Good afternoon, and thank you for attending today's Hawaiian Electric Industries' Earnings Conference Call. My name is Danielle, 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. [Operator Instructions] It is now my pleasure to pass the conference over to our host, Mateo Garcia, Director of Investor Relations. Mateo, the floor is yours.

Thank you, Danielle. Welcome, everyone, to HEI's full-year and fourth quarter 2022 earnings call. Joining me today are Scott Seu, HEI President and CEO; Paul Ito, HEI's CFO; Shelee Kimura, Hawaiian Electric President and CEO; Ann Teranishi, American Savings Bank President and CEO; and other members of senior management. Our earnings release and our presentation for this call are available in the Investor Relations section of our website. As a reminder, forward-looking statements will be made on today's call. 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 will begin with his remarks.

Greetings, everyone. Thank you for joining us today. I'll give an overview of our results and accomplishments over the past year, update you on the Hawaii economy and then turn the call over to Paul to further discuss our financial results and guidance. 2022 was a year of strong achievement for HEI, highlighting the strategic benefits we continue to see from our combination of companies. We earned $241 million in net income and $2.20 in earnings per share for the full-year, reflecting solid performance at both the utility and bank. Despite an unprecedented combination of macroeconomic challenges occurring in the first full-year under our new regulatory framework, Hawaiian Electric grew earnings 6% year-over-year to $189 million. This was consistent with our expectations and in line with the improved guidance we messaged during our third quarter webcast. ASB had a strong year as well with the strongest loan growth in a decade, reflecting continued solid credit quality and a healthy Hawaii economy. Bank earnings of $80 million were in line with the increased earnings guidance we communicated in the third quarter. As a reminder, the $101 million the bank earned in 2021 reflected benefits from unique pandemic recovery related items that Paul will highlight later. Last week, we raised our annual dividend for the fifth year in a row, reflecting our confidence that our combination of companies will continue to deliver steady results going forward. Turning to Slide 3. 2022 was our first full-year of performance-based regulation, or PBR. Given the unusual convergence of macro headwinds during the year, we saw 2022 as a successful stress test of this new regulatory framework. Our utilities showed an ability to quickly adjust and maintain operational efficiency despite multiple challenges from inflation, interest rates and fuel costs. We executed well and delivered earnings growth…

Thank you, Scott. I'll start on Slide 6 with our results for the year. We are pleased with our 2022 performance. We generated consolidated net income of $241 million, an EPS of $2.20 compared to $246 million and EPS of $2.25 in 2021. As a reminder, our 2022 results included a $0.06 gain on sale of the EverCharge investment recorded at Pacific Current. Also, as Scott mentioned, net income for 2021 reflected bank earnings that were elevated by two pandemic recovery-related items, a net benefit from the release of reserves and PPP fee income. Excluding these items and the EverCharge gain recognized in 2022, earnings grew meaningfully year-over-year. Our consolidated ROE for 2022 was 10.5%, an increase of 10 basis points from 2021. The utility made progress in narrowing the allowed ROE gap, achieving an ROE of 8.2%, which was up from 8.1% in 2021. And bank ROE increased to 14.1% from 13.8% in 2021. On Slide 7, we show the major variances across our enterprise compared to last year. Overall, we saw very strong results from the bank in 2022 and results were in line with the increased guidance we provided in the third quarter. As mentioned, the net income variance compared to 2021 was largely due to two pandemic-related items. First, the bank returned to a more normalized provision for credit losses of $2 million as we provision for the strong loan growth seen during the year. In comparison, in 2021, the bank recorded a negative provision for credit losses that is a net benefit of $25.8 million due to an improved economic outlook and credit quality improvements coming out of the pandemic. Second, net income in 2021 benefited from over $11 million in higher PPP fee income compared to 2022. However, the decrease in PPP fee income…

Mahalo, Paul, and Mahalo to all of you for joining us today. In summary, we had a great year characterized by strong performance from both the utility and bank and our investors benefited from our unique combination of operating companies during a challenging macroeconomic period. There were no surprises in our results and we executed well to the higher revised guidance given in the third quarter. Our new regulatory framework at the utility is showing that it provides us with stability and predictability, and as macroeconomic and operational headwinds ease up, we expect to see growing performance as we execute our strategies of investing in our system and running the business efficiently for our customers. Our bank will continue to be run conservatively and is well situated to respond to changes in the economy and interest rate environment. We are confident that we will again deliver solid results in 2023. With that, let's open up the call for questions.

[Operator Instructions] The first question comes from the line of Shar Pourreza of Guggenheim Partners. Please proceed.

Hi. Good afternoon, team. It's actually Constantine here for Shar. Congrats on a great quarter and to Paul on the new position.

Thanks, Shar. Appreciate it.

Maybe starting off on the utility. Can you help elaborate on the O&M targets that you're setting prospectively and conditions that you're seeing across the business? Any constraints on labor materials and any path to normalize? Just to get a sense of kind of percentage of O&M that's subject to external factors? And maybe what will cause you to rethink kind of any levels of regulatory relief.

Yes. Well, maybe I can start. What we have baked into our forecast are still some elevated O&M expenses, especially with respect to our power plant generation station maintenance. We are expecting that to continue into 2023, but albeit it will start to taper off as we start to get more new generation resources online and later on, of course, as we're able to retire some of our older power plant units. So we've taken that into account in our look ahead. Like we experienced in 2022, I think the utility was able to respond fairly well to managing overall expenses and other areas of the company. So we're going to continue to be able to do that in 2023 and beyond. Maybe Paul, if you have any further comments specifically about our management of our expenses within the ARA.

Yes. So we are committed to managing O&M and looking at efficiencies to further ensure that our O&M stays within the ARA recovery levels. I'll just provide a data point in terms of how successful the utility has been over the past few years in managing O&M efficiently. So if you take a look at O&M, and I'm referencing adjusted O&M, which strips out some of the pension and other costs that are recovered from other parties from 2019 through 2022, if you look at the compounded annual growth rate of O&M, it's been less than 0.5%. So the utility has done very well in managing those costs. Obviously, the low hanging fruit has probably been harvested, so it does get a little bit harder over time, but I think the utility has shown that it has the ability to manage O&M well within this PBR framework, which again, we feel is a good framework because we know what it adds stability and predictability. We know what revenues we're getting and so our task as a management team is to ensure that we conduct the business such that our expenses come in within that area allowance.

Excellent. I think that's very helpful. And you kind of mentioned a part of my second question, which is on the revenue side kind of since the kind of ARA portion of the revenue formulas for 2023 is fairly well defined by the GDPPI. Just a question on what level of visibility do you have on the other PBR elements, namely the non-RPS related ones, like AMI energy efficiency as those could kind of impact earnings? And how is the most recent fuel cost trajectory impacting your risk-sharing calculations?

Yes, I'll start. I think with respect to the full slate of performance incentive mechanisms or PIMs, we now have a track record of a full-year of operating under the PBR and experiencing how those PIMs perform. So the utility is able to put their focus on the PIMs that they have pretty good line of sight on controlling. Perhaps a good example is the interconnection PIM which the utility performed fairly well last year, earning a reward there. Those are the types of PIMs that provide the utility with the ability to manage their work, how they plan and execute the work. And ultimately achieve on the PIM rewards. That's going to continue to be the focus of our utility team. There are admittedly some other PIMs that are a little bit more challenging to have direct control over. And one example of that is probably the fuel cost risk sharing PIM where we did receive a penalty based on overall fuel prices last year. As best we can, we're going to continue to focus on the PIMs that we do have control over. And meanwhile, on the other PIMs, we'll just as we see how they play out during the course of the year, that will just be a signal on how we need to adjust in other areas of the business.

And I'll just add, there are a good number of PIMs. But what we focus on, at least in terms of providing guidance that we initiated here on the PIMs is really the RPS-A and some of the DER related PIMs because those are the ones that are more meaningful. A lot of the other ones, one is more difficult to predict, but of smaller amounts. And so those tend to have puts and takes that, that generally offset in our – we're at least what we're forecasting here. So again, the most important ones that we focus on would be the RPS-A PIM, which we see overtime growing as additional projects come online.

Okay. That makes sense. And the last one, if I may, really quick. Just on what's embedded in guidance on the bank side for repricing of earnings assets, and that's been kind of tracking, I believe since June, so that’s raised from roughly $175 million to $475 million. But just beyond that, kind of what are you embedding in terms of repricing kind of as we look at the guidance today?

Yes. So if you're referring to our NIM, we are expecting that to increase in 2023 to 3% to 3.15%. That increase is in a large part, based on managing the funding side, so paying down higher cost wholesale borrowings. That at the margin has – those costs have increased quite significantly, as the Fed has increased rates. So we see an opportunity as our investment portfolio pays down. Those proceeds are used to pay off some of those higher cost borrowings. And that will help us increase our net interest margin.

And the revenue sides of the adjustable rate assets, those are kind of in plan marked as of the last Fed date, any assumptions around increases for 2023 or just holding flat?

Yes. So in terms of our adjustable rate assets, as we mentioned, because of the strong loan growth that we had in 2022, we did have to supplement on the funding, some of these higher-cost sources of funds, the FHLB and some CDs. And so our balance sheet is a little bit more asset neutral, meaning additional fed fund rate increases doesn't – is not accretive to NIM, it does – is accretive to net interest income. So in terms of further Fed rate increases, we wouldn't expect a significant impact to our NIM. But again, as I mentioned, if we were able to manage the funding side and pay down those higher cost borrowings, our balance sheet will become more asset sensitive in which case for the Fed fund rate increases would be accretive to NIM. So that's the plan currently is, again, to focus on paying down some of those higher-cost funding sources.

Yes. And we expect to have more capacity to do that as we see the loan activity sort of get back more towards normal levels.

Yes. We just saw a very unusually high probably more than a decade of high loan growth in which we had to tap some of these other sources of funding.

Yes. Let me ask Ann Teranishi, our Bank President, if she has any other comment.

Yes. Maybe just specific to the question about our adjustable rate portfolio, about $1 billion of our loan book is in the adjustable rate category. So that does change as the rates go up. Also, all of our new origination, all the new loans coming on are at a higher rate than what's on our books. So the rate environment in that sense helps us. But I think what Paul and Scott are referencing is what all banks are experiencing is just increasing funding costs. The one thing I would add to that, though, is Hawaii traditionally has a fairly sticky deposit base. So our betas are low. Our deposit betas are low and our funding costs, while they are increasing. They are lower relative to our mainland peers. So that's something that should help us whether this particular portion of the rate cycle.

That's very helpful and comprehensive as always. Thank you for taking our questions and best of luck.

Thank you.

Thank you. The next question comes from the line of Paul Patterson of Glenrock Associates. Please proceed.

Hey. Good morning.

Hey, Paul.

So just really – I apologize. I just want to follow-up on Constantine’s question, I guess, from a different angle. When we’re looking at the NIM, I just – I guess, it sounds like you're – could you just walk through a little bit for me. I guess I'm a little slow on what's driving your expected lower costs? You're saying you're paying down wholesale cost – wholesale funding – are you going to be increasing deposits? Or is this – just walk me through in terms of what's leading to because it seems that your costs are going up. And I just am not clear on the NIM, what you're projecting to decrease that exactly? I mean you're going to be using less wholesale. Where is that coming from now? Where is the source of funding coming from? Is coming from deposits?

So in terms of the funding, right? So we expect the loan growth to normalize from the high growth rates that we had in 2022. So in 2022, we had to define additional funding beyond sort of the investment portfolio runoff. And because deposit growth was relatively flat in 2022, we had to take on these higher cost wholesale borrowings. Looking forward to 2023, we expect loan growth to moderate. And so we expect the runoff from the investment portfolio as well as retained earnings to provide the funding to pay down some of these wholesale borrowings. And so that's what allows us to shift the kind of the funding mix on the balance sheet.

Got it. I understand. So and the low growth you see going down to what level?

Loan growth of low to mid-single digits, which is the normal sort of rate in the Hawaii market.

Okay. And there's no pressure at all in the – on deposits in terms of increased cost there at all. The market just doesn't – it just isn’t any competition from online banking or anything like that? Or you're not seeing any, I guess, is what you're expecting, at least or what you've been seeing?

Well, as rates rise, I mean, we are seeing some pressures more on the commercial side versus our core deposit base. But over time, we do expect rates to follow kind of the Fed fund rate increases. I would say we still believe we have a low deposit beta relative to the Mainland, much lower. We're – to date our deposit beta is in sort of the single-digit range. So we expect that to kind of remain as we go through this rate cycle. But again, it is a faster increase in rates versus in prior rate cycles. So we could be a little bit higher than that. But again in the context of betas across the nation. I think we're in a pretty good position here in the Hawaii market.

And just to add to what you just said, Paul, in terms of most of the pressure coming from the commercial side, of our deposits, our core deposits, 75% are retail, 25% are commercial. So a large part of our base is retail with a little bit less pressure.

Okay. Most of my question’s been answered. Thanks so much, guys. Have a great one.

Thanks, Paul.

Thank you, Paul.

Thank you. The next question comes from Julien Dumoulin-Smith from Bank of America. Please proceed.

Hey guys, thank you very much for the time. I appreciate the opportunity and good morning to you guys. Maybe just coming back to the questions on cost for a moment ago and just talking about the earnings trajectory. I see this 5% figure rolled forward here. Can you talk a little bit about the utility earnings growth and sort of the cadence of that inflation playing itself out? I mean, effectively, maybe let me ask this directly, given the fact that inflation, at least from near-term perspective, seems acute, are we expecting for there to be a linear trajectory to this 5% growth? Or do you think actually the 2024 to 2025 time frame to see something of an uptick as you deal with and effectively absorb some of these inflationary items as well as some of the commentary you made on CapEx in the remarks as well?

Yes, I can start, and then I can ask Tayne to kind of jump in here. But in terms of the inflationary question, we do expect that to moderate over time. So that has been built into our forecast. I would say that because of the inflationary adjustment we received in 2022 versus what actually happened, there is a little bit of a leakage, if you will, where we do have some catch-up. And so that's part of kind of our forecast, right? Because the ARA was at 2.78%, I believe, and the inflation that we actually realized was higher than that. And so again, going forward, though, we expect to manage within the ARA, and we expect to catch up over time. With respect to your question on linear growth, I do believe we're expecting a relatively consistent growth as opposed to variations between the years. Again, because under the PBR framework, right, it provides more predictability and stability. And so we're forecasting kind of the area inflationary adjustment to sort of normalize as we go out here. And then there’s just a matter of then planning our work and our O&M to be within that level. So the growth would be a little bit more linear. Now having said that, I think where there could be earnings that may not as be as linear would be EPRM because that's really based on when we file the applications, when we start work, et cetera. Tayne, do you have any to add to that?

No, I would echo what Paul said because if you look at our CapEx trajectory there, we do have some projects that are awaiting PUC approval under the EPRM mechanism. And the timing of those projects are slowly coming in, in the 2023 and 2024 period. So I mean, there is a slight opportunity there. But as Paul mentioned in his prepared comments, for those projects that are awaiting EPRM recovery, 40% of those projects, 40% of those costs are within this 2023 to 2025 forecast period. But a large part of those expenses and the completion of those projects are expected in the sort of back-ended part of the forecast.

Got it. So if I'm hearing you, there's maybe some degree of upside as you see these programs play themselves out. But perhaps just as you look at the outlook for as much as there’s perhaps a near-term impact or a pressure point on O&M, you're managing this to have a more linear trajectory?

Yes, that's right, Julien.

All right. Fair enough. Excellent. And actually, how does that fit with just a regulatory recovery time line? Maybe you can speak to that just quickly through the 2025 time line in terms of managing these pressures.

Sorry, Julien, you're asking for how is our outlook in terms of regulatory lag?

Yes. Just how do you think about this aligning against your regulatory lag expectations? Obviously, there's some degree of under earning there and not obviously [indiscernible] by the year. Can you talk a little bit about how that fits against this inflation narrative in terms of managing the pain points and keeping it linear through the forecast?

Well, I'll speak generally, just to begin with and Paul, if you want to jump in or Tayne. But I think one of the nice things about the PBR framework is that it actually has removed a lot of the regulatory lag because effective January 1, that's when the new ERA the adjustment kicked in for us. So we are seeing higher revenues provided by that ERA adjustment, the net 3.68%. So what at least on our core CapEx and core O&M spend, that gives us the line of sight so that we can manage within that going forward. And then with respect to the larger projects, whether they're MPIR or EPRM projects. Again, those are large – typically large projects that we plan accordingly, and we will reduce the risk by not making any commitments until we actually have the commission's approval.

Absolutely. Thank you guys very much.

Okay.

Thanks, Julien.

Thank you. There are currently no additional questions registered at this time. So I would like to pass the conference back over to the management team for closing remarks.

Thank you for joining us, everyone. Have a good rest of your day.

Thank you, everyone.

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.