Hawaiian Electric Industries, Inc.

Good day, and welcome to the second quarter 2020 Hawaiian Electric Industries, Inc.' 's earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Julie Simulinski, Director of Investor Relations. Please go ahead.

Thank you, Anita. Welcome, everyone, to Hawaiian Electric Industries' second quarter 2020 earnings call. Joining me today are Connie Lau, HEI President and CEO, Greg Hazelton, HEI Executive Vice President and CFO, Scott Hsu, Hawaiian Electric President and CEO, Rich Wacker, American Savings Bank President and CEO, and other members of senior management. We're continuing to follow social distancing procedures, so our executives are in different locations today. Please bear with us again if we have any delays or mixed audio quality during the call. On the call, we'll use non-GAAP financial measures to describe our operating performance. Our press release and presentation are posted in the investor relations section of our website and contain reconciliations of these measures to the comparable GAAP measures. 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 on our website. And now Connie will begin with her remarks.

Thanks, Julie, and aloha to everyone. Thank you very much for joining us today, and we hope that you are safe and well and your families are as well. I am very proud of the performance of our companies and our employees today. during this COVID-19 pandemic. While all of us face uncertainties regarding the trajectory of the virus and its implications for our pace of economic recovery, what is clear is the strength and resilience of our businesses, the dedication of our employees, and our commitment to supporting our customers and our economy throughout this period. On last quarter's call, we talked about the strengths that would help our company navigate through COVID-19, our long history of providing essential services for most of our state, our strong liquidity across our enterprise, the stabilizing effect of decoupling and other regulatory mechanisms at our utility, and our bank's conservative approach to risk, low-risk loan portfolio, low-cost core deposit base, and strong capital position. This strong foundation, coupled with other factors that benefited earnings, enabled us to deliver solid financial results for the second quarter, 45 cents per share compared to 39 cents per share in the same period last year, while achieving important progress on our long-term goals. I'll start with an update on the virus and economic conditions in Hawaii Before turning to an update on our companies, then Greg will review our financial results and outlook. We're fortunate that Hawaii continues to have the nation's lowest COVID-19 mortality rate. While cases per capita in Hawaii have generally been lower than other states throughout the pandemic, we have seen an uptick in cases recently, which our state is working to address. We're seeing the effects of reopening of our local economy and unprecedented federal stimulus, which is estimated to have delivered approximately $7.7 billion in funding to our state thus far. Hawaii's unemployment rate improved to 13.9 percent in June, after peaking at 23.8 percent in April. At our utility, while sales were 11.6% below the same quarter last year, we've seen sales improve in some areas, such as shopping centers and retail, since opening of our local economy began. We've also seen areas that have maintained stability throughout the COVID period, such as our federal government and military presence. Residential real estate values have remained strong and are up from last year, showing continued strength for the collateral that secures much of our bank's lending. A key question for Hawaii's economy is when Trans-Pacific travel and tourism can resume. Hawaii currently plans to allow travelers with a negative COVID test to forego the mandatory 14-day quarantine beginning September 1st. Recognizing Hawaii's prudent management of COVID-19, Japan announced Hawaii's addition to a list of 12 global destinations deemed safe for Japan residents to resume travel. This will help restart tourism, although it may take some time before we see tourism near pre-COVID levels. Of course, all of these plans are subject to the actual course of the virus, and the effectiveness of mitigation. While tourism and federal stimulus developments will have a significant impact on the pace at which our economy rebounds, our state does have the ingredients for a solid recovery. We continue to benefit from a robust federal government presence here as host to the U.S. Indo-Pacific Command, from which the U.S. watches 52% of the world's surface. and all component service commands. We also believe the unique environment and experience we offer here will continue to make our state a very attractive place for tourism. There is a new energy to economic diversification efforts here as well, and our companies are actively supporting those efforts. Turning to our companies, at our utility, Solid regulatory foundations have served both the company and our customers well and enabled us to be a source of strength for our community during this unprecedented time. Our decoupled regulatory structure has provided accrued revenue stability despite reduced sales in the second quarter. On June 30th, our commission approved our request to defer COVID-related costs to be considered for potential recovery in a future proceeding. To help customers during this time, we extended our suspension of disconnections through September 1st and have offered a range of payment plans to help customers manage their bills. Working closely with customers is a key focus for us. Ensuring our services are affordable is also a key focus now even more than ever. Customer bills are lower now than last quarter due to lower fuel costs and a reduction in the RBA component of the bill due to higher than projected electricity sales in 2019. A customer using 500 kilowatt hours of electricity in July paid 14% less for that energy than in March. We are also working to become a highly efficient utility. And as of June 30, we recorded $7.2 million in a regulatory liability account related to ERP benefits, amounts that are to be returned to customers as a reduction in O&M expenses included in rates. We've also secured significantly lower and fixed-priced renewable energy plus storage contracts through our recent RFPs. which will help lower and stabilize customer bills once those come online. Last week, the PUC issued a final decision in the Hawaii electric light rate case. Results were consistent with the interim decision maintaining current effective rates. In recognition of financial challenges our customers face in this COVID period, in late May, we and the consumer advocate filed a settlement with the PUC to hold base rates flat in Hawaiian Electric's 2020 Oahu rate case. You may recall that the PUC had commissioned a management audit as part of the rate case. The audit report highlighted areas for improvement, including several we had identified and were working to address. In response to the audit and as part of the settlement, we committed to ramp up to $25 million in annual savings by year-end 2022 to be delivered to customers beginning by 2023. We have proposed to deliver those savings to customers through PBR. An interim decision on the settlement is scheduled for October. In addition, we are no longer planning to file a Maui Electric 2021 rate case. To offset the lack of a base rate increase and achieve our $25 million by year-end 2022 commitment, we're developing and have begun implementing plans to reduce costs, including through overtime reductions, better scheduling and coordination, managed reductions of our workforce, and reducing lower priority work. And in the second quarter, we already began to see some of these savings. As we advance these important cost reductions, we, our Commission, and other stakeholders continue to ensure that the renewable and regulatory transition moves forward. There is great interest in our state in doing everything we can to make Hawaii's economic recovery a green and sustainable recovery. Performance-based rate-making, or PBR, continues on track for PUC decision this December, which we believe will lay out the core mechanisms and performance incentive mechanisms, or PIMs. A new step in the schedule has been added thereafter to enable development of tariffs to implement the new and changed mechanisms The Commission will determine when the new changes will be effective in 2021. We continue to aggressively advance efforts to help move our state towards 100% renewable energy and carbon neutrality. These efforts will also help provide jobs and construction activity to help our state recover from the impacts of COVID-19. This includes pursuing new sources of renewable energy through Hawaii's largest renewable procurement. In May, we announced the final selection of projects for our Stage 2 Renewable Energy RFP. We're excited to have 14 projects, all solar plus storage or storage only, from the original 16 selected moving forward through the contract negotiation and community engagement phase. If all are completed, they could add about 450 megawatts of solar and about 3 gigawatt hours of storage to our system. Two of the projects are company self-built storage projects on Maui and Hawaii Island. Stage 1 RFP projects also continue to advance. While some developers provided force majeure notices as a preventive measure given the possibility of COVID-19 interruptions, So far, all Stage 1 projects are still moving forward. Last month, the Commission approved our application to rebuild the Puna Geothermal Venture, or PGV, transmission line. This will allow us to bring PGV back onto our system under the existing PPA while awaiting approval of our amended PPA. With land at a premium in Hawaii, We'll need to use both open land and as many rooftops as are available to reach our renewable energy goals. We're gathering information on parcels as small as one acre and rooftops of at least 3,200 square feet for future grid-scale solar and wind projects and community solar projects. We also continue working to help reduce carbon emissions from the transportation sector. To help accelerate this transition, we filed a pilot project for eBus Make Ready infrastructure. And just this week, Hawaiian Electric announced its commitment to convert its entire fleet of light duty vehicles across the islands, nearly 400 sedans, SUVs, small vans, and light trucks, to be electric by 2035, leading the state of Hawaii in electric vehicle fleets. Turning to our bank, In the second quarter, we stayed focused on doing the right things during this difficult time, ensuring employee and customer safety and well-being, supporting our customers, managing risk, and controlling costs. We've ramped up sanitation efforts and the use of PPE at all of our locations and workspaces, and we've rolled out a new contactless card for all of our debit card holders to keep them safe. We've been able to help our customers manage economic uncertainty, offering fee suspensions and loan deferral and forbearance options, and providing Paycheck Protection Program or PPP loans. Our team worked aggressively to secure and deploy PPP funding, delivering $370 million in loans for approximately 4,100 small businesses that represent roughly 40,000 jobs in our state. This accounted for the bulk of our loan growth in the quarter. At the bank, we have a front row seat to the effects of federal stimulus, with federal stimulus checks leading to significant deposit growth, 24% on an annualized basis. This excess liquidity gives us added cushion during this COVID period, although it does pressure net interest margin. The bank's net interest margin was also impacted by the lower interest rate environment and PPP loans. A core focus has been prudently managing our risk. Our team has been working closely with commercial customers to understand their financial condition and ensure we provision at the right levels. And we're controlling costs despite additional COVID-related expenses. We're also taking advantage of new opportunities that this period presents. As an example, we've seen rapid customer adoption of self-service options such as online banking and ATMs. This allows us to accelerate our plans for optimizing our branch footprint. We've also started implementing our planned replacement of our ATM fleet with smart ATMs, which will be the newest in Hawaii and will give customers even more capabilities outside the branches. Now Greg will review our results for the quarter and our outlook. Greg?