This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: Hello and welcome to the Q3 2021 Hawaiian Electric Industries Earnings Conference call. Following the presentation today, we will have a question and answer session. If you would like to register a question, please press start followed by the number one on your telephone keypads. I would now like to hand the conference over to Julie Smolenski, VP Investor Relations and Corporate Sustainability. So, Julie, please go ahead.
spk01: Thank you, Rika. Welcome, everyone, to Hawaiian Electric Industries' third quarter 2021 earnings call. Joining me today are Connie Lau, HEI President and CEO, Greg Hazleton, HEI Executive Vice President and CFO, Scott Hsu, Hawaiian Electric President and CEO and the incoming HEI President and CEO as of January 1st, Shelley Kimura, Hawaiian Electric Senior Vice President of Customer Service and Public Affairs, who is the incoming Hawaiian Electric president and CEO, also January 1st, and Tara Nishi, American Savings Bank president and CEO, and other members of senior management. Our press release and presentation are available in the investor relations section of our website. As a reminder, forward-looking statements will be made on today's call. Factors that could cause actual results to differ materially from expectations can be found in our presentation, our SEC filings, and in the Investor Relations section of our website. And now Connie will begin with her remarks.
spk05: Thanks, Julie. And aloha, everyone. Very good to have you on the call today. Mahalo. Thank you for joining us. HEI had a good third quarter with utility financial performance in line with our expectations and solid profitability at the bank. Third quarter consolidated net income was $63.4 million dollars, with EPS of 58 cents compared to $65 million and EPS of 59 cents in the same quarter last year. For the first nine months, our consolidated net income and EPS were up 30% compared to the same period last year. As we near the end of the year, we are increasing the bottom end of our earnings guidance range. Greg will discuss the drivers of our performance and our guidance shortly. First, let me provide an update on Hawaii's economy. While we saw a surge in COVID cases in the late summer from the Delta variant, our community handled it well, and cases and hospitalizations are now down dramatically. Given these improvements, Governor Ige recently welcomed tourists back to the islands, and on Oahu, restrictions have been loosened on events. 72% of residents are now fully vaccinated, and 82% have received at least one dose. Vaccination of children is also starting. A couple months ago, in its September forecast, UHERO, the University of Hawaii Economic Research Organization, estimated the state's economic recovery would see some delay due to Delta, and reduced its 2021 state GDP estimate to 3.5% instead of 4%. We've seen some signs of improvement since then, so we'll see how that plays out in UHERO's next update. Despite Delta, unemployment declined to 6.6% in September, the eighth month of improvement. Hawaii real estate values and activity have remained very strong, with O'ahu prices and sales volumes up compared to the prior year. Median housing prices on three of our four major islands now exceed $1 million. Overall, we see encouraging signs for Hawaii's economy. Turning to the utility, cost efficiencies continue to be a central focus. This benefits our customers and our company as we operate under performance-based regulation, or PBR. The third quarter was our first full quarter under the new PBR framework. We're on track to deliver on our commitment to provide $6.6 million in management audit savings this year. Those savings have been reflected in customer bills since June 1st, including $3 million in the third quarter and another $3 million to be delivered by year end. We continue to have good collaboration with stakeholders and regulators as we work to decarbonize our economy and deliver affordable, equitable, reliable, and resilient power for our customers. We're working with developers and communities to add more renewable and storage resources. The vast majority of Stage 1 and 2 projects continue to progress. We're monitoring supply chain impacts and working with developers to keep projects moving forward. Last month, we launched the third stage of our renewable procurement for Hawaii Island. Together with other members of the Governor's Powering Past Coal Task Force, we're working to ensure Commission-approved projects on Oahu successfully come online as we prepare for the retirement of Hawaii's only coal plant next fall. We're confident we'll have enough generation and adequate reserve margin to keep delivering reliable power when the coal plant shuts down. Customers and distributed energy resources play a major role in the clean energy effort. Even through the pandemic, DER adoption has remained on track for our decarbonization goals. Our grid services RFP process is also progressing. We have reviewed and shortlisted the bids with final selection expected this month followed by PPA negotiations. Adding grid services will help us leverage customer resources to provide additional options for our system. We're also progressing on electrification of transportation. Last week, we filed an application to expand public EV charging by adding 300 more public chargers across our service territories through 2030 including 150 fast chargers, and offering new rates to incentivize charging during the day when solar resources are abundant. Finally, the Commission opened a new process under PBR to consider potential additional performance mechanisms and has encouraged collaboration among the utility and stakeholders in that effort. Parties will spend the remainder of this year considering proposals to address outcome areas identified by the PUC. Now, I want to ask Scott Hsu, who is succeeding me in January, to discuss the utility's newly announced carbon reduction goal. Scott?
spk07: Thank you, Connie. Aloha, everyone. Today, we announced our goal to cut carbon emissions from power generation 70% by 2030. compared to 2005 levels. This includes our own generation and that of independent power producers on our system. We also announced our commitment to achieve net zero carbon emissions, or better, from power generation by 2045. Our 2030 goal is aggressive yet achievable and based on real world projects and plans already in motion. Key elements include shutting down the state's last coal plant next year, retiring at least six fossil fuel generating units and significantly reducing the use of others as new renewable resources come online, adding renewable projects capable of providing at least one gigawatt of energy to our system, including shared solar, growing rooftop solar by about 55% from the 768 megawatts that were online in 2020, using more grid scale and customer-owned energy storage, expanding geothermal resources, and creating innovative programs that incentivize use of clean, lower-cost energy at certain times of the day. Beyond 2030, achieving net zero or better assumes commercial-scale development of new technologies, like more cost-effective biofuels and carbon capture. A diverse portfolio will also enhance resilience to climate-related events. We're excited about this goal. It's a major down payment on the economy-wide carbon reductions of what you will have to achieve to be in line with the Biden administration's goal of a 50% to 52% nationwide emissions reduction. Back to you, Connie.
spk05: Mahalo, Scott. Now turning to the bank, the bank delivered solid profitability in the third quarter. A modest release of reserves, low cost of funds and deposit growth that drove earning asset growth helped offset the impacts of the low interest rate environment. During the pandemic, credit has been a key focus as our customers adapt to evolving economic conditions. The bank's conservative approach to credit has served it well. Prudent reserve levels enabled it to manage the uncertainty from the Delta variant. While we're optimistic about Hawaii's economic prospects, we're continuing our conservative approach to account for continued pandemic uncertainty in the bank's reserve levels. Our bank is well-positioned to benefit in a recovering economy. We're seeing increased customer interest in equipment purchases, commercial real estate, and other investments. And as interest rates rise, margins tend to expand particularly for a bank like ASB, which has been able to maintain a low cost of funds relative to peers in rising rate environments. The income can also benefit as economic activity increases with further reopening. The bank is also aggressively pressing forward with its digital transformation. We continue to invest in key data analytics and customer management platforms, to empower our teams to grow customer relationships and strengthen service. We're seeing strong customer adoption of our digital offerings. Digital deposits are now almost 50% of all consumer deposits, and we're seeing strong growth in use of our online tools. We've opened four digital centers in recent months, and customers are responding well to that new concept. And now Greg will discuss our financial results and our outlook as well as our updated guide. Over to you, Greg.
spk06: Thank you, Connie. Turning to our third quarter results, as mentioned, consolidated earnings per share were 58 cents versus 59 cents in the same quarter last year. Both the utility and the bank performed well. Utility results reflected timing items we've talked about all year. We saw timing benefits in the first half of the year from a change in methodology for recognizing target revenues, from accelerated cost reductions and efficiencies as we've prepared to deliver management audit savings to customers starting June 1st, and from generation overhauls that shifted to later in the year. As anticipated in our annual guidance, we saw reversals of some of those benefits, timing-related benefits, in the third quarter. The bank continued to perform well in a challenging environment. A modest release of reserves in a strengthening economy, the low cost of funds, and increased deposits that drove earning asset growth all contributed to solid profitability for the quarter. Compared to the same time last year, our consolidated trailing 12-month ROE improved more than 90 basis points to 10.3%. The utilities ROE increased slightly compared to last year, while the bank ROE, which we look at on an annualized basis, increased on a year-over-year basis to 10.3%. On slide 9, utility net income was $50.3 million compared to $60.1 million in the third quarter 2020. The most significant variance drivers were six million in lower revenues, including five million from a change in timing for revenue recognition within the year, and one million net relating to the annual revenue adjustment mechanism, which also included the three million of management audit savings delivered to customers. We also had four million higher O&M expenses driven by more generating facility overhauls, including some that shifted from earlier in the year higher costs for energy management system upgrades, and a one-time credit in 2020 that reduced medical costs last year. These O&M increases were partially offset by $1 million from lower labor expenses. We also had about $1 million each from higher depreciation, lower fuel efficiency due to maintenance outages, and higher interest expense from increased borrowings. The higher expenses were partially offset by $1 million from lower non-service pension costs due to the reset of pension costs and rates, and $1 million lower enterprise resource planning system implementation benefits passed on to customers compared to last year, as we fully delivered on our commitment to provide O'ahu customers savings related to the system. Regarding the drivers of utility performance for the rest of the year, we still expect no material upside from PBR performance incentive mechanisms this year. And we're tracking the downside sharing under the fuel cost risk sharing mechanism and the potential for reliability PIM penalties. A lengthy substation outage that had impacted reliability this year has now been fully restored. At quarter end, we had about $29 million of COVID-related costs, primarily estimated bad debt expense, in a deferred regulatory asset account. The Commission approved an extension of COVID-related cost deferrals until year end. We will separately file for recovery at a future date once we get a better idea of bad debt amounts that will be realized. We expect to incur further overhaul expenses in the fourth quarter, which are included in our guidance. Of note, the utility has achieved the savings to meet its annual commitment under the management audit and is delivering those savings to customers. As noted last quarter, under PBR, during the multi-year rate plan, earnings growth is primarily driven by three sources. the annual revenue adjustment or ARA mechanism, which works like an allowance that covers the revenue requirement on baseline capital, including return on and of our invested capital and operating expenditures. This means if we manage O&M and capital investments at ARA levels, we will earn our full allowed return on the CapEx portion. We can also grow earnings incrementally by keeping O&M below inflationary levels. Capital and O&M recovery from the Exceptional Project Recovery Mechanism, or EPRM, innovative pilot projects, and the Renewable Energy Infrastructure Project, REIP mechanism, provide opportunities for meaningful earnings growth from invested capital necessary to support resilience, grid modernization, energy storage, and other important utility programs. These mechanisms also provide an additional O&M recovery mechanisms for those qualified programs. All prudently invested capital earns AFU DC prior to being placed in service, which can also contribute to earnings and earnings growth if capital investment levels increase over time. Importantly, performance incentive mechanisms can provide an additional opportunity to earn rewards through incentive sharing and shared savings mechanisms. Under these programs, we continue to expect utility earnings growth of 4 to 5% with potential upside in 2022, the first full year of PBR. Turning to the next slide, We are now, we are revising our expected 2021 CapEx to $290 million to $310 million versus the previously expected $310 to $335 million. Our CapEx plans this year have been temporarily impacted by substation restoration work, COVID-19 related supply chain disruptions, and a change in procedural schedules for battery energy storage projects. In addition, we have more efficiently increased cost efficiencies on capital deployment. We expect 2021 baseline CapEx to be about $265 to $275 million and about $300 to $320 million annually in 2022 and 2023. Separately, recovered CapEx above the ARA, primarily EPRM, should increase in the coming years as we have a pipeline of EPRM projects awaiting approval. We currently have eight proposed projects totaling $324 million in the aggregate under EPRM and are awaiting Commission approval of those projects, including public EV charging investments. We are preparing an additional filing for resilience investments necessary to address climate-related events for our isolated island networks and communities. not yet reflected on this chart. As you can see on the chart, we provided ranges for separately covered CapEx with the low end of the range including only approved separately recovered projects and the high end including projects awaiting approval. Turning to the bank, ASB's net income for the quarter was $19.3 million compared to $30.3 million last quarter and $12.2 million in the third quarter of 2020. Compared to the second quarter, the lower negative provision for credit losses was the most significant driver of lower income in the third quarter. Net interest income was flat to the linked quarter as deposit growth that drove earning asset growth and PPP fees helped soften the impact of margin pressures. Higher non-interest expense was primarily due to increased incentive compensation expense reflecting the bank's stronger-than-expected performance for this year and increased investment in technology and data analytic capabilities as part of its digital transformation. ASB's net interest margin contracted to 2.9% from 2.8% in the second quarter. but still compares favorably with the median of our publicly traded peers. Fees related to PPP loans and a record low cost of funds helped offset some of the margin impacts from the low interest rate environment and continued excess liquidity. We saw a faster pace of PPP forgiveness than we had expected during the quarter and recognized $4 million in PPP fees. As of the end of the quarter, Third quarter, we had $6 million in PPP fees remaining to be recognized in future periods. We anticipate about half of that will be recognized in the fourth quarter and the remainder in 2022. Cost of funds was again a record low, six basis points, down one basis points from the linked quarter and seven basis points from the prior year. Overall, we still expect that NIM for the year will range from 2.8% to 3%. We also expect that the balance sheet growth should still lead to net interest income in line with expectations for the year, despite the continued low interest rate environment. Turning to credit, in the third quarter, the allowance for credit losses declined to 2.3 million, reflecting credit upgrades in the commercial and commercial real estate portfolios and consumer loan paydowns. The bank recorded a negative provision of $1.7 million compared to a negative provision of $12.2 million in the second quarter and a provision of $14 million in the third quarter last year. The net charge-off ratio of 0.03% was again the lowest since 2015. This compared to 0.04% in the second quarter and 0.32% in the third quarter of 2020. Non-accrual loans were 0.97% down from 1.03% in the second quarter and up from 0.77% in the prior year quarter. As of September 30, nearly all previously deferred loans had returned to scheduled payments. Our allowance for credit losses to outstanding loans was 1.48% at quarter end That still includes $22 million in reserves related to pandemic uncertainty. ASB continues to manage liquidity and capital conservatively, maintaining ample liquidity and healthy core capital ratios. The bank has more than $4 billion in available liquidity from a combination of reliable resources. ASB's Tier 1 leverage ratio of 8% was comfortably above well-capitalized levels and at the high end of our 7.5% to 8% target range. Our financing outlook for 2021 reflects our strong financial condition and solid dividends from both the utility and bank. HEI's consolidated capital structure and liquidity remains strong and we do not anticipate the need to issue external equity the rest of the year. Our strong earnings and cash flow outlook allows us to maintain a conservative capital structure consistent with an investment grade profile. Turning to our guidance, we're narrowing our consolidated guidance range to $2.10 to $2.20 per share from our previously issued guidance of $2 to $2.20 per share. We now expect utility EPS to be at or slightly above the midpoint of its $1.53 to $1.61 range, while adjusting capital guidance to $290 to $310 million. We're reaffirming our bank guidance of 79 cents to 94 cents per share and adjusting several of the drivers. If the positive economic signs we're seeing continue, there's a potential for further negative provision expense in the fourth quarter. So we've widened our provision credits range to negative 15 to negative 25 million accordingly. Additional provision could put us in the upper half of the bank's guidance range. Any increase in bank earnings should contribute to an increase in the bank's dividend to the holding company, which we've revised to $60 million to $75 million. We now expect return on assets to exceed 1.1% for the year. Given continued deposit growth for this year, we are increasing our earning asset growth expectation to low double-digit earning asset growth from mid-single-digit. Regarding non-interest expense, we now anticipate a slight increase from the prior year compared to our previous expectation of flat to down. Now I'll turn the call over to Scott.
spk07: Mahalo, Greg. Now before we turn to your questions, it's hard to believe that today marks Connie's last earnings call. Connie, mahalo for your leadership and vision. not just for our companies, but also for our state. As they say, we stand on the shoulders of giants, and in this case, that's you. From signing the 2008 agreement with the governor and other leaders that put us on our path for our clean energy transition to leading the transformation of American Savings Bank into a full-service community bank that's now Hawaii's third largest financial institution, you set us on course for where we are today and positioned us well for the future. And so we move forward with the benefit of all that you've led and achieved. Thank you again.
spk05: Mahalo, Scott. It's truly been an honor. To all of those listening in today, it's been a pleasure working with you, in some cases going back many years, well before I became HEI CEO and I headed HEI's IR function. I've loved all your probing questions and insights and appreciate your friendship over the years. Now I'm privileged to turn the reins over to Scott starting in January. With Scott at HEI, Shelly Kimura succeeding him at the utility, and Ann Teranishi at the helm of the bank, and with Greg as HEI CFO and Kurt Murau as our general counsel, I am very optimistic about the future of our companies and our ability to deliver on our mission to be a catalyst for a better Hawaii. We and our shareholders are in excellent hands, experienced in our markets and businesses, possessing deep relationships in our communities, and committed to continuing HEI's ESG leadership, particularly in climate change, to benefit our communities and beyond. at the same time that we create value for shareholders. I look forward to seeing many of you at the upcoming Edison Electric Institute Financial Conference. And for those I don't see there, aloha, and as we say in Hawaii, a hui hou, or until we meet again. And now, let's open up the call for questions.
spk00: Thank you. The Q&A session is now open. If you wish to ask a question, please press star, followed by the number one on your telephone keypads. The first question we have on the phone lines comes from Julian de Lamont-Smith of Bank of America. So, Julian, please go ahead when you're ready.
spk09: Good afternoon, team. And I've got to pass my congratulations to everyone here. What a legacy created here. And really, I wish every one of you the best of luck here. Really do.
spk05: So, indeed, mahalo.
spk09: And we will see you soon. Yeah. Absolutely. Well, so maybe just to kick things off, speaking about leaving on a high note here, you talk about, I think a moment ago we talked about utility earnings of 4 to 5 with the potential upside into 22 here under the first full year of PBR. Can you expand a little bit on your latest thought process there? I know that, you know, obviously in the back half of this year you talked about having some timing issues from an ROE perspective, you know, having a little bit more downward pressure in the back half. But what's that dynamic that flips perhaps more in your favor here as you think about the 22 and the puts and takes?
spk06: Well, Julian, just to remind you, we made that same statement last quarter as well. Because under PBR, once it's implemented for the – we benefit immediately from the lack of regulatory lag that was embedded in the RAM recovery mechanism. So that helps us begin the accruals at the current levels immediately in January of 2022. So that's an immediate uptick. But in addition, we see the potential for a solid recovery across all of our invested capital programs under ARA as we've now achieved some of the efficiencies we've been targeting and believe we can live under that ARA mechanism for the baseline CapEx as well as the significant investments that we need to make under EPRM programs that will drive, which we get separate recovery under those EPRM, REIP, and other mechanisms. So there's solid potential under a stable framework going forward. And then finally, while we haven't anticipated any meaningful PIM contribution this year, we do expect that ongoing dialogue around the further PIMS enhancement development and our achievement of RPSA and other PIMS will continue to provide upside to that baseline growth.
spk05: Yeah, and Julian, I'd just add, as Greg had in his prepared remarks, we were able to bring a substation, a critical substation back into service that was impacting our reliability statistics earlier in the year.
spk09: Right, indeed. Excellent. And then, actually, you alluded to this in prepared remarks as well, but if you could elaborate, You know, talking about the positive economic signals you're continuing to see, if I'm paraphrasing correctly, how do you think about the potential for further provision expense here? Obviously, that's been pretty material here through the course of the year. Can you elaborate at all to any extent on just A, the trends, and B, to put that a little bit more in context on how you think about the potential magnitude of any provision?
spk05: Yeah. Yeah, so I'm going to let Anne, who's now running the bank, answer that question for you. Anne. Hi, Julian.
spk03: Thanks for your question. So when we look at release and provision numbers, there's two main drivers. One is the state of the whole economy as well as loan growth, and certainly the signals as shared in the prepared remarks show that things are pointing up. As we looked at third quarter, we were still kind of in the height of the Delta variant and Visitor counts are going down and a lot more restrictions in place. But certainly, as we sit here today in October or November, rather, you know, vaccines for children, international travel opening up, and optimism in our business and consumer base is clearly evident. So as, you know, we reflected in the change in guidance, we do feel that signals are pointing in the right direction.
spk05: And, Julian, I just add, as we've, you know, said on prior calls, it isn't just looking forward, but, you know, in banking, you tend to really want to make sure that actual results flow through. So we have kept that same conservatism in our reserving practices during this quarter.
spk09: Got it. And just to recap here quickly on the changes in CapEx, lastly, I know you mentioned specifically here that, you know, COVID had some certain impacts on substation, et cetera. But just the outer years here as well, just recap a little bit. I know there's some changes in the ranges there in 22 and 23. What exactly is going on there? If you don't mind speaking to it a little bit more. I mean, it sounds like you had some efficiencies in the CapEx.
spk06: Sure. And maybe I'll have Tane speak to that because they've done a great job of deploying capital efficiently. And we also have some updates there. So, Tane?
spk04: Hi, Julian. This is Tane here. Thank you for your question. You're talking about the ranges in the future years that have changed. And what we did for that was, for the lower end of the range, we included a level of CAPEX under the ARA recovery, and we also included CAPEX for projects that were approved under EPRM recovery by the Commission. The high end of the range included what I just spoke of, as well as projects that are to be filed applications for the commission. And as we await for those decisions, we will feather those in as part of the normal range of CapEx. I'd also like to comment that if you look at our future years in 2022, 2023, And we do have projects sitting before the commission for their approval related to projects that are renewable, reliability type in nature. And those include our battery energy storage projects on Maui and Hawaii Island, as well as a project over in Kahului that will enable the retirement of the Kahului plant in 2024. Does that answer your question?
spk06: Got it. Excellent. No, indeed, indeed. Go for it. As I mentioned in my remarks, we anticipate a further filing here shortly regarding resilience programs and investments necessary for our communities for climate-related impacts over the long term. And so that will likely be added to our prospective guidance once that gets filed and clarified. and that would be in the EPRM category.
spk09: Got it. Understood. Sorry, actually, one more. Sorry if I can squeeze this one in. You know, AES obviously has a fairly large facility in West Oahu. Could that have any impact on how you think about either grid investments or potential generation procurement activities? I just want to clarify that. I know that there's been some questions around the fate of that plant here. I just want to ask you explicitly.
spk07: Yeah, hi, Julian. This is Scott. Yeah, I'll take that one. Hi, Julian. Yeah, so right now, of course, it's been pretty widely reported, the interest in terms of whether or not that AES coal plant can be repurposed to be filled with biomass. The PUC recently issued a letter which basically establishes the process for key considerations that need to be put on the table in terms of making that decision. And so, for example, cost effectiveness of a biomass conversion, the fit in terms of a plant of that size. I mean, it is in current operation, but as we look towards the future, the size and operational characteristics of the plant and how compatible that is with the energy system, a number of other factors and considerations. I'd say that at this stage, that consideration is still, I'd say, in the early stages. There's been no conclusions, no detailed analysis, and certainly we haven't filed anything to the PUC yet. We don't have any agreement with AES. As far as your question about whether that would impact our thoughts on future procurements, the answer is no. At this stage for O'ahu, we are actively considering what would be the next wave of renewable energy projects online. That's actually happening as part of our integrated grid planning, IGP process. And that's going to continue. And as part of that process, we will be considering the addition of new resources. And, you know, so I would say that it's all just being part of our resource planning.
spk09: All right. Excellent, guys. I'll pass it over. Thank you again and see you soon.
spk05: Yeah. Okay. See you at EEI.
spk00: Thank you. We now have the next question on the line from Paul. Patterson from Glen Rocks Associates. So, Paul, I've opened your line.
spk02: Hey, good morning. Hi, Paul. Hey, Paul. Congratulations, of course, to everybody and, of course, to Connie. And, well, it's, you know, a day in history.
spk05: I know, 37 years, Paul.
spk02: Well, I can remember most of them.
spk05: I know, right. I know, I know. I was just thinking about that. And, you know, the nice thing is I always kid Julie because I do love the IR function since I started it here many years ago. But you all remember Shelly as well because she was with me in IR too.
spk02: Yes, absolutely. So a couple things. First of all, the PIM proceeding, which seems to be sort of, I guess, never-ending. So there's this next iteration that we have here. And, you know, what sort of struck me was sort of the language of sort of this, quote-unquote, sense of urgency regarding some of the issues there. And I know that there's some issues on Molokai and Lanai and what have you. But generally speaking, I mean... How should we think about that in the context of everything? I mean, you know, this upcoming proceeding which the stakeholders are talking amongst each other, how should we think about just how significant that proceeding will be vis-a-vis what we've already been through?
spk05: So, Scott, another one for you.
spk07: Yeah. Hi, Paul. Well, the particular issues that the Commission described as needing to be addressed with urgency ties back to the very same issues that are being addressed in the interconnection docket, and that is how are we able to get new energy resources online in a timely manner to be able to be sure that we have enough capacity you know, to serve loads. Especially here on Oahu, as we see the next year's retirement of the AES coal plant at the end of the year, you know, that is the situation that the Commission has flagged as the urgent situation. Similarly, on Maui, as we think about in the coming years, retirement of the Kahului Power Plant, same situation, bringing on additional new resources in a timely manner so that we can smoothly transition and shut down these plants. Like I said, that is being addressed in the interconnection docket. We are actively working with all of the renewable energy project developers on you know, trying to help them maintain schedule. So that is happening in parallel to these discussions that were started in terms of the PBR PIMS. You know, so going to that discussion about these new PIMS, I think what's important is that, you know, the PIMS or maybe the PBR framework, you know, as it was initially designed and established, It involved a very, very good collaboration between the regulators, between the utility, and many stakeholders. And as we continue to dialogue about the additional new PIMs that may be added, you know, what we really see is that that collaborative effort really needs to continue. In our comments on the staff proposal coming from the PUC, we flagged that, hey, you know, let's make sure that we have the appropriate chance to talk about the issues. These are complex issues. We are, in fact, addressing them, like I said, in a separate proceeding and direct dealings with our independent power producer developers. So going to the PBR PIMs, we are just basically We are fully engaged. We understand the Commission's concerns. We understand the objectives. But at the same time, we also want to be sure that the PBR framework is given the chance to succeed because so much good effort was put into that in the original design.
spk02: All of that makes a lot of sense. I guess what I'm a little bit confused by is that the issue on the interconnection seems to be rather a technical issue. It doesn't seem to me, I guess intuitively, that that leads to that there's an incentive issue here. Like, in other words, you guys are just not incentive, or there's not enough of an incentive to deal with this as opposed to just sort of the blocking and tackling of the legalistic sort of issues that are associated with it. Do you follow what I'm saying? I guess that's what sort of surprised me by the... Yeah, no, I would say this.
spk07: I'd say the current set of PIMs that we have, including, for example, RPSA, including the interconnection PIMs. I mean, we have incentives in those PIMs. So there is no reason why we'd want to stand on or sit on any of these projects. And in fact, you know, even in our announcement today about our carbon reduction commitment, you know, for us, it really is that all paths lead to acceleration of renewable energy projects, getting these projects interconnected and so on. Um, so we believe that that's, uh, you know, I think that's appropriate. Um, and, uh, you know, we, again, we want to make sure that we are adequately addressing the commission's, uh, uh, sense of priorities and, and, and certainly showing urgency. So we think we're aligned. Um, I think where we have expressed concerns in our comments is that, you know, let's, again, not put PIMS in, which, uh, you know, our, our, uh, perhaps counter to what we're all intending to achieve.
spk02: Okay, great. And then there's, I guess, still to be determined, I believe, that the non-wires alternative PBR PIM stuff and the renewable procurement, where do we stand on that, I guess? And, I mean, I think that's separate from this stakeholder stuff that we just discussed. If I'm wrong, correct me. It's sort of hard to follow all that. But when might we get that, and do you see any potential – upside or impact one way or the other regarding those PBR things?
spk07: The Commission made clear when they issued the DNO for the PBR framework that they wanted to have the ability to consider new PIMs going forward. Case by case, as new priorities get added or You know, remember there were a bunch of additional issues that were flagged in the original PBR proceeding that were decided that for now let's try and track and better understand how they work. You know, for example, resilience, electric transportation. So I would say that those particular issues that you asked about fall into that bucket. We fully expect that over the course of time there will be more discussion about, you know, what a correct and adequate PIM might be for non-wires alternatives and so on. So I would say it's on deck and more to come.
spk02: Okay. Fair enough. I'll leave it there and have a great – congratulations again to everybody. Take care.
spk06: Thanks, Paul. Thanks, Paul.
spk00: Thank you, Paul. As we have no further questions on the line, I would like to hand it back to Julie to close. We have another question on the line from Jonathan Reeder of Wells Fargo. So please go ahead, Jonathan.
spk06: You may need another wire.
spk08: Yeah, sorry to hold you up. I'll see you in a couple days. But, yeah, just, you know, maybe, Greg, I missed your direct explanation, but what's changed your expectations today? of the utility now being at the midpoint or slightly above guidance versus the lower half before? Is it lower reliability PIN penalties or better delivery of the cost savings? What's changed there?
spk06: Yeah, well, the year-to-date performance has clearly indicated that we're on track. We felt the need to certainly narrow the range. And as we gained confidence around their ability on the You know, we've been tracking the efficiency for some time, and we had confidence that that would be achieved. But there is some volatility in the potential PIMs that you have to track and account for and just other elements. So as it all pulled together, we took a fresh look at it for the quarter. Deep consultations with Payne, Scott, and team as well. They are tracking well and in line with plan and probably slightly ahead. We had some minor wins on the upside in the tax R&D credits, some other things that came through that just pushed us over the line there.
spk04: Hey, Greg, this is Tane here. I wanted to add a couple more points to what Greg mentioned. And, you know, we talked in the prepared remarks about the completion of the restoration as a substation. And so, you know, we are looking at our reliability PIMs and probably looking at a slight improvement over what we had originally forecasted. So that is one item. The other item is as we continue on our cost efficiency plans, which include looking at how we schedule and plan our work, manage the resources to get it done in terms of our staffing count, all of those things. You know, that's also providing some of that, you know, benefit to being above the midpoint on the EPS.
spk08: Okay. And then, Tane, is the fuel cost sharing, Tim, is that expected to kind of be maxed out at the highest level given the rise in, you know, global energy costs in oil?
spk04: Yeah. So, let me comment a little bit about that. The way we record the fuel cost risk sharing mechanism impact is, you know, there's an amount that is accrued every month. So we've got nine months of the full year impact embedded already in our earnings. To date, I will say that because of rising fuel prices, we have an amount of penalty, if you will, already reflected through the third quarter. For the fourth quarter, we do expect a little bit of uptick in our fuel prices, and we've baked additional penalties in our guidance. But I don't expect the full amount of penalty to be recorded for the year. But again, I did want to emphasize the Q4 forecast is already embedded in our guidance.
spk08: Okay, no, that's very helpful, so. All right, I'm going to leave it there and save the rest of my questions for EEI. Looking forward to see you guys there. We'll have your going away party there, Connie, I guess.
spk05: Thanks, Jonathan.
spk08: We'll see you then.
spk00: Thank you. We have no further questions on the line, so we'll hand it back to Julie to close.
spk01: Thank you all for joining us today. Please reach out should you have any further questions. Mahalo again, Connie, for your leadership and, of course, congratulations on your last earnings call. Thanks, everyone. Have a great weekend and see many of you at EEI.
spk00: Thank you. Ladies and gentlemen, this does conclude the Q3 2021 Hawaiian Electric Industries Earnings Conference Call. Today's call has now concluded. Please enjoy the rest of your day.
Disclaimer