Hello, and welcome to the Q3 2021 Hawaiian Electric Industries Earnings Conference Call. Following the presentation today, we will have a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Julie Smolinski, VP, Investor Relations and Corporate Sustainability. So Julie, please go ahead.

Thank you, Brika. Welcome, everyone to Hawaiian Electric Industries Third Quarter 2021 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 and the incoming ATI President and CEO as of January 1; Shelee Kimura, Hawaiian Electric, Senior Vice President of Customer Service and Public Affairs, who is the incoming Hawaiian Electric President and CEO, also January 1; Ann Teranishi, American Savings Bank President and CEO; and other members of senior management. Our press release and presentation are available 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. And now, Connie will begin with her remarks.

Thanks, Julie, and aloha, everyone, very good to have you on the call today. Mahalo, thank you for joining us. HEI had a good third quarter with utility financial performance in line with our expectations and solid profitability at the bank. Third quarter consolidated net income was $63.4 million, with EPS of $0.58 compared to $65 million and EPS of $0.59, in the same quarter last year. For the first nine months, our consolidated net income and EPS were up 30% compared to the same period last year. As we near the end of the year, we are increasing the bottom end of our earnings guidance range. Greg will discuss the drivers of our performance and our guidance shortly. First, let me provide an update on Hawaii's economy. While we saw a surge in COVID cases in the late summer from the Delta variant, our community handled it well, and cases and hospitalizations are now down dramatically. Given these improvements, Governor Ige recently welcomed tourists back to the islands. And on Oahu, restrictions have been loosened on events. 72% of residents are now fully vaccinated and 82% have received at least one dose. Vaccination of children is also starting. A couple of months ago, in its September forecast, UHERO, the University of Hawaii Economic Research Organization, estimated the state's economic recovery would see some delay due to Delta and reduced its 2021 state GDP estimate to 3.5% instead of 4%. We've seen some signs of improvement since then, so we'll see how that plays out in UHERO's next update. Despite Delta, unemployment declined to 6.6% in September, the eighth month of improvement. Hawaii real estate values and activity have remained very strong with Oahu prices and sales volumes up compared to the prior year. Median housing prices on three of…

Thank you, Connie. Hello, everyone. Today we announced our goal to cut carbon emissions from power generation 70% by 2030, compared to 2005 levels. This includes our own generation and that of independent power producers on our system. We also announced our commitment to achieve net-zero carbon emissions or better from power generation by 2045. Our 2030 goal is aggressive, yet achievable and based on real-world projects and plans already in motion. Key elements include: shutting down the state's last coal plant next year; retiring at least six fossil fuel-generating units and significantly reducing the use of others as new renewable resources come online; adding renewable projects capable of providing at least one gigawatt of energy to our system including shared solar; growing rooftop solar by about 55% from the 768 megawatts that were online in 2020; using more grid scale in customer-owned energy storage; expanding geothermal resources; and creating innovative programs that incentivize use of clean, lower cost energy at certain times of the day. Beyond 2030, achieving net zero or better assumes commercial-scale development of new technologies like more cost-effective biofuels and carbon capture. A diverse portfolio will also enhance resilience to climate-related events. We're excited about this goal. It's a major down payment on the economy-wide carbon reductions or what you will have to achieve to be in line with the Biden administration's goal of a 50% to 52% nationwide emissions reduction. Back to you Connie.

Mahalo Scott. Now turning to the bank. The bank delivered solid profitability in the third quarter. A modest release of reserves, low cost of funds and deposit growth that drove earning asset growth, helped offset the impact of the low interest rate environment. During the pandemic, credit has been a key focus as our customers adapt to evolving economic conditions. The bank's conservative approach to credit has served it well. Prudent reserve levels enabled it to manage the uncertainty from the Delta variant. While we're optimistic about Hawaii's economic prospects, we're continuing our conservative approach to account for continued pandemic uncertainty in the bank's reserve levels. Our bank is well positioned to benefit in a recovering economy. We're seeing increased customer interest in equipment purchases, commercial real estate and other investments. And as interest rates rise, margins tend to expand, particularly for a bank like ASB, which has been able to maintain a low cost of funds relative to peers in rising rate environments. Fee income can also benefit as economic activity increases with further reopening. The bank is also aggressively pressing forward with its digital transformation. We continue to invest in key data analytics and customer management platforms to empower our teams to grow customer relationships and strengthen service. We're seeing strong customer adoption of our digital offerings. Digital deposits are now almost 50% of all consumer deposits and we're seeing strong growth in use of our online tools. We've opened four digital centers in recent months and customers are responding well to that new concept. And now Greg will discuss our financial results and our outlook as well as our updated guidance. Over to you, Greg.

Thank you, Connie. Turning to our third quarter results. As mentioned, consolidated earnings per share were $0.58 versus $0.59 in the same quarter last year. Both the utility and the bank performed well. Utility results reflected timing items we've talked about all year. We saw timing benefits in the first half of the year from a change in methodology for recognizing target revenues from accelerated cost reductions and efficiencies as we've prepared to deliver management audit savings to customers starting June 1 and from generation overhauls that shifted to later in the year. As anticipated in our annual guidance, we saw reversals of some of those benefits timing-related benefits in the third quarter. The bank continued to perform well in a challenging environment. A modest release of reserves in a strengthening economy, low cost of funds and increased deposits that drove earning asset growth, all contributed to solid profitability for the quarter. Compared to the same time last year, our consolidated trailing 12-month ROE improved more than 90 basis points to 10.3%. The utility's ROE increased slightly compared to last year. While the bank ROE, which we look at on an annualized basis increased on a year-over-year basis to 10.3%. On Slide 9, utility net income was $50.3 million compared to $60.1 million in the third quarter 2020. The most significant variance drivers were $6 million in lower revenues including $5 million from a change in timing for revenue recognition within the year and $1 million net relating to the annual revenue adjustment mechanism, which also included the $3 million of management audit savings delivered to customers. We also had $4 million higher O&M expenses, driven by more generating facility overhauls including some that shifted from earlier in the year, higher costs for energy management system upgrades and a onetime…

Mahalo Greg. Now before we turn to your questions, it's hard to believe that today marks Connie's last earnings call. Connie, mahalo for your leadership and vision not just for our companies but also for our state. As they say we stand on the shoulders of giants. And in this case that's you. From signing the 2008 agreement with the governor and other leaders that put us on our path for our clean energy transition to leading the transformation of American Savings Bank into a full-service community bank that's now Hawaii's third largest financial institution, you set us on course for where we are today and positioned us well for the future. And so we move forward with the benefit of all that you've led and achieved. Thank you again.

Mahalo Scott. It's truly been an honor. To all of those listening in today, it's been a pleasure working with you in some cases going back many years, well before I became HEI's CEO and I headed HEI's IR function. I've loved all your probing questions and insights and appreciate your friendship over the years. Now I'm privileged to turn the reins over to Scott starting in January. With Scott at HEI, Shelee Kimura succeeding him at the utility and Ann Teranishi at the helm of the bank and with Greg as HEI's CFO and Kurt Murao as our General Counsel, I am very optimistic about the future of our companies and our ability to deliver on our mission to be a catalyst for a better Hawaii. We and our shareholders are in excellent hands experienced in our markets and businesses, possessing deep relationships in our communities and committed to continuing HEI's ESG leadership, particularly in climate change to benefit our communities and beyond at the same time that we create value for shareholders. I look forward to seeing many of you at the upcoming Edison Electric Institute Financial Conference. And for those I don't see there, aloha and as we say in Hawaii, a hui hou or until we meet again. And now, let's open up the call for questions.

Thank you. The Q&A session is now open. [Operator Instructions] The first question we have on the phone lines comes from Julien Dumoulin-Smith of Bank of America. So Julien, please go ahead when you are ready.

Good afternoon team and I've got to pass my congratulations to everyone here. What a legacy created here. And really I wish every one of you the best of luck here really do.

Thank you, Julien.

Indeed Mahalo. And we will see you soon.

Yes.

Absolutely. Well, so maybe just to kick things off, speaking about leaving on a high note here. You talked about -- I think a moment ago, we talked about utility earnings of 4% to 5% with the potential upside in the '22 here under the first full year of PBR. Can you expand a little bit on your latest thought process there? I know that obviously in the back half of this year, you talked about having some timing from an ROE perspective having a little bit more downward pressure in the back half. But what's that dynamic that flips perhaps more in your favor here as you think about the '22 and the puts and takes?

Well Julien, just to remind you, we made that same statement last quarter as well. Because under PBR, once it's implemented for the -- yes as it's implemented for the full year, we benefit immediately from the lack of regulatory lag on certain -- on the -- that was embedded in the RAM recovery mechanism. So that helps us begin the accruals at the current levels immediately in January of 2022. So that's an immediate uptick. But in addition, we see the potential for a solid recovery across all of our invested capital programs under ARA, as we've now achieved some of the efficiencies we've been targeting and believe that we can live under that ARA mechanism for the baseline CapEx, as well as the significant investments that we need to make under EPRM programs that will drive -- which we get separate recovery under those EPRM, REIP and other mechanisms. So there's a solid potential under a stable framework going forward. And then finally, while we haven't anticipated any meaningful PIM contribution this year, we do expect that ongoing dialogue around the further PIMs enhancement development and our achievement of RPSA and other PIMs will continue to provide upside to that baseline growth.

Yes. And Julien, I'd just add as Greg had in his prepared remarks, we were able to bring a substation -- a critical substation back into service that was impacting our reliability statistics earlier in the year.

Right. Indeed. Excellent. And then actually, you alluded to this in the prepared remarks as well, but if you can elaborate, talking about the positive economic signals you're continuing to see if I'm paraphrasing correctly. How do you think about the potential for further provision expense here? Obviously, that's been pretty material here through the course of the year. Can you elaborate at all to any extent on just a, the trends; and b, to put that in a little bit more context on how you think about the potential magnitude of any provision?

Yes. So I'm going to let Ann, who's now running the bank, answer that question for you. Ann?

Hi Julien, thanks for your question. So, when we look at release and provision numbers, there's two main drivers. One is the state of the whole economy as well as loan growth. And certainly, the signals as shared in the prepared remarks show that things are pointing up. As we looked at third quarter, we were still kind of in the height of the Delta variant and visitor counts are going down and a lot more restrictions in place. But certainly, as we sit here today in October or November rather, vaccines for children, international travel opening up and optimism in our business and consumer base, is clearly evident. So, as we reflected in the change in guidance, we do feel that signals are putting in the right direction.

And Julien, I'd just add, as we've said on prior calls, it isn't just looking forward. But in banking, you tend to really want to make sure that actual results flow through. So we have kept that same conservatism in our reserving practices during this quarter.

Got it. And just to recap here quickly on the changes in CapEx lastly. I know you mentioned specifically here that COVID had some certain impacts on substations et cetera. But just the outer years here as well, just recap a little bit. I know, there's some changes in the ranges there in '22 and '23. What exactly is going on there if you don't mind speaking to it a little bit more? I mean, it sounds like you had some efficiencies in CapEx?

Sure. And maybe, I'll have Tayne speak to that because she's done a great job of deploying capital efficiently and we also have some updates there. So Tayne?

Hi Julien, this is Tayne here. Thank you for your question. You're talking about the ranges in the future years that have changed. And what we did for that was for the lower end of the range, we included a level of CapEx under the ARA recovery and we also included CapEx that -- for projects that were approved under EPRM recovery by the commission. The high end of the range included what I just spoke of, as well as projects that are to be filed applications for the commission. And as we await for those decisions, we will feather those in as part of the normal range of CapEx. I'd also like to comment that, if you look at our future years in 2022 2023 and we do have projects sitting for before the commission for their approval related to projects that are renewable reliability type of nature and those include our battery energy storage projects on Maui and Hawaii island, as well as a project over in Kahului that will enable the retirement of the Kahului plant in 2024. Does that answer your questions?

Got it. Excellent. Indeed, indeed. Go for it.

As I mentioned in my remarks, we anticipate a further filing here shortly regarding resilience programs and investments necessary for our communities for climate-related impacts over the long term. And so that will likely be added to our prospective guidance once that gets filed and clarified. And that would be in the EPRM category.

Got it. Understood. Sorry actually one more. I just -- sorry if I can squeeze this one in. On -- AES obviously has a fairly large facility in West Oahu. Does that -- could that have any impact on how you think about either grid investments or potential generation procurement activities? I just want to clarify that. I know that that's been -- there's been some questions around the state of that plant here. Just want to ask you explicitly?

Yes. Hi Julien, this is Scott. I'll...

Yes. So we'll pass that one to Scott.

Yes. I'll take that one. Hi Julien. Yes. So right now, of course it's been pretty widely reported the interest in terms of whether or not that AES coal plant can be repurposed to be filled with biomass. The PUC recently issued a letter which basically establishes the process for key considerations that need to be put on the table in terms of making that decision. And so for example cost effectiveness of a biomass conversion, the fit in terms of a plant of that size I mean it isn't current operation, but as we look towards the future the size and operational characteristics of the plant and how compatible that is with the energy system, a number of other factors in consideration. So, I would say that, at this stage that consideration is still, I'd say in the early stages. There has been no conclusions no detailed analysis. And certainly we haven't filed anything to the PUC yet. We don't have any agreement with AES. As far as your question about whether that would impact our thoughts on future procurements, the answer is no. At this stage for Oahu, we are actively considering what would be the next wave of renewable energy projects online that's actually happening as part of our Integrated Grid Planning IGP process. And that's going to continue. And as part of that process, we will be considering the addition of new resources. And so, I would say that it's all just being part of our resource planning.

All right. Excellent guys. I'll pass it over. And see you soon.

Okay. See you at EEI.

Thank you. We now have the next question on the line from Paul Patterson from Glenrock Associates. Hey Paul, I have opened your line.

Hey good morning.

Hi Paul.

Congratulations of course to everybody and of course to Connie. And well it's a day in history. So...

I know. 37 years Paul long time.

Well, I can remember most of them. I know right?

I know. I know. I was just thinking about that in. The nice thing is I always kid Julie because I do love the IR function since, I started it here many years ago. But you all remember Shelee as well because she was with me in IR too.

Yes. Absolutely. So, a couple of things. First of all, the PIM proceeding which seems to be sort of I guess never ending. So, there's this next iteration that we have here. And what sort of struck me was sort of the language of sort of this "sense of urgency" regarding some of the issues there. And I know there's some issues on Molokai and Lanai and what have you. But generally speaking, I mean how should we think about that in the context of everything? I mean this upcoming proceeding which the stakeholders are talking to -- or talking amongst each other, how should we think about just how significant that proceeding will be vis-à-vis what we've already been through?

So Scott another one for you.

Yes. Hi Paul well the issues -- the particular issues that the commission described with -- as needing to be addressed with urgency ties back to the very same issues that are being addressed in the interconnection docket and that is, how are we able to get new energy resources online in a timely manner to be able to be sure that we have enough capacity to serve loads especially here on Oahu as we see the next year's retirement of the AES coal plant at the end of the year. That is the situation that the commission has flagged as the urgent situation. Similarly on Maui, as we think about in the coming years retirement of the Kapolei power plant same situation bringing on additional new resources in a timely manner so that we can smoothly transition and shut down these plants. Like I said that is being addressed in the interconnection docket. We are actively working with all of the renewable energy project developers on trying to help them maintain schedule. So that is happening in parallel to these discussions that were started in terms of the PBR PIMs. So going to that discussion about these new PIMs, I think what's important is that the PIMs or maybe the PBR framework, as it was initially designed and established, it involved a very, very good collaboration, between the regulators, between the utility and many stakeholders. And as we continue to dialogue about the additional new PIMs that maybe added, what we really see is that that collaborative effort really needs to continue. In our comments on the staff proposal coming from the PUC, we flagged that, hey, let's make sure that we have the appropriate chance to talk about the issues. These are complex issues. We are in fact addressing them, like I said in a separate proceeding and direct dealings with our independent power producer developers. So going to the PBR PIMS, we are just basically -- we are fully engaged. We understand the commission's concerns. We understand the objectives. But at the same time, we also want to be sure that the PBR framework is given the chance to succeed, because so much good effort was put into that in the original design.

All that makes a lot of sense. I guess what I'm a little bit confused by is that the issue on the interconnection seems to be rather a technical issue. It doesn't seem to be that -- I guess intuitively that that leads that there's an incentive issue here. Like in other words, you guys are just not incentive -- or there's not enough of an incentive to deal with this as opposed to just sort of the blocking and tackling of the legalistic sort of issues that are associated with it. Do you follow what I'm saying? I guess that's what sort of surprised me by the...

Yeah. No, I would say this. I'd say the current set of PIMs that we have, including for example RPSA, including the interconnection PIMs, I mean we have incentives in those PIMs. So there is no reason why we would want to stand on or sit on any of these projects. And in fact, even in our announcement today about our carbon-reduction commitment, for us, it really is that all paths lead to acceleration of renewable energy projects getting these projects interconnected and so on. So, we believe that that's -- I think that's appropriate. And we – again, we want to make sure that we are adequately addressing the commission's sense of priorities and certainly showing urgency. So we think we're aligned. I think where we have expressed concerns in our comments is that, let's again, not put PIMs in which are perhaps counter to what we're all intending to achieve.

Okay, great. And then, there's -- I guess still to be determined I believe that the non-wires alternative PBR PIM stuff and the renewable procurement. Where do we stand on that I guess? And I mean I think that's separate from this stakeholder stuff that we just discussed. If I'm wrong correct me. It's sort of hard to follow all. But, when might we get that? And do you see any potential upside or impact one way or the other regarding those PBR things?

The commission made clear when they issued the D&O for the PBR framework that they wanted to have the ability to consider new PIMs going forward. Case-by-case, as new priorities get added or -- remember there were a bunch of additional issues that were flagged in the original PBR proceeding that were decided that for now let's try and track and better understand how they work, for example, resilience, electric transportation. So I would say that those particular issues that you asked about fall into that bucket. We fully expect that over the course of time, there will be more discussion about what a correct and adequate PIM might be for non-wires alternatives and so on. So, I would say it's on deck and more to come.

Okay. Fair enough. I'll leave it there and have a great -- congratulations again to everybody. Take care.

Thanks Paul.

Thanks Paul.

Thanks Paul.

Thank you, Paul. As we have no further questions on the line, I would like to hand it back to Julie to close. Oh, we have another question on the line from Jonathan Reeder of Wells Fargo. So, please go ahead, Jonathan.

You maybe get fire [ph].

Yes.

Yeah, sorry all of you. Just maybe Greg, I missed your direct explanation. But what's changed your expectations of the utility now being at the midpoint or slightly above guidance versus the lower half before? Is it lower reliability PIM penalties or better delivery of the cost savings? What's changed there?

Yeah. Well, the year-to-date performance has clearly indicated that we're on track. We felt the need to certainly narrow the range and as we gain confidence around their ability on the -- we've been tracking the efficiency for some time and we had confidence that that would be achieved but there is some volatility in the potential PIMs that you have to track and account for and just other elements. So as it all pulled together, we took a fresh look at it for the quarter, deep consultations with Tayne, Scott and team as well. They are tracking well and in line with plan and probably slightly ahead. We had some minor wins on the upside on in the tax R&D credits some other things that came through, that just pushed us over the line there.

Hey Greg, this is Tayne here.

Yes please.

I wanted to add a couple more points to what Greg mentioned. And we talked in the prepared remarks about the completion of the restoration of the substation. And so, we are looking at our reliability PIMs. And probably looking at a slight improvement over what we had originally forecasted. So that is one item. The other item is, as we continue on our cost efficiency plan, which include looking at how we schedule and plan our work, manage the resources to get it done in terms of our staffing count all of those things, that's also providing some of that benefit to being above the midpoint on the EPS.

Okay. And then, Tayne is the fuel cost sharing PIMs is that expected to kind of be maxed out at the highest level given the rise in global energy costs in oil?

Yeah. So let me comment a little bit about that. The way we record the fuel cost risk-sharing mechanism impact is there is an amount that is accrued every month. So we've got nine months of the full year impact embedded already in our earnings. To-date I will say that, because of rising fuel prices we have an amount of penalty if you will already reflected through the third quarter. For the fourth quarter we do expect a little bit of up-tick in our fuel prices. And we've baked additional penalties in our guidance, but I don't expect the full amount of penalty to be recorded for the year. But again, I did want to emphasize the Q4 forecast is already embedded in our guidance.

Okay. No that's very helpful. So -- all right, I'm going to leave it there. And save the rest of my questions for EEI. Looking forward to see you guys there, we'll have your going away party there, Connie, I guess.

Thanks Jonathan.

We'll see you then.

Thank you. We have no further questions on the line, so I will hand it back to Julie to close.

Thank you all for joining us today. Please reach out should you have any further questions. Mahalo again Connie, for your leadership, and of course congratulations on your last earnings call. Thanks everyone. Have a great weekend. And see many of you at EEI.

Thank you. Ladies and gentlemen, this does conclude the Q3 2021, Hawaiian Electric Industries Earnings Conference Call. Today's call has now concluded. Please enjoy the rest of your day.