Hawaiian Electric Industries · NYSE:HE

Hawaiian Electric Industries — Q2 2018 Earnings Presentation

62 slides from Hawaiian Electric Industries's earnings presentation, Aug 3, 2018

  1. Slide 1: Cautionary Note Regarding Forward-Looking Statements

    CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This presentation made by Hawaiian Electric Industries, Inc. (HEI) and Hawaiian Electric Company, Inc. (Hawaiian Electric) and their subsidiaries contain “forward-looking statements,” which include statements that are predictive in nature, depend

  2. Slide 2: Cautionary Note Regarding Forward-Looking Statements (continued)

    (OPEB) tracking mechanisms, and the continued decoupling of revenues from sales to mitigate the effects of declining kilowatthour sales; • the ability of the Utilities to achieve performance incentive mechanisms currently in place; • the impact from the PUC’s implementation of performance-based rate

  3. Slide 3: Cautionary Note Regarding Forward-Looking Statements (continued)

    • changes in ASB’s deposit cost or mix which may have an adverse impact on ASB’s cost of funds; • the final outcome of tax positions taken by HEI and its subsidiaries; • the risks of suffering losses and incurring liabilities that are uninsured (e.g., damages to the Utilities’ transmission and distr

  4. Slide 4: Second Quarter 2018 Financial Results and Outlook

    Hawaiian Electric Industries, Inc. Second Quarter 2018 Financial Results and Outlook August 3, 2018

  5. Slide 5: 2Q 2018 consolidated earnings results

    2Q 2018 consolidated earnings results  Strong consolidated earnings growth  Includes second consecutive quarter of record bank quarterly net income  Reaffirming 2018 earnings guidance Net Income Diluted EPS (in millions) $46.1 $38.7 $0.42 $0.36 Q2 2017 Q2 2018 2

  6. Slide 6: Continued progress on utility initiatives

    Continued progress on utility initiatives Hawaiian Electric Highlights  Key milestones reached in transition back to triennial rate case cycle ‒ Final decisions in 2017 Hawaiian Electric and 2016 Hawaii Electric Light rate cases • Hawaiian Electric decision includes symmetrical fossil fuel risk sha

  7. Slide 7: Solid bank performance; growing Pacific Current

    Solid bank performance; growing Pacific Current American Savings Bank Highlights  Continued strong financial performance in healthy Hawaii economy  Good operating execution and positive tax reform impact  Focus on making banking easy, deepening customer relationships  Honolulu campus on track; c

  8. Slide 8: Hawaii economy continues to grow

    Hawaii economy continues to grow Year-over- June 2018 YTD 2018 year change Tourism Arrivals +7.3% +8.2% Expenditures +10.3% +10.8% Unemployment • June 2018 – Hawaii: 2.1%; U.S.: 4.0% • YTD June 2018 Oahu sales volume: – Single family homes, down 1.6 % from the prior year Real Estate – Condominiums,

  9. Slide 9: Q2 2018 earnings by segment

    Q2 2018 earnings by segment EPS (Diluted) Net Income (in millions) $46 $0.42 $39 $0.36 $31 $0.29 $26 $0.24 $0.19 $17 $21 $0.15 ($0.03) ($0.05) ($4) ($6) 2017 2018 2017 2018 Utility Bank Holding Co. & Other Note: Columns may not foot due to rounding . 6

  10. Slide 10: HEI LTM ROE continues to strengthen as utility completes transition to triennial rate cases

    HEI LTM ROE continues to strengthen as utility completes transition to triennial rate cases  Continued expansion of bank ROE due to tax reform and net interest income growth  GAAP LTM 6/30/18 ROE includes 4Q17 tax reform impact  GAAP LTM 6/30/17 ROE includes merger termination fee Consolidated HE

  11. Slide 11: 2Q18 utility financial highlights

    2Q18 utility financial highlights ($ in millions) Utility net income Key utility earnings drivers, after-tax 2Q18 vs fav/(unfav) 2Q17 RAM revenues 8 (a) Interim rate relief for Hawaiian Electric and 7 Hawaii Electric Light $31.2 $25.6 Operation & maintenance, excluding net (6) income neutral items D

  12. Slide 12: Strong bank financial results

    Strong bank financial results ($ in millions)  Second consecutive quarter of record bank net income  Driven by higher net interest income and net positive impact of tax reform Bank net income Key bank earnings drivers, after-tax 2Q18 vs 2Q18 vs fav/(unfav) 1Q18 2Q17 Net interest income 1 3 Provisi

  13. Slide 13: Solid bank profitability

    Solid bank profitability Return on assets (%) Net interest margin (%) 1.60 1.20 1.21 3.76 3.76 3.77 1.16 ~3.7 - 3.8 3.62 >1.10 Target ASB ASB Peers YTD Target ASB ASB Peers YTD 2Q18 YTD 2Q18 YTD ASB Target ASB QTD Annualized ASB YTD Annualized Peers1 High Performing Peers1 Source for peer data: SNL

  14. Slide 14: Strong net interest margin

    Strong net interest margin  Disciplined management of funding costs Asset yield % 4.50 4.00 Net interest margin % 4.00 3.50 3.98 3.99 3.88 3.88 3.88 3.00 2Q17 3Q17 4Q17 1Q18 2Q18 3.50 3.76 3.76 3.68 3.69 3.68 0.80 Cost of funds % 0.40 3.00 2Q17 3Q17 4Q17 1Q18 2Q18 0.21 0.20 0.21 0.23 0.24 0.00 1 1

  15. Slide 15: Net interest income growth

    Net interest income growth ($ in millions)  Driven by good deposit growth that funded earning asset growth  YTD June 30: 4.4% annualized loan growth, 7.7% annualized deposit growth* Total loans $4,748 $4,743 $4,775 Net interest income and noninterest income Net interest income Noninterest income $

  16. Slide 16: Prudent credit quality management

    Prudent credit quality management ($ in millions) Net charge-offs1 Nonaccrual loans2 0.53% 0.50% 0.51% 0.57% 0.32% 0.49% 0.32% 0.46% 0.28% 0.26% 0.44% 0.49% 0.21% 0.14% 0.43% 0.08% 0.40% 0.39% 0.06% 0.38% 0.11% 0.03% 0.04% 0.35% 0.07% 0.05% 0.05% 0.03% $27.2 $25.1 $23.4 $23.6 $21.0 $3.8 $3.7 $3.5 $3

  17. Slide 17: Quality balance sheet

    Quality balance sheet  100% of ASB loans funded with low-cost core deposits Peer Banks1 ASB 3/31/18 (%) 6/30/18 (%) Core Deposits Loans Loans 63 68 Core Deposits 72 77 Leverage ratio: 8.6% Tangible common equity to tangible assets: 7.6% Total capital ratio: 13.9% Certificates of Deposit 16 Investme

  18. Slide 18: Clean and reliable energy the primary driver of our capital investment strategy

    Clean and reliable energy the primary driver of our capital investment strategy Year End Rate Base Forecast (in millions) = Top of Range $4,000 = Bottom of Range $3,700 $3,450 $200 $3,500 $3,240 $150 $60 $3,000 $2,500 $3,500 $3,180 $3,300 $2,833 $2,972 $2,000 $1,500 2016 2017 2018 2019 2020 1 Rate B

  19. Slide 19: HEI financing outlook 2018

    HEI financing outlook 2018* 2018 holding company sources & uses of capital (in millions) ~$305M ~$305M Other HC Exp. $20  Intend to maintain a Debt Maturities consolidated investment $50 grade profile Debt Issuance and Cash $160  No new equity required HEI Investments in Utility $100 Utility Divid

  20. Slide 20: HEI 2018 EPS guidance

    HEI 2018 EPS guidance (as of August 3, 2018) HEI EPS: $1.80 - $2.00 per share No new equity issuances through 2018 Utility EPS: $1.33 - $1.46 Bank EPS: $0.68 - $0.74 Key Assumptions: Key Assumptions:  No change to decoupling or recovery mechanisms  Low to mid-single digit earning asset growth  Sc

  21. Slide 21: Summary

    Summary  Focused on enterprise-wide mission to be a catalyst for a better Hawaii  Hawaiian Electric – Modernizing our grid to enable more renewables, customer options – Continued momentum toward state’s renewable goals – Creating resilient, sustainable communities through technology, smart use of

  22. Slide 22: Slide 22

  23. Slide 23: Appendices

    Appendices 20

  24. Slide 24: Utility LTM ROE

    Utility LTM ROE Consolidated Utility ROE Twelve Months Ended June 30 7.2% 7.7% (core) (core) 7.2% 7.2% (GAAP) (GAAP) 2017 2018 Consolidated Utility Hawaiian Electric Hawaii Electric Light Maui Electric 2018 GAAP 7.2% 7.2% 7.5% 6.8% 2017 GAAP 7.2% 7.3% 6.9% 7.5% 1 Allowed 9.4% 9.5% 9.5% 9.0% Note: La

  25. Slide 25: Utility LTM ROE reflects continued transition to triennial rate case cycle

    Utility LTM ROE reflects continued transition to triennial rate case cycle  ROE gap expected to narrow as transition continues LTM 6/30/18 Consolidated Utility ROE 9.3 Structural Lagged Items One-time 22

  26. Slide 26: Regulatory progress is being made at a rapid pace

    Regulatory progress is being made at a rapid pace  Resumption of triennial rate case cycle Approves  PUC support of key strategies Hawaiian Electric Approves Hawaii Final D&O on Hawaiian base rate Electric and Electric Light base adjustment due Hawaii Electric rate adjustment due Approves to feder

  27. Slide 27: Continued progress toward Hawaii's renewable energy goals

    Continued progress toward Hawaii’s renewable energy goals Hawaiian Electric continues to utilize a diverse portfolio of resources to meet Hawaii’s RPS targets Hawaii’s 100% by 2045 RPS goal is among the most ambitious Hawaiian Electric is on course to exceed near-term, 2020 in the nation target of 3

  28. Slide 28: National leader in renewable energy integration and distributed generation

    National leader in renewable energy integration and distributed generation Rapid growth of renewables, especially solar Committed to achieving Hawaii’s 100% renewable goal by 2045 MW 1,200 2017 Renewable Portfolio Standard1 Consolidated Oahu Maui County Hawaii Island 1,000 26.8% 20.8% 34.2% 56.6% 80

  29. Slide 29: Renewable energy is cost competitive in Hawaii

    Renewable energy is cost competitive in Hawaii Utility fossil fuel energy cost Contracted renewable energy cost Significant reduction in cost of utilty-scale Subject to volatile oil prices renewables* Pre-2016 2016+ PPAs 0.40 PPAs Proposed and Approved 0.35 Oil 0.30 Energy Cost ($/kWh) Wind 0.25 12/

  30. Slide 30: Oil is the primary driver of rates in Hawaii

    Oil is the primary driver of rates in Hawaii Fuel Breakdown of Hawaiian Electric Rates1 Purchased Energy Fossil Fuels Revenue Taxes 40 (typical residential bill) Purchased Energy Renewables PPAC Expenses All Other December 35 2013 June $173.33 2018 31.8 31.5 $154.86 30.9 30 29.1 December 28.9 Decemb

  31. Slide 31: Hawaii oil prices exceed mainland U.S.

    Hawaii oil prices exceed mainland U.S. Low Sulfur Fuel Oil vs. Crude Oil Price per bbl June 2012 to June 2018 $145 $125 HAWAII OIL PRICES $105 $85 CRUDE OIL PRICES $65 $45 $25 28

  32. Slide 32: 2017 impact of loss of January RAM revenue recognition method

    2017 impact of loss of January 1 RAM revenue recognition method Calendar Year Method – Beginning January 2017 10 $40M RAM Revenues 8 9 9 9 9 9 9 • Per settlement approved by PUC in 2013, Hawaiian (in $ millions) 8 8 8 8 8 Electric recorded RAM revenues beginning January 1 6 7 (“calendar year method”

  33. Slide 33: Utility regulatory mechanisms provide financial stability during renewable transition

    Utility regulatory mechanisms provide financial stability during renewable transition Mechanisms What they do Provides predictable revenue stream by fixing net revenues at level approved in last Sales decoupling rate case (revenues not linked to kWh sales) Revenue adjustment Annually adjusts revenue

  34. Slide 34: Components of decoupling

    Components of decoupling Hawaii PUC Docket No. 2008 - 0274 Hawaii PUC Docket No. for the decoupling review: 2013 - 0141 Components 1. Sales Delinks utility revenues from electricity usage decoupling  GAAP revenue = revenue approved in the last rate case (interim or final) via a Revenue  Recorded r

  35. Slide 35: Components of decoupling

    Components of decoupling Hawaii PUC Docket No. 2008 - 0274 Hawaii PUC Docket No. for the decoupling review: 2013 - 0141 Components 2. RAM Revenue Lesser of: Adjustment  2a - RAM Revenue Adjustment based on the RAM provisions in place prior to Order No. 32735** -or- Allowed  2b - RAM Revenue Adjust

  36. Slide 36: Components of decoupling

    Components of decoupling Hawaii PUC Docket No. 2008 - 0274 Hawaii PUC Docket No. for the decoupling review: 2013 - 0141 Components 2a. RAM Revenue RAM for Rate Base – Component 2 Adjustment  Change in rate base compared to test year levels in last rate case, for certain items including annual Deter

  37. Slide 37: Components of decoupling

    Components of decoupling Hawaii PUC Docket No. 2008 - 0274 Hawaii PUC Docket No. For the decoupling review: 2013 - 0141 Components 2b. RAM Revenue Cumulative RAM for 2018 RAM Revenue Adjustment – Adjustment  Prior year RAM Cap Target Revenues times GDPPI (2.1% for 2018) + prior year RAM Cap Cap Rev

  38. Slide 38: Major Project Infrastructure Recovery (MPIR) Mechanism

    Major Project Infrastructure Recovery (MPIR) Mechanism Hawaii PUC Docket No. 2013-0141  MPIR adjustment mechanism established by PUC on April 27, 2017 in decoupling reexamination proceeding ‒ Allows recovery for eligible major projects in between rate cases through the revenue balancing account (RB

  39. Slide 39: Performance-based regulation (PBR) proceeding

    Performance-based regulation (PBR) proceeding Hawaii PUC Docket No. 2018-0088 (opened 4/18/18)  Aspects of traditional PBR already in effect include decoupling, 3-year rate case cycle, performance incentives relating to reliability, customer service, demand response and renewable energy procurement

  40. Slide 40: Performance Incentive Mechanisms (PIMs)

    Performance Incentive Mechanisms (PIMs) Current Performance Incentive Mechanisms1 Reliability Customer Service Fuel Cost Resource Acquisitions $4.0 $2.0 $3.5 $2.5 $1.3 $0.0 $0.0 $0.0 $0.0 $0.5 $0.0 ($1.3) ($2.5) ($2.0) ($3.3) ($3.3) ($4.0) Interuption Interuption Call Center Fuel Cost Risk Demand Re

  41. Slide 41: Fossil Fuel Cost Risk Sharing

    Fossil Fuel Cost Risk Sharing Part of Hawaiian Electric 2017 Rate Case Final Decision & Order (D&O) Hawaii PUC Docket No. 2016-0328  As part of the Final D&O in Hawaiian Electric’s 2017 rate case, the Commission established a new fossil fuel cost risk sharing mechanism to be part of the new Energy

  42. Slide 42: Power supply improvement plan (PSIP) update

    Power supply improvement plan (PSIP) update Hawaii PUC Docket No. 2014-0183 (closed) Accepted on July 14, 2017  Anticipates reaching 100% Renewable Portfolio Standard (RPS)1 by 2040, 5 years ahead of mandate  On track to meet or exceed 2020 milestone of 30%  Plan stresses the need to stay flexibl

  43. Slide 43: Grid Modernization Strategy

    Grid Modernization Strategy Hawaii PUC Docket No. 2017-0226  In February 2018 the PUC directed the Companies to implement the grid modernization strategy with project applications to follow  Customer and stakeholder engagement used to define grid modernization goals; engagement to continue as impl

  44. Slide 44: Electrification of Transportation (EoT) Strategic Roadmap

    Electrification of Transportation (EoT) Strategic Roadmap Hawaii PUC Docket No. 2018-0135  Commission opened new docket for EoT Strategic Roadmap and requested public comments by July 16, 2018 ‒ Overwhelmingly positive response reflected in public comments from residents, commercial customers, priv

  45. Slide 45: Demand Response

    Demand Response Hawaii PUC Docket No. 2015-0412  In January 2018, the Companies received approval to proceed with launching an aggregator-based demand response (DR) portfolio: ‒ Companies are currently negotiating with 2 selected aggregators 5-year contracts for the delivery of load building servic

  46. Slide 46: Distributed Energy Resources (DER)

    Distributed Energy Resources (DER) Hawaii PUC Docket No. 2014-0192  In February 2018, the Companies launched two new DER programs: ‒ Smart Export: For customers installing rooftop PV combined with battery storage. Customers may export energy between 4pm – 9 am for credit, but are not credited for e

  47. Slide 47: Renewable Dispatchable RFP Timeline

    Renewable Dispatchable RFP Timeline April 30th, June 11th, 2018 2018 Proposals for Best and final variable RFPs offers due received December 31, 2018 April June September Executed PPAs to be filed with PUC June 1st, 2018 No later than September Selection of 17th, 2018 short list Selection of final a

  48. Slide 48: Maui Electric Rate Case: 2018 Test Year

    Maui Electric Rate Case: 2018 Test Year Hawaii PUC Docket No. 2017-0150 June 2018 Settlement Application Adjustment for Tax Reform Approved New (10/12/17) (2/26/18) Depreciation Rates $21.2M $30.1M (6.5% increase over revenues at $12.5M Amount requested (9.3% increase over revenues at current effect

  49. Slide 49: Hawaiian Electric Rate Case: 2017 Test Year

    Hawaiian Electric Rate Case: 2017 Test Year Hawaii PUC Docket No. 2016-0328 March 2018 Settlement/ Application Settlement Interim D&O Final D&O Tax Reform Act Impact (12/16/16) (11/15/17) (12/15/17 as modified) (6/22/18) (3/5/18) Approximately $53.7M (at Approximately $36.0M (at $106.4M 9.5% ROE)-$5

  50. Slide 50: Hawaiian Electric TY2017 Changes to Fossil Target Heat Rates and Deadband

    Hawaiian Electric TY2017 Changes to Fossil Target Heat Rates and Deadband Part of Hawaiian Electric 2017 Rate Case Final Decision & Order (D&O) Hawaii PUC Docket No. 2016-0328  As part of the Final D&O in Hawaiian Electric’s 2017 rate case, the Commission approved:  Increase to the low sulfur fuel

  51. Slide 51: Hawaii Electric Light Rate Case: 2016 Test Year

    Hawaii Electric Light Rate Case: 2016 Test Year Hawaii PUC Docket No. 2015-0170 Adjustment to Interim Application Settlement Interim D&O Final D&O Increase (9/19/16) (7/11/17) (eff. 8/31/17) (6/29/18) (eff 5/1/18) Approximately $9.9M (at Approximately $9.9M (at $19.3M 9.5% ROE)-$11.1M (at Lower tax

  52. Slide 52: Maui Electric Rate Case: 2012 Test Year

    Maui Electric Rate Case: 2012 Test Year Hawaii PUC Docket No. 2011-0092 Application Interim D&O (eff.6/1/12) Final D&O (7/22/11) (eff.8/1/13) $27.5M1 $13.1M3 $5.3M4 Base Request (6.7% increase) (3.2% increase) (1.3% increase) $19.8M $19.7M $19.7M Depr. & amort. expenses without mechanisms with mecha

  53. Slide 53: Low-risk loan mix

    Low-risk loan mix Total loans at 6/30/18 - $4.8B1 Commercial Construction, 2% Commercial real estate, 16% Commercial Residential 1-4, 44% Fixed-rate mortgage markets, 12% Residential Construction & Lot Loans, 1% Consumer, 5% HELOC, 20% Note: $ in millions, unless otherwise noted 1 Before deferred fe

  54. Slide 54: ASB peer group – 2018

    ASB peer group – 2018 * 1st Source Corp. SRCE First Commonwealth Financial FCF OFG Bancorp OFG Ameris Bancorp ABCB First Financial Bancorp. FFBC Opus Bank OPB * BancFirst Corp. BANF * First Financial Bankshares FFIN Pacific Premier Bancorp PPBI Bancorp Inc TBBK * First Merchants Corp. FRME * Park Na

  55. Slide 55: Overall, tax reform a net positive moving forward

    Overall, tax reform a net positive moving forward 2017 one-time adjustments* Primary ongoing impacts • Benefits from lower tax rates to flow to customers • Loss of bonus depreciation increases need for financing of capex and ($9.2) million should incrementally increase rate base going forward Hawaii

  56. Slide 56: Pacific Current provides non-regulated platform for clean energy and sustainability investments

    Pacific Current provides non-regulated platform for clean energy and sustainability investments  Focused on helping achieve Hawaii's sustainability goals  Initial project cash flow helping fund start-up costs Awarded and contracted for solar plus battery Acquired Hamakua Energy Plant, Hawaii Islan

  57. Slide 57: Continued favorable outlook for Hawaii's economy

    Continued favorable outlook for Hawaii’s economy Year-over-year % 2017 2018 2019 change Tourism Visitor Arrivals +4.9% +6.5% +1.2% 2017 2018 2019 Unemployment Rate (%) Hawaii +2.4% +2.1% +2.3% 2017 2018 2019 Real personal income Hawaii +0.5% +2.0% +1.8% 2017 2018 2019 Real State GDP Hawaii +1.1% +1.

  58. Slide 58: Visitor expenditures

    June 2018 Hawaii visitor arrivals up 7.3% and visitor expenditures up 10.3% 1400 30.0% Year vs. Year % Change Year vs. Year % Change 1200 15.0% Visitor arrivals (in thousands) 1000 0.0% 800 -15.0% 600 -30.0% Monthly Visitor Arrivals Yr-Yr% Change Visitor Arrivals 400 -45.0% Jun-15 Jun-16 Jun-17 June

  59. Slide 59: Hawaii unemployment rate remains low at 2.1%

    Hawaii unemployment rate remains low at 2.1% 12 Seasonally adjusted 8 Hawaii U.S. US: 4.0% 4 Hawaii: 2.1% 0 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 June-18 12 Not seasonally adjusted Not seasonally adjusted Honolulu County 8 Maui County Hawaii County: 3.4% Hawaii County

  60. Slide 60: Hawaii real estate market remains strong

    Hawaii real estate market remains strong Oahu Number of Sales and Median Sales Price $1,000,000 400 $800,000 Number of sales 300 Median price $600,000 200 $400,000 100 $200,000 $0 0 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 June-18 Number of Sales Median Sales Price Median Sales

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  62. Slide 62: Explanation of HEI's use of certain unaudited non-GAAP measures

    EXPLANATION OF HEI’S USE OF CERTAIN UNAUDITED NON-GAAP MEASURES HEI and Hawaiian Electric Company management use certain non-GAAP measures to evaluate the performance of HEI and the utility. Management believes these non-GAAP measures provide useful information and are a better indicator of the comp

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