Good morning, and welcome to the Hawaiian Electric Industries Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Julie Smolinski, Vice President of Investor Relations and Corporate Sustainability. Please go ahead.

Thank you, Tom. Welcome everyone to Hawaiian Electric Industries Fourth Quarter and Full Year 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.

Thank you, Julie. Aloha everyone. And Mahalo thank you for joining us today. In 2020, we achieved consolidated net income of $197.8 million and earnings per share of $1.81. While down from 2019, our consolidated 2020 earnings include solid results driven by good regulatory mechanisms, and the utilities focus on cost savings, while the bank performed well given pandemic driven economic challenges. Last week, our Board approved our third consecutive annual dividend raising the quarterly dividend per share from $0.33 to $0.34. This reflects our continued financial performance and our confidence in our future prospects. I'm proud of the commitment of our employees as we work to support our customers through the challenges of 2020. Protect fellow employees and care for our community. All while continuing to deliver solid consolidated financial results and advance long-term priorities. We have viewed our institute as source of strength to help our state enter the challenges of COVID. This has included extensive actions across our company, including at our utility, suspending disconnections, providing payment options to help customers manage their bills, and proposing to hold base rates flat on a Wahoo to help keep rates down. In addition, based on the utility strong financial results at year end, HEI provided $2 million for Hawaiian Electric to be the founding sponsor of the Aloha United Way Hawaii Utility Bill Assistance Program to help families in all islands pay utility bills. Similarly, our bank offered loan deferral, temporarily suspended fees and deployed $370 million in Paycheck Protection Program funding to support approximately 4,100 small businesses representing about 40,000 local jobs. 2020 was a record year for our charitable giving, including the utility bill Assistance Fund I just mentioned, our companies and employees together made charitable commitments of $5.5 million, more than doubles our typical level. These…

Thank you, Connie. While 2020 was a challenging year for the Hawaii economy. There are signs of progress in our economy is on a path to recovery. Daily visitor arrivals are currently around 8,000 and still well below the roughly 30,000 per day on average in 2019. It represents a significant improvement from the 2,000 to 3,000 we were seeing before Hawaii is reopening to tourism in October. Our state's pre travel testing program has succeeded in keeping Coronavirus cases low. Hawaii's positivity rate is just 1% compared to the national average of 9.1%. Arrivals are expected to continue improving with the nationwide rollout of the vaccine. Unemployment has also improved significantly to 9.3% in December of 2020, down markedly from 24% at the nadir of the pandemic. Hawaii's housing market has remained resilient, with single family home sales up 2.3% in 2020, and Oahu median prices for the full year 2020 rising 5.2% to $830,000. Year-over-year sales volume and median prices remain strong in January at 14.7% and 9.8%, respectively. While GDP is expected to have declined by 10.2% in 2020 is expected to return to growth beginning in 2021 at 0.1% and strengthening to 5.2% in 2022. Turning to our financial results; in 2020, we achieved solid consolidated financial performance and advanced our longer-term priorities despite this difficult economy. Full year 2020 earnings were $197.8 million, or $1.81 per share, compared to $217.9 million, or $1.99 per share in 2019. Utility earnings grew about 8% to $169.3 million and reflected efficiency improvements helping drive O&M lower. ASB's full year earnings were down $31 million or 35% versus a strong 2019 as financial results were impacted by both net interest margin compression and higher provision expense related to the economic shutdown. However, the low interest rate environment helped drive…

Thanks, Greg. And Mahalo to all of you for joining us today. We are proud of the accomplishments we made in 2020. And we look forward to continuing to work with our customers, community and employees as we progress through recovery this year. We now look forward to your questions.

[Operator Instructions] The first question comes from Julien Smith with Bank of America.

Good afternoon, team. Thank you so much for the opportunity. Congrats on the year here. One of the shows up on the outlook here a couple of questions. How do you think about the cost savings that you've now committed to in the context of the recent arrangement? And I'm really thinking about these first few years. Have you fully identified those offsets shall we say to the savings commitments? And then the second related question, I'll throw it out there at the same time, you talk about 4% to 5%, generically of utility growth. And now that in theory, this PIMS implementation gives you a multiyear transition, does that enable a more definitive type of utility category here in terms of starting and ending point, relative to that 4% to 5% you've talked about?

Yes, so Julien let me let me start; this as Connie, and let me first address the cost savings and then ask Tayne or Scott, if they want to comment, and then on the PIMS, and the outlook, the growth rate going forward, we'll let Greg comment on that. So on the cost savings the utility had a great year in 2020, really focusing down very, very quickly on delivering those cost savings. As I mentioned, even before, management audit results came out. And we expect that those cost savings are going to carry forward into the future. And we've probably identified maybe half of that amount that's continuing forward. We are delivering not only the levelized management, audit savings, but also the ERP savings that we're also building up. So those are all going to be flowing through to our customers during 2021, which we believe is really a good thing because our community is still struggling with COVID now so if you're going to give back savings, this is the time to do that. And we're continuing to look more and maybe let me let Scott or Tayne comment on that because they've got all teams that are evaluating additional cost savings. So Scott or Tayne?

Hi, Julien, this is Tayne. Let me add to what Connie mentioned. So, in 2020, management audit savings, our team worked very aggressively to ensure that the recommendations from the audit were being implemented. And so in 2020, we've identified of the $6.6 million we identified and actually achieved roughly half of those savings on an annualized basis, which will accrue to 2021. But in addition to that, we're also continuing to look for further opportunities to change how we coordinate work and plan work so there are additional savings there, which will then result in additional workforce reductions, position reduction, we're also continuing our efforts on strategic sourcing to look for opportunities there on both our goods and services. And then also, I would mention that during COVID, we did find different ways to work with one another, and also looking to see how we can operate in smaller footprints. So our lease rent costs for example will be decreasing as well. But those efforts are all continuing from 2020 into 2021.

So, let me have Greg comment on the growth rate going forward.

Yes. Hey, Julian, so you noted the 4% to 5%, which is really based upon the investment levels and what we believe is recovery under both the EPRM and other mechanisms. And in most of the expenditures that we see over the next few years have an identified mechanism for timely recovery. So that drives the fundamental where we're in the performance incentive mechanisms are obviously need to be achieved on an agreed upon targets. And that's why we highlighted the RPS-A as we already have in flight a number of increasing through stage one, stage two, RFP procurement, additional renewable resources coming online that under that mechanism, have a potential for some for meaningful contributions, as additional PIMS, are developed. And we see what the potential opportunity there is, we see PIMS as a continuous and ongoing part of our revenue and earnings capabilities at the utility. So I see those achievements on aligned goals and targets to enhance our overall level of potential growth over time. It's hard to predict at this point how impactful and at what rate that could be achieved, as you know, we've been - we've seen improvements in our achieved ROEs into the 8%, 8.5 level. Recently, we just were at 8.1 and spin an objective of ours to get closer to our allowed ROE over time. We think PIMS provide that potential. The other element that could take us above that baseline is if we see higher levels of needed investments in programmatic types of expenditures, whether for resilience or other types of programs that may be needed, as we address some of the challenges of climate and other things here in Hawaii, which could also drive additional growth over time. But for the near term based on our capital expenditure plans are current planning levels at 4% to 5% baseline we're pretty comfortable with. Did that answer your question?

Yes. Can I clarify one thing? And I apologize; I know you guys gave a very thorough answer. Greg, when it comes to the 2021 versus 2022 onwards walk, you talked about the 4% to 5%, there's a lot of pieces moving in and out here. What do you think about overall ROE trends year-over-year here? What is the broader trend we should be expecting? I'm sorry, but that kind of track all the pluses and minuses here.

Yes, no and good question. I'm glad you asked that because that's why I also highlighted at the midpoint of our guidance range 2021 with partial implementation, some of the challenges with the implementation as we've had to, as we've settled for a no base rate increases, we do have some capital expenditures that have not been yet rolled into rates. We're seeing 2021 is a transition year, a bit of a step back in terms of realized ROE. But as you step into 2022, and have a full year of implementation and potential greater opportunity under the PIMS, we see a market improvement in performance including elimination of the RAM lag, which should which would contribute contributed about 20 basis point improvement based on our estimates, as well as full year implementation of some of the incentive mechanisms. My 4% to 5% that I was targeting was that I had mentioned were once we having full implementation of the PBR in 2022. So I'll be using 2022 as the base year for that growth rate.

And Julien I don't know if you caught in Greg's comments, we are actually expecting a decline in earned ROE this year because of all the different moving pieces. So he had said it would be at 7.8%. So quick example, PBR is not effective until June 1. However, things like the levelized management audit savings that we're going to deliver, actually, the levelized amount is for the full year 2021. So that really is starting January 1. So that's some of the, like you say, there's a lot of moving pieces, but we're expecting a decline in ROE at the utility of share.

The next question comes from Paul Patterson with Glenrock Associates.

Hey, good morning. So just let's follow-up on Julien's questions because as he mentioned, there are some - there's a lot of moving parts. But back to the ROE, you said 7.8%, I believe, the utility ROE at 2021, is that correct?

Yes. And that at the midpoint of our guidance range.

Right. And then with the RAM lag going away, there were 20 base points, is that correct?

Yes.

And that will be in 2022?

So the RAM lag for 2021 is approximately 40 basis points in our 20, excuse me, 20 basis points last year, it was 40 in 2020. Excuse me. And so that and remaining and anticipated to be approximately that level in 2022 if it were to continue, so that will be eliminated year-over-year, with ARA in place for the full calendar year.

Okay. And so we're talking something in the neighborhood of 8%, again, in certain midpoint kind of thing for 2022, in theory, everything else being equal?

Yes, but we've got additional earnings growth driven by $335 million of capital expenditures this year, ability and some ability under PIMS. The utility has plans to fully offset the $6.6 million of O&M that they've - that they've committed to. So there are the ongoing cost efforts to reduce that which could strengthen performance as well.

Well that was - you're anticipating. So basically, what I was going to ask is, so what we talked about 4% to 5%, that includes the potential upside that you guys think leasable speaking, you should be able to with incentives and everything else, is everything mixed together, you think that's including everything, is that correct? Places what have you or is it upside from there?

Yes. So really quickly, Paul. So what we're saying is that we should be reset in 2022, 2021 is the transition year, and then from the 2022 year, there would be the 4% to 5% growth part of Julian's question, as implied, well, geez, can't you guys do better given that PIMS may be coming in, and that is a possibility. But there's a lot of work that has to be done with the commission with stakeholder groups to actually determine PIMS that will be as I mentioned the whole framework is intended to balance various stakeholder interests. And so there's a lot of work to be done on those additional PIMS going forward. So, I don't know if that helps.

No, that does help. I just want to make sure I'm not missing something. Okay. So - and then I guess when we're - regarding the RPS standards and what have you, I guess, you guys hit some, like 50% Maui for 2020. Am I right about that for Maui County? I mean, I guess what my question is, is there some point where you guys are concerned about reaching a threshold where sort of the low-hanging fruit-- I mean, just from a reliability perspective, keeping it all together, I realize that Polar vortex isn't likely to happen in Hawaii. But I mean, I'm just trying to get a sense as to whether or not there's something we should be thinking - I mean, what kind of challenges you guys might be thinking about in terms of as these are very high numbers, as you know. And I mean I know you guys are focused on it. Just if you could talk about that a little bit.

Yes, sure. I'm going to ask Scott to do that. I mean, I'll say that. I mean, as you know we have been focused on that for years now particularly as Hawaii has led in things like the DER the rooftop solar integration. And we don't have a lot of the resources like you've got on the mainland, like nuclear or gas to help offset. So we've been very focused on it while and actually have participated with the national labs and leading in some of those technologies, and thankfully, Scott, guys have been doing a good job, keeping the lights on. But, Scott, can I turn it over to you?

Sure. Yes. Hi, Paul. This is Scott Seu, Hawaiian Electric Utility. So as we chart the pathway forward, the Public Utilities Commission, of course, the utility, a number of critical stakeholders, we've been paying a lot of attention over the years in the various dockets focused on how do you make this transition to a more distributed energy resource-based system, while at the same time maintaining the resilience and the reliability that's critical. We have some very critical customers here. So probably a good example of that is, as we've gone forward and procured the solar, now we are fully in the realm of procuring solar plus storage, the early days, it was all about just solar resources, wind farms. But now, as the - again, the commission as well as the utility as we look to our needs for the system, we recognize that we have to maintain the capacity, as well as the reserves being out here on isolated systems to maintain that reliability and resilience. We are also in our grid modernization programs, also seeking to integrate these distributed energy resources in a manner that not only prevents any, perhaps a potential risk, but actually seeking to grab the value from these DER sources to help us run the grid. So yes, there is always going to be some consideration given how far away we are from the West Coast than other. We're not interconnected in the islands. But what that means is we're being I'd say even more aggressive as we look at these issues.

Okay. Great. And then just finally, on the digital banking, the cost savings. It sounds like you're closing quite a few branches. And I was just wondering what's your expectation with respect to the savings that's associated with that and when it would be coming in?

Okay, let me ask Rich to answer that.

Yes, so we are seeing some of it now, we consolidated eight branches in 2020. And the staffing in those branches is down of about 50 teammates, some of that gets offset into the call center and other areas as the transaction shift to other places. And we'll expect to see that work through. So you'll see some reductions in occupancy out there. We are taking some early termination charges and things as we get out of some leases early. And that will be in there offsetting it during the calendar year, but then you'll see those savings roll through from 2022.

And how much in 2022 would that sort of is in the ballpark being since the cost to achieve will be served out of the way?

So the roughly half - roughly two thirds of our occupancy is branch occupancy. So our occupancy run about $20 million, about 13 of it is out in the branches, about six of it is our campus and our vault operation. And so you I think you'd expect to see some reduction on the order of about 10% out of the branch footprint. We are - we mentioned the digital centers that we'll see coming in, so that offsets a little bit, some of those reductions and the branches that we're closing typically are the smaller footprint ones. And we've talked to you about kind of our branch network. We're down from roughly 70 branches over time, and we've been focused on sort of the long-term keepers, servicers and as we've done that the branches that are going to be our keepers are the larger part of the occupancy footprint that's out there.

The next question comes from Jackie Bohlen with KBW.

Hi, everyone. Good afternoon. I just wanted to stick with a line of questioning on expenses that also tie mortgage into that and see what your expectations are for volume. I know we're obviously very early in the year and that changed quite a bit, but just what you're seeing so far, and what your expectations are through the year.

Yes. So as we looked at mortgage last year, we had an outstanding year, I ended up having to shave my head or my team shaved my head because they broke a $1 billion in mortgage sales. So we call it the billion-dollar haircut. So they did about $1.2 billion of originations, we were expecting the market to be down around 20%. So that would get you somewhere south of a $1 billion, $900 million maybe of production if we did well. We've started the year a little bit stronger than that run rate. And we're hoping that hangs on but if rates move a little bit that hit the volume opportunity there. So right now, our target for production was somewhere around $900 million, a little bit south of $900 million. And we're running a little bit stronger than that in the first five weeks.

Okay, so, Jackie, you might have caught in Greg's comments on the economy that our residential market is quite strong here with housing prices up over 5% year-over-year, and sales volumes continuing.

Yes, no, I did catch that. And thank you for just the well-rounded update on all of that in it. I mean, it sounds like still a good source of income. But some of the lower volume - am I correct in assuming that that plays into some lower compensation costs in 2021? And so that's some of the drivers being able to hold expenses flat this year?

Yes, well and a chunk of that compensation ends up in deferred loan costs, as you know right anyway. And so the net-net, the net fall through isn't that big from that factor right. The other things on holding it flat are really all the other activity actions we're taking; we've got a pretty strong set of actions that were taken to try to contain costs.

Okay, thank you. I sometimes forget about the FAS 91 impact and how it redirects that. And then when you think about PPP, and this net new round of it, how has demand been so far for you?

So demands it's not as strong as the last time right. We're probably - we've received about 150 million of applications 1,700 applications, we've gotten about half of that approved so far. And that's a few weeks in the customers are calmer. I think they've been managing through it; they understand that we'll get it most the biggest part of our people who are - who took out in the first round and are coming back for another pass at it. Some have processed their forgiveness, some have not. And so there's a mix. But we've also, I think the technology solutions that most of the institutions have implemented have also made it feel calmer. Last time, even though there's - it's still pretty, that's pretty good demand for loans. But it's running at a slower pace than round one.

Okay. And I mean that makes sense too. Do you happen to have the amount of fees that are left for forgiveness from round one?

About $7.5 million.

Okay. All right. And then I just wanted to make sure that I was reading one of your slides correctly. And thank you for all the details on the loan portfolio and the deferral trends that you have. So it looks like only $2 million in C&I deferrals. And so based on the slide that gave the total deferrals, the majority of commercial deferrals are real estate secure, right. Do I understand that properly?

Yes, I think so. Let me just pull up this slide. Make sure that you're looking at - make sure we're answering that correctly.

All right, I lost the slide I give you the number I know it was towards the end.

So it's one of the ones in the back.

It was slide whatever the deferral one, so probably slide 19. I think I heard you say correct, and then slide 48 had the C&I number that I pulled.

Right, yes, so you're correct C&I is a small number of the remaining deferred. There's some of the C&I that converted to TDR. But in the commercial space, the bulk of it is owner occupied CRE and CRE intra strength.

And just I mean based on collateral values, and the trends you've seen to date, and the reserve build that you've had that's been really strong especially if I exclude PPP balances out of that calculation. I mean, you're in a very secure position from what it looks like to me. I mean, is that a fair statement?

Yes, we feel like we've properly reflected the risk we see. And we are managing like dogs to not let it fall through into losses, right. So our guys are working very closely with customers, we're in with them working through liquidity and cash burn rates on a consistent basis. Trying to help them preserve cash and set burn rates. So while we had to provide and we think we were, as we mentioned, I think second quarter when we did the broad special mention re-grading of the accounts that asked for deferment, we think we've been conservative in the approach appropriately conservative, and we're working really hard to make sure those don't turn into losses.

Okay. And if we're sitting here at the latter half of 2021, you can even call it the fourth quarter. And tourism has come back quite a bit. We're looking at a widely vaccinated population, and things are looking much better. And if you haven't realized meaningful charge off, or meaningful loan growth. I mean based on CECL, I know, you're not modeling this, and it's not in your guidance or anything, but based on CECL, we could be in a position where you would have to bring that ratio down. Is that fair?

Yes, I think especially as we have special mentions that continue to demonstrate ongoing payment performance then you would look at upgrading special mentions, and if the risk in the environment has gone the direction that you describe, which we're lighting candles too, and hoping it works out that way. Then I think the bias would be that you would see a reduction in the coverage rate, we just - we are just a little bit more sober maybe on how quickly that happens until we see it and so we haven't guided that that would happen in this year.

Okay. Yes, no, definitely fair enough. I know there's still a lot of uncertainty. Okay. Thank you for taking my questions.

Thank you, Jackie. I would just add American has very active risk management practices and actually also at the board level of risk committee. And that's all very consistent with the role that American plays within the total HEI enterprise where we want to be sure, we know that our investors are very focused on risk. And so we want to be sure that we take a conservative profile with respect to the bank.

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

Thank you all for joining us today and for your questions. Please reach out if you have any other questions and have a great day.

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