Hawaiian Electric Industries · NYSE:HE

Hawaiian Electric Industries — Q4 2017 Earnings Presentation

53 slides from Hawaiian Electric Industries's earnings presentation, Feb 14, 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: Forward-looking statements (continued)

    • the potential that, as IPP contracts near the end of their terms, there may be less economic incentive for the IPPs to make investments in their units to ensure the availability of their units; • the ability of the Utilities to negotiate, periodically, favorable agreements for significant resource

  3. Slide 3: Fourth Quarter 2017 Financial Results and Outlook

    Hawaiian Electric Industries, Inc. Fourth Quarter 2017 Financial Results and Outlook February 14, 2018

  4. Slide 4: 2017 Highlights

    2017 Highlights 2017 core financial results in line with full year expectations  Returning to triennial rate case  Strong financial performance  Newly formed subsidiary cycle  Higher net interest income focused on clean energy and  Progressing foundational  Strong deposit growth sustainability

  5. Slide 5: Other Developments

    Progress is being made at a rapid pace • Key PUC decisions issued at increased pace • Entering 2018 with momentum toward renewable goals Grants Hawaiian Electric’s motion for partial reconsideration Approves demand of 2017 TY Rate Case Approves Approves PPAs response management interim D&O; interim

  6. Slide 6: 2017 rates and recovery mechanism developments

    2017 rates and recovery mechanism developments Hawaii Electric Light  Interim Decision and Order (D&O) effective Aug. 31, 2017 2016 Rate Case  Rate increase of 3.4% ($9.9 million) Allowed ROE of 9.5% (Docket No. 2015-0170) Hawaiian Electric (Oahu)  Interim D&O received Dec. 15, 2017 effective Feb

  7. Slide 7: Key developments in renewables, customer programs

    Key developments in renewables, customer programs Power Supply Improvement  Comprehensive and flexible roadmap for Hawaii’s 100% renewable future Plan (PSIP) Update  Details a proposed five-year action plan through 2021 (Docket No. 2014-0183)  Accepted July 2017 Grid Modernization Strategy  Tang

  8. Slide 8: 2017 saw continued strong increase in solar, up 19% from 2016

    2017 saw continued strong increase in solar, up 19% from 2016  Company ended year with 695 MW of solar on grid  19% increase from 2016 includes additions of grid-scale and private rooftop solar Grid-scale and distributed  Biggest increase in solar in 5 years, reduces annual oil consumption by 300

  9. Slide 9: Hawaii's economy continues to grow

    Hawaii’s economy continues to grow Year-over-year December 2017 2017 change Tourism Arrivals +6.3% +5.0% Expenditures +2.9% +6.2% Unemployment • December 2017 – Hawaii: 2.0%; U.S.: 4.1% • Oahu sales volume: • 2017: single family homes up 6.3%, condominiums up 6.9% vs 2016 • Jan. 2018: single family

  10. Slide 10: Consolidated Net Income 4Q and Full Year

    Consolidated Net Income 4Q and Full Year ($ millions) GAAP Net Income Non-Core Adjustments $248.3 2017: federal tax reform Core Net Income 2016: merger/spin related $190.1 $179.5 $165.3 $142.3 Full Year $120.0 $144.5 $129.1 $57.3 $58.2 $1.0 $67.0 $60.3 ($6.0) $57.3 $66.0 $48.7 ($9.2) ($21.7) ($2.1)

  11. Slide 11: Consolidated Diluted EPS 4Q and Full Year

    Consolidated Diluted EPS 4Q and Full Year ($ per share) GAAP EPS Non-Core Adjustments Core EPS 2017: federal tax reform $2.29 2016: merger/spin related $1.75 $1.52 $1.65 $1.31 Full Year $1.10 $1.33 $1.19 $0.53 $0.54 $0.01 ($0.05) $0.45 $0.62 $0.56 $0.53 $0.61 ($0.08) ($0.20) ($0.02) ($0.11) * ($0.14

  12. Slide 12: HEI ROE

    HEI ROE Consolidated HEI ROE Twelve Months Ended December 31 12.4% (GAAP) 8.6% (Core) 9.5% 7.9% (Core) (GAAP) 2016 2017 Core Earnings Adjustment 2016 2017 Utility GAAP 8.1% / Core 8.2% GAAP 6.6% / Core 7.1% Bank 10.1% 11.3% See the reconciliation of GAAP to Non-GAAP (Core) measures in this presentat

  13. Slide 13: 2017 utility financial highlights

    2017 utility financial highlights (in millions) 4Q17 2017 $160 Utility Core net income Key utility core earnings drivers, after-tax vs vs fav/(unfav) 4Q16 2016 $140 $120 Expiration of the Oahu RAM settlement -- (11) Higher (lower) RAM revenues 2 6 $100 Hawaii Electric Light 2016 interim increase 1 2

  14. Slide 14: 2017 bank financial highlights

    2017 bank financial highlights (in millions) Bank net income 4Q17 4Q17 2017 Key bank earnings drivers, vs vs vs after-tax fav/(unfav) 3Q17 4Q16 2016 Net interest income -- 2 11 $67.0 $57.3 Provision for loan losses (2) (1) 4 Noninterest income -- (1) (3) Noninterest expense, $16.2 $17.6 $16.9 exclud

  15. Slide 15: Bank 2017 performance

    Bank 2017 performance Return on assets (%) Net interest margin (%) 1.17 ~3.5 - 3.6 3.68 3.69 3.57 1.01 1.02 3.50 0.95 >0.90 Original ASB ASB Peers 2017 Original ASB ASB Peers 2017 Target 4Q17 2017 Target 4Q17 2017 ASB Target ASB QTD Annualized ASB 2017 Peers1 High Performing Peers2 Source for peer d

  16. Slide 16: Net interest margin

    Net interest margin 4.50 Asset yield % 4.00 4.00 Net interest margin (NIM) % 3.50 3.80 3.88 3.88 3.88 3.88 3.00 3.50 4Q16 1Q17 2Q17 3Q17 4Q17 0.80 3.68 3.68 3.69 3.68 Liability cost % 3.59 0.40 3.00 4Q16 1Q17 2Q17 3Q17 4Q17 0.22 0.20 0.21 0.20 0.21 0.00 4Q16 1Q17 2Q17 3Q17 4Q17 1 2 ASB Peers High Pe

  17. Slide 17: Revenue growth driven primarily by net interest income

    Revenue growth driven primarily by net interest income ($ in millions) Total loans Net interest income and noninterest income $4,744 $4,678 $4,672 $69.4 $69.9 $72.2 $71.4 $72.0 $16.4 $15.1 $16.2 $15.2 $15.0 $53.0 $54.8 $56.0 $56.2 $57.0 4Q16 3Q17 4Q17 4Q16 1Q17 2Q17 3Q17 4Q17 Net interest income Non

  18. Slide 18: Credit quality

    Credit quality ($ in millions) Net charge-offs1 Nonaccrual loans2 Annual $16.8 0.47% 0.40% 0.53% 0.43% 0.49% 0.41% 0.44% 0.42% 0.50% 0.51% 0.29% 0.32% 0.49% 0.45% 0.42% 0.40% 0.26% 0.21% $12.8 0.15% $11.3 $10.9 0.11% 0.10% 0.06% 0.04% 0.11% 0.08% 0.06% 0.04% 0.05% $23.3 $23.4 $23.6 $21.0 $4.7 $19.4

  19. Slide 19: Quality balance sheet

    Quality balance sheet  Overall loan-to-deposit ratio of 79%  100% of ASB loans funded with low-cost core deposits Peer Banks1 ASB 09/30/17 (%) 12/31/17 (%) Core Deposits Loans Loans 62 68 Core Deposits 72 76  Leverage ratio: 8.6%  Tangible common equity to tangible assets: 7.8%  Total capital r

  20. Slide 20: Clean and reliable energy the primary driver of our capital investment strategy

    Clean and reliable energy the primary driver of our capital investment strategy (in millions) Year End Rate Base Forecast $4,000 = Top of Range $3,700 = Bottom of Range $3,450 $200 $3,500 $3,260 $150 $60 $3,000 $2,500 $3,500 $3,200 $3,300 $2,972 $2,750 $2,000 $1,500 2016 2017 2018 2019 2020 2 2016 2

  21. Slide 21: HEI financing outlook 2018

    HEI financing outlook 2018 (as of February 14, 2018) 2018 holding company sources & uses of capital (in millions) ~$335M ~$335M Other HC Exp. $20 Debt Maturities  Intend to maintain a $50 consolidated investment Debt Issuance/cash grade profile reduction HEI $190 Investments in Utility $130 Utility

  22. Slide 22: 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 ($9.2) million and should incrementally increase rate base going forward Hawaiia

  23. Slide 23: HEI 2018 EPS guidance

    HEI 2018 EPS guidance (as of February 14, 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 asset growth  O&M1: f

  24. Slide 24: Summary

    Summary • Tax reform results in net positive impact to consolidated enterprise due to increased earnings and dividend capacity for our bank • Hawaiian Electric Company – Returning to triennial rate case cycle – Made major progress on foundational frameworks to reach 100% RPS goal by 2045 – Increasin

  25. Slide 25: Appendices

    Appendices 23

  26. Slide 26: Tax Reform Act Impacts

    Tax Reform Act Impacts  We expect benefit pass-through to utility customers in near- to mid-term / Negative cash flow impact  Filed estimated tax benefit with PUC on January 31; working with Consumer Advocate and the PUC on amount and timing of customer give-backs Tax Rate Reduction  Deferred tax

  27. Slide 27: Utility ROE

    Utility ROE Consolidated Utility ROE Twelve Months Ended December 31, 8.2% (core) 7.1% (core) 8.1% (GAAP) 6.6% (GAAP) 2016 2017 Consolidated Utility Hawaiian Electric Hawaii Electric Light Maui Electric 2016 GAAP 8.1% 8.3% 7.3% 8.1% 2017 GAAP 6.6% 6.5% 7.0% 6.8% 1 Allowed 9.4% 9.5% 9.5% 9.0% Note: L

  28. Slide 28: 2017 consolidated utility ROE lag

    2017 consolidated utility ROE lag 9.3 26

  29. Slide 29: Power supply improvement plan (PSIP) update

    Power supply improvement plan (PSIP) update Hawaii PUC Docket No. 2014-0183 (closed) Accepted on July 14, 2017  Accelerates achievement of key milestones, including reaching a 48% Renewable Portfolio Standard1 by 2020; mandated goal is 30%  Anticipates reaching 100% Renewable Portfolio Standard1 b

  30. Slide 30: Grid Modernization Strategy update

    Grid Modernization Strategy update Hawaii PUC Docket No. 2017-0226  Implementation of grid modernization strategy approved by PUC February 2018, pending project applications  Customer and stakeholder engagement used to define grid modernization goals; engagement to continue as implementation appli

  31. Slide 31: Maui Electric Rate Case: 2018 Test Year

    Maui Electric Rate Case: 2018 Test Year Hawaii PUC Docket No. 2017-0150 Application (10/12/17) Amount requested $30.1M (9.3% increase over revenues at current effective rates) 1 Deprec. & amort. expenses $24.6M Return on average common equity 10.60% with mechanisms Common equity capitalization (%) 5

  32. Slide 32: Hawaiian Electric Rate Case: 2017 Test Year

    Hawaiian Electric Rate Case: 2017 Test Year Hawaii PUC Docket No. 2016-0328 Application Settlement Interim D&O (12/16/16) (11/15/17) (12/15/17) Approximately $53.7M (at 9.5% ROE)- Approximately $36.0M (at 9.5% ROE) 3 $106.4M $58.8M (at 9.75% ROE) Amount requested (6.9% increase over revenues at curr

  33. Slide 33: Hawaii Electric Light Rate Case: 2016 Test Year

    Hawaii Electric Light Rate Case: 2016 Test Year Hawaii PUC Docket No. 2015-0170 Application Settlement Interim D&O (9/19/16) (7/11/17) (eff. 8/31/17) Approximately $9.9M (at 9.5% ROE)-$11.1M (at Approximately $9.9M (at $19.3M Amount requested (6.5% increase over revenues at 9.75% ROE)2 9.5% ROE)3 cu

  34. Slide 34: Maui Electric Rate Case: 2012 Test Year

    Maui Electric Rate Case: 2012 Test Year Hawaii PUC Docket No. 2011-0092 Application Interim D&O Final D&O (7/22/11) (eff.6/1/12) (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

  35. Slide 35: 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 27% 21% 34% 57% 800 600 En

  36. Slide 36: Renewable energy can be cost competitive in Hawaii

    Renewable energy can be cost competitive in Hawaii depending on oil price volatility Utility fossil fuel energy cost Contracted renewable energy cost Significant reduction in cost of utilty-scale Subject to volatile oil prices renewables* 0.40 2016+ PPAs Pre-2016 PPAs Proposed and Approved 0.35 Oil

  37. Slide 37: Hawaii's oil situation

    Hawaii’s oil situation Low Sulfur Fuel Oil vs. Crude Oil Price per bbl December 2011 to December 2017 $145 $125 HAWAII OIL PRICES HAWAII PRICES HAWAII OIL PRICES OIL PRICES HAWAII OIL $105 HAWAII OIL PRICES HAWAII OIL PRICES $85 HAWAII OIL PRICES $65 CRUDE OIL PRICES $45 $25 Hawaii oil prices based

  38. Slide 38: 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 • Background: Per the Settlement Agreement with the 10 $40M RAM Revenues Consumer Advocate approved by the Public Utilities 8 9 9 9 9 9 9 Commission in 2013, Hawaiian Electric was allowed to

  39. Slide 39: Oil is the primary driver of rates in Hawaii

    Oil is the primary driver of rates in Hawaii Fuel Breakdown of Hawaiian Electric Rates 1 Purchased Energy Fossil Fuels Revenue Taxes Typical 40 Residential Purchased Energy Renewables Bill PPAC Expenses December All Other Typical 2013 Residential 35 $173.33 Bill Typical February Typical 31.8 Residen

  40. Slide 40: Utility regulatory mechanisms provide financial stability during renewable transition

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

  41. Slide 41: 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 Balancing 

  42. Slide 42: 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

  43. Slide 43: 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

  44. Slide 44: 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 2017 RAM Revenue Adjustment – Adjustment  Prior year RAM Cap Target Revenues times GDPPI (2.0% for 2017) + prior year RAM Cap Cap Rev

  45. Slide 45: Low-risk loan mix

    Low-risk loan mix Total loans at 12/31/17 - $4.7B1 Commercial construction $108 (2%) Commercial real estate $733 (16%) Commercial markets $545 (12%) Residential 1-4 Residential Construction $2,118 (45%) & Lot Loans $31 (<1%) Consumer $224 (5%) HELOC $913 (20%) Note: $ in millions, unless otherwise n

  46. Slide 46: ASB peer group – 2017

    ASB peer group – 2017 * 1st Source Corporation SRCE First Bancorp FBNC Opus Bank OPB Ameris Bancorp ABCB First Busey Corporation BUSE * Oritani Financial Corp. ORIT BancFirst Corporation BANF First Commonwealth Financial Corporation FCF Pacific Premier Bancorp, Inc. PPBI Berkshire Hills Bancorp, Inc

  47. Slide 47: Visitor expenditures

    YTD Hawaii visitor arrivals up 5.0% and visitor expenditures up 6.2% 1400 30.0% Year vs. Year % Change Year vs. Year % Change 1200 15.0% Visitor arrivals (in thousands) 1000 0.0% 800 Monthly Visitor Arrivals -15.0% 600 -30.0% Yr-Yr% Change Visitor Arrivals 400 -45.0% Dec-14 Dec-15 Dec-16 Dec-17 2350

  48. Slide 48: Hawaii unemployment rate remains low at 2.0%

    Hawaii unemployment rate remains low at 2.0% 12 Seasonally adjusted 8 Hawaii U.S. US: 4.1% 4 Hawai‘i: 2.0% 0 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 12 Not seasonally Not seasonally adjusted Honolulu County adjusted 8 Maui County Hawaii County: 2.0% Hawaii County

  49. Slide 49: Hawaii real estate (December 2008 – December 2017)

    Hawaii real estate (December 2008 – December 2017) 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 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Number of Sales Median Sales Price Med

  50. Slide 50: Hawaiian Electric Industries, Inc.

    Hawaiian Electric Industries, Inc.

  51. Slide 51: 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

  52. Slide 52: Reconciliation of GAAP to non-GAAP measures (HEI)

    RECONCILIATION OF GAAP1 TO NON-GAAP MEASURES Hawaiian Electric Industries, Inc. and Subsidiaries (HEI) Unaudited Three months ended Years ended December 31 December 31 ($ in millions, except per share amounts) 2017 2016 2017 2016 HEI CONSOLIDATED (INCOME) EXPENSES RELATED TO THE TERMINATED MERGER WI

  53. Slide 53: Reconciliation of GAAP to non-GAAP measures (Hawaiian Electric)

    RECONCILIATION OF GAAP1 TO NON-GAAP MEASURES Hawaiian Electric Company, Inc. and Subsidiaries Unaudited Three months ended Years ended December 31 December 31 ($ in millions) 2017 2016 2017 2016 HAWAIIAN ELECTRIC CONSOLIDATED COSTS RELATED TO THE TERMINATED MERGER WITH NEXTERA ENERGY Pre-tax expense

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