Q1 2021 Hawaiian Electric Industries Inc Earnings Call
Yes.
Good day and welcome to the Hawaiian Electric Industries, Inc. First quarter 2021 earnings conference call.
All participants will be in listen only mode.
You need assistance. Please signal a conference specialist by pressing the star followed by zero.
After todays presentation and there'll be an opportunity to ask questions.
And I ask the question and refreshed stores and one of you touched on flow.
So withdraw your question. Please press Star then two.
Please note this event is being recorded.
Now I'd like to turn the conference over to Julie Smolinski, Vice President of Investor Relations. Please go ahead and map.
Thank you Rocco welcome everyone to Hawaiian Electric industries first quarter, 2020 one earnings call. Joining me today are Connie Lau Hei, President and CEO, Greg Hazelton, Hei Executive Vice President and CFO, Scott Sue Hawaiian electric President and CEO.
Rich Wacker American savings Bank, President and CEO and other members of senior management and our.
Our 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 and 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.
Now Connie will begin with her remarks.
Thank you, Julie and Aloha, everyone and mahalo, Thank you for joining us today.
We had a very strong start to the year with first quarter consolidated net income of $64.4 million and earnings per share of 59 cents. These results were 93 per cent and 90% respectively above the same quarter last year and were driven by stronger earnings and both.
The utility and the bank.
And the first quarter Hawaiian electric benefited from continued savings from the robust cost management program, we started last year.
And the savings will be delivered to customers and rate beginning in June and along with other timing elements. We expect the utility to remain within the guidance range, we announced in February.
Americans first quarter results reflect good execution and an environment that remains challenging for bank profitability. Our results benefited from a release of provision as we continue to conservatively manage credit and the improving Hawaii economy and.
And Greg will cover in more detail, we're increasing our bank guidance and consolidated hei guidance for the year to reflect this improvement.
We're seeing strengthening and the local economy and sort of thought he continues to manage the virus well and the vaccine rollout continues unemployment.
Unemployment declined to 9% and <unk>.
Well, it's still above the national average, it's headed in the right direction, having declined from a peak of nearly 24 per cent a year ago.
We've seen significant growth and tourism arrivals this year and lately, we've experienced multiple days, where arrivals have approached pre pandemic averages.
At this point almost all our rivals are from the U S mainland as the COVID-19 situation and vaccinations abroad have been more challenging than domestically.
How about you real estate fundamentals are strong and continue to support the conservative portfolio mix at the bank.
Year to date March for Wahoo sales volumes are up 19% for single family homes and 53 per cent for condos median prices are also up.
17% to $950000 for single family homes, and 4% to $450000 for condos.
And it's March outlook, the University of Hawaii Economic research organization accelerated its forecast for the state's economic recovery by 18 months with the GDP now expected to rise three 7% in 2020, one and $3 one per cent and 2020.
COVID-19 cases, and Hawaii have remained far below the mainland the seven day Rolling average was 94 for the state and is the fifth lowest per capita among U S states as of May six.
40% of our residents are now fully vaccinated and more than half have had at least one dose.
While this is encouraging we're mindful that we're still in the early stages of Hawaii's economic recovery and there is still some uncertainty about the pandemic of course.
At the utility cost efficiency, our transition to the new P. B, our framework and our clean energy future have been and continue to be our major focus.
We and our stakeholders are all learning the new P. B, our framework, which is designed to align our interests as we work together to increase renewable energy and Decarbonize, our economy, and a way that is affordable and reliable resilient and equitable.
Our commitment to cost efficiency positions us well as we transition into P. B R.
The utility has been successful and implementing efficiencies and achieving savings to deliver on our management audit savings commitment and the customer dividend we'll.
We will start returning these savings to customers through the annual revenue adjustment or a R. E. When P. B R goes into effect June one.
Cost management will continue to be a focus as we operate under P. B R.
We've been working with stakeholders to finalize and you can see our performance incentive mechanisms or pens as well as the scorecards and metrics, we'll report on going forward.
We are expecting the PUC to issue an order setting forth the parameters.
And in the near future.
As we said before reaching our collective clean energy and decarbonization goals must be done in a way that is Costco a Hawaiian word that means it takes everyone working together.
We're working to bring projects from Hawaii's largest ever renewable energy and storage procurement online.
We are fully committed to this effort, which is no easy task given the number of projects. The scale of this procurement relative to our small and some community considerations land constraints and the need to ensure reliability on isolated island grids.
And we're actively working with independent power producer and government agencies and other stakeholders to overcome obstacles to bring projects online faster.
Last week, the PUC directed us to establish regulatory liabilities to track costs to customers, resulting from delays and commercial operation of approved stage, one stage, two and C. B R. E phase one projects, while we do not believe we are liable for any amounts we believe.
The puc's intention may be to track rather than record costs before a determination is made so we will be seeking reconsideration or clarification.
Last week the PUC also approved with conditions our agreement for the Koppel, a energy storage project a stay.
And alone battery project that will help ensure reliability when deal wahoo.
And retired and.
And enable integration of more renewable energy.
Well technically and approval the order imposes conditions that may prevent us and the developer from moving forward with this project.
The regulatory process allows us to raise our concerns to the PUC and we will be filing a motion for reconsideration on Monday.
Another key focus is accelerating the addition, and more distributed energy resources or D E R's and demand response.
On May 3rd we filed our recommendations to achieve this acceleration well underscoring the importance of equity and fairness and how the programs are designed we're advancing programs to benefit all customers, including expanding our community solar program proposing a rooftop rental program and.
And procuring aggregated grid services from D R's.
Grid modernization is key and facilitating faster deployment and effective use of demand response and D E R's.
In March the PUC approved our proposal to shift from an opt in to and opt out approach for advanced meters and targeted areas, allowing us to deploy advanced meters more quickly and thus, enabling operational efficiencies and a more advanced rate programs.
Turning to the bank American continues to perform well and a challenging environment.
And the first quarter, we continued to have strong mortgage production and deployed an additional $150 million S. B cares or paycheck protection program loans to support small businesses in round two of that program year.
Year to date that amount and has increased to over $170 million.
Record deposit growth in large part driven by federal stimulus continues to outpace lending opportunities and this early stage of Hawaii's economic recovery.
We're taking a balanced approach to managing our portfolio optimizing fee income and loan portfolio growth and remote.
Rate environment.
While net interest margin is still pressured record low funding costs and balance sheet growth are helping grow net interest income consistent with our expectations.
Our first quarter release of reserves for credit losses reflects the resilience of our customers as well as the moderating credit risk environment cause other he's economy begins to recover we continue to manage our reserves for credit losses conservatively.
American has also continued its cost control efforts, leading to lower noninterest expense and the first quarter, even as we invest in our anytime anywhere banking transition.
Improved profitability is also allowing the banks dividend to hei to increase.
We're accelerating our digital transformation to enable customers to bank with us anytime and anywhere.
Day, 44% of deposits are made through self service channel.
And and mobile.
More than double pre pandemic levels, and we've seen increased customer satisfaction across all channels over that time.
We're enhancing our digital offerings to make banking even easier for our customers.
This includes providing new online financial wellness tools upgrading our ATM fleet strengthening our mobile app expanding online capabilities and opening new digital centers, where our teammates will help customers with digital banking solutions.
Now, Greg will discuss our financial and.
And our outlook right.
Greg Thank you Connie.
Turning to our first quarter results consolidated earnings per share were 15, nine cents versus 31 cents and the same quarter last year.
Both the utility and the bank reported strong performance, reflecting the resilience of our companies and the Hawaii economy that has showed signs of a strengthening and recovery.
At the utility earnings reflect lower O&M expenses from cost reduction efforts and delays on timing of generation overhauls, coupled with higher revenues from our annual rate adjustment mechanism.
Including timing related charges for target revenue recognition to eliminate seasonality impact.
The bank benefited from the release of provision for credit losses as certain credits earned upgrades and we saw stable credit trends and and improving economic outlooks.
While the holding company losses, well in line with plan, we increased charitable giving inc.
During the quarter, including a 2 million dollar contribution to support our communities through challenging times.
Compared to the same quarter same time last year consolidated trop and trailing 12 month ROE improved 80 basis points to 10%.
Utility Roe.
Increased 160 basis points to 9% and bank Roe.
Which we look at it on an annualized basis was 16%.
The utility outlook remains unchanged, however, and the ROE expectations will be impacted by the management audit savings and customer dividend is O&M cost reductions that have improved earnings for the quarter are used to fund customer bill reductions under P. B R.
Regarding the utility's results net income for the quarter was $43 4 million compared to $23 9 million and the first quarter of 2020 and.
And most significant variance drivers were $10 million lower O&M expenses compared to the first quarter last year. There were three main factors that drove O&M lower lower staffing and efficiency improvements from the ongoing cost management program.
Timing related items, including higher bad debt expense in the first quarter of 2020 related to COVID-19, which has since been deferred.
And fewer generating facility overhauls, some of which will be performed later in the year.
There were also higher costs in 'twenty, and 'twenty related to and increased environmental reserve and higher outside service costs to support the PBR docket and.
And the other customer service projects.
In addition to lower O&M, we benefited from a $5 million revenue increase from higher rate adjustment mechanism revenues, a $4 million revenue increase related to timing of the recognition of target revenues during the year.
Which we will have no net impact on 2020, one and which is due to a change in methodology that and eliminate seasonality for recognizing target revenues within the year.
A $1 million lower enterprise resource planning system implementation benefits to be passed onto customers and 1 million and lower non service pension costs due to a reset of pension costs included in rates as part of a final rate case decision.
These items were partially offset by 1 million higher depreciation.
Regarding the drivers of utility performance for the rest of the year, we expect no meaningful contribution from the performance and set sensitive mechanisms during 2021.
We currently have approximately $22 million of COVID-19 related cost, primarily bad debt expense, the crude and a deferred regulatory asset accounts.
We will continue differing COVID-19 related costs through June 30.
More tourism on customer Disconnections is in place through May 31st 2021, and we will and we continue to work with customers on extended payment plans and assisting with other bill assistance alternatives.
We plan to file a separate application to seek recovery of cost.
Once actual costs are known.
We will also be filing a request for approval to continue differing COVID-19 related costs be beyond June 30.
As mentioned, our O&M expense was positively impacted by the timing of Overhauls Goose, Inc.
Expect some of these overhauls to occur later in the year in line with our annual guidance.
The utility's ability to achieve accelerated management audit savings commitment is an important driver of O&M expenses utility is on track to achieve the savings necessary to meet the manual annual $6 6 million dollar commitment, which will be returned to customers starting June 1st.
Utility capital investments for the quarter of approximately $60 million were lower than planned due to unexpected delays. Some other delays were due to extended repairs being made at one of our substation Stacy.
Stations limiting work that can be done on other parts of the electric system. We also experienced additional design work required for tea and deep projects COVID-19 travel limitations and meter deployment delays that impacted our grid modernization work.
Despite the delays, we still expect to achieve or utility capital investment plan for 2021.
And we are maintaining the capex and rate base growth guidance, we issued during our previous earnings call and still expect 2021 capex of approximately $335 million to $355 million, reflecting rate base growth of four to five per cent.
Turning to the bank Asp's net income for the quarter was $29 6 million compared to $15 7 million.
Last quarter, and $15 8 million and the first quarter of 2000 Twenty's and the.
The increase primarily reflected modern a moderation of the elevated credit risk environment as Hawaii's economy begins to recover and results benefited from a release of reserves for credit losses, which I'll discuss further.
Net interest income reflects the impact of strong deposit growth lower loan demand and increased growth of our investment portfolio.
Noninterest income benefited from strong mortgage origination and sales in line with plan despite being below the prior year's quarter.
Noninterest expense remained in line with plan is a S. B continues to focus on strategic investments to drive efficiency and productivity.
A S fees net interest margin compressed 17 basis points during the quarter.
And the NIM was $2 95 per cent compared to $3, one, 2% and the fourth quarter 2020.
The low interest rate environment and record deposit growth each contributed to NIM compression.
$3 1 million and fees from our PPP lending and a record low cost of funds helped soften the pressure on asset yields. The average cost of funds was 0.08% down one basis point from the linked quarter and 16 basis points from the prior year.
We expect continued pressure from low interest rates and from excess liquidity due to strong deposit growth and lower reinvestment yields and consequently, we are updating our NIM guidance range to 280% to 3%.
We anticipate the balance sheet growth should still lead to net interest income in line with expectations for the year.
Turning to credit and the first quarter, the bank released $8 4 million and provision for credit losses compared to provisions of $11 3 million in the fourth quarter and 10.4 million in the first quarter last year.
This reflects credit upgrades and come on in the commercial loan portfolio reduced exposure to riskier, but profitable consumer unsecured loans and lower net charge offs as Hawaii's economy begins to recover and credit the credit risk environment moderates.
Asp's net charge off ratio for the quarter was <unk>, one eight per cent compared to 0.36% and the fourth quarter and 0.44% and the first quarter 2020 non.
Non accrual loans were up slightly to 1% compared to eight 9% and the fourth quarter and <unk> nine zero percent in the prior year.
We remain conservative as we take a wait and see approach to Hawaii's economic recovery and at 1.73% as of quarter and our allowance for credit losses was.
Is the highest among Hawaii peers.
We're seeing positive loan deferral trends across day as fees portfolio nearly all deferred loans have returned to scheduled payments.
Active deferrals or just point to percentage of the total loan portfolio.
We're experiencing we've experienced declining delinquencies and the higher risk commercial and consumer portfolios, while we write realizing a slight uptick in delinquencies and the residential portfolio that portfolio. It's a low risk is low risk and secured by rising value and the Hawaii real estate market. These two.
Factors have contributed to decreasing profile of our overall risk profile of our overall loan portfolio.
S. B continues to manage liquidity and capital conservatively, maintaining ample liquidity and a healthy core capital ratios the <unk>.
<unk> has approximately $4 billion and available liquidity from a combination of reliable resources asps.
Asps and tier one leverage ratio of 833% was comfortably above well capitalized levels prospectively, given the lower risk profile profile of our portfolio, we anticipate managing closer to an 8.0 per cent or above tier one leverage ratio and drive competitive profitability.
And the metrics growth and D. S P dividend, while maintaining a strong capital position.
Yeah.
We expect higher Davitt bank dividends to hei this year than reflected in our February guidance, given a S b strong performance and outlook and efficient capital structure.
Now expect dividends of approximately $50 million to $60 million versus the previously estimated $40 million for the quarter. The HP Board has declared a $23 million dividend to hei.
We still do not anticipate the need to issue any external equity in 2020, one at hei and unless we identify significant additional accretive investment opportunities we.
We are committed to maintaining an investment grade profile at the utility. We're pleased to have had recent utility credit rating upgrades by S&P to triple B flat and.
And Moody's to B double a one both with stable outlooks.
Turning to our guidance, we are reaffirming our previously issued utility guidance, while the utility had a strong first quarter will be returning cost savings to customers beginning June 1st and.
And expect additional overhauls later in the year. In addition, while the first quarter benefited from higher revenues due to a methodology change to remove seasonality and.
And recognizing target revenues a portion of that will reverse later in the year.
However, we are revising our bank and consolidated guidance.
Our revised guidance is 67 cents to 74 cents per share up from our prior guidance of 52.
Since 262 cents.
And we're revising our NIM expectations at the bank to two 8% to 3% down from $2 92 to $3 15.
315 per cent.
The impact on net interest income should be muted by the balanced by balance sheet growth.
Given strengthening credit dynamics and outlook for the Hawaii economy, and we now expect provision to range from zero to $10 million, which we believe remains appropriately conservative given continued uncertainty for the economy until we can see increased vaccination levels and the eventual return of international travel.
Five cents per share.
Now I'll turn the call back to Connie.
Thanks, Greg.
I'm proud of the dedication of our employees and the resilience of our companies as we continue to provide a central electricity and banking services and deliver solid financial results, while helping Hawaii reach its aggressive climate goals and build back better.
Last month, we issued our second consolidated ESG report, which includes our ESG priorities and our first task force on climate related financial disclosure and.
And reporting.
We're considering the implications for our companies.
And the administration's goal to cut carbon emissions 50 per cent from a 2005 baseline by 2030, we believe our goals and plans here in Hawaii and the work we've been doing for some time place us on a strong path to achieve net zero future, we're updating our planning and analysis.
And we'll report further on that and the future.
And finally, we say Aloha to rich today as he is leaving American to pursue other interests Richard accomplished a great deal during his more than 10 years at the helm of American Rich leaves American and great shape as evidenced by S. B strong first quarter earnings and Greg's comments earlier.
Under Rich's leadership SP has grown its assets expanded its customer base products and services and improved operational efficiency.
He and his team have provided great customer service and made banking easy for customers.
We thank rich for his leadership and contributions to American and also our state.
Antero Nishi currently the bank's executive Vice President of operations will succeed richest president and CEO later today.
And as a strong collaborative leader with deep banking industry knowledge, and a 14 year track record of success at American and we look forward to Anne's leadership.
And now.
We will open it up for your questions.
Thank you we will now begin the questions and answers.
To ask a question you May Press Star then one on your Touchtone phone.
Please refer them, we ask that you please forget per handset before pressing the keys.
And your question. Please press Star then two.
And then just first question comes from Julien Dumoulin Smith with Bank of America Merrill Lynch. Please go ahead.
Hey, good afternoon and team are a good morning to you all thanks, so much thicker design.
And as shown here.
Absolutely likewise, well congratulations on some fairly impressive results and turnaround and so.
And to kick things off here on the utility side can you comment a little bit on this 9% or are we I mean, that's a pretty fantastic outcome, especially given the backdrop here. How do you think about the cadence through the course of the year of that or are we.
Because obviously you've kept your utility numbers intact. How do you think about that that degradations and of course of the year relative to what is presumably some of the cost savings metrics and then if I could throw another twist on there is that 9% something we should think about in the later years as those costs.
And those are front and loaded cost benefits roll off here.
So thanks, Julian for the question and I'll tell I'll start and and characterize this for the first quarter. We had a we had a good start to the quarter, but largely in line with plan.
The utility has been focused on efficiencies and cost savings since last year and you saw the benefits of that and at our year end report as well and that's continued well into this year.
But as you know we have accelerated our customer build benefits as we implement P b or this year and in 2020. One is a transition year under P. B R. So we expect while we've got a great start and and solid expectations will meet all of our plans on those cost reduction efforts.
And that debt, we're still in line with our overall guidance that we issued at the beginning of the year and that our Rovs will reflect that guidance, which we represented just below 8% earlier. This year. So again, the quarterly results and recognize a fast start but overtime it will moderate too.
Consistent with our guidance. The other element that you mentioned, though was those cost benefits and of of the cost saves and we'll continue with the programs that Scott obtained and the utility team has put into place. So we do expect some opportunity for that to benefit.
And I realized earnings over time as we continue through the full implementation of P. D R and over the next several years.
Got it and excellent and then just to make sure I heard this from the utility side right. How do you think about that utility capex issue here I mean, just around some of the delays and what's the order of magnitude that's at risk here just to understand because I know you alluded to some things, but you are keeping intact your rate base targets and this year at the same time.
Yeah, and again, we don't see a lot of risk to the capital deployment plan and investment plan, there's a lot of needed investment and the utility has done a great job and and preparing and deploying for that you've seen at different points in time, the timing of specific projects can get delayed and impacted but.
Overall the.
And the utilities confident that there'll be able to meet their investment a program and capital deployment consistent with the guidance we've provided.
Got it and Super quick on the ASP side of the equation.
With respect to NIM versus these the the release of reserves here and how do you think about that to trend through the course of the year right.
Obviously things are accelerating as you described yourself and your prepared remarks, so presumably that that bodes well and release, but obviously NIM lower here just can you comment about those two factors through the course of the year as best you understand it today.
Sure. This is rich and so the NIM, we brought the guidance down really reflecting the sort of what's the continued pressure of the current environment and you know if you think about it and you've seen the deposits grow.
A lot of that since loan growth is relatively modest a lot of that goes into the investment portfolio and so you're mixing down because he and the NIM and the margins on the investment portfolio or no.
And just lower than than loans, because theres no credit risk and there right. So so that youre going to continue to have that mix effect until you get the economy, a stronger and loan growth moving up right.
So and then on the provision.
Right now a lot of it will depend on what happens with the specific credits right. So if the economy stays stronger we would we would expect the credits that are you know and the special mentioned category would would come up because that's you know potential credit concerns and.
If we don't see them and because the economy is improving and they're paying and theirs and the risks don't.
Appear then with those upgrades you could you could see a continued adjustment of the level of coverage on the portfolio.
And I think all the all the banks and the market brought down the coverage level, a bit and and the first quarter and you know, it's it's going to depend on how the sustained improvement of the economy is in and the results on those specific credits.
And excellent alright, and I'll leave it there congrats again speak to.
Hey, Thanks, Julien have a good Friday and the next question and cultural and they're going to show flow was.
Please go ahead.
Hey, Jim Thanks for the update today and taking my question can I, just maybe Greg in terms of.
The utility EPS growth guidance of 4% to 5% corn and going to plus that does not include performance incentive mechanisms and I understand that maybe just can you debt.
You know depending on can you quantify I guess, what I'm trying to can you quantify what the.
Upside might be does it put you at the high end of that growth target or could you actually grow higher than five per cent and then what to look for in terms of timeline as to the cadence of when these PMI has to get approved and rolled into your plan.
Sure and and as you know and with the implementation of P. B R. A lot of those are near term pins and the incremental payments under P. B are being finalized currently.
And the initial deployment of those or are seem to be.
And somewhat moderate to provide room for additional pimm's overtime, and and potentially a more meaningful opportunity. So.
The current year's guidance does not anticipate any meaningful contribution from Perms are locked the guidance that we've given in terms of the five for 5% growth area was really predicated on our growth is invested and a return on our invested capital, which all we have good recovery mechanisms for may.
I'll turn it over to chain or the utility to talk about the dynamics, though longer term of depends development and opportunities.
Yeah.
Hi, Yeah. This is Jay Thanks, Greg and.
From the Pam and we've laid out some of that in our appendix.
Appendix part of our slides.
But what we do see is for the PBR, the new camps and P. B are you can see that there is.
A lot more upside opportunity rather than penalties or downside.
Currently this year is as Greg mentioned, the terms are very modest as we get more guidance.
In terms of the details.
Tim.
But what I would say is looking forward the greatest opportunity we have for the pin.
Income from the Rps ATM and that comes from well, what we're doing in terms of adding.
Oh and renewables on our system.
And the other thing I would say you.
You know about that is you know there's also opportunities in other other the hum.
Outcomes are set forth in the PBR, docket, which actually relate to customer outcomes, and and 40 and the states and energy goals there.
So that's a little bit on the pin did I answer your question yes.
Yes, you did and just to be clear, though I mean, not from four to five per cent.
Like does not include.
And the additional upside that you might have for them that would be that would be on top of a four to five per cent and just recovery of these capital right as it stands and the plant.
Correct correct, that's correct, yes, the 4% to 5% growth is on our invested capital.
You do get as you know, we have and annual adjustment mechanism under under the PBR, which will give us and increasing our budget relative to inflation and that should keep us whole so cost management within that target and which and then also the recovery mechanisms on capital or part of that relative to the pin.
So I would just point you to pages 35, and a 36 37, where we provide more detail and on 37 and we did provide some estimated ranges for the Rps, a Pam and particular based upon our expectations of renewable project growth at that could be achieved but we still have to we still have to.
Prove that out.
Understood. Thank you that's very helpful and just maybe a quick follow up Greg Your comments around equity you mentioned no equity this year unless you identify additional investment opportunities and we just more just a little bit more color on what those opportunities might look like.
Yeah well.
You know you you've gotten specific guidance for each of our primary operating subsidiaries.
And ASB, which is self funding.
And a great source of capital and dividend distribution to the holding company with a very efficient capital structure and and you can understand the capital deployment plans at the utility which are online to achieve their targets.
Pacific current as you know continues to develop and look at our investment strategies here in Hawaii, consistent with their infrastructure oriented mandate and the conservative approach, but also focused on competitive sustainability type investments here in Hawaii and so they continue to keep.
And active and inactive development pipeline and opportunities.
And some of those investments can be lumpy, we will announce to you windows when and when we achieve additional growth and investments, but we see that as a promising opportunity for the time being we see those as relatively moderate ah and and and well accommodated by our overall.
Guidance and our ability to fund.
And fund a growing platform.
Understood and thanks again for the time today much appreciate it.
Thanks to a cash Inc.
And our next question comes from Paul Patterson Associates. Please go ahead.
Uh huh.
Hi, Paul.
So just.
And just to follow up on on the other bone.
Boom.
Question is from Julian on the loan relief.
Given the how should we think about I mean, if the economy continues to stay strong.
How often should we think about the potential for the loan loss reserve to be to be released you've all me I mean, it's as simple.
Quarter by quarter thing or I mean, it would seem to me that perhaps you.
Wanted to handle that.
Time, and not just on a quarterly basis to see how these loans are performing in terms of reversing it and just generically. It sounded to me that you guys felt that you were quite conservative and clearly with this release this quarter. It seems you were so so.
So how should we think about the other people all of them soon.
Yeah. So if you if you look back to last year kind of before.
The pandemic our coverage.
Reserves to the loan book was about one 5% right and.
That built up over the course of last year to one 9% and we came down to about 1.7 and as Greg mentioned, our coverage is the strongest of of the peers and the market. So so you can see we still have.
And the book shifted slightly over the course of that time right, we have lower consumer unsecured that's by design.
And and so I think the mix of the book as a as a lower risk mix and so right. Now there are there are hmm and the reserving there are assumptions that it was.
And as soon as Greg said it and.
Wait and see attitude, we haven't built in assumptions of a lot of improvement and the economy, because we need to see it and.
And we're waiting so so it will be a quarter by quarter.
Testament of the ratings on specific credits and how the book evolves in terms of lower balances higher balances and certain categories. So, but I think you can see from where we are we're still at a more robust coverage level than we were going in and that reflects the environment and.
And that reflects the you know the.
The state of specific credits.
The customers worked through the environment. So you.
You know who it is.
And we came into the year, we didnt assume a lot of reduction that that's the difference and what you saw and if you think about the the zero to 10 range. The 10 would assume basically not much reduction and additional coverage and the zero would it would assume that you've got some.
And so.
The where we ended up and that will be a quarter by quarter and assess.
Okay, great and.
And then on the CBRE order.
And what Youre, saying was that these are sort of ppas.
And Ah.
And I just was wondering I mean, when looking at the order.
Oh, Yeah, I guess I'm wondering is this really a Hawaiian electric.
I mean, we think that ultimately that it would be with the with the party I'm doing the P. P. E. B. The other party is supposed to be coming in with certain commercial dates.
And so I'm just sort of wondering how if it was found.
Debt. These ppas weren't working out as planned and debt there was some liability.
That's why and electric would theoretically be would have exposed would there be any recourse to the.
The.
The other party.
Do you follow what I'm, saying.
Yeah. So.
Let me ask the utility to address that.
Yeah, Hi, Paul This is Scott you are with Hawaiian electric so.
The issue here is whether or not.
And there is any liability for project these projects being delayed and you know one other things that we are planning.
Planning to really raise to our commission is just throughout the process.
Process has allowed for additional technical work to be done in terms of establishing and requirements for these projects to be interconnected to the grid.
And then as necessary to be able to file amendments to the ppas, including possibly <unk>.
Pending the guaranteed commercial operation dates so that's really what the crux of the matter is.
As far as we see it to.
To the extent that.
We are able to work through these issues with the PUC.
While we are all trying to accelerate these project and service stage, just because of a variety of factors such as accelerating the rps.
At the same time, we feel that we have to be able to allow the developers reasonable time to get their projects installed and interconnected.
Your question about you know could be developers in theory.
Sensually challenge the utility.
I don't again, it really depends on the specific of the project.
We've been working collaboratively with the developers as we've worked through the technical and contractual and service day issue. So it's.
I just won't speculate in terms of whether or not any of these developers at some point and the future Wood wood.
I feel the need to have a challenge to us.
Okay, and I know that they're asking you to sort of record and sort of underlying that and and.
And if they're not actually doing that they're not that any potential penalties I guess would be would be and another proceeding but for future proceeding but.
Just as a ballpark what what are the if they were to be regulatory liabilities.
What are we potentially talking about whats just roughly speaking.
What's the size of the potential liabilities.
Hi, Paul this is chain, where we're talking about millions.
Millions of dollars annually.
In terms of and a potential.
But that yeah.
And somewhere between somewhere less than $10 million a year.
Well, Okay, let me let me.
Also provide you some details and in order to calculate any type of thing it really does matter on assumptions in terms of guaranteed commercial operation dates and avoided costs and then also the price of oil and so theres a lot of Assam.
Assumptions made in that calculation and so.
Very hard to determine at this point in time, but I would say, we're talking about millions of dollars annually.
Okay, and then just on the storage order that came out.
Also like as last week.
Yes.
And I guess the feeling there is they're just not happy with the cost controls that are associated with that could you elaborate a little bit further about.
About how you see that the commissions order and if we should have any larger takeaways and.
And with their with their the order that they put out on Thursday.
Yeah, Paul you know I think the commission has raised has some additional concern beyond the cost of the project.
One of the concerns they've raised is the role of the battery and how it's actually functioning as part of our electric system and and in particular.
And whether or not this grid tied standalone battery would be charged by renewable energy versus fossil fuel energy.
So that's one I think that's almost a central issue as far as a concern that the commission has raised and.
And.
And that's really that's really again for further discussion and you know as we file our motion for reconsideration next week will be will be raising our or our own points of view.
Okay. Thanks, so much guys and.
Have a happy happy a weekend. Thank you.
Thanks, Thank you.
And our next question comes from Jackie Bohlen with VW. Please go ahead.
Hi, everyone. Good morning.
Oh.
Why don't I start off with time.
But any mix and understanding there's a lot of factors at play here and you know I saw the borrowing reduction that took place in the quarter on and just curious about what your thoughts are about additional liquidity deployment with that bucket now lower and then and you know just the expectation that P. P. P loans will continue to be forgiven. So how do you expect things to.
With that and what any deployment plans might be.
Yeah, Yeah, no, where we're diligently seeking loan growth right I mean, that's the.
The obvious place where we'd like it to go we are probably not.
Not selling as much of the mortgage production and so you'll you'll see we hope the more of that production to go on balance sheet.
Otherwise, it's it's you know commercial.
Commercial real estate Theres, some theres some projects that we hope.
I hope to be able to get them a participation in and some some other.
Our ongoing investment and commercial and investment commercial real estate.
And.
And the shift is strictly going to be based on what the organic level of loan growth that we can achieve is we're not looking at portfolio purchases at this point and things like that and so it's all sort of regular customer community banking relationship.
And and the.
And the deposits continue to be strong.
We do expect at some point that we would see a drawdown and and deposits and as things normalize, but we haven't seen that yet and so and it.
And it goes into the investment portfolio and Dana and his team do the best they can to get some yield on it.
Okay.
And then.
Is there anything that would indicate that the HELOC portfolio and that some other contraction there and I I mean, I fully understand the rate environment and that's driving that I'm. My expectation is it might continue to come down even if single family mortgage outside the mix of what you're putting in portfolio and not putting into portfolio.
<unk> life is just with people you know it might still be advantageous to refi is that the correct way to look at it or do you see it a different way.
And I.
Think that the trend is still there where as rates are you now.
Interest rates moving up hasn't yet resulted in mortgage rates moving up so you've got that.
And that gap.
There. So you will continue to see the refinancing dynamic, but we're also starting to see you know with the with the valuation increases on on residential you're starting to see people and thinking about ways to monetize some of their equity growth that they have and.
And so and <unk>.
We were there we are at early stages of I think the the HELOC.
Applications starting to pick up.
Okay, So maybe some and home and prevent project could be coming down the pipeline and that could mitigate some other other rate pressures.
Right.
Okay. Okay.
That's helpful and then.
I'm, sorry, just running through my left and I know, we already had a pretty robust provision discussion and just in terms of the expense guide and I know it theres a lot of maintenance and control is the plan still to offset and kind of the investments that were discussed early on and the prepared remarks with cost savings from other areas.
Yeah. So you know we were trying our guidance was was to come out kind of and roughly the 48 and a $48 million a quarter kind of range of a flat a flat versus last year and and so you know there are naturally embedded inflations.
And and.
And the cost base, which are you know lease escalation.
Escalations and things like that we held we described last time, what we were doing the whole payroll costs and and and we didn't do our merit increases and things this year, because because of the importance of controlling the things that we're doing on the branch network will.
Pay savings and the future Oh, and you know we've already brought head count down fairly.
Significantly and and and some of those areas. So I think you know we continue to to offset those embedded inflations and we you know our work is not done till we are and we get the cost savings that we want for out of all the all the investments that we're doing.
Okay.
I think when you look at the Connie mentioned, the the metrics on our deposit transaction migration kind of is the indicator on the consumer side, you know we've gone up from.
If we were sitting here a year ago, we would have said the transactions were about just under 20% and on the consumer side now 40.
647 per cent of the transactions and as we left the quarter were being done outside of the branch and through the new Atms and mobile and <unk> and remote deposits.
And so.
The business side is lagging that and we will work on that but as we do the we've talked about these digital centers, which are going to be more lightly lightly staffed branches built around the full function Atms, but with with teammates and there to help customers learn and adopt and get comfortable.
You know, it's those kinds of things that will take the the workload are down and that will allow us to do more of the more of the savings.
Okay.
Great and you know rich best of luck day with with whatever life brings <unk> and it's been nice chatting with you over the last decade.
Thanks, Jackie will Miss it.
And remember of course and somebody comes from Charles Fishman with Morningstar. Please go ahead.
Thank you just one question left.
If I understood great correctly.
Some of the cost savings that you experienced in the first quarter.
Later in the year, you're going to be and.
And reversing knows or giving our credits will go to customers under the P. B R.
And I guess that leads to my question is once the P. D R.
Cause and effect.
June one.
Will you just at that point will there just be a regulatory liability that you established so you won't have that timing issue.
Well, maybe to clarify the guidance and so as you know as PBR was implemented there was a.
There was an acceleration of our cost saving benefits that was required under our under that and your P. B R, which we clarified and was $6 6 million annually level is for the next three years or for the initial period of PBR.
And you know it takes a while for the for that to organically happen for the cost controls and everything to realize those type of savings and efficiencies.
Or the utility has accelerated that work and and as you see they started that last year to allow the O&M and <unk> to the see the O&M savings.
<unk> be.
And be able to fund that accelerated commitment.
But there's our expectation is and and in the guidance was that O&M, excluding our pension costs would be down flat to down year over year, despite even and on the utility side. Some natural inflationary cost increases because that's offset by the overall.
Fish and she programs, but as those continue to gain traction and are implemented more fully there will be likely benefits above and beyond what we're providing directly to customers that will help us close the gap on our realized Roe.
And and and achieve a day are in line with earnings growth expectations over time and.
And Charles just to be clear in the near term.
There is a timing difference because that $6 6 million and a customer savings that Greg mentioned for 2020, one and the utility did start.
Generating those savings, but under P. B R. They don't start going back to our customers for the total year until the June one and so we are generating savings upfront, but they will go back to customers on a starting June one for the 2021 year.
And then starting in 2020 two the level of nation will take it a month by month throughout the year.
And to be clear the implementation and PBR and June 1st also limited some of the benefits from PBR, including a lot of moving the lag on our annual revenue.
Our revenue adjustment mechanisms and so forth. So again next year some of the additional benefits of the PBR framework when fully implemented for the full year, we should see some benefits from that outside of the O&M issue that we're talking about.
Charles This is gene and thank you more one day don't want to add to what Greg and Connie said in terms of the mechanics of the return of those customer savings it's built into the.
The <unk> formula as part of P. B, our and those tariffs going into effect on June 1st So that's how mechanically it'll be returned back to customers.
Okay.
And it'll just be a learning curve for I guess all of us on this thank.
Thank you that was that was that was good and I saw the all the information you provided and.
That's helpful. Thank you that's all I had.
Okay. Thanks Charles.
And ladies and gentlemen, this concludes our question and answer session.
Once you have any final remarks.
Yeah.
Thank you all for joining us today and for your questions. Please do reach out to us and Investor Relations. If you have any further questions and most importantly have a great weekend.
Thank you Ma'am. This concludes today's call control and thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.