Q2 2022 Hawaiian Electric Industries Inc Earnings Call
Good afternoon. Thank.
Thank you for attending todays Q2, 2022 Hawaiian Electric Industries, Inc. Earnings Conference call. My name is Julia and I will be your moderator for today.
All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question. Please press star one on your telephone keypad. It is now my pleasure to pass the conference over to our host Julie Smolinski, Vice President Investor Relations and corporate sustainability. Please proceed.
Thank you to me I welcome everyone to a T. I S second quarter 2022 earnings call.
Joining me today are Scott Sue Hei, President and CEO , Paul Ito interim a T I C F O.
Shelley Kimura, Hawaiian electric President and CEO , and Karen Nishi American savings Bank, President and CEO and other members of senior management.
Our press release and our presentation for this call are available in the Investor Relations section of our website.
As a reminder, forward looking statements will be made on today's call.
Actors that could cause actual results to differ materially from expectations can be found in our presentation, our SEC filings and in the Investor Relations section of our website.
Now Scott will begin with his remarks.
Hello Hook, a cool greetings everyone. Thank you for joining us today.
We're pleased with our consolidated second quarter earnings of $52 5 million and earnings per share of <unk> 48 cents or.
Our earnings reflect solid results at the utility which continues to perform well under the performance based regulation framework.
We've continued to see the higher O&M expenses, we mentioned on last quarters call and which will discuss further shortly we expect to remain within our utility guidance range for the year, albeit within the lower half of the range.
The bank had a good quarter as well.
Fitting from strong loan growth and the higher rate environment.
With the bank's loan growth the quarter also saw a return to a more normalized provision expense following five consecutive quarters of negative provision.
While this reduce the bank's results versus the prior year and linked quarters. This was consistent with dynamics anticipated for this year.
Overall, we are reaffirming our consolidated consolidated guidance range for the year.
Taking a closer look at recent utility developments.
Together with government agencies regulators developers and other stakeholders, we're making great strides in our clean energy transition.
We're approaching a major milestone at the end of coal in Hawaii.
Key action in our climate change action plan.
The retirement of the states last coal plant is on track for September one.
The state's largest solar plus storage project came online in July 31.
Two more solar plus storage projects are slated to come online in the next few months.
And the Commission recently approved the last page to solar plus storage PPA that was awaiting decision.
The Commission also asked us to consider adding solar to our proposed battery storage project on mode and were working on a proposal to do so.
In addition, the commission indicated it may reconsider our proposed Hawaii Island battery storage projects that it previously denied after we learn whether we've secured infrastructure investment and jobs Act, where I I J a funding for that project.
Renewable capacity approved by the PUC under stage, one or two rfps that remain active totals nearly 575 megawatts with 202 in 2250 megawatt hours of battery energy storage.
We are continuing to seek more clean energy resources issuing our draft stage three rfps for Wahoo, Hawaii Island and Maui.
Totaling 1600 gigawatt hours annually of variable renewable dispatch will energy.
And between 540, and 740 megawatts of renewable firm capacity.
We are working to grow customer resources as well.
Our expanded smart meter deployment continues with smart meters now in place for more than 20% of customers and we now have greater flexibility under our recent commission decisions to manage costs within the cost recovery mechanism for that program.
As well as seek recovery of additional O&M associated with the increased deployment.
Finally, our state's Rps law has been updated.
And he's now based on renewable generation as a percent of total generation rather than a percent of sales consistent with our Rps a performance incentive mechanism for Ken.
The effect of this formula change is that actual results will be lower while the rps targets remain unchanged.
However, all of our plans are designed to exceed the Rps E targets. So we remain confident we'll meet our rps goals.
Ensuring reliability and resilience for our customers throughout this transition is a key priority.
We've purposely accelerated overhauls and maintenance on our generating units to meet electricity needs and enhance reliability as the coal plant approaches retirement.
This along with inflation has impacted our O&M the past two quarters and we expect similar dynamics the rest of the year.
Strengthening our resilience to the impacts of climate change is also critical.
Last month, we filed a five year plan with the commission that if approved will allow us to harden our grids, while limiting customer a customer bill impact to less than a dollar a month.
Okay.
Last month, the commission issued an order in the performance based regulation or PBR docket, creating three new performance incentives covering generation reliability cost management cost management and timely completion of interconnection studies.
And extending the timeframe for the grid services incentive.
We propose that the new Kim's be effective January one 2023, and our request is pending PUC approval.
The outcome reflects the collaborative efforts of the PV, our working group, which the commission has designated as a forum for refining and developing further proposed performance incentives going forward.
We know our customers are feeling financially challenged as inflation and high fuel costs continue to pressure household expenses.
Due to current high oil costs. We also expect a temporary increase in customer rates when the E. S coal plant retires.
We have comprehensive efforts underway to help customers manage their utility bills.
This includes offering flexible payment plans connecting customers to government and nonprofit utility assistance programs encouraging electricity conservation energy efficiency and participation in our D. E R programs.
<unk> away from fossil fuel generation, two utility scale fixed rates solar and storage and continuing to look for ways to improve our cost structure such as through our cost saving employee retirement program redesign we recently implemented.
Turning to the bank.
ASP continues to perform very well and maintains its high quality position, including its low risk profile solid credit quality and low cost funding base.
The bank's results for the second quarter are consistent with dynamics, we anticipated this year.
Loan growth was strong during the quarter across most of the banks portfolio.
We did see a return to more normalized provision expense to accommodate that growth, reducing bank earnings compared to the prior year and linked quarters.
We continue to see healthy activity in our loan pipeline.
The rising rate environment drove margin expense in the second quarter and the federal Reserve's additional rate increase last month.
As expected to spur further expansion.
I'm sorry, the rising rate environment drove margin expansion in the second quarter and the federal Reserve's additional rate increase last month is expected to spur further expansion.
Our banks digital transformation remains on track.
We recently upgraded the zelle for person to person payments and continue to invest in our digital transformation, including in customer relationship capabilities and data management.
Now I will hand, the call over to Paul who is serving as our interim CFO until we complete our process to fill the CFO position.
Thank you Scott.
Hawaii's economy remains healthy and we believe it is well positioned.
Economic headwinds we are seeing.
Tourism arrivals have continued to strengthen and in June we're at close to 90% of pre pandemic levels.
Total domestic passenger accounts year to date through July 2022 were very strong.
Over 11% higher than the total domestic passenger accounts year to date through July 2019.
International arrivals, which traditionally account for over a quarter of our total are still well below 2019 levels.
International Tourism is picking up however, and will serve as an additional tailwind for our economy.
Japan is a key source of tourism for us and in June we saw the highest level of Japan arrivals since April 2020.
Arrivals from Canada are now approaching pre pandemic levels and arrivals from other international markets are also higher than last year.
Although still well off of pre pandemic levels.
Visitors are also expanding parks June expenditures, 12% above 2019 levels.
Police housing market has historically been strong compared to the maintenance.
Strength this year with housing prices hitting records in multiple months and inventory remaining tight.
Our housing market has performed well on a relative basis through downturns.
From 2008 through 2011, the decline in single family home prices in Hawaii was less than half the mainland average.
This housing market stability, which is the result of limited supply and attractive location.
Contributes to our bank strong credit quality, that's 85% of the bank's portfolio is real estate secured at conservative loan to value levels.
With a weighted average loan to value on our residential portfolio of less than 50% and.
And on our commercial portfolio of best in 58%.
Hawaii unemployment has also fared comparatively well during downturns.
During the great financial crisis, Hawaii's unemployment rate peaked at 7% while national unemployment reached 10%.
Hawaii unemployment has trended favorably since its pandemic peak of 24% in April 2020.
And was four 3% in June down from five 9% in June of last year.
In summary, while there is measured optimism for the near term path of the Hawaii economy, we continue to watch inflation and supply chain dynamics as well as the risks.
The impacts of a recession very closely.
However, on a relative basis, the Hawaii economy has shared well through downturns in the past and is currently stable.
Turning to slide six our second quarter results reflected solid execution across the enterprise.
The utility continues to perform well in its first full year under PBR and earnings were up 5% versus last year.
We are seeing some pressures on utility O&M, which I'll discuss shortly.
The bank saw strong loan growth and expanding net interest margin, although earnings were impacted by a more normalized provision expense given the quarters strong loan growth.
Consolidated last 12 months return on equity remained healthy at 10, 4%.
Utility ROE was inline with expectations at eight 2%, despite O&M pressures and.
And bank ROE remained strong at 13% on a last 12 months basis.
On slide seven we show the major variances across our enterprise compared to the second quarter of last year.
Lower bank net income was primarily driven by a return to a more normalized provision expense $2 8 million this quarter compared to the negative provision of $12 2 million recorded in the second quarter of 2021.
Recall that we anticipated lower bank earnings compared to 2021, as we had sizable provision releases last year coming off large provisions taken in 2020 due to the pandemic.
The bank saw strong loan growth in the quarter and although we did have some provision releases due to favorable favorable credit trends.
The releases were more than offset by provision expense, primarily driven by loan growth.
Net interest income of $61 8 million was up $1 million versus the second quarter of last year due primarily to higher average, earning asset balances, partially offset by expected lower fee income associated with the paycheck protection program or PPP as PPP loans continue to pay down.
Noninterest income was down compared to last year, primarily due to lower bank owned life insurance income.
Lower mortgage banking income has a higher interest rate environment has impacted mortgage production.
The bank saw slightly higher noninterest expenses and like most companies. The bank has seen upward pressure on compensation and benefit costs due to the tight labor market.
Compensation and benefit expenses were also impacted by higher performance incentives from strong loan growth.
Overall, the bank continues to manage expenses well as it invests in its digital transformation.
On the utility side, the 5% higher net income was primarily driven by higher annual revenue adjustment for <unk> revenues and higher major project interim recovery revenues from grid modernization.
These items were partially offset by higher O&M expenses, which were primarily driven by more generating facility overhauls and maintenance performed as.
As well as higher bad debt expense.
If you recall from last quarter, we message the continuation of higher generating facility maintenance throughout this year, which is driven by our efforts to maintain reliability as we approach the aes coal plant retirement and by increased maintenance needs as we cycle, our older generating fleet more often to accommodate intermittent renewable energy.
To ensure adequate reserve margins, we needed to accelerate and complete our generating unit overhauls.
Work in shorter periods of time driving up costs.
In addition, inflationary cost pressures have also impacted O&M.
Bad debt expense has also been higher than anticipated given high fuel oil prices, leading to higher customer bills.
Last year's deferral of Covid related bad debt expense magnifies the year over year variance.
Turning to slide eight utility capex through the second quarter was approximately $125 million.
This years Capex has been lower than anticipated due to headwinds from continuing supply chain disruptions.
<unk> delays and resource availability constraints.
We now anticipate that Capex would be at the lower end of our $350 million to $400 million range for the year.
Yeah.
Turning to drivers for the rest of the year for each of them.
I mentioned earlier, we expect continued O&M pressures from higher generating station overhauls and maintenance expenses to maintain reliability as we transition off coal and cycle our generators more often.
In addition, we are experiencing inflationary pressures on costs that exceeded the two 8% inflationary allowance provided under PBR for 2022.
Inflationary adjustment for 2023 will be determined by the forecasted 2023 GDP Pi in October of this year.
We also expect bad debt expense pressures, resulting from higher fuel oil prices and higher customer accounts receivable to persist through the year.
Although we previously expected O&M for the year to be within the Aerie allowance, we now expect it to be modestly above that level.
We are also now forecasting our net penalty this year from kind.
Kind of mechanisms due mostly from our fuel cost risk sharing mechanism for which we expect to incur the maximum penalty given high fuel costs.
We previously expected that better heat rate performance, which substantially offset that but heat rate performance expectations have moderated since last quarter. We also expect that rewards from our interconnection pin will be slightly lower than previously forecasted.
Turning to the bank Asp's net interest income growth in the quarter continued to reflect growth in earning assets and higher yields, particularly in our commercial and commercial real estate loan portfolio.
We've also been able to maintain a low cost of funds at five basis points flat versus Q1.
Our low cost of funds has been a durable advantage for ASP, even in rising rate environments.
Net interest margin expanded to 285% versus $2, 79% last quarter as the benefits of a higher rate environment and higher yields were only partially offset by lower PPP fees.
We've now recognized nearly all remaining PPP fees with about 300000 left.
Turning to drivers of bank performance for the rest of the year on slide 11.
The market now expects the fed funds rate to be around three 5% to 4% by year end.
We expect to continue to see net interest margin benefits from the higher rate environment.
On a comparative basis quarter over quarter, we will see some offset from lower PPP fees.
We now expect net interest margin for the year to be near the high end of our $2, 70% to 85% guidance range.
We expect to continue seeing lower mortgage banking income this year, given lower mortgage production due to higher interest rates.
We anticipate some continued pressure on noninterest expense as we balanced.
Gary and labor market conditions, as well as costs related to our digital transformation.
We continue to see a healthy pipeline across the loan portfolio and expect to continue to redeploy run off from the investment portfolio to fund loan growth.
Now turning to our guidance updates.
On the utility slide as mentioned, we are expecting capex at the lower end of our 350 to 400 million guidance range.
We're also expecting that teams will be a moderate drag this year based on the factors noted earlier.
We also expect utility O&M to be modestly above aerie allowed levels with continued pressure this year from higher generating station overhaul and maintenance expenses.
Higher bad debt expense and inflationary pressures.
Overall, we expect utility EPS to be at the lower end of our dollars 68 to $1 78 guidance range.
On a longer term basis, we still expect 2022 to 2020 for earnings growth of approximately 5% with upside from tims.
Turning to the bank as mentioned, we are expecting NIM at the higher end of our guidance range, given the inflationary environment and pressures on compensation and benefit expenses, we now expect noninterest expense to be slightly above the prior year.
We are reaffirming bank EPS guidance in the 59 to 68 range.
The potential to be in the upper half of that range.
We are still expecting a holding company loss of 28 to 30 for the year, excluding the <unk> gain on sale at Pacific current in the first quarter.
Overall at this time, we are reaffirming our consolidated guidance range for the year of $2 to $2 20.
Now I'll turn the call back to Scott.
Mahalo, everyone for joining us we look forward to your questions.
Yeah.
We will now begin the question and answer session. If you would like to ask a question. Please press star followed by one of your telephone keypad.
If for any reason at all I would like to move that question. Please press star followed by two.
Again to ask a question press star one.
As a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking a question. We'll pause here briefly ask questions are registered.
The first question comes from Julien Dumoulin Smith with Bank of America. Your line is open.
Excellent Hey, good afternoon. Thanks, so much for the opportunity to connect here.
I appreciate it.
Hey, Thank you.
Maybe just to kick us off here you you said a moment ago to quote you read you expect utility earnings be the lower end of the range.
With upside from pimps.
Can you discuss the perms upside potential here just considering the commentary from earlier in the remarks with respect to the fuel cost.
And and how those.
Potentially.
Packed your pens expectations, along with the rewards from interconnect I just want to understand exactly whats reflected in guidance and how that that that upside from pimps could materialize at this point if you can speak to at all that.
Okay.
Yeah, I'll start off and then I'll pitch it over to Shelly and Tina utility but.
That statement as you recall, where we're referencing the 'twenty two through 'twenty for earnings growth.
And whereas we are definitely seeing some pins headwinds this year.
We are still looking at a.
<unk>, a potentially robust rps APM in the years 'twenty three and 'twenty four.
And then as far as the field cost sharing a pin you know yes, we are in particular being challenged this year because of the high fuel oil fuel.
The oil prices are but like everybody we are expecting that to moderate as we go forward, but let me ask Kelly and team if they want to to add onto that.
Yes, you got that right Scott Hi, Julien This is Shelly Kimura from.
Electric so I'm, sorry, just taking off my mask here still in this COVID-19 world.
So.
The comment on upside for pins really is talking about the longer term outlook as Scott indicated for 2022, we're really not expecting them to be able to hit the Pam four our PSA and that's where we get the greatest potential but going forward and this is because of all of the delays we've had because of supply chain.
And tariff impacts all the things that you probably know about very well.
We'd have to push back the in service dates for many of our renewable projects. So that's also pushing back our PSA, earning potential and that's where we see the upside going forward.
Got it could you guys remind us just how that resets here with respect to the fuel year over year beyond 'twenty two 'twenty three 'twenty four period.
So <unk>.
Yeah can you just clarify your question when you said fuel just how should we think about the elevated fuel cost cascading into 'twenty three 'twenty four again net of these other factors that you. Just described if we can try to quantify that a little bit more obviously, it's been a headwind this year, but how do you think about it in the next year, even if it's moderating if you will.
Yeah well.
Several factors feel is going to be.
Somewhat unpredictable, we're expecting that the impact for our customers to be up right now, but we do we are hopeful that it's going to come down in 2023, but of course, nobody has that crystal ball. The other thing is that or fuel levels will get reset and that is in jet.
January and then I'll ask <unk> to to add to that.
Hi, Todd This is Shane just a quick summary of how the fuel cost risk sharing mechanism works in.
In each of January a base index price is set.
For that fuel costs were sharing mechanism and depending on where prices go.
During the year up or down.
It determines how much we would have in terms of a penalty or reward so really the prices arent going to be set in 2023 January 2023.
<unk> will be the base index.
Does that mean does that make sense, Paul yeah, absolutely right, what what what is what is a.
A decrement this year could contribute to upside in subsequent periods, especially considering the reset period with their with the order here for the Pendency period 23, which is in some respects what I was trying to get at earlier about that you know what would be the puts and takes here and in future periods as well right the extent of moderation.
It could be a positive contributor next year.
Yeah.
It's important.
So I'm sorry to.
Ed was that.
So essentially as team was describing in January is when it will be reset right in terms of visa.
Fuel price index, and then as we would expect to see if fuel prices are able to decline as we get into 2023, then that actually is a benefit for us.
So it has gone.
Depending on the year and depending on what the January fuel prices are that that's going to determine whether or not that is a positive upside for us or negative.
Right and maybe started to bring everything together Super quickly here as you think about that 24 period.
You've got a five or some number out there in terms of growth what is the hypothetical upside from patents considering this new order and just the outlook today, if if I can tie it all together here.
Yeah.
Yes, you changed Tina.
Yeah, I'll take that question.
Do have some guidance on the Rps ATM in the materials that that provides the the biggest opportunity. There. So you can see the ranges we have for 2023 between two and $6 million and then in 2020 for between five to 8 million.
But in addition to that we also have a summary summary of RPM.
And there are Tim.
Tim such as the.
Grid services, Pam, the interconnection, Pam, which which I'll provide some upside there.
And.
The other.
Seeing that we we also.
We didn't talk about here is you know there are some new cans.
That potentially could be effective in 2023 awaiting a PUC decision on the effective date of those new Pam.
But you know there are some upsides therefore.
You know what the collective shared savings mechanism as an example.
Alright, numerous pieces moving here. Thank you guys very much for your patience I. Appreciate you guys walking through this I know, there's a lot of pieces.
Thanks Julien.
Thank you. Our next question comes from Paul Patterson with Glen Rock Associates.
Please proceed.
Hey, good morning.
Okay.
So I apologize if I missed this but the.
The policeman reduction act.
Could you guys.
I apologize I didn't hear much about it I'm afraid.
What are.
What do you guys think about it.
Generally speaking.
Yeah. So so generally speaking and I'm I'm sure you're hearing.
From other utilities, along the same lines.
We see a lot of potential upside, especially with respect to the tax credit provisions are.
Very very supportive of our renewable energy strategies and projects and ultimately that will benefit our customers as well so.
Oh good good good.
Good legislation.
The additional tax provisions are actually do not look like they would impact us just because we would fall below the threshold.
But overall it looks like a positive positive piece of legislation.
But let me ask if Paul or anybody else wants to provide some additional color.
Yes the people.
So yes as Scott mentioned, we were very pleased by the progress that is being made to tackle climate change with the Senate approval yesterday.
Obviously, we're still evaluating the bill we're not at the finish line yet, but as Scott mentioned, we're very pleased with the clean energy incentives that will further incentivize Hawaii transition to two 100% renewable material again, Scott mentioned lower cost for our customers, but also accelerate the utilities.
Progress in <unk>.
Achieving its aggressive climate action plan.
The one provision as Scott mentioned that a lot of utilities are where.
We're focused on outside of the incentives of course was this.
Minimum tax and because we were well below the <unk>.
The thresholds, we won't be affected by it but there are a lot of provisions on the tax credit side that we're hoping that will benefit.
The broader community, but also the low to moderate income.
Segment of our population so.
Obviously, there's a lot there's a lot there to for us to go through but we feel very good about about this this new bill.
Okay.
How are you.
How are you doing I was just kidding.
Good I was just going to add that as you heard we have hundreds of megawatts that we're seeking and rfps that are coming up of renewable energy and so this will really help.
Lower cost for our customers as we go through this procurement process and that's what we're hopeful for it really depends on the timing of when that comes in and the timing of our rfps and the bids that come through.
Okay great.
One of the things that you mentioned one of the newer pins as this generation reliability one.
Is that only for company owned generation I would assume or does that also involve ppas.
That is that it's only for generation right.
I'm sorry go ahead, Charlie you can you can clarify that.
I'll, let I'll, let <unk> answer that.
Okay.
Good morning, Paul This is Colton Ching from Hawaiian electric yes, so the generation Pam reliability pin encompasses both utility owned as well as third party IPP generation performance in total.
But as Scott mentioned it is for generation caused.
Events separate from the existing or the previous.
Transmission and distribution that we currently have.
Okay.
The reliability of <unk>.
Third parties.
You will be incentivized to.
I guess make sure that they're performing was that the idea I mean I guess.
My concern might be that.
It's not completely in your control I would think or how should we think about that.
Yes.
Yes, so Paul.
It is a different way right, when which will need to manage the performance and reliability of independent power producers.
But because of Hawaii situation, where our Ipp's are long term partners with US we have for many years now have had contracts with.
Critical performance requirements and how we manage.
The reliability and operation of those facilities.
As well as having the right kinds of partnerships with our IPP. So that they have to understand the role that they have in keeping hawaii's grids reliable.
We also the reliability also comes from how our system operators dispatches the entire fleet of generation the combination of independent power producers as well as our units as well.
Okay well.
Thanks, so much for the info and.
Have a good one.
Thank you.
Currently no questions in the queue. So as a reminder, it is star one on your telephone keypad. If you would like to ask a question.
Yeah.
As there are no further questions in the queue I would like to pass it back to the management team for any closing remarks.
Thank you everyone for joining us today and please do let us know if any.
Further questions come up later on and have a great week.
Okay.
Okay.
This concludes the Q2 2020 to Hawaiian Electric Industries, Inc. Earnings Conference call. Thank you for your participation you may now disconnect your line.
Yeah.
Uh huh.