Cliff Chen - Treasurer and Manager, Investor Relations Connie Lau - President, Chief Executive Officer and Chairman, Hawaiian Electric Company and American Savings Bank Greg Hazelton - Executive Vice President and Chief Financial Officer Alan Oshima - President and Chief Executive Officer, Hawaiian Electric Company Rich Wacker - President and Chief Executive Officer, American Savings Bank Tayne Sekimura - Senior Vice President and Chief Financial Officer, Hawaiian Electric Company Joe Viola - Vice President, Regulatory Affairs.

Julien Dumoulin-Smith - Bank of America/Merrill Lynch Greg Gordon - Evercore ISI Paul Patterson - Glenrock Associates Charles Fishman - Morningstar Ashar Khan - Verition David Frank - Corso Capital Management.

Hello, everyone and welcome to the Hawaiian Electric Industries Fourth Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Cliff Chen, Treasurer and Manager, Investor Relations. Please go ahead..

Thank you and welcome to HEI’s 2017 fourth quarter and year end earnings conference call.

Joining me this morning are Connie Lau, HEI President and Chief Executive Officer and Chairman of the Boards of Hawaiian Electric Company and American Savings Bank; Greg Hazelton, HEI Executive Vice President and Chief Financial Officer; Alan Oshima, Hawaiian Electric Company President and Chief Executive Officer; and Rich Wacker, American Savings Bank President and Chief Executive Officer, as well as other members of senior management.

Connie will provide an overview, followed by Greg who will update you on Hawaii’s economy, our results for the fourth quarter and year end 2017 and our 2018 earnings guidance. Then, we will conclude with questions and answers. In today’s presentation, management will be using non-GAAP financial measures to describe the company’s operating performance.

Our press release and webcast presentation materials which are posted on HEI’s Investor Relations website contain additional disclosures regarding these non-GAAP measures, including reconciliations to the equivalent GAAP measures. Forward-looking statements will also be made on today’s call.

Actual results could differ materially from what is described in those statements. Please refer to the cautionary note regarding the forward-looking statements disclosure accompanying the webcast slides which provides additional information on important factors that could cause results to differ.

The company undertakes no obligation to publicly update or revise any forward-looking statements, including without limitation EPS guidance, whether as a result of new information, future events or otherwise. I will now ask our CEO, Connie Lau to begin with an overview..

Thank you, Cliff and aloha to everyone. Hawaii’s economy had a very strong year in 2017 and I am proud to say that our utility performed within guidance and our bank produced stronger than expected results.

As with other companies, we are subject to some one-time impacts from the tax reform act in 2017, a net negative $14.2 million which Greg will explain. Moving forward however, our bank subsidiary like other banks will benefit from lower tax rates and that will have a net positive impact on the consolidated enterprise.

Customers at our utility will also benefit as our utility is working with the Public Utilities Commission to return the net benefits of tax reform to utility customers. Looking at company developments, 2017 was a productive year. We had rate cases underway at all three utilities.

And together with our Public Utilities Commission and other stakeholders, we continue to lay the foundation to meet Hawaii’s 100% renewable goal by 2045. In 2017, we also started construction on our bank’s new Honolulu campus and look forward to its completion later this year.

It will bring together approximately 600 teammates at one of the most innovative, collaborative and modern worksites in the state and results in greater efficiencies for the bank and its customers.

We formed Pacific Current, a non-regulated platform to make clean energy and sustainability investment that will help us carryout our enterprise mission to be a catalyst for a better Hawaii. Late last year, Pacific Current made its first investment purchasing the Hamakua Energy plant on Hawaii Island.

The investment provides Hawaii-based ownership for this critical resource and is important in helping our utility on Hawaii Island reliably integrate renewable energy.

And because the plant will continue to supply power to the utility pursuant to the original 1997 commission approved power purchase agreement, there are no rate impacts for utility customers. The Hamakua purchase is expected to be accretive in 2018 and we plan to announce another Pacific Current project short.

2017 was a very active and constructive year for our utility and for Public Utilities Commission. We met major foundational milestones, received important PUC decisions in quick succession and have begun 2018 with strong momentum toward our renewable goals. We are returning to a triennial rate case cycle with three rate cases underway.

And in the latter part of 2017 we received interim decisions and orders on two of them. We progressed our foundational framework for achieving 100% renewables with the Public Utility Commission’s acceptance of our power supply improvement plan and approval last week to move forward on our grid modernization strategy.

In 2017 solar on our system grew by 19% through the addition of distributed and grid scale systems, offsetting the need for incremental fossil generation, the equivalent reduction of annual oil consumption with approximately 300,000 barrels.

We are making further progress towards our renewable goals with the issuance of our RFP for the state’s largest ever renewables procurement and the introduction of an innovative new PPA to advance renewables growth.

The utilities continued to develop ways for customers to participate in the renewable transition such as through our newly approved community solar program and our demands response programs both of which were approved recently. We also continued to work on our internal transformation.

We are working to enhance efficiency and have committed to $244 million in customer benefits over 12 years as part of our enterprise resource planning and enterprise asset management project.

Turning to Slide 4, after 6 years without any base rate increases and interim increase of $9.9 in revenues and an interim allowed ROE of 9.5% were approved in the Hawaii Electric Light 2016 test year rate case and became effective on August 31.

In the Hawaiian Electric, 2017 test year rate case on Oahu and interim rate increase of $36 million with a 9.5% allowed ROE was approved at December 15 and will become effective February 16. Evidentiary hearings on the remaining issues in our Oahu case will be held in March.

And last October Maui Electric filed its 2018 test year rate case application requesting a rate increase of $30 million in revenues. For the PUC procedural schedule, we expect an interim decision this August. As mentioned this last quarter for 2017 decoupling order established guidelines for major projects interim recovery.

The MPIR mechanism applies to projects placed in service between rate cases under circumstances in which cost recovery net of related benefit is limited by the RAM Cap.

We applied for and are awaiting PUC decisions under the MPIR mechanism for our 50 megawatt Schofield Generating Station project and our 20 megawatt West Loch Solar facility which are expected to be placed into service this year. We expect that the MPIR mechanism will help increase the timeliness of recovery and reduce ROE lag.

The first of our performance incentive mechanisms went into effect at the beginning of this year pertaining to system interruption goals and call center performance.

And finally, on January 31, we filed estimated tax benefits from tax reform for all three utilities and we are working with our commission on a plan to flow net tax reform benefits back to customers. Turning to Slide 5, let me review the significant developments on our path to 100% renewable future.

First the PUC accepted our Power Supply Improvement Plan or PSIP in July which proposed a 5-year action plan to 2021 and provides a roadmap to achieve Hawaii’s 100% renewable energy goal by 2045.

In August we filed and last week the PUC approved implementation of our companion grid modernization strategy which is our vision developed with extensive customer and stakeholder input for building more resilient and renewable ready island grids.

In October the company filed with the PUC their proposed process for procuring Hawaii’s largest ever amount of renewable resources 370 megawatts through 2022 including 40 megawatts of firm generation.

The process includes a groundbreaking new PPA that provides the utility greater dispatch flexibility to meet system needs provides greater economic certainty for IPPs and maximizes value for customers. The company has filed final draft RFPs with the PUC this month.

We have made progress on demand response which enables customer resources such as water heating, air conditioning and customer cited storage to help integrate more renewable resources on the grid, while maintaining grid stability and reliability. In January, the PUC approved our expanded demand response portfolio and revised tariff structure.

Recovery of the deferred charges will be through a surcharge until included in base rates. In December 2017, the PUC approved the community-based renewable energy or CBRE program, which will have two phases.

The utility has an administrative only role in Phase 1 and will be able to bid for up to 9 megawatts in Phase 2, with 50% of that amount reserved for moderate income residents. In 2017, we saw continued strong increase in solar, up 19% from the prior year, the largest year-over-year increase of installed solar since 2013.

We anticipate continued growth in solar integration with 135 megawatts of new grid scale solar expected to come online through 2019, including our 20 megawatt West Loch project at Joint Base Pearl Harbor-Hickam, which will produce the lowest price grid scale solar in the state.

In October, we introduced in just last week the PUC approved our smart export and customer grid supply plus, or CGS plus programs for rooftop solar and energy storage systems. With smart exports, customers with battery storage can export power during non-daylight hours when the grid experiences peak demand and are credited at a marginal cost rate.

With CGS plus, customers with solar, but not energy storage can export energy to the grid during the day provided they have equipment allowing the utility to manage the power in order to maintain a stable grid. Customers are credited in a export rate based on avoided cost.

The company continues to improve the rooftop solar application process for customers last fall, launching an online customer interconnection tool, where customers can submit their applications.

The tool is believed to be the first of its kind to provide a seamless process allowing customers to follow the status of their applications from start to finish. We continue to support electrification activities in transport and beyond to achieve a more sustainable future while reducing Hawaii’s collective energy bill.

We have been working with stakeholders and in March will file with the Public Utilities Commission a roadmap for implementation of electrification activities in various sectors. Hawaii is second in the nation in the electric vehicle sales per capita and growth remains strong with a year-over-year increase of approximately 30%.

Honolulu is also conducting a pilot project for the transition of bus transportation to an all electric fleet. Ended 2017, all mayors in the state committed to 100% renewable fuel sources for public and private transportation by 2045.

Along with our goal of 100% renewable energy by 2045, this clean transportation initiative will help us all achieve a greater level of sustainability for our environment economy and communities. I will now ask Greg to cover Hawaii’s economy, our 2017 financial results and company outlook for 2018..

$3 million lower non-interest income primarily due to lower mortgage banking income and $3 million higher non-interest expense primarily due to higher performance based incentive costs, excluding the special bonuses elated to tax reform. On Slide 13, we see American’s strong performance reflected in ASP’s return on assets and net interest margin.

We achieved a return on assets of 102 basis points for the year exceeding our 2017 original target of 90 basis points and over our third quarter revised target of greater than 95 basis points.

Our net interest margin of 3.69% for 2017 is above our original range of 3.5% to 3.6% and higher than the – and at the higher end of our third quarter revised range of 3.6% to 3.7%. Our strong net interest margin was primarily attributable to higher yields on interest-earning assets and growth in higher yielding loan portfolios.

Slide 14 shows the drivers of our net interest margin of 3.68% in the fourth quarter of 2017. Our interest earning asset yield was unchanged from the linked quarter and our liability cost of 21 basis points increased by 1 basis point compared to the linked quarter as the cost of deposits increased slightly.

On Slide 15, although retail loans were up $161 million or 5.2%, this is offset by reduction in commercial and commercial real estate loans of $233 million or 14.4%.

Overall, total loans were lower by $72 million reflecting our work to improve American’s credit risk profile through the reduction in our exposure to national syndicated credits by $75 million as well as the resolution of specific problem loans.

Total deposits were up $342 million or 6.2% from December 2016 and deposit growth continued to be strong in the fourth quarter of 2017, up 9.6% annualized.

The growth of our low cost deposits has funded increases in our investment portfolio and higher yields on our loans have contributed to higher net interest income compared to the prior year and quarter.

Net interest income of $61.6 million in 2017 was $5.4 million lower than the prior year primarily due to $4.4 million lower mortgage banking income and no gain of sale of investment securities in 2017. On Slide 16, we review year-over-year credit quality.

The year-over-year lower provision for loan losses of $5.9 million reflects the reduction in our syndicated national credit portfolio and resolution of specific problem loans partially offset by reserves required for growth in the retail loan portfolio.

Our slightly higher net charge-offs in 2017 as compared to 2016 reflected the higher margin lending in our consumer loan portfolios. Non-accrual loans as a percentage of total loans receivable held for investment was 0.51% compared to 0.50% or 0.5% at the end of the linked quarter and 0.49% in the prior year quarter.

The allowance for loan losses was 1.15% as outstanding loans at $54 million at the quarter end compared to 1.13% at the end of the linked quarter and 1.7% as of the fourth quarter of the prior year. Slide 17 illustrates American’s continued attractive asset and funding mix relative to our peer banks.

American’s December 2017 balance sheet is compared to the last complete available dataset for our peers, which is as of September 2017. A 100% of our loan portfolio was funded with low cost core deposits versus the aggregate of our peer banks at 86%.

In 2017, total deposits increased by $342 million or 6.2%, while maintaining very low cost of funds of 21 basis points, 35 basis points lower than the median of our peers.

In 2017, American paid $37.5 million in dividends to HEI and American remains well capitalized at December 31 with a leverage ratio of 8.6%, tangible common equity to tangible assets ratio of 7.8% and total capital ratio of 14.2%. Delivering clean and reliable energy was the primary driver of our capital investment strategy.

In 2017, the utility invested $400 million in CapEx resulting in 5% rate base growth.

In 2018, we expect our Schofield Generating Station, Joint Base Pearl Harbor-Hickam and ERP projects to be complete and estimate $450 million in CapEx for the year driving 8% to 10% rate base growth based on the completion of those projects and including the lots of bonus depreciation from tax reform.

For each of 2019 and 2020, we forecast a range of $400 million to $500 million in CapEx for each year, including projects that we will be applying for pursuant to our power supply improvement plan and grid modernization strategy.

Turning to Slide 19, HEI starts 2018 with a strong capital structure of 53% consolidated common equity to total capitalization.

It is our plan to maintain investment grade credit profile, a strong credit profile is necessary to support our utility CapEx program and clean energy and sustainability investments at Pacific Current and provide a sustainable dividend as part of our competitive return to shareholders.

While the Tax Reform Act has resulted in higher financing needs in the future for utility due to the loss of bonus depreciation, we do not expect to need any additional external equity or equity from our dividend reinvestment program during 2018.

Our 2018 holding company financing plans also assume investments in the utility of approximately $130 million, our plans to refinance $50 million of maturing long-term debt at the holding company as well as additional debt finance plans, investments in Pacific Current and cover the remainder of our needs.

Earlier I walked through the negative $14 million one-time tax reform related net impact for our companies in 2017. Moving forward though, we see tax reform as an overall net positive to the consolidated enterprise. At the utility, the benefits from lower tax rates are expected to flow back to our customers.

On January 31, the company filed with the PUC our estimated impacts of the federal tax reform act. We will continue to work with the consumer advocate and the commission on the specifics of how and when these benefits will flow back to customers.

At our bank like others in the banking industry, the lower tax rate provides a positive net income benefit. The bank shared a portion of this benefit with employees in the form of a $1,000 bonus per non-executive employee in 2017 and an increase in the minimum wage and elevated pay scale throughout the organization.

The bank’s earnings improvement from tax reform will improve capital generation and allow the bank to provide increased dividends to the holding company. In addition, bank net interest income, will more than cover holding company interest expense, so interest expense deductibility will not be an issue.

Pacific Current’s initial investment is generating positive earnings and now more of those earnings will flow to the bottom line. At the holding company, the net loss will be increased slightly with the lower tax rate in 2018. Overall, tax reform has a net positive benefit to our company, its employees, our customers in the Hawaii economy.

We are initiating HEI’s earning guidance in the range of the $1.80 to $2 per share. We expect 2018 utility EPS in the range of $1.33 to $1.46 and the bank EPS in the range of $0.68 to $0.74. Our guidance also includes approximately $0.03 accretion from Pacific Current’s initial investment.

Based on our 2018 CapEx and investment plans and our intent to maintain greater than 50% consolidated common equity capitalization, we do not expect the need for any additional equity in 2018.

At the utility, our guidance assumes no changes to the decoupling model or other recovery mechanisms, utility O&M to be 2% higher than 2017 levels excluding pension costs. Fuel efficiency should be consistent with rate case levels. We assume rate base growth of 8% to 10% based upon 2018 CapEx plans of $450 million with the loss of bonus depreciation.

At the bank, we expect low to mid single-digit asset growth, net interest margins between 3.7% and 3.8%, provision expense is expected to be in the range of $14 million to $18 million and overall we expect bank returned on assets greater 110 basis points.

Our guidance incorporates the impacts of the federal tax reform act as discussed on the previous slide. Connie, I will turn it back to you for closing remarks..

Thanks Greg. In summary, our consolidated enterprise will benefit from tax reform due to the increased earnings and dividend capacity from American Savings Bank. At the utility, we are returning triennial rate case. We have made major progress on our foundational frameworks to achieve our state’s 100% renewable goal.

We continued to focus on enhancing our resilience and reliability and expanding customer options to increase customer value. And we are promoting sustainable communities and electrification activities to help achieve a broader clean energy vision and increase Hawaii’s energy independent.

Our bank enters 2018 in a strong financial position having achieved a better than expected results in 2017 and with an earnings boost from tax reform.

American will continue to focus on making banking easier, deepening customer relationships, improving operating efficiency and profitability and enhancing asset quality while growing its asset portfolio. And with the completion of its new campus expected this year, it will be even better positioned to achieve its goals.

In addition, we formed Pacific Current to invest in clean energy and sustainability projects as part of our enterprise strategy to serve as the catalyst for a better Hawaii. Its first investment is expected to be accretive in 2018 and we plan to announce another Pacific Current project soon.

And finally our Board maintained our quarterly dividend of $0.31 per share earlier in the month continuing our uninterrupted dividend payment since 1901. The dividend yield continues to be attractive at 3.8% as of yesterday’s market close.

Our companies will continue to focus on providing long-term value for our customers, communities, employees and shareholders. And now we look forward to hearing your questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Julien Dumoulin-Smith with Bank of America/Merrill Lynch. Please go ahead..

Hi, good morning..

Hi Juliann..

Hi Juliann..

Hi. So, congratulations on good results.

I am curious to hear on what this means perhaps moving even beyond 2018 on expectations for earned ROEs back at utilities, as you move through obviously you still got rate case activity going on, but have a certain degree of comfort and visibility at this point, how are you thinking about it in the years going – years forward and the ability to more sustainably earn closer to your authorized levels you can speak to the puts and takes, but more importantly the puts there?.

Okay. So let me just make a very high level comment and I will turn it over to Greg.

Julien, I think you remember that last year going into 2017, we talked about it being a transition year and because of some of the delays in the primarily the Oahu rate case 2018 is going to be partially a continuation of that transition, but then thereafter we should be in fairly good shape..

Yes. I was going to note the same thing. We have two still in flight rate cases this year to do a full reset of all utility – all three utilities to set our base level of earnings power for all three utilities having come out of 6-year hiatus from rate cases. So 2018 continues to be a critical year for us to close that gap.

So it’s something we continue to focus on.

And maybe to address your question, we did include a slide on Slide 26 to show how we accounted for some of the ROE lag relative to our allowed and certainly this will change as we reset the allowed ROE whether that is or it remains at the 9.5% was authorized in the interim for collection or whether that is adjusted on the final order to 9.75% which we continued to educate and advocate for with the commission that we still show the structural items that have not been cured and unlikely to be cured as a result of this rate case of the rate case cycles in Items 1 through 3 on that slide.

I would note that Item 3 is the RAM lag meaning the June 1 through May 31 cycle that creates some leakage in keeping this whole under that recovery mechanism, which will now include also Hawaiian Electric, not just Hawaiian Electric Light and Maui Electric. So, there will be another 10 basis points so or there as you look forward to 2018.

So you have got probably 60 basis points or so of structural lag naturally built into our rate recovery mechanisms. And so that minus whatever the allowed is will create the opportunity for our earnings.

I would expect that coming out of 2018 we would narrow the gap even further whether or not we can close it all the way to be perfect performance of just the other structural items.

I think Julien as I have spoken to you previously, we will now be going through annual test years and rate cases on an annual basis with each utility and there is always the element of investing in those rate cases supporting the programs you believe need to be incorporated in future rates and so forth.

So again you have to balance that with maximizing your results as well, but we would see continued improvement coming out of 2018 is what I would say in general..

Yes.

And Julien, I just add that we also have to get used to some of the newer mechanisms like MPIR, so although Oahu has the 2017 test year rate case this year, Schofield and West Loch are due to go in service outside of that rate case and therefore we have applied for recovery under MPIR for those two projects plus some of our other projects do qualify for the renewable energy infrastructure program surcharge, the REIP.

And so that’s another mechanism that we will be using to help close the gap..

And many of those would be – continue to be benefit outside of the rate case that you just alluded to into 2019, right or would that really annualized into the ‘20 year?.

Yes, they would be during the test year. So for example with Schofield it would be Schofield goes in service..

Got it.

How much are those mechanisms just quickly in aggregate out of the rate case, if you were to think about ROE improvement?.

Outside of the rate case, Schofield….

Schofield project, Julien, this is Tayne. The Schofield project is about $150 million project and the Joint Base Pearl Harbor PV project is another $60 million project. So those would be recovered like Connie said in the MPIR..

So there is lag in recovery assuming that they are approved under the MPIR mechanism and so the impact of those mechanisms depend upon the projects that are being approved and closed in any particular year.

Again, this year we have got two fairly lumpy, two large investments that will be coming in, which we expect to be covered by those mechanisms without any significant lag..

So you will see Julien, the CapEx for those programs are in our CapEx numbers and then when they go into service and become planned as they are in the rate base growth numbers that we gave you as Greg said rate base growth for 2018 is a little bit higher at 8% to 10% primarily because the two big projects are going into service this year, but that’s kind of how it works through all of our numbers..

Got it.

And Connie quickly, did you say – did I catch it right that you are looking at a second investment on Pacific Current, did you throw that out there?.

Yes, we are indeed, yes. We are just not quite ready to announce it yet..

Got it. Alright. Thank you very much..

Thank you..

Julien, we will see you in February in Boston..

Thank you. See you there..

Thanks..

Our next question comes from Greg Gordon with Evercore ISI. Please go ahead..

Thanks.

Hi, how are you?.

Hi Greg..

Hi Greg..

So – okay.

So you are saying that just the build on Julien’s question, you are hoping to get to a point where if your mechanisms were operating perfectly and rate cases were going smoothly that whatever your authorized ROEs are you would eliminate all but 60 basis points of structural lag, but then you also said this is a lumpy year with a couple these large projects coming in and with the rate case cycle, but did you indicate what the assumed authorized ROE is – sorry what the assumed earned ROE is at the midpoint of guidance for ‘18 or should – do we just need to sort of do that algebraically to come up with a guess?.

Well, I think I can do the math. We haven’t provided the point asked on our guidance range.

It is, we do expect to meaningfully close the gap between the allowed and the achieved relative to where were at and closed 2017 as you know 2017 had a number of challenges, had a number of challenges to it inwards which were to be addressed within the rate cases themselves.

So we expect much stronger performance in ROE level well within – well within the range of the reasonable ROE given our opportunity hearing and depending on where the final ROEs – authorized ROEs come out..

And Greg just to clarify, my comment about 2018 becoming a transition year as well as ‘17 was primarily based on the Oahu decision. I think if you recall we thought that we would have interim rates for Oahu in December.

The interim decision did come out in December, but we worked through a reconsideration of some issues that has resulted in those rates not going into effect until mid-February. So that is creating some transition for us and of course Maui Electric is still going through its rate case.

But as for the large projects, because of large projects have been applied for outside of the rate case cycle through the MPIR those rates are assuming they are approved would be expected to start when the projects go into service..

Understood.

So you expect demonstrable improvement from the 7% core earned ROE last year and hope to start approaching sort of what your structural allowed minus the – allowed minus the structural impediments as you get into ‘19 and ‘20 is that fair?.

Yes. You know that 2017 was impacted. We lost 75 basis points because of the loss of the 2013 calendar year settlement. And so we lost 75 basis points right there, so if you just normalize for that you get a much higher performance for even for 2017.

But yes we would expect significant impact and pick up including I would also note that part of these rate cases were also true up our periodic – net periodic pension costs which have contributed to an ROE lag, because although we defer any differential between what we collect and what we actually paid to the external trust and that periodic pension costs.

We are not getting a return on that differential, so it does create in earnings an ROE drag on that. And so these rate cases are also turning upper net periodic pension costs and therefore it’s improving our cash flow as well as improving our ability to earn higher ROE..

Fantastic.

And then second question, the acquisition that you did, it was Hamakua I believe that you did on Pacific Current, correct, is that – those numbers are not in the CapEx or the rate base numbers you gave on Slide 18, correct, but Pacific Current is not underneath the regulated utility or are you sort of showing us the entire CapEx with…?.

No, no..

That’s strictly utility, regulated utility..

And that was signaling what was going into our rate base and driving rate base growth, which is just solely a utility concept..

Right.

So to the extent you are able to identify and execute on this second acquisition or theoretically do more in the future that would be totally outside the construct of this rate base forecast you are giving us?.

Yes, it would be incremental to that..

Right. And you are giving us on Slide 21 a guidance range for utility and a guidance range for the bank.

Is Pacific Current just sort of in the sort of the net parent expectation holding company and other net loss?.

It is. Yes, it’s in neither of the utility or the bank EPS guidance range. It is part of the – is included in the consolidated holding company as we roll that up to the $1.80 to $2 per share. As I indicated in my comments, we anticipated about $0.03 earnings accretion from that investment in 2018..

Right.

And that’s incorporated into the $0.19 to $0.21 net loss that’s noted on Slide 21?.

Yes..

Perfect. Thank you very much and great performance at the bank by the way, I mean just an incredible performance relative to peers on certain metrics, I think in particular, your net interest margin, your high-performing, you are well above even your high-performing peers.

Can you give us a sense of what are the key attributes of your customer base, the underlying economic backdrop in the state that are allowing you to achieve that and what’s your expectations are going forward over that is a sustainable competitive advantage?.

Yes, thanks for the comments. We have recorded them and I am going to use them. No, it is an area we work very hard on managing the balance of the yields and the funding costs and so we had good deposit growth we were able to control the costs and actually keep them down.

It’s been through a lot of the strong growth on the retail side through all the efforts we are doing to make banking easy as Connie talked about and relationship selling and really just making sure we are becoming more and more the prime bank for more and more of our retail customers.

And then you see that in our core deposits basically our entire loan book is funded with core deposits plus than what we are able to put into the investment portfolio. So, I think heavier concentration retail has helped us with what we have been able to do there.

We have a relatively lower component of public deposits in our deposit portfolio, we are only about 4% public deposits compared to our peers who are kind of in double-digits in terms of share. And as we have managed – we didn’t have a stronger loan growth.

So, we were able to manage the demand on the deposit side and we think while there is pressure on it, we think the things that we are doing will help maintain a pretty good performance on both the yields and the deposit costs as we go forward..

And Greg, I would just add that this is also the time when historically when you have rising rates in a steepening curve that the Hawaii banking market in general has done better relative to the national market, because of the characteristic in this marketplace is a very strong core deposit base.

And then particularly if you look at Slide 17 on Rich’s funding base, a lot of that core deposit actually – most of the core deposits is from the retail side..

Fantastic. Great quarter and good luck with everything. Talk soon..

Thanks, Greg..

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

Good afternoon.

How are you?.

Hi, Paul..

Hi, Paul..

Just quickly just in terms of the rate base growth, you guys mentioned that incrementally bonus depreciation obviously was a benefit, is that pretty much the driver or is there something else we should be thinking about when we see the increase that you are seeing going out for ‘18 and ‘19?.

It really is largely the impact of the tax reform act. We don’t think the utilities were excluded from expensing of capital investments. We have lost bonus depreciation as well. So that major portion of cash funding for our investments was done through those tax benefits.

Those were stimulus types incentives that were provided by the federal government which we have now been excluded from the current tax law. So what that means is that we will be funding more of every dollar of capital investment that goes into the utility will have to be funded more through debt and equity capital.

So that will increase, that will drive a greater rate of increase in CapEx. In addition, now we have had to revalue our deferred tax liabilities and we will be refunding those back to customers or returning those back to customers over time.

We still have to determine the full mechanisms and timing for doing that which is to add that is amortized often ultimately will if it’s done rapidly will also have to be replaced with additional capital that would also increase our growth in rate base..

Will increase it further, I mean so when we look at the numbers that you guys have in the slides, I mean what’s the added return to customers that’s estimated and I guess is there upside to that when you say more rapidly, I mean so how do we think about that?.

Yes. I think we have done a pretty measured approach in terms of the return of that. There is a protected class which the regulators do not have the ability to accelerate and that’s a large majority of that, so it tends to follow the natural life or the investment life of the underlying assets as prescribed by tax law.

So then there is the unprotected classes which again we anticipate to be amortized over reasonable period relative to the investments that were that had driven that to – I think those can be accelerated marginally or decelerated somewhat.

But I think we have made a reasonable estimate, we don’t impact and expect a material deviation from that nor a material impact on that once that pursuit once with the final determination is made..

Right.

But just to reiterate you guys, I think do not plan on issuing incremental equity, is that – am I correct about that?.

Well, not during 2018, no. But I would say as a result of the tax reform. One thing I would also say is on Slide 18 it does highlight that our capital expenditure plans have not increased from what we have indicated previously. The midpoint of our 2019 is $450 million, which we were indicating at last year.

We have added now 2020 which is also another midpoint about $450 million kind of consistent with that. So again rate base growth is higher now rather than 4% to 5%, 5% to 8% range on a longer term basis, primarily because of the dynamics that we are talking about..

So maybe in 2019 you might equity, is that I should think about?.

Yes. All things being equal under the tax – now the tax reform act and this CapEx plan will need equity earlier than we otherwise would have. It could begin as early as 2019 – a modest amount in 2019..

And Paul I think you will be able to anticipate that because our capital allocation policies and our overall capital policies are not going to change, i.e. it starts with maintaining investment grade rating and then making sure that both regulated entities are appropriately capitalized as agreed upon with their regulators..

Okay and then just…?.

So it won’t change from what you have seen historically..

I would add one thing that we do anticipate is a stronger dividend or a higher level of dividend based upon expected higher earnings from the bank as a result of tax reform as well. So that’s the benefit which also helps moderate our need for additional equity at the holding company over time..

Great. And then just on the – I know it’s in the [indiscernible] you guys are expecting I guess the settlement it seems like.

And I am just sort of wondering given how the process worked in the – just recently in terms of the commission not let’s say going along with the settlements how if there is any change in your outlook in terms of settlement versus sort of fully litigated case kind of thing or how should we think about that?.

So Paul, we actually have with us Joe Viola, who is our Vice President Regulatory. There has been so much activity on the regulatory front. We invited Joe to be with us today. So, I will let him answer that..

Hi, Paul. Actually for the Maui rate case what we anticipate is an interim decision on the rate case in August. The commission has approved a procedural schedule that would give us the interim. The schedule, as all of our schedules and rate cases due include an opportunity to settle.

So I am always hopeful that will settle, but we are pretty early in the process for the Maui Electric case, we are still really in the discovery phase, we would be looking at settlement discussions in the next couple of months, but we just – we haven’t even started that process yet..

And I would just add we just went through public hearings on the 30, 31 of January and also the 6 of February..

Okay.

And just finally, how should we think about Pacific Current past 2018, I mean how big a driver I mean it sounds like you guys see some interesting opportunities, I mean, could this – I guess just in general, how should we think of this in terms of an earnings driver post 2018?.

Yes.

So Greg and I talk about this all the time and it’s I think the safest thing to say Paul right now is that we are not to the stage where we can actually quantify the amount of Pacific Current’s contribution to earnings going forward and that’s primarily because I think as you recall on the last call, I described it as a place-based strategy, i.e., for our State of Hawaii to help us encourage more clean energy and sustainability investments in our community.

And so that means that we are going to be looking at a range of projects and also potentially a range of rules for ourselves in that process, but I think what we can say and what Greg has said before is that we are looking to build that as an investment grade operation and we are expecting that at least the first couple of investments are going to meet that standard..

Okay, great. Thanks so much, guys..

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

Connie, I will just follow-up on that last comment. Well, I know Greg said during his prepared remarks as well as the Q&A that Pacific Current would be $0.03 accretive this year.

Can I assume that this project to be disclosed will be accretive?.

So, we will continue part of them as we value projects and look at investments we always take into account accretion and dilution and yes, long-term investments that will be done accretively on an economic basis.

It depends on the types of projects that we invest in whether there is any initial development costs that as you acquire projects and you are bringing in projects to conclusion whether or not on announcement whether that is immediately accretive or there is an initial phase. So, we are looking at a wide range of projects.

We have high criteria around this for the right credit profile contracted the right counterparties that fit with our criteria. So we are very careful to manage and select not only based on financial criteria, but some of the other broader criteria.

I would say that we expected as we gain greater growth and scale we will see more meaningful contribution to our accretion dilution over time, but as you can expect as you start growing a platform and you get greater scale that means we also have to put in place the appropriate organization to manage that as well.

So, there is some costs incurred in terms of growing that organization at the same time. So again, we are making modest steps and we think all of them are very positive and we are trying to manage that growth appropriately..

Okay. Thanks, Greg.

And then Connie, you really baked this question with your first bullet point in your summary slide, tax reform obviously benefits the earnings of the bank, but also dividend capacity of the bank and if you hit the top of your guidance, it’s driving your payout ratio down to low 60% range, there is also other utilities that have certainly not banks, but they have like MLPs that provide dividend capacity up to the parent, we see where the payout ratio is driven higher, how will the Board think about a dividend increase if things keep improving for the bank, I mean are they going to take into account this some extra cash flow in other words the dividend upstream or is it going to be, do they look more at a payout ratio or how are they – how do you think they will look at it?.

Yes. So let me first start at the subsidiary level and reiterate what I said about our policies surrounding intercompany dividends don’t change particularly on the bank side.

The bank has to retain as does the utility at certain level of equity to support their business and then every quarter now we file with the Federal Reserve to approve the dividend above that capital level to the holding company.

And so to the extent that their basic operations are not changing and they are continuing to generate increased earnings that extra capital generation would automatically be requested from FRB and then dividend and up to the holding company. So that’s the reference to the increased dividend capacity coming up from the subsidiary.

And then certainly when the HEI Board considers the dividend to external shareholders, it’s going to be considering all of the cash flows that are coming up from the two subsidiaries. And as you can tell from the financing slide that Greg showed Slide 19, the dividends up from the subsidiaries are covering that external dividend.

So as our consolidated enterprise strengthens those are the – it’s at that level that the HEI Board would be looking at an external dividend increase. Even there I think our statements previously about wanting to be able to meet kind of an average dividend payout ratio that’s consistent with the utility industry is still remains in place.

And so when we approach that level and we have said roughly in the 60%, 65% range that we would be considering that..

Okay.

But with the bank doing pretty solid I guess my question is would the Board consider the bank as a unique a non-utility business which obviously it is that might allow the payout ratio to go higher and again we have seen that in other utilities non-utilities…?.

Yes. So let me just let me just break in there Charles, because we actually do dividend out a much higher payout from the bank than a normal bank might be paying out.

I think as you recall when we were in the discussions around the potential spin of the enterprise that normal banks their payout ratio might be half that of what American was dividend – up to the parent.

It’s just that we are able with our relationship with the banking regulators to be able to take out the excess capital that they don’t need for their own growth and also to account for things like credit risk and interest rate risk in their business. So we are already taking out an outsized payout ratio for the bank..

Okay. Thank you for your answer. That’s it..

Our next question comes from Ashar Khan with Verition. Please go ahead..

Congratulations, Connie I guess he asked my question, but going back to what you said in respond to it, so we will reach 65% payout level this year based on the midpoint of your guidance for 2018, so assuming earnings keep on growing which they should based on the outlook that you provided today for the bank and the utility.

Can we then assume that something by the board could we look that next year, because then we would be going below the 65% payout level?.

Yes, well we had – Connie had mentioned the range is 60% to 65% certainly, as we get down, that’s the lowest payout ratio that we have had in a long period of time. Maintaining our dividend has been a critical part of our total return to shareholders and we remain committed to that.

Once we have – as we see the earnings growth and potential of the overall platform increase, it maintains sustainable earnings we would certainly consider recommending to the Board an increase of dividend in line with earnings once we have hit our target payout ratio range.

Part of that will also be dependent upon other investment opportunities we might have and the timing of those at Pacific Current and so forth, but that would certainly be a consideration and a potential for us..

And Ashar, I would add that we are cognizant that our particular shareholder base being heavily retail and actually a quarter of our shares here in the islands themselves that a lot of our shareholders do depend on our dividend and they waited a very, very long time for any kind of dividend increase..

Yes..

Yes, if I am right, the last dividend increase was 1998, so we might be ready for one Connie?.

It’s been a long time..

Okay..

We understand..

Yes..

Okay, okay. Thank you so much. Appreciate it..

Thanks, Ashar..

Our next question comes from David Frank with Corso Capital Management. Please go ahead..

Hi, I apologize I joined the call a little late.

And I was wondering did you quantify the actual savings, income tax savings at the utilities, the regulated businesses?.

We have actually made a filing with the commission on January 31 for those benefits, but all benefits that are generated on the utility side will be flowed back to customers..

Well, I understand that, but you have an open case in Maui for instance. Is there some way or would you consider netting the ask against the savings that you might get in for that utility for instance? And I think there were some other costs that were recently disallowed like pension maybe in some of your other cases.

Is there anyway to ask again, but also netting some of the benefits of the tax savings?.

So, I will let Joe to answer that, because actually each one of our three utilities is different depending on where they are in the rate case cycle..

Hi, David. Yes. So actually, we are in progress in all three, the expectation from the commission was that we would estimate what those impacts would be for our three utilities.

The Maui rate case that you mentioned, the commission actually issued an order last week expecting us actually to revise our revenue requirements to reflect what the impact of the tax impact would be.

In the Hawaii Electric case that’s ongoing, that’s one of the remaining issues in the case we have provided estimates of working with our consumer advocate as well to try and come up with a strategy, but that’s under review.

And then for Hawaii Electric Light, we have also indicated that we would have proposed to reflect those as an adjustment to the interim. We still don’t have the final in that case yet..

Okay.

So you are sort of filing in two ways and if I understand it’s you are going to show what the benefit is, but then you are also going to amend current cases to reflect as if it was a benefit coming in this?.

Well, it’s ultimately up to the commission how they want to flow back those benefits to customers. So we have given them two options, one would be for the Maui case, which is really is a 2018 test year case is more appropriate actually in the process of that case to reflect that in the case.

For the Hawaii Electric case, be the 2017 test year, so we have given them number that, that’s the matter under review and for Hawaii Electric Light, it’s really would be essentially outside of the rate case cycle to do that, but we are – because we are still expecting a final decision, the commission has the option to reflect that as an adjustment to the ultimate final revenue award..

Right.

I guess it would just obviously be nice and particularly if you are planning on meeting renewable goals or CapEx expenditures for renewable generation if you could somehow work this in a way to keep it, but allocated towards the growth?.

That would be nice..

Thank you..

Okay. Thank you, David..

This concludes our question-and-answer session. I would like to turn the conference back over to Cliff Chen for any closing remarks..

Thank you, Steven and thank you everyone for participating on today’s call. Thanks for joining us on a Valentine’s Day. Hope we have a good week..

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect..