levels that existed before the start of the COVID-19 pandemic. As a result, 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 September 30, 2020, there were no amounts outstanding on Hawaiian Electric’s revolving credit facilities.
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 issued $160 million of notes through a 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. Secondly, $50 million of an existing 364-day term loan was refinanced with a new $50 million term loan maturing in April 2021. In addition, the Utilities executed a $115 million private placement of taxable debt on October 29, 2020, to finance their capital expenditures and/or to reimburse funds used for the payment of capital expenditures. The private placement has a delayed draw feature, which allows the Utilities to draw the funds at any time on or before January 15, 2021. As of September 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. Starting in the second quarter of 2020, the Utilities also deferred approximately $5.7 million per month in planned monthly pension contributions to further strengthen is liquidity position. These deferred contributions were paid in September 2020. 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) | | September 30, 2020 | | December 31, 2019 |
| Short-term borrowings | | $ | 50 | | | 1 | % | | $ | 89 | | | 2 | % |
| Long-term debt, net | | 1,561 | | | 42 | | | 1,498 | | | 41 | |
| Preferred stock | | 34 | | | 1 | | | 34 | | | 1 | |
| Common stock equity | | 2,093 | | | 56 | | | 2,047 | | | 56 | |
| | $ | 3,738 | | | 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) | | Nine months ended September 30, 2020 | | September 30, 2020 | | December 31, 2019 |
Short-term borrowings 1 | | | | | | |
| Commercial paper | | $ | 24 | | | $ | — | | | $ | 39 | |
| Borrowings from HEI | | — | | | — | | | — | |
| Line of credit draws | | 21 | | | — | | | — | |
| Undrawn capacity under line of credit facilities | | — | | | 275 | | | 200 | |
1 The maximum amount of external short-term borrowings by Hawaiian Electric during the first nine months of 2020 was approximately $210 million. As of September 30, 2020, Hawaii Electric Light and Maui Electric had short-term borrowings from Hawaiian Electric of $26.5 million and $2 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 September 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 September 30, 2020, Hawaiian Electric had $20 million of undrawn funds remaining with the trustee. Hawaii Electric Light and Maui Electric had no undrawn funds as of September 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.
On September 30, 2020, the Utilities received PUC approval to issue, prior to December 31, 2021, $115 million of 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) to finance capital expenditures, repay long-term and/or short term debt used to finance or refinance capital expenditures, and/or to reimburse funds used for payment of capital expenditures.
Pursuant to this approval, on October 29, 2020, the Utilities executed through a private placement, $115 million of unsecured senior notes bearing taxable interest ($60 million for Hawaiian Electric, $30 million for Hawaii Electric Light and $25 million for Maui Electric) to finance their capital expenditures and/or to reimburse funds used for the payment of capital expenditures. The private placement has a delayed draw feature, which allows the Utilities to draw the funds at any time on or before January 15, 2021. See Note 5 of the Condensed Consolidated Financial Statements.
As of October 29, 2020, 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 to be issued on or before January 15, 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 September 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 nine months ended September 30, 2020 compared to the nine months ended September 30, 2019:
| | | | | | | | | | | | | | | | | |
| Nine months ended September 30 | | |
| (in thousands) | 2020 | | 2019 | | Change |
| Net cash provided by operating activities | $ | 244,955 | | | $ | 282,618 | | | $ | (37,663) | |
| Net cash used in investing activities | (260,187) | | | (295,145) | | | 34,958 | |
| Net cash provided by financing activities | 23,596 | | | 9,157 | | | 14,439 | |
Net cash provided by operating activities. The decrease in net cash provided by operating activities was primarily driven by lower cash from a decrease in accounts payable due to timing, and lower cash receipts from customers due to lower customer bills as a result of 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 increase in net cash provided by financing activities was primarily driven by higher net cash proceeds from long-term borrowings.
Forecast capital expenditures. The Utilities continuously monitor the impact of COVID-19, and for the three-year period 2021 through 2023, 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
See also Recent developments—COVID-19 in HEI’s MD&A.
ASB continues to be impacted by the economic slowdown caused by COVID-19, including significant disruption to the global financial markets and impacts to the capital markets, which has resulted in lower interest rates across the curve. The bank’s net interest margin of 3.12% for the quarter ended September 30, 2020 was 9 basis points lower than the net interest margin for the prior quarter and 70 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-lived 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 was 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 for travelers that have not provided a negative pre-arrival COVID-19 test result 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 September 30, 2020, the provision for credit losses was $14.0 million, compared to $3.3 million for the three months ended September 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 September 2020, short-term loan modifications were made to approximately 3% 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 certain fees were waived during the quarter to accommodate the hardships facing its customers. Through September 2020, ASB also had higher direct and incremental operating expenses related to COVID-19 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 September 30, 2020, the higher operating expenses, which were considered direct and incremental COVID-19 related costs, were approximately $4.5 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 five of the branches that were temporarily closed and permanently closed six branches. 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 September 30 | | Increase | | |
| (in millions) | | 2020 | | 2019 | | (decrease) | | Primary reason(s) |
| Interest income | | $ | 60 | | | $ | 67 | | | $ | (7) | | | The decrease in interest income was primarily the result of lower earning asset yields partly offset by an increase in the balances of the loan and investment portfolios. ASB’s average loan portfolio balance for the three months ended September 30, 2020 increased by $383 million compared to the same period in 2019 due to increases in the average commercial and commercial real estate loan portfolio balances of $424 million and $80 million, respectively. Included in the commercial loan portfolio growth were the PPP loans with an average balance of $358 million. The consumer and residential loan portfolio average balances decreased by $71 million and $39 million, respectively. The decrease in the consumer loan portfolio average balance was due to ASB’s decision to reduce its production of personal unsecured loans in the current economic environment. The decrease in the residential loan portfolio average balance was due to ASB’s decision to sell its low interest rate saleable loan production. The yield on the loan portfolio was 82 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 September 30, 2020 increased by $225 million compared to the same period in 2019 as ASB purchased investment securities with excess liquidity. The yield on the investment securities portfolio decreased by 40 basis points due to the lower interest rate environment. The average balance of interest-earning deposits increased by $243 million for the three months ended September 30, 2020 compared to the same period in 2019 as cash balances grew due to deposit growth, which outpaced loan growth. |
| Noninterest income | | 19 | | | 16 | | | 3 | | | Noninterest income increased for the three months ended September 30, 2020 compared to noninterest income for the three months ended September 30, 2019 primarily due to an increase in mortgage banking income, partly offset by lower fee income from other financial services and deposit liabilities. 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 partially 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 | | — | | | — | | | — | | | 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 | | 79 | | | 83 | | | (4) | | | The decrease in revenues for the three months ended September 30, 2020 compared to the same period in 2019 was primarily due to lower interest income, partly offset by higher noninterest income. |
| Interest expense | | 2 | | | 5 | | | (3) | | | The decrease in interest expense for the three months ended September 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 September 30, 2020 increased by $826 million compared to the same period in 2019 due to an increase in core deposits of $1.1 billion, partly offset by a decrease in average term certificate balances of $225 million. Average cost of deposits for the three months ended September 30, 2020 was 13 basis points, or 15 basis points lower than the cost of deposits for the same period in 2019. Average other borrowings for the three months ended September 30, 2020 was $19 million lower compared to the same period in 2019 and the rate was 120 basis points lower. The interest-bearing liability rate for the three months ended September 30, 2020 of 20 basis points decreased 23 basis points compared to the same period in 2019. |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30 | | Increase | | |
| (in millions) | | 2020 | | 2019 | | (decrease) | | Primary reason(s) |
| Provision for credit losses | | 14 | | | 3 | | | 11 | | | The provision for credit losses increased for the three months ended September 30, 2020 compared to the provision for loan losses for the three months ended September 30, 2019. The provision for credit losses for 2020 was primarily for increased reserves in the commercial, commercial real estate and consumer loan portfolios for expected credit deterioration due to the COVID-19 pandemic of $12.3 million and additional loss reserves to cover net charge-offs, partly offset by lower loss reserves for the consumer unsecured loan portfolio due to lower portfolio balances and loss rates. The provision for credit losses for 2019 was primarily for additional loan loss reserves for the consumer loan portfolio and growth in the loan portfolio, partly offset by the release of commercial and commercial real estate loan loss reserves due to a loan payoff and upgrades in those portfolios, and the release of loan loss reserves resulting from improving credit trends throughout the loan portfolio. Delinquency rates have decreased from 0.41% at September 30, 2019 to 0.31% at September 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 September 30, 2020 was 0.32% compared to an annualized net charge-off ratio of 0.69% for the same period in 2019. The annualized net charge-off for 2019 was impacted by the partial charge-off of a commercial credit. |
| Noninterest expense | | 47 | | | 46 | | | 1 | | | Noninterest expense for the three months ended September 30, 2020 increased compared to the same period in 2019. The increase in expenses were due to higher compensation and benefit expenses and additional expenses related to the COVID-19 pandemic of approximately $0.7 million1. See Recent Developments-COVID-19 for a discussion of the additional expenses incurred due to the COVID-19 pandemic. |
| Expenses | | 63 | | | 54 | | | 9 | | | The increase in expenses for the three months ended September 30, 2020 compared to the same period in 2019 was due to higher provision for loan losses and higher noninterest expenses, partly offset by lower interest expense. |
| Operating income | | 16 | | | 28 | | | (12) | | | The decrease in operating income for the three months ended September 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 higher noninterest income and lower interest expense. |
| Gain on sale of investment securities, net | | — | | | 1 | | | (1) | | | Prior year gain on sale of investment securities |
| Net income | | 12 | | | 23 | | | (11) | | | The decrease in net income for the three months ended September 30, 2020 compared to the same period in 2019 was primarily due to lower operating income, partly offset by lower income tax expense. |
1 Higher operating expenses, which were considered direct and incremental COVID-19 related costs, included approximately $0.1 million of incremental compensation expense and $0.5 million of enhanced cleaning and sanitation costs.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Nine months ended September 30 | | Increase | | |
| (in millions) | | 2020 | | 2019 | | (decrease) | | Primary reason(s) |
| Interest income | | $ | 184 | | | $ | 202 | | | $ | (18) | | | The decrease in interest income was primarily the result of a decrease in yield on earning assets, partly offset by higher loan portfolio balances. ASB’s average loan portfolio balance for the nine months ended September 30, 2020 increased by $382 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 portfolio balances of $305 million, $74 million and $54 million, respectively. Included in the commercial loan portfolio growth were the PPP loans with an average balance of $209 million. The average consumer loan portfolio balance decreased by $43 million due to ASB’s decision to reduce its production of personal unsecured loans in the current economic environment. 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 70 basis points. The average investment portfolio balance for the nine months ended September 30, 2020 increased slightly compared to the same period in 2019 and the portfolio yield for September 30, 2020 was 26 basis points lower than the investment portfolio yield in the prior year. The average interest-earning deposit balance for the nine months ended September 30, 2020 increased by $163 million compared to the same period in 2019 as cash balances grew due to deposit growth, which outpaced loan growth. |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Nine months ended September 30 | | Increase | | |
| (in millions) | | 2020 | | 2019 | | (decrease) | | Primary reason(s) |
| Noninterest income | | 58 | | | 46 | | | 12 | | | The increase in noninterest income for the nine months ended September 30, 2020 compared to noninterest income for the nine months ended September 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 and lower bank owned life insurance income. In 2020, 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. 2019 bank owned life insurance income included higher policy payouts. |
| 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 | | 233 | | | 248 | | | (15) | | | The decrease in revenues for the nine months ended September 30, 2020 compared to the same period in 2019 was primarily due to lower interest income, partly offset by higher noninterest income. |
| Interest expense | | 9 | | | 14 | | | (5) | | | The decrease in interest expense for the nine months ended September 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 nine months ended September 30, 2020 increased by $529 million compared to the same period in 2019 due to an increase in core deposits of $650 million, partly offset by a decrease in average term certificate balances of $121 million. Average cost of deposits for the nine months ended September 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 nine months ended September 30, 2020 decreased by $11 million compared to the same period in 2019 due to a decrease in FHLB advances of $17 million, partly offset by an increase in repurchase agreements and federal funds purchased of $6 million. The interest-bearing liability rate for the nine months ended September 30, 2020 of 27 basis points decreased by 16 basis points compared to the same period in 2019. |
| Provision for credit losses | | 40 | | | 18 | | | 22 | | | The provision for credit losses increased for the nine months ended September 30, 2020 compared to the provision for credit losses for the nine months ended September 30, 2019. The provision for credit losses for 2020 was primarily due to additional loss reserves for the commercial, commercial real estate and the consumer loan portfolios for expected credit deterioration due to the COVID-19 pandemic and additional loss reserves for the consumer loan portfolio. 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 0.41% at September 30, 2019 to 0.31% at September 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 nine months ended September 30, 2020 was 0.41% compared to an annualized net charge-off ratio of 0.46% for the same period in 2019. |
| Noninterest expense | | 142 | | | 139 | | | 3 | | | Noninterest expense for the nine months ended September 30, 2020 was increased slightly compared to the same period in 2019. Higher expenses1 related to the COVID-19 pandemic, of approximately $4.5 million, were partly offset by lower marketing expenses. See Recent Developments-COVID-19 for a discussion of the additional expenses incurred due to the COVID-19 pandemic. |
| Expenses | | 191 | | | 171 | | | 20 | | | The increase in expenses for the nine months ended September 30, 2020 compared to the same period in 2019 was due to higher provision for credit losses and higher noninterest expenses, partly offset by lower interest expense. |
| Operating income | | 42 | | | 76 | | | (34) | | | The decrease in operating income for the nine months ended September 30, 2020 compared to the same period in 2019 was primarily due to lower interest income, higher provision for credit losses and higher noninterest expenses, partly offset by lower interest expense and higher noninterest income. |
| 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 | | 42 | | | 61 | | | (19) | | | Net income for the nine months ended September 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 and lower income tax expenses. |
1 Higher operating expenses, which were considered direct and incremental COVID-19 related costs, included approximately $2.4 million of incremental compensation expense and $1.7 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 September 30 | | Nine months ended September 30 |
| (%) | | 2020 | | 2019 | | 2020 | | 2019 |
| Return on average assets | | 0.61 | | | 1.29 | | | 0.73 | | | 1.14 | |
| Return on average equity | | 6.75 | | | 13.75 | | | 7.95 | | | 12.44 | |
| Net interest margin | | 3.12 | | | 3.82 | | | 3.34 | | | 3.87 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30 |
| | 2020 | | 2019 |
| (dollars in thousands) | | Average
balance | | Interest
income/
expense | | Yield/
rate (%) | | Average
balance | | Interest
income/
expense | | Yield/
rate (%) |
| Assets: | | | | | | | | | | | | |
| Interest-earning deposits | | $ | 252,738 | | | $ | 64 | | | 0.10 | | | $ | 9,764 | | | $ | 55 | | | 2.20 | |
| FHLB stock | | 9,891 | | | 83 | | | 3.31 | | | 10,029 | | | 91 | | | 3.63 | |
| Investment securities | | | | | | | | | | | | |
| Taxable | | 1,598,389 | | | 6,922 | | | 1.73 | | | 1,372,821 | | | 7,175 | | | 2.09 | |
| Non-taxable | | 27,917 | | | 193 | | | 2.70 | | | 28,341 | | | 352 | | | 4.86 | |
| Total investment securities | | 1,626,306 | | | 7,115 | | | 1.75 | | | 1,401,162 | | | 7,527 | | | 2.15 | |
| Loans | | | | | | | | | | | | |
| Residential 1-4 family | | 2,158,258 | | | 21,085 | | | 3.91 | | | 2,196,926 | | | 22,550 | | | 4.11 | |
| Commercial real estate | | 947,337 | | | 8,207 | | | 3.41 | | | 867,164 | | | 10,107 | | | 4.58 | |
| Home equity line of credit | | 1,052,607 | | | 8,201 | | | 3.10 | | | 1,064,020 | | | 9,961 | | | 3.71 | |
| Residential land | | 13,574 | | | 187 | | | 5.51 | | | 14,341 | | | 202 | | | 5.64 | |
| Commercial | | 1,055,190 | | | 8,119 | | | 3.06 | | | 630,739 | | | 7,314 | | | 4.58 | |
| Consumer | | 202,844 | | | 6,642 | | | 13.03 | | | 273,629 | | | 9,149 | | | 13.26 | |
Total loans 1,2 | | 5,429,810 | | | 52,441 | | | 3.84 | | | 5,046,819 | | | 59,283 | | | 4.66 | |
Total interest-earning assets 3 | | 7,318,745 | | | 59,703 | | | 3.25 | | | 6,467,774 | | | 66,956 | | | 4.11 | |
| Allowance for credit losses | | (81,055) | | | | | | | (58,441) | | | | | |
| Noninterest-earning assets | | 764,504 | | | | | | | 707,733 | | | | | |
| Total assets | | $ | 8,002,194 | | | | | | | $ | 7,117,066 | | | | | |
| Liabilities and shareholder’s equity: | | | | | | | | | | | | |
| Savings | | $ | 2,715,445 | | | $ | 424 | | | 0.06 | | | $ | 2,338,580 | | | $ | 504 | | | 0.09 | |
| Interest-bearing checking | | 1,130,053 | | | 92 | | | 0.03 | | | 1,041,485 | | | 388 | | | 0.15 | |
| Money market | | 165,330 | | | 86 | | | 0.21 | | | 141,664 | | | 229 | | | 0.64 | |
| Time certificates | | 596,601 | | | 1,685 | | | 1.12 | | | 821,711 | | | 3,263 | | | 1.58 | |
| Total interest-bearing deposits | | 4,607,429 | | | 2,287 | | | 0.20 | | | 4,343,440 | | | 4,384 | | | 0.40 | |
| Advances from Federal Home Loan Bank | | 30,283 | | | 27 | | | 0.36 | | | 39,880 | | | 233 | | | 2.32 | |
| Securities sold under agreements to repurchase and federal funds purchased | | 65,988 | | | 34 | | | 0.20 | | | 75,814 | | | 189 | | | 0.99 | |
| Total interest-bearing liabilities | | 4,703,700 | | | 2,348 | | | 0.20 | | | 4,459,134 | | | 4,806 | | | 0.43 | |
| Noninterest bearing liabilities: | | | | | | | | | | | | |
| Deposits | | 2,421,842 | | | | | | | 1,860,080 | | | | | |
| Other | | 156,687 | | | | | | | 131,832 | | | | | |
| Shareholder’s equity | | 719,965 | | | | | | | 666,020 | | | | | |
| Total liabilities and shareholder’s equity | | $ | 8,002,194 | | | | | | | $ | 7,117,066 | | | | | |
| Net interest income | | | | $ | 57,355 | | | | | | | $ | 62,150 | | | |
Net interest margin (%) 4 | | | | | | 3.12 | | | | | | | 3.82 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30 |
| | 2020 | | 2019 |
| (dollars in thousands) | | Average
balance | | Interest
income/
expense | | Yield/
rate (%) | | Average
balance | | Interest income/ expense | | Yield/
rate (%) |
| Assets: | | | | | | | | | | | | |
| Interest-earning deposits | | $ | 173,151 | | | $ | 216 | | | 0.16 | | | $ | 9,776 | | | $ | 172 | | | 2.32 | |
| FHLB stock | | 9,639 | | | 236 | | | 3.27 | | | 10,052 | | | 276 | | | 3.67 | |
| Investment securities | | | | | | | | | | | | |
| Taxable | | 1,444,895 | | | 21,919 | | | 2.02 | | | 1,444,810 | | | 24,490 | | | 2.26 | |
| Non-taxable | | 28,463 | | | 719 | | | 3.32 | | | 27,476 | | | 1,043 | | | 5.00 | |
| Total investment securities | | 1,473,358 | | | 22,638 | | | 2.05 | | | 1,472,286 | | | 25,533 | | | 2.31 | |
| Loans | | | | | | | | | | | | |
| Residential 1-4 family | | 2,170,785 | | | 64,642 | | | 3.97 | | | 2,178,214 | | | 67,280 | | | 4.12 | |
| Commercial real estate | | 927,901 | | | 26,014 | | | 3.70 | | | 854,252 | | | 30,393 | | | 4.71 | |
| Home equity line of credit | | 1,080,914 | | | 25,894 | | | 3.20 | | | 1,026,440 | | | 29,295 | | | 3.82 | |
| Residential land | | 13,650 | | | 568 | | | 5.55 | | | 13,658 | | | 557 | | | 5.44 | |
| Commercial | | 914,431 | | | 22,535 | | | 3.28 | | | 609,732 | | | 21,196 | | | 4.63 | |
| Consumer | | 228,280 | | | 21,917 | | | 12.82 | | | 271,600 | | | 27,058 | | | 13.32 | |
Total loans 1,2 | | 5,335,961 | | | 161,570 | | | 4.03 | | | 4,953,896 | | | 175,779 | | | 4.73 | |
Total interest-earning assets 3 | | 6,992,109 | | | 184,660 | | | 3.52 | | | 6,446,010 | | | 201,760 | | | 4.17 | |
| Allowance for credit losses | | (77,891) | | | | | | | (55,210) | | | | | |
| Noninterest-earning assets | | 756,882 | | | | | | | 691,148 | | | | | |
| Total assets | | $ | 7,671,100 | | | | | | | $ | 7,081,948 | | | | | |
| Liabilities and shareholder’s equity: | | | | | | | | | | | | |
| Savings | | $ | 2,554,376 | | | $ | 1,583 | | | 0.08 | | | $ | 2,335,613 | | | $ | 1,392 | | | 0.08 | |
| Interest-bearing checking | | 1,091,944 | | | 415 | | | 0.05 | | | 1,041,420 | | | 918 | | | 0.12 | |
| Money market | | 157,689 | | | 425 | | | 0.36 | | | 146,247 | | | 725 | | | 0.66 | |
| Time certificates | | 702,030 | | | 6,522 | | | 1.24 | | | 822,483 | | | 9,888 | | | 1.61 | |
| Total interest-bearing deposits | | 4,506,039 | | | 8,945 | | | 0.26 | | | 4,345,763 | | | 12,923 | | | 0.40 | |
| Advances from Federal Home Loan Bank | | 25,918 | | | 138 | | | 0.71 | | | 42,601 | | | 808 | | | 2.54 | |
| Securities sold under agreements to repurchase and federal funds purchased | | 83,148 | | | 311 | | | 0.50 | | | 77,417 | | | 553 | | | 0.95 | |
| Total interest-bearing liabilities | | 4,615,105 | | | 9,394 | | | 0.27 | | | 4,465,781 | | | 14,284 | | | 0.43 | |
| Noninterest bearing liabilities: | | | | | | | | | | | | |
| Deposits | | 2,204,221 | | | | | | | 1,835,214 | | | | | |
| Other | | 148,547 | | | | | | | 129,642 | | | | | |
| Shareholder’s equity | | 703,227 | | | | | | | 651,311 | | | | | |
| Total liabilities and shareholder’s equity | | $ | 7,671,100 | | | | | | | $ | 7,081,948 | | | | | |
| Net interest income | | | | $ | 175,266 | | | | | | | $ | 187.476 | | | |
Net interest margin (%) 4 | | | | | | 3.34 | | | | | | | 3.87 | |
1 Includes loans held for sale, at lower of cost or fair value.
2 Includes recognition of net deferred loan fees of $1.5 million and nil for the three months ended September 30, 2020 and 2019 and $2.1 million and $0.2 million for the nine months ended September 30, 2020 and 2019, respectively, together with interest accrued prior to suspension of interest accrual on nonaccrual loans.
3 For the three and nine months ended September 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.
| | | | | | | | | | | | | | |
| | | September 30, 2020 | | December 31, 2019 |
| Outstanding balance of home equity loans (in thousands) | | $ | 1,028,011 | | | $ | 1,092,125 | |
| Percent of portfolio in first lien position | | 56.3 | % | | 53.7 | % |
| Annualized net charge-off (recoveries) ratio | | (0.01 | %) | | 0.01 | % |
| Delinquency ratio | | 0.29 | % | | 0.27 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | End of draw period – interest only | | Current amortizing |
| September 30, 2020 | | Total | | Interest only | | 2020-2021 | | 2022-2024 | | Thereafter | |
| Outstanding balance (in thousands) | | $1,028,011 | | $782,835 | | $26,251 | | $98,202 | | $658,382 | | $245,176 |
| % of total | | 100 | % | | 76 | % | | 2 | % | | 10 | % | | 64 | % | | 24 | % |
The HELOC portfolio makes up 19% 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 78% 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 September 30, 2020, approximately 21% 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2020 | | December 31, 2019 |
| (dollars in thousands) | | Balance | | % of total | | Balance | | % of total |
| U.S. Treasury and federal agency obligations | | $ | 63,588 | | | 3 | % | | $ | 117,787 | | | 9 | % |
| Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies | | 1,759,406 | | | 94 | | | 1,165,836 | | | 85 | |
| Corporate bonds | | 31,337 | | | 2 | | | 60,057 | | | 4 | |
| Mortgage revenue bonds | | 27,185 | | | 1 | | | 28,597 | | | 2 | |
| Total investment securities | | $ | 1,881,516 | | | 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.
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 $766 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 September 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 nine months of 2020 and 2019 was 0.18% and 0.28%, respectively.
Federal Home Loan Bank of Des Moines. As of September 30, 2020 ASB had advances outstanding at the FHLB of Des Moines of $56 million compared to nil as of December 31, 2019. As of September 30, 2020, 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.
In February 2020, the FHLB of Des Moines notified its members that certain assets, which included high-quality home equity lines of credit that were priced off a variable index with a fixed rate option, would no longer qualify as collateral for FHLB Advances. In March 2020, the FHLB of Des Moines provisionally accepted the previously disqualified assets as collateral while they assessed 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. 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 ASB’s 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 commercial real estate loans, which increased the borrowing capacity by $200 million.
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 September 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 $22.2 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 nine months of 2020, ASB recorded a provision for credit losses related to the allowance for credit losses of $35.2 million primarily due to increased reserves for the commercial, commercial real estate and consumer loan portfolios for expected credit deterioration due to the COVID-19 pandemic and additional loss reserves for the consumer loan portfolio. During the first nine months of 2019, ASB recorded a provision for credit losses of $17.9 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.
| | | | | | | | | | | | | | | | | | | | |
| | | Nine months ended September 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 | | 35,204 | | | 17,873 | | | 23,480 | |
| Less: net charge-offs | | 16,541 | | | 16,952 | | | 22,244 | |
| Allowance for credit losses, end of period | | $ | 91,459 | | | $ | 53,040 | | | $ | 53,355 | |
| Ratio of net charge-offs during the period to average loans outstanding (annualized) | | 0.41 | % | | 0.46 | % | | 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. For the nine months ended September 30, 2020 and 2019, ASB recorded a provision for credit losses for unfunded commitments of $4.3 million and nil, respectively. As of September 30, 2020 and December 31, 2019, the reserve for unfunded loan commitments was $7.6 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 an FRB response to an inquiry letter sent by ASB. The bank has not reached a decision on the election.
FINANCIAL CONDITION
Liquidity and capital resources.
| | | | | | | | | | | | | | | | | | | | |
| (dollars in millions) | | September 30, 2020 | | December 31, 2019 | | % change |
| Total assets | | $ | 8,076 | | | $ | 7,233 | | | 12 | |
| Investment securities | | 1,882 | | | 1,372 | | | 37 | |
| Loans held for investment, net | | 5,389 | | | 5,068 | | | 6 | |
| Deposit liabilities | | 7,038 | | | 6,272 | | | 12 | |
| Other bank borrowings | | 152 | | | 115 | | | 32 | |
As of September 30, 2020, ASB was one of Hawaii’s largest financial institutions based on assets of $6.6$8.1 billion and deposits of $5.8$7.0 billion.
As of September 30, 2017,2020, ASB’s unused FHLB borrowing capacity was approximately $1.9$2.0 billion. As of September 30, 2017,2020, ASB had commitments to borrowers for loans and unused lines and letters of credit of $1.8 billion. As$2.0 billion, of September 30, 2017, the Company did not havewhich, commitments to lend to borrowers whose loan terms have been modified in troubled debt restructurings.restructurings were nil. Management believes ASB’s current sources of funds will enable it to meet these obligations while maintaining liquidity at satisfactory levels.
For the nine months ended September 30, 2017,2020, net cash provided by ASB’s operating activities was $80$75 million. Net cash used during the same period by ASB’s investing activities was $211$862 million, primarily due to purchases of investmentavailable-for-sale securities of $369$986 million, a net increase in loans of $374 million, purchases of held-to-maturity securities of $29 million, additions to premises and equipment of $36$9 million, and contributions to low-incomelow income housing investments of $8$4 million and a net increase in stock from the Federal Home Loan Bank of $2 million, partly offset by the receipt of repayments from investment securities of $155$366 million, proceeds from the sale of commercial loansinvestment securities of $31 million, a net decrease in loans receivable of $13$169 million and a decrease in restricted cashproceeds from the sale of $2low income housing investments of $7 million. Net cash provided by financing activities during this period was $131$770 million, primarily due to increases in deposit liabilities of $203$766 million and proceeds from FHLB advances of $60 million, and a net increase in retail repurchase agreements of $24$56 million, partly offset by principal payments on FHLB advancesa net decrease in repurchase agreements of $110 million, repayments of securities sold under agreements to repurchase of $14$19 million, a net decrease in mortgage escrow deposits of $5 million and $28 million in common stock dividends to HEI (through ASB Hawaii).
For the nine months ended September 30, 2016,2019, net cash provided by ASB’s operating activities was $42$71 million. Net cash used during the same period by ASB’s investing activities was $310$65 million, primarily due to purchases of investment securities of $354 million, a net increase in loans receivable of $175$258 million, and additions to premises and equipment of $8$22 million, purchases of available-for-sale securities of $5 million, contributions to low income housing investments of $6 million and purchase of bank owned life insurance of $4 million, partly offset by the receipt of repayments and calls offrom available-for-sale investment securities of $173$195 million, proceeds from the sale of investment securities of $16$20 million, and proceeds from the saleredemption of commercial loansbank owned life insurance policies of $38$6 million and the receipt of held-to-maturity investment securities of $9 million. Net cash provided by financing activities during this period was $260$5 million, primarily due to increases in deposit liabilities of $355$37 million and a net increase in retail repurchase agreements of $26 million, partly offset by a net decrease in retail repurchase agreementsFHLB advances of $21 million, maturities of securities sold under agreements to repurchase of $42$7 million, a net decrease in mortgage escrow deposits of $5 million and $27$47 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 be required to report only its leverage ratio. As of September 30, 2017,2020, ASB was well-capitalized (minimum(well-capitalized ratio requirements noted in parentheses)
with a Common equity Tier-1 ratio of 12.7% (6.5%), a Tier-1 capital ratio of 12.7% (8.0%), a Total capital ratio of 13.9% (10.0%) and a Tier-1 leverage ratio of 8.7%8.3% (5.0%). As of December 31, 2016,2019, ASB was well-capitalized with a common equity Tier-1 ratio of 12.2%13.2%, Tier-1 capital ratio of 12.2%13.2%, a Total capital ratio of 13.4%14.3% and a Tier-1 leverage ratio of 8.6%9.1%. 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 very significant market risk for ASB as it could potentially have a significant effectmaterial 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 20162019 Form 10-K (pages 7969 to 81)71).
ASB’s interest-rate risk sensitivity measures as of September 30, 20172020 and December 31, 20162019 constitute “forward-looking statements” and were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Change in interest rates | | Change in NII
(gradual change in interest rates) | | Change in EVE
(instantaneous change in interest rates) |
| (basis points) | | September 30, 2020 | | December 31, 2019 | | September 30, 2020 | | December 31, 2019 |
| +300 | | 4.0 | % | | 2.8 | % | | 24.7 | % | | 15.3 | % |
| +200 | | 2.9 | | | 2.1 | | | 19.4 | | | 12.2 | |
| +100 | | 1.6 | | | 1.3 | | | 11.6 | | | 7.5 | |
| -100 | | (1.7) | | | (2.0) | | | (23.1) | | | (12.7) | |
|
| | | | | | | | | | | | |
| Change in interest rates | | Change in NII (gradual change in interest rates) | | Change in EVE (instantaneous change in interest rates) |
| (basis points) | | September 30, 2017 | | December 31, 2016 | | September 30, 2017 | | December 31, 2016 |
| +300 | | 3.4 | % | | 1.9 | % | | (6.0 | )% | | (8.0 | )% |
| +200 | | 2.5 |
| | 0.8 |
| | (2.7 | ) | | (4.6 | ) |
| +100 | | 1.4 |
| | — |
| | — |
| | (1.6 | ) |
| -100 | | (2.6 | ) | | (0.5 | ) | | (6.1 | ) | | (1.6 | ) |
Management believes that ASB’s net interest rate risk positionincome (NII) sensitivity profile was more asset sensitive as of September 30, 2017 represents a reasonable level of risk. The NII profile under2020 compared to December 31, 2019, primarily driven by the risingexceptionally low interest rate scenarios was more asset sensitive for all rate increasesenvironment. The decrease in market rates increased prepayment expectations in the bank’s fixed-rate mortgage and mortgage-backed investment portfolios.
Economic value of equity (EVE) sensitivity increased as of September 30, 20172020 compared to December 31, 2016. Interest income increased2019 primarily due to thestrong growth of the investment portfolio and higher income from the commercial and HELOC loan portfolios due to an increase in the short-term LIBOR and prime rates.long duration core deposits. In addition, the repricing assumptions of certain commercial loans were updated, which resulteddownward shift in a net increase in NII.
ASB’s base EVE increasedthe yield curve led to $1.15 billion as of September 30, 2017, compared to $1.09 billion as of December 31, 2016, due tofaster prepayment expectations and shortened the growth and mixduration of the balance sheet. The growth of thefixed-rate mortgage and mortgage-backed investment portfolio was funded with the increase in core deposits. The upward shift in short term rates resulted in the market valuation of assets exceeding the valuation of liabilities.
EVE sensitivity to rising rates declined as of September 30, 2017 compared to December 31, 2016. During the first nine months of the year, the purchase of intermediate-termed duration investment securities was funded by longer duration core deposits, resulting in a net decrease in EVE sensitivity. In addition, during the third quarter, the implementation of a new balance sheet management system along with some modeling improvements further decreased sensitivity.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 indicativeindications 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. Furthermore, 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 third quarter of 20172020 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 third quarter of 20172020 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 20162019 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 ASB)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, and travel restrictions, and other governmental orders that severely restrict economic activity remain in place. In the third quarter of 2020, overall kWh sales have declined 13.1% as compared to the third quarter of 2019. 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, and approved by the PUC in October 2020. 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 also 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 September 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 2517 to 3528 of HEI’s and Hawaiian Electric’s 20162019 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 and vthrough 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 third quarter of 2020 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 |
| July 1 to 31, 2017 | | 33,787 |
| | $32.51 | | — | | NA |
| August 1 to 31, 2017 | | 25,972 |
| | $33.23 | | — | | NA |
| September 1 to 30, 2017 | | 181,072 |
| | $34.33 | | — | | 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 |
| July 1 to 31, 2020 | | 27,760 | | $36.66 | | — | | NA |
| August 1 to 31, 2020 | | 20,052 | | $35.24 | | — | | NA |
| September 1 to 30, 2020 | | 208,317 | | $33.71 | | — | | 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,” 32,81719,533 of the 33,78727,660 shares, all10,405 of the 25,97220,052 shares and 163,512181,061 of the 181,072208,317 shares were purchased for the DRIP; none7,052 of the 33,78727,660 shares, none8,153 of the 25,97220,052 shares and 13,70022,749 of the 181,072208,317 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 5. Other Information
A.Ratio of earnings to fixed charges. |
| | | | | | | | | | | | | | | | | | | | | |
| | | Nine months ended September 30 | | Years ended December 31 |
| | | 2017 | | 2016 | | 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
| HEI and Subsidiaries | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Excluding interest on ASB deposits | | 3.92 |
| | 5.34 |
| | 5.05 |
| | 3.68 |
| | 3.80 |
| | 3.55 |
| | 3.30 |
|
| Including interest on ASB deposits | | 3.66 |
| | 5.04 |
| | 4.75 |
| | 3.54 |
| | 3.65 |
| | 3.42 |
| | 3.15 |
|
| Hawaiian Electric and Subsidiaries | | 3.58 |
| | 4.18 |
| | 4.11 |
| | 3.97 |
| | 4.04 |
| | 3.72 |
| | 3.37 |
|
See HEI Exhibit 12.1 and Hawaiian Electric Exhibit 12.2.
Item 6. Exhibits
| | | | | | | | |
| | |
| | |
| | Letter Amendment effective August 15, 2017 to Master Trust Agreement (dated September 4, 2012) between HEI and ASB and Fidelity Management Trust Company |
| | |
| | Hawaiian Electric Industries, Inc. and Subsidiaries
Computation of ratio of earnings to fixed charges, nine months ended September 30, 2017 and 2016 and years ended December 31, 2016, 2015, 2014, 2013 and 2012
|
| | |
| | Certification Pursuant to Rule 13a-14 promulgated under the Securities Exchange Act of 1934 of Constance H. Lau (HEI Chief Executive Officer) |
| | |
| | Certification Pursuant to Rule 13a-14 promulgated under the Securities Exchange Act of 1934 of Gregory C. Hazelton (HEI Chief Financial Officer) |
| | |
| | HEI Certification Pursuant to 18 U.S.C. Section 1350 |
| | |
| HEI Exhibit 101.INS | | XBRL Instance Document - the instance document does not appear on the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
| | |
| HEI Exhibit 101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
| | |
| HEI Exhibit 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| | |
| HEI Exhibit 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| | |
| HEI Exhibit 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
| | |
| HEI Exhibit 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| | |
| HEI Exhibit 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
| | |
| | |
| | Hawaiian Electric Company, Inc. and Subsidiaries
Computation of ratio of earnings to fixed charges, nine months ended September 30, 2017 and 2016 and years ended December 31, 2016, 2015, 2014, 2013 and 2012
|
| | |
| | Certification Pursuant to Rule 13a-14 promulgated under the Securities Exchange Act of 1934 of Alan M. OshimaScott W. H. Seu (Hawaiian Electric Chief Executive Officer) |
| | |
| | Certification Pursuant to Rule 13a-14 promulgated under the Securities Exchange Act of 1934 of Tayne S. Y. Sekimura (Hawaiian Electric Chief Financial Officer) |
| | |
| | Hawaiian Electric Certification Pursuant to 18 U.S.C. Section 1350 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized. The signature of the undersigned companies shall be deemed to relate only to matters having reference to such companies and any subsidiaries thereof.
|
| | | | | | | | | | | | | |
| HAWAIIAN ELECTRIC INDUSTRIES, INC. | | HAWAIIAN ELECTRIC COMPANY, INC. |
| (Registrant) | | (Registrant) |
| | |
| | |
| By | /s/ Constance H. Lau | | By | /s/ Alan M. OshimaScott W. H. Seu |
| Constance H. Lau | | | Alan M. OshimaScott 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 and | | | Senior Vice President |
| Chief Financial Officer | | | and Chief Financial Officer | | | and Chief Financial Officer |
| (Principal Financial and AccountingOfficer of HEI) | | | (Principal Financial Officer of Hawaiian Electric) |
| Officer of HEI) | | |
| | |
| | |
Date: November 2, 20176, 2020 | | Date: November 2, 20176, 2020 |