Q4 2020 Hawaiian Electric Industries Inc Earnings Call
[music].
Good day and welcome to the Hawaiian Electric industries fourth quarter, 'twenty and 'twenty earnings conference call on.
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I would now like to turn the conference over to Julie Smolinski, Smolinski, Vice President of Investor Relations and corporate sustainability. Please go ahead.
Thank you, Tom and welcome everyone to Hawaiian Electric industries fourth quarter, and full year 'twenty and 'twenty earnings call. Joining me today are Connie Lau Hei, President and CEO, Greg Hazelton, Hei 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.
Our press release and presentation are posted 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 and the Investor Relations section of our website.
And now Connie will begin with her remarks.
Thank you, Julie and Aloha, everyone and mahalo, Thank you for joining us today.
In 'twenty and 'twenty, we achieved consolidated net $197.8 million and earnings per share on a dollar and 81 cents.
Down from 2019, our consolidated 'twenty and 'twenty earnings.
The majority of accounts driven.
Driven by good regulatory mechanism and the utilities focus on coffee.
The bank performed well given pandemic driven economic challenges.
Last week, our board approved our third consecutive annual dividend.
Raising the quarterly dividend per share from 33 from.
34, so on.
This reflects our continued financial performance and our confidence and our future prospects.
And I'm proud of the commitment of our employees as we work to support our customers through the challenges of 'twenty and 'twenty protect to fellow employees and care for our communities all while.
Continuing to deliver solid consolidated financial results and advance long term priorities.
We have viewed the army and the source of strength to help our state and whether the challenges of Covid.
This is included extensive actions across our company, including.
And our utility suspending disconnection, providing payment options to help customers manage their bills and proposing to hold base rates flat on a walk to help keep rates down.
In addition, based on each one of these strong financial results and.
And trend a G I provided $2 million for Hawaiian electric to be the founding sponsor of the Aloha and United Way, Hawaii utility Bill assistance programs to help families on all islands pay utility bills.
Similarly, our bank offered loan deferral temporarily suspended fees and deployed $370 million and paycheck protection program funding to support approximately 4100 small businesses representing about 40000 local jobs.
2020 was a record year for our charitable giving and including the utility Bill assistance Fund I just mentioned our companies and employees together made charitable commitments of five and a half million dollars more than double our typical level.
These actions reflect who we are as a company and our longstanding ESG focus.
And 2020, we issued our first consolidated ESG report.
And is aligned with the guidance.
Despite the challenges presented by Covid, we remained focus on our strategic priorities, including at Hawaiian Electric.
And those are to deliver a cost effective clean energy portfolio.
Improved customer experience and offer innovative energy solutions create a modern grid and technology platform strength and stakeholder relationships work with stakeholders to align regulatory and market models improve our company culture and ensure that we have the.
Actual strength to deliver on our state's ambitious energy coals.
A few highlights.
We outperformed our 'twenty and 'twenty renewable energy portfolio and milestone of 30% with 34 and a half per cent rps for the year, while lower demand due to the pandemic contributed to that result.
And for electricity use had been the same as 2019, we would still have exceeded the milestone at 32 per cent.
And the Rps a pin established in the performance based ratemaking docket and incentivize us to continue to focus on exceeding the statutory milestone and we will talk about that and a moment.
We continue to aggressively advance renewable energy and storage procurement.
Filing nine stage two RFP purchase power agreement three of those have now been approved by the PUC. We also filed applications for our two self built storage project and continues moving stage one RFP projects forward together.
Together stage, one and two projects if completed as planned and are expected to add about 650 megawatts of solar and about three gigawatt hours of storage to our system by the end of 'twenty 'twenty three.
Limited land, especially on Oahu means that in addition to utility scale projects distributed energy resources community based projects and grid services are critical to achieving our goals 20.
20% of our residential customers and 36% of single family homes on Oahu and real.
I'll start and solar by far the leading rooftop solar uptake per capita and the nation.
The pace of new rooftop solar additions also picked up in 'twenty and 'twenty with 55% more installed in 'twenty and 'twenty than in the prior year importantly, 78% of new rooftop solar applications also have battery storage and this allows daytime and excess solar production.
To be used to reduce fossil based power at night.
We've launched our new quick connect program to enable customers to interconnect their rooftop solar faster and we will soon launch our shared solar program, a new phase of community based renewable energy to extend the benefits of clean energy to a wider range of residents with priority.
And to those who have been under represented and solar adoption, such as renters and customers with low to moderate income.
All of these clean energy efforts are contributing to our state's economic recovery and creating local jobs.
We continue to work together with our communities and stakeholders to find the best ways to achieve a clean energy future, that's affordable resilient and reliable.
Stakeholder engagement has been central to our integrated grid planning process, which is developing long range plans to inform investment priorities for resilience grid and generation resources.
Our utility focused heavily on cost savings in 'twenty and 'twenty.
Building on our one company initiative and 'twenty 'twenty, we outlined at your program to reduce costs and increase efficiency beginning well before the main management audit report that was part of our 'twenty and 'twenty rate case.
In 2020, we achieved significant savings, including $7 million and O&M savings through better planning coordination and execution of work targeted staffing reductions and continued efforts and strategic sourcing.
We also achieved the savings we committed to deliver to customers and connection with our enterprise resource planning system ERP.
Our cost management focus enabled us to adjust to the flat base rates, we propose for Oahu rate case and positions the utility well to deliver on its management audit savings commitment customer dividend and operate under P. B R.
Our utilities achievements in 'twenty and 'twenty support our 'twenty 'twenty, one 'twenty and 'twenty five strategic planned priorities, which include advancing de carbonization and resilience, both and our electric system and more broadly and our state driving a sustainable and Ed.
What about a local economy strengthening our company culture, and demonstrating our commitment to safety and the highest level of performance and all that we do.
Engaging with our communities to develop solutions that are sustainable reliable and affordable and ensuring we have the financial strength to invest in this decarbonize and sustainable future for our companies and our communities.
In December the PUC issued its phase two decision, establishing the landmark PBR framework capping a two and a half year process that included extensive involvement by the utility and stakeholders.
Overall, we view the new framework is providing a balanced approach designed to provide value for customers and opportunities for the utility as we continue one of the nation's most ambitious energy transformation.
The P D. Our framework is designed to balance a number of important interests, including those the PUC identified and its phase one P. B our decision last year.
For example, P. B R promotes cost control and affordability through the inflationary adjustment and customer dividend component of the annual revenue adjustment or a or a mechanism.
Advances customer equity through incentives to collaborate on low to moderate income or LMI energy efficiency initiatives.
Encourages innovation through our new pilot project process.
Incentivize has accelerated renewable energy additions through the R. P S a performance incentive mechanism or pin.
And supports utility financial integrity by eliminating elements of structural regulatory lag and.
Establishing new revenue opportunities through pins, and the new pilot process and the ability to earn on O&M based as well as capital based projects through the new E. P. R M mechanism.
Providing safeguards against extreme results.
From an ESG standpoint, we view the PBR framework as providing a greater connection between our achievement of environmental and social goals and our financial performance.
As Greg will discuss further 'twenty 'twenty, one as a transition year for the utility our 'twenty 'twenty, one guidance and implied ROE rift.
It reflects moderated assumptions for earnings and ROE with the initial implementation of P. B R. Midyear this year.
Moving into 'twenty and 'twenty, two we see strengthening financial opportunities for our company.
Among the key drivers of this 2021 transition our first most P. B R elements, including the annual revenue adjustment become effective June one.
So we'll see the full effect of P. B are for the first time in 'twenty and 'twenty. Two for example, the Ram lag we've had will remain and 'twenty 'twenty, one but will be eliminated in 'twenty and 'twenty, two and going forward.
And while we anticipate modest renewable energy additions in 2021.
We expect that to pick up in 'twenty, and 'twenty, two and 'twenty and 'twenty three with more stage, one and stage two RFP projects, which if completed as planned and will contribute to rewards under the new Rps a pin.
Third with accelerated delivery of our management audit savings commitment to customers and 'twenty 'twenty, one and we're adjusting to a higher level of cost containment this year than originally planned.
Finally, with our 'twenty and 'twenty rate case settlement, a portion of 2019 and 2020 capital investment is not yet covered and rates and we'll be working to address that.
We see increased opportunities for the company and 'twenty 'twenty, two and beyond as we work through these transition items and gain experience and U P. B arm mechanism.
Turning to the bank American performed very well and a challenging banking environment.
Well its earnings were impacted by low interest rates and higher provision in light of Covid, driven economic uncertainty the bank delivered solid profitability.
<unk> had record mortgage production, gaining market share and new customer relationships. The bank also work to control costs to offset increased expenses related to COVID-19, while still investing and core priorities.
Throughout the pandemic the bank is focused on delivering for its customers, including through deferrals fee waivers and P. P. P. Hyundai.
American is now working on round two of PPP with new technology in place to streamline the process for both customers and the bank.
American and worked hard for other stakeholders as well, enabling our successful program to deploy cares act funds to help both unemployed families and our restaurant industry during the pandemic and continuing to support it and teammates with an excellent workplace culture.
As we look ahead, we expect low interest rates to continue to pressure on margins for the bank on.
Although a steepening of the curve could provide some tailwind.
And low interest rate environment cost management becomes all the more important and that will be a central focus for us.
At the same time, we will be investing in key areas to advance our anytime anywhere digital banking transformation.
We continue to manage credit conservatively, while we're optimistic about the economy. There is still some near term uncertainty, particularly in the first half of the year. So we have maintained our strong provisioning to date that said our loan portfolio remains strong with low net charge off.
<unk> and delinquencies.
The pandemic has altered customer behavior and expectations in profound ways, we've seen a dramatic acceleration of customers migrating to our digital and self service options non branch transactions, such as online and ATM transactions have increased from.
19% prior to Covid to 40% and December and we've been pleased to see very high levels of customer satisfaction with those options.
We want to continue our focus on making banking easy b available to customers anytime anywhere and encourage them to make American their primary bank.
We've rolled out new Atms with increased capabilities launched more online tools, including for mortgage applications and online deposit account opening.
With increased customer use of our digital channels, we've been able to consolidate eight branches and are introducing digital centers. This spring. These locations will leverage our digital capabilities, while still providing in person interaction. This refocusing of our branch network will provide.
Savings over time.
As we enhance our digital offerings and deepening our relationships with our customers remains a cornerstone of our strategy will also soon be launching additional online financial wellness tools for customers empowering them with greater financial knowledge, and providing increasing avenues to engage with and.
Offer services to them.
And now Greg will provide an update on the economy, our financial results and our outlook Greg. Thanks.
Thank you Tony.
Well 'twenty and 'twenty was a challenging year for the Hawaii economy, there are signs of progress and our economy is on a path to recovery.
Daily visitor arrivals are currently around 8000, and still well below the roughly 30000 per day.
On average in 2019, it represents a significant improvement from the two to 3000, we were seeing before Hawaii's reopening to tourism in October.
Our stage pre travel testing program has exceeded and keeping corona virus cases slow.
Hawaii's positivity rate is just one per cent compared to the national average of $9 one per cent.
Arrivals are expected to continue improving with the nationwide rollout of the vaccine.
Unemployment has also improved significantly to nine 3% in December of 2020 day.
And markedly from 24% at the nadir of the pandemic.
Hawaii Hawaiian housing market has remained resilient with single family home sales up two 3% and 2020 and.
Oh, AHU median prices for the full year, 'twenty and 'twenty rising five 2% to 830000.
Year over year sales volume and median prices remained strong in January at 14, 7% and nine 8% respectively.
While GDP is expected to have declined by 10, 2% and 2020 is expected to return to growth beginning in 'twenty, one and <unk>.
<unk>, 1% and strengthening and 252% and 2022.
Yeah.
Turning to our financial results in 'twenty and 'twenty, we achieved solid consolidated financial performance and it and advanced our longer term priorities. Despite this difficult economy.
Full year, 'twenty and 'twenty earnings were $197 8 million or $1 81 per share compared to $217 9 million or a dollar and 99 per share and 2019.
Utility earnings grew about 8% to $169 3 million and reflected efficiency improvements, helping drive O&M lower.
<unk> full year earnings were down $31 million or 35% versus a strong 2019.
Financial results were impacted by both net interest margin compression and higher provision expense related to the economic shutdown.
However, the low interest rate environment helped drive record mortgage originations and sales.
And strong deposit growth.
Good expense control enabled management to offset costs related to COVID-19, while still investing and our priorities.
The holding company and other segment loss was higher than 2019, primarily due to higher charitable contribution.
Expenses to support our community during Covid.
Our consolidated ROE for the last 12 months was eight 6%.
And from nine 8% and 2019.
Utility ROE for the last 12 months improved 30 basis points. Despite the settled rate case that resulted in certain capital expenditures not being included in base rates and peak.
Contributing to a 90 basis points drag on realized on ROE in 'twenty and 'twenty.
Bank ROE was down significantly due to the impacts from the pandemic.
The utility had a solid year delivering 8% net income growth during the pandemic as Hawaiian electric executed on its commitment to reduce costs and deliver customer savings from opportunities identified in the Puc's management audit well.
While also adjusting to a no base rate increase from our 2020 Hawaiian electric rate case settlement, which also resulted in no incremental rate recovery for certain above baseline capital investments and 2019, and 2020 that were expected to be addressed and the general rate case.
The utilities higher net income was primarily driven by the following items 17 million and revenues under the annual rate adjustment mechanism or Ram, which funds investments and resilience reliability and the integration of renewable energy.
$6 million from lower O&M expenses, primarily due to fewer generating facility overhauls and efficiency improvements and planning and execution of work and reduced staffing levels offset in part by higher environmental reserves.
$3 million from lower interest expense due to debt refinancings.
And $2 million from the recovery of West Loch PV and grid modernization projects under the <unk>.
M P I R mechanism par.
Partially offset by lower Schofield M P IR revenues.
These items were also partially offset by $5 million higher depreciation expense due to increasing investments to integrate renewable energy and improved customer reliability and ability and system efficiency.
$4 million from higher enterprise resource planning system implementation and benefits to be returned to customers and <unk>.
And $4 million lower a a few D C. As there were fewer long duration projects and construction work in progress.
And.
Okay.
And 20, turning to slide 11.
11.
<unk> 'twenty 'twenty, one is a transition year for Hawaiian electric.
Has the newly adopted PBR framework has implemented over the coming months.
Most of the PBR mechanisms included in the annual.
Revenue adjustment mechanism will become effective June 1st.
With the full effect of PBR in 'twenty and 'twenty two.
Three new pumps will be effective for the full year of 'twenty, one while additional new tenants identified and the Puc's PBR order are planned to go into effect and chew on on.
On June 1st.
Ongoing working group meetings will develop tariffs and flush out many of the details needed to implement the new PBR framework.
Of note the Ram lag, which in 'twenty and 'twenty resulted in approximately 40 basis points of structural lag.
And in 'twenty and 'twenty, one are projected a per.
Rejected 20 basis points of ROE reduction or lag.
Relative to authorized levels will.
It will be eliminated beginning in 2022.
Although newly identified Pimm's provide limited financial opportunity. During 2021. The commission has indicated its intent to work with the utility and other stakeholders to increase and expand the incentive opportunity overtime.
In addition, P. B R is likely to evolve over the initial multiyear plan as the PUC monitors its functioning and plans for a comprehensive review and 2024.
Overall, we see P be ours to stable framework that can deliver reasonable earnings growth and returns once fully implemented.
Management showed a strong ability to control expenses and deliver O&M reductions during 2020, while offsetting certain inflationary cost increases and costs incurred to achieve long term savings.
We have a plan to deliver additional savings through improved scheduling.
Leading to reduced overtime managed reductions and workforce process improvements.
Strategic sourcing and reducing our office footprint.
Under P. B, our management's ability to effectively control expenses will be increasingly important in order to ensure strong financial performance over time.
And while P. B R provides inflationary adjustments through the new annual revenue adjustment formula ongoing savings will be required to offset above inflationary cost increases.
In addition in 'twenty and 'twenty, one point electric has agreed to and acceleration of planned audit management savings, which were originally planned to be delivered over time is realized.
Under our our level is management audit savings commitment, we're living and $6 6 million more and customer savings in 'twenty and 'twenty one than originally planned.
Our work to offset those customer savings through cost efficiencies is expected to be further reduced.
To further reduce O&M in 'twenty and 'twenty, one resetting our base our O&M base.
Yeah.
Slide 13 shows the performance incentive mechanisms under PBR and with the exception of the our PSA pin, which I'll touch on shortly.
Under P. B are the pimps are and ongoing component of future earnings opportunities performance incentives aren't new to us as you can see on the left of the chart. We've already had numerous perms and place for reliability customer service and renewable energy procurement among others.
Under PBR, we now have pins that reward the utility's ability to achieve faster interconnection times for new renewable resources efficiently acquired grid services capabilities from distributed energy resources collaborate to deliver energy savings for low to moderate income customers.
And effectively deploy and enable advanced meters.
Only one of these new pimm's, the interconnection Pam has the possibility of a penalty.
While initial Pam opportunities in 'twenty and 'twenty, one are modest and its December P. B are ordered the PUC characterize the new chems has purposely conservative to make room for development and for further pins, including and other pockets such as the D. E. R. Docket to potentially reached 800 and says on the 150 to 200.
Basis points of opportunity referenced in the PBR docket.
Turning to slide 14, the new Rps APM established under PBR will likely be the most impactful on the new pins and over the next several years, particularly as renewable projects from our stage, one and stage two rfps start coming online in 'twenty and 'twenty two.
And 2023 time frame.
The R. P S. A P M rewards based on the cheap.
Towards our based on the achievement of what the commission calls a corrected Rps calculation.
The statutory calculation is total renewable generation, including customer sited generation assets.
As a percentage of utility sales.
Customer sited generation is not included in and utility sales.
You can see on the right side of this slide that the RP assay Pam measures total renewable generation over total net generation were both generation numbers include customer sited.
The annual milestones are still based on the statutory rps goals, even the even though the peep PBR based our PSA calculation it makes them more difficult to achieve.
The annual targets are and interpellation of the Rps goals for the 'twenty and 'twenty 'twenty 30, 2040, and 2045 states. We are rewarded for outperformance on a dollar per megawatt hour basis with the rewards starting at $20 per megawatt hour and 2021 and 2022.
And declining to $10 per megawatt hour by 2024 and thereafter.
Based on our current projections, we think the reward this year could be up to 800000 next year it could be up to 5 million and in 2023 and it could be up to as high as $14 million.
It is important to note that these projections are based on current assumptions surrounding our D E. Our forecast.
Project project commercial operations dates performance of third party generators and many other variables.
In 2020, we invested $335 million.
And capital and VAT and utility capital investments, we expect to be at or above this level in 2021 with over $300 million of baseline capital investment Ernie.
Investments underway.
Under the earning under the new annual revenue adjustment mechanism.
In addition, both the E P. R M and renewable energy infrastructure recovery mechanisms provide for recovery of approved projects above the a R E.
And the E P. Our am allows recovery for value added expense based projects in addition to capital projects.
We have some large projects and anticipated in 'twenty and 'twenty, two including two self build battery projects and a project to enable the retirement of our fossil fuel power plant on Maui.
Overall, 2021, and 2022 Capex is expected to average just under $400 million annually.
We expect the utility to fund its forecasted capex through retained earnings Hei equity contributions and access to debt capital markets.
Under P. B are our investment investments should drive average annual base earnings growth and the 4% to 5% area over the next several years, excluding any upside for <unk>.
Performance incentive mechanism achievements.
Turning to the bank.
Higher provisioning and credit risk associated with the negative impacts of COVID-19 impacted 2020 earnings which declined by about 35% year over year.
Both 2019 and 2020 included onetime gains.
Thousand 19 included net gains from the sales of properties the banks bank exited when moving to its new campus and 2020 included one time gains from security sales.
Excluding both earnings were still down about $31 million.
Although yields on earning assets was impacted by the low interest rate environment, we had strong performance and a number of areas, including record residential mortgage production.
A record low cost of funds supporting net interest margin and strong loan and deposit growth.
On slide 17, Asp's net interest margin on NIM stabilized and the fourth quarter and full year 'twenty and 'twenty NIM remained healthy despite the challenging interest rate environment at 329%.
Record low cost of funds along with PPP fees helped soften the impact of low interest rate environment on asset yields. The average cost of funds was 16 basis points for the full year, 'twenty and 'twenty 13 basis points lower than the prior year.
For the fourth quarter. The average cost of funds was a record low of nine basis points.
On the LOE side on the loan side in the current market most of our adjustable rate loans have already repriced at floors are market levels.
Ongoing declining loan yields are primarily driven by the differential between newly originated loans and existing prepaid or maturing loans.
We continue to.
We expect to continue to see pressure pressure from low interest rates and from excess liquidity due to strong deposit growth and lower reinvestment yields and.
And 2021, we expect the net interest margin range to range from $2, 2.9% to $3 one five per cent for the full year.
Turning to credit.
Provision for the year was $50 8 million or approximately $15 million compared to $23 5.002 million 19.
The increase reflected additional credit risk associated with the negative economic impact of COVID-19 provision.
Provision for the fourth quarter was $11 3 million down.
Down from the 14 million and the third quarter and yet still elevated relative to $5 6 million and the same quarter last year.
We believe we are well provisioned going into 'twenty 'twenty one.
Given the uncertainty that remains as we continue to navigate through and expected multiyear recovery.
To date, we have not realized and elevated level of losses that had been provided for as 'twenty and 'twenty net charge offs were slightly lower than pre COVID-19 2019 levels.
Slide 19 provides an update on what what we're seeing in our loan portfolio.
Overall, we have a high quality loan book that remains healthy with only 1% of our portfolio on active deferral and at the end of the year.
Most deferred loans have returned to payments previously.
Previously deferred loans do have a somewhat higher delinquency rate of 1% compared to 40 basis points for portfolio as a whole.
We continue to carefully monitor our portfolio and are working closely with customers to understand their circumstances and outlook.
ASB continues to maintain ample liquidity and healthy capex capital ratios.
The bank has approximately $3 7 billion and available liquidity from a combination of reliable sources.
Asp's tier one leverage ratio of eight 4% was comfortably above well capitalized levels as of the end of the fourth quarter.
As a reminder, the bank is self funding and we don't.
Expect that it would need capital from the holding company, even under more severe stress scenarios that we evaluated under COVID-19.
On slide 21, our financing outlook for 'twenty, one for the year reflects our strong financial position.
The bank remains competitive and profitable and remains self funding with high levels of liquidity.
We expect this to continue into 'twenty one.
In 2020, Asb's dividend to the holding company was $31 million and in 2021, we expect this to increase about 35% to approximately $42 million.
The utility is expected to continue to sport.
65% industry average dividend payout ratio, which and 'twenty 'twenty, one will amount to about $112 million and dividends to the holding company.
Hei remains well capitalized and will continue to ensure the utility has access to equity capital to meet its needs and maintain an investment grade capital structure.
With improved cash distributions from the bank and utility we do not anticipate the need to issue any external equity and 2021 and.
We identify significant additional accretive investment opportunities.
Solid 'twenty and 'twenty results and our improved earnings and cash flow outlook have allowed us to grow our hei dividend, while managing our capital structure to maintain our investment grade rating.
Okay.
We are initiating our 2021 consolidated earnings guidance of $1 75 to $1 95 per share.
Our utility guidance of $1 53 to $1 61 per share assumes PBR implementation and June consistent with the Puc's December order.
We also assume full recovery of COVID-19 related deferred expenses.
And we expect utility capital investment to be at or above $335 million and mostly comprised of baseline capex covered by the <unk> mechanism.
We do not expect <unk> to be a meaningful contributor.
To earnings this year, given the conservative level of and the initial Pam opportunity.
At the midpoint of our guidance range, we expect to utilities realized Roe to be approximately seven 8% and 2021.
Once <unk> is fully implemented in 2022, and we're able to effectively realize the benefit of the new.
Our a and E. P. R M mechanisms along with existing mechanisms such as the renewable energy infrastructure structure mechanism. We expect average annual utility earnings growth of four 5% with the potential for Perm achievement to enhance earnings growth and realized ROE is.
At the utility.
Our bank guidance of 52 to 62 cents per share reflects continued profitability and a low interest rate environment and more normalized provision levels.
As economic conditions and credit quality improve release of loan loss reserves could provide some upside but are not currently and our guidance range.
We expect flat to low single digit asset growth and we expect net interest margin to be $2 290 to 315 basis points.
We expect holding company losses to be consistent with 2020 levels.
And as we are continuing to build out the Pacific current platform, we do not expect that it will contribute meaningfully to 'twenty 'twenty, one and earnings.
We do not expect the need for external equity in 'twenty and 'twenty one.
And we are targeting consistent dividend growth in line with earnings growth and a long term dividend payout ratio range of 60% to 70%.
I'll turn it over to Connie for it to make her closing remarks.
Thanks, Greg and Mahalo to all of you for joining us today.
We are proud of the accomplishments we've made.
On the 20, and we look forward to continuing to work with our customers communities and employees as we progressed through recovery this year.
We now look forward to your questions.
We will now begin the question and answer session to ask a question you May Press Star and then one on your Touchtone phone.
If you're using a speakerphone please pick up your handset before pressing the keys.
Anytime you question has been addressed and you would like to withdraw your question. Please press Star and then two at this time, we will pause momentarily to assemble our roster.
Okay.
And the first question comes from Julien Dumoulin Smith with Bank of America. Please go ahead.
Oh.
Good afternoon and team. Thank you so much for the opportunity and congrats on on year here and.
I wanted to show up on absolutely.
Absolutely wanted to follow up on the outlook here a couple of questions.
How do you think about the cost savings that you've committed to in the context of the recent arrangement.
And I'm really thinking about these first few years have you fully identified those offered those offsets shall we say to those savings commitments.
And then the second related question and I'll throw it out there at the same time and you talk about 4% to 5% generically of utility growth, but now that in theory. There's pins implementation gives you a multi year transition does that enable a more definitive type of utility cargo here.
In terms of the starting and ending point relative to the four to five per cent you've talked about.
Yeah. So Julien let me start this is Connie and.
Well, let me first address the cost savings and then ask a pain or Scott if they want to comment and then on the the pins and the outlook the growth rate going forward will let Greg comment on that.
And so on the cost savings are you know.
The utility had a great year in 2020 really focusing down very very quickly on delivering those cost savings you know as I mentioned, even before us on management audit results came out.
And you know we expect that those cost savings are going to carry forward into the future.
And we probably identified maybe half of that amount that's continuing forward.
You know we are delivering not only the level is a management audit savings.
But also the ERP savings that we're also building up and so those are all going to be flowing through to our customers during.
2021, which we believe is really a good thing because you know our community and still struggling with Covid.
And also if youre going to give back savings. This is the time.
To do that and.
And we're continuing to look for more and maybe let me, let Scott or <unk> comment on that because they've got all teams that are evaluating additional cost savings.
So scott or pain.
Okay.
I do and pain.
And see what Connie mentioned and so on.
And each one management audit savings you know our team worked very aggressively to ensure that the recommendations from the audit where were being implemented and so in 2020, we've identified of the $6 6 million and.
We identified and actually achieved roughly half of those savings on an annualized basis, which will.
Accrued to the 2021, but in addition to that we're also continuing to look for further opportunities to change.
Change how we.
Coordinate work and planned work. So there are additional savings there, which will then result in additional work force reductions position reduction and.
We're also continuing our efforts on strategic sourcing to look for.
Opportunities there on both our goods and services and then also I would mention that you know during and.
Covid, we did find different ways to work with one another and also looking to see how we can operate in smaller footprints. So are our lease rent costs for example will.
It will be decreasing as well, but those efforts are all continuing from 'twenty and 'twenty into 'twenty and 'twenty one.
And so let me have Greg comment on the growth rate going forward.
Hey, Julien. So you you noted the 4% to 5%, which is really based upon the investment levels and and what we believe is recovery under both the.
And the P. R M and other mechanisms and and most of the expenditures that we see over the next few years, having identified mechanism for timely recovery.
So that that drives the fundamental where we're and the performance incentive mechanisms are obviously need to be achieved on it.
Agreed upon targets and that's why we highlighted the RP assay is we already have and flight a number of increasing and through stage one stage two.
RFP procurement.
Additional renewable resources coming online that under that mechanism.
Have a potential for some for meaningful contributions.
And as additional pimm's are developed and we see what the potential opportunity. There is we see Pam says a continuous and ongoing part of our of our revenue and earnings.
Earnings capabilities at the utility so I see it.
And those achievements on aligned goals and targets.
To enhance our overall level of potential growth.
Over time, it's hard to predict at this point, you know, how and how impactful and at what rate that could be achieved as you know we've been we've seen improvements in and our achieved Roe.
Into the eight 8% eight and a half level recently, we just.
We're at 8.1, and spin and our objective of ours to get closer to our allowed ROE overtime, we think pimps provide that potential.
The other the other element that could take us above that baseline is if we see higher levels of.
Needed investments in programmatic types of expenditures whether for resilience or other types of programs that may be needed as we as we address some of the challenges of climate and other things here in Hawaii.
Which could also drive additional growth over time, but for the near term based on our capital expenditure plans are and planning levels at 4% to 5% baseline, we're pretty comfortable with did.
Did that answer your question.
Yeah can I clarify one thing and I apologize I know you guys gave a very thorough answer Greg when it comes to the 'twenty one versus 'twenty. Two onwards walk you talked about the 4% to 5%, there's a lot of pieces moving in and out here.
What are you, saying about overall ROE trend year over year here, what is the broader trend and we should be expecting I'm sorry, but.
And that's trying to track all the pluses and minuses on here.
Yeah, No and good question and I'm glad you asked that because that's why I also highlighted the.
And at the midpoint of our guidance range of.
'twenty 'twenty, one with partial implementation some of the challenges with the implementation is we've and as we've had to as we've settled for no base rate increases we do have some capital expenditures that have not been yet rolled into rates. We're seeing 2021 is a transition year.
A bit of a step back in terms of realized Roe.
But as you step into 'twenty and 'twenty two and.
And have a full year of implementation and potential greater opportunity under the pins and we see a market improvement and performance, including elimination of the Ram lag, which should which should contribute contributed about a 20 basis point improvement based on our estimates.
As well as full year implementation of some of the incentive Megan.
Mechanisms my 4% to 5% our debt I was targeting was that it had mentioned was once we have full implementation.
Of the AR of the P. P. R and 2022, so I'll be using 2022 as the base year for that that.
That growth rate.
And Julian I'd I.
And you've caught and Greg's comments, we're actually expecting a decline in earned ROE. This year because of all the different moving pieces. So he had said it would be at seven 8%.
And so quick example.
And with PBR is not effective until June one however.
And like the level is.
Management audit savings and we're going to deliver actually the level is the amount is for the full year 'twenty.
'twenty 'twenty one so that really is starting January one so that's some of the like you say, there's a lot of moving pieces, but we're expecting a decline and ROE at the utility share.
Got it alright, thank you very much best of luck.
Thanks, Joe and thanks Julian.
The next question comes from Paul Patterson with Glen Rock Associates. Please go ahead.
Morning.
Hi, Paul and Paul.
So just let's follow up on on Julians questions, because what as I'd mentioned there are some there's a lot of moving parts.
But that and to the ROE.
He said at some 0.8 per cent I believe utility or are we at 'twenty 'twenty, one and is that correct.
Yes, that's all right and that's at the midpoint of our guidance range right and then.
The rib.
Were going away and there were 20 basis points is that correct.
Yes, and that would be its way towards getting and toy. It just showed the ram lag for 'twenty 'twenty, one it's approximately 40 basis points.
And our 20 excuse me 20 basis points last year. It was 40 and 2020 excuse me.
And so that and remaining and anticipated to be approximately that level. In 2022. If it were to continue so that will be eliminated year over year with a a R E in place for the full calendar year.
Okay and.
So we're talking something in the neighborhood of 8% again and sort of mid point kind of thing for 'twenty 'twenty, two and theory everything else being equal.
Yeah, but we've got we've got additional earnings growth driven by a $335 million of capital expenditures this year.
City, and some ability under under.
<unk> underpins the utility has plans to fully offset and the $6 6 million of O&M that day that they've committed to so there's ongoing cost efforts to reduce debt, which could strength and performance as well.
Your your your anticipated so.
So basically what I was going to ask and so we're talking about four to five per cent that includes the potential upside that you.
Sig reasonably speaking you should be able to with incentives and everything else is everything fits together do you think that's accrued and everything is that correct.
No.
Or is it on the upside from there.
Yeah, so and so really quickly Paul so what we're saying is that we should be reset in 'twenty and 'twenty two 'twenty 'twenty. One is the transition year and then from the 2022 year, there would be the 4% to 5% growth.
Part of Julians question, I think implied well geez can't you guys do better given that <unk> may be coming in and that is a possibility, but you know theres a lot of work that has to be done.
And with the commission and with.
Stakeholder groups to actually determine pins that will.
And as I mentioned the at a whole framework is intended to balance our various stakeholder interests and so you know there's a lot of work to be done on those additional pins going forward.
And so I.
And I don't know if that helps so that does help.
Just wanted to make sure I'm not missing something okay. So.
And then I guess, when where and when we're regarding the Rps standards and what have you you.
You know I guess you guys had some like 50 per cent and now we have for 2000, Twenty's and my right about that from Maui County.
Yeah.
I mean, I guess, what my question is.
And if there's some point where.
You guys are concerned about and you should get a threshold where.
Sort of below hanging fruit I mean, just from a reliability perspective, keeping it altogether.
We realize that a polar vortex is unlikely to happen and Hawaii, but but but I mean, I'm just trying to get a sense.
True.
And we're not there and something we should be thinking.
What kind of challenges you guys might be thinking about in terms of you know.
These are very high numbers as you know and and.
And I know you guys are focused on it and just if you could talk about that a little bit yeah.
Sure I'm going to ask Scott to do that I mean, I will say that I mean as you know we have been focused on that for years now.
And particularly as Hawaii has led and things like Oh.
The rooftop solar integration and you know we don't have a lot of the resources like you've got on the mainland like nuclear or gas to help offset and so we've been very focused on it for a while and actually have participated with the national labs, and a leading and.
Some of those technologies and thankfully Scott guys have been doing a good job keeping the lights on but Scott and I turn it over to me that's true.
Sure Yeah, Hi, Paul This is Scott SEU Hawaiian electric.
Utilities so.
You know as we chart the path forward.
Public Utilities Commission of course, the utility a number of critical stakeholders, we've been paying a lot of attention over the years, we and the various dockets focused on how do you make this transition to a more distributed.
<unk> energy resource based system.
While at the same time, maintaining the resilience and the reliability that is critical we have some very critical customers here.
So you know probably a good example of that is as we've gone forward and procured the solar now we are fully in the realm of procuring solar plus storage. The earlier days. It was all about just solar resources wind farms, but I'm now as the again the.
Commission as well as the utility as we look to our needs for the system. We recognize that we have to maintain the capacity as well as the reserves being out here on isolated systems to maintain that reliability and resilience.
We are also and our grid modernization programs and also seeking to integrate these distributed energy resources in a manner that not only prevents any perhaps a potential risk, but actually seeking to grab the value from these D. R.
Sources.
And to help us run the grid so yes.
Yes, there is always going to be some consideration given how far away. We are from the west coast and other you know, we're not interconnected and the islands, but what that means is we're being I'd say, even more aggressive as we look at these issues. Okay. Great and then just blow me on that.
And the cost savings.
Sure and sounds like Youre closing quite a few branches and I was just wondering.
What's your expectation with respect to the savings that's associated with that and what it would be coming in.
Okay, well, let me ask rich.
Yeah. So we are seeing some of it now we consolidated eight branches are in 'twenty, and 'twenty and the staffing and the and those branches is down about 52.
He made some of that gets offset into the call center and and other areas as the transaction shift to two other places and.
And we'll expect to see that worked through we are yeah. So you'll see.
Some some reductions in occupancy and out there we are taking some early termination charges and and things as we get out of some some leases early and the that'll be and they're offsetting it and during the calendar year, but then you'll see those those savings roll through from 'twenty.
Two and.
And how much how much and 2022.
What would that sort of beat and the ballpark beef since two.
On the cost to achieve will be sort of out of the way.
Uh huh.
And the roughly half of it roughly two thirds of our occupancy is as branch occupancy. So our occupancy runs about $20 million and about 13 of it is out and the branches about six of it as our campus and our our our volt operation and so you I think you.
To see.
And some some reduction on the order of about 10 per cent out of the out of the Oh the branch footprint.
Where we are we mentioned the digital centers.
There you will see them coming in so that offsets a little bit some of those reductions and the branches that we're closing typically are smaller.
Smaller footprint once we've.
And we've talked to you about kind of our branch network. We're you know we're down from roughly.
70 branches overtime, and we've been focused on sort of the long term keepers.
Servicers and and as we as we've done that Oh. The branches that are that are going to be the R are keepers or are the larger and larger part of the of the occupancy footprint that's out there.
Okay, great. Thanks, so much.
Thanks, Paul.
As a reminder, if you have a question. Please press star and then one to be joined into the queue.
The next question comes from Jackie Bohlen with K B W. Please go ahead.
Hey, everyone and good afternoon and.
And two.
And I just wanted to stick with the line of questioning on expenses and also time mortgage and to that and see what your expectations are for volume and you know I know, we're obviously very and.
Early in the year and that exchange quite a bit, but just what you're seeing so far and what your expectations are through the air.
And so as we looked at mortgage you know last year, we had an outstanding year I ended up having to shave My head are on my team shaved my head because the food they broke $1 billion and mortgage sales. So we call it the $1 billion haircut.
So they did about 1 billion to of originations, we were expecting the market to be down around 20%.
So that would go we'd get you somewhere south.
South of $1 billion 900 million maybe of a production if we did well and we've started the year a little bit stronger than that run rate and you know, we're we're hoping that hangs on our book.
And if rates move a little bit debt, but it's the hits the volume opportunity there.
So right now our target for production was with somewhere around 900, a little bit South of 900, and you know, we're running a little bit stronger than that and the first.
Five weeks.
Okay.
Jackie you might've caught and Greg's comments on the economy that are residential market is quite strong here with housing prices up over 5% year over year and our sales volumes continuing.
Yeah, Yeah, no I I did catch that and net yeah. Thank you for just a well rounded update on all of that and it I mean, it sounds like Hillary.
Still a good source of income and.
But some of the lower volume am I, correct, and assuming that that plays into some lower compensation costs.
In 2021, and so that's another driver of being able to hold expenses flat this year.
Well, you know and a chunk of that compensation and ends up and deferred loan costs as you know right anyway and.
And so the net net the net fall through isn't that big and from that factor right. The other things.
And things on hold and holding it flat or really all the other activities actions, we're taking we've got a.
And a pretty strong a set of actions that were taken to try to contain costs.
Okay.
Okay. Thank.
Thank you I, sometimes forget about the Fas 91 impact and Howie.
And redirect that.
Great.
And then when you think about P. P P and net net new round of it how has demand been so far for you.
So demand is not as.
As strong as the last time, right, where we're probably we've received about Uh huh.
$150 million of applications.
1700 applications, we've got and about half of that approved and so far and that's a few weeks and the customers are calmer.
And you know they they've been managing through it they understand that we will get it most of you know the biggest part of our people who are who took out and the first round and are coming back for another.
Another another pass at it.
Some have process their forgiveness, some have not and so theres a mix, but we've also and I think the technology solutions that most of the institutions that are implemented and I've also made it feel calmer.
And last time, even though theres you know its still pretty.
That's pretty good demand for loans, and but and it's running at a at a slower pace than the round one.
Okay and that I mean.
And that makes sense yeah yeah.
Do you happen to have the amount of fees that are left for forgiveness from round one.
About seven and a half a million.
Okay.
Alright, and then I just wanted to make sure that I was reading one of your slides correctly and thank you for all the details on football and portfolio and so the general trend that you have so it it looks like only 2 million and C&I deferrals and so based on the slide they gave the toll.
It'll deferrals on.
The majority of commercial deferrals and real estate secured right am I understanding that properly.
Yes, I think so let me just pull up the slide and major.
And Youre looking at and make sure we're answer and that correctly.
So.
Alright, and lots of flatter I'd give you the number I know it was towards that mid 19.
So it's one of the ones and the back.
Hi, It was slide whatever the deferral and so probably slide 19, I think I heard you say mom and Pops.
And 48, and with Eni number that I called.
Right Yeah.
Yeah. So so.
Youre correct CNI.
<unk> is a small number of the of the remaining deferred theres some of the C&I that converted the T D R.
But and in the commercial space the bulk of it is is owner.
Owner occupied CRE.
Okay.
And then it and.
Sure.
And I mean based on collateral values and the trends you've seen to date and the reserve belt that you've had that's been really strong and especially if I exclude and P. P. P balances out of that calculation I mean, you're in a very secure and from what it looks like to me I mean is that a fair statement yes.
And we feel like we've.
We've properly reflected the risk and we see and you know we are managing like.
Dogs to not let it fall through into and the losses right. So.
Our guys are working very closely with customers, where and with them working through.
And you know and liquidity and cash burn rates on on.
A consistent basis.
Trying to help them preserve cash and and cut burn rates. So you know, while we had to provide and we think we.
And as we've mentioned I think second quarter. When we did the you know the broad special mention and you know.
Re grading of the accounts that debt.
Asked for deferment.
And we think we've been conservative and and the approach appropriately conservative and.
And we're working really hard to make sure those don't turn into losses.
Okay.
And if we're sitting here at the latter half of 'twenty, one and you don't even call. It the fourth quarter and you know tourism has come back quite a bit. We're looking at you know a widely vaccinated population and things are looking much better and if you haven't realized meaningful charge offs or meaningful loan growth on.
And I mean based on seasonal I know, you're you're not modeling this and it's not in your guidance or anything but based on seasonal we could be in a position where you would have to bring that ratio down is that fair.
Yeah, I think the you know, especially as we have special mentions that.
And two new to demonstrate ongoing payment performance Ah you know.
And then you would look at upgrading and special mentions and if the if the and risk and the environment.
And is gone.
The direction that you describe which were you know were lighting candles too and and.
And it works out that way and.
And then I think the bias would be that you would see a reduction and and the coverage rate. We just we're just a little bit more sober maybe on how quickly that happens and until we see it and and so we haven't guided that that would happen and.
This year.
Okay, Yeah, no definitely fair enough I know, there's still a lot of uncertainty okay. Thank you for taking my questions.
Jackie I would just add.
You know American has very active risk management practices actually also and at the board level.
And.
And that's all very consistent with the role that American plays within the total Hei enterprise, where you know we want to be sure. We know that our investors are very focused on risk.
And so we want to be sure that we take a conservative profile with respect to the bank.
Yes.
Yes.
This concludes our question and answer session.
I would now like to turn the conference back over to Julie Smolinski for any closing remarks.
Thank you all for joining us today and for your questions. Please reach out if you have any other questions and have a great day.
Okay.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Okay.
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