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    HAWAIIAN ELECTRIC INDUSTRIES INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Resultsof Operations


    May 10, 2022 - Edgar Glimpses

     

       The following discussion updates "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in HEI's and Hawaiian Electric's 2021 Form 10-K and should be read in conjunction with such discussion and the 2021 annual consolidated financial statements of HEI and Hawaiian Electric and notes thereto included in HEI's and Hawaiian Electric's 2021 Form 10-K, as well as the quarterly (as of and for the three months ended March 31, 2022) condensed consolidated financial statements and notes thereto included in this Form 10-Q. HEI consolidated Recent developments-COVID-19. Hawaii's 7-day average daily COVID-19 case counts have receded from the high of 4,610 reached in January 2022 and recently the 7-day average for new cases was 436 as of April 25, 2022. In March 2022, the state ended the Safe Travels program for domestic U.S. travelers and the indoor mask mandate. Hawaii vaccinations have steadily increased with over 77% of the state's population fully vaccinated as of April 19, 2022 and 39% of those fully vaccinated received a third shot. Tourism numbers remain below pre-pandemic levels, primarily due to a delayed recovery in international travel. However, domestic travel has recovered significantly and recently exceeded pre-pandemic levels, with March 2022 total domestic passenger counts at approximately 112% of March 2019 (pre-pandemic) total domestic passenger counts. Although the Hawaii economy experienced a temporary setback with the Delta and Omicron variants, the Hawaii economy is expected to continue its improvement in 2022 with the lifting of restrictions and gradual return of international travel. In the first quarter of 2022, Utility kWh sales remained below pre-pandemic levels, but were 2.5% higher than the first quarter of 2021 due to increased economic activity following the loosening of restrictions and an increase in tourism. While the level of kWh sales does not affect Utility revenues due to decoupling, it may increase or decrease the price per kWh paid by customers. See "Decoupling" in Note 3 of the Condensed Consolidated Financial Statements for a discussion of the decoupling mechanism. At the Bank, due to favorable credit trends and continued improvement in the economic environment, ASB recorded a $3.3 million negative provision for credit losses in the first quarter of 2022 compared to a negative provision for credit losses of $8.4 million in the first quarter of 2021. Net interest income increased $1.9 million to $59.0 million in the first quarter of 2022 due to growth in the investment securities portfolio that was principally funded by the growth in deposits, as well as lower amortization of premiums in the investment portfolio. The higher net interest income from the investment portfolio was partly offset by the impact of a decrease in loan portfolio balances and lower loan portfolio yields as a result of the low interest rate environment and lower PPP fees. For further discussion of the impact of the COVID-19 pandemic on the Utilities and the Bank, see "Recent Developments-COVID-19" in the Electric Utility and Bank sections below. There has been no material impact on the "Other" segment and Pacific Current as a result of the COVID-19 pandemic as the primary businesses of Pacific Current are supported by PPAs that provide for contractual cash flows with credit-worthy counterparties. 

      For a discussion regarding the impact of the economic conditions caused by the COVID-19 pandemic on the Company's liquidity and capital resources, see discussion under "Financial Condition-Liquidity and capital resources," contained in each of the "HEI Consolidated," "Electric utility" and "Bank" sections of this MD&A.

       Environmental, Social & Governance. At HEI, environmental, social and governance (ESG) principles and sustainability have long been embedded within all aspects of the Company's activities and integral to the Company's efforts to create value for all of its stakeholders. With all of its operations isolated in the middle of the Pacific Ocean, the Company's long-term health and financial performance is inextricably linked with the strength of the Hawaii economy, its communities, and the environment. That is why long-term shareholder and broader stakeholder value are both served by the Company's mission to be a catalyst for a better Hawaii. In 2021, the Company identified a number of priorities that reflect the essential connection between the health of Hawaii's environment, economy and communities and HEI's long-term success. The key ESG priorities the Company is working to advance include: 

      •decarbonizing the Company's operations and the broader Hawaii economy;

      •promoting Hawaii's economic health and improving affordability for all residents;

      •ensuring reliability and resilience as the Company navigates the clean energy transition and adapts to a changing climate;

      •advancing digitalization of the Company's operations to better serve customers and increase efficiency while protecting against cyber-security challenges;

       51 --------------------------------------------------------------------------------

      •promoting diversity, equity and inclusion both within the Company and in the ways the Company interacts with and impacts external stakeholders;

      •increasing employee engagement; and

      •identifying and integrating climate-related risks and opportunities throughout the Company's planning and decision-making.

      The Company has also focused on ensuring that ESG considerations are appropriately integrated into governance structures, strategies and risk management. This includes:

       •Integration of Board oversight of important ESG matters into its existing governance structures and processes. This includes full Board review of ESG-related strategies, Audit & Risk Committee oversight of ESG risks, Compensation & Human Capital Management Committee responsibility for ESG-related compensation matters and human capital management and Nominating and Corporate Governance Committee responsibility for ensuring an appropriate board governance framework is in place with respect to ESG. 

      •Robust ESG expertise among board members, including directors with direct experience in renewable energy, climate change policy and strategy, environmental management and sustainable investing.

      •Expanded ESG goals as part of HEI and Utility executive incentive compensation.

      •ESG considerations explicitly woven into strategic planning efforts and enterprise risk management processes.

       The Company is committed to transparency and providing information to allow customers, community leaders, investors and other stakeholders understand how the Company's strategies and operations advance ESG objectives and contribute to long-term stakeholder value creation. The Company issued its first ESG report in September 2020. The report encompassed ESG policies, principles and results reported during 2019 across the Company's two primary operating subsidiaries, Hawaiian Electric and ASB, and was aligned with Sustainability Accounting Standards Board (SASB) guidance-using the electric utilities standard for Hawaiian Electric, and the commercial banks, commercial finance, and mortgage finance standards for ASB. On April 22, 2021, the Company issued its second ESG report. This report continues to include SASB disclosures for Hawaiian Electric and ASB and incorporates disclosures regarding risks and opportunities related to climate change, as well as associated risk management and governance processes, based on recommendations from the Task Force on Climate-related Financial Disclosures. It also outlines key impacts for the Company under two climate scenarios, including a scenario targeted to limit global temperature rise to 2 degrees Celsius or lower. On April 12, 2022, the Company issued its third and most comprehensive ESG report. The report includes HEI's first enterprise-wide greenhouse gas (GHG) emissions inventory, which will further guide the company's ESG strategies and provide greater transparency around its progress on climate issues. Net enterprise-wide GHG emissions in measured categories have decreased over time, driven largely by reductions in the utility's generation-related emissions The Company's ESG reports can be found at www.hei.com/esg. RESULTS OF OPERATIONS Three months ended March 31 % (in thousands) 2022 2021 change Primary reason(s)* Revenues $ 785,068 $ 642,946 22 Primarily increase for the electric utility segment Operating income 99,276 98,031 1 Increase for the electric utility segment and lower losses for the "other" segment, partly offset by decrease for bank segment Net income for common stock 69,167 64,358 7 Higher net income at the electric utility segment and lower net loss for the "other" segment, partly offset by lower net income at the bank segment. See below for effective tax rate explanation. * Also, see segment discussions which follow. 

      The Company's effective tax rates for the first three months of 2022 and 2021 were comparable at 20% and 19%, respectively.

      Economic conditions.

       Note: The statistical data in this section is from public third-party sources that management believes to be reliable (e.g., Department of Business, Economic Development and Tourism (DBEDT), University of Hawaii Economic Research Organization (UHERO), Department of Health of the State of Hawaii , U.S. Bureau of Labor Statistics, Department of Labor 52 --------------------------------------------------------------------------------

      and Industrial Relations (DLIR), Hawaii Tourism Authority (HTA), Honolulu Board of REALTORS® and national and local news media).

       At the end of March 2022, the Safe Travels Program, which required proof of vaccination or a negative COVID test for travel to Hawaii, ended following a significant reduction in case counts in recent months. In addition, lower case counts across most states also led to stronger demand for travel to Hawaii in the first quarter of 2022, resulting in the average daily passenger count 122.7% higher than the comparable period in the prior year, but still 16.8% below 2019. The recovery in total passenger counts from the low levels in 2020 thus far has been driven by domestic travelers, with international travelers remaining at low levels due to higher restrictions for international travelers, depending on country of origin. In March 2022, domestic passenger counts were up 10.8% compared to 2019 pre-COVID-19 levels, while international passenger counts were down 87% compared to 2019 pre-COVID-19 levels. Hawaii's seasonally adjusted unemployment rate in March 2022 was 4.1%, which was lower compared to the March 2021 rate of 6.6%. The national unemployment rate in March 2022 was 3.6% compared to 6.0% in March 2021. Hawaii's unemployment rate is expected to continue to improve now that restrictions have been lifted. Hawaii real estate activity through March 2022, as indicated by Oahu's home resale market, drove an increase in the median sales price of 12.1% for condominiums and 20.2% for single-family homes compared to the same period in 2021, with the March median single-family home price reaching a record $1,150,000 set in March. The number of closed sales was up 16.8% for condominiums and down 2.6% for single-family residential homes for the first quarter of 2022 compared to 2021. Hawaii's petroleum product prices reflect supply and demand in the Asia-Pacific region and the price of crude oil in international markets. The price of crude oil gradually increased throughout 2021 but decreased in January 2022 and increased significantly in February 2022. At its March 15, 2022 meeting, the Federal Open Market Committee (FOMC) decided to raise the federal funds rate target range of 0.25%-0.5%. The FOMC plans to continue to maintain an accommodative stance of monetary policy to achieve maximum employment and inflation at the rate of 2 percent over the long run. The Federal Reserve stated that it will begin to reduce its holdings of Treasury securities and agency mortgage-backed securities. The most recent forecast by UHERO, which was issued on March 6, 2022, forecasts full year 2022 real GDP growth of 3.8%, increase in total visitor arrivals of 29.1%, decrease in real personal income of 4.7%, and an unemployment rate of 5.1%. This forecast reflects improvement of Hawaii's economy after experiencing a downturn due to the Delta and Omicron variants of COVID-19 in 2021. The international market is still anticipated to gradually return in late summer of 2022. However, a full economic recovery is still forecasted to be several years out and dependent on the ability to adapt to new COVID-19 threats, the global economic fallout from Russia's invasion of Ukraine, increasing federal interest rates, and the return of international visitors. The Company expects economic conditions to improve going forward; however, it is difficult to predict the future path of the pandemic. If economic conditions worsen from current levels or remain depressed for an extended period of time, it could have a material unfavorable impact on the Company's financial position or results of operations in 2022. See also "Recent Developments-COVID-19" in the "Electric utility" and "Bank" sections below for further discussion of the economic impact caused by the pandemic. "Other" segment. Three months ended March 31 (in thousands) 2022 2021 Primary reason(s) Revenues $ 1,161 $ 951 

      Increase in other sales at Pacific Current subsidiaries. Operating loss

       (4,349) (6,379) The first three months of 2022 and 2021 include $0.8 million and $0.7 million, respectively, of operating income from Pacific Current1. Corporate expenses for the first three months of 2022 was $1.9 million lower than the same period in 2021, primarily due to lower charitable donations, due to timing of contributions. Gain on sale of 8,123 - 

      Gain on sale of an equity-method investment at Pacific equity-method investment

      Current.

       Net loss (1,112) (8,556) The net loss for the first three months of 2022 was lower than the net loss for the first three months of 2021 due to the gain on sale of an equity-method investment by Pacific Current and the same factors cited for the change in operating loss. 

      1 Hamakua Energy's sales to Hawaii Electric Light (a regulated affiliate) are eliminated in consolidation.

       53 -------------------------------------------------------------------------------- The "other" business segment loss includes results of the stand-alone corporate operations of HEI (including eliminations of intercompany transactions) and ASB Hawaii, Inc. (ASB Hawaii), as well as the results of Pacific Current, a direct subsidiary of HEI focused on investing in clean energy and sustainable infrastructure projects; Pacific Current's indirect subsidiary, Hamakua Energy, which owns a 60-MW combined cycle power plant that provides electricity to Hawaii Electric Light; Pacific Current's subsidiaries, Mauo, LLC (Mauo), which owns solar-plus-storage projects totaling 8.6 MW on five University of Hawaii campuses, Alenuihaha Developments, LLC, which owns a collection of renewable energy assets, Ka'ie'ie Waho Company, LLC, which owns a 6 MW solar photovoltaic system that provides renewable energy to Kauai Island Utility Cooperative, and Ka'aipua'a, LLC, which is constructing a wastewater treatment and energy recovery facility on Hawaii island; as well as eliminations of intercompany transactions. FINANCIAL CONDITION Liquidity and capital resources. As of March 31, 2022, there was no balance on HEI's revolving credit facility or Hawaiian Electric's revolving credit facility and the available committed capacities under the facilities were $175 million and $200 million, respectively. At the end of the quarter, HEI and Hawaiian Electric had approximately $66 million and $6 million of commercial paper outstanding, respectively. As of March 31, 2022, ASB's unused FHLB borrowing capacity was approximately $2.1 billion and ASB had unpledged investment securities of $2.8 billion that were available to be used as collateral for additional borrowing capacity. 

      As of March 31, 2022 and December 31, 2021, the total amount of available borrowing capacity (net of commercial paper outstanding) under the Company's committed lines of credit was approximately $304 million and $321 million, respectively.

       The Company believes that its cash and cash equivalents, expected operating cash flow from subsidiaries, existing credit facilities, and access to the capital markets will be sufficient to meet the Company's cash requirements over the next twelve months and beyond based on its current business plans. However, the Company expects that its liquidity will continue to be moderately impacted at the Utilities due to higher working capital requirements due to lingering COVID-19 impacts to the local economy. For the Utilities, the economic impact of the pandemic on customers have resulted in higher accounts receivable balances and bad debt expense and may result in higher write-offs in the future. As of March 31, 2022, approximately $38 million of the Utilities' accounts receivables were 30 days past due. Of the over 30 days past due amounts, approximately 23% were on payment plans. The Company commenced its disconnection process on a tiered basis, starting in the third quarter of 2021, targeting the oldest and largest balances first, which is expected to reduce delinquent accounts receivable balances over time as payments are made. In addition to the cash flow impact from delayed collection of accounts receivable, lower kWh sales relative to the level of kWh sales approved in the last rate case generally result in delayed timing of cash flows, resulting in higher working capital requirements (see "Recent Developments-COVID-19" in the Electric utility section below). At this time, the delay in customer cash collections has not significantly affected the Company's liquidity. The Company is prepared to address, if needed, the potential financing requirement related to the delayed timing of customer collections. At ASB, liquidity remains at satisfactory levels largely due to U.S. economic stimulus programs implemented as a result of COVID-19 that led to a substantial increase in customer deposits. ASB's cash and cash equivalents was $270 million as of March 31, 2022, compared to $251 million as of December 31, 2021. ASB remains well above the "well capitalized" level under the FDIC Improvement Act prompt correction action capital category, and while the economic outlook has improved and is expected to continue to improve, there are still COVID-19 risks, such as new variants, that could create ongoing uncertainty regarding COVID-19's impact on loan performance and the allowance for credit losses (see "Recent Developments - COVID-19" in the Bank section below). HEI material cash requirements. HEI's material cash requirements include: capital expenditures, labor and benefit costs, O&M expenses, fuel and purchase power costs, and debt and interest payments at the Utilities; investments in loans and investment securities at the Bank; labor and benefits costs, shareholder dividends and debt and interest payments at HEI; and HEI equity contributions to support Pacific Current's sustainable infrastructure investments. The Company believes that its ability to generate cash, both internally from electric utility and banking operations and externally from issuances of equity and debt securities, as well as bank borrowings, is adequate to maintain sufficient liquidity to fund its contractual obligations and commercial commitments, its forecasted capital expenditures and investments, its expected retirement benefit plan contributions and other short-term and long-term material cash requirements. However, the COVID-19 pandemic continues to be an evolving situation, and the Company cannot predict the extent or duration of outbreaks from new variants, the future effects that it will have on the global, national or local economy, including the impact on the Company's cost of capital and its ability to access additional capital, or the future impacts on the Company's financial position, results of operations, and cash flows. 54 -------------------------------------------------------------------------------- The consolidated capital structure of HEI (excluding deposit liabilities and other bank borrowings) was as follows: (dollars in millions) March 31, 2022 

      December 31, 2021 Short-term borrowings-other than bank $ 71 1 % $

       54 1 % Long-term debt, net-other than bank 2,316 49 2,322 48 Preferred stock of subsidiaries 34 1 34 1 Common stock equity 2,304 49 2,391 50 $ 4,725 100 % $ 4,801 100 % HEI's commercial paper borrowings and line of credit facility were as follows: Average balance Balance Three months ended March 31, (in millions) 2022 March 31, 2022 December 31, 2021 Commercial paper $ 51 $ 66 $ 54 Line of credit draws on revolving credit facility - - - Note: This table does not include Hawaiian Electric's separate commercial paper issuances and line of credit facilities and draws, which are disclosed below under "Electric utility-Financial Condition-Liquidity and capital resources." The maximum amount of HEI's short-term commercial paper borrowings during the first three months of 2022 was $66 million. As of March 31, 2022, available committed capacity under HEI's line of credit facility was $175 million. 

      There were no new issuances of common stock through the HEI Dividend Reinvestment and Stock Purchase Plan (DRIP), HEIRSP or the ASB 401(k) Plan in the three months ended March 31, 2022 and 2021 and HEI satisfied the share purchase requirements of the DRIP, HEIRSP and ASB 401(k) Plan through open market purchases of its common stock.

       For the first three months of 2022, net cash provided by operating activities of HEI consolidated was $93 million. Net cash used by investing activities for the same period was $228 million, primarily due to capital expenditures, ASB's purchases of available-for-sale investment securities, partly offset by ASB's receipt of investment security repayments and maturities and net decrease in loans. Net cash provided by financing activities during this period was $131 million as a result of several factors, including net increases in ASB's deposit liabilities and other bank borrowings, the issuances of long-term debt and net increases in short-term borrowings, partly offset by repayment of long-term debt and payment of common stock dividends. During the first three months of 2022, Hawaiian Electric and ASB (through ASB Hawaii) paid cash dividends to HEI of $31 million and $15 million, respectively. Dividends. The payout ratios for the first three months of 2022 and full year 2021 were 55% and 60%, respectively. On February 11, 2022, the HEI Board of Directors approved a 1 cent increase in the quarterly dividend from $0.34 per share to $0.35 per share, starting with the dividend in the first quarter of 2022. HEI currently expects to maintain its dividend at its present level; however, the HEI Board of Directors evaluates the dividend quarterly and considers many factors in the evaluation including, but not limited to, the Company's results of operations, the long-term prospects for the Company, current and expected future economic conditions, including impacts from the COVID-19 pandemic, and capital investment alternatives. MATERIAL ESTIMATES AND CRITICAL ACCOUNTING POLICIES

      In preparing financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ significantly from those estimates.

       In accordance with SEC Release No. 33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies," management has identified the accounting policies it believes to be the most critical to the Company's financial statements-that is, management believes that these policies are both the most important to the portrayal of the Company's results of operations and financial condition, and currently require management's most difficult, subjective or complex judgments. For information about these material estimates and critical accounting policies, in addition to the critical policy discussed below, see pages 45 to 46, 62 to 63, and 76 to 77 of HEI's MD&A included in Part II, Item 7 of HEI's 2021 Form 10-K. 

      Following are discussions of the results of operations, liquidity and capital resources of the electric utility and bank segments.

       55 --------------------------------------------------------------------------------

      Electric utility

      Recent developments-COVID-19

      See also Recent developments-COVID-19 in HEI's MD&A.

       In the first quarter of 2022, COVID-19 case counts peaked in mid-January 2022, followed by a rapid decline in case counts and hospitalizations by the end of the quarter. In response to the improvement in COVID-19 trends, in March 2022, the state ended the Safe Travels program that required proof of vaccination or a negative COVID-19 test for transpacific travelers and removed the indoor mask mandate. As a result, for the first quarter of 2022, driven by continued recovery of the economy and the lifting of all COVID-19 restrictions, the demand for electricity increased 2.5% from 2021 levels. Accounts receivable collection trends improved in the first quarter with past due accounts receivable balances decreasing by $6.2 million, or 9%, and the number of accounts past due decreasing by approximately 4% since December 31, 2021. The decrease in accounts receivables was primarily driven by payments on installment plans, Low Income Home Energy Assistance Program payment, a large government account payment that was previously in arrears, higher cash receipts associated with increased disconnection efforts, application of the $2 million Kokua bill credit, offset by higher customer balances driven by higher fuel prices. At this time, the delay in customer cash collections has not significantly affected the Utilities' liquidity. The Utilities are prepared to address, if needed, the financing requirement related to the delayed timing of cash flows collected under the decoupling mechanism through the RBA and the modest slowing or reduction in accounts receivable collections from customers. See "Financial Condition-Liquidity and capital resources" for additional information. In the second quarter of 2020, the PUC approved the deferral of certain COVID-19 related costs, such as higher bad debt expense, higher financing costs, non-collection of late payment fees, increased personal protective equipment costs, and sequestration costs for mission-critical employees. As of March 31, 2022, these cumulative costs, which have been deferred and recorded as a regulatory asset, totaled approximately $27.8 million (see also discussion under "Regulatory assets for COVID-19 related costs" in Note 3 of the Condensed Consolidated Financial Statements). The Utilities deferred COVID-19 related costs through a PUC approved period that ended on December 31, 2021 and will be seeking recovery of the deferred costs in a separate proceeding to be filed in the second quarter of 2022. Looking forward, while case counts and hospitalizations have declined since the peak in January 2022, the positivity rate has recently increased. A worsening of COVID-19 case counts with existing or new variants or a reinstatement of COVID-19 restrictions could adversely affect the ability of the Utilities' contractors, suppliers, IPPs, and other business partners to perform or fulfill their obligations timely, or at all, or require modifications to existing contracts, which could adversely affect the Utilities' business, increase expenses, and impact the Utilities' ability to achieve their RPS and other climate related goals. Additionally, while the state's aggressive response to the pandemic has managed to control the spread of the coronavirus, the measures taken have had a negative economic impact on the state's businesses and residents, which may influence the PUC's actions regarding future rate increases. In March 2022, the consumer price index reached a 40-year high of 8.5% as gas prices and rents spiked. In Hawaii, the Urban Hawaii (Honolulu) Consumer Price Index (CPI) was 7.5% higher than it was one year ago. For the Utilities, the inflationary impacts have primarily manifested as higher fuel prices, which have increased 62% quarter-over-quarter. Although the Utilities are able to pass through fuel costs to customers and have limited fuel cost exposure through a 2% fuel-cost sharing mechanism (approximately $3.7 million exposure annually), higher customer bills could reduce customers' ability to pay timely or increase the risk of non-payment. In addition, the higher customer bills may lead the PUC to consider other actions to limit or delay any proposed increase in rates in order to mitigate the overall bill impact of rising fuel prices. Under the PBR framework, the Utilities receive annual inflationary adjustments (compounded) on test year target revenues. The annual revenue adjustment is equal to the gross domestic producer price index (GDPPI), less a productivity factor (currently zero) and a 0.22% customer dividend, multiplied by the previous year's adjusted revenue requirements. The GDPPI adjustment is measured in October and is effective for the following calendar year. For the 2022 calendar year, GDPPI was measured at 3% in October 2021 and will be remeasured in October 2022 for the 2023 calendar year. Although the GDPPI inflationary adjustment protects the Utilities from inflationary pressures over time, there may be a lag in recovery when prices move rapidly as they have done in recent months. 

      For a discussion regarding the impact of the economic conditions caused by the COVID-19 pandemic on the Utilities' liquidity and capital resources, see discussion under "Financial Condition-Liquidity and capital resources."

       56 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Three months ended March 31 Increase 2022 2021 (decrease) (dollars in millions, except per barrel amounts) $ 709 $ 565 $ 144 

      Revenues. Net increase largely due to:

       $ 105 higher 

      fuel oil prices and higher kWh generated1

       25 higher 

      purchased power energy prices offset by lower kWh

      purchased2

       10 higher 

      revenue from ARA adjustments, which included an

       offset 

      of management audit savings delivered to customers

       2 

      revenue in 2022 related to ownership of and responsibility

       for 

      the U.S. Army's electrical distribution system on Oahu

      starting March 1, 2022, offset by an equal amount of

      operating expense

       1 

      increase related solely to a change in the timing for

      revenue recognition within the year, which eliminates

      seasonality in recognizing target revenues and results in

      recognizing revenues evenly throughout the year with target

      revenues recognized on an annual basis remaining unchanged

       1 higher 

      MPIR and PIMs revenue

       221 127 94 Fuel

      oil expense1. Net increase largely due to higher fuel

       oil 

      prices and higher kWh generated partially offset by

       lower 

      penalties for fuel efficiency due to reset of heat

       rate 164 142 22 

      Purchased power expense1, 2. Net increase largely due to

       higher 

      purchased power energy prices partially offset by

       lower 

      kWh purchased and lower capacity charges

       125 115 10 

      Operation and maintenance expenses. Net increase largely

       due 

      to:

       2 more 

      generating facility overhauls and maintenance work

      performed

       2 

      expense in 2022 related to ownership of and responsibility

       for 

      the U.S. Army's electrical distribution system on Oahu

      starting March, 1, 2022, offset by an equal amount of

      revenue

       2 higher 

      transmission and distribution preventive and

      corrective maintenance expense

       1 higher 

      outside services for Information Technology and

      Services support, Demand Response Management System, and

      Battery Bonus program

       1 higher 

      property damage and legal reserve for pending claims

       1 higher 

      bad debt expense

       125 111 14 Other

      expenses. Increase due to higher revenue taxes,

      coupled with higher depreciation expense in 2022 for plant

      investments in 2021

       74 69 5 

      Operating income. Increase largely due to higher ARA

      revenue, MPIR and PIMs revenue and lower penalties for fuel

      efficiency, partially offset by higher operation and

      maintenance expenses and higher depreciation expense

       59 55 4 Income 

      before income taxes. Increase largely due to higher

      operating income

       46 43 3 Net

      income for common stock. Increase largely due to higher

      operating income. See below for effective tax rate

      explanation

       1,957 1,909 48 Kilowatthour sales (millions)3 $ 103.40 $ 63.87 $ 39.53 

      Average fuel oil cost per barrel

       470,851 468,745 2,106 

      Customer accounts (end of period)

      1The rate schedules of the electric utilities currently contain ECRCs through which changes in fuel oil prices and certain components of purchased energy costs are passed on to customers.

       2The rate schedules of the electric utilities currently contain PPACs through which changes in purchased power expenses (except purchased energy costs) are passed on to customers. 3 In the first quarter of 2022, kWh sales were higher when compared to the same periods last year largely due to continued recovery from the impacts of the COVID-19 pandemic. COVID-19 cases peaked in January 2022 due to the Omicron variant, but case counts have since returned to pre-Omicron levels. U.S. visitor arrivals continued to increase above first quarter of 2021 levels and approach pre-pandemic levels, but international arrivals remain low. With the outlook of the pandemic transitioning to an endemic status and remaining restrictions removed at the end of March, the economic recovery is expected to strengthen this year as international visitors return and sales rebound, although the improvement is expected to remain below pre-pandemic levels. 57 -------------------------------------------------------------------------------- The Utilities' effective tax rate for the first three months of 2022 and 2021 were comparable at 21% and 20%, respectively. Hawaiian Electric's consolidated ROACE was 8.1% and 9.0% for the twelve months ended March 31, 2022 and March 31, 2021, respectively. The net book value (cost less accumulated depreciation) of utility property, plant and equipment (PPE) as of March 31, 2022 amounted to $4.9 billion, of which approximately 25% related to generation PPE, 66% related to transmission and distribution PPE, and 9% related to other PPE. Approximately 8% of the total net book value relates to generation PPE that has been deactivated or that the Utilities plan to deactivate or decommission. 

      See "Economic conditions" in the "HEI Consolidated" section above.

       Executive overview and strategy. The Utilities provide electricity on all the principal islands in the state, other than Kauai, to approximately 95% of the state's population and operate five separate grids. The Utilities' mission is to provide innovative energy leadership for Hawaii, to meet the needs and expectations of customers and communities, and to empower them with affordable, reliable and clean energy. The goal is to create a modern, resilient, flexible and dynamic electric grid that enables an optimal mix of distributed energy resources, such as private rooftop solar, demand response and grid-scale resources to enable the creation of smart, sustainable, resilient communities and achieve the statutory goal of 100% renewable energy by 2045. Performance-based regulations. On December 23, 2020, the PUC issued a D&O (PBR D&O) approving a new performance-based regulation framework (PBR Framework). See "Regulatory proceedings" under "Commitments and contingencies" in Note 3 of the Condensed Consolidated Financial Statements. 

      Transition to a decarbonized and sustainable energy future. The Utilities are fully committed to leading and enabling pathways to a decarbonized and sustainable energy future for Hawaii. The Utilities believe that a holistic approach to decarbonization is needed, and that such a strategy requires achieving the Utilities' decarbonization and renewable energy commitments, facilitating and promoting beneficial electrification, and deploying carbon removal and offsets among other levers to reduce statewide emissions.

       In the fourth quarter of 2021, the Utilities outlined its Climate Action Plan to cut carbon emissions from power generation 70% by 2030, compared to a 2005 baseline. The emissions covered by this goal include stack emissions from generation owned by Hawaiian Electric and IPPs who sell electricity to the Utilities. The 2030 commitment would provide a significant portion of the reduction the entire Hawaii economy needs to meet the U.S. target of cutting carbon emissions by at least 50% economy-wide by 2030. Hawaiian Electric has also committed to achieving net zero carbon emissions from power generation by 2045 or sooner. Key elements of the 2030 plan include the closure of the state's last coal-fired IPP plant in 2022 upon expiry of the PPA, increasing rooftop solar by more than 50% over 2021 levels, retiring six fossil fuel generating units, adding at least 1 GW of renewable generation to what was already in place in 2021, increasing grid-scale and customer-owned storage, expanding geothermal resources, and creating customer incentives for using clean, lower-cost energy at certain times of the day and using less fossil-fueled energy at night. The retirement of fossil-fueled generating units to achieve the Utilities' 70% decarbonization goal is consistent with state policy and supported by Hawaii State law. See "Forecast of capital expenditures-Liquidity and capital resources" for a discussion of potential capital expenditures related to decarbonization efforts. 

      On September 1, 2022, the last coal-fired IPP plant in the state, providing approximately 10% of Oahu's generation, will cease operations, removing a significant amount of GHG emissions from the Utilities' generation mix. The plant's aging infrastructure could lead to more unscheduled outages compared to historic performance, which may impact system reliability.

       In anticipation of the retirement of the coal-fired IPP plant, the Utilities have developed plans, including contingency plans, to ensure reliable service through the transition period. These plans include the anticipated addition of ten renewable energy/storage projects, reserve capacity from existing generation sources, the acceleration of maintenance work during periods with anticipated higher reserve levels, and multiple demand response/distributed energy resources programs. However, future events, including unexpected issues with existing generation, or supply chain issues and inflationary pressures, as well as federal policies related to solar panel imports, among other factors, delay in the commercial operation of new generation resources, could disrupt the ability of the Utilities to deliver reliable service. Also, see the "Developments in renewable energy efforts-New renewable PPAs" section below. 

      Hawaii's renewable portfolio standard law requires electric utilities to meet an RPS of 40%, 70% and 100% by December 31, 2030, 2040 and 2045, respectively. Hawaii law has also established a target of sequestering more atmospheric

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      carbon and greenhouse gases than emitted within the state by 2045. The Utilities' strategies and plans are fully aligned in meeting these targets.

       The Utilities have made significant progress on the path to clean energy and have been successful in achieving RPS goals. The Utilities reached its 2015 RPS goal two years early and exceeded the 30% RPS target for 2020, achieving an RPS of 34.5% that year. In 2021, the Utilities achieved an RPS of 38.4%. The Utilities will continue to actively procure additional renewable energy post-2021 and expect to meet or exceed the next statutory RPS goal of 40% in advance of the 2030 compliance year. (See "Developments in renewable energy efforts" below). If the Utilities are not successful in meeting the RPS targets as mandated by law, the PUC could assess a penalty of $20 for every MWh that an electric utility is deficient. Based on the level of electricity sales in 2021, a 1% shortfall in meeting the 2030 RPS requirement of 40% would translate into a penalty of approximately $1.7 million. The PUC has the discretion to reduce the penalty due to events or circumstances that are outside an electric utility's reasonable control, to the extent the event or circumstance could not be reasonably foreseen and ameliorated. In addition to penalties under the RPS law, failure to meet the mandated RPS targets would be expected to result in a higher proportion of fossil fuel-based generation than if the RPS target had been achieved, which in turn would be expected to subject the Utilities to limited commodity fossil fuel price exposure under a fuel cost risk-sharing mechanism. The fuel cost risk-sharing mechanism apportions 2% of the fuel cost risk to the utilities (and 98% to ratepayers) and has a maximum exposure (or benefit) of $3.7 million. Conversely, the Utilities have incentives under PIMs that provide a financial reward for accelerating the achievement of renewable generation as a percentage of total generation, including customer supplied generation. The Utilities may earn a reward for the amount of system generation above the interpolated statutory RPS goal at $20/MWh in 2022, $15/MWh in 2023, and $10/MWh for the remainder of the multi-year rate period. The Utilities are fully aligned with, and supportive of, state policy to achieve a decarbonized future and have made significant progress in reducing emissions through renewable energy and electrification. This alignment with state policy is reflected in management compensation programs and the Utilities' long-range plans, which include aspirational targets in order to catalyze action and accelerate the transition away from fossil fuels throughout its operations at a pace more rapid than dictated by current law. The long-range plans, including aspirational targets, serve as guiding principles in the Utilities' continued transformation, and are updated regularly to adapt to changing technology, costs, and other factors. While there is no financial penalty for failure to achieve the Utilities' long-range aspirational objectives, the Utilities recognize that there are environmental and social costs from the continued use of fossil fuels. The State of Hawaii's policy is supported by the regulatory framework and includes a number of mechanisms designed to maintain the Utilities' financial stability during the transition toward the State's decarbonized future. Under the sales decoupling mechanism, the Utilities are allowed to recover from customers, target test year revenues, independent of the level of kWh sales, which have generally trended lower over time as privately-owned distributed energy resources have been added to the grid and energy efficiency measures have been put into place. Other regulatory mechanisms under the new PBR framework reduce some of the regulatory lag during the multi-year rate plan (MRP), such as the annual revenue adjustment to provide annual changes in utility revenues and the exceptional project recovery mechanism, which allows the Utilities to recover and earn on certain approved eligible projects placed into service. See "Regulatory proceedings" under "Commitments and contingencies" and "Decoupling" in Note 3 of the Condensed Consolidated Financial Statements. Integrated Grid Planning. Achieving high levels of renewable energy and a carbon free electric system will require modernizing the grid through coordinated energy system planning in partnership with local communities and stakeholders. To accomplish this, the Utilities are implementing an innovative systems approach to energy planning intended to yield the most cost-effective renewable energy and decarbonization pathways that incorporates customer and stakeholder input. The Integrated Grid Planning (IGP) utilizes an inclusive and transparent Stakeholder Engagement model to provide an avenue for interested parties to engage with the Utilities and contribute meaningful input throughout the IGP process. The IGP Stakeholder Council, Technical Advisory Panel and Working groups have been established and meet regularly to provide feedback and input on specific issues and process steps in the IGP. The Utilities submitted an updated IGP work plan to the PUC in January 2021. In August 2021, the Utilities submitted their Revised Inputs and Assumptions to the PUC for review and approval, marking the significant progress made through the stakeholder engagement phase of the IGP process. On March 31, 2022, the Utilities submitted the final Inputs and Assumptions approved by the PUC. The PUC is currently reviewing the Utilities' planning methodologies and criteria. Once approved, the next step in the IGP process to complete a Grid Needs Assessment will begin. Demand response programs. Pursuant to PUC orders, the Utilities are developing an integrated Demand Response (DR) Portfolio Plan that will enhance system operations and reduce costs to customers. The reduction in cost for the customer will take the form of either rates or incentive-based programs that will compensate customers for their participation individually, 59 --------------------------------------------------------------------------------

      or by way of engagements with turnkey service providers that contract with the Utilities to aggregate and deliver various grid services on behalf of participating customers and their distributed assets.

       On June 9, 2021, the PUC issued an order providing guidance to the third Grid Service RFP filed on February 23, 2021. The proposed Grid Service RFP focused only on Oahu and is seeking 132 MW of grid services with focus on capacity reduction (60 MW) similarly in response to the potential reserve shortfall from the AES coal plant retirement scheduled on September 1, 2022. The Utilities filed a final draft and received PUC approval to proceed on August 3, 2021. The Utilities subsequently issued an approved Grid Services RFP and the bids were due on October 13, 2021. The Utilities made their final selections on November 10, 2021 and commenced negotiations immediately after. The Utilities executed a GSPA for a total grid services amount of 97.4 MW and filed with the PUC to request approval on March 16, 2022. On June 8, 2021, the PUC approved the new program, Emergency Demand Response Program (EDRP), a battery storage incentive program to dispatch electricity between 6 p.m. to 8 p.m. daily from participating residential and commercial customers, to address the potential reserve shortfalls following the AES coal plant retirement. The PUC approved EDRP for 50MW on Oahu with an incentive budget not to exceed $34 million, which will be recovered via a surcharge cost recovery mechanism over a 10-year amortization. The Utilities' implementation plan was approved by the PUC on June 30, 2021, and the Utilities subsequently filed the updated EDRP tariffs on July 1, 2021. On February 25, 2022, the PUC approved an amendment to the Battery Bonus program that provides additional incentives to participating customers. This new amendment became effective on March 1, 2022. As of March 31, 2022, the Utilities have received and approved the applications totaling approximately 5 MW. Grid modernization. The overall goal of the Grid Modernization Strategy is to deploy modern grid investments at an appropriate priority, sequence and pace to cost-effectively maximize flexibility, minimize the risk of redundancy and obsolescence, deliver customer benefits and enable greater distributed energy resources and renewable energy integration. Under the Grid Modernization Strategy, the Utilities expect that new technology will help increase adoption of private rooftop solar and make use of rapidly evolving products, including storage and advanced inverters. On March 25, 2019, the PUC approved a plan for the Utilities to implement Phase 1 of their Grid Modernization Strategy (proportional deployment of advanced metering infrastructure "AMI"). On February 28, 2022, the PUC expanded the scope of Phase 1 AMI to the full service territory with a completion date set for the third quarter of 2024. The estimated cost of full deployment (including proportional deployment) is approximately $143 million in capital and deferred software cost and is expected to be incurred over five years. As of March 31, 2022, approximately $42 million of capital and deferred software cost has been incurred to date under Phase 1 and is currently being recovered under the MPIR mechanism until such costs are included in base rates. On February 14, 2022, the Utilities filed a request with the PUC to increase operations and maintenance costs to reflect the incremental O&M costs associated with full-service territory AMI deployment. To date, the Utilities have deployed over 65,000 advanced meters, or approximately 14% of the total scheduled deployment under Phase 1. The Utilities filed an application with the PUC on September 30, 2019 for an Advanced Distribution Management System (ADMS) as part of the second phase of their Grid Modernization Strategy implementation. However, on December 30, 2019, the PUC suspended the Utilities' application for the Advanced Distribution Management System pending the Utilities' filing of a supplemental application for the broad deployment of field devices. This supplement and update to the Grid Mod Phase 2 field devices application was filed on March 31, 2021. The estimated cost for the implementation over five years of the ADMS and field devices, which includes capital, deferred software costs and O&M costs, is $105 million. A PUC order was issued on April 27, 2021, unsuspending and resuming consideration of the Phase 2 Application. The Utilities filed the reply statement of position on October 15, 2021, completing the discovery phase of the docket. On November 16, 2021, the PUC suspended the Utilities' ADMS and Phase 2 field device application to focus the Utilities' attention on completing Phase 1. The Utilities filed a Motion for Reconsideration with the PUC in response to the suspension, but was denied. The PUC subsequently clarified that the Utilities may resume the Phase 2 docket no earlier than six months before Phase 1 is scheduled to be completed, which is the third quarter of 2024. Resumption of the Phase 2 proceeding would likely commence six months prior to this completion date selected by the 
      

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