Good afternoon. Thank you for attending today's Full Year and Q4 2021 Hawaiian Industries Incorporated Earnings Conference Call. My name is Amber, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with the opportunity to questions and answers at the end.

[Operator Instructions] I would now like to pass the conference over to our host, Julie Smolinski, Vice President of Investor Relations and Corporate Sustainability with Hawaiian Electric Inc. Julie, please proceed..

Thank you, Amber. Welcome, everyone, to HEI's Full Year and Fourth Quarter 2021 Earnings Call. Our press release and the presentation we'll review on this call are available in the Investor Relations section of our website. During today's call, we'll be using certain non-GAAP financial measures to describe our operating performance.

Our presentation contains reconciliations of these measures to the equivalent GAAP measures. 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 Seu, HEI President and CEO, will begin with his remarks..

creating customer value, strengthening our foundation and building a stronger Hawaii. We created customer value on several fronts in 2021. We delivered $8 million in customer savings from cost efficiencies and supported customers who faced financial challenges during the pandemic.

We did this through bill relief programs, including a $2 million bill credit program; extended and deferred payment plans; and facilitating customer use of government assistance.

We also launched programs giving customers more options to benefit from the clean energy transition, including battery bonus to incentivize customer-owned energy storage; and Quick Connect to enable customers to interconnect solar and battery systems to the grid faster.

This work also helped us earn a financial award under our interconnection experience performance incentive, a win-win-win for customers to fight against climate change and the Company.

We've worked on strengthening our foundation for a while, including working with the Public Utilities Commission and stakeholders to create the new performance-based regulation, or PBR, framework, which we successfully transitioned to in June.

Our focus now is on continued execution under PBR to advance operational efficiencies and customer and clean energy initiatives. Our workforce and culture, which are critical to our success, were also a focus in 2021.

We implemented new programs for leadership development, continue to promote equity and inclusion within our diverse employee base and successfully concluded negotiations with our union leading to ratification of a new three-year contract. All of this supports our work to build a stronger Hawaii.

In 2021, we showed continued climate leadership, committing to reduced carbon emissions from power generation 70% by 2030 compared to 2005 levels and to reach net zero or better by 2045. We achieved a renewable portfolio standard of 38.4%, putting us well ahead of schedule to reach Hawaii's statutory goal of 40% RPS by 2030.

And with our customers, we reached 1 gigawatt of installed solar capacity, mostly customer-owned. That's a major milestone considering the peak load of our five island system is about 1.6 gigawatts.

We made great strides in our electrification of transportation strategy as well, which is crucial to decarbonizing our economy and reducing the per unit cost of energy for customers.

Our eBus Make-Ready and commercial EV charging rate pilot programs have now been approved and we filed an application to dramatically expand our public EV charging network. We'll build on this momentum in 2022.

We will eliminate coal in Hawaii this fall when the AES coal plant contract expires, and we have a diverse portfolio of measures to support reliability when that happens. We're working with developers, state and county government and community members to move renewable energy and storage projects forward as quickly as possible.

Like others in the industry, we've seen some delays due to global supply chain dynamics and inflationary conditions. We're committed to our goals, and you'll see us continue to procure additional clean energy resources in the future to meet them.

In 2022, we remain focused on operating within the PBR framework with an ongoing emphasis on cost efficiency.

We'll continue to work collaboratively with the PUC and key stakeholders in the ongoing process to develop additional performance incentive mechanisms, and we'll soon be filing a significant resilience strategy that will seek cost recovery for under the Exceptional Project Recovery Mechanism, or EPRM.

American Savings Bank has performed very well through the pandemic, demonstrating the value of its conservative management approach, good credit quality and low-cost funding base.

It continues to produce solid earnings that provide efficient capital to support a consolidated investment-grade capital structure and growing dividends to HEI shareholders. The bank's solid 2021 financial performance was matched with robust execution on a number of strategies and initiatives.

Customers' reliance on online and other self-service options grew dramatically through the pandemic. We aggressively accelerated our anytime, anywhere banking transition to meet their needs.

In 2021, we executed on several projects to expand customer options and our capabilities, including completing our ATM refleet, opening four new digital centers, the first of their kind in Hawaii; and implementing more online and remote functionality.

We also implemented the second and third rounds of Paycheck Protection Program, or PPP, loans; achieved mortgage production volume of $1.2 billion, on par with our record in 2020; and grew our commercial real estate loan portfolio, all while continuing to support our community and local economy.

As Greg will discuss further, in 2022, we expect a reset of bank earnings after the last two pandemic years, which created some volatility with respect to reserves for credit losses. We expect provision for credit losses to resume in 2022 with anticipated growth in loans.

The outlook for Fed rate increases is promising and is expected to benefit our margin as our balance sheet is asset sensitive. In 2022, the bank will continue to focus on its digital transformation to position itself to compete and grow in the future. I'll hand it off to Greg now who will review our financial results and earnings guidance..

first, the annual revenue adjustment or ARA, which covers baseline O&M and CapEx through an inflationary adjusted adjustment minus a customer dividend. Additionally, we've achieved the $6.6 million in committed annual savings under the management audit, which are now reflected in rates.

The ARA provides us with predictability on baseline revenues and flexibility to manage O&M and CapEx within the ARA during the rate case stay-out period. Second, separate recovery mechanisms for eligible O&M and capital projects, providing recovery above the baseline levels covered by the ARA.

And third, performance incentive mechanisms, which provide opportunity for additional rewards if we achieve preset goals. In 2022, we expect, together with the PUC ARA approved minus the management audit savings, to provide a net $23 million in revenues during the year.

The accrual for the ARA started on January 1 rather than June 1 under the previous framework, so we expect this to eliminate 20 basis points of lag on ROE. With respect to separate recovery, we'll be accruing $23 million in revenues during 2022 for projects that have been approved by the PUC.

This is under the exceptional projects recovery mechanism, or EPRM; and the major project interim recovery mechanism or MPIR. Additional revenues are possible for EPRM-requested projects that have been filed under pending commission decision.

We expect these two mechanisms, the ARA and separate recovery mechanisms, based on planned investments as approved will result in an average annual utility earnings growth of approximately 5% from 2022 through 2024.

We expect moderate growth in contributions from performance incentive mechanisms in 2022, primarily coming from the achievement of RPSA and interconnection experience and grid services incentives. Combined, we estimate $2 million to $4 million from those PIMS this year with potential upside from the RPSA. Other PIMS are less estimable at this time.

And in the appendix of the slides we've provided today on Slide 21, we've added some additional color on each. Turning to Slide 10, you will see we invested $302 million in CapEx in 2021.

That was lower than our initial outlook which you'll recall we adjusted during the year due to productivity improvements and efficiencies that reduced certain project costs, delays related to a prolonged substation outage that has been resolved, but limited work we could do on other parts of the system during the year and some supply chain delays due to the pandemic.

Our CapEx outlook for 2022 is $350 million to $400 million, mostly comprised of baseline CapEx covered by the ARA mechanism. We expect the ARA baseline CapEx to be approximately $300 million to $320 million annually from 2022 through 2024.

With respect to separately recovered CapEx, the higher end of the ranges for 2022 to 2024 include projects for which we are awaiting PUC approval, including our Maui and Hawaii Island battery energy storage projects, full meter deployment of our grid modernization Phase 1 project and our public EV charger expansion project and, additionally, our soon-to-be-filed resilient strategy.

Turning to the bank on Slide 11. ASB's significant increase in net income over 2020 was primarily due to improvement in credit trends and economic -- and the economic environment. That drove $25.8 million in negative provision for credit losses for the year compared to a provision of $50.8 million in 2020.

Higher net interest income on expansion of earning assets also contributed to the bank's solid 2021 results. These factors more than offset lower non-interest income and higher expenses.

The lower non-interest income reflected lower gains on sale of mortgages as we elected to add more to our mortgage -- of our mortgage production to our portfolio in 2021 and a onetime gain on the sale of certain visa securities in 2020.

Higher non-interest expense was primarily due to higher incentive compensation costs, reflecting the bank's strong 2021 performance as well as investments in the digital transformation.

While lower interest rate environment impacted net interest margin in 2021, net interest income still grew due to strong deposit growth and drove average earning assets higher by 11.4%. ASB's full year 2021 net interest margin was 2.91% compared to 3.29% in the prior year.

PPP fees and record low funding costs helped offset some of the effects of the low interest rate environment and continued excess liquidity. The average cost of funds remained at record lows, 6 basis points for the full year and 5 basis points for the fourth quarter. Our projected outlook for 2022 net interest margin is 2.7% to 2.85%.

This reflects the current interest rate environment and the fact that we've already realized the bulk of remaining PPP fees. We would expect -- we have an asset-sensitive balance sheet, and we would expect about 9% of our book to re-price quickly following initial Fed rate increases this year.

Approximately 3% of our book is currently at floors and rates will need to increase above those floors before we see the benefit on margin from further rate increases. The rest of our book would reflect rate increases more gradually over time. In 2022, we expect continued solid profitability from the bank.

While some of the tailwinds that benefited us in 2021 will taper off in the year, we're starting to see -- we're starting in a good place. This -- on Slide 13, this slide walks us through key differences that we expect compared to 2021. As mentioned, we realized most of the PPP fee income last year with approximately $3 million left in 2022.

We expect a resumption of provisioning for loan losses in 2022 as we see more loan growth. Our negative provision in 2021 reflected significant improvement in economic conditions during the year compared to the economic uncertainty we had in 2020.

While our reserves are based on credit risk in the portfolio and the potential impacts of COVID are not yet over, we do expect further economic recovery in 2022.

At the same time, we're starting 2022 with a larger earning asset base of over $8.5 billion, giving us a stronger platform from which to invest the bank's capital in a rising interest rate environment.

Like at the utility, the bank is also very focused on efficiency, and that is expected to help keep bank operating expense increases moderate even while investing in its digital transformation. On Slide 14, our financing outlook for 2022 reflects our strong financial condition and solid dividends from both the utility and the bank.

HEI's consolidated capital structure and liquidity remain strong. Our cash distributions from both the utility and bank are projected to increase in 2022. Given those cash flows and our debt issuances and re-financings in 2021, we do not expect to need external equity the rest of the year and anticipate minimal debt issuances.

Our strong earnings and cash flow outlook allow us to maintain a conservative capital structure consistent with an investment-grade credit profile and supportive of a growing dividend. Please note on this slide that incremental Pacific Current investments are not included and would be announced once approved and under contract.

On Slide 15, we're initiating our 2022 consolidated earnings guidance range of $2 to $2.20 per share. Our utility guidance of $1.68 or $1.78 per share assumes full recovery of COVID-19-related deferred expenses. At year-end, we recorded approximately $28 million of COVID-related costs in the deferred regulatory account.

We plan to request recovery of those costs in the first half of the year. Based on current economic conditions and trends in customer payments, we do not expect to request further deferral beyond 2021 but would consider making such a request if conditions warrant.

We expect adjusted O&M excluding pension, to remain within the ARA inflationary-adjusted levels. I've already covered our expectations for 2022 regarding CapEx and moderate contributions from PIMS.

We expect average annual utility earnings growth of about 5% from 2022 to 2024 based on ARA and separate recovery mechanisms with the potential for PIM achievements to enhance earnings growth and realized ROEs beyond that level.

Our bank's guidance of $0.59 to $0.68 per share reflects continued solid profitability, which we've seen throughout the pandemic and a reset of our earnings expectations given the resumption of provision and a recovering but still COVID endemic economy. Our base case assumes 4 Fed rate increases and our guidance range accommodates further increases.

It also accounts for inflationary impacts to expenses, which we continue to manage through cost efficiencies, including our branch optimization strategy. We expect low single-digit earning asset growth and net interest margin of 270 to 285 basis points. We expect holding company losses to be consistent with 2021 levels despite higher inflation.

And we are targeting long-term dividend growth in line with earnings growth and a dividend payout ratio range of 60% to 70%. Scott will now make his closing remarks..

Mahalo, Greg, and Mahalo to all of you for joining us today. We're proud of our performance for our customers, our community and our shareholders in 2021, and we look forward to building on this momentum in 2022. With that, let's open up the call for questions..

[Operator Instructions] Our first question comes from Ryan Greenwald with Bank of America. Ryan, your line is now open..

Can you talk a bit more about what drives net interest margin to decline year-over-year? Appreciate the color around re-pricing of the portfolio and the 4 Fed rate increases embedded than guide, but any general sensitivities you could provide around the varying magnitude of rate hikes that might materialize here?.

Sure. And we'll hand that off to Dane Teruya, our CFO at the bank..

Hi, Ryan. So for the fourth quarter, our margin was 2.79%. And so the 2.91% was an average for the 2021 year. So, we're starting the year a little bit lower on the lower end of the guidance range.

So what our margin guidance range anticipates is four rate hikes, and obviously, we would benefit more on additional rate hikes beyond that if it were to materialize. Our balance sheet is asset sensitive. And so we have a bunch of loans and assets that will re-price upward as rates are higher throughout the year..

Got it.

On the increase in fuel cost of late, how do you guys think about that potentially leading to an acceleration of any generation strategies in the state? And any opportunity here for repowering of the AES plans at this point?.

Yes. Ryan, this is Scott. I'll start but open it up to Shelee Kimura and the utility team to add in as well. But in general, the fuel cost increases the volatility, especially -- I mean, it just fits in with the long-range plans for Hawai'i that we've been on for quite a while. We are chasing, getting off of fossil fuels as aggressively as we can.

I think that there continues to be significant progress made, and we are ahead of goal with respect to the renewable portfolio standard. So I believe that seeing the fuel volatility will just continue to put the focus here in Hawaii across the board to continue that progress.

I don't expect any material changes in policy other than keep going as aggressively as we can. And I would say that here in Hawaii, we've been doing that pretty consistently over the past several years. As far as the AES coal plant, whether or not that could be repowered, that did come up as a possibility in discussion last year.

But at this stage, the utility actually has plans to initiate a firm renewable RFP this year. And any types of optionality for that AES plant would have to be within that framework. So, I'm not saying one way or the other whether or not that will be feasible. If ultimately it rises as a good option, then we'll consider it..

Scott, I think you covered that well, nothing to add..

Thanks, Shelee..

Our next question comes from Paul Patterson with Glenrock Associates. Paul, your line is now open..

Can you hear me?.

Yes. Yes..

Just quickly on the, a couple of things. First of all, the PIM outlook for the RPSA rewards. It looked like you guys scaled it down a little bit maybe then from what the last numbers I saw on Slide 22. And I was wondering what's driving that..

Yes, Paul, I'll let Shelley fill in the blanks here. But in essence, this reflects the latest expectations we have for some of the renewable projects that are in the development pipeline.

One of the things I mentioned earlier on the call was that we are starting to see some impacts of supply chain delays, some inflationary challenges to some of the projects. So what we are doing is just updating our anticipated commercial operation dates for some of the projects.

So what that does is, of course, if a project is pushed into later commercial operations in the year, we're seeing less renewable energy come into play in the near term, and that, of course, directly impacts the amount of RPSA PIMs that we achieve..

Okay. Fair enough. And then on the action experience -- sorry, go ahead..

Paul, this is Shelee. I hope you're well. I would just add to that, that I think one of the good things that have come out of this because of the supply chain challenges that we're all seeing, there's been a really positive rallying of many stakeholders to try and make sure these projects get done.

So the governor put together the powering pass coal task force, and that includes many representatives from government as well as all of the independent power producers and ourselves. And I think it really creates a a positive model going forward for Hawaii in terms of all the different players that have a part in ensuring these projects get done.

So that is the positive side of what's come out of this situation..

That's great. And I just was wondering, I apologize if I sort of just don't know this, but what is the interconnection experience as far as -- I mean, what does that actually mean? Is that just a question of timing? Or when you guys have improved it, and obviously, it was a benefit for you guys.

What did you guys do the -- how is the experience so much better? I guess what does that mean actually?.

I can take that one, Scott. I think you're talking about the PAM, Paul. And so that one is based on number of days it takes us to complete the review process on our end.

And so it looks at all the steps that are in our control, and we've been able to significantly reduce the number of days it takes for a customer to be able to energize their DER system. So this is focused on rooftop solar and distributed energy resources. This is not the utility scale resources.

And we've been able to do that through changes in process also making sure that each division in our company that has a role in this has their respective goals to achieve in terms of days.

Consistent monitoring on the number of days that it's taking within the process every week and reprioritizing work to make sure that we're achieving the goals that have been put in front of us..

It seems that depreciation increased significantly because of investments to integrate more renewable energy. How do you see that going forward in 2022? I apologize again if I missed it..

I'm going to ask Tayne to respond to that one..

Tayne, you want to take that?.

Okay. Go ahead..

Tayne?.

Paul, this is Tayne. In terms of the depreciation expense, we do have some investments related to our integrating more renewables, which also include making sure that we have a reliable grid looking forward. In addition to that, we do have other projects actually in the hopper to afford those renewables.

And those include things like our grid modernization strategy. And then also things that are waiting at the commission relate to a couple of utility build battery energy storage projects that we're awaiting approval.

So depreciation for our capital investments include not only our own utility build renewable sources but also the infrastructure needed to accommodate additional renewables.

Does that answer your question, Paul?.

Yes, I think I got it. And then just finally on the PPP income, it sounds to me like it was -- if I understood it correctly, it's $3 million that you anticipate for this year. And that will probably pretty much finish it.

Is that correct?.

Paul, this is Dane. Yes, that is correct..

There are currently no further questions registered at this time. [Operator Instructions] There are currently no questions in queue. So, I will hand the conference back over to our management team for closing remarks..

Thank you very much, Amber, and thank you, everyone, for joining us today. Please do reach out if you have any other questions, and have an excellent week..

That concludes the full year and Q4 2021 Hawaiian Electric Industries, Inc. Earnings Conference Call. You may now disconnect your lines..