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spk09: good afternoon thank you for attending today's full year and q4 2021 hawaiian industries incorporated earnings conference call my name is amber and i will be your moderator for today's call 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 1 on your telephone keypad at any time i would now like to pass the conference over to our host julie smolinski Vice President of Investor Relations and Corporate Sustainability with Hawaiian Electric Incorporated. Julie, please proceed.
spk07: Thank you, Amber. Welcome, everyone, to HEI's full year and fourth quarter 2021 earnings call. Our press release and the presentation we'll review on this call are available in the Investor Relations section of our website. During today's call, we'll be using certain non-GAAP financial measures to describe our operating performance. Our presentation contains reconciliations of these measures to the equivalent GAAP measures. 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. Now, Scott Hsu, HEI President and CEO, will begin with his remarks. Scott Hsu, HEI President and CEO, will begin with his remarks.
spk00: Aloha, everyone, and mahalo, or thank you for joining us today. As you know, Connie Lau retired as HEI CEO at year end. I'm very excited to build on the strong foundation Connie handed to me and to take HEI forward with the help of our leadership team. With me on today's call are Greg Hazelton, HEI Executive Vice President and CFO, who will discuss our financial performance and earnings guidance. Shelley Kimura, who became Hawaiian Electric President and CEO on January 1st of this year, and Tara Nishi, who became American Savings Bank President and CEO last May, and other members of senior management. 2021 was a year of strong achievement for our companies, for the customers who rely on us, for our communities, and for the long-term health of our state. On the financial front, consolidated net income and earnings per share each rose 24% to $246 million in net income and earnings per share of $2.25. We exceeded the high end of our latest guidance range. Hawaiian Electric's hard work on cost efficiencies enabled us to deliver strong financial results for the utility while providing significant customer savings and advancing our ambitious Climate Change Action Plan. Improved credit quality and Hawaii's recovering economy drove bank earnings above initial expectations as we were able to release reserves for unrealized credit losses, resulting in significant negative provision for the year. Coupled with net interest income growth from earning asset expansion and PPP fees, as well as strong execution on its digital transformation, our bank had a good year. Last week, we raised our annual dividend for the fourth year in a row. At the utility, we made significant progress on our 2021 to 2025 strategic plan, which centers on three pillars, creating customer value, strengthening our foundation, and building a stronger Hawaii. We created customer value on several fronts in 2021. We delivered $8 million in customer savings from cost efficiencies and supported customers who faced financial challenges during the pandemic. We did this through bill relief programs, including a $2 million bill credit program, extended and deferred payment plans, and facilitating customer use of government assistance. We also launched programs giving customers more options to benefit from the clean energy transition, including Battery Bonus to incentivize customer-owned energy storage, and Quick Connect to enable customers to interconnect solar and battery systems to the grid faster. This work also helped us earn a financial award under our Interconnection Experience Performance Incentive, a win-win-win for customers, the fight against climate change, and the company. We've worked on strengthening our foundation for a while, including working with the Public Utilities Commission and stakeholders to create the new performance-based regulation, or PBR framework, which we successfully transitioned to in June. Our focus now is on continued execution under PBR to advance operational efficiencies and customer and clean energy initiatives. Our workforce and culture, which are critical to our success, were also a focus in 2021. We implemented new programs for leadership development, continued to promote equity and inclusion within our diverse employee base, and successfully concluded negotiations with our union leading to ratification of a new three-year contract. All of this supports our work to build a stronger Hawaii. In 2021, we showed continued climate leadership, committing to reduce carbon emissions from power generation 70% by 2030, compared to 2005 levels, and to reach net zero or better by 2045. We achieved a renewable portfolio standard of 38.4%, putting us well ahead of schedule to reach Hawaii's statutory goal of 40% RPS by 2030. And with our customers, we reached one gigawatt of installed solar capacity, mostly customer owned. That's a major milestone considering the peak load of our five island system is about 1.6 gigawatts. We made great strides in our electrification of transportation strategy as well, which is crucial to decarbonizing our economy and reducing the per unit cost of energy for customers. Our eBus Make Ready and commercial EV charging rate pilot programs have now been approved, and we filed an application to dramatically expand our public EV charging network. We'll build on this momentum in 2022. We will eliminate coal in Hawaii this fall when the AES coal plant contract expires. and we have a diverse portfolio of measures to support reliability when that happens. We're working with developers, state and county government, and community members to move renewable energy and storage projects forward as quickly as possible. Like others in the industry, we've seen some delays due to global supply chain dynamics and inflationary conditions. We're committed to our goals and you'll see us continue to procure additional clean energy resources in the future to meet them. In 2022, we remain focused on operating within the PBR framework with an ongoing emphasis on cost efficiency. We'll continue to work collaboratively with the PUC and key stakeholders in the ongoing process to develop additional performance incentive mechanisms. and will soon be filing a significant resilience strategy that will seek cost recovery for under the Exceptional Project Recovery Mechanism, or EPRM. American Savings Bank has performed very well through the pandemic, demonstrating the value of its conservative management approach, good credit quality, and low-cost funding base. It continues to produce solid earnings that provide efficient capital to support a consolidated investment-grade capital structure and growing dividends to HEI shareholders. The bank's solid 2021 financial performance was matched with robust execution on a number of strategies and initiatives. Customers' reliance on online and other self-service options grew dramatically through the pandemic. We aggressively accelerated our anytime-anywhere banking transition to meet their needs. In 2021, we executed on several projects to expand customer options and our capabilities, including completing our ATM refleet, opening four new digital centres, the first of their kind in Hawaii, and implementing more online and remote functionality. We also implemented the second and third rounds of Paycheck Protection Program, or PPP, loans, achieved mortgage production volume of $1.2 billion, on par with our record in 2020, and grew our commercial real estate loan portfolio, all while continuing to support our community and local economy. As Greg will discuss further, in 2022, we expect a reset of bank earnings after the last two pandemic years, which created some volatility with respect to reserves for credit losses. We expect provision for credit losses to resume in 2022 with anticipated growth in loans. The outlook for Fed rate increases is promising and is expected to benefit our margin as our balance sheet is asset sensitive. In 2022, the bank will continue to focus on its digital transformation to position itself to compete and grow in the future. I'll hand it off to Greg now, who will review our financial results and earnings guidance. Thank you, Scott.
spk01: 2021 saw significant improvement in the Hawaii economy as we've continued to adapt to the evolving COVID-19 environment and policies that have focused on safely keeping the economy open, supported by good health care capacity and low hospitalization rates. Visitor arrivals reached 2019 levels for a time last summer, and travel over the holiday season was strong. The outlook for 2022 is promising as the state anticipates continued strong domestic travel demand and a gradual recovery of international travel. Unemployment in the state has continued to steadily improve, reporting 5.7% in December, improving 4.6% year over year, and down markedly from its peak in April 2020 of nearly 24%. while still lagging at the national average of 3.9%. Hawaii's housing market has remained very strong. On Oahu, single-family home sales were up 17.9% in 2021, and the median prices for the year rose 19.3%. In December, the median Oahu home price was over $1 million. We've seen continued strength so far in 2022. While some pandemic uncertainty remains, we are cautiously optimistic regarding Hawaii's economic outlook. After an estimated 5.8% improvement in the state GDP in 2021, the University of Hawaii Economic Research Organization's December baseline forecast expects GDP to grow by 2.7% in 2022. Turning to our results on slide six, Solid execution at both bank and utility during the fourth quarter contributed to our strong consolidated financial performance, with full-year 2021 earnings up 24% to $246.2 million, or $2.25 per share. Utility earnings grew approximately 5% to $177.6 million. Our ability to control costs while pursuing ambitious carbon reduction strategies allowed Hawaiian Electric to provide the $8 million in customer savings Scott mentioned and establish a $2 million customer bill credit program that wasn't previously included in our prior guidance. Full year adjusted O&M excluding pension declined even as the impacts of inflation and supply chain dynamics increased as we came into year end. ASB's full year earnings were up 76% compared to 2020, at a record $101.2 million. This reflected $25.8 million in negative provision as credit quality and the economic environment improved. Growth in net interest income as earning assets increased funded by low-cost deposit growth, and PPP, continued PPP fee income in conjunction with loan forgiveness under the program. Holding company and other segment net loss was $32.7 million, up from 2020, primarily due to higher performance incentive compensation. Our consolidated ROE for the last 12 months was 10.4%. an increase of 180 basis points from 2020. Utility ROE of 8.1% was consistent with 2020 and better than originally anticipated during this year's June 1st transition into the PBR framework. Bank ROE was up significantly as well at 13.8%. On slide 7, the key drivers of the utility's higher 2021 net income compared to the prior year were $9 million higher net revenues from the rate adjustment mechanism and June 1st transition to the annual revenue adjustment mechanism or ARA, which included a customer dividend and additional offset of $4 million or $6.6 million pre-tax of management audit savings delivered to customers. $4 million from a reduction in enterprise resource planning or ERP system implementation benefits to be passed through to customers as delivery of the full O'ahu ERP benefits commitment was completed in 2020. $2 million from higher performance incentive mechanisms or PIMs primarily related to achievement of interconnection experience targets. Partially offsetting these items were $5 million higher depreciation expense due to increasing investments to integrate more renewable energy and improve customer reliability and system efficiency, $3 million higher interest expense to higher borrowings, and $3 million lower fuel efficiency related to planned maintenance outages. The utility managed costs well in 2021. On a GAAP basis, the utility had a net increase of $1 million in expense. However, adjusted O&M, which is a non-GAAP measure and excludes retirement service costs and expenses covered by surcharges and activities billed to third parties, was $412 million, below 2020, even in the inflationary environment we experienced during the fourth quarter. 2021 came in slightly above our guidance of $409 million, primarily due to the $2 million customer bill credit program refunded at year end and higher than expected December storm costs. Continuing to manage costs efficiently will remain a central focus under the PBR framework. In fact, 2022 is our first full year operating under PBR. Recall that there are three key earnings drivers for the utility under this framework. First, the annual revenue adjustment, or ARA, which covers baseline O&M and CapEx through an inflationary adjustment minus a customer dividend. Additionally, we've achieved the $6.6 million in committed annual savings under the management audit, which are now reflected in rates. The ARA provides us with predictability on baseline revenues and flexibility to manage O&M and CapEx within the ARA during the rate case stay out period. Second, separate recovery mechanisms for eligible O&M and capital projects providing recovery above the baseline levels covered by the ARA. And third, performance incentive mechanisms, which provide opportunity for additional rewards if we achieve preset goals. In 2022, we expect, together with the PUC ARA approved, minus the management audit savings to provide a net $23 million in revenues during the year. The accrual for the ARA started on January 1st. rather than June 1st under the previous framework, so we expect this to eliminate 20 basis points of lag on ROE. With respect to separate recovery, we'll be accruing $23 million in revenues during 2022 for projects that have been approved by the PUC. This is under the Exceptional Projects Recovery Mechanism, or EPRM, and the Major Project Interim Recovery Mechanism, or MPIR. Additional revenues are possible for EPRM-requested projects that have been filed under pending commission decision. We expect these two mechanisms, the ARA and separate recovery mechanisms, based on planned investments as approved, will result in an average annual utility earnings growth of approximately 5% from 2022 through 2024. We expect moderate growth in contributions from performance incentive mechanisms in 2022, primarily coming from the achievement of RPSA in interconnection experience and grid services incentives. Combined, we estimate $2 to $4 million from those PIMs this year, with potential upside from the RPSA. Other PIMs are less estimable at this time, And in the appendix of the slides we've provided today on slide 21, we've added some additional color on each. Turning to slide 10, you'll see we invested $302 million in CAPEX in 2021. That was lower than our initial outlook, which you'll recall we adjusted during the year due to productivity improvements and efficiencies that reduced certain project costs, delays related to a prolonged substation outage that has been resolved, but limited work we could do on other parts of the system during the year, and some supply chain delays due to the pandemic. Our CAPEX outlook for 2022 is $350 to $400 million, mostly comprised of baseline CAPEX covered by the ARA mechanism. We expect the ARA baseline CapEx to be approximately $300 to $320 million annually from 2022 through 2024. With respect to separately recovered CapEx, the higher end of the ranges for 2022 to 2024 include projects for which we are awaiting PUC approval, including our Maui and Hawaii Island battery energy storage projects, full meter deployment of our grid modernization phase one project, and our public EV charger expansion project, and additionally, our soon to be filed resilience strategy. Turning to the bank on slide 11, ASB's significant increase in net income over 2020 was primarily due to improvement in credit trends and the economic environment. That drove $25.8 million in negative provision for credit losses for the year, compared to a provision of $50.8 million in 2020. Higher net interest income on expansion of earning assets also contributed to the bank's solid 2021 results. These factors more than offset lower non-interest income and higher expenses. The lower non-interest income reflected lower gains on sale of mortgages as we elected to add more of our mortgage production to our portfolio in 2021, and a one-time gain on the sale of certain visa securities in 2020. Higher non-interest expense was primarily due to higher incentive compensation costs reflecting the bank's strong 2021 performance, as well as investments in the digital transformation. While lower interest rate environment impacted net interest margin in 2021, net interest income still grew due to strong deposit growth and drove average earning assets higher by 11.4%. ASB's full year 2021 net interest margin was 2.91% compared to 3.29% in the prior year. PPP fees and record low funding costs helped offset some of the effects of the low interest rate environment and continued excess liquidity. The average cost of funds remained at record lows, six basis points for the full year and five basis points for the fourth quarter. Our projected outlook for 2022 net interest margin is 2.7 to 2.85%. This reflects the current interest rate environment and the fact that we've already realized the bulk of remaining PPP fees. We would expect We have an asset-sensitive balance sheet and we would expect about 9% of our book to reprice quickly following initial Fed rate increases this year. Approximately 3% of our book is currently at floors and rates will need to increase above those floors before we see the benefit on margin from further rate increases. The rest of our book would reflect rate increases more gradually over time. In 2022, we expect continued solid profitability from the bank. While some of the tailwinds that benefited us in 2021 will taper off in the year, we're starting in a good place. On slide 13, the slide walks us through key differences that we expect compared to 2021. As mentioned, we realized most of the PPP fee income last year with approximately 3 million left in 2022. We expect a resumption of provisioning for loan losses in 2022 as we see more loan growth. Our negative provision in 2021 reflected significant improvement in economic conditions during the year compared to the economic uncertainty we had in 2020. While our reserves are based on credit risk in the portfolio and the potential impacts of COVID are not yet over, we do expect further economic recovery in 2022. At the same time, we're starting 2022 with a larger earning asset base of over $8.5 billion, giving us a stronger platform from which to invest the bank's capital in a rising interest rate environment. Like at the utility, the bank is also very focused on efficiency, and that is expected to help keep bank operating expense increases moderate, even while investing in its digital transformation. On slide 14, our financing outlook for 2022 reflects our strong financial condition and solid dividends from both the utility and the bank. HEI's consolidated capital structure and liquidity remain strong, Our cash distributions from both the utility and bank are projected to increase in 2022. Given those cash flows and our debt issuances and refinancings in 2021, we do not expect to need external equity the rest of the year and anticipate minimal debt issuances. Our strong earnings and cash flow outlook allow us to maintain a conservative capital structure consistent with an investment grade credit profile and supportive of a growing dividend. Please note on this slide that incremental Pacific current investments are not included and would be announced once approved and under contract. On slide 15, we're initiating our 2022 consolidated earnings guidance range of $2 to $2.20 per share. Our utility guidance of $1.68 or 78 per share assumes full recovery of COVID-19 related deferred expenses. At year end, we recorded approximately 28 million of COVID related costs in a deferred regulatory account. We plan to request recovery of those costs in the first half of the year. Based on current economic conditions and trends in customer payments, we do not expect to request further deferral beyond 2021. but would consider making such a request if conditions warrant. We expect adjusted O&M, excluding pension, to remain within the ARA inflationary adjusted levels. I've already covered our expectations for 2022 regarding capex and moderate contributions from PIMS. We expect average annual utility earnings growth of about 5% from 2022 to 2024 based on ARA and separate recovery mechanisms, with the potential for PIM achievements to enhance earnings growth and realized ROEs beyond that level. Our bank's guidance of 59 to 68 cents per share reflects continued solid profitability, which we've seen throughout the pandemic, and a reset of our earning expectations given the resumption of provision and a recovering but still COVID-endemic economy. Our base case assumes four Fed rate increases, and our guidance range accommodates further increases. It also accounts for inflationary impacts to expenses, which we continue to manage through cost efficiencies, including our branch optimization strategy. We expect low single-digit earning asset growth and net interest margin of 270 to 285 basis points. We expect holding company losses to be consistent with 2021 levels despite higher inflation. And we are targeting long-term dividend growth in line with earnings growth and a dividend payout ratio range of 60 to 70%. Scott will now make his closing remarks.
spk00: Mahalo, Greg, and mahalo to all of you for joining us today. We're proud of our performance for our customers, our community, and our shareholders in 2021, and we look forward to building on this momentum in 2022. With that, let's open up the call for questions.
spk09: Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star 1. If you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. Our first question comes from Ryan Greenwald with Bank of America. Ryan, your line is now open.
spk03: great thank you all appreciate the time maybe to start can you talk a bit hey can you talk a bit more about what drives net interest margin to decline year over year appreciate the color around repricing the portfolio and the four fed rate increases embedded in guide but any general sensitivities you could provide around the varying magnitudes of rate hikes that might materialize here sure and we'll hand that off to dane terria our cfo at the bank
spk02: Hi, Ryan. So the fourth quarter, our margin was 2.79%. And so the 291 was an average for the 2021 year. So we're starting the year a little bit lower on the lower end of the guidance range. So what our margin guidance range anticipates is four rate hikes, and obviously we would benefit more on additional rate hikes beyond that if it were to materialize. Um, our balance sheet is asset sensitive. And so we have a bunch of loans and assets that will reprice upward as rates are higher throughout the year.
spk03: Got it on the increasing fuel costs of late. How do you guys think about that potentially leading to an acceleration of any generation strategies in the state and any opportunity here for repowering of the AES plan at this point?
spk00: Hi, Ryan. This is Scott. I'll start, but open it up to Shelly Kimura on the utility team to add in as well. But in general, you know, the fuel cost increases, the volatility especially, I mean, it just fits in with the long-range plans for Hawaii that we've been on for quite a while. You know, we are chasing getting off of fossil fuels as aggressively as we can. I think that there continues to be significant progress made and we are ahead of goal with respect to the renewable portfolio standard. So, you know, I believe that seeing the field volatility will just continue to put the focus here in Hawaii across the board to continue that progress. I don't expect any material changes in policy other than keep going as aggressively as we can. And I would say that here in Hawaii, we've been doing that pretty consistently over the past several years. As far as the AES coal plant, whether or not that could be repowered, that did come up as a possibility in discussion last year. But at this stage, the utility actually has plans to initiate a firm renewable RFP this year. and any types of optionality for that AES plant would have to be within that framework. So I'm not saying one way or the other whether or not that will be feasible. If ultimately it rises as a good option, then we'll consider it.
spk06: Scott, I think you covered that well. Nothing to add.
spk03: Thanks, Shelley. Great. I'll leave it there. Thank you for the time. Thanks, Ryan. Thanks, Ryan.
spk09: Thank you, Ryan. Our next question comes from Paul Patterson with Glenrock Associates. Paul, your line is now open.
spk04: Hey, good morning, guys. How are you doing? Hey, Paul. Can you hear me? Good, okay. Yes, yeah. Just quickly on a couple things. First of all, the PIM outlook for the RPSA rewards Looked like you guys scaled it down a little bit maybe than from what the last numbers I saw on slide 22. And I was wondering what's driving that.
spk00: Yeah, Paul, I'll let Shelly fill in the blanks here. But in essence, this reflects the latest expectations we have for some of the renewable projects that are in the development pipeline. One of the things I mentioned earlier on the call was that, you know, we are starting to see some impacts of supply chain delays, some inflationary challenges to some of the projects. So what we are doing is just updating our anticipated commercial operation dates for some of the projects. So what that does is, of course, if a project is pushed into later commercial operations in the year, we're seeing less renewable energy come into play in the near term, and that, of course, directly impacts the amount of RPSA PIMs that we achieve.
spk04: Paul, this is Shelley.
spk06: Hope you're well. I would just add to that that I think one of the good things that have come out of this, because of the supply chain challenges that we're all seeing, There's been a really positive rallying of many stakeholders to try and make sure these projects get done. So the governor put together the Powering Past Coal Task Force, and that includes many representatives from government as well as all of the independent power producers and ourselves. And I think it really creates a positive model going forward for Hawaii in terms of all the different players that have a part in ensuring these projects get done. So that is the positive side of what's come out of this situation.
spk04: That's great. I just was wondering, I apologize if I just don't know this, but what is the interconnection experience as far as it means? I mean, what does that actually mean? Is that just a question of... timing or when you guys have improved it and obviously it was a benefit for you guys, what did you guys do? How is the experience so much better, I guess? What does that mean, actually?
spk06: I can take that one, Scott. I think you're talking about the PIM, Paul. And so that one is based on number of days it takes us to complete the review process on our end. And so it looks at all the steps that are in our control. And we've been able to significantly reduce the number of days it takes for a customer to be able to energize their DER system. So this is focused on rooftop solar and distributed energy resources. This is not the utility scale resources. And we've been able to do that through changes in process, also making sure that each system division in our company that has a role in this, has their respective goals to achieve in terms of days, consistent monitoring on the number of days that it's taking within the process every week, and reprioritizing work to make sure that we're achieving the goals that have been put in front of us.
spk04: It seems that depreciation increased significantly because of investments to integrate more renewable energy. How do you see that going forward in 2022? I apologize again if I missed it.
spk05: I'm going to ask Tane to respond on that one. Oh, okay. Go ahead.
spk00: Tane?
spk08: Go ahead. Hi, Paul. This is Tane. In terms of the depreciation expense, We do have some investments related to our integrating more renewables, which also include making sure that we have a reliable grid looking forward. In addition to that, we do have other projects actually in the hopper to forward those renewables, and those include things like our grid modernization strategy. And then also, things that are awaiting at the commission relate to a couple of utility build battery energy storage projects that were awaiting approval. So depreciation for our capital investments include not only our own utility build renewable sources, but also the infrastructure needed to accommodate additional renewables. Did that answer your question, Paul?
spk04: Yeah, I think I got it. And then just finally on the PPC income, it sounds to me like it was, if I understood it correctly, it's $3 million that you had to anticipate for this year, and that will probably pretty much finish it. Is that correct?
spk02: Hi, Paul. This is Dean. Yes, that is correct. Awesome.
spk04: Thanks so much, guys. Thanks, Paul.
spk09: Thank you, Paul. There are currently no further questions registered at this time. So as a reminder, to ask a question, that's star 1 on your telephone keypad. There are currently no questions in queue, so I will hand the conference back over to our management team for closing remarks.
spk07: Thank you very much, Amber, and thank you everyone for joining us today. Please do reach out if you have any other questions and have an excellent week.
spk09: That concludes the full year and Q4 2021 Hawaiian Electric Industries Incorporated Earnings Conference Call. You may now disconnect your lines.
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