Good morning, and welcome to the Hawaiian Electric Industries, Inc. Third Quarter 2020 Earnings Call. All participants will be in a listen-only mode. [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. Please go ahead.

Thank you, Eli. Welcome, everyone to Hawaiian Electric Industries Third Quarter 2020 Earnings 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 and other members of senior management. Our press release and presentation are posted in the Investor Relations section of our website. As a reminder, 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 SEC filings and in the Investor Relations section of our website. Now, Connie will begin with her remarks.

Aloha, everyone, and mahalo for joining us today. We hope you are safe and well. I have been deeply impressed by the dedication of our employees and the resilience of our customers and communities, as we all adapt to the ongoing challenges of COVID-19. Our core strengths continue to serve us well in these unprecedented times. That includes our long history of providing essential services for the state of Hawaii, strong liquidity, stabilizing utility regulatory mechanisms, our bank's conservative approach to risk, its low-risk loan portfolio and strong capital position. In the third quarter, our financial stability enabled us to continue helping our customers, our economy and our communities, and again, to deliver solid financial results: net income of $65 million and earnings per share of $0.59 compared to $63.4 million and earnings per share of $0.58 in the same quarter last year. I'll start with an update on the virus and economic conditions in Hawaii, before turning to an update on our companies. Then, Greg will review our financial results and outlook. While there is still uncertainty, regarding the course of the virus and the timing of economic recovery, we've seen some positive signs. First, daily new COVID cases are down significantly from the surge we saw this summer. The seven-day average of new cases is down to 92, with about a 2% positivity rate after a second stay-at-home order on Oahu, starting in late August. Oahu's local economy largely reopened in late September under a tiered framework. And since then, we've been able to move to the second tier, allowing more business activity. On October 15, Hawaii's tourism sector reopened with a program allowing domestic travelers, with a negative COVID test to bypass the 14-day quarantine. Since then, we've seen an average of 5,600 arrivals per day, up…

Thanks, Connie. Turning to our third quarter results, consolidated earnings per share were $0.59 versus $0.58 in the same quarter last year. At the utility, timing and management of O&M expenses had a positive impact. At the bank, tighter lending margins and COVID-driven provisioning continued to affect results, while non-interest income from core activities improved compared to the linked quarter. While holding company loss is well in line with plan, we saw a modest increase due to lower income at Pacific current and higher interest expense from higher short-term borrowing. Consolidated trailing 12-month ROE remains healthy at 9.4%. Utility ROE increased 80 basis points versus the same time last year to 8.4%. Bank ROE, which we look at on an annualized rather than a trailing 12-month basis, was 6.8% for the quarter, down from last year due to the economic impacts of COVID and a low interest rate environment. Turning to the next slide. Utility earnings were $60.1 million compared to $46.8 million in the same quarter last year. The most significant variance drivers were $10 million lower O&M expenses, primarily due to fewer generating unit overhauls, lower labor cost due to lower staffing levels and reduced overtime and elevated vegetation management work in the third quarter of 2019. The lower overhauls represented about $5 million of the $10 million O&M variance. Of the $5 million, $2 million was due to an elevated number of overhauls in the third quarter of 2019, and the remaining $3 million was timing as some overhaul work will be performed later this year or in 2021. We also had a $5 million revenue increase from higher rate adjustment mechanism revenues and a $1 million increase in major project interim recovery revenues for the West Loch PV and grid modernization projects. These items were partially…

Thanks, Greg. Overall, our companies continue to perform well during the pandemic. Our financial stability has enabled us to deliver value for all our stakeholders. In that vein, I'd like to close with a comment on ESG. ESG has been a focus for us for a long time, that's why we say ESG is in our DNA. We just didn't call it ESG before. We've long talked about the linkage between the health of our state and that of our companies. Our renewable energy transition is central to our company strategy, and we talk about it on every call, along with the evolution of our regulatory framework to support that transition. For our bank, key areas of focus include addressing affordable housing and financial fitness for our communities and customers, as well as economic diversification, and job creation. And you'll recall that Pacific Current was formed to advance sustainability, through infrastructure investments here in Hawaii. We're formalizing our ESG approach, integrating it more deeply in our businesses, to the extent material to value creation. We published our first FASB-aligned report in September. And plan to expand future reporting, to include TCFD-aligned disclosures. So look to hear more from us, on ESG going forward. And with that, we look forward to your questions.

[Operator Instructions] Our first question today comes from Julien Dumoulin-Smith with Bank of America.

Hey, good afternoon to all of your or good morning [Indiscernible], excellent time. [Indiscernible]

Hi Julien.

First off, how do you think about sustainability of O&M savings going into next year, and frankly beyond. I mean, there's a question across a lot of utilities to you guys specifically. And in particular, can you talk about, what has driven the $10 million year-over-year improvement on utility O&M, beyond just shifting out generation maintenance costs?

Yeah. Okay. Go ahead.

So well, we'll provide clarification of the expected savings for next year, some of which -- of the savings that we've achieved so far this year, we expect to be durable, meaning some of the staffing reductions and the efficiencies that have been put in place. But I'll have Tayne Sekimura also comment with a little more detail on that point and the look forward.

Hi, this is Tayne. Commenting on the O&M, as we see it, our cost efficiency initiatives have included things like managing staffing levels, to meet our management audit commitments as well as to offset the no base rate increase for Hawaiian Electric. It also includes reduced overtime and higher productivity, due to better planning, scheduling and coordination of work. And so that -- those sorts of activities are sustainable into next year. The other thing we're doing is, we're engaged in our strategic sourcing efforts to bring down the cost of our goods and services. And that, too, will continue, as we move on into 2021. We also look for other opportunities as well as we are working differently in a teleworking virtual environment. And have found different ways to get our work done. And so some of the things we are looking at is how much office space do we need, how big should our footprint really be, use of technology to be able to interact with one another, inside the company as well as outside the company. So those are just some of the examples.

Yeah, excellent, okay, perfect and then, maybe related to that, if you don't mind, can you discuss the improvement in utility LTM, ROE? Obviously, it's improved here to 8.4 from 7.9 in prior. How do you think about this carrying forward, right? It kind of dovetails with the O&M?

Yeah. So, a big part of that improvement does relate to our lower O&M expenses and so that we're seeing that in our results to-date, going forward, it's going to be really key for us to see what comes out of the PBR proceeding. And let me take you through some -- as well as what came out of the Hawaiian Electric final decision. And so let me take you through some of those pieces. In our ROE chart, we do have a breakdown of the ROE drivers there. And if you look at some of the things like the customer benefit adjustment, is an example. In the Hawaiian Electric final decision, it was considered to be removed. And so we're going to stop accruing that amount of the customer benefits. And a very small amount will remain for Maui. Right now, it's about 40 basis points. And what will remain later would be, for Maui, is just a couple of basis points. The other thing is for the ERP customer benefits, that was deemed to be removed from the Hawaiian Electric final decision. All that will remain there is roughly 10 basis points for Maui Electric and Hawaii Electric Light. So those two items come from the Hawaiian Electric final decision in order. The last piece is the RAM revenue adjustment. And the accrual right now is delayed to June 1. But in the PBR docket, there is general consensus of the parties, in PBR that this lag should be removed. Of course, that is subject to the PUC's decision in PBR that we expect in December. In addition to that, as we look forward at PBR, our cost containment, cost management issue – management initiatives will continue and be expected as we operate our company. So that's going to be really key, our continuation of cost management efforts to close the ROE gap.

Yes. Sorry, if I can squeeze in one more, just real quickly to finish out the thought. So your full year 2020 guidance remains unchanged, ultimately. Why does utility earnings remain in the bottom half then? And is that implicit that some of this pushed out generation maintenance spend is in 4Q, or is there something in the tail end of this year? And is there any update you can provide around ASB earnings based on the provision loss to date? Just again, trying to square that against the guidance and where you're trending.

Okay. I can speak to the utility. What is coming up in the fourth quarter, as mentioned earlier, you heard about the timing of some of our generating unit overhauls and some station maintenance work that will be performed in Q4. So there will be some elevated O&M there. In addition to that, we also have other expenses that were timing-related related to things like what we're doing in the community-based renewable energy, CBRE. And we had some IT software and hardware purchases that were delayed to Q4. So we'll see those O&M expenses elevated.

Yes. And Julien, if I can add, the original guidance way, way back actually was when we were looking at having the Oahu rate case. And of course, that's the one that's been settled at a no base rate increase.

Yes. So, yes. So as we go into the fourth quarter, we still have to offset the no base rate increase costs. And it is a range, Julien. So obviously, there's some movement within the range, but still some uncertainty going into fourth quarter around timing of certain expenses and when and if they materialize. So we've kept it within the lower half of that range, but I think we're positioned well going into the fourth quarter. And then on a consolidated basis, you did see the improvement in our pre-tax pre-provision guidance from the bank as well, which was an improvement in debt position going into the fourth quarter now just seeing how the provisioning plays out during that period as we reopen the economy.

Got it. Excellent. A sort time and patients. Yes.

Thanks for the Friday afternoon discussion.

Yes, we thought we were going to hear from Eric, not you. Thank you.

Our next question will come from Paul Patterson with Glenrock Associates.

How are you doing?

Hi, Paul.

Hi, Paul.

So I apologize for not being able to completely – could you just – why the higher pre-tax pre-provision bank income? What's exactly driving that?

Let me turn that over to Rich. They've had a great quarter, but go ahead.

Hi, Paul, as Greg mentioned in the comments, as he was going through, we've been able to run pretty well on our expenses and manage those down. We've got some unique things that are related to COVID that come and go. But those are tighter. And then during the initial stages of the lockdown, we did things like waived all ATM fees and put in bigger sort of grace periods for late fees and things like that. And during the third quarter, we began to feed those back in as we tried to sort of normalize operations again. So you're seeing those things come up. And you've also seen really strong production on the mortgage side. We're number two in the market so far year-to-date on production of mortgages, and that's played through as we work to kind of balance how much we want on the book versus how much we sell, when we sell those gains come through that mortgage banking line. And so those are the main factors.

So just to understand this, so when you guys were doing -- when you guys were giving your guidance last quarter, you were more cautious about fee income and expense, all these things that you just mentioned, I won't repeat them all. But basically, you were just being more cautious and things came in better than you thought, or was there any -- is that right to think about this?

Yeah. So for example, we didn't know exactly how the phase-in of the fees would -- how much of it would come back to pre-COVID levels, the strength of the market on the mortgage side and things. So every one of them, we're just working hard to beat what we can do, because we've got a big nut of provisions we got to pay for, right? So the team is just working hard.

Yeah. How is the loan deferrals? Can you remind us how those are accounted for? If there's any sort of provision associated with that if it's past 90 days or something, or is there any yet?

So we've taken what we think is a conservative approach on loan deferrals. So any -- especially on the commercial side, any customer that has asked for a payment deferral, we've classified that as a special mention loan, because the definition of special mention is there is a potential weakness. And approaching us to say, hey, I need help to pay is -- seems like a potential weakness. And so that's been one of the reasons you've seen our provision higher. When we classify a loan, criticize a loan, you carry a higher provision. And so that's been the main difference. The deferments -- with the deferment, we freeze the loan in the delinquency status that it is. If it's current or if it's 30 days, it just stays there until the payment period starts again and it picks up from there, but that -- the classification change is the biggest impact.

Okay. And then turning to the utility. First, on PBR, is there any potential for a settlement as we approach the December time frame here?

Hi, Paul. This is Scott Seu from Hawaiian Electric. This is a PUC-driven proceeding. And so where we are in that proceeding is it's in front of the PUC basically ready for their decision-making. So the PUC is considering all of the filings, statements of position. Evidentiary hearings took place in September, and all the parties have filed their post hearing briefs. So it's basically ready for decision-making, and that's expected in December.

Okay. So -- okay. And then just in terms of what you guys are thinking about and I guess it depends on what we obviously get with the PBR and everything. But -- and I know you guys have done a bunch of stuff here with base rates and the settlements that you have. But how should we think about the rate trajectory for total rates, right, with all the stuff that you have going on. What's your expectation for sort of the total rates? Now obviously, subject to change because we don't know what's going to happen with certain variables, but holding fuel and stuff flat kind of thing, where do you see the trajectory of rates over the next couple of years given your rate base growth at this point?

Hey, Paul, that's a little bit tough to answer, but I maybe the way I can frame it is, at least, as far as the context of the discussions with the PBR docket, it appears that we will be retaining most of the recovery adjustment mechanisms such as for the fuel power purchase adjustment clause and some of those other recovery mechanisms. The commission is looking at possible adjustments to our major project interim recovery mechanism as part of the PBR docket. It's difficult for me to answer that question just because there are a variety of these moving parts. And of course, as you even reflected, feel is going to be the biggest driver, at least for the foreseeable future, even though we are working hard to wean ourselves off that. But that is the biggest driver of what the customers see in their bills.

Okay. Fair enough, and we'll see what happens with -- in December. Thanks so much and have a good one.

Thanks, Paul. And Paul, I'd just add, remember going forward too, the performance incentive mechanisms are incentive-based so there will be benefit to customers. At the same time, there might be benefit to the company.

Great. Thank you.

And our next question comes from Jackie Bohlen with KBW.

Hi. Good morning.

Hi, Jackie.

Hey, Jackie.

Hi. Just wanted to start on the risk rating, and understanding that you've taken a really conservative stance with how your marking your special mentions. How is that going to have an impact as those get upgraded to watch and to pass? You had a really good decline in the level of deferrals in the quarter. So just wondering, number one, if borrowers are going back on to payment, how long you expect them to sit in the special mention bucket? And number two, how you would expect that to affect your reserve methodology as they do that?

Right. So Jackie, it's a great point. The -- we look, kind of, for about six months of sustained payment performance before we'd look at upgrading the accounts. The -- and so we think that's right now, given still the uncertainty about will the recent opening sustain and all that. So we will take some time and watch them. We don't want to jerk around the provision, moving them up, moving them back down if there's a closing again. So we'll look over a couple of quarters.

Okay. So I would suspect that I will call it, by the third quarter of next year, assuming that conditions continue to improve, that we could be back to a lower level of special mention and you could have some potential reserve release associated with upgrades to offset any potential charge-offs that are coming through the pipe at that point. Is that a fair assessment?

From your lips to God's ears, I hope. So I think the point that you're making is a really good one. And I think it's important for people as they think about banking. The provision is for potential credit losses, right? And if you think about what we're doing, we're providing for what we know is a difficult situation for our customers. When we -- the big increase in coverage that we've had this year is around the risky environment. And we've got a lot of customers, as we said, kind of in our release that have really impressed us how they've shepherded their resources and have hunkered down to kind of work their way through. And we got to see how it plays out. If they succeed, then, yes, when those upgrade, we'll get those provisions back. And we're in their corner fighting with them, and we hope that these provisions don't turn into charge-offs, right? And that's the game. And you've seen charge-offs have been relatively stable with our past. You haven't seen a surge in that. And so we're -- we hope this scenario works out like you described.

Okay. Okay. And then turning to balance sheet liquidity. How are you thinking about that over the next couple of quarters, understanding that there are obviously a lot of factors that play inclusive of whether or not we're going to get more stimulus in the future.

Yes. We're cautiously optimistic that it continues to be as strong as it is. Our deposits have continued to build the customers. As we look at where they are, we're seeing it on the consumer and we're seeing it in commercial. We know people will need to spend down some, but we don't anticipate a large runoff over the next quarter or so. So it's strong. Liquidity is good. We're staying close to the customers. The commercial customers, our guys are with them on a very regular basis, understanding what their cash flow situation is and how they look. So right now, we would expect relatively consistent performance.

Okay. And then just lastly, in terms of loan growth, on a linked-quarter basis, you had good generation in CRE balances. Is there anything point-to-point that was unusual there, or was it just really solid growth in the quarter?

Yes. No. There were -- we've got a terrific new leader of that CRE team that joined our bank earlier this year. And he's just good at finding the right kind of deals. We have tended to be more heavy in sort of construction-related project. He's excellent at getting the long-term investor component of the portfolio growing, too. And we're really prudent in this environment, right? We're sitting here saying that we're not interested in bringing somebody else's troubled asset onto our book. But as you know, we've also stressed to you how Hawaii real estate is a resilient asset. So, we're being really selective. But when we see the deal that we like, we also want to support those deals and the customers associated with them.

Okay, great. Thanks Rich.

[Operator Instructions] Our next question comes from Charles Fishman with Morningstar.

Hi, morning. I just have a couple. On Oahu breakage. Will that now be a three-year cycle? And there was nothing in that settlement that allowed for a -- to come back for three years?

So, Charles, the commission is no longer looking at the mandatory triennial rate case cycle because of the transition to PBR. And so that's why in the PBR framework, there's a multiyear rate plan, which is at five years.

Yes, I forgot about that. Okay. So, let's talk about CRO. I mean, on that one slide, I've lost it. You have the things that you brief to -- I realize you're still negotiating this the PVR. But on the left-hand side, as far the agreed to things. Can you maybe discuss that? It seemed like, as I look at that list, to eliminate the RAM lag, that's a real positive. Is there something else on that left side that I should be saying, wow, that's pretty good?

We'll let Tayne answer you or Scott.

Charles, hi this is Tayne. Yes. And again, as a reminder, this is a summary of the consensus and differences of the parties. It is subject to PUC decision-making. But yes, it is positive that the existing -- the parties do agree that the existing RAM like should be removed because that's roughly 30 to 40 basis points.

Well, I know that's been a bottom in the past. So that's -- I thought that was good. That's on the left-hand side.

Yes, the other thing that's positive, but we'll need to see what actually comes out is the potential to earn performance incentive mechanisms consistent with the outcomes put forth by the PUC. We'll need to see how those are set up and how achievable they are. But that's another positive thing. The other thing I would point out is the earnings sharing mechanism and again, it's the position of the parties. The general consensus was that it should be modified to be symmetrical. Currently, we have an asymmetrical mechanism, whereby earnings above and allowed ROE are shared with customers. So, there is -- on the other side, for the company to be protected there.

Yes, symmetrical would be good. Just one more thing. I think it was the last call that the Hawaiian Economic Research Organization, I guess this is where the number came from. The goal was to get back to a 50% level of tourism by the end of the year, which obviously would be [indiscernible] testing program being delayed and the second wave here, I suspect that's optimistic. But you provided a lot of data from the Economic Research Organization. But is there any number like that that's comparable that I'm missing, or is that just something that they're not doing anymore? I thought that was really interesting to see just the level of recovery on the tourism.

Yeah. Charles, this is Greg. We show on slide 3, it's part of the UHERO forecast. And by the way, this information is also available on the University of Hawaii Economic Research Organization website, so it's publicly available here. So what they showed was, and you see 2020 as 70%, almost 74% reduction from 2020 pre-COVID to where we're at, what they're projecting for the calendar year in 2020, with roughly a recovery starting in the fourth quarter. So consistent with what we're starting to see now. And then, on a base case, they're looking at a 73%, 74% recovery back, starting off of that lower base, and then further improvement in 2022. What the indication is, it will take -- and ultimately, their forecast gets to 80% to 90% recovery of relative to pre-COVID over the three, four-year forecast. So it's a recovery. Their revised forecast is a more gradual recovery. And it does stop short of the pre-COVID levels within the forecast period that they have. But it's still a pretty robust number when you think that pre-COVID we were at 10 million arrivals, which was a high watermark year-over-year for us coming out of 2019.

Okay. Well, thank you. That’s helpful. That’s all I have. Thanks, and stay safe.

Okay. Thanks Charles.

Thanks, Charles.

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

Yeah. Thank you all for joining us today and for your questions. And with that, have a great weekend.

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