Good day and welcome to the Q2 2017 Hawaiian Electric Industries, Inc. Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Cliff Chen, Treasurer and Manager of Investor Relations. Please go ahead.

Thank you. And welcome to HEI’s second quarter 2017 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 our outlook for the remainder of the year. 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 of these measures 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 provide 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'll now turn the call over to our CEO, Connie Lau.

Thank you, Cliff and Aloha to everyone. Both our operating companies, Hawaiian Electric and American Savings Bank delivered the second quarter financial results in line with our full year expectations and our 2017 annual EPS guidance. At the bank, we continued our strong performance through the second quarter with higher returns from improving credit quality, higher yields and greater efficiency. Our balance sheet continued to grow with our deposit growth, although lending was flat as our growth in consumer, home equity, residential and commercial real estate lending was offset by lower commercial lending. At the utility, as we have previously disclosed, our 2017 results are impacted by the expiration of the 2013 settlement agreement with the Hawaii Public Utilities Commission that previously allowed Hawaiian Electric to record rate adjustment mechanism or RAM revenue on a calendar year basis for the years 2014, 2015 and 2016. RAM revenue now has been recorded on a May 31, fiscal year basis, concurrent with cash collection. Overall, 2017 is a transitional year at the utility. After six years without rate cases and post-merger termination, we are returning to the mandatory triennial rate case cycle under our state’s decoupling framework where one of each of our three utilities is in a rate case test year each year as well as working with our commission and all stakeholders in our state on Hawaii’s move to a clean energy economy. Turning to slide two. Our transition is progressing well. With respect to our rate case filings, we settled with Consumer Advocate in July on all issues in the Hawaii Electric Light 2016 test year rate case, other than the allowed ROE. We agreed to a maximum allowed ROE of 9.75% with the possibility of up to a 25 basis-point reduction to be determined by the PUC. We…

Thank you, Connie. Hawaii’s tourism industry, a significant driver of Hawaii's economy, continues to grow with visitor spending and arrivals year-to-date through June increasing 8.7% and 4.3%, respectively, compared to the same period of last year. The state’s unemployment rate remained low for fourth month -- consecutive month at 2.7% in June 2017, lower than the prior years' rate of 3.1% and national rate of 4.4%. Hawaii’s real estate market continued to show strength in 2017 as median sale prices for single family residential homes and condominiums on Oahu increased 3.2% and 3.6%, respectively, year-to-date through June 2017, compared to the prior year. The median sales price for single family homes on Oahu in June was $795,000, up 4.6% from last year. Overall, Hawaii’s economy is expected to be buoyed by the strong tourism industry. Risk remains stemming from geopolitical uncertainty and its impact on tourism and from the impact of the financial markets on real estate and development in sales. As I review the current period results, please note that the 2017 versus 2016 quarterly and year-to-date comparisons were complicated by onetime elements, materially impacting each period. 2017 reflected the loss of $14 million or approximately $0.13 per share in RAM after tax revenues, all fully reflected in the January to May period. With the resumption of the June 1st to May 31st RAM cycle, the balance of the year will not be subjected to the same continued variances created by this onetime transition. In addition, in 2016, we incurred merger-related costs of $2.7 million and $5.6 million after tax for the quarterly and year-to-date comparable periods, respectively. Note that we eliminate merger-related costs to reflect core earnings, to enhance comparability of operating results. Also, the outlook for the year is highly depended on timely resolution of the utilities…

Thanks, Greg. In summary, our utility will continue expansion of our renewable energy portfolio and grid modernization efforts to increase our resilience, reliability and promoting sustainable communities while working towards achieving Hawaii's 100% renewable energy goal. And, we're actively involved in discussions to encourage electrification within our state to help us achieve a broader clean energy vision for Hawaii. Our bank will continue to focus on deepening customer relationships to drive balance sheet and income growth. On Tuesday, our Board maintained our quarterly dividend of $0.31 per share, continuing our uninterrupted dividend payment since 1901. The dividend yield continues to be attractive at 3.75%, as of yesterday's market close. HEI, Hawaiian Electric and American Savings Bank will continue to move forward, providing long-term value for our customers, community, employees and shareholders. And now, we look forward to answering your questions.

[Operator Instructions] Our first question comes from Greg Gordon with Evercore ISI. Please go ahead.

As usual, you have a lot going on, irons in the fire on the regulatory front. So, a couple of questions there, just to synthesize what you said. The current CapEx forecast and the rate base forecast that results from that show you on page 16. As we go through the course of the next 12 months of regulatory activity, what are the things that could change that could either increase or decrease the CapEx forecast? Some of the things that I noticed are you're asking for approval for more grid modernization spending but you have also got some other large projects pending approval. So, if you could try to synthesize what the puts and takes might be over the 12 months for us that would be helpful.

Sure. Let me give you an overall comment and then I'll ask Tayne to give you more detail. Greg, if you remember, we had originally said that we were expecting, over this timeframe, roughly between $400 million to $500 million of capital expenditures, annually, as we moved through Hawaii's transformation to clean energy economy. And so that’s really kind of the range that we continue to expect. And as you know, there is actually lots of projects that we have talked about. And so, in any particular given year, some projects may move in, some projects may move out, much as Greg commented about the HEP purchase, we were denied in making that. But there are other capital expenditures that we're making to offset that denial. So, let me ask Tayne, at this moment, to comment a little bit further on that.

Thanks, Connie. Greg, the other things that we have in process in terms of major projects, really noted on that slide, we’ve got the Schofield Generating Station project along with Joint Base Pearl Harbor PV project, and then the third item we’re embarking on our enterprise resource planning software project there. And those three projects all have been approved by the Public Utilities Commission and are slated to be completed in the 2018 timeframe. Adding on to what Connie said on the Power Supply Improvement Plan, which was accepted by the PUC, it provides a framework for initiatives and projects that we will be working on. We do need to file PUC applications for those major projects. And some of the things we do anticipate coming up very shortly would be applications for batteries on all three companies, as well as some of the core T&D asset management strategies that go along with our Power Supply Improvement Plan. I do want to note that our grid modernization expenditures, they do need to be incorporated within our budget, and we will be doing so and reprioritizing work. That new forecast will be coming out as part of our year-end 2017 year-end webcast expected for February of next year.

Okay. So, whatever develops on the Power Supply Improvement Plan front, in terms of projects that get into the queue there and the integration of grid modernization strategy expenditures, sort of things that might move into the plan, other things might move out. But you’re sticking with your view that the range of spending would still be in the 4 to 5 -- was it $400 million to $500 million that you articulated?

That’s correct, $400 million to $500 million. Yes.

Okay. That’s helpful.

Yes. And Greg, I would add, part of the other reason for that is when you look at the Power Supply Improvement Plan, today’s energy landscape now includes a lot of other players. And so, just as I noted in our prepared remarks that we’re getting 109 megawatts from three NRG solar plants and also now an additional 21.5 megawatts from the Hu Honua biomass plant. A lot of the Power Supply Improvement Plan also covers third-party investments, not just the utilities.

Understood, understood. And when you talk about the earnings guidance ranges, you talk about being at that -- turning towards the high-end of the bank, having some near-term pressures at the utility. You also foot note that your holding company expenses should be between $0.13 and $0.15. Are you sort of trying to tell us that you’re trending towards the low end of the utility guidance range at this point and that’s how we should think about things as we go into the end of the year?

This is Greg, Greg. Based on where we’re at on a year-to-date basis -- we have mentioned some of the headwinds on the O&M side created by a number of onetime charges, so that put a slightly behind plan on a year-to-date basis. As we look forward, the main driver I think overall of where we line up within the guidance range, will be the timing of the interim rate results and which is -- and that timing for interim rates on the Hawaiian Electric rate case, which is the major rate case, has now been determined, just very recently, tentatively as mid-December. So, that will -- rate relief within 2017 will be helpful, although may not be fully what we expected when we -- the timing may not be fully what we expected when we originally set the guidance range. I would say that we’re in internal discussions of finding ways to offset those increased costs, as well as the timing on the settlement of the rate case. So, more to come on that front, but I would say, the pressures that we’re seeing right now, put us slightly towards the lower end of the range.

Final question, you do give lots of good insight into earned returns here and you give a GAAP ROE for the 12 months trailing basis at the utilities overall and then for each subsidiary relative to your allowed. And then, you also have a separate slide in the appendix where you show sort of what the structural regulatory lag looked like in 2016? Can you give us some sense of what your aspiration is for earned ROE as we exit 2017, get into 2018 and beyond, and we get past these ramp issues and these timing issues? Is there still an expectation that there’ll be sort of a structural regulatory lag that’s sort of pretty difficult to offset but we should expect some sort of an aspiration at a certain level? In the past, you’ve sort of given guidance around that front?

Maybe a couple of comments here and then Tayne can contribute as well. First of all, our actuals for year-to-date was impacted by the denial of HEP, which cost -- it was an $85 million anticipated purchase, equitized at roughly 56%, which we anticipated to be around the timing of the first quarter in our original guidance. So, you have that impact to this year, which impacted our ROE expectations. Secondly, the $14 million loss on the RAM on a actuals-to-actual basis all of which has been incurred now because of that one time transition. $14 million over our equity invested into the utility will get you -- you can do the math on that; it's just $14 million net income, will get you somewhere around 70 to 75 basis-point reduction in what we've achieved year-to-date. So, you make adjustments for that for the current period. Looking forward, the purpose of slide -- or the 2016 consolidated ROE lag, was to show, to demonstrate largely what the structural issues are that are embedded in our rate structure generally. And that 50, 60 basis-point lag, it tends to be structural and not something that's likely to be recoverable through the rate case cycle. But as you look to the right on that slide, past the structural items, you see we've demonstrated, if in 2016 had we been able to recover a full cost of service and return on our investments, that would have made a 120 basis points differential. I mean, that's the opportunity that we see as we go through our first rate case cycle in six years, true-up the coupling mechanisms and go through standard rate case cycle, that's the upside; that's the opportunity that we see to improve our performance through a full recovery of our cost -- of our allowed cost at or allowed rates.

Our next question comes from Chris Turnure with JP Morgan. Please go ahead.

I wanted to just clarify first on HELCO. The settlement is in regard to interim rates, not the entire case. Is that correct?

Yes. It is the entirety.

Okay. And then, you did put some details on the slides there, but can you maybe highlight anything that is a little bit short of maybe what you had originally expected or anything there that differs from your base case expectation, assuming that your ask was pretty far off from that?

Yes. I'm going to ask Alan Oshima who heads our utilities, to comment for you.

As with any settlement, there is puts and takes. And our original revenue requirement request was around $19 million, and the settlement would get anywhere 10 to $11 million in revenue adjustment. So, the individual line items, we can't get into; the settlement it is pending before the PUC. But is on far.

And that original request included and requested ROE at 10.6%. As I mentioned, this settlement is at 9.75 with the potential for a decrease of upto an additional 25 basis points, primarily related to decoupling.

And I would that in the Hawaii Electric Light rate case, with the Consumer Advocate, we have agreed to all of the issues in the proceeding with the exception of what Connie stated on ROE.

And then, sorry if I missed this, but can you remind me of the timing there and ultimate implementation date, kind of best guess scenario?

The decision is expected on August 21. And so, then thereafter, I don’t know, maybe 30 days to implement the rates -- file the tariffs and begin the cash collection.

And then, transitioning to O&M expenses; you touched on things a bit in the last question. But, if I look at the test years of this case and your HECO case as well, I would think that the only test year that applies to 2017 at least, is for one of the cases. So, is it possible that you could kind of be a little bit more disciplined on the O&M side here in the second half of the year or has something kind of been running ahead on plan on that front in particular year-to-date?

What we’re doing is, as Greg mentioned, we’re taking a look at opportunities to mitigate some of the matters related to a delay, a possible delay in the Hawaiian Electric rate case, so there are some opportunities but we in the 2017 test year for Hawaiian Electric Company as well.

And is there a true-up for that, actually versus planned?

No, not for the -- whatever the test year is, that is what is being adjudicated, and that is what would go into interim and then final base rates, and there is no adjustment for actually within that test year. Although, obviously the commission always takes a look at what actual results look like, but there is no mechanism for that actual true-up.

And that’s something [indiscernible]?

Yes. And just to clarify, the HELCO case that we're settling where we expect the decision on August 21, was on the 2016 test year, and then it is, as you say, the largest utility is this year on 2017 test year.

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

If I go back to slide 22 in the appendix, and Greg, you talked about items four through eight. Are any of those being pending in the current pending rate cases or any of those items included as far as providing some benefit?

Yes. They all are being adjudicated as part of the rate case. The interest rate savings for lower cost debt that we issued is embedded into our cost of capital. The pension asset, the prepaid pension assets that we contribute to, there is a mechanism for full recovery of that investment, as well as true-up, so that we’re fully collecting on a real-time basis our true net periodic pension costs. So that will provide cash flow relief, not necessarily earnings release, but cash flow relief. The earnings release comes off of the recovery of the cash we’ve invested, which is not currently earning the return. So, you see that on the Item 6. The O&M in excess of the RAM, the RAM mechanism, the interim mechanism, which was intended to keep us full for inflationary costs and investments between rate cases had a cap implemented to that. And so, to the extent they costs and investments exceeds those levels, we have some exposure that is being trued up. And remember, we’ve been relying on those RAM mechanisms now for six years, much longer than was originally planned. So that will get trued up. And then the plant additions that were over the RAM cap, those have been put into the rate base calculations included for settlement here within the rate case cycle. So, we view everything to the right of that, the first three items as issues that are being addressed through these current rate case cycles in there. And it’s the opportunity to close that significant gap between our allowed and what we actually achieve.

You get past this cycle of rate cases and then you get to your regular cycles for years…

Yes.

Utility. Do some of these take care of themselves? I mean there is not necessarily trackers but are there -- should we work -- will you work your way to the 120 basis-point lag by the time you get to the next round, or will some of that be dealt with in these filings?

Remember, they’re dealt with, this is -- they are dealt with on a utility by utility basis. So, each of the three utilities have some elements of each of these lag items within the rate case. The rate case should be a full reset in terms of what our O&M recovery is, return on rate base, and adjustment of our ROE. What’s not indicated on here, this is looking historically at the historically allowed, so the ROE, allowed ROE will be reset as well. That creates the cap on ultimately what we are likely to achieve at the high-end, but all of these items should be trued up as we come out of the rate case cycle. And then to the extent that there is deviation as we go forward, we make incremental investments between the settled rate case and the up -- and each year, as we go out we make investments. The RAM mechanisms, those decoupling mechanisms should keep us full between the three-year rate case cycles, the triennial rate case cycle at each utility. Did that answer your question?

Yes. I mean, going from three years to six years is going to help…

Tremendously.

This lag too quite a bit. Okay.

Yes. But this should reset base rates that give us recovery on a settled basis as well as our O&M -- O&M cost, our rate base investments that are included in that rate base at or allowed ROE. So that -- we should be coming out this with that reset but further, with all of the coupling mechanisms going forward that also provide benefit in between rate cases at each of the utilities.

And Craig, I would also add we -- with the commission’s establishment of that major project’s interim recovery mechanism, it has -- there is a mechanism to recover cost for major projects in between rate cases.

So, Charles, if you look at slide 22, where it says plant adds over the RAM cap, that new major project, interim recovery mechanism is intended to address that issue in between rate cases as well.

I want to mention though that all of this is in the context of the Power Supply Improvement Plan, the grid modernization plan which is all intended to have the utility work in collaboration with all the stakeholders towards the state policy, getting us to a renewable energy future with customer benefit.

[Operator Instructions] Our next question comes from Paul Patterson with Glenrock Associates. Please go ahead.

Very quickly, on the loan loss provision and the credit quality, what was driving the credit quality improvement, was it real estate prices or anything else?

Thank you, Paul. Rich always loves the question on the bank.

Yes. Paul, we’ve been working through some of the higher risk exposures we have, particularly around leverage lending and national book, and those are the areas that we just decided at this part of the cycle we wanted a bit less exposure to. A couple of larger exposures locally on the commercial real estate side that have -- we worked through and got paid off. And that’s it. It’s been a sort of a combination of some specific local exposures and then that national leverage lending exposure.

Okay, great. And then, on the piece of approval, and I guess sort of following up on Greg’s question and I think you may have answered it, but I wasn’t completely paying attention, I guess. When you mentioned about revising your CapEx forecast I think, providing that in February next year, does that include what you currently -- should we think of there being a significant revision to that CapEx forecast, due to the piece of approval?

No.

Okay.

As I mentioned before, we’re looking at that range of the $400 million to $500 million on a go forward basis. And we’ve kind been obviously thinking about that number as we’ve gone through working through the Power Supply Improvement Plan and also the grid modernization strategy.

Okay.

And again, it’s driven by those plans and state policy and customer benefit.

Right. I thought, when I read it, and tell me if it’s different, but you obviously have a better interpretation on perhaps than I do. But, it seemed like it was a pretty positive order. But, one thing that I thought was a little bit -- that they raised an issue of was the rate impact over time with customers. And I was just wondering, A, how did you feel about the pieces of order that came out? But also just about that specific issue, what do you think about the potential rate impact or what should we think about that, given the obvious sensitivity to it, which I’m sure you guys are -- I know you guys are very focused on. So, can you sort of just address those -- the general issue of the order and also just that specific issue?

Thank you, Alan here. Yes, we’re pleased at the acceptance of the planning. That was done, as you know, over a long time, but including a lot of the stakeholders and community input. Contrary to some interpretations, the commission did not reject things in the order, nor approved things in the order. And those open items that might contribute to additional costs, are still subject to our application with community input and a full hearing. So, it’s our obligation to provide information as to customer rate impact. And so, we did that from a very conservative standpoint. We are very aware of the issue as the commission and other stakeholders. We have to work on the mitigating alternatives, and there are many. And we will be working through that with the stakeholders and the regulators as we move forward. If you look at the drivers for our rates in isolated island on grids, a lot of it is due to imported fossil fuel costs, which we are trying to get off of, those things don’t change immediately however, as we transition. So, there are many things that we are looking at. And I think as this process moves forward that we have robust discussion around all of these issues.

Okay. In terms of jus the near-term action plan and this concern about the affordability, that section of it. Do you feel that like, I mean obviously you are going to be addressing it and what have you, but did you feel that that may slow down the CapEx, or in other words, what should we think about in terms of at least in the near-term potential issues associated with rate impacts? You mentioned the fossil fuel offset, but is there anything else we should think about that might be mitigating the cost?

Nothing that I can really discuss with you now, because we really do have to include all of our stakeholders. We have talks and I'm sure others have as well. But you will be hearing more about it, as we implement the PSIP but there are ways. I also want to be clear though that this transition comes at a cost.

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, Brendon. And thank you for all the participants on the call. Have a good afternoon.