Good day, and welcome to the First Quarter 2020 Hawaiian Electric Industries, Inc. Earnings Conference call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Julie Smolinski, Director of Investor Relations and Strategic Planning. Please go ahead.

Thank you, Brandon, and thank you everyone for joining us today. Apologies for the delay there. Thanks for being with us. Today, of course is Hawaiian Electric Industries first quarter 2020 earnings conference call. Joining me today are Connie Lau, HEI President and CEO; Greg Hazelton, HEI Executive Vice President and CFO; Scott Seu, Hawaiian Electric, President and CEO; Rich Wacker, American Savings Bank, President and CEO as well as other members of senior management. In keeping with our social distancing practices, our executives are in different locations today. So, please bear with us if we have any delays or mixed audio quality during the call. During today’s call, we’ll use non-GAAP financial measures to describe our operating performance. Our press release and presentation are posted in the Investor Relations section of our website and contain reconciliations of these measures to the comparable GAAP measures. Forward-looking statements will be made on today’s call. Factors that could cause actual results to differ materially from expectations can be found in our presentation, our filings with the SEC and on our website. And now, Connie Lau will begin with her remarks.

Thank you, Julie. And aloha, everyone. Mahalo, thank you for joining us today. We hope you are safe and well. Our thoughts are with those who have been affected by COVID-19. We’re grateful for the healthcare workers and the many others on the front lines, providing supplies and services as we collectively weather this pandemic. Today, I’ll start with COVID-19 impacts in Hawaii, plans for reopening our economy and how our companies are positioned. Then, Greg will review our first quarter results and discuss guidance before we turn to your questions. Hawaii is facing an unprecedented challenge from COVID-19, and we’re especially mindful of the essential roles our companies play. Through our utility, we provide reliable electricity to keep our hospitals, homes and essential businesses running. And through our bank, we help ensure money keeps flowing through our economy. I’m proud of the dedication of our employees and thank them for continuing to provide these essential services throughout these challenging times, even with personal risk to themselves and their families. Continuing to provide these vital services while protecting the health of our customers as well as our employees has been a core focus. In Hawaii, we talk about our special culture of Aloha and of kuleana, our responsibility to others. It’s a culture that we’ve described previously in terms of our community coming together to take care of each other and of the land and environment. And it’s a culture that has served us well in managing the public health impacts of COVID-19. Our government’s early actions to impose statewide stay-at-home, work-from-home orders and mandatory 14-day quarantines for all incoming travelers, both visitors and residential like, and a whole of community response have succeeded in flattening the curve in Hawaii. As of May 4th, we have had sadly 17 deaths…

Thank you, Connie. And welcome, everyone. I’ll speak briefly on our Q1 results, before moving to our outlook. On slide 9, our Q1 earnings were $0.31 per share compared to $0.42 per share in the prior year quarter. COVID-19 expenses impacted earnings at both the utility and the bank, including $2.5 million higher utility bad debt expense, pretax, than Q1 of last year, and additional provisioning for COVID-19 of over $4 million at the bank. Bad debt expense at the utility also impacted utility ROE. And we expect that debt expense will continue to impact our income statement until deferral treatment is granted for future recovery. Although we did have negative impacts from COVID-19 during the quarter, we also had a very strong start to the year prior to the pandemic. Loads were strong and showed increases over the prior year of nearly 5%. We started the year with one of the nation’s lowest unemployment rates. And the strength of the pre-COVID Hawaii economy makes us optimistic about our future, once we’re through the crisis. On slide 10, utility earnings were $23.9 million compared to $32.1 million in the first quarter of 2019. The most significant drivers of the variance were $3 million revenue increase from higher rate adjustment mechanism revenues; $1 million revenue increase from the recovery of West Loch and Grid Modernization projects under the major project interim recovery mechanism; and $1 million lower interest expense due to debt refinancings at lower rates. These items were offset by $7 million higher O&M expenses compared to Q1 2019, primarily due to increased bad debt expense due to COVID-19; the absence of onetime -- of a onetime benefit in Q1 ‘19, due to deferral treatment for certain previously incurred expenses; and an increase in vegetation management work and higher outside…

Thanks, Greg. And mahalo, again. Thank you to everyone for joining us today. Although this is a difficult time for our community, we are proud of the way our companies have stepped up to help our state recover. However, we recognize that there is a long road ahead. And we think we are well-prepared to weather the storm and help our customers as COVID-19 runs its course. And now, we look forward to hearing your questions.

[Operator Instructions] Our first question comes from Jackie Bohlen with KBW. Please go ahead.

Hi. Good morning, everyone. I just wanted to clarify a couple of items with the Paycheck Protection Program and make sure I heard correctly. So, is that -- you said roughly $370 million for about 3,600 applications. Did I hear that right?

Yes. Hi, Jackie. It’s Rich. And that’s through -- that’s through April.

Okay. Through April? So, that includes some round two in there as well?

Correct.

Okay. So, when I look at that number, it seems like the average loan size is a little bit larger than a 100,000. So, I would guess there is a fee on that. It’s somewhere in between 3% to 5%, maybe towards the higher end, given the average loan size. Is that accurate or are there some larger loans in there that are moving the average a little bit?

No. That’s correct. That’s correct. We have only probably in there -- I think we have less than two dozen loans that are bigger than a couple of million bucks. So, we really hit the sweet spot of the small businesses.

Okay. And then, are you obtaining to fund these through existing balance sheet liquidity or are you looking at the Feds 1 funding facility for that?

Yes, existing balance sheet primarily. And we’re set up to take advantage of the Fed facility, but we’ll do that if we have the need to. Right now, we’re keeping it on balance sheet. As you know, we don’t expect them to last too long. A significant portion will get forgiven as we come out of the second quarter. So, it’s sort of a temporary spike.

Okay. Thank you. That’s helpful. And then, in terms of the -- and thank you for the added detail within the slide deck. I was flipping through that as you were going through prepared remarks. I’m just looking to this mix exposure in general and understanding that at 4% it’s a pretty low piece of the portfolio. Related to the grades on those with 75% of the portfolio being investment grade, is that similar to where it was at 12/31 or did you see any downgrades during the quarter? I know it’s still a little bit early for that given the timing, but just curious.

Yes. It’s pretty consistent. We haven’t seen downgrades on our exposures in that time.

Okay. And then, in terms of just outreach that you might be doing for the personal and secured loans, if you could just provide any color on that and how that plays into deferrals that you might be granting, and how that played into some of the reserve builds you had in the quarter?

Yes. So, as you know, we’re offering deferments and others across the portfolio, across the bank, commercial and consumer. In the consumer unsecured, we’ve had about 3,000 customers ask for referrals out of that portfolio. It represents a little more than 10% of the balance of the book. And as we work through that we’re communicating with customers about -- this is a deferral, not a forgiveness. This is -- we need to be -- we’re happy to help you. Let’s make sure we’re communicating about how you’re going to make payments again, when this starts up. And we’re beefing up our loss mitigation resources on that side as well. So, as we look at it, we felt coming out of the quarter, it was prudent to put up a little bit of reserves against deterioration in the collectability of that book. And we’ll see how it goes as we play through. But as Connie mentioned, Hawaii tends to have a little bit better performance than the national average on payments and paying back our debt. So, we’re hopeful that that continues through this crisis too.

Okay. That’s helpful. And if I’m remembering correctly, that’s a very granular portfolio. Right?

Right. The average loan size is somewhere around $10,000. So, it’s not a large individual exposure, very, very small size loans.

Okay. And then, just one last one for me, and I’ll step back. Looking to the net interest margin specifically and understanding some of the repricing trends the pushes and pulls that you have going on there. It sounds like following repricing that takes place in 2Q, outside of new generation that may be at a lower rate in the portfolio, the NIM could start to stabilize in the latter half of the year. Is that how you’re thinking about it?

Yes. The biggest hit that we take is the repricing on the variable loans. That has been -- you can see the benchmark, how they’ve moved. That’s been pretty severe since down 150 basis points on LIBOR just since year-end. So, it doesn’t have much further to go, I don’t think. And, as the clarity on the economy becomes more evident, then we would expect interest rates to stabilize. And we wouldn’t expect to see significantly further lower repricing.

Okay, great. Thanks, Rich. I appreciate it.

Okay.

Our next question comes from Paul Patterson with Glenrock Associates. Please go ahead.

Hey. Good morning.

Hi, Paul.

So, just sort of to go over sort of the bank stuff a little bit more. And I’m not as familiar as perhaps others. But, just in general, when we’re talking about these deferrals and sort of the 40 13 [ph] and the just sort of all the stuff that’s going on with CARES. How should we think about -- what’s the accounting impact that’s associated when somebody asked for deferrals? Is there any reserve or anything that we should think about that happens with that? And what has been the run rate? I mean, you mentioned that the non -- the unsecured consumer stuff. But, I was just wondering in general, what are you seeing on the mortgage side? I’m sorry, if I missed that.

Yes. So, across the -- this is Rich again. Good morning, Paul. Across the book, we have roughly 10% of the book that has asked for hardship accommodations and that we’ve accommodated. So, the mortgage side is about 11% of the book. And so, under the guidance that was released, as long as the customer was current prior to the situation and the hardship, it doesn’t affect the pass-through status. So, they’re considered still current good loans. And we are not required to make any adjustments for the provision. We -- though on certain parts of the book, we’ve determined that that’s prudent. And that was the case with some of the consumer unsecured, where we elected to provide on a qualitative factor some additional for uncollectability of that book. But broadly, initially restructurings of commercial loans that are -- that again were current before are not going to be considered TDRs. So, the regulatory guidance has been, I think, constructive as we come through it. And so, what we’re really going to see is as we -- as the clarity comes on how the economy is going to open up, how the tourism industry is going to open up again, then we’ll be really on a company by company exposure by exposure basis and determining what we do.

Okay. And then, just in general though, I mean, my understanding, these things are sort of automatic almost. And they can be, I guess, granted for up to 12 months. Is that about right?

No, it’s not that long. We’re -- currently, we’re doing three months at a time. We would be able to -- the current is up to six months. So, we began doing these in late March. You had an initial surge -- the additional requests have sort of leveled off. So, I think the people who wanted and needed to take advantage of it at the early stages have, and the growth since then has been fairly modest. We’ll go through that towards the end of this quarter and the end of the second quarter on considerations for another three-month extension of those terms. And that’s at our discretion to do that. We -- in the first round, we did make it very easy for people to take advantage of those. And we’ll make our call on that at the end of the second quarter, based on how things look.

Okay. And then, I guess, you guys used references to 2008 what have you, and you guys did quite well, I think in comparison to others on that. But, this is considerably different, I guess. And, for instance, the Governor, at least -- there is also report, was suggesting that public employees take a 20% pay cut. And I know you guys are very-dependent on tourism, what have you. And so, I’m just sort of trying to get a sense as to what kind of exposure we should be thinking about here. I mean, if that kind of activity were to take place, I’m just trying to get some sense as to what that stress might mean in terms of your loans and what have you. Do you follow what I’m saying? I mean, it just feels very different.

That would be called guidance around the provision. So, as we said that it’s a bit murky. I think there’s -- it is hard to draw a comparison to any specific search situation. We’ve provided the historical context for one situation. But I think, while there’s also never been anything like the kind of stimulus coming in this -- will be close to $3.5 billion is my guest on the PPP by the time we get through round two. The $1.5 billion or $1.3 billion that’s coming in through the CARES Act in Coronavirus Relief Fund, the $1.2 billion of stimulus payments that are getting out into the individual consumer. So, we’ve never seen that dynamic either. So, I think there’s things in the negative sense and things in the positive sense that we’re going to just need a little time to play out. But, I think there’s factors that affect it both ways.

Okay. Could you have a sense, if that 20% take up was happening, how many -- how much of the workforce of Hawaii would be -- I see that you guys say 19% is government, but on the other hand -- and so that’s probably defense and what have you. But, then there’s another number that’s involved in education in that pie chart on slide 3, and healthcare. So, I’m just wondering, just -- do you guys have -- do you guys look at your own numbers? What are you guys thinking about in terms of the number of people who might theoretically face that kind of reduction if they would remain employed? Do you follow me? As a presenter of the workforce, do you guys have any sense or sort of metric associated with that?

Paul, this is Julie. We will double check the number. I’m pretty sure it’s in the range of about 10%.

Okay.

And Paul, just to clarify the Governor’s signaled that that might be a possibility and also said it would be a last resort.

Yes. No, I’m sure, they’ll have resistance to it as well. Just finally on the University of Hawaii stuff. That 75%, I apologize for just not getting that completely, what -- 75% of activity would be normalized by the end of the year. Is that what they were saying? Just what is it?

That’s correct. And I really urge you to go take a look at UHERO’s forecast because for example, the prior forecast which was as of the end of March, he did not include the effect of the stimulus payments that Rich was talking about. And that now is included in this current one, although he has a little more pessimistic view on tourism. So, that’s the nature of everybody. We’re all trying to look into this crystal ball and look at all the determinants and put them together and come up with views that are different as time progresses, and we see what actually develops within the economy.

Our next question comes from Charles Fishman with Morningstar. Please go ahead.

On the deferral of COVID-19 expenses with respect to the utility, I guess, we have a track record in the Southeast U.S. mainland with storms where pretty much what happens and how they get deferrals when a hurricane comes through. Is there anything you have that a precedent in Hawaii for this type of deferral of unusual expense?

Why don’t turn that over to Joe Viola, on a regulatory team at the utility?

Hi. Thanks. This is Joe Viola. Yes, we have experienced in Hawaii on approval for deferral of significant costs. It’s usually threshold amount for that. You’re right. I mean, hurricane-related for some of utilities, actually in the past for our lava incidents on that [Technical Difficulty]. So there is precedence for deferral treatment for extraordinary costs.

So, I guess, there’s a fair level of confidence that you’ll get that and I realize you can’t. I mean, you’re holding that as an unknown. But, there is certainly, I would think, a decent chance you’re going to get it. Is that a fair assessment?

Yes. Charles, Hi. This is Scott Seu, Hawaiian Electric? Just to add to what Joe just said. Even yesterday, our Public Utilities Commission issued an order, which basically had a number of elements. But probably the most important was that in addition to saying that if you’ve not already done so, please suspend disconnections. And meanwhile, it’s given us authorization to establish regulatory assets to record our costs that results from the suspension of these disconnections. So that’s a pretty good signal I think that our Commission is one -- we’re required to start tracking these costs and then to file regular updates to the Commission of these costs.

Okay. And then, moving to the bank. I believe Greg said that a pretty material portion of the loan book was mortgages. Could you maybe give a little more color to that? Like, what percentage is residential mortgages, what percentage is commercial mortgages of the total loan book?

Yes. So, if you refer to -- there’s a slide in the material that gives you a little bit more on it. I think, it’s Slide 31 in the back that shows you we got about a $5.2 billion loan book. If you look at the residential mortgage piece, counting the home equities, you’ve got about $3.3 billion of it right there. And then, you add commercial real estate that gets you up -- and then within other component that gets you up to the 80% of the book.

Perfect slide, I just never noticed that before. I suspect that’s a slide you include in every deck and I just never had a reason to look at it. Okay.

That was Charles for today. We thought you might ask.

There you go. Okay. Well, that slide is perfect.

Charles, this is Connie. Let me just add to that and call your attention. So, not only do we have Slide 31, which basically shows that about 80% of the total loan portfolio is secured by real estate here in Hawaii, but then thereafter on slides 32, 33, 34 and even 35, which is the national syndication slide that Jackie was referring to. We’ve tried to break out the loan portfolio and give some stats there, so everyone has a sense of the quality of the loan portfolio. So, for example, if I go to Slide 32 for the residential mortgage portfolio, it will show you that the average loan to value for the portfolio is 53.5%. So, that gives you a sense of how much equity is in each one of these loans as a buffer.

Right. And I think, on there you can also see that our home equity portfolio is different than you might think about home equity. So, a lot of times people think about them as a second mortgage and a high LTV. And in fact, predominant -- a majority of ours are first position. A lot of -- the LTVs are very low. People use it as almost a sort of flexible source of funding on what has always been strong real estate values -- strong and stable real estate values in Hawaii. So, it’s not what your initial perception of home equity books would be. And we’ve seen it perform quite, quite well over time.

And you can also see the granularity that Jackie was talking about, for example, for the residential mortgages, average loan size of $300,000, the personal unsecured $10,000. So, we have very Community Bank like portfolio that is quite granular.

Okay. Well, again, I’m not a bank analyst, but that’s certainly got to give you confidence that people don’t like to walk away from their home loans or their homes. So, that’s an added level of confidence that I suspect you experienced 10 plus years ago in the last crisis.

Yes. And as we said in Hawaii, that’s especially true when it’s so hard -- we have limited land mass. So, it’s so hard to even get into a home.

This concludes our question-and-answer session. I’d like to turn the call back over to management for any closing remarks.

Thank you all for joining us today. I appreciate your comments and questions, and please let us know, please feel free to get in touch if you have anything else, and certainly stay healthy and safe. Take care.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.