Hawaiian Electric Industries Inc (HE) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Hawaiian Electric Industries Inc. Q1 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Manager of Investor Relations, Mr. Cliff Chen. You may begin, sir.

Thank you, Andrew. Welcome to Hawaiian Electric Industries first quarter 2016 earnings conference call.

Joining us this morning are Connie Lau, HEI President and Chief Executive Officer; Jim Ajello, HEI Executive Vice President and Chief Financial Officer; Alan Oshima, Hawaiian Electric Company President and Chief Executive Officer; 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 Jim, who will update you on Hawaii's economy, our results for the first quarter and our outlook for the remainder of the year. Then we'll 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 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 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. Turning to our first quarter results, both our bank and utility delivered financial results in line with our full year expectations, although expenses to support our filing of plans to achieve our state's goal of 100% renewable energy by 2045 caused utility expenses to come in slightly higher than normal.

At the utility, we continue to work on action plans to ensure reliable service for our customers and to lay the foundation for Hawaii's renewable energy future. These plans include modernizing our electric grids, implementing smart meters and other enhanced technology, and supporting the electrification of transportation to help reduce our state's reliance on fuel oil for our cars and other vehicles.

Even though our customers are seeing the lowest electric bills in more than six years, largely due to lower fuel oil prices, we know firsthand how volatile oil prices can be and remain committed to reducing our state's reliance on imported oil, attempting to reduce price volatility by locking in lower pricing for the long term and protecting Hawaii's environment.

At the bank, we saw excellent deposit growth and higher net interest income and margins. However, the bank results were impacted by higher provisioning in the first quarter, which Jim will cover in greater detail a little later.

Turning to slide 3, regarding the utility merger with NextEra Energy, the Hawaii Public Utilities Commission's regulatory hearings on the merger were completed on March 1, after three rounds of hearings covering more than 20 days. On May 2, we filed our post evidentiary hearing reply briefs, along with other parties and interveners, and now the docket is complete and the PUC can hereafter render its decision. There is no statutory deadline for the Public Utilities Commission to decide.

In addition to the PUC approval of the merger, the bank spinoff requires Federal Reserve Board approval to deregister HEI as a savings and loan holding company. Most of the conditions for the spinoff have been satisfied, although certain of the conditions can only be satisfied shortly before closing. However, we are well prepared for the spinoff.

The bank accomplished an important step this morning towards its planned cross-conditional spinoff as an independent publicly traded company by filing a second amendment to the Form 10 with the Securities and Exchange Commission.

If the utility merger is not consummated by June 3, our merger agreement with NextEra Energy contains certain termination rights for either party to terminate the agreement. However, we continue to believe that the right partner for Hawaii and for Hawaiian Electric is NextEra Energy, which brings a powerful combination of renewable energy experience, technological and operational know-how, and financial strength to help achieve Hawaii's 100%% renewable energy goal, the most ambitious goal in the country.

On April 1, our utilities filed their comprehensive update to the Power Supply Improvement Plans that chart a 30-year course leading to 100% renewable energy in Hawaii. Hawaii continues to be a national leader in clean energy, with over 23% renewable energy in 2015 across the five island electric grids we serve.

Our recently developed plans reflect a path to 100% renewable energy by 2045, the highest level of any state in the country, and sooner on our smaller subsidiaries, by 2030 on Molokai and Lanai, and by 2040 on Hawaii island and Maui.

The path to 100% renewable energy will continue, with five-year action plans that will lay the foundation for even more progress. The near term action plans include implementing a smart grid by installing a modern wireless network, smart meters and other enhanced technology to modernize the existing power grid, increased customer options, and improvement of the integration of distributed energy resources.

As an important foundation for our clean energy plans, the utilities also filed an application with the PUC requesting to install smart grid technology for more than 455,000 customers on Oahu, Hawaii island and Maui County. The project cost is estimated at $340 million and is expected to begin as early as 2017 on Oahu and 2018 on Hawaii island and Maui County and implemented over five years.

The smart grid technology will improve outage detection and restoration and provide electricity usage information to help customers better manage their bills. It will enable automated services, such as remote meter reads, and provide system operators and engineers with data and tools for the monitoring and control needed to help achieve Hawaii's 100% renewable energy goal.

Other near term actions include growing private rooftop solar by more than 250% from current levels, issuing an RFP for a variety of renewable energy projects with a combined capacity of more than 350 megawatts to be developed by 2022, pursuing energy storaging options, including both utility scale systems and energy storage integrated with rooftop PV systems, implementing community-based renewable energy to allow customers who cannot or choose not to take advantage of rooftop solar to receive the benefits of participating in a renewable energy program, and pursuing the benefits of LNG, which can serve as a lower cost, cleaner fuel during the transition to 100% renewable energy.

Our next steps include updating our analysis for fuel prices by mid-year. We'll also reassess the scope and requirements for an inter-island cable, as Oahu will likely need a substantial amount of off-island renewable resources to meet a 100% renewable energy goal in 2045. We'll also do more research on offshore wind energy. And we'll continue to evaluate other potential long-term renewable resource options.

We know that any plan that looks 30 years into the future will need to evolve, as new technologies are developed and costs continue to decline. We want to work collaboratively with all stakeholders in our community to refine the plans going forward. I'll ask Jim now to cover Hawaii's economy, our financial results, and outlook for the Company.

Thanks, Connie. I'll start today with Hawaii's economy. Hawaii's tourism industry ended the first quarter of 2016 with continued strength in arrivals and expenditures as compared to the same period a year ago. Year-to-date visitor arrivals exceeded 2.0 million visitors and total expenditures for visitors amounted to more than $3.9 billion, increasing 3.6% and 2.6%, respectively, from 2015.

Statewide unemployment was 3.1% in March of 2016, the lowest in eight years, compared to 3.9% a year ago, still significantly below the national unemployment rate of 5% as of March, 2016. Hawaii's real estate activity remained strong during March of 2016, with median sales price for single family homes on Oahu at $725,000, up 3.6% from last year and up 7.2% year-to-date. Construction activity remains high. That activity is expected to continue in 2016 as planned and permitted building continues.

Overall, Hawaii's year-to-date economic performance is being sustained by the continuing strength in the tourism industry and strong activity in the construction industry. And the University of Hawaii forecasters expect real state GDP to grow 3.2% in 2016.

As shown on slide 6, first quarter 2016 GAAP earnings per share were $0.30. However, core earnings per share, which excluded merger and spin-related expenses, were $0.31 per share compared to $0.35 per share in the first quarter of 2015. Consolidated core net income was $2.7 million lower than the prior year quarter, but core EPS was $0.04 lower due to 4.7 million additional shares from the settlement of the equity forward agreement in March of 2015.

As shown on slide 7, HEI's GAAP consolidated ROE for the last 12 months was 8.4%. Excluding merger-related and spinoff costs, HEI's core consolidated ROE was 9%, with ROE contributions of 7.9% from the utility and 9.7% from the bank.

On slide 8, utility earnings were $25 million in the first quarter of 2016, compared to $27 million in the prior year quarter. The most significant net income driver was the $2 million in higher depreciation expense, or increasing investments for customer reliability, greater system efficiency, and the integration of more renewable energy.

O&M expenses were relatively flat compared to the prior year quarter. The first quarter of 2016 included higher than expected Power Supply Improvement Plan and LNG consulting expenses, while the first quarter of 2015 included higher storm repair cost, bad debt reserves for one customer account, and costs for the damage to a combined heat and power generating station.

At the bank, net income for the first quarter of 2016 was $12.7 million, $2.3 million lower than the linked quarter. Our results reflect $2 million in higher provision for loan losses after tax. The higher loss provisioning was due to loan growth, as well as higher provisioning during the construction phase of several commercial real estate projects, along with a single commercial credit charge-off for the first quarter of 2016. This is compared to lower provisioning during the fourth quarter of 2015, due to net recoveries on previously charged off loans.

In order to provide a little more color on the provision, during the construction phase of commercial real estate projects, the bank provides at a higher coverage rate compared to the period after construction completion. Lending to construction projects increased $30 million compared to the linked quarter.

Compared to the linked quarter, the bank was also impacted by $1 million in lower non-interest income after tax compared to the fourth quarter of 2015, which included gains from the sale of mortgage servicing rights. These declines were partially offset by $1 million in higher net interest income after tax, primarily attributed to loan and investment portfolio growth, and higher yields on interest earning assets in the first quarter of 2016.

Compared to the first quarter of 2015, first quarter 2016 net income declined by $800,000, primarily driven by the following after tax. $2 million in higher provision for loan losses, mainly driven by commercial real estate loan growth and a commercial credit charge-off, and $1 million in higher non-interest expense, driven by investment in our electronic banking platform and higher compensation expense. These two items were partially offset by $3 million higher net interest income in the first quarter of 2016, due to loan and investment portfolio growth and higher yields on interest earning assets.

Slide 9 shows the utility's actual ROEs for the last 12 months. Consolidated utility ROE of 7.9%, in line with the 2016 guidance of about 8%.

Turning to American Savings Bank, on slide 10. American delivered solid profitability metrics in the first quarter. Although we achieved a return on assets of 84 basis points, we expect to achieve our 90 basis points target for the full year, as loan provision normalizes.

Annualized loan growth was 2.21%, primarily in our targeted commercial real estate and consumer portfolios. We expect to meet our target of mid-single loan growth for the year.

Our net interest margin was 3.62%, 10 basis points higher than the prior year quarter, reflecting favorable mix impact of growth and higher yielding loan portfolios and higher yields in our variable rate portfolios. Our net charge-offs ratio was above our target of 15 basis points, coming in at 21 basis points, attributed primarily to one commercial borrower in the first quarter.

We continue to improve our efficiency ratio through a combination of revenue growth and cost reductions. Our first quarter efficiency ratio improved by over 100 basis points, to 63%, from the linked quarter at 64.2%, and over 250 basis points improvement from the prior year quarter, was at 65.5%. Overall, the bank continues to maintain its low risk profile, strong balance sheet, and straightforward community business banking model.

On slide 11 our net interest margin of 3.62% in the first quarter of 2016 was 7 basis points higher than the linked quarter and 10 basis points higher than the prior year quarter of 2015. Our interest earning asset yield improved by 8 basis points, primarily due to growth in the higher yielding commercial real estate and consumer loan portfolios and higher yields in our investment portfolio. And our liability cost of 23 basis points was 1 basis point higher than the linked quarter.

On slide 12, non-interest income was $1.4 million lower than the linked quarter, primarily due to the gain on sale of mortgage servicing rights in the fourth quarter of 2015 and fees on deposit liabilities, which were lower mainly due to seasonality.

Credit quality, slide 13, remains stable, reflecting prudent credit risk management and a strong Hawaii economy. Provision for loan losses was higher than the linked quarter and prior year quarter, mainly due to the commercial real estate loan and a commercial credit charge-off in the first quarter of 2016. Commercial construction project loans, which have a higher reserve ratio, increased $30 million and $53 million compared to the linked and prior year quarters, respectively. However, we are not changing provision guidance for the bank.

The first quarter of 2016 net charge-off ratio was 21 basis points, primarily related to the charge-off for the one commercial borrower. The allowance for loan losses was 1.13% of outstanding loans, at $52 million at quarter end, compared to 1.08% at the end of the linked quarter and 1.03% of the prior year-end.

On slide 14, American's non-performing asset ratio was 1.03% at the end of the first quarter of 2016, compared to 1.02% at the end of the fourth quarter of 2015 and 0.8% at the end of the first quarter of 2015. The increase from the fourth quarter of 2015 was primarily due to the reclassification of two commercial loans which are still payment current.

Slide 15 illustrates American's continued attractive asset and funding mix relative to our peer banks. American's March 31, 2016 balance sheet is stacked against the last complete available data set from our peers, which is December 31, 2015. Nearly 100% of our loan portfolio was funded with low cost core deposits versus the aggregate of our peer banks at 84%.

In the first quarter, total deposits increased $115 million, or 9.1% annualized, while maintaining a very low cost of funds at 23 basis points, 20 basis points lower than the median of our peers. American remains well capitalized at March 31, with a leverage ratio of 8.7%, tangible common equity to total assets ratio of 8.1%, and a total capital ratio of 13.2%. In the first quarter of 2016, American paid $9 million in dividends to HEI, while maintaining healthy capital levels.

Now I'll address HEI's outlook for 2016. Turning to slide 17, given our PSIP filing on April 1 that Connie discussed earlier, we are now providing our preliminary 2017 and 2018 rate base and CapEx estimates, net of contributions in aid of construction, of $480 million and $500 million, respectively. We want to stress that the rate base and capital expenditure estimates shown on the slide, especially for 2017 and 2018, may vary as to timing and exact amount, depending on what is approved at the Public Utilities Commission.

We expect that these forecast CapEx levels and the timing of plant being placed into service will result in annualized rate base growth of 4% to 5% through 2018. And there was no change to the 2016 CapEx estimate of $450 million.

We are reaffirming HEI's 2016 earnings guidance of $1.62 to $1.75 per share, excluding any merger and spin expenses. However, at the utility, although we are maintaining the utility EPS range of $1.28 to $1.36, we now expect utility O&M to be lower by 4% instead of 5% that we were guiding to last quarter, mainly due to the higher expected cost related to the update of our Power Supply Improvement Plan and the LNG agreements.

At the bank, there are no changes to the EPS guidance range and key assumptions. I'll now turn the call back to Connie.

Thanks, Jim. In summary, our utility is continuing its transformation into a next generation utility by focusing on expanding customer options and lowering customer bills and leading the industry in integrating renewables and in distributed resources.

Our bank will continue to focus on its core banking business, targeting mid -ingle digit loan growth and strong credit quality, while also preparing for life as an independent public company. And 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 3.8%, as of yesterday's market close.

Finally, we continue to believe that the right partner for Hawaiian Electric is NextEra Energy, which brings a powerful combination of renewable energy expertise, operational and technological know-how, and financial strength necessary for achieving Hawaii's 100% renewable energy goal. And with that, we look forward to hearing your questions.

(Operator Instructions)

And our first question or comment comes from the line of Charles Fishman with Morningstar. Your line is now open.

Connie, if I could, I'd like to ask you the same question I asked last quarter. Have you detected any change, since I last asked this, in the Governor's position on the merger?

Since that last call, Charles, the Governor has not come out with any additional statement, so there is no change, at least from our perspective. And now that the docket is complete and the decision is before the Public Utilities Commission, I think the regulatory process is really the one that will govern, at this point in time.

Okay. And then my second question related to the merger is I would just assume, and there's ongoing, or there will be discussions with NextEra on extending the merger agreement -- and is there anything you can say about that? Or I certainly understand if you can't.

Yes, I really can't comment on that, Charles.

Okay. Thank you.

And our next question or comment comes from the line of Michael Goldenberg with Luminous Management. Your line is now open.

Good afternoon or rather, good morning.

Hello, Michael.

Hello. I have several questions. Have you and NextEra had discussions about expanding the agreement past June 3?

I think I just answered that. Charles asked the same question. I really can't comment

I missed it. I'm sorry. There was an announcement in the building. Okay, then I'll move on to another question that I had. On the last Q4 call, I think we had a discussion about rating agencies. And if I remember correctly, the answer was that at $300 million CapEx level, rating agencies were definitely comfortable. These slides have forecasted CapEx of about $480 million or $500 million. And I'm wondering, have rating agencies -- have you discussed this with rating agencies?

Michael, this is Jim Ajello. On the last call, we did discuss that, I can recall. We have not had specific conversations with the rating agencies, but these CapEx numbers that you're seeing were embedded in the Power Supply Improvement Plans that were filed at the Commission, and I have no feedback for you there on those. But those have been out for a bit of time now.

Do you feel that you may need to do equity issuance for this CapEx or you can accomplish this and maintain credit rating without equity issuance?

So our policy is to maintain investment grade credit ratings. And we begin with the premise that the CapEx that has been outlined here today and in the Power Supply Improvement Plans meet really three criteria. Number one, they're beneficial to customers. Number two, we could manage the projects embedded in the plans. In particular, you'll see the Schofield generation system in that plan, you'll see the Hamakua Energy project acquisition in that plan. And then number three, that they are financeable within our policies and within the ratings that we have. So we back test that all the time. And I'm sure in due course, we'll have conversations with the rating agencies.

So just so I'm clear, you're not saying yes equity, not saying no equity, you're saying we will see.

I'm saying that we will maintain the capital structure that we are obliged to maintain in regulation at the utility, and you should expect that the capital structure that HEI profiles today will continue. And so I won't comment exactly on the amounts involved, because these are preliminary filings at the PUC which haven't been reviewed yet or approved. But you can assume the maintenance of the standard capital structure that we have, if these numbers were to come to pass. Of course, I think as you probably infer, there's a balance of equity and debt that will be required at HEI and Hawaiian Electric companies and cash flow, of course.

And Michael, let me just add. I think what you're hearing Jim say is that you would not see any difference in our policies or our practices from prior year, and therefore, as the capital expenditures are approved by the Commission and we go forward with them, we would always make sure that they were, as Jim said, beneficial to our customers, executable and financeable. Part of that is that we do have our dividend reinvestment program open now, and that has also been consistent with past practice to utilize that program to raise small amounts of equity on an ongoing basis.

Okay. Got you. Thank you.

And our next question or comment comes from the line of Paul Patterson with Glenrock Associates. Your line is now open.

Good morning.

Hello, Paul.

So the slide 17 and the rate base growth, how should we think, with some of the changes that we've had with respect to the tracking, the trackers and what have you, and just your general outlook, how should we think about the potential for rate lag during that period that you guys give us a read-through that you show on slide 17?

So I think, Paul, you know from last year when the decoupling mechanism was changed to add a cap on the rate base RAM that we have now begun to manage our capital expenditures in accordance with that cap. And so because of that, we would not expect any difference in the regulatory lag on capital expenditures than you saw begin in 2016, although 2016 was a transitional year.

Okay. Great. And then when we look at the bank, there was $1 million associated -- there was a decrease, I think, in non-interest income because you guys -- well, you mentioned that there was a benefit from the mortgage -- I apologize, the term isn't coming to mind right now.

Servicing rights, Paul.

Right, the servicing rights. Is that pretty much the entire reason why that was responsible for the lower non-interest income, or was there anything else?

Paul, this is Rich Wacker. That is the principal driver in there.

Okay. And then to the question -- there was an article regarding the Chairman of the PUC's statement regarding the possibility of having a decision by the 3rd. And I think he said it was like 50/50. Could you remind us, in the absence of an agreement with NextEra or what have you, what would happen if June 3 was to come and go and there was no decision?

Sure. Paul, under the merger agreement, as of June 3, either party -- if we have not closed by that time, either party can decide to exit the agreement.

And if no party decides to do that, what happens?

It just continues on.

Okay. But you don't necessarily need an agreement to -- in theory, one could just wait until the PUC rules?

Yes, if that's what each party decides to do now after June 3 individually, then the agreement would just continue.

Okay. That's my questions. Thanks a lot.

Our next question or comment comes from the line of Andrew Weisel with [McGuire] Capital. Your line is now open.

Close enough. Hello, everybody.

Hello, Andrew. (Laughter)

Another question. I really appreciate the extended guidance for rate base in CapEx. One thing that I'm a little bit surprised about is the range you show is relatively narrow. So what gives you the confidence that that bottom of the range is truly a floor for the CapEx, given how robust a review the PSIP is and that we haven't really, as far as I know, gotten a ton of feedback from regulators relative to what you filed close to two years ago?

Hello, Andrew. This is Tayne. Let me take that question. So if you look nearer term, the range is actually smaller. So for 2016, there's a lot more clarity. One of the question marks would be the Hamakua Energy Partners acquisition, which is still pending before the PUC. But as we look further out in 2017 and 2018, the range for the rate base growth does grow. And that expansion of the range really reflects the uncertainty in terms of the timing of some of these plant additions, as we await PUC approval for some of these larger projects, such as smart grids. We have that application pending before the PUC, as well as our ERP project.

Okay. So in other words, you think that's sufficiently wide to show a range of potential outcomes from the PUC.

Yes, we do believe that.

Andrew, remember, there are three very significant individual items embedded here. The smart grid, as we mentioned in the remarks, over $300 million, $340 million. You've got ERP coming up that's also a large project, and Schofield is in there for construction. So while the range is narrow, these are pretty discernable projects and should they be approved, I think there's a decent opportunity here to grow.

So this is different than the past, when we didn't have as many discrete, larger projects. So I would add to what Tayne said, that the profile is changing here, as larger projects get implemented.

And below that, Andrew, of course, there's the maintenance level of CapEx.

Right. Okay. Great. And I assume this is the case, but this reflects bonus depreciation in each of the years. We talked about that on the last call. But this is all after bonus depreciation.

That's correct. And there's no change in what we had said on the last call relative to bonus D.

Okay. Very good. My next question is on the guidance. You explained the change to the utility O&M being a little bit less of a year-over-year decline, but didn't change the total guidance ranges. Does that mean that we're still within the range but maybe toward the lower end, or there's some kind of offset that might pick up the slack?

Yes and yes. (Laughter) I'm laughing because it's early in the year, so we did want to be completely straightforward that based on the first quarter's results and the additional consulting expense for a very, very significant, I can't stress that enough, effort that the utility put in also with consultants on the PSIP filings and the LNG activities, that actually puts us a little behind the O&M run rate. So we wanted to be clear that it would be minus 4 this year versus minus 5. However, we all will try to make that up as the year goes. And with respect to the earnings themselves, there's no change to the range. The math has it, I guess, such that you're correct, there might be a slightly lower end of the range. But we will try -- we'll stop trying to preserve as much as we can of that range.

Okay. Thank you. The next question I had, on slide 34, about the rate case filings. The HelCo 2016 test year rate case, visually the box is more to the right. Is that just to show the passage of time that we haven't seen the filing in 2016, or maybe if you could just elaborate a little bit more on when those rate cases might be filed and if that depends on whether or not the merger closes?

It does not depend on whether the merger closes. This was a filing that we had made with the Commission earlier to allow us to file the 2016 test year rate case by the end of 2016. And so that would be the time schedule for that and that's the reason it's a little bit further over. Normally we would be filing earlier in the year.

All right. My last question, if you're able to comment, why was your stock halted for about an hour this afternoon? What was going on there?

Andrew, it's Jim. In the ordinary course, the New York Stock Exchange might halt trading in terms of both issuer protection on disclosure, as well as regular market activity. In our case, the earnings results, both GAAP and core, were different than the consensus expectations. Number two, there was a lot of volatility this morning. I think number three, the utility sector was the highest performing sector this morning. And then we had a number of filings stacked up within, let's call it, the roughly 1:30 time frame, including the 8-K on the earnings release, the 10-Q, which has been filed, and in addition this morning, Amendment 2 of Form 10, which is the registration statement for the bank, was filed literally moments after those.

And so in the ordinary course, the New York Stock Exchange halted trading for about 45 minutes. And it's now, of course, back underway, given the fullness of all the disclosures that have been released and then this call. So a very short period of time.

Okay. Thank you for all the details.

And our next question or comment comes from the line of Jacque Chimera with KBW. Your line is now open.

Hello. Good morning, everyone.

Hello, Jackie.

I wanted to start first with the NIM. How much of the expansion that occurred in the quarter was due to just general loan mix and to more profitable yields versus the December rate movement?

Quarter-over-quarter -- Jackie, this is Rich -- quarter-over-quarter versus fourth, it is principally pricing improvement. There's about a basis point of mix improvement, but most of it is price improvement and we saw that in most of the portfolio. So we saw it in the consumer book, the commercial real estate, the commercial markets. And even in our home equity line, we saw a little bit of bump on pricing for the lines that are not below the floor. So it was pretty good general price improvement.

And why did that rate bump, and understanding that the yield curve did then subsequently flatten, what did that do for new loan production in the quarter versus -- the rate on new loan production versus where your yields are at presently in the portfolio?

With the exception of the res book, most of the new production is coming in pretty comparable to the existing portfolio yields. There's not a lot of lag on the commercial side. The new stuff on commercial real estate, slightly better, and the res book is about -- it's about flat now, actually, new stuff coming in to portfolio yield.

Okay. And it looks like there wasn't much of a change in terms of deposit pricing, if at all.

Correct. There's a basis point higher cost on deposits overall, but that's mix of a little bit higher CDs, mostly coming from the public funding.

Okay. So in light of all of that and that loan yields are doing better, deposit costs haven't really moved, and the NIM was up quite a bit quarter on quarter, why is it that guidance is still at 345 to 355, if that implies that it would trend down from here?

I think the ranges that we gave are still good on overall. So the NIM is a little bit stronger. But you have a pretty good range there overall for how we're going to do. And as we come through the next quarters, we do have project costs and things related to our e-banking project and other things that are coming in, as well. So the quarters are choppy. They're not all equal as we go through the year, and we feel good about the overall guidance.

I mean specifically the NIM, because if I look at it at 362 in the quarter, it's well above the upper end of the range. Is there something that you think could drive it back down into that range?

I think it's new production, depending on the mix of the new production as they come in, relative to the average overall. As we look at that, I think it's going to be -- it will be more around that, the mix on the new production.

Okay. Makes sense. The construction growth that you had in the quarter, was that net new generation or was that drawdowns on existing lines you may have had in place last quarter?

Principally fundings of existing lines.

And do you have more to fund?

Yes. And we also have projects that will complete as we go through the year, too. So that's part of the driver on why we expect provision to come back in line in future quarters, because coverage on completed projects is lower than when they're in the construction phase. And some of the projects, as you know, pay down and convert to mortgages, if we can get them, or in the case of residential projects, they'll convert -- they'll just pay down with sales of the units in those buildings.

Okay. That makes sense. And then just lastly, I know that last quarter the compensation expense line, it included quite a bit from pension benefit expense. Was that reduced this quarter? Did that drive the linked quarter decline?

So there is pension expense reduction in the quarter, based on where discount rates and yields were at the end of the year. So we are seeing a few hundred thousand dollars a quarter benefit from lower pension expense. That's one of the drivers. Some of it is timing around our project spend. So there's several factors in there and pension is one of them.

Okay. Great. Thank you. That's great color.

(Operator Instructions)

And our next question or comment comes from the line of Andy Levi with Avon Capital. Your line is now open.

Hello. Good morning to you guys. How you doing?

Hello, Andy.

I apologize if you guys went through this already, but just very quickly on the incremental CapEx, is most of that big projects that will automatically go into rates/rate base, or do you have to file for a rate recovery for the incremental portion? I know we went through some of this stuff, you have two big projects that come online this year and next year, but beyond those two?

Andy, it's Jim. I'll just refresh. Your instincts and recollection are correct. The two big projects are the Hamakua Energy project that is now pending approval at the PUC. It's $85 million. It's at the lower part of that chart. The Schofield project is a new build construction, and that will take a little more than two years to build, which has been approved by the PUC. So there's more certainty there.

And then in the period recent here, filed for the smart grid, which has not been approved yet, but that's $340 million. So that is pending approval and you can expect that if approved as we had proposed it, that 2017 to 2021 is the period of time of spending there.

And the smart grid would go right into rates as you spend it, assuming it gets approved?

If it's approved, yes.

Okay. And is that, the smart grid is the -- because I guess you hadn't given 2017 and 2018 CapEx. And so now you're giving it and we were guessing the number was going to be, just on the low end, 300 each year, as a place holder. So that incremental portion on top of maybe what we were assuming, which would be your base CapEx, I guess, that is all smart grid or is that something else?

I think it's principally smart grid. It wasn't the case that we necessarily indicated about a $300 million number.

No, no, no, no, we did. We were just guessing at it.

Actually, Andy, you look at the 2017 detail on the major projects from your $300 million number, you add Schofield, which is already approved, and then you've got the other two, the smart grid and ERP in there, that are still pending approval.

Okay. So really the incremental portion, on top of let's say your baseline CapEx, that should theoretically, if everything goes right Commission-wise, flow into earnings as you spend it or as it comes -- or as it gets completed, I guess, depending on the project, and wouldn't need separate rate cases for that. Is that correct?

Yes, that's correct.

With AFUDC.

Okay. So I get that. So that's good. And then just, I think you maybe discussed this, but just on the funding of it, your operating cash flow I'm guessing id probably in the 400 to 450 range, something like that. And dividend's about $100 million, or something like that. So with $400 million to $500 million of annual CapEx and your equity ratio in the mid to high 50s on the parent level, if I'm not mistaken, how should we think about funding, again, if this is the level of CapEx at your standalone, you're not obviously with NextEra? But I'm trying to see what the standalone earnings power obviously would be and whether there would be a need for incremental equity or whether you could fund this from just regular sources and debt.

I'm glad you mentioned the standalone, because that's the profile that we have here. First of all, the parent company assumption on equity is going to be in the 51% or so range, so debt to cap, maybe 49%, 51%, let's say all together. We've been running a little heavier currently, but your question, I think, is more prospective. You should assume about a 50%, 51% equity level. The utility's equity levels, of course, are in regulation and they are -- if you look in the back of the book, you'll see each of the equity levels. So they are in the order of 57% or 58% equity levels. So you could make that assumption.

You could assume that there will be really four sources. Cash flow is number one. There will be a mixture of debt at the utility and at the hold co to maintain the ratios that I spoke about, as well as the investment grade rating. And of course I would estimate that although we haven't lined it out yet on a multi-year level, if you just -- you can easily back into the fact that there will be equity.

There's presently the DRIP, dividend reinvestment plan on for original issuance right now. That's only about 1.2% dilution this year. But going into the out years, I would expect with on the order of $1 billion more capital here, if approved, and we'll wait to see line of sight on that before we do issuance or at least feel comfortable about the expenditures. But there will be a mixture of equity and debt down the line.

And again, standalone, how much do you get from NextEra if the deal doesn't happen? Just remind me of that.

There's a termination fee of $90 million plus.

Go ahead. $90 million, plus.

$90 million plus $5 million expense allocation. And Andy, I just wanted to go back to the prior recitation on the cash flow. The bank is expected to continue to pay its dividend. And so I think that is, for all intents and purposes, that's kind of an equity-like contribution.

Right. That's about $40 million, is that correct?

That's a good round number when you think about the longer frame, right.

Okay. And then that $90 million to $95 million you get from NextEra, is that taxable and have you received that yet or that would be incremental cash?

No, Andy.

I just don't -- I don't mean it in that respect. I just don't know.

It wasn't a prepay type of fee. It was when due. So the $95 million would be considered taxable income.

It would be taxable, okay.

You should assume the regular corporate rate, yes.

Okay. That's all very helpful. Thank you very much.

You're welcome.

And our next question or comment comes from the line of Tim Winter with Gabelli. Your line is now open.

Connie and Jim, I was wondering if you could update us on the thinking of the bank spin, should the merger not go through.

So Tim, it would be very similar to our policies as in the past. We always take a look at the structural alternatives on a regular basis for our Board. If the numbers make sense, then we would consider it. But that would be the process that we would go through.

Do you know if there would be any different types of filings or implications to IPO the bank as opposed to spin it, should the merger not go through?

No. I mean, the process is very similar to -- of course, as you know, to do a tax free spin, you would first do 20% and then the remaining 80% later. So that could be done.

Tim, it's Jim. The subtle difference here is that you now have a very, very mature Form 10 pending at the SEC, as of an hour ago. You would typically file an S-1 if you did an IPO. But the substance of the information is basically the same. So not a hard transition to make.

And Tim, I think you know us, the way in which we've always run the operating companies, we've always run them quite separate. And so that's the reason why even in this transaction, getting ready for a spin of the bank before a merger of the utility was relatively easy for us to do because of the separateness of the two very highly regulated operating companies.

Okay. Great. Thank you.

And at this time, I'm showing no further questions or comments. So with that said, I'd like to turn the call back over to Manager of Investor Relations, Cliff Chen.

Thanks, Andrew. We appreciate everyone's participation on today's call. Hope everyone has a good day. Thanks.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may now disconnect. Everyone, have a wonderful day.