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


    August 9, 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 six months ended June 30, 2022) condensed consolidated financial statements and notes thereto included in this Form 10-Q. HEI consolidated Recent developments. In the second quarter of 2022, Hawaii's 7-day average daily COVID-19 case counts peaked at 1,258 cases and case counts have since receded, recently averaging below 600 cases per day (7-day daily average). Hospitalizations have remained at low levels with approximately 77% of the state's population fully vaccinated, and approximately 44% of those fully vaccinated received the first booster shot as of July 26, 2022. On March 25, 2022, Hawaii ended its Safe Travels program for domestic U.S. travelers and its indoor mask mandate. On June 12, 2022, the U.S. Centers for Disease Control and Prevention ended the requirement that required air passengers traveling from a foreign country to the United States to show a negative COVID-19 test before boarding their flight. As a result of the removal of COVID restrictions, domestic tourism has recovered to pre-pandemic levels with June 2022 domestic passenger counts up more than 5% of the domestic passenger counts in June 2019. However, the number of international travelers remains below pre-pandemic levels with June 2022 passenger counts down approximately 72% from the total number of international travelers in June 2019. While economic conditions have improved significantly over the past year as the Hawaii economy fully reopened, new variants, such as BA.5, present potential risks to the ongoing economic recovery. At this time, the Company does not expect that COVID restrictions will be reinstated, but will continue to monitor the situation and remains focused on the continued safety and well-being of customers, employees, their families and the community. The Company has maintained its safety protocols and policies to keep employees safe, while at the same time ensuring the reliability and resilience of its operations. In the second quarter of 2022, driven by increased economic activity as the tourism industry continues its recovery, the Utility's kWh sales improved modestly increasing 0.3% compared to the second quarter of 2021. 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, an improving Hawaii economy helped fuel loan growth, which required additional provision for credit losses. ASB recorded a $2.8 million provision for credit losses in the second quarter of 2022 due primarily to growth in the commercial real estate loan portfolio and consumer loan purchases. In the second quarter of 2021, ASB recorded a negative provision for credit losses of $12.2 million due primarily to credit upgrades in the commercial real estate and commercial loan portfolios and lower net charge-offs. Net interest income increased $1.0 million to $61.8 million in the second quarter of 2022 compared to net interest income in the second quarter of 2021 due primarily to higher investment portfolio balances and yields, partially offset by lower PPP fees. Over the past few months, inflation has rapidly increased as reflected in the U.S. Consumer Price Index, which hit a 41-year high of 9.1% in June 2022. In addition, fuel costs have risen rapidly, increasing 90% over the prior year's quarter. These inflationary pressures are expected to continue over the near- to medium-term and have led to higher costs for O&M and capital projects at the Utility, as well as higher compensation and benefits cost at the bank. For further discussion of the impacts of the COVID-19 pandemic, fuel prices and other macro-economic factors impacting the Utilities and the Bank, see "Recent Developments" in the Electric Utility and Bank sections below. 61 --------------------------------------------------------------------------------
       RESULTS OF OPERATIONS Three months ended June 30 % (in thousands) 2022 2021 change Primary reason(s)* Revenues $ 895,607 $ 680,257 32 Primarily increase for the electric utility segment Operating income 86,668 101,856 (15) Decrease for bank segment and higher losses for the "other" segment, partly offset by increase for the electric utility segment Net income for common stock 52,541 63,872 (18) Lower net income at the bank segment and higher net loss for the "other" segment, partly offset by higher net income at the electric utility segment. See below for effective tax rate explanation. Six months ended June 30 % (in thousands) 2022 2021 change Primary reason(s)* Revenues $ 1,680,675 $ 1,323,203 27 Primarily increase for the electric utility segment Operating income 185,944 199,887 (7) Decrease for bank segment, partially offset by increase for the electric utility segment and lower losses for the "other" segment Net income for common stock 121,708 128,230 (5) Lower net income at the bank segment, partly offset by lower net loss for the "other" segment and higher net income at the electric utility segment. See below for effective tax rate explanation. * Also, see segment discussions which follow. The Company's effective tax rates for the second quarters of 2022 and 2021 were 20% and 22%, respectively. The Company's effective tax rates for the first six months of 2022 and 2021 were comparable at 20% and 21%, respectively. The lower effective tax rate for the second quarter and first six months of 2022 was primarily due to a decrease in income before taxes at ASB over the prior periods, which increased the rate impact of certain tax items. 

      Economic conditions.

       Note: The statistical data in this section is from public third-party sources that management believes to be reliable (e.g., Department of Business, Economic Development and Tourism (DBEDT), University of Hawaii Economic Research Organization (UHERO), U.S. Bureau of Labor Statistics, Department of Labor and Industrial Relations (DLIR), Hawaii Tourism Authority (HTA), Honolulu Board of REALTORS® and national and local news media). 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 second quarter of 2022, resulting in the average daily passenger count 29.1% higher than the comparable period in the prior year, but remained 5.7% 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 June 2022, domestic passenger counts were up 7.6% compared to 2019 pre-COVID-19 levels, while international passenger counts were down 72% compared to 2019 pre-COVID-19 levels. Hawaii's seasonally adjusted unemployment rate in June 2022 was 4.3%, which was lower compared to the June 2021 rate of 5.9%. The national unemployment rate in June 2022 was 3.6% compared to 5.9% in June 2021. Hawaii's unemployment rate is expected to continue to improve now that restrictions have been lifted and non-farm jobs are expected to increase this year. Hawaii real estate activity through June 2022, as indicated by Oahu's home resale market, drove an increase in the median sales price of 13.2% for condominiums and 17% for single-family homes compared to the same period in 2021, with the June median single-family home price of $1,100,000, below the record $1,150,000 set in March. The number of closed sales was up 7.5% for condominiums and down 8.8% for single-family residential homes for the second 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 through May 2022. 

      At its July 27, 2022 meeting, the Federal Open Market Committee (FOMC) decided to raise the federal funds rate target range of 2.25%-2.5% and anticipates ongoing increases as appropriate. The FOMC plans to continue to maintain an

       62 -------------------------------------------------------------------------------- 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 continue to reduce its holdings of Treasury securities and agency mortgage-backed securities. The most recent forecast by UHERO, which was issued on May 12, 2022, forecasts full year 2022 real GDP growth of 3.5%, an increase in total visitor arrivals of 31.8%, a decrease in real personal income of 5.1%, and an unemployment rate of 3.6%. This forecast reflects growth of Hawaii's economy after experiencing a downturn due to omicron variants of COVID-19 in early 2022. The international market is anticipated to return as the omicron wave in Asia recedes. However, a full economic recovery is still forecasted to be several years out and dependent on adapting to new COVID-19 threats, ongoing global economic fallout from Russia's invasion of Ukraine, increasing federal interest rates to combat rising inflation, risks of recession, and returning 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" in the "Electric utility" and "Bank" sections below for further discussion of the economic impact caused by the pandemic.

       "Other" segment. Three months ended June 30 Six months ended June 30 (in thousands) 2022 2021 2022 2021 Primary reason(s) Revenues $ 1,410 $ 1,118 $ 2,571 $ 2,069 Increase in other sales at Pacific Current subsidiaries. Operating loss (6,409) (5,634) (10,758) (12,013) The second quarters of 2022 and 2021 include $0.7 million and $0.6 million, respectively, of operating income from Pacific Current1. Corporate expenses for the second quarter 2022 were $0.8 million higher than the same period in 2021, primarily due to higher charitable donations in the second quarter of 2022 (due to timing of contributions) and higher board and consulting expenses, partly offset by a settlement agreement with the former President and Chief Executive Officer of the Bank in 2021. The first six months of 2022 and 2021 include $1.5 million and $1.3 million, respectively, of operating income from Pacific Current1. Corporate expenses for the first six months of 2022 were $1.1 million lower than the same period in 2021, primarily due to a settlement agreement with the former President and Chief Executive Officer of the Bank in 2021 and higher charitable donations in 2021, due to timing of contributions, partly offset by higher board and consulting expenses. Gain on sale of - - 8,123 - Gain on sale of an equity-method investment equity-method investment at Pacific Current. Net loss (9,060) (8,313) (10,172) (16,869) The net loss for the second quarter of 2022 was slightly higher than the net loss for the second quarter of 2021 due to the same factors cited for the change in operating loss and higher interest expense due to higher average borrowings. The net loss for the first six months of 2022 was lower than the net loss for the first six 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, partly offset by higher interest expense due to higher average borrowings. 

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

       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 63 --------------------------------------------------------------------------------

      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 June 30, 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 $69 million and $55 million of commercial paper outstanding, respectively. As of June 30, 2022, ASB's unused FHLB borrowing capacity was approximately $2.0 billion and ASB had unpledged investment securities of $2.3 billion that were available to be used as collateral for additional borrowing capacity. 

      As of June 30, 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 $251 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 and elevated fuel prices. For the Utilities, the elevated fuel prices billed to customers have resulted in higher accounts receivable balances and bad debt expense and may result in higher write-offs in the future. As of June 30, 2022, approximately $42 million of the Utilities' accounts receivables were 30 days past due. Of the over 30 days past due amounts, approximately 22% 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 has reduced the older balances in arrears over time as payments were made, as well as decreasing the number of customers in arrears. 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. 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 $141 million as of June 30, 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 emerging risks from inflation and the tightening of monetary policy that increases the risk of a recession, as well as ongoing COVID-19 risks, such as new variants, all of which could create increased uncertainty regarding the impact on loan performance and the allowance for credit losses. 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 economic impact of higher fuel prices, inflation, higher interest rates, tightening of monetary policy and the ongoing COVID-19 pandemic, create significant uncertainty, and the Company cannot predict the future effects that these factors 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. 64 -------------------------------------------------------------------------------- The consolidated capital structure of HEI (excluding deposit liabilities and other bank borrowings) was as follows: (dollars in millions) June 30, 2022 December 31, 2021 Short-term borrowings-other than bank $ 124 2 % $ 54 1 % Long-term debt, net-other than bank 2,375 50 2,322 48 Preferred stock of subsidiaries 34 1 34 1 Common stock equity 2,234 47 2,391 50 $ 4,767 100 % $ 4,801 100 % HEI's commercial paper borrowings and line of credit facility were as follows: Average balance Balance Six months ended (in millions) June 30, 2022 June 30, 2022 December 31, 2021 Commercial paper $ 45 $ 69 $ 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 six months of 2022 was $69 million. As of June 30, 2022, available committed capacity under HEI's line of credit facility was $175 million. On June 27, 2022, Fitch revised HEI's outlook to "Positive" from "Stable" and affirmed the "BBB" long-term issuer default rating and "F3" short-term issuer default rating. 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 six months ended June 30, 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 six months of 2022, net cash provided by operating activities of HEI consolidated was $75 million. Net cash used by investing activities for the same period was $497 million, primarily due to capital expenditures, ASB's purchases of available-for-sale investment securities, net increase in loans held for investment, partly offset by ASB's receipt of investment security repayments and maturities. Net cash provided by financing activities during this period was $276 million as a result of several factors, including net increases in ASB's other bank borrowings and deposit liabilities, net increases in short-term borrowings and issuances of long-term debt, partly offset by repayment of long-term debt and payment of common stock dividends. During the first six months of 2022, Hawaiian Electric and ASB (through ASB Hawaii) paid cash dividends to HEI of $63 million and $27 million, respectively. Dividends. The payout ratios for the first six months of 2022 and full year 2021 were 63% 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.

       65 --------------------------------------------------------------------------------

      Electric utility

      Recent developments

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

       In the second quarter and first six months of 2022, kWh sales volume increased 0.3% and 1.4% compared to the same periods in 2021, respectively. The increase in kWh sales is primarily due to continued recovery of the economy and tourism activity. Accounts receivable increased in the second quarter with past due accounts receivable balances increasing by $11.9 million, or 17%, while the number of accounts past due decreased by approximately 9% since December 31, 2021. The increase in accounts receivables was primarily driven by higher customer bills impacted by the increase in fuel prices, delays in a large government account payments, offset by payments on installment plans, higher cash receipts associated with increased disconnection efforts and application of the $2 million Kokua bill credit, all of which contributed to the decrease in the number of customers in arrears. 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 Revenue Balancing Account 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. The Utilities deferred COVID-19 related costs through a PUC approved period that ended on December 31, 2021. In the second quarter of 2022, the Utilities filed an application, which is currently pending, to seek recovery of the COVID-19 deferred costs, not to exceed the amount of $27.8 million. (See discussion under "Regulatory assets for COVID-19 related costs" in Note 3 of the Condensed Consolidated Financial Statements). 

      Looking forward, while case counts and hospitalizations have declined, a worsening of COVID-19 case counts with 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.

       In June 2022, the consumer price index reached a 40-year high of 9.1% as gas prices and rents spiked. In Hawaii, the May 2022 Urban Hawaii (Honolulu) Consumer Price Index (CPI) was 7.0% higher than it was one year ago. In addition, fuel costs have risen rapidly and have increased 90% over prior year's 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, inflation risk for the Utilities is mitigated by an Annual Rate Adjustment (ARA), which is based on a formula that includes a compounded and non-compounded portion.

       •The compounded portion of the ARA adjustment includes an adjustment for inflation based on the estimated change in Gross Domestic Product Price Index (GDPPI) for the upcoming year, less a predetermined annual productivity factor (currently set at zero), less a 0.22% customer dividend, applied to a basis equal to test year target revenues plus the RAM Revenue adjustments in effect prior to the implementation of PBR, plus the prior adjustment year's compounded portion of the ARA adjustment. The GDPPI adjustment is determined using the forecasted GDPPI in October, which is effective for the following calendar year. For the 2022 calendar year, GDPPI was measured at 3% in October 2021 and was effective in rates on January 1, 2022. For the 2023 calendar year, the estimated change in GDPPI will be effective in rates on January 1, 2023. 

      •The non-compounded portion of the ARA adjustment includes a subtractive component, representing the management audit savings commitment, or refund to customers, which was approved by the PUC for the years 2021 through 2025.

       Regulatory Developments. On June 17, 2022, the PUC issued a D&O approving (1) a new (penalty-only) Performance Incentive Mechanism (PIM) to incentivize achievement of generation-based reliability targets, with an annual maximum penalty of $1 million, (2) a new (penalty/reward) PIM to incentivize the timely completion of the interconnection requirements study process for large-scale renewable energy projects, the penalty/reward will depend on the specifics of the upcoming procurement, (3) a new (reward-only) Collective Shared Savings Mechanism to incentivize cost control over the Utilities' fuel, purchased power, and Exceptional Project Recovery Mechanism costs (collectively, non-Annual Revenue Adjustment-related costs), and (4) a modification and extension of the existing interim (reward-only) Grid Services PIM with a maximum reward of 66 --------------------------------------------------------------------------------

      $1.5 million through December 31, 2023. The effective date for the changes has not yet been established. See "Regulatory proceedings" in Note 3 of the Condensed Consolidated Financial Statements for additional discussions.

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

       RESULTS OF OPERATIONS Three months ended June 30 Increase 2022 2021 (decrease) (dollars in millions, except per barrel amounts) $ 819 $ 602 $ 217 

      Revenues. Net increase largely due to:

       $ 143 higher 

      fuel oil prices and higher kWh generated1

       62 higher 

      purchased power energy prices, partially offset by

       lower 

      kWh purchased2

       10 higher 

      revenue from ARA adjustments, which included an

       offset 

      of management audit savings delivered to customers

       1 revenue 

      in 2022 related to ownership of and responsibility

       for the 

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

       starting March 1, 2022 1 higher MPIR revenue 1 higher

      revenue 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

       270 139 131 Fuel 

      oil expense1. Net increase largely due to higher fuel

       oil 

      prices and higher kWh generated

       218 162 56 

      Purchased power expense1, 2. Net increase largely due to

       higher 

      purchased power energy prices partially offset by

       lower 

      kWh purchased

       125 118 7 

      Operation and maintenance expenses. Net increase largely due

       to: 5 more 

      generating facility maintenance work performed

       3 more 

      generating facility overhauls performed

       1 higher 

      bad debt expense

       (1) expense 

      due to decommissioning of combined heat and power

       unit on 

      Lanai in 2021

       (1) higher 

      Pearl Harbor environmental reserves in 2021

       135 114 21 Other

      expenses. Increase due to higher revenue taxes,

       coupled 

      with higher depreciation expense in 2022 for plant

      investment in 2021

       71 68 3 

      Operating income. Increase largely due to higher ARA and

       MPIR 

      revenue, offset in part by higher operation and

      maintenance expenses and higher depreciation expense

       57 54 3 Income

      before income taxes. Increase largely due to higher

      operating income, partially offset by higher interest

       expense 44 42 2 Net 

      income for common stock. Increase largely due to higher

       income 

      before income taxes. See below for effective tax rate

      explanation.

       2,031 2,026 5 Kilowatthour sales (millions)3 $ 139.51 $ 73.58 $ 65.93 Average fuel oil cost per barrel 67
       -------------------------------------------------------------------------------- Six months ended June 30 Increase 2022 2021 (decrease) (dollars in millions, except per barrel amounts) $ 1,528 $ 1,167 $ 361 

      Revenues. Net increase largely due to:

       $ 247 

      higher fuel oil prices and higher kWh generated1

       86 

      higher purchased power energy prices, partially offset by lower kWh

      purchased2

       20 

      higher revenue from ARA adjustments, which included an offset of

      management audit savings delivered to customers

       3 

      revenue in 2022 related to ownership of and responsibility for the U.S.

      Army's electrical distribution system on Oahu starting March 1, 2022

       2 

      higher MPIR revenue

       2 

      higher revenue 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

       491 267 224 

      Fuel oil expense1. Net increase largely due to higher fuel oil prices and

      higher kWh generated partially offset by lower penalties for better fuel

      efficiency due to reset of heat rate

       382 305 77 

      Purchased power expense1, 2. Net increase largely due to higher purchased

      power energy prices partially offset by lower kWh purchased

       250 233 17 

      Operation and maintenance expenses. Net increase largely due to:

       7 

      more generating facility maintenance work performed

       3 

      more generating facility overhauls performed

       2 

      higher transmission and distribution preventive and corrective maintenance

      expense

       2 

      higher outside services for Information Technology and Services support,

      Customer Interconnection/Installation, Demand Response Management System,

       and Battery Bonus program 2 higher bad debt expense 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

       1 

      higher property damage and legal reserve for pending claims

       (1) 

      expense due to decommissioning of combined heat and power unit on Lanai in

      2021

       (1) 

      higher Pearl Harbor environmental reserves in 2021

       260 226 34 

      Other expenses. Increase due to higher revenue taxes, coupled with higher

      depreciation expense in 2022 for plant investment in 2021

       145 137 8 

      Operating income. Increase largely due to higher ARA and MPIR revenue,

      offset by higher operation and maintenance expense and higher depreciation

      expense

       116 109 7 

      Income before income taxes. Increase largely due to higher operating

      income, partially offset by higher interest expense

       91 85 6 

      Net income for common stock. Increase largely due to higher income before

      income taxes. See below for effective tax rate explanation.

       3,988 3,935 53 Kilowatthour sales (millions)3 $ 120.54 $ 68.59 $ 51.95 

      Average fuel oil cost per barrel

       470,812 468,745 2,067 

      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 second 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 have decreased in the second quarter of 2022, but not to pre-Omicron levels. U.S. visitor arrivals continued to increase above the second quarter of 2021 levels and approach pre-pandemic levels, but international 68 -------------------------------------------------------------------------------- arrivals remain low. 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 due to global economic factors such as the continued effects of the invasion of Ukraine, increasing inflation, supply chain issues, and lingering impacts from the pandemic. The Utilities' effective tax rate for the second quarters of 2022 and 2021 were comparable at 21%. The Utilities' effective tax rate for the first six months of 2022 and 2021 were comparable at 21%. Hawaiian Electric's consolidated ROACE was 8.2% and 8.9% for the twelve months ended June 30, 2022 and June 30, 2021, respectively. The net book value (cost less accumulated depreciation) of utility property, plant and equipment (PPE) as of June 30, 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 (DER), 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 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/DER programs. For example, the state's largest solar plus battery storage project to date, totaling 39 MW, reached commercial operations on July 31, 2022. 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. 69 -------------------------------------------------------------------------------- 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 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. To date the Utilities have met all of the statutory RPS goals, including exceeding the last milestone RPS target of 30% for 2020, where it achieved an RPS of 34.5%. 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. In July 2022, Governor Ige signed Act 240 (H.B.2089), that amended the RPS calculation from renewable energy as a percentage of sales to renewable energy as a percentage of total generation. The amended RPS calculation results in a lower calculated percentage than the amount calculated under the previous methodology. The change in the definition is to be applied prospectively to future milestone measurements and will require that the Utilities acquire more renewable energy than under the previous RPS calculation to comply with the RPS milestones; however, the Utilities expect to continue to meet the RPS milestones under the amended RPS law. (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 total generation in 2021, a 1% shortfall in meeting the 2030 RPS requirement of 40% would translate into a penalty of approximately $2 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 a 
      

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