Good day, and welcome to the Fourth Quarter 2019 Hawaiian Electric Industries, Inc. Earnings Conference call and Webcast. [Operator Instructions]. Please note, this event is being recorded.I would now like to turn the conference over to Ms. Julie Smolinski, Director of Investor Relations and Strategic Planning. Please go ahead.

Thank you, Elisa, and welcome, everyone, to Hawaiian Electric Industries Fourth Quarter and Full Year 2019 Earnings Conference Call. Joining me today are Connie Lau, HEI President and Chief Executive Officer; Greg Hazelton, HEI Executive Vice President and Chief Financial Officer; Alan Oshima, Hawaiian Electric, President and Chief Executive Officer; Scott Sue, incoming Hawaiian Electric, President and Chief Executive Officer; and Rich Wacker, American Savings Bank President and Chief Executive Officer; as well as other members of senior management.Connie will provide an overview followed by Greg, who will update you on Hawaii's economy, our results for the fourth quarter and full year and our outlook for 2020. Then we'll conclude with questions and answers. During today's call, we'll be using non-GAAP financial measures to describe our operating performance. Our press release and webcast presentation are posted on HEI's Investor Relations website and contain reconciliations of these measures to the equivalent GAAP measures.Forward-looking statements will also be made on today's call. Factors that could cause actual results to differ materially from expectations can be found in our webcast slides, our filings with the SEC and on the HEI website.And I'll now ask our CEO, Connie Lau, to begin with an overview.

Thank you, Julie, and aloha to everyone. 2019 was a year of solid achievement for our companies, from financial to operational to environmental results. We achieved solid earnings at both our utility and bank and grew consolidated earnings 8%. We strengthened our consolidated return on equity to 9.8% and improved earned ROE at the utility and maintained a strong ROE at the bank. Our utility continued to deliver on key priorities of its 5-year plan. We're especially proud that Hawaiian Electric and the state of Hawaii were recognized for their leadership in transforming our state to a clean energy carbon neutral economy. Our state's leadership and innovation in clean energy transformation was highlighted in recent reports by the Rocky Mountain Institute and Public Utilities fortnightly. And Hawaiian Electric was named 2019 Utility of the year by utility dive.American Savings Bank also performed well, delivering 5.7% loan growth and maintaining a net interest margin above its peers. Excluding a onetime net gain on sale of properties, the bank exited as it moved to its new campus. Bank earnings were up slightly from 2018 despite lower-than-expected interest rates.Our Pacific current team continued to focus on optimizing its existing project portfolio and pursuing additional sustainable investment opportunities. With our continued financial performance and our confidence in our future prospects, our Board approved a second consecutive annual increase in the dividend raising the quarterly dividend per share from $0.32 to $0.33 or $1.32 annually.At Hawaiian Electric, our 2019 accomplishments reflect goals and initiatives from our 2015 to 2020 strategic transformation plan, which focused on delivering a cost-effective clean energy portfolio, improving customer experiences and offering innovative energy solutions, creating a modern grid and technology platform, strengthening stakeholder relationships and working with stakeholders to align regulatory and market models with the transformation of our industry…

Thanks, Connie. As shown on Slide 7, Hawaii's economy remains stable in 2019 and finished the year at a record level of visitors, exceeding $10 million for the year. This represented a 5.4% increase over 2018, with visitor expenditures also up slightly. Unemployment remained low at 2.6% as of December, well below the national average. Hawaii real estate sales volumes were up for single-family homes and prices on Oahu were flat.Condo sales volumes were down, while condo prices were up slightly over the prior year. The state's outlook is stable with moderate GDP growth expected at 0.9% in 2020 and 1.1% in 2021. I would note, we are also closely monitoring coronavirus developments and the potential impacts on our Hawaii economy and our businesses.Turning to our results. In 2019, we achieved solid consolidated financial performance with good results at both the bank and the utility. 2019 consolidated earnings increased 8% to approximately $218 million or $1.99 per share. Our 2019 results included a $5.5 million gain on the sale, net of associated cost of 2 former bank properties.The year-over-year earnings grew at the bank, even when excluding the net gain from the property sales. The holding company and other segment loss grew primarily due to higher interest expense from incremental long-term debt issued in late 2018. On the right side of the slide -- on Slide 8, our consolidated ROE for the last 12 months was 9.8%, up 30 basis points from last year. Utility ROE for the last 12 months improved 20 basis points, while bank ROE, including the impact of the gain on sale was comparable to last year.Turning to Slide 9. Utility net income grew 9% to $157 million, contributing $1.43 to EPS, well within our guidance range of $1.40 to $1.47. On an after-tax basis, the…

Thanks, Greg. The accomplishments and financial guidance we've talked about today are part of our strategy is to deliver sustainable long-term value for all of our stakeholders. We've long viewed the success of our enterprise and the value we deliver to shareholders as inextricably linked with the value we deliver for our customers, our employees and our community. And the health of our environment, our economy and our space as a whole.With all of our operations here in Hawaii and Island state with ambitious renewable energy, carbon neutrality and clean transportation goals, we are very attuned to both the risk and also the opportunities presented by climate change.Last summer, our Board spent most of its strategic retreat on climate change as well as other environmental, social and governance or ESG considerations. Since then, we've been formally integrating climate change and ESG into our strategic planning, enterprise risk management and our disclosures. We've been reporting on certain key ESG metrics for some time since one of our core strategies is to help Hawaii transition to 100% renewable energy.We'll be expanding our disclosures and are targeting to issue our first Sustainability Accounting standards Board, or SASB, aligned report in 2020 and also plan to add TCFD or Task Force on Climate-related Financial Disclosures thereafter. To further align management incentives with our strategic goals, our Board has increased the proportion of performance-based executive compensation to include the achievement of renewable portfolio standards ahead of state-mandated timelines. And you'll see that in our upcoming proxy. Our board is always focused on strong governance. And in our proxy statement, you'll also see our Board's proposals to enhance our governance policies by adopting majority voting and declassifying the board over the next three years.We see these initiatives is further enhancing our core strategies and governance profile…

[Operator Instructions]. And the first question today comes from Eric Lee of Bank of America Merrill Lynch.

Maybe first off, I just wanted to check in for ASP. How should we think about average interest-earning asset growth? I see that it is about 1% for 2019. Could you just discuss the drivers there and expectations for that portfolio growth on a forward basis?

Yes. This is Rich. Thanks for the question. We're targeting mid-single -- low to mid-single digits. So that would be in the kind of 3%, 4% range, typically there. And if you see what we did this year, and I think Greg highlighted, core deposit growth was about 3% last year. We offset that with some reductions in some of the higher government CD, that brought us back down to kind of the 1% overall. So we think we've had adjustments done. So it's kind of normal course business, trying to keep that consistent. We've had it for multiple years, that 3% to 5% range. And that's through just everything we're doing around relationship expansion and growing primary customer -- primary bank customers.

Got it. So we should expect it to normalize back to the expectation for 2020 at least within -- embedded within guidance as a normalization back towards that?

Right.

Okay, that's helpful. And then maybe shifting to the utility a little bit. Could you just discuss the CapEx outlook a bit more? It seems like there was a bit of a decrease there as well as under rate base outlook subsequently. Could you discuss the drivers towards the low and high? And I get that there was a little bit of a pull forward into '19-'20 but it seems like '21 and '22 are lower relative to the prior $400 million to $500 million guidance?

Yes, we've revised the guidance range, as you've seen, the $350 million to $450 million on a forward basis with a point estimate about $360 million for 2020. And as I highlighted, mentioned previously, you've got to look at that in conjunction with the 2019 because you really -- Q1 projects being accelerated. And then the timing of those really puts you just slightly above $400 million, and that's consistent with our -- a midpoint of our guidance range on a going-forward basis. That level, that's down a bit from what we had previously as shown before, $400 million to $500 million as we look forward to the major capital investments across the system, which also included a couple of battery -- several actually battery energy storage projects that were on the planning board as you know, 2 projects were declined this last year. And we've, I think, conservatively reevaluated how much of those projects we put into our forward CapEx as we think the -- some of them may be competitively procured versus utility build, and we will update the forecast as we get clarity relative to those types of projects.

So those are the media. Yes. That's certainly helpful. So it seems like the battery storage is what would be towards the high end, presumably?

[Indiscernible] Of that in any major projects, they come in a bit lumpy, and they -- and that's why you have a range from year-to-year a team.

Yes, and adding to what Greg said, what would trust this morning to the higher end of the range are like the acceleration of some of the project expenditures, for example, with the Army privatization. We've got a schedule for that with commission decision making and depending on when that decision comes out, we may be able to accelerate some of those expenditures. And then also on the grid modernization, we do put our best forecast forward, but depending on the pace of that project, there could be some acceleration. And as you may know, the grid modernization projects, they don't come in, in 1 big chunk. They come in smoothly over the period. So we have some of that, that could support the higher end of the range.

Got it. That's helpful. And just 1 more question before I pass it on, perhaps. So I know you mentioned the rooftop solar earlier in your conversation towards meeting the RPS goals. Could you just discuss plans on DR integration broadly and how discussions there have been going around potential incentives with PBR? And so maybe also ties into grid mod spend just given presumably need for grid mod to support DR integration?

This is Alan. I think we can just speak in generalities. We are dependent on an increased percentage of private rooftop solar, given their very small relative land base in Hawaii, that's available for renewable projects. We've recently combined our DR, demand response and DER activities seeing the benefit of folks offsetting each other or complementing each other. We look forward to increased penetration of rooftop, private rooftop combined with behind-the-meter storage. So there's so many moving parts to our total renewable efforts, and we're looking at many different generating resources to get to our 100%. Does that answer your question? Or did you have a different question in mind?

Yes, I was just wondering, in addition to that, just how discussions have been going around potential incentive pens with PBR, their Performance Incentive mechanisms for supporting DR Integration? I know that, that was one of the pillars discussed in PBR. So just wondering if there's anything to point to?

This is Joe Viola with the regulatory affairs in Hawaiian Electric. So as you've identified, that's correct. Currently, the PBR docket is in the Phase 2, as we call it, the kind of the design fee. So the commission has asked all the parties to develop and propose incentive mechanisms, specifically related to DER integration. So that's in process. Parties have been developing proposals. The Current electric companies have submitted proposals, several other stakeholders have and the commission has indicated, expect to have a decision on those proposals collectively in December of this year. So we're still -- we're waiting.

The next question today comes from Paul Patterson of Glenrock Associates.

So just to sort of follow-up on that rate base question. I'm a little bit -- when you look at 2021, before we just get -- without going into all the CapEx timing and acceleration, what have you. Rate base itself seems to be like substantially lower than what your expectations were before. Is that because of the battery storage, if you could just clarify what's causing the substantial decrease in the expectation for 2021?

Paul, this is Tayne. Yes. In terms of what's causing that decline, it was the battery energy storage projects for slated for completion in that time frame. And what we had in the forecast and what you previously saw was about $140 million of investments of battery storage here in Oahu.

So Paul, if you remember that those were going to be companies done projects, and they were put into the competitive bid RFP.

Okay, I got you. And then with respect to PBR, you guys mentioned the constructive process that collaborative or stakeholder process that you guys have going on. Do you think there's a potential for a settlement given where you are now? Or could you comment a little bit on that? Or just any more color on how that's proceeding?

This is Joe Viola again. So I'm not sure we're still -- actually, we just had a -- I just came over from a workshop today. So the schedule and the doc calls for continuing exchange between the parties to better understand positions, but the commission has encouraged all of the parties and stakeholders to focus on developing their own proposals. We certainly see many areas of alignment, but I don't know that we expect any type of settlement. We expect the parties to do what the commission has asked us to do, to provide very comprehensive detailed proposals to address the outcomes they want to promote in this proceeding.

Okay. So Alan, the congratulations. I wanted to.

Thank you, Paul.

Follow-up on it. Good. So -- but a few quarters ago, I think I asked you about the potential for rate increases with respect with PBR, with the transformation, et cetera. And it was a little too early. I think you guys felt comfortable in terms of commenting on what the potential rate increase or rate outlook might be leading fuel and stuff out of the picture. And I'm just wondering given how things have been coming in, sort of just -- do you have an update on how we should think about the rate impact you guys are looking at now? We've now that you're further along in the PBR further along in your rate base and outlook and what have you?

All of this will be an unsatisfactory answer to a very good question. I don't think we have an update. As Joe mentioned, we're still in PBR, we won't get the results of the full docket until the end of this year. We're seeing, I think the most comforting aspect of the process is that the environmental utility financial aspects are all being discussed. At the same time, and there's some true understanding of the totality of as Connie mentioned earlier, how this has to be caught coal that is all of us together, operating towards a very ambitious state energy policy, which we are all fully committed to. But underlying it, is a realization, and I think it's always been emphasized by our regulators as one of the guiding principles, and that is the financial integrity of the utility because it is the grid that makes it all possible. So with that, I mean, as unsatisfactory as that may be in terms of a metrics-driven answer. I don't think we can give any more color to it than that. But it's been a good process so far.

Okay, great. No problem. And then just finally, on the coronavirus, I know that obviously, the virus can travel and what have you, you guys have a substantial amount of Asian tourism. But how much -- do you have like, off the top of your head, the percentage of tourism that comes from China as opposed to Asia in general?

Yes. We've looked at that. As you know, we get about 10 million visitors annually. We just broke through that threshold. From Mainland China and Hong Kong, it's approximately 1% or slightly below. So it's pretty minimal overall. So the things we'd be concerned about is travel in general, people's willingness to get on planes and travel, which could impact the economy somewhat.

The next question comes from Charles Fishman of Morningstar.

Well, first, Alan, good luck to you.

Thank you very much.

And then let me make sure I got these I'm thinking about this right. The bank generated about $0.81, about a $0.05 of that was from the headquarter sale, leaving $0.76 for this year or last year, which is about the midpoint of guidance. So essentially, excluding the gain, the bank is roughly flattish, yet you're projecting a dividend increase that is like 1/3 higher what -- can you give a little more color on that? What's going on?

Yes. Yes. So thanks for the question. So if you'll notice our capital levels ticked up across the second half of the year. We were in the process. We're adopting CECL, the new accounting standard for provisions this year. And so we were retaining a little bit more capital. So when that adjustment comes through, which is an adjustment to the provision level, a onetime adjustment to the provision level offset to capital that we end up in a good spot relative to our overall capitalization. And so with that, we have the ability to dividend up a little bit more of our earnings as we go through the year and stay in a good spot.

And Charles, I'll just add that -- so the bank will still be targeting what has been our long-time target of about 8.5% on the Tier 1 leverage ratio. So as Rich just noted, they had trended above that towards the end of 2019, and now they'll be coming back down to that.

So the $75 million of dividend that you're projecting for 2020 is pretty much a new base going forward?

No, no, thank you. On an ongoing basis, you'd expect our traditional levels to be about the right component of earnings that we would. And we have a little bit of an adjustment this year in 2020 projected as we reset to the ongoing leverage ratio that we've been in the past, too.

And remember that we're anticipating consistent earnings performance through this period of time. So there'll be some level of consistency to the dividend capabilities of the bank going forward.

Got it. That's helpful. Just another question on the utility. Last quarter, we talked a lot about the CapEx, especially because of the cycling of the diesel units. And that's understandable with the -- I mean, you're sort of the canary here with what's going on with renewable in the country, if not the world. And hearing you talk about that, but certainly a concern of something that maybe nobody in the industry is fully appreciating, at least on the analyst side. I didn't hear you talk about that this this time. In fact, you said on the guidance, O&M at or below inflation. So is that something that was just a onetimer? Or you just didn't talk about it.

Well, so we did show it as a year-over-year increase 2018 to '19. So that was in some of our results this year. Ultimately, you're absolutely right. Those units have to be kept in good work in order to backstop all of the renewable energy, and it's a cycle. However, we have to operate them. And if we cycle them higher levels, we have to have the appropriate maintenance for those. But I think prospectively, we've gone through a series of periods with major overhauls and those the major overhauls don't have to be done annually. Is that right, Tayne?

Yes. So Charles, this is Tayne Sekimura. So when we look at our overhaul, there planned overhauls, and it depends on run hours, and they can be lumpy in between years. And so and if you link it to what we see from a recovery standpoint, I mean, it could also be a little lumpy as you look at it over a period of time. As you look into 2020, though, and trying to understand the O&M forecast being at or below inflation. How to think about it, we did talk about our completion of our 1 company initiative, where we restructured functions to allow more standardization and consistency of work, and that will help us in terms of bringing more efficiencies to our utility as well as enabling us to do things like strategic sourcing in our purchasing area. In this forecast for 2020, we also have embedded or benefits from use of our new system using SAP, which went live in the fourth quarter of 2018. Those efficiencies are also embedded in 2020 as well. So you can see that's how we're allowed to forecast an O&M level at or below inflation.

Charles, I'd add to what Tayne said about the ERP savings because those are now fully ramped up. They were ramping up over 2019. So they're fully ramped up now for the 2020 year.

Okay. I forgot about that SAP. That's right. Well, that's good to hear that it's providing benefit.

The last question today comes from Andy Levi of Exoduspoint.

Just two very quick ones. Just I guess following up on Paul, just on the coronavirus. So how specifically does it I thought you guys would decouple. How will this affect? I mean, I understand the tourism part, but how does it affect the earnings?

Well, potentially, through economic activity that could impact the commercial enterprises where the bank has deployed capital and is lending into the community, it could slow down commercial activity somewhat. That would be 1 concern. We've also keeping a close eye on the supply chain for procurement of our renewable projects. If that gets either constrained or the cost of those go up. We haven't seen anything to date, but it's something continue to monitor because bringing those projects online is very important to us.

It's more project-related and bank-related.

I would think so.

Okay. And then just for 2020, just in your forecast for the utility, what ROE -- earned ROE are you embedding in that?

We haven't actually disclosed that. But if you use the midpoint of the range, it would be a slight improvement to where we're at today. As you know, we closed at 7.8% year, and we would see some improvement over that. If we -- assuming the midpoint of the range, I would say, a modest improvement we don't anticipate -- we do have a couple of rate cases going on. We have an interim decision on holdco and the ongoing potential interim will expect it in term hearing about July time frame on the HECO rate case, which may provide some benefit. But beyond that, for significant improvements in the achieved ROE. We'll have to see how PBR plays out and the implementation in 2021.

Okay. And my last question, just on the rate base slide 15. So 4% to 6% off to '18? Is that how it kind of works.

It is because we were trying to normalize the differentials between '19 and '20. And also to align that with the guidance, how we had done our previous guidance range and using '18 as a base as well for comparability.

So it's 3% to 5% off of '19 4% to 6% off of '18. Okay. I get that. And thank you for moving the call to Wednesday afternoon.

This concludes the question-and-answer session. I would like to turn the conference back over to Julie Smolinski for any closing remarks.

Just thank you all for joining us today. And most of all, Mahalo and congratulations to Alan on your last webcast.

Thank you.

And I hope you all have a great rest of the week. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.