Earnings Call Transcript - HE Q1 2021

Operator, Operator

Good day, and welcome to the Hawaiian Electric Industries, Inc. First Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Julie Smolinski, Vice President of Investor Relations. Please go ahead, ma’am.

Julie Smolinski, Vice President of Investor Relations

Thank you, Rocco. Welcome, everyone, to Hawaiian Electric Industries’ first quarter 2021 earnings call. Joining me today are Connie Lau, HEI’s President and CEO; Greg Hazelton, HEI’s Executive Vice President and CFO; Scott Seu, Hawaiian Electric President and CEO; Rich Wacker, American Savings Bank President and CEO; and other members of senior management. Our press release and presentation are posted 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, Connie will begin with her remarks.

Connie Lau, President and CEO

Thank you, Julie, and aloha to everyone. Mahalo, thank you for joining us today. We had a very strong start to the year with first quarter consolidated net income of $64.4 million and earnings per share of $0.59. These results were 93% and 90%, respectively, above the same quarter last year and were driven by stronger earnings at both the utility and the bank. In the first quarter, Hawaiian Electric benefited from continued savings from the robust cost management program we started last year. The savings will be delivered to customers in rates beginning in June, and along with other timing elements, we expect the utility to remain within the full year guidance range we announced in February. American’s first quarter results reflect good execution in an environment that remains challenging for bank profitability. Our results benefited from a release of provision as we continue to conservatively manage credit in the improving Hawaii economy. As Greg will cover in more detail, we’re increasing our bank guidance and consolidated HEI guidance for the year, to reflect this improvement. We’re seeing strengthening in the local economy as Hawaii continues to manage the virus well and the vaccine rollout continues. Unemployment declined to 9% in March, while still above the national average, it’s headed in the right direction, having declined from a peak of nearly 24% a year ago. We’ve seen significant growth in tourism arrivals this year. And lately, we’ve experienced multiple days where arrivals have approached pre-pandemic averages. At this point, almost all our arrivals are from the U.S. mainland as the COVID situation and vaccinations abroad have been more challenging than domestically. Hawaii real estate fundamentals are strong and continue to support the conservative portfolio mix at the bank. Year-to-date, March, Oahu sales volumes are up 19% for single-family homes and 53% for condos. Median prices are also up, 17% to $950,000 for single-family homes and 4% to $450,000 for condos. In its March outlook, the University of Hawaii Economic Research Organization accelerated its forecast for the state’s economic recovery by 18 months with the GDP now expected to rise 3.7% in 2021 and 3.1% in 2022. COVID-19 cases in Hawaii have remained far below mainland. The seven-day rolling average was 94 for the state and is the fifth lowest per capita among U.S. states as of May 6. 40% of our residents are now fully vaccinated and more than half have had at least one dose. While this is encouraging, we’re mindful that we’re still in the early stages of Hawaii’s economic recovery, and there is still some uncertainty about the pandemic’s course. At the utility, cost efficiency, our transition to the new PBR framework, and our clean energy future have been and continue to be our major focus. We and our stakeholders are all learning the new PBR framework, which is designed to align our interest as we work together to increase renewable energy and decarbonize our economy in a way that is affordable, reliable, resilient, and equitable. Our commitment to cost efficiency positions us well as we transition into PBR. The utility has been successful in implementing efficiencies and achieving savings to deliver on our management audit savings commitment and the customer dividend. We’ll start returning these savings to customers through the annual revenue adjustment, or ARA, when PBR goes into effect June 1. Cost management will continue to be a focus as we operate under PBR. We’ve been working with stakeholders to finalize the new PBR performance incentive mechanisms, or PIMs, as well as the scorecards and metrics we’ll report on going forward. We are expecting the PUC to issue an order setting forth the parameters of the new PIMs in the near future. As we’ve said before, reaching our collective clean energy and decarbonization goals must be done in a way that is kākou, a Hawaiian word that means it takes everyone working together. We’re working to bring projects from Hawaii’s largest ever renewable energy and storage procurement online as soon as possible. We are fully committed to this effort, which is no easy task given the number of projects, the scale of this procurement relative to our small system, community considerations, land constraints, and the need to ensure reliability on isolated island grids. We’re actively working with independent power producers, government agencies, and other stakeholders to overcome obstacles to bring projects online faster. Last week, the PUC directed us to establish regulatory liabilities to track costs to customers resulting from delays in commercial operations of approved Stage 1, Stage 2, and CBRE Phase 1 projects. While we do not believe we are liable for any amount, we believe the PUC’s intention may be to track rather than record costs before a determination is made. So, we will be seeking reconsideration or clarification. Last week, the PUC also approved with conditions our agreement for the Kapolei Energy Storage Project, a standalone battery project that will help ensure reliability when the Oahu coal plant retires and enable integration of more renewable energy. While technically an approval, the order imposes conditions that may prevent us and the developer from moving forward with this project. The regulatory process allows us to raise our concerns to the PUC, and we will be filing a motion for reconsideration on Monday. Another key focus is accelerating the addition of more distributed energy resources, or DERs, and demand response. On May 3rd, we filed our recommendations to achieve this acceleration while underscoring the importance of equity and fairness in how the programs are designed. We’re advancing programs to benefit all customers, including expanding our community solar program, proposing a rooftop rental program, and procuring aggregated grid services from DERs. Grid modernization is key to facilitating faster deployment and effective use of demand response and DERs. In March, the PUC approved our proposal to shift from an opt-in to an opt-out approach for advanced meters in targeted areas, allowing us to deploy advanced meters more quickly and thus enabling operational efficiencies and more advanced rate programs. Turning to the bank. American continues to perform well in a challenging environment. In the first quarter, we continued to have strong mortgage production and deployed an additional $150 million of ASB CARES or Paycheck Protection Program loans to support small businesses in round two of that program. Year-to-date, that amount has increased to over $170 million. Record deposit growth, in large part driven by federal stimulus, continues to outpace lending opportunities in this early stage of Hawaii’s economic recovery. We’re taking a balanced approach to managing our portfolio, optimizing fee income and loan portfolio growth in a low interest rate environment. While net interest margin is still pressured, record low funding costs and balance sheet growth are helping grow net interest income consistent with our expectations. Our first quarter release of reserves for credit losses reflects the resilience of our customers as well as the moderating credit risk environment as Hawaii’s economy begins to recover. We continue to manage our reserves for credit losses conservatively. American has also continued its cost control efforts, leading to lower noninterest expense in the first quarter, even as we invest in our anytime, anywhere banking transition. Improved profitability is also allowing the bank’s dividend to HEI to increase. We’re accelerating our digital transformation to enable customers to bank with us anytime and anywhere. Today, 44% of deposits are made through self-service channels such as ATMs and mobile, more than double pre-pandemic levels. And we’ve seen increased customer satisfaction across all channels over that time. We’re enhancing our digital offerings to make banking even easier for customers. This includes providing new online financial wellness tools, upgrading our ATM fleet, strengthening our mobile app, expanding online capabilities and opening new digital centers where our teammates will help customers with digital banking solutions. Now, Greg will discuss our financial results and our outlook.

Greg Hazelton, Executive Vice President and CFO

Thank you, Connie. Turning to our first quarter results, consolidated earnings per share were $0.59, up from $0.31 in the same quarter last year. Both the utility and the bank demonstrated strong performance, reflecting the resilience of our companies and signs of a strengthening recovery in the Hawaii economy. The utility's earnings benefited from lower O&M expenses due to cost reduction efforts and delays in generation overhauls, along with higher revenues from our annual rate adjustment mechanism, including timing-related charges for target revenue recognition to mitigate seasonality impacts. The bank gained from the release of provision for credit losses as certain credits upgraded, and we observed stable credit trends alongside an improving economic outlook. The holding company loss aligns well with our plan, but we increased charitable contributions during the quarter, including a $2 million donation to support our community in challenging times. Compared to the same period last year, consolidated trailing 12-month ROE improved by 80 basis points to 10%. Utility ROE rose by 160 basis points to 9%, while bank ROE, assessed on an annualized basis, was 16%. The utility outlook remains stable, but ROE expectations will be influenced by savings from the management audit and customer dividends, as O&M cost reductions enhancing quarterly earnings will fund customer bill reductions under PBR. For the utility, net income for the quarter was $43.4 million compared to $23.9 million in the first quarter of 2020, primarily driven by $10 million lower O&M expenses compared to the first quarter last year. O&M was lower due to reduced staffing and efficiency improvements from an ongoing cost management program, timing-related items like higher bad debt expense in the first quarter of 2020 that has since been deferred, and fewer generating facility overhauls planned, some of which will occur later in the year. There were additional higher costs in 2020 for increased environmental reserves and outside service costs to support the PBR docket and other customer service projects. Apart from lower O&M, we also saw a $5 million revenue increase from higher rate adjustment mechanism revenues and a $4 million revenue increase from timing-related target revenue recognition changes this year, which won't impact 2021. These gains were partly offset by $1 million higher depreciation. For utility performance over the remainder of the year, we don't expect significant contributions from performance incentive mechanisms in 2021. We have approximately $22 million in COVID-related costs, mainly bad debt expense, which we are deferring until June 30. The moratorium on customer disconnections will remain until May 31, 2021, and we are working with customers on extended payment plans and other bill assistance options. We plan to file a separate application to recover costs once actual amounts are confirmed, and will also seek approval to continue deferring COVID-related costs beyond June 30. As indicated, our O&M expenses were positively influenced by the timing of overhauls, which we expect to happen later in the year. Achieving management audit savings is crucial for O&M expenses. We are on track to meet the $6.6 million savings commitment, which will be returned to customers starting June 1st. Utility capital investments for the quarter were about $60 million, lower than anticipated due to unexpected delays, including extended repairs at one of our substations, additional redesign work for T&D projects, COVID travel restrictions, and meter deployment delays affecting grid modernization efforts. Despite these delays, we still aim to meet our utility capital investment plan for 2021 and maintain our CapEx and rate base growth guidance of approximately $335 million to $355 million, reflecting a 4% to 5% growth in rate base. Regarding the bank, ASB’s net income for the quarter was $29.6 million, compared to $15.7 million last quarter and $15.8 million in the first quarter of 2020. The increase was largely due to a moderation of the previously high credit risk environment as Hawaii’s economy recovers and the release of reserves for credit losses. Net interest income reflects strong deposit growth, lower loan demand, and increased growth of our investment portfolio. Noninterest income benefited from strong mortgage origination and sales, even though it was below the prior year’s quarter. Noninterest expenses remained consistent with our plans, as ASB continues its focus on strategic investments for efficiency and productivity. ASB’s net interest margin decreased by 17 basis points during the quarter, with NIM at 2.95% compared to 3.12% in the previous quarter. The low interest rate environment and record deposit growth contributed to this compression. Fees from PPP lending and a low cost of funds helped offset the pressure on asset yields. The average cost of funds was 0.08%, down from the linked quarter and the prior year. We anticipate ongoing pressure from low interest rates and excess liquidity from strong deposit growth and lower reinvestment yields, which leads us to update our NIM guidance to a range of 2.80% to 3%. We expect balance sheet growth to allow net interest income to align with our expectations for the year. In the first quarter, the bank released $8.4 million in provisions for credit losses, compared to $11.3 million in the fourth quarter and $10.4 million in the first quarter of last year. This reflects upgrades in the commercial loan portfolio, reduced exposure to riskier consumer unsecured loans, and lower net charge-offs as Hawaii’s economy begins to stabilize. ASB’s net charge-off ratio for the quarter was 0.18%, compared to 0.36% in the fourth quarter and 0.44% in the first quarter of 2020. Nonaccrual loans increased slightly to 1% compared to 0.89% in the fourth quarter and 0.90% in the previous year. We remain cautious as we monitor Hawaii’s economic recovery, and at 1.73% as of the end of the quarter, our allowance for credit losses was the highest among Hawaii peers. Positive trends in loan deferrals are evident across ASB’s portfolio, with nearly all deferred loans returning to scheduled payments. Active deferrals represent just 0.2% of the total loan portfolio. We have seen a decrease in delinquencies in higher-risk commercial and consumer portfolios, while noticing a slight uptick in delinquencies in the residential portfolio, which remains low-risk and is backed by rising values in the Hawaii real estate market. These dynamics have contributed to an overall decrease in our loan portfolio's risk profile. ASB is managing liquidity and capital conservatively, retaining ample liquidity and strong core capital ratios, with around $4 billion in available liquidity from reliable resources. ASB’s Tier 1 leverage ratio of 8.33% is comfortably above well-capitalized levels. Given the lower risk profile of our portfolio, we anticipate managing toward an 8.0% or above Tier 1 leverage ratio while promoting competitive profitability metrics and ASB dividend growth, all while maintaining a strong capital position. We are expecting higher dividends from the bank to HEI this year, as detailed in our February guidance, given ASB’s strong performance and positive outlook, now anticipating dividends of approximately $50 million to $60 million instead of the previously estimated $40 million. For the quarter, the ASB Board declared a $23 million dividend to HEI. We do not foresee the need to issue external equity in 2021 at HEI unless we come across significant additional investment opportunities. We are committed to upholding an investment-grade profile. The utility has recently received credit rating upgrades from S&P to BBB flat and Moody’s to Baa1, both with stable outlooks. Looking at our guidance, we are reaffirming our previously issued utility guidance. Despite a strong first quarter for the utility, we will be returning cost savings to customers starting June 1st and anticipate additional overhauls later in the year. Also, while the first quarter saw higher revenues due to a methodology change to eliminate seasonality in target revenue recognition, a portion of this change will reverse later in the year. However, we are revising our bank consolidated guidance to $0.67 to $0.74 per share, up from the previous range of $0.52 to $0.62. We are adjusting our NIM expectations at the bank to 2.8% to 3%, down from 2.90% to 3.15%. The impact on net interest income should remain muted due to balance sheet growth. Given improving credit dynamics and the outlook for the Hawaii economy, we now expect provisions to fall between zero and $10 million, which we believe is conservatively appropriate given ongoing uncertainties in the economy until vaccination levels increase and international travel resumes. We expect stronger bank profitability to translate to consolidated earnings growth and higher bank dividends to the holding company, and we are raising HEI EPS guidance to $1.90 to $2.05 per share. Now, I’ll turn the call back to Connie.

Connie Lau, President and CEO

Thanks, Greg. I’m proud of the dedication of our employees and the resilience of our companies as we continue to provide essential electricity and banking services and deliver solid financial results while helping Hawaii reach its aggressive climate goals and build back better. Last month, we issued our second consolidated ESG report, which includes our ESG priorities and our first task force on climate-related financial disclosures aligned reporting. We’re considering the implications for our companies by the Biden administration’s goal to cut carbon emissions 50% from a 2005 baseline by 2030. We believe our goals and plans here in Hawaii and the work we’ve been doing for some time, place us on a strong path to achieve a net zero future. We’re updating our planning and analysis, and we’ll report further on that in the future. And finally, we say aloha to Rich today as he is leaving American to pursue other interests. Rich accomplished a great deal during his more than 10 years at the helm of American. Rich leaves American in great shape as evidenced by ASB’s strong first quarter earnings and Greg’s comments earlier. Under Rich’s leadership, ASB has grown its assets, expanded its customer base, products and services and improved operational efficiency. He and his team have provided great customer service and made banking easy for customers. We thank Rich for his leadership and contributions to American and also our state. Ann Teranishi, currently the bank’s Executive Vice President of Operations, will succeed Rich as President and CEO later today. Ann is a strong collaborative leader with deep banking industry knowledge and a 14-year track record of success at American. We look forward to Ann’s leadership. And now, we will open it up for your questions.

Operator, Operator

Today’s first question comes from Julien Dumoulin-Smith with Bank of America Merrill Lynch. Please go ahead.

Julien Dumoulin-Smith, Analyst

Good afternoon, team or good morning to you all. Thank you for taking the time. Congratulations on some impressive results and the turnaround. To start off on the utility side, could you comment on the 9% return on equity? That’s a fantastic outcome, especially considering the current backdrop. How do you view the progression of that return on equity throughout the year? You've maintained your utility numbers, so how do you see any potential decline through the year in relation to what seems to be some cost savings? Additionally, should we consider that 9% as an expectation for the following years as the initial cost benefits diminish?

Greg Hazelton, Executive Vice President and CFO

So, thanks, Julien, for the question. I’ll start and characterize this. For the first quarter, we had a good start to the quarter, but largely in line with plan. The utility has been focused on efficiencies and cost savings since last year, and you saw the benefits of that at our year-end report as well, and that’s continued well into this year. But, as you know, we have accelerated customer build benefits as we implement PBR this year, and 2021 is a transition year under PBR. So, we expect, while we’ve got a great start and solid expectations, we’ll meet all of our plans on those cost reduction efforts, that we’re still in line with our overall guidance that we issued at the beginning of the year and that our ROEs will reflect that guidance, which we represented just below 8% earlier this year. So, again, the quarterly results recognize a fast start, but over time, it will moderate to be consistent with our guidance. The other element that you mentioned, though, was those cost benefits of the cost savings will continue with the programs that Scott and Tayne and the utility team have put into place. So, we do expect some opportunity for that to benefit realized earnings over time as we continue through the full implementation of PBR and over the next several years.

Julien Dumoulin-Smith, Analyst

Got it. Excellent. And then, just to make sure I heard this on the utility side right. How do you think about that utility CapEx issue here? I mean, just around some of the delays. I mean, what’s the order of magnitude that’s at risk here? Just to understand because I know you alluded to some things. But you’re keeping intact your rate base targets this year at the same time.

Greg Hazelton, Executive Vice President and CFO

Yes. We do not see significant risk to the capital deployment and investment plans. There is a substantial need for investment, and the utility has effectively prepared for and implemented these plans. While the timing of specific projects can sometimes be delayed or affected, the utility is overall confident in its ability to meet its investment and capital deployment goals in line with the guidance we have provided.

Julien Dumoulin-Smith, Analyst

Got it. And super quick on the ASB side of the equation. With respect to NIM versus the release of reserves here, I mean how do you think about that to trend through the course of the year, right? I mean, obviously, things are accelerating, as you described yourself in your prepared remarks. So, presumably, that bodes well on release. But obviously, NIM, lower here. Just can you comment about those two factors through the course of the year as best you understand it today?

Rich Wacker, President and CEO of American Savings Bank

Sure, this is Rich. We lowered the guidance on net interest margin to reflect the ongoing pressures in the current environment. As you can see, deposits have increased, and since loan growth is relatively modest, much of that is being directed into the investment portfolio. Consequently, we are experiencing a mix effect because the margins on the investment portfolio are lower than those on loans, as there is no credit risk involved. This mix effect will persist until the economy strengthens and loan growth rises. Regarding the provision, its outcome will depend significantly on the status of specific credits. If the economy remains robust, we anticipate that credits in the special mention category may increase due to potential credit concerns. However, if we do not see these concerns and the economy improves—with borrowers making payments and risks diminishing—we could see upgrades, leading to a continued adjustment in the level of coverage for the portfolio. I believe that all banks have slightly reduced their coverage levels in the first quarter. The outcome will hinge on the sustained improvement in the economy and its impacts on these specific credits.

Operator, Operator

And our next question comes from Durgesh Chopra with Evercore ISI. Please go ahead.

Durgesh Chopra, Analyst

Can you provide clarity on the utility EPS growth guidance of 4% to 5% for 2022 and beyond? I understand that this does not include performance incentive mechanisms. Could you quantify the potential upside from those mechanisms? Could this bring you to the high end of your growth target, or is there a possibility of exceeding 5%? Additionally, what should we anticipate regarding the timeline for the approval and incorporation of these mechanisms into your plan?

Greg Hazelton, Executive Vice President and CFO

Certainly. With the implementation of PBR, we are currently finalizing many of the near-term PIMs and the additional PIMs under PBR. The initial deployment appears to be modest, allowing space for more PIMs in the future and potentially significant opportunities. Therefore, the guidance for this year does not expect any substantial contribution from PIMs. The growth guidance of 4% to 5% is based on our invested capital growth and our effective recovery mechanisms. I’ll hand it over to Tayne or the utility to discuss the long-term dynamics of PIM development and opportunities.

Tayne Sekimura, Utility Executive

Yes, this is Tayne. Thank you, Greg. Regarding the PIMs, we've outlined some information in our appendix slides. What we observe is that for the new PIMs and PBR, there is significantly more upside potential rather than risks or downsides. This year, as Greg indicated, the PIMs are modest as we await more detailed guidance on them. Looking ahead, the biggest opportunity we see for the PIM stems from the RPSA, which relates to our efforts to increase the amount of renewables in our system. Additionally, there are other opportunities linked to the customer outcomes outlined in the PBR docket, which connect to the state's energy goals. That provides a brief overview of the PIMs. Did I address your questions?

Durgesh Chopra, Analyst

Yes, you did. Thank you. Just to be clear, though, I mean, the 4% to 5% sounds like does not include the additional upside that you might have for PIMs. That would be on top. The 4% to 5% is just recovery of base capital, right, as it stands in the plan?

Tayne Sekimura, Utility Executive

Yes, that’s correct. That’s correct. Just the 4% to 5% growth is on our invested capital.

Greg Hazelton, Executive Vice President and CFO

Yes, we have an annual adjustment mechanism under the PBR that will provide us with an increasing budget in line with inflation, which should keep us balanced. Cost management within that target, along with the recovery mechanisms on capital, is part of our strategy. For the PIMs, I would refer you to pages 35, 36, and 37, where we offer more details. On page 37, we have included estimated ranges for the RPSA PIM based on our expectations for renewable project growth, although we still need to validate that.

Operator, Operator

And our next question comes from Paul Patterson with Glenrock Associates. Please go ahead.

Paul Patterson, Analyst

So just to follow up on the questions regarding the loan release, how should we consider the potential for the loan loss reserve to be released if the economy remains strong? Is this something we should evaluate on a quarterly basis, or do you think it would be prudent to take a bit more time to assess how these loans are performing before making any decisions? It appears to me that you are being quite conservative, and with this release this quarter, it reinforces that perception. How should we approach this conversation?

Rich Wacker, President and CEO of American Savings Bank

Yes. Looking back to last year, prior to the pandemic, our reserve coverage relative to the loan book was approximately 1.5%. This increased to 1.9% over the course of last year, and we have since adjusted it to about 1.7%. As Greg pointed out, our coverage remains the strongest compared to our market peers. The composition of our loan book has shifted slightly during this time, as we have intentionally reduced our consumer unsecured lending. This results in a mix that carries lower risk. Currently, in our reserving approach, we are making assumptions that reflect a cautious “wait-and-see” stance. We have not factored in expectations of significant economic improvement since we want to see actual data first. Thus, we will assess the ratings on specific credits and how the loan portfolio changes in terms of balances on a quarterly basis. Overall, while we are currently at a stronger coverage level compared to the beginning of the year, this situation reflects the current environment and the performance of specific credits as our customers navigate through it. As we entered this year, we did not anticipate significant reductions, which explains the differences in what you have observed. To put it in perspective, on a scale from 0 to 10, a 10 would imply minimal reduction in additional coverage, while a 0 would suggest that some reductions occurred. The final outcome will depend on our assessments each quarter.

Paul Patterson, Analyst

Okay, great. Regarding the CBRE order, my understanding is that these are essentially Power Purchase Agreements (PPAs). I’m curious about whether this is directly related to Hawaiian Electric. It seems that the responsibility ultimately lies with the party involved in the PPA, who is expected to meet certain commercial dates. I’m wondering how, if the PPAs do not perform as expected and there are liabilities, Hawaiian Electric would be impacted. Is there any recourse to another party in that situation? Do you understand what I’m asking?

Connie Lau, President and CEO

Yes. So, let me ask the utility to address that.

Scott Seu, President and CEO of Hawaiian Electric

Yes. Hi Paul, this is Scott Seu with Hawaiian Electric. The main concern here is assessing any liability for the delays in these projects. We plan to address this with our commission, highlighting that the process has permitted additional technical work to determine the requirements for these projects to connect to the grid. This may also involve filing amendments to the Power Purchase Agreements, including potentially changing the guaranteed dates for commercial operation. That's the core issue as we see it. We aim to resolve these matters with the PUC while simultaneously working to expedite these projects due to factors like accelerating the Renewable Portfolio Standards. At the same time, we recognize the importance of giving developers a reasonable timeframe to complete their installations and interconnections. Regarding your question on whether developers could challenge the utility, it really depends on the specifics of each project. We have been collaborating with developers to navigate the technical, contractual, and service date challenges. Therefore, I won't speculate on whether any developers might feel the need to challenge us in the future.

Paul Patterson, Analyst

Okay. I understand they are emphasizing that they are not currently taking any action regarding potential penalties, which would be addressed in a future proceeding. However, could you provide a rough estimate of what the potential regulatory liabilities might be if any were to arise? What size are we potentially looking at?

Tayne Sekimura, Utility Executive

Paul, this is Tayne. We’re discussing millions of dollars annually in terms of potential. I mean that, yes.

Paul Patterson, Analyst

So, somewhere less than $10 million a year?

Tayne Sekimura, Utility Executive

Let me also provide you some details. In order to calculate any type of it really does matter on assumptions, in terms of guaranteed commercial operation dates, avoided costs and then also the price of oil. So, there are a lot of assumptions made in that calculation. It is very hard to determine at this point in time, but I would say we’re talking about millions of dollars annually.

Paul Patterson, Analyst

Okay. Regarding the storage order that was released last week, there seems to be a concern about the cost controls linked to it. Could you provide more details on your perspective regarding the commission's order and whether there are any key takeaways we should note from the order issued on Thursday?

Scott Seu, President and CEO of Hawaiian Electric

Yes, Paul, I believe the commission has raised additional concerns beyond just the project's cost. One of their main concerns is related to the role of the battery and its function within our electric system, particularly whether this grid-tied standalone battery will be charged using renewable energy or fossil fuels. This appears to be a central issue that the commission is focused on. We will discuss this further, and as we file our motion for reconsideration next week, we plan to present our own viewpoints.

Operator, Operator

And our next question comes from Jackie Bohlen with KBW. Please go ahead.

Jackie Bohlen, Analyst

I wanted to start off with just the liquidity mix and understanding there’s a lot of factors at play here. I saw the borrowing reduction that took place in the quarter. And just curious about what your thoughts are about additional liquidity deployment with that bucket now lower and then just the expectation that PPP loans will continue to be forgiven. So, how you expect things to fluctuate with that and what any deployment plans might be?

Rich Wacker, President and CEO of American Savings Bank

Yes, we are actively pursuing loan growth, which is our primary focus. We are likely not selling as much of our mortgage production, so we hope to retain more of that on our balance sheet. Our interest is also in commercial real estate, where we aim to participate in various projects and ongoing investments. The shift in our strategy will depend on our organic loan growth capacity. Currently, we are not considering portfolio purchases and are concentrating on strengthening our community banking relationships. Our deposits remain robust, and while we anticipate a potential reduction in deposits as things normalize, we have not experienced that yet. These deposits are being allocated into the investment portfolio, and Dane and his team are working hard to generate yield from them.

Jackie Bohlen, Analyst

Okay. Is there anything that suggests a contraction in the HELOC portfolio? I understand that the current interest rate environment is influencing this. I expect it may decrease further even if single-family mortgages stabilize, as people might still find it beneficial to refinance. Is that the right perspective, or do you have a different view?

Rich Wacker, President and CEO of American Savings Bank

I believe the trend remains as interest rates have risen, but mortgage rates have not yet followed suit, leaving a gap. As a result, we will continue to witness refinancing activity. Additionally, with the increases in residential valuations, individuals are beginning to explore options to leverage their equity growth. Consequently, we are early in seeing an uptick in HELOC applications.

Jackie Bohlen, Analyst

Okay. So, maybe some home improvement projects could be coming down the pipeline and that could mitigate some of the other rate pressures?

Rich Wacker, President and CEO of American Savings Bank

Right.

Jackie Bohlen, Analyst

Okay, that’s helpful. I know we already had a thorough discussion about provisions. Regarding the expense guidance, I understand there's a focus on maintenance and control. Is the plan still to balance some of the investments discussed earlier with cost savings from other areas?

Rich Wacker, President and CEO of American Savings Bank

Yes. Our guidance was to aim for approximately $48 million per quarter, which is flat compared to last year. Naturally, there are some cost increases due to things like lease escalations. We explained previously how we are managing payroll costs by not implementing merit increases this year to ensure better control. The changes we are making in the branch network will lead to future savings, and we have already reduced headcount significantly in certain areas. We are working to offset those cost increases, and our efforts will continue until we achieve the desired cost savings for all the investments we are making.

Jackie Bohlen, Analyst

Okay.

Rich Wacker, President and CEO of American Savings Bank

When we examine the metrics around deposit transaction migration as an indicator on the consumer side, we see significant progress. A year ago, transaction volume was just under 20%. Now, at the end of the quarter, 46% to 47% of transactions are being conducted outside the branch using new ATMs, mobile services, and remote deposits. The business side is not yet at that level, and we plan to address that. We mentioned the introduction of digital centers, which will consist of less staffed branches centered around fully functional ATMs, with team members available to assist customers in learning and adapting to these services. Such initiatives will help reduce workload and enable us to achieve more savings.

Jackie Bohlen, Analyst

Okay, great. And Rich, best of luck with whatever life brings to you next. It’s been nice chatting with you over the last decade.

Rich Wacker, President and CEO of American Savings Bank

Thanks, Jackie, will miss it.

Operator, Operator

And our next question comes from Charles Fishman with Morningstar. Please go ahead.

Charles Fishman, Analyst

I have one last question. Greg, if I understood correctly, some of the cost savings you realized in the first quarter will be reversed later in the year, and credits will go to customers under the PBR. My question is, once the PBR is in place after June 1, will you establish a regulatory liability at that point to avoid a timing issue?

Greg Hazelton, Executive Vice President and CFO

To clarify the guidance, with the implementation of PBR, there was a need for an acceleration of cost-saving benefits, which we outlined as $6.6 million annually for the next three years during the initial PBR period. It typically takes time for cost controls to organically generate these savings and efficiencies. However, the utility has expedited this process, beginning last year, to enable O&M savings to support the accelerated commitment. Our guidance indicated that O&M costs, excluding pension costs, would remain flat or decrease year-over-year, even with some natural inflationary increases on the utility side, which would be counterbalanced by overall efficiency programs. As these programs gain momentum and are more fully implemented, we anticipate benefits that exceed what we provide directly to customers, assisting us in closing the gap on our realized ROE and aligning with long-term earnings growth expectations.

Connie Lau, President and CEO

And Charles, to clarify, there is a timing difference in the short term regarding the $6.6 million in customer savings that Greg mentioned for 2021. The utility began generating those savings, but under PBR, they won't be returned to customers for the entire year until June 1. So, we are generating the savings in advance, but they will be credited to customers starting June 1 for the 2021 year. Beginning in 2022, we will implement levelization on a month-by-month basis throughout the year.

Greg Hazelton, Executive Vice President and CFO

And to be clear, the implementation of PBR in June 1st also limited some of the benefits from PBR, including removing the lag on our annual revenue adjustment mechanisms and so forth. So again, next year, some of the additional benefits the PBR framework when fully implemented for the full year, we should see some benefits from that outside of the O&M issue that we’re talking about.

Tayne Sekimura, Utility Executive

Charles, this is Tayne Sekimura. One thing I want to add to what Greg and Connie said. In terms of mechanics of the return of those customer savings, it’s built into the ARA formula as part of PBR and then those tariffs going into effect on June 1st. So, that’s how mechanically it will be returned back to customers.

Charles Fishman, Analyst

Okay. It’ll just be a learning curve for, I guess, all of us on this. Thank you. That was good. And I saw the information you provided in the Q. That’s helpful. Thank you. That’s all I had.

Connie Lau, President and CEO

Okay. Thanks, Charles.

Operator, Operator

And ladies and gentlemen, this concludes our question-and-answer session. I’d like to turn the conference back over to Julie Smolinski for any final remarks.

Julie Smolinski, Vice President of Investor Relations

Thank you all for joining us today and for your questions. Please do reach out to us in Investor Relations if you have any further questions. And most importantly, have a great weekend.

Operator, Operator

Thank you, ma’am. This concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines. And have a wonderful day.