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Hawaiian Electric Industries, Inc. (HE)

Q4 2017 Earnings Call· Wed, Feb 14, 2018

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Transcript

Operator

Operator

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.

Cliff Chen

Analyst

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.

Connie Lau

Analyst

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…

Greg Hazelton

Analyst

Thanks, Connie. Overall, Hawaii’s economy in 2017 was very strong. Hawaii’s tourism industry, a significant driver of the state’s economy set records in 2017. For the sixth consecutive year, the tourism industry achieved new annual record totals in several key categories. Visitor spending and arrivals generated tax revenue, transpacific air seats serving Hawaii and jobs supported statewide. Hawaii’s unemployment rate of 2% in December is the lowest unemployment rate on record dating back to 1976 and lower than the current national rate of 4.1%. Hawaii’s real estate market has remained strong. Sales volume for single-family homes and condominiums on Oahu increased 6.3% and 6.9% respectively in 2017 compared to the prior year. In January 2018, single-family home sales volume was also up compared to the same period last year, while condominium sales declined slightly. January median sales prices for Oahu single-family homes of $772,000 and condominiums of $430,000 was up from last year as well. On Slide 8, we show HEI results for the fourth quarter and full year of 2017. The fourth quarter was largely in line with expectations except for the impact of the tax reform act, which I will address in the full year results. Going from left to right on this slide, consolidated GAAP net income for the full year was $165.3 million in 2017 compared to $248.3 million in 2016. In 2017 consolidated GAAP net income was reduced by the one-time impact of the tax reform act of $14.2 million, primarily due to the revaluation of the net deferred tax asset and liability balances as well as the one-time bonus to bank employees that was announced shortly after the tax reform act went into effect. 2016 consolidated GAAP net income included the one-time impact of $58.2 million additional net income due to the terminated merger…

Connie Lau

Analyst

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.

Operator

Operator

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.

Julien Dumoulin-Smith

Analyst

Hi, good morning.

Connie Lau

Analyst

Hi Juliann.

Greg Hazelton

Analyst

Hi Juliann.

Julien Dumoulin-Smith

Analyst

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?

Connie Lau

Analyst

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.

Greg Hazelton

Analyst

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.

Connie Lau

Analyst

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.

Julien Dumoulin-Smith

Analyst

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?

Connie Lau

Analyst

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

Julien Dumoulin-Smith

Analyst

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

Connie Lau

Analyst

Outside of the rate case, Schofield…

Tayne Sekimura

Analyst

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.

Greg Hazelton

Analyst

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.

Connie Lau

Analyst

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.

Julien Dumoulin-Smith

Analyst

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?

Connie Lau

Analyst

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

Julien Dumoulin-Smith

Analyst

Got it. Alright. Thank you very much.

Connie Lau

Analyst

Thank you.

Greg Hazelton

Analyst

Julien, we will see you in February in Boston.

Julien Dumoulin-Smith

Analyst

Thank you. See you there.

Greg Hazelton

Analyst

Thanks.

Operator

Operator

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

Greg Gordon

Analyst · Evercore ISI. Please go ahead.

Thanks. Hi, how are you?

Connie Lau

Analyst · Evercore ISI. Please go ahead.

Hi Greg.

Greg Hazelton

Analyst · Evercore ISI. Please go ahead.

Hi Greg.

Greg Gordon

Analyst · Evercore ISI. Please go ahead.

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?

Greg Hazelton

Analyst · Evercore ISI. Please go ahead.

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.

Connie Lau

Analyst · Evercore ISI. Please go ahead.

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.

Greg Gordon

Analyst · Evercore ISI. Please go ahead.

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?

Greg Hazelton

Analyst · Evercore ISI. Please go ahead.

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.

Greg Gordon

Analyst · Evercore ISI. Please go ahead.

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…?

Greg Hazelton

Analyst · Evercore ISI. Please go ahead.

No, no.

Connie Lau

Analyst · Evercore ISI. Please go ahead.

That’s strictly utility, regulated utility.

Greg Hazelton

Analyst · Evercore ISI. Please go ahead.

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

Greg Gordon

Analyst · Evercore ISI. Please go ahead.

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?

Greg Hazelton

Analyst · Evercore ISI. Please go ahead.

Yes, it would be incremental to that.

Greg Gordon

Analyst · Evercore ISI. Please go ahead.

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?

Greg Hazelton

Analyst · Evercore ISI. Please go ahead.

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.

Greg Gordon

Analyst · Evercore ISI. Please go ahead.

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

Greg Hazelton

Analyst · Evercore ISI. Please go ahead.

Yes.

Greg Gordon

Analyst · Evercore ISI. Please go ahead.

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?

Greg Hazelton

Analyst · Evercore ISI. Please go ahead.

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.

Connie Lau

Analyst · Evercore ISI. Please go ahead.

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.

Greg Gordon

Analyst · Evercore ISI. Please go ahead.

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

Greg Hazelton

Analyst · Evercore ISI. Please go ahead.

Thanks, Greg.

Operator

Operator

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

Paul Patterson

Analyst · Glenrock Associates. Please go ahead.

Good afternoon. How are you?

Connie Lau

Analyst · Glenrock Associates. Please go ahead.

Hi, Paul.

Greg Hazelton

Analyst · Glenrock Associates. Please go ahead.

Hi, Paul.

Paul Patterson

Analyst · Glenrock Associates. Please go ahead.

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?

Greg Hazelton

Analyst · Glenrock Associates. Please go ahead.

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.

Paul Patterson

Analyst · Glenrock Associates. Please go ahead.

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?

Greg Hazelton

Analyst · Glenrock Associates. Please go ahead.

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.

Paul Patterson

Analyst · Glenrock Associates. Please go ahead.

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

Greg Hazelton

Analyst · Glenrock Associates. Please go ahead.

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.

Paul Patterson

Analyst · Glenrock Associates. Please go ahead.

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

Greg Hazelton

Analyst · Glenrock Associates. Please go ahead.

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.

Connie Lau

Analyst · Glenrock Associates. Please go ahead.

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.

Paul Patterson

Analyst · Glenrock Associates. Please go ahead.

Okay and then just…?

Connie Lau

Analyst · Glenrock Associates. Please go ahead.

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

Greg Hazelton

Analyst · Glenrock Associates. Please go ahead.

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.

Paul Patterson

Analyst · Glenrock Associates. Please go ahead.

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?

Connie Lau

Analyst · Glenrock Associates. Please go ahead.

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.

Joe Viola

Analyst · Glenrock Associates. Please go ahead.

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.

Connie Lau

Analyst · Glenrock Associates. Please go ahead.

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

Paul Patterson

Analyst · Glenrock Associates. Please go ahead.

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?

Connie Lau

Analyst · Glenrock Associates. Please go ahead.

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.

Paul Patterson

Analyst · Glenrock Associates. Please go ahead.

Okay, great. Thanks so much, guys.

Operator

Operator

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

Charles Fishman

Analyst · 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?

Greg Hazelton

Analyst · Morningstar. Please go ahead.

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.

Charles Fishman

Analyst · Morningstar. Please go ahead.

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?

Connie Lau

Analyst · Morningstar. Please go ahead.

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.

Charles Fishman

Analyst · Morningstar. Please go ahead.

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…?

Connie Lau

Analyst · Morningstar. Please go ahead.

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.

Charles Fishman

Analyst · Morningstar. Please go ahead.

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

Operator

Operator

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

Ashar Khan

Analyst · 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?

Greg Hazelton

Analyst · Verition. Please go ahead.

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.

Connie Lau

Analyst · Verition. Please go ahead.

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.

Greg Hazelton

Analyst · Verition. Please go ahead.

Yes.

Ashar Khan

Analyst · Verition. Please go ahead.

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

Connie Lau

Analyst · Verition. Please go ahead.

It’s been a long time.

Ashar Khan

Analyst · Verition. Please go ahead.

Okay.

Greg Hazelton

Analyst · Verition. Please go ahead.

We understand.

Connie Lau

Analyst · Verition. Please go ahead.

Yes.

Ashar Khan

Analyst · Verition. Please go ahead.

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

Greg Hazelton

Analyst · Verition. Please go ahead.

Thanks, Ashar.

Operator

Operator

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

David Frank

Analyst · 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?

Connie Lau

Analyst · Corso Capital Management. Please go ahead.

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.

David Frank

Analyst · Corso Capital Management. Please go ahead.

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?

Connie Lau

Analyst · Corso Capital Management. Please go ahead.

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.

Joe Viola

Analyst · Corso Capital Management. Please go ahead.

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.

David Frank

Analyst · Corso Capital Management. Please go ahead.

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?

Joe Viola

Analyst · Corso Capital Management. Please go ahead.

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.

David Frank

Analyst · Corso Capital Management. Please go ahead.

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?

Joe Viola

Analyst · Corso Capital Management. Please go ahead.

That would be nice.

David Frank

Analyst · Corso Capital Management. Please go ahead.

Thank you.

Greg Hazelton

Analyst · Corso Capital Management. Please go ahead.

Okay. Thank you, David.

Operator

Operator

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

Cliff Chen

Analyst

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.

Operator

Operator

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