Good afternoon. Thank you for attending today's Q2 2022 Hawaiian Electric Industries Inc. Earnings Conference Call. My name is Tania and I will be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. [Operator Instructions] It is now my pleasure to pass the conference over to our host, Julie Smolinski, Vice President, Investor Relations and Corporate Sustainability. Please proceed?

Thank you, Tania. Welcome everyone to HEI's second quarter 2022 earnings call. Joining me today are Scott Seu, HEI's President and CEO; Paul Ito, Interim HEI CFO; Shelee Kimura, Hawaiian Electric President and CEO; Ann Teranishi, American Savings Bank President and CEO; and other members of senior management. Our press release and our presentation for this call are available on 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, Scott will begin with his remarks.

Greetings everyone. Thank you for joining us today. We're pleased with our consolidated second quarter earnings of $52.5 million and earnings per share of $0.48. Our earnings reflect solid results at the utility, which continues to perform well under the performance-based regulation framework. While we've continued to see the higher O&M expenses we mentioned on last quarter's call and which we'll discuss further shortly, we expect to remain within our utility guidance range for the year, albeit within the lower half of the range. The bank had a good quarter as well, benefiting from strong loan growth and the higher rate environment. With the bank's loan growth, the quarter also saw a return to a more normalized provision expense following five consecutive quarters of negative provision. While this reduced the bank's results versus the prior year and linked quarters. This was consistent with dynamics anticipated for this year. Overall, we are reaffirming our consolidated guidance range for the year. Taking a closer look at recent utility developments; together with government agencies, regulators, developers and other stakeholders, we're making great strides in our clean energy transition. We're approaching a major milestone, the end of coal in Hawaii, a key action in our climate change action plan. The retirement of state's last coal plant is on track for September 1. The state's largest solar plus storage project came online, July 31. Two more solar plus storage projects are slated to come online in the next few months and the commission recently approved the last Stage 2 Solar Plus storage PTA [ph] that was awaiting decision. The Commission also asked us to consider adding solar to our proposed battery storage project on Maui and we're working on a proposal to do so. In addition, the Commission indicated it may reconsider our proposed Hawaii…

Thank you, Scott. Hawaiian's economy remains healthy and we believe it is well positioned to grow some of their economic headwinds we are seeing. Tourism arrivals have continued to strengthen and in June, we're close to 90% of pre-pandemic levels. Total domestic passenger accounts year to date through July 2022 were very strong, over 11% higher than the total domestic passenger accounts year-to-date through July 2019. International arrivals, which traditionally account for over a quarter of our total are still well below 2019 levels. International tourism is picking up however and will serve as an additional tailwind for our economy. Japan is a key source of tourism for us and in June we saw the highest level of Japan arrival since April 2020. Arrivals from Canada are now approaching pre-pandemic levels and arrivals from other international markets are also higher than last year although still well off of pre-levels. Visitors are also spending more June on visitor expenditures 12% above 2019 levels? Hawaiian's housing market has historically been strong compared to the main strength this year with housing prices hitting records in multiple months and inventory remaining tight. Our housing market has performed well on a relative basis through downturns. From 2008 through 2011, the decline in single family home prices in Hawaii was less than half the Mainland average. This housing market stability, which is the result of limited supply and attractive location contributes to our bank's strong credit quality as 85% of the bank's portfolio is real estate secured at conservative loan to value levels with a weighted average loan to value on a residential portfolio of less than 50% and on our commercial portfolio of less than 58%. Hawaii unemployment has also fared comparatively well during downturns. During the great financial crisis, Hawaii's unemployment rate peaked at…

[Operator instructions] The first question comes from Julien Dumoulin-Smith of Bank of America. Your line is open.

Excellent. Hey, good afternoon team. Thanks so much for the opportunity here. Appreciate it. So thank you. Maybe just to kick us off here, you saw a moment ago to quote you right, you expect utility earnings to lower end of the range with upside from PIMs. Can you discuss the PIMs upside potential here, just considering the commentary from earlier in the remarks with respect to the fuel cost and how those potentially impact your PIMs expectations along with the rewards from interconnect. I just want to understand exactly what's reflected in guidance and how that upside from PIMs could materialize at this point. If you can speak to it a little bit, some puts and takes.

Yeah. I'll start off and then I'll pitch it over to Shelee and team at the utility. But that statement, as you recall, we're referencing the '22 through '24 earnings grow and whereas we are definitely seeing some PIMs headwinds this year, we are still looking at a potentially robust RPSA PIM in the years, '23 and '24 and then as far as the field cost sharing PIM, yes, we are in particular being challenged this year because of the high fuel oil prices, but like everybody, we are expecting that to moderate as we go forward. But let me ask Shelee and team if they want to add onto that.

Yes, you got that right, Scott. Hi, Julian. This is Shelee Kimura from Hawaiian Electric. So sorry, just taking off my mask here while still in COVID world. So the comment on the upside for PIMs really is talking about the longer term outlook, as Scott indicated for 2022, we're really not expecting to be able to hit the PIM for RPSA. And that's where we get the greatest potential, but going forward and this is because of, all of the delays we've had because of supply chain and tariff impacts all the things that you probably know about very well. We've have to push back the in-service states for many of our renewable projects. So that's also pushing back our RPSA earning potential and that's where we see the upside going forward.

Got it. And can you guys remind us just how that resets here with respect to the fuel year-over-year beyond '22 and the '23, '24 period.

Yeah. Can you just clarify your question when you said fuel?

Just how should we think about the elevated fuel cost cascading into '23, '24, again, net of these other factors that you just described? If we can try to quantify a little bit more, obviously it's been a headwind this year, but how do you think about it in the next year, even if it's moderating, if you will.

Yeah, well, several factors; fuel is going to be somewhat unpredictable. We're expecting the impact for our customers to be up right now. But we do -- we are hopeful that it's going to come down in 2023, but of course, nobody has that crystal ball. The other thing is that our fuel levels will get reset and that is in January. And then I'll ask team to add to that.

Hi Paul, this is Dane. Just a quick summary of how the fuel cost risk sharing mechanism works. In each January, a base index price is set for that fuel cost risk sharing mechanism, and depending on where prices go during the year up or down, it determines how much we would have in terms of a penalty or reward. So really the prices are going to be set. In 2023, January 2023, will be the base index. Does that make -- does that make sense, Paul?

Yeah, absolutely. Right. What is a decrement this year could contribute to upside in subsequent periods, especially considering the reset period with the order here for the PIMs period '23. In some respects, what I was trying to get at earlier about, what the puts and takes here in future periods as well, right? The extent of moderation could be a positive contributor next year.

Sorry. What I was going to add was that so essentially as Dane was describing in January, is when it will be reset, right in terms of the fuel price index and then as we would expect to see if field prices are able to decline as we get into 2023, then that actually is a benefit for us. So it has gone -- depending on the year and depending on what the January field prices are, that's going to determine whether or not that's a positive upside for us or a negative.

Right. And maybe to bring everything together super quickly here, as you think about that '24 period, you've got a 5% number out there in terms of growth. What is the hypothetical upside from PIM's considering this new order and just the outlook today, if I could tie it all together here.

Yeah. Julien, this is Dane. Yeah. I'll take that question. We do have some guidance on the RPS-A PIM in the materials that provides the biggest opportunity there. So you can see the ranges we have for 2023, between $2 million and $6 million, and then in 2024 between $5.2 million and $8 million. But in addition to that, we also have a summary of our PIM and there are PIMs as the grid services PIM the interconnection PIM, which, all provide some upside there. And, the other thing that we also didn't talk about here is, there are some new PIMs that potentially could be effective in 2023, awaiting a PUC, a decision on the effective date of those new cams PIM but, there are some upsides there for the collective shared savings mechanism as an example.

Right. Numerous pieces moving here. Thank you guys very much for your patience. Appreciate you guys walking through this. I know there are a lot of pieces.

Thank you. Our next question comes from Paul Patterson, Glenrock Associates. Please proceed.

Okay. So I apologize if I missed this, but the Inflation Reduction Act. Could you guys, and I apologize, I didn't hear much about it. I'm afraid. What do you guys think about it generally speaking?

Yeah. So, generally speaking, and I'm sure you're hearing from other utilities along the same lines, we see a lot of potential upside, especially with respect to the tax credit provisions, very, very supportive of our renewable energy strategies and projects and ultimately that will benefit our customers as well. So good legislation. The additional tax provisions actually do not look like they would impact us just because we would fall below the threshold but overall it looks like a positive piece of legislation. But let me ask if Paul or anybody else wants to provide some additional color.

So yeah, as Scott mentioned, we're very pleased by the progress that is being made to tackle climate change with the Senate approval yesterday. Obviously we're still evaluating the bill. We're not at the finish line yet, but as Scott mentioned, we're very pleased with the Clean Energy incentives that will further incentivize Hawaii's transition to 100% renewable, which will again, as Scott mentioned, lower cost for our customers, but also accelerate the utilities progress in achieving its aggressive climate action plan. The one provision as Scott mentioned that a lot of utilities, we're focused on outside of the incentives, of course, was this minimum tax, and because we're well below the, the threshold, we won't be affected by it, but there are a lot of provisions on the tax credit side that, we're hoping that will benefit the broader community, but also the low to moderate income segment of our population. So obviously there's a lot there for us to go through, but we feel very good about this new bill.

This is Shelee. How are you? I was just going to add that as you heard, we have hundreds of megawatts that we're seeking and RFPs that are coming up of renewable energy and so this will really help lower cost for our customers as we go through this procurement process. And that's what we're hopeful for. It really depends on the timing of when that comes in and the timing of our RFPs and the bids that come through.

Okay, great. There, was one of the PIMs that you mentioned one of the newer PIMs is this generation reliability one, is that only for company owned generation, I would assume, or does that also involve PPAs?

That is only for generation, right? I'm sorry, go ahead, Shele. Go ahead Shelee, you can clarify.

I'll let, Colton answer that.

Good morning, Paul, this is Colton Ching from Hawaiian Electric. Yeah. So the generation PIM reliability PIM encompasses both utility owned as well as third party IPP generation performance in total. But as Scott mentioned, it is for generation caused events separate from the existing or the, the previous transmission and distribution PIM that we currently have.

Okay. So the reliability of third parties, you will be incentivized to, I guess, make sure that they're performing. Is that the idea? I guess slight concern might be, is that start completely in your control I would think. Or how should we think about that?

Yeah. So, Paul, it is a different way, right? In which we'll need to manage the performance and reliability of independent power producers. But, because of Hawaii situation where our IPPs are long term partners with us, we have for many years now have had contracts with quite critical performance requirements in how we manage the reliability and operation of those facilities as well as having the right kinds of partnerships with our IPP, so that they too understand the role that they have in keeping Hawaii's grids, reliable. The reliability also comes from how our system operators dispatches the entire fleet of generation, the combination of independent power producers, as well as our units as well.

Okay. Well thanks so much for the info and have a great one.

[Operator instructions] As there are no further questions in the queue, I would like to pass it back to the management team for any closing remarks.

Thank you everyone for joining us today. And please do let us know if any further questions come up later on. Have a great week. Thanks.

This concludes the queue 2022 Hawaiian Electric Industries, Inc. earning conference call. Thank you for your participation. You may now disconnect your line.