Hawaiian Electric Industries, Inc. (HE) Earnings Call Transcript & Summary

Good afternoon, everyone. Welcome. We are extremely pleased today to have Hawaii Electric (sic) [ Hawaiian Electric ] joining us, and we are joined by CEO, Connie Lau; CFO, Greg Hazelton; and Investor Relations Director, Julie Smolinski. Sorry about that, Julie. Today, we're going to start off with the presentation talking about Hawaii Electric (sic) [ Hawaiian Electric ], and then we're going to open up the session for Q&A afterwards. So please feel free to enter your questions through the website, and I can work that into the conversation. And with that, I'll turn over the presentation to Connie.

Thanks very much, Jeremy. And aloha to everyone. I had to apologize to Jeremy for my attire. I don't have a business suit on, but this is Hawaii, and we are working from home. And I think Greg's got his aloha shirt on, too. So hopefully, someday, you can all come and visit us. So for those of you who don't know us, I'm Connie Lau. I'm President and CEO of Hawaiian Electric Industries, and we are the holding company for Hawaiian Electric Company that serves 95% of the state of Hawaii. We're a little unusual in that we also own American Savings Bank, which is the third largest bank in our state. And then we have a third subsidiary, Pacific Current, which is our newest subsidiary to invest in sustainable infrastructure. And before I go on, I'll just mention that I am talking through the slides that are up on the JPMorgan map site. And so if you just pull it up, I'm just on the introductory slide. We are the largest publicly-traded company in Hawaii. We've been known as a stable investment, moderate growth, but [indiscernible] that dividend, and we paid that dividend continuously since 1901. We've also been known as a green investment and the reason for that is that Hawaii has some of the most aggressive climate goals in the nation. We're headed towards 100% RPS and also carbon neutrality by 2045. We also are known as a good ESG investment. Our Board now -- well in addition to me as a female CEO, 50% of our Board is female now, and 65% of the Board is diverse. We've been very purpose-driven all of our lives. We've got a slide in the appendix that talks about ESG being in our DNA. And the reason for that is because we only do business in Hawaii. And so we have long-held the belief that our future and the returns that we can generate for you as shareholders really are inextricably linked with how our state does. And so our overall mission statement is to be a catalyst for a better Hawaii. So onto Slide 2. Because on Slide 2, we've got some data there on how Hawaii has been doing during this pandemic. And what you'll find, if you just look in the lower left, is that Hawaii has had one of the lowest infection rates in the nation, well shy of 1,000 cases thus far. And actually since mid-April, we've been in the single digits, except for a couple of days which went into the teens when actually there was 1 family, quite a large family, 14 of them, that tested positive. But otherwise, we've been in single digits. And that's because of very aggressive government policies here. Our Governor shut our borders to incoming travelers very early on. If we go on now to Slide 3, the state is reopening. And in that colorful chart on the lower right, you can see that we are actually in the yellow phase. It says kama'aina economy for Phase 2 reopening. And kama'aina stands for locals. So it is the folks who are here in Hawaii. And so Tuesday of this week, we -- actually, just yesterday, the Governor opened up inter-island travel. So we can now travel to the island of Maui, people from Maui or Kauai can come to Oahu. And so that's going to allow us to test out the procedures at our airports and make sure that we can keep not only travelers who are coming in safe, but also our local residents safe as well. Our local government has stressed the fact that Hawaii will be conservative in how it reopens. And they stressed that we will be doing it in a very responsible way. That's largely because if you think of tourism as one of our major drivers, we have to make sure that people feel comfortable coming back here on vacation and also that our residents are feeling comfortable to welcome demand. If we go on to Slide 4. We have a statement there that our company is very well positioned to weather the pandemic. And that's because, as I mentioned earlier, our core operating companies are both essential infrastructure and the essential banking business. So very, very stable serving our local economy. We've also had a robust liquidity position. Our bank has not needed any capital from the holding company. They have plenty of liquidity. And then Greg is going to talk a little bit later, but he and the CFO for our utility have done quite a lot around increasing our short-term liquidity sources so that we have plenty of liquidity to go through this pandemic. So there's no need for capital injections into the bank. We are still injecting capital into the utility because it has a nice capital expenditure program and that requires some equity support. Overall, our financial strength has enabled us to help our customers and community through this challenging period. And I must say that both of our companies have actually been able to enhance their reputation locally during the pandemic for all the good things that they have been doing, not just in keeping our businesses operating, but also in helping those in need in our community. We really have been very, very focused on making sure that we take care of our community as we do our business. If you move on to Slide 5, a little bit more about our utility. As I mentioned, we serve 95% of the state of Hawaii, which is there in the map on the lower left. And we are in a jurisdiction that is fully decoupled. And so the -- our targeted revenues are not affected by volumetric sales. So although sales have gone down, our revenues are not affected. What is affected, of course, is bad debt and accounts receivable but if you actually look at us historically, Hawaii also has very, very low bad debt ratios compared to mainland utilities. That propensity of the local population to really pay their bills in a timely way is something that you see characteristic not only on the utility side, but also when we take a look at our bank's statistics, what we call the asset quality or the quality of the loans that they make in Hawaii are also very good. It's just one of those cultures where people pay their bills. We -- while we're decoupled on the sales side, we're recoupled on the cost side. And so we actually have very good recovery mechanisms. Julie's got all the detail on all those mechanisms in the appendices, and you'll see that they cover not only O&M, with inflation rates, capital, even major large projects. We have a major project interim recovery mechanism. We have a tracker for our pension. There's a fuel clause. You name it, we've got a lot of good recovery mechanisms. Our jurisdiction is moving towards performance-based rate making and all of what I just described forms the basis for the so-called PBR. We are expecting a final decision in that PBR docket by the end of this year. I also mentioned that we're known as a green investment and we are processing a major set of procurements around renewable energy. And I have a slide later, so let me just hold off on that and I'll talk about it in a moment on that slide. If you go to Slide 6, a few high points about our bank. Very conservatively managed and has a very strong financial position, as I mentioned. They actually are a capital generator for us, and that's how our 2 businesses fit together. The Hawaii banking market is the kind of banking market that is what we call deposit-rich, and that means that we have very good low-cost funding here from depositors. We normally fund this bank anywhere from 20 to 30 basis points for the entire $7 billion of our bank. And so what that means and translates into is actually a very good net interest margin for banks in Hawaii. So banks in Hawaii tend to be very stable, very profitable. And so our bank, just like all the other banks in Hawaii, generates excess capital. We then are able to dividend that up to the holding company and then be able to support our utilities capital expenditure program, which is pretty significant given the aggressive move of Hawaii towards clean energy and the investments that are needed to do that. Most of -- one of the big issues for banks these days is, of course, the credit, and we have some statistics a little later. But overall, that loan portfolio, as I mentioned, is very high quality because of the propensity of people here to really try to make sure that they pay off their bills as well as their loans. And what you'll see in a later slide is that 80% of our loan portfolio is actually secured by Hawaii real estate. And that's a really good thing, particularly in Hawaii, because if you think of us as islands, we have limited land mass and therefore, land here is considered very precious. It's very valuable, and it tends to hold its value. And so having 80% of the portfolio secured by real estate makes it a very solid portfolio. And I think that's all I'll cover on that slide. If you'll go on to Slide 7, we have a fair amount of detail on a recent settlement that we just entered into with our consumer advocate for the rate case for our largest utility. We have agreed to hold base rates flat during this pandemic. But as I mentioned, all the mechanisms that I described earlier do continue, including our major projects interim recovery mechanism and all the trackers. In that settlement, it includes a 9.5% ROE and roughly a 58% equity ratio for our utility, which is what we normally run at. If you go on to Slide 8. As I mentioned, we are a decoupled jurisdiction. There's a little more detail in there on the slide. We have also asked for deferral of our COVID-19 expenses. They're running at -- estimated at about $22 million and we are expecting a commission decision hopefully by the end of June on that. And then we're all very aware of what's happened to energy prices and how fuel prices have really come down. One of the reasons Hawaii has such aggressive climate policies is that like many isolated locations, islands in particular, we have tended to use oil as a fuel source. And so the intent is to have lower cost renewable resources displace that higher cost fuel. The good thing right now about where energy prices are is that, that fuel component of our generation actually has come down significantly. And so that's really helped our residents during the pandemic because the lower fuel prices go through our energy cost recovery clause within about 2 months, and so residents have been benefiting from lower oil prices. If you go on to Slide 9, this is a slide where we have a little more detail about our major renewable procurement. You can see that it is being done in 2 stages. The first stage resulted in 7 PPAs for 260 megawatts of solar and what's also been really unique about Hawaii is that the procurements that we have been doing have -- the winning bids have been combinations of both solar and storage, and that's to help stabilize our system. So we were doing some of the first solar plus storage procurements in the nation. And you can see in the Stage 2 RFP, we just announced the selection of 16 projects for an aggregate of 460 megawatts and over 3 gigawatt hours of storage. That also includes, and this is a major milestone for us, 2 of the selected projects will be built by the utility. And so we're in the process now of preparing our applications to the Public Utilities Commission for those projects. When they're approved, the treatment will be that they will go into rate base and be treated the same as any other capital expenditure that our utility does. We've also been known for rooftop solar here. We have some of the highest rates of adoption in the nation. Roughly 30% of the homes in Hawaii have private rooftop solar, and the commission is very interested in allowing other people who don't necessarily have their own rooftops to participate. And so we have a community-based renewable energy program that is really gearing up. And as I mentioned, we're retiring our oil fire generation. And also we've had a coal plant that we have under a PPA that expires in 2022. And so that's also scheduled to be retired with these procurements. For the RPS itself, if you go on to Slide 10, you can immediately understand that all these renewable procurements are really moving us rapidly towards renewable generation. So we are on track and actually are expected to handily exceed our current goal, which is 30% by 2020. Actually, the lower sales has helped that ratio as well but we were previously on track to achieve that in any event. And as you can see from the buildup at the bottom of Slide 10, the -- we have a potential to be at 50% within 3 years as our stage 2 projects -- the stage 1 projects build out and stage 2 also comes on. If you go to Slide 11. As I mentioned, renewables, reliability and resilience investments are driving our capital expenditures. We're looking at roughly $400 million a year for our company. And you can see in the chart on the lower left that our so-called baseline projects, and these are ones that would go through the annual rate adjustment mechanism for capital, is roughly $315 million of the $400 million that we expect. So a large portion of our annual capital is in what are called our baseline projects. And then the 2 self-build projects that I mentioned are towards the bottom of that chart, which are 2 battery storage projects for the islands of Maui and Hawaii. Moving on to Slide 12. There's a little information there on our bank. We did suspend guidance after the first quarter because in the banking market, there's 2 major risks, interest rate risk and credit risk. And the one thing that all banks now are finding extremely difficult to predict is the credit cost and the reason for that is that credit depends very much on economic recovery. And this pandemic is different than any other shock that has -- that we've experienced, primarily because there's so much government intervention. As I mentioned, our Governor shut our state down by imposing a 14-day quarantine on incoming travelers. And that's not something that one can predict, when government will feel comfortable enough to raise those quarantines. And therefore, we did suspend guidance. We did provide guidance for the bank at what is called the pretax pre-provision level, and pretax pre-provision gives you all of the earnings for the bank with the exception of the provision. And that will include the effect of the interest rate change in the lower rates and also the shape of the yield curve. And you can see that we lost roughly $20 million to $30 million off of the earnings of the bank. But if we go on now to Slide 13, you can see why we say that our bank is very solid because of that very low-cost funding base. So all the fundamentals of the bank are still very much intact, and we expect the bank to do well as we come through this pandemic, as it always has. On the right side of Slide 13, the main profitability metric is the net interest margin, what we earn off of the funding base and the loans that we have made. And the green is, of course, our own net interest margin, and the line is peer institutions. And the net interest margin for American has always been best-in-class and always good, healthy margin, as I mentioned. And that is a characteristic of the banking market in Hawaii as well. Going on to Slide 14. Here's the note that I mentioned earlier about 80% of our loan portfolio being secured by real estate. And I'd also point out that our exposure to some of the sectors that have been harder hit like hotels or entertainment is actually quite low. Like all banks, we have been entertaining payment deferral requests. And so far, only about 10% of our overall portfolio customers have requested deferrals. So with that, we're going to go on to Slide 15 on capital and liquidity and then we do have a slide on guidance. And I'm going to turn it now over to Greg Hazelton to [indiscernible].

Great. Thank you, Connie, and hopefully, everyone can hear me. I'm on Slide 15, labeled Solid Capital and Liquidity Positions. As Connie has addressed, our bank is self funding. It has strong stand-alone access to liquidity through its -- through high-quality loan portfolio and access to the Federal Home Loan Bank. So it is self funding, no need for liquidity from the holding company. And it has also got a strong credit -- or capital position, which is, as you may know, is -- goes through stress testing even under very severe scenarios in excess of what we've experienced under COVID. So we have high confidence in the bank's capitalization levels and ongoing liquidity. At the holding company, HEI and Hawaiian Electric, our liquidity remains solid and very strong with access to the capital markets. We recently accessed and issued $160 million of long-term debt in the private placement market, including $50 million of green bonds because of investor interest in our investments -- renewable investments in Hawaii. Those were planned financings. As we stand here today, we have over $400 million of liquidity in committed capital at both HEI and Hawaiian Electric, which is sufficient for our needs through 2020 and into '21. As you know, we remain committed to an investment-grade capital structure and remain well capitalized as well. We have limited need for equity and because of the strong dividends from both our bank and our utility and expect that to remain the same. Most of our cash flow is invested into CapEx, our CapEx program and growth at the utility as well as our external dividend. Our external dividend remains sound, and we're committed to our quarterly dividend. In terms of our overall liquidity, we have very modest need for refinancing of long-term debt. We pushed out and refinanced most of the maturities. So again, most of our capital needs are really for the investment and growth in the CapEx at our utility. That drives rate base growth and even under PBR, which will offer us enhanced revenues for performance in noninvestment-related activities, we still -- we earn on our invested capital and the growth of our rate base and our CapEx program will also drive earnings growth for HEI as a consolidated company. I'm turning to Slide 16 and regarding our 2020 guidance. Our utility and holding company guidance remains unchanged since our initial announcement and guidance range at the beginning of the year. At the utility, that's $1.46 to $1.54. Because we are decoupled at the utility and under the regulatory mechanisms, we remain very stable from an earnings perspective even as we have to bridge accounts receivables and some of the receivables on regulatory assets. We remain liquid, and earnings remain stable. We did guide, because of some of the unanticipated COVID impacts when we initially established the range, we did guide to the lower end of the range for the year. We remain committed to our CapEx program. We were uncertain around whether there'd be COVID-related delays in supply chains for our capital expenditure programs, but we believe that the CapEx of $360 million remains on track, and we're continuing to remain focused on our investments and transformation of the utility and investments in renewable infrastructure. Connie mentioned the COVID-19 related costs. We do anticipate a regulatory order allowing us to defer those costs, approximately $22 million. We should know by the end of June. On the bank, as Connie had mentioned, the -- while we could not provide full guidance on a net income basis because of the credit and provision issues, we did provide guidance on a pretax pre-provision range of $90 million to $110 million. We do understand we are able to operate profitably even in a low interest rate environment. And as Connie had mentioned, we are best-in-class on net interest margin relative to our peers. And so we see continued profitable operations at the bank for the calendar year. With that, I'll turn it over to Jeremy for any questions.

We do have a question from the field here on the bank side. Curious if other banks in Hawaii have withdrawn guidance as well. And when do you believe that you'd be in a position to provide guidance again for the bank?

Connie, do you want me to answer that?

Sure. Go ahead. Okay.

No. I think it's common for the banking sector as well as the Hawaii banks to withdraw net income guidance. The depth and duration of the COVID impact and particularly the impact on the credit, the loan portfolio, while most of the banks here have high-quality loan portfolios and the real estate market is very strong, there is uncertainty there that we don't feel comfortable enough to be able to provide a accurate range at this point.

That sounds good. I think we might be running thin on time at this point. I don't know if there's any kind of final thoughts or comments that you want to leave the audience with?

Connie?

No, I think as we look at our companies, in fact, we just had a Board meeting yesterday, and I was telling the Board that, overall, I feel good about our companies. They're doing exactly what they should be doing right now, which is operating, serving customers. We're solid. We'll be coming back as the recovery comes back. And I think as we get through this pandemic, you'll also see Hawaii come back. With respect to tourism, somehow people still love Hawaii. They love to travel. They want a vacation. And after 9/11 and the great financial crisis, we saw tourism just come back with vengeance. So I believe our major driver here of tourism will remain strong. And of course, the second driver is federal government expenditures. We're the headquarters for USINDOPACOM for the Pacific area, and those expenditures have continued right throughout.

Great. I want to again say thank you so much for joining us this afternoon.