Item 1. Financial Statements
Hawaiian Electric Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Income (unaudited)
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Three months ended June 30
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Six months ended June 30
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(in thousands, except per share amounts)
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2020
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2019
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2020
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2019
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Revenues
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Electric utility
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$
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534,215
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$
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633,784
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$
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1,131,657
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$
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1,212,279
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Bank
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74,714
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81,687
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154,452
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164,739
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Other
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16
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14
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22
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82
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Total revenues
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608,945
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715,485
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1,286,131
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1,377,100
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Expenses
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Electric utility
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466,414
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578,090
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1,019,898
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1,100,025
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Bank
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66,221
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60,435
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126,556
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117,365
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Other
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4,754
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4,326
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8,419
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9,139
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Total expenses
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537,389
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642,851
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1,154,873
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1,226,529
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Operating income (loss)
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Electric utility
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67,801
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55,694
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111,759
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112,254
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Bank
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8,493
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21,252
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27,896
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47,374
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Other
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(4,738)
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(4,312)
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(8,397)
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(9,057)
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Total operating income
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71,556
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72,634
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131,258
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150,571
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Retirement defined benefits expense—other than service costs
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(934)
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(761)
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(1,868)
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(1,524)
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Interest expense, net—other than on deposit liabilities and other bank borrowings
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(22,613)
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(23,533)
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(44,388)
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(46,656)
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Allowance for borrowed funds used during construction
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752
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1,179
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1,440
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2,257
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Allowance for equity funds used during construction
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2,194
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3,175
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4,209
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6,085
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Gain on sale of investment securities, net
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9,275
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—
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9,275
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—
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Income before income taxes
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60,230
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52,694
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99,926
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110,733
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Income taxes
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10,870
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9,709
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16,673
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21,587
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Net income
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49,360
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42,985
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83,253
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89,146
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Preferred stock dividends of subsidiaries
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473
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473
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946
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946
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Net income for common stock
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$
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48,887
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$
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42,512
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$
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82,307
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$
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88,200
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Basic earnings per common share
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$
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0.45
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$
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0.39
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$
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0.75
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$
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0.81
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Diluted earnings per common share
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$
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0.45
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$
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0.39
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$
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0.75
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$
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0.81
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Weighted-average number of common shares outstanding
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109,146
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108,938
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109,098
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108,925
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Net effect of potentially dilutive shares
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159
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317
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276
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399
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Weighted-average shares assuming dilution
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109,305
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109,255
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109,374
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109,324
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This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2019 Form 10-K.
Hawaiian Electric Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (unaudited)
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Three months ended June 30
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Six months ended June 30
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(in thousands)
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2020
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2019
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2020
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2019
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Net income for common stock
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$
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48,887
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$
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42,512
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$
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82,307
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$
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88,200
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Other comprehensive income (loss), net of taxes:
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Net unrealized gains on available-for-sale investment securities:
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Net unrealized gains on available-for-sale investment securities arising during the period, net of taxes of $356, $5,182, $7,476 and $8,637, respectively
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973
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14,154
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20,421
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23,593
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Reclassification adjustment for net realized gains included in net income, net of taxes of $(599), nil, $(599) and nil, respectively
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(1,638)
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—
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(1,638)
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—
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Derivatives qualifying as cash flow hedges:
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Unrealized interest rate hedging losses arising during the period, net of taxes of $(69), $(380), $(688) and $(520), respectively
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(198)
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(660)
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(1,982)
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(1,063)
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Retirement benefit plans:
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Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of taxes of $1,981, $871, $3,967 and $1,741, respectively
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5,690
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2,503
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11,396
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5,006
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Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes of $(1,789), $(797), $(3,578) and $(1,594), respectively
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(5,159)
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(2,298)
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(10,317)
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(4,596)
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Other comprehensive income (loss), net of taxes
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(332)
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13,699
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17,880
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22,940
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Comprehensive income attributable to Hawaiian Electric Industries, Inc.
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$
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48,555
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$
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56,211
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$
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100,187
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$
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111,140
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This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2019 Form 10-K.
Hawaiian Electric Industries, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (unaudited)
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(dollars in thousands)
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June 30, 2020
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December 31, 2019
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Assets
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Cash and cash equivalents
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$
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574,482
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$
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196,813
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Restricted cash
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29,376
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30,872
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Accounts receivable and unbilled revenues, net
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271,314
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300,794
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Available-for-sale investment securities, at fair value
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1,389,633
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1,232,826
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Held-to-maturity investment securities, at amortized cost
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124,623
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139,451
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Stock in Federal Home Loan Bank, at cost
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9,880
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8,434
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Loans held for investment, net
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5,356,510
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5,067,821
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Loans held for sale, at lower of cost or fair value
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37,143
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12,286
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Property, plant and equipment, net of accumulated depreciation of $2,840,462 and $2,765,569 at June 30, 2020 and December 31, 2019, respectively
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5,181,427
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5,109,628
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Operating lease right-of-use assets
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184,759
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199,171
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Regulatory assets
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682,570
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715,080
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Other
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556,793
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649,885
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Goodwill
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82,190
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82,190
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Total assets
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$
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14,480,700
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$
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13,745,251
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Liabilities and shareholders’ equity
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Liabilities
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Accounts payable
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$
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142,113
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$
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220,633
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Interest and dividends payable
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24,396
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24,941
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Deposit liabilities
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7,029,952
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6,271,902
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Short-term borrowings—other than bank
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131,180
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185,710
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Other bank borrowings
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124,975
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115,110
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Long-term debt, net—other than bank
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2,070,224
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1,964,365
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Deferred income taxes
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368,834
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379,324
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Operating lease liabilities
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191,058
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199,571
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Regulatory liabilities
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977,780
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972,310
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Defined benefit pension and other postretirement benefit plans liability
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514,415
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513,287
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Other
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580,082
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583,545
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Total liabilities
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12,155,009
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11,430,698
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Preferred stock of subsidiaries - not subject to mandatory redemption
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34,293
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34,293
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Commitments and contingencies (Notes 3 and 4)
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Shareholders’ equity
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Preferred stock, no par value, authorized 10,000,000 shares; issued: none
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—
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—
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Common stock, no par value, authorized 200,000,000 shares; issued and outstanding: 109,181,124 shares and 108,973,328 shares at June 30, 2020 and December 31, 2019, respectively
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1,676,616
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1,678,257
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Retained earnings
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616,941
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622,042
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Accumulated other comprehensive loss, net of tax benefits
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(2,159)
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(20,039)
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Total shareholders’ equity
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2,291,398
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2,280,260
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Total liabilities and shareholders’ equity
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$
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14,480,700
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$
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13,745,251
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This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2019 Form 10-K.
Hawaiian Electric Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Shareholders’ Equity (unaudited)
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Common stock
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Retained
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Accumulated
other
comprehensive
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(in thousands)
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Shares
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Amount
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Earnings
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income (loss)
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Total
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Balance, December 31, 2019
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108,973
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$
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1,678,257
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$
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622,042
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$
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(20,039)
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$
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2,280,260
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Impact of adoption of ASU No. 2016-13
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—
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—
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(15,372)
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—
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(15,372)
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Balance, January 1, 2020 after adoption of
ASU No. 2016-13
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108,973
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1,678,257
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606,670
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(20,039)
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2,264,888
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Net income for common stock
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—
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—
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33,420
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—
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33,420
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Other comprehensive income, net of taxes
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—
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—
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—
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18,212
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18,212
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Share-based expenses and other, net
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172
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(3,996)
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—
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—
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(3,996)
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Common stock dividends (33¢ per share)
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—
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|
|
—
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|
|
(36,019)
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—
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(36,019)
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|
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Balance, March 31, 2020
|
|
109,145
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|
|
1,674,261
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|
|
604,071
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|
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(1,827)
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|
|
2,276,505
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Net income for common stock
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—
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|
|
—
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|
|
48,887
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|
|
—
|
|
|
48,887
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|
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Other comprehensive loss, net of tax benefits
|
|
—
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|
|
—
|
|
|
—
|
|
|
(332)
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|
|
(332)
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|
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Share-based expenses and other, net
|
|
36
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|
|
2,355
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|
|
—
|
|
|
—
|
|
|
2,355
|
|
|
Common stock dividends (33¢ per share)
|
|
—
|
|
|
—
|
|
|
(36,017)
|
|
|
—
|
|
|
(36,017)
|
|
|
Balance, June 30, 2020
|
|
109,181
|
|
|
$
|
1,676,616
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|
|
$
|
616,941
|
|
|
$
|
(2,159)
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|
|
$
|
2,291,398
|
|
|
Balance, December 31, 2018
|
|
108,879
|
|
|
$
|
1,669,267
|
|
|
$
|
543,623
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|
|
$
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(50,610)
|
|
|
$
|
2,162,280
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|
|
Net income for common stock
|
|
—
|
|
|
—
|
|
|
45,688
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|
|
—
|
|
|
45,688
|
|
|
Other comprehensive income, net of taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,241
|
|
|
9,241
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|
|
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
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|
|
—
|
|
|
—
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|
|
3,720
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|
|
Common stock dividends (32¢ per share)
|
|
—
|
|
|
—
|
|
|
(34,860)
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|
|
—
|
|
|
(34,860)
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|
|
Balance, June 30, 2019
|
|
108,972
|
|
|
$
|
1,674,153
|
|
|
$
|
562,103
|
|
|
$
|
(27,670)
|
|
|
$
|
2,208,586
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
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|
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|
|
|
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|
|
|
|
|
|
|
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|
|
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2019 Form 10-K.
Hawaiian Electric Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30
|
|
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
Cash flows from operating activities
|
|
|
|
|
|
Net income
|
|
$
|
83,253
|
|
|
$
|
89,146
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities
|
|
|
|
|
|
Depreciation of property, plant and equipment
|
|
119,367
|
|
|
114,863
|
|
|
Other amortization
|
|
26,055
|
|
|
22,439
|
|
|
Provision for credit losses
|
|
25,534
|
|
|
14,558
|
|
|
Loans originated, held for sale
|
|
(277,738)
|
|
|
(96,033)
|
|
|
Proceeds from sale of loans, held for sale
|
|
259,268
|
|
|
89,573
|
|
|
Gain on sale of investment securities, net
|
|
(9,275)
|
|
|
—
|
|
|
Gain on sale of loans
|
|
(8,252)
|
|
|
(1,589)
|
|
|
Deferred income taxes
|
|
(21,565)
|
|
|
(6,662)
|
|
|
Share-based compensation expense
|
|
4,059
|
|
|
5,883
|
|
|
Allowance for equity funds used during construction
|
|
(4,209)
|
|
|
(6,085)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
(3,854)
|
|
|
(4,929)
|
|
|
Changes in assets and liabilities
|
|
|
|
|
|
Decrease in accounts receivable and unbilled revenues, net
|
|
23,458
|
|
|
12,048
|
|
|
Decrease (increase) in fuel oil stock
|
|
31,583
|
|
|
(40,557)
|
|
|
Decrease in regulatory assets
|
|
9,432
|
|
|
25,392
|
|
|
Increase (decrease) in regulatory liabilities
|
|
1,717
|
|
|
(3,403)
|
|
|
Increase (decrease) in accounts, interest and dividends payable
|
|
(48,336)
|
|
|
3,926
|
|
|
Change in prepaid and accrued income taxes, tax credits and utility revenue taxes
|
|
(12,306)
|
|
|
(45,977)
|
|
|
Increase (decrease) in defined benefit pension and other postretirement benefit plans liability
|
|
16,312
|
|
|
(1,774)
|
|
|
|
|
|
|
|
|
Change in other assets and liabilities
|
|
(17,120)
|
|
|
(37,413)
|
|
|
Net cash provided by operating activities
|
|
197,383
|
|
|
133,406
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
Available-for-sale investment securities purchased
|
|
(476,582)
|
|
|
(4,530)
|
|
|
Principal repayments on available-for-sale investment securities
|
|
181,451
|
|
|
123,855
|
|
|
Proceeds from sale of available-for-sale investment securities
|
|
169,157
|
|
|
—
|
|
|
|
|
|
|
|
|
Principal repayments of held-to-maturity investment securities
|
|
15,093
|
|
|
4,774
|
|
|
Purchase of stock from Federal Home Loan Bank
|
|
(22,966)
|
|
|
(53,115)
|
|
|
Redemption of stock from Federal Home Loan Bank
|
|
21,520
|
|
|
54,640
|
|
|
Net increase in loans held for investment
|
|
(328,356)
|
|
|
(173,546)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of low-income housing investments
|
|
6,725
|
|
|
—
|
|
|
Capital expenditures
|
|
(197,816)
|
|
|
(229,282)
|
|
|
|
|
|
|
|
|
Contributions to low income housing investments
|
|
(1,951)
|
|
|
(4,069)
|
|
|
Other
|
|
4,469
|
|
|
6,143
|
|
|
Net cash used in investing activities
|
|
(629,256)
|
|
|
(275,130)
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
Net increase in deposit liabilities
|
|
758,050
|
|
|
98,531
|
|
|
Net increase (decrease) in short-term borrowings with original maturities of three months or less
|
|
(119,211)
|
|
|
112,901
|
|
|
|
|
|
|
|
|
Net increase (decrease) in other bank borrowings with original maturities of three months or less
|
|
(20,135)
|
|
|
1,445
|
|
|
Proceeds from issuance of short-term debt
|
|
165,000
|
|
|
25,000
|
|
|
Repayment of short-term debt
|
|
(100,000)
|
|
|
—
|
|
|
Proceeds from issuance of other bank borrowings
|
|
30,000
|
|
|
—
|
|
|
Proceeds from issuance of long-term debt
|
|
351,942
|
|
|
56,150
|
|
|
Repayment of long-term debt and funds transferred for repayment of long-term debt
|
|
(177,245)
|
|
|
(52,489)
|
|
|
Withheld shares for employee taxes on vested share-based compensation
|
|
(5,700)
|
|
|
(996)
|
|
|
|
|
|
|
|
|
Common stock dividends
|
|
(72,037)
|
|
|
(69,720)
|
|
|
Preferred stock dividends of subsidiaries
|
|
(946)
|
|
|
(946)
|
|
|
Other
|
|
(1,672)
|
|
|
1,189
|
|
|
Net cash provided by financing activities
|
|
808,046
|
|
|
171,065
|
|
|
Net increase in cash, cash equivalents and restricted cash
|
|
376,173
|
|
|
29,341
|
|
|
Cash, cash equivalents and restricted cash, beginning of period
|
|
227,685
|
|
|
169,208
|
|
|
Cash, cash equivalents and restricted cash, end of period
|
|
603,858
|
|
|
198,549
|
|
|
Less: Restricted cash
|
|
(29,376)
|
|
|
—
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
574,482
|
|
|
$
|
198,549
|
|
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2019 Form 10-K.
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidated Statements of Income (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30
|
|
|
|
Six months ended June 30
|
|
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Revenues
|
|
$
|
534,215
|
|
|
$
|
633,784
|
|
|
$
|
1,131,657
|
|
|
$
|
1,212,279
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
Fuel oil
|
|
112,451
|
|
|
181,620
|
|
|
285,672
|
|
|
342,229
|
|
|
Purchased power
|
|
136,838
|
|
|
162,854
|
|
|
276,654
|
|
|
297,299
|
|
|
Other operation and maintenance
|
|
110,041
|
|
|
119,260
|
|
|
237,588
|
|
|
237,390
|
|
|
Depreciation
|
|
55,696
|
|
|
53,913
|
|
|
111,546
|
|
|
107,860
|
|
|
Taxes, other than income taxes
|
|
51,388
|
|
|
60,443
|
|
|
108,438
|
|
|
115,247
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
466,414
|
|
|
578,090
|
|
|
1,019,898
|
|
|
1,100,025
|
|
|
Operating income
|
|
67,801
|
|
|
55,694
|
|
|
111,759
|
|
|
112,254
|
|
|
Allowance for equity funds used during construction
|
|
2,194
|
|
|
3,175
|
|
|
4,209
|
|
|
6,085
|
|
|
Retirement defined benefits expense—other than service costs
|
|
(382)
|
|
|
(701)
|
|
|
(763)
|
|
|
(1,404)
|
|
|
Interest expense and other charges, net
|
|
(17,338)
|
|
|
(18,530)
|
|
|
(33,932)
|
|
|
(36,516)
|
|
|
Allowance for borrowed funds used during construction
|
|
752
|
|
|
1,179
|
|
|
1,440
|
|
|
2,257
|
|
|
Income before income taxes
|
|
53,027
|
|
|
40,817
|
|
|
82,713
|
|
|
82,676
|
|
|
Income taxes
|
|
10,199
|
|
|
7,744
|
|
|
15,481
|
|
|
16,978
|
|
|
Net income
|
|
42,828
|
|
|
33,073
|
|
|
67,232
|
|
|
65,698
|
|
|
Preferred stock dividends of subsidiaries
|
|
229
|
|
|
229
|
|
|
458
|
|
|
458
|
|
|
Net income attributable to Hawaiian Electric
|
|
42,599
|
|
|
32,844
|
|
|
66,774
|
|
|
65,240
|
|
|
Preferred stock dividends of Hawaiian Electric
|
|
270
|
|
|
270
|
|
|
540
|
|
|
540
|
|
|
Net income for common stock
|
|
$
|
42,329
|
|
|
$
|
32,574
|
|
|
$
|
66,234
|
|
|
$
|
64,700
|
|
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2019 Form 10-K.
HEI owns all of the common stock of Hawaiian Electric. Therefore, per share data with respect to shares of common stock of Hawaiian Electric are not meaningful.
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30
|
|
|
|
Six months ended June 30
|
|
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Net income for common stock
|
|
$
|
42,329
|
|
|
$
|
32,574
|
|
|
$
|
66,234
|
|
|
$
|
64,700
|
|
|
Other comprehensive income (loss), net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement benefit plans:
|
|
|
|
|
|
|
|
|
|
Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of taxes of $1,798, $805, $3,596 and $1,610, respectively
|
|
5,184
|
|
|
2,321
|
|
|
10,368
|
|
|
4,643
|
|
|
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes of $(1,789), $(797), $(3,578) and $(1,594), respectively
|
|
(5,159)
|
|
|
(2,298)
|
|
|
(10,317)
|
|
|
(4,596)
|
|
|
Other comprehensive income, net of taxes
|
|
25
|
|
|
23
|
|
|
51
|
|
|
47
|
|
|
Comprehensive income attributable to Hawaiian Electric Company, Inc.
|
|
$
|
42,354
|
|
|
$
|
32,597
|
|
|
$
|
66,285
|
|
|
$
|
64,747
|
|
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2019 Form 10-K.
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands, except par value)
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Assets
|
|
|
|
|
|
Property, plant and equipment
|
|
|
|
|
|
Utility property, plant and equipment
|
|
|
|
|
|
Land
|
|
$
|
51,607
|
|
|
$
|
51,816
|
|
|
Plant and equipment
|
|
7,353,841
|
|
|
7,240,288
|
|
|
Less accumulated depreciation
|
|
(2,758,544)
|
|
|
(2,690,157)
|
|
|
Construction in progress
|
|
214,487
|
|
|
193,074
|
|
|
Utility property, plant and equipment, net
|
|
4,861,391
|
|
|
4,795,021
|
|
|
Nonutility property, plant and equipment, less accumulated depreciation of $113 and $111 as of June 30, 2020 and December 31, 2019, respectively
|
|
6,955
|
|
|
6,956
|
|
|
Total property, plant and equipment, net
|
|
4,868,346
|
|
|
4,801,977
|
|
|
Current assets
|
|
|
|
|
|
Cash and cash equivalents
|
|
63,995
|
|
|
11,022
|
|
|
Restricted cash
|
|
29,376
|
|
|
30,872
|
|
|
Customer accounts receivable, net
|
|
138,038
|
|
|
152,790
|
|
|
Accrued unbilled revenues, net
|
|
100,601
|
|
|
117,227
|
|
|
Other accounts receivable, net
|
|
10,415
|
|
|
11,568
|
|
|
Fuel oil stock, at average cost
|
|
60,479
|
|
|
91,937
|
|
|
Materials and supplies, at average cost
|
|
66,244
|
|
|
60,702
|
|
|
Prepayments and other
|
|
37,929
|
|
|
116,980
|
|
|
Regulatory assets
|
|
21,286
|
|
|
30,710
|
|
|
Total current assets
|
|
528,363
|
|
|
623,808
|
|
|
Other long-term assets
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
161,029
|
|
|
176,809
|
|
|
Regulatory assets
|
|
661,284
|
|
|
684,370
|
|
|
|
|
|
|
|
|
Other
|
|
112,985
|
|
|
101,718
|
|
|
Total other long-term assets
|
|
935,298
|
|
|
962,897
|
|
|
Total assets
|
|
$
|
6,332,007
|
|
|
$
|
6,388,682
|
|
|
Capitalization and liabilities
|
|
|
|
|
|
Capitalization
|
|
|
|
|
|
Common stock ($6 2/3 par value, authorized 50,000,000 shares; outstanding 17,048,783 shares at
June 30, 2020 and December 31, 2019)
|
|
$
|
113,678
|
|
|
$
|
113,678
|
|
|
Premium on capital stock
|
|
714,824
|
|
|
714,824
|
|
|
Retained earnings
|
|
1,232,795
|
|
|
1,220,129
|
|
|
Accumulated other comprehensive loss, net of tax benefits-retirement benefit plans
|
|
(1,228)
|
|
|
(1,279)
|
|
|
Common stock equity
|
|
2,060,069
|
|
|
2,047,352
|
|
|
Cumulative preferred stock — not subject to mandatory redemption
|
|
34,293
|
|
|
34,293
|
|
|
Long-term debt, net
|
|
1,560,955
|
|
|
1,401,714
|
|
|
Total capitalization
|
|
3,655,317
|
|
|
3,483,359
|
|
|
Commitments and contingencies (Note 3)
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
Current portion of operating lease liabilities
|
|
64,534
|
|
|
63,707
|
|
|
Current portion of long-term debt, net
|
|
14,000
|
|
|
95,953
|
|
|
Short-term borrowings from non-affiliates
|
|
49,919
|
|
|
88,987
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
107,078
|
|
|
187,770
|
|
|
Interest and preferred dividends payable
|
|
20,659
|
|
|
20,728
|
|
|
Taxes accrued, including revenue taxes
|
|
193,851
|
|
|
207,992
|
|
|
Regulatory liabilities
|
|
26,067
|
|
|
30,724
|
|
|
Other
|
|
71,691
|
|
|
67,305
|
|
|
Total current liabilities
|
|
547,799
|
|
|
763,166
|
|
|
Deferred credits and other liabilities
|
|
|
|
|
|
Operating lease liabilities
|
|
102,570
|
|
|
113,400
|
|
|
Deferred income taxes
|
|
371,052
|
|
|
377,150
|
|
|
Regulatory liabilities
|
|
951,713
|
|
|
941,586
|
|
|
Unamortized tax credits
|
|
115,006
|
|
|
117,868
|
|
|
Defined benefit pension and other postretirement benefit plans liability
|
|
479,850
|
|
|
478,763
|
|
|
Other
|
|
108,700
|
|
|
113,390
|
|
|
Total deferred credits and other liabilities
|
|
2,128,891
|
|
|
2,142,157
|
|
|
|
|
|
|
|
|
Total capitalization and liabilities
|
|
$
|
6,332,007
|
|
|
$
|
6,388,682
|
|
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2019 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
|
|
|
|
(in thousands)
|
|
Shares
|
|
Amount
|
|
stock
|
|
earnings
|
|
income (loss)
|
|
Total
|
|
Balance, December 31, 2019
|
|
17,048
|
|
|
$
|
113,678
|
|
|
$
|
714,824
|
|
|
$
|
1,220,129
|
|
|
$
|
(1,279)
|
|
|
$
|
2,047,352
|
|
|
Net income for common stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
23,905
|
|
|
—
|
|
|
23,905
|
|
|
Other comprehensive income, net of taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
26
|
|
|
26
|
|
|
Common stock dividends
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(26,784)
|
|
|
—
|
|
|
(26,784)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2020
|
|
17,048
|
|
|
113,678
|
|
|
714,824
|
|
|
1,217,250
|
|
|
(1,253)
|
|
|
2,044,499
|
|
|
Net income for common stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
42,329
|
|
|
—
|
|
|
42,329
|
|
|
Other comprehensive income, net of taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25
|
|
|
25
|
|
|
Common stock dividends
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(26,784)
|
|
|
—
|
|
|
(26,784)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2020
|
|
17,048
|
|
|
$
|
113,678
|
|
|
$
|
714,824
|
|
|
$
|
1,232,795
|
|
|
$
|
(1,228)
|
|
|
$
|
2,060,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2018
|
|
16,751
|
|
|
$
|
111,696
|
|
|
$
|
681,305
|
|
|
$
|
1,164,541
|
|
|
$
|
99
|
|
|
$
|
1,957,641
|
|
|
Net income for common stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
32,126
|
|
|
—
|
|
|
32,126
|
|
|
Other comprehensive income, net of taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
24
|
|
|
24
|
|
|
Common stock dividends
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(25,313)
|
|
|
—
|
|
|
(25,313)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2019
|
|
16,751
|
|
|
111,696
|
|
|
681,305
|
|
|
1,171,354
|
|
|
123
|
|
|
1,964,478
|
|
|
Net income for common stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
32,574
|
|
|
—
|
|
|
32,574
|
|
|
Other comprehensive income, net of taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
23
|
|
|
23
|
|
|
Common stock dividends
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(25,313)
|
|
|
—
|
|
|
(25,313)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2019
|
|
16,751
|
|
|
$
|
111,696
|
|
|
$
|
681,305
|
|
|
$
|
1,178,615
|
|
|
$
|
146
|
|
|
$
|
1,971,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2019 Form 10-K.
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30
|
|
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
Cash flows from operating activities
|
|
|
|
|
|
Net income
|
|
$
|
67,232
|
|
|
$
|
65,698
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities
|
|
|
|
|
|
Depreciation of property, plant and equipment
|
|
111,546
|
|
|
107,860
|
|
|
Other amortization
|
|
16,275
|
|
|
13,661
|
|
|
Deferred income taxes
|
|
(16,237)
|
|
|
(6,611)
|
|
|
|
|
|
|
|
|
State refundable credit
|
|
(5,060)
|
|
|
(4,192)
|
|
|
Bad debt expense
|
|
1,089
|
|
|
802
|
|
|
Allowance for equity funds used during construction
|
|
(4,209)
|
|
|
(6,085)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
116
|
|
|
639
|
|
|
Changes in assets and liabilities
|
|
|
|
|
|
Decrease in accounts receivable
|
|
10,730
|
|
|
9,201
|
|
|
Decrease in accrued unbilled revenues
|
|
15,780
|
|
|
2,581
|
|
|
Decrease (increase) in fuel oil stock
|
|
31,458
|
|
|
(41,706)
|
|
|
Increase in materials and supplies
|
|
(5,542)
|
|
|
(5,890)
|
|
|
Decrease in regulatory assets
|
|
9,432
|
|
|
25,392
|
|
|
Increase (decrease) in regulatory liabilities
|
|
1,717
|
|
|
(3,403)
|
|
|
Decrease in accounts payable
|
|
(48,209)
|
|
|
(45)
|
|
|
Change in prepaid and accrued income taxes, tax credits and revenue taxes
|
|
(14,700)
|
|
|
(45,785)
|
|
|
Increase (decrease) in defined benefit pension and other postretirement benefit plans liability
|
|
14,968
|
|
|
(1,899)
|
|
|
Change in other assets and liabilities
|
|
(4,918)
|
|
|
(9,402)
|
|
|
Net cash provided by operating activities
|
|
181,468
|
|
|
100,816
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
Capital expenditures
|
|
(186,532)
|
|
|
(199,896)
|
|
|
|
|
|
|
|
|
Other
|
|
5,441
|
|
|
2,510
|
|
|
Net cash used in investing activities
|
|
(181,091)
|
|
|
(197,386)
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
Common stock dividends
|
|
(53,568)
|
|
|
(50,626)
|
|
|
Preferred stock dividends of Hawaiian Electric and subsidiaries
|
|
(998)
|
|
|
(998)
|
|
|
Proceeds from issuance of short-term debt
|
|
100,000
|
|
|
25,000
|
|
|
Repayment of short-term debt
|
|
(100,000)
|
|
|
—
|
|
|
Proceeds from issuance of long-term debt
|
|
255,000
|
|
|
50,000
|
|
|
Repayment of long-term debt and funds transferred for repayment of long-term debt
|
|
(109,000)
|
|
|
(51,546)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in short-term borrowings from non-affiliates and affiliates with original maturities of three months or less
|
|
(38,987)
|
|
|
111,901
|
|
|
Other
|
|
(1,347)
|
|
|
323
|
|
|
Net cash provided by financing activities
|
|
51,100
|
|
|
84,054
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
51,477
|
|
|
(12,516)
|
|
|
Cash, cash equivalents and restricted cash, beginning of period
|
|
41,894
|
|
|
35,877
|
|
|
Cash, cash equivalents and restricted cash, end of period
|
|
93,371
|
|
|
23,361
|
|
|
Less: Restricted cash
|
|
(29,376)
|
|
|
—
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
63,995
|
|
|
$
|
23,361
|
|
This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements appearing in the 2019 Form 10-K.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 · Basis of presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) for interim financial information, the instructions to SEC Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In preparing the unaudited condensed consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenues and expenses for the period. Actual results could differ significantly from those estimates. The accompanying unaudited condensed consolidated financial statements and the following notes should be read in conjunction with the audited consolidated financial statements and the notes thereto in HEI’s and Hawaiian Electric’s Form 10-K for the year ended December 31, 2019.
In the opinion of HEI’s and Hawaiian Electric’s management, the accompanying unaudited condensed consolidated financial statements contain all material adjustments required by GAAP to fairly state consolidated HEI’s and Hawaiian Electric’s financial positions as of June 30, 2020 and December 31, 2019 and the results of their operations for the three and six months ended June 30, 2020 and 2019 and cash flows for the six months ended June 30, 2020 and 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.
Credit losses. In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, “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 referred to as the current expected credit loss (CECL) methodology and applies to financial assets subject to credit losses and measured at amortized cost and certain off-balance sheet credit exposures. This includes, but is not limited to loans, loan commitments and held-to-maturity securities. In addition, ASU No. 2016-13 amends the accounting for credit losses on available-for-sale (AFS) debt securities and purchased financial assets with credit deterioration. The other-than-temporary impairment model of accounting for credit losses on AFS debt securities has been replaced with an estimate of expected credit losses only when the fair value is below the amortized cost of the asset. The length of time the fair value of an AFS debt security has been below the amortized cost will no longer impact the determination of whether a credit loss exists. The AFS debt security model requires the use of an allowance to record the estimated losses (and subsequent recoveries).
The Company adopted ASU No. 2016-13 on January 1, 2020 using the modified retrospective method with the cumulative effect of initially applying the amendments recognized in retained 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 over a reasonable and supportable forecast period and then reverts to a longer-term historical loss experience to arrive at lifetime expected credit losses. The reversion period incorporates forward-looking expectations about repayments (including prepayments) as determined by the Company’s asset liability management system.
The allowance for credit losses (ACL) is 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 after-tax basis. The ACL is based on the composition, characteristics and quality of the loans and off balance sheet credit exposures as well as the prevailing economic conditions as of the adoption date. The increase in the ACL primarily relates to required reserves for residential mortgages and consumer loans, due to the requirement to estimate lifetime expected credit losses, with lower ACL requirements for commercial and commercial real estate loans due to their short-term nature. Based on the credit quality of the Company’s existing held-to-maturity and AFS investment securities portfolio, the Company did not recognize an ACL at adoption for those investments. The adoption of the new standard did not have a material impact to the Utilities’ customer and other accounts receivables and accrued unbilled revenue. Results for reporting periods beginning after January 1, 2020 are presented under ASU No. 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
The table below summarizes the impact of the Company’s adoption of ASU No. 2016-13.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2020
|
|
|
|
|
|
(in thousands)
|
|
Pre-ASU No. 2016-13 adoption
|
|
Impact of ASU No. 2016-13
|
|
As reported under ASU No. 2016-13
|
|
HEI consolidated
|
|
|
|
|
|
|
|
Loans held for investments, net1
|
|
$
|
5,067,821
|
|
|
$
|
(19,441)
|
|
|
$
|
5,048,380
|
|
|
Total assets
|
|
$
|
13,745,251
|
|
|
$
|
(19,441)
|
|
|
$
|
13,725,810
|
|
|
Deferred income taxes
|
|
$
|
379,324
|
|
|
$
|
(5,628)
|
|
|
$
|
373,696
|
|
|
Other1
|
|
583,545
|
|
|
1,559
|
|
|
585,104
|
|
|
Total liabilities
|
|
11,430,698
|
|
|
(4,069)
|
|
|
11,426,629
|
|
|
Retained earnings
|
|
622,042
|
|
|
(15,372)
|
|
|
606,670
|
|
|
Total shareholders’ equity
|
|
2,280,260
|
|
|
(15,372)
|
|
|
2,264,888
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
13,745,251
|
|
|
$
|
(19,441)
|
|
|
$
|
13,725,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 The allowance for credit losses is classified in “Loans held for investments, net,” and the allowance for loan commitments is classified in “Other” liabilities in the Company’s condensed consolidated balance sheets.
Reference Rate Reform. In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 provides optional guidance for a limited period of time to ease the potential impacts of transitioning away from reference rates which are expected to be discontinued, such as the London Interbank Offered Rate (LIBOR). The amendments in this ASU apply only to contracts, hedging relationships, and other transactions which reference LIBOR or another reference rate expected to be discontinued. The guidance is effective upon issuance and generally can be applied through December 2022. The Company is evaluating the options provided by ASU 2020-04 and is evaluating the impact on its consolidated financial statements and related disclosures.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Note 2 · Segment financial information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Electric utility
|
|
Bank
|
|
Other
|
|
Total
|
|
Three months ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
534,206
|
|
|
$
|
74,714
|
|
|
$
|
25
|
|
|
$
|
608,945
|
|
|
Intersegment revenues (eliminations)
|
|
9
|
|
|
—
|
|
|
(9)
|
|
|
—
|
|
|
Revenues
|
|
$
|
534,215
|
|
|
$
|
74,714
|
|
|
$
|
16
|
|
|
$
|
608,945
|
|
|
Income (loss) before income taxes
|
|
$
|
53,027
|
|
|
$
|
17,334
|
|
|
$
|
(10,131)
|
|
|
$
|
60,230
|
|
|
Income taxes (benefit)
|
|
10,199
|
|
|
3,320
|
|
|
(2,649)
|
|
|
10,870
|
|
|
Net income (loss)
|
|
42,828
|
|
|
14,014
|
|
|
(7,482)
|
|
|
49,360
|
|
|
Preferred stock dividends of subsidiaries
|
|
499
|
|
|
—
|
|
|
(26)
|
|
|
473
|
|
|
Net income (loss) for common stock
|
|
$
|
42,329
|
|
|
$
|
14,014
|
|
|
$
|
(7,456)
|
|
|
$
|
48,887
|
|
|
Six months ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
1,131,636
|
|
|
$
|
154,452
|
|
|
$
|
43
|
|
|
$
|
1,286,131
|
|
|
Intersegment revenues (eliminations)
|
|
21
|
|
|
—
|
|
|
(21)
|
|
|
—
|
|
|
Revenues
|
|
$
|
1,131,657
|
|
|
$
|
154,452
|
|
|
$
|
22
|
|
|
$
|
1,286,131
|
|
|
Income (loss) before income taxes
|
|
$
|
82,713
|
|
|
$
|
36,303
|
|
|
$
|
(19,090)
|
|
|
$
|
99,926
|
|
|
Income taxes (benefit)
|
|
15,481
|
|
|
6,528
|
|
|
(5,336)
|
|
|
16,673
|
|
|
Net income (loss)
|
|
67,232
|
|
|
29,775
|
|
|
(13,754)
|
|
|
83,253
|
|
|
Preferred stock dividends of subsidiaries
|
|
998
|
|
|
—
|
|
|
(52)
|
|
|
946
|
|
|
Net income (loss) for common stock
|
|
$
|
66,234
|
|
|
$
|
29,775
|
|
|
$
|
(13,702)
|
|
|
$
|
82,307
|
|
|
Total assets (at June 30, 2020)
|
|
$
|
6,332,007
|
|
|
$
|
8,019,665
|
|
|
$
|
129,028
|
|
|
$
|
14,480,700
|
|
|
Three months ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
633,771
|
|
|
$
|
81,687
|
|
|
$
|
27
|
|
|
$
|
715,485
|
|
|
Intersegment revenues (eliminations)
|
|
13
|
|
|
—
|
|
|
(13)
|
|
|
—
|
|
|
Revenues
|
|
$
|
633,784
|
|
|
$
|
81,687
|
|
|
$
|
14
|
|
|
$
|
715,485
|
|
|
Income (loss) before income taxes
|
|
$
|
40,817
|
|
|
$
|
21,292
|
|
|
$
|
(9,415)
|
|
|
$
|
52,694
|
|
|
Income taxes (benefit)
|
|
7,744
|
|
|
4,276
|
|
|
(2,311)
|
|
|
9,709
|
|
|
Net income (loss)
|
|
33,073
|
|
|
17,016
|
|
|
(7,104)
|
|
|
42,985
|
|
|
Preferred stock dividends of subsidiaries
|
|
499
|
|
|
—
|
|
|
(26)
|
|
|
473
|
|
|
Net income (loss) for common stock
|
|
$
|
32,574
|
|
|
$
|
17,016
|
|
|
$
|
(7,078)
|
|
|
$
|
42,512
|
|
|
Six months ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
1,212,253
|
|
|
$
|
164,739
|
|
|
$
|
108
|
|
|
$
|
1,377,100
|
|
|
Intersegment revenues (eliminations)
|
|
26
|
|
|
—
|
|
|
(26)
|
|
|
—
|
|
|
Revenues
|
|
$
|
1,212,279
|
|
|
$
|
164,739
|
|
|
$
|
82
|
|
|
$
|
1,377,100
|
|
|
Income (loss) before income taxes
|
|
$
|
82,676
|
|
|
$
|
47,454
|
|
|
$
|
(19,397)
|
|
|
$
|
110,733
|
|
|
Income taxes (benefit)
|
|
16,978
|
|
|
9,599
|
|
|
(4,990)
|
|
|
21,587
|
|
|
Net income (loss)
|
|
65,698
|
|
|
37,855
|
|
|
(14,407)
|
|
|
89,146
|
|
|
Preferred stock dividends of subsidiaries
|
|
998
|
|
|
—
|
|
|
(52)
|
|
|
946
|
|
|
Net income (loss) for common stock
|
|
$
|
64,700
|
|
|
$
|
37,855
|
|
|
$
|
(14,355)
|
|
|
$
|
88,200
|
|
|
Total assets (at December 31, 2019)
|
|
$
|
6,388,682
|
|
|
$
|
7,233,017
|
|
|
$
|
123,552
|
|
|
$
|
13,745,251
|
|
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.
Hamakua Energy, LLC’s (Hamakua Energy’s) sales to Hawaii Electric Light (a regulated affiliate) are eliminated in consolidation.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Note 3 · Electric utility segment
Unconsolidated variable interest entities.
Power purchase agreements. As of June 30, 2020, the Utilities had four 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 (i.e., customers with cogeneration and/or power production facilities who buy power from or sell power to the Utilities), none of which are currently required to be consolidated as VIEs.
Pursuant to the current accounting standards for VIEs, the Utilities are deemed to have a variable interest in Kalaeloa Partners, L.P. (Kalaeloa), AES Hawaii, Inc. (AES Hawaii) and Hamakua Energy by reason of the provisions of the PPA that the Utilities have with the three IPPs. However, management has concluded that the Utilities are not the primary beneficiary of Kalaeloa, AES Hawaii and Hamakua Energy because the Utilities do not have the power to direct the activities that most significantly impact the three IPPs’ economic performance nor the obligation to absorb their expected losses, if any, that could potentially be significant to the IPPs. Thus, the Utilities have not consolidated Kalaeloa, AES Hawaii and Hamakua Energy in its condensed consolidated financial statements. Hamakua Energy is an indirect subsidiary of Pacific Current and is consolidated in HEI’s condensed consolidated financial statements.
For the other PPAs with IPPs, the Utilities have concluded that the consolidation of the IPPs was not required because either the Utilities do not have variable interests in the IPPs due to the absence of an obligation in the PPAs for the Utilities to absorb any variability of the IPPs, or the IPP was considered a “governmental organization,” and thus excluded from the scope of accounting standards for VIEs. Two IPPs of as-available energy declined to provide the information necessary for Utilities to determine the applicability of accounting standards for VIEs. If information is ultimately received from the IPPs, a possible outcome of future analyses of such information is the consolidation of one or both of such IPPs in the unaudited condensed consolidated financial statements. The consolidation of any significant IPP could have a material effect on the unaudited condensed consolidated financial statements, including the recognition of a significant amount of assets and liabilities and, if such a consolidated IPP were operating at a loss and had insufficient equity, the potential recognition of such losses. If the Utilities determine they are required to consolidate the financial statements of such an IPP and the consolidation has a material effect, the Utilities would retrospectively apply accounting standards for VIEs to the IPP.
Commitments and contingencies.
Contingencies. The Utilities are subject in the normal course of business to pending and threatened legal proceedings. Management does not anticipate that the aggregate ultimate liability arising out of these pending or threatened legal proceedings will be material to its financial position. However, the Utilities cannot rule out the possibility that such outcomes could have a material effect on the results of operations or liquidity for a particular reporting period in the future.
Power purchase agreements. Purchases from all IPPs were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30
|
|
|
|
Six months ended June 30
|
|
|
|
|
|
|
|
(in millions)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
|
|
Kalaeloa
|
|
$
|
34
|
|
|
$
|
61
|
|
|
$
|
72
|
|
|
$
|
101
|
|
|
|
|
|
|
AES Hawaii
|
|
32
|
|
|
32
|
|
|
63
|
|
|
64
|
|
|
|
|
|
|
HPOWER
|
|
17
|
|
|
19
|
|
|
34
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hamakua Energy
|
|
11
|
|
|
18
|
|
|
24
|
|
|
34
|
|
|
|
|
|
|
Wind IPPs
|
|
25
|
|
|
23
|
|
|
53
|
|
|
43
|
|
|
|
|
|
|
Solar IPPs
|
|
17
|
|
|
8
|
|
|
28
|
|
|
15
|
|
|
|
|
|
|
Other IPPs 1
|
|
1
|
|
|
1
|
|
|
3
|
|
|
2
|
|
|
|
|
|
|
Total IPPs
|
|
$
|
137
|
|
|
$
|
162
|
|
|
$
|
277
|
|
|
$
|
296
|
|
|
|
|
|
1Includes hydro power and other PPAs
Kalaeloa Partners, L.P. Under a 1988 PPA, as amended, Hawaiian Electric is committed to purchase 208 MW of firm capacity from Kalaeloa. Hawaiian Electric and Kalaeloa are currently in negotiations to address the PPA term that ended on May 23, 2016. The PPA automatically extends on a month-to-month basis as long as the parties are still negotiating in good faith. Hawaiian Electric and Kalaeloa have agreed that neither party will terminate the PPA (which has been subject to automatic extension on a month-to-month basis) prior to November 20, 2020, 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 ending September 2022, Hawaiian Electric agreed to purchase 180 MW of firm capacity from AES Hawaii. Hawaiian Electric and AES Hawaii have been in dispute over an additional 9 MW of capacity. In February 2018, Hawaiian Electric reached agreement with AES Hawaii on an amendment to the PPA. However, in June 2018, the PUC issued an order suspending review of the amendment pending a Department of Health of the State of Hawaii (DOH) decision on AES Hawaii’s request for approval of its Emission Reduction Plan and partnership with Hawaiian Electric. If approved by the PUC, the amendment will resolve AES Hawaii’s claims related to the additional capacity.
Hu Honua Bioenergy, LLC (Hu Honua). In May 2012, Hawaii Electric Light signed a PPA, which the PUC approved in December 2013, with Hu Honua for 21.5 MW of renewable, dispatchable firm capacity fueled by locally grown biomass from a facility on the island of Hawaii. Under the terms of the PPA, the Hu Honua plant was scheduled to be in service in 2016. However, Hu Honua encountered construction and litigation delays, which resulted in an amended and restated PPA between Hawaii Electric Light and Hu Honua dated May 9, 2017. In July 2017, the PUC approved the amended and restated PPA, which becomes effective once the PUC’s order is final and non-appealable. In August 2017, the PUC’s approval was appealed by a third party. On May 10, 2019, the Hawaii Supreme Court issued a decision remanding the matter to the PUC for further proceedings consistent with the court’s decision which must include express consideration of Green House Gas (GHG) emissions that would result from approving the PPA, whether the cost of energy under the PPA is reasonable in light of the potential for GHG emissions, and whether the terms of the PPA are prudent and in the public interest, in light of its potential hidden and long-term consequences. On June 20, 2019, the PUC issued an order reopening the docket for further proceedings, including re-examining all of the issues in the proceedings. On September 29, 2019, the PUC issued an order setting the procedural schedule for the matter and on December 20, 2019, issued an order modifying the procedural schedule. Pre-hearing matters were completed on March 6, 2020. On July 9, 2020, the PUC issued an order denying the Hawaii Electric Light’s request to waive the amended and restated PPA from the PUC’s competitive bidding requirements and therefore, dismissed the request for approval of the amended and restated PPA without prejudice to possible participation in any future competitive bidding process. On July 20, 2020, Hu Honua filed a motion for reconsideration of the PUC’s order which is currently pending review by the PUC.
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-imposed caps on project costs are expected to be exceeded, project costs may need to be written off in amounts that could result in significant reductions in Hawaiian Electric’s consolidated net income.
Enterprise Resource Planning/Enterprise Asset Management (ERP/EAM) implementation project. The ERP/EAM Implementation Project went live in October 2018. Starting in January 2020, Hawaii Electric Light began to incorporate their portion of the deferred project costs in rate base and start the amortization over a 12-year period. As of June 30, 2020, the total deferred project costs and accrued carrying costs after the project went into service amounted to $59.4 million, which is net of the amortization of $0.3 million at Hawaii Electric Light.
In February 2019, the PUC approved a methodology for passing the future cost saving benefits of the new ERP/EAM system to customers developed by the Utilities in collaboration with the Consumer Advocate. The Utilities filed a benefits clarification document on June 10, 2019, reflecting $150 million in future net O&M expense reductions and cost avoidance, and $96 million in capital cost reductions and tax savings over the 12-year service life. To the extent the reduction in O&M expense relates to amounts reflected in electric rates, the Utilities would reduce future rates for such amounts. In October 2019, the PUC approved the Utilities and the Consumer Advocate’s Stipulated Performance Metrics and Tracking Mechanism. As of June 30, 2020, the Utilities’ regulatory liability was $7.2 million for amounts to be returned to customers for reduction in O&M expense included in rates.
At the PUC’s direction, the Utilities have been filing Semi-Annual Enterprise System Benefits (SAESB) reports. The most recent SAESB report was filed on February 26, 2020 for the period July 1 through December 31, 2019.
Environmental regulation. The Utilities are subject to environmental laws and regulations that regulate the operation of existing facilities, the construction and operation of new facilities and the proper cleanup and disposal of hazardous waste and toxic substances.
Hawaiian Electric, Hawaii Electric Light and Maui Electric, like other utilities, periodically encounter petroleum or other chemical releases associated with current or previous operations. The Utilities report and take action on these releases when and as required by applicable law and regulations. The Utilities believe the costs of responding to such releases identified to date will not have a material effect, individually or in the aggregate, on Hawaiian Electric’s consolidated results of operations, financial condition or liquidity.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Former Molokai Electric Company generation site. In 1989, Maui Electric acquired Molokai Electric Company. Molokai Electric Company had sold its former generation site (Site) in 1983, but continued to operate at the Site under a lease until 1985. The Environmental Protection Agency (EPA) has since identified environmental impacts in the subsurface soil at the Site. In cooperation with the DOH and EPA, Maui Electric further investigated the Site and the Adjacent Parcel to determine the extent of impacts of polychlorinated biphenyls (PCBs), residual fuel oils and other subsurface contaminants. Maui Electric has a reserve balance of $2.7 million as of June 30, 2020, representing the probable and reasonably estimable undiscounted cost for remediation of the Site and the Adjacent Parcel; however, final costs of remediation will depend on the cleanup approach implemented.
Pearl Harbor sediment study. In July 2014, the U.S. Navy notified Hawaiian Electric of the Navy’s determination that Hawaiian Electric is a Potentially Responsible Party responsible for the costs of investigation and cleanup of PCB contamination in sediment in the area offshore of the Waiau Power Plant as part of the Pearl Harbor Superfund Site. Hawaiian Electric was also required by the EPA to assess potential sources and extent of PCB contamination onshore at Waiau Power Plant.
As of June 30, 2020, the reserve account balance recorded by Hawaiian Electric to address the PCB contamination was $4.8 million. The reserve balance represents the probable and reasonably estimable undiscounted cost for the onshore investigation and the remediation of PCB contamination in the offshore sediment. The final remediation costs will depend on the potential onshore source control requirements and actual offshore 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 mechanism has the following major components: (1) monthly revenue balancing account (RBA) revenues or refunds for the difference between PUC-approved target revenues and recorded adjusted revenues, which delinks revenues from kilowatthour sales, (2) rate adjustment mechanism (RAM) revenues for escalation in certain O&M expenses and rate base changes, (3) major project interim recovery (MPIR) component, (4) performance incentive mechanisms (PIMs), and (5) an earnings sharing mechanism, which would provide for a reduction of revenues between rate cases in the event the utility exceeds the return on average common equity (ROACE) allowed in its most recent rate case. The requirement for triennial general rate cases under the decoupling mechanism was terminated by the PUC on April 29, 2020.
Rate adjustment mechanism. The RAM is based on the lesser of: a) an inflationary adjustment for certain O&M expenses and return on investment for certain rate base changes, or b) cumulative annual compounded increase in Gross Domestic Product Price Index applied to annualized target revenues (the RAM Cap). Annualized target revenues reset upon the issuance of an interim or final decision and order (D&O) in a rate case. All Utilities were limited to the RAM Cap in 2020.
Major project interim recovery. On April 27, 2017, the PUC issued an order that provided guidelines for interim recovery of revenues to support major projects placed in service between general rate cases.
Projects eligible for recovery through the MPIR adjustment mechanism are major projects (i.e., projects with capital expenditures net of customer contributions in excess of $2.5 million), including, but not restricted to, renewable energy, energy efficiency, utility scale generation, grid modernization and smaller qualifying projects grouped into programs for review. The MPIR adjustment mechanism provides the opportunity to recover revenues for approved costs of eligible projects placed in service between general rate cases wherein cost recovery is limited by a revenue cap and is not provided by other effective recovery mechanisms. The request for PUC approval must include a business case, and all costs that are allowed to be recovered through the MPIR adjustment mechanism must be offset by any related benefits. The guidelines provide for accrual of revenues approved for recovery upon in-service date to be collected from customers through the annual RBA tariff. Capital projects that are not recovered through the MPIR would be included in the RAM and be subject to the RAM Cap, until the next rate case when the Utilities would request recovery in base rates.
The 2019 approved MPIR amounts for Schofield Generating Station of $19.8 million (which accrued effective January 1, 2019), included the 2019 return on project amount (up to the capped amount) in rate base, depreciation and incremental O&M expenses, are collected from June 2020 through May 2021.
The PUC approved the Utilities’ requests for MPIR recovery of the cost of the Grid Modernization Strategy Phase 1 project and West Loch Photovoltaic (PV) project in March and December 2019, respectively. On 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 (up to the capped amount) in rate base, depreciation and incremental O&M expenses, for collection from June 2021 through May 2022, subject to PUC review.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Performance incentive mechanisms. The PUC has established the following PIMs:
•Service Quality performance incentives are measured on a calendar-year basis. The PIM tariff requires the performance targets, deadbands and the amount of maximum financial incentives used to determine the PIM financial incentive levels for each of the PIMs to be re-determined upon issuance of an interim or final order in a general rate case for each utility.
•Service Reliability Performance measured by System Average Interruption Duration and Frequency Indexes (penalties only). Target performance is based on each utility’s historical 10-year average performance with a deadband of one standard deviation. The maximum penalty for each performance index is 20 basis points applied to the common equity share of each respective utility’s approved rate base (or maximum penalties of approximately $6.8 million - for both indices in total for the three utilities).
•Call Center Performance measured by the percentage of calls answered within 30 seconds. Target performance is based on the annual average performance for each utility for the most recent 8 quarters with a deadband of 3% above and below the target. The maximum penalty or reward is 8 basis points applied to the common equity share of each respective utility’s approved rate base (or maximum penalties or rewards of approximately $1.4 million - in total for the three utilities).
•In December 2019, 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 and increased customer rates in the period June 1, 2020 through May 31, 2021.
•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 seven PPAs approved in 2019, the Utilities recognized $1.7 million in 2019.
On October 9, 2019, the PUC issued an order establishing PIMs for the Utilities with regards to the Variable Renewable Dispatchable Generation and Energy Storage requests for proposals (RFPs) as well as the Delivery of Grid Services via Customer-sited Distributed Energy Resources RFPs that were issued on August 22, 2019 for Oahu, Maui and Hawaii island. The order establishes pricing thresholds, timelines to complete contracting, and other performance criteria for the performance incentive eligibility. The PIMs provide incentives only without penalties. The earliest the Utilities would be eligible for a PIM pursuant to this order is upon PUC approval of executed contracts resulting from the Phase 2 RFPs. The order requires contracts under the Grid Service RFP be filed for approval by May 2020 (subsequently extended to July 9, 2020), and by September 2020 under the Renewable RFPs, with a declining PIM for projects that are not filed by these deadlines. On July 9, 2020, the Utilities filed two Grid Service Purchase Agreements for the Grid Service RFP, which qualify for PIMs, however, details of the incentive metrics will be determined by PUC.
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)
|
|
|
|
|
|
|
|
|
|
|
|
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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
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 examined the current regulatory framework and identified those areas of utility performance that are deserving of further focus in Phase 2. In May 2019, the PUC issued an order concluding Phase 1, which established guiding principles, regulatory goals, and priority outcomes to guide the 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. The remainder of the Phase 2 schedule includes discovery, reply statements of positions in August 2020, an evidentiary hearing in September 2020 and anticipated decision in December 2020. The latest procedural schedule includes steps after the Phase 2 D&O “to review and approve PBR tariffs.”
Most recent rate proceedings.
Hawaiian Electric 2020 test year rate 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 case. The settlement agreement is subject to PUC approval.
On May 13, 2020, the PUC issued its 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 committed to deliver these savings to customers over time through a proposal it later submitted in its statement of position in the PBR proceeding. The PUC’s decisions on the settlement agreement and on the remaining procedural steps in this proceeding are pending.
Hawaii Electric Light 2019 test year rate case. On September 24, 2019, Hawaii Electric Light and the Consumer Advocate filed a Stipulated Partial Settlement Letter which documented agreements reached on all of the issues in the proceeding, except for the ROACE, capital structure, amortization period for the state investment tax credit, and automatic annual target heat rate adjustment. On November 13, 2019, the PUC issued an interim decision maintaining Hawaii Electric Light’s revenues at current effective rates based on an interim revenue requirement of $387 million, average rate base of $534 million, and a 7.52% return on rate base (RORB) that incorporates a ROACE of 9.5% and 58.0% total equity ratio, and tariffs became effective January 1, 2020 . On July 28, 2020, the PUC issued an order, approving the Stipulated Partial Settlement Letter in part and ordering final rates for the 2019 test year to remain at current effective rates such that there is a zero increase in rates. The PUC determined that an appropriate ROACE for the 2019 test year is 9.5%, approved a capital structure of 58% total equity and approved as fair a 7.52% RORB. In addition, the order, among others, (1) approved a 10-year amortization period for the state investment tax credit; and (2) approved a modification to Hawaii Electric Light’s ECRC to incorporate a 98%/2% risk-sharing split between customers and Hawaii Electric Light with an annual maximum exposure cap
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
of +/- $600,000. Hawaii Electric Light is to submit proposed final tariffs and a revised ECRC tariff for the PUC’s review within 30 days of this order.
Maui Electric 2021 test year rate case. By an order issued on April 29, 2020, the PUC terminated the requirement of a mandatory triennial rate case cycle that was established in the Decoupling final D&O, and indicated Maui Electric is not required to file a 2021 test year rate case. Maui Electric does not intend to file a 2021 test year rate case.
Regulatory assets for COVID-19 related expenses. On April 22, 2020, the Utilities filed a request to the PUC for deferral treatment of COVID-19 related expenses, including higher bad debt expense and write-offs, higher financing costs and other expenses. On May 4, 2020, the PUC issued an order, authorizing all utilities, including the Utilities, to establish regulatory assets to record costs resulting from the suspension of disconnections of service during the pendency of the Governor’s Emergency Proclamation and until otherwise ordered by the PUC. In future proceedings, the PUC will consider the reasonableness of the costs, the appropriate period of recovery, any amount of carrying costs thereon, and any savings directly attributable to suspension of disconnects, and other related matters. As part of the order, the PUC prohibits the Utilities from charging late payment fees on past due payments. On June 30, 2020, the PUC issued an order on the Utilities request for deferral treatment of COVID-19 related expenses through December 31, 2020, and allowed the Utilities to file application to request an extension of the deferral period beyond December 31, 2020. Beginning on July 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 details for the deferred costs, and identifying funds received or benefits received that have resulted from the COVID-19 emergency period. As of June 30, 2020, the Utilities recorded a total of $6.5 million in regulatory assets pursuant to the order.
Condensed consolidating financial information. Condensed consolidating financial information for Hawaiian Electric and its subsidiaries are presented for the three and six month periods ended June 30, 2020 and 2019, and as of June 30, 2020 and December 31, 2019.
Hawaiian Electric unconditionally guarantees Hawaii Electric Light’s and Maui Electric’s obligations (a) to the State of Hawaii for the repayment of principal and interest on Special Purpose Revenue Bonds issued for the benefit of Hawaii Electric Light and Maui Electric, and (b) under their respective private placement note agreements and the Hawaii Electric Light notes and Maui Electric notes issued thereunder. Hawaiian Electric is also obligated, after the satisfaction of its obligations on its own preferred stock, to make dividend, redemption and liquidation payments on Hawaii Electric Light’s and Maui Electric’s preferred stock if the respective subsidiary is unable to make such payments.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Income
Three months ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Hawaiian Electric
|
|
Hawaii Electric Light
|
|
Maui Electric
|
|
Other subsidiaries
|
|
Consolidating adjustments
|
|
Hawaiian Electric
Consolidated
|
|
Revenues
|
|
$
|
380,634
|
|
|
78,505
|
|
|
75,216
|
|
|
—
|
|
|
(140)
|
|
|
$
|
534,215
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel oil
|
|
77,290
|
|
|
16,254
|
|
|
18,907
|
|
|
—
|
|
|
—
|
|
|
112,451
|
|
|
Purchased power
|
|
108,946
|
|
|
15,846
|
|
|
12,046
|
|
|
—
|
|
|
—
|
|
|
136,838
|
|
|
Other operation and maintenance
|
|
74,274
|
|
|
17,581
|
|
|
18,186
|
|
|
—
|
|
|
—
|
|
|
110,041
|
|
|
Depreciation
|
|
37,860
|
|
|
9,761
|
|
|
8,075
|
|
|
—
|
|
|
—
|
|
|
55,696
|
|
|
Taxes, other than income taxes
|
|
36,673
|
|
|
7,470
|
|
|
7,245
|
|
|
—
|
|
|
—
|
|
|
51,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
335,043
|
|
|
66,912
|
|
|
64,459
|
|
|
—
|
|
|
—
|
|
|
466,414
|
|
|
Operating income
|
|
45,591
|
|
|
11,593
|
|
|
10,757
|
|
|
—
|
|
|
(140)
|
|
|
67,801
|
|
|
Allowance for equity funds used during construction
|
|
1,807
|
|
|
193
|
|
|
194
|
|
|
—
|
|
|
—
|
|
|
2,194
|
|
|
Equity in earnings of subsidiaries
|
|
13,776
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(13,776)
|
|
|
—
|
|
|
Retirement defined benefits expense—other than service costs
|
|
(546)
|
|
|
193
|
|
|
(29)
|
|
|
—
|
|
|
—
|
|
|
(382)
|
|
|
Interest expense and other charges, net
|
|
(12,499)
|
|
|
(2,533)
|
|
|
(2,446)
|
|
|
—
|
|
|
140
|
|
|
(17,338)
|
|
|
Allowance for borrowed funds used during construction
|
|
626
|
|
|
62
|
|
|
64
|
|
|
—
|
|
|
—
|
|
|
752
|
|
|
Income before income taxes
|
|
48,755
|
|
|
9,508
|
|
|
8,540
|
|
|
—
|
|
|
(13,776)
|
|
|
53,027
|
|
|
Income taxes
|
|
6,156
|
|
|
2,196
|
|
|
1,847
|
|
|
|
|
|
|
10,199
|
|
|
Net income
|
|
42,599
|
|
|
7,312
|
|
|
6,693
|
|
|
—
|
|
|
(13,776)
|
|
|
42,828
|
|
|
Preferred stock dividends of subsidiaries
|
|
—
|
|
|
133
|
|
|
96
|
|
|
—
|
|
|
|
|
229
|
|
|
Net income attributable to Hawaiian Electric
|
|
42,599
|
|
|
7,179
|
|
|
6,597
|
|
|
—
|
|
|
(13,776)
|
|
|
42,599
|
|
|
Preferred stock dividends of Hawaiian Electric
|
|
270
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
270
|
|
|
Net income for common stock
|
|
$
|
42,329
|
|
|
7,179
|
|
|
6,597
|
|
|
—
|
|
|
(13,776)
|
|
|
$
|
42,329
|
|
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Comprehensive Income
Three months ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Hawaiian Electric
|
|
Hawaii Electric Light
|
|
Maui Electric
|
|
Other
subsidiaries
|
|
Consolidating
adjustments
|
|
Hawaiian Electric
Consolidated
|
|
Net income for common stock
|
|
$
|
42,329
|
|
|
7,179
|
|
|
6,597
|
|
|
—
|
|
|
(13,776)
|
|
|
$
|
42,329
|
|
|
Other comprehensive income (loss), net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits
|
|
5,184
|
|
|
751
|
|
|
650
|
|
|
—
|
|
|
(1,401)
|
|
|
5,184
|
|
|
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes
|
|
(5,159)
|
|
|
(748)
|
|
|
(653)
|
|
|
—
|
|
|
1,401
|
|
|
(5,159)
|
|
|
Other comprehensive income (loss), net of taxes
|
|
25
|
|
|
3
|
|
|
(3)
|
|
|
—
|
|
|
—
|
|
|
25
|
|
|
Comprehensive income attributable to common shareholder
|
|
$
|
42,354
|
|
|
7,182
|
|
|
6,594
|
|
|
—
|
|
|
(13,776)
|
|
|
$
|
42,354
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Income
Three months ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Hawaiian Electric
|
|
Hawaii Electric Light
|
|
Maui Electric
|
|
Other subsidiaries
|
|
Consolidating adjustments
|
|
Hawaiian Electric
Consolidated
|
|
Revenues
|
|
$
|
450,020
|
|
|
89,916
|
|
|
94,050
|
|
|
—
|
|
|
(202)
|
|
|
$
|
633,784
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel oil
|
|
125,431
|
|
|
19,941
|
|
|
36,248
|
|
|
—
|
|
|
—
|
|
|
181,620
|
|
|
Purchased power
|
|
126,871
|
|
|
24,029
|
|
|
11,954
|
|
|
—
|
|
|
—
|
|
|
162,854
|
|
|
Other operation and maintenance
|
|
78,551
|
|
|
18,031
|
|
|
22,678
|
|
|
—
|
|
|
—
|
|
|
119,260
|
|
|
Depreciation
|
|
35,868
|
|
|
10,453
|
|
|
7,592
|
|
|
—
|
|
|
—
|
|
|
53,913
|
|
|
Taxes, other than income taxes
|
|
42,590
|
|
|
8,706
|
|
|
9,147
|
|
|
—
|
|
|
—
|
|
|
60,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
409,311
|
|
|
81,160
|
|
|
87,619
|
|
|
—
|
|
|
—
|
|
|
578,090
|
|
|
Operating income
|
|
40,709
|
|
|
8,756
|
|
|
6,431
|
|
|
—
|
|
|
(202)
|
|
|
55,694
|
|
|
Allowance for equity funds used during construction
|
|
2,614
|
|
|
218
|
|
|
343
|
|
|
—
|
|
|
—
|
|
|
3,175
|
|
|
Equity in earnings of subsidiaries
|
|
8,086
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8,086)
|
|
|
—
|
|
|
Retirement defined benefits expense—other than service costs
|
|
(567)
|
|
|
(105)
|
|
|
(29)
|
|
|
—
|
|
|
—
|
|
|
(701)
|
|
|
Interest expense and other charges, net
|
|
(13,390)
|
|
|
(2,920)
|
|
|
(2,422)
|
|
|
—
|
|
|
202
|
|
|
(18,530)
|
|
|
Allowance for borrowed funds used during construction
|
|
962
|
|
|
91
|
|
|
126
|
|
|
—
|
|
|
—
|
|
|
1,179
|
|
|
Income before income taxes
|
|
38,414
|
|
|
6,040
|
|
|
4,449
|
|
|
—
|
|
|
(8,086)
|
|
|
40,817
|
|
|
Income taxes
|
|
5,570
|
|
|
1,241
|
|
|
933
|
|
|
—
|
|
|
—
|
|
|
7,744
|
|
|
Net income
|
|
32,844
|
|
|
4,799
|
|
|
3,516
|
|
|
—
|
|
|
(8,086)
|
|
|
33,073
|
|
|
Preferred stock dividends of subsidiaries
|
|
—
|
|
|
133
|
|
|
96
|
|
|
—
|
|
|
—
|
|
|
229
|
|
|
Net income attributable to Hawaiian Electric
|
|
32,844
|
|
|
4,666
|
|
|
3,420
|
|
|
—
|
|
|
(8,086)
|
|
|
32,844
|
|
|
Preferred stock dividends of Hawaiian Electric
|
|
270
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
270
|
|
|
Net income for common stock
|
|
$
|
32,574
|
|
|
4,666
|
|
|
3,420
|
|
|
—
|
|
|
(8,086)
|
|
|
$
|
32,574
|
|
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Comprehensive Income
Three months ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Hawaiian Electric
|
|
Hawaii Electric Light
|
|
Maui Electric
|
|
Other
subsidiaries
|
|
Consolidating
adjustments
|
|
Hawaiian Electric
Consolidated
|
|
Net income for common stock
|
|
$
|
32,574
|
|
|
4,666
|
|
|
3,420
|
|
|
—
|
|
|
(8,086)
|
|
|
$
|
32,574
|
|
|
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
|
|
2,321
|
|
|
352
|
|
|
289
|
|
|
—
|
|
|
(641)
|
|
|
2,321
|
|
|
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes
|
|
(2,298)
|
|
|
(351)
|
|
|
(289)
|
|
|
—
|
|
|
640
|
|
|
(2,298)
|
|
|
Other comprehensive income, net of taxes
|
|
23
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
(1)
|
|
|
23
|
|
|
Comprehensive income attributable to common shareholder
|
|
$
|
32,597
|
|
|
4,667
|
|
|
3,420
|
|
|
—
|
|
|
(8,087)
|
|
|
$
|
32,597
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Income
Six months ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Hawaiian Electric
|
|
Hawaii Electric Light
|
|
Maui Electric
|
|
Other subsidiaries
|
|
Consolidating adjustments
|
|
Hawaiian Electric
Consolidated
|
|
Revenues
|
|
$
|
801,800
|
|
|
167,798
|
|
|
162,414
|
|
|
—
|
|
|
(355)
|
|
|
$
|
1,131,657
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel oil
|
|
197,825
|
|
|
38,686
|
|
|
49,161
|
|
|
—
|
|
|
—
|
|
|
285,672
|
|
|
Purchased power
|
|
216,897
|
|
|
35,367
|
|
|
24,390
|
|
|
—
|
|
|
—
|
|
|
276,654
|
|
|
Other operation and maintenance
|
|
159,911
|
|
|
36,685
|
|
|
40,992
|
|
|
—
|
|
|
—
|
|
|
237,588
|
|
|
Depreciation
|
|
75,871
|
|
|
19,521
|
|
|
16,154
|
|
|
—
|
|
|
—
|
|
|
111,546
|
|
|
Taxes, other than income taxes
|
|
77,174
|
|
|
15,812
|
|
|
15,452
|
|
|
—
|
|
|
—
|
|
|
108,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
727,678
|
|
|
146,071
|
|
|
146,149
|
|
|
—
|
|
|
—
|
|
|
1,019,898
|
|
|
Operating income
|
|
74,122
|
|
|
21,727
|
|
|
16,265
|
|
|
—
|
|
|
(355)
|
|
|
111,759
|
|
|
Allowance for equity funds used during construction
|
|
3,550
|
|
|
312
|
|
|
347
|
|
|
—
|
|
|
—
|
|
|
4,209
|
|
|
Equity in earnings of subsidiaries
|
|
22,580
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(22,580)
|
|
|
—
|
|
|
Retirement defined benefits expense—other than service costs
|
|
(1,092)
|
|
|
387
|
|
|
(58)
|
|
|
—
|
|
|
—
|
|
|
(763)
|
|
|
Interest expense and other charges, net
|
|
(24,501)
|
|
|
(5,017)
|
|
|
(4,769)
|
|
|
—
|
|
|
355
|
|
|
(33,932)
|
|
|
Allowance for borrowed funds used during construction
|
|
1,228
|
|
|
98
|
|
|
114
|
|
|
—
|
|
|
—
|
|
|
1,440
|
|
|
Income before income taxes
|
|
75,887
|
|
|
17,507
|
|
|
11,899
|
|
|
—
|
|
|
(22,580)
|
|
|
82,713
|
|
|
Income taxes
|
|
9,113
|
|
|
3,994
|
|
|
2,374
|
|
|
—
|
|
|
—
|
|
|
15,481
|
|
|
Net income
|
|
66,774
|
|
|
13,513
|
|
|
9,525
|
|
|
—
|
|
|
(22,580)
|
|
|
67,232
|
|
|
Preferred stock dividends of subsidiaries
|
|
—
|
|
|
267
|
|
|
191
|
|
|
—
|
|
|
—
|
|
|
458
|
|
|
Net income attributable to Hawaiian Electric
|
|
66,774
|
|
|
13,246
|
|
|
9,334
|
|
|
—
|
|
|
(22,580)
|
|
|
66,774
|
|
|
Preferred stock dividends of Hawaiian Electric
|
|
540
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
540
|
|
|
Net income for common stock
|
|
$
|
66,234
|
|
|
13,246
|
|
|
9,334
|
|
|
—
|
|
|
(22,580)
|
|
|
$
|
66,234
|
|
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Comprehensive Income
Six months ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Hawaiian Electric
|
|
Hawaii Electric Light
|
|
Maui Electric
|
|
Other subsidiaries
|
|
Consolidating adjustments
|
|
Hawaiian Electric Consolidated
|
|
Net income for common stock
|
|
$
|
66,234
|
|
|
13,246
|
|
|
9,334
|
|
|
—
|
|
|
(22,580)
|
|
|
$
|
66,234
|
|
|
Other comprehensive income (loss), net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits
|
|
10,368
|
|
|
1,499
|
|
|
1,302
|
|
|
—
|
|
|
(2,801)
|
|
|
10,368
|
|
|
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes
|
|
(10,317)
|
|
|
(1,495)
|
|
|
(1,305)
|
|
|
—
|
|
|
2,800
|
|
|
(10,317)
|
|
|
Other comprehensive income (loss), net of taxes
|
|
51
|
|
|
4
|
|
|
(3)
|
|
|
—
|
|
|
(1)
|
|
|
51
|
|
|
Comprehensive income attributable to common shareholder
|
|
$
|
66,285
|
|
|
13,250
|
|
|
9,331
|
|
|
—
|
|
|
(22,581)
|
|
|
$
|
66,285
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Income
Six months ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Hawaiian Electric
|
|
Hawaii Electric Light
|
|
Maui Electric
|
|
Other subsidiaries
|
|
Consolidating adjustments
|
|
Hawaiian Electric
Consolidated
|
|
Revenues
|
|
$
|
855,689
|
|
|
177,121
|
|
|
179,703
|
|
|
—
|
|
|
(234)
|
|
|
$
|
1,212,279
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel oil
|
|
234,353
|
|
|
40,783
|
|
|
67,093
|
|
|
—
|
|
|
—
|
|
|
342,229
|
|
|
Purchased power
|
|
232,094
|
|
|
43,206
|
|
|
21,999
|
|
|
—
|
|
|
—
|
|
|
297,299
|
|
|
Other operation and maintenance
|
|
159,729
|
|
|
36,767
|
|
|
40,894
|
|
|
—
|
|
|
—
|
|
|
237,390
|
|
|
Depreciation
|
|
71,735
|
|
|
20,906
|
|
|
15,219
|
|
|
—
|
|
|
—
|
|
|
107,860
|
|
|
Taxes, other than income taxes
|
|
81,221
|
|
|
16,811
|
|
|
17,215
|
|
|
—
|
|
|
—
|
|
|
115,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
779,132
|
|
|
158,473
|
|
|
162,420
|
|
|
—
|
|
|
—
|
|
|
1,100,025
|
|
|
Operating income
|
|
76,557
|
|
|
18,648
|
|
|
17,283
|
|
|
—
|
|
|
(234)
|
|
|
112,254
|
|
|
Allowance for equity funds used during construction
|
|
5,061
|
|
|
350
|
|
|
674
|
|
|
—
|
|
|
—
|
|
|
6,085
|
|
|
Equity in earnings of subsidiaries
|
|
19,935
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(19,935)
|
|
|
—
|
|
|
Retirement defined benefits expense—other than service costs
|
|
(1,134)
|
|
|
(211)
|
|
|
(59)
|
|
|
—
|
|
|
—
|
|
|
(1,404)
|
|
|
Interest expense and other charges, net
|
|
(26,190)
|
|
|
(5,821)
|
|
|
(4,739)
|
|
|
—
|
|
|
234
|
|
|
(36,516)
|
|
|
Allowance for borrowed funds used during construction
|
|
1,864
|
|
|
147
|
|
|
246
|
|
|
—
|
|
|
—
|
|
|
2,257
|
|
|
Income before income taxes
|
|
76,093
|
|
|
13,113
|
|
|
13,405
|
|
|
—
|
|
|
(19,935)
|
|
|
82,676
|
|
|
Income taxes
|
|
10,853
|
|
|
3,011
|
|
|
3,114
|
|
|
—
|
|
|
—
|
|
|
16,978
|
|
|
Net income
|
|
65,240
|
|
|
10,102
|
|
|
10,291
|
|
|
—
|
|
|
(19,935)
|
|
|
65,698
|
|
|
Preferred stock dividends of subsidiaries
|
|
—
|
|
|
267
|
|
|
191
|
|
|
—
|
|
|
—
|
|
|
458
|
|
|
Net income attributable to Hawaiian Electric
|
|
65,240
|
|
|
9,835
|
|
|
10,100
|
|
|
—
|
|
|
(19,935)
|
|
|
65,240
|
|
|
Preferred stock dividends of Hawaiian Electric
|
|
540
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
540
|
|
|
Net income for common stock
|
|
$
|
64,700
|
|
|
9,835
|
|
|
10,100
|
|
|
—
|
|
|
(19,935)
|
|
|
$
|
64,700
|
|
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Comprehensive Income
Six months ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Hawaiian Electric
|
|
Hawaii Electric Light
|
|
Maui Electric
|
|
Other subsidiaries
|
|
Consolidating adjustments
|
|
Hawaiian Electric Consolidated
|
|
Net income for common stock
|
|
$
|
64,700
|
|
|
9,835
|
|
|
10,100
|
|
|
—
|
|
|
(19,935)
|
|
|
$
|
64,700
|
|
|
Other comprehensive income (loss), net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits
|
|
4,643
|
|
|
704
|
|
|
578
|
|
|
—
|
|
|
(1,282)
|
|
|
4,643
|
|
|
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes
|
|
(4,596)
|
|
|
(702)
|
|
|
(578)
|
|
|
—
|
|
|
1,280
|
|
|
(4,596)
|
|
|
Other comprehensive income, net of taxes
|
|
47
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
(2)
|
|
|
47
|
|
|
Comprehensive income attributable to common shareholder
|
|
$
|
64,747
|
|
|
9,837
|
|
|
10,100
|
|
|
—
|
|
|
(19,937)
|
|
|
$
|
64,747
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Balance Sheet
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Hawaiian Electric
|
|
Hawaii Electric Light
|
|
Maui Electric
|
|
Other
subsi-
diaries
|
|
Consoli-
dating
adjustments
|
|
Hawaiian Electric
Consolidated
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility property, plant and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
42,389
|
|
|
5,606
|
|
|
3,612
|
|
|
—
|
|
|
—
|
|
|
$
|
51,607
|
|
|
Plant and equipment
|
|
4,859,373
|
|
|
1,321,091
|
|
|
1,173,377
|
|
|
—
|
|
|
—
|
|
|
7,353,841
|
|
|
Less accumulated depreciation
|
|
(1,636,504)
|
|
|
(586,351)
|
|
|
(535,689)
|
|
|
—
|
|
|
—
|
|
|
(2,758,544)
|
|
|
Construction in progress
|
|
170,655
|
|
|
20,181
|
|
|
23,651
|
|
|
—
|
|
|
—
|
|
|
214,487
|
|
|
Utility property, plant and equipment, net
|
|
3,435,913
|
|
|
760,527
|
|
|
664,951
|
|
|
—
|
|
|
—
|
|
|
4,861,391
|
|
|
Nonutility property, plant and equipment, less accumulated depreciation
|
|
5,308
|
|
|
115
|
|
|
1,532
|
|
|
—
|
|
|
—
|
|
|
6,955
|
|
|
Total property, plant and equipment, net
|
|
3,441,221
|
|
|
760,642
|
|
|
666,483
|
|
|
—
|
|
|
—
|
|
|
4,868,346
|
|
|
Investment in wholly owned subsidiaries, at equity
|
|
599,198
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(599,198)
|
|
|
—
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
55,170
|
|
|
4,594
|
|
|
4,130
|
|
|
101
|
|
|
—
|
|
|
63,995
|
|
|
Restricted cash
|
|
29,376
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
29,376
|
|
|
Advances to affiliates
|
|
13,500
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(13,500)
|
|
|
—
|
|
|
Customer accounts receivable, net
|
|
97,615
|
|
|
21,422
|
|
|
19,001
|
|
|
—
|
|
|
—
|
|
|
138,038
|
|
|
Accrued unbilled revenues, net
|
|
74,086
|
|
|
12,705
|
|
|
13,810
|
|
|
—
|
|
|
—
|
|
|
100,601
|
|
|
Other accounts receivable, net
|
|
19,409
|
|
|
3,592
|
|
|
4,358
|
|
|
—
|
|
|
(16,944)
|
|
|
10,415
|
|
|
Fuel oil stock, at average cost
|
|
30,477
|
|
|
14,965
|
|
|
15,037
|
|
|
—
|
|
|
—
|
|
|
60,479
|
|
|
Materials and supplies, at average cost
|
|
38,475
|
|
|
10,116
|
|
|
17,653
|
|
|
—
|
|
|
—
|
|
|
66,244
|
|
|
Prepayments and other
|
|
18,005
|
|
|
17,151
|
|
|
2,773
|
|
|
—
|
|
|
—
|
|
|
37,929
|
|
|
Regulatory assets
|
|
16,846
|
|
|
2,598
|
|
|
1,842
|
|
|
—
|
|
|
—
|
|
|
21,286
|
|
|
Total current assets
|
|
392,959
|
|
|
87,143
|
|
|
78,604
|
|
|
101
|
|
|
(30,444)
|
|
|
528,363
|
|
|
Other long-term assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
159,169
|
|
|
1,490
|
|
|
370
|
|
|
—
|
|
|
—
|
|
|
161,029
|
|
|
Regulatory assets
|
|
460,493
|
|
|
104,707
|
|
|
96,084
|
|
|
—
|
|
|
—
|
|
|
661,284
|
|
|
Other
|
|
76,482
|
|
|
16,915
|
|
|
19,588
|
|
|
—
|
|
|
—
|
|
|
112,985
|
|
|
Total other long-term assets
|
|
696,144
|
|
|
123,112
|
|
|
116,042
|
|
|
—
|
|
|
—
|
|
|
935,298
|
|
|
Total assets
|
|
$
|
5,129,522
|
|
|
970,897
|
|
|
861,129
|
|
|
101
|
|
|
(629,642)
|
|
|
$
|
6,332,007
|
|
|
Capitalization and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock equity
|
|
$
|
2,060,069
|
|
|
304,088
|
|
|
295,009
|
|
|
101
|
|
|
(599,198)
|
|
|
$
|
2,060,069
|
|
|
Cumulative preferred stock—not subject to mandatory redemption
|
|
22,293
|
|
|
7,000
|
|
|
5,000
|
|
|
—
|
|
|
—
|
|
|
34,293
|
|
|
Long-term debt, net
|
|
1,116,186
|
|
|
216,400
|
|
|
228,369
|
|
|
—
|
|
|
—
|
|
|
1,560,955
|
|
|
Total capitalization
|
|
3,198,548
|
|
|
527,488
|
|
|
528,378
|
|
|
101
|
|
|
(599,198)
|
|
|
3,655,317
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of operating lease liabilities
|
|
64,405
|
|
|
97
|
|
|
32
|
|
|
—
|
|
|
—
|
|
|
64,534
|
|
|
Current portion of long-term debt
|
|
—
|
|
|
14,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14,000
|
|
|
Short-term borrowings from non-affiliates
|
|
49,919
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
49,919
|
|
|
Short-term borrowings from affiliate
|
|
—
|
|
|
12,000
|
|
|
1,500
|
|
|
—
|
|
|
(13,500)
|
|
|
—
|
|
|
Accounts payable
|
|
79,071
|
|
|
14,408
|
|
|
13,599
|
|
|
—
|
|
|
—
|
|
|
107,078
|
|
|
Interest and preferred dividends payable
|
|
14,580
|
|
|
3,349
|
|
|
2,736
|
|
|
—
|
|
|
(6)
|
|
|
20,659
|
|
|
Taxes accrued
|
|
133,321
|
|
|
32,526
|
|
|
28,004
|
|
|
—
|
|
|
—
|
|
|
193,851
|
|
|
Regulatory liabilities
|
|
11,467
|
|
|
7,401
|
|
|
7,199
|
|
|
—
|
|
|
—
|
|
|
26,067
|
|
|
Other
|
|
55,378
|
|
|
17,181
|
|
|
16,070
|
|
|
—
|
|
|
(16,938)
|
|
|
71,691
|
|
|
Total current liabilities
|
|
408,141
|
|
|
100,962
|
|
|
69,140
|
|
|
—
|
|
|
(30,444)
|
|
|
547,799
|
|
|
Deferred credits and other liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities
|
|
100,833
|
|
|
1,394
|
|
|
343
|
|
|
—
|
|
|
—
|
|
|
102,570
|
|
|
Deferred income taxes
|
|
261,044
|
|
|
52,485
|
|
|
57,523
|
|
|
—
|
|
|
—
|
|
|
371,052
|
|
|
Regulatory liabilities
|
|
674,621
|
|
|
178,861
|
|
|
98,231
|
|
|
—
|
|
|
—
|
|
|
951,713
|
|
|
Unamortized tax credits
|
|
84,885
|
|
|
15,773
|
|
|
14,348
|
|
|
—
|
|
|
—
|
|
|
115,006
|
|
|
Defined benefit pension and other postretirement benefit plans liability
|
|
340,672
|
|
|
69,719
|
|
|
69,459
|
|
|
—
|
|
|
—
|
|
|
479,850
|
|
|
Other
|
|
60,778
|
|
|
24,215
|
|
|
23,707
|
|
|
—
|
|
|
—
|
|
|
108,700
|
|
|
Total deferred credits and other liabilities
|
|
1,522,833
|
|
|
342,447
|
|
|
263,611
|
|
|
—
|
|
|
—
|
|
|
2,128,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization and liabilities
|
|
$
|
5,129,522
|
|
|
970,897
|
|
|
861,129
|
|
|
101
|
|
|
(629,642)
|
|
|
$
|
6,332,007
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Balance Sheet
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Hawaiian Electric
|
|
Hawaii Electric Light
|
|
Maui Electric
|
|
Other
subsi-diaries
|
|
Consoli-
dating
adjustments
|
|
Hawaiian Electric
Consolidated
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility property, plant and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
42,598
|
|
|
5,606
|
|
|
3,612
|
|
|
—
|
|
|
—
|
|
|
$
|
51,816
|
|
|
Plant and equipment
|
|
4,765,362
|
|
|
1,313,727
|
|
|
1,161,199
|
|
|
—
|
|
|
—
|
|
|
7,240,288
|
|
|
Less accumulated depreciation
|
|
(1,591,241)
|
|
|
(574,615)
|
|
|
(524,301)
|
|
|
—
|
|
|
—
|
|
|
(2,690,157)
|
|
|
Construction in progress
|
|
165,137
|
|
|
9,993
|
|
|
17,944
|
|
|
—
|
|
|
—
|
|
|
193,074
|
|
|
Utility property, plant and equipment, net
|
|
3,381,856
|
|
|
754,711
|
|
|
658,454
|
|
|
—
|
|
|
—
|
|
|
4,795,021
|
|
|
Nonutility property, plant and equipment, less accumulated depreciation
|
|
5,310
|
|
|
114
|
|
|
1,532
|
|
|
—
|
|
|
—
|
|
|
6,956
|
|
|
Total property, plant and equipment, net
|
|
3,387,166
|
|
|
754,825
|
|
|
659,986
|
|
|
—
|
|
|
—
|
|
|
4,801,977
|
|
|
Investment in wholly owned subsidiaries, at equity
|
|
591,969
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(591,969)
|
|
|
—
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
2,239
|
|
|
6,885
|
|
|
1,797
|
|
|
101
|
|
|
—
|
|
|
11,022
|
|
|
Restricted cash
|
|
30,749
|
|
|
123
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
30,872
|
|
|
Advances to affiliates
|
|
27,700
|
|
|
8,000
|
|
|
—
|
|
|
—
|
|
|
(35,700)
|
|
|
—
|
|
|
Customer accounts receivable, net
|
|
105,454
|
|
|
24,520
|
|
|
22,816
|
|
|
—
|
|
|
—
|
|
|
152,790
|
|
|
Accrued unbilled revenues, net
|
|
83,148
|
|
|
17,071
|
|
|
17,008
|
|
|
—
|
|
|
—
|
|
|
117,227
|
|
|
Other accounts receivable, net
|
|
18,396
|
|
|
1,907
|
|
|
1,960
|
|
|
—
|
|
|
(10,695)
|
|
|
11,568
|
|
|
Fuel oil stock, at average cost
|
|
69,003
|
|
|
8,901
|
|
|
14,033
|
|
|
—
|
|
|
—
|
|
|
91,937
|
|
|
Materials and supplies, at average cost
|
|
34,876
|
|
|
8,313
|
|
|
17,513
|
|
|
—
|
|
|
—
|
|
|
60,702
|
|
|
Prepayments and other
|
|
88,334
|
|
|
3,725
|
|
|
24,921
|
|
|
—
|
|
|
—
|
|
|
116,980
|
|
|
Regulatory assets
|
|
27,689
|
|
|
1,641
|
|
|
1,380
|
|
|
—
|
|
|
—
|
|
|
30,710
|
|
|
Total current assets
|
|
487,588
|
|
|
81,086
|
|
|
101,428
|
|
|
101
|
|
|
(46,395)
|
|
|
623,808
|
|
|
Other long-term assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
174,886
|
|
|
1,537
|
|
|
386
|
|
|
—
|
|
|
—
|
|
|
176,809
|
|
|
Regulatory assets
|
|
476,390
|
|
|
109,163
|
|
|
98,817
|
|
|
—
|
|
|
—
|
|
|
684,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
69,010
|
|
|
15,493
|
|
|
17,215
|
|
|
—
|
|
|
—
|
|
|
101,718
|
|
|
Total other long-term assets
|
|
720,286
|
|
|
126,193
|
|
|
116,418
|
|
|
—
|
|
|
—
|
|
|
962,897
|
|
|
Total assets
|
|
$
|
5,187,009
|
|
|
962,104
|
|
|
877,832
|
|
|
101
|
|
|
(638,364)
|
|
|
$
|
6,388,682
|
|
|
Capitalization and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock equity
|
|
$
|
2,047,352
|
|
|
298,998
|
|
|
292,870
|
|
|
101
|
|
|
(591,969)
|
|
|
$
|
2,047,352
|
|
|
Cumulative preferred stock—not subject to mandatory redemption
|
|
22,293
|
|
|
7,000
|
|
|
5,000
|
|
|
—
|
|
|
—
|
|
|
34,293
|
|
|
Long-term debt, net
|
|
1,006,737
|
|
|
206,416
|
|
|
188,561
|
|
|
—
|
|
|
—
|
|
|
1,401,714
|
|
|
Total capitalization
|
|
3,076,382
|
|
|
512,414
|
|
|
486,431
|
|
|
101
|
|
|
(591,969)
|
|
|
3,483,359
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of operating lease liabilities
|
|
63,582
|
|
|
94
|
|
|
31
|
|
|
—
|
|
|
—
|
|
|
63,707
|
|
|
Current portion of long-term debt
|
|
61,958
|
|
|
13,995
|
|
|
20,000
|
|
|
—
|
|
|
—
|
|
|
95,953
|
|
|
Short-term borrowings-non-affiliate
|
|
88,987
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
88,987
|
|
|
Short-term borrowings-affiliate
|
|
8,000
|
|
|
—
|
|
|
27,700
|
|
|
—
|
|
|
(35,700)
|
|
|
—
|
|
|
Accounts payable
|
|
139,056
|
|
|
25,629
|
|
|
23,085
|
|
|
—
|
|
|
—
|
|
|
187,770
|
|
|
Interest and preferred dividends payable
|
|
14,759
|
|
|
3,115
|
|
|
2,900
|
|
|
—
|
|
|
(46)
|
|
|
20,728
|
|
|
Taxes accrued
|
|
143,522
|
|
|
32,541
|
|
|
31,929
|
|
|
—
|
|
|
—
|
|
|
207,992
|
|
|
Regulatory liabilities
|
|
13,363
|
|
|
9,454
|
|
|
7,907
|
|
|
—
|
|
|
—
|
|
|
30,724
|
|
|
Other
|
|
51,295
|
|
|
11,362
|
|
|
15,297
|
|
|
—
|
|
|
(10,649)
|
|
|
67,305
|
|
|
Total current liabilities
|
|
584,522
|
|
|
96,190
|
|
|
128,849
|
|
|
—
|
|
|
(46,395)
|
|
|
763,166
|
|
|
Deferred credits and other liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities
|
|
111,598
|
|
|
1,442
|
|
|
360
|
|
|
—
|
|
|
—
|
|
|
113,400
|
|
|
Deferred income taxes
|
|
265,864
|
|
|
53,534
|
|
|
57,752
|
|
|
—
|
|
|
—
|
|
|
377,150
|
|
|
Regulatory liabilities
|
|
664,894
|
|
|
178,474
|
|
|
98,218
|
|
|
—
|
|
|
—
|
|
|
941,586
|
|
|
Unamortized tax credits
|
|
86,852
|
|
|
16,196
|
|
|
14,820
|
|
|
—
|
|
|
—
|
|
|
117,868
|
|
|
Defined benefit pension and other postretirement benefit plans liability
|
|
339,471
|
|
|
69,928
|
|
|
69,364
|
|
|
—
|
|
|
—
|
|
|
478,763
|
|
|
Other
|
|
57,426
|
|
|
33,926
|
|
|
22,038
|
|
|
—
|
|
|
—
|
|
|
113,390
|
|
|
Total deferred credits and other liabilities
|
|
1,526,105
|
|
|
353,500
|
|
|
262,552
|
|
|
—
|
|
|
—
|
|
|
2,142,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization and liabilities
|
|
$
|
5,187,009
|
|
|
962,104
|
|
|
877,832
|
|
|
101
|
|
|
(638,364)
|
|
|
$
|
6,388,682
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Changes in Common Stock Equity
Six months ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Hawaiian Electric
|
|
Hawaii Electric Light
|
|
Maui Electric
|
|
Other
subsidiaries
|
|
Consolidating
adjustments
|
|
Hawaiian Electric
Consolidated
|
|
Balance, December 31, 2019
|
|
$
|
2,047,352
|
|
|
298,998
|
|
|
292,870
|
|
|
101
|
|
|
(591,969)
|
|
|
$
|
2,047,352
|
|
|
Net income for common stock
|
|
66,234
|
|
|
13,246
|
|
|
9,334
|
|
|
—
|
|
|
(22,580)
|
|
|
66,234
|
|
|
Other comprehensive income (loss), net of taxes
|
|
51
|
|
|
4
|
|
|
(3)
|
|
|
—
|
|
|
(1)
|
|
|
51
|
|
|
Common stock dividends
|
|
(53,568)
|
|
|
(8,160)
|
|
|
(7,192)
|
|
|
—
|
|
|
15,352
|
|
|
(53,568)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2020
|
|
$
|
2,060,069
|
|
|
304,088
|
|
|
295,009
|
|
|
101
|
|
|
(599,198)
|
|
|
$
|
2,060,069
|
|
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Changes in Common Stock Equity
Six months ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
|
64,700
|
|
|
9,835
|
|
|
10,100
|
|
|
—
|
|
|
(19,935)
|
|
|
64,700
|
|
|
Other comprehensive income, net of taxes
|
|
47
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
(2)
|
|
|
47
|
|
|
Common stock dividends
|
|
(50,626)
|
|
|
(5,090)
|
|
|
(7,534)
|
|
|
—
|
|
|
12,624
|
|
|
(50,626)
|
|
|
Common stock issuance expenses
|
|
—
|
|
|
(2)
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
Balance, June 30, 2019
|
|
$
|
1,971,762
|
|
|
300,619
|
|
|
283,429
|
|
|
101
|
|
|
(584,149)
|
|
|
$
|
1,971,762
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Cash Flows
Six months ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Hawaiian Electric
|
|
Hawaii Electric Light
|
|
Maui Electric
|
|
Other
subsidiaries
|
|
Consolidating
adjustments
|
|
Hawaiian Electric
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
154,967
|
|
|
20,307
|
|
|
21,601
|
|
|
—
|
|
|
(15,407)
|
|
|
$
|
181,468
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
(129,829)
|
|
|
(30,785)
|
|
|
(25,918)
|
|
|
—
|
|
|
—
|
|
|
(186,532)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances from affiliates
|
|
14,200
|
|
|
8,000
|
|
|
—
|
|
|
—
|
|
|
(22,200)
|
|
|
—
|
|
|
Other
|
|
4,354
|
|
|
552
|
|
|
480
|
|
|
—
|
|
|
55
|
|
|
5,441
|
|
|
Net cash used in investing activities
|
|
(111,275)
|
|
|
(22,233)
|
|
|
(25,438)
|
|
|
—
|
|
|
(22,145)
|
|
|
(181,091)
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock dividends
|
|
(53,568)
|
|
|
(8,160)
|
|
|
(7,192)
|
|
|
—
|
|
|
15,352
|
|
|
(53,568)
|
|
|
Preferred stock dividends of Hawaiian Electric and subsidiaries
|
|
(540)
|
|
|
(267)
|
|
|
(191)
|
|
|
—
|
|
|
—
|
|
|
(998)
|
|
|
Proceeds from issuance of short-term debt
|
|
100,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
100,000
|
|
|
Repayment of short-term debt
|
|
(100,000)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(100,000)
|
|
|
Proceeds from issuance of long-term debt
|
|
205,000
|
|
|
10,000
|
|
|
40,000
|
|
|
—
|
|
|
—
|
|
|
255,000
|
|
|
Repayment of long-term debt and funds transferred for repayment of long-term debt
|
|
(95,000)
|
|
|
(14,000)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(109,000)
|
|
|
Net increase (decrease) in short-term borrowings from non-affiliates and affiliate with original maturities of three months or less
|
|
(46,987)
|
|
|
12,000
|
|
|
(26,200)
|
|
|
—
|
|
|
22,200
|
|
|
(38,987)
|
|
|
Other
|
|
(1,039)
|
|
|
(61)
|
|
|
(247)
|
|
|
—
|
|
|
—
|
|
|
(1,347)
|
|
|
Net cash provided by financing activities
|
|
7,866
|
|
|
(488)
|
|
|
6,170
|
|
|
—
|
|
|
37,552
|
|
|
51,100
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
51,558
|
|
|
(2,414)
|
|
|
2,333
|
|
|
—
|
|
|
—
|
|
|
51,477
|
|
|
Cash, cash equivalents and restricted cash, beginning of period
|
|
32,988
|
|
|
7,008
|
|
|
1,797
|
|
|
101
|
|
|
—
|
|
|
41,894
|
|
|
Cash, cash equivalents and restricted cash, end of period
|
|
84,546
|
|
|
4,594
|
|
|
4,130
|
|
|
101
|
|
|
—
|
|
|
93,371
|
|
|
Less: Restricted cash
|
|
(29,376)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(29,376)
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
55,170
|
|
|
4,594
|
|
|
4,130
|
|
|
101
|
|
|
—
|
|
|
$
|
63,995
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Hawaiian Electric Company, Inc. and Subsidiaries
Condensed Consolidating Statement of Cash Flows
Six months ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Hawaiian Electric
|
|
Hawaii Electric Light
|
|
Maui Electric
|
|
Other
subsidiaries
|
|
Consolidating
adjustments
|
|
Hawaiian Electric
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
84,427
|
|
|
16,406
|
|
|
12,607
|
|
|
—
|
|
|
(12,624)
|
|
|
$
|
100,816
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
(150,945)
|
|
|
(18,083)
|
|
|
(30,868)
|
|
|
—
|
|
|
—
|
|
|
(199,896)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances to affiliates
|
|
(25,300)
|
|
|
(5,000)
|
|
|
—
|
|
|
—
|
|
|
30,300
|
|
|
—
|
|
|
Other
|
|
2,821
|
|
|
(280)
|
|
|
(31)
|
|
|
—
|
|
|
—
|
|
|
2,510
|
|
|
Net cash used in investing activities
|
|
(173,424)
|
|
|
(23,363)
|
|
|
(30,899)
|
|
|
—
|
|
|
30,300
|
|
|
(197,386)
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock dividends
|
|
(50,626)
|
|
|
(5,090)
|
|
|
(7,534)
|
|
|
—
|
|
|
12,624
|
|
|
(50,626)
|
|
|
Preferred stock dividends of Hawaiian Electric and subsidiaries
|
|
(540)
|
|
|
(267)
|
|
|
(191)
|
|
|
—
|
|
|
—
|
|
|
(998)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of short-term debt
|
|
25,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25,000
|
|
|
Proceeds from issuance of long-term debt
|
|
30,000
|
|
|
10,000
|
|
|
10,000
|
|
|
—
|
|
|
—
|
|
|
50,000
|
|
|
Repayment of long-term debt
|
|
(31,546)
|
|
|
(10,000)
|
|
|
(10,000)
|
|
|
—
|
|
|
—
|
|
|
(51,546)
|
|
|
Net increase in short-term borrowings from non-affiliates and affiliate with original maturities of three months or less
|
|
116,901
|
|
|
—
|
|
|
25,300
|
|
|
—
|
|
|
(30,300)
|
|
|
111,901
|
|
|
Other
|
|
197
|
|
|
43
|
|
|
83
|
|
|
—
|
|
|
—
|
|
|
323
|
|
|
Net cash provided by (used in) financing activities
|
|
89,386
|
|
|
(5,314)
|
|
|
17,658
|
|
|
—
|
|
|
(17,676)
|
|
|
84,054
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
389
|
|
|
(12,271)
|
|
|
(634)
|
|
|
—
|
|
|
—
|
|
|
(12,516)
|
|
|
Cash and cash equivalents, beginning of period
|
|
16,732
|
|
|
15,623
|
|
|
3,421
|
|
|
101
|
|
|
—
|
|
|
35,877
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
17,121
|
|
|
3,352
|
|
|
2,787
|
|
|
101
|
|
|
—
|
|
|
$
|
23,361
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Note 4 · Bank segment
Selected financial information
American Savings Bank, F.S.B.
Statements of Income and Comprehensive Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30
|
|
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Interest and dividend income
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
53,541
|
|
|
$
|
58,620
|
|
|
$
|
109,086
|
|
|
$
|
116,480
|
|
|
Interest and dividends on investment securities
|
|
6,288
|
|
|
7,535
|
|
|
15,718
|
|
|
18,163
|
|
|
Total interest and dividend income
|
|
59,829
|
|
|
66,155
|
|
|
124,804
|
|
|
134,643
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
Interest on deposit liabilities
|
|
3,071
|
|
|
4,287
|
|
|
6,658
|
|
|
8,539
|
|
|
Interest on other borrowings
|
|
75
|
|
|
411
|
|
|
388
|
|
|
939
|
|
|
Total interest expense
|
|
3,146
|
|
|
4,698
|
|
|
7,046
|
|
|
9,478
|
|
|
Net interest income
|
|
56,683
|
|
|
61,457
|
|
|
117,758
|
|
|
125,165
|
|
|
Provision for credit losses
|
|
15,133
|
|
|
7,688
|
|
|
25,534
|
|
|
14,558
|
|
|
Net interest income after provision for credit losses
|
|
41,550
|
|
|
53,769
|
|
|
92,224
|
|
|
110,607
|
|
|
Noninterest income
|
|
|
|
|
|
|
|
|
|
Fees from other financial services
|
|
3,102
|
|
|
4,798
|
|
|
7,673
|
|
|
9,360
|
|
|
Fee income on deposit liabilities
|
|
2,897
|
|
|
5,004
|
|
|
8,010
|
|
|
10,082
|
|
|
Fee income on other financial products
|
|
1,212
|
|
|
1,830
|
|
|
3,084
|
|
|
3,423
|
|
|
Bank-owned life insurance
|
|
1,673
|
|
|
2,390
|
|
|
2,467
|
|
|
4,649
|
|
|
Mortgage banking income
|
|
6,252
|
|
|
976
|
|
|
8,252
|
|
|
1,590
|
|
|
Gain on sale of investment securities, net
|
|
9,275
|
|
|
—
|
|
|
9,275
|
|
|
—
|
|
|
Other income, net
|
|
(251)
|
|
|
534
|
|
|
162
|
|
|
992
|
|
|
Total noninterest income
|
|
24,160
|
|
|
15,532
|
|
|
38,923
|
|
|
30,096
|
|
|
Noninterest expense
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
25,079
|
|
|
25,750
|
|
|
50,856
|
|
|
51,262
|
|
|
Occupancy
|
|
5,442
|
|
|
5,479
|
|
|
10,709
|
|
|
10,149
|
|
|
Data processing
|
|
3,849
|
|
|
3,852
|
|
|
7,686
|
|
|
7,590
|
|
|
Services
|
|
2,474
|
|
|
2,606
|
|
|
5,283
|
|
|
5,032
|
|
|
Equipment
|
|
2,290
|
|
|
2,189
|
|
|
4,629
|
|
|
4,253
|
|
|
Office supplies, printing and postage
|
|
1,049
|
|
|
1,663
|
|
|
2,390
|
|
|
3,023
|
|
|
Marketing
|
|
379
|
|
|
1,323
|
|
|
1,181
|
|
|
2,313
|
|
|
FDIC insurance
|
|
751
|
|
|
628
|
|
|
853
|
|
|
1,254
|
|
|
Other expense1
|
|
7,063
|
|
|
4,519
|
|
|
11,257
|
|
|
8,373
|
|
|
Total noninterest expense
|
|
48,376
|
|
|
48,009
|
|
|
94,844
|
|
|
93,249
|
|
|
Income before income taxes
|
|
17,334
|
|
|
21,292
|
|
|
36,303
|
|
|
47,454
|
|
|
Income taxes
|
|
3,320
|
|
|
4,276
|
|
|
6,528
|
|
|
9,599
|
|
|
Net income
|
|
14,014
|
|
|
17,016
|
|
|
29,775
|
|
|
37,855
|
|
|
Other comprehensive income (loss), net of taxes
|
|
(280)
|
|
|
14,275
|
|
|
19,567
|
|
|
20,527
|
|
|
Comprehensive income
|
|
$
|
13,734
|
|
|
$
|
31,291
|
|
|
$
|
49,342
|
|
|
$
|
58,382
|
|
1 The three- and six-month periods ended June 30, 2020 include approximately $3.7 million and $3.8 million, respectively, of certain significant direct and incremental COVID-19 related costs. These costs, which have been recorded in Other expense, include $2.3 million of compensation expense and $1.1 million of enhanced cleaning and sanitation costs.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Reconciliation to amounts per HEI Condensed Consolidated Statements of Income*:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30
|
|
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Interest and dividend income
|
|
$
|
59,829
|
|
|
$
|
66,155
|
|
|
$
|
124,804
|
|
|
$
|
134,643
|
|
|
Noninterest income
|
|
24,160
|
|
|
15,532
|
|
|
38,923
|
|
|
30,096
|
|
|
Less: Gain on sale of investment securities, net
|
|
(9,275)
|
|
|
—
|
|
|
(9,275)
|
|
|
—
|
|
|
*Revenues-Bank
|
|
74,714
|
|
|
81,687
|
|
|
154,452
|
|
|
164,739
|
|
|
Total interest expense
|
|
3,146
|
|
|
4,698
|
|
|
7,046
|
|
|
9,478
|
|
|
Provision for credit losses
|
|
15,133
|
|
|
7,688
|
|
|
25,534
|
|
|
14,558
|
|
|
Noninterest expense
|
|
48,376
|
|
|
48,009
|
|
|
94,844
|
|
|
93,249
|
|
|
Less: Retirement defined benefits gain (expense)—other than service costs
|
|
(434)
|
|
|
40
|
|
|
(868)
|
|
|
80
|
|
|
*Expenses-Bank
|
|
66,221
|
|
|
60,435
|
|
|
126,556
|
|
|
117,365
|
|
|
*Operating income-Bank
|
|
8,493
|
|
|
21,252
|
|
|
27,896
|
|
|
47,374
|
|
|
Add back: Retirement defined benefits (gain) expense—other than service costs
|
|
434
|
|
|
(40)
|
|
|
868
|
|
|
(80)
|
|
|
Add back: Gain on sale of investment securities, net
|
|
(9,275)
|
|
|
—
|
|
|
(9,275)
|
|
|
—
|
|
|
Income before income taxes
|
|
$
|
17,334
|
|
|
$
|
21,292
|
|
|
$
|
36,303
|
|
|
$
|
47,454
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
American Savings Bank, F.S.B.
Balance Sheets Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
June 30, 2020
|
|
|
|
December 31, 2019
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
|
$
|
140,968
|
|
|
|
|
$
|
129,770
|
|
|
Interest-bearing deposits
|
|
|
|
365,996
|
|
|
|
|
48,628
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
|
|
|
|
|
|
|
|
Available-for-sale, at fair value
|
|
|
|
1,389,633
|
|
|
|
|
1,232,826
|
|
|
Held-to-maturity, at amortized cost (fair value of $131,131 and $143,467, respectively)
|
|
|
|
124,623
|
|
|
|
|
139,451
|
|
|
Stock in Federal Home Loan Bank, at cost
|
|
|
|
9,880
|
|
|
|
|
8,434
|
|
|
Loans held for investment
|
|
|
|
5,437,817
|
|
|
|
|
5,121,176
|
|
|
Allowance for credit losses
|
|
|
|
(81,307)
|
|
|
|
|
(53,355)
|
|
|
Net loans
|
|
|
|
5,356,510
|
|
|
|
|
5,067,821
|
|
|
Loans held for sale, at lower of cost or fair value
|
|
|
|
37,143
|
|
|
|
|
12,286
|
|
|
Other
|
|
|
|
512,722
|
|
|
|
|
511,611
|
|
|
Goodwill
|
|
|
|
82,190
|
|
|
|
|
82,190
|
|
|
Total assets
|
|
|
|
$
|
8,019,665
|
|
|
|
|
$
|
7,233,017
|
|
|
Liabilities and shareholder’s equity
|
|
|
|
|
|
|
|
|
|
Deposit liabilities—noninterest-bearing
|
|
|
|
$
|
2,422,042
|
|
|
|
|
$
|
1,909,682
|
|
|
Deposit liabilities—interest-bearing
|
|
|
|
4,607,910
|
|
|
|
|
4,362,220
|
|
|
Other borrowings
|
|
|
|
124,975
|
|
|
|
|
115,110
|
|
|
Other
|
|
|
|
158,344
|
|
|
|
|
146,954
|
|
|
Total liabilities
|
|
|
|
7,313,271
|
|
|
|
|
6,533,966
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
1
|
|
|
|
|
1
|
|
|
Additional paid-in capital
|
|
|
|
350,826
|
|
|
|
|
349,453
|
|
|
Retained earnings
|
|
|
|
344,662
|
|
|
|
|
358,259
|
|
|
Accumulated other comprehensive income (loss), net of taxes
|
|
|
|
|
|
|
|
|
|
Net unrealized gains on securities
|
|
$
|
21,264
|
|
|
|
|
$
|
2,481
|
|
|
|
|
Retirement benefit plans
|
|
(10,359)
|
|
|
10,905
|
|
|
(11,143)
|
|
|
(8,662)
|
|
|
Total shareholder’s equity
|
|
|
|
706,394
|
|
|
|
|
699,051
|
|
|
Total liabilities and shareholder’s equity
|
|
|
|
$
|
8,019,665
|
|
|
|
|
$
|
7,233,017
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
Bank-owned life insurance
|
|
|
|
$
|
159,951
|
|
|
|
|
$
|
157,465
|
|
|
Premises and equipment, net
|
|
|
|
203,217
|
|
|
|
|
204,449
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
|
|
23,381
|
|
|
|
|
19,365
|
|
|
Mortgage-servicing rights
|
|
|
|
9,647
|
|
|
|
|
9,101
|
|
|
Low-income housing investments
|
|
|
|
61,632
|
|
|
|
|
66,302
|
|
|
Real estate acquired in settlement of loans, net
|
|
|
|
43
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
54,851
|
|
|
|
|
54,929
|
|
|
|
|
|
|
$
|
512,722
|
|
|
|
|
$
|
511,611
|
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
|
|
$
|
40,382
|
|
|
|
|
$
|
45,822
|
|
|
Federal and state income taxes payable
|
|
|
|
18,021
|
|
|
|
|
14,996
|
|
|
Cashier’s checks
|
|
|
|
25,284
|
|
|
|
|
23,647
|
|
|
Advance payments by borrowers
|
|
|
|
10,458
|
|
|
|
|
10,486
|
|
|
Other
|
|
|
|
64,199
|
|
|
|
|
52,003
|
|
|
|
|
|
|
$
|
158,344
|
|
|
|
|
$
|
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 $95.0 million, nil and $30.0 million, respectively, as of June 30, 2020 and $115 million, nil and nil, respectively, as of December 31, 2019.
Investment securities. The major components of investment securities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
Gross unrealized gains
|
|
Gross unrealized losses
|
|
Estimated fair
value
|
|
Gross unrealized losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
|
|
|
12 months or longer
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Number of issues
|
|
Fair
value
|
|
Amount
|
|
Number of issues
|
|
Fair
value
|
|
Amount
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and federal agency obligations
|
|
$
|
100,195
|
|
|
$
|
2,219
|
|
|
$
|
—
|
|
|
$
|
102,414
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Mortgage-backed securities*
|
|
1,201,796
|
|
|
25,469
|
|
|
(280)
|
|
|
1,226,985
|
|
|
6
|
|
|
96,296
|
|
|
(258)
|
|
|
1
|
|
|
1,803
|
|
|
(22)
|
|
|
Corporate bonds
|
|
29,767
|
|
|
1,640
|
|
|
—
|
|
|
31,407
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Mortgage revenue bonds
|
|
28,827
|
|
|
—
|
|
|
—
|
|
|
28,827
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
$
|
1,360,585
|
|
|
$
|
29,328
|
|
|
$
|
(280)
|
|
|
$
|
1,389,633
|
|
|
6
|
|
|
$
|
96,296
|
|
|
$
|
(258)
|
|
|
1
|
|
|
$
|
1,803
|
|
|
$
|
(22)
|
|
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities*
|
|
$
|
124,623
|
|
|
$
|
6,508
|
|
|
$
|
—
|
|
|
$
|
131,131
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
124,623
|
|
|
$
|
6,508
|
|
|
$
|
—
|
|
|
$
|
131,131
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
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
|
|
|
—
|
|
|
60,057
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Mortgage revenue bonds
|
|
28,597
|
|
|
—
|
|
|
—
|
|
|
28,597
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
$
|
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)
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
139,451
|
|
|
$
|
4,087
|
|
|
$
|
(71)
|
|
|
$
|
143,467
|
|
|
1
|
|
|
$
|
12,986
|
|
|
$
|
(71)
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
* Issued or guaranteed by U.S. Government agencies or sponsored agencies
ASB does not believe that the investment securities that were in an unrealized loss position at June 30, 2020, represent a credit loss. Total gross unrealized losses were primarily attributable to change in market conditions. On a quarterly basis the investment securities are evaluated for changes in financial condition of the issuer. Based upon ASB’s evaluation, all securities held within the investment portfolio continue to be investment grade by one or more agencies. The contractual cash flows of the U.S. Treasury, federal agency obligations and agency mortgage-backed securities are backed by the full faith and credit guaranty of the United States government or an agency of the government. ASB does not intend to sell the securities before the recovery of its amortized cost basis and there have been no adverse changes in the timing of the contractual cash flows for the securities. ASB’s investment securities portfolio did not require an allowance for credit losses at June 30, 2020.
U.S. Treasury, federal agency obligations, corporate bonds, and mortgage revenue bonds have contractual terms to maturity. Mortgage-backed securities have contractual terms to maturity, but require periodic payments to reduce principal. In addition, expected maturities will differ from contractual maturities because borrowers have the right to prepay the underlying mortgages.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
The contractual maturities of investment securities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
Amortized cost
|
|
Fair value
|
|
(in thousands)
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
Due in one year or less
|
|
$
|
65,330
|
|
|
$
|
65,776
|
|
|
Due after one year through five years
|
|
44,570
|
|
|
46,378
|
|
|
Due after five years through ten years
|
|
33,462
|
|
|
35,067
|
|
|
Due after ten years
|
|
15,427
|
|
|
15,427
|
|
|
|
|
158,789
|
|
|
162,648
|
|
|
Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies
|
|
1,201,796
|
|
|
1,226,985
|
|
|
Total available-for-sale securities
|
|
$
|
1,360,585
|
|
|
$
|
1,389,633
|
|
|
Held-to-maturity
|
|
|
|
|
|
Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies
|
|
$
|
124,623
|
|
|
$
|
131,131
|
|
|
Total held-to-maturity securities
|
|
$
|
124,623
|
|
|
$
|
131,131
|
|
Proceeds from the sale of available-for-sale securities, which also included the sale of ASB’s entire Visa Class B restricted stock holdings, were $169.2 million for each of the three and six months ended June 30, 2020 and nil for each of the three and six months ended June 30, 2019. Gross realized gains were $9.3 million for each of the three and six months ended June 30, 2020 and nil for each of the three and six months ended June 30, 2019. Gross realized losses were nil for each of the three and six months ended June 30, 2020 and 2019. Tax expense on realized gains were $2.5 million for the three and six months ended June 30, 2020.
Loans. The components of loans were summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
(in thousands)
|
|
|
|
|
Real estate:
|
|
|
|
|
Residential 1-4 family
|
$
|
2,123,226
|
|
|
$
|
2,178,135
|
|
|
Commercial real estate
|
855,566
|
|
|
824,830
|
|
|
Home equity line of credit
|
1,065,264
|
|
|
1,092,125
|
|
|
Residential land
|
13,224
|
|
|
14,704
|
|
|
Commercial construction
|
92,904
|
|
|
70,605
|
|
|
Residential construction
|
10,759
|
|
|
11,670
|
|
|
Total real estate
|
4,160,943
|
|
|
4,192,069
|
|
|
Commercial
|
1,073,829
|
|
|
670,674
|
|
|
Consumer
|
216,030
|
|
|
257,921
|
|
|
Total loans
|
5,450,802
|
|
|
5,120,664
|
|
|
Deferred fees and discounts
|
(12,985)
|
|
|
512
|
|
|
Allowance for credit losses
|
(81,307)
|
|
|
(53,355)
|
|
|
Total loans, net
|
$
|
5,356,510
|
|
|
$
|
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 property purchases, the loan-to-value ratio may not exceed 75% of the lower of the appraised value or purchase price at origination.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Allowance for credit losses. The allowance for credit losses by 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 June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
4,476
|
|
|
$
|
16,587
|
|
|
$
|
6,225
|
|
|
$
|
352
|
|
|
$
|
3,446
|
|
|
$
|
14
|
|
|
$
|
12,977
|
|
|
$
|
33,007
|
|
|
|
|
$
|
77,084
|
|
|
Charge-offs
|
|
(7)
|
|
|
—
|
|
|
—
|
|
|
(343)
|
|
|
—
|
|
|
—
|
|
|
(699)
|
|
|
(6,331)
|
|
|
|
|
(7,380)
|
|
|
Recoveries
|
|
2
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
106
|
|
|
657
|
|
|
|
|
770
|
|
|
Provision
|
|
(560)
|
|
|
4,513
|
|
|
(11)
|
|
|
342
|
|
|
1,311
|
|
|
—
|
|
|
1,484
|
|
|
3,754
|
|
|
|
|
10,833
|
|
|
Ending balance
|
|
$
|
3,911
|
|
|
$
|
21,100
|
|
|
$
|
6,214
|
|
|
$
|
356
|
|
|
$
|
4,757
|
|
|
$
|
14
|
|
|
$
|
13,868
|
|
|
$
|
31,087
|
|
|
|
|
$
|
81,307
|
|
|
Three months ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
1,911
|
|
|
$
|
14,825
|
|
|
$
|
6,493
|
|
|
$
|
425
|
|
|
$
|
2,843
|
|
|
$
|
3
|
|
|
$
|
10,814
|
|
|
$
|
16,983
|
|
|
|
|
$
|
54,297
|
|
|
Charge-offs
|
|
(5)
|
|
|
—
|
|
|
(19)
|
|
|
(4)
|
|
|
—
|
|
|
—
|
|
|
(494)
|
|
|
(5,102)
|
|
|
|
|
(5,624)
|
|
|
Recoveries
|
|
8
|
|
|
—
|
|
|
4
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
1,281
|
|
|
764
|
|
|
|
|
2,064
|
|
|
Provision
|
|
101
|
|
|
986
|
|
|
403
|
|
|
109
|
|
|
(797)
|
|
|
(1)
|
|
|
1,472
|
|
|
5,415
|
|
|
|
|
7,688
|
|
|
Ending balance
|
|
$
|
2,015
|
|
|
$
|
15,811
|
|
|
$
|
6,881
|
|
|
$
|
537
|
|
|
$
|
2,046
|
|
|
$
|
2
|
|
|
$
|
13,073
|
|
|
$
|
18,060
|
|
|
|
|
$
|
58,425
|
|
|
Six months ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
—
|
|
|
—
|
|
|
(351)
|
|
|
—
|
|
|
—
|
|
|
(1,068)
|
|
|
(12,585)
|
|
|
|
|
(14,011)
|
|
|
Recoveries
|
|
55
|
|
|
—
|
|
|
6
|
|
|
14
|
|
|
—
|
|
|
—
|
|
|
292
|
|
|
1,421
|
|
|
|
|
1,788
|
|
|
Provision
|
|
(667)
|
|
|
5,839
|
|
|
(173)
|
|
|
308
|
|
|
2,371
|
|
|
(3)
|
|
|
3,477
|
|
|
9,582
|
|
|
|
|
20,734
|
|
|
Ending balance
|
|
$
|
3,911
|
|
|
$
|
21,100
|
|
|
$
|
6,214
|
|
|
$
|
356
|
|
|
$
|
4,757
|
|
|
$
|
14
|
|
|
$
|
13,868
|
|
|
$
|
31,087
|
|
|
|
|
$
|
81,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
1,976
|
|
|
$
|
14,505
|
|
|
$
|
6,371
|
|
|
$
|
479
|
|
|
$
|
2,790
|
|
|
$
|
4
|
|
|
$
|
9,225
|
|
|
$
|
16,769
|
|
|
|
|
$
|
52,119
|
|
|
Charge-offs
|
|
(19)
|
|
|
—
|
|
|
(19)
|
|
|
(4)
|
|
|
—
|
|
|
—
|
|
|
(1,112)
|
|
|
(10,661)
|
|
|
|
|
(11,815)
|
|
|
Recoveries
|
|
617
|
|
|
—
|
|
|
9
|
|
|
14
|
|
|
—
|
|
|
—
|
|
|
1,461
|
|
|
1,462
|
|
|
|
|
3,563
|
|
|
Provision
|
|
(559)
|
|
|
1,306
|
|
|
520
|
|
|
48
|
|
|
(744)
|
|
|
(2)
|
|
|
3,499
|
|
|
10,490
|
|
|
|
|
14,558
|
|
|
Ending balance
|
|
$
|
2,015
|
|
|
$
|
15,811
|
|
|
$
|
6,881
|
|
|
$
|
537
|
|
|
$
|
2,046
|
|
|
$
|
2
|
|
|
$
|
13,073
|
|
|
$
|
18,060
|
|
|
|
|
$
|
58,425
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
898
|
|
|
$
|
2
|
|
|
$
|
322
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,015
|
|
|
$
|
454
|
|
|
|
|
$
|
2,691
|
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
1,482
|
|
|
$
|
15,051
|
|
|
$
|
6,600
|
|
|
$
|
449
|
|
|
$
|
2,097
|
|
|
$
|
3
|
|
|
$
|
9,230
|
|
|
$
|
15,752
|
|
|
|
|
$
|
50,664
|
|
|
Financing Receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
2,178,135
|
|
|
$
|
824,830
|
|
|
$
|
1,092,125
|
|
|
$
|
14,704
|
|
|
$
|
70,605
|
|
|
$
|
11,670
|
|
|
$
|
670,674
|
|
|
$
|
257,921
|
|
|
|
|
$
|
5,120,664
|
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
15,600
|
|
|
$
|
1,048
|
|
|
$
|
12,073
|
|
|
$
|
3,091
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,418
|
|
|
$
|
507
|
|
|
|
|
$
|
40,737
|
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
2,162,535
|
|
|
$
|
823,782
|
|
|
$
|
1,080,052
|
|
|
$
|
11,613
|
|
|
$
|
70,605
|
|
|
$
|
11,670
|
|
|
$
|
662,256
|
|
|
$
|
257,414
|
|
|
|
|
$
|
5,079,927
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Allowance for loan commitments. The allowance for loan commitments by portfolio segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Home equity
line of credit
|
|
Commercial construction
|
|
Commercial loans
|
|
Total
|
|
|
Three months ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan commitments:
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
300
|
|
|
$
|
3,191
|
|
|
$
|
309
|
|
|
$
|
3,800
|
|
|
|
Provision
|
|
—
|
|
|
4,309
|
|
|
(9)
|
|
|
4,300
|
|
|
|
Ending balance
|
|
$
|
300
|
|
|
$
|
7,500
|
|
|
$
|
300
|
|
|
$
|
8,100
|
|
|
|
Six months ended June 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
|
|
—
|
|
|
4,824
|
|
|
(24)
|
|
|
4,800
|
|
|
|
Ending balance
|
|
$
|
300
|
|
|
$
|
7,500
|
|
|
$
|
300
|
|
|
$
|
8,100
|
|
|
Credit quality. ASB performs an internal loan review and grading on an ongoing basis. The review provides management with periodic information as to the quality of the loan portfolio and effectiveness of its lending policies and procedures. The objectives of the loan review and grading procedures are to identify, in a timely manner, existing or emerging credit trends so that appropriate steps can be initiated to manage risk and avoid or minimize future losses. Loans subject to grading include commercial, commercial real estate and commercial construction loans.
Each commercial and commercial real estate loan is assigned an Asset Quality Rating (AQR) reflecting the likelihood of repayment or orderly liquidation of that loan transaction pursuant to regulatory credit classifications: Pass, Special Mention, Substandard, Doubtful and Loss. The AQR is a function of the probability of default model rating, the loss given default and possible non-model factors which impact the ultimate collectability of the loan such as character of the business owner/guarantor, interim period performance, litigation, tax liens and major changes in business and economic conditions. Pass exposures generally are well protected by the current net worth and paying capacity of the obligor or by the value of the asset or underlying collateral. Special Mention loans have potential weaknesses that, if left uncorrected, could jeopardize the liquidation of the debt. Substandard loans have well-defined weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that ASB may sustain some loss. An asset classified Doubtful has the weaknesses of those classified Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. An asset classified Loss is considered uncollectible and has such little value that its continuance as a bankable asset is not warranted.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
The credit risk profile by vintage date based on payment activity or internally assigned grade for loans was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loans by Origination Year
|
|
|
|
|
|
|
|
|
|
|
|
Revolving Loans
|
|
|
|
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
Prior
|
|
Revolving
|
|
Converted to term loans
|
|
Total
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
176,536
|
|
|
$
|
272,951
|
|
|
$
|
165,584
|
|
|
$
|
258,111
|
|
|
$
|
215,920
|
|
|
$
|
1,029,434
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,118,536
|
|
|
30-59 days past due
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,192
|
|
|
—
|
|
|
—
|
|
|
2,192
|
|
|
60-89 days past due
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
606
|
|
|
—
|
|
|
—
|
|
|
606
|
|
|
Greater than 89 days past due
|
|
—
|
|
|
—
|
|
|
—
|
|
|
353
|
|
|
—
|
|
|
1,539
|
|
|
—
|
|
|
—
|
|
|
1,892
|
|
|
|
|
176,536
|
|
|
272,951
|
|
|
165,584
|
|
|
258,464
|
|
|
215,920
|
|
|
1,033,771
|
|
|
—
|
|
|
—
|
|
|
2,123,226
|
|
|
Home equity line of credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,027,589
|
|
|
33,797
|
|
|
1,061,386
|
|
|
30-59 days past due
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
790
|
|
|
312
|
|
|
1,102
|
|
|
60-89 days past due
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
408
|
|
|
175
|
|
|
583
|
|
|
Greater than 89 days past due
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,358
|
|
|
835
|
|
|
2,193
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,030,145
|
|
|
35,119
|
|
|
1,065,264
|
|
|
Residential land
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
2,095
|
|
|
4,975
|
|
|
2,024
|
|
|
2,041
|
|
|
22
|
|
|
2,067
|
|
|
—
|
|
|
—
|
|
|
13,224
|
|
|
30-59 days past due
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
60-89 days past due
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Greater than 89 days past due
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
2,095
|
|
|
4,975
|
|
|
2,024
|
|
|
2,041
|
|
|
22
|
|
|
2,067
|
|
|
—
|
|
|
—
|
|
|
13,224
|
|
|
Residential construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
2,725
|
|
|
5,034
|
|
|
974
|
|
|
2,026
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10,759
|
|
|
30-59 days past due
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
60-89 days past due
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Greater than 89 days past due
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
2,725
|
|
|
5,034
|
|
|
974
|
|
|
2,026
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10,759
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
25,186
|
|
|
87,908
|
|
|
53,640
|
|
|
14,851
|
|
|
1,602
|
|
|
505
|
|
|
21,691
|
|
|
3,062
|
|
|
208,445
|
|
|
30-59 days past due
|
|
105
|
|
|
573
|
|
|
583
|
|
|
229
|
|
|
18
|
|
|
—
|
|
|
200
|
|
|
44
|
|
|
1,752
|
|
|
60-89 days past due
|
|
83
|
|
|
741
|
|
|
792
|
|
|
209
|
|
|
24
|
|
|
—
|
|
|
248
|
|
|
67
|
|
|
2,164
|
|
|
Greater than 89 days past due
|
|
95
|
|
|
1,258
|
|
|
1,172
|
|
|
483
|
|
|
73
|
|
|
—
|
|
|
424
|
|
|
164
|
|
|
3,669
|
|
|
|
|
25,469
|
|
|
90,480
|
|
|
56,187
|
|
|
15,772
|
|
|
1,717
|
|
|
505
|
|
|
22,563
|
|
|
3,337
|
|
|
216,030
|
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
89,882
|
|
|
77,350
|
|
|
78,115
|
|
|
29,390
|
|
|
56,246
|
|
|
172,941
|
|
|
17,219
|
|
|
—
|
|
|
521,143
|
|
|
Special Mention
|
|
9,684
|
|
|
41,662
|
|
|
54,791
|
|
|
35,400
|
|
|
69,418
|
|
|
60,098
|
|
|
—
|
|
|
—
|
|
|
271,053
|
|
|
Substandard
|
|
—
|
|
|
488
|
|
|
1,930
|
|
|
605
|
|
|
3,669
|
|
|
56,678
|
|
|
—
|
|
|
—
|
|
|
63,370
|
|
|
Doubtful
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
99,566
|
|
|
119,500
|
|
|
134,836
|
|
|
65,395
|
|
|
129,333
|
|
|
289,717
|
|
|
17,219
|
|
|
—
|
|
|
855,566
|
|
|
Commercial construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
6,933
|
|
|
13,458
|
|
|
29,873
|
|
|
—
|
|
|
7,472
|
|
|
—
|
|
|
14,060
|
|
|
—
|
|
|
71,796
|
|
|
Special Mention
|
|
819
|
|
|
—
|
|
|
—
|
|
|
18,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
18,819
|
|
|
Substandard
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,289
|
|
|
—
|
|
|
—
|
|
|
2,289
|
|
|
Doubtful
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
7,752
|
|
|
13,458
|
|
|
29,873
|
|
|
18,000
|
|
|
7,472
|
|
|
2,289
|
|
|
14,060
|
|
|
—
|
|
|
92,904
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
450,699
|
|
|
154,672
|
|
|
94,309
|
|
|
33,771
|
|
|
13,876
|
|
|
38,911
|
|
|
92,475
|
|
|
14,868
|
|
|
893,581
|
|
|
Special Mention
|
|
6,593
|
|
|
29,695
|
|
|
4,759
|
|
|
10,578
|
|
|
38,970
|
|
|
20,813
|
|
|
44,521
|
|
|
11,222
|
|
|
167,151
|
|
|
Substandard
|
|
165
|
|
|
4,681
|
|
|
145
|
|
|
1,637
|
|
|
1,241
|
|
|
3,139
|
|
|
607
|
|
|
1,482
|
|
|
13,097
|
|
|
Doubtful
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
457,457
|
|
|
189,048
|
|
|
99,213
|
|
|
45,986
|
|
|
54,087
|
|
|
62,863
|
|
|
137,603
|
|
|
27,572
|
|
|
1,073,829
|
|
|
Total loans
|
|
$
|
771,600
|
|
|
$
|
695,446
|
|
|
$
|
488,691
|
|
|
$
|
407,684
|
|
|
$
|
408,551
|
|
|
$
|
1,391,212
|
|
|
$
|
1,221,590
|
|
|
$
|
66,028
|
|
|
$
|
5,450,802
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Revolving loans converted to term loans during the six months ended June 30, 2020 in the commercial, home equity line of credit and consumer portfolios was $13.7 million, $8.7 million, and $1.4 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
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
2,192
|
|
|
$
|
606
|
|
|
$
|
1,892
|
|
|
$
|
4,690
|
|
|
$
|
2,118,536
|
|
|
$
|
2,123,226
|
|
|
$
|
—
|
|
|
Commercial real estate
|
|
642
|
|
|
—
|
|
|
—
|
|
|
642
|
|
|
854,924
|
|
|
855,566
|
|
|
—
|
|
|
Home equity line of credit
|
|
1,102
|
|
|
583
|
|
|
2,193
|
|
|
3,878
|
|
|
1,061,386
|
|
|
1,065,264
|
|
|
—
|
|
|
Residential land
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,224
|
|
|
13,224
|
|
|
—
|
|
|
Commercial construction
|
|
—
|
|
|
—
|
|
|
2,289
|
|
|
2,289
|
|
|
90,615
|
|
|
92,904
|
|
|
—
|
|
|
Residential construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10,759
|
|
|
10,759
|
|
|
—
|
|
|
Commercial
|
|
461
|
|
|
575
|
|
|
452
|
|
|
1,488
|
|
|
1,072,341
|
|
|
1,073,829
|
|
|
—
|
|
|
Consumer
|
|
1,752
|
|
|
2,164
|
|
|
3,669
|
|
|
7,585
|
|
|
208,445
|
|
|
216,030
|
|
|
—
|
|
|
Total loans
|
|
$
|
6,149
|
|
|
$
|
3,928
|
|
|
$
|
10,495
|
|
|
$
|
20,572
|
|
|
$
|
5,430,230
|
|
|
$
|
5,450,802
|
|
|
$
|
—
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
2,588
|
|
|
$
|
290
|
|
|
$
|
1,808
|
|
|
$
|
4,686
|
|
|
$
|
2,173,449
|
|
|
$
|
2,178,135
|
|
|
$
|
—
|
|
|
Commercial real estate
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
824,830
|
|
|
824,830
|
|
|
—
|
|
|
Home equity line of credit
|
|
813
|
|
|
—
|
|
|
2,117
|
|
|
2,930
|
|
|
1,089,195
|
|
|
1,092,125
|
|
|
—
|
|
|
Residential land
|
|
—
|
|
|
—
|
|
|
25
|
|
|
25
|
|
|
14,679
|
|
|
14,704
|
|
|
—
|
|
|
Commercial construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
70,605
|
|
|
70,605
|
|
|
—
|
|
|
Residential construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,670
|
|
|
11,670
|
|
|
—
|
|
|
Commercial
|
|
1,077
|
|
|
311
|
|
|
172
|
|
|
1,560
|
|
|
669,114
|
|
|
670,674
|
|
|
—
|
|
|
Consumer
|
|
4,386
|
|
|
3,257
|
|
|
2,907
|
|
|
10,550
|
|
|
247,371
|
|
|
257,921
|
|
|
—
|
|
|
Total loans
|
|
$
|
8,864
|
|
|
$
|
3,858
|
|
|
$
|
7,029
|
|
|
$
|
19,751
|
|
|
$
|
5,100,913
|
|
|
$
|
5,120,664
|
|
|
$
|
—
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
The credit risk profile based on nonaccrual loans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
June 30, 2020
|
|
|
|
|
|
December 31, 2019
|
|
|
|
With a Related ACL
|
|
Without a Related ACL
|
|
Total
|
|
Total
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
7,584
|
|
|
$
|
3,395
|
|
|
$
|
10,979
|
|
|
$
|
11,395
|
|
|
Commercial real estate
|
|
16,241
|
|
|
—
|
|
|
16,241
|
|
|
195
|
|
|
Home equity line of credit
|
|
6,249
|
|
|
1,616
|
|
|
7,865
|
|
|
6,638
|
|
|
Residential land
|
|
—
|
|
|
413
|
|
|
413
|
|
|
448
|
|
|
Commercial construction
|
|
—
|
|
|
2,289
|
|
|
2,289
|
|
|
—
|
|
|
Residential construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Commercial
|
|
616
|
|
|
2,939
|
|
|
3,555
|
|
|
5,947
|
|
|
Consumer
|
|
5,637
|
|
|
—
|
|
|
5,637
|
|
|
5,113
|
|
|
Total nonaccrual loans
|
|
$
|
36,327
|
|
|
$
|
10,652
|
|
|
$
|
46,979
|
|
|
$
|
29,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The credit risk profile based on loans whose terms have been modified and accruing interest were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Real estate:
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
8,667
|
|
|
$
|
9,869
|
|
|
Commercial real estate
|
|
1,016
|
|
|
853
|
|
|
Home equity line of credit
|
|
9,430
|
|
|
10,376
|
|
|
Residential land
|
|
2,007
|
|
|
2,644
|
|
|
Commercial construction
|
|
—
|
|
|
—
|
|
|
Residential construction
|
|
—
|
|
|
—
|
|
|
Commercial
|
|
3,203
|
|
|
2,614
|
|
|
Consumer
|
|
55
|
|
|
57
|
|
|
Total troubled debt restructured loans accruing interest
|
|
$
|
24,378
|
|
|
$
|
26,413
|
|
ASB did not recognize interest on nonaccrual loans for the three and six months ended June 30, 2020.
Troubled debt restructurings. A loan modification is deemed to be a TDR when the borrower is determined to be experiencing financial difficulties and ASB grants a concession it would not otherwise consider.
The allowance for credit losses on TDR loans that do not share risk characteristics are individually evaluated based on the present value of expected future cash flows discounted at the loan’s effective original contractual rate or based on the fair value of collateral less cost to sell. The financial impact of the estimated loss is an increase to the allowance associated with the modified loan. When available information confirms that specific loans or portions thereof are uncollectible (confirmed losses), these amounts are charged off against the allowance for credit losses.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Loan modifications that occurred during the first six months of 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans modified as a TDR
|
|
Three months ended June 30, 2020
|
|
|
|
|
|
Six months ended June 30, 2020
|
|
|
|
|
|
(dollars in thousands)
|
|
Number
of contracts
|
|
Outstanding
recorded
investment
(as of period end)1
|
|
Related allowance
(as of period end)
|
|
Number
of contracts
|
|
Outstanding
recorded
investment
(as of period end)1
|
|
Related allowance
(as of period end)
|
|
Troubled debt restructurings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
1
|
|
|
$
|
147
|
|
|
$
|
7
|
|
|
Commercial real estate
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
16,430
|
|
|
4,301
|
|
|
Home equity line of credit
|
|
2
|
|
|
19
|
|
|
3
|
|
|
2
|
|
|
19
|
|
|
3
|
|
|
Residential land
|
|
2
|
|
|
330
|
|
|
—
|
|
|
2
|
|
|
330
|
|
|
—
|
|
|
Commercial construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Residential construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Commercial
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
751
|
|
|
275
|
|
|
Consumer
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
4
|
|
|
$
|
349
|
|
|
$
|
3
|
|
|
11
|
|
|
$
|
17,677
|
|
|
$
|
4,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2019
|
|
|
|
|
|
Six months ended June 30, 2019
|
|
|
|
|
|
(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
|
|
|
$
|
469
|
|
|
$
|
154
|
|
|
9
|
|
|
$
|
1,501
|
|
|
$
|
161
|
|
|
Commercial real estate
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Home equity line of credit
|
|
2
|
|
|
311
|
|
|
59
|
|
|
3
|
|
|
432
|
|
|
83
|
|
|
Residential land
|
|
2
|
|
|
825
|
|
|
—
|
|
|
2
|
|
|
825
|
|
|
—
|
|
|
Commercial construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Residential construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Commercial
|
|
2
|
|
|
1,317
|
|
|
133
|
|
|
3
|
|
|
1,507
|
|
|
150
|
|
|
Consumer
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
7
|
|
|
$
|
2,922
|
|
|
$
|
346
|
|
|
17
|
|
|
$
|
4,265
|
|
|
$
|
394
|
|
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.
There were no loans modified in TDRs that experienced a payment default of 90 days or more during the second quarter and first six months of 2020 and 2019.
If a loan modified in a TDR subsequently defaults, ASB evaluates the loan for further impairment. Based on its evaluation, adjustments may be made in the allocation of the allowance or partial charge-offs may be taken to further write-down the carrying value of the loan. Commitments to lend additional funds to borrowers whose loan terms have been modified in a TDR totaled nil at June 30, 2020 and December 31, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
Amortized cost
|
|
Collateral type
|
|
(in thousands)
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
1,795
|
|
|
Residential real estate property
|
|
Home equity line of credit
|
|
1,387
|
|
|
Residential real estate property
|
|
Commercial construction
|
|
2,289
|
|
|
Commercial real estate property
|
|
Total real estate
|
|
5,471
|
|
|
|
|
Commercial
|
|
90
|
|
|
Business assets
|
|
Total
|
|
$
|
5,561
|
|
|
|
ASB had $3.0 million and $3.5 million of consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure at June 30, 2020 and December 31, 2019, respectively.
The credit risk profile by internally assigned grade for loans was as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Commercial
real estate
|
|
Commercial
construction
|
|
Commercial
|
|
Total
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
|
|
|
|
|
|
|
|
$
|
756,747
|
|
|
$
|
68,316
|
|
|
$
|
621,657
|
|
|
$
|
1,446,720
|
|
|
Special mention
|
|
|
|
|
|
|
|
|
|
4,451
|
|
|
—
|
|
|
29,921
|
|
|
34,372
|
|
|
Substandard
|
|
|
|
|
|
|
|
|
|
63,632
|
|
|
2,289
|
|
|
19,096
|
|
|
85,017
|
|
|
Doubtful
|
|
|
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
824,830
|
|
|
$
|
70,605
|
|
|
$
|
670,674
|
|
|
$
|
1,566,109
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
The total carrying amount and the total unpaid principal balance of impaired loans were as follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
Three months ended June 30, 2019
|
|
|
|
Six months ended June 30, 2019
|
|
|
|
(in thousands)
|
|
Recorded
investment
|
|
Unpaid
principal
balance
|
|
Related
allowance
|
|
Average
recorded
investment
|
|
Interest
income
recognized*
|
|
Average
recorded
investment
|
|
Interest
income
recognized*
|
|
With no related allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
6,817
|
|
|
$
|
7,207
|
|
|
$
|
—
|
|
|
$
|
8,993
|
|
|
$
|
87
|
|
|
$
|
8,492
|
|
|
$
|
247
|
|
|
Commercial real estate
|
|
195
|
|
|
200
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Home equity line of credit
|
|
1,984
|
|
|
2,135
|
|
|
—
|
|
|
1,940
|
|
|
54
|
|
|
2,238
|
|
|
66
|
|
|
Residential land
|
|
3,091
|
|
|
3,294
|
|
|
—
|
|
|
2,280
|
|
|
24
|
|
|
2,158
|
|
|
50
|
|
|
Commercial construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Residential construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Commercial
|
|
1,948
|
|
|
2,285
|
|
|
—
|
|
|
4,626
|
|
|
—
|
|
|
4,299
|
|
|
—
|
|
|
Consumer
|
|
2
|
|
|
2
|
|
|
—
|
|
|
31
|
|
|
—
|
|
|
31
|
|
|
—
|
|
|
|
|
$
|
14,037
|
|
|
$
|
15,123
|
|
|
$
|
—
|
|
|
$
|
17,870
|
|
|
$
|
165
|
|
|
$
|
17,218
|
|
|
$
|
363
|
|
|
With an allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
8,783
|
|
|
$
|
8,835
|
|
|
$
|
898
|
|
|
$
|
8,440
|
|
|
$
|
96
|
|
|
$
|
8,417
|
|
|
$
|
179
|
|
|
Commercial real estate
|
|
853
|
|
|
853
|
|
|
2
|
|
|
894
|
|
|
9
|
|
|
900
|
|
|
19
|
|
|
Home equity line of credit
|
|
10,089
|
|
|
10,099
|
|
|
322
|
|
|
11,665
|
|
|
152
|
|
|
11,743
|
|
|
282
|
|
|
Residential land
|
|
—
|
|
|
—
|
|
|
—
|
|
|
79
|
|
|
—
|
|
|
54
|
|
|
—
|
|
|
Commercial construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Residential construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Commercial
|
|
6,470
|
|
|
6,470
|
|
|
1,015
|
|
|
10,997
|
|
|
30
|
|
|
7,874
|
|
|
56
|
|
|
Consumer
|
|
505
|
|
|
505
|
|
|
454
|
|
|
288
|
|
|
1
|
|
|
173
|
|
|
2
|
|
|
|
|
$
|
26,700
|
|
|
$
|
26,762
|
|
|
$
|
2,691
|
|
|
$
|
32,363
|
|
|
$
|
288
|
|
|
$
|
29,161
|
|
|
$
|
538
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
15,600
|
|
|
$
|
16,042
|
|
|
$
|
898
|
|
|
$
|
17,433
|
|
|
$
|
183
|
|
|
$
|
16,909
|
|
|
$
|
426
|
|
|
Commercial real estate
|
|
1,048
|
|
|
1,053
|
|
|
2
|
|
|
894
|
|
|
9
|
|
|
900
|
|
|
19
|
|
|
Home equity line of credit
|
|
12,073
|
|
|
12,234
|
|
|
322
|
|
|
13,605
|
|
|
206
|
|
|
13,981
|
|
|
348
|
|
|
Residential land
|
|
3,091
|
|
|
3,294
|
|
|
—
|
|
|
2,359
|
|
|
24
|
|
|
2,212
|
|
|
50
|
|
|
Commercial construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Residential construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Commercial
|
|
8,418
|
|
|
8,755
|
|
|
1,015
|
|
|
15,623
|
|
|
30
|
|
|
12,173
|
|
|
56
|
|
|
Consumer
|
|
507
|
|
|
507
|
|
|
454
|
|
|
319
|
|
|
1
|
|
|
204
|
|
|
2
|
|
|
|
|
$
|
40,737
|
|
|
$
|
41,885
|
|
|
$
|
2,691
|
|
|
$
|
50,233
|
|
|
$
|
453
|
|
|
$
|
46,379
|
|
|
$
|
901
|
|
* Since loan was classified as impaired.
Mortgage servicing rights (MSRs). In its mortgage banking business, ASB sells residential mortgage loans to government-sponsored entities and other parties, who may issue securities backed by pools of such loans. ASB retains no beneficial interests in these loans other than the servicing rights of certain loans sold.
ASB received proceeds from the sale of residential mortgages of $186.8 million and $64.7 million for the three months ended June 30, 2020 and 2019, respectively, and $259.3 million and $89.6 million for the six months ended June 30, 2020 and 2019, respectively, and recognized gains on such sales of $6.3 million and $1.0 million for the three months ended June 30, 2020 and 2019, respectively, and $8.3 million and $1.6 million for the six months ended June 30, 2020 and 2019, respectively.
There were no repurchased mortgage loans for the three and six months ended June 30, 2020 and 2019. The repurchase reserve was $0.1 million as of June 30, 2020 and 2019.
Mortgage servicing fees, a component of other income, net, were $0.8 million for the three months ended June 30, 2020 and 2019, respectively and $1.6 million and $1.5 million for the six months ended June 30, 2020 and 2019, respectively.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Changes in the carrying value of MSRs were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Gross
carrying amount1
|
|
Accumulated amortization
|
|
Valuation allowance
|
|
Net
carrying amount
|
|
June 30, 2020
|
|
$
|
23,904
|
|
|
$
|
(13,993)
|
|
|
$
|
(264)
|
|
|
$
|
9,647
|
|
|
December 31, 2019
|
|
21,543
|
|
|
(12,442)
|
|
|
—
|
|
|
9,101
|
|
1 Reflects impact of loans paid in full
Changes related to MSRs were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30
|
|
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Mortgage servicing rights
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
9,120
|
|
|
$
|
7,897
|
|
|
$
|
9,101
|
|
|
$
|
8,062
|
|
|
Amount capitalized
|
|
1,726
|
|
|
632
|
|
|
2,362
|
|
|
862
|
|
|
Amortization
|
|
(935)
|
|
|
(426)
|
|
|
(1,552)
|
|
|
(821)
|
|
|
Other-than-temporary impairment
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Carrying amount before valuation allowance
|
|
9,911
|
|
|
8,103
|
|
|
9,911
|
|
|
8,103
|
|
|
Valuation allowance for mortgage servicing rights
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Provision (recovery)
|
|
264
|
|
|
—
|
|
|
264
|
|
|
—
|
|
|
Other-than-temporary impairment
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Ending balance
|
|
264
|
|
|
—
|
|
|
264
|
|
|
—
|
|
|
Net carrying value of mortgage servicing rights
|
|
$
|
9,647
|
|
|
$
|
8,103
|
|
|
$
|
9,647
|
|
|
$
|
8,103
|
|
ASB capitalizes MSRs acquired upon the sale of mortgage loans with servicing rights retained. On a monthly basis, ASB compares the net carrying value of the MSRs to its fair value to determine if there are any changes to the valuation allowance and/or other-than-temporary impairment for the MSRs.
ASB uses a present value cash flow model to estimate the fair value of MSRs. Impairment is recognized through a valuation allowance for each stratum when the carrying amount exceeds fair value, with any associated provision recorded as a component of loan servicing fees included in “Revenues - bank” in the consolidated statements of income. A direct write-down is recorded when the recoverability of the valuation allowance is deemed to be unrecoverable.
Key assumptions used in estimating the fair value of ASB’s MSRs used in the impairment analysis were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Unpaid principal balance
|
|
$
|
1,360,920
|
|
|
$
|
1,276,437
|
|
|
Weighted average note rate
|
|
3.87
|
%
|
|
3.96
|
%
|
|
Weighted average discount rate
|
|
9.3
|
%
|
|
9.3
|
%
|
|
Weighted average prepayment speed
|
|
16.9
|
%
|
|
11.4
|
%
|
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)
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Prepayment rate:
|
|
|
|
|
|
25 basis points adverse rate change
|
|
$
|
(539)
|
|
|
$
|
(950)
|
|
|
50 basis points adverse rate change
|
|
(1,062)
|
|
|
(1,947)
|
|
|
Discount rate:
|
|
|
|
|
|
25 basis points adverse rate change
|
|
(64)
|
|
|
(102)
|
|
|
50 basis points adverse rate change
|
|
(128)
|
|
|
(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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Other borrowings. As of June 30, 2020, ASB had $30.0 million of FHLB advances outstanding. ASB was in compliance with all Advances, Pledge and Security Agreement requirements as of June 30, 2020. ASB also had no federal funds purchased with the Federal Reserve Bank as of June 30, 2020. There were no 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 Sheets
|
|
Net amount of
liabilities presented
in the Balance Sheets
|
|
Repurchase agreements
|
|
|
|
|
|
|
|
June 30, 2020
|
|
$
|
95
|
|
|
$
|
—
|
|
|
$
|
95
|
|
|
December 31, 2019
|
|
115
|
|
|
—
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
$
|
95
|
|
|
$
|
143
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
115
|
|
|
130
|
|
|
—
|
|
|
|
|
|
|
|
|
|
The securities underlying the agreements to repurchase are book-entry securities and were delivered by appropriate entry into the counterparties’ accounts or into segregated tri-party custodial accounts at the FHLB. The securities underlying the agreements to repurchase continue to be reflected in ASB’s asset accounts.
Derivative financial instruments. ASB enters into interest rate lock commitments (IRLCs) with borrowers, and forward commitments to sell loans or to-be-announced mortgage-backed securities to investors to hedge against the inherent interest rate and pricing risks associated with selling loans.
ASB enters into IRLCs for residential mortgage loans, which commit ASB to lend funds to a potential borrower at a specific interest rate and within a specified period of time. IRLCs that relate to the origination of mortgage loans that will be held for sale are considered derivative financial instruments under applicable accounting guidance. Outstanding IRLCs expose ASB to the risk that the price of the mortgage loans underlying the commitments may decline due to increases in mortgage interest rates from inception of the rate lock to the funding of the loan. The IRLCs are free-standing derivatives which are carried at fair value with changes recorded in mortgage banking income.
ASB enters into forward commitments to hedge the interest rate risk for rate locked mortgage applications in process and closed mortgage loans held for sale. These commitments are primarily forward sales of to-be-announced mortgage backed securities. Generally, when mortgage loans are closed, the forward commitment is liquidated and replaced with a mandatory delivery forward sale of the mortgage to a secondary market investor. These commitments are free-standing derivatives which are carried at fair value with changes recorded in mortgage banking income.
Changes in the fair value of IRLCs and forward commitments subsequent to inception are based on changes in the fair value of the underlying loan resulting from the fulfillment of the commitment and changes in the probability that the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time.
The notional amount and fair value of ASB’s derivative financial instruments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
December 31, 2019
|
|
|
|
(in thousands)
|
|
Notional amount
|
|
Fair value
|
|
Notional amount
|
|
Fair value
|
|
Interest rate lock commitments
|
|
$
|
70,190
|
|
|
$
|
2,341
|
|
|
$
|
23,171
|
|
|
$
|
297
|
|
|
Forward commitments
|
|
57,750
|
|
|
(287)
|
|
|
29,383
|
|
|
(42)
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
ASB’s derivative financial instruments, their fair values and balance sheet location were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Financial Instruments Not Designated as Hedging Instruments 1
|
|
June 30, 2020
|
|
|
|
December 31, 2019
|
|
|
|
(in thousands)
|
|
Asset derivatives
|
|
Liability
derivatives
|
|
Asset derivatives
|
|
Liability
derivatives
|
|
Interest rate lock commitments
|
|
$
|
2,341
|
|
|
$
|
—
|
|
|
$
|
297
|
|
|
$
|
—
|
|
|
Forward commitments
|
|
—
|
|
|
287
|
|
|
3
|
|
|
45
|
|
|
|
|
$
|
2,341
|
|
|
$
|
287
|
|
|
$
|
300
|
|
|
$
|
45
|
|
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 June 30,
|
|
|
|
Six months ended June 30
|
|
|
|
(in thousands)
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Interest rate lock commitments
|
|
Mortgage banking income
|
|
$
|
489
|
|
|
$
|
11
|
|
|
$
|
2,044
|
|
|
$
|
382
|
|
|
Forward commitments
|
|
Mortgage banking income
|
|
298
|
|
|
46
|
|
|
(245)
|
|
|
(72)
|
|
|
|
|
|
|
$
|
787
|
|
|
$
|
57
|
|
|
$
|
1,799
|
|
|
$
|
310
|
|
Low-Income Housing Tax Credit (LIHTC). ASB’s unfunded commitments to fund its LIHTC investment partnerships were $21.4 million and $23.4 million at June 30, 2020 and December 31, 2019, respectively. These unfunded commitments were unconditional and legally binding and are recorded in other liabilities with a corresponding increase in other assets. As of June 30, 2020, ASB did not have any impairment losses resulting from forfeiture or ineligibility of tax credits or other circumstances related to its LIHTC investment partnerships.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Note 5 · Credit agreements and changes in debt
HEI and Hawaiian Electric each entered into a separate agreement with a syndicate of eight financial institutions (the HEI Facility and Hawaiian Electric Facility, respectively, and together, the Credit Facilities), effective July 3, 2017, to amend and restate their respective previously existing revolving unsecured credit agreements. The $150 million HEI Facility and $200 million Hawaiian Electric Facility both terminate on June 30, 2022. No amounts under the Credit Facilities were outstanding as of June 30, 2020 and December 31, 2019. None of the facilities are collateralized.
The Credit Facilities will be maintained to support each company’s respective short-term commercial paper program, but may be drawn on to meet each company’s respective working capital needs and general corporate purposes.
Changes in debt. On April 20, 2020, HEI closed on a $65 million 364-day term loan from a syndicate of two banks. The loan bears interest at a floating rate at HEI’s option of either (i) a rate equal to an alternate base rate as defined in the agreement or (ii) a rate equal to an adjusted London interbank offered rate, as defined in the agreement, plus an applicable margin, and matures on April 19, 2021. The proceeds of the loan were used to pay down the balance on the HEI Facility, which increased the available borrowing capacity on the HEI Facility by $65 million. The loan contains provisions requiring the maintenance by HEI of certain financial ratios substantially consistent with those in HEI’s existing, amended and restated revolving unsecured credit agreement. The loan may be prepaid without penalty at any time, but proceeds from any debt capital market transactions over $50 million must first be applied to pay down the term loan.
On April 20, 2020, Hawaiian Electric closed on a $75 million 364-day revolving credit agreement (364-day Revolver) with a syndicate of four 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 June 30, 2020, Hawaiian Electric had no amounts outstanding on this revolving credit agreement.
On May 14, 2020, the Utilities issued, through a private placement pursuant to separate Note Purchase Agreements (the Note Purchase Agreements), the following unsecured senior notes bearing taxable interest (the Notes):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 2020A
|
|
Series 2020B
|
|
Series 2020C
|
|
Aggregate principal amount
|
|
$80 million
|
|
$60 million
|
|
$20 million
|
|
Fixed coupon interest rate
|
|
|
|
|
|
|
|
Hawaiian Electric
|
|
3.31%
|
|
3.31%
|
|
3.96%
|
|
Hawaii Electric Light
|
|
3.96%
|
|
|
|
|
|
Maui Electric
|
|
3.31%
|
|
3.96%
|
|
|
|
Maturity date
|
|
|
|
|
|
|
|
Hawaiian Electric
|
|
5/1/2030
|
|
5/1/2030
|
|
5/1/2050
|
|
Hawaii Electric Light
|
|
5/1/2050
|
|
|
|
|
|
Maui Electric
|
|
5/1/2030
|
|
5/1/2050
|
|
|
|
Principal amount by company:
|
|
|
|
|
|
|
|
Hawaiian Electric
|
|
$50 million
(Green Bond)
|
|
$40 million
|
|
$20 million
|
|
Hawaii Electric Light
|
|
$10 million
|
|
—
|
|
—
|
|
Maui Electric
|
|
$20 million
|
|
20 million
|
|
—
|
The Notes include substantially the same financial covenants and customary conditions as Hawaiian Electric’s credit agreement. Hawaiian Electric is also a party as guarantor under the Note Purchase Agreements entered into by Hawaii Electric Light and Maui Electric. All of the proceeds of the Notes were used by Hawaiian Electric, Hawaii Electric Light and Maui Electric to finance their capital expenditures and/or to reimburse funds used for the payment of capital expenditures. The Notes may be prepaid in whole or in part at any time at the prepayment price of the principal amount plus a “Make-Whole Amount.”
On May 19, 2020, Hawaiian Electric paid off and terminated $100 million term loan credit agreement dated as of December 23, 2019. In addition, Hawaiian Electric entered into a 364-day, $50 million term loan credit agreement that matures
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
on April 19, 2021. The term loan credit agreement includes substantially the same financial covenant and customary representations and warranties, affirmative and negative covenants, and events of default (the occurrence of which may result in the loan outstanding becoming immediately due and payable) consistent with those in Hawaiian Electric’s existing, amended and restated revolving unsecured credit agreement. The loan may be prepaid without penalty at any time, but proceeds from any debt capital market transactions over $75 million must be first applied to pay down the term loan. Hawaiian Electric drew the full $50 million on May 19, 2020.
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)
|
18,783
|
|
|
(1,982)
|
|
|
1,079
|
|
|
17,880
|
|
|
|
|
51
|
|
|
|
|
Balance, June 30, 2020
|
$
|
21,264
|
|
|
$
|
(3,595)
|
|
|
$
|
(19,828)
|
|
|
$
|
(2,159)
|
|
|
|
|
$
|
(1,228)
|
|
|
|
|
Balance, December 31, 2018
|
$
|
(24,423)
|
|
|
$
|
(436)
|
|
|
$
|
(25,751)
|
|
|
$
|
(50,610)
|
|
|
|
|
$
|
99
|
|
|
|
|
Current period other comprehensive income (loss)
|
23,593
|
|
|
(1,063)
|
|
|
410
|
|
|
22,940
|
|
|
|
|
47
|
|
|
|
|
Balance, June 30, 2019
|
$
|
(830)
|
|
|
$
|
(1,499)
|
|
|
$
|
(25,341)
|
|
|
$
|
(27,670)
|
|
|
|
|
$
|
146
|
|
|
|
Reclassifications out of AOCI were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount reclassified from AOCI
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30
|
|
|
|
Six months ended June 30
|
|
|
|
Affected line item in the
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Statements of Income / Balance Sheets
|
|
HEI consolidated
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains on securities included in net income
|
|
$
|
(1,638)
|
|
|
$
|
—
|
|
|
$
|
(1,638)
|
|
|
$
|
—
|
|
|
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
|
|
5,690
|
|
|
2,503
|
|
|
11,396
|
|
|
5,006
|
|
|
See Note 8 for additional details
|
|
Impact of D&Os of the PUC included in regulatory assets
|
|
(5,159)
|
|
|
(2,298)
|
|
|
(10,317)
|
|
|
(4,596)
|
|
|
See Note 8 for additional details
|
|
Total reclassifications
|
|
$
|
(1,107)
|
|
|
$
|
205
|
|
|
$
|
(559)
|
|
|
$
|
410
|
|
|
|
|
Hawaiian Electric consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service credit and net losses recognized during the period in net periodic benefit cost
|
|
$
|
5,184
|
|
|
$
|
2,321
|
|
|
$
|
10,368
|
|
|
$
|
4,643
|
|
|
See Note 8 for additional details
|
|
Impact of D&Os of the PUC included in regulatory assets
|
|
(5,159)
|
|
|
(2,298)
|
|
|
(10,317)
|
|
|
(4,596)
|
|
|
See Note 8 for additional details
|
|
Total reclassifications
|
|
$
|
25
|
|
|
$
|
23
|
|
|
$
|
51
|
|
|
$
|
47
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Note 7 · Revenues
Revenue from contracts with customers. The following tables disaggregate revenues by major source, timing of revenue recognition, and segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2020
|
|
|
|
|
|
|
|
Six months ended June 30, 2020
|
|
|
|
|
|
|
|
(in thousands)
|
|
Electric utility
|
|
Bank
|
|
Other
|
|
Total
|
|
Electric utility
|
|
Bank
|
|
Other
|
|
Total
|
|
Revenues from contracts with customers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric energy sales - residential
|
|
$
|
187,590
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
187,590
|
|
|
$
|
377,856
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
377,856
|
|
|
Electric energy sales - commercial
|
|
159,874
|
|
|
—
|
|
|
—
|
|
|
159,874
|
|
|
356,979
|
|
|
—
|
|
|
—
|
|
|
356,979
|
|
|
Electric energy sales - large light and power
|
|
176,467
|
|
|
—
|
|
|
—
|
|
|
176,467
|
|
|
392,687
|
|
|
—
|
|
|
—
|
|
|
392,687
|
|
|
Electric energy sales - other
|
|
1,779
|
|
|
—
|
|
|
—
|
|
|
1,779
|
|
|
5,237
|
|
|
—
|
|
|
—
|
|
|
5,237
|
|
|
Bank fees
|
|
—
|
|
|
7,211
|
|
|
—
|
|
|
7,211
|
|
|
—
|
|
|
18,767
|
|
|
—
|
|
|
18,767
|
|
|
Total revenues from contracts with customers
|
|
525,710
|
|
|
7,211
|
|
|
—
|
|
|
532,921
|
|
|
1,132,759
|
|
|
18,767
|
|
|
—
|
|
|
1,151,526
|
|
|
Revenues from other sources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory revenue
|
|
2,826
|
|
|
—
|
|
|
—
|
|
|
2,826
|
|
|
(12,478)
|
|
|
—
|
|
|
—
|
|
|
(12,478)
|
|
|
Bank interest and dividend income
|
|
—
|
|
|
59,829
|
|
|
—
|
|
|
59,829
|
|
|
—
|
|
|
124,804
|
|
|
—
|
|
|
124,804
|
|
|
Other bank noninterest income
|
|
—
|
|
|
7,674
|
|
|
—
|
|
|
7,674
|
|
|
—
|
|
|
10,881
|
|
|
—
|
|
|
10,881
|
|
|
Other
|
|
5,679
|
|
|
—
|
|
|
16
|
|
|
5,695
|
|
|
11,376
|
|
|
—
|
|
|
22
|
|
|
11,398
|
|
|
Total revenues from other sources
|
|
8,505
|
|
|
67,503
|
|
|
16
|
|
|
76,024
|
|
|
(1,102)
|
|
|
135,685
|
|
|
22
|
|
|
134,605
|
|
|
Total revenues
|
|
$
|
534,215
|
|
|
$
|
74,714
|
|
|
$
|
16
|
|
|
$
|
608,945
|
|
|
$
|
1,131,657
|
|
|
$
|
154,452
|
|
|
$
|
22
|
|
|
$
|
1,286,131
|
|
|
Timing of revenue recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services/goods transferred at a point in time
|
|
$
|
—
|
|
|
$
|
7,211
|
|
|
$
|
—
|
|
|
$
|
7,211
|
|
|
$
|
—
|
|
|
$
|
18,767
|
|
|
$
|
—
|
|
|
$
|
18,767
|
|
|
Services/goods transferred over time
|
|
525,710
|
|
|
—
|
|
|
—
|
|
|
525,710
|
|
|
1,132,759
|
|
|
—
|
|
|
—
|
|
|
1,132,759
|
|
|
Total revenues from contracts with customers
|
|
$
|
525,710
|
|
|
$
|
7,211
|
|
|
$
|
—
|
|
|
$
|
532,921
|
|
|
$
|
1,132,759
|
|
|
$
|
18,767
|
|
|
$
|
—
|
|
|
$
|
1,151,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2019
|
|
|
|
|
|
|
|
Six months ended June 30, 2019
|
|
|
|
|
|
|
|
(in thousands)
|
|
Electric utility
|
|
Bank
|
|
Other
|
|
Total
|
|
Electric utility
|
|
Bank
|
|
Other
|
|
Total
|
|
Revenues from contracts with customers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric energy sales - residential
|
|
$
|
195,868
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
195,868
|
|
|
$
|
371,613
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
371,613
|
|
|
Electric energy sales - commercial
|
|
217,278
|
|
|
—
|
|
|
—
|
|
|
217,278
|
|
|
404,686
|
|
|
—
|
|
|
—
|
|
|
404,686
|
|
|
Electric energy sales - large light and power
|
|
231,869
|
|
|
—
|
|
|
—
|
|
|
231,869
|
|
|
430,795
|
|
|
—
|
|
|
—
|
|
|
430,795
|
|
|
Electric energy sales - other
|
|
3,774
|
|
|
—
|
|
|
—
|
|
|
3,774
|
|
|
7,852
|
|
|
—
|
|
|
—
|
|
|
7,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank fees
|
|
—
|
|
|
11,632
|
|
|
—
|
|
|
11,632
|
|
|
—
|
|
|
22,865
|
|
|
—
|
|
|
22,865
|
|
|
Total revenues from contracts with customers
|
|
648,789
|
|
|
11,632
|
|
|
—
|
|
|
660,421
|
|
|
1,214,946
|
|
|
22,865
|
|
|
—
|
|
|
1,237,811
|
|
|
Revenues from other sources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory revenue
|
|
(20,360)
|
|
|
—
|
|
|
—
|
|
|
(20,360)
|
|
|
(14,153)
|
|
|
—
|
|
|
—
|
|
|
(14,153)
|
|
|
Bank interest and dividend income
|
|
—
|
|
|
66,155
|
|
|
—
|
|
|
66,155
|
|
|
—
|
|
|
134,643
|
|
|
—
|
|
|
134,643
|
|
|
Other bank noninterest income
|
|
—
|
|
|
3,900
|
|
|
—
|
|
|
3,900
|
|
|
—
|
|
|
7,231
|
|
|
—
|
|
|
7,231
|
|
|
Other
|
|
5,355
|
|
|
—
|
|
|
14
|
|
|
5,369
|
|
|
11,486
|
|
|
—
|
|
|
82
|
|
|
11,568
|
|
|
Total revenues from other sources
|
|
(15,005)
|
|
|
70,055
|
|
|
14
|
|
|
55,064
|
|
|
(2,667)
|
|
|
141,874
|
|
|
82
|
|
|
139,289
|
|
|
Total revenues
|
|
$
|
633,784
|
|
|
$
|
81,687
|
|
|
$
|
14
|
|
|
$
|
715,485
|
|
|
$
|
1,212,279
|
|
|
$
|
164,739
|
|
|
$
|
82
|
|
|
$
|
1,377,100
|
|
|
Timing of revenue recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services/goods transferred at a point in time
|
|
$
|
—
|
|
|
$
|
11,632
|
|
|
$
|
—
|
|
|
$
|
11,632
|
|
|
$
|
—
|
|
|
$
|
22,865
|
|
|
$
|
—
|
|
|
$
|
22,865
|
|
|
Services/goods transferred over time
|
|
648,789
|
|
|
—
|
|
|
—
|
|
|
648,789
|
|
|
1,214,946
|
|
|
—
|
|
|
—
|
|
|
1,214,946
|
|
|
Total revenues from contracts with customers
|
|
$
|
648,789
|
|
|
$
|
11,632
|
|
|
$
|
—
|
|
|
$
|
660,421
|
|
|
$
|
1,214,946
|
|
|
$
|
22,865
|
|
|
$
|
—
|
|
|
$
|
1,237,811
|
|
There are no material contract assets or liabilities associated with revenues from contracts with customers existing at the beginning of the period or as of June 30, 2020. Accounts receivable and unbilled revenues related to contracts with customers represent an unconditional right to consideration since all performance obligations have been satisfied. These amounts are
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
disclosed as accounts receivable and unbilled revenues, net on HEI’s condensed consolidated balance sheets and customer accounts receivable, net and accrued unbilled revenues, net on Hawaiian Electric’s condensed consolidated balance sheets.
As of June 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 six months of 2020, the Company contributed $17 million ($17 million by the Utilities) to its pension and other postretirement benefit plans, compared to $24 million ($23 million by the Utilities) in the first six months of 2019. The Company’s current estimate of total contributions to its pension and other postretirement benefit plans in 2020 is $71 million ($70 million by the Utilities, $1 million by HEI and nil by ASB), compared to $49 million ($48 million by the Utilities, $1 million by HEI and nil by ASB) in 2019. In addition, the Company expects to pay directly $3 million ($1 million by the Utilities) of benefits in 2020, compared to $2 million ($1 million by the Utilities) paid in 2019.
The components of net periodic pension costs (NPPC) and net periodic benefit costs (NPBC) for HEI consolidated and Hawaiian Electric consolidated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30
|
|
|
|
|
|
|
|
Six months ended June 30
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
|
|
Other benefits
|
|
|
|
Pension benefits
|
|
|
|
Other benefits
|
|
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
HEI consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
18,362
|
|
|
$
|
15,382
|
|
|
$
|
631
|
|
|
$
|
542
|
|
|
$
|
36,725
|
|
|
$
|
30,764
|
|
|
$
|
1,262
|
|
|
$
|
1,083
|
|
|
Interest cost
|
|
20,164
|
|
|
21,033
|
|
|
1,856
|
|
|
1,997
|
|
|
40,327
|
|
|
42,066
|
|
|
3,711
|
|
|
3,994
|
|
|
Expected return on plan assets
|
|
(28,465)
|
|
|
(27,999)
|
|
|
(3,039)
|
|
|
(3,086)
|
|
|
(56,931)
|
|
|
(55,997)
|
|
|
(6,077)
|
|
|
(6,172)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net prior period (gain)/cost
|
|
2
|
|
|
(11)
|
|
|
(441)
|
|
|
(452)
|
|
|
5
|
|
|
(22)
|
|
|
(881)
|
|
|
(904)
|
|
|
Amortization of net actuarial (gains)/losses
|
|
8,058
|
|
|
3,839
|
|
|
51
|
|
|
(4)
|
|
|
16,115
|
|
|
7,678
|
|
|
101
|
|
|
(7)
|
|
|
Net periodic pension/benefit cost (return)
|
|
18,121
|
|
|
12,244
|
|
|
(942)
|
|
|
(1,003)
|
|
|
36,241
|
|
|
24,489
|
|
|
(1,884)
|
|
|
(2,006)
|
|
|
Impact of PUC D&Os
|
|
6,261
|
|
|
12,278
|
|
|
777
|
|
|
811
|
|
|
12,523
|
|
|
24,557
|
|
|
1,554
|
|
|
1,622
|
|
|
Net periodic pension/benefit cost (adjusted for impact of PUC D&Os)
|
|
$
|
24,382
|
|
|
$
|
24,522
|
|
|
$
|
(165)
|
|
|
$
|
(192)
|
|
|
$
|
48,764
|
|
|
$
|
49,046
|
|
|
$
|
(330)
|
|
|
$
|
(384)
|
|
|
Hawaiian Electric consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
17,891
|
|
|
$
|
15,001
|
|
|
$
|
625
|
|
|
$
|
538
|
|
|
$
|
35,782
|
|
|
$
|
30,002
|
|
|
$
|
1,251
|
|
|
$
|
1,075
|
|
|
Interest cost
|
|
18,715
|
|
|
19,414
|
|
|
1,781
|
|
|
1,918
|
|
|
37,430
|
|
|
38,828
|
|
|
3,563
|
|
|
3,835
|
|
|
Expected return on plan assets
|
|
(26,857)
|
|
|
(26,164)
|
|
|
(2,990)
|
|
|
(3,036)
|
|
|
(53,712)
|
|
|
(52,328)
|
|
|
(5,980)
|
|
|
(6,071)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net prior period (gain)/cost
|
|
3
|
|
|
2
|
|
|
(439)
|
|
|
(451)
|
|
|
5
|
|
|
4
|
|
|
(879)
|
|
|
(902)
|
|
|
Amortization of net actuarial losses
|
|
7,369
|
|
|
3,576
|
|
|
51
|
|
|
—
|
|
|
14,737
|
|
|
7,152
|
|
|
102
|
|
|
—
|
|
|
Net periodic pension/benefit cost (return)
|
|
17,121
|
|
|
11,829
|
|
|
(972)
|
|
|
(1,031)
|
|
|
34,242
|
|
|
23,658
|
|
|
(1,943)
|
|
|
(2,063)
|
|
|
Impact of PUC D&Os
|
|
6,261
|
|
|
12,278
|
|
|
777
|
|
|
811
|
|
|
12,523
|
|
|
24,557
|
|
|
1,554
|
|
|
1,622
|
|
|
Net periodic pension/benefit cost (adjusted for impact of PUC D&Os)
|
|
$
|
23,382
|
|
|
$
|
24,107
|
|
|
$
|
(195)
|
|
|
$
|
(220)
|
|
|
$
|
46,765
|
|
|
$
|
48,215
|
|
|
$
|
(389)
|
|
|
$
|
(441)
|
|
HEI consolidated recorded retirement benefits expense of $31 million ($29 million by the Utilities) in the first six months of 2020 and $29 million ($29 million by the Utilities) in the first six months of 2019 and charged the remaining net periodic benefit cost primarily to electric utility plant.
The Utilities have implemented pension and OPEB tracking mechanisms under which all of their retirement benefit expenses (except for executive life and nonqualified pension plan expenses) determined in accordance with GAAP are recovered over time. Under the tracking mechanisms, any actual costs determined in accordance with GAAP that are over/under
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
amounts allowed in rates are charged/credited to a regulatory asset/liability. The regulatory asset/liability for each utility will then be amortized over 5 years beginning with the respective utility’s next rate case.
Defined contribution plans information. For the first six months of 2020 and 2019, the Company’s expenses for its defined contribution plans under the Hawaiian Electric Industries Retirement Savings Plan (HEIRSP) and the ASB 401(k) Plan were $3.7 million and $3.6 million, respectively, and cash contributions were $4.6 million and $4.9 million, respectively. For the first six months of 2020 and 2019, the Utilities’ expenses for its defined contribution plan under the HEIRSP were $1.4 million and $1.3 million, respectively, and cash contributions were $1.4 million and $1.3 million, respectively.
Note 9 · Share-based compensation
Under the 2010 Equity and Incentive Plan, as amended, HEI can issue shares of common stock as incentive compensation to selected employees in the form of stock options, stock appreciation rights, restricted shares, restricted stock units, performance shares and other share-based and cash-based awards. The 2010 Equity and Incentive Plan (original EIP) was amended and restated effective March 1, 2014 (EIP) and an additional 1.5 million shares were added to the shares available for issuance under these programs.
As of June 30, 2020, approximately 3.0 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 0.7 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 June 30, 2020, there were 274,163 shares remaining available for future issuance under the 2011 Director Plan.
Share-based compensation expense and the related income tax benefit were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30
|
|
|
|
Six months ended June 30
|
|
|
|
(in millions)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
HEI consolidated
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense 1
|
|
$
|
2.4
|
|
|
$
|
3.7
|
|
|
$
|
4.1
|
|
|
$
|
5.9
|
|
|
Income tax benefit
|
|
0.4
|
|
|
0.7
|
|
|
0.7
|
|
|
0.9
|
|
|
Hawaiian Electric consolidated
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense 1
|
|
0.4
|
|
|
1.1
|
|
|
1.2
|
|
|
1.8
|
|
|
Income tax benefit
|
|
0.1
|
|
|
0.2
|
|
|
0.2
|
|
|
0.3
|
|
1 For the three and six months ended June 30, 2020 and 2019, the Company has not capitalized any share-based compensation.
Stock awards. HEI granted HEI common stock to nonemployee directors under the 2011 Director Plan as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30
|
|
|
|
Six months ended June 30
|
|
|
|
(dollars in millions)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Shares granted
|
|
35,632
|
|
|
35,580
|
|
|
36,100
|
|
|
35,580
|
|
|
Fair value
|
|
$
|
1.3
|
|
|
$
|
1.5
|
|
|
$
|
1.3
|
|
|
$
|
1.5
|
|
|
Income tax benefit
|
|
0.3
|
|
|
0.4
|
|
|
0.3
|
|
|
0.4
|
|
The number of shares issued to each nonemployee director of HEI, Hawaiian Electric and ASB is determined based on the closing price of HEI common stock on the grant date.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Restricted stock units. Information about HEI’s grants of restricted stock units was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30
|
|
|
|
|
|
|
|
Six months ended June 30
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
|
Shares
|
|
(1)
|
|
Shares
|
|
(1)
|
|
Shares
|
|
(1)
|
|
Shares
|
|
(1)
|
|
Outstanding, beginning of period
|
203,441
|
|
|
$
|
40.67
|
|
|
211,225
|
|
|
$
|
35.28
|
|
|
207,641
|
|
|
$
|
35.36
|
|
|
200,358
|
|
|
$
|
33.05
|
|
|
Granted
|
916
|
|
|
37.90
|
|
|
—
|
|
|
—
|
|
|
78,595
|
|
|
47.99
|
|
|
94,559
|
|
|
37.68
|
|
|
Vested
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(77,719)
|
|
|
34.19
|
|
|
(76,712)
|
|
|
32.61
|
|
|
Forfeited
|
—
|
|
|
—
|
|
|
(2,600)
|
|
|
35.56
|
|
|
(4,160)
|
|
|
35.81
|
|
|
(9,580)
|
|
|
33.82
|
|
|
Outstanding, end of period
|
204,357
|
|
|
$
|
40.65
|
|
|
208,625
|
|
|
$
|
35.28
|
|
|
204,357
|
|
|
$
|
40.65
|
|
|
208,625
|
|
|
$
|
35.28
|
|
|
Total weighted-average grant-date fair value of shares granted (in millions)
|
$
|
—
|
|
|
|
|
$
|
—
|
|
|
|
|
$
|
3.8
|
|
|
|
|
$
|
3.6
|
|
|
|
(1) Weighted-average grant-date fair value per share based on the average price of HEI common stock on the date of grant.
For the first six months of 2020 and 2019, total restricted stock units and related dividends that vested had a fair value of $4.2 million and $3.2 million, respectively, and the related tax benefits were $0.7 million and $0.5 million, respectively.
As of June 30, 2020, there was $6.9 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 2.9 years.
Long-term incentive plan payable in stock. The 2018-2020, 2019-2021 and 2020-2022 long-term incentive plans (LTIP) provide for performance awards under the EIP of shares of HEI common stock based on the satisfaction of performance goals, including a market condition goal. The number of shares of HEI common stock that may be awarded is fixed on the date the grants are made, subject to the achievement of specified performance levels and calculated dividend equivalents. The potential payout varies from 0% to 200% of the number of target shares, depending on the achievement of the goals. The market condition goal is based on HEI’s total shareholder return (TSR) compared to the Edison Electric Institute Index over the relevant three-year period. The other performance condition goals relate to earnings per share (EPS) growth, return on average common equity (ROACE), renewable portfolio standards, Hawaiian Electric’s net income growth, ASB’s efficiency ratio and Pacific Current’s EBITDA growth and return on average invested capital.
LTIP linked to TSR. Information about HEI’s LTIP grants linked to TSR was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30
|
|
|
|
|
|
|
|
Six months ended June 30
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
|
Shares
|
|
(1)
|
|
Shares
|
|
(1)
|
|
Shares
|
|
(1)
|
|
Shares
|
|
(1)
|
|
Outstanding, beginning of period
|
90,616
|
|
|
$
|
42.08
|
|
|
98,311
|
|
|
$
|
39.61
|
|
|
96,402
|
|
|
$
|
39.62
|
|
|
65,578
|
|
|
$
|
38.81
|
|
|
Granted
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
24,630
|
|
|
48.62
|
|
|
34,647
|
|
|
41.07
|
|
|
Vested (issued or unissued and cancelled)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(29,409)
|
|
|
39.51
|
|
|
—
|
|
|
—
|
|
|
Forfeited
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,007)
|
|
|
41.72
|
|
|
(1,914)
|
|
|
38.62
|
|
|
Outstanding, end of period
|
90,616
|
|
|
$
|
42.08
|
|
|
98,311
|
|
|
$
|
39.61
|
|
|
90,616
|
|
|
$
|
42.08
|
|
|
98,311
|
|
|
$
|
39.61
|
|
|
Total weighted-average grant-date fair value of shares granted (in millions)
|
$
|
—
|
|
|
|
|
$
|
—
|
|
|
|
|
$
|
1.2
|
|
|
|
|
$
|
1.4
|
|
|
|
(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
|
For the six months ended June 30, 2020, total vested LTIP awards linked to TSR and related dividends had a fair value of $2.6 million and the related tax benefits were $0.4 million. There were no share-based LTIP awards linked to TSR with a vesting date in 2019.
As of June 30, 2020, there was $1.9 million of total unrecognized compensation cost related to the nonvested performance awards payable in shares linked to TSR. The cost is expected to be recognized over a weighted-average period of 1.4 years.
LTIP awards linked to other performance conditions. Information about HEI’s LTIP awards payable in shares linked to other performance conditions was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30
|
|
|
|
|
|
|
|
Six months ended June 30
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
|
Shares
|
|
(1)
|
|
Shares
|
|
(1)
|
|
Shares
|
|
(1)
|
|
Shares
|
|
(1)
|
|
Outstanding, beginning of period
|
336,344
|
|
|
$
|
39.64
|
|
|
407,090
|
|
|
$
|
35.12
|
|
|
403,768
|
|
|
$
|
35.15
|
|
|
276,169
|
|
|
$
|
33.80
|
|
|
Granted
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
98,522
|
|
|
48.10
|
|
|
138,580
|
|
|
37.68
|
|
|
Vested
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(135,804)
|
|
|
33.48
|
|
|
—
|
|
|
—
|
|
|
Increase above target (cancelled)
|
(38,821)
|
|
|
34.12
|
|
|
—
|
|
|
—
|
|
|
(64,932)
|
|
|
34.12
|
|
|
—
|
|
|
—
|
|
|
Forfeited
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,031)
|
|
|
39.67
|
|
|
(7,659)
|
|
|
33.91
|
|
|
Outstanding, end of period
|
297,523
|
|
|
$
|
40.37
|
|
|
407,090
|
|
|
$
|
35.12
|
|
|
297,523
|
|
|
$
|
40.37
|
|
|
407,090
|
|
|
$
|
35.12
|
|
|
Total weighted-average grant-date fair value of shares granted (at target performance levels) (in millions)
|
$
|
—
|
|
|
|
|
$
|
—
|
|
|
|
|
$
|
4.7
|
|
|
|
|
$
|
5.2
|
|
|
|
(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 six months ended June 30, 2020, total vested LTIP awards linked to other performance conditions and related dividends had a fair value of $7.6 million and the related tax benefits were $1.2 million. There were no share-based LTIP awards linked to other performance conditions with a vesting date in 2019.
As of June 30, 2020, there was $6.8 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 1.6 years.
Note 10 · Income taxes
The Company’s and the Utilities’ effective tax rates (combined federal and state income tax rates) were 17% and 19%, respectively, for the six months ended June 30, 2020. These rates differed from the combined statutory rates, due primarily to the Utilities’ amortization of excess deferred income taxes related to the provision in the Tax Act that lowered the federal income tax rate from 35% to 21%, the tax benefits derived from the low income housing tax credit investments and the non-taxability of the bank-owned life insurance income. The Company’s and the Utilities’ effective tax rates were 19% and 21%, respectively, for the six months ended June 30, 2019.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Note 11 · Cash flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30
|
|
2020
|
|
2019
|
|
(in millions)
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
HEI consolidated
|
|
|
|
|
|
Interest paid to non-affiliates, net of amounts capitalized
|
|
$
|
50
|
|
|
$
|
53
|
|
|
Income taxes paid (including refundable credits)
|
|
—
|
|
|
46
|
|
|
Income taxes refunded (including refundable credits)
|
|
—
|
|
|
4
|
|
|
Hawaiian Electric consolidated
|
|
|
|
|
|
Interest paid to non-affiliates
|
|
32
|
|
|
34
|
|
|
Income taxes paid (including refundable credits)
|
|
—
|
|
|
46
|
|
|
Income taxes refunded (including refundable credits)
|
|
—
|
|
|
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)
|
|
3
|
|
|
1
|
|
|
Unpaid invoices and accruals for capital expenditures, balance, end of period (investing)
|
|
34
|
|
|
30
|
|
|
Reduction of long-term debt from funds previously transferred for repayment (financing)
|
|
82
|
|
|
—
|
|
|
Right-of-use assets obtained in exchange for operating lease obligations (investing)
|
|
20
|
|
|
2
|
|
|
Common stock issued (gross) for director and executive/management compensation (financing)1
|
|
16
|
|
|
5
|
|
|
Real estate transferred from property, plant and equipment to other assets held-for-sale (investing)
|
|
—
|
|
|
9
|
|
|
Obligations to fund low income housing investments (investing)
|
|
—
|
|
|
6
|
|
|
Hawaiian Electric consolidated
|
|
|
|
|
|
Electric utility property, plant and equipment
|
|
|
|
|
|
Estimated fair value of noncash contributions in aid of construction (investing)
|
|
3
|
|
|
1
|
|
|
Unpaid invoices and accruals for capital expenditures, balance, end of period (investing)
|
|
30
|
|
|
27
|
|
|
Reduction of long-term debt from funds previously transferred for repayment (financing)
|
|
82
|
|
|
—
|
|
|
Right-of-use assets obtained in exchange for operating lease obligations (investing)
|
|
16
|
|
|
1
|
|
1 The amounts shown represent the market value of common stock issued for director and executive/management compensation and withheld to satisfy statutory tax liabilities.
Note 12 · Fair value measurements
Fair value measurement and disclosure valuation methodology. The following are descriptions of the valuation methodologies used for assets and liabilities recorded at fair value and for estimating fair value for financial instruments not carried at fair value:
Short-term borrowings—other than bank. The carrying amount of short-term borrowings approximated fair value because of the short maturity of these instruments.
Investment securities. The fair value of ASB’s investment securities is determined quarterly through pricing obtained from independent third-party pricing services or from brokers not affiliated with the trade. Non-binding broker quotes are infrequent and generally occur for new securities that are settled close to the month-end pricing date. The third-party pricing vendors ASB uses for pricing its securities are reputable firms that provide pricing services on a global basis and have processes in place to ensure quality and control. The third-party pricing services use a variety of methods to determine the fair value of securities that fall under Level 2 of ASB’s fair value measurement hierarchy. Among the considerations are quoted prices for similar securities in an active market, yield spreads for similar trades, adjustments for liquidity, size, collateral characteristics, historic and generic prepayment speeds, and other observable market factors.
To enhance the robustness of the pricing process, ASB will on a quarterly basis compare its standard third-party vendor’s price with that of another third-party vendor. If the prices are within an acceptable tolerance range, the price of the standard vendor will be accepted. If the variance is beyond the tolerance range, an evaluation will be conducted by ASB and a challenge to the price may be made. Fair value in such cases will be based on the value that best reflects the data and observable
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
characteristics of the security. In all cases, the fair value used will have been independently determined by a third-party pricing vendor or non-affiliated broker.
The fair value of the mortgage revenue bonds is estimated using a discounted cash flow model to calculate the present value of future principal and interest payments and, therefore is classified within Level 3 of the valuation hierarchy.
Loans held for sale. Residential and commercial loans are carried at the lower of cost or market and are valued using market observable pricing inputs, which are derived from third party loan sales and, therefore, are classified within Level 2 of the valuation hierarchy.
Loans held for investment. Fair value of loans held for investment is derived using a discounted cash flow approach which includes an evaluation of the underlying loan characteristics. The valuation model uses loan characteristics which includes product type, maturity dates and the underlying interest rate of the portfolio. This information is input into the valuation models along with various forecast valuation assumptions including prepayment forecasts, to determine the discount rate. These assumptions are derived from internal and third party sources. Since the valuation is derived from model-based techniques, ASB includes loans held for investment within Level 3 of the valuation hierarchy.
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 credit 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. MSRs are capitalized at fair value based on market data at the time of sale and accounted for in subsequent periods at the lower of amortized cost or fair value. MSRs are evaluated for impairment at each reporting date. ASB's MSRs are stratified based on predominant risk characteristics of the underlying loans including loan type and note rate. For each stratum, fair value is calculated by discounting expected net income streams using discount rates that reflect industry pricing for similar assets. Expected net income streams are estimated based on industry assumptions regarding prepayment expectations and income and expenses associated with servicing residential mortgage loans for others. Impairment is recognized through a valuation allowance for each stratum when the carrying amount exceeds fair value, with any associated provision recorded as a component of loan servicing fees included in "Revenues - bank" in the consolidated statements of income. A direct write-down is recorded when the recoverability of the valuation allowance is deemed to be unrecoverable. ASB compares the fair value of MSRs to an estimated value calculated by an independent third-party. The third-party relies on both published and unpublished sources of market related assumptions and its own experience and expertise to arrive at a value. ASB uses the third-party value only to assess the reasonableness of its own estimate.
Deposit liabilities. The fair value of fixed-maturity certificates of deposit was estimated by discounting the future cash flows using the rates currently offered for FHLB advances of similar remaining maturities. Deposit liabilities are classified in Level 2 of the valuation hierarchy.
Other borrowings. For advances and repurchase agreements, fair value is estimated using quantitative discounted cash flow models that require the use of interest rate inputs that are currently offered for advances and repurchase agreements of similar remaining maturities. The majority of market inputs are actively quoted and can be validated through external sources, including broker market transactions and third party pricing services.
Long-term debt—other than bank. Fair value of fixed-rate long-term debt—other than bank was obtained from third-party financial services providers based on the current rates offered for debt of the same or similar remaining maturities and from discounting the future cash flows using the current rates offered for debt of the same or similar risks, terms, and remaining maturities. The carrying amount of floating rate long-term debt—other than bank approximated fair value because of the short-term interest reset periods. Long-term debt—other than bank is classified in Level 2 of the valuation hierarchy.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Interest rate lock commitments (IRLCs). The estimated fair value of commitments to originate residential mortgage loans for sale is based on quoted prices for similar loans in active markets. IRLCs are classified as Level 2 measurements.
Forward sales commitments. To be announced (TBA) mortgage-backed securities forward commitments are classified as Level 1, and consist of publicly-traded debt securities for which identical fair values can be obtained through quoted market prices in active exchange markets. The fair values of ASB’s mandatory delivery loan sale commitments are determined using quoted prices in the market place that are observable and 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
HEI consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale investment securities
|
|
$
|
1,389,633
|
|
|
$
|
—
|
|
|
$
|
1,360,806
|
|
|
$
|
28,827
|
|
|
$
|
1,389,633
|
|
|
Held-to-maturity investment securities
|
|
124,623
|
|
|
—
|
|
|
131,131
|
|
|
—
|
|
|
131,131
|
|
|
Stock in Federal Home Loan Bank
|
|
9,880
|
|
|
—
|
|
|
9,880
|
|
|
—
|
|
|
9,880
|
|
|
Loans, net
|
|
5,393,653
|
|
|
—
|
|
|
37,345
|
|
|
5,540,050
|
|
|
5,577,395
|
|
|
Mortgage servicing rights
|
|
9,647
|
|
|
—
|
|
|
—
|
|
|
10,328
|
|
|
10,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
|
70,190
|
|
|
—
|
|
|
2,341
|
|
|
—
|
|
|
2,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
HEI consolidated
|
|
|
|
|
|
|
|
|
|
|
|
Deposit liabilities
|
|
657,627
|
|
|
—
|
|
|
663,296
|
|
|
—
|
|
|
663,296
|
|
|
Short-term borrowings—other than bank
|
|
131,180
|
|
|
—
|
|
|
131,180
|
|
|
—
|
|
|
131,180
|
|
|
Other bank borrowings
|
|
124,975
|
|
|
—
|
|
|
124,966
|
|
|
—
|
|
|
124,966
|
|
|
Long-term debt, net—other than bank
|
|
2,070,224
|
|
|
—
|
|
|
2,427,374
|
|
|
—
|
|
|
2,427,374
|
|
|
Derivative liabilities
|
|
81,861
|
|
|
287
|
|
|
4,843
|
|
|
—
|
|
|
5,130
|
|
|
Hawaiian Electric consolidated
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
49,919
|
|
|
—
|
|
|
49,919
|
|
|
—
|
|
|
49,919
|
|
|
Long-term debt, net
|
|
1,574,955
|
|
|
—
|
|
|
1,895,365
|
|
|
—
|
|
|
1,895,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
HEI consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale investment securities
|
|
$
|
1,232,826
|
|
|
$
|
—
|
|
|
$
|
1,204,229
|
|
|
$
|
28,597
|
|
|
$
|
1,232,826
|
|
|
Held-to-maturity investment securities
|
|
139,451
|
|
|
—
|
|
|
143,467
|
|
|
—
|
|
|
143,467
|
|
|
Stock in Federal Home Loan Bank
|
|
8,434
|
|
|
—
|
|
|
8,434
|
|
|
—
|
|
|
8,434
|
|
|
Loans, net
|
|
5,080,107
|
|
|
—
|
|
|
12,295
|
|
|
5,145,242
|
|
|
5,157,537
|
|
|
Mortgage servicing rights
|
|
9,101
|
|
|
—
|
|
|
—
|
|
|
12,379
|
|
|
12,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
|
25,179
|
|
|
—
|
|
|
300
|
|
|
—
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
HEI consolidated
|
|
|
|
|
|
|
|
|
|
|
|
Deposit liabilities
|
|
769,825
|
|
|
—
|
|
|
765,976
|
|
|
—
|
|
|
765,976
|
|
|
Short-term borrowings—other than bank
|
|
185,710
|
|
|
—
|
|
|
185,710
|
|
|
—
|
|
|
185,710
|
|
|
Other bank borrowings
|
|
115,110
|
|
|
—
|
|
|
115,107
|
|
|
—
|
|
|
115,107
|
|
|
Long-term debt, net—other than bank
|
|
1,964,365
|
|
|
—
|
|
|
2,156,927
|
|
|
—
|
|
|
2,156,927
|
|
|
Derivative liabilities
|
|
51,375
|
|
|
33
|
|
|
2,185
|
|
|
—
|
|
|
2,218
|
|
|
Hawaiian Electric consolidated
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
88,987
|
|
|
—
|
|
|
88,987
|
|
|
—
|
|
|
88,987
|
|
|
Long-term debt, net
|
|
1,497,667
|
|
|
—
|
|
|
1,670,189
|
|
|
—
|
|
|
1,670,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited)
Fair value measurements on a recurring basis. Assets and liabilities measured at fair value on a recurring basis were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
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
|
|
$
|
—
|
|
|
$
|
1,226,985
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,026,385
|
|
|
$
|
—
|
|
|
U.S. Treasury and federal agency obligations
|
|
—
|
|
|
102,414
|
|
|
—
|
|
|
—
|
|
|
117,787
|
|
|
—
|
|
|
Corporate bonds
|
|
—
|
|
|
31,407
|
|
|
—
|
|
|
—
|
|
|
60,057
|
|
|
—
|
|
|
Mortgage revenue bonds
|
|
—
|
|
|
—
|
|
|
28,827
|
|
|
—
|
|
|
—
|
|
|
28,597
|
|
|
|
|
$
|
—
|
|
|
$
|
1,360,806
|
|
|
$
|
28,827
|
|
|
$
|
—
|
|
|
$
|
1,204,229
|
|
|
$
|
28,597
|
|
|
Derivative assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate lock commitments (bank segment)1
|
|
$
|
—
|
|
|
$
|
2,341
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
297
|
|
|
$
|
—
|
|
|
Forward commitments (bank segment)1
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
2,341
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
300
|
|
|
$
|
—
|
|
|
Derivative liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward commitments (bank segment)1
|
|
$
|
287
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
33
|
|
|
$
|
12
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap (Other segment)2
|
|
—
|
|
|
4,843
|
|
|
—
|
|
|
—
|
|
|
2,173
|
|
|
—
|
|
|
|
|
$
|
287
|
|
|
$
|
4,843
|
|
|
$
|
—
|
|
|
$
|
33
|
|
|
$
|
2,185
|
|
|
$
|
—
|
|
1 Derivatives are carried at fair value in other assets or other liabilities in the balance sheets with changes in value included in mortgage banking income.
2 Derivatives are included in other liabilities in the balance sheets.
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30
|
|
|
Six months ended June 30
|
|
|
Mortgage revenue bonds
|
|
2020
|
2019
|
|
2020
|
2019
|
|
(in thousands)
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
28,726
|
|
$
|
27,970
|
|
|
$
|
28,597
|
|
$
|
23,636
|
|
|
Principal payments received
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
Purchases
|
|
101
|
|
196
|
|
|
230
|
|
4,530
|
|
|
Unrealized gain (loss) included in other comprehensive income
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
Ending balance
|
|
$
|
28,827
|
|
$
|
28,166
|
|
|
$
|
28,827
|
|
$
|
28,166
|
|
ASB holds two mortgage revenue bonds issued by the Department of Budget and Finance of the State of Hawaii. The Company estimates the fair value by using a discounted cash flow model to calculate the present value of estimated future principal and interest payments. The unobservable input used in the fair value measurement is the weighted average discount rate. As of June 30, 2020, the weighted average discount rate was 2.15%, 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
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage servicing rights
|
|
$
|
5,419
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,419
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
Loans
|
|
25
|
|
|
—
|
|
|
—
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2020 and 2019, there were no adjustments to fair value for ASB’s loans held for sale.
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant unobservable
input value (1)
|
|
|
|
($ in thousands)
|
|
Fair value
|
|
Valuation technique
|
|
Significant unobservable input
|
|
Range
|
|
Weighted
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage servicing rights
|
|
$
|
5,419
|
|
|
Discounted cash flow
|
|
Prepayment Speed
|
|
13.9% - 18.4%
|
|
16.6
|
%
|
|
|
|
|
|
|
|
Discount rate
|
|
9.3
|
%
|
|
9.3
|
%
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Residential land
|
|
$
|
25
|
|
|
Fair value of property or collateral
|
|
Appraised value less 7% selling cost
|
|
N/A (2)
|
|
N/A (2)
|
|
Total loans
|
|
$
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Represents percent of outstanding principal balance.
(2) N/A - Not applicable. There is one asset in each fair value measurement type.
Significant increases (decreases) in any of those inputs in isolation would result in significantly higher (lower) fair value measurements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion updates “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in HEI’s and Hawaiian Electric’s 2019 Form 10-K and should be read in conjunction with such discussion and the 2019 annual consolidated financial statements of HEI and Hawaiian Electric and notes thereto included in HEI’s and Hawaiian Electric’s 2019 Form 10-K, as well as the quarterly (as of and for the six months ended June 30, 2020) condensed consolidated financial statements and notes thereto included in this Form 10-Q.
HEI consolidated
Recent developments—COVID-19.
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. These actions have significantly reduced the number of new cases, allowing the state to move toward a reopening of the Hawaii economy. Currently, generally all business activities have resumed, with the exception of activities related to large venues and clubs, and are allowed as long as social distancing and Safe Practices (as defined in the proclamations) are followed. Travelers from out of state are subject to a 14-day quarantine upon arrival; however, beginning September 1, 2020, travelers that test negative for COVID-19 within 72 hours of arrival and present valid documentation will not be subject to the mandatory 14-day quarantine. In addition to the restrictions imposed within Hawaii, due to the numerous other state and local jurisdictions around the world that have imposed “shelter-in-place” orders, quarantines, and similar government orders and restrictions, and in particular, travel restrictions that directly impact Hawaii tourism, economic activity in the state has been severely impacted. See “Economic Conditions” for further discussion.
The Company’s Incident Management Team, composed of senior executives across the Company, continues to monitor and manage the COVID-19 situation. Regular updates are provided to the boards of directors of the Company and its subsidiaries to discuss key focus areas, including employee and customer safety, operations, liquidity, cybersecurity, and internal controls over financial reporting. The Company’s top priority remains unchanged, which is to ensure the safety and well-being of our customers, our employees, their families and the community, while at the same time continuing to deliver essential electric and banking services. To protect its employees, customers and minimize community spread of the coronavirus, 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 September 1, 2020, customer disconnections for nonpayment and is working closely with impacted customers on payment plans. At ASB, borrowers that are experiencing financial hardship may be eligible to receive a loan forbearance, deferment or extension for up to three months. Additionally, late fee waivers may be granted for up to three months and ATM fees were waived through July 1, 2020. ASB has also secured loans totaling more than $370 million for affected businesses under the Paycheck Protection Program (PPP). Through the PPP, which was established under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and implemented by the United States Small Business Association, ASB has helped approximately 4,100 small businesses, which support roughly 40,000 jobs that contribute to economic activity in Hawaii. See “Recent Developments—COVID-19” in the Bank section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A).
For further discussion of the impact of the COVID-19 pandemic on our subsidiaries see “Recent Developments—COVID-19” section in the Electric Utility and Bank MD&As. There has been no material impact on the “Other” segment and Pacific Current as a result of the COVID-19 pandemic.
For a discussion regarding the impact of the economic conditions caused by the pandemic on the Company’s liquidity and capital resources, see discussion under “Financial Condition–Liquidity and capital resources,” contained in each of the HEI Consolidated, Electric Utility and Bank MD&As.
RESULTS OF OPERATIONS
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Three months ended June 30, 2020
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%
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(in thousands)
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2020
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2019
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change
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Primary reason(s)*
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Revenues
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$
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608,945
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$
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715,485
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(15)
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Decrease for the electric utility and bank segments
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Operating income
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71,556
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72,634
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(1)
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Decrease for the bank segment, partly offset by increase for electric utility segment
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Net income for common stock
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48,887
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42,512
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15
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Increase due to higher net income at electric utility segment, partly offset by lower net income at the bank segment
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Six months ended June 30
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%
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(in thousands)
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2020
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2019
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change
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Primary reason(s)*
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Revenues
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$
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1,286,131
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$
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1,377,100
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(7)
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Decrease for the electric utility and bank segments
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Operating income
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131,258
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150,571
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(13)
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Primarily due to decrease for the bank segment
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Net income for common stock
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82,307
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88,200
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(7)
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Decrease due to lower net income at the bank segment, partly offset by higher net income at electric utility segment and lower losses at the Other segment. See below for effective tax rate explanation
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* Also, see segment discussions which follow.
The Company’s effective tax rate for the second quarters of 2020 and 2019 was 18% for both periods. The Company’s effective tax rates for the first six months of 2020 and 2019 were 17% and 19%, respectively. The effective tax rates were lower for the six months ended June 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 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 newspapers).
Hawaii’s economy began to weaken in the latter part of March 2020 due to the effects of the COVID-19 pandemic, which forced a statewide stay-at-home, work-from-home declaration that began March 25th, shuttered many businesses, including hotels, restaurants, bars, and other gathering places, led to an overwhelming surge in unemployment claims, and impacted the tourism industry with a significant reduction to visitor arrivals. Starting in June 2020, restrictions were gradually lifted and most business activities resumed (with operations modified as required under state guidelines), other than those related to clubs and large venues, but the mandatory 14-day quarantine for travelers entering the state remains in effect at least through August. The most recent interim forecast by UHERO, which was issued on May 28, 2020, forecasts full year 2020 real GDP contraction of 11.1%, decline in total visitor arrivals of 59.6%, decline in real personal income of 5.3%, and an unemployment rate of 18.2%. However, federal fiscal and monetary policy response is expected to cushion the economic impact of the pandemic.
The CARES Act was passed by Congress and signed into law by President Trump on March 27th, 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. 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 58.5% in visitor arrivals through the first six 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 the mandatory 14-day quarantine remains in place at least through August for all visitors and residents returning from outside the State. As a result, between April 1, 2020 and June 30, 2020, daily passenger counts declined by over 97% to 876 passengers on average per day compared to the same time period in 2019.
Due to the effects of the measures to contain the COVID-19 pandemic, Hawaii’s seasonally adjusted unemployment rate in June 2020 was 13.9%, which was substantially higher compared to the June 2019 rate of 2.7%. The national unemployment rate rose to 11.1% in June 2020 compared to 3.7% in June 2019. Hawaii’s unemployment rate is expected to decrease as restrictions are eased on travel. Year-to-date through July 25, 2020, there were 323,165 initial unemployment claims filed with the State compared to 37,598 initial claims, or an increase of 760%, during the same period in 2019.
Hawaii real estate activity through June 2020, as indicated by the home resale market, resulted in an increase in the median sales price of 2.1% for condominiums and 1.3% for single family homes through the same period in 2019. The number of closed sales was down 22.0% for condominiums and 4.8% for single family residential homes through June 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 during the first half of 2020 and has begun to stabilize 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 June 10, 2020 meeting, the Federal Open Market Committee (FOMC) decided to maintain the federal funds rate target range of 0%-0.25%. The FOMC indicated that it will continue to monitor the implications of the COVID-19 pandemic and take further actions to support the flow of credit to households and businesses by addressing strains in the markets. The Federal Reserve stated that it will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to support the flow of credit to households and businesses in order to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions.
The Company expects that the negative trends and uncertainties in the multiple sectors described above will result in a significant economic downturn that may have a material unfavorable impact on the Company’s net revenues or income from continuing operations in 2020.
“Other” segment.
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Three months ended June 30,
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Six months ended June 30
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(in thousands)
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2020
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2019
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2020
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2019
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Primary reason(s)
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Revenues
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$
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16
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$
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14
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$
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22
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$
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82
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Operating loss
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(4,738)
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(4,312)
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(8,397)
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(9,057)
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The second quarters of 2020 and 2019 include $0.9 million and $1.2 million, respectively, of operating income from Pacific Current1. Second quarter 2020 corporate expense was comparable to the second quarter of 2019. The first six months of 2020 and 2019 include $1.8 million and $1.4 million, respectively, of operating income from Pacific Current1. The first six months of 2020 corporate expense was $0.3 million lower compared to the same period of 2019, primarily due to lower professional fees.
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Net loss
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(7,456)
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(7,078)
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(13,702)
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(14,355)
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The net loss for the second quarter of 2020 was higher than the net loss for the second quarter of 2019 due to the same factors cited for the change in operating loss. The net loss for the first six month of 2020 was lower than the net loss for the first six months of 2019 due to the same factors cited for the change in operating loss.
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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 and ASB Hawaii, Inc. (ASB Hawaii), as well as the results of Pacific Current, a direct subsidiary of HEI focused on investing in clean energy and sustainable infrastructure projects; Pacific Current’s indirect subsidiary, Hamakua Energy, which owns a 60-MW combined cycle power plant that provides electricity to Hawaii Electric Light; Pacific Current’s indirect subsidiary, Mauo, LLC (Mauo), which is currently constructing a solar-plus-storage project totaling 8.6 MW on five University of Hawaii campuses; and The Old Oahu Tug Service, Inc., a subsidiary that ceased operations in 1999; as well as eliminations of intercompany transactions.
FINANCIAL CONDITION
Liquidity and capital resources. In the first quarter of 2020, the capital markets, including the commercial paper markets, experienced high levels of volatility, and in some cases, disruption. As a result, in March 2020, due to elevated concerns regarding corporate credit risk, the commercial paper markets experienced significantly less liquidity, particularly for tier-3 issuers. As a consequence, HEI and Hawaiian Electric were unable to place commercial paper at reasonable rates and instead borrowed under their respective backup revolving credit facilities (floating rate at an adjusted London interbank offered rate, as defined in the agreements, plus 137.5 basis points or an alternate base rate, as defined in the agreements, plus 37.5 basis points). In the second quarter of 2020, conditions gradually improved in the commercial paper market for tier-3 issuers, and as a result, HEI returned to the commercial paper markets for its short-term borrowings at average rates that are lower than the average rates before the pandemic. As of June 30, 2020, HEI and Hawaiian Electric had $16.5 million and nil in commercial paper outstanding, respectively.
As of June 30, 2020, there was no balance on HEI’s revolving credit facility and the available committed capacity under the revolving credit facility was $150 million. As of June 30, 2020, there was no balance on Hawaiian Electric’s revolving credit facilities and the available committed capacity under the revolving credit facilities was $275 million. As of June 30, 2020, ASB’s unused FHLB borrowing capacity was approximately $2.2 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 September 1, 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 $507.0 million as of June 30, 2020, up from $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 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. Additionally, on April 20, 2020, the Utilities added an incremental $75 million in committed revolving credit capacity at Hawaiian Electric with a 364-day revolving credit facility (see Note 5 of the Condensed Consolidated Financial Statements). The Utilities also launched and closed a $160 million private placement of taxable 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, $50 million of an existing 364-day term loan was refinanced with a new $50 million term loan maturing in April 2021. As of June 30, 2020 the total amount of available borrowing capacity under the Company’s committed lines of credit was approximately $408 million, which was an increase of approximately $194 million compared to December 31, 2019. HEI and the Utilities have no remaining long-term debt maturities in 2020.
In addition to the foregoing financing transactions, in order to further enhance the Company’s liquidity position, the Company has deferred, pursuant to section 2302 of the CARES Act, the payment of the applicable employer portion of Old-Age, Survivors and Disability Insurance payroll tax deposits that are due in 2020, but arose subsequent to the enactment of the CARES Act, which is estimated to be approximately $10 million. Fifty percent of the deferred payroll taxes will be paid in each of December 2021 and December 2022. The Company is also deferring approximately $5.8 million per month in planned monthly pension contributions, to be paid later in the year, to further strengthen its liquidity position. If further liquidity is necessary, which is not contemplated at this time, the Utilities could also reduce the pace of capital spending related to non-essential projects. Additionally, the Company has the option to issue new shares rather than purchase currently outstanding shares on the open market to satisfy share issuances under its Dividend Reinvestment and Stock Purchase Plan (DRIP) program. The estimated amount of capital that could be preserved by issuing new shares, rather than utilizing open market purchases, is estimated to be approximately $30 million on an annual basis, based on historical demand, but such future amount is dependent on a number of factors, including, without limitation, future share prices, number of shares/participants in the DRIP program, and the amount of new investment in HEI’s stock by DRIP participants.
The Company believes that its ability to generate cash, both internally from electric utility and banking operations and externally from issuances of equity and debt securities, as well as bank borrowings, is adequate to maintain sufficient liquidity to fund its contractual obligations and commercial commitments, its forecasted capital expenditures and investments, its expected retirement benefit plan contributions and other cash requirements. However, the COVID-19 pandemic is a rapidly evolving situation, and the Company cannot predict the extent or duration of the outbreak, the future effects that it will have on the global, national or local economy, including the impact on the Company’s cost of capital and its ability to access additional capital, or the future impacts on the Company’s financial position, results of operations, and cash flows. See Item 1A. “Risk Factors” in Part II for further discussion of risks and uncertainties.
The consolidated capital structure of HEI (excluding deposit liabilities and other bank borrowings) was as follows:
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(dollars in millions)
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June 30, 2020
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December 31, 2019
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Short-term borrowings—other than bank
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$
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131
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3
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%
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$
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186
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4
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%
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Long-term debt, net—other than bank
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2,070
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46
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1,964
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44
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Preferred stock of subsidiaries
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34
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1
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34
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1
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Common stock equity
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2,291
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50
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2,280
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51
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$
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4,526
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100
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%
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$
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4,464
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100
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%
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HEI’s commercial paper borrowings and line of credit facility were as follows:
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Average balance
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Balance
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(in millions)
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Six months ended June 30, 2020
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June 30, 2020
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December 31, 2019
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Commercial paper
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$
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35
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$
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17
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$
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97
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Line of credit draws
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13
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—
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—
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Undrawn capacity under HEI’s line of credit facility
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150
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150
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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 six months of 2020 was $99 million.
HEI has a $150 million line of credit facility with no amounts outstanding at June 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 six months ended June 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 six months of 2020, net cash provided by operating activities of HEI consolidated was $197 million. Net cash used by investing activities for the same period was $629 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’s receipt of repayments from and sales of available-for-sale investment securities. Net cash provided by financing activities during this period was $808 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 funds transferred for repayment of long-term debt and payment of common stock dividends. During the first six
months of 2020, Hawaiian Electric and ASB (through ASB Hawaii) paid cash dividends to HEI of $54 million and $28 million, respectively.
Dividends. The payout ratios for the first six months of 2020 and full year 2019 were 88% 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, 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.
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 13.9% as of June 30, 2020. As a consequence of the significant decline in economic activity, the demand for electricity was adversely impacted. In the second quarter of 2020, kWh sales were down 11.6% compared with the same quarter in 2019. For the full year, the Utilities expect the level of kWh sales to be 6%-12% below sales levels achieved in 2019. Although the Utilities continue to expect lower sales due to COVID-19, the Utilities expect the RPS achievement to be closer to, but still above, the 30% statutory requirement by December 31, 2020.
While the Utilities do not expect electric energy revenues to be significantly impacted due to the decoupling mechanism, which allows recovery of the difference between PUC approved target revenues and recorded adjusted revenues regardless of the level of kWh sales, the timing of customer collections would be delayed (or accelerated) if the level of kWh sales decreases below (or increases above) the estimated kWh sales. See “Decoupling” in Note 3 of the Condensed Consolidated Financial Statements for a discussion of decoupling. Annually, the Utilities submit a decoupling filing to the PUC, which requests recovery by the utility (or refund to customers) of the difference between recorded adjusted revenues and target revenues under the RBA. The difference is collected or refunded through an adjustment to customer 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 June 30, 2020, the RBA credit balance related to decoupling revenues was approximately $17 million, a decrease in the credit balance by $7.8 million, or 32% since March 31, 2020. While the billed accounts receivable balances as of June 30, 2020 of $138 million is 9.7% lower than the billed accounts receivable balances as of December 31, 2019, due to lower fuel prices resulting in lower bills, the past due accounts receivable balance has increased by $6 million or 19% since December 31, 2019. The increase is primarily driven by the state mandated stay-at-home order, which was lifted on July 1, 2020, as well as the pandemic’s impact on the tourism industry resulting in higher unemployment rate, moratorium on customer disconnections (which moratorium is currently in place through September 1, 2020) 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, and sequestration costs for mission-critical employees. As of June 30, 2020, these costs, which have been deferred and recorded as a regulatory asset, totaled approximately $6.5 million (see also discussion under Item 1A. “Risk Factors” and “Regulatory assets for COVID-19 costs” in Note 3 of the Condensed Consolidated Financial Statements). Looking forward, the prolonged impact of COVID-19 could adversely affect the ability of the Utilities’ contractors, suppliers, IPPs, and other business partners to perform or fulfill their obligations, or require modifications to existing contracts, which could adversely affect the Utilities’ business, increase expenses, and impact the Utilities’ ability to achieve their RPS goals beyond 2020. Additionally, while the state’s aggressive response to the pandemic has dramatically reduced the spread of the coronavirus, the measures taken have had a severe economic impact on the state’s businesses and residents, which may influence the PUC’s actions regarding requested rate increases. See “Item 1A. Risk Factors” in Part II for additional discussion of risks.
At this time, the Utilities are not able to predict what the full impact of the COVID-19 pandemic will have on its results of operations, financial position and cash flows because it is uncertain the extent to which the virus can be contained and the extent to which protective measures to prevent the spread of the virus will be in place.
For a discussion regarding the impact of economic conditions caused by the COVID-19 pandemic on the Utilities’ liquidity and capital resources, see discussion under “Financial Condition–Liquidity and capital resources.”
RESULTS OF OPERATIONS
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Three months ended June 30,
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Increase
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2020
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2019
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(decrease)
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(dollars in millions, except per barrel amounts)
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$
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534
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$
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634
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$
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(100)
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Revenues. Net decrease largely due to:
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$
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(76)
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lower fuel oil prices and lower kWh generated1
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(29)
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lower purchased power energy prices and lower kWh purchased2
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(2)
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higher cost savings from ERP system implementation to be returned to customers in future rates
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5
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higher electric rates
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1
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higher PIM revenue due to an adjustment made in 2019 related to 2018 reliability performance incentives
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1
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higher MPIR revenue (increase for West Loch PV project and Grid Modernization project)
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112
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182
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(70)
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Fuel oil expense1. Decrease largely due to lower fuel oil prices coupled with lower kWh generated
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137
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163
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(26)
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Purchased power expense1, 2. Decrease largely due to lower purchased power energy price coupled with lower kWh purchased
|
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110
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119
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(9)
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Operation and maintenance expenses. Net decrease largely due to:
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(4)
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less generating unit overhauls performed in 2020
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(3)
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PUC approval to defer COVID-19 related bad debt expenses recorded in the first quarter to a regulatory asset
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(2)
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lower labor due to lower staffing and reduction in overtime
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(2)
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less station maintenance work performed
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1
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higher medical premium costs
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1
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leased office demolition costs
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107
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|
|
114
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(7)
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Other expenses. Decrease due to lower revenue taxes offset in part by higher depreciation in 2020 for plant investment in 2019
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68
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56
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12
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Operating income. Increase due to lower operation and maintenance, coupled with higher electric rates, PIM revenue and MPIR revenue, offset in part by higher depreciation expenses
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53
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41
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12
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Income before income taxes. Increase due to lower operation and maintenance expense, higher electric rates, higher PIM revenue, higher MPIR revenue, and lower interest expense related to the hybrid securities redemption replaced with lower cost debt (in May 2019) and refinancing of revenue bonds (in July 2019) at lower rates, offset in part by higher depreciation expense and lower AFUDC
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42
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33
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9
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Net income for common stock. Increase due to lower operating expenses, coupled with higher electric rates, higher PIM revenue and higher MPIR revenue
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1,874
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|
2,119
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(245)
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Kilowatthour sales (millions)3
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$
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63.12
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|
|
$
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88.38
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$
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(25.26)
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Average fuel oil cost per barrel
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Six months ended June 30
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Increase
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2020
|
|
2019
|
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(decrease)
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(dollars in millions, except per barrel amounts)
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|
$
|
1,132
|
|
|
$
|
1,212
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|
|
$
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(80)
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|
|
Revenues. Net decrease largely due to:
|
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|
|
|
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|
$
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(63)
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|
|
lower fuel oil prices and lower kWh generated1
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(21)
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|
|
lower purchased power energy prices and lower kWh purchased2
|
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(4)
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|
higher cost savings from ERP system implementation to be returned to customers in future rates
|
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|
|
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|
|
7
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|
|
higher electric rates
|
|
|
|
|
|
|
|
2
|
|
|
higher MPIR revenue (increase for West Loch PV project and Grid Modernization project)
|
|
286
|
|
|
342
|
|
|
(56)
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|
|
|
|
Fuel oil expense1. Decrease largely due to lower fuel oil prices coupled with lower kWh generated
|
|
277
|
|
|
297
|
|
|
(20)
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|
|
|
|
Purchased power expense1 ,2. Decrease largely due to lower purchased power energy prices coupled with lower kWh purchased
|
|
237
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|
|
237
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|
|
—
|
|
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|
|
Operation and maintenance expenses.
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(5)
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|
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less generating unit overhauls performed in 2020
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|
|
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(2)
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lower labor due to lower staffing and reduction in overtime
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|
|
|
|
|
|
(2)
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|
|
less station maintenance work performed
|
|
|
|
|
|
|
|
1
|
|
|
higher medical premium costs
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1
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|
|
leased office demolition costs
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|
|
|
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2
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higher outside services for system support (Interactive Voice Response, Customer Information System, Energy Management and development of portal for CBRE)
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|
|
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|
2
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increase in vegetation management work
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3
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|
|
2019 PUC approval of deferral treatment for previously-incurred expense to modify existing generating units on Maui to run at lower loads in order to accept more renewable generation
|
|
220
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|
|
223
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|
|
(3)
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|
|
|
|
Other expenses. Decrease due to lower revenue taxes offset in part by higher depreciation expense in 2020 for plant investments in 2019
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|
112
|
|
|
112
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|
|
—
|
|
|
|
|
Operating income. Higher electric rates and higher MPIR revenue offset by higher depreciation expense
|
|
83
|
|
|
83
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|
|
—
|
|
|
|
|
Income before income taxes. Higher electric rates, higher MPIR revenue and lower interest expense due to the hybrid securities redemption replaced with lower cost debt (in May 2019) and refinancing of revenue bonds (in July 2019) at lower rates, offset by higher depreciation expense and lower AFUDC
|
|
66
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|
|
65
|
|
|
1
|
|
|
|
|
Net income for common stock. Increase due to higher electric rate and MPIR revenue offset in part by higher depreciation expense. See below for effective tax rate explanation
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|
3,880
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|
|
4,035
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|
|
(155)
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|
|
|
|
Kilowatthour sales (millions)3
|
|
$
|
72.77
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|
|
$
|
84.44
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|
|
$
|
(11.67)
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|
|
|
|
Average fuel oil cost per barrel
|
|
465,953
|
|
|
464,281
|
|
|
1,672
|
|
|
|
|
Customer accounts (end of period)
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1The rate schedules of the electric utilities currently contain ECRCs through which changes in fuel oil prices and certain components of purchased energy costs are passed on to customers.
2The rate schedules of the electric utilities currently contain PPACs through which changes in purchase power expenses (except purchased energy costs) are passed on to customers.
3 kWh sales were lower when compared to the same periods in the prior year largely due to the effects of the COVID-19 pandemic. The enormous reduction to visitor arrivals due to the mandatory in-bound and inter-island travel quarantine has significantly impacted the tourism industry, led to record unemployment claims, and shuttered many businesses and hotels. As restrictions are lifted and visitors begin to arrive, sales are expected to slowly rebound but at lower levels than the prior year.
The Utilities’ effective tax rate for each of the second quarters of 2020 and 2019 was 19%. The Utilities’ effective tax rates for the first six months of 2020 and 2019 were at 19% and 21%, respectively. The effective tax rate was lower for the six
months ended June 30, 2020 compared to the same period in 2019 due primarily to higher 2020 amortization of the Utilities’ regulatory liability related to certain excess deferred income taxes resulting from the Tax Act’s decrease in federal income tax rate. The resulting benefit of lower tax expense is passed on to customers.
Hawaiian Electric’s consolidated ROACE was 7.9% and 7.8% for the twelve months ended June 30, 2020 and June 30, 2019, respectively.
The net book value (cost less accumulated depreciation) of utility property, plant and equipment (PPE) as of June 30, 2020 amounted to $4 billion, of which approximately 28% related to generation PPE, 63% related to transmission and distribution PPE, and 9% related to other PPE. Approximately 11% of the total net book value relates to generation PPE that has been deactivated or that the Utilities plan to deactivate or decommission.
See “Economic conditions” in the “HEI Consolidated” section above.
Executive overview and strategy. The Utilities provide electricity on all the principal islands in the state, other than Kauai, to approximately 95% of the state’s population and operate five separate grids. The Utilities’ mission is to provide innovative energy leadership for Hawaii, to meet the needs and expectations of customers and communities, and to empower them with affordable, reliable and clean energy. The goal is to create a modern, resilient, flexible and dynamic electric grid that enables an optimal mix of distributed energy resources, such as private rooftop solar, demand response and grid-scale resources to enable the creation of smart, sustainable, resilient communities and achieve the statutory goal of 100% renewable energy by 2045.
Transition to renewable energy. The Utilities are fully committed to a 100 percent renewable energy future for Hawaii and are partnering with the State of Hawaii in achieving their Renewable Portfolio Standard goal of 100% renewable energy by 2045. Hawaii’s RPS law requires electric utilities to meet an RPS of 30%, 40%, 70% and 100% by December 31, 2020, 2030, 2040 and 2045, respectively.
The Utilities have made significant progress on the path to clean energy and have been successful in adding significant amounts of renewable energy resources to their electric systems and exceeded the 2015 RPS goal two years early. The Utilities’ RPS for 2019 was approximately 28% and the Utilities are on track to achieve the 2020 RPS goal of 30%. The Utilities will continue to actively procure additional renewable energy post-2020 and expect to meet or exceed the next statutory RPS goal of 40% in advance of the 2030 compliance year. (See “Developments in renewable energy efforts” below).
If the Utilities are not successful in meeting the RPS targets as mandated by law, the PUC could assess a penalty of $20 for every MWh that an electric utility is deficient. Based on the level of electricity sales in 2019, a 1% shortfall in meeting the 2020 RPS requirement of 30% would translate into a penalty of approximately $1.75 million. The PUC has the discretion to reduce the penalty due to events or circumstances that are outside an electric utility’s reasonable control, to the extent the event or circumstance could not be reasonably foreseen and ameliorated. In addition to penalties under the RPS law, failure to meet the mandated RPS targets would be expected to result in a higher proportion of fossil fuel-based generation than if the RPS target had been achieved, which in turn would be expected to subject Hawaiian Electric and Maui Electric to limited commodity fossil fuel price exposure under a fuel cost risk-sharing mechanism. Currently, the fuel cost risk-sharing mechanism apportions 2% of the fuel cost risk to the two utilities (and 98% to ratepayers) 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 provide the Utilities financial stability during the transition toward the State’s 100% renewable energy future. Under the sales decoupling mechanism, the Utilities are allowed to recover from customers, target test year revenues, independent of the level of kWh sales, which have generally declined (with the exception of 2019 and the first quarter of 2020), as privately-owned distributed energy resources have been added to the grid and energy efficiency measures have been put into place. Other regulatory mechanisms reduce regulatory lag, such as the rate adjustment mechanism to provide revenues for escalation in certain O&M expenses and rate base changes between rate cases, and the major project interim recovery mechanism, which allow the Utilities to recover and earn on certain approved major capital projects placed into service in between rate cases. See “Decoupling” in Note 3 of the Consolidated Financial Statements.
Integrated Grid Planning. Achieving 100% renewable energy will require modernizing the grid through coordinated energy system planning in partnership with local communities and stakeholders. To accomplish this, the Utilities filed their Integrated Grid Planning (IGP) Report with the PUC on March 1, 2018, which provides an innovative systems approach to energy planning intended to yield the most cost-effective renewable energy pathways that incorporates customer and stakeholder input.
The PUC opened a docket to review the IGP process that the Utilities had proposed, and the resulting plans. In March 2019, the PUC accepted the Utilities’ IGP Work plan submitted on December 14, 2018, which describes the timing and scope of major activities that will occur in the IGP process. The IGP utilizes an inclusive and transparent Stakeholder Engagement model to provide an avenue for interested parties to engage with the Utilities and contribute meaningful input throughout the IGP process. The IGP Stakeholder Council, Technical Advisor Panel and Working groups have been established and meet regularly to provide feedback and input on specific issues and process steps in the IGP. In March 2020, the Utilities launched a broad public engagement program, which consisted of a combination of in-person and online engagement. This provided customers opportunities to connect with the IGP team.
Demand response programs. Pursuant to PUC orders, the Utilities are developing an integrated Demand Response (DR) Portfolio Plan that will enhance system operations and reduce costs to customers. The reduction in cost for the customer will take the form of either rates or incentive-based programs that will compensate customers for their participation individually, or by way of engagements with turnkey service providers that contract with the Utilities to aggregate and deliver various grid services on behalf of participating customers and their distributed assets.
In October 2017, the PUC approved the Utilities’ request made in December 2015 to defer and recover certain computer software and software development costs for a DR Management System in an amount not to exceed $3.9 million, exclusive of allowance for funds used during construction, through the Renewable Energy Infrastructure Program (REIP) Surcharge. The Utilities placed the DR Management System in service in the first quarter of 2019. On October 30, 2019, the Utilities filed the final cost report, reflecting total project costs of $3.7 million. On February 27, 2020, the PUC approved the Utilities’ request to recover deferred and other related costs of the DR Management System through the REIP Surcharge effective March 1, 2020 until such costs are included in determining base rates. On June 26, 2020, the Utilities submitted an updated REIP rate effective August 1, 2020 to the PUC.
On January 25, 2018, the PUC approved the Utilities’ revised DR Portfolio tariff structure. The PUC supported the approach of working with aggregators to implement the DR portfolio. In 2019, the Utilities signed a multi-year Grid Services Purchase Agreement (GSPA) with a third party aggregator. These contracts pay service providers to aggregate grid-supporting capabilities from customer-sited Distributed Energy Resources. The first of these five-year contracts has been executed (PUC approval obtained on August 9, 2019) and is expected to not only deliver benefits through efficient grid operations, but also avoided fuel costs over that 5-year period. The Utilities selected the next set of aggregators in the first quarter of 2020, commenced GSPA contract negotiations, and filed two executed contracts on July 9, 2020. This complements the Utilities’ transformation and supports customer choice.
Grid modernization. The overall goal of the Grid Modernization Strategy is to deploy modern grid investments at an appropriate priority, sequence and pace to cost-effectively maximize flexibility, minimize the risk of redundancy and obsolescence, deliver customer benefits and enable greater DER and renewable energy integration. Under the Grid Modernization Strategy, the Utilities expects that new technology will help triple private rooftop solar and make use of rapidly evolving products, including storage and advanced inverters. The Utilities have begun work to implement the Grid Modernization Strategy Phase 1, which received PUC approval on March 25, 2019. The estimated cost for this initial phase is approximately $86 million and is expected to be incurred over five years. The Utilities filed an application with the PUC on September 30, 2019 for an Advanced Distribution Management System as part of the second phase of their Grid Modernization Strategy implementation. The estimated cost for the implementation over five years of the Advanced Distribution Management System, which includes capital, deferred and O&M costs, is $46 million. Additional applications will be filed later to implement subsequent phases of the Grid Modernization Strategy. On December 30, 2019, the PUC suspended the Utilities’ application for the Advanced Distribution Management System pending the Utilities’ filing of a supplemental application for the broad deployment of field devices.
Community-based renewable energy. In December 2017, the PUC adopted a community-based renewable energy (CBRE) program framework which allows customers who cannot, or chose not to, take advantage of private rooftop solar to receive the benefits of renewable energy to help offset their monthly electric bills and support clean energy for Hawaii. The program has two phases.
The first phase, which commenced in July 2018, totals 8 MW of solar photovoltaic (PV) only with one credit rate for each island, closed on April 9, 2020.
By PUC order, CBRE Phase 2 commenced on April 9, 2020 with the goal to develop a robust CBRE market with competitive pricing anticipating that clean energy projects and programs, such as CBRE, can meaningfully contribute to the State’s recovery from the COVID-19 Emergency. CBRE Phase 2 capacity is substantially larger than Phase 1 and allows up to 235 MW across all Hawaiian Electric service territories. The capacities are allocated by island and allow for small and large system sizes to encourage a variety of system sizes. Projects will be selected through a competitive process with increased rigor around price and non-price criteria. To provide opportunities for low- to moderate-income (LMI) customers to participate in the program, separate project proposals may be submitted specifically targeting LMI customers. LMI projects do not have a size cap nor do they decrease the 235 MW capacity available to other projects. In addition to its administrative role, the Utilities and their affiliates are eligible to participate in the solicitations. The Utilities will also have opportunities to earn based on shared savings mechanisms for specific solicitations.
Microgrid services tariff proceeding. In July 2018, the PUC originally issued an order instituting a proceeding to investigate establishment of a microgrid services tariff, pursuant to Act 200 of 2018. The PUC granted motions to intervene in the docket by eight parties (there are currently four parties) and completed its initial procedural schedule in March 2019. In August 2019, the PUC issued an order stating that the focus for the remainder of the docket is to facilitate the ability of microgrids to disconnect from the grid and provide backup power to customers and critical energy uses during contingency events.
The PUC also required the parties to form two Working Groups: (1) a Market Facilitation Working Group to recommend draft tariff language for the Microgrid Services Tariff; and (2) an Interconnection Standards Working Group to develop a new section of Rule 14H specific to interconnection and islanding/reconnection of microgrids. The Utilities filed a Draft Microgrid Services Tariff and updated language for various DER Rules on March 30, 2020. Parties to the docket filed comments on and proposed revisions to the Draft Tariff on April 27, 2020.
Decoupling. See "Decoupling" in Note 3 of the Condensed Consolidated Financial Statements for a discussion of decoupling.
As part of decoupling, the Utilities also track their rate-making ROACEs as calculated under the earnings sharing mechanism, which includes only items considered in establishing rates. At year-end, each utility's rate-making ROACE is compared against its ROACE allowed by the PUC to determine whether earnings sharing has been triggered. Annual earnings of a utility over and above the ROACE allowed by the PUC are shared between the utility and its ratepayers on a tiered basis. Earnings sharing credits are included in the annual decoupling filing for the following year. Results for 2019, 2018 and 2017 did not trigger the earnings sharing mechanism for the Utilities.
Regulated returns. Actual and PUC-allowed returns, as of June 30, 2020, were as follows:
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|
|
|
|
|
|
|
%
|
|
Rate-making Return on rate base (RORB)*
|
|
|
|
|
|
ROACE**
|
|
|
|
|
|
Rate-making ROACE***
|
|
|
|
|
|
Twelve months ended
June 30, 2020
|
|
Hawaiian Electric
|
|
Hawaii Electric Light
|
|
Maui Electric
|
|
Hawaiian Electric
|
|
Hawaii Electric Light
|
|
Maui Electric
|
|
Hawaiian Electric
|
|
Hawaii Electric Light
|
|
Maui Electric
|
|
Utility returns
|
|
6.76
|
|
|
6.68
|
|
|
6.32
|
|
|
7.90
|
|
|
8.01
|
|
|
7.46
|
|
|
8.73
|
|
|
8.39
|
|
|
8.22
|
|
|
PUC-allowed returns
|
|
7.57
|
|
|
7.52
|
|
|
7.43
|
|
|
9.50
|
|
|
9.50
|
|
|
9.50
|
|
|
9.50
|
|
|
9.50
|
|
|
9.50
|
|
|
Difference
|
|
(0.81)
|
|
|
(0.84)
|
|
|
(1.11)
|
|
|
(1.60)
|
|
|
(1.49)
|
|
|
(2.04)
|
|
|
(0.77)
|
|
|
(1.11)
|
|
|
(1.28)
|
|
* Based on recorded operating income and average rate base, both adjusted for items not included in determining electric rates.
** Recorded net income divided by average common equity.
*** ROACE adjusted to remove items not included by the PUC in establishing rates, such as incentive compensation.
The gap between PUC-allowed ROACEs and the ROACEs actually achieved is primarily due to: the consistent exclusion of certain expenses from rates (for example, incentive compensation and charitable contributions), the recognition of annual RAM revenues on June 1 annually rather than on January 1, and O&M increases and return on capital additions since the last rate case in excess of indexed escalations.
Most recent rate proceedings. As of June 30, 2020, the status of ongoing rate case for each utility was as follows:
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|
|
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
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|
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|
|
|
|
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|
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|
|
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|
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|
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|
|
|
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|
|
|
|
|
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|
|
|
|
|
|
|
2020 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Request
|
|
8/21/19
|
|
$
|
77.6
|
|
|
4.1
|
|
|
10.50
|
|
|
7.97
|
|
|
$
|
2,477
|
|
|
57.15
|
|
|
Yes
|
|
Hawaii Electric Light
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
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|
|
2019 2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Request
|
|
12/14/18
|
|
$
|
13.4
|
|
|
3.4
|
|
|
10.50
|
|
|
8.30
|
|
|
$
|
537
|
|
|
56.91
|
|
|
Yes
|
|
Interim increase
|
|
1/1/20
|
|
0.0
|
|
0.0
|
|
9.50
|
|
7.52
|
|
534
|
|
56.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
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|
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|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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|
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|
|
|
|
|
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|
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|
|
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|
|
|
|
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|
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|
|
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|
|
Note: The “Request” date reflects the application filing date for the rate proceeding. The “Interim increase” and “Final increase” date reflects the effective date of the revised schedules and tariffs as a result of the PUC-approved increase.
1 On May 27, 2020, Hawaiian Electric and the Consumer Advocate filed a Stipulated Settlement Letter, agreeing to no base rate increase. PUC’s decision on the settlement agreement is pending.
2 The Interim D&O issued on November 13, 2019 approved an adjustment to base rates to maintain revenues at current effective rates.
See “Most recent rate proceedings” in Note 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. The NPM wind farm was expected to be placed into service by August 31, 2019, but has been delayed due to a contested case hearing and appeal of the Board of Land and Natural Resources’ decision to approve NPM’s Habitat Conservation Plan and Incidental Take Permit/License. NPM received its Incidental Take Permit from the Department of Fish and Wildlife Service on September 7, 2018 and anticipates achieving commercial operations in late third quarter of 2020.
Keep the North Shore Country (KNSC) has appealed this decision and the case has been transferred to the Hawaii Supreme Court. On June 17, 2020, KNSC filed a Motion for Stay Upon Appeal. No additional activity has occurred regarding KNSC’s 40-day Notice of Intent to Sue that was filed on November 15, 2019. The Notice alleges the NPM Final Environmental Impact Study did not adequately address certain project aspects related to the transport route and security provisions. KNSC and Kahuku Community Association have also petitioned to appeal NPM’s Conditional Use Permits. A hearing date for motions was scheduled for April 9, 2020 but was delayed and has not yet been rescheduled.
Life of the Land (LOL) filed a Motion for Relief to argue the PPA approval was invalid and should be revised. The Utilities and the Consumer Advocate filed an opposition to this motion for relief. A hearing on the motion for relief was held on November 22, 2019. On April 16, 2020, the PUC issued an order denying LOL’s Motion for Relief. On April 27, 2020, LOL filed a Notice of Appeal of the PUC’s order with the Supreme Court of the State of Hawaii.
•In July 2018, the PUC approved Maui Electric’s PPA with Molokai New Energy Partners (MNEP) to purchase solar energy from a PV plus battery storage project. The 4.88 MW PV and 3 MW Battery Energy Storage System (BESS) project was to deliver no more than 2.64 MW at any time to the Molokai system. On March 25, 2020, MNEP filed a complaint in the United Stated District Court for the District of Hawaii against Maui Electric claiming breach of contract. Management disputes the facts presented by MNEP and all claims within the complaint. On June 3, 2020, Maui Electric provided Notice of Default and Termination of the PPA to MNEP terminating the PPA with an effective date of July 10, 2020.
•On December 31, 2019, Hawaii Electric Light and PGV entered into an Amended and Restated Power Purchase Agreement (ARPPA), subject to approval by the PUC. The ARPPA extends the term of the existing PPA by 25 years to 2052, expands the firm capacity of the facility to 46 MW and delinks the pricing for energy delivered from the facility from fossil fuel prices to reduce cost to customers. The existing PPA (except for lower-tiered pricing for
certain energy dispatched above 30 MW) will remain in effect until it is superseded by the ARPPA when the expanded capacity is in commercial operation.
Tariffed renewable resources.
•As of June 30, 2020, there were approximately 493MW, 106 MW and 120 MW of installed distributed renewable energy technologies (mainly PV) at Hawaiian Electric, Hawaii Electric Light and Maui Electric, respectively, for tariff-based private customer generation programs, namely Standard Interconnection Agreement, Net Energy Metering, Net Energy Metering Plus, Customer Grid Supply, Customer Self Supply, Customer Grid Supply Plus and Interim Smart Export. As of June 30, 2020, an estimated 30% of single family homes on the islands of Oahu, Hawaii and Maui have installed private rooftop solar systems, and approximately 18% of the Utilities' total customers have solar systems.
•The Utilities began accepting energy from feed-in tariff projects in 2011. As of June 30, 2020, there were 40 MW, 2 MW and 5 MW of installed feed-in tariff capacity from renewable energy technologies at Hawaiian Electric, Hawaii Electric Light and Maui Electric, respectively.
Biofuel sources.
•In July 2018, the PUC approved Hawaiian Electric’s 3-year biodiesel supply contract with Pacific Biodiesel Technologies, LLC (PBT) to supply 2 million to 4 million gallons of biodiesel at Hawaiian Electric’s Schofield Generating Station and the Honolulu International Airport Emergency Power Facility (HIA Facility) and any other generating unit on Oahu, as necessary. The PBT contract became effective on November 1, 2018. Hawaiian Electric also has a spot buy contract with PBT to purchase additional quantities of biodiesel at or below the price of diesel. Some purchases of “at parity” biodiesel have been made under the spot purchase contract, which was extended through June 2021.
•Hawaiian Electric has a contingency supply contract with REG Marketing & Logistics Group, LLC to also supply biodiesel to any generating unit on Oahu in the event PBT is not able to supply necessary quantities. This contingency contract has been extended to November 2021, and will continue with no volume purchase requirements.
Requests for renewable proposals, expressions of interest, and information.
•Under a request for proposal process governed by the PUC and monitored by independent observers, in February 2018, the Utilities issued RFPs for 220 MW of renewable generation on Oahu, 50 MW of renewable generation on Hawaii Island, and 60 MW of renewable generation on Maui. The Utilities selected a final award group for Hawaii Island in August 2018 and for Maui and Oahu in September 2018.
In December 2018, the Utilities executed a total of seven renewable generation PPAs utilizing photovoltaic technology paired with a battery storage system for a total of 262 MW, of which six PPAs were approved by the PUC in March 2019 and one PPA for Maui Electric is still under PUC review. In February 2019, Hawaiian Electric filed an additional PPA for a proposed 12.5 MW PV plus battery storage project, which was approved by the PUC on August 20, 2019. Summarized information for a total of 8 PPAs, including one for Maui Electric that is pending PUC approval, is as follows:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilities
|
|
Number of contracts
|
|
Total photovoltaic size (MW)
|
|
BESS Size (MW/MWh)
|
|
Guaranteed commercial operation dates
|
|
Contract term (years)
|
|
Total projected annual payment (in millions)
|
|
Hawaiian Electric
|
|
4
|
|
139.5
|
|
139.5/558
|
|
9/30/21 & 12/31/21
|
|
20 & 25
|
|
$
|
30.9
|
|
|
Hawaii Electric Light
|
|
2
|
|
60
|
|
60/240
|
|
7/20/21 & 6/30/22
|
|
25
|
|
14.1
|
|
|
Maui Electric
|
|
2
|
|
75
|
|
75/300
|
|
7/20/21 & 6/30/22
|
|
25
|
|
17.6
|
|
|
Total
|
|
8
|
|
274.5
|
|
274.5/1,098
|
|
|
|
|
|
$
|
62.6
|
|
In March 2019 and August 2019, the Utilities received PUC approval to recover the total projected annual payment of $57.8 million for 7 PPAs through the PPAC to the extent such costs are not included in base rates. The remaining $4.8 million of total projected annual payments for the remaining PPA is pending PUC approval.
•In continuation of its February 2018 request for proposal process, the Utilities issued its Stage 2 Renewable RFPs for Oahu, Maui and Hawaii Island and Grid Services RFP on August 22, 2019. This procurement plan sought approximately 900 MW of renewable energy, including 594 MW on Oahu, 135 MW on Maui and a range between 32 to 203 MW on Hawaii Island. This second phase, as approved by the PUC, was open to all renewable and storage resources, including efforts to add more renewable generation, renewable plus storage, standalone storage and grid services. The scope of these RFPs has been expanded to accelerate renewable energy procurement beyond the remainder of the 2022 targets identified in Stage 1 to include the energy requirement associated with the planned retirement of the Kahului Power Plant on Maui and the upcoming expiration of the agreement for the AES Hawaii
facility on Oahu. For the Grid Services RFP, the targets had been expanded in alignment with the Renewable RFPs Utility proposals were submitted on November 4, 2019. Proposals from third parties for these RFPs were submitted on November 5, 2019. Final awards for the renewable projects were made on May 8, 2020. Final awards for the grid services projects were made starting in January 2020. On Oahu, seven solar-plus-storage projects and one standalone storage project totaling approximately 281 MW of generation and 1.8 GWh of storage advanced were selected. On Maui Island, three solar-plus-storage projects and one standalone storage project totaling approximately 100 MW of generation and 560 MWh of storage were selected. On Hawaii Island, two solar-plus-storage projects and one standalone storage project totaling approximately 72 MW of generation and 492 MWh of storage were selected. Two Utility Self-Build projects were among those selected; a 40-MW, 160-MWh standalone energy storage system on Maui and a 12-MW, 12-MWh storage system on Hawaii Island. Contract negotiations are ongoing. Executed contracts are projected to be filed for PUC approval in the fourth quarter of 2020.
•On November 27, 2019, the Utilities issued RFPs for renewable generation paired with energy storage on the islands of Lanai and Molokai. Projects may come online as early as 2022. The Utilities are seeking PV paired with storage or small wind (specified as 100 kW turbines or smaller) on Molokai and PV paired with storage on Lanai. Proposals for the Molokai RFP were received on February 14, 2020, and are currently being evaluated by the Utilities. The Lanai RFP has been temporarily postponed, while the Utilities reevaluate the system needs. The Utilities filed an update to the Lanai RFP on March 10, 2020. In light of a PUC order issued on April 9, 2020 in the CBRE docket, the Utilities have proposed in their July 9, 2020 filing to combine the previously issued Lanai RFP with the CBRE RFP described in the order to optimize the benefits of procuring renewable energy, spurring development and increasing the likelihood of success of the CBRE program on Lanai.
Legislation and regulation. Congress and the Hawaii legislature periodically consider legislation that could have positive or negative effects on the Utilities and their customers. Also see “Environmental regulation” in Note 3 of the Condensed Consolidated Financial Statements.
Fuel contracts. The fuel contract entered into in January 2019, by the Utilities and PAR Hawaii Refining, LLC (PAR Hawaii), for the Utilities’ low sulfur fuel oil (LSFO), high sulfur fuel oil (HSFO), No. 2 diesel, and ultra-low sulfur diesel (ULSD) requirements was approved by the PUC, and became effective on April 28, 2019 and terminates on December 31, 2022. This contract is a requirement contract with no minimum purchases. If PAR is unable to provide LSFO, HSFO, diesel and/or ULSD the contract allows the Utilities to purchase LSFO, HSFO, diesel and/or ULSD from another supplier. The contract will automatically renew upon the conclusion of the original term for successive terms of 1 year beginning on January 1, 2023 unless a party gives written termination notice at least 120 days before the beginning of an extension. The costs incurred under the contract with PAR Hawaii are recovered in the Utilities’ respective ECRCs.
On June 9, 2020, the Utilities and Par Hawaii entered into a First Amendment to the fuel contract. The First Amendment amends only the pricing to create a two-tiered structure based on volume, with all tier-1 LSFO up to the tier-1 maximum to be purchased exclusively from PAR at the established pricing, and purchases in excess of that volume (tier-2) either from PAR at the established pricing, or from an alternative supplier. On August 4, 2020, the PUC approved the First Amendment, which has an effective date of July 15, 2020, on an interim basis. The PUC’s approval order allows the recovery of such costs associated with the First Amendment through the ECRC to the extent that the costs are not recovered in base rates. The PUC intends to review whether the First Amendment is reasonable and in the public interest in the final decision, but it will not subject the recovery of the costs between the interim decision and the final decision to retroactive disallowances.
FINANCIAL CONDITION
Liquidity and capital resources. In response to the COVID-19 pandemic, many countries, states, and cities have imposed strict social distancing measures that have had a significant impact on global economic activity. As a result, the capital markets, including the commercial paper markets, have experienced high levels of volatility, and in some cases, disruption. However, in March 2020, the Commercial Paper Funding Facility was announced, and the program was launched in April 2020. As a result, commercial paper rates began to decrease and were back down to what they were before the start of the COVID-19 pandemic. Thus, there was a significant increase in liquidity in the commercial paper market as many companies found other sources of liquidity, however, Hawaiian Electric has not needed to access the commercial paper market since closing on its private placement transaction in May 2020 (see Note 5 of Condensed Consolidated Financial Statements). As of June 30, 2020, following financing transactions further discussed below, there were no amounts outstanding on Hawaiian Electric’s revolving credit facilities and the available committed capacity under the revolving credit facilities was $275 million.
To preserve and enhance the Utilities’ liquidity position, given the significant and ongoing uncertainty regarding the potential scale and duration of the COVID-19 pandemic, the Utilities have taken a number of steps. First, on April 20, 2020, Hawaiian Electric added an incremental $75 million in committed revolving credit capacity with a 364-day revolving credit facility (see Note 5 of the Condensed Consolidated Financial Statements). The Utilities also launched and closed on a $160 million private placement of taxable debt in May 2020, the proceeds of which were used to finance capital expenditures, repay
short-term debt used to finance or refinance capital expenditures and/or reimburse funds for payment of capital expenditures. In addition, $50 million of an existing 364-day term loan was refinanced with a new $50 million term loan maturing in April 2021. As of June 30, 2020, the total amount of available borrowing capacity under the Utilities’ committed lines of credit was $275 million. The Utilities had $14 million of long-term debt that was paid off when it matured on July 1, 2020.
In addition to the foregoing financing transactions, in order to further enhance the Utilities’ liquidity position, the Utilities are deferring, pursuant to section 2302 of the CARES Act, the payment of the applicable employer portion of Old-Age, Survivors and Disability Insurance payroll tax deposits that are due in 2020, but arose subsequent to the enactment of the CARES Act, which is estimated to be approximately $10 million. Fifty percent of the deferred payroll taxes will be paid in each of December 2021 and December 2022. The Utilities are also deferring approximately $5.7 million per month in planned monthly pension contributions, to be instead paid later in the year, to further strengthen is liquidity position. If further liquidity is necessary, the Utilities could also reduce the pace of capital spending related to non-essential projects.
The Utilities believe that their ability to generate cash, both internally from operations and externally from issuances of equity and debt securities, as well as bank borrowings, is adequate to maintain sufficient liquidity to fund their contractual obligations and commercial commitments, their forecasted capital expenditures and investments, their expected retirement benefit plan contributions and other cash requirements. However, the COVID-19 pandemic is a rapidly evolving situation, and the Utilities cannot predict the extent or duration of the outbreak, the future effects that it will have on the global, national or local economy, including the impacts on the Utilities’ ability, as well as the cost, to access additional capital, or the future impacts on the Utilities’ financial position, results of operations, and cash flows. See Item 1A. “Risk Factors” in Part II for further discussion of risks and uncertainties.
Hawaiian Electric’s consolidated capital structure was as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
June 30, 2020
|
|
|
|
December 31, 2019
|
|
|
|
Short-term borrowings
|
|
$
|
50
|
|
|
1
|
%
|
|
$
|
89
|
|
|
2
|
%
|
|
Long-term debt, net
|
|
1,575
|
|
|
42
|
|
|
1,498
|
|
|
41
|
|
|
Preferred stock
|
|
34
|
|
|
1
|
|
|
34
|
|
|
1
|
|
|
Common stock equity
|
|
2,060
|
|
|
56
|
|
|
2,047
|
|
|
56
|
|
|
|
|
$
|
3,719
|
|
|
100
|
%
|
|
$
|
3,668
|
|
|
100
|
%
|
Information about Hawaiian Electric’s commercial paper borrowings, borrowings from HEI and line of credit facility were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance
|
|
Balance
|
|
|
|
(in millions)
|
|
Six months ended June 30, 2020
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Short-term borrowings 1
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
36
|
|
|
$
|
—
|
|
|
$
|
39
|
|
|
Borrowings from HEI
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Line of credit draws
|
|
32
|
|
|
—
|
|
|
—
|
|
|
Undrawn capacity under line of credit facilities
|
|
—
|
|
|
275
|
|
|
200
|
|
1 The maximum amount of external short-term borrowings by Hawaiian Electric during the first six months of 2020 was approximately $210 million. As of June 30, 2020, Hawaii Electric Light and Maui Electric had short-term borrowings from Hawaiian Electric of $12 million and $1.5 million, respectively, which intercompany borrowings are eliminated in consolidation. In addition to the short-term borrowings above, on May 19, 2020, Hawaiian Electric paid off and terminated the $100 million term loan facility dated as of December 23, 2019 and entered into a 364-day, $50 million term loan facility as of May 19, 2020. Hawaiian Electric drew the full $50 million on May 19, 2020.
Hawaiian Electric has a $200 million line of credit facility and a $75 million 364-day revolving credit facility with no amounts outstanding at June 30, 2020. See Note 5 of the Condensed Consolidated Financial Statements.
SPRBs. Special purpose revenue bonds (SPRBs) have been issued by the Department of Budget and Finance of the State of Hawaii (DBF) to finance (and refinance) capital improvement projects of Hawaiian Electric and its subsidiaries, but the sources of their repayment are the non-collateralized obligations of Hawaiian Electric and its subsidiaries under loan agreements and notes issued to the DBF, including Hawaiian Electric’s guarantees of its subsidiaries’ obligations.
On May 24, 2019, the PUC approved the Utilities’ request to issue SPRBs in the amounts of up to $70 million, $2.5 million and $7.5 million for Hawaiian Electric, Hawaii Electric Light and Maui Electric, respectively, prior to June 30, 2020, to finance the Utilities’ capital improvement programs. Pursuant to this approval, on October 10, 2019, the DBF issued, at par, Series 2019 SPRBs in the aggregate principal amount of $80 million with a maturity of October 1, 2049. As of June 30, 2020,
Hawaiian Electric had $29 million of undrawn funds remaining with the trustee. Hawaii Electric Light and Maui Electric had no undrawn funds as of June 30, 2020.
On June 10, 2019, the Hawaii legislature authorized the issuance of up to $700 million of SPRBs ($400 million for Hawaiian Electric, $150 million for Hawaii Electric Light and $150 million for Maui Electric), with PUC approval, prior to June 30, 2024, to finance the Utilities’ multi-project capital improvement programs (2019 Legislative Authorization).
On May 4, 2020, the Utilities requested PUC approval to issue up to $700 million of SPRBs (under the 2019 Legislative Authorization) in the amounts of up to $400 million, $150 million and $150 million for Hawaiian Electric, Hawaii Electric Light and Maui Electric, respectively, prior to June 30, 2024 to finance the Utilities’ multi-project capital improvement programs.
Bank loans. On May 19, 2020, Hawaiian Electric paid off and terminated the $100 million term loan credit agreement dated as of December 23, 2019. In addition, Hawaiian Electric entered into a 364-day, $50 million term loan credit agreement that matures on April 19, 2021. Hawaiian Electric drew the full $50 million on May 19, 2020.
Taxable debt. On January 31, 2019, the Utilities received PUC approval (January 2019 Approval) to issue the remaining authorized amounts under the PUC approval received in April 2018 (April 2018 Approval) in 2019 through 2020 (Hawaiian Electric up to $205 million and Hawaii Electric Light up to $15 million of taxable debt), as well as a supplemental increase to authorize the issuance of additional taxable debt to finance capital expenditures, repay long-term and/or short term debt used to finance or refinance capital expenditures, and/or to reimburse funds used for payment of capital expenditures, and to refinance the Utilities’ 2004 junior subordinated deferrable interest debentures (QUIDS) prior to maturity. In addition, the January 2019 Approval authorized the Utilities to extend the period to issue additional taxable debt from December 31, 2021 to December 31, 2022. The new total “up to” amounts of taxable debt requested to be issued through December 31, 2022 are $410 million, $150 million and $130 million for Hawaiian Electric, Hawaii Electric Light and Maui Electric, respectively.
Pursuant to this approval, on May 14, 2020, the Utilities issued through a private placement, $160 million of unsecured senior notes bearing taxable interest ($110 million for Hawaiian Electric, $10 million for Hawaii Electric Light and $40 million for Maui Electric) to finance their capital expenditures and/or to reimburse funds used for the payment of capital expenditures. See Note 5 of the Condensed Consolidated Financial Statements.
As of June 30, 2020, Hawaiian Electric, Hawaii Electric Light, and Maui Electric have $195 million, $115 million, and $70 million, respectively, of remaining taxable debt to issue prior to December 31, 2022. See summary table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Hawaiian Electric
|
Hawaii Electric Light
|
Maui Electric
|
|
Total “up to” amounts of taxable debt authorized through 2022
|
$
|
410
|
|
$
|
150
|
|
$
|
130
|
|
|
Less:
|
|
|
|
|
Taxable debt authorized and issued in 2018 under April 2018 Approval
|
75
|
|
15
|
|
10
|
|
|
Taxable debt issuance to refinance the 2004 QUIDS in 2019
|
30
|
|
10
|
|
10
|
|
|
Taxable debt issuance in 2020
|
110
|
|
10
|
|
40
|
|
|
Remaining authorized amounts
|
$
|
195
|
|
$
|
115
|
|
$
|
70
|
|
In July 2020, the Utilities requested PUC approval to issue, prior to December 31, 2021, unsecured senior notes bearing taxable interest (Hawaiian Electric up to $60 million, Hawaii Electric Light up to $30 million and Maui Electric up to $25 million), with the proceeds expected to be used, as applicable, to finance capital expenditures, repay long-term and/or short term debt used to finance or refinance capital expenditures, and/or to reimburse funds used for payment of capital expenditures.
Equity. In October 2018, the Utilities received PUC approval for the supplemental increase to issue and sell additional common stock in the amounts of up to $280 million for Hawaiian Electric and up to $100 million each for Hawaii Electric Light and Maui Electric, with the new total “up to” amounts of $430 million for Hawaiian Electric and $110 million each for Hawaii Electric Light and Maui Electric, and to extend the period authorized by the PUC to issue and sell common stock from December 31, 2021 to December 31, 2022. As of June 30, 2020, Hawaiian Electric, Hawaii Electric Light, and Maui Electric
have $309.8 million, $110 million, and $98.8, respectively, of remaining common stock to issue prior to December 31, 2022. See summary table below.
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|
|
|
|
|
|
|
|
(in millions)
|
Hawaiian Electric
|
Hawaii Electric Light
|
Maui Electric
|
|
Total “up to” amounts of common stock authorized to issue and sell through 2021
|
$
|
150.0
|
|
$
|
10.0
|
|
$
|
10.0
|
|
|
Supplemental increase authorized
|
280.0
|
|
100.0
|
|
100.0
|
|
|
Total “up to” amounts of common stock authorized to issue and sell through 2022
|
430.0
|
|
110.0
|
|
110.0
|
|
|
Common stock authorized and issued in 2017, 2018 and 2019
|
120.2
|
|
—
|
|
11.2
|
|
|
Remaining authorized amounts
|
$
|
309.8
|
|
$
|
110.0
|
|
$
|
98.8
|
|
Cash flows. The following table reflects the changes in cash flows for the six months ended June 30, 2020 compared to the six months ended June 30, 2019:
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|
|
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|
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|
|
|
|
|
|
|
|
Six months ended June 30
|
|
|
|
|
|
(in thousands)
|
2020
|
|
2019
|
|
Change
|
|
Net cash provided by operating activities
|
$
|
181,468
|
|
|
$
|
100,816
|
|
|
$
|
80,652
|
|
|
Net cash used in investing activities
|
(181,091)
|
|
|
(197,386)
|
|
|
16,295
|
|
|
Net cash provided by financing activities
|
51,100
|
|
|
84,054
|
|
|
(32,954)
|
|
Net cash provided by operating activities. The increase in net cash provided by operating activities was primarily driven by lower cash paid for fuel oil stock largely due to lower fuel oil prices.
Net cash used in investing activities. The decrease in net cash used in investing activities was primarily driven by a decrease in capital expenditures related to construction activities.
Net cash provided by financing activities. The decrease in net cash provided by financing activities was primarily driven by higher net cash repayments for short-term borrowings.
Forecast capital expenditures. The Utilities continuously monitor the impact of COVID-19, and for the three-year period 2020 through 2022, the Utilities forecast up to $1.3 billion of net capital expenditures, which could change over time based upon external factors such as the timing and scope of environmental regulations, unforeseen delays in permitting and timing of PUC decisions. Proceeds from the issuance of equity and long-term debt, cash flows from operating activities, temporary increases in short-term borrowings and existing cash and cash equivalents are expected to provide the funds needed for the net capital expenditures, to pay down commercial paper or other short-term borrowings, as well as to fund any unanticipated expenditures not included in the 2020 to 2022 forecast (such as increases in the costs or acceleration of capital projects, or unanticipated capital expenditures that may be required by new environmental laws and regulations).
Management periodically reviews capital expenditure estimates and the timing of construction projects. These estimates may change significantly as a result of many considerations, including changes in economic conditions, changes in forecasts of kWh sales and peak load, the availability of purchased power and changes in expectations concerning the construction and ownership of future generation units, the availability of generating sites and transmission and distribution corridors, the need for fuel infrastructure investments, the ability to obtain adequate and timely rate increases, escalation in construction costs, the effects of opposition to proposed construction projects and requirements of environmental and other regulatory and permitting authorities.
Bank
Recent Developments—COVID-19
While the extent and duration of the economic slowdown caused by COVID-19 is difficult to predict, the significant disruption to the global financial markets, including impacts to the capital markets and lower interest rates across the curve has begun to impact ASB’s results. The bank’s net interest margin of 3.21% for the quarter ended June 30, 2020 was 51 basis points lower than the net interest margin for the prior quarter and 61 basis points lower than the net interest margin for the same period last year. The lower interest rate environment will continue to have a negative impact on ASB’s net interest income and net interest margin in future quarters and could have an impact on the inputs and assumptions used in significant accounting estimates, such as assessing goodwill and long-live assets for impairment. ASB’s funding of short-term loans at a fixed rate of 1% under the Paycheck Protection Program (PPP) had reduced net interest margin modestly, but the income impact will be partially offset by the receipt of processing fees under the program. The state and local responses to the COVID-19 pandemic included a statewide stay-at-home order and a mandatory 14-day self-quarantine for any person traveling to Hawaii, which had a severe adverse economic impact to businesses and residents. Although many businesses have begun to reopen on a modified basis in compliance with applicable government orders, the mandatory 14-day self-quarantine order will remain in effect until the end of August, which will continue to impact the tourism industry and the unemployment rate in the state of Hawaii. ASB’s provision for credit losses increased due to forecasted credit deterioration as a result of the COVID-19 pandemic. For the three months ended June 30, 2020, the provision for credit losses was $15.1 million, compared to $7.7 million for the three months ended June 30, 2019. In response to COVID-19, ASB made short-term loan modifications to borrowers who were generally payment current at the time of relief. As of the end of June 2020, short-term loan modifications were made to approximately 13% of the total loans outstanding. These loans were not classified as past due or as a TDR under various provisions of the regulatory framework, as further described below. In addition to lower net interest income and higher provision for credit losses, ASB collected lower fee income as fees were waived to accommodate the hardships facing its customers. ASB also had higher direct and incremental operating expenses related to COVID-19 throughout 2020 as the Bank had purchased additional safety protection equipment to ensure its employees were protected and cleaning supplies to sanitize its facilities. The bank also provided additional compensation to frontline employees that serviced customers in the open branches and accrued expenses to purchase excess paid leave that employees will not be able to use during the remainder of 2020. ASB did realize lower expenses in other areas such as marketing, travel, business development and entertainment due to the bank delaying or reducing marketing efforts while focusing on the PPP loan program and there were restrictions on travel and dining at restaurants as result of the COVID-19 pandemic. Through June 30, 2020, the higher operating expenses, which were considered direct and incremental COVID-19 related costs, were approximately $3.8 million. For the balance of the year, ASB expects that direct and incremental COVID-19 related operating expenses will moderate from the levels experienced in the first half of 2020. In April 2020, ASB had temporarily closed 15 of its 49 branches and reduced banking hours at the branches that remained open in an effort to reduce social gathering and protect employees and customers. The bank has reopened three of the branches that were temporarily closed and permanently closed four branches. Two additional branches will be permanently closed and further branch closures may occur if the negative impacts of COVID-19 accelerate. The reduction in ASB’s branch network should not have a significant impact to the bank’s customers as there are other branches nearby and other channels such as online and mobile banking. ASB’s senior management team continues to meet on a regular basis to manage the response to the pandemic and discuss key focus areas such as the safety of the bank’s employees and customers as well as any impacts to the operations of the bank. Senior management also continues to meet weekly with ASB’s board of directors to keep them apprised of the impacts of the COVID-19 pandemic.
The CARES Act was signed into law by President Trump on March 27, 2020. The CARES Act provides over $2 trillion in economic assistance for American workers, families, and small businesses, and job preservation for American industries. The PPP was established under the CARES Act and implemented by the United States Small Business Administration (SBA) to provide a direct incentive for small businesses to keep their workers on the payroll as a result of the COVID-19 crisis. The Paycheck Protection Program Flexibility Act was signed into law on June 5, 2020, which amended some of the prior rules and guidelines of the CARES Act. Loans issued through the PPP are 100% federally guaranteed and have a maturity of 2-5 years, depending on when the loan was made, at a fixed interest rate of 1%. Loan payments will be deferred until the earlier of (a) the date that the forgiven amount is remitted to the lender by the SBA; or (b) 10 months from the date the covered period ends. The SBA will forgive all loan amounts to a particular small business if such small business is compliant with the terms and conditions of the PPP. Small businesses have the earlier of 24 weeks from disbursement of the loan or December 31, 2020 to incur allowable expenses such as payroll costs, interest on mortgages, rent and utility expenses that would be covered by the loan forgiveness rules, with 60% of the loan forgiveness needing to be for payroll costs. There is a partial forgiveness if less than 60% of the loan disbursement was spent on payroll costs. Employers will have until December 31, 2020 to restore their workforce. Lenders will process and approve the PPP loans under delegated authority of the SBA. As an existing SBA certified lender, ASB worked with a number of small businesses, both customers and non-customers, to complete the loan application forms so that these businesses could participate in the program. The bank has secured more than $370 million in PPP loans for approximately 4,100 small businesses that support over 40,000 jobs, ASB received processing fees totaling approximately $13 million and will recognize these fees over the life of the loans.
To bolster the effectiveness of the SBA’s PPP, the Federal Reserve supplied liquidity to participating financial institutions through term financing backed by PPP loans to small businesses. The Paycheck Protection Program Liquidity Facility (PPPLF), authorized under section 13(3) of the Federal Reserve Act, lends to eligible borrowers on a non-recourse basis, taking PPP loans as collateral. The maturity date of an extension of credit under this facility will equal the maturity date of the PPP loan pledged to secure the extension of credit. The maturity date of the facility’s extension of credit will be accelerated if the underlying PPP loan goes into default and ASB sells the loan to the SBA to realize on the SBA guarantee. The maturity date of the facility’s extension of credit also will be accelerated to the extent of any loan forgiveness reimbursement received by ASB from the SBA.
Other provisions of the CARES Act provides that a financial institution may elect to suspend the requirements under GAAP for certain loan modifications that would otherwise be categorized as a TDR and any related impairment for accounting purposes. See Note 4 of the Condensed Consolidated Financial Statements and “Economic conditions” in the “HEI Consolidated” section above.
ASB continues to maintain its low-risk profile, strong balance sheet and straightforward community banking business model.
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Increase
|
|
|
|
(in millions)
|
|
2020
|
|
2019
|
|
(decrease)
|
|
Primary reason(s)
|
|
Interest income
|
|
$
|
60
|
|
|
$
|
66
|
|
|
$
|
(6)
|
|
|
The decrease in interest income was primarily the result of lower earning asset yields partly offset by an increase in loan portfolio balances. ASB’s average loan portfolio balance for the three months ended June 30, 2020 increased by $506 million compared to the same period in 2019 due to increases in the average commercial, commercial real estate and home equity line of credit loan portfolios of $390 million, $88 million and $68 million, respectively. Included in the commercial loan portfolio growth are the PPP loans with an average balance of $268 million. The yield on the loan portfolio was 80 basis points lower than the yield on the loan portfolio in the prior year. The decrease was primarily due to the declining interest rate environment which started in the second half of 2019 and has continued this year. ASB’s average investment securities portfolio balance for the three months ended June 30, 2020 decreased by $102 million compared to the same period in 2019 as ASB used the investment portfolio repayments to fund the growth in the loan portfolio. The yield on the investment securities portfolio decreased by 22 basis points due to the lower interest rate environment. The average balance of interest-earning deposits increased by $230 million for the three months ended June 30, 2020 compared to the same period in 2019 as cash balances grew due to deposit growth, which outpaced loan growth.
|
|
Noninterest income
|
|
24
|
|
|
16
|
|
|
8
|
|
|
Noninterest income increased for the three months ended June 30, 2020 compared to noninterest income for the three months ended June 30, 2019 primarily due to the gain on sale of securities and an increase in mortgage banking income, partly offset by lower fee income from other financial services and deposit liabilities. In the second quarter of 2020, ASB sold all of its Visa Class B restricted shares and $160 million of investment securities for a pretax gain of $9.3 million. The sale of the investment securities reduced yield volatility and credit risk within the investment portfolio. The increase in mortgage banking income was due to the increase in residential mortgage loan sales in the secondary market as a result of higher loan production volumes. The lower fee income from other financial services and deposit liabilities was due to ASB’s decision to waive overdraft and other deposit account fees to accommodate the hardships customers are experiencing during the COVID-19 pandemic.
|
|
Less: gain on sale of investment securities, net
|
|
(9)
|
|
|
—
|
|
|
(9)
|
|
|
Gain on sale of investment securities, net, which is included in Noninterest income above and in the Bank’s statements of income and comprehensive income in Note 4, is classified as gain on sale of investment securities, net in the condensed consolidated statements of income, and accordingly, is reflected below following operating income as a separate line item and excluded from Revenues.
|
|
Revenues
|
|
75
|
|
|
82
|
|
|
(7)
|
|
|
The decrease in revenues for the three months ended June 30, 2020 compared to the same period in 2019 was primarily due to lower interest income.
|
|
Interest expense
|
|
3
|
|
|
5
|
|
|
(2)
|
|
|
The decrease in interest expense for the three months ended June 30, 2020 compared to the same period in 2019 was due to a decrease in term certificate balances and lower yields on costing liabilities. Average deposit balances for the three months ended June 30, 2020 increased by $638 million compared to the same period in 2019 due to an increase in core deposits of $712 million, partly offset by a decrease in average term certificate balances of $74 million. Average cost of deposits for the three months ended June 30, 2020 was 18 basis points, or 10 basis points lower than the cost of deposits for the same period in 2019. Average other borrowings for the three months ended June 30, 2020 was flat compared to the same period in 2019 and the rate was 121 basis points lower. The interest-bearing liability rate for the three months ended June 30, 2020 of 27 basis points decreased 15 basis points compared to the same period in 2019.
|
|
Provision for credit losses
|
|
15
|
|
|
8
|
|
|
7
|
|
|
The provision for credit losses increased for the three months ended June 30, 2020 compared to the provision for loan losses for the three months ended June 30, 2019. The provision for loan losses for 2020 was primarily for additional loan loss reserves for the consumer loan portfolio, reserves for increases in commercial real estate loan commitments and increased reserves in the commercial, commercial real estate and consumer loan portfolios for expected credit deterioration due to the COVID-19 pandemic. The provision for loan losses for 2019 was primarily additional loan loss reserves for the consumer loan portfolio, increased reserves for an impaired commercial loan and growth in the loan portfolio, partly offset by the release of loan loss reserves for the payoff of a commercial real estate loan and the completion of a commercial real estate construction project. Delinquency rates have decreased from 0.51% at June 30, 2019 to 0.38% at June 30, 2020, which exclude loans that were modified due to COVID-19. These loans were generally payment current at the time of the modification and qualify to not be treated as past due or as a TDR under relevant regulatory relief. The annualized net charge-off ratio for the three months ended June 30, 2020 was 0.49% compared to an annualized net charge-off ratio of 0.29% for the same period in 2019. The annualized net charge-off for 2019 benefited from recoveries in the commercial loan portfolio.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense
|
|
48
|
|
|
48
|
|
|
—
|
|
|
Noninterest expense for the three months ended June 30, 2020 was flat compared to the same period in 2019. Higher expenses1 related to the COVID-19 pandemic, of approximately $3.7 million, were offset by lower compensation and benefits and marketing expenses. See Recent Developments-COVID-19 for a discussion of the additional expenses incurred due to the COVID-19 pandemic.
|
|
Expenses
|
|
66
|
|
|
61
|
|
|
5
|
|
|
The increase in expenses for the three months ended June 30, 2020 compared to the same period in 2019 was due to higher provision for loan losses partly offset by lower interest expense.
|
|
Operating income
|
|
8
|
|
|
21
|
|
|
(13)
|
|
|
The decrease in operating income for the three months ended June 30, 2020 compared to the same period in 2019 was primarily due to lower interest income and higher provision for credit losses, partly offset by lower interest expense.
|
|
Gain on sale of investment securities, net
|
|
9
|
|
|
—
|
|
|
9
|
|
|
Increase was due to the sale of ASB’s Visa Class B restricted shares and other investment securities.
|
|
Net income
|
|
14
|
|
|
17
|
|
|
(3)
|
|
|
The decrease in net income for the three months ended June 30, 2020 compared to the same period in 2019 was primarily due to lower operating income, partly offset by gain on sale of investment securities, net.
|
1 Higher operating expenses, which were considered direct and incremental COVID-19 related costs, included approximately $2.3 million of incremental compensation expense and $1.1 million of enhanced cleaning and sanitation costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30
|
|
|
|
Increase
|
|
|
|
(in millions)
|
|
2020
|
|
2019
|
|
(decrease)
|
|
Primary reason(s)
|
|
Interest income
|
|
$
|
125
|
|
|
$
|
135
|
|
|
$
|
(10)
|
|
|
The decrease in interest income was primarily the result of a decrease in yield on earning assets and lower investment portfolio balances, partly offset by higher loan portfolio balances. ASB’s average loan portfolio balance for the six months ended June 30, 2020 increased by $382 million compared to the same period in 2019 due to increases in the average commercial, home equity line of credit, commercial real estate and residential loan portfolios of $244 million, $88 million, $70 million and $8 million, respectively. Included in the commercial loan portfolio growth are the PPP loans with an average balance of $134 million. The yield on loans was impacted by the declining interest rate environment which started during the last half of 2019 and has continued this year, resulting in a decrease in yields from the total loan portfolio of 63 basis points. The average investment portfolio balance for the six months ended June 30, 2020 decreased $112 million compared to the same period in 2019 due to repayments in the portfolio and the lack of new investment security purchases for most of 2019 as liquidity was used to fund the loan portfolio growth. The investment portfolio yield for 2020 was 17 basis points lower than the investment portfolio yield in the prior year. The average interest-earning deposit balance for the six months ended June 30, 2020 increased by $123 million compared to the same period in 2019 as cash balances grew due to deposit growth, which outpaced loan growth.
|
|
Noninterest income
|
|
39
|
|
|
30
|
|
|
9
|
|
|
The increase in noninterest income for the six months ended June 30, 2020 compared to noninterest income for the six months ended June 30, 2019 was primarily due to gains on sales of investment securities and higher mortgage banking income, partly offset by lower fee income from financial services and deposit liabilities. ASB sold all of its Visa Class B restricted shares and $160 million of investment securities portfolio for a pretax gain of $9.3 million. The sale of the investment securities reduced yield volatility and credit risk within the investment portfolio. The higher mortgage banking income in 2020 was due to an increase in residential mortgage loans sold in the secondary market as a result of higher loan production volumes. The lower fee income from financial services and deposit liabilities was due to ASB’s decision to waive overdraft and other deposit account fees to accommodate the hardships customers are experiencing during the COVID-19 pandemic.
|
|
Less: gain on sale of investment securities, net
|
|
(9)
|
|
|
—
|
|
|
(9)
|
|
|
Gain on sale of investment securities, net, which is included in Noninterest income above and in the Bank’s statements of income and comprehensive income in Note 4, is classified as gain on sale of investment securities, net in the condensed consolidated statements of income, and accordingly, is reflected below following operating income as a separate line item and excluded from Revenues.
|
|
Revenues
|
|
155
|
|
|
165
|
|
|
(10)
|
|
|
The decrease in revenues for the six months ended June 30, 2020 compared to the same period in 2019 was primarily due to lower interest income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
7
|
|
|
9
|
|
|
(2)
|
|
|
The decrease in interest expense for the six months ended June 30, 2020 compared to the same period in 2019 was primarily due to lower term certificate balances and costing liability yields. Average deposit balances for the six months ended June 30, 2020 increased by $379 million compared to the same period in 2019 due to an increase in core deposits of $447 million, partly offset by a decrease in average term certificate balances of $68 million. Average cost of deposits for the six months ended June 30, 2020 was 20 basis points, or 8 basis points lower than the cost of deposits for the same period in 2019. Average other borrowings for the six months ended June 30, 2020 decreased by $7 million compared to the same period in 2019 due to a decrease in FHLB advances of $20 million, partly offset by an increase in repurchase agreements and federal funds purchased of $13 million. The interest-bearing liability rate for the six months ended June 30, 2020 of 31 basis points decreased by 12 basis points compared to the same period in 2019.
|
|
Provision for credit losses
|
|
26
|
|
|
15
|
|
|
11
|
|
|
The provision for credit losses increased for the six months ended June 30, 2020 compared to the provision for credit losses for the six months ended June 30, 2019. The provision for credit losses for 2020 was primarily due to additional loss reserves for the consumer loan portfolio, reserves for increases in commercial real estate commitments and increased reserves for the commercial, commercial real estate and the consumer portfolios for expected credit deterioration due to the COVID-19 pandemic. The provision for credit losses for 2019 was primarily due to additional loss reserves for the consumer loan portfolio, increased reserves for an impaired commercial loan and a commercial real estate loan that was downgraded to substandard. Delinquency rates have decreased from 0.51% at June 30, 2019 to 0.38% at June 30, 2020, which exclude loans that were modified due to COVID-19. These loans were generally payment current at the time of the modification and qualify to not be treated as past due or as a TDR under relevant regulatory relief. The annualized net charge-off ratio for the six months ended June 30, 2020 was 0.46% compared to an annualized net charge-off ratio of 0.34% for the same period in 2019. The increase was due to higher net charge-offs in the consumer loan portfolio with risk-based pricing.
|
|
Noninterest expense
|
|
94
|
|
|
94
|
|
|
—
|
|
|
Noninterest expense for the six months ended June 30 2020 was flat compared to the same period in 2019. Higher expenses1 related to the COVID-19 pandemic, of approximately $3.8 million, were partly offset by lower marketing expenses and 2019 expenses included higher occupancy expenses as the bank had the costs for the new campus and properties being vacated. See Recent Developments-COVID-19 for a discussion of the additional expenses incurred due to the COVID-19 pandemic.
|
|
Expenses
|
|
127
|
|
|
118
|
|
|
9
|
|
|
The increase in expenses for the six months ended June 30, 2020 compared to the same period in 2019 was due to higher provision for credit losses, partly offset by lower interest expense.
|
|
Operating income
|
|
28
|
|
|
47
|
|
|
(19)
|
|
|
The decrease in operating income for the six months ended June 30, 2020 compared to the same period in 2019 was primarily due to lower interest income and higher provision for credit losses, partly offset by lower interest expense.
|
|
Gain on sale of investment securities, net
|
|
9
|
|
|
—
|
|
|
9
|
|
|
Increase was due to the sale of ASB’s Visa Class B restricted shares and other investment securities.
|
|
Net income
|
|
30
|
|
|
38
|
|
|
(8)
|
|
|
Net income for the six months ended June 30, 2020 was lower than the same period in 2019 due to lower operating income, partly offset by gain on sale of investment securities, net.
|
1 Higher operating expenses, which were considered direct and incremental COVID-19 related costs, included approximately $2.3 million of incremental compensation expense and $1.1 million of enhanced cleaning and sanitation costs.
ASB’s return on average assets, return on average equity and net interest margin were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30
|
|
|
|
Six months ended June 30
|
|
|
|
(%)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Return on average assets
|
|
0.72
|
|
|
0.96
|
|
|
0.79
|
|
|
1.07
|
|
|
Return on average equity
|
|
8.00
|
|
|
10.46
|
|
|
8.57
|
|
|
11.76
|
|
|
Net interest margin
|
|
3.21
|
|
|
3.82
|
|
|
3.46
|
|
|
3.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
|
|
2019
|
|
|
|
|
|
(dollars in thousands)
|
|
Average
balance
|
|
Interest
income/
expense
|
|
Yield/
rate (%)
|
|
Average
balance
|
|
Interest
income/
expense
|
|
Yield/
rate (%)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning deposits
|
|
$
|
239,186
|
|
|
$
|
60
|
|
|
0.10
|
|
|
$
|
9,212
|
|
|
$
|
55
|
|
|
2.36
|
|
|
FHLB stock
|
|
9,649
|
|
|
75
|
|
|
3.13
|
|
|
9,785
|
|
|
89
|
|
|
3.62
|
|
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
1,346,145
|
|
|
5,978
|
|
|
1.78
|
|
|
1,449,233
|
|
|
7,105
|
|
|
1.96
|
|
|
Non-taxable
|
|
28,794
|
|
|
221
|
|
|
3.04
|
|
|
28,096
|
|
|
362
|
|
|
5.09
|
|
|
Total investment securities
|
|
1,374,939
|
|
|
6,199
|
|
|
1.80
|
|
|
1,477,329
|
|
|
7,467
|
|
|
2.02
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
2,175,756
|
|
|
21,635
|
|
|
3.98
|
|
|
2,177,030
|
|
|
22,480
|
|
|
4.13
|
|
|
Commercial real estate
|
|
937,990
|
|
|
8,298
|
|
|
3.52
|
|
|
850,037
|
|
|
10,113
|
|
|
4.72
|
|
|
Home equity line of credit
|
|
1,090,752
|
|
|
8,473
|
|
|
3.12
|
|
|
1,022,479
|
|
|
9,841
|
|
|
3.86
|
|
|
Residential land
|
|
13,326
|
|
|
184
|
|
|
5.53
|
|
|
13,816
|
|
|
172
|
|
|
4.98
|
|
|
Commercial
|
|
999,251
|
|
|
7,686
|
|
|
3.08
|
|
|
609,285
|
|
|
7,022
|
|
|
4.60
|
|
|
Consumer
|
|
232,360
|
|
|
7,286
|
|
|
12.61
|
|
|
270,914
|
|
|
9,008
|
|
|
13.34
|
|
|
Total loans 1,2
|
|
5,449,435
|
|
|
53,562
|
|
|
3.94
|
|
|
4,943,561
|
|
|
58,636
|
|
|
4.74
|
|
|
Total interest-earning assets 3
|
|
7,073,209
|
|
|
59,896
|
|
|
3.39
|
|
|
6,439,887
|
|
|
66,247
|
|
|
4.11
|
|
|
Allowance for credit losses
|
|
(80,083)
|
|
|
|
|
|
|
(55,068)
|
|
|
|
|
|
|
Noninterest-earning assets
|
|
783,826
|
|
|
|
|
|
|
683,179
|
|
|
|
|
|
|
Total assets
|
|
$
|
7,776,952
|
|
|
|
|
|
|
$
|
7,067,998
|
|
|
|
|
|
|
Liabilities and shareholder’s equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
$
|
2,550,162
|
|
|
$
|
619
|
|
|
0.10
|
|
|
$
|
2,333,175
|
|
|
$
|
486
|
|
|
0.08
|
|
|
Interest-bearing checking
|
|
1,096,350
|
|
|
93
|
|
|
0.03
|
|
|
1,040,865
|
|
|
266
|
|
|
0.10
|
|
|
Money market
|
|
159,876
|
|
|
89
|
|
|
0.22
|
|
|
146,726
|
|
|
255
|
|
|
0.69
|
|
|
Time certificates
|
|
740,297
|
|
|
2,270
|
|
|
1.23
|
|
|
814,518
|
|
|
3,280
|
|
|
1.62
|
|
|
Total interest-bearing deposits
|
|
4,546,685
|
|
|
3,071
|
|
|
0.27
|
|
|
4,335,284
|
|
|
4,287
|
|
|
0.40
|
|
|
Advances from Federal Home Loan Bank
|
|
24,231
|
|
|
21
|
|
|
0.36
|
|
|
33,791
|
|
|
222
|
|
|
2.63
|
|
|
Securities sold under agreements to repurchase and federal funds purchased
|
|
87,631
|
|
|
54
|
|
|
0.25
|
|
|
77,693
|
|
|
189
|
|
|
0.98
|
|
|
Total interest-bearing liabilities
|
|
4,658,547
|
|
|
3,146
|
|
|
0.27
|
|
|
4,446,768
|
|
|
4,698
|
|
|
0.42
|
|
|
Noninterest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
2,273,656
|
|
|
|
|
|
|
1,847,228
|
|
|
|
|
|
|
Other
|
|
144,256
|
|
|
|
|
|
|
123,371
|
|
|
|
|
|
|
Shareholder’s equity
|
|
700,493
|
|
|
|
|
|
|
650,631
|
|
|
|
|
|
|
Total liabilities and shareholder’s equity
|
|
$
|
7,776,952
|
|
|
|
|
|
|
$
|
7,067,998
|
|
|
|
|
|
|
Net interest income
|
|
|
|
$
|
56,750
|
|
|
|
|
|
|
$
|
61,549
|
|
|
|
|
Net interest margin (%) 4
|
|
|
|
|
|
3.21
|
|
|
|
|
|
|
3.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
|
|
2019
|
|
|
|
|
|
(dollars in thousands)
|
|
Average
balance
|
|
Interest
income/
expense
|
|
Yield/
rate (%)
|
|
Average
balance
|
|
Interest
income/
expense
|
|
Yield/
rate (%)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning deposits
|
|
$
|
132,920
|
|
|
$
|
152
|
|
|
0.23
|
|
|
$
|
9,782
|
|
|
$
|
117
|
|
|
2.39
|
|
|
FHLB stock
|
|
9,512
|
|
|
153
|
|
|
3.25
|
|
|
10,064
|
|
|
185
|
|
|
3.69
|
|
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
1,367,306
|
|
|
14,997
|
|
|
2.19
|
|
|
1,481,400
|
|
|
17,315
|
|
|
2.34
|
|
|
Non-taxable
|
|
28,738
|
|
|
526
|
|
|
3.62
|
|
|
27,037
|
|
|
691
|
|
|
5.08
|
|
|
Total investment securities
|
|
1,396,044
|
|
|
15,523
|
|
|
2.22
|
|
|
1,508,437
|
|
|
18,006
|
|
|
2.39
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
2,177,118
|
|
|
43,557
|
|
|
4.00
|
|
|
2,168,703
|
|
|
44,730
|
|
|
4.13
|
|
|
Commercial real estate
|
|
918,076
|
|
|
17,807
|
|
|
3.86
|
|
|
847,689
|
|
|
20,286
|
|
|
4.77
|
|
|
Home equity line of credit
|
|
1,095,224
|
|
|
17,693
|
|
|
3.25
|
|
|
1,007,338
|
|
|
19,334
|
|
|
3.87
|
|
|
Residential land
|
|
13,688
|
|
|
381
|
|
|
5.57
|
|
|
13,311
|
|
|
355
|
|
|
5.33
|
|
|
Commercial
|
|
843,277
|
|
|
14,416
|
|
|
3.42
|
|
|
599,054
|
|
|
13,882
|
|
|
4.65
|
|
|
Consumer
|
|
241,138
|
|
|
15,275
|
|
|
12.74
|
|
|
270,569
|
|
|
17,909
|
|
|
13.35
|
|
|
Total loans 1,2
|
|
5,288,521
|
|
|
109,129
|
|
|
4.13
|
|
|
4,906,664
|
|
|
116,496
|
|
|
4.76
|
|
|
Total interest-earning assets 3
|
|
6,826,997
|
|
|
124,957
|
|
|
3.66
|
|
|
6,434,947
|
|
|
134,804
|
|
|
4.20
|
|
|
Allowance for credit losses
|
|
(76,292)
|
|
|
|
|
|
|
(53,568)
|
|
|
|
|
|
|
Noninterest-earning assets
|
|
753,029
|
|
|
|
|
|
|
682,718
|
|
|
|
|
|
|
Total assets
|
|
$
|
7,503,734
|
|
|
|
|
|
|
$
|
7,064,097
|
|
|
|
|
|
|
Liabilities and shareholder’s equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
$
|
2,472,957
|
|
|
$
|
1,159
|
|
|
0.09
|
|
|
$
|
2,334,106
|
|
|
$
|
888
|
|
|
0.08
|
|
|
Interest-bearing checking
|
|
1,072,680
|
|
|
323
|
|
|
0.06
|
|
|
1,041,387
|
|
|
530
|
|
|
0.10
|
|
|
Money market
|
|
153,826
|
|
|
339
|
|
|
0.44
|
|
|
148,577
|
|
|
496
|
|
|
0.67
|
|
|
Time certificates
|
|
755,323
|
|
|
4,837
|
|
|
1.28
|
|
|
822,875
|
|
|
6,625
|
|
|
1.62
|
|
|
Total interest-bearing deposits
|
|
4,454,786
|
|
|
6,658
|
|
|
0.30
|
|
|
4,346,945
|
|
|
8,539
|
|
|
0.40
|
|
|
Advances from Federal Home Loan Bank
|
|
23,713
|
|
|
111
|
|
|
0.94
|
|
|
43,983
|
|
|
575
|
|
|
2.64
|
|
|
Securities sold under agreements to repurchase and federal funds purchased
|
|
91,822
|
|
|
277
|
|
|
0.61
|
|
|
78,232
|
|
|
364
|
|
|
0.94
|
|
|
Total interest-bearing liabilities
|
|
4,570,321
|
|
|
7,046
|
|
|
0.31
|
|
|
4,469,160
|
|
|
9,478
|
|
|
0.43
|
|
|
Noninterest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
2,094,215
|
|
|
|
|
|
|
1,822,574
|
|
|
|
|
|
|
Other
|
|
144,433
|
|
|
|
|
|
|
128,529
|
|
|
|
|
|
|
Shareholder’s equity
|
|
694,765
|
|
|
|
|
|
|
643,834
|
|
|
|
|
|
|
Total liabilities and shareholder’s equity
|
|
$
|
7,503,734
|
|
|
|
|
|
|
$
|
7,064,097
|
|
|
|
|
|
|
Net interest income
|
|
|
|
$
|
117,911
|
|
|
|
|
|
|
$
|
125,326
|
|
|
|
|
Net interest margin (%) 4
|
|
|
|
|
|
3.46
|
|
|
|
|
|
|
3.90
|
|
1 Includes loans held for sale, at lower of cost or fair value.
2 Includes recognition of net deferred loan fees of $0.7 million and $0.1 million for the three months ended June 30, 2020 and 2019 and $0.7 million and $0.2 million for the six months ended June 30, 2020 and 2019, respectively, together with interest accrued prior to suspension of interest accrual on nonaccrual loans.
3 For the three and six months ended June 30, 2020 and 2019, the taxable-equivalent basis adjustments made to the table above were not material.
4 Defined as net interest income, on a fully taxable equivalent basis, as a percentage of average total interest-earning assets.
Earning assets, costing liabilities, contingencies and other factors. Earnings of ASB depend primarily on net interest income, which is the difference between interest earned on earning assets and interest paid on costing liabilities. The interest rate environment has been impacted by disruptions in the financial markets over a period of several years. In the prior year, interest rate increases had resulted in an increase in ASB’s net interest income and net interest margin. However, the recent interest rate reductions have negatively impacted ASB’s net interest income and net interest margin. Future interest reductions may continue to negatively impact ASB’s net interest income and net interest margin.
Loans and mortgage-backed securities are ASB’s primary earning assets.
Loan portfolio. ASB’s loan volumes and yields are affected by market interest rates, competition, demand for financing, availability of funds and management’s responses to these factors. See Note 4 of the Condensed Consolidated Financial Statements for the composition of ASB’s loans.
Home equity — key credit statistics. Attention has been given by regulators and rating agencies to the potential for increased exposure to credit losses associated with home equity lines of credit (HELOC) that were originated during the period of rapid home price appreciation between 2003 and 2007 as they have reached the end of their 10-year, interest-only payment periods. Once the interest-only payment period has ended, payments are reset to include principal repayments along with interest. ASB does not have a large exposure to HELOCs originated between 2003 and 2007. Nearly all of ASB’s HELOC originations prior to 2008 consisted of amortizing equity lines that have structured principal payments during the draw period. These older equity lines represent 1% of the HELOC portfolio and are included in the amortizing balances identified in the loan portfolio table below.
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June 30, 2020
|
|
December 31, 2019
|
|
Outstanding balance of home equity loans (in thousands)
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|
$
|
1,065,264
|
|
|
$
|
1,092,125
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|
|
Percent of portfolio in first lien position
|
|
55.4
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%
|
|
53.7
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%
|
|
Annualized net charge-off ratio
|
|
—
|
%
|
|
0.01
|
%
|
|
Delinquency ratio
|
|
0.36
|
%
|
|
0.27
|
%
|
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|
End of draw period – interest only
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|
|
|
|
|
Current amortizing
|
|
June 30, 2020
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|
Total
|
|
Interest only
|
|
2020-2021
|
|
2022-2024
|
|
Thereafter
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|
|
|
Outstanding balance (in thousands)
|
|
$1,065,264
|
|
$803,363
|
|
$29,096
|
|
$103,873
|
|
$670,394
|
|
$261,901
|
|
% of total
|
|
100
|
%
|
|
75
|
%
|
|
2
|
%
|
|
10
|
%
|
|
63
|
%
|
|
25
|
%
|
The HELOC portfolio makes up 20% of the total loan portfolio and is generally an interest-only revolving loan for a 10-year period, after which time the HELOC outstanding balance converts to a fully amortizing variable-rate term loan with a 20-year amortization period. This product type comprises 77% of the total HELOC portfolio and is the current product offering. Borrowers also have a “Fixed Rate Loan Option” to convert a part of their available line of credit into a 5, 7 or 10-year fully amortizing fixed-rate loan with level principal and interest payments. As of June 30, 2020, approximately 22% of the portfolio balances were amortizing loans under the Fixed Rate Loan Option.
Loan portfolio risk elements. See Note 4 of the Condensed Consolidated Financial Statements.
Investment securities. ASB’s investment portfolio was comprised as follows:
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|
|
June 30, 2020
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|
|
|
December 31, 2019
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|
|
|
(dollars in thousands)
|
|
Balance
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|
% of total
|
|
Balance
|
|
% of total
|
|
U.S. Treasury and federal agency obligations
|
|
$
|
102,414
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|
|
7
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%
|
|
$
|
117,787
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|
|
9
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%
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|
Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies
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|
1,351,608
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|
|
89
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|
|
1,165,836
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|
|
85
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|
|
Corporate bonds
|
|
31,407
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|
|
2
|
|
|
60,057
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|
|
4
|
|
|
Mortgage revenue bonds
|
|
28,827
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|
|
2
|
|
|
28,597
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|
|
2
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|
|
Total investment securities
|
|
$
|
1,514,256
|
|
|
100
|
%
|
|
$
|
1,372,277
|
|
|
100
|
%
|
Currently, ASB’s investment portfolio consists of U.S. Treasury and federal agency obligations, mortgage-backed securities, corporate bonds and mortgage revenue bonds. ASB owns mortgage-backed securities issued or guaranteed by the U.S. government agencies or sponsored agencies, including the Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC), Government National Mortgage Association (GNMA) and Small Business Administration (SBA). Principal and interest on mortgage-backed securities issued by FNMA, FHLMC, GNMA and SBA are guaranteed by the issuer and, in the case of GNMA and SBA, backed by the full faith and credit of the U.S. government. U.S. Treasury securities are also backed by the full faith of the U.S. government. The increase in the investment securities portfolio was primarily due to the purchase of securities with excess liquidity.
In June 2020, the bank sold all of its Visa Class B restricted shares resulting in a pretax gain of approximately $7.1 million. ASB also sold corporate bonds and mortgage-backed securities during the second quarter for $160 million, which resulted in a pretax gain of approximately $2.2 million. The sale of the investment securities reduced yield volatility and credit risk within the investment portfolio. The proceeds from the sales were reinvested into the investment portfolio at current market yields.
Deposits and other borrowings. Deposits continue to be the largest source of funds for ASB and are affected by market interest rates, competition and management’s responses to these factors. Deposit retention and growth will remain challenging in the current environment due to competition for deposits and the low level of short-term interest rates. Advances from the FHLB of Des Moines, securities sold under agreements to repurchase and federal funds purchased continue to be additional sources of funds. As of June 30, 2020 and December 31, 2019, ASB’s costing liabilities consisted of 98% deposits and 2% other borrowings. The weighted average cost of deposits for the first six months of 2020 and 2019 was 0.20% and 0.28%, respectively.
Federal Home Loan Bank of Des Moines. As of June 30, 2020 ASB had advances outstanding at the FHLB of Des Moines of $30 million compared to nil as of December 31, 2019. As of June 30, 2020, the unused borrowing capacity with the FHLB of Des Moines was $2.2 billion. The FHLB of Des Moines continues to be an important source of liquidity for ASB.
ASB had previously reported that in February 2020, the FHLB of Des Moines notified the bank that certain assets, which included high-quality home equity lines of credit, would no longer qualify as collateral for FHLB Advances, reducing ASB’s total FHLB borrowing capacity. In March 2020, the FHLB of Des Moines notified ASB that they have provisionally accepted the previously disqualified assets as collateral while they assess the eligibility of those assets. In July 2020, the FHLB of Des Moines announced the conclusion of their review of home equity lines of credit eligibility and effective October 1, 2020, the FHLB of Des Moines will no longer accept the fixed rate portion of any home equity lines of credit. If such an amendment were effective as of June 30, 2020, the amount of unused FHLB borrowing capacity would have been reduced by approximately $140 million. In addition, on June 12, 2020, the FHLB of Des Moines announced an update to their Loan to Value (LTV), a system-wide percentage applied to eligible pledged collateral to determine borrowing capacity, to reflect ongoing risks in the market due to COVID-19. Effective July 13, 2020, the LTV was lowered, which reduced the collateral value of the existing pledged loans and the borrowing capacity by $100 million. To increase the borrowing capacity at the FHLB of Des Moines, ASB pledged a portion of its commercial real estate loan portfolio in July 2020, which increased the borrowing capacity by $136 million. Additional collateral may be pledged in the third quarter of 2020 to increase the borrowing capacity.
Contingencies. ASB is subject in the normal course of business to pending and threatened legal proceedings. Management does not anticipate that the aggregate ultimate liability arising out of these pending or threatened legal proceedings will be material to its financial position. However, ASB cannot rule out the possibility that such outcomes could have a material adverse effect on the results of operations or liquidity for a particular reporting period in the future.
Other factors. Interest rate risk is a significant risk of ASB’s operations and also represents a market risk factor affecting the fair value of ASB’s investment securities. Increases and decreases in prevailing interest rates generally translate into decreases and increases in the fair value of the investment securities, respectively. In addition, changes in credit spreads also impact the fair values of the investment securities.
As of June 30, 2020, ASB had an unrealized gain, net of taxes, on available-for-sale investment securities (including securities pledged for repurchase agreements) in AOCI of $21.3 million compared to an unrealized gain, net of taxes, of $2.5 million as of December 31, 2019. See “Item 3. Quantitative and qualitative disclosures about market risk” for a discussion of ASB’s interest rate risk sensitivity.
During the first six months of 2020, ASB recorded a provision for credit losses of $25.5 million primarily due to additional loss reserves for the consumer loan portfolio, reserves for increases in commercial real estate commitments and increased reserves for the commercial, commercial real estate and consumer loan portfolios for expected credit deterioration due to the COVID-19 pandemic. During the first six months of 2019, ASB recorded a provision for credit losses of $14.6 million primarily due to increased loss reserves for the consumer loan portfolio and additional reserves for an impaired commercial loan and a commercial real estate loan that was downgraded.
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|
Six months ended June 30
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|
|
Year ended
December 31, 2019
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|
(in thousands)
|
|
2020
|
|
2019
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|
|
Allowance for credit losses, prior to adoption of ASU No. 2016-13
|
|
$
|
53,355
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|
|
$
|
52,119
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|
|
$
|
52,119
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|
|
Impact of adopting ASU No. 2016-13
|
|
19,441
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|
|
—
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|
|
—
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|
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Provision for credit losses
|
|
20,734
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|
|
14,558
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|
|
23,480
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Less: net charge-offs
|
|
12,223
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|
|
8,252
|
|
|
22,244
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|
|
Allowance for credit losses, end of period
|
|
$
|
81,307
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|
|
$
|
58,425
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|
|
$
|
53,355
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|
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Ratio of net charge-offs during the period to average loans outstanding (annualized)
|
|
0.46
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%
|
|
0.34
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%
|
|
0.45
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%
|
ASB maintains a reserve for credit losses that consists of two components, the allowance for credit losses and an allowance for loan commitments (unfunded reserve). The level of the reserve for unfunded loan commitments is adjusted by recording an expense or recovery in provision for credit losses. As of June 30, 2020 and December 31, 2019, the reserve for unfunded loan commitments was $8.1 million and $1.7 million, respectively.
Legislation and regulation. ASB is subject to extensive regulation, principally by the OCC and the FDIC. Depending on ASB’s level of regulatory capital and other considerations, these regulations could restrict the ability of ASB to compete with other institutions and to pay dividends to its shareholder. See the discussion below under “Liquidity and capital resources.”
Changes to Community Bank Leverage Ratio. In April 2020, the federal bank regulatory agencies issued two interim final rules to implement Section 4012 of the CARES Act, which requires the agencies to temporarily lower the community bank leverage ratio to 8 percent. The two rules modify the community bank leverage ratio framework so that:
•Beginning in the second quarter of 2020 and until the end of the year, a banking organization that has a leverage ratio of 8 percent or greater and meets certain other criteria may elect to use the community bank leverage ratio framework; and
•Community banking organizations will have until January 1, 2022 before the community bank leverage ratio requirement is re-established at greater than 9 percent.
Under the interim final rules, the community bank leverage ratio will be 8 percent beginning in the second quarter of 2020 and for the remainder of calendar year 2020, 8.5 percent for calendar year 2021, and 9 percent thereafter. The interim final rules also maintain a two-quarter grace period for a qualifying community banking organization whose leverage ratio falls no more than 1 percent below the applicable community bank leverage ratio.
Beginning in the second quarter of 2020, ASB has adopted the community bank leverage ratio framework.
Covered Savings Associations. On May 24, 2019, the OCC issued a final rule to allow federal savings associations with total consolidated assets of $20 billion or less, as reported by the association to the OCC on its call report as of December 31, 2017, to elect to operate as covered savings associations. A covered savings association generally has the same rights and privileges as a national bank that has its main office situated in the same location as the home office of the covered savings association, with some exceptions. It is subject to the same duties, restrictions, penalties, liabilities, conditions, and limitations that apply to a national bank, with some exceptions, and must comply with certain rules and regulations applicable to the powers and investments of a national bank. A covered savings association is not required to comply with the lending and investment limits in HOLA and is not required to be a qualified thrift lender under HOLA. Finally, a covered savings association is not permitted to retain or engage in any subsidiaries, assets, or activities that are not permissible for a national bank. ASB has initiated a preliminary examination of the benefits and disadvantages of such an election with the preservation of being held by a unitary thrift holding company in mind. ASB is awaiting official FRB commentary, and has not reached a decision on the election.
FINANCIAL CONDITION
Liquidity and capital resources.
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|
|
|
|
|
|
(dollars in millions)
|
|
June 30, 2020
|
|
December 31, 2019
|
|
% change
|
|
Total assets
|
|
$
|
8,020
|
|
|
$
|
7,233
|
|
|
11
|
|
|
Investment securities
|
|
1,514
|
|
|
1,372
|
|
|
10
|
|
|
Loans held for investment, net
|
|
5,357
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|
|
5,068
|
|
|
6
|
|
|
Deposit liabilities
|
|
7,030
|
|
|
6,272
|
|
|
12
|
|
|
Other bank borrowings
|
|
125
|
|
|
115
|
|
|
9
|
|
As of June 30, 2020, ASB was one of Hawaii’s largest financial institutions based on assets of $8.0 billion and deposits of $7.0 billion.
As of June 30, 2020, ASB’s unused FHLB borrowing capacity was approximately $2.2 billion. As of June 30, 2020, ASB had commitments to borrowers for loans and unused lines and letters of credit of $1.9 billion, of which, commitments to lend to borrowers whose loan terms have been modified in troubled debt restructurings were nil. Management believes ASB’s current sources of funds will enable it to meet these obligations while maintaining liquidity at satisfactory levels.
For the six months ended June 30, 2020, net cash provided by ASB’s operating activities was $29 million. Net cash used during the same period by ASB’s investing activities was $440 million, primarily due to purchases of available-for-sale securities of $477 million, a net increase in loans of $328 million, additions to premises and equipment of $4 million and contributions to low income housing investments of $2 million, partly offset by the receipt of repayments from investment securities of $197 million, proceeds from the sale of investment securities of $169 million and proceeds from the sale of low income housing investments of $7 million. Net cash provided by financing activities during this period was $740 million, primarily due to increases in deposit liabilities of $758 million and proceeds from FHLB advances of $30 million, partly offset by a net decrease in repurchase agreements of $20 million and $28 million in common stock dividends to HEI (through ASB Hawaii).
For the six months ended June 30, 2019, net cash provided by ASB’s operating activities was $41 million. Net cash used during the same period by ASB’s investing activities was $67 million, primarily due to a net increase in loans of $174 million, additions to premises and equipment of $20 million, purchases of available-for-sale investment securities of $5 million and contributions to low income housing investments of $4 million, partly offset by the receipt of repayments from available-for-sale investment securities of $124 million, proceeds from the redemption of bank owned life insurance policies of $6 million and the receipt of held-to-maturity investment securities of $5 million. Net cash provided by financing activities during this period was $68 million, primarily due to increases in deposit liabilities of $99 million, partly offset by $33 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 June 30, 2020, ASB was well-capitalized (well-capitalized ratio requirements noted in parentheses) with a Tier-1 leverage ratio of 8.4% (5.0%). As of December 31, 2019, ASB was well-capitalized with a common equity Tier-1 ratio of 13.2%, Tier-1 capital ratio of 13.2%, a Total capital ratio of 14.3% and a Tier-1 leverage ratio of 9.1%. All dividends are subject to review by the OCC and FRB and receipt of a letter from the FRB communicating the agencies’ non-objection to the payment of any dividend ASB proposes to declare and pay to HEI (through ASB Hawaii).
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company considers interest-rate risk (a non-trading market risk) to be a significant market risk for ASB as it could potentially have material impacts on the Company’s results of operations, financial condition and liquidity. For additional quantitative and qualitative information about the Company’s market risks, see HEI’s and Hawaiian Electric’s Quantitative and Qualitative Disclosures About Market Risk in Part II, Item 7A of HEI’s 2019 Form 10-K (pages 69 to 71).
ASB’s interest-rate risk sensitivity measures as of June 30, 2020 and December 31, 2019 constitute “forward-looking statements” and were as follows:
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|
Change in interest rates
|
|
Change in NII
(gradual change in interest rates)
|
|
|
|
Change in EVE
(instantaneous change in interest rates)
|
|
|
|
(basis points)
|
|
June 30, 2020
|
|
December 31, 2019
|
|
June 30, 2020
|
|
December 31, 2019
|
|
+300
|
|
5.5
|
%
|
|
2.8
|
%
|
|
29.0
|
%
|
|
15.3
|
%
|
|
+200
|
|
3.8
|
|
|
2.1
|
|
|
22.6
|
|
|
12.2
|
|
|
+100
|
|
2.0
|
|
|
1.3
|
|
|
13.1
|
|
|
7.5
|
|
|
-100
|
|
(1.6)
|
|
|
(2.0)
|
|
|
(23.5)
|
|
|
(12.7)
|
|
ASB’s net interest income (NII) sensitivity profile was more asset sensitive as of June 30, 2020 compared to December 31, 2019. The decrease in long term market rates increased prepayment expectations, resulting in higher reinvestment into lower yielding fixed-rate mortgage and mortgage-backed investment portfolios. In addition, the bank had significantly more cash on hand as of June 30, 2020, further increasing asset sensitivity.
Economic value of equity (EVE) sensitivity increased as of June 30, 2020 compared to December 31, 2019 primarily due to strong growth in long duration core deposits. In addition, the downward shift in the yield curve led to faster prepayment expectations and shortened the duration of the fixed-rate mortgage and mortgage-backed investment portfolios.
The computation of the prospective effects of hypothetical interest rate changes on the NII sensitivity and the percentage change in EVE is based on numerous assumptions, including relative levels of market interest rates, loan prepayments, balance changes and pricing strategies, and should not be relied upon as indications of actual results. To the extent market conditions and other factors vary from the assumptions used in the simulation analysis, actual results may differ materially from the simulation results. NII sensitivity analysis measures the change in ASB’s twelve-month, pretax NII in alternate interest rate scenarios, and is intended to help management identify potential exposures in ASB’s current balance sheet and formulate appropriate strategies for managing interest rate risk. The simulation does not contemplate any actions that ASB management might undertake in response to changes in interest rates. Further, the changes in NII vary in the twelve-month simulation period and are not necessarily evenly distributed over the period. These analyses are for analytical purposes only and do not represent management’s views of future market movements, the level of future earnings or the timing of any changes in earnings within the twelve month analysis horizon. The actual impact of changes in interest rates on NII will depend on the magnitude and speed with which rates change, actual changes in ASB’s balance sheet and management’s responses to the changes in interest rates.