Q3 2020 Hawaiian Electric Industries Inc Earnings Call

Good morning, and welcome to the Hawaiian Electric industries, Inc. third quarter 2020 earnings call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero after.

After todays presentation, there will be an opportunity to ask questions.

Good question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded.

I would now like to turn the conference over to Julie Smolyansky Director of Investor Relations. Please go ahead.

Thank you Eileen.

Welcome everyone to Hawaiian Electric industries third quarter 2020 earnings call joining.

Joining me today are Connie Lau, H., <unk>, President and CEO, Greg Hazelton, H.I. Executive Vice President and CFO, Scott to Hawaiian Electric President and CEO Rich Wacker American savings Bank, President and CEO and other members of senior management.

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 FCC filings and then the Investor Relations section of our website now.

Now Connie will begin with her remarks.

Hello, everyone and mahalo for a day and for joining us today.

We hope you were safe and well.

I've been deeply impressed by the dedication of our employees and the resilience of our customers and communities as we all adapt to the result is the ongoing challenges of COVID-19.

Our core strengths continue to serve us well in these unprecedented times.

That includes our long history of providing a central services for the state of like E strong liquidity stabilizing utility regulatory mechanisms.

Our banks conservative approach to risk, it's low risk loan portfolio and strong capital position.

In the third quarter, our financial stability enabled us to continue helping our customers our economy and our communities and again to deliver solid financial result.

Net income of $65 million and earnings per share of 59 cents compare.

Compared to $63.4 million and earnings per share of 58 cents in the same quarter last year.

I'll start with an update on the virus and economic conditions in Hawaii before turning to an update on our company.

Then Greg will you our financial results and outlook.

Well there is still uncertainty regarding the course of the virus and the timing of economic recovery, we've seen some positive signs.

First daily New Cobot cases are down significantly from the surge we saw this summer.

The seven day average of new cases is down to 92 with about a 2% positivity rate. After a second stay at home order on Oahu starting in late August.

Oh I was local economy largely reopened in late September under a tiered framework and since then we've been able to move to the second tier, allowing more business activity.

On October 15th Hawaiis tourism sector reopened with a program, allowing domestic travelers with a negative coven test to bypass the 14 day warranty.

Since then we've seen an average of 5600 arrivals per day up from roughly 2000, a day that we saw before the 15th.

Starting today. This program also includes travelers from Japan.

What he is working to extend it to other countries.

Well the tourism reopening is encouraging the timing of a sustained reopening depends on how the virus plays out.

The federal government and military our second largest economic driver helped maintain stability throughout the cogan period.

Residential real estate values have also remained strong year to date September Wahoo single family home prices were up 3%, 3.3% and compared to the month of September last year, Wahoo single family home prices were up more than 13% driven by.

Low inventory and low interest rates.

The latest forecast from the University of Hawaii, Economic Research organization or you hero Who's outlooks have informed our own estimate.

Project <unk> economic recovery, starting in Twentytwenty, one and accelerating into 2022.

Turning to our company keeping.

Keeping customer rates down has been a central focus for our utility.

That began before the onset of coated and remains a core priority.

Fortunately customers have seen some bill relief this year lower.

Lower fuel costs, and a lower revenue balancing account component from higher than projected electricity sales last year meant that enter wahoo residential customer using 500 kilowatt hours of electricity in the October page, 13% less than in March.

The commission has extended the suspension of Disconnections for nonpayment through year end.

We continue working with customers on repayment options and connecting them with services to help them through this time, including with utility bills.

Last month, the commission approved our settlement with the consumer advocate to not increase base rates in our Oahu rate case.

In approving the settlement the commission maintain to walk Hawaiian electric current allowed return on equity of nine and a half a percent and 58% equity capitalization.

Lifted the 90% cap on Schofield generating station project cost recovery.

Ended the 2017 rate case customer benefit adjustments.

And deemed the enterprise resource planning system benefits commitment to be flowed through to customers as part of the zero base rate increase.

To help offset the lack of a base rate increase and deliver on our commitment to ramp up to $25 million and customer savings by year end 2022.

Our utility is executing on its multiyear efficiency improvement program, which began earlier this year.

While we pursue cost efficiencies were also pressing forward aggressively on our clean energy goals.

We're on track to exceed the Twentytwenty Rps milestone of 30% for the year.

Since the Rps calculation divides renewable energy by sales lower.

Lower sales due to covance temporarily pushed our rps above 35% as of the second quarter.

Electricity sales expected to increase in the fourth quarter, we expect our P.S. to moderate but still exceed 30% by year end.

In the next few years, we anticipate strong rps growth from our major renewable energy and storage procurements.

In the third quarter, we filed eight purchase power agreements for renewable energy and storage projects.

And to self build storage applications as part of our stage two procurement.

Two of the projects selected in that procurement are still under negotiation.

Last month, the PSC approved the eighth final P.A. from our stage one procurement for a solar plus storage project on Maui.

If all stage, one projects and filed it stage two projects come online in anticipated time frames. They would add nearly 600 megawatts of renewable energy and three gigawatt hours of storage to our system between now and the end of 2023.

This will help and coal in Hawaii in 2022, with the expiration of one of our own Wahoo I P. P contracts.

The stage two projects together with our recently proposed Kahului synchronous condenser project will also help us retire one of our Maui fossil plants by 2024.

We're also preparing an RFP for up to 235 megawatts of community based renewable energy.

Given the scale of our system. These procurements are significant.

If you add up what I've just talked about you get over 800 megawatts.

That's on a system with a total peak load of just 1200 megawatts on a wahoo and 200 megawatts, each on Hawaii Island, and Maui County.

Well tiny for projects to come online can be affected by many factors. There's no question, we're moving forward aggressively.

As you know, we the commission and many stakeholders have been working hard to align the regulatory framework with customer interest and Hawaiis renewable energy goals through the performance based regulation or PBR docket.

The commission has kept the docket moving through coated and appears on track for a December decision.

The guiding principles set early on and PBR, including maintaining financial integrity of the utility and the collaborative stakeholder based approach. The commission established has been consistent throughout the process.

Weve generally summarized areas of consensus and divergence slide 30 of our deck.

The commissions decision in order will confirm the way forward.

The commission has been progressing other dockets too and just last week approved a 50 year contract for Hawaiian electric to own operate and maintain the electric system, serving the Army's 12 installations on Oahu.

Turning to our bank.

American savings Bank continues its solid execution, a dynamic co, but I [noise] environment.

[noise] areas are returning to normal operations.

Weve reopened six branches, we had temporarily closed.

While low interest rates continue to press net interest margin in the third quarter for able to replace much of the prior quarters [noise] sale.

Sales charities through core activities, including strong mortgage banking income tend to read some [noise].

We remain focused on sound risk management.

The timing of a sustained [noise].

Opening uncertain.

If these third quarter results again reflect elevated provision [noise].

We think we're well provisioned and continue pro actively working with customers to understand how their financial health and outlook are affected by coal but [noise].

[noise] cost efficiency is and will continue.

Because particularly in the current low interest rate environment.

In addition to reducing Covance cost. We also closed five branch with two more scheduled.

Number.

Most of these had been temporarily closed earlier in the pandemic.

We're continuing to roll out, our new smart ATM, providing more customer options and convenient.

We've been impressed by how customers have conserved to manage their resources. During this time.

The majority of customers, who sought initial loan deferrals are returning to repayment.

While some customers and sectors are more impacted overall, we're seeing low delinquency rates and continued strong deposit growth.

For customers, who received P.P.P. loans, we're now working on forgiveness and have started submitting loans to the S.B.A. for that process.

We've continued to see robust adoption of our online and mobile banking services and high customer satisfaction with our design digital offerings.

And now Greg will review our results for the quarter and our outlook.

Thanks Connie.

Turning to our third quarter results consolidated earnings per share were 59 cents versus 58 cents in the same quarter last year.

At the utility timing in management of own him expenses had a positive impact.

At the bank tighter lending margins and Kobin, driven provisioning continued to affect results well.

While non interest income from core activities improved compared to the linked quarter.

While holding company loss is well in line with plan, we saw a modest increase due to lower income at Pacific current and higher interest expense from higher short term borrowings.

Consolidated trailing 12 month or are we remains healthy at 9.4%.

[noise] utility are are we increased 80 basis points versus the same time last year to 8.4%.

Thank our OE, which we look at on an annualized rather than a trailing 12 month basis was 6.8% for the quarter.

Down from last year due to the economic impacts of coated and the low interest rate environment.

Turning to the next slide utility earnings were 60.1 million compared to 46.8 million in the same quarter last year.

The most significant variance drivers were 10 million lower on M. expenses, primarily due to fewer generating unit overhauls lower labor cost due to lower staffing levels and reduced overtime.

And elevated vegetation management work in the third quarter of 2019.

The lower overhauls represented about 5 million to 10 million on him variants of the 5 million 2 million was due to an elevated number of overhauls in the third quarter of 2018.

And the remaining 3 million was timing as some overhaul work will be performed later this year or in 2021.

We also had a $5 million revenue increase from higher rate adjustment mechanism revenues and a 1 million dollar increase major project in term recovery revenues for the Weslock PB in grid modernization projects.

These items were partially offset by the following after tax items 1 million lower if you do see as there were fewer long duration projects in construction work in progress.

1 million higher savings from enterprise resource planning system implementation, which are to be returned to customers.

And 1 million higher depreciation due to increasing investments to integrate renewable energy and improved customer reliability and system efficiency.

Looking at the drivers of the utilities financial performance for the rest of the year.

With the Commission's final decision in or Hawaii electric rate case, our rates cost of capital and equity capitalization are now set across all three utilities.

Recall that we received a final decision in July for no base rate increase in Hawaii Electric light rate case and are not filing a request a rate case for Maui electric.

The utilities multiyear efficiency program will help offset the lack of base rate increases and achieve the management audit customer savings commitment.

Cost savings initiatives are well underway with additional efficiency opportunities to be identified.

[noise] covert related expenses from March 17, two year end are being deferred for the commission order we received in June.

We've recut requested an extension of that deferral through at least June thirtyth of next year.

Well have to file separate separately.

For recovery at a later date.

Nobody related costs have been 12.4 million to date, mostly related to bad debt expense.

The suspension of customer Disconnections remains in place until year end.

Lower fuel prices have been good for our customers with a typical 500 kilowatt hour residential monthly bill on Oahu in October was down $21 since March due to fuel price savings for customers.

With these savings to the <unk> utility may qualify for reward under the fossil fuel cost risk sharing mechanism.

On slide 11 based on year to date information, we're forecasting 340 to 350 million of Capex and 2020 down from 360 360 million communicated last quarter primarily.

Primarily due to unexpected delays from Tobey 19.

And completion of some of our work at lower cost.

Specifically COVID-19 delayed our smart meter deployment.

Completion of a generating unit overhaul on Maui.

And impacted transmission structural replacement work when a helicopter contract or went out of business due to cope with 19.

Fortunately, we were able to bring some of that work in house and completed at lower cost.

We also saw some other delays related to permitting.

We're maintaining or longer term capex and rate base guidance in the 2021 to 22 period.

We still expect Capex to average approximately 400 million per year or about two times depreciation.

Well strategically important we don't expect the recently approved army privatization contract to have a material impact on annual earnings, which will depend on a number of factors, including the amount and timing of capital upgrades and capital replacements.

We continue to expect utility to self fund its forecasted capex through 2020 via retained earnings and access to the debt capital markets.

[noise] turning to the bank on slide 12.

Americans net income was 12.2 million in the quarter compared to 14 million in the prior quarter.

Although yield on earning assets continued to be impacted by the low interest rate environment. We.

We had improvements in a number of areas, including record mortgage banking income.

A record low cost of funds supporting net interest margin.

Increased fee income as we reserve resumed certain fees.

Suspended to help customers during the initial impact of cobot.

And lower non interest expense.

We continue to see elevated provisioning this year given ongoing COVID-19 related economic uncertainty.

Provision was down slightly versus the last quarter, which included amounts for unfunded commitments.

[noise] improved non interest income from core activities and expense controls were key drivers of banks <unk> Bank.

Bank net income during the quarter.

As you May recall, we had a large one time impact in the second quarter from 9.3 million in gains on sale of securities on a pre tax basis.

We were able to replace much of that amount through a combination of record mortgage production generating mortgage backed mortgage banking income of 7.7 million versus 6.3 million last quarter.

And resumption of previously suspended fees driving six 9.6 million in fee revenue compared to 7.2 million last quarter.

Expense controls were also also helped offset the second quarters gain on sales in the second quarter, we incurred 3.7 million encoded 19 related expenses consisting of additional pay on a pay to frontline employees the payout of excess vacation days for employees and able to you.

U.S vacation, while working through the pandemic purchases of P. P E and sanitation supplies and employee meals to promote employee safety.

And supports small business restaurants.

Third quarter or COVID-19 related costs were down three.

3.1 million 2.7 million, consisting consisting primarily of cleaning and sanitation costs.

On slide 14 as expected as fees net interest margin compressed more moderately in the third quarter than prior quarter narrowing nine basis points to 3.1%.

Record low cost of funds and lower Fas 91, amortization helped offset the impact of the low interest rate environment on asset yields.

Most of our adjustable rate loans repriced in the second quarter, well fixed price loans, which are driving most of the repricing now reprice more gradually.

For the remainder of the year, we expect continued margin pressure, but at a moderate pace.

This includes pressure from continued low interest rates and from excess liquidity due to strong deposit growth and lower reinvestment yields.

For the full year, we expect to be within our previously guided NIM range of 3.35% to 3.25% yeah.

Year to date year to date net interest margin was 3.34%.

Turning to credit this quarters provision was 14 million compared to 15.1 million in the linked quarter.

With uncertainty regarding if we'll realize the sustained gradual reopening of tourism and strengthening of our economy. This quarters provision included 12.3 million in additional reserves related to potential economic impacts from the pandemic.

Credit quality improved in our personal unsecured loan portfolio and we were able to release some reserves related to that portfolio during the quarter.

Net charge offs improved also improved and were lower than the last two quarters.

With the economic picture still in flux, we're still holding off on providing provision guidance.

Slide 16 provides an update on what we're seeing in our loan portfolio. Overall, we have a high quality loan books that remained healthy with only 3% of our portfolio on active deferral at the end of the quarter.

76% of deferred loans have returned to payment pre.

Previously deferred loans do have a somewhat higher delinquency rate of 1% compared to <unk>, 0.3% for our portfolio as a whole.

We continue to carefully monitor our portfolio and are closely working or working closely with our customers to understand their circumstances and outlook give.

Given the enhanced monitoring we have implemented for commercial loans as well as the overall quality of our loan book, we feel we are well provisioned as of September Thirtyth.

As we continue ASV continues to maintain ample liquidity and healthy capital ratios. The bank is over 3.2 billion and available liquidity from a combination of reliable sources Sps tier one leverage ratio of 8.35% was comfortably well above.

Well capitalized levels as of the ended the quarter.

As a reminder, the bank is self funding and we don't anticipate that it would need capital from the holding company, even under more severe stress scenarios than we anticipate from COVID-19.

Turning to consolidated liquidity, we are well positioned to withstand the impacts of cobot as of September 30, We had 425 million of Undrawn credit facility capacity, consisting of 150 million at the holding company and 275 million at the utility.

With just 23 million in commercial paper outstanding all of which was at the holding company.

We recently executed transactions to further enhance liquidity and prefund upcoming debt maturities.

At the holding company in September we executed a 15 million dollar private placement to pre fund in March 21 maturity you.

In October we launched and priced a subsequent transaction to Prefund a term loan maturity coming up in April 21.

At the utility in October we executed $115 million private placement.

Which we can drawn at any time, leading up to its January funding date.

The utility has no long term debt maturities and 21.

At the holding company all long term debt maturities and 21 are now pre funded and we maintain solid liquidity liquidity and financial flexibility and strength tending heading into 2021.

And we remain committed to an investment grade capital structure.

On the next slide we expect our dividend from from Andy equity investment in the utility to be consistent with our earlier projections the.

The utility continues to perform in line with plan has sufficient retained earnings to support its capex and adequate liquidity to support growth and customer account receivable balances and payment programs for customers impacted by cobot.

Thank dividends received to date are sufficient to maintain H.T.I.s strong consolidated capital structure and liquidity.

We expect to maintain or external dividend as reflected in H.T.I.s recent dividend announcement.

On slide 20, we've updated our guidance for the full year.

At the utility, we're reaffirming our guidance range of $1.46 to $1.54 per share and expect the utility to be within the bottom half of that range.

Well second quarter and third quarter <unk> utility results were strong that was partially due to timing of expenses some of which are expected to be incurred in the fourth quarter.

We're also working to offset the lack of the Hawaii electric base rate increase and as mentioned, we're expecting capex to be $10 million to $20 million lower than previously anticipated.

At the bank, given economic uncertainty and its effect on provision, we're continuing to provide pretax pre provision income guidance.

We have revised our pre tax pre provision income guidance upward.

205 to 115 million.

Versus the previous range of 90 to 110 million or 10 million increase from midpoint to midpoint.

Our holding company guidance is unchanged at 27 cents to 29 cents loss.

Since bank provision remains uncertain, we're still not providing consolidated EPS guidance.

I will turn the call back to Connie.

Thanks, Greg.

Overall, our companies continue to perform well during the pandemic.

Our financial stability has enabled us to deliver value for all our stakeholders.

In that vein I'd like to close with a comment on E.S.G.

He is GE has been a focus for us for a long time. That's why we say is GE is in our DNA.

We just didn't call it U.S.G. before.

We've long talked about the linkage between the health of our state and that of our companies.

Our renewable energy transition is central to our company strategy and we talk about it on every call along with the evolution of our regulatory framework to support that transition.

For our bank key areas of focus include addressing affordable housing and financial fitness for our communities and customers as well as economic diversification and job creation.

And you'll recall that Pacific current was formed to advance sustainability through infrastructure investment here in Hawaii.

We are formalizing, our iasci approach integrating it more deeply in our businesses to the extent material to value creation.

We published our first sads be aligned report in September.

And plan to expand future reporting to include Tcf de aligned disclosures, so look to hear more from us on iasci going forward.

And with that we look forward to your questions.

Well now begin the question and answer session ask a question you May Press Star then one on your Touchtone phone if.

If you are using a speaker phone please pick up your handset before pressing the keys to let's try a question. Please press Star then two.

Our first question today comes from Julien Dumoulin Smith with Bank of America.

[noise] Hey, good afternoon to all of you are good morning, rather I'm sorry.

[laughter] as it goes.

[laughter].

<unk>.

Glezer.

First off how are you thinking about sustainability bone in chicken going into next year.

Yup.

Across a lot of you tell you, but you guys specifically and in particular can you talk about what has driven the 10 million year over year improvement on utility on a beyond just shifting out generation maintenance costs.

Okay.

Yeah Okay.

So well well, we'll provide clarification of the expected savings for next year, some of which of the savings that we've achieved so far this year, we expect to be durable, meaning some of the staffing reductions and sign the efficiencies that we put in place, but don't have thought teen second Laura also comment with a little more.

Detail.

On that point and and look forward.

Hi, this is.

Hi, This is tayne I'm, commenting on that Oh in EM as we see yet you know our cost efficiency initiatives have included on things like managing staffing level to meet our management audit commitments as well as to offset the no base rate increase for Hawaiian electric. It also includes a redo.

Overtime and higher productivity due to better planning scheduling and coordination at work and so that those sorts of activities are sustainable into the into next year.

Other thing we're doing is we're engaged in our strategic sourcing efforts to bring down the cost of our goods and services and that too will continue as we move on into 2021, we also look for other opportunities as well as.

We are working differently in Ah teleworking virtual environment and have found different ways to get our work done and so some of the things. We are looking at is how much office space do we need <unk>, how big should our footprint really be I'm used to think of technology to be able to interact with one another inside the.

Company as well as outside the company so.

So those are just some somebody out an example.

Mike.

Yeah, I thought okay, perfect and then maybe related to that if you don't mind can you discuss the improvement really.

LTM or are we.

See its improved year to 8.47.

Seven nine prior how do you think are the carrying forward right kind of dovetails they own them.

Yes, so a big part of that improvement does relate to our lower on an expensive and so there were seeing that in our results today I'm going forward, it's gonna be really key for us to see what comes out of the PBR proceeding.

And you know, let me take you through some as well as what came out of the Hawaiian Electric final decision and so let me take you through some of those pieces in our we chart we do have a.

A breakdown of the the ROI, we can be a driver there and if you look at some of the things like the customer benefit adjustment is an example in the Hawaiian electric a final decision.

It was considered to be removed and so we're going to stop accruing that amount of the customer benefit.

And it's a very small amount will remain for Maui right now, it's about 40 basis points and what will remain a later would be for Maui is just a couple of basis points.

The other thing is for the ERP customer benefits that was deemed to be oh removed from the Hawaiian electric final decision all that will remain there isn't a roughly 10 basis points for for Maui Electric and Hawaii Electric light so those.

Two items come from the Hawaiian electric final.

Vision in order.

The last piece is the the WRAM revenue adjustment.

And the accrual right now is is delayed to June 1st but ended up PBR docket. There is general consensus of the parties.

In PBR that this lag should be removed of course that is subject to the Pcs decision in PBR that we expect in December.

In addition to that as we look forward at PV, our cost containment cost management issue.

Management initiatives will continue and and be expected as as we operate our company.

So that's going to be really key our continuation of cost management efforts.

The Army gap.

Yes, sorry, if I can squeeze in one more just real quickly to finish off the top so your full year 20 guidance remain unchanged ultimately why does utility earnings remained in the bottom half them in is that implicit that some of this pushout generation maintenance spend is in Fourq you are.

There's something in the tail end of this year and is there any update you can provide around its be earnings based on the provision loss to date, just like I'm trying to square that against that.

And where you're trending.

Okay, I I can speak to the utility what is coming up in the fourth quarter as mentioned earlier you heard about the timing of some of our generating.

Unit overhauls and some station maintenance work that will be performed in Q4. So there will be some elevated on m. there.

In addition to that we also have.

Have other expenses that were timing related or related to things like what we're doing in the community based renewable energy CBR E and we had some some IP software and hardware purchases that were delayed to Q4. So we'll see those oh I know expenses elevated.

Yeah, and Julian it's I can add to it you know the original guidance a way way back actually was when we were looking at having the allahu rate case and of course, that's the one that's been settled at a no base rate increase yeah.

So yeah. So as we go into the fourth quarter, we still have to offset the no base rate increase cost and it is a range Julian so obviously, there's some movement within the range, but still some uncertainty going into fourth quarter around the timing of certain expenses and and when and if they materialize. So we've kept it within the lower half.

Half of that range, but I think we're positioned well going into the fourth quarter.

And then on a consolidated basis, you did see the improvement on our pre tax pre provision guidance from the bank as well, which was a improvement in that position going into the fourth quarter now just seeing how the provisioning plays out during that period as we reopened the economy.

Got it excellent. Thank you guys for the time and patient yeah.

Yeah, Thanks to their Friday afternoon discussion [laughter], Yeah, we thought we were going to hear from Eric not you. Thank you [laughter].

And our next question will come from Paul Patterson with Glenrock Associates.

Oh, how are you doing.

A high bar I, Paul So I apologize for not being able to completely <unk> why the higher pretax pre provision bank income what's exactly driving that.

Weve you know, let me turn it over to rich they've had a great quarter, but go ahead sorry, Paul.

As Greg mentioned in the comments as he was going through you know, we've been able to run pretty well on our expenses and manage those down we've got some unique things that are related to covanta that come.

Come and go but but those are those are tighter.

And then during the initial stages of the locked on we did things like wave all ATM fees and put in.

Bigger sort of grace periods for late fees, and and things like that and during the third quarter. We began to phase those back in as as we've tried to sort of normalize operations again, so you're seeing those things come up and you've also seen a really strong.

Production on the mortgage side, we you know we're number two in the market. So far a year to date on production of mortgages and that's played through as we work to kind of balance how much. We went on the books versus how much we sell when we sell the those games come through that mortgage banking line and so.

Those those are the main factors. So so just to understand and so when you guys were doing when you were giving your guidance last quarter you were more cautious about fee income and expenses. All these things that you just mentioned I won't repeat them all but basically you were just being more cautious and things came in better than you thought or was there any.

Right Yeah. So for so for example, we didn't know exactly how the phase in of the of the fees would or how how much of it would come back to pre pre covered levels. You know this the straight to the market on the mortgage side and things. So every one of them you know, we're just working hard to.

To to beat what.

What we can do because we've got a big nut of provisions we got to pay for it right.

The team is working hard pills.

Oh, how is the.

The low deferrals can you might have held those are accounted for.

Let me sort of provision associated with that if it's past 90 days or something or or is there any yet.

So we we've taken what we think is a conservative approach on loan deferrals, so any and especially on the commercial side any customer that has asked for a payment deferral, we classify that as a special mention loans because the definition of special mention is there's a.

Potential weakness and approaching us to say hey.

Hey, I need help to to pay is.

Seems like a potential weakness and so so that's been one of the reasons you've seen our provision higher when we classify alone.

Her criticize alone you carry a higher provision and so so that's that's been the main difference the difference the deferment or where the deferment, we we freeze the the loan and the delinquency status. It is if its current or if it's 30 days. It just stays there until the payment period starts again and it picks up from.

In there, but that's the reclassification changes that is the biggest impact.

Okay.

And then turning to the.

Through the ER.

To the utility.

First on PPR is there any potential for a settlement Uh huh.

As we approached the December.

Well the timeframe here.

Hi, Paul This is Scott Super Hawaiian electric.

This is a PC driven a proceeding and so where we are in that proceeding is a it's in front of the PC basically ready for their decision, making so that you see is considering all of the.

Filings statements of physician evidentiary hearings took place in September and all the parties have filed their post hearing briefs. So it's basically ready for decision, making and that's expected in December.

Okay. So okay. Thanks for that so and then just in terms of what you guys are thinking about that.

I guess it depends on what we obviously get with the PBR and everything but and I know what you guys have done a bunch of stuff here with base rates and the settlement that you have but how should we think about the right trajectory for total rates right with all the stuff that you have going on.

What's your expectation for sort of the total rate now obviously subject to change because we don't know whats going to happen with certain variables, but.

Yeah, holding fuel and stuff like that kind of thing where do you where do you see the.

The trajectory of rates over the next couple of years given your rate base growth at this point.

Yeah. Paul this is a little bit tough to answer, but I, maybe the way I can frame. It is at least in far as far as the context of the discussions with the PBR docket.

You know it it it appears that we will be retaining most of the recovery adjustment mechanisms such as where the feel of a power purchase a good adjustment.

[noise] clause and some of you those other recovery mechanisms and the commission is looking at possible adjustments to our major project interim recovery mechanism as part of the PBR docket it.

It's difficult for me to answer that question just because there are a variety of these moving parts and of course as you even reflected fuel is going to be the biggest driver or at least for the foreseeable future. Even though we are working hard to wean ourselves off that but that is the biggest driver of what the customer sees on their bills.

Okay fair enough and well see what happens with the in December Okay.

So much and have a hell of a good one.

Thanks, Paul and Paul I, just add you know remember going forward to the performance incentive mechanisms are incentive based so there will be benefit to customers at the same time, there might be benefit to the company.

Thank you.

And our next question comes from Jackie Bohlen with KBW.

Hi, Good morning, Hi, Jackie Jackie Hi, Hi.

Hi, [laughter] start on the risk rating on understanding that you've taken a really conservative stance with how you're you're barking.

Mark in your your special mentioned.

I can I have an impact as those get upgraded to watch and to pass on here you had a really good decline and the the level of deferrals in the quarter. So just wondering number one.

Borrowers are going back onto the payment how long you expect them to send the special mention bucket and number two how you would expect that to affect your reserve methodology as they do that.

Right. So so check to see great point, the we look kind of for about six months of sustained payment performance before we'd look at upgrading the account the the <unk> and so we think that's right now given still the the uncertainty about.

Well, we will the recent openings sustain an hour and all that so we.

We will take some time and watch them, we don't want a jerk around the the provision moving them up moving them back down if there is a a closing again. So so we'll look at over a couple of quarters.

Okay.

Well I would suspect that.

I'll call it by.

By the third quarter of next year.

Assuming that.

Conditions continue to improve that we could be back to a lower level of special mention and you could have some potential reserve release associated with upgrades to offset any potential charge offs that are coming through the pipe at that point is that a fair assessment from your lips to God's ears, I hope [laughter].

So I think the you know the the point that you're making is a really good one and I think it's it's important for people as they think about banking the provision is for potential credit losses, right and if you. If you think about what we're doing we're providing for what we know is a difficult.

Jewish and for our customers weren't when we did the big increase in coverage that we've had this year is around the end of the risky environment and and you know we've got a lot a lot of customers as we said kind of in our release that have really impressed us how they've shepherded the resources of hunker down.

On to to kind of work their way through.

And we got to see how it plays out if they if they succeed then yeah. When when those upgrade will will get those provisions back.

And were were in their corner Friday with them and we hope that these provisions don't turn into charge offs right and that's the.

The game and you see.

You know charge offs have been you know relatively stable with our with our past you haven't seen a surge in that.

And so and so you know were we hope this scenario works out like you described.

Okay.

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

Yeah. We're we're we're cautiously optimistic that it continues to be as strong as it is you know our our deposits have continued to build the customers as we look at.

Where they are you know we're seeing it on the consumer and we're seeing it in commercial we know people will need to spend down some but we don't anticipate a.

Oh large run off over the next quarter or so so so it's it's strong liquidity is good we're staying close to the customers commercial customers. Our guys are with them you know on a very regular basis understanding what their cash flow situation.

He is and how they look so so right now we we would expect relatively consistent performance.

Okay.

And then just lastly in terms of loan growth I'm on a linked quarter basis, you had good generation in theory balance as I'm is there anything.

The point that was unusual there I you know whether it just really solid growth in the quarter.

Yeah, No. There were we've got a terrific a new leader of that CRT team that joined our bank earlier this year.

And he is just good at finding [noise].

The right kind of deals you know, we we have tended to be more heavy in sort of construction related and project. She is excellent at getting you the long term investor a component of the portfolio growing too.

And you know, we're really we're really prudent in this environment right, we're sitting here, saying.

You know the <unk>, we're not interested in bringing somebody else's troubled asset under our book, but as you know we've also stress to you how Hawaii real estate is a is.

A resilient a resilient asset so so were be really selective but when we when we see the deal there that we like we also want to support those deals and and the customers associated with them.

Okay, great. Thanks, so much.

And again, if you have a question. Please press star and then one can join Archeo.

Our next question comes from Charles Fishman with Morningstar.

Hi.

Morning news or is that a couple on your wahoo, a great, okay, well that and I'll be your with three year cycle.

There was nothing in that settlement.

Settlements.

Well now parade.

You could come back come back for three years.

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

And then Oh.

Yeah Yeah.

Yeah, I forgot about that okay, let's talk about gargle.

I mean on that one slide off so you have the things that you read too.

Morning.

Sorry.

I realize you're still negotiating or the PVR, but on.

On the left hand side.

Are they agreed two things could you maybe discuss that it would seem like you know as I look at that list who.

To eliminate the Ram lag that's a real positive does that.

Is there something else on that one, but I should be thinking Wow, that's pretty.

Pretty good [laughter].

[laughter] well, let Tayne answer you Oh, my God [laughter].

Charles hike Hi, this is team yeah, and again as a reminder, d. This is a summary of the consensus and differences of the party. It is subject to a PC decision, making but yes. It is you know positive that the existing the parties do agree that.

The existing round like should be removed 'cause, that's roughly 30 to 40 basis points.

Well I know I know that's not a problem in the past. So that's I thought that was but that's on the left hand side you.

Yeah. The other thing that's a positive but we'll need to see what actually comes out is the potential to earn performance incentive mechanisms you know consistent with the outcomes put forth by the PC well need to see how those are set up and how achievable. They are but you know that's another a positive thing.

The other thing I would point out is the earnings sharing mechanism and again, it's the position of the party. The general consensus was that it should be modified to be symmetrical. Currently we have an asymmetrical mechanism whereby earnings above and a lot of our or we are shared with customers. So there is a.

On the other side support for the company to be protected there.

No local would be good.

Just one more thing I think it was the last call.

The oil and economic research organization I guess this is where the rubber calling in from the goal is to get back to wait.

Oh no no.

Level of tourism by the end of the year, which obviously would be.

Good for you bought a legal that's the program in the late it yeah.

Well the second wave here.

I suspect that's optimistic but.

You provided a lot of data from a.

Oh got it economic research organization, but is.

Is there any number like that that's comparable to the other thing or.

Is that just something that they're not doing any more I thought the real interest thing that's really just the level of recovery on the floor.

Yeah. Charles This is Greg we show on slide three as part of the your hair a forecast and by the way. This information is also available on the University of Hawaii Economic Research organization websites, what's publicly available here. So what what they showed was and you shave 2020 is 70% almost 74% redone.

Action.

From 20 pre coveted two to where we're at what they're projecting for the calendar year and 2020 with roughly a recovery starting in the fourth quarter. So consistent with what we're starting to see now and then we see on a base case, they're looking at you know a 70, 374%.

Recovery back starting offer that lower base and then a further improvement in 2022, what the indication is it'll take and then ultimately their forecast kits to to 80% to 90% recovery a a precursor to pre cut relative to pre cove it over the three.

For your forecast so its a recovery a it's a more their revised forecast is more gradual recovery.

And it does stop short of the pre covert levels within the current forecast period that they have but it's still a pretty robust number when you think that pre covered we were at 10 million arrivals, which was well high water marks a year over year for us going coming out of 2019.

Okay.

Well. Thank you that's helpful. That's all I have thanks.

Yes.

Okay. Thanks, Charles Thanks, Charles.

This concludes our question and answer session and I would like to turn the call back over to Julie Smolyansky for any closing remark.

[noise]. Thank you all for joining us today and for your questions and with that have a great weekend.

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