NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Note 1 · Summary of significant accounting policies |
Hawaiian Electric Industries, Inc. (HEI) is a holding company with direct and indirect subsidiaries principally engaged in electric utility, banking, and non-regulated renewable/sustainable infrastructure businesses operating in the State of Hawaii. HEI owns Hawaiian Electric Company, Inc. (Hawaiian Electric), ASB Hawaii, Inc. (ASB Hawaii), an intermediate holding company that owns American Savings Bank, F.S.B. (ASB), and Pacific Current, LLC (Pacific Current).
Hawaiian Electric and its wholly owned operating subsidiaries, Hawaii Electric Light Company, Inc. (Hawaii Electric Light) and Maui Electric Company, Limited (Maui Electric), are regulated public electric utilities (collectively, the Utilities) in the business of generating, purchasing, transmitting, distributing and selling electric energy on all major islands in Hawaii other than Kauai. See Note 3.
ASB is a federally chartered, full-service community bank providing a wide range of banking services to individual and business customers through its 35 branches on Oahu (25), Maui (4), Hawaii (3), Kauai (2) and Molokai (1).
Pacific Current’s significant subsidiaries include Hamakua Energy, LLC (Hamakua Energy), Mauo, LLC (Mauo) and Kaʻieʻie Waho Company, LLC (Kaʻieʻie Waho) and Mahipapa, LLC (Mahipapa). See Note 3.
Basis of presentation. In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP), management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change for HEI and its subsidiaries (collectively, the Company) include the amounts reported as fair value for investment securities (ASB only); pension and other postretirement benefit obligations; contingencies and litigation; income taxes; regulatory assets and liabilities (Utilities only); asset retirement obligations (Utilities only); and allowance for credit losses (ASB only).
Consolidation. The HEI consolidated financial statements include the accounts of HEI and its subsidiaries. The Hawaiian Electric consolidated financial statements include the accounts of Hawaiian Electric and its subsidiaries. When HEI or Hawaiian Electric has a controlling financial interest in another entity (usually, majority voting interest), that entity is consolidated. Investments in companies over which the Company or the Utilities have the ability to exercise significant influence, but not control, are accounted for using the equity method. The consolidated financial statements exclude variable interest entities (VIEs) when the Company or the Utilities are not the primary beneficiaries. Significant intercompany amounts are eliminated in consolidation (see Note 3 for limited exceptions).
Cash and cash equivalents. The Utilities consider cash on hand, deposits in banks, money market accounts, certificates of deposit, short-term commercial paper of non-affiliates and liquid investments (with original maturities of three months or less) to be cash and cash equivalents. The Company considers the same items to be cash and cash equivalents as well as ASB’s deposits with the Federal Home Loan Bank (FHLB), federal funds sold (excess funds that ASB loans to other banks overnight at the federal funds rate) and securities purchased under resale agreements with original maturities of three months or less.
Restricted cash. The Utilities consider funds on deposit with Wells Fargo, which represent collateral to secure company purchasing cards, to be restricted cash because these funds are available only to finance (or reimburse payment of) approved expenditures. In addition to the Utilities’ funds held for collateral, the Company considers cash held by trustees, related to non-recourse loans at Pacific Current subsidiaries, to be restricted cash. At December 31, 2023 and 2022, total restricted cash of the Company was $15.0 million and $5.1 million, respectively, and for the Utilities was $2.0 million and nil, respectively.
Property, plant and equipment. Property, plant and equipment are reported at cost. Self-constructed electric utility plant includes engineering, supervision, administrative and general costs and an allowance for the cost of funds used during the construction period. These costs are recorded in construction in progress and are transferred to utility plant when construction is completed and the facilities are either placed in service or become useful for public utility purposes. Costs for betterments that make utility plant more useful, more efficient, of greater durability or of greater capacity are also capitalized. Upon the retirement or sale of electric utility plant, generally no gain or loss is recognized. The cost of the plant retired is charged to accumulated depreciation. Amounts collected from customers for cost of removal are included in regulatory liabilities. See discussion regarding “Utility projects” in Note 4.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Depreciation. Depreciation is computed primarily using the straight-line method over the estimated lives of the assets being depreciated. Electric utility plant additions in the current year are depreciated beginning January 1 of the following year in accordance with rate-making. Electric utility plant and Pacific Current generation assets have lives ranging from 16 to 51 years for production plant, from 10 to 79 years for transmission and distribution plant, and from 5 to 50 years for general plant. The Utilities’ composite annual depreciation rate, which includes a component for cost of removal, was 3.2% in 2023, 2022 and 2021.
Retirement benefits. Pension and other postretirement benefit costs are charged primarily to expense and electric utility plant (in the case of the Utilities). Funding for the Company’s qualified pension plans (Plans) is based on actuarial assumptions adopted by the Pension Investment Committee administering the Plans. The participating employers contribute amounts to pension trusts for the Plans in accordance with the funding requirements of the Employee Retirement Income Security Act of 1974, as amended (ERISA), including changes promulgated by the Pension Protection Act of 2006, and considering the deductibility of contributions under the Internal Revenue Code. The Company generally funds at least the net periodic pension cost during the year, subject to ERISA minimum and Internal Revenue Code limits and targeted funded status.
Certain health care and/or life insurance benefits are provided to eligible retired employees and the employees’ beneficiaries and covered dependents. The Company generally funds the net periodic postretirement benefit costs other than pensions (except for executive life) for postretirement benefits other than pensions (OPEB), while maximizing the use of the most tax-advantaged funding vehicles, subject to cash flow requirements and reviews of the funded status with the consulting actuary.
Environmental expenditures. The Company and the Utilities are subject to numerous federal and state environmental statutes and regulations. In general, environmental contamination treatment costs are charged to expense. Environmental costs are capitalized if the costs extend the life, increase the capacity, or improve the safety or efficiency of property; the costs mitigate or prevent future environmental contamination; or the costs are incurred in preparing the property for sale. Environmental costs are either capitalized or charged to expense when environmental assessments and/or remedial efforts are probable and the cost can be reasonably estimated. The Utilities review their sites and measure the liability quarterly by assessing a range of reasonably likely costs of each identified site using currently available information, including existing technology, presently enacted laws and regulations, experience gained at similar sites, and the probable level of involvement and financial condition of other potentially responsible parties.
Contingencies and litigation. The Company and the Utilities are subject to proceedings (including PUC proceedings), lawsuits and other claims. Management assesses the likelihood of any adverse judgments in or outcomes of these matters as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies is based on an analysis of each individual case or proceeding often with the assistance of outside counsel. Loss contingencies are reviewed quarterly and estimates are adjusted to reflect the impact of all known information, such as new developments in each matter or changes in approach in dealing with these matters, including changes in settlement strategy. When a loss is probable and reasonably estimable, a liability is recorded in the amount of the estimable loss. If it is reasonably possible that a loss may have been incurred and the effect on the financial statements could be material, the Company and the Utilities disclose the nature of the loss contingency and an estimate of the possible loss or range of loss or a statement that such an estimate cannot be made within the notes to the financial statements.
Income taxes. Deferred income tax assets and liabilities are established for the temporary differences between the financial reporting bases and the tax bases of the Company’s and the Utilities’ assets and liabilities at federal and state tax rates expected to be in effect when such deferred tax assets or liabilities are realized or settled. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount expected to be realized.
HEI and the Utilities’ investment tax credits are deferred and amortized over the estimated useful lives of the properties to which the credits relate (and for the Utilities, this treatment is in accordance with Accounting Standards Codification (ASC) Topic 980, “Regulated Operations”).
The Utilities are included in the consolidated income tax returns of HEI. However, income tax expense has been computed for financial statement purposes as if each utility filed a separate income tax return and Hawaiian Electric filed a consolidated Hawaiian Electric income tax return.
Governmental tax authorities could challenge a tax return position taken by the Company. The Company and the Utilities use a “more-likely-than-not” recognition threshold and measurement standard for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Fair value measurements. Fair value estimates are estimates of the price that would be received to sell an asset, or paid upon the transfer of a liability, in an orderly transaction between market participants at the measurement date. The fair value estimates are generally determined based on assumptions that market participants would use in pricing the asset or liability and are based on market data obtained from independent sources. However, in certain cases, the Company and the Utilities use their own assumptions about market participant assumptions based on the best information available in the circumstances. These valuations are estimates at a specific point in time, based on relevant market information, information about the financial instrument and judgments regarding future expected loss experience, economic conditions, risk characteristics of various financial instruments and other factors. These estimates do not reflect any premium or discount that could result if the Company or the Utilities were to sell its entire holdings of a particular financial instrument at one time. Because no active trading market exists for a portion of the Company’s and the Utilities’ financial instruments, fair value estimates cannot be determined with precision. Changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the estimates. In addition, the tax ramifications related to the realization of the unrealized gains and losses could have a significant effect on fair value estimates, but have not been considered in making such estimates.
The Company and the Utilities group their financial assets measured at fair value in three levels outlined as follows:
Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and is used to measure fair value whenever available.
Level 2: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by observable market data by correlation or other means.
Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
Classification in the hierarchy is based upon the lowest level input that is significant to the fair value measurement of the asset or liability. For instruments classified in Level 1 and 2 where inputs are primarily based upon observable market data, there is less judgment applied in arriving at the fair value. For instruments classified in Level 3, management judgment is more significant due to the lack of observable market data.
The Company reviews and updates the fair value hierarchy classifications on a quarterly basis. Changes from one quarter to the next related to the observability of inputs in fair value measurements may result in a reclassification between the fair value hierarchy levels and are recognized based on period-end balances.
Fair value is also used on a nonrecurring basis to evaluate certain assets for impairment or for disclosure purposes. Examples of nonrecurring uses of fair value include mortgage servicing rights accounted for by the amortization method, loan impairments for certain loans, real estate acquired in settlement of loans, goodwill and asset retirement obligations (AROs).
Earnings per share (HEI only). Basic earnings per share (EPS) is computed by dividing net income for common stock by the weighted-average number of common shares outstanding for the period. Diluted EPS is computed similarly, except that dilutive common shares for stock compensation is added to the denominator. As of December 31, 2023, the antidilutive effect of restricted stock units (RSUs) on 65,078 shares of common stock, was not included in the computation of diluted EPS. There were no shares of antidilutive securities outstanding during the years ended December 31, 2022 and 2021.
Impairment of long-lived assets and long-lived assets to be disposed of. The Company and the Utilities review long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. When the Utilities conclude that recovery of the remaining carrying amount of long-lived generation asset upon retirement is probable of recovery in future rates the carrying amount of the long-lived generation asset is recorded as a regulatory asset. Other assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Recent accounting pronouncements.
Credit Losses. In March 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2022-02, “Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures,” which eliminates the accounting guidance for Troubled Debt Restructurings (TDRs) by creditors in Subtopic 310-40, Receivables-Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and restructuring guidance in paragraphs 310-20-35-9 through 35-11 to determine whether a modification results in a new loan or a continuation of an existing loan. The amendments in this update also require that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, “Financial Instruments-Credit Losses-Measured at Amortized Cost.” Gross write-off information must be included in the vintage disclosures required for public business entities in accordance with paragraph 325-20-50-6, which requires that an entity disclose the amortized cost basis of financing receivables by credit-quality indicator and class of financing receivable by year of origination. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. ASB updated the accounting for certain loan refinancings and restructurings, and included the required disclosures in the Notes herein in accordance with ASU No. 2022-02.
Segment Reporting. In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures to improve reportable segment disclosure requirements, primarily through enhanced disclosure requirements of significant segment expenses. These amendments are effective for annual periods beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. These amendments apply on a retrospective basis. The Company is currently evaluating the impact of this amendment on the Company’s consolidated financial statements.
Income Taxes. In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvement to Income Tax Disclosures to enhance the transparency and decision usefulness of income tax disclosures. The amendments are effective for annual periods beginning after December 15, 2024. These amendments apply on a prospective basis with a retrospective option. Early adoption is permitted. The Company is currently evaluating the impact of this amendment on the Company’s consolidated financial statements.
Regulation by the Public Utilities Commission of the State of Hawaii (PUC). The Utilities are regulated by the PUC and account for the effects of regulation under FASB ASC Topic 980, “Regulated Operations.” As a result, the Utilities’ financial statements reflect assets, liabilities, revenues and expenses based on current cost-based rate-making regulations (see Note 4—“Regulatory assets and liabilities”). Their continued accounting under ASC Topic 980 generally requires that rates are established by an independent, third-party regulator; rates are designed to recover the costs of providing service; and it is reasonable to assume that rates can be charged to, and collected from, customers. Management believes that the operations of the Utilities, including the impact of the approved PBR Framework, currently satisfy the criteria under ASC Topic 980.
The rate schedules of the Utilities include energy costs recovery clauses (ECRCs) under which electric rates are adjusted for changes in the weighted-average price paid for fuel oil and certain components of purchased power, and the relative amounts of company-generated power and purchased power. The rate schedules also include purchased power adjustment clauses (PPACs) under which the remaining purchase power expenses are recovered through surcharge mechanisms. The amounts collected through the ECRCs and PPACs are required to be reconciled quarterly.
Accounts receivable. Accounts receivable are recorded at the invoiced amount. The Utilities generally assess a late payment charge on balances unpaid from the previous month. The allowance for doubtful accounts is the Utilities’ best estimate of the amount of expected credit losses in the Utilities’ existing accounts receivable. At December 31, 2023 and 2022, the allowance for customer accounts receivable, accrued unbilled revenues and other accounts receivable was $4.6 million and $6.1 million, respectively.
Electric utility revenues. Revenues related to electric service are generally recorded when service is rendered and include revenues applicable to energy consumed in the accounting period but not yet billed to the customers. The Utilities also record revenue under a decoupling mechanism. See “Decoupling” discussion in Note 4.
Repairs and maintenance costs. Repairs and maintenance costs for overhauls of generating units are generally expensed as they are incurred.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Allowance for funds used during construction (AFUDC). AFUDC represents the estimated costs of debt (i.e., interest) and equity funds used to finance plant construction. AFUDC is credited on the statement of income and charged to construction in progress on the balance sheet. If a project under construction is delayed for an extended period of time, AFUDC on the delayed project may be stopped after assessing the causes of the delay and probability of recovery. The tax gross up of the allowance for equity funds used during construction is credited to income taxes on the statement of income and charged to a regulatory asset. This gross up, net of amortization of the regulatory asset, is reflected in income tax expense.
The weighted-average AFUDC rate was 7.2% in 2023, 7.1% in 2022 and 2021, and reflected quarterly compounding.
Asset retirement obligations. AROs are accounted for in accordance with ASC 410-20, “Asset Retirement Obligations.” AROs are recognized at present value of expected costs to retire long-lived assets from service, provided a legal obligation exists and a reasonable estimate of the fair value and the settlement date can be made. In the subsequent period, the liability is accreted to its future value while the asset retirement cost is depreciated over the estimated useful life of the underlying asset. The Utilities’ recognition of AROs have no impact on earnings, as the cost of the AROs are recovered over the life of the asset through depreciation. AROs recognized by the Utilities relate to legal obligations with the retirement of plant and equipment, including removal of asbestos and other hazardous materials. See “Asset retirement obligations” in Note 4.
Investment securities. Investments in debt securities are classified as held-to-maturity (HTM), trading or available-for-sale (AFS). ASB determines the appropriate classification at the time of purchase. Debt securities that ASB intends to and has the ability to hold to maturity are classified as HTM securities and reported at amortized cost. Marketable debt securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. Marketable debt securities not classified as either HTM or trading securities are classified as AFS and reported at fair value. Unrealized gains and losses for AFS securities are excluded from earnings and reported on a net basis in accumulated other comprehensive income (AOCI) until realized. Transfers of debt securities from the available-for-sale classification to the held-to-maturity classification are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer remains in AOCI and in the carrying value of the held-to-maturity investment security. Unrealized holding gains or losses that remain in AOCI are amortized or accreted over the expected life of the security as an adjustment of yield, offsetting the related amortization of the premium or accretion of the discount.
Interest income is recorded on an accrual basis. Discounts and premiums on securities are accreted or amortized into interest income using the interest method over the remaining contractual lives of the agency obligation securities and the estimated lives of the mortgage-backed securities adjusted for anticipated prepayments. ASB uses actual prepayment experience and estimates of future prepayments to determine the constant effective yield necessary to apply the interest method of income recognition. The discounts and premiums on the agency obligations portfolio are accreted or amortized on a prospective basis using expected contractual cash flows. The discounts and premiums on the mortgage-backed securities portfolio are accreted or amortized on a retrospective basis using changes in anticipated prepayments. This method requires a retrospective adjustment of the effective yield each time ASB changes the estimated life as if the new estimate had been known since the original acquisition date of the securities. Estimates of future prepayments are based on the underlying collateral characteristics and historic or projected prepayment behavior of each security. The specific identification method is used in determining realized gains and losses on the sales of securities.
AFS debt securities with unrealized losses are reviewed quarterly. ASB will first assess whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either criteria is met, the security’s amortized cost basis is written down to fair value through income. For AFS securities that do not meet the aforementioned criteria, ASB evaluates whether the decline in fair value is the result of a credit loss or other factors. The determination of whether or not a credit loss exists is based on consideration of the cash flows expected to be collected from the debt security. ASB develops these expectations after considering various factors such as agency ratings, the financial condition of the issuer, payment history, payment structure of the security, industry and market conditions, underlying collateral and other factors which may be relevant based on the facts and circumstances pertaining to individual securities. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as a provision for (or reversal of) credit losses. Losses are charged against the allowance when management believes the uncollectibility of an AFS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
security is confirmed or when either of the criteria regarding intent or requirement to sell is met. As of December 31, 2023, 2022 and 2021, there was no indicated impairment as ASB expects to collect the contractual cash flows for these investments.
Held-to-maturity debt securities are assessed periodically to determine if a valuation allowance is necessary to absorb credit losses expected to occur over the remaining contractual life of the securities. The carrying amount of held-to-maturity debt securities is presented net of the valuation allowance for credit losses when such an allowance is deemed necessary.
Stock in FHLB is carried at cost and is reviewed at least quarterly for impairment, with valuation adjustments recognized in noninterest income.
Loans. ASB carries loans at amortized cost less the allowance for credit losses, loan origination fees (net of direct loan origination costs), commitment fees and purchase premiums and discounts. Interest on loans is credited to income as it is earned. Discounts and premiums are accreted or amortized over the life of the loans using the interest method.
Loan origination fees (net of direct loan origination costs) are deferred and recognized as an adjustment in yield over periods not exceeding the contractual life of the loan using the interest method or taken into income when the loan is paid off or sold. Nonrefundable commitment fees (net of direct loan origination costs, if applicable) received for commitments to originate or purchase loans are deferred and, if the commitment is exercised, recognized as an adjustment of yield over the life of the loan using the interest method. Nonrefundable commitment fees received for which the commitment expires unexercised are recognized as income upon expiration of the commitment.
Loans held for sale are stated at the lower of cost or estimated fair value on an aggregate basis. Premiums, discounts and net deferred loan fees are not amortized while a loan is classified as held for sale. A sale is recognized only when the consideration received is other than beneficial interests in the assets sold and control over the assets is transferred irrevocably to the buyer. Gains or losses on sales of loans are recognized at the time of sale and are determined by the difference between the net sales proceeds and the allocated basis of the loans sold.
Allowance for credit losses. The allowance for credit losses (ACL) represents management’s estimate of expected credit losses over the expected contractual life of the related loans as of the balance sheet date. Contractual terms are adjusted for expected prepayments but are not extended for expected extensions, renewals or modifications except in circumstances where ASB reasonably expects to execute a troubled debt restructuring with the borrower or where certain extension or renewal options are embedded in the original contract and not unconditionally cancellable by the Bank.
Accrued interest receivables on loans are presented in the Consolidated Financial Statements as a component of other assets. When accrued interest is deemed to be uncollectible (typically when a loan is placed on nonaccrual status), interest income is reversed against interest income on loans. ASB follows established policies for placing loans on nonaccrual status, so uncollectible accrued interest receivable is reversed in a timely manner. As a result, the Bank has elected not to measure an allowance for credit losses for accrued interest receivables.
Credit losses are charged and recoveries are credited to the ACL. The ACL is maintained at a level the Bank considers to be adequate and is based on ongoing assessments and evaluations of the collectability of loans. The Bank’s expected credit loss models consider historical credit loss experience, current market and economic conditions, and forecasted changes in market and economic conditions if such forecasts are considered reasonable and supportable. Generally, the Bank considers its forecasts to be reasonable and supportable for a period of up to a year from the estimation date. For periods beyond the reasonable and supportable forecast period, expected credit losses are estimated by reverting to historical loss information without adjustment for changes in economic conditions. The Bank evaluates the length of its reasonable and supportable forecast period, its reversion period and reversion methodology at least annually, or more often if warranted by economic conditions or other circumstances.
The Bank’s methodology for determining the ACL includes an estimate of expected credit losses on a collective basis for groups of loans with similar risk characteristics and specific allowances for loans which are individually evaluated.
ASB disaggregates its portfolio loans into portfolio segments for purposes of determining the allowance for credit losses. Commercial, commercial real estate, and commercial construction loans are defined as non-homogeneous loans and ASB utilizes a risk rating system for evaluating the credit quality of the loans. Non-homogeneous loans are also categorized into the regulatory asset quality classifications—Pass, Special Mention, Substandard, Doubtful, and Loss based on credit quality. ASB utilizes a numerical-based, risk rating “PD Model” that takes into consideration fiscal year-end financial information of the borrower and identified financial attributes including retained earnings, operating cash flows, interest coverage, liquidity and leverage that demonstrate a strong correlation with default to assign default probabilities at the borrower level. In addition, a
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
loss given default (LGD) value is assigned to each loan to measure loss in the event of default based on loan specific features such as collateral that mitigates the amount of loss in the event of default.
Residential, consumer and credit scored business loans are considered homogeneous loans, which are typically underwritten based on common, uniform standards. For the homogeneous portfolio, the quality of the loan is best indicated by the repayment performance of an individual borrower. ASB supplements performance data with external credit bureau data and credit scores such as the Fair Isaac Corporation (FICO) score on a quarterly basis. ASB has built portfolio loss models for each major segment based on the combination of internal and external data to predict the probability of default at the loan level.
The Bank also considers qualitative factors in determining the ACL. Qualitative factors are used to capture characteristics in the portfolio that impact expected credit losses but that are not fully captured within the Bank’s expected credit loss models. These include but are not limited to adjustments for changes in policies or procedures in underwriting, monitoring or collections, economic conditions, portfolio mix, lending and risk management personnel, results of internal audit and quality control reviews, collateral values and any concentrations of credit.
The reserve for unfunded commitments is maintained at a level believed by management to cover expected losses related to unfunded credit facilities and is included in accounts payable and other liabilities in the consolidated balance sheets. The determination of the adequacy of the reserve is based upon an evaluation of the unfunded credit facilities, including an assessment of historical commitment utilization experience, credit risk grading and historical loss rates. This process takes into consideration the same risk elements that are analyzed in the determination of the adequacy of the allowance for credit losses, as discussed above. Net adjustments to the reserve for unfunded commitments are included in the provision for credit losses in the consolidated statements of income.
The allowance for credit losses is based on currently available information and historical experience, and future adjustments may be required from time to time to the allowance for credit losses based on new information and changes that occur (e.g., due to changes in economic conditions, particularly in Hawaii). Actual losses could differ from management’s estimates, and these differences and subsequent adjustments could be material.
Nonperforming loans. Loans are generally placed on nonaccrual status when contractually past due 90 days or more, or earlier if the probability of collection is insufficient to warrant further accrual. All interest that is accrued but not collected is reversed. A loan may be returned to accrual status if (i) principal and interest payments have been brought current and repayment of the remaining contractual principal and interest is expected to be made, (ii) the loan has otherwise become well-secured and in the process of collection, or (iii) the borrower has been making regularly scheduled payments in full for the prior six months and it is reasonably assured that the loan will be brought fully current within a reasonable period. Cash receipts on nonaccruing loans are generally applied to reduce the unpaid principal balance.
Loans considered to be uncollectible are charged-off against the allowance for credit losses. The amount and timing of charge-offs on loans includes consideration of the loan type, length of delinquency, insufficiency of collateral value, lien priority and the overall financial condition of the borrower. Recoveries on loans previously charged-off are credited back to the allowance for credit losses. Loans that have been charged-off against the allowance for credit losses are periodically monitored to evaluate whether further adjustments to the allowance are necessary.
Loans in the commercial and commercial real estate portfolio are charged-off when the loan is risk rated “Doubtful” or “Loss.” The loan or a portion thereof is determined to be uncollectible after considering the borrower’s overall financial condition and collateral deficiency. A commercial or commercial real estate loan is considered uncollectible when: (a) the borrower is delinquent in principal or interest 90 days or more; (b) significant improvement in the borrower’s repayment capacity is doubtful; and/or (c) collateral value is insufficient to cover outstanding indebtedness and no other viable assets or repayment sources exist.
Loans in the residential mortgage and home equity portfolios are charged-off when the loan or a portion thereof is determined to be uncollectible after considering the borrower’s overall financial condition and collateral deficiency. Such loan is considered uncollectible when: (a) the borrower is delinquent in principal or interest 180 days or more; (b) it is probable that collateral value is insufficient to cover outstanding indebtedness and no other viable assets or repayment sources exist; (c) notification of the borrower’s bankruptcy is received or the borrower’s debt is discharged in bankruptcy and the loan is not reaffirmed; or (d) in cases where ASB is in a subordinate position to other debt, the senior lien holder has foreclosed and ASB’s junior lien is extinguished.
Other consumer loans are generally charged-off when the balance becomes 120 days delinquent.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Loans modified in a troubled debt restructuring. Prior to January 1, 2023, loans were considered to have been modified in a troubled debt restructuring (TDR) when, due to a borrower’s financial difficulties, ASB made concessions to the borrower that it would not otherwise consider for a non-troubled borrower. With the adoption of ASU No. 2022-02, accounting guidance for TDRs by creditors is eliminated. Loan refinancing and restructuring guidance is applied to determine whether a modification results in a new loan or a continuation of an existing loan. Prior to January 1, 2023, TDR modifications may have included interest rate reductions, interest only payments for an extended period of time, protracted terms such as amortization and maturity beyond the customary length of time found in the normal market place, and other actions intended to minimize economic loss and to provide alternatives to foreclosure or repossession of collateral. Generally, a nonaccrual loan that had been modified in a TDR remained on nonaccrual status until the borrower demonstrated sustained repayment performance for a period of six consecutive months. However, performance prior to the modification, or significant events that coincided with the modification, were included in assessing whether the borrower could meet the new terms and may have resulted in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule was uncertain, or there was reasonable doubt over the full collectability of principal and interest, the loan remained on nonaccrual status.
Real estate acquired in settlement of loans. ASB records real estate acquired in settlement of loans at fair value, less estimated selling expenses. ASB obtains appraisals based on recent comparable sales to assist management in estimating the fair value of real estate acquired in settlement of loans. Subsequent declines in value are charged to expense through a valuation allowance. Costs related to holding real estate are charged to operations as incurred.
Goodwill. Goodwill is initially recorded as the excess of the purchase price over the fair value of the net assets acquired in a business combination and is subsequently evaluated at least annually for impairment during the fourth quarter. At December 31, 2023 and 2022, the amount of goodwill was $82.2 million. The goodwill relates to ASB and is the Company’s only intangible asset with an indefinite useful life.
To determine if there was an impairment to the book value of goodwill pertaining to ASB, the fair value of ASB was estimated using a valuation method based on the market and income approaches. The market approach considers publicly traded financial institutions and measures the institutions’ market values as a multiple to (1) net income and (2) tangible book equity. The income approach uses a discounted cash flow method to value a company on a going concern basis and is based on the concept that the future benefits derived from a particular company can be measured by its sustainable after-tax cash flows in the future. ASB used its forecasted net income and estimated cost savings if the Bank were acquired and applied a discount rate to calculate its discounted cash flows. A capitalization of earnings method was used to calculate a terminal value for the discounted cash flow method. The income approach was weighted 75% and the publicly traded company valuation method was weighted 25%. More weight was given to the income approach as this approach uses the projected performance of ASB in the stressed environment and would be more indicative of the current fair value of the Bank. For the three years ended December 31, 2023, there has been no impairment of goodwill.
Mortgage banking. Mortgage loans held for sale are stated at the lower of cost or estimated fair value on an aggregate basis. Premiums, discounts and net deferred loan fees are not amortized while a loan is classified as held-for-sale. A sale is recognized only when the consideration received is other than beneficial interests in the assets sold and control over the assets is transferred irrevocably to the buyer. Gains or losses on sales of loans are recognized at the time of sale and are determined by the difference between the net sales proceeds and the allocated basis of the loans sold. ASB is obligated to subsequently repurchase a loan if the purchaser discovers a standard representation or warranty violation such as noncompliance with eligibility requirements, customer fraud or servicing violations. This primarily occurs during a loan file review. ASB considers and records a reserve for loan repurchases if appropriate.
ASB recognizes a mortgage servicing asset when a mortgage loan is sold with servicing rights retained. This mortgage servicing right (MSR) is initially capitalized at its presumed fair value based on market data at the time of sale and accounted for in subsequent periods at the lower of amortized cost or fair value. Mortgage servicing assets or liabilities are included as a component of gain on sale of loans. Under ASC Topic 860, “Transfers and Servicing,” ASB amortizes the MSRs in proportion to and over the period of estimated net servicing income and assess for impairment at each reporting date.
ASB’s MSRs are stratified based on predominant risk characteristics of the underlying loans including loan type such as fixed-rate 15- and 30-year mortgages and note rate in bands primarily of 50 to 100 basis points. For each stratum, fair value is calculated by discounting expected net income streams using discount rates that reflect industry pricing for similar assets. 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ASB uses a present value cash flow model using techniques described above to estimate the fair value of MSRs. Because observable market prices with exact terms and conditions may not be readily available, ASB compares the fair value of MSRs to an estimated value calculated by an independent third-party on a semi-annual basis. 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 fair value generated by the valuation model.
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.
Loan servicing fee income represents income earned for servicing mortgage loans owned by investors. It includes mortgage servicing fees and other ancillary servicing income, net of guaranty fees. Servicing fees are generally calculated on the outstanding principal balances of the loans serviced and are recorded as income when earned.
Tax credit investments. ASB invests in limited liability entities formed to operate qualifying affordable housing projects.
The affordable housing investments provide tax benefits to investors in the form of tax deductions from operating losses and tax credits. As a limited partner, ASB has no significant influence over the operations. These investments are initially recorded at the initial capital contribution with a liability recognized for the commitment to contribute additional capital over the term of the investment.
ASB uses the proportional amortization method of accounting for its investments. Under the proportional amortization method, ASB amortizes the cost of its investments in proportion to the tax credits and other tax benefits it receives. The amortization, tax credits and tax benefits are reported as a component of income tax expense.
For these limited liability entities, ASB assesses whether it is the primary beneficiary of the limited liability entity, which is a variable interest entity (VIE). The primary beneficiary of a VIE is determined to be the party that meets both of the following criteria: (i) has the power to make decisions that most significantly affect the economic performance of the VIE; and (ii) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE. Generally, ASB, as a limited partner, is not deemed to be the primary beneficiary as it does not meet the power criterion, i.e., no power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and no direct ability to unilaterally remove the general partner.
All tax credit investments are evaluated for potential impairment at least annually, or more frequently, when events or conditions indicate that it is deemed probable that ASB will not recover its investment. If an investment is determined to be impaired, it is written down to its estimated fair value and the new cost basis of the investment is not adjusted for subsequent recoveries in value. As of December 31, 2023, ASB did not have any impairment losses resulting from forfeiture or ineligibility of tax credits or other circumstances related to its low-income housing tax credit (LIHTC) investments.
At December 31, 2023 and 2022, the carrying amount of LIHTC investments was $112.2 million and $107.0 million, respectively, and included in other assets in the consolidated balance sheets.
ASB’s unfunded commitments to fund its LIHTC investment partnerships were $87.9 million and $70.1 million as of December 31, 2023 and 2022, respectively. These unfunded commitments are unconditional and legally binding and are recorded in other liabilities with a corresponding increase in other assets.
The table below summarizes the amounts in income tax expense related to ASB’s LIHTC investments:
| | | | | | | | | | | | | | | | | |
| Years ended December 31 | 2023 | | 2022 | | 2021 |
| (in millions) | | | | | |
Amounts in income taxes related to low-income housing tax credit investments | | | | | |
| Amortization recognized in the provision for income taxes | $ | (13.5) | | | $ | (12.0) | | | $ | (10.3) | |
| Tax credits and other tax benefits recognized in the provision for income taxes | 18.3 | | | 16.3 | | | 13.9 | |
| Net benefit to income tax expense | $ | 4.8 | | | $ | 4.3 | | | $ | 3.6 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | |
Note 2 · Maui windstorm and wildfires |
On August 8, 2023, a number of brush fires in the West Maui (Lahaina) and Upcountry Maui areas caused widespread property damage, including damage to property of the Utilities, and 101 confirmed fatalities in Lahaina at this time (the Maui windstorm and wildfires). The Maui windstorm and wildfires were fueled by extreme winds and drought-like conditions in those parts of Maui.
The circumstances surrounding the Maui windstorm and wildfires are currently the subject of several investigations.
Restoration costs and recoveries. The Utilities are continuing restoration work to rebuild portions of the electric system in Lahaina to ensure safe and reliable power to all West Maui customers. Ongoing restoration efforts include the rebuilding of transmission and distribution lines along former routes in the Lahaina area with the installation of new interim steel poles and electrical equipment. Currently, crews are also continuing repairs to restore power to less than ten customers in Lahaina. All other properties that can have power restored have been brought back online in West Maui.
On December 27, 2023, the Public Utilities Commission of the State of Hawaii (PUC) issued an order authorizing deferred accounting treatment for the Utilities’ incremental non-labor expenses related to the Maui windstorm and wildfires. The deferred accounting treatment applies to certain non-labor expenses incurred from August 8, 2023 through December 31, 2024 that are not already a part of the base rates. The approval pertains only to deferred cost treatment; any cost recovery of deferred costs will be the subject of a separate application(s). As of December 31, 2023, the Utilities have deferred $14.7 million of certain incremental costs related to the Maui windstorm and wildfires to a regulatory asset.
While the Utilities plan to seek recovery of damage to covered electrical infrastructure under their insurance programs, the timing and amount of any insurance recoveries are not determinable at this time and, as such, an insurance receivable has not been recorded as of the date of this filing. The Company’s property insurance has a total policy limit of $500 million with a $1 million retention for damages related to Utility-owned non-generating assets, including overhead transmission and distribution assets within 1,000 feet of such assets. The Utilities believe capital expenditures related to restoration that are not covered by insurance will be managed under their current regulatory mechanisms, the recovery of which would be subject to PUC approval.
ASB’s Lahaina branch, including most of its contents and automated teller machine, was destroyed in the fire. The Bank leased the property of its Lahaina location.
Third-party claims and other proceedings.
Tort-related legal claims. Multiple civil and class action lawsuits related to the Maui windstorm and wildfires have been filed in the Maui and Oahu Circuit Courts against HEI, the Utilities, and other defendants, including the County of Maui, the State of Hawaii and related state entities, private landowners and developers, and telecommunications companies (collectively “tort-related legal claims”). The majority of these lawsuits have been removed to federal court, but many of the cases are subject to motions to remand them back to the state courts. Most of these lawsuits allege that the defendants were responsible for, and/or negligent in failing to prevent or respond to the wildfires that led to the property destruction and loss of life. Other claims include, among other things, personal injury, wrongful death, emotional distress and inverse condemnation. One lawsuit asserting similar theories and claims was filed by the County of Maui against HEI and the Utilities, and two other lawsuits were filed by approximately 160 subrogation insurers against HEI, the Utilities, a private landowner, and telecommunications companies. Additional lawsuits may be filed against the Company and other defendants in the future. The plaintiffs seek to recover damages and other costs, including punitive damages.
While the investigations into the circumstances surrounding the Maui windstorm and wildfires are ongoing, various unaffiliated third parties have published estimates of the total economic damage generally ranging from $3.8 billion to $6 billion. These estimates have not been validated by the Company, and they represent gross numbers that do not take into account causation or liability nor attempt to allocate responsibility among the various defendants. As such, these estimates are not intended to provide a range of a reasonably possible loss under ASC Topic 450-20, “Loss Contingencies” attributable to the Company arising from the Maui windstorm and wildfires. In addition, on November 6, 2023, the Hawaii Insurance Division of the State of Hawaii Department of Commerce and Consumer Affairs released preliminary data on Maui windstorm and wildfires claims, and the Hawaii Insurance Division has subsequently provided updated data. Through November 30, 2023, the data collected from over 200 insurers indicated estimated total insured losses for residential and personal property of more than $1.6 billion. The estimated total losses represent insured claims related to personal motor vehicles and residential property (i.e., homeowners insurance, dwelling-fire landlord, condominium unit owner, renters insurance, and other residential property) and do not account for uninsured or underinsured property losses, commercial property losses, interest, attorneys’ fees, fire suppression and clean-up costs, evacuation costs, personal injury or wrongful death damages, medical expenses or other costs, such as potential punitive damages, fines or penalties. It is uncertain whether the insured claims reported to the Hawaii
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Insurance Division are complete, and together with property damage claims unaccounted for, as mentioned above, the total amount of property damage claims could be materially higher than the amount reported by the Hawaii Insurance Division. The Hawaii Insurance Division did not state whether it intends to provide updated information in the future.
The Company is actively working with the State of Hawaii and others in the community on solutions for Maui’s recovery, including the compensation of those who suffered losses in the Maui windstorm and wildfires and who are currently named as plaintiffs in the various cases. On November 8, 2023, Hawaii Governor Josh Green announced the One ‘Ohana Initiative (the Initiative) as a collective path forward to recovery from the Maui windstorm and wildfires. The Initiative is a new humanitarian aid fund of $175 million, with the objective to compensate, in an expedited manner, those who have lost loved ones and those who have suffered severe injuries in the Maui windstorm and wildfires. The Initiative provides an alternative to a lengthy and expensive legal process. Beneficiaries who have lost loved ones are anticipated to receive payments of $1.5 million per decedent, and those who suffered severe injuries are expected to share in a specially allocated pool of compensation. In exchange for receiving such a payment, beneficiaries will be required to waive their ability to pursue legal claims for wrongful death and severe injuries. Hawaiian Electric fully supports this humanitarian initiative and has pledged to contribute $75 million. The Governor announced that other parties, including the State of Hawaii, the County of Maui, and Kamehameha Schools have all agreed to contribute to the fund. Hawaiian Electric’s contribution to the Initiative will be less than half of the total, and Hawaiian Electric's insurance carriers have agreed to fund its share of the contributions to the fund. Hawaiian Electric’s contribution is reflective of its commitment to join with community partners to provide solutions to promote Maui’s recovery. Hawaiian Electric’s commitment to contribute to the Initiative is not an admission of guilt or reflection of fault or liability related to the wildfires.
In connection with its commitment to contribute to the Initiative, the Utilities accrued, as of December 31, 2023, $75 million, and concurrently, recorded an insurance reimbursement receivable of an equivalent amount as the recovery of the Utilities’ contribution to the Initiative under its excess liability insurance policy is deemed probable. The Initiative contemplates additional phases, including a process to potentially resolve remaining tort-related legal claims, as well as seeking legislation to reduce wildfire risk and provide financial support to help ensure a strong energy future for all of Hawaii. While the Utilities plan to participate in a process with the State and community partners to explore solutions to support Maui’s recovery and compensate victims for damages, as noted above, the Utilities are unable to reasonably estimate any additional potential loss, or range of loss. The Company believes it is reasonably possible that a loss will be incurred in excess of the expected $75 million contribution to the Initiative and is unable to predict the ultimate outcome or reasonably estimate a range of possible loss from these actions at this time.
The Company intends to vigorously defend against the litigation if necessary. There is no assurance that the Company will be successful in the defense of the litigation or that insurance will be available or adequate to fund any potential settlements, judgments, or costs associated with the litigation or contributions to any potential additional phases of the Initiative. If additional liabilities were to be incurred, the loss could be material to the Company’s results of operations, financial positions and cash flows. If any such losses were to be sufficiently high, the Company may not have liquidity or the ability to access liquidity at levels necessary to satisfy such losses.
Securities class action and shareholder lawsuits. On August 24, 2023, a putative securities class action captioned Bhangal v. Hawaiian Electric Industries, Inc., et al., No.: 3:23-cv-04332-JSC was filed in the United States District Court for the Northern District of California. The lawsuit alleges violations of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder against HEI and certain of its current and former officers, and Section 20(a) of the Exchange Act against certain of HEI’s current and former officers. Plaintiff broadly alleges that HEI and certain of its current and former officers made materially false and misleading statements or omissions regarding HEI’s wildfire prevention and safety protocols and related matters. Plaintiff seeks unspecified monetary damages. On December 7, 2023, the court appointed Daniel Warren as lead plaintiff and Pomerantz LLP as lead plaintiff’s counsel and on January 9, 2024, the court set March 8, 2024, as lead plaintiff’s deadline for filing amended complaint and set a briefing schedule on defendants’ anticipated motion to dismiss. The Company intends to vigorously defend against this action. There is no assurance that the Company will be successful in the defense of the litigation or that insurance will be available or adequate to fund any potential settlement or judgment or the litigation costs of the action. The Company does not believe that a loss is probable and any potential loss or range of loss is not reasonably estimable.
On September 11, 2023, a putative shareholder derivative action captioned Rice v. Connors, et al., No. 1CCV-23-0001181 was filed in the Circuit Court of the First Circuit, State of Hawai‘i. On December 6, 2023, the case was removed to the United States District Court for the District of Hawaii and captioned Rice v. Connors, et al., No. 1:23-cv-00577-JAO-BMK. This action is purportedly brought by a shareholder on behalf of nominal defendants HEI and Hawaiian Electric against certain current and former officers and directors of HEI and Hawaiian Electric. Plaintiff asserts Hawai‘i state law breach of fiduciary duty, abuse of control, corporate waste and unjust enrichment claims allegedly arising in connection with the Maui windstorm and wildfires that occurred in August 2023 and certain of HEI’s prior public disclosures. Plaintiff seeks, on behalf of HEI and
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Hawaiian Electric, compensatory and punitive damages, restitution and equitable relief in the form of changes to HEI’s corporate governance, policies and culture. Pursuant to a schedule agreed upon by the parties and ordered by the court, defendants are not required to respond to plaintiff’s amended complaint until after the pending motions to remand in the tort litigation are resolved. While the Company has obligations to indemnify and/or advance the defendants’ legal fees and costs in connection with this lawsuit, any monetary recovery in the derivative litigation should accrue to the Company. The Company is unable to predict the ultimate outcome and is unable to make a reasonable estimate of the amount or range of loss, if any, that could result from any unfavorable outcome.
On December 26, 2023, another putative shareholder derivative action captioned Kallaus v. Johns, et al., No. 3:23-cv-06627 was filed in the United States District Court for the Northern District of California. This action is purportedly brought by a shareholder on behalf of nominal defendants HEI and Hawaiian Electric against certain current and former officers and directors of HEI and Hawaiian Electric. Plaintiff purports to assert both Hawai‘i state law and federal securities law claims. Plaintiff brings state law breach of fiduciary duty, corporate waste, and unjust enrichment claims purportedly arising in connection with the Maui windstorm and wildfires that occurred in August 2023 and certain public disclosures. Plaintiff also asserts claims for contribution under Sections 10(b) and 21D of the Exchange Act against certain of HEI’s current and former directors and officers, and claims for violation of Section 14(a) of the Exchange Act against certain of HEI’s current and former directors. Plaintiff generally alleges that HEI and certain of its current and former officers made materially false and misleading statements or omissions regarding HEI’s wildfire prevention and safety protocols and related matters. Plaintiff also broadly claims HEI proxy statements were materially false and misleading for similar reasons. Plaintiff seeks, on behalf of HEI and Hawaiian Electric, unspecified monetary damages and equitable relief in the form of changes to HEI’s corporate governance and internal procedures. While the Company has certain obligations to indemnify and/or advance the defendants’ legal fees and costs in connection with this lawsuit, any monetary recovery in the derivative litigation should accrue to the Company. The Company is unable to predict the ultimate outcome and is unable to make a reasonable estimate of the amount or range of loss, if any, that could result from any unfavorable outcome.
On January 31, 2024, an additional putative shareholder derivative action captioned Cole v. Johns, et al., No. 3:24-cv-00598 was filed in the United States District Court for the Northern District of California. This action is purportedly brought by a shareholder on behalf of nominal defendants HEI and Hawaiian Electric against certain current and former officers and directors of HEI and Hawaiian Electric. Plaintiff purports to assert both Hawai‘i state law and federal securities law claims. Plaintiff brings state law breach of fiduciary duty, corporate waste, and unjust enrichment claims purportedly arising in connection with the Maui windstorm and wildfires that occurred in August 2023 and certain public disclosures. Plaintiff also asserts claims for contribution under Sections 10(b) and 21D of the Exchange Act against certain of HEI’s current and former directors and officers, and claims for violation of Section 14(a) of the Exchange Act against certain of HEI’s current and former directors. Plaintiff generally alleges that HEI and certain of its current and former officers made materially false and misleading statements or omissions regarding HEI’s wildfire prevention and safety protocols and related matters. Plaintiff also broadly claims HEI proxy statements were materially false and misleading for similar reasons. Plaintiff seeks, on behalf of HEI and Hawaiian Electric, unspecified monetary and punitive damages. While the Company has certain obligations to indemnify and/or advance the defendants’ legal fees and costs in connection with this lawsuit, any monetary recovery in the derivative litigation should accrue to the Company. The Company is unable to predict the ultimate outcome and is unable to make a reasonable estimate of the amount or range of loss, if any, that could result from any unfavorable outcome.
Maui windstorm and wildfires costs. Legal costs in connection with the litigation and loss contingencies are expensed as incurred. As of December 31, 2023, the Company incurred and accrued $34.9 million ($24.7 million by the Utilities) of legal expenses to address these lawsuits and other legal matters related to the Maui windstorm and wildfires. The Company has $165 million of excess liability insurance for third party claims, including claims related to wildfires, with a retention of $0.3 million, and $145 million directors and officers liability insurance to cover claims related to the shareholder and derivative lawsuits, with a retention of $1.0 million. As of December 31, 2023, the Company recorded legal-related insurance recoveries for a total of $29.6 million under the policies, of which, $26.6 million has been recorded to insurance receivable.
As of December 31, 2023, on a consolidated basis, the Company has incurred $63.4 million of incremental expenses related to the Maui windstorm and wildfires, which excludes the $75 million contribution and insurance receivable discussed above.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2023 | | | |
| (in thousands) | | Electric utility | | | | | | HEI Consolidated | | | |
| Maui windstorm and wildfires related expenses: | | | | | | | | | | | |
| | | | | | | | | | | |
| Legal expenses | | $ | 24,737 | | | | | | | $ | 34,876 | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
One ‘Ohana Initiative contribution | | 75,000 | | | | | | | 75,000 | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Other expense | | 15,071 | | | | | | | 28,507 | | | | |
| Total Maui windstorm and wildfires related expenses | | 114,808 | | | | | | | 138,383 | | | | |
Insurance recoveries1 | | (98,613) | | | | | | | (104,580) | | | | |
| | | | | | | | | | | |
Deferral treatment approved by the PUC2 | | (14,692) | | | | | | | (14,692) | | | | |
| Total Maui windstorm and wildfires related expenses, net of insurance recoveries and approved deferral treatment | | $ | 1,503 | | | | | | | $ | 19,111 | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
1 Includes insurance receivable of $75 million related to the One ‘Ohana Initiative contribution.
2 Related to the PUC’s order, received on December 27, 2023, approving deferred accounting treatment for the Utilities’ incremental non-labor expenses related to the August 2023 Maui windstorm and wildfires. Amounts were reclassified to a regulatory asset.
In addition, the Utilities incurred $18.0 million of total capital costs related to the Maui windstorm and wildfires.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | |
Note 3 · Segment financial information |
The electric utility and bank segments are strategic business units of the Company that offer different products and services and operate in different regulatory environments. The accounting policies of the segments are the same as those described for the Company in the summary of significant accounting policies, except as otherwise indicated and except that federal and state income taxes for each segment are calculated on a “stand-alone” basis. HEI evaluates segment performance based on net income. Each segment accounts for intersegment sales and transfers as if the sales and transfers were to third parties (i.e., at current market prices). Intersegment revenues consist primarily of Hamakua Energy electricity revenues, interest, rent and preferred stock dividends.
Hawaiian Electric and its wholly owned operating subsidiaries, Hawaii Electric Light and Maui Electric, are public electric utilities in the business of generating, purchasing, transmitting, distributing and selling electric energy on all major islands in Hawaii other than Kauai, and are regulated by the PUC. The utility subsidiaries are aggregated within the electric utility segment because they: (1) are involved in the business of supplying electric energy in the same geographical location (i.e., the State of Hawaii), (2) have similar production processes that comprise electric generation, (3) serve similar customers within their franchise territories (e.g., residential, commercial and industrial customers), (4) use similar electric grids to distribute the energy to their customers, (5) are regulated by the PUC and undergo similar rate-making processes, (6) have similar economic characteristics and (7) perform financial reporting oversight and management of the business at the consolidated level.
ASB is a federally chartered savings bank that provides a full range of banking services to individual and business customers through its branch system in Hawaii. ASB is subject to examination and comprehensive regulation by the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC), and is subject to reserve requirements established by the Board of Governors of the Federal Reserve System.
“Other” includes amounts for the holding companies (HEI and ASB Hawaii), Pacific Current and its subsidiaries, and intercompany eliminations.
Pacific Current. Pacific Current was formed in 2017 to focus on investing in non-regulated renewable energy and sustainable infrastructure in the State of Hawaii to help achieve the state’s sustainability goals. Significant investments of Pacific Current made through its subsidiaries, Hamakua Energy, Mauo, Kaʻieʻie Waho, and Mahipapa include:
Hamakua power plant. In 2017, Hamakua Energy acquired Hamakua Energy Partners, L.P.’s 60-MW combined cycle power plant and other assets from affiliates of ArcLight Capital Partners, a private equity firm. The plant sells all the power it produces to Hawaii Electric Light under an existing power purchase agreement (PPA) that expires in 2030.
Solar-plus-storage power purchase agreement. In 2018, Mauo executed definitive agreements to acquire a solar-plus-storage PPA for a multi-site, commercial-scale project that provides 8.1 MW of solar capacity and 42.6 megawatt-hours (MWh) of storage capacity on the islands of Maui and Oahu. The PPA has a 15-year term with a customer option to extend for an additional five years.
6-MW photovoltaic system. In 2020, Kaʻieʻie Waho acquired a 6-MW photovoltaic system situated on 20 acres of land on the island of Kauai. Kauai Island Utility Cooperative purchases all of the power generated by the system under a PPA that expires in 2033.
7.5-MW renewable, firm dispatchable closed-loop biomass-to-energy facility. In July 2022, Mahipapa acquired a 7.5-MW renewable, firm dispatchable closed-loop biomass-to-energy facility on Kauai. Kauai Island Utility Cooperative purchases all of the power generated by the system under a PPA that expires in 2035.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Segment financial information was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Electric utility | | Bank | | Other | | Total |
| 2023 | | | | | | | |
| | | | | | | |
| | | | | | | |
| Revenues | 3,269,521 | | | 394,663 | | | 17,982 | | | 3,682,166 | |
| Depreciation and amortization | 270,195 | | | 28,491 | | | 12,111 | | | 310,797 | |
Interest income | 6,454 | | | — | | | 2,651 | | | 9,105 | |
| Interest expense, net | 86,140 | | | 82,797 | | | 39,392 | | | 208,329 | |
| Income (loss) before income taxes | 247,140 | | | 63,401 | | | (64,840) | | | 245,701 | |
| Income taxes (benefit) | 51,193 | | | 10,039 | | | (16,659) | | | 44,573 | |
| Net income (loss) | 195,947 | | | 53,362 | | | (48,181) | | | 201,128 | |
| Preferred stock dividends of subsidiaries | 1,995 | | | — | | | (105) | | | 1,890 | |
| Net income (loss) for common stock | 193,952 | | | 53,362 | | | (48,076) | | | 199,238 | |
Capital expenditures1 | 438,775 | | | 5,569 | | | 3,952 | | | 448,296 | |
| Assets (at December 31, 2023) | 7,283,554 | | | 9,673,192 | | | 287,075 | | | 17,243,821 | |
| 2022 | | | | | | | |
| Revenues from external customers | $ | 3,408,583 | | | $ | 321,068 | | | $ | 12,334 | | | $ | 3,741,985 | |
| Intersegment revenues (eliminations) | 4 | | | — | | | (4) | | | — | |
| Revenues | 3,408,587 | | | 321,068 | | | 12,330 | | | 3,741,985 | |
| Depreciation and amortization | 260,744 | | | 24,436 | | | 9,661 | | | 294,841 | |
| Interest expense, net | 76,416 | | | 13,301 | | | 26,986 | | | 116,703 | |
| Income (loss) before income taxes | 240,600 | | | 102,241 | | | (38,646) | | | 304,195 | |
| Income taxes (benefit) | 49,676 | | | 22,252 | | | (10,761) | | | 61,167 | |
| Net income (loss) | 190,924 | | | 79,989 | | | (27,885) | | | 243,028 | |
| Preferred stock dividends of subsidiaries | 1,995 | | | — | | | (105) | | | 1,890 | |
| Net income (loss) for common stock | 188,929 | | | 79,989 | | | (27,780) | | | 241,138 | |
Capital expenditures1 | 329,457 | | | 4,704 | | | 9,876 | | | 344,037 | |
| Assets (at December 31, 2022) | 6,597,467 | | | 9,545,970 | | | 140,807 | | | 16,284,244 | |
| 2021 | | | | | | | |
| Revenues from external customers | $ | 2,539,589 | | | $ | 306,398 | | | $ | 4,392 | | | $ | 2,850,379 | |
| Intersegment revenues (eliminations) | 47 | | | — | | | (47) | | | — | |
| Revenues | 2,539,636 | | | 306,398 | | | 4,345 | | | 2,850,379 | |
| Depreciation and amortization | 251,206 | | | 21,124 | | | 6,372 | | | 278,702 | |
| Interest expense, net | 72,447 | | | 5,040 | | | 21,916 | | | 99,403 | |
| Income (loss) before income taxes | 223,785 | | | 130,559 | | | (43,481) | | | 310,863 | |
| Income taxes (benefit) | 44,148 | | | 29,325 | | | (10,666) | | | 62,807 | |
| Net income (loss) | 179,637 | | | 101,234 | | | (32,815) | | | 248,056 | |
| Preferred stock dividends of subsidiaries | 1,995 | | | — | | | (105) | | | 1,890 | |
| Net income (loss) for common stock | 177,642 | | | 101,234 | | | (32,710) | | | 246,166 | |
Capital expenditures1 | 292,000 | | | 11,131 | | | 11,393 | | | 314,524 | |
| Assets (at December 31, 2021) | 6,491,625 | | | 9,181,603 | | | 149,409 | | | 15,822,637 | |
1 Contributions in aid of construction balances are included in capital expenditures.
Intercompany electricity sales of the Utilities to ASB 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.
Hamakua Energy’s sales to Hawaii Electric Light (a regulated affiliate) are eliminated in consolidation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | |
Note 4 · Electric utility segment |
Regulatory assets and liabilities. The Utilities record regulatory assets and liabilities when they are deemed probable of recovery from or refund to customers. Determining probability requires significant judgment by management and includes considerations of regulatory orders, proposed regulatory treatment, strength of the applications and other available evidence. Regulatory assets represent deferred costs and accrued decoupling revenues which are expected to be recovered through rates over PUC-authorized periods. Generally, the Utilities do not earn a return on their regulatory assets; however, they have been allowed to recover interest on certain regulatory assets and to include certain regulatory assets in rate base. Regulatory liabilities represent amounts included in rates and collected from ratepayers for costs expected to be incurred in the future, or amounts collected in excess of costs incurred that are refundable to customers. For example, the regulatory liability for cost of removal in excess of salvage value represents amounts that have been collected from ratepayers for costs that are expected to be incurred in the future to retire a utility plant. Generally, the Utilities include regulatory liabilities in rate base or are required to apply interest to certain regulatory liabilities. In the table below, noted in parentheses are the original PUC authorized amortization or recovery periods and, if different, the remaining amortization or recovery periods as of December 31, 2023 are noted.
Regulatory assets were as follows:
| | | | | | | | | | | |
| December 31 | 2023 | | 2022 |
| (in thousands) | | | |
| Retirement benefit plans (balance primarily varies with plans’ funded statuses) | $ | 70,616 | | | $ | 69,919 | |
Income taxes (2-36 years) | 81,620 | | | 82,583 | |
Decoupling revenue balancing account and RAM (1-2 years) | 19,002 | | | 14,290 | |
Right-Of-Use (ROU) assets (21 years remaining) | 9,067 | | | 7,711 | |
Vacation earned, but not yet taken (1 year) | 14,585 | | | 14,109 | |
| COVID-19 related costs (to be determined by PUC) | 8,715 | | | 11,403 | |
| | | |
ECRC/PPAC (1 year) | 24,691 | | | 20,369 | |
Maui windstorm and wildfire related costs (to be determined by PUC) | 14,692 | | | — | |
Retirement of generating units (10 years) | 29,930 | | | — | |
Other (1-36 years remaining) | 21,886 | | | 22,129 | |
| Total regulatory assets | $ | 294,804 | | | $ | 242,513 | |
| Included in: | | | |
| Current assets | $ | 68,453 | | | $ | 52,273 | |
| Long-term assets | 226,351 | | | 190,240 | |
| Total regulatory assets | $ | 294,804 | | | $ | 242,513 | |
Regulatory liabilities were as follows:
| | | | | | | | | | | |
| December 31 | 2023 | | 2022 |
| (in thousands) | | | |
Cost of removal in excess of salvage value (1-79 years) | $ | 591,298 | | | $ | 577,985 | |
Income taxes (2-36 years) | 303,225 | | | 316,947 | |
Decoupling revenue balancing account and RAM (1-2 years) | 5,995 | | | 10,426 | |
Retirement benefit plans (balance primarily varies with plans’ funded statuses) | 171,421 | | | 81,950 | |
Solar tax credits (1-18 years) | 49,507 | | | 50,240 | |
ECRC/PPAC (1 year) | 15,169 | | | 4,034 | |
Enterprise Resource Planning (ERP) Benefits (2 years) | 12,409 | | | 10,491 | |
Other (1 year remaining) | 1,666 | | | 3,577 | |
| Total regulatory liabilities | $ | 1,150,690 | | | $ | 1,055,650 | |
| Included in: | | | |
| Current liabilities | $ | 36,559 | | | $ | 31,475 | |
| Long-term liabilities | 1,114,131 | | | 1,024,175 | |
| Total regulatory liabilities | $ | 1,150,690 | | | $ | 1,055,650 | |
The regulatory asset and liability relating to retirement benefit plans was recorded as a result of pension and OPEB tracking mechanisms adopted by the PUC in rate case decisions for the Utilities in 2007 (see Note 11).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Regulatory asset related to retirement of Honolulu generating units 8 and 9. On December 22, 2023, the PUC issued a decision and order approving the Utilities’ request to establish a regulatory asset for the remaining net book value of the fossil fuel generating units Honolulu units 8 and 9 assets that retired on December 31, 2023, and amortize the regulatory asset over approximately nine years. The PUC also ruled that the Utilities may seek to include the regulatory asset in rate base and seek to recover the amortization expense and a return on the unamortized balance of the regulatory asset in the next rate case or rate re-setting proceeding. As of December 31, 2023, the Utilities have recorded $29.9 million in regulatory assets for the remaining net book value of Honolulu generating units 8 and 9.
Regulatory assets for Maui windstorm and wildfires related costs. On December 27, 2023, the PUC issued an order authorizing deferred accounting treatment for the Utilities’ incremental non-labor expenses under specific cost categories related to the August 2023 Maui windstorm and wildfires. The deferred accounting treatment applies to certain non-labor expenses incurred from August 8, 2023 through December 31, 2024 that are not already a part of base rates. The approval pertains to deferred cost treatment. The requests for cost recovery of deferred costs will be the subject of a separate application at which time the PUC will evaluate whether such costs were prudently incurred and reasonable and determine the extent to which such costs will be eligible for recovery, and the period over which recovery will occur. If the PUC denies recovery of any deferred costs, such costs would be charged to expense in the period that those costs are no longer considered probable of recovery.
As of December 31, 2023, the Utilities have recorded $14.7 million in regulatory assets for the incremental costs incurred related to the Maui windstorm and wildfires event.
Regulatory liabilities for Enterprise Resource Planning/Enterprise Asset Management (ERP/EAM). The ERP/EAM Implementation Project went live in October 2018. Hawaii Electric Light and Hawaiian Electric began to incorporate their portion of the deferred project costs in rate base and started the amortization over a 12-year period in January 2020 and November 2020, respectively. The PUC required a minimum of $246 million ERP/EAM project-related benefit to be delivered to customers over the system’s 12-year service life.
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 other operation and maintenance (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 part of the settlement agreement approved in the Hawaiian Electric 2020 test year rate case, the regulatory liability for Hawaiian Electric will be amortized over five years, beginning in November 2020, and the O&M benefits for Hawaiian Electric was considered flowed through to customers. On December 29, 2023, the PUC approved the Utilities’ proposal to accelerate flow-through of the ERP benefits savings currently tracked in regulatory liability accounts to Hawaii Electric Light and Maui Electric customers as part of the customer dividend in the ARA, to mitigate the impact of the Utilities’ recovery of the COVID-19 related costs on customers. See “Regulatory assets for COVID-19 related costs” section below.
As of December 31, 2023, the Utilities’ regulatory liability was $12.4 million ($2.6 million for Hawaiian Electric, $3.9 million for Hawaii Electric Light and $5.9 million for Maui Electric) for the O&M expense savings that are being amortized or to be included in future rates. At the PUC’s direction, the Utilities have been filing Annual Enterprise System Benefits (AESB) report on the achieved benefits savings. The most recent AESB report was filed on February 13, 2024 for the period January 1 through December 31, 2023.
Regulatory assets for COVID-19 related costs. On December 29, 2023, the PUC issued a decision and order (December 2023 D&O) approving the Utilities’ request to recover the COVID-19 related deferred costs up to $8.8 million evenly over a three-year recovery period from 2024 through 2026. Following the Utilities’ motion for clarification or in the alternative partial reconsideration of the December 2023 D&O, on February 27, 2024, the PUC issued an order clarifying the December 2023 D&O and approving, among other things, the Utilities’ requests to base the recovery on the recorded balances as of December 31, 2023 and to modify the recovery period to begin June 1, 2024 and end May 31, 2027. As of December 31, 2023, the Utilities have recorded $8.7 million in regulatory assets for deferral of COVID-19 related costs.
Regulatory assets for suspension of disconnections related costs. Based on the circumstances related to the Maui windstorm and wildfires, on August 31, 2023 and subsequently on October 13, 2023, the PUC issued orders directing all regulated utilities located on, or providing utility service on Maui, including the Utilities, among other things, (i) to suspend disconnections of services and associated disconnection fees beginning from August 8, 2023, through the end of the emergency relief period established by the Governor’s Emergency Proclamations related to the Maui windstorm and wildfires, which currently continues through March 5, 2024 (Suspension Period); (ii) to suspend any and all rules and provisions of individual utility tariffs that prevent or condition re-connection of disconnected customers during the Suspension Period; (iii) not to charge customers interest on past due payments or impose any late payment fees through the Suspension Period; (iv) to establish
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
regulatory assets to record costs directly related to the suspension of disconnections, and to record receipt of governmental aid and donation-based aid, loans or grants, and/or all other assistance measures, and any cost savings realized; and (v) to file a notice with the PUC regarding any upcoming application or other request pursuant to HRS Sections 269-16.3, -17, -17.5, -18, -19, or -19.5 and/or regarding any significant financial change to the Maui utility, at least 60 days prior to filing such application or other request with the PUC. The orders also discourage the filing of emergency or general rate increases in response to the emergency situation. In future proceedings, the PUC will assess the utility’s request for recovery of these regulatory assets including whether it is reasonable and necessary, the appropriate period of recovery for the approved amount of regulatory assets, any amount of carrying costs thereon, any savings directly attributable to suspension of disconnects, and other related matters. As of December 31, 2023, the Utilities have recorded $0.6 million in regulatory assets for the incremental costs incurred due to the suspension of disconnections.
Major customers. The Utilities received 12% ($376 million), 12% ($393 million) and 11% ($267 million) of their operating revenues from the sale of electricity to various federal government agencies in 2023, 2022 and 2021, respectively.
Cumulative preferred stock. The following series of cumulative preferred stock are redeemable only at the option of the respective company at the following prices in the event of voluntary liquidation or redemption:
| | | | | | | | | | | |
| December 31, 2023 | Voluntary
liquidation price | | Redemption
price |
| Series | | | |
| C, D, E, H, J and K (Hawaiian Electric) | $ | 20 | | | $ | 21 | |
| I (Hawaiian Electric) | 20 | | | 20 | |
| G (Hawaii Electric Light) | 100 | | | 100 | |
| H (Maui Electric) | 100 | | | 100 | |
Hawaiian Electric is obligated to make dividend, redemption and liquidation payments on the preferred stock of each of its subsidiaries if the respective subsidiary is unable to make such payments, but this obligation is subordinated to Hawaiian Electric’s obligation to make payments on its own preferred stock.
Related-party transactions. HEI charged the Utilities $5.2 million, $5.6 million and $5.2 million for general management and administrative services in 2023, 2022 and 2021, respectively. The amounts charged by HEI to its subsidiaries for services provided by HEI employees are allocated primarily on the basis of time expended in providing such services.
In 2023, 2022 and 2021, Hamakua Energy (an indirect subsidiary of HEI) sold energy and capacity to Hawaii Electric Light (subsidiary of Hawaiian Electric and indirect subsidiary of HEI) under a power purchase agreement (PPA) in the amount of $71 million, $66 million and $53 million, respectively.
Hawaiian Electric’s short-term borrowings from HEI totaled nil at December 31, 2023 and 2022. Borrowings among the Utilities are eliminated in consolidation. Interest charged by HEI to Hawaiian Electric was not material for the years ended December 31, 2023 and 2022.
Unconsolidated variable interest entities.
Power purchase agreements. As of December 31, 2023, the Utilities had four PPAs for firm capacity 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) and Hamakua Energy by reason of the provisions of the PPA that the Utilities have with the two IPPs. However, management has concluded that the Utilities are not the primary beneficiary of Kalaeloa and Hamakua Energy because the Utilities do not have the power to direct the activities that most significantly impact the two 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 and Hamakua Energy in its consolidated financial statements. However, Hamakua Energy is an indirect subsidiary of Pacific Current, and is consolidated in HEI’s 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. The consolidation of any significant IPP could have a material effect on the 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 legal, regulatory and environmental proceedings. Excluding the potential liabilities from the Maui windstorm and wildfires, 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. The Utilities record loss contingencies when the outcome of such proceedings is probable and when the amount of the loss is reasonably estimable. The Utilities also evaluate, on a continuous basis, whether developments in such proceedings could cause these assessments or estimates to change. Assessment regarding future events is required when evaluating whether a loss is probable or reasonably possible, and as to whether such loss or a range of such loss is estimable. Management is often unable to estimate a reasonably possible loss, or a range of loss, particularly in cases in which: (i). the damages sought are indeterminate or the basis for the damages claimed is not clear; (ii) proceedings are in early stages; (iii) discovery is not complete; (iv) the matters involve novel or unsettled legal theories; (v) significant facts are in dispute; (vi) a large number of parties are represented (including circumstances in which it is uncertain how liability, if any, would be shared among multiple defendants); (vii) a lower court or administrative agency’s decision or ruling has been appealed; and/or (vii) a wide range of potential outcomes exist. In such cases, there may be considerable uncertainty regarding the timing or ultimate resolution, including any possible loss, fine, penalty, or business impact.
August 2023 Maui windstorm and wildfires. See Note 2 of the Consolidated Financial Statements.
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 the termination of the original PPA. Following the termination, Hu Honua filed a lawsuit in the U.S. District Court for the District of Hawaii. The parties reached a settlement that was conditioned on the PUC’s timely, non-appealable final approval of an amended and restated PPA dated May 9, 2017. On May 23, 2022, following a contested case hearing, the PUC issued a decision and order denying the amended and restated PPA, based on, among other things, findings that: (1) the project will result in significant greenhouse gas (GHG) emissions, (2) Hu Honua’s proposed carbon commitment to sequester more GHG emissions than produced by the project are speculative and unsupported, (3) the amended and restated PPA is likely to result in high costs to customers through its relatively high cost of electricity and through potential displacement of other, lower cost, renewable resources, and (4) based on the foregoing, approving the amended and restated PPA is not prudent or in the public interest. On June 2, 2022, Hawaii Electric Light and Hu Honua filed their separate motions for reconsideration, which were denied by the PUC on June 24, 2022. On June 29, 2022, Hu Honua filed its notice of appeal to the Hawaii Supreme Court of the PUC’s May 23, 2022 decision and order denying the amended and restated PPA. On March 13, 2023, the Hawaii Supreme Court affirmed the PUC’s decision denying the amended and restated PPA between Hu Honua and Hawaii Electric Light and entered its judgment on appeal on April 12, 2023. On June 7, 2023, Hu Honua filed a status report with the U.S. District Court for the District of Hawaii, stating, among other things, that because settlement of the underlying federal lawsuit was contingent on timely, non-appealable, final approval of the amended and restated PPA by the PUC, that the Hawaii Supreme Court’s opinion made fulfillment of the condition impossible, and therefore the settlement agreement between the Hawaiian Electric defendants (HEI, Hawaiian Electric, and Hawaii Electric Light) and Hu Honua is null and void and of no further effect. On November 16, 2023, Hu Honua filed its Motion for Leave to Filed Third Amended and Supplemental Complaint and for Permissive Joinder with the U.S. District Court for the District of Hawaii, asking the court to grant it leave to file a Third Amended and Supplemental Complaint, which would amend its claims and add three new proposed defendants. The hearing on this motion took place on February 14, 2024 and a decision has not been made yet.
Molokai New Energy Partners (MNEP). In July 2018, the PUC approved Maui Electric’s PPA with MNEP to purchase solar energy from a photovoltaic (PV) plus battery storage project. The 4.88 MW PV and 3 MW Battery Energy Storage System (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. On June 3, 2020, Maui Electric provided a Notice of Default and Termination of the PPA to MNEP terminating the PPA with an effective date of July 10, 2020. Thereafter, MNEP filed an amended complaint to include claims relating to the termination and Hawaiian Electric filed its answer to the amended complaint on September 11, 2020, disputing the facts presented by MNEP and all claims within the original and amended complaint. Currently, the discovery phase is ongoing.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
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 and left the property in 1987. The Environmental Protection Agency (EPA) has since identified environmental impacts in the subsurface soil at the Site. In cooperation with the State of Hawaii Department of Health 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 $2.6 million as of December 31, 2023, representing the probable and reasonably estimable undiscounted cost for remediation of the Site and the adjacent parcel based on presently available information; 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 under CERCLA 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 December 31, 2023, the reserve account balance recorded by Hawaiian Electric to address the PCB contamination was $9.6 million. The reserve balance represents the probable and reasonably estimable undiscounted cost for the onshore and offshore investigation and remediation. The final remediation costs will depend on the actual onshore and offshore cleanup costs.
Kapolei pipeline. James Campbell Company (JCC) through its wholly owned subsidiary, Aina Nui Corporation discovered petroleum contamination in ground water during construction of a project in Kapolei in late 2022 and incurred approximately $0.8 million in remediation costs. JCC made a joint demand for these costs in June 2023 to the two companies, including Hawaiian Electric, that have pipelines in the area of the contamination. This demand was updated on September 1, 2023 to $1.2 million to incorporate additional costs. It has not been determined whether the nature of the contamination is consistent with what was in the Utilities’ pipelines or is wholly or partially the responsibility of the other pipeline owner. At this time, the parties are engaging in settlement discussions and the Utilities are unable to determine the ultimate outcome or the amount of any possible loss.
Endangered Species Act. The Utilities received a sixty-day notice from the American Bird Conservancy and Conservation Council for Hawaii in early February. The sixty-day notice is the pre-cursor to a citizen’s suit under the Endangered Species Act. The letter alleges that the Utilities are out of compliance with the Act due to alleged impacts on endangered seabirds caused by the Utilities’ powerlines and street and facility lights on Maui and Lanai. The Utilities are already in the process of drafting a Habitat Conservation Plan and will be applying for associated state and federal permits. The letter asserts that the scope of the plan should be broader and that additional interim measures are required while the plan and permits are pending. At this time, the Utilities are unable to determine the ultimate outcome or the amount of any potential loss.
Commitments.
Purchase commitments. As of December 31, 2023, the Utilities’ estimated future minimum payments pursuant to purchase obligations related to material contracts for the following five years and thereafter are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments Due | |
| (in millions) | 2024 | | 2025 | | 2026 | | 2027 | | 2028 | Thereafter |
| | | | | | | | | | |
Firm capacity PPAs | $ | 74 | | | $ | 74 | | | $ | 74 | | | $ | 74 | | | $ | 70 | | $ | 295 | |
Renewable dispatchable generation plus energy storage and energy storage PPAs | 49 | | | 49 | | | 49 | | | 49 | | | 49 | | 740 | |
Fuel transportation | 7 | | | 7 | | | 7 | | | 2 | | | — | | — | |
Total | $ | 130 | | | $ | 130 | | | $ | 130 | | | $ | 125 | | | $ | 119 | | $ | 1,035 | |
Firm capacity PPAs. The Utilities are committed to purchase from four firm capacity PPAs for a total of 362.2 megawatts (MW) of firm capacity, which expire at various dates through 2033.
Renewable dispatchable generation plug energy storage and energy storage PPAs. The Utilities also have long-term renewable PPAs with IPPs from the issuances of Stage 1 and 2 request for proposals in 2018 and 2019, respectively. The Utilities have additional annual payments of $40 million when three projects began commercial operations in 2023. As of
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2023, a total of four projects provides the Utilities capacity of 105 MW, with 985 MWh batteries. The contracts expire at various dates through 2048.
Fuel transportation lease contract. The Utilities entered into an inter-island fuel transportation contract, expiring in 2027.
The PUC has approved PPACs for the Utilities to recover purchased power capacity, operation and maintenance (O&M) and other non-energy costs related to all aforementioned PPAs. In addition, the Utilities are able to recover fuel component of the energy charges for firm capacity PPAs as well as costs associated to fuel transportation through ECRC.
In general, the Utilities base their payments under the PPAs upon available capacity and actual energy supplied and they are generally not required to make payments for capacity if the contracted capacity is not available, and payments are reduced, under certain conditions, if available capacity drops below contracted levels. In general, the payment rates for capacity have been predetermined for the terms of the agreements. The Utilities do not operate, or participate in the operation of, any of the facilities that provide power under the agreements. Title to the facilities does not pass to Hawaiian Electric or its subsidiaries upon expiration of the agreements, and the agreements do not contain bargain purchase options for the facilities.
Purchases from all IPPs were as follows:
| | | | | | | | | | | | | | | | | | | | |
| Years ended December 31 | | 2023 | | 2022 | | 2021 |
| (in millions) | | | | | | |
| Kalaeloa | | $ | 298 | | | $ | 342 | | | $ | 204 | |
AES Hawaii1 | | — | | | 82 | | | 130 | |
| HPOWER | | 70 | | | 73 | | | 70 | |
Hamakua Energy | | 71 | | | 66 | | | 53 | |
| Puna Geothermal Venture | | 38 | | | 48 | | | 29 | |
| | | | | | |
| Wind IPPs | | 125 | | | 119 | | | 124 | |
| Solar IPPs | | 72 | | | 57 | | | 50 | |
Other IPPs2 | | (2) | | | 7 | | | 10 | |
| Total IPPs | | $ | 672 | | | $ | 794 | | | $ | 670 | |
1 The term of the PPA with AES Hawaii expired on September 1, 2022 and the AES Hawaii coal plant ceased operations.
2 Includes hydro power and other PPAs.
Utility projects. Many public utility projects require PUC approval and various permits from other governmental agencies. Difficulties in obtaining, or the inability to obtain, the necessary approvals or permits or community support can result in significantly increased project costs or even cancellation of projects. In the event a project does not proceed, or if it becomes probable the PUC will disallow cost recovery for all or part of a project, or if PUC-imposed caps on project costs are expected to be exceeded, project costs may need to be written off in amounts that could result in significant reductions in Hawaiian Electric’s consolidated net income.
Waena Switchyard/Synchronous Condenser Project. In October 2020, to support efforts to increase renewable energy generation and reduce fossil fuel consumption by deactivating current generating units, Maui Electric filed a PUC application to construct a switchyard, which includes the extension of two 69 kV transmission lines and the relocation of another 69 kV transmission line; and the conversion of two generating units to synchronous condensers at Kahului Power Plant in central Maui. In November 2021, the PUC approved Maui Electric’s request to commit funds estimated at $38.8 million for the project, and to recover capital expenditures for the project under Exceptional Project Recovery Mechanism (EPRM) not to exceed $38.8 million, which shall be further reduced to reflect the total project cost exclusive of overhead costs not directly attributable to the project. The Waena Switchyard was placed in service on October 25, 2023. The conversion of the two generating units will be performed after the retirement of Kahului Power Plant Units 3 and 4, which is targeted for the end of 2027.
In approving the project, the PUC recognized that the project will facilitate the ability to accommodate increased renewable energy, as contemplated under the EPRM guidelines. As of December 31, 2023, $24.7 million has been incurred for the project.
Waena Battery Energy Storage System Project. In September 2020, Maui Electric filed a PUC application to purchase and install a 40 MW BESS at its Waena Site in Central Maui. In December 2023, the PUC approved Maui Electric’s request to commit funds estimated at $82.1 million, for the purchase and installation of the project, and to recover costs for the project under EPRM. Project costs incurred as of December 31, 2023 amount to $0.6 million.
Climate Adaptation Transmission and Distribution Resilience Program. The Utilities maintains that improving resiliency of the electric grid is an urgent matter and recognizes that climate change is making Hawaii increasingly vulnerable to sever weather events. On January 31, 2024, the PUC approved the Utilities’ request to commit an estimated $189.7 million in funds for the Climate Adaptation Transmission and Distribution Resilience Program, over a project period of five years. The project is to focus on, among other things, strengthening transmission lines and circuits that serve critical loads, enable
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
substation to proactively de-energize before natural disasters and system hardening in wildfire risk areas to prevent ignition and to enable quicker response.
The project costs to be recovered through EPRM is subject to a cap of $95 million and any amount in excess will be subject to the PUC’s further review. Additionally, on August 29, 2023, the U.S. Department of Energy notified the Utilities that their application for $95 million in federal funds under the Infrastructure Investment and Jobs Act (IIJA) has been recommended for award, subject to negotiation of the terms of financial assistance.
Asset retirement obligations. Asset retirement obligations (AROs) represent legal obligations associated with the retirement of certain tangible long-lived assets, are measured as the present value of the projected costs for the future retirement of specific assets and are recognized in the period in which the liability is incurred if a reasonable estimate of fair value can be made. The Utilities’ recognition of AROs have no impact on their earnings. The cost of the AROs is recovered over the life of the asset through depreciation. AROs recognized by the Utilities relate to legal obligations associated with the retirement of plant and equipment, including removal of asbestos and other hazardous materials.
The Utilities recorded AROs related to: 1) the removal of retired generating units, certain types of transformers and underground storage tanks; 2) the abandonment of fuel pipelines, underground injection and supply wells; and 3) the removal of equipment and restoration of leased land used in connection with Utility-owned renewable and dispatchable generation facilities.
Changes to the ARO liability included in “Other liabilities” on Hawaiian Electric’s balance sheet were as follows:
| | | | | | | | | | | |
| (in thousands) | 2023 | | 2022 |
| Balance, January 1 | $ | 11,548 | | | $ | 11,110 | |
| Accretion expense | 463 | | | 442 | |
| Liabilities incurred | — | | | — | |
| Liabilities settled | (2) | | | (4) | |
| | | |
| Balance, December 31 | $ | 12,009 | | | $ | 11,548 | |
The Utilities have not recorded AROs for assets that are expected to operate indefinitely or where the Utilities cannot estimate a settlement date (or range of potential settlement dates). As such, ARO liabilities are not recorded for certain asset retirement activities, including various Utilities-owned generating facilities and certain electric transmission, distribution and telecommunications assets resulting from easements over property not owned by the Utilities.
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. Decoupling delinks the utility’s revenues from the utility’s sales, removing the disincentive to promote energy efficiency and accept more renewable energy. Decoupling continues under the PBR Framework.
Performance-based regulation framework. On December 23, 2020, the PUC issued a decision and order (PBR D&O) establishing the PBR Framework to govern the Utilities. The PBR Framework incorporates an annual revenue adjustment (ARA) and a suite of new regulatory mechanisms in addition to previously established regulatory mechanisms. Under the PBR Framework, the decoupling mechanism (i.e., the Revenue Balancing Account (RBA)) established by the previous regulatory framework will continue. The existing cost recovery mechanisms continued as previously implemented (e.g., the Energy Cost Recovery Clause, Purchased Power Adjustment Clause (PPAC), Demand-Side Management surcharge, Renewable Energy Infrastructure Program, Demand Response Adjustment Clause, Pension and Other Post-Employment Benefits (OPEB) tracking mechanisms). In addition to annual revenues provided by the ARA, the Utilities may seek relief for extraordinary projects or programs through the Exceptional Project Recovery Mechanism (EPRM) (formerly known as the Major Project Interim Recovery adjustment mechanism) and earn financial rewards for exemplary performance as provided through a portfolio of Performance Incentive Mechanisms (PIMs) and Shared Savings Mechanisms (SSMs). The PBR Framework incorporates a variety of additional performance mechanisms, including Scorecards, Reported Metrics, and an expedited Pilot Process. The PBR Framework also contains a number of safeguards, including a symmetric Earnings Sharing Mechanism (ESM) which protects the Utilities and customers from excessive earnings or losses, as measured by the Utilities’ achieved rate-making ROACE and a Re-Opener mechanism, under which the PUC will open an examination, at its discretion, to determine if adjustments or modifications to specific PBR mechanisms are appropriate. The PBR Framework became fully effective on June 1, 2021.
On June 17, 2022, the PUC issued a decision and order (June 2022 D&O) establishing additional PIMs under the PBR Framework for the Utilities. The June 2022 D&O approved two new PIMs, a new SSM, and extended the timeframe for an existing PIM. Specifically, the PUC approved (1) a new (penalty-only) generation-caused interruption reliability PIM, (2) a new
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(penalty/reward) interconnection requirements study PIM, (3) a new (reward-only) Collective Shared Savings Mechanism (CSSM), and (4) a modification and extension of the existing Interim Grid Services PIM (reward-only). On November 23, 2022, the PUC approved the Utilities’ proposed tariffs to implement the aforementioned PIMs with an effective date of January 1, 2023.
In addition, the June 2022 D&O instructed the Utilities to prepare and submit: a detailed fossil fuel retirement report (FF Retirement Report) outlining necessary steps to safely and reliably retire certain existing fossil fuel power plants during the first multi-year rate period (MRP); and a functional integration plan (FIP) for distributed energy resources (DER) to increase transparency into the Utilities’ plans and progress for utilizing cost-effective grid services from DERs and ensure that the necessary functionalities and requisite technologies are in place to do so. The PUC also instructed the PBR Working Group to continue its ongoing collaborative efforts to consider other potential new incentive mechanisms and to address other issues raised during the proceeding. On March 30, 2023, the PUC held a PBR Working Group coordination meeting to initiate subgroups on the Long-Term Grid Services PIM, modification/evaluation of existing PIMs, and comprehensive PBR Framework review priority topics.
In accordance with the June 2022 D&O, the Utilities filed their FIP on September 30, 2022, Long-Term Grid Services PIM proposal on July 3, 2023, and FF Retirement Report on October 13, 2023.
On October 16, 2023, the Utilities filed a request for limited suspension of the Transmission and Distribution (T&D) System Average Interruption Duration Index (SAIDI) PIM, the T&D System Average Interruption Frequency Index (SAIFI) PIM, and the target heat rate provision of Maui Electric Maui Division’s Energy Cost Recovery Clause (ECRC) tariff starting from August 8, 2023. On December 28, 2023, the PUC issued an order granting a temporary suspension of Maui Electric’s T&D SAIDI and SAIFI PIMs and Maui Electric Maui Division’s target heat rate provision from August 8, 2023 through June 30, 2024, which the tariffs became effective on January 1, 2024.
On November 3, 2023, the Utilities, Ulupono Initiative LLC, and the County of Hawaii filed a stipulation on proposed modifications to the RPS-A, Call Center, AMI Utilization, and interconnection requirements study PIM. On February 8, 2024, the PUC issued a procedural schedule to govern review of the proposals in the stipulation, which provides for a D&O on the stipulation by June 30, 2024.
On December 26, 2023, the PUC issued an order (1) confirming that the Interim Grid Services PIM will sunset on December 31, 2023, (2) extending the Interconnection Approval PIM through December 31, 2024, and (3) determining that it will continue examination of the Long-Term Grid Services PIM into 2024 as part of a broader examination that addresses barriers to the utilization of DERs to meet grid needs.
Revenue adjustment mechanism. Prior to the implementation of the PBR Framework, the revenue adjustment mechanism (RAM) was a major component of the previously established regulatory framework. The RAM was 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). Under the PBR Framework, the ARA mechanism replaced the RAM, and became effective on June 1, 2021. RAM revenue adjustments approved by the PUC in 2020 will continue to be included in the RBA provision’s target revenue and RBA rate adjustment unless modified with PUC approval.
Annual revenue adjustment mechanism. The PBR Framework established a five-year MRP during which there will be no general rate cases. Target revenues will be adjusted according to an index-driven ARA based on (i) an inflation factor, (ii) a predetermined X-factor to encompass productivity, which is set at zero, (iii) a Z-factor to account for exceptional circumstances not in the Utilities’ control and (iv) a customer dividend consisting of a negative adjustment of 0.22% of adjusted revenue requirements compounded annually and a flow through of the “pre-PBR” savings commitment from the management audit recommendations developed in a prior docket at a rate of $6.6 million per year from 2021 to 2025. The implementation of the ARA occurred on June 1, 2021.
Earnings sharing mechanism. The PBR Framework established a symmetrical ESM for achieved rate-making ROACE outside of a 300 basis points deadband above or below the current authorized ROACE of 9.5% for each of the Utilities. There is a 50/50 sharing between customers and Utilities for the achieved rate-making ROACE falling within 150 basis points outside of the deadband in either direction, and a 90/10 sharing for any further difference. A reopening or review of the PBR terms may be triggered if the Utilities credit rating outlook indicates a potential credit downgrade below investment grade status, or if its achieved rate-making ROACE enters the outer most tier of the ESM.
On August 31, 2023, the PUC issued an order temporarily suspending the ESM until further notice. The intent of the order is to address the unintended consequence of customers potentially bearing the costs associated with the Maui windstorm and wildfires through the operation of the ESM without prior PUC review.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Exceptional project recovery mechanism. Prior to the implementation of the PBR Framework, the PUC established the Major Project Interim Recovery (MPIR) adjustment mechanism and MPIR Guidelines. The MPIR mechanism provides the opportunity to recover revenues for net costs of approved eligible projects placed in service between general rate cases. In establishing the PBR Framework, the MPIR Guidelines were terminated and replaced with the EPRM Guidelines. Although the MPIR Guidelines were terminated and replaced by the EPRM Guidelines, the MPIR mechanism will continue within the PBR Framework to provide recovery of project costs previously approved for recovery under the MPIR. The established EPRM Guidelines permit the Utilities to include the full amount of approved costs in the EPRM for recovery in the first year the project goes into service, pro-rated for the portion of the year the project is in service. Deferred and O&M expense projects are also eligible for EPRM recovery under the EPRM Guidelines. EPRM recoverable costs will be limited to the lesser of actual incurred project costs or PUC-approved amounts, net of savings.
As of December 31, 2023, the Utilities annualized MPIR and EPRM revenue amounts totaled $33.1 million, including revenue taxes, for the Schofield Generating Station ($16.5 million), West Loch PV project ($3.3 million), Grid Modernization Strategy (GMS) Phase 1 project ($11.2 million for all three utilities), Waiawa UFLS project ($0.1 million) and Waena Switchyard/Synchronous project ($2.0 million) that included the 2023 return on project amount (based on approved amounts) in rate base, depreciation and incremental O&M expenses. The PUC approved the Utilities’ recovery of the annualized 2023 MPIR amounts for the Schofield Generating Station, West Loch PV, GMS Phase 1, and Waiawa UFLS projects effective June 1, 2023 and for the Waena Switchyard project effective January 1, 2024 through the RBA rate adjustment.
As of December 31, 2023, the PUC approved three EPRM applications for projects totaling $123.5 million to the extent the project costs are not included in rates. On January 31, 2024, the PUC approved one EPRM application, subject to a cap of $95 million to the extent the project costs are not included in rates. Currently, the Utilities are seeking EPRM recovery for three projects with total project costs up to $215.9 million, subject to PUC approval.
Pilot process. As part of the PBR Framework, the PUC approved a Pilot Process to foster innovation by establishing an expedited implementation process for pilots that tests new technologies, programs, business models, and other arrangements. Under the Pilot Process, the Utilities submit specific pilot proposals (Pilot Notices) that are within the scope of the approved Workplan to the PUC for their expedited review. The PUC will strive to issue an order addressing a proposed pilot within 45 days of the filing date of a Pilot Notice. If the PUC does not take affirmative action on a Pilot Notice by the end of the 45-day period, the Pilot Notice shall be considered approved as submitted. The PUC may modify the pilot as originally proposed, and the Utilities shall have 15 days to notify the PUC whether the Utilities accept the modification, propose further modification, or withdraw the Pilot Notice. The PUC may also, where necessary, suspend the Pilot Notice for further investigation.
The approved Pilot Process includes a cost recovery process that generally allows the Utilities to defer and recover total annual expenditures of approved pilot projects net of revenues, subject to an annual cap of $10 million, over 12 months beginning June 1 of the year following pilot implementation through the RBA rate adjustment, although the PUC may determine on a case-by-case basis that a particular project’s deferred costs should be amortized over a period greater than 12 months.
On February 28, 2023, the Utilities filed their annual Pilot Update report covering pilot projects that were active during 2022, including reporting on pilot projects that were initiated prior to the commencement of the Pilot Process. The Pilot Update reported on approximately $0.4 million of 2022 recorded pilot project costs including revenue taxes for the Utilities. The 2022 recorded pilot project costs were included in the Utilities’ proposed adjustments to target revenue in the 2023 spring revenue report filed on March 28, 2023.
On March 22, 2023, the PUC issued an order temporarily suspending the filing of Pilot Notices, pending a stakeholder meeting which was convened on June 15, 2023 to discuss potential improvements to the Pilot Process.
On July 28, 2023, the PUC issued an order providing additional guidance on the Pilot Process, specifying expectations for future Pilot Notices submitted pursuant to the Pilot Process. The order lifted the temporary suspension on submitting Pilot Notices and the Utilities may file Pilot Notices consistent with the approved Workplan.
Performance incentive mechanisms. The PUC has established the following PIMs and SSMs: (1) Service Quality performance incentives, (2) Phase 1 Request for proposal (RFP) PIM for procurement of low-cost renewable energy, (3) Phase 2 RFP PIMs for generation and generation plus storage project, and grid services and standalone storage, (4) PIMs established in the PBR D&O and (5) PIMs and a SSM established in the June 2022 D&O.
•Service Quality performance incentives (ongoing). Service Quality performance incentives are measured on a calendar-year basis. The PIM tariff requires the performance targets, deadbands and the amount of maximum financial incentives used to determine the PIM financial incentive levels for each of the PIMs to remain constant in interim periods, unless otherwise amended by order of the PUC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
•Service Reliability Performance measured by Transmission and Distribution-caused 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 $6.4 million for calendar year 2023 - for both indices in total for the three utilities). On December 28, 2023, the PUC issued an order granting a temporary suspension of Maui Electric’s T&D SAIDI and SAIFI PIMs from August 8, 2023 through June 30, 2024. For the 2023 evaluation period, the Utilities accrued $3.7 million in penalties.
•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 eight 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).
•Phase 1 RFP PIM. Procurement of low-cost variable renewable resources through the RFP process in 2018 is measured by comparison of the procurement price to target prices. The first portion of the incentive was earned upon PUC approval of the PPAs. Based on the seven PPAs approved in 2019, the Utilities recognized $1.7 million in 2019 with the remaining award to be recognized in the year following the in-service date of the projects prorated in proportion to the actual amount of energy utilized, which is estimated to occur from 2023 to 2025. Based on the in-service date of one project, for the 2023 evaluation period, the Utilities earned $0.1 million (for Hawaiian Electric) in rewards.
•Phase 2 RFP PIMs. The PUC order issued on October 9, 2019 establishes pricing thresholds, timelines to complete contracting, and other performance criteria for the performance incentive eligibility. The PIMs provide incentives only without penalties. On July 9, 2020, the Utilities filed two Grid Services Purchase Agreements (GSPA) for the Grid Service RFP that potentially qualify for a demand response PIM; however, details of the incentive metrics will be determined by the PUC. On September 15, 2020, the Utilities filed one PPA that qualified for a PIM incentive and on February 16, 2021, the Utilities filed one additional PPA that qualified for a declining PIM incentive. The PUC approved two PPAs in September 2021 and November 2021, and two GSPAs on December 31, 2020. Based on the two approved PPAs, the Utilities recognized $0.1 million in rewards in 2021. In December 2022 and March 2023, these two PPAs were terminated or declared null and void.
•The PUC previously established the following two PIMs in its PBR D&O, which were approved in an order issued on March 23, 2021 and became effective on June 1, 2021. In its June 2022 D&O, the PUC modified and extended the Interim Grid Services PIM through December 31, 2023.
•Renewable portfolio standard (RPS) - A PIM that provides a financial reward for accelerating the achievement of RPS goals. The Utilities may earn a reward for the amount of system generation above the interpolated statutory RPS goal at $20/MWh in 2021 and 2022, $15/MWh in 2023, and $10/MWh for the remainder of the MRP. Penalties are already prescribed in the RPS as $20/MWh for failing to meet RPS targets in 2030, 2040 and 2045. The evaluation period commenced on January 1, 2021. For the 2023 evaluation period, the Utilities accrued $0.4 million in rewards.
•Interim Grid Services - A PIM that provides financial rewards on a $/kW basis for the acquisition of eligible grid services. The June 2022 D&O increased the incentive rate for the acquisition of load reduction grid services. During the PIM performance period, newly acquired committed capacity in the Oahu Scheduled Dispatch Program (SDP), the Oahu Fast DR program (up to the 7 MW cap), and the Maui SDP program shall qualify for the incentive. The Utilities can earn a maximum reward of $1.5 million from 2021 through 2023. For the 2023 evaluation period, the Utilities accrued $1.1 million in rewards.
•The PUC also previously established the following three PIMs in its PBR D&O, which were approved by the PUC on May 17, 2021 and became effective on June 1, 2021.
•Interconnection Approval PIM that provides financial rewards and penalties for interconnection times for DER systems <100 kW in size. The Utilities can earn a total annual maximum reward of $3.0 million or a total annual maximum penalty of $0.9 million. For the 2023 evaluation period, the Utilities accrued $3.0 million in rewards.
•Low-to-Moderate Income (LMI) Energy Efficiency PIM that provides financial rewards for collaboration between the Utilities and the third-party Public Benefits Fee Administrator to deliver energy savings for low- and moderate-income customers. The Utilities can earn a total annual maximum reward of $2.0 million. The PIM will initially have a duration of three years and be subject to an annual review. The evaluation period is based on Hawaii Energy’s program year with the initial evaluation year being the period of July 1, 2021 through June 30,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2022. For the 2022 program year (July 1, 2022 through June 30, 2023), the Utilities did not accrue any rewards pending receipt of verified results.
•Advanced Metering Infrastructure Utilization PIM that provides financial rewards for leveraging grid modernization investments and engaging customers beyond what is already planned in the Phase 1 Grid Modernization program. The Utilities can earn a total annual maximum reward of $2.0 million. The PIM will initially have a duration of three years after which it will be re-evaluated. The evaluation period commenced on January 1, 2021.
•The PUC established the following PIMs and SSM in its June 2022 D&O, which became effective on January 1, 2023.
•Generation-caused System Average Interruption Duration and Frequency Indexes PIMs to incentivize achievement of generation-based reliability targets, measured by Generation 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 3 basis points applied to the common equity share of each respective utility’s approved rate base (or maximum penalties of approximately $1 million - for both indices in total for the three utilities).
•An interconnection requirements study PIM to incentivize the timely completion of the IRS process for large-scale renewable energy projects (rewards and penalties) measured by the number of months between final model checkout and delivery of IRS results to the developer. Target performance is ten months with an asymmetrical deadband of two-months for penalties and no deadband for rewards. The maximum penalty and reward will depend on the specifics of the upcoming procurement.
•A CSSM to incentivize cost control over the Utilities’ fuel, purchased power, and EPRM/MPIR costs (collectively, non-ARA costs). This is a reward only incentive where the Utilities retain 20% share of savings when non-ARA costs in a performance year are lower than target year non-ARA costs, which are adjusted for changes in fuel prices, inflation, and system generation from a base year (calendar year 2021). The CSSM does not have a potential penalty and does not have a cap for maximum reward.
For the 2023 evaluation period, the Utilities accrued $0.9 million ($1.2 million for Hawaiian Electric, $(0.6) million for Hawaii Electric Light and $0.3 million for Maui Electric) in estimated rewards net of penalties. The net rewards related to 2023 will be reflected in the 2024 PIMs annual report and 2024 spring revenue report filings with the exception of the Phase 1 RFP PIM that was approved in the 2023 fall revenue report.
Annual review cycle. PBR D&O established an annual review cycle for revenue adjustments under the PBR Framework, including the biannual submission of the revenue reports. On December 20, 2023, the PUC approved the Utilities’ fall revenue report filed on October 31, 2023, as amended by the November 13, 2023 Addendum filing, with the exception of the proposed recovery of the COVID-19 related deferred costs and the accelerated return of the Enterprise Resource Planning system benefits savings to Hawaii Electric Light and Maui Electric customers. (See discussion under “Regulatory assets and liabilities” above. The filing reflected ARA revenues for 2023 to be collected from January 1 through December 31, 2024, as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Total |
2024 ARA revenues | | $ | 16.6 | | | $ | 4.1 | | | $ | 4.0 | | | $ | 24.7 | |
| Management Audit savings commitment | | (4.6) | | | (1.0) | | | (1.0) | | | (6.6) | |
| | | | | | | | |
| | | | | | | | |
Net 2024 ARA revenues | | $ | 12.0 | | | $ | 3.1 | | | $ | 3.0 | | | $ | 18.1 | |
Note: Columns may not foot due to rounding.
The net incremental amounts between the 2023 spring and fall revenue reports are shown in the following table. The amounts are to be collected (refunded) from January 1 through December 31, 2024 under the RBA rate tariffs, which were included in the 2023 fall revenue report filing.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Total |
Incremental RAM revenues and ARA revenues | | $ | 16.6 | | | $ | 4.1 | | | $ | 4.0 | | | $ | 24.7 | |
Annual change in accrued RBA balance through September 30, 2023 (and associated revenue taxes) | | 3.6 | | | (0.3) | | | 0.1 | | | 3.4 | |
Incremental Performance Incentive Mechanisms (net) | | 0.1 | | | — | | | — | | | 0.1 | |
Incremental MPIR/EPRM Revenue Adjustment | | — | | | — | | | 2.0 | | | 2.0 | |
| Net incremental amount to be collected under the RBA rate tariffs | | $ | 20.3 | | | $ | 3.8 | | | $ | 6.1 | | | $ | 30.2 | |
Note: Columns may not foot due to rounding.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Army privatization. On October 30, 2020, the PUC approved Hawaiian Electric’s 50-year contract with the U.S. Army to own, operate and maintain the electric distribution system serving the U.S. Army’s 12 installations on Oahu, including Schofield Barracks, Wheeler Army Airfield, Tripler Army Medical Center, Fort Shafter, and Army housing areas. On March 1, 2022, Hawaiian Electric acquired the Army’s existing distribution system for a purchase price of $14.5 million, and will pay the Army in the form of a monthly credit against the monthly utility services charge over the 50-year term of the contract. The acquisition of additional assets contemplated in the contract, with an estimated value of $4 million, is planned for the fourth quarter of 2024.
Hawaiian Electric took ownership and all responsibilities for operation and maintenance of the system on March 1, 2022 for a 50-year term after a one-year transition period. Under the contract, Hawaiian Electric will make initial capital upgrades over the first six years of the contract and replace aging infrastructure over the 50-year term. In addition to its regular monthly electricity bill, the Army will pay Hawaiian Electric a monthly utility services charge to cover operations and maintenance expenses and provide recovery for capital upgrades, capital replacements, and the existing distribution system based on a rate of return determined by the PUC for regulated utility investments, as well as depreciation expense. The PUC requires Hawaiian Electric to file regular periodic reports on the activities and investments in fulfillment of the contract and will review the major projects planned on behalf of the Army.
Consolidating financial information. Consolidating financial information for Hawaiian Electric and its subsidiaries are presented for the years ended December 31, 2023, 2022 and 2021, and as of December 31, 2023 and 2022.
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 CONSOLIDATED FINANCIAL STATEMENTS (continued)
Consolidating statement of income
Year ended December 31, 2023
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | | | Consolidating adjustments | | | Hawaiian Electric Consolidated |
| Revenues | $ | 2,356,478 | | | 464,161 | | | 448,882 | | | | | — | | | | $ | 3,269,521 | |
| Expenses | | | | | | | | | | | | |
| Fuel oil | 913,801 | | | 105,009 | | | 192,610 | | | | | — | | | | 1,211,420 | |
| Purchased power | 486,067 | | | 142,837 | | | 42,865 | | | | | — | | | | 671,769 | |
| Other operation and maintenance | 343,462 | | | 85,261 | | | 104,834 | | | | | — | | | | 533,557 | |
| Depreciation | 164,150 | | | 42,541 | | | 37,014 | | | | | — | | | | 243,705 | |
| Taxes, other than income taxes | 221,664 | | | 43,095 | | | 42,153 | | | | | — | | | | 306,912 | |
| Total expenses | 2,129,144 | | | 418,743 | | | 419,476 | | | | | — | | | | 2,967,363 | |
| Operating income | 227,334 | | | 45,418 | | | 29,406 | | | | | — | | | | 302,158 | |
| Allowance for equity funds used during construction | 11,721 | | | 1,411 | | | 2,032 | | | | | — | | | | 15,164 | |
| Equity in earnings of subsidiaries | 44,809 | | | — | | | — | | | | | (44,809) | | [2] | | — | |
| Retirement defined benefits credit (expense)—other than service costs | 3,735 | | | 667 | | | (99) | | | | | — | | | | 4,303 | |
| Interest expense and other charges, net | (62,362) | | | (11,650) | | | (12,933) | | | | | 805 | | [1] | | (86,140) | |
| Allowance for borrowed funds used during construction | 4,081 | | | 451 | | | 669 | | | | | — | | | | 5,201 | |
Interest Income | 5,113 | | | 1,071 | | | 1,075 | | | | | (805) | | [1] | | 6,454 | |
| Income before income taxes | 234,431 | | | 37,368 | | | 20,150 | | | | | (44,809) | | | | 247,140 | |
| Income taxes | 39,399 | | | 8,327 | | | 3,467 | | | | | — | | | | 51,193 | |
| Net income | 195,032 | | | 29,041 | | | 16,683 | | | | | (44,809) | | | | 195,947 | |
| Preferred stock dividends of subsidiaries | — | | | 534 | | | 381 | | | | | — | | | | 915 | |
| Net income attributable to Hawaiian Electric | 195,032 | | | 28,507 | | | 16,302 | | | | | (44,809) | | | | 195,032 | |
Preferred stock dividends of Hawaiian Electric | 1,080 | | | — | | | — | | | | | — | | | | 1,080 | |
| Net income for common stock | $ | 193,952 | | | 28,507 | | | 16,302 | | | | | (44,809) | | | | $ | 193,952 | |
Consolidating statement of comprehensive income
Year ended December 31, 2023
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | | | Consolidating
adjustments | | | Hawaiian Electric
Consolidated |
| Net income for common stock | $ | 193,952 | | | 28,507 | | | 16,302 | | | | | (44,809) | | | | $ | 193,952 | |
Other comprehensive loss, net of taxes: | | | | | | | | | | | | |
| Retirement benefit plans: | | | | | | | | | | | | |
| Net gains arising during the period, net of taxes | 10,175 | | | 961 | | | 1,275 | | | | | (2,236) | | [1] | | 10,175 | |
Adjustment for amortization of prior service credit and net gains recognized during the period in net periodic benefit cost, net of taxes | (1,983) | | | (221) | | | (266) | | | | | 487 | | [1] | | (1,983) | |
| Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes | (8,204) | | | (752) | | | (978) | | | | | 1,730 | | [1] | | (8,204) | |
Other comprehensive income (loss), net of taxes | (12) | | | (12) | | | 31 | | | | | (19) | | | | (12) | |
Comprehensive income attributable to common shareholder | $ | 193,940 | | | 28,495 | | | 16,333 | | | | | (44,828) | | | | $ | 193,940 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Consolidating statement of income
Year ended December 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | | | Consolidating adjustments | | | Hawaiian Electric Consolidated |
| Revenues | $ | 2,452,969 | | | 485,590 | | | 470,355 | | | | | (327) | | [1] | | $ | 3,408,587 | |
| Expenses | | | | | | | | | | | | |
| Fuel oil | 917,801 | | | 133,238 | | | 214,575 | | | | | — | | | | 1,265,614 | |
| Purchased power | 601,235 | | | 143,636 | | | 48,713 | | | | | — | | | | 793,584 | |
| Other operation and maintenance | 326,785 | | | 85,110 | | | 85,706 | | | | | — | | | | 497,601 | |
| Depreciation | 158,725 | | | 41,404 | | | 35,295 | | | | | — | | | | 235,424 | |
| Taxes, other than income taxes | 228,843 | | | 44,685 | | | 43,645 | | | | | — | | | | 317,173 | |
| | | | | | | | | | | | |
| Total expenses | 2,233,389 | | | 448,073 | | | 427,934 | | | | | — | | | | 3,109,396 | |
| Operating income | 219,580 | | | 37,517 | | | 42,421 | | | | | (327) | | | | 299,191 | |
Allowance for equity funds used during construction | 8,464 | | | 898 | | | 1,212 | | | | | — | | | | 10,574 | |
| Equity in earnings of subsidiaries | 47,493 | | | — | | | — | | | | | (47,493) | | [2] | | — | |
| Retirement defined benefits credit (expense)—other than service costs | 3,296 | | | 666 | | | (127) | | | | | — | | | | 3,835 | |
| Interest expense and other charges, net | (55,260) | | | (10,659) | | | (10,824) | | | | | 327 | | [1] | | (76,416) | |
| Allowance for borrowed funds used during construction | 2,769 | | | 277 | | | 370 | | | | | — | | | | 3,416 | |
| Income before income taxes | 226,342 | | | 28,699 | | | 33,052 | | | | | (47,493) | | | | 240,600 | |
| Income taxes | 36,333 | | | 6,349 | | | 6,994 | | | | | — | | | | 49,676 | |
| Net income | 190,009 | | | 22,350 | | | 26,058 | | | | | (47,493) | | | | 190,924 | |
| Preferred stock dividends of subsidiaries | — | | | 534 | | | 381 | | | | | — | | | | 915 | |
| Net income attributable to Hawaiian Electric | 190,009 | | | 21,816 | | | 25,677 | | | | | (47,493) | | | | 190,009 | |
| Preferred stock dividends of Hawaiian Electric | 1,080 | | | — | | | — | | | | | — | | | | 1,080 | |
| Net income for common stock | $ | 188,929 | | | 21,816 | | | 25,677 | | | | | (47,493) | | | | $ | 188,929 | |
Consolidating statement of comprehensive income
Year ended December 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | | | Consolidating adjustments | | | Hawaiian Electric
Consolidated |
| Net income for common stock | $ | 188,929 | | | 21,816 | | | 25,677 | | | | | (47,493) | | | | $ | 188,929 | |
Other comprehensive income, net of taxes: | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Retirement benefit plans: | | | | | | | | | | | | |
Net gains arising during the period, net of taxes | 187,193 | | | 44,411 | | | 44,386 | | | | | (88,797) | | [1] | | 187,193 | |
| Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of taxes | 18,884 | | | 2,811 | | | 2,584 | | | | | (5,395) | | [1] | | 18,884 | |
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes | (199,936) | | | (46,841) | | | (46,694) | | | | | 93,535 | | [1] | | (199,936) | |
| Other comprehensive income, net of taxes | 6,141 | | | 381 | | | 276 | | | | | (657) | | | | 6,141 | |
Comprehensive income attributable to common shareholder | $ | 195,070 | | | 22,197 | | | 25,953 | | | | | (48,150) | | | | $ | 195,070 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Consolidating statement of income
Year ended December 31, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | | | Consolidating adjustments | | | Hawaiian Electric Consolidated |
| Revenues | $ | 1,793,372 | | | 381,033 | | | 365,256 | | | | | (25) | | [1] | | $ | 2,539,636 | |
| Expenses | | | | | | | | | | | | |
| Fuel oil | 442,818 | | | 80,086 | | | 121,445 | | | | | — | | | | 644,349 | |
| Purchased power | 508,642 | | | 108,997 | | | 52,855 | | | | | — | | | | 670,494 | |
| Other operation and maintenance | 313,009 | | | 79,390 | | | 83,013 | | | | | — | | | | 475,412 | |
| Depreciation | 155,607 | | | 40,201 | | | 33,661 | | | | | — | | | | 229,469 | |
| Taxes, other than income taxes | 170,604 | | | 35,499 | | | 34,251 | | | | | — | | | | 240,354 | |
| | | | | | | | | | | | |
| Total expenses | 1,590,680 | | | 344,173 | | | 325,225 | | | | | — | | | | 2,260,078 | |
| Operating income | 202,692 | | | 36,860 | | | 40,031 | | | | | (25) | | | | 279,558 | |
Allowance for equity funds used during construction | 7,734 | | | 586 | | | 1,214 | | | | | — | | | | 9,534 | |
| Equity in earnings of subsidiaries | 45,353 | | | — | | | — | | | | | (45,353) | | [2] | | — | |
| Retirement defined benefits credit (expense)—other than service costs | 3,348 | | | 670 | | | (128) | | | | | — | | | | 3,890 | |
| Interest expense and other charges, net | (51,680) | | | (10,353) | | | (10,439) | | | | | 25 | | [1] | | (72,447) | |
Allowance for borrowed funds used during construction | 2,617 | | | 197 | | | 436 | | | | | — | | | | 3,250 | |
| Income before income taxes | 210,064 | | | 27,960 | | | 31,114 | | | | | (45,353) | | | | 223,785 | |
| Income taxes | 31,342 | | | 6,246 | | | 6,560 | | | | | — | | | | 44,148 | |
| Net income | 178,722 | | | 21,714 | | | 24,554 | | | | | (45,353) | | | | 179,637 | |
| Preferred stock dividends of subsidiaries | — | | | 534 | | | 381 | | | | | — | | | | 915 | |
Net income attributable to Hawaiian Electric | 178,722 | | | 21,180 | | | 24,173 | | | | | (45,353) | | | | 178,722 | |
| Preferred stock dividends of Hawaiian Electric | 1,080 | | | — | | | — | | | | | — | | | | 1,080 | |
| Net income for common stock | $ | 177,642 | | | 21,180 | | | 24,173 | | | | | (45,353) | | | | $ | 177,642 | |
Consolidating statement of comprehensive income
Year ended December 31, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | | | Consolidating adjustments | | | Hawaiian Electric
Consolidated |
| Net income for common stock | $ | 177,642 | | | 21,180 | | | 24,173 | | | | | (45,353) | | | | $ | 177,642 | |
Other comprehensive income (loss), net of taxes: | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Retirement benefit plans: | | | | | | | | | | | | |
Net gains arising during the period, net of taxes | 151,523 | | | 17,902 | | | 16,572 | | | | | (34,474) | | [1] | | 151,523 | |
| Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of taxes | 19,461 | | | 2,749 | | | 2,553 | | | | | (5,302) | | [1] | | 19,461 | |
Reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes | (171,345) | | | (20,585) | | | (18,898) | | | | | 39,483 | | [1] | | (171,345) | |
| Other comprehensive income (loss), net of tax benefits | (361) | | | 66 | | | 227 | | | | | (293) | | | | (361) | |
Comprehensive income attributable to common shareholder | $ | 177,281 | | | 21,246 | | | 24,400 | | | | | (45,646) | | | | $ | 177,281 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Consolidating balance sheet
December 31, 2023
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other subsidiary | | Consolidating
adjustments | | | Hawaiian Electric
Consolidated |
| Assets | | | | | | | | | | | | |
| Property, plant and equipment | | | | | | | | | | | | |
| Utility property, plant and equipment | | | | | | | | | | | | |
| Land | $ | 42,859 | | | 5,645 | | | 3,594 | | | — | | | — | | | | $ | 52,098 | |
| Plant and equipment | 5,398,281 | | | 1,459,639 | | | 1,374,890 | | | — | | | — | | | | 8,232,810 | |
| Finance lease right-of-use assets | 306,099 | | | 36,075 | | | — | | | — | | | — | | | | 342,174 | |
| Less accumulated depreciation | (1,925,660) | | | (666,581) | | | (605,273) | | | — | | | — | | | | (3,197,514) | |
| Construction in progress | 247,836 | | | 33,488 | | | 38,899 | | | — | | | — | | | | 320,223 | |
| Utility property, plant and equipment, net | 4,069,415 | | | 868,266 | | | 812,110 | | | — | | | — | | | | 5,749,791 | |
Nonutility property, plant and equipment, less accumulated depreciation | 5,295 | | | 115 | | | 1,532 | | | — | | | — | | | | 6,942 | |
| Total property, plant and equipment, net | 4,074,710 | | | 868,381 | | | 813,642 | | | — | | | — | | | | 5,756,733 | |
Investment in wholly-owned subsidiaries, at equity | 722,211 | | | — | | | — | | | — | | | (722,211) | | [2] | | — | |
| Current assets | | | | | | | | | | | | |
| Cash and cash equivalents | 89,755 | | | 10,658 | | | 5,587 | | | 77 | | | — | | | | 106,077 | |
| Restricted cash | 2,000 | | | — | | | — | | | — | | | — | | | | 2,000 | |
| Advances to affiliates | 70,500 | | | — | | | — | | | — | | | (70,500) | | [1] | | — | |
Customer accounts receivable, net | 172,747 | | | 38,216 | | | 33,346 | | | — | | | — | | | | 244,309 | |
| Accrued unbilled revenues, net | 136,367 | | | 25,102 | | | 24,175 | | | — | | | — | | | | 185,644 | |
| Other accounts receivable, net | 143,160 | | | 13,318 | | | 32,521 | | | — | | | (77,480) | | [1] | | 111,519 | |
| Fuel oil stock, at average cost | 108,228 | | | 17,968 | | | 22,041 | | | — | | | — | | | | 148,237 | |
Materials and supplies, at average cost | 64,334 | | | 14,397 | | | 35,702 | | | — | | | — | | | | 114,433 | |
| Prepayments and other | 40,767 | | | 7,724 | | | 11,638 | | | — | | | (1,638) | | [1] | | 58,491 | |
| Regulatory assets | 58,920 | | | 5,771 | | | 3,762 | | | — | | | — | | | | 68,453 | |
| Total current assets | 886,778 | | | 133,154 | | | 168,772 | | | 77 | | | (149,618) | | | | 1,039,163 | |
| Other long-term assets | | | | | | | | | | | | |
| Operating lease right-of-use assets | 34,856 | | | 27,470 | | | 9,551 | | | — | | | — | | | | 71,877 | |
| Regulatory assets | 189,417 | | | 13,575 | | | 23,359 | | | — | | | — | | | | 226,351 | |
| | | | | | | | | | | | |
| Other | 134,033 | | | 36,439 | | | 33,129 | | | — | | | (14,171) | | [1] | | 189,430 | |
| Total other long-term assets | 358,306 | | | 77,484 | | | 66,039 | | | — | | | (14,171) | | | | 487,658 | |
Total assets | $ | 6,042,005 | | | 1,079,019 | | | 1,048,453 | | | 77 | | | (886,000) | | | | $ | 7,283,554 | |
| Capitalization and liabilities | | | | | | | | | | | | |
| Capitalization | | | | | | | | | | | | |
| Common stock equity | $ | 2,409,110 | | | 359,790 | | | 362,344 | | | 77 | | | (722,211) | | [2] | | $ | 2,409,110 | |
Cumulative preferred stock–not subject to mandatory redemption | 22,293 | | | 7,000 | | | 5,000 | | | — | | | — | | | | 34,293 | |
| Long-term debt, net | 1,426,516 | | | 249,339 | | | 258,422 | | | — | | | — | | | | 1,934,277 | |
| Total capitalization | 3,857,919 | | | 616,129 | | | 625,766 | | | 77 | | | (722,211) | | | | 4,377,680 | |
| Current liabilities | | | | | | | | | | | | |
| Current portion of operating lease liabilities | 6,788 | | | 7,025 | | | 2,804 | | | — | | | — | | | | 16,617 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Short-term borrowings-affiliate | — | | | — | | | 70,500 | | | — | | | (70,500) | | [1] | | — | |
| Accounts payable | 136,102 | | | 29,418 | | | 25,520 | | | — | | | — | | | | 191,040 | |
Interest and preferred dividends payable | 17,085 | | | 3,098 | | | 3,074 | | | — | | | (375) | | [1] | | 22,882 | |
| Taxes accrued, including revenue taxes | 211,840 | | | 43,932 | | | 37,808 | | | — | | | (1,638) | | [1] | | 291,942 | |
| Regulatory liabilities | 20,013 | | | 8,508 | | | 8,038 | | | — | | | — | | | | 36,559 | |
| Other | 165,131 | | | 33,240 | | | 50,170 | | | — | | | (77,105) | | [1] | | 171,436 | |
| Total current liabilities | 556,959 | | | 125,221 | | | 197,914 | | | — | | | (149,618) | | | | 730,476 | |
| Deferred credits and other liabilities | | | | | | | | | | | | |
| Operating lease liabilities | 34,262 | | | 20,792 | | | 7,044 | | | — | | | — | | | | 62,098 | |
| Finance lease liabilities | 295,935 | | | 35,043 | | | — | | | — | | | — | | | | 330,978 | |
| Deferred income taxes | 280,029 | | | 51,661 | | | 67,311 | | | — | | | — | | | | 399,001 | |
| Regulatory liabilities | 803,404 | | | 199,173 | | | 111,554 | | | — | | | — | | | | 1,114,131 | |
| Unamortized tax credits | 61,130 | | | 11,650 | | | 11,532 | | | — | | | — | | | | 84,312 | |
Defined benefit pension and other postretirement benefit plans liability | 74,842 | | | — | | | — | | | — | | | (14,171) | | [1] | | 60,671 | |
| Other | 77,525 | | | 19,350 | | | 27,332 | | | | | — | | | | 124,207 | |
Total deferred credits and other liabilities | 1,627,127 | | | 337,669 | | | 224,773 | | | — | | | (14,171) | | | | 2,175,398 | |
| Total capitalization and liabilities | $ | 6,042,005 | | | 1,079,019 | | | 1,048,453 | | | 77 | | | (886,000) | | | | $ | 7,283,554 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Consolidating balance sheet
December 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other subsidiary | | Consolidating
adjustments | | | Hawaiian Electric
Consolidated |
| Assets | | | | | | | | | | | | |
| Property, plant and equipment | | | | | | | | | | | | |
| Utility property, plant and equipment | | | | | | | | | | | | |
| Land | $ | 42,860 | | | 5,606 | | | 3,594 | | | — | | | — | | | | $ | 52,060 | |
| Plant and equipment | 5,260,685 | | | 1,425,442 | | | 1,293,383 | | | — | | | — | | | | 7,979,510 | |
| Finance lease right-of-use assets | 48,371 | | | — | | | — | | | — | | | — | | | | 48,371 | |
| Less accumulated depreciation | (1,855,150) | | | (644,457) | | | (586,892) | | | — | | | — | | | | (3,086,499) | |
| Construction in progress | 215,560 | | | 23,989 | | | 35,804 | | | — | | | — | | | | 275,353 | |
| Utility property, plant and equipment, net | 3,712,326 | | | 810,580 | | | 745,889 | | | — | | | — | | | | 5,268,795 | |
Nonutility property, plant and equipment, less accumulated depreciation | 5,298 | | | 115 | | | 1,532 | | | — | | | — | | | | 6,945 | |
| Total property, plant and equipment, net | 3,717,624 | | | 810,695 | | | 747,421 | | | — | | | — | | | | 5,275,740 | |
Investment in wholly-owned subsidiaries, at equity | 701,833 | | | — | | | — | | | — | | | (701,833) | | [2] | | — | |
| Current assets | | | | | | | | | | | | |
| Cash and cash equivalents | 27,579 | | | 5,092 | | | 6,494 | | | 77 | | | — | | | | 39,242 | |
| | | | | | | | | | | | |
| Advances to affiliates | — | | | 4,500 | | | 21,700 | | | — | | | (26,200) | | [1] | | — | |
Customer accounts receivable, net | 216,802 | | | 39,339 | | | 32,197 | | | — | | | — | | | | 288,338 | |
| Accrued unbilled revenues, net | 136,508 | | | 23,839 | | | 22,933 | | | — | | | — | | | | 183,280 | |
| Other accounts receivable, net | 23,746 | | | 5,519 | | | 6,686 | | | — | | | (22,384) | | [1] | | 13,567 | |
| Fuel oil stock, at average cost | 153,342 | | | 16,964 | | | 21,224 | | | — | | | — | | | | 191,530 | |
Materials and supplies, at average cost | 48,130 | | | 9,783 | | | 21,655 | | | — | | | — | | | | 79,568 | |
| Prepayments and other | 24,040 | | | 6,346 | | | 4,137 | | | — | | | (1,041) | | [1] | | 33,482 | |
| Regulatory assets | 46,504 | | | 2,435 | | | 3,334 | | | — | | | — | | | | 52,273 | |
| Total current assets | 676,651 | | | 113,817 | | | 140,360 | | | 77 | | | (49,625) | | | | 881,280 | |
| Other long-term assets | | | | | | | | | | | | |
| Operating lease right-of-use assets | 42,752 | | | 34,283 | | | 12,283 | | | — | | | — | | | | 89,318 | |
| Regulatory assets | 154,040 | | | 21,816 | | | 14,384 | | | — | | | — | | | | 190,240 | |
| Other | 115,028 | | | 32,654 | | | 29,495 | | | — | | | (16,288) | | [1] | | 160,889 | |
| Total other long-term assets | 311,820 | | | 88,753 | | | 56,162 | | | — | | | (16,288) | | | | 440,447 | |
Total assets | $ | 5,407,928 | | | 1,013,265 | | | 943,943 | | | 77 | | | (767,746) | | | | $ | 6,597,467 | |
| Capitalization and liabilities | | | | | | | | | | | | |
| Capitalization | | | | | | | | | | | | |
| Common stock equity | $ | 2,344,170 | | | 344,720 | | | 357,036 | | | 77 | | | (701,833) | | [2] | | $ | 2,344,170 | |
Cumulative preferred stock–not subject to mandatory redemption | 22,293 | | | 7,000 | | | 5,000 | | | — | | | — | | | | 34,293 | |
| Long-term debt, net | 1,126,915 | | | 224,439 | | | 233,500 | | | — | | | — | | | | 1,584,854 | |
| Total capitalization | 3,493,378 | | | 576,159 | | | 595,536 | | | 77 | | | (701,833) | | | | 3,963,317 | |
| Current liabilities | | | | | | | | | | | | |
| Current portion of operating lease liabilities | 9,775 | | | 6,690 | | | 2,630 | | | — | | | — | | | | 19,095 | |
| Current portion of long-term debt, net | 49,981 | | | 19,992 | | | 29,989 | | | — | | | — | | | | 99,962 | |
| Short-term borrowings-non-affiliate | 87,967 | | | — | | | — | | | — | | | — | | | | 87,967 | |
| Short-term borrowings-affiliate | 26,200 | | | — | | | — | | | — | | | (26,200) | | [1] | | — | |
| Accounts payable | 143,253 | | | 32,113 | | | 27,126 | | | — | | | — | | | | 202,492 | |
Interest and preferred dividends payable | 12,398 | | | 2,576 | | | 2,282 | | | — | | | (80) | | [1] | | 17,176 | |
| Taxes accrued, including revenue taxes | 207,798 | | | 42,436 | | | 40,709 | | | — | | | (1,041) | | [1] | | 289,902 | |
| Regulatory liabilities | 13,145 | | | 8,553 | | | 9,777 | | | — | | | — | | | | 31,475 | |
| Other | 64,659 | | | 20,856 | | | 22,385 | | | — | | | (22,304) | | [1] | | 85,596 | |
| Total current liabilities | 615,176 | | | 133,216 | | | 134,898 | | | — | | | (49,625) | | | | 833,665 | |
| Deferred credits and other liabilities | | | | | | | | | | | | |
| Operating lease liabilities | 41,049 | | | 27,817 | | | 9,849 | | | — | | | — | | | | 78,715 | |
| Finance lease liabilities | 46,048 | | | — | | | — | | | — | | | — | | | | 46,048 | |
| Deferred income taxes | 271,234 | | | 50,615 | | | 62,581 | | | — | | | — | | | | 384,430 | |
| Regulatory liabilities | 729,683 | | | 194,222 | | | 100,270 | | | — | | | — | | | | 1,024,175 | |
| Unamortized tax credits | 69,614 | | | 13,150 | | | 12,536 | | | — | | | — | | | | 95,300 | |
Defined benefit pension and other postretirement benefit plans liability | 65,907 | | | 129 | | | — | | | — | | | (16,288) | | [1] | | 49,748 | |
| Other | 75,839 | | | 17,957 | | | 28,273 | | | | | — | | | | 122,069 | |
Total deferred credits and other liabilities | 1,299,374 | | | 303,890 | | | 213,509 | | | — | | | (16,288) | | | | 1,800,485 | |
| Total capitalization and liabilities | $ | 5,407,928 | | | 1,013,265 | | | 943,943 | | | 77 | | | (767,746) | | | | $ | 6,597,467 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Consolidating statements of changes in common stock equity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other subsidiary | | Consolidating
adjustments | | Hawaiian Electric
Consolidated |
| Balance, December 31, 2020 | $ | 2,141,918 | | | 317,451 | | | 309,363 | | | 77 | | | (626,891) | | | $ | 2,141,918 | |
| Net income for common stock | 177,642 | | | 21,180 | | | 24,173 | | | — | | | (45,353) | | | 177,642 | |
| Other comprehensive income (loss), net of taxes | (361) | | | 66 | | | 227 | | | — | | | (293) | | | (361) | |
| Issuance of common stock, net of expenses | 54,400 | | | 8,803 | | | 24,597 | | | — | | | (33,400) | | | 54,400 | |
| Common stock dividends | (111,700) | | | (14,600) | | | (15,100) | | | — | | | 29,700 | | | (111,700) | |
| | | | | | | | | | | |
| Balance, December 31, 2021 | 2,261,899 | | | 332,900 | | | 343,260 | | | 77 | | | (676,237) | | | 2,261,899 | |
| Net income for common stock | 188,929 | | | 21,816 | | | 25,677 | | | — | | | (47,493) | | | 188,929 | |
| Other comprehensive income, net of taxes | 6,141 | | | 381 | | | 276 | | | — | | | (657) | | | 6,141 | |
Issuance of common stock, net of expenses | 13,101 | | | 6,023 | | | 3,023 | | | — | | | (9,046) | | | 13,101 | |
| Common stock dividends | (125,900) | | | (16,400) | | | (15,200) | | | — | | | 31,600 | | | (125,900) | |
| Balance, December 31, 2022 | 2,344,170 | | | 344,720 | | | 357,036 | | | 77 | | | (701,833) | | | 2,344,170 | |
| Net income for common stock | 193,952 | | | 28,507 | | | 16,302 | | | — | | | (44,809) | | | 193,952 | |
Other comprehensive income (loss), net of taxes | (12) | | | (12) | | | 31 | | | — | | | (19) | | | (12) | |
| | | | | | | | | | | |
| Common stock dividends | (129,000) | | | (13,425) | | | (11,025) | | | — | | | 24,450 | | | (129,000) | |
| | | | | | | | | | | |
| Balance, December 31, 2023 | 2,409,110 | | | 359,790 | | | 362,344 | | | 77 | | | (722,211) | | | 2,409,110 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Consolidating statement of cash flows
Year ended December 31, 2023
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other subsidiary | | Consolidating
adjustments | | | Hawaiian Electric
Consolidated |
| Cash flows from operating activities | | | | | | | | | | | | |
| Net income | $ | 195,032 | | | 29,041 | | | 16,683 | | | — | | | (44,809) | | [2] | | $ | 195,947 | |
| Adjustments to reconcile net income to net cash provided by operating activities | | | | | | | | | | | | |
| Equity in earnings of subsidiaries | (44,809) | | | — | | | — | | | — | | | 44,809 | | [2] | | — | |
| Common stock dividends received from subsidiaries | 24,450 | | | — | | | — | | | — | | | (24,450) | | [2] | | — | |
| Depreciation of property, plant and equipment | 164,150 | | | 42,541 | | | 37,014 | | | — | | | — | | | | 243,705 | |
| Other amortization | 17,692 | | | 5,003 | | | 3,795 | | | — | | | — | | | | 26,490 | |
Deferred income tax expense (benefit) | (851) | | | (296) | | | 2,586 | | | — | | | — | | | | 1,439 | |
| | | | | | | | | | | | |
| State refundable credit | (7,577) | | | (1,782) | | | (1,966) | | | — | | | — | | | | (11,325) | |
| Bad debt expense | 5,565 | | | 1,353 | | | 1,243 | | | — | | | — | | | | 8,161 | |
| Allowance for equity funds used during construction | (11,721) | | | (1,411) | | | (2,032) | | | — | | | — | | | | (15,164) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Other | 380 | | | (46) | | | 126 | | | — | | | — | | | | 460 | |
| Changes in assets and liabilities: | | | | | | | | | | | | |
Increase in accounts receivable | (83,401) | | | (7,398) | | | (29,301) | | | — | | | 55,096 | | [1] | | (65,004) | |
Decrease (increase) in accrued unbilled revenues | 8 | | | (1,308) | | | (1,748) | | | — | | | — | | | | (3,048) | |
Decrease (increase) in fuel oil stock | 45,114 | | | (1,004) | | | (817) | | | — | | | — | | | | 43,293 | |
| Increase in materials and supplies | (16,204) | | | (4,614) | | | (14,047) | | | — | | | — | | | | (34,865) | |
Decrease (increase) in regulatory assets | (6,616) | | | 5,501 | | | (9,498) | | | — | | | — | | | | (10,613) | |
Increase (decrease) in regulatory liabilities | 48,833 | | | (1,176) | | | 6,813 | | | — | | | — | | | | 54,470 | |
| Increase in accounts payable | 13,988 | | | 5,998 | | | 468 | | | — | | | — | | | | 20,454 | |
| Change in prepaid and accrued income taxes, tax credits and revenue taxes | 4,314 | | | 2,407 | | | (4,843) | | | — | | | — | | | | 1,878 | |
| Decrease in defined benefit pension and other postretirement benefit plans liability | (5,653) | | | (1,348) | | | (1,185) | | | — | | | — | | | | (8,186) | |
| Change in other assets and liabilities | 62,010 | | | 2,056 | | | 17,305 | | | — | | | (55,096) | | [1] | | 26,275 | |
| Net cash provided by operating activities | 404,704 | | | 73,517 | | | 20,596 | | | — | | | (24,450) | | | | 474,367 | |
| Cash flows from investing activities | | | | | | | | | | | | |
| Capital expenditures | (276,600) | | | (63,889) | | | (98,286) | | | — | | | — | | | | (438,775) | |
Advances from (to) affiliates | (70,500) | | | 4,500 | | | 21,700 | | | — | | | 44,300 | | [1] | | — | |
| Other | 4,118 | | | 932 | | | 1,126 | | | — | | | — | | | | 6,176 | |
| Net cash used in investing activities | (342,982) | | | (58,457) | | | (75,460) | | | — | | | 44,300 | | | | (432,599) | |
| Cash flows from financing activities | | | | | | | | | | | | |
| Common stock dividends | (129,000) | | | (13,425) | | | (11,025) | | | — | | | 24,450 | | [2] | | (129,000) | |
| Preferred stock dividends of Hawaiian Electric and subsidiaries | (1,080) | | | (534) | | | (381) | | | — | | | — | | | | (1,995) | |
| | | | | | | | | | | | |
| Proceeds from issuance of long-term debt | 300,000 | | | 25,000 | | | 25,000 | | | — | | | — | | | | 350,000 | |
| Repayment of long-term debt | (50,000) | | | (20,000) | | | (30,000) | | | — | | | — | | | | (100,000) | |
| Net increase (decrease) in short-term borrowings from non-affiliates and affiliate with original maturities of three months or less | (114,167) | | | — | | | 70,500 | | | — | | | (44,300) | | [1] | | (87,967) | |
| Payments of obligations under finance leases | (2,728) | | | (400) | | | — | | | — | | | — | | | | (3,128) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Other | (571) | | | (135) | | | (137) | | | — | | | — | | | | (843) | |
| Net cash provided by (used in) financing activities | 2,454 | | | (9,494) | | | 53,957 | | | — | | | (19,850) | | | | 27,067 | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | 64,176 | | | 5,566 | | | (907) | | | — | | | — | | | | 68,835 | |
| Cash, cash equivalents and restricted cash, January 1 | 27,579 | | | 5,092 | | | 6,494 | | | 77 | | | — | | | | 39,242 | |
| Cash, cash equivalents and restricted cash, December 31 | 91,755 | | | 10,658 | | | 5,587 | | | 77 | | | — | | | | 108,077 | |
| Less: Restricted cash | (2,000) | | | — | | | — | | | — | | | — | | | | (2,000) | |
| Cash and cash equivalents, December 31 | $ | 89,755 | | | 10,658 | | | 5,587 | | | 77 | | | — | | | | $ | 106,077 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Consolidating statement of cash flows
Year ended December 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other subsidiary | | Consolidating
adjustments | | | Hawaiian Electric
Consolidated |
| Cash flows from operating activities | | | | | | | | | | | | |
| Net income | $ | 190,009 | | | 22,350 | | | 26,058 | | | — | | | (47,493) | | [2] | | $ | 190,924 | |
Adjustments to reconcile net income to net cash provided by operating activities | | | | | | | | | | | | |
Equity in earnings of subsidiaries | (47,493) | | | — | | | — | | | — | | | 47,493 | | [2] | | — | |
Common stock dividends received from subsidiaries | 31,600 | | | — | | | — | | | — | | | (31,600) | | [2] | | — | |
Depreciation of property, plant and equipment | 158,725 | | | 41,404 | | | 35,295 | | | — | | | — | | | | 235,424 | |
| Other amortization | 16,708 | | | 4,996 | | | 3,616 | | | — | | | — | | | | 25,320 | |
Deferred income taxes | (33,648) | | | (4,040) | | | (3,727) | | | — | | | — | | | | (41,415) | |
| | | | | | | | | | | | |
State refundable credit | (7,375) | | | (1,734) | | | (1,890) | | | — | | | — | | | | (10,999) | |
| Bad debt expense | 4,175 | | | 1,073 | | | 779 | | | — | | | — | | | | 6,027 | |
Allowance for equity funds used during construction | (8,464) | | | (898) | | | (1,212) | | | — | | | — | | | | (10,574) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Other | (65) | | | (50) | | | (24) | | | — | | | — | | | | (139) | |
| Changes in assets and liabilities: | | | | | | | | | | | | |
| Increase in accounts receivable | (74,067) | | | (11,644) | | | (10,680) | | | — | | | 4,649 | | [1] | | (91,742) | |
| Increase in accrued unbilled revenues | (43,972) | | | (4,289) | | | (5,762) | | | — | | | — | | | | (54,023) | |
| Increase in fuel oil stock | (82,158) | | | (4,150) | | | (1,144) | | | — | | | — | | | | (87,452) | |
Increase in materials and supplies | (6,124) | | | (56) | | | (1,511) | | | — | | | — | | | | (7,691) | |
Decrease in regulatory assets | 28,076 | | | 1,546 | | | 4,978 | | | — | | | — | | | | 34,600 | |
Increase in regulatory liabilities | 28,621 | | | 7,977 | | | 8,290 | | | | | — | | | | 44,888 | |
| Decrease in accounts payable | 18,657 | | | 3,294 | | | 404 | | | — | | | — | | | | 22,355 | |
Change in prepaid and accrued income taxes, tax credits and revenue taxes | 77,903 | | | 11,117 | | | 14,178 | | | — | | | — | | | | 103,198 | |
| Decrease in defined benefit pension and other postretirement benefit plans liability | (3,545) | | | (626) | | | (657) | | | — | | | — | | | | (4,828) | |
Change in other assets and liabilities | (17,884) | | | 213 | | | (3,623) | | | — | | | (4,649) | | [1] | | (25,943) | |
Net cash provided by operating activities | 229,679 | | | 66,483 | | | 63,368 | | | — | | | (31,600) | | | | 327,930 | |
Cash flows from investing activities | | | | | | | | | | | | |
| Capital expenditures | (223,223) | | | (49,004) | | | (57,230) | | | — | | | — | | | | (329,457) | |
Advances from (to) affiliates | 1,000 | | | (4,500) | | | (21,700) | | | — | | | 25,200 | | [1] | | — | |
| Other | (5,687) | | | 760 | | | 1,253 | | | — | | | 9,046 | | [1],[2] | | 5,372 | |
| | | | | | | | | | | | |
| Net cash used in investing activities | (227,910) | | | (52,744) | | | (77,677) | | | — | | | 34,246 | | | | (324,085) | |
| Cash flows from financing activities | | | | | | | | | | | | |
| Common stock dividends | (125,900) | | | (16,400) | | | (15,200) | | | — | | | 31,600 | | [2] | | (125,900) | |
Preferred stock dividends of Hawaiian Electric and subsidiaries | (1,080) | | | (534) | | | (381) | | | — | | | — | | | | (1,995) | |
Proceeds from the issuance of common stock | 13,101 | | | 6,023 | | | 3,023 | | | — | | | (9,046) | | [2] | | 13,101 | |
Proceeds from the issuance of long-term debt | 40,000 | | | 10,000 | | | 10,000 | | | — | | | — | | | | 60,000 | |
| Repayment of long-term debt | (40,000) | | | (12,000) | | | — | | | — | | | — | | | | (52,000) | |
| Net increase (decrease) in short-term borrowings from non-affiliates and affiliate with original maturities of three months or less | 114,167 | | | (1,000) | | | — | | | — | | | (25,200) | | [1] | | 87,967 | |
| | | | | | | | | | | | |
| Payments of obligations under finance leases | (670) | | | — | | | — | | | — | | | — | | | | (670) | |
| | | | | | | | | | | | |
| Other | (241) | | | (62) | | | (61) | | | — | | | — | | | | (364) | |
Net cash used in financing activities | (623) | | | (13,973) | | | (2,619) | | | — | | | (2,646) | | | | (19,861) | |
Net increase (decrease) in cash, cash equivalents and restricted cash | 1,146 | | | (234) | | | (16,928) | | | — | | | — | | | | (16,016) | |
Cash, cash equivalents and restricted cash, January 1 | 26,433 | | | 5,326 | | | 23,422 | | | 77 | | | — | | | | 55,258 | |
Cash, cash equivalents and restricted cash, December 31 | 27,579 | | | 5,092 | | | 6,494 | | | 77 | | | — | | | | 39,242 | |
Less: Restricted cash | — | | | — | | | — | | | — | | | — | | | | — | |
Cash and cash equivalents, December 31 | $ | 27,579 | | | 5,092 | | | 6,494 | | | 77 | | | — | | | | $ | 39,242 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Consolidating statement of cash flows
Year ended December 31, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Hawaiian Electric | | Hawaii Electric Light | | Maui Electric | | Other subsidiary | | Consolidating
adjustments | | | Hawaiian Electric
Consolidated |
| Cash flows from operating activities | | | | | | | | | | | | |
| Net income | $ | 178,722 | | | 21,714 | | | 24,554 | | | — | | | (45,353) | | [2] | | $ | 179,637 | |
Adjustments to reconcile net income to net cash provided by operating activities | | | | | | | | | | | | |
Equity in earnings of subsidiaries | (45,353) | | | — | | | — | | | — | | | 45,353 | | [2] | | — | |
Common stock dividends received from subsidiaries | 29,700 | | | — | | | — | | | — | | | (29,700) | | [2] | | — | |
Depreciation of property, plant and equipment | 155,607 | | | 40,201 | | | 33,661 | | | — | | | — | | | | 229,469 | |
| Other amortization | 16,688 | | | 3,532 | | | 1,517 | | | — | | | — | | | | 21,737 | |
Deferred income tax expense (benefit) | (3,191) | | | (1,955) | | | 1,317 | | | — | | | — | | | | (3,829) | |
| | | | | | | | | | | | |
State refundable credit | (7,120) | | | (1,672) | | | (1,790) | | | — | | | — | | | | (10,582) | |
| Bad debt expense | 1,159 | | | 509 | | | 515 | | | — | | | — | | | | 2,183 | |
Allowance for equity funds used during construction | (7,734) | | | (586) | | | (1,214) | | | — | | | — | | | | (9,534) | |
| Bill credits | 1,400 | | | 300 | | | 300 | | | — | | | — | | | | 2,000 | |
| | | | | | | | | | | | |
Other | 366 | | | (41) | | | 1,025 | | | — | | | — | | | | 1,350 | |
| Changes in assets and liabilities: | | | | | | | | | | | | |
| Increase in accounts receivable | (41,727) | | | (6,832) | | | (3,071) | | | — | | | 1,540 | | [1] | | (50,090) | |
| Increase in accrued unbilled revenues | (18,345) | | | (5,816) | | | (3,303) | | | — | | | — | | | | (27,464) | |
| Increase in fuel oil stock | (32,407) | | | (4,343) | | | (9,090) | | | — | | | — | | | | (45,840) | |
| Decrease (increase) in materials and supplies | (3,220) | | | 169 | | | (1,482) | | | — | | | — | | | | (4,533) | |
| Decrease (increase) in regulatory assets | (15,422) | | | 24 | | | 1,524 | | | — | | | — | | | | (13,874) | |
| Increase (decrease) in regulatory liabilities | 16,269 | | | (1,031) | | | 120 | | | — | | | — | | | | 15,358 | |
| Decrease in accounts payable | 9,828 | | | 4,723 | | | 3,120 | | | — | | | — | | | | 17,671 | |
Change in prepaid and accrued income taxes, tax credits and revenue taxes | 21,217 | | | 3,861 | | | 1,938 | | | — | | | (86) | | [1] | | 26,930 | |
| Decrease in defined benefit pension and other postretirement benefit plans liability | (3,480) | | | (950) | | | (724) | | | — | | | — | | | | (5,154) | |
Change in other assets and liabilities | (36,733) | | | (5,833) | | | (8,196) | | | — | | | (1,540) | | [1] | | (52,302) | |
Net cash provided by operating activities | 216,224 | | | 45,974 | | | 40,721 | | | — | | | (29,786) | | | | 273,133 | |
Cash flows from investing activities | | | | | | | | | | | | |
| Capital expenditures | (194,984) | | | (50,516) | | | (46,500) | | | — | | | — | | | | (292,000) | |
| Advances to affiliates | 25,700 | | | — | | | — | | | — | | | (25,700) | | [1] | | — | |
| Other | (29,596) | | | 1,072 | | | 1,073 | | | — | | | 33,486 | | [1][2] | | 6,035 | |
| | | | | | | | | | | | |
| Net cash used in investing activities | (198,880) | | | (49,444) | | | (45,427) | | | — | | | 7,786 | | | | (285,965) | |
| Cash flows from financing activities | | | | | | | | | | | | |
| Common stock dividends | (111,700) | | | (14,600) | | | (15,100) | | | — | | | 29,700 | | [2] | | (111,700) | |
Preferred stock dividends of Hawaiian Electric and subsidiaries | (1,080) | | | (534) | | | (381) | | | — | | | — | | | | (1,995) | |
Proceeds from the issuance of common stock | 54,400 | | | 8,803 | | | 24,597 | | | — | | | (33,400) | | [2] | | 54,400 | |
Proceeds from the issuance of long-term debt | 60,000 | | | 30,000 | | | 25,000 | | | — | | | — | | | | 115,000 | |
| | | | | | | | | | | | |
| Net increase (decrease) in short-term borrowings from non-affiliates and affiliate with original maturities of three months or less | — | | | (17,800) | | | (7,900) | | | — | | | 25,700 | | [1] | | — | |
| | | | | | | | | | | | |
| Repayment of short-term debt | (50,000) | | | — | | | — | | | — | | | — | | | | (50,000) | |
| Other | (702) | | | (119) | | | (120) | | | — | | | — | | | | (941) | |
Net cash provided by (used in) financing activities | (49,082) | | | 5,750 | | | 26,096 | | | — | | | 22,000 | | | | 4,764 | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | (31,738) | | | 2,280 | | | 21,390 | | | — | | | — | | | | (8,068) | |
| Cash, cash equivalents and restricted cash, January 1 | 58,171 | | | 3,046 | | | 2,032 | | | 77 | | | — | | | | 63,326 | |
Cash, cash equivalents and restricted cash, December 31 | 26,433 | | | 5,326 | | | 23,422 | | | 77 | | | — | | | | 55,258 | |
Less: Restricted cash | (3,089) | | | — | | | — | | | — | | | — | | | | (3,089) | |
Cash and cash equivalents, December 31 | $ | 23,344 | | | 5,326 | | | 23,422 | | | 77 | | | — | | | | $ | 52,169 | |
Explanation of consolidating adjustments on consolidating schedules:
[1] Eliminations of intercompany receivables and payables and other intercompany transactions
[2] Elimination of investment in subsidiaries, carried at equity
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | |
Note 5 · Bank segment (HEI only) |
Selected financial information
American Savings Bank, F.S.B.
Statements of Income and Comprehensive Income Data
| | | | | | | | | | | | | | | | | |
| Years ended December 31 | 2023 | | 2022 | | 2021 |
| (in thousands) | | | | | |
| Interest and dividend income | | | | | |
| Interest and fees on loans | $ | 276,688 | | | $ | 207,830 | | | $ | 198,802 | |
| Interest and dividends on investment securities | 58,095 | | | 58,044 | | | 43,464 | |
| Total interest and dividend income | 334,783 | | | 265,874 | | | 242,266 | |
| Interest expense | | | | | |
| Interest on deposit liabilities | 48,905 | | | 7,327 | | | 4,981 | |
| Interest on other borrowings | 33,892 | | | 5,974 | | | 59 | |
| Total interest expense | 82,797 | | | 13,301 | | | 5,040 | |
| Net interest income | 251,986 | | | 252,573 | | | 237,226 | |
| Provision for credit losses | 10,357 | | | 2,037 | | | (25,825) | |
| Net interest income after provision for credit losses | 241,629 | | | 250,536 | | | 263,051 | |
| Noninterest income | | | | | |
| Fees from other financial services | 19,034 | | | 19,830 | | | 21,225 | |
| Fee income on deposit liabilities | 19,131 | | | 18,762 | | | 16,663 | |
| Fee income on other financial products | 10,616 | | | 10,291 | | | 8,770 | |
| Bank-owned life insurance | 7,390 | | | 2,533 | | | 7,318 | |
| Mortgage banking income | 910 | | | 1,692 | | | 9,305 | |
| Gain on sale of real estate | 495 | | | 1,778 | | | — | |
Gain (loss) on sale of investment securities, net | (14,965) | | | — | | | 528 | |
| Other income, net | 2,799 | | | 2,086 | | | 851 | |
| Total noninterest income | 45,410 | | | 56,972 | | | 64,660 | |
| Noninterest expense | | | | | |
| Compensation and employee benefits | 118,297 | | | 113,839 | | | 113,970 | |
| Occupancy | 21,703 | | | 24,026 | | | 20,584 | |
| Data processing | 20,545 | | | 17,681 | | | 17,634 | |
| Services | 13,943 | | | 10,679 | | | 10,327 | |
| Equipment | 11,842 | | | 10,100 | | | 9,510 | |
| Office supplies, printing and postage | 4,315 | | | 4,398 | | | 4,239 | |
| Marketing | 4,001 | | | 3,968 | | | 3,870 | |
| FDIC insurance | 6,230 | | | 3,591 | | | 3,235 | |
| Other expense | 22,762 | | | 16,985 | | | 13,783 | |
| Total noninterest expense | 223,638 | | | 205,267 | | | 197,152 | |
| Income before income taxes | 63,401 | | | 102,241 | | | 130,559 | |
| Income taxes | 10,039 | | | 22,252 | | | 29,325 | |
| Net income | 53,362 | | | 79,989 | | | 101,234 | |
| Other comprehensive income (loss), net of taxes | 44,343 | | | (298,833) | | | (52,728) | |
| Comprehensive income (loss) | $ | 97,705 | | | $ | (218,844) | | | $ | 48,506 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Reconciliation to amounts per HEI Consolidated Statements of Income*:
| | | | | | | | | | | | | | | | | |
| Years ended December 31 | 2023 | | 2022 | | 2021 |
| (in thousands) | | | | | |
| Interest and dividend income | $ | 334,783 | | | $ | 265,874 | | | $ | 242,266 | |
| Noninterest income | 45,410 | | | 56,972 | | | 64,660 | |
| Less: Gain on sale of real estate | 495 | | | 1,778 | | | — | |
Less: Loss on sale of investment securities, net | (14,965) | | | — | | | 528 | |
| *Revenues-Bank | 394,663 | | | 321,068 | | | 306,398 | |
| Total interest expense | 82,797 | | | 13,301 | | | 5,040 | |
| Provision for credit losses | 10,357 | | | 2,037 | | | (25,825) | |
| Noninterest expense | 223,638 | | | 205,267 | | | 197,152 | |
| Less: Retirement defined benefits expense (credit)—other than service costs | (754) | | | (723) | | | (1,828) | |
Add: Gain on sale of real estate | 495 | | | 1,778 | | | — | |
| *Expenses-Bank | 317,051 | | | 219,550 | | | 178,195 | |
| *Operating income-Bank | 77,612 | | | 101,518 | | | 128,203 | |
| Add back: Retirement defined benefits expense (credit)—other than service costs | (754) | | | (723) | | | (1,828) | |
Add back: Loss on sale of investment securities, net | (14,965) | | | — | | | 528 | |
| Income before income taxes | $ | 63,401 | | | $ | 102,241 | | | $ | 130,559 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Balance Sheets Data
| | | | | | | | | | | | | | |
| December 31 | | 2023 | | 2022 |
| (in thousands) | | | | |
| Assets | | | | |
| Cash and due from banks | | $ | 184,383 | | | $ | 153,042 | |
| Interest-bearing deposits | | 251,072 | | | 3,107 | |
| Cash and cash equivalents | | 435,455 | | | 156,149 | |
| Investment securities | | | | |
| Available-for-sale, at fair value | | 1,136,439 | | | 1,429,667 | |
Held-to-maturity, at amortized cost (fair value of $1,103,668 and $1,150,971 at December 31, 2023 and 2022, respectively) | | 1,201,314 | | | 1,251,747 | |
| Stock in Federal Home Loan Bank, at cost | | 14,728 | | | 26,560 | |
| Loans held for investment | | 6,180,810 | | | 5,978,906 | |
| Allowance for credit losses | | (74,372) | | | (72,216) | |
| Net loans | | 6,106,438 | | | 5,906,690 | |
| Loans held for sale, at lower of cost or fair value | | 15,168 | | | 824 | |
| Other | | 681,460 | | | 692,143 | |
| Goodwill | | 82,190 | | | 82,190 | |
| Total assets | | $ | 9,673,192 | | | $ | 9,545,970 | |
| Liabilities and shareholder’s equity | | | | |
| Deposit liabilities–noninterest-bearing | | $ | 2,599,762 | | | $ | 2,811,077 | |
| Deposit liabilities–interest-bearing | | 5,546,016 | | | 5,358,619 | |
| Other borrowings | | 750,000 | | | 695,120 | |
| Other | | 247,563 | | | 212,269 | |
| Total liabilities | | 9,143,341 | | | 9,077,085 | |
| Commitments and contingencies | | | | |
| Common stock | | 1 | | | 1 | |
| Additional paid in capital | | 358,067 | | | 355,806 | |
| Retained earnings | | 464,055 | | | 449,693 | |
| Accumulated other comprehensive loss, net of tax benefits | | | | |
| Net unrealized losses on securities | $ | (282,963) | | | $ | (328,904) | | |
| Retirement benefit plans | (9,309) | | (292,272) | | (7,711) | | (336,615) | |
| Total shareholder’s equity | | 529,851 | | | 468,885 | |
| Total liabilities and shareholder’s equity | | $ | 9,673,192 | | | $ | 9,545,970 | |
| | | | |
| | | | | | | | | | | | | | |
| December 31 | | 2023 | | 2022 |
| (in thousands) | | | | |
| Other assets | | | | |
| Bank-owned life insurance | | $ | 187,857 | | | $ | 182,986 | |
| Premises and equipment, net | | 187,042 | | | 195,324 | |
| Accrued interest receivable | | 28,472 | | | 25,077 | |
| Mortgage servicing rights | | 8,169 | | | 9,047 | |
| Low-income housing investments | | 112,234 | | | 106,978 | |
| | | | |
| Deferred tax asset | | 104,292 | | | 116,441 | |
| | | | |
| Other | | 53,394 | | | 56,290 | |
| | | $ | 681,460 | | | $ | 692,143 | |
| Other liabilities | | | | |
| Accrued expenses | | $ | 115,231 | | | $ | 97,295 | |
| Federal income taxes payable | | — | | | 863 | |
| Cashier’s checks | | 40,479 | | | 36,401 | |
| Advance payments by borrowers | | 10,107 | | | 9,637 | |
| Other | | 81,746 | | | 68,073 | |
| | | $ | 247,563 | | | $ | 212,269 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
Investment securities. The major components of investment securities were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Gross unrealized losses |
| | | | Gross unrealized
gains | | Gross unrealized
losses | | Estimated fair value | | Less than 12 months | | 12 months or longer |
| (dollars in thousands) | Amortized
cost | | | | | Number of issues | | Fair value | | Amount | | Number of issues | | Fair value | | Amount |
| December 31, 2023 | | | | | | | | | | | | | | | | | | | |
| Available-for-sale | | | | | | | | | | | | | | | | | | | |
U.S. Treasury and federal agency obligations | $ | 12,437 | | | $ | — | | | $ | (427) | | | $ | 12,010 | | | — | | $ | — | | | $ | — | | | 9 | | $ | 12,010 | | | $ | (427) | |
| Mortgage-backed securities* | 1,279,852 | | | — | | | (202,684) | | | 1,077,168 | | | 3 | | 1,649 | | | (22) | | | 116 | | 1,075,519 | | | (202,662) | |
Corporate bonds | 35,239 | | | — | | | (2,336) | | | 32,903 | | | — | | — | | | — | | | 3 | | 32,903 | | | (2,336) | |
Mortgage revenue bonds | 14,358 | | | — | | | — | | | 14,358 | | | — | | — | | | — | | | — | | — | | | — | |
| $ | 1,341,886 | | | $ | — | | | $ | (205,447) | | | $ | 1,136,439 | | | 3 | | $ | 1,649 | | | $ | (22) | | | 128 | | $ | 1,120,432 | | | $ | (205,425) | |
| Held-to-maturity | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury and federal agency obligations | $ | 59,917 | | | $ | — | | | $ | (7,135) | | | $ | 52,782 | | | — | | $ | — | | | $ | — | | | 3 | | $ | 52,782 | | | $ | (7,135) | |
| Mortgage-backed securities* | 1,141,397 | | | 2,221 | | | (92,732) | | | 1,050,886 | | | 37 | | 378,326 | | | (7,610) | | | 43 | | 432,082 | | | (85,122) | |
| $ | 1,201,314 | | | $ | 2,221 | | | $ | (99,867) | | | $ | 1,103,668 | | | 37 | | $ | 378,326 | | | $ | (7,610) | | | 46 | | $ | 484,864 | | | $ | (92,257) | |
| December 31, 2022 | | | | | | | | | | | | | | | | | | | |
| Available-for-sale | | | | | | | | | | | | | | | | | | | |
U.S. Treasury and federal agency obligations | $ | 88,344 | | | $ | — | | | $ | (7,281) | | | $ | 81,063 | | | 12 | | $ | 41,201 | | | $ | (2,120) | | | 4 | | $ | 39,862 | | | $ | (5,161) | |
| Mortgage-backed securities* | 1,530,582 | | | — | | | (237,614) | | | 1,292,968 | | | 113 | | 455,836 | | | (56,999) | | | 70 | | 837,132 | | | (180,615) | |
Corporate bonds | 44,377 | | | — | | | (3,643) | | | 40,734 | | | 4 | | 29,644 | | | (2,028) | | | 1 | | 11,090 | | | (1,615) | |
| Mortgage revenue bonds | 14,902 | | | — | | | — | | | 14,902 | | | — | | — | | | — | | | — | | — | | | — | |
| | $ | 1,678,205 | | | $ | — | | | $ | (248,538) | | | $ | 1,429,667 | | | 129 | | $ | 526,681 | | | $ | (61,147) | | | 75 | | $ | 888,084 | | | $ | (187,391) | |
| Held-to-maturity | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury and federal agency obligations | $ | 59,894 | | | $ | — | | | $ | (8,478) | | | $ | 51,416 | | | 1 | | $ | 16,874 | | | $ | (3,222) | | | 2 | | $ | 34,542 | | | $ | (5,256) | |
| Mortgage-backed securities* | 1,191,853 | | | 2,670 | | | (94,968) | | | 1,099,555 | | | 22 | | 183,629 | | | (10,593) | | | 51 | | 567,250 | | | (84,375) | |
| $ | 1,251,747 | | | $ | 2,670 | | | $ | (103,446) | | | $ | 1,150,971 | | | 23 | | $ | 200,503 | | | $ | (13,815) | | | 53 | | $ | 601,792 | | | $ | (89,631) | |
* 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 as of December 31, 2023, 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 rated 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 as of December 31, 2023.
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 CONSOLIDATED FINANCIAL STATEMENTS (continued)
The contractual maturities of investment securities were as follows:
| | | | | | | | | | | |
| | Amortized | | Fair |
| December 31, 2023 | Cost | | value |
| (in thousands) | | | |
| Available-for-sale | | | |
| Due in one year or less | $ | 1,419 | | | $ | 1,404 | |
| Due after one year through five years | 46,257 | | | 43,509 | |
| Due after five years through ten years | 14,358 | | | 14,358 | |
| Due after ten years | — | | | — | |
| | 62,034 | | | 59,271 | |
Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies | 1,279,852 | | | 1,077,168 | |
| Total available-for-sale securities | $ | 1,341,886 | | | $ | 1,136,439 | |
| Held-to-maturity | | | |
| Due in one year or less | $ | — | | | $ | — | |
| Due after one year through five years | 39,832 | | | 35,597 | |
| Due after five years through ten years | 20,085 | | | 17,185 | |
| Due after ten years | — | | | — | |
| 59,917 | | | 52,782 | |
Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies | 1,141,397 | | | 1,050,886 | |
| Total held-to-maturity securities | $ | 1,201,314 | | | $ | 1,103,668 | |
The proceeds, gross gains and losses from sales of available-for-sale securities were as follows:
| | | | | | | | | | | | | | | | | |
| Years ended December 31 | 2023 | | 2022 | | 2021 |
| (in thousands) | | | | | |
| Proceeds | $ | 170,481 | | | $ | — | | | $ | 197,354 | |
| Gross gains | — | | | — | | | 975 | |
| Gross losses | (14,965) | | | — | | | (447) | |
Tax expense (benefit) on realized gains (losses) | (4,011) | | | — | | | 142 | |
Interest income from taxable and non-taxable investment securities were as follows:
| | | | | | | | | | | | | | | | | |
| Years ended December 31 | 2023 | | 2022 | | 2021 |
| (in thousands) | | | | | |
| Taxable | $ | 56,450 | | | $ | 56,731 | | | $ | 42,534 | |
| Non-taxable | 1,645 | | | 1,313 | | | 930 | |
| $ | 58,095 | | | $ | 58,044 | | | $ | 43,464 | |
ASB pledged securities with a market value of approximately $1.7 billion and $0.9 billion as of December 31, 2023 and 2022, respectively, as collateral for public funds and other deposits, mortgage pipeline hedge margin, automated clearinghouse transactions, the Federal Reserve Bank of San Francisco discount window and bankruptcy account, and the Federal Home Loan Bank of Des Moines advance line. In addition, ASB pledged securities with a market value of nil and $327 million as of December 31, 2023 and 2022, respectively, as collateral for securities sold under agreements to repurchase.
Transfer of available-for-sale securities to held-to-maturity. In October 2022, ASB transferred 66 available-for-sale investment securities with a fair value of $755 million to the held-to-maturity category. On the date of transfer, these securities had a total unrealized loss of $206 million, which will be amortized from accumulated other comprehensive loss over the remaining life of the securities to Interest and dividends on investment securities in the statements of income and comprehensive income data. The unamortized amount was $133 million at December 31, 2023.
These transfers were executed to mitigate the potential future impact to capital through accumulated other comprehensive loss and the impact of rising rates on the market value of the investment securities. ASB believes that it maintains sufficient liquidity for future business needs and it has the positive intent and ability to hold these securities to maturity.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Stock in FHLB. As of December 31, 2023 and 2022, ASB’s stock in FHLB was carried at cost ($14.7 million and $26.6 million, respectively) because it can only be redeemed at par and it is a required investment based on measurements of ASB’s capital, assets and borrowing levels.
Quarterly and as conditions warrant, ASB reviews its investment in the stock of the FHLB for impairment. ASB evaluated its investment in FHLB stock for credit losses as of December 31, 2023, consistent with its accounting policy. ASB did not recognize any credit losses for 2023, 2022 and 2021 based on its evaluation of the underlying investment.
Future deterioration in the FHLB’s financial position and/or negative developments in any of the factors considered in ASB’s impairment evaluation may result in future impairment losses.
Loans. The components of loans were summarized as follows:
| | | | | | | | | | | |
| December 31 | 2023 | | 2022 |
| (in thousands) | | | |
| Real estate: | | | |
| Residential 1-4 family | $ | 2,595,162 | | | $ | 2,479,637 | |
| Commercial real estate | 1,374,038 | | | 1,358,123 | |
| Home equity line of credit | 1,017,207 | | | 1,002,905 | |
| Residential land | 18,364 | | | 20,679 | |
| Commercial construction | 172,405 | | | 88,489 | |
| Residential construction | 17,843 | | | 20,788 | |
| Total real estate | 5,195,019 | | | 4,970,621 | |
| Commercial | 743,303 | | | 779,691 | |
| Consumer | 272,256 | | | 254,709 | |
| Total loans | 6,210,578 | | | 6,005,021 | |
| Less: Deferred fees and discounts | (29,768) | | | (26,115) | |
| Allowance for credit losses | (74,372) | | | (72,216) | |
| Total loans, net | $ | 6,106,438 | | | $ | 5,906,690 | |
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.
ASB services real estate loans for investors (principal balance of $1.5 billion, $1.5 billion and $1.5 billion as of December 31, 2023, 2022 and 2021, respectively), which are not included in the accompanying balance sheets data. ASB reports fees earned for servicing such loans as income when the related mortgage loan payments are collected and charges loan servicing cost to expense as incurred.
As of December 31, 2023 and 2022, ASB had pledged loans with an amortized cost of approximately $3.2 billion and $3.0 billion, respectively, as collateral to secure advances from the FHLB.
As of December 31, 2023 and 2022, the aggregate amount of loans to directors and executive officers of ASB and its affiliates and any related interests (as defined in Federal Reserve Board (FRB) Regulation O) of such individuals, was $23.5 million and $10.7 million, respectively. As of December 31, 2023 and 2022, there were loans to a related interest of a director of ASB totaling $21.6 million and $10.0 million, respectively. The loans were made at ASB’s normal credit terms.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Allowance for credit losses. As discussed in Note 1, ASB must maintain an allowance for credit losses that is adequate to absorb estimated expected credit losses associated with its loan portfolio.
The allowance for credit losses (balances and changes) and financing receivables 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 | | Consumer | | | | Total |
| December 31, 2023 | | | | | | | | | | | | | | | | | | | |
| Allowance for credit losses: | | | | | | | | | | | | | | | | | | |
| Beginning balance | $ | 6,270 | | | $ | 21,898 | | | $ | 6,125 | | | $ | 717 | | | $ | 1,195 | | | $ | 46 | | | $ | 12,426 | | | $ | 23,539 | | | | | $ | 72,216 | |
| Charge-offs | (994) | | | — | | | (375) | | | — | | | — | | | — | | | (723) | | | (11,227) | | | | | (13,319) | |
| Recoveries | 89 | | | — | | | 176 | | | 4 | | | — | | | — | | | 1,983 | | | 3,566 | | | | | 5,818 | |
| Net (charge-offs) recoveries | (905) | | | — | | | (199) | | | 4 | | | — | | | — | | | 1,260 | | | (7,661) | | | | | (7,501) | |
| Provision | 2,070 | | | 287 | | | 1,852 | | | (100) | | | 2,408 | | | (3) | | | (4,564) | | | 7,707 | | | | | 9,657 | |
| Ending balance | $ | 7,435 | | | $ | 22,185 | | | $ | 7,778 | | | $ | 621 | | | $ | 3,603 | | | $ | 43 | | | $ | 9,122 | | | $ | 23,585 | | | | | $ | 74,372 | |
| Average loans outstanding | $ | 2,523,767 | | | $ | 1,380,924 | | | $ | 1,030,983 | | | $ | 20,077 | | | $ | 127,332 | | | $ | 17,634 | | | $ | 754,601 | | | $ | 258,149 | | | | | $ | 6,113,467 | |
| Net charge-offs (recoveries) to average loans | 0.04 | % | | — | % | | 0.02 | % | | (0.02 | %) | | — | % | | — | % | | (0.17 | %) | | 2.97 | % | | | | 0.12 | % |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | | | | | | | | | | | | | | | | | | |
| Allowance for credit losses: | | | | | | | | | | | | | | | | | | |
| Beginning balance | $ | 6,545 | | | $ | 24,696 | | | $ | 5,657 | | | $ | 646 | | | $ | 2,186 | | | $ | 18 | | | $ | 15,798 | | | $ | 15,584 | | | | | $ | 71,130 | |
| Charge-offs | (13) | | | — | | | — | | | — | | | — | | | — | | | (563) | | | (6,254) | | | | | (6,830) | |
| Recoveries | 79 | | | — | | | 71 | | | 104 | | | — | | | — | | | 1,288 | | | 3,837 | | | | | 5,379 | |
| Net (charge-offs) recoveries | 66 | | | — | | | 71 | | | 104 | | | — | | | — | | | 725 | | | (2,417) | | | | | (1,451) | |
| Provision | (341) | | | (2,798) | | | 397 | | | (33) | | | (991) | | | 28 | | | (4,097) | | | 10,372 | | | | | 2,537 | |
| Ending balance | $ | 6,270 | | | $ | 21,898 | | | $ | 6,125 | | | $ | 717 | | | $ | 1,195 | | | $ | 46 | | | $ | 12,426 | | | $ | 23,539 | | | | | $ | 72,216 | |
| Average loans outstanding | $ | 2,331,473 | | | $ | 1,204,756 | | | $ | 918,563 | | | $ | 21,442 | | | $ | 90,021 | | | $ | 18,317 | | | $ | 710,658 | | | $ | 161,722 | | | | | $ | 5,456,952 | |
| Net charge-offs (recoveries) to average loans | — | % | | — | % | | (0.01 | %) | | (0.49 | %) | | — | % | | — | % | | (0.10 | %) | | 1.49 | % | | | | 0.03 | % |
| December 31, 2021 | | | | | | | | | | | | | | | | | | | |
| Allowance for credit losses: | | | | | | | | | | | | | | | | | | |
| Beginning balance | $ | 4,600 | | | $ | 35,607 | | | $ | 6,813 | | | $ | 609 | | | $ | 4,149 | | | $ | 11 | | | $ | 25,462 | | | $ | 23,950 | | | | | $ | 101,201 | |
| Charge-offs | (67) | | | — | | | (45) | | | — | | | — | | | — | | | (1,561) | | | (8,027) | | | | | (9,700) | |
| Recoveries | 92 | | | — | | | 113 | | | 61 | | | — | | | — | | | 1,468 | | | 4,320 | | | | | 6,054 | |
| Net (charge-offs) recoveries | 25 | | | — | | | 68 | | | 61 | | | — | | | — | | | (93) | | | (3,707) | | | | | (3,646) | |
| Provision | 1,920 | | | (10,911) | | | (1,224) | | | (24) | | | (1,963) | | | 7 | | | (9,571) | | | (4,659) | | | | | (26,425) | |
| Ending balance | $ | 6,545 | | | $ | 24,696 | | | $ | 5,657 | | | $ | 646 | | | $ | 2,186 | | | $ | 18 | | | $ | 15,798 | | | $ | 15,584 | | | | | $ | 71,130 | |
| Average loans outstanding | $ | 2,155,322 | | | $ | 1,046,276 | | | $ | 885,759 | | | $ | 18,227 | | | $ | 111,711 | | | $ | 11,361 | | | $ | 856,226 | | | $ | 135,609 | | | | | $ | 5,220,491 | |
| Net charge-offs (recoveries) to average loans | — | % | | — | % | | (0.01 | %) | | (0.33 | %) | | — | % | | — | % | | 0.01 | % | | 2.73 | % | | | | 0.07 | % |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 |
| Year ended December 31, 2023 | | | | | | | | |
| Allowance for loan commitments: | | | | | | | | |
| Beginning balance | | $ | 400 | | | $ | 2,600 | | | $ | 1,400 | | | $ | 4,400 | |
| Provision | | 200 | | | 1,700 | | | (1,200) | | | 700 | |
| Ending balance | | $ | 600 | | | $ | 4,300 | | | $ | 200 | | | $ | 5,100 | |
| | | | | | | | |
| Year ended December 31, 2022 | | | | | | | | |
| Allowance for loan commitments: | | | | | | | | |
| Beginning balance | | $ | 400 | | | $ | 3,700 | | | $ | 800 | | | $ | 4,900 | |
| Provision | | — | | | (1,100) | | | 600 | | | (500) | |
| Ending balance | | $ | 400 | | | $ | 2,600 | | | $ | 1,400 | | | $ | 4,400 | |
| | | | | | | | |
| Year ended December 31, 2021 | | | | | | | | |
| Allowance for loan commitments: | | | | | | | | |
| Beginning balance | | $ | 300 | | | $ | 3,000 | | | $ | 1,000 | | | $ | 4,300 | |
| Provision | | 100 | | | 700 | | | (200) | | | 600 | |
| Ending balance | | $ | 400 | | | $ | 3,700 | | | $ | 800 | | | $ | 4,900 | |
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.
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) | | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | Revolving loans | | Converted to term loans | | Total |
| December 31, 2023 | | | | | | | | | | | | | | | | | | |
| Residential 1-4 family | | | | | | | | | | | | | | | | | | |
| Current | | $ | 263,605 | | | $ | 407,304 | | | $ | 729,256 | | | $ | 399,766 | | | $ | 104,487 | | | $ | 672,408 | | | $ | — | | | $ | — | | | $ | 2,576,826 | |
| 30-59 days past due | | — | | | 708 | | | — | | | 268 | | | — | | | 3,525 | | | — | | | — | | | 4,501 | |
| 60-89 days past due | | — | | | 726 | | | 2,694 | | | — | | | — | | | 1,745 | | | — | | | — | | | 5,165 | |
| Greater than 89 days past due | | — | | | 2,519 | | | 871 | | | 1,129 | | | 489 | | | 3,662 | | | — | | | — | | | 8,670 | |
| | 263,605 | | | 411,257 | | | 732,821 | | | 401,163 | | | 104,976 | | | 681,340 | | | — | | | — | | | 2,595,162 | |
| Current YTD period | | | | | | | | | | | | | | | | | | |
| Gross charge-offs | | — | | | — | | | — | | | — | | | — | | | 994 | | | — | | | — | | | 994 | |
| Home equity line of credit | | | | | | | | | | | | | | | | | | |
| Current | | — | | | — | | | — | | | — | | | — | | | — | | | 954,461 | | | 59,146 | | | 1,013,607 | |
| 30-59 days past due | | — | | | — | | | — | | | — | | | — | | | — | | | 1,219 | | | 262 | | | 1,481 | |
| 60-89 days past due | | — | | | — | | | — | | | — | | | — | | | — | | | 597 | | | — | | | 597 | |
| Greater than 89 days past due | | — | | | — | | | — | | | — | | | — | | | — | | | 1,111 | | | 411 | | | 1,522 | |
| | — | | | — | | | — | | | — | | | — | | | — | | | 957,388 | | | 59,819 | | | 1,017,207 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Term loans by origination year | | Revolving loans | | |
| (in thousands) | | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | Revolving loans | | Converted to term loans | | Total |
| Current YTD period | | | | | | | | | | | | | | | | | | |
| Gross charge-offs | | — | | | — | | | — | | | — | | | — | | | — | | | 92 | | | 283 | | | 375 | |
| Residential land | | | | | | | | | | | | | | | | | | |
| Current | | 3,788 | | | 4,097 | | | 7,234 | | | 1,847 | | | — | | | 723 | | | — | | | — | | | 17,689 | |
| 30-59 days past due | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| 60-89 days past due | | — | | | 675 | | | — | | | — | | | — | | | — | | | — | | | — | | | 675 | |
| Greater than 89 days past due | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | 3,788 | | | 4,772 | | | 7,234 | | | 1,847 | | | — | | | 723 | | | — | | | — | | | 18,364 | |
| Current YTD period | | | | | | | | | | | | | | | | | | |
| Gross charge-offs | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Residential construction | | | | | | | | | | | | | | | | | | |
| Current | | 5,369 | | | 10,984 | | | 1,490 | | | — | | | — | | | — | | | — | | | — | | | 17,843 | |
| 30-59 days past due | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| 60-89 days past due | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Greater than 89 days past due | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | 5,369 | | | 10,984 | | | 1,490 | | | — | | | — | | | — | | | — | | | — | | | 17,843 | |
| Current YTD period | | | | | | | | | | | | | | | | | | |
| Gross charge-offs | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Consumer | | | | | | | | | | | | | | | | | | |
| Current | | 87,686 | | | 153,239 | | | 9,852 | | | 1,654 | | | 451 | | | 200 | | | 10,663 | | | 2,779 | | | 266,524 | |
| 30-59 days past due | | 805 | | | 1,314 | | | 176 | | | 29 | | | 24 | | | — | | | 56 | | | 163 | | | 2,567 | |
| 60-89 days past due | | 385 | | | 886 | | | 114 | | | 41 | | | 21 | | | — | | | 60 | | | 69 | | | 1,576 | |
| Greater than 89 days past due | | 354 | | | 786 | | | 101 | | | 24 | | | 34 | | | — | | | 67 | | | 223 | | | 1,589 | |
| | 89,230 | | | 156,225 | | | 10,243 | | | 1,748 | | | 530 | | | 200 | | | 10,846 | | | 3,234 | | | 272,256 | |
| Current YTD period | | | | | | | | | | | | | | | | | | |
| Gross charge-offs | | 2,139 | | | 6,539 | | | 1,032 | | | 194 | | | 378 | | | 40 | | | 422 | | | 483 | | | 11,227 | |
| Commercial real estate | | | | | | | | | | | | | | | | | | |
| Pass | | 104,368 | | | 384,144 | | | 180,986 | | | 267,458 | | | 65,625 | | | 307,367 | | | 15,482 | | | — | | | 1,325,430 | |
| Special Mention | | — | | | 1,975 | | | 11,159 | | | — | | | 14,110 | | | 3,008 | | | — | | | — | | | 30,252 | |
| Substandard | | — | | | — | | | 1,538 | | | — | | | 11,048 | | | 5,770 | | | — | | | — | | | 18,356 | |
| Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | 104,368 | | | 386,119 | | | 193,683 | | | 267,458 | | | 90,783 | | | 316,145 | | | 15,482 | | | — | | | 1,374,038 | |
| Current YTD period | | | | | | | | | | | | | | | | | | |
| Gross charge-offs | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Commercial construction | | | | | | | | | | | | | | | | | | |
| Pass | | 45,863 | | | 33,240 | | | 26,133 | | | 1,333 | | | — | | | — | | | 65,836 | | | — | | | 172,405 | |
| Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | 45,863 | | | 33,240 | | | 26,133 | | | 1,333 | | | — | | | — | | | 65,836 | | | — | | | 172,405 | |
| Current YTD period | | | | | | | | | | | | | | | | | | |
| Gross charge-offs | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Commercial | | | | | | | | | | | | | | | | | | |
| Pass | | 124,667 | | | 199,796 | | | 106,669 | | | 73,976 | | | 37,580 | | | 80,012 | | | 87,206 | | | 6,250 | | | 716,156 | |
| Special Mention | | 1,860 | | | 6,989 | | | 951 | | | — | | | 250 | | | — | | | 7,352 | | | — | | | 17,402 | |
| Substandard | | — | | | 2,962 | | | 1,848 | | | 98 | | | 60 | | | 3,369 | | | 1,275 | | | 133 | | | 9,745 | |
| Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | 126,527 | | | 209,747 | | | 109,468 | | | 74,074 | | | 37,890 | | | 83,381 | | | 95,833 | | | 6,383 | | | 743,303 | |
| Current YTD period | | | | | | | | | | | | | | | | | | |
| Gross charge-offs | | $ | — | | | $ | — | | | $ | 51 | | | $ | — | | | $ | — | | | $ | — | | | $ | 332 | | | $ | 340 | | | $ | 723 | |
| Total loans | | $ | 638,750 | | | $ | 1,212,344 | | | $ | 1,081,072 | | | $ | 747,623 | | | $ | 234,179 | | | $ | 1,081,789 | | | $ | 1,145,385 | | | $ | 69,436 | | | $ | 6,210,578 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Term loans by origination year | | Revolving loans | | |
| (in thousands) | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Revolving loans | | Converted to term loans | | Total |
| December 31, 2022 | | | | | | | | | | | | | | | | | | |
| Residential 1-4 family | | | | | | | | | | | | | | | | | | |
| Current | | $ | 432,707 | | | $ | 755,056 | | | $ | 423,455 | | | $ | 113,096 | | | $ | 51,860 | | | $ | 698,354 | | | $ | — | | | $ | — | | | $ | 2,474,528 | |
| 30-59 days past due | | — | | | — | | | — | | | — | | | 448 | | | 1,098 | | | — | | | — | | | 1,546 | |
| 60-89 days past due | | — | | | — | | | 268 | | | — | | | — | | | 90 | | | — | | | — | | | 358 | |
| Greater than 89 days past due | | — | | | — | | | — | | | — | | | 809 | | | 2,396 | | | — | | | — | | | 3,205 | |
| | 432,707 | | | 755,056 | | | 423,723 | | | 113,096 | | | 53,117 | | | 701,938 | | | — | | | — | | | 2,479,637 | |
| Home equity line of credit | | | | | | | | | | | | | | | | | | |
| Current | | — | | | — | | | — | | | — | | | — | | | — | | | 959,131 | | | 40,814 | | | 999,945 | |
| 30-59 days past due | | — | | | — | | | — | | | — | | | — | | | — | | | 1,103 | | | 209 | | | 1,312 | |
| 60-89 days past due | | — | | | — | | | — | | | — | | | — | | | — | | | 209 | | | 226 | | | 435 | |
| Greater than 89 days past due | | — | | | — | | | — | | | — | | | — | | | — | | | 587 | | | 626 | | | 1,213 | |
| | — | | | — | | | — | | | — | | | — | | | — | | | 961,030 | | | 41,875 | | | 1,002,905 | |
| Residential land | | | | | | | | | | | | | | | | | | |
| Current | | 5,245 | | | 9,010 | | | 5,222 | | | 203 | | | 522 | | | 477 | | | — | | | — | | | 20,679 | |
| 30-59 days past due | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| 60-89 days past due | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Greater than 89 days past due | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | 5,245 | | | 9,010 | | | 5,222 | | | 203 | | | 522 | | | 477 | | | — | | | — | | | 20,679 | |
| Residential construction | | | | | | | | | | | | | | | | | | |
| Current | | 7,986 | | | 11,624 | | | 1,178 | | | — | | | — | | | — | | | — | | | — | | | 20,788 | |
| 30-59 days past due | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| 60-89 days past due | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Greater than 89 days past due | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | 7,986 | | | 11,624 | | | 1,178 | | | — | | | — | | | — | | | — | | | — | | | 20,788 | |
| Consumer | | | | | | | | | | | | | | | | | | |
| Current | | 199,574 | | | 21,330 | | | 5,543 | | | 7,580 | | | 527 | | | 140 | | | 10,810 | | | 4,782 | | | 250,286 | |
| 30-59 days past due | | 1,110 | | | 287 | | | 65 | | | 239 | | | 30 | | | — | | | 81 | | | 167 | | | 1,979 | |
| 60-89 days past due | | 756 | | | 163 | | | 88 | | | 137 | | | 19 | | | — | | | 45 | | | 107 | | | 1,315 | |
| Greater than 89 days past due | | 621 | | | 105 | | | 37 | | | 176 | | | 28 | | | — | | | 20 | | | 142 | | | 1,129 | |
| | 202,061 | | | 21,885 | | | 5,733 | | | 8,132 | | | 604 | | | 140 | | | 10,956 | | | 5,198 | | | 254,709 | |
| Commercial real estate | | | | | | | | | | | | | | | | | | |
| Pass | | 390,206 | | | 177,130 | | | 283,321 | | | 51,542 | | | 63,084 | | | 278,280 | | | 8,235 | | | — | | | 1,251,798 | |
| Special Mention | | — | | | 11,250 | | | 3,446 | | | 40,423 | | | — | | | 24,466 | | | — | | | — | | | 79,585 | |
| Substandard | | — | | | — | | | 665 | | | 11,357 | | | — | | | 14,718 | | | — | | | — | | | 26,740 | |
| Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | 390,206 | | | 188,380 | | | 287,432 | | | 103,322 | | | 63,084 | | | 317,464 | | | 8,235 | | | — | | | 1,358,123 | |
| Commercial construction | | | | | | | | | | | | | | | | | | |
| Pass | | 15,094 | | | 47,478 | | | 44 | | | — | | | — | | | — | | | 25,873 | | | — | | | 88,489 | |
| Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | 15,094 | | | 47,478 | | | 44 | | | — | | | — | | | — | | | 25,873 | | | — | | | 88,489 | |
| Commercial | | | | | | | | | | | | | | | | | | |
| Pass | | 239,852 | | | 185,013 | | | 85,220 | | | 68,161 | | | 46,142 | | | 53,192 | | | 60,871 | | | 13,964 | | | 752,415 | |
| Special Mention | | — | | | — | | | — | | | 2,374 | | | — | | | 645 | | | 9,005 | | | 8 | | | 12,032 | |
| Substandard | | 3,322 | | | 2,305 | | | 401 | | | 1,304 | | | 1,346 | | | 3,849 | | | 1,664 | | | 1,053 | | | 15,244 | |
| Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | 243,174 | | | 187,318 | | | 85,621 | | | 71,839 | | | 47,488 | | | 57,686 | | | 71,540 | | | 15,025 | | | 779,691 | |
| Total loans | | $ | 1,296,473 | | | $ | 1,220,751 | | | $ | 808,953 | | | $ | 296,592 | | | $ | 164,815 | | | $ | 1,077,705 | | | $ | 1,077,634 | | | $ | 62,098 | | | $ | 6,005,021 | |
Revolving loans converted to term loans during 2023 in the commercial, home equity line of credit and consumer portfolios were $2.8 million, $26.4 million and $1.1 million, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 | | Greater
than
90 days | | Total
past due | | Current | | Total
financing
receivables | | Recorded
investment>
90 days and
accruing |
| December 31, 2023 | | | | | | | | | | | | | |
| Real estate: | | | | | | | | | | | | | |
| Residential 1-4 family | $ | 4,501 | | | $ | 5,165 | | | $ | 8,670 | | | $ | 18,336 | | | $ | 2,576,826 | | | $ | 2,595,162 | | | $ | 425 | |
| Commercial real estate | — | | | — | | | 11,048 | | | 11,048 | | | 1,362,990 | | | 1,374,038 | | | — | |
| Home equity line of credit | 1,481 | | | 597 | | | 1,522 | | | 3,600 | | | 1,013,607 | | | 1,017,207 | | | — | |
| Residential land | — | | | 675 | | | — | | | 675 | | | 17,689 | | | 18,364 | | | — | |
| Commercial construction | — | | | — | | | — | | | — | | | 172,405 | | | 172,405 | | | — | |
| Residential construction | — | | | — | | | — | | | — | | | 17,843 | | | 17,843 | | | — | |
| Commercial | 163 | | | 135 | | | 244 | | | 542 | | | 742,761 | | | 743,303 | | | — | |
| Consumer | 2,567 | | | 1,576 | | | 1,589 | | | 5,732 | | | 266,524 | | | 272,256 | | | — | |
| Total loans | $ | 8,712 | | | $ | 8,148 | | | $ | 23,073 | | | $ | 39,933 | | | $ | 6,170,645 | | | $ | 6,210,578 | | | $ | 425 | |
| December 31, 2022 | | | | | | | | | | | | | |
| Real estate: | | | | | | | | | | | | | |
| Residential 1-4 family | $ | 1,546 | | | $ | 358 | | | $ | 3,205 | | | $ | 5,109 | | | $ | 2,474,528 | | | $ | 2,479,637 | | | $ | — | |
| Commercial real estate | 508 | | | 217 | | | — | | | 725 | | | 1,357,398 | | | 1,358,123 | | | — | |
| Home equity line of credit | 1,312 | | | 435 | | | 1,213 | | | 2,960 | | | 999,945 | | | 1,002,905 | | | — | |
| Residential land | — | | | — | | | — | | | — | | | 20,679 | | | 20,679 | | | — | |
| Commercial construction | — | | | — | | | — | | | — | | | 88,489 | | | 88,489 | | | — | |
| Residential construction | — | | | — | | | — | | | — | | | 20,788 | | | 20,788 | | | — | |
| Commercial | 614 | | | 18 | | | 77 | | | 709 | | | 778,982 | | | 779,691 | | | — | |
| Consumer | 1,979 | | | 1,315 | | | 1,129 | | | 4,423 | | | 250,286 | | | 254,709 | | | — | |
| Total loans | $ | 5,959 | | | $ | 2,343 | | | $ | 5,624 | | | $ | 13,926 | | | $ | 5,991,095 | | | $ | 6,005,021 | | | $ | — | |
The credit risk profile based on nonaccrual loans were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
| (in thousands) | With a related
ACL | | Without a
related ACL | | Total | | With a related
ACL | | Without a
related ACL | | Total |
| Real estate: | | | | | | | | | | | |
| Residential 1-4 family | $ | 7,755 | | | $ | 2,190 | | | $ | 9,945 | | | $ | 4,198 | | | $ | 2,981 | | | $ | 7,179 | |
| Commercial real estate | 11,048 | | | — | | | 11,048 | | | — | | | — | | | — | |
| Home equity line of credit | 2,626 | | | 1,135 | | | 3,761 | | | 3,654 | | | 1,442 | | | 5,096 | |
| Residential land | 780 | | | — | | | 780 | | | 420 | | | — | | | 420 | |
| Commercial construction | — | | | — | | | — | | | — | | | — | | | — | |
| Residential construction | — | | | — | | | — | | | — | | | — | | | — | |
| Commercial | 133 | | | 301 | | | 434 | | | 2,183 | | | — | | | 2,183 | |
| Consumer | 2,458 | | | — | | | 2,458 | | | 1,588 | | | — | | | 1,588 | |
| Total | $ | 24,800 | | | $ | 3,626 | | | $ | 28,426 | | | $ | 12,043 | | | $ | 4,423 | | | $ | 16,466 | |
ASB did not recognize interest on nonaccrual loans for 2023, 2022 and 2021.
Modifications Made to Borrowers Experiencing Financial Difficulty. The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon origination. The starting point for the estimate of the allowance for credit losses is historical loan information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. ASB uses a probability of default/loss given default model to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made at the time of the modification.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses, a change to the allowance for credit losses is generally not recorded upon modification.
Modifications may include interest rate reductions, interest only payments for an extended period of time, protracted terms such as amortization and maturity beyond the customary length of time found in the normal marketplace, and other actions intended to minimize economic loss and to provide alternatives to foreclosure or repossession of collateral.
During 2023, no loans received a material modification based on borrower financial difficulty.
Troubled debt restructurings. Prior to January 1, 2023, a loan modification was deemed to be a TDR when the borrower was determined to be experiencing financial difficulties and ASB granted a concession it would not have otherwise considered. With the adoption of ASU No. 2022-02, accounting guidance for TDRs by creditors was eliminated. Loan refinancing and restructuring guidance was applied to determine whether a modification resulted in a new loan or a continuation of an existing loan. The disclosures below relate to TDRs for prior periods in accordance with Subtopic 310-40, Receivables-Troubled Debt Restructurings by Creditors.
When a borrower who was experiencing financial difficulty failed to make a required payment on a loan or was in imminent default, ASB took a number of steps to improve the collectability of the loan and maximize the likelihood of full repayment. At times, ASB may have modified or restructured a loan to help a distressed borrower improve its financial position to eventually be able to fully repay the loan, provided the borrower had demonstrated both the willingness and the ability to fulfill the modified terms. TDR loans were considered an alternative to foreclosure or liquidation with the goal of minimizing losses to ASB and maximizing recovery.
ASB may have considered various types of concessions in granting a TDR including maturity date extensions, extended amortization of principal, temporary deferral of principal payments, and temporary interest rate reductions. ASB rarely granted principal forgiveness in its TDR modifications. Residential loan TDR modifications generally involved interest rate reduction, extending the amortization period, or capitalizing certain delinquent amounts owed not to exceed the original loan balance. Land loan TDR modifications typically involved extending the maturity date up to three years and converting the payments from interest-only to principal and interest monthly, at the same or higher interest rate. Commercial loan TDR modifications generally involved extensions of maturity dates, extending the interest only or amortization period, and temporary deferral or reduction of principal payments. ASB generally did not reduce the interest rate on commercial loan TDR modifications. Occasionally, additional collateral and/or guaranties were obtained.
The allowance for credit losses on TDR loans that did not share risk characteristics were 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 was an increase to the allowance associated with the modified loan. When available information confirmed that specific loans or portions thereof are uncollectible (confirmed losses), those amounts were charged off against the allowance for credit losses.
The credit risk profile based on loans whose terms have been modified and accruing interest were as follows:
| | | | | | | | | | | |
| (in thousands) | | | December 31, 2022 |
| Real estate: | | | |
| Residential 1-4 family | | | $ | 8,821 | |
| Commercial real estate | | | 9,477 | |
| Home equity line of credit | | | 4,404 | |
| Residential land | | | 782 | |
| Commercial construction | | | — | |
| Residential construction | | | — | |
| Commercial | | | 6,596 | |
| Consumer | | | 50 | |
| Total troubled debt restructured loans accruing interest | | | $ | 30,130 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Loan modifications that occurred during 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | |
| |
| (dollars in thousands) | Number of contracts | | Outstanding recorded investment (as of period end)1 | | Related allowance (as of period end) |
| | | | |
| Year ended December 31, 2022 | | | | | |
| Real estate: | | | | | |
| Residential 1-4 family | 5 | | | $ | 1,475 | | | $ | 164 | |
| Commercial real estate | — | | | — | | | — | |
| Home equity line of credit | — | | | — | | | — | |
| Residential land | 1 | | | 203 | | | 42 | |
| Commercial construction | — | | | — | | | — | |
| Residential construction | — | | | — | | | — | |
| Commercial | 3 | | | 2,634 | | | 497 | |
| Consumer | — | | | — | | | — | |
| 9 | | | $ | 4,312 | | | $ | 703 | |
| Year ended December 31, 2021 | | | | | |
| Real estate: | | | | | |
| Residential 1-4 family | 14 | | | $ | 8,379 | | | $ | 442 | |
| Commercial real estate | — | | | — | | | — | |
| Home equity line of credit | — | | | — | | | — | |
| Residential land | 3 | | | 799 | | | 38 | |
| Commercial construction | — | | | — | | | — | |
| Residential construction | — | | | — | | | — | |
| Commercial | 7 | | | 2,931 | | | 205 | |
| Consumer | — | | | — | | | — | |
| 24 | | | $ | 12,109 | | | $ | 685 | |
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Loans modified in TDRs that experienced a payment default of 90 days or more in 2022 and 2021 and for which the payment default occurred within one year of the modification, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years ended December 31 | | 2022 | | 2021 |
| (dollars in thousands) | | Number of
contracts | | Recorded
investment | | Number of
contracts | | Recorded
investment |
Troubled debt restructurings that subsequently defaulted | | | | | | | | |
| Real estate: | | | | | | | | |
| Residential 1-4 family | | — | | | $ | — | | | 1 | | | $ | 474 | |
| Commercial real estate | | — | | | — | | | — | | | — | |
| Home equity line of credit | | — | | | — | | | — | | | — | |
| Residential land | | — | | | — | | | — | | | — | |
| Commercial construction | | — | | | — | | | — | | | — | |
| Residential construction | | — | | | — | | | — | | | — | |
| Commercial | | — | | | — | | | 1 | | | 9 | |
| Consumer | | — | | | — | | | — | | | — | |
| | | — | | | $ | — | | | 2 | | | $ | 483 | |
If a loan modified in a TDR subsequently defaulted, ASB evaluated 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 December 31, 2022.
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:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2023 | | December 31, 2022 |
| | Amortized cost | | Collateral type | | Amortized cost | | Collateral type |
| (in thousands) | | | | | | | | |
| Real estate: | | | | | | | | |
| Residential 1-4 family | | $ | 2,272 | | | Residential real estate property | | $ | 3,959 | | | Residential real estate property |
| Commercial real estate | | 11,048 | | | Commercial real estate property | | — | | | |
| Home equity line of credit | | 1,135 | | | Residential real estate property | | 1,425 | | | Residential real estate property |
| Residential land | | — | | | | | — | | | |
| | | | | | | | |
| Total real estate | | 14,455 | | | | | 5,384 | | | |
| Commercial | | 301 | | | Business assets | | — | | | |
| Total | | $ | 14,756 | | | | | $ | 5,384 | | | |
ASB had $3.4 million and $4.2 million of consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure at December 31, 2023 and 2022, respectively.
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 $49.2 million, $136.5 million and $364.8 million of proceeds from the sale of residential mortgages in 2023, 2022, and 2021, respectively, and recognized gains on such sales of $0.9 million, $1.7 million, and $9.3 million in 2023, 2022, and 2021, respectively.
There was one repurchased mortgage loan for 2022 and no repurchased mortgage loans for 2023 and 2021. ASB believes that the current unpaid principal balance of loans sold to date represents the maximum exposure to repurchases and has established a repurchase reserve of $0.1 million as of December 31, 2023 and 2022, to estimate its probable exposure to repurchases.
Mortgage servicing fees, a component of other income, net, were $3.5 million, $3.7 million and $3.8 million for the years ended December 31, 2023, 2022, and 2021, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Changes in the carrying value of MSRs were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Gross carrying amount | | Accumulated amortization | | Valuation allowance | | Net
carrying amount |
| December 31, 2023 | $ | 18,241 | | | $ | (10,072) | | | $ | — | | | $ | 8,169 | |
| December 31, 2022 | $ | 19,544 | | | $ | (10,497) | | | $ | — | | | $ | 9,047 | |
Changes related to MSRs were as follows:
| | | | | | | | | | | | | | | | | |
| (in thousands) | 2023 | | 2022 | | 2021 |
| Mortgage servicing rights | | | | | |
| Balance, January 1 | $ | 9,047 | | | $ | 9,950 | | | $ | 10,280 | |
| Amount capitalized | 423 | | | 1,130 | | | 3,404 | |
| Amortization | (1,301) | | | (2,033) | | | (3,734) | |
| Sale of mortgage servicing rights | — | | | — | | | — | |
| Other-than-temporary impairment | — | | | — | | | — | |
| Carrying amount before valuation allowance, December 31 | 8,169 | | | 9,047 | | | 9,950 | |
| Valuation allowance for mortgage servicing rights | | | | | |
| Balance, January 1 | — | | | — | | | 260 | |
| Provision | — | | | — | | | (260) | |
| Other-than-temporary impairment | — | | | — | | | — | |
| Balance, December 31 | — | | | — | | | — | |
| Net carrying value of mortgage servicing rights | $ | 8,169 | | | $ | 9,047 | | | $ | 9,950 | |
The estimated aggregate amortization expenses of MSRs for 2024, 2025, 2026, 2027 and 2028 are $1.0 million, $0.9 million, $0.8 million, $0.8 million and $0.7 million, respectively.
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:
| | | | | | | | | | | |
| December 31 | 2023 | | 2022 |
| (dollars in thousands) | | | |
| Unpaid principal balance | $ | 1,402,736 | | | $ | 1,451,322 | |
| Weighted average note rate | 3.47 | % | | 3.38 | % |
| Weighted average discount rate | 10.00 | % | | 10.00 | % |
| Weighted average prepayment speed | 5.71 | % | | 6.56 | % |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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:
| | | | | | | | | | | |
| December 31 | 2023 | | 2022 |
| (in thousands) | | | |
| Prepayment rate: | | | |
| 25 basis points adverse rate change | $ | (90) | | | $ | (92) | |
| 50 basis points adverse rate change | (204) | | | (214) | |
| Discount rate: | | | |
| 25 basis points adverse rate change | (203) | | | (182) | |
| 50 basis points adverse rate change | (402) | | | (361) | |
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.
Deposit liabilities. The summarized components of deposit liabilities were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31 | 2023 | | 2022 |
| (dollars in thousands) | Weighted-average stated rate | | Amount | | Weighted-average stated rate | | Amount |
| Savings | 0.15 | % | | $ | 2,765,175 | | | 0.03 | % | | $ | 3,198,329 | |
| Checking | | | | | | | |
| Interest-bearing | 0.85 | | | 1,427,225 | | | 0.17 | | | 1,359,519 | |
| Noninterest-bearing | — | | | 1,383,197 | | | — | | | 1,453,937 | |
| Commercial checking | — | | | 1,216,565 | | | — | | | 1,357,140 | |
| Money market | 3.52 | | | 289,709 | | | 0.82 | | | 189,053 | |
| Time certificates | 3.99 | | | 1,063,907 | | | 2.39 | | | 611,718 | |
| | 0.85 | % | | $ | 8,145,778 | | | 0.24 | % | | $ | 8,169,696 | |
As of December 31, 2023 and 2022, time certificates of $250,000 or more totaled $348.2 million and $346.9 million, respectively.
The approximate scheduled maturities of time certificates outstanding at December 31, 2023 were as follows:
| | | | | |
| (in thousands) | |
| 2024 | $ | 898,996 | |
| 2025 | 136,462 | |
| 2026 | 14,405 | |
| 2027 | 6,158 | |
| 2028 | 5,854 | |
| Thereafter | 2,032 | |
| $ | 1,063,907 | |
Overdrawn deposit accounts are classified as loans and totaled $3.9 million and $1.5 million at December 31, 2023 and 2022, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Interest expense on deposit liabilities by type of deposit was as follows:
| | | | | | | | | | | | | | | | | |
| Years ended December 31 | 2023 | | 2022 | | 2021 |
| (in thousands) | | | | | |
| Time certificates | $ | 31,366 | | | $ | 5,372 | | | $ | 3,805 | |
| Savings | 2,367 | | | 860 | | | 802 | |
| Money market | 8,669 | | | 330 | | | 132 | |
| Interest-bearing checking | 6,503 | | | 765 | | | 242 | |
| | $ | 48,905 | | | $ | 7,327 | | | $ | 4,981 | |
Other borrowings.
Securities sold under agreements to repurchase. Securities sold under agreements to repurchase are accounted for as financing transactions and the obligations to repurchase these securities are recorded as liabilities in the consolidated balance sheets. ASB pledges investment securities as collateral for securities sold under agreements to repurchase. All such agreements are subject to master netting arrangements, which provide for conditional right of set-off in case of default by either party; however, ASB presents securities sold under agreements to repurchase on a gross basis in the balance sheet. The 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 | | | | | | |
| December 31, 2023 | | $ | — | | | $ | — | | | $ | — | |
| December 31, 2022 | | 281 | | | — | | | 281 | |
| | | | | | | | | | | | | | | | | | | | |
| | | 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 | | | | | | |
| | | | | | |
| | | | | | |
| December 31, 2023 | | $ | — | | | $ | — | | | $ | — | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| December 31, 2022 | | 281 | | | 327 | | | — | |
| | | | | | |
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. The counterparties or tri-parties may determine that additional collateral is required based on movements in the fair value of the collateral. Typically, a five percent discount is taken from the fair value of the investment securities to determine the value of the collateral pledged for the repurchase agreements.
Information concerning securities sold under agreements to repurchase, which provided for the repurchase of identical securities, was as follows:
| | | | | | | | | | | | | | | | | |
| (dollars in thousands) | 2023 | | 2022 | | 2021 |
| Amount outstanding as of December 31 | $ | — | | | $ | 281,120 | | | $ | 88,305 | |
| Average amount outstanding during the year | 62,441 | | | 127,170 | | | 88,405 | |
| Maximum amount outstanding as of any month-end | 148,060 | | | 284,040 | | | 129,665 | |
| Weighted-average interest rate as of December 31 | — | % | | 3.02 | % | | 0.02 | % |
| Weighted-average interest rate during the year | 3.48 | % | | 0.99 | % | | 0.02 | % |
| Weighted-average remaining days to maturity as of December 31 | 0 | | 1 | | 1 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Securities sold under agreements to repurchase were summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31 | 2023 | | 2022 |
| Maturity | Repurchase liability | | Weighted-average
interest rate | | Collateralized by
mortgage-backed
securities and federal
agency obligations at fair value plus
accrued interest | | Repurchase liability | | Weighted-average
interest rate | | Collateralized by
mortgage-backed
securities and federal
agency obligations at fair value plus
accrued interest |
| (dollars in thousands) | | | | | | | | | | | |
| Overnight | $ | — | | | — | % | | $ | — | | | $ | 281,120 | | | 3.02 | % | | $ | 326,841 | |
| 1 to 29 days | — | | | — | % | | — | | | — | | | — | % | | — | |
| 30 to 90 days | — | | | — | % | | — | | | — | | | — | % | | — | |
| Over 90 days | — | | | — | % | | — | | | — | | | — | % | | — | |
| | $ | — | | | — | % | | $ | — | | | $ | 281,120 | | | 3.02 | % | | $ | 326,841 | |
Advances from Federal Home Loan Bank. Outstanding FHLB advances were $200 million and $414 million as of December 31, 2023 and 2022, respectively. ASB and the FHLB are parties to an Advances, Pledge and Security Agreement (Advances Agreement), which applies to currently outstanding and future advances, and governs the terms and conditions under which ASB borrows and the FHLB makes loans or advances from time to time. Under the Advances Agreement, ASB agrees to abide by the FHLB’s credit policies, and makes certain warranties and representations to the FHLB. Upon the occurrence of and during the continuation of an “Event of Default” (which term includes any event of nonpayment of interest or principal of any advance when due or failure to perform any promise or obligation under the Advances Agreement or other credit arrangements between the parties), the FHLB may, at its option, declare all indebtedness and accrued interest thereon, including any prepayment fees or charges, to be immediately due and payable. Advances from the FHLB are collateralized by loans, investment securities and stock in the FHLB. As of December 31, 2023 and 2022, ASB’s available FHLB borrowing capacity was $1.9 billion, and $1.6 billion, respectively.
ASB is required to obtain and hold a specific number of shares of capital stock of the FHLB. ASB was in compliance with all Advances Agreement requirements as of December 31, 2023 and 2022.
Borrowings from Federal Reserve Bank. In March 2023, the Federal Reserve Bank created the Bank Term Funding Program (BTFP) to provide an additional source of liquidity to eligible depository institutions. The BTFP offers loans up to one year in length that can be prepaid without penalty. The amount that can be borrowed under the BTFP is based upon the par value of securities pledged as collateral to the program. Advances can be requested under the BTFP until March 11, 2024. At December 31, 2023, ASB had $550.0 million of BTFP borrowings at a weighted average fixed rate of 4.37%, collateralized by investment securities with a book value of $804.3 million, maturing in March 2024.
Common stock equity. ASB is regulated and supervised by the OCC. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on ASB’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, ASB must meet specific capital guidelines that involve quantitative measures of ASB’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
The prompt corrective action provisions impose certain restrictions on institutions that are undercapitalized. The restrictions imposed become increasingly more severe as an institution’s capital category declines from “undercapitalized” to “critically undercapitalized.” The regulators have substantial discretion in the corrective actions they might direct and could include restrictions on dividends and other distributions that ASB may make to ASB Hawaii and the requirement that ASB develop and implement a plan to restore its capital. In 1988, HEI agreed with the OTS predecessor regulatory agency at the time, to contribute additional capital to ASB up to a maximum aggregate amount of approximately $65.1 million (Capital Maintenance Agreement). As of December 31, 2023, as a result of capital contributions in prior years, HEI’s maximum obligation to contribute additional capital under the Capital Maintenance Agreement has been reduced to approximately $28.3 million. In addition to OCC oversight, federal law and Federal Reserve Board policy require that HEI, as a savings and loan holding company, serve as a source of financial and managerial strength for any FDIC-insured depository institution that it controls. Accordingly, if ASB were to be in financial distress or to otherwise be viewed by the regulators as in unsatisfactory condition, HEI could be required to provide additional capital or liquidity support or take other action, in support of ASB.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
To be categorized as “well capitalized,” ASB must maintain minimum total capital, Tier 1 capital, and Tier 1 leverage ratios as set forth in the table below. As of December 31, 2023, and 2022 ASB was in compliance with the minimum capital requirements under OCC regulations, and was categorized as “well capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events that management believes have changed the institution’s category under the capital guidelines.
The tables below set forth actual and minimum required capital amounts and ratios:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Actual | | Minimum required | | Required to be well capitalized |
| (dollars in thousands) | Capital | | Ratio | | Capital | | Ratio | | Capital | | Ratio |
| December 31, 2023 | | | | | | | | | | | |
| Tier 1 leverage | $ | 759,921 | | | 7.68 | % | | $ | 395,812 | | | 4.00 | % | | $ | 494,765 | | | 5.00 | % |
| Common equity tier 1 | 759,921 | | | 12.27 | % | | 278,681 | | | 4.50 | % | | 402,539 | | | 6.50 | % |
| Tier 1 capital | 759,921 | | | 12.27 | % | | 371,575 | | | 6.00 | % | | 495,433 | | | 8.00 | % |
| Total capital | 828,901 | | | 13.38 | % | | 495,433 | | | 8.00 | % | | 619,291 | | | 10.00 | % |
| December 31, 2022 | | | | | | | | | | | |
| Tier 1 leverage | 750,851 | | | 7.78 | % | | 386,265 | | | 4.00 | % | | 482,831 | | | 5.00 | % |
| Common equity tier 1 | 750,851 | | | 12.15 | % | | 278,076 | | | 4.50 | % | | 401,665 | | | 6.50 | % |
| Tier 1 capital | 750,851 | | | 12.15 | % | | 370,767 | | | 6.00 | % | | 494,356 | | | 8.00 | % |
| Total capital | 811,729 | | | 13.14 | % | | 494,356 | | | 8.00 | % | | 617,946 | | | 10.00 | % |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
In 2023, ASB paid cash dividends of $39.0 million to HEI, compared to cash dividends of $42.0 million in 2022. The FRB and OCC approved the dividends.
Related-party transactions. HEI charged ASB $2.3 million, $1.9 million and $2.1 million for general management and administrative services in 2023, 2022 and 2021, respectively. The amounts charged by HEI for services performed by HEI employees to its subsidiaries are allocated primarily on the basis of time expended in providing such services. All amounts charged to ASB were settled as a capital contribution by HEI to ASB.
Derivative financial instruments. ASB enters into interest rate lock commitments (IRLCs) with borrowers, and forward commitments to sell loans or to-be-announced mortgage-backed securities to investors to hedge against the inherent interest rate and pricing risks associated with selling loans.
ASB enters into IRLCs for residential mortgage loans, which commit ASB to lend funds to a potential borrower at a specific interest rate and within a specified period of time. IRLCs that relate to the origination of mortgage loans that will be held for sale are considered derivative financial instruments under applicable accounting guidance. Outstanding IRLCs expose ASB to the risk that the price of the mortgage loans underlying the commitments may decline due to increases in mortgage interest rates from inception of the rate lock to the funding of the loan. The IRLCs are free-standing derivatives which are carried at fair value with changes recorded in mortgage banking income.
ASB enters into forward commitments to hedge the interest rate risk for rate locked mortgage applications in process and closed mortgage loans held for sale. These commitments are primarily forward sales of to-be-announced mortgage backed securities. Generally, when mortgage loans are closed, the forward commitment is liquidated and replaced with a mandatory delivery forward sale of the mortgage to a secondary market investor. In some cases, a best-efforts forward sale agreement is utilized as the forward commitment. These commitments are free-standing derivatives which are carried at fair value with changes recorded in mortgage banking income.
Changes in the fair value of IRLCs and forward commitments subsequent to inception are based on changes in the fair value of the underlying loan resulting from the fulfillment of the commitment and changes in the probability that the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time.
The notional amount and fair value of ASB’s derivative financial instruments were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31 | 2023 | | 2022 |
| (in thousands) | Notional amount | | Fair value | | Notional amount | | Fair value |
| Interest rate lock commitments | $ | 6,246 | | | $ | 86 | | | $ | 1,720 | | | $ | 9 | |
| Forward commitments | 5,500 | | | (18) | | | 1,500 | | | 18 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ASB’s derivative financial instruments, their fair values, and balance sheet location were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Derivative Financial Instruments Not Designated | | | | | | | |
as Hedging Instruments 1 | | | | | | | |
| December 31 | 2023 | | 2022 |
| (in thousands) | Asset derivatives | | Liability derivatives | | Asset derivatives | | Liability derivatives |
| Interest rate lock commitments | $ | 86 | | | $ | — | | | $ | 9 | | | $ | — | |
| Forward commitments | — | | | 18 | | | 18 | | | — | |
| | $ | 86 | | | $ | 18 | | | $ | 27 | | | $ | — | |
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 | Location of net gains | | | | | | |
| as Hedging Instruments | (losses) recognized in | | Years ended December 31 |
| (in thousands) | the Statements of Income | | 2023 | | 2022 | | 2021 |
| Interest rate lock commitments | Mortgage banking income | | $ | 77 | | | $ | (629) | | | $ | (3,898) | |
| Forward commitments | Mortgage banking income | | (36) | | | 29 | | | 489 | |
| | | | $ | 41 | | | $ | (600) | | | $ | (3,409) | |
Commitments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitments. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since certain commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. ASB minimizes its exposure to loss under these commitments by requiring that customers meet certain conditions prior to disbursing funds. The amount of collateral, if any, is based on a credit evaluation of the borrower and may include residential real estate, accounts receivable, inventory and property, plant and equipment.
Letters of credit are conditional commitments issued by ASB to guarantee payment and performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. ASB holds collateral supporting those commitments for which collateral is deemed necessary.
The following is a summary of outstanding off-balance sheet arrangements:
| | | | | | | | | | | |
| December 31 | 2023 | | 2022 |
| (in thousands) | | | |
| Unfunded commitments to extend credit: | | | |
| Home equity line of credit | $ | 1,141,891 | | | $ | 1,264,320 | |
| Commercial and commercial real estate | 602,973 | | | 692,989 | |
| Consumer | 67,229 | | | 85,768 | |
| Residential 1-4 family | 25,037 | | | 20,546 | |
| Commercial and financial standby letters of credit | 9,359 | | | 15,521 | |
| Total | $ | 1,846,489 | | | $ | 2,079,144 | |
Federal Deposit Insurance Corporation assessment. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) raised the minimum reserve ratio for the Deposit Insurance Fund (DIF) to 1.35 percent. As of June 30, 2020, the Federal Deposit Insurance Corporation (FDIC) DIF reserve ratio fell to 1.30%, below the statutory minimum of 1.35%. The FDIC, as required under the Federal Deposit Insurance Act, established a plan on September 15, 2020 to restore the DIF reserve ratio to meet or exceed the statutory minimum of 1.35% within eight years. On October 18, 2022, the FDIC adopted an amended restoration plan to increase the likelihood that the reserve ratio would be restored to at least 1.35% by September 30, 2028. The FDIC’s amended restoration plan increases the initial base deposit insurance assessment rate schedules uniformly by 2 basis points, beginning in 2023. For the years ended December 31, 2023, 2022 and 2021 ASB’s FDIC insurance expenses were $6.2 million, $3.6 million and $3.2 million, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | |
Note 6 · Short-term borrowings |
Commercial paper and bank term loan. As of December 31, 2023 and 2022, HEI had nil and $50 million of commercial paper outstanding, respectively. The weighted-average interest rate of HEI’s outstanding commercial paper as of December 31, 2022 was 5.19%.
As of December 31, 2023 and 2022, Hawaiian Electric had nil and $88 million commercial paper outstanding, respectively. The weighted-average interest rate of Hawaiian Electric’s outstanding commercial paper as of December 31, 2022 was 4.8%.
At both December 31, 2023 and 2022, HEI had five letters of credit outstanding in the aggregate amount of $8 million, on behalf of Mauo and Hamakua Energy.
HEI term loan. On October 20, 2022, HEI entered into a term loan facility in the aggregate principal amount of $100 million. On December 28, 2022, HEI drew $35 million on the term loan and on March 31, 2023, HEI drew the remaining $65 million at an initial interest rate of 5.81% for an initial one month interest period. On May 31, 2023, HEI fully repaid the term loan facility at which time it was terminated. Borrowings under the facility bore interest at Term Secured Overnight Financing Rate (SOFR), as defined in the agreement, plus an applicable margin and a SOFR spread adjustment. The term loan facility contained certain restrictive financial covenants that were substantially the same as the financial covenants contained in the HEI credit facility.
Credit agreements. On May 14, 2021, HEI and Hawaiian Electric each entered into a separate agreement with a syndicate of nine financial institutions (the HEI Facility and Hawaiian Electric Facility, respectively, and together, the Credit Facilities) to amend and restate their respective previously existing revolving unsecured credit agreements. The $175 million HEI Facility’s initial termination date was May 14, 2026. The $200 million Hawaiian Electric Facility’s initial termination date was May 13, 2022, but on February 18, 2022, the PUC approved Hawaiian Electric’s request to extend the term of the $200 million Hawaiian Electric Facility to May 14, 2026. In addition to extending the term, Hawaiian Electric also received PUC approval to exercise its options of two one-year extensions of the commitment termination date and to increase its aggregate revolving commitment amount from $200 million to $275 million, should there be a need.
On April 21, 2023, HEI and Hawaiian Electric executed Amendment No. 1 to the Credit Facilities (Amendment). The Amendment was executed to reflect the transition from the London Inter-Bank Offered Rate (LIBOR) to the Term Secured Overnight Financing Rate (SOFR) as the benchmark interest rate for non-Alternate Base Rate (ABR) Loans under the Credit Facilities.
On May 14, 2023, HEI and Hawaiian Electric exercised their first of two, one-year extensions to the commitment termination date with eight of the nine financial institutions to extend the Credit Facilities to May 14, 2027. The committed capacities under the HEI Facility and Hawaiian Electric Facility are $175 million and $200 million, respectively, through May 14, 2026, and step down to approximately $157 million and $180 million, respectively, through May 14, 2027 (see Note 7).
After multiple downgrades of the Companies’ credit ratings to ratings below investment grade, by Fitch, Moody’s and S&P due to the Maui windstorm and wildfires, on August 15, 2023, HEI made an initial $2.5 million draw on its $175 million existing revolving credit facility to repay maturing commercial paper. By August 23, 2023, HEI drew its remaining and Hawaiian Electric drew its full committed capacity on their respective existing revolving credit facilities, totaling $175 million and $200 million, respectively. The draws were made to provide access to liquidity and support the Company’s restoration efforts on Maui. The cash proceeds were primarily invested in highly liquid short-term investments, were used to repay $100 million of Hawaiian Electric’s long-term debt that matured on November 1, 2023, and used for general corporate purposes.
None of the facilities are collateralized.
The Credit Facilities were maintained to support each company’s respective short-term commercial paper program, and were drawn in August 2023 to meet each company’s respective working capital needs and general corporate purposes.
Under the Credit Facilities, draws generally bear interest, based on each company’s respective current long-term credit ratings, at the “Adjusted Term SOFR Rate,” as defined in the Credit Facilities, plus 175.0 basis points for HEI and Hawaiian Electric, and incur annual fees on undrawn commitments, excluding swingline borrowings, at the rate of 30.0 basis points for HEI and Hawaiian Electric.
Additionally, the Credit Facilities contain provisions for pricing adjustments in the event of a long-term ratings change based on the respective Facility’s ratings-based pricing grid, which includes the ratings by Fitch, Moody’s and S&P. The Credit
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Facilities do not contain clauses that would affect access to the Credit Facilities by reason of a ratings downgrade, nor do they have broad “material adverse change” clauses. In addition, the Credit Facilities contain provisions for potential annual pricing adjustments to the Term Benchmark or Alternate Base Rate margin on draws and fees on undrawn commitments of up to +/-5 basis points and +/-1 basis point, respectively, based on performance against certain sustainability-linked metrics. The sustainability-linked metrics include achievement of renewable portfolio standards in excess of statutory requirements and increasing cumulative penetration of installed MWs of photovoltaic systems on residential rooftops.
The Credit Facilities also include updated terms and conditions customary for facilities of this type and contain customary conditions that must be met in order to draw on them, including compliance with covenants (such as covenants preventing HEI’s and Hawaiian Electric’s respective subsidiaries from entering into agreements that restrict the ability of such subsidiaries to pay dividends to, or to repay borrowings from, HEI or Hawaiian Electric, as applicable; and a covenant in Hawaiian Electric’s facility restricting Hawaiian Electric’s ability, as well as the ability of any of its subsidiaries, to guarantee additional indebtedness of the subsidiaries if such additional debt would cause the subsidiary’s “Consolidated Subsidiary Funded Debt to Capitalization Ratio” (as defined in the Hawaiian Electric Facility) to exceed 65%).
Under the HEI Facility, it is an event of default if HEI fails to maintain an unconsolidated “Capitalization Ratio” (funded debt) (as defined in the HEI Facility) of 50% or less or if HEI no longer owns Hawaiian Electric or ASB. Under the Hawaiian Electric Facility, it is an event of default if Hawaiian Electric fails to maintain a “Consolidated Capitalization Ratio” (equity) (as defined in the Hawaiian Electric Facility) of at least 35%, or if Hawaiian Electric is no longer owned by HEI.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | | | | | | | |
| December 31 | 2023 | | 2022 |
| (dollars in thousands) | | | |
Long-term debt of Utilities, net of unamortized debt issuance costs 1 | $ | 1,934,277 | | | $ | 1,684,816 | |
HEI 3.99% senior notes, paid in 2023 | — | | | 50,000 | |
HEI 4.58% senior notes, due 2025 | 50,000 | | | 50,000 | |
HEI 4.72% senior notes, due 2028 | 100,000 | | | 100,000 | |
HEI 2.82% senior notes, due 2028 | 24,000 | | | 24,000 | |
HEI 2.48% senior notes, due 2028 | 30,000 | | | 30,000 | |
HEI 6.04% senior notes, due 2028 | 39,000 | | | — | |
HEI 2.98% senior notes, due 2030 | 50,000 | | | 50,000 | |
HEI 3.15% senior notes, due 2031 | 51,000 | | | 51,000 | |
HEI 2.78% senior notes, due 2031 | 25,000 | | | 25,000 | |
HEI 2.98% senior notes, due 2032 | 30,000 | | | 30,000 | |
HEI 5.43% senior notes, due 2032 | 75,000 | | | 75,000 | |
HEI 6.10% senior notes, due 2033 | 61,000 | | | — | |
HEI 5.43% senior notes, due 2034 | 35,000 | | | 35,000 | |
HEI 3.74% senior notes, due 2051 | 20,000 | | | 20,000 | |
HEI 3.94% senior notes, due 2052 | 20,000 | | | 20,000 | |
Hamakua Energy 4.02% non-recourse notes, due 20302 | 44,855 | | | 49,048 | |
Mauo SOFR + 1.475% loan, due 20243 | 5,384 | | | 11,060 | |
Mauo 4.91% non-recourse term loan, due 2034 to 20352 | 16,962 | | | 17,692 | |
Kaʻieʻie Waho 2.79% non-recourse loan, due 20312 | 9,727 | | | 10,936 | |
Mahipapa 1.90% non-recourse loan, due 2034 to 20362 | 53,743 | | | 58,869 | |
Mahipapa 5.625% non-recourse loan, due 20272 | 578 | | | 724 | |
HEI revolving credit facility SOFR + 1.80%, due 2026 to 20274 | 175,000 | | | — | |
| Less unamortized debt issuance costs and debt discount | (8,097) | | | (8,165) | |
| $ | 2,842,429 | | | $ | 2,384,980 | |
1 See components of “Total long-term debt” and unamortized debt issuance costs in Hawaiian Electric and subsidiaries’ Consolidated Statements of Capitalization.
2 Secured by real and personal property of the respective entity, including various land parcels, a 60MW combined cycle facility, photovoltaic and battery storage infrastructure, and a biomass plant. The aggregate net book value of the collateralized property, plant & equipment is approximately $187 million as of December 31, 2023.
3 In December 2021, the loan was amended to allow advances through October 5, 2022, in the maximum aggregate principal amount of up to $50.5 million. As of July 1, 2023, LIBOR was replaced by the term SOFR plus the applicable margin of 1.375%, plus an additional 0.10% replacement rate adjustment. On February 8, 2024, the outstanding loan balance was fully repaid and the loan was terminated.
4 As of December 31, 2023, the interest rate is based on term SOFR plus the applicable margin of 1.75%, reduced by a 0.05% sustainability margin adjustment, plus an additional 0.10% spread adjustment; the weighted-average interest rate was 7.19%.
As of December 31, 2023, the aggregate principal payments required on the Company’s long-term debt for 2024 through 2028 are $18 million in 2024, $109 million in 2025, $174 million in 2026, $449 million in 2027 and $273 million in 2028. As of December 31, 2023, the aggregate payments of principal required on the Utilities’ long-term debt for 2024 through 2028 are nil in 2024, $47 million in 2025, $145 million in 2026, $280 million in 2027 and $68 million in 2028.
The HEI term loans and senior notes contain customary representation and warranties, affirmative and negative covenants and events of default (the occurrence of which may result in some or all of the notes then outstanding becoming immediately due and payable). The HEI term loans and senior notes also contain provisions requiring the maintenance by HEI of certain financial ratios generally consistent with those in HEI’s revolving unsecured credit facility, as amended. Upon a change of control or certain dispositions of assets (as defined in the note purchase agreements of the senior notes), HEI is required to offer to prepay the senior notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Utilities’ senior notes contain customary representations and warranties, affirmative and negative covenants, and events of default (the occurrence of which may result in some or all of the notes of each and all of the utilities then outstanding becoming immediately due and payable) and provisions requiring the maintenance by Hawaiian Electric, and each of Hawaii Electric Light and Maui Electric, of certain financial ratios generally consistent with those in Hawaiian Electric’s existing, amended revolving unsecured credit agreement.
Changes in long-term debt. As of December 31, 2023, HEI and Hawaiian Electric were in compliance with all applicable financial covenants.
HEI and Hawaiian Electric’s Credit Facilities. See Note 6 for more information.
HEI private placement. On March 16, 2023, HEI entered into a note purchase agreement (HEI NPA) under which HEI has authorized the issue and sale of $100 million of unsecured senior notes that were drawn on May 30, 2023. The proceeds of the notes were used to repay the $100 million term loan facility on May 31, 2023. The terms of the notes are as follows:
| | | | | | | | | | | | | | | | | |
| | | HEI Series 2023A | | HEI Series 2023B |
Aggregate principal amount | | | $39 million | | $61 million |
Fixed coupon interest rate | | | 6.04% | | 6.10% |
| Maturity date | | | 6/15/2028 | | 6/15/2033 |
| | | | | |
Interest on the notes is paid semiannually on June 15th and December 15th. The HEI NPA contains certain restrictive financial covenants that are substantially the same as the financial covenants contained in the HEI Facility, as amended. The HEI notes may be prepaid in whole or in part at any time at the prepayment price of the principal amount, together with interest accrued to the date of prepayment plus a “Make-Whole Amount,” as defined in the agreements.
Utilities private placement. On January 10, 2023, the Utilities executed, through a private placement pursuant to separate Note Purchase Agreements (the NPAs), the following unsecured senior notes bearing taxable interest (2023 Notes). The 2023 Notes had a delayed draw feature and the Utilities drew down all the proceeds on February 9, 2023.
| | | | | | | | | | | |
| Series 2023A | Series 2023B | Series 2023C |
| Aggregate principal amount | $90 million | $40 million | $20 million |
| Fixed coupon interest rate | | | |
| Hawaiian Electric | 6.11% | 6.25% | 6.70% |
| Hawaii Electric Light | 6.25% | — | — |
| Maui Electric | 6.25% | — | — |
| Maturity date | | | |
| Hawaiian Electric | 2/9/2030 | 2/9/2033 | 2/9/2053 |
| Hawaii Electric Light | 2/9/2033 | — | — |
| Maui Electric | 2/9/2033 | — | — |
| Principal amount by company | | | |
| Hawaiian Electric | $40 million | $40 million | $20 million |
| Hawaii Electric Light | $25 million | — | — |
| Maui Electric | $25 million | — | — |
The 2023 Notes include substantially the same financial covenants and customary conditions as the Hawaiian Electric Facility. Hawaiian Electric is also a party as guarantor under the NPAs entered into by Hawaii Electric Light and Maui Electric. The Utilities did not obtain any of the proceeds at execution and instead drew down all the proceeds on February 9, 2023. The proceeds were used to finance their respective capital expenditures, repay short-term debt used to finance or refinance capital expenditures and/or reimburse funds used for the payment of capital expenditures. The 2023 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” as defined in the NPAs.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | |
Note 8 · Shareholders’ equity |
Reserved shares. As of December 31, 2023, HEI had reserved a total of 13.9 million shares of common stock for future issuance under the HEI Dividend Reinvestment and Stock Purchase Plan (DRIP), the Hawaiian Electric Industries Retirement Savings Plan (HEIRSP), the ASB 401(k) Plan, the HEI 2011 Nonemployee Director Stock Plan, and the 2010 Equity and Incentive Plan, as amended.
Accumulated other comprehensive income/(loss). Changes in the balances of each component of 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, 2020 | $ | 19,986 | | | $ | (3,363) | | | $ | (17,887) | | | $ | (1,264) | | | $ | (2,919) | |
Current period other comprehensive income (loss) and reclassifications, net of taxes | (52,023) | | | (275) | | | 1,029 | | | (51,269) | | | (361) | |
| Balance, December 31, 2021 | (32,037) | | | (3,638) | | | (16,858) | | | (52,533) | | | (3,280) | |
Current period other comprehensive income (loss) and reclassifications, net of taxes | (296,867) | | | 5,629 | | | 7,743 | | | (283,495) | | | 6,141 | |
| | | | | | | | | |
| Balance, December 31, 2022 | (328,904) | | | 1,991 | | | (9,115) | | | (336,028) | | | 2,861 | |
Current period other comprehensive income (loss) and reclassifications, net of taxes | 45,941 | | | (353) | | | 1,090 | | | 46,678 | | | (12) | |
| | | | | | | | | |
| Balance, December 31, 2023 | $ | (282,963) | | | $ | 1,638 | | | $ | (8,025) | | | $ | (289,350) | | | $ | 2,849 | |
Reclassifications out of AOCI were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Amount reclassified from AOCI | | Affected line item in the Statement of
Income/Balance Sheet |
| Years ended December 31 | | 2023 | | 2022 | | 2021 | |
| (in thousands) | | | | | | | | |
| HEI consolidated | | | | | | | | |
Available-for sale investment securities: | | | | | | | | |
Net realized losses (gains) on securities included in net income | | $ | 10,954 | | | $ | — | | | $ | (387) | | | Loss (gain) on sale of investment securities, net and equity-method investment |
| Amortization of unrealized holding losses on held-to-maturity securities | | 14,398 | | | 3,993 | | | — | | | Bank revenues |
Net realized losses (gains) on derivatives qualifying as cash flow hedges | | (186) | | | 172 | | | 37 | | | Interest expense |
| Retirement benefit plans: | | | | | | | | |
Amortization of prior service credit and net losses (gains) recognized during the period in net periodic benefit cost | | (1,560) | | | 19,659 | | | 19,253 | | | See Note 11 for additional details |
| Impact of D&Os of the PUC included in regulatory assets | | (8,204) | | | (199,936) | | | (171,345) | | | See Note 11 for additional details |
| Total reclassifications | | $ | 15,402 | | | $ | (176,112) | | | $ | (152,442) | | | |
| Hawaiian Electric consolidated | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Retirement benefit plans: | | | | | | | | |
Amortization of prior service credit and net losses (gains) recognized during the period in net periodic benefit cost | | $ | (1,983) | | | $ | 18,884 | | | $ | 19,461 | | | See Note 11 for additional details |
| Impact of D&Os of the PUC included in regulatory assets | | (8,204) | | | (199,936) | | | (171,345) | | | See Note 11 for additional details |
| Total reclassifications | | $ | (10,187) | | | $ | (181,052) | | | $ | (151,884) | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company leases certain real estate and equipment for various terms under long-term lease agreements. The agreements expire at various dates through 2054 and provide for renewal options up to 10 years. The periods associated with the renewal options are excluded for the purpose of determining the lease term unless the exercise of the renewal option is reasonably certain. In the normal course of business, it is expected that many of these agreements will be replaced by similar agreements. Certain real estate leases require the Company to pay for operating expenses such as common area maintenance, real estate taxes and insurance, which are recognized as variable lease expense when incurred and are not included in the measurement of the lease liability. The Company elected the short-term lease recognition exemption for all of its leases that qualify, and accordingly, does not recognize lease liabilities and ROU assets for all leases that have lease terms that are 12 months or less. The amounts related to short-term leases are not material. The Company elected the practical expedient to not separate lease and non-lease components for its real estate and equipment and fossil fuel and renewable energy PPAs and to separate lease components from non-lease components for renewable energy plus battery storage PPAs.
The Utilities contract with independent power producers to supply energy under long-term power purchase agreements. Certain PPAs are treated as operating leases under the lease standard because the Company elected the practical expedient package under which prior conclusions about lease identification were not reassessed. The fixed capacity payments under the PPAs are included in the lease liability, while the variable lease payments (e.g., payments based on kWh) are excluded from the lease liability. Several as-available PPAs have variable-only payment terms based on production. For PPAs with no minimum lease payments, the Utilities do not recognize any lease liabilities or ROU assets, and the related costs are reported as variable lease costs.
The Utilities’ lease payments for each operating lease agreement were discounted using its estimated unsecured borrowing rates for the appropriate term, reduced for the estimated impact of collateral, which is a reduction of approximately 20 basis points. ASB’s lease payments for each operating lease agreement were discounted using Federal Home Loan Bank (FHLB) of Des Moines fixed rate advance rates, which are collateralized, for the appropriate term. The FHLB is ASB’s primary wholesale funding source and can provide collateralized borrowing rates for various terms starting at overnight borrowings to 30-year borrowing terms.
In August 2021, the Utilities entered into an agreement with an unrelated party for exclusive use of a barge and tug to transport fuels between islands, commencing in January 2022. The contract is an operating lease with a term of five years with an option to extend the term for an additional five years. Annual base rent expense is approximately $6.4 million and the operating lease liability recorded upon commencement was $32 million. In addition to the annual base payment, there are additional payments for operating expenses, such as inspection expense, wharfage and pipeline tolls, which are recognized as variable lease cost when incurred.
The Utilities account for the battery portion of renewable energy plus storage and energy storage PPAs as leases at their commencement dates. As of December 31, 2023, the Utilities recognized additional finance lease liabilities with corresponding right-of-use assets of $293.8 million, including Waiawa Solar, AES Waikoloa Solar and Kapolei Energy Storage project that began commercial operations during the year. The timing of the Utilities’ recognition of the expense conforms to ratemaking treatment for the Utilities’ recovery of the cost of electricity and is included in purchased power for the interest and amortization of financing leases related to PPAs. Any material differences between expense recognition and timing of payments are deferred as a regulatory asset or liability in order to match what is being recovered for ratemaking purposes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amounts related to the Company’s total lease cost and cash flows arising from lease transactions are as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| HEI consolidated | | Hawaiian Electric consolidated |
| Year ended December 31, 2023 | Other leases | PPAs classified as leases | Total | | Other leases | PPAs classified as leases | Total |
| (dollars in thousands) | | | | | | | |
| Operating lease cost | $ | 21,882 | | $ | 4,071 | | $ | 25,953 | | | $ | 15,947 | | $ | 4,071 | | $ | 20,018 | |
| | | | | | | |
| Variable lease cost | 8,491 | | 202,556 | | 211,047 | | | 5,605 | | 202,556 | | 208,161 | |
| Sublease income | (3,031) | | — | | (3,031) | | | (3,031) | | — | | (3,031) | |
| Total operating lease cost | $ | 27,342 | | $ | 206,627 | | $ | 233,969 | | | $ | 18,521 | | $ | 206,627 | | $ | 225,148 | |
| Finance lease costs: | | | | | | | |
| Amortization of right-of-use assets | $ | 390 | | $ | 5,591 | | $ | 5,981 | | | $ | — | | $ | 5,591 | | $ | 5,591 | |
| Interest on lease liabilities | 32 | | 6,350 | | 6,382 | | | — | | 6,350 | | 6,350 | |
| Total finance lease cost | $ | 422 | | $ | 11,941 | | $ | 12,363 | | | $ | — | | $ | 11,941 | | $ | 11,941 | |
| Other information | | | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | |
| Operating cash flows from operating leases | $ | 23,076 | | $ | 4,071 | | $ | 27,147 | | | $ | 17,729 | | $ | 4,071 | | $ | 21,800 | |
| Operating cash flows from financing leases | $ | 32 | | $ | 6,350 | | $ | 6,382 | | | $ | — | | $ | 6,350 | | $ | 6,350 | |
| Financing cash flows from financing leases | $ | 391 | | $ | 3,128 | | $ | 3,519 | | | $ | — | | $ | 3,128 | | $ | 3,128 | |
| Weighted-average remaining lease term (in years): | | | | | | | |
| Operating leases | 7.9 | 4.0 | 7.4 | | 6.8 | 4.0 | 6.3 |
| Finance leases | 1.5 | 20.1 | 20.0 | | — | | 20.1 | 20.1 |
| Weighted-average discount rate: | | | | | | | |
| Operating leases | 3.04 | % | 3.50 | % | 3.11 | % | | 2.92 | % | 3.50 | % | 3.03 | % |
| Finance leases | 3.77 | % | 8.18 | % | 8.18 | % | | — | | 8.18 | % | 8.18 | % |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | | | | | | | | | | | | | | | | | | | |
| HEI consolidated | | Hawaiian Electric consolidated |
| Year ended December 31, 2022 | Other leases | PPAs classified as leases | Total | | Other leases | PPAs classified as leases | Total |
| (dollars in thousands) | | | | | | | |
| Operating lease cost | $ | 20,811 | | $ | 46,160 | | $ | 66,971 | | | $ | 15,030 | | $ | 46,160 | | $ | 61,190 | |
| | | | | | | |
| Variable lease cost | 8,931 | | 241,199 | | 250,130 | | | 6,152 | | 241,199 | | 247,351 | |
| Sublease income | (2,675) | | — | | (2,675) | | | (2,675) | | — | | (2,675) | |
Total operating lease cost | $ | 27,067 | | $ | 287,359 | | $ | 314,426 | | | $ | 18,507 | | $ | 287,359 | | $ | 305,866 | |
| Finance lease costs: | | | | | | | |
| Amortization of right-of-use assets | $ | 188 | | $ | 1,008 | | $ | 1,196 | | | $ | — | | $ | 1,008 | | $ | 1,008 | |
| Interest on lease liabilities | 20 | | 786 | | 806 | | | — | | 786 | | 786 | |
| Total finance lease cost | $ | 208 | | $ | 1,794 | | $ | 2,002 | | | $ | — | | $ | 1,794 | | $ | 1,794 | |
| Other information | | | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | |
Operating cash flows from operating leases | $ | 19,143 | | $ | 40,050 | | $ | 59,193 | | | $ | 14,068 | | $ | 40,050 | | $ | 54,118 | |
Operating cash flows from financing leases | $ | 20 | | $ | 786 | | $ | 806 | | | $ | — | | $ | 786 | | $ | 786 | |
Financing cash flows from financing leases | $ | 179 | | $ | 670 | | $ | 849 | | | $ | — | | $ | 670 | | $ | 670 | |
| Weighted-average remaining lease term (in years): | | | | | | | |
Operating leases | 8.1 | 5.0 | 7.7 | | 7.3 | 5.0 | 6.8 |
Finance leases | 2.4 | 19.6 | 19.2 | | — | | 19.6 | 19.6 |
| Weighted-average discount rate: | | | | | | | |
Operating leases | 2.96 | % | 3.50 | % | 3.04 | % | | 2.94 | % | 3.50 | % | 3.05 | % |
Finance leases | 3.77 | % | 3.92 | % | 3.92 | % | | — | | 3.92 | % | 3.92 | % |
The following table summarizes the maturity of our operating lease liabilities as of December 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| HEI consolidated | | Hawaiian Electric consolidated |
| (in millions) | Other leases | PPAs classified as leases | Total | | Other leases | PPAs classified as leases | Total |
| 2024 | $ | 21 | | $ | 4 | | $ | 25 | | | $ | 15 | | $ | 4 | | $ | 19 | |
| 2025 | 16 | | 4 | | 20 | | | 12 | | 4 | | 16 | |
| 2026 | 16 | | 4 | | 20 | | | 12 | | 4 | | 16 | |
| 2027 | 9 | | 4 | | 13 | | | 6 | | 4 | | 10 | |
| 2028 | 7 | | — | | 7 | | | 5 | | — | | 5 | |
| Thereafter | 33 | | — | | 33 | | | 21 | | — | | 21 | |
| Total lease payments | 102 | | 16 | | 118 | | | 71 | | 16 | | 87 | |
| Less: Imputed interest | (13) | | (1) | | (14) | | | (7) | | (1) | | (8) | |
Total present value of lease payments1 | $ | 89 | | $ | 15 | | $ | 104 | | | $ | 64 | | $ | 15 | | $ | 79 | |
1The fixed capacity payment related to the existing PPA with PGV, which will expire on December 31, 2027, is included as a lease liability as of December 31, 2021. The PGV facility returned to service with firm capacity in 2021. The annual capacity payment based on the most recent accepted output is approximately $4 million. The lease liability will be remeasured when PGV ramps back up to the original contracted firm capacity.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes the maturity of our finance lease liabilities for PPAs as of December 31, 2023:
| | | | | | | | | | | | | | | |
| | HEI consolidated | | | | Hawaiian Electric consolidated | |
| (in millions) | | PPAs classified as leases | | | | PPAs classified as leases | |
| 2024 | | $ | 34 | | | | | $ | 34 | | |
| 2025 | | 34 | | | | | 34 | | |
| 2026 | | 34 | | | | | 34 | | |
| 2027 | | 34 | | | | | 34 | | |
| 2028 | | 34 | | | | | 34 | | |
| Thereafter | | 511 | | | | | 511 | | |
| Total lease payments | | 681 | | | | | 681 | | |
| Less: Imputed interest | | (343) | | | | | (343) | | |
| Total present value of lease payments | | $ | 338 | | | | | $ | 338 | | |
Note: Other finance leases are not material.
Revenue from contracts with customers. The revenues subject to ASC Topic 606 include the Utilities’ electric energy sales revenue and the ASB’s transaction fees, as further described below.
Electric Utilities.
Electric energy sales. Electric energy sales represent revenues from the generation and transmission of electricity to customers under tariffs approved by the PUC. Transaction pricing for electricity is determined and approved by the PUC for each rate class and includes revenues from the base electric charges, which are composed of (1) the customer, demand, energy, and minimum charges, and (2) the power factor, service voltage, and other adjustments as provided in each rate and rate rider schedule. Electric energy sales also represent contract rate charge from the generation and transmission of electricity to the Army. The monthly pricing is recalculated on an annual basis based on actual costs, approved by the Army.
The Utilities satisfy performance obligations of electric energy sales over time, i.e., the Utilities generate and transfer control of the electricity over time as the customer simultaneously receives and consumes the benefits provided by the Utilities’ performance. Payments from customers are generally due within 30 days from the end of the billing period. As electric bills to customers reflect the amount that corresponds directly with the value of the Utilities’ performance to date, the Utilities have elected to use the right to invoice practical expedient, which entitles them to recognize revenue in the amount they have the right to invoice.
The Utilities’ revenues include amounts for recovery of various Hawaii state revenue taxes. Revenue taxes are generally recorded as an expense in the year the related revenues are recognized. For 2023, 2022 and 2021, the Utilities’ revenues include recovery of revenue taxes of approximately $291 million, $303 million and $226 million, respectively, which amounts are in “Taxes, other than income taxes” expense. However, the Utilities pay revenue taxes to the taxing authorities based on (1) the prior year’s billed revenues (in the case of public service company taxes and PUC fees) in the current year or (2) the current year’s cash collections from electric sales (in the case of franchise taxes) after year end. As of December 31, 2023 and 2022, the Utilities had recorded $182 million and $188 million, respectively, in “Taxes accrued, including revenue taxes” on the Utilities’ consolidated balance sheet for amounts previously collected from customers or accrued for public service company taxes and PUC fees, net of amounts paid to the taxing authorities. Such amounts will be used to pay public service company taxes and PUC fees owed for the following year.
Bank.
Bank fees. Bank fees are primarily transaction-based and are recognized when the transaction has occurred and the performance obligation satisfied. From time to time, customers will request a fee waiver and ASB may grant reversals of fees. Revenues are not recorded for the estimated amount of fee reversals for each period.
Fees from other financial services - These fees primarily include debit card interchange income and fees, automated teller machine fees, credit card interchange income and fees, check ordering fees, wire fees, safe deposit rental fees, corporate/business fees, merchant income, online banking fees and international banking fees. Amounts paid to third parties for payment
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
network expenses are included in this financial statement caption in ASB’s Statements of Income and Comprehensive Income Data (in Revenues—Bank financial statement caption of HEI’s Consolidated Statements of Income).
Fee income on deposit liabilities - These fees primarily include “not sufficient funds” fees, monthly deposit account service charge fees, commercial account analysis fees and other deposit fees.
Fee income on other financial products - These fees primarily include commission income from the sales of annuity, mutual fund, and life insurance products. ASB also offers a fee-based, managed account product in which income is based on a percentage of assets under management.
Other Segment.
Other sales. Other sales primarily consist of revenues from the generation and sale of renewable energy at fixed contractual prices per kWh to customers under power purchase agreements by Pacific Current subsidiaries. The performance obligation is satisfied over time as renewable energy is generated and control is transferred to the customer that simultaneously receives and consumes the benefits provided. Payments from customers are generally due within 30 days from the end of the billing period. The bill to customers reflects the amount that corresponds directly with the value of performance to date. Pacific Current has elected to use the right to invoice practical expedient, which entitles it to recognize revenue in the amount they have the right to invoice.
Revenues from other sources. Revenues from other sources not subject to ASC Topic 606 are accounted for as follows:
Electric Utilities.
Regulatory revenues. Regulatory revenues primarily consist of revenues from the decoupling mechanism and cost recovery surcharges.
Decoupling mechanism - Under the current decoupling mechanism, the Utilities are allowed to recover or obligated to refund the difference between actual revenue and the target revenue as determined by the PUC, collect annual revenue adjustment mechanism (ARA) and exceptional project recovery mechanism revenues, and recover or refund performance incentive mechanism penalties or rewards. These adjustments will be reflected in tariffs in future periods. Under the PBR framework, the accrued RBA revenues as of the preceding September 30 balance and the annual ARA amount are billed from January 1 through December 31 of each year, which is within 24 months following the end of the year in which they are recorded as required by the accounting standard for alternative revenue programs (see “Regulatory proceedings” in Note 4).
Cost recovery surcharges - For the timely recovery of additional costs incurred, and reconciliation of costs and expenses included in tariffed rates, the Utilities recognize revenues under surcharge mechanisms approved by the PUC. These will be reflected in tariffs in future periods (e.g., ECRC and PPAC).
Since revenue adjustments discussed above resulted from either agreements with the PUC or change in tax law, rather than contracts with customers, they are not subject to the scope of ASC Topic 606. Also, see Notes 1, 4 and 13 of the Consolidated Financial Statements. The Utilities have elected to present these revenue adjustments on a gross basis, which results in the amounts being billed to customers presented in revenues from contracts with customers and the amortization of the related regulatory asset/liability as revenues from other sources. Depending on whether the previous deferral balance being amortized was a regulatory asset or regulatory liability, and depending on the size and direction of the current year deferral of surcharges and/or refunds to customers, it could result in negative regulatory revenue during the year.
Utility pole attachment fees. These fees primarily represent revenues from third-party companies for their access to and shared use of Utilities-owned poles through licensing agreements. As the shared portion of the utility pole is functionally dependent on the rest of the structure, no distinct goods appear to exist. Therefore, these fees are not subject to the scope of ASC Topic 606, but recognized in accordance with ASC Topic 610, Other Income.
Army privatization extraordinary O&M (EOM) fees. The monthly EOM fee provides the recovery of the incremental extraordinary O&M costs not covered under the standard utility services. The nature of the work related to transitional period revenue and monthly EOM fees do not represent the Utilities’ ongoing major or central operations (i.e., generating, and transmission and distribution of electricity) and is provided specifically for the arrangement between the Utilities and the Army. Therefore, these revenues are not subject to the scope of ASC Topic 606, but recognized in accordance with ASC Topic 610, Other Income.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Bank.
Interest and dividend income. Interest and fees on loans are recognized in accordance with ASC Topic 310, Receivables, including the related allowance for credit losses. Interest and dividends on investment securities are recognized in accordance with ASC Topic 320, Investments-Debt and Equity Securities. See Notes 1 and 5 of the Consolidated Financial Statements.
Other bank noninterest income. Other bank noninterest income primarily consists of mortgage banking income and bank-owned life insurance income.
Mortgage banking income - Mortgage banking income consists primarily of realized and unrealized gains on sale of loans accounted for pursuant to ASC Topic 860, Transfers and Servicing. Interest rate lock commitments and forward loan sales are considered derivatives and are accounted pursuant to ASC Topic 815, Derivatives and Hedging.
Bank-Owned Life Insurance (BOLI) - The recognition of BOLI cash surrender value does not represent a contract with a customer and is accounted for in accordance with ASC 325-30, Investments-Other - Investments in Insurance Contracts.
Revenue disaggregation. The following tables disaggregate revenues by major source, timing of revenue recognition, and segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2023 | | Year ended December 31, 2022 |
| (in thousands) | | Electric utility | | Bank | | Other | | Total | | Electric utility | | Bank | | Other | | Total |
| Revenues from contracts with customers | | | | | | | | | | | | | | | | |
Electric energy sales - residential | | $ | 1,026,321 | | | $ | — | | | $ | — | | | $ | 1,026,321 | | | $ | 1,078,372 | | | $ | — | | | $ | — | | | $ | 1,078,372 | |
Electric energy sales - commercial | | 1,044,045 | | | — | | | — | | | 1,044,045 | | | 1,087,485 | | | — | | | — | | | 1,087,485 | |
Electric energy sales - large light and power | | 1,141,128 | | | — | | | — | | | 1,141,128 | | | 1,221,608 | | | — | | | — | | | 1,221,608 | |
| Electric energy sales - other | | 19,471 | | | — | | | — | | | 19,471 | | | 17,063 | | | — | | | — | | | 17,063 | |
| | | | | | | | | | | | | | | | |
| Bank fees | | — | | | 48,781 | | | — | | | 48,781 | | | — | | | 48,883 | | | — | | | 48,883 | |
| Other sales | | — | | | — | | | 17,540 | | | 17,540 | | | — | | | — | | | 11,804 | | | 11,804 | |
| Total revenues from contracts with customers | | 3,230,965 | | | 48,781 | | | 17,540 | | | 3,297,286 | | | 3,404,528 | | | 48,883 | | | 11,804 | | | 3,465,215 | |
| Revenues from other sources | | | | | | | | | | | | | | | | |
| Regulatory revenue | | 3,708 | | | — | | | — | | | 3,708 | | | (29,124) | | | — | | | — | | | (29,124) | |
Bank interest and dividend income | | — | | | 334,783 | | | — | | | 334,783 | | | — | | | 265,874 | | | — | | | 265,874 | |
Other bank noninterest income | | — | | | 11,099 | | | — | | | 11,099 | | | — | | | 6,311 | | | — | | | 6,311 | |
| Other | | 34,848 | | | — | | | 442 | | | 35,290 | | | 33,183 | | | — | | | 526 | | | 33,709 | |
| Total revenues from other sources | | 38,556 | | | 345,882 | | | 442 | | | 384,880 | | | 4,059 | | | 272,185 | | | 526 | | | 276,770 | |
| Total revenues | | $ | 3,269,521 | | | $ | 394,663 | | | $ | 17,982 | | | $ | 3,682,166 | | | $ | 3,408,587 | | | $ | 321,068 | | | $ | 12,330 | | | $ | 3,741,985 | |
| Timing of revenue recognition | | | | | | | | | | | | | | | | |
Services/goods transferred at a point in time | | $ | — | | | $ | 48,781 | | | $ | — | | | $ | 48,781 | | | $ | — | | | $ | 48,883 | | | $ | — | | | $ | 48,883 | |
Services/goods transferred over time | | 3,230,965 | | | — | | | 17,540 | | | 3,248,505 | | | 3,404,528 | | | — | | | 11,804 | | | 3,416,332 | |
| Total revenues from contracts with customers | | $ | 3,230,965 | | | $ | 48,781 | | | $ | 17,540 | | | $ | 3,297,286 | | | $ | 3,404,528 | | | $ | 48,883 | | | $ | 11,804 | | | $ | 3,465,215 | |
There are no material contract assets or liabilities associated with revenues from contracts with customers existing at December 31, 2023 and 2022. 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 disclosed as accounts receivable and unbilled revenues, net on HEI’s consolidated balance sheets and customer accounts receivable, net and accrued unbilled revenues, net on Hawaiian Electric’s consolidated balance sheets.
As of December 31, 2023, 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | |
Note 11 · Retirement benefits |
Defined benefit plans. Substantially all of the employees of HEI and the Utilities hired on or before December 31, 2021, participate in the Retirement Plan for Employees of Hawaiian Electric Industries, Inc. and Participating Subsidiaries (HEI Pension Plan). The HEI Pension Plan was closed to new employees first hired on or after January 1, 2022. Substantially all of the employees of ASB participated in the American Savings Bank Retirement Plan (ASB Pension Plan) until it was frozen on December 31, 2007. The HEI Pension Plan and the ASB Pension Plan (collectively, the Plans) are qualified, noncontributory defined benefit pension plans and include, in the case of the HEI Pension Plan, benefits for utility union employees determined in accordance with the terms of the collective bargaining agreements between the Utilities and the union. The Plans are subject to the provisions of ERISA. In addition, some current and former executives and directors of HEI and its subsidiaries participate in noncontributory, nonqualified plans (collectively, Supplemental Plans). In general, benefits are based on the employees’ or directors’ years of service and compensation.
The continuation of the Plans and the Supplemental Plans and the payment of any contribution thereunder are not assumed as contractual obligations by the participating employers. The Supplemental Plan for directors has been frozen since 1996. The ASB Pension Plan was frozen as of December 31, 2007. The HEI Supplemental Executive Retirement Plan and ASB Supplemental Executive Retirement, Disability, and Death Benefit Plan (noncontributory, nonqualified, defined benefit plans) were frozen as of December 31, 2008. No participants have accrued any benefits under these plans after the respective plan’s freeze and the plans will be terminated at the time all remaining benefits have been paid.
Each participating employer reserves the right to terminate its participation in the applicable plans at any time, and HEI and ASB reserve the right to terminate their respective plans at any time. If a participating employer terminates its participation in the Plans, the interest of each affected participant would become 100% vested to the extent funded. Upon the termination of the Plans, assets would be distributed to affected participants in accordance with the applicable allocation provisions of ERISA and any excess assets that exist would be paid to the participating employers. Participants’ benefits in the Plans are covered up to certain limits under insurance provided by the Pension Benefit Guaranty Corporation.
Postretirement benefits other than pensions. HEI and the Utilities provide eligible employees health and life insurance benefits upon retirement under the Postretirement Welfare Benefits Plan for Employees of Hawaiian Electric Company, Inc. and participating employers (Hawaiian Electric Benefits Plan). Eligibility of employees and dependents is based on eligibility to retire at termination, the retirement date and the date of hire. The plan was amended in 2011, changing eligibility for certain bargaining unit employees hired prior to May 1, 2011, based on new minimum age and service requirements effective January 1, 2012, per the collective bargaining agreement, and certain management employees hired prior to May 1, 2011 based on new eligibility minimum age and service requirements effective January 1, 2012. The minimum age and service requirements for management and bargaining unit employees hired May 1, 2011 and thereafter have increased and their dependents are not eligible to receive postretirement benefits. Employees may be eligible to receive benefits from the HEI Pension Plan but may not be eligible for postretirement welfare benefits if the different eligibility requirements are not met.
The executive death benefit plan was frozen on September 10, 2009 for participants at benefit levels as of that date.
The Company’s and Utilities’ cost for OPEB has been adjusted to reflect the plan amendments, which reduced benefits and created prior service credits to be amortized over average future service of affected participants. The amortization of the prior service credit will reduce benefit costs until the various credit bases are fully recognized. Each participating employer reserves the right to terminate its participation in the Hawaiian Electric Benefits Plan at any time.
Balance sheet recognition of the funded status of retirement plans. Employers must recognize on their balance sheets the funded status of defined benefit pension and other postretirement benefit plans with an offset to AOCI in shareholders’ equity (using the projected benefit obligation (PBO) and accumulated postretirement benefit obligation (APBO), to calculate the funded status).
The PUC allowed the Utilities to adopt pension and OPEB tracking mechanisms in previous rate cases. The amount of the net periodic pension cost (NPPC) and net periodic benefits costs (NPBC) to be recovered in rates is established by the PUC in each rate case or as allowed under the PBR Framework (see “Regulatory proceedings” in Note 4). Under the Utilities’ tracking mechanisms, any actual costs determined in accordance with GAAP that are over/under amounts allowed in rates are charged/credited to a regulatory asset/liability. The regulatory asset/liability for each utility will then be amortized over 5 years beginning with the respective utility’s next rate case. Accordingly, all retirement benefit expenses (except for executive life and nonqualified pension plan expenses, which amounted to $0.7 million and $1.3 million in 2023 and 2022, respectively) determined in accordance with GAAP will be recovered.
Under the tracking mechanisms, amounts that would otherwise be recorded in AOCI (excluding amounts for executive life and nonqualified pension plans), net of taxes, as well as other pension and OPEB charges, are allowed to be reclassified as a
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
regulatory asset, as those costs will be recovered in rates through the NPPC and NPBC in the future. The Utilities have reclassified to a regulatory asset/(liability) charges for retirement benefits that would otherwise be recorded in AOCI (amounting to the elimination of a potential adjustment to AOCI of $(11.1) million pretax and $(269.3) million pretax for 2023 and 2022, respectively).
Under the pension tracking mechanism, the Utilities are required to make contributions to the pension trust in the amount of the actuarially calculated NPPC, except when limited by the ERISA minimum contribution requirements or the maximum contributions imposed by the Internal Revenue Code. Contributions in excess of the calculated NPPC are recorded in a separate regulatory asset.
The OPEB tracking mechanisms generally require the Utilities to make contributions to the OPEB trust in the amount of the actuarially calculated NPBC, (excluding amounts for executive life), except when limited by material, adverse consequences imposed by federal regulations. Future decisions in rate cases could further impact funding amounts.
Defined benefit pension and other postretirement benefit plans information. The changes in the obligations and assets of the Company’s and Utilities’ retirement benefit plans and the changes in AOCI (gross) for 2023 and 2022 and the funded status of these plans and amounts related to these plans reflected in the Company’s and Utilities’ consolidated balance sheets as of December 31, 2023 and 2022 were as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 |
| (in thousands) | Pension
benefits | | Other
benefits | | Pension
benefits | | Other
benefits |
| HEI consolidated | | | | | | | |
| Benefit obligation, January 1 | $ | 1,856,765 | | | $ | 157,436 | | | $ | 2,644,639 | | | $ | 218,151 | |
| Service cost | 45,578 | | | 1,430 | | | 78,173 | | | 2,580 | |
| Interest cost | 103,000 | | | 8,520 | | | 80,062 | | | 6,502 | |
Actuarial loss (gain) | 131,437 | | | (13,867) | | | (848,905) | | | (60,283) | |
| Participants contributions | — | | | 3,542 | | | — | | | 3,348 | |
| Benefits paid and expenses | (103,802) | | | (13,718) | | | (97,204) | | | (12,862) | |
| Benefit obligation, December 31 | 2,032,978 | | | 143,343 | | | 1,856,765 | | | 157,436 | |
| Fair value of plan assets, January 1 | 1,806,379 | | | 190,547 | | | 2,320,745 | | | 239,311 | |
| Actual return on plan assets | 260,748 | | | 25,926 | | | (461,669) | | | (39,469) | |
| Employer contributions | 8,274 | | | — | | | 42,542 | | | — | |
| Participants contributions | — | | | 3,542 | | | — | | | 3,348 | |
| Benefits paid and expenses | (101,862) | | | (12,643) | | | (95,239) | | | (12,643) | |
| Fair value of plan assets, December 31 | 1,973,539 | | | 207,372 | | | 1,806,379 | | | 190,547 | |
| Accrued benefit asset (liability), December 31 | $ | (59,439) | | | $ | 64,029 | | | $ | (50,386) | | | $ | 33,111 | |
| Other assets | $ | 23,091 | | | $ | 64,463 | | | $ | 21,012 | | | $ | 33,526 | |
Defined benefit pension and other postretirement benefit plans liability | (82,530) | | | (434) | | | (71,398) | | | (415) | |
| Accrued benefit asset (liability), December 31 | $ | (59,439) | | | $ | 64,029 | | | $ | (50,386) | | | $ | 33,111 | |
| AOCI debit/(credit), January 1 (excluding impact of PUC D&Os) | $ | 74,418 | | | $ | (26,238) | | | $ | 347,799 | | | $ | (19,975) | |
| | | | | | | |
| Recognized during year – prior service credit | — | | | 875 | | | — | | | 928 | |
Recognized during year – net actuarial gain (loss) | (669) | | | 1,888 | | | (27,412) | | | 12 | |
Occurring during year – net actuarial loss (gain) | 11,513 | | | (26,143) | | | (245,969) | | | (7,203) | |
| AOCI debit/(credit) before cumulative impact of PUC D&Os, December 31 | 85,262 | | | (49,618) | | | 74,418 | | | (26,238) | |
| Cumulative impact of PUC D&Os | (67,732) | | | 43,066 | | | (55,201) | | | 19,486 | |
| AOCI debit/(credit), December 31 | $ | 17,530 | | | $ | (6,552) | | | $ | 19,217 | | | $ | (6,752) | |
| Net actuarial loss (gain) | $ | 85,262 | | | $ | (49,618) | | | $ | 74,418 | | | $ | (25,363) | |
| Prior service gain | — | | | — | | | — | | | (875) | |
| AOCI debit/(credit) before cumulative impact of PUC D&Os, December 31 | 85,262 | | | (49,618) | | | 74,418 | | | (26,238) | |
| Cumulative impact of PUC D&Os | (67,732) | | | 43,066 | | | (55,201) | | | 19,486 | |
| AOCI debit/(credit), December 31 | 17,530 | | | (6,552) | | | 19,217 | | | (6,752) | |
| Income taxes (benefits) | (4,639) | | | 1,689 | | | (5,088) | | | 1,740 | |
| AOCI debit/(credit), net of taxes (benefits), December 31 | $ | 12,891 | | | $ | (4,863) | | | $ | 14,129 | | | $ | (5,012) | |
| | | | | | | |
As shown in the table above, as of December 31, 2023 and 2022, the other postretirement benefit plan with APBO in excess of plan assets is related to an unfunded plan. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| 2023 | | 2022 |
| (in thousands) | Pension
benefits | | Other
benefits | | Pension
benefits | | Other
benefits |
| Hawaiian Electric consolidated | | | | | | | |
| Benefit obligation, January 1 | $ | 1,716,125 | | | $ | 150,534 | | | $ | 2,464,944 | | | $ | 209,470 | |
| Service cost | 44,143 | | | 1,415 | | | 75,845 | | | 2,554 | |
| Interest cost | 95,351 | | | 8,143 | | | 74,363 | | | 6,227 | |
Actuarial loss (gain) | 126,846 | | | (13,721) | | | (804,498) | | | (58,253) | |
| Participants contributions | — | | | 3,473 | | | — | | | 3,286 | |
| Benefits paid and expenses | (94,783) | | | (13,272) | | | (88,450) | | | (12,750) | |
| Transfers | 781 | | | — | | | (6,079) | | | — | |
| Benefit obligation, December 31 | 1,888,463 | | | 136,572 | | | 1,716,125 | | | 150,534 | |
| Fair value of plan assets, January 1 | 1,665,880 | | | 187,494 | | | 2,142,617 | | | 235,525 | |
| Actual return on plan assets | 246,976 | | | 25,529 | | | (426,825) | | | (38,764) | |
| Employer contributions | 8,252 | | | — | | | 41,894 | | | — | |
| Participants contributions | — | | | 3,473 | | | — | | | 3,286 | |
| Benefits paid and expenses | (94,332) | | | (12,356) | | | (87,952) | | | (12,541) | |
| Other | 509 | | | — | | | (3,854) | | | (12) | |
| Fair value of plan assets, December 31 | 1,827,285 | | | 204,140 | | | 1,665,880 | | | 187,494 | |
| Accrued benefit asset (liability), December 31 | $ | (61,178) | | | $ | 67,568 | | | $ | (50,245) | | | $ | 36,960 | |
| Other assets | $ | — | | | $ | 67,568 | | | $ | — | | | $ | 36,960 | |
| Other liabilities (short-term) | (507) | | | — | | | (497) | | | — | |
Defined benefit pension and other postretirement benefit plans liability | (60,671) | | | — | | | (49,748) | | | — | |
| Accrued benefit asset (liability), December 31 | $ | (61,178) | | | $ | 67,568 | | | $ | (50,245) | | | $ | 36,960 | |
| AOCI debit/(credit), January 1 (excluding impact of PUC D&Os) | $ | 57,264 | | | $ | (25,402) | | | $ | 329,645 | | | $ | (20,231) | |
| | | | | | | |
| Recognized during year – prior service credit | — | | | 872 | | | — | | | 925 | |
Recognized during year – net actuarial gain (loss) | (28) | | | 1,827 | | | (26,358) | | | — | |
Occurring during year – net actuarial loss (gain) | 12,103 | | | (25,807) | | | (246,023) | | | (6,096) | |
| AOCI debit/(credit) before cumulative impact of PUC D&Os, December 31 | 69,339 | | | (48,510) | | | 57,264 | | | (25,402) | |
| Cumulative impact of PUC D&Os | (67,732) | | | 43,066 | | | (55,201) | | | 19,486 | |
| AOCI debit/(credit), December 31 | $ | 1,607 | | | $ | (5,444) | | | $ | 2,063 | | | $ | (5,916) | |
| Net actuarial loss (gain) | $ | 69,339 | | | $ | (48,510) | | | $ | 57,264 | | | $ | (24,530) | |
| Prior service gain | — | | | — | | | — | | | (872) | |
| AOCI debit/(credit) before cumulative impact of PUC D&Os, December 31 | 69,339 | | | (48,510) | | | 57,264 | | | (25,402) | |
| Cumulative impact of PUC D&Os | (67,732) | | | 43,066 | | | (55,201) | | | 19,486 | |
| AOCI debit/(credit), December 31 | 1,607 | | | (5,444) | | | 2,063 | | | (5,916) | |
| Income taxes (benefits) | (414) | | | 1,402 | | | (531) | | | 1,523 | |
| AOCI debit/(credit), net of taxes (benefits), December 31 | $ | 1,193 | | | $ | (4,042) | | | $ | 1,532 | | | $ | (4,393) | |
Pension benefits. In 2023, actuarial losses due to demographic experience, including any assumption changes, reduced the funded position. The most impactful of these assumption changes were the decrease in the discount rate used to measure PBO compared to the prior year and the change in assumed rates of retirement. Investment returns greater than assumed largely offset the decline.
In 2022, actuarial gains due to demographic experience, including any assumption changes, the most significant of which was the increase in the discount rate used to measure PBO compared to the prior year, improved funded position while investment returns lower than assumed rates, partially offset the improvement.
Other benefits. In 2023, actuarial gains due to demographic experience, including any assumption changes, improved the funded position. The most impactful of these assumption changes was a reduction in the percentage of participants expected to participate. This gain was partially offset by a decrease in the discount rate. Investment returns greater than assumed further improved the funded position.
In 2022, actuarial gains due to demographic experience, including any assumption changes, the most significant of which was the increase in the discount rate used to measure APBO compared to the prior year, improved funded position while investment returns lower than assumed rates, partially offset the improvement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The dates used to determine retirement benefit measurements for the defined benefit plans and OPEB were December 31 of 2023, 2022 and 2021.
Through December 31, 2020, for purposes of calculating NPPC and NPBC for all plan assets, the Company and the Utilities have determined the market-related value of retirement benefit plan assets, primarily equity securities and fixed income securities, by calculating the difference between the expected return and the actual return on the fair value of the plan assets, then amortizing the difference over future years – 0% in the first year and 25% in each of years two through five – and finally adding or subtracting the unamortized differences for the past four years from fair value. The method includes a 15% range restriction around the fair value of such assets (i.e., 85% to 115% of fair value). Effective January 1, 2021, the Company adopted a change in accounting principle for the plans’ fixed income securities from the calculated market-related value method to the fair value method in the calculation of the expected return on plan assets component of NPPC and NPBC. The remaining plan assets continue to use the calculated market-related value methodology. The Company considers the fair value approach to be preferable for its fixed-income securities portfolio because it results in a current reflection of the changes in the value of plan assets in a way similar to the obligations it is intended to hedge. The Company evaluated the effect of this change in accounting principle and deemed it to be immaterial to the historical financial statements of the Company and Hawaiian Electric and, therefore, did not account for the change retrospectively and recorded the cumulative effects from the change in accounting principle in earnings for non-Utility businesses in the first quarter of 2021. Amounts related to the Utilities were reflected as adjustments to regulatory assets as appropriate, consistent with the expected regulatory treatment as described in the following paragraph.
The Utilities have implemented pension and OPEB tracking mechanisms under which all of their retirement benefit expenses (except for executive life and nonqualified pension plan expenses) determined in accordance with GAAP are recovered over time. Under the tracking mechanisms, any actual costs determined in accordance with GAAP that are over/under 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 proceeding.
A primary goal of the plans is to achieve long-term asset growth sufficient to pay future benefit obligations at a reasonable level of risk. The investment policy target for defined benefit pension and OPEB plans of HEI and the Utilities reflects the philosophy that long-term growth can best be achieved by prudent investments in equity securities while balancing overall fund and pension liability volatility by an appropriate allocation to fixed income securities. To reduce the level of portfolio risk and volatility in returns, efforts have been made to diversify the plans’ investments by asset class, geographic region, market capitalization and investment style. ASB’s frozen, overfunded defined benefit pension plan is invested in a portfolio that uses a liability-driven investment strategy to limit funded status volatility.
The asset allocation of defined benefit retirement plans to equity and fixed income securities (excluding cash) and related investment policy targets and ranges were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension benefits1 | | Other benefits2 |
| | | | | Investment policy | | | | | | Investment policy |
| December 31 | 2023 | | 2022 | | Target | | Range3 | | 2023 | | 2022 | | Target | | Range3 |
| Assets held by category | | | | | | | | | | | | | | | |
| U.S. equity securities | 56 | % | | 58 | % | | 50 | % | | 40-65% | | 58 | % | | 57 | % | | 50 | % | | 40-65% |
| Non-U.S equity securities | 13 | | | 13 | | | 15 | | | 5-25% | | 15 | | | 15 | | | 15 | | | 5-25% |
| Fixed income securities | 28 | | | 27 | | | 30 | | | 20-60% | | 27 | | | 28 | | | 30 | | | 20-60% |
| Private equity | 3 | | | 2 | | | 5 | | | 0-10% | | — | | | — | | | 5 | | | 0-10% |
| | 100 | % | | 100 | % | | 100 | % | | | | 100 | % | | 100 | % | | 100 | % | | |
1 Asset allocation (excluding cash) is applicable to only HEI and the Utilities. As of December 31, 2023 and 2022, nearly all of ASB’s pension assets were invested in fixed income securities.
2 Asset allocation (excluding cash) is applicable to only HEI and the Utilities. ASB does not fund its other benefits.
3 Broad range for equity securities is a minimum of 60% and a maximum of 80% for pension benefits and other benefits.
The fair values of the investments shown in the tables below represent the Company’s best estimates of the amounts that would be received upon sale of those assets in an orderly transaction between market participants at that date. Those fair value measurements maximize the use of observable inputs. However, in situations where there is little, if any, market activity for the asset at the measurement date, the fair value measurement reflects the Company’s judgments about the assumptions that market participants would use in pricing the asset. Those judgments are developed by the Company based on the best information available in the circumstances.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company used the following valuation methodologies for assets measured at fair value. There have been no changes in the methodologies used at December 31, 2023 and 2022.
Equity securities, equity index fund, exchange-traded funds, U.S. Treasury fixed income securities and mutual funds (Level 1). Equity securities, equity index fund, exchange-traded funds, U.S. Treasury fixed income securities and mutual funds are valued at the closing price reported on the active market on which the individual securities or funds are traded.
Fixed income securities and preferred securities (Level 2). Fixed income and preferred securities, other than those issued by the U.S. Treasury, are valued based on yields currently available on comparable securities of issuers with similar credit ratings.
Assets held in various trusts for the retirement benefit plans are measured at fair value on a recurring basis and were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension benefits | | Other benefits |
| | | | Fair value measurements using | | | | Fair value measurements using |
| (in millions) | December 31 | | Quoted prices in active markets for identical assets
(Level 1) | | Significant other observable inputs
(Level 2) | | | | December 31 | | Quoted prices in active markets for identical assets
(Level 1) | | Significant other observable inputs
(Level 2) | | |
| 2023 | | | | | | | | | | | | | | | |
| U.S. equity securities | $ | 449 | | | $ | 449 | | | $ | — | | | | | $ | 54 | | | $ | 54 | | | $ | — | | | |
| Non-U.S. equity securities | 165 | | | 165 | | | — | | | | | 20 | | | 20 | | | — | | | |
U.S. equity index and exchange-traded funds (ETFs) | 584 | | | 584 | | | — | | | | | 64 | | | 64 | | | — | | | |
| Non-U.S. equity investments at net asset value (NAV) | 77 | | | — | | | — | | | | | 10 | | | — | | | — | | | |
Total equity investments | 1,275 | | | 1,198 | | | — | | | | | 148 | | | 138 | | | — | | | |
| Fixed income securities | 85 | | | 13 | | | 72 | | | | | — | | | — | | | — | | | |
Fixed income mutual and ETFs | 264 | | | 264 | | | — | | | | | 53 | | | 53 | | | — | | | |
Fixed income investments at NAV | 250 | | | — | | | — | | | | | 2 | | | — | | | — | | | |
Total fixed income investments | 599 | | | 277 | | | 72 | | | | | 55 | | | 53 | | | — | | | |
| Private equity at NAV | 50 | | | — | | | — | | | | | 1 | | | — | | | — | | | |
| Cash equivalents, fund and at NAV | 60 | | | 15 | | | — | | | | | 3 | | | 3 | | | — | | | |
| Total | 1,984 | | | $ | 1,490 | | | $ | 72 | | | | | 207 | | | $ | 194 | | | $ | — | | | |
Cash, receivables and payables, net | (10) | | | | | | | | | — | | | | | | | |
Fair value of plan assets | $ | 1,974 | | | | | | | | | $ | 207 | | | | | | | |
| 2022 | | | | | | | | | | | | | | | |
| U.S. equity securities | $ | 387 | | | $ | 387 | | | $ | — | | | | | $ | 48 | | | $ | 48 | | | $ | — | | | |
| Non-U.S. equity securities | 147 | | | 147 | | | — | | | | | 18 | | | 18 | | | — | | | |
U.S. equity index and ETFs | 580 | | | 580 | | | — | | | | | 58 | | | 58 | | | — | | | |
| Non-U.S. equity investments at NAV | 75 | | | — | | | — | | | | | 10 | | | — | | | — | | | |
Total equity investments | 1,189 | | | 1,114 | | | — | | | | | 134 | | | 124 | | | — | | | |
Fixed income securities | 83 | | | 10 | | | 73 | | | | | — | | | — | | | — | | | |
Fixed income mutual and ETFs | 225 | | | 225 | | | — | | | | | 50 | | | 50 | | | — | | | |
Fixed income investments at NAV | 226 | | | — | | | — | | | | | 3 | | | — | | | — | | | |
Total fixed income investments | 534 | | | 235 | | | 73 | | | | | 53 | | | 50 | | | — | | | |
| Private equity at NAV | 34 | | | — | | | — | | | | | — | | | — | | | — | | | |
| Cash equivalents, fund and at NAV | 48 | | | 15 | | | — | | | | | 4 | | | 3 | | | — | | | |
| Total | 1,805 | | | $ | 1,364 | | | $ | 73 | | | | | 191 | | | $ | 177 | | | $ | — | | | |
Cash, receivables and payables, net | 1 | | | | | | | | | — | | | | | | | |
Fair value of plan assets | $ | 1,806 | | | | | | | | | $ | 191 | | | | | | | |
The fair value of investments measured at NAV presented in the table above is intended to permit reconciliation to the fair value of plan assets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table represents assets measured at NAV.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension benefits | | Other benefits |
| Measured at NAV | December 31 | | Redemption frequency | | Redemption notice period | | December 31 | | Redemption frequency | | Redemption notice period |
| (in millions) | | | | | | | | | | | |
| 2023 | | | | | | | | | | | |
| Non-U.S. equity funds (a) | $ | 77 | | | Daily-Monthly | | 5-30 days | | $ | 10 | | | Daily-Monthly | | 5-30 days |
Fixed income investments (b) | 250 | | | Daily | | 15 days | | 2 | | | Daily | | 15 days |
| Private equity (c) | 50 | | | NA | | NA | | 1 | | | NA | | NA |
| Cash equivalents (d) | 45 | | | Daily | | 0-1 day | | — | | | Daily | | 0-1 day |
| $ | 422 | | | | | | | $ | 13 | | | | | |
| 2022 | | | | | | | | | | | |
| Non-U.S. equity funds (a) | $ | 75 | | | Daily-Monthly | | 5-30 days | | $ | 10 | | | Daily-Monthly | | 5-30 days |
Fixed income investments (b) | 226 | | | Daily | | 15 days | | 3 | | | Daily | | 15 days |
| Private equity (c) | 34 | | | NA | | NA | | — | | | NA | | NA |
| Cash equivalents (d) | 33 | | | Daily | | 0-1 day | | 1 | | | Daily | | 0-1 day |
| $ | 368 | | | | | | | $ | 14 | | | | | |
NA Not applicable
None of the investments presented in the tables above have unfunded commitments, other than private equity disclosed in (c) below.
(a) Represents investments in funds that primarily invest in non-U.S., emerging markets equities. Redemption frequency for pension benefits assets as of December 31, 2023 were: daily, 63% and monthly, 37%, and as of December 31, 2022 were daily, 59% and monthly, 41%. Redemption frequency for other benefits assets as of December 31, 2023 were: daily, 61% and monthly, 39% and as of December 31, 2022 were: daily, 56% and monthly, 44%.
(b) Represents investments in fixed income securities invested in a US-dollar denominated fund that seeks to exceed the Bloomberg US Long Corporate A or Better Bond Index through investments in US-dollar denominated fixed income securities and commingled vehicles.
(c) Represents investment in a private equity fund. The fund is valued as reported by the General Partner, based on the valuation of the underlying investments. As of December 31, 2023 and 2022, the unfunded commitment of the private equity fund was $138 million and $56 million, respectively. A second tranche commitment of $100 million was entered into effective January 1, 2023. The fund does not allow redemptions but may be dissolved with six months written notice. The termination date of the fund is November 1, 2100, unless dissolved earlier.
(d) Represents investments in cash equivalent funds. This class includes funds that invest primarily in securities issued or guaranteed by the U.S. government or its agencies or instrumentalities. For pension benefits, the fund may also invest in fixed income securities of investment grade issuers.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following weighted-average assumptions were used in the accounting for the plans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension benefits | | Other benefits |
| December 31 | 2023 | | 2022 | | 2021 | | 2023 | | 2022 | | 2021 |
| Benefit obligation | | | | | | | | | | | |
Discount rate1 | 5.35 | % | | 5.67 | % | | 3.05 | % | | 5.39 | % | | 5.66 | % | | 3.07 | % |
| Rate of compensation increase | 3.5 | | | 3.5 | | | 3.5 | | | NA | | NA | | NA |
| Net periodic pension/benefit cost (years ended) | | | | | | | | | | | |
Discount rate2 | 5.67 | | | 3.05 | | | 2.92 | | | 5.66 | | | 3.07 | | | 2.83 | |
Expected return on plan assets3 | 7.25 | | | 7.25 | | | 7.25 | | | 7.25 | | | 7.25 | | | 7.25 | |
Rate of compensation increase4 | 3.5 | | | 3.5 | | | 3.5 | | | NA | | NA | | NA |
NA Not applicable 1 HEI and the Utilities pension benefits discount rate only at December 31, 2023, 2022 and 2021. ASB’s pension benefits discount rate at December 31, 2023, 2022 and 2021 was 5.39%, 5.63% and 3.04%, respectively. All other disclosed rates apply to the Company and the Utilities.
2 ASB’s pension benefits discount rate for the year ended December 31, 2023, 2022 and 2021 was 5.63%, 3.04% and 2.76%. All other disclosed rates apply to the Company and the Utilities.
3 HEI and the Utilities’ plan assets only (gross return). For 2023, 2022 and 2021, ASB’s expected return on plan assets was 5.83%, 3.24% and 2.96%, respectively.
4 HEI and the Utilities use a graded rate of compensation increase assumption based on age. The rate provided above is an average across all future years of service for the current population. NA for ASB.
The Company and the Utilities based their selection of an assumed discount rate for 2024 NPPC and NPBC and December 31, 2023 disclosure on a cash flow matching analysis that utilized bond information provided by Bloomberg for all non-callable, high quality bonds (generally rated Aa or better) as of December 31, 2023. In selecting the expected rate of return on plan assets for 2024 NPPC and NPBC: a) HEI and the Utilities considered economic forecasts for the types of investments held by the plans (primarily equity and fixed income investments), the Plans’ asset allocations, industry and corporate surveys and the past performance of the plans’ assets in selecting 7.25% and b) ASB considered its liability-driven investment strategy in selecting 5.59%, which is consistent with the assumed discount rate as of December 31, 2023 with a 20 basis point active manager premium. For 2023, retirement benefit plans’ assets of the Company had a net gain of 14.9% and the Utilities had a net gain of 15.2%.
As of December 31, 2023, the assumed health care trend rates for 2024 and future years were as follows: medical, 6.25%, grading down to 5% for 2029 and thereafter; dental, 5%; and vision, 4%. As of December 31, 2022, the assumed health care trend rates for 2023 and future years were as follows: medical, 6.50%, grading down to 5% for 2029 and thereafter; dental, 5%; and vision, 4%.
The components of NPPC and NPBC were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension benefits | | Other benefits |
| (in thousands) | 2023 | | 2022 | | 2021 | | 2023 | | 2022 | | 2021 |
| HEI consolidated | | | | | | | | | | | |
| Service cost | $ | 45,578 | | | $ | 78,173 | | | $ | 81,432 | | | $ | 1,430 | | | $ | 2,580 | | | $ | 2,827 | |
| Interest cost | 103,000 | | | 80,062 | | | 75,361 | | | 8,520 | | | 6,502 | | | 6,122 | |
| Expected return on plan assets | (140,824) | | | (141,266) | | | (132,223) | | | (13,648) | | | (13,621) | | | (12,957) | |
| | | | | | | | | | | |
Amortization of net prior service gain | — | | | — | | | — | | | (875) | | | (928) | | | (1,533) | |
Amortization of net actuarial losses (gains) | 669 | | | 27,412 | | | 27,245 | | | (1,888) | | | (12) | | | 203 | |
| Net periodic pension/benefit cost | 8,423 | | | 44,381 | | | 51,815 | | | (6,461) | | | (5,479) | | | (5,338) | |
| Impact of PUC D&Os | 71,905 | | | 37,148 | | | 27,963 | | | 5,846 | | | 4,966 | | | 4,839 | |
Net periodic pension/benefit cost (adjusted for impact of PUC D&Os) | $ | 80,328 | | | $ | 81,529 | | | $ | 79,778 | | | $ | (615) | | | $ | (513) | | | $ | (499) | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension benefits | | Other benefits |
| (in thousands) | 2023 | | 2022 | | 2021 | | 2023 | | 2022 | | 2021 |
Hawaiian Electric consolidated | | | | | | | | | | | |
Service cost | $ | 44,143 | | | $ | 75,845 | | | $ | 79,463 | | | $ | 1,415 | | | $ | 2,554 | | | $ | 2,802 | |
Interest cost | 95,351 | | | 74,363 | | | 70,235 | | | 8,143 | | | 6,227 | | | 5,875 | |
Expected return on plan assets | (131,962) | | | (133,873) | | | (125,404) | | | (13,442) | | | (13,381) | | | (12,755) | |
| | | | | | | | | | | |
Amortization of net prior service gain | — | | | — | | | — | | | (872) | | | (925) | | | (1,530) | |
Amortization of net actuarial losses (gains) | 28 | | | 26,358 | | | 27,534 | | | (1,827) | | | — | | | 206 | |
| Net periodic pension/benefit cost | 7,560 | | | 42,693 | | | 51,828 | | | (6,583) | | | (5,525) | | | (5,402) | |
Impact of PUC D&Os | 71,905 | | | 37,148 | | | 27,963 | | | 5,846 | | | 4,966 | | | 4,839 | |
Net periodic pension/benefit cost (adjusted for impact of PUC D&Os) | $ | 79,465 | | | $ | 79,841 | | | $ | 79,791 | | | $ | (737) | | | $ | (559) | | | $ | (563) | |
The Company recorded pension expense of $43 million, $47 million, $47 million in 2023, 2022 and 2021, respectively, and OPEB income of $(0.1) million in 2023, 2022 and 2021 and charged the remaining amounts primarily to electric utility plant. The Utilities recorded pension expense of $42 million, $45 million and $47 million, respectively, and OPEB income of $(0.3) million, $(0.1) million and $(0.2) million in 2023, 2022 and 2021, respectively, and charged the remaining amounts primarily to electric utility plant.
Additional information on the defined benefit pension plans’ accumulated benefit obligations (ABOs), which do not consider projected pay increases (unlike the PBOs shown in the table above), and pension plans with ABOs and PBOs in excess of plan assets were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| HEI consolidated | | Hawaiian Electric consolidated |
| December 31 | 2023 | | 2022 | | 2023 | | 2022 |
| (in billions) | | | | | | | |
Defined benefit plans - ABOs | $ | 1.8 | | | $ | 1.7 | | | $ | 1.7 | | | $ | 1.5 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Defined benefit plans with PBOs in excess of plan assets | | | | | | | |
PBOs | 2.0 | | | 1.8 | | | 1.9 | | | 1.7 | |
Fair value of plan assets | 1.9 | | | 1.7 | | | 1.8 | | | 1.7 | |
HEI consolidated. The Company estimates that the cash funding for the qualified defined benefit pension plans in 2024 will be $8 million, which will fully satisfy the ERISA minimum required contribution, the requirements of the Utilities’ pension tracking mechanisms and the Plan’s funding policy. The Company’s current estimate of contributions to its other postretirement benefit plans in 2024 is nil.
As of December 31, 2023, the benefits expected to be paid under all retirement benefit plans in 2024, 2025, 2026, 2027, 2028 and 2029 through 2033 amount to $113 million, $117 million, $121 million, $124 million, $128 million and $690 million, respectively.
Hawaiian Electric consolidated. The Utilities estimate that the cash funding for the qualified defined benefit pension plan in 2024 will be $8 million, which will fully satisfy the ERISA minimum required contribution, the requirements of the pension tracking mechanisms and the Plan’s funding policy. The Utilities’ current estimate of contributions to its other postretirement benefit plans in 2024 is nil.
As of December 31, 2023, the benefits expected to be paid under all retirement benefit plans in 2024, 2025, 2026, 2027, 2028 and 2029 through 2033 amounted to $103 million, $107 million, $110 million, $114 million, $117 million and $635 million, respectively.
Defined contribution plans information. For 2023, 2022 and 2021, the Company’s expense for its defined contribution plans under the HEIRSP and the ASB 401(k) Plan was $9 million, $9 million and $6 million, respectively; and its cash contributions were $10 million, $7 million and $6 million, respectively. Included in the 2023 and 2022 amounts are non-elective employer contributions for the Utilities and HEI employees first hired on or after January 1, 2022, equal to 10% of those new employees’ annual compensation. For 2023, 2022 and 2021 the Utilities’ expense and cash contributions for its defined contribution plan under the HEIRSP was $6 million, $4 million and $3 million, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | |
Note 12 · Share-based compensation |
Under the 2010 Equity and Incentive Plan, as amended and restated effective March 1, 2014 (EIP), 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 original 2010 Equity and Incentive Plan was amended and restated effective March 1, 2014 and an additional 1.5 million shares were added to the shares available for issuance under these programs.
As of December 31, 2023, approximately 2.7 million shares remained available for future issuance under the terms of the EIP, assuming recycling of shares withheld to satisfy statutory tax liabilities relating to EIP awards, including an estimated 0.5 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).
Restricted stock units awarded under the EIP in 2023, 2022, 2021 and 2020 will vest and be issued in unrestricted stock in three (2023, 2022 and 2021) or four (2020) equal annual increments on the anniversaries of the grant date and are forfeited to the extent they have not become vested for terminations of employment during the vesting period, except that pro-rata vesting is provided for terminations due to death, disability and retirement. Restricted stock units expense has been recognized in accordance with the fair-value-based measurement method of accounting. Dividend equivalent rights are accrued and are paid at the end of the restriction period when the associated restricted stock units vest.
Stock performance awards granted under the 2023-25, 2022-24 and 2021-23 long-term incentive plans (LTIP) entitle the grantee to shares of common stock with dividend equivalent rights once service conditions and performance conditions are satisfied at the end of the three-year performance period. LTIP awards are forfeited for terminations of employment during the performance period, except that pro-rata participation is provided for terminations due to death, disability and retirement based upon completed months of service after a minimum of 12 months of service in the performance period. Compensation expense for the stock performance awards portion of the LTIP has been recognized in accordance with the fair-value-based measurement method of accounting for performance shares.
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. As of December 31, 2023, there were 168,177 shares remaining available for future issuance under the 2011 Director Plan.
Share-based compensation expense and the related income tax benefit were as follows:
| | | | | | | | | | | | | | | | | |
| (in millions) | 2023 | | 2022 | | 2021 |
| HEI consolidated | | | | | |
Share-based compensation expense1 | $ | 10.5 | | | $ | 10.4 | | | $ | 9.1 | |
| Income tax benefit | 2.2 | | | 2.1 | | | 1.4 | |
| Hawaiian Electric consolidated | | | | | |
Share-based compensation expense1 | 3.3 | | | 3.0 | | | 2.7 | |
| Income tax benefit | 0.8 | | | 0.7 | | | 0.6 | |
1For 2023, 2022 and 2021, 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:
| | | | | | | | | | | | | | | | | |
| (dollars in millions) | 2023 | | 2022 | | 2021 |
| Shares granted | 40,450 | | | 35,720 | | | 29,816 | |
| Fair value | $ | 1.5 | | | $ | 1.5 | | | $ | 1.3 | |
| Income tax benefit | 0.4 | | | 0.4 | | | 0.3 | |
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 CONSOLIDATED FINANCIAL STATEMENTS (continued)
Restricted stock units. Information about HEI’s grants of restricted stock units was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
| | Shares | | (1) | | Shares | | (1) | | Shares | | (1) |
| Outstanding, January 1 | 182,528 | | | $ | 39.75 | | | 233,448 | | | $ | 38.10 | | | 193,939 | | | $ | 40.89 | |
| Granted | 100,088 | | | 42.41 | | | 98,463 | | | 41.31 | | | 137,582 | | | 34.66 | |
| Vested | (84,794) | | | 39.41 | | | (96,282) | | | 37.75 | | | (79,623) | | | 38.51 | |
| Forfeited | (8,798) | | | 41.63 | | | (53,101) | | | 39.01 | | | (18,450) | | | 39.92 | |
| Outstanding, December 31 | 189,024 | | | $ | 41.23 | | | 182,528 | | | $ | 39.75 | | | 233,448 | | | $ | 38.10 | |
Total weighted-average grant-date fair value of shares granted (in millions) | $ | 4.2 | | | | | $ | 4.1 | | | | | $ | 4.8 | | | |
(1)Weighted-average grant-date fair value per share based on the average price of HEI common stock on the date of grant.
For 2023, 2022 and 2021, total restricted stock units and related dividends that vested had a fair value of $3.7 million, $4.2 million and $3.0 million, respectively, and the related tax benefits were $0.8 million, $0.6 million and $0.6 million, respectively.
As of December 31, 2023, there was $4.1 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 1.8 years.
Long-term incentive plan payable in stock. The 2021-23, 2022-24 and 2023-25 LTIPs 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 Peer Group (Edison Electric Institute Index (EEI Index) for the 2021-23 and 2022-24 performance periods, and compared to the Company's compensation peer group consisting of companies in the EEI Index and approved by the Company's Compensation and Human Capital Management Committee for the 2023-25 performance period), in each case over the relevant three-year period. The other performance condition goals relate to EPS growth, cumulative EPS, return on average common equity (ROACE), renewable portfolio standards, carbon emissions reduction, Hawaiian Electric’s net income growth, ASB’s efficiency ratio and strategic initiatives and Pacific Current’s EBITDA growth and return on average invested capital.
LTIP linked to TSR. Information about HEI’s LTIP grants linked to TSR was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
| | Shares | | (1) | | Shares | | (1) | | Shares | | (1) |
| Outstanding, January 1 | 71,574 | | | $ | 47.67 | | | 90,974 | | | $ | 42.86 | | | 89,222 | | | $ | 42.10 | |
| Granted | 27,123 | | | 55.98 | | | 26,469 | | | 54.92 | | | 46,024 | | | 41.12 | |
| Vested (issued or unissued and cancelled) | (18,691) | | | 48.62 | | | (29,042) | | | 41.07 | | | (32,355) | | | 38.20 | |
| Forfeited | (3,529) | | | 53.72 | | | (16,827) | | | 44.45 | | | (11,917) | | | 43.07 | |
| Outstanding, December 31 | 76,477 | | | $ | 50.11 | | | 71,574 | | | $ | 47.67 | | | 90,974 | | | $ | 42.86 | |
Total weighted-average grant-date fair value of shares granted (in millions) | $ | 1.5 | | | | | $ | 1.5 | | | | | $ | 1.9 | | | |
(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 the Peer Group for the period from the beginning of the performance period to the grant date and estimated future stock volatility of HEI and the Peer Group over the remaining three-year performance period. The expected stock volatility assumptions for HEI and the Peer Group were based on the three-year historic stock volatility. A dividend assumption is not required for the Monte Carlo simulation because the grant payout includes dividend equivalents and projected returns include the value of reinvested dividends.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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:
| | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
| Risk-free interest rate | 4.19 | % | | 1.71 | % | | 0.19 | % |
| Expected life in years | 3 | | 3 | | 3 |
| Expected volatility | 33.1 | % | | 31.0 | % | | 29.9 | % |
| Range of expected volatility for Peer Group | 28.7% to 38.8% | | 25.4% to 76.7% | | 25.6% to 102.9% |
| Grant date fair value (per share) | $ | 55.98 | | | $ | 54.92 | | | $ | 41.12 | |
There were no share-based LTIP awards linked to TSR with a vesting date in 2023. For 2022 and 2021, total vested LTIP awards linked to TSR and related dividends had a fair value of $0.8 million and $0.8 million, respectively, and the related tax benefits were $0.1 million and $0.2 million, respectively.
As of December 31, 2023, there was $1.3 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 1.5 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
| | Shares | | (1) | | Shares | | (1) | | Shares | | (1) |
| Outstanding, January 1 | 309,589 | | | $ | 39.50 | | | 306,342 | | | $ | 38.42 | | | 220,715 | | | $ | 41.03 | |
| Granted | 108,499 | | | 42.41 | | | 105,860 | | | 41.31 | | | 184,102 | | | 34.37 | |
| Vested | (62,778) | | | 48.07 | | | (71,807) | | | 37.68 | | | (43,155) | | | 34.12 | |
| Increase above target (cancelled) | (13,153) | | | 36.59 | | | 36,505 | | | 35.75 | | | (7,646) | | | 39.06 | |
| Forfeited | (15,072) | | | 42.19 | | | (67,311) | | | 37.35 | | | (47,674) | | | 38.74 | |
| Outstanding, December 31 | 327,085 | | | $ | 39.44 | | | 309,589 | | | $ | 39.50 | | | 306,342 | | | $ | 38.42 | |
Total weighted-average grant-date fair value of shares granted (at target performance levels) (in millions) | $ | 4.6 | | | | | $ | 4.4 | | | | | $ | 6.3 | | | |
(1)Weighted-average grant-date fair value per share based on the average price of HEI common stock on the date of grant.
For 2023, 2022 and 2021, total vested LTIP awards linked to other performance conditions and related dividends had a fair value of $2.9 million, $3.2 million and $1.7 million, respectively, and the related tax benefits were $0.6 million, $0.4 million and $0.4 million, respectively.
As of December 31, 2023, there was $4.4 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 1.5 years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The components of income taxes attributable to net income for common stock were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| HEI consolidated | | Hawaiian Electric consolidated |
| Years ended December 31 | 2023 | | 2022 | | 2021 | | 2023 | | 2022 | | 2021 |
| (in thousands) | | | | | | | | | | | |
| Federal | | | | | | | | | | | |
| Current | $ | 30,909 | | | $ | 77,595 | | | $ | 51,455 | | | $ | 40,365 | | | $ | 75,118 | | | $ | 42,794 | |
| Deferred | 1,072 | | | (37,410) | | | (11,689) | | | (3,444) | | | (39,646) | | | (12,109) | |
| Deferred tax credits, net* | 52 | | | 4,031 | | | 4,611 | | | 22 | | | 137 | | | 302 | |
| | 32,033 | | | 44,216 | | | 44,377 | | | 36,943 | | | 35,609 | | | 30,987 | |
| State | | | | | | | | | | | |
| Current | 8,344 | | | 11,981 | | | 12,119 | | | 9,367 | | | 15,780 | | | 4,861 | |
| Deferred | 4,196 | | | 4,914 | | | 6,290 | | | 4,883 | | | (1,769) | | | 8,279 | |
| Deferred tax credits, net* | — | | | 56 | | | 21 | | | — | | | 56 | | | 21 | |
| | 12,540 | | | 16,951 | | | 18,430 | | | 14,250 | | | 14,067 | | | 13,161 | |
| Total | $ | 44,573 | | | $ | 61,167 | | | $ | 62,807 | | | $ | 51,193 | | | $ | 49,676 | | | $ | 44,148 | |
* In 2022 and 2021, primarily represents federal tax credits related to Mauo’s solar-plus-storage project, deferred and amortized starting in 2022 and 2021, respectively.
A reconciliation of the amount of income taxes computed at the federal statutory rate to the amount provided in the consolidated statements of income was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| HEI consolidated | | Hawaiian Electric consolidated |
| Years ended December 31 | 2023 | | 2022 | | 2021 | | 2023 | | 2022 | | 2021 |
| (in thousands) | | | | | | | | | | | |
| Amount at the federal statutory income tax rate | $ | 51,597 | | | $ | 63,881 | | | $ | 65,281 | | | $ | 51,899 | | | $ | 50,526 | | | $ | 46,995 | |
| Increase (decrease) resulting from: | | | | | | | | | | | |
State income taxes, net of federal income tax benefit | 10,827 | | | 14,438 | | | 15,735 | | | 11,097 | | | 11,026 | | | 10,323 | |
Net deferred tax asset (liability) adjustment related to the Tax Act | (7,316) | | | (9,886) | | | (9,886) | | | (7,316) | | | (9,886) | | | (9,886) | |
Tax credits, net | (4,070) | | | (1,297) | | | (4,473) | | | (2,251) | | | (397) | | | (2,203) | |
| Other, net | (6,465) | | | (5,969) | | | (3,850) | | | (2,236) | | | (1,593) | | | (1,081) | |
| Total | $ | 44,573 | | | $ | 61,167 | | | $ | 62,807 | | | $ | 51,193 | | | $ | 49,676 | | | $ | 44,148 | |
| Effective income tax rate (%) | 18.1 | | | 20.1 | | | 20.2 | | | 20.7 | | | 20.6 | | | 19.7 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The tax effects of book and tax basis differences that give rise to deferred tax assets and liabilities were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| HEI consolidated | | Hawaiian Electric consolidated |
| December 31 | 2023 | | 2022 | | 2023 | | 2022 |
| (in thousands) | | | | | | | |
| Deferred tax assets | | | | | | | |
Regulatory liabilities, excluding amounts attributable to property, plant and equipment | $ | 78,884 | | | $ | 82,488 | | | $ | 78,884 | | | $ | 82,488 | |
Lease liabilities | 113,968 | | | 45,016 | | | 107,409 | | | 37,472 | |
| Retirement benefits | 23,502 | | | 7,692 | | | 23,247 | | | 6,852 | |
| Revenue taxes | 49,522 | | | 51,392 | | | 49,522 | | | 51,392 | |
| Allowance for bad debts | 22,942 | | | 22,734 | | | 1,646 | | | 2,195 | |
| Available-for-sale investments | 103,587 | | | 120,405 | | | — | | | — | |
Other1 | 40,051 | | | 39,399 | | | 19,171 | | | 20,287 | |
| Total deferred tax assets | 432,456 | | | 369,126 | | | 279,879 | | | 200,686 | |
| Deferred tax liabilities | | | | | | | |
| Property, plant and equipment related | 533,286 | | | 511,832 | | | 513,064 | | | 497,929 | |
| | | | | | | |
Lease right-of-use assets | 113,498 | | | 44,461 | | | 107,409 | | | 37,472 | |
Regulatory assets, excluding amounts attributable to property, plant and equipment | 21,872 | | | 22,183 | | | 21,872 | | | 22,183 | |
| | | | | | | |
| Retirement benefits | — | | | — | | | — | | | — | |
| | | | | | | |
| Other | 61,754 | | | 53,112 | | | 36,535 | | | 27,532 | |
| Total deferred tax liabilities | 730,410 | | | 631,588 | | | 678,880 | | | 585,116 | |
| Net deferred income tax liability | $ | 297,954 | | | $ | 262,462 | | | $ | 399,001 | | | $ | 384,430 | |
1 As of December 31, 2023, HEI consolidated has deferred tax assets of $6.0 million relating to the benefit of state tax credit carryforwards of $8.1 million. These state tax credit carryforwards primarily relate to the West Loch PV project and low income housing investments that do not expire. The Company concluded that as of December 31, 2023, a valuation allowance is not required.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. Based upon historical taxable income and projections for future taxable income, management believes it is more likely than not the Company and the Utilities will realize substantially all of the benefits of the deferred tax assets. As of December 31, 2023 and 2022, valuation allowances for deferred tax benefits were nil. The Utilities are included in the consolidated federal and Hawaii income tax returns of HEI and are subject to the provisions of HEI’s tax sharing agreement, which determines each subsidiary’s (or subgroup’s) income tax return liabilities and refunds on a standalone basis as if it filed a separate return (or subgroup consolidated return).
The following is a reconciliation of the Company’s liability for unrecognized tax benefits for 2023, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| HEI consolidated | | Hawaiian Electric consolidated |
| (in millions) | 2023 | | 2022 | | 2021 | | 2023 | | 2022 | | 2021 |
| Unrecognized tax benefits, January 1 | $ | 30.6 | | | $ | 17.1 | | | $ | 12.7 | | | $ | 11.7 | | | $ | 11.6 | | | $ | 12.7 | |
| Additions based on tax positions taken during the year | 0.5 | | | 19.0 | | | 2.8 | | | 0.3 | | | 0.1 | | | 0.3 | |
| Reductions based on tax positions taken during the year | — | | | (3.5) | | | (0.5) | | | — | | | — | | | — | |
| Additions for tax positions of prior years | 3.8 | | | 0.6 | | | 7.6 | | | 3.7 | | | 0.2 | | | 0.2 | |
| Reductions for tax positions of prior years | (7.2) | | | (2.6) | | | (5.5) | | | (0.1) | | | (0.2) | | | (1.6) | |
| Lapses of statute of limitations | — | | | — | | | — | | | — | | | — | | | — | |
| Settlement | — | | | — | | | — | | | — | | | — | | | — | |
| Unrecognized tax benefits, December 31 | $ | 27.7 | | | $ | 30.6 | | | $ | 17.1 | | | $ | 15.6 | | | $ | 11.7 | | | $ | 11.6 | |
The Internal Revenue Service began its examination of the Company’s U.S. income tax returns for 2017 and 2018 in the third quarter of 2020. The Company and the Utilities anticipate completing the examination by the end of 2024. At December 31, 2023, the Company and the Utilities believe that it is reasonably possible that there will be a decrease of up to $1.8 million in unrecognized tax benefits related to the reversal of temporary differences, due to the completion of the examination. In addition, the Company believes that it is reasonably possible that there will be a decrease of up to $1.3 million
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
related the reversal of temporary differences due to the lapsing of the statute of limitations. The Company’s and the Utilities’ estimate of the unrecognized tax benefits related to the tax credit claims under examination range from nil to $10 million. Of this amount, the Utilities expect that a portion of the recognized tax credit will be returned to ratepayers. At December 31, 2022, the amount was not material.
At December 31, 2023 and 2022, there were $13.8 million and $10.2 million of unrecognized tax benefits, respectively, that, if recognized, would affect the Company’s and Utilities’ annual effective tax rate.
Based on information currently available, the Company and the Utilities believe these accruals have adequately provided for potential income tax issues with federal and state tax authorities, and that the ultimate resolution of tax issues for all open tax periods will not have a material adverse effect on its results of operations, financial condition or liquidity.
The statute of limitations for IRS examinations has expired for years prior to 2017. The Company is currently under IRS examination for the tax years 2017 and 2018. In the fourth quarter of 2020, the Company and the Hawaii Department of Taxation agreed to a final assessment of tax liabilities for the years 2011 through 2018, however, the statute of limitations for Hawaii remains open for tax years 2017 and subsequent.
HEI consolidated. The Company recognizes interest accrued related to unrecognized tax benefits in “Interest expense-other than on deposit liabilities and other bank borrowings” and penalties, if any, in operating expenses. In 2023, 2022 and 2021, the Company recognized approximately $1.3 million, $0.4 million and $0.2 million, respectively, in interest expense. The Company had $1.9 million and $0.6 million of interest accrued as of December 31, 2023 and 2022, respectively.
Hawaiian Electric consolidated. The Utilities recognize interest accrued related to unrecognized tax benefits in “Interest expense and other charges, net” and penalties, if any, in operating expenses. In each of 2023, 2022 and 2021, the Utilities recognized approximately $0.1 million in interest expense. The Utilities had $0.4 million and $0.2 million of interest accrued as of December 31, 2023 and 2022, respectively.
As of December 31, 2023, the disclosures above present the Company’s and the Utilities’ accruals for potential tax liabilities, which involve management’s judgment regarding the likelihood of the benefits being sustained under governmental review.
Tax developments. The Inflation Reduction Act of 2022 (IRA) was signed by President Biden on August 16, 2022. Key provisions under the IRA include a 15% corporate alternative minimum tax (CAMT) imposed on certain large corporations and a 1% excise tax on stock repurchases after December 31, 2022. Based on current interpretation of the law and current guidance available we do not believe HEI will be impacted by the CAMT or stock repurchase excise tax provisions.
The IRA also creates new tax credits and enhances others to stimulate investment in renewable energy sources. Certain provisions of the IRA became effective in tax year 2023. The Company is exploring clean energy tax incentives included in the IRA.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | | | | | | | | | | | | | |
| Years ended December 31 | 2023 | | 2022 | | 2021 |
| (in millions) | | | | | |
| Supplemental disclosures of cash flow information | | | | | |
| HEI consolidated | | | | | |
| Interest paid to non-affiliates, net of amounts capitalized | $ | 170 | | | $ | 106 | | | $ | 98 | |
| Income taxes paid (net of refundable credits) | 28 | | | 41 | | | 41 | |
| Income taxes refunded (including refundable credits) | 1 | | | 2 | | | 7 | |
| Hawaiian Electric consolidated | | | | | |
| Interest paid to non-affiliates, net of amounts capitalized | 74 | | | 69 | | | 71 | |
| Income taxes paid (net of refundable credits) | 39 | | | 67 | | | 45 | |
| Income taxes refunded (including refundable credits) | 2 | | | — | | | 5 | |
| Supplemental disclosures of noncash activities | | | | | |
| HEI consolidated | | | | | |
| Property, plant and equipment-Unpaid invoices and accruals for capital expenditures, balance, end of period (investing) | 43 | | | 68 | | | 48 | |
Common stock dividends reinvested in HEI common stock (financing) 1 | 5 | | | — | | | — | |
| Loans transferred from held for investment to held for sale (investing) | 106 | | | — | | | 61 | |
| | | | | |
Real estate transferred from property, plant and equipment to other assets held-for-sale (investing) | — | | | — | | | 3 | |
| Transfer of retail repurchase agreements to deposit liabilities (financing) | 98 | | | — | | | — | |
| Right-of-use assets obtained in exchange for operating lease obligations (investing) | 1 | | | 51 | | | 44 | |
| Property, plant, equipment and other assets received in exchange for the assumption of debt associated with a business acquisition (investing) | — | | | 68 | | | — | |
| Debt, lease liabilities and other liabilities assumed in business acquisition (financing) | — | | | 68 | | | — | |
Common stock issued (gross) for director and executive/management compensation (financing)1 | 8 | | | 10 | | | 7 | |
| Obligations to fund low income housing investments, net (investing) | 18 | | | 9 | | | 36 | |
| Transfer of securities from available for sale to held to maturities (investing) | — | | | 755 | | | — | |
| Hawaiian Electric consolidated | | | | | |
| Electric utility property, plant and equipment-Unpaid invoices and accruals for capital expenditures, balance, end of period (investing) | 42 | | | 64 | | | 43 | |
| Right-of-use assets obtained in exchange for operating lease obligations (investing) | — | | | 44 | | | 44 | |
| HEI Consolidated and Hawaiian Electric consolidated | | | | | |
| Electric utility property, plant and equipment | | | | | |
| Estimated fair value of noncash contributions in aid of construction (investing) | 21 | | | 14 | | | 8 | |
| | | | | |
| | | | | |
| Increase related to an acquisition (investing) | — | | | 15 | | | — | |
| Right-of-use assets obtained in exchange for finance lease obligations (financing) | 294 | | | 48 | | | — | |
| | | | | |
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | |
Note 15 · Regulatory restrictions on net assets |
The abilities of certain of HEI’s subsidiaries to pay dividends or make other distributions to HEI are subject to contractual and regulatory restrictions. Under the PUC Agreement, in the event that the consolidated common stock equity of the electric utility subsidiaries falls below 35% of the total capitalization of the electric utilities (including the current maturities of long-term debt, but excluding short-term borrowings), the electric utility subsidiaries would, absent PUC approval, be restricted in their payment of cash dividends to 80% of the earnings available for the payment of dividends in the current fiscal year and preceding five years, less the amount of dividends paid during that period. The PUC Agreement also provides that the foregoing dividend restriction shall not be construed as relinquishing any right the PUC may have to review the dividend policies of the electric utility subsidiaries. As of December 31, 2023, the consolidated common stock equity of HEI’s electric utility subsidiaries was 51% of their total capitalization (as calculated for purposes of the PUC Agreement, which total capitalization includes finance lease liabilities). As of December 31, 2023, Hawaiian Electric and its subsidiaries had common stock equity of $2.4 billion of which approximately $1.2 billion was not available for transfer to HEI in the form of dividends, loans or advances without regulatory approval.
The ability of ASB to make capital distributions to HEI and other affiliates is restricted under federal law. Subject to a limited exception for stock redemptions that do not result in any decrease in ASB’s capital and would improve ASB’s financial condition, ASB is prohibited from declaring any dividends, making any other capital distributions, or paying a management fee to a controlling person if, following the distribution or payment, ASB would be deemed to be undercapitalized, significantly undercapitalized or critically undercapitalized. As of December 31, 2023, ASB had in excess of approximately $210 million of net assets over the required “well-capitalized” position. Prior to making any capital distribution (including dividends) to HEI (through ASB Hawaii), ASB evaluates its level of business model risk, credit outlook, current and forecasted liquidity and expected balance sheet growth to determine if a distribution is warranted. All capital distributions (including dividends) to HEI (through ASB Hawaii) are reviewed and approved by the OCC and FRB prior to distribution. Generally, the FRB and OCC may disapprove or deny ASB’s request to make a capital distribution if the proposed distribution will cause ASB to become undercapitalized, or the proposed distribution raises safety and soundness concerns, or the proposed distribution violates a prohibition contained in any statute, regulation or agreement between ASB and the OCC. As of December 31, 2023, ASB did not request a dividend distribution from the OCC and FRB, and will reevaluate its ability to distribute excess capital next quarter.
HEI and its subsidiaries are also subject to debt covenants, preferred stock resolutions and the terms of guarantees that could limit their respective abilities to pay dividends. The Company does not expect that the regulatory and contractual restrictions applicable to HEI and/or its subsidiaries will significantly affect the operations of HEI.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | |
Note 16 · Significant group concentrations of credit risk |
Most of the Company’s business activity is with customers located in the State of Hawaii.
The Utilities are regulated operating electric public utilities engaged in the generation, purchase, transmission, distribution and sale of electricity on the islands of Oahu, Hawaii, Maui, Lanai and Molokai in the State of Hawaii. The Utilities provide the only electric public utility service on the islands they serve. The Utilities extend credit to customers, all of whom reside or conduct business in the State of Hawaii. See Note 4 for a discussion of the Utilities’ major customers. The Utilities target compensation at market rates, and due to the significant increase in competitive market pay for linemen over the past few years, provided an 11.4% market rate adjustment and a 4% annual incentive effective February 1, 2024. The International Brotherhood of Electrical Workers Local 1260 represents roughly half of the Utilities’ workforce covered by a collective bargaining agreement. On January 26, 2024, a new three-year contract was ratified and will be in effect from November 1, 2024 through October 31, 2027. The contract provides for a 3% general wage increase in each year of the three-year contract, double time for callouts, and a 1% incentive payment upon achievement of specified objectives.
Most of ASB’s financial instruments are based in the State of Hawaii, except for the investment securities it owns. Substantially all real estate loans are collateralized by real estate in Hawaii. ASB’s policy is to require mortgage insurance on all real estate loans with a loan to appraised value ratio in excess of 80% at origination.
Pacific Current’s investments are in projects located in the State of Hawaii since its strategy is focused on investing in non-regulated renewable energy and sustainable infrastructure in the State of Hawaii.
| | |
Note 17 · 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 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Collateral dependent loans. Collateral dependent loans have been adjusted to fair value. When a loan is identified as collateral dependent, the Company measures the impairment using the current fair value of the collateral, less selling costs. Depending on the characteristics of a loan, the fair value of collateral is generally estimated by obtaining external appraisals, but in some cases, the value of the collateral may be estimated as having little or no value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. If it is determined that the value of the collateral dependent loan is less than its recorded investment, the Company recognizes this impairment and adjusts the carrying value of the loan to fair value through the allowance for credit losses.
Real estate acquired in settlement of loans. Foreclosed assets are initially measured at fair value (less estimated costs to sell) and subsequently measured at the lower of the carrying value or fair value less selling costs. Fair values 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. ASB includes MSRs within Level 3 of the valuation hierarchy.
Time deposits. The fair value of fixed-maturity certificates of deposit was estimated by discounting the future cash flows using the rates currently offered for FHLB advances of similar remaining maturities. Deposit liabilities are classified in Level 2 of the valuation hierarchy.
Other borrowings. For advances, repurchase agreements and other bank borrowings, fair value is estimated using quantitative discounted cash flow models that require the use of interest rate inputs that are currently offered for advances, repurchase agreements and other bank borrowings 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.
Interest rate lock commitments (IRLCs). The estimated fair value of commitments to originate residential mortgage loans for sale is based on quoted prices for similar loans in active markets. IRLCs are classified as Level 2 measurements.
Forward sales commitments. To be announced (TBA) mortgage-backed securities forward commitments are classified as Level 1, and consist of publicly-traded debt securities for which identical fair values can be obtained through quoted market prices in active exchange markets. The fair values of ASB’s best efforts and mandatory delivery loan sale commitments are determined using quoted prices in the market place that are observable and are classified as Level 2 measurements.
Interest rate swaps. The Company measures its interest rate swaps at fair value. The fair values of the Company's interest rate swaps are based on the estimated amounts that the Company would receive or pay to terminate the contracts at the reporting date and are determined using interest rate pricing models and interest rate related observable inputs. The fair values of the Company's interest rate swaps are classified as a Level 2 measurements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table presents the carrying or notional amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 |
| December 31, 2023 | | | | | | | | | |
| Financial assets | | | | | | | | | |
| HEI consolidated | | | | | | | | | |
| | | | | | | | | |
Available-for-sale investment securities | $ | 1,136,439 | | | $ | — | | | $ | 1,122,081 | | | $ | 14,358 | | | $ | 1,136,439 | |
Held-to-maturity investment securities | 1,201,314 | | | — | | | 1,103,668 | | | — | | | 1,103,668 | |
| | | | | | | | | |
| Loans, net | 6,121,606 | | | — | | | 15,176 | | | 5,723,823 | | | 5,738,999 | |
| Mortgage servicing rights | 8,169 | | | — | | | — | | | 18,722 | | | 18,722 | |
| | | | | | | | | |
| Derivative assets | 16,880 | | | — | | | 1,058 | | | — | | | 1,058 | |
| | | | | | | | | |
| | | | | | | | | |
| Financial liabilities | | | | | | | | | |
| HEI consolidated | | | | | | | | | |
| Deposit liabilities | 1,063,907 | | | — | | | 1,053,101 | | | — | | | 1,053,101 | |
| | | | | | | | | |
| Other bank borrowings | 750,000 | | | — | | | 747,508 | | | — | | | 747,508 | |
| Long-term debt, net—other than bank | 2,842,429 | | | — | | | 2,133,225 | | | — | | | 2,133,225 | |
Derivative liabilities | 28,449 | | | 18 | | | 303 | | | — | | | 321 | |
| Hawaiian Electric consolidated | | | | | | | | | |
| | | | | | | | | |
Long-term debt, net | 1,934,277 | | | — | | | 1,385,025 | | | — | | | 1,385,025 | |
| | | | | | | | | |
| December 31, 2022 | | | | | | | | | |
| Financial assets | | | | | | | | | |
| HEI consolidated | | | | | | | | | |
| | | | | | | | | |
Available-for-sale investment securities | $ | 1,429,667 | | | $ | — | | | $ | 1,414,765 | | | $ | 14,902 | | | $ | 1,429,667 | |
Held-to-maturity investment securities | 1,251,747 | | | — | | | 1,150,971 | | | — | | | 1,150,971 | |
| | | | | | | | | |
| Loans, net | 5,907,514 | | | — | | | 821 | | | 5,453,381 | | | 5,454,202 | |
| Mortgage servicing rights | 9,047 | | | — | | | — | | | 17,646 | | | 17,646 | |
| | | | | | | | | |
| Derivative assets | 16,220 | | | 18 | | | 1,330 | | | — | | | 1,348 | |
| | | | | | | | | |
| | | | | | | | | |
| Financial liabilities | | | | | | | | | |
| HEI consolidated | | | | | | | | | |
| Deposit liabilities | 611,718 | | | — | | | 597,617 | | | — | | | 597,617 | |
| Short-term borrowings—other than bank | 172,568 | | | — | | | 172,568 | | | — | | | 172,568 | |
| Other bank borrowings | 695,120 | | | — | | | 695,095 | | | — | | | 695,095 | |
| Long-term debt, net—other than bank | 2,384,980 | | | — | | | 2,122,605 | | | — | | | 2,122,605 | |
| Derivative liabilities | 22,949 | | | — | | | 472 | | | — | | | 472 | |
| Hawaiian Electric consolidated | | | | | | | | | |
Short-term borrowings | 87,967 | | | — | | | 87,967 | | | — | | | 87,967 | |
Long-term debt, net | 1,684,816 | | | — | | | 1,487,496 | | | — | | | 1,487,496 | |
| | | | | | | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Fair value measurements on a recurring basis. Assets and liabilities measured at fair value on a recurring basis were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31 | 2023 | | 2022 |
| 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 | $ | — | | | $ | 1,077,168 | | | $ | — | | | $ | — | | | $ | 1,292,968 | | | $ | — | |
| U.S. Treasury and federal agency obligations | — | | | 12,010 | | | — | | | — | | | 81,063 | | | — | |
| Corporate bonds | — | | | 32,903 | | | — | | | — | | | 40,734 | | | — | |
| Mortgage revenue bonds | — | | | — | | | 14,358 | | | — | | | — | | | 14,902 | |
| | $ | — | | | $ | 1,122,081 | | | $ | 14,358 | | | $ | — | | | $ | 1,414,765 | | | $ | 14,902 | |
| Derivative assets | | | | | | | | | | | |
Interest rate lock commitments (bank segment)1 | $ | — | | | $ | 86 | | | $ | — | | | $ | — | | | $ | 9 | | | $ | — | |
Forward commitments (bank segment)1 | — | | | — | | | — | | | 18 | | | — | | | — | |
| | | | | | | | | | | |
Interest rate swap (Other segment)2 | — | | | 972 | | | — | | | — | | | 1,321 | | | — | |
| $ | — | | | $ | 1,058 | | | $ | — | | | $ | 18 | | | $ | 1,330 | | | $ | — | |
| Derivative liabilities | | | | | | | | | | | |
| | | | | | | | | | | |
Forward commitments (bank segment)1 | $ | 18 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | |
Interest rate swap (Other segment)2 | — | | | 303 | | | — | | | — | | | 472 | | | — | |
| $ | 18 | | | $ | 303 | | | $ | — | | | $ | — | | | $ | 472 | | | $ | — | |
1 Derivatives are carried at fair value in other assets or other liabilities in the balance sheets with changes in value included in mortgage banking income.
2 Derivatives are included in other assets and other liabilities in the balance sheets.
There were no transfers of financial assets and liabilities between Level 1 and Level 2 of the fair value hierarchy during the years ended December 31, 2023 and 2022.
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows:
| | | | | | | | |
| (in thousands) | 2023 | 2022 |
| Mortgage revenue bonds | | |
| Balance, January 1 | $ | 14,902 | | $ | 15,427 | |
| Principal payments received | (544) | | (525) | |
| Purchases | — | | |
| Unrealized gain (loss) included in other comprehensive income | — | | — | |
| Balance, December 31 | $ | 14,358 | | $ | 14,902 | |
Mortgage revenue bonds are issued by the Department of Budget and Finance of the State of Hawaii. The Company estimates the fair value by using a discounted cash flow model to calculate the present value of estimated future principal and interest payments. The unobservable input used in the fair value measurement is the weighted average discount rate. As of December 31, 2023, the weighted average discount rate was 5.67% which was derived by incorporating a credit spread over the one month SOFR. Significant increases (decreases) in the weighted average discount rate could result in a significantly lower (higher) fair value measurement.
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. As of December 31, 2022 and 2021, there were no financial instruments measured at fair value on a nonrecurring basis.
For 2023 and 2022, there were no adjustments to fair value for ASB’s loans held for sale.
