Hawaiian Electric Industries Inc (HE) 2018 Q1 法說會逐字稿

Good day, and welcome to the Hawaiian Electric Industries, Inc. First Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Julie Smolinski, Manager, Investor Relations. Please go ahead.

Thank you, and welcome to Hawaiian Electric Industries' First Quarter 2018 Earnings Conference Call.

Joining me this morning are Connie Lau, HEI President and Chief Executive Officer, and Chairman of the Board 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 first quarter and our outlook for the remainder of the year. Then, we will conclude with questions-and-answers.

During today's call, we'll be using non-GAAP financial measures to describe our operating performance. Our press release and webcast presentation are posted on HEI's Investor Relations website, and contain reconciliations of these measures to the equivalent GAAP measures.

Forward-looking statements will also be made on today's call. Factors that could cause actual results to differ materially from expectations can be found on our webcast slides, our filings with the SEC and on the HEI website.

I'll now ask our CEO, Connie Lau, to begin with an overview.

Thank you, Julie, and aloha to everyone. As we get started today, I'd like to provide an update on the lava and related seismic activity on the island of Hawaii. Our thoughts are with those who have lost their homes and with those who have had to evacuate. Our utility on Hawaii Island has been working with authorities to ensure public safety and sufficient power supply, and our teams from Oahu and Maui County have been providing assistance as well. I want to acknowledge the hard work of our teams, and we thank them for their dedication and support of one another and of our customers.

While this is still a developing situation, at this time, we expect that the lava and seismic activity will not have a material impact on our company. The affected area is about 10 square miles on the southeastern part of Hawaii Island, and while several hundred residents have evacuated and some have indeed lost their homes, significant utility infrastructure has not been destroyed. We are also assessing earthquake impacts to facilities and have not found widespread damage to date.

On the bank side, total loan exposure in the lava-affected area is limited. The area is not densely populated and American ceased making new loans in that area after lava activity in 2014.

Now turning to the results for the first quarter. We are pleased to report solid earnings from both our bank and utility, in line with our expectations for the year and resulting in consolidated net income of $40 million and consolidated earnings per share of $0.37. This includes American's highest ever quarterly earnings. Greg will walk through our results in more detail in a few minutes.

With respect to the utility, in the first quarter, we've made progress on a number of important initiatives. As we complete our return to a triannual rate case cycle for our 3 utilities, we are providing the net benefits of tax reform to our utility customers. These benefits are reflected in adjusted interim rates for our Oahu and Hawaii Island customers that began this spring. And our Maui County utility has filed a reduced 2018 RAM adjustment mechanism request and also reduced its 2018 rate case request to reflect tax reform, with an interim decision expected in August.

We filed our electrification of transportation road map in March, driving near and long-term actions to create a clean energy future and reduce dependence on imported fuel oil for both transportation and electricity. Transportation accounts for nearly 2/3 of fossil fuel brought to Hawaii, so addressing the transportation sector is essential to reducing Hawaii's carbon footprint and increasing our island state's energy security. At our current pace, we're on track to meet or exceed our state's next renewable milestone of 30% by 2020.

We've recently seen the groundbreaking of several large solar projects, including our own 20-megawatt photovoltaic project at Joint Base Pearl Harbor-Hickam. Through our renewable generation RFPs, we are providing a platform for third party development of approximately 300 megawatts of additional renewables. And last week, we filed applications to add 2 good-scale batteries on Oahu, to help integrate more renewables while improving resilience and (inaudible)

Finally, as many of you know, last month, our commission opened a proceeding and our Governor signed into law a legislation to evaluate and implement performance-based regulation, or PBR. We have advocated for this PBR for some time and already have some elements of it in place such as decoupling and performance incentives for reliability, customer service, renewable energy procurement and demand response. In its docket, the commission indicated it seeks to build on the existing regulatory framework rather than make wholesale changes.

We see PBR as an opportunity for our company as incentives may be approved to provide revenue opportunities without completely changing cost of service regulation. The recently established performance incentives for our renewable generation RFPs are a good example of this, providing the potential for the utility to earn by successfully adding competitively priced contracted renewables under our new PPA framework.

With the Commission's acceptance of our power supply improvement plan last year and approval of our grid modernization strategy earlier this year, and now our recently filed electrification of transportation road map, we now have in place comprehensive plans for reaching our 100% clean energy goal and the framework for measuring performance as we move forward. We believe the commission has outlined a collaborative, deliberative approach for developing PBR elements to advance Hawaii's goals while maintaining a financially stable utility and a safe, reliable and resilient grid, and we look forward to participating in the process over the next 2 years.

Turning to the bank. As I mentioned, American had the highest quarterly net income in its history, delivering well on fundamentals like net interest margin and deposit and loan growth, while benefiting from lower tax rates due to tax reform. The lower tax expense also allowed American to meaningfully increase wage rates for its employees at entry-level and lower wage positions starting this year.

American's new Honolulu campus remains a key focus for the bank and construction is well underway. Our bank team looks forward to consolidating its core management and operations teams into a single, new innovative space later this year, resulting in greater efficiencies for the bank and its customers.

Moving to Pacific Current. In the first quarter, our new subsidiary announced its second investment, a solar plus storage project that will provide 8.6 megawatts of solar capacity and 42.3-megawatt hours of storage capacity on the islands of Maui and Oahu at 5 University of Hawaii campuses. The facilities are in construction phase and are expected to be operational in 2019. We expect this project to be accretive to earnings in its first full year of operation.

This project is a great example of Pacific Current's approach of partnering with others and helping bring together Hawaii-based resources to advance our state's clean energy and sustainability goals. Our initial project, Hamakua Energy, is helping to fund Pacific Current's startup cost, and we are focused on building out Pacific Current's organization and management team.

I'll now ask Greg to cover Hawaii's economy, our first quarter financial results and company outlook for 2018. Greg?

Thanks, Connie. The overall health of Hawaii economy has remained sound as expansion continues, with ongoing strength in tourism and real estate and the labor force near full employment. Unemployment remains very low, below 3% since mid-2016. At 2.1% in March, it is now the lowest on record for the state and continues to be below the national rate. The increasingly tight labor market could begin to spur wage growth, which consistent with the rest of the country, has lagged unemployment levels.

A key area of employment growth has been the tourism industry, which continued a lengthy expansion that began in 2010. The industry has built on its record-setting 2017 results, seeing visitor arrivals and spending continue to rise.

The outlook is positive. At current rates, we are heading toward another record year for arrivals approaching 10 million visitors. Airlines have increased scheduled air seats to Hawaii, particularly from the western U.S. And Southwest is entering the market with service from the mainland as well as interisland.

Hawaii real estate has remained strong. Year-to-date April, both sales volume and prices continued to rise due to high demand. As of April, the median sales price for single-family homes rose 4.6% from the prior year to $774,000, and condos were up 7.5% to $425,000. Overall, the Hawaii economy is performing well with local and international conditions supporting the positive outlook.

Turning to our financial results, as shown on Slide 6. First quarter earnings per share were $0.37 per share, compared to $0.31 per share for the first quarter of 2017. We realized earnings improvement at both the utility and bank, offset in part by higher holding company losses, which were expected due to lower tax benefits on expenses and from a reduced federal tax rate and increased interest expense.

The holding company segment currently includes -- also includes Pacific Current, currently with 2 investments, Hamakua Energy, which has operated well and according to plan and contributed positively to earnings. However, our UH investment in February incurred transaction costs, which offset in part the earnings contributions at Hamakua.

Turning to Slide 7. HEI's consolidated ROE for the last 12 months was 8.2%, with contributions of 6.9% from the utility and 11.8% from the bank. Excluding the onetime impacts of tax reform recorded in the fourth quarter of 2017, HEI's core consolidated ROE for the last 12 months was 8.9% and the utility core ROE was 7.4%.

Utility results for the March 2018 LTM period reflect the impact of the 2017 expiry of the RAM settlement agreement as well as our ongoing transition back to a triannual rate case cycle and reset of base rates after no base rate increases for 6 years.

The March 2018 LTM results include 7 months of interim rates at Hawaii Electric Light and 1.5 months of interim rates at Hawaiian Electric, our largest utility. We expect ROE improvement from continuation of these interim rates throughout the year -- throughout the rest of the year as well as the upcoming interim decision on a Maui Electric rate case in August.

At the bank, we realized an increase in ROEs for the last 12 months, primarily driven by tax reform, continued low-cost funding and strengthening yield on earning assets. We expect further ROE expansion as we progress through the year. The bank's annualized ROE for Q1 2018 was 12.58%.

On Slide 8, utility earnings were $27.5 million in the first quarter of 2018 compared to $21.5 million in the first quarter of 2017. The most significant net income drivers were as follows: $11 million higher RAM revenues in 2018, primarily due to lower revenues in the first quarter of 2017 because of the return in 2017 to reporting Oahu RAM revenues for accounting purposes on a lagged basis beginning June 1, 2017 instead of on a calendar year basis due to the expiration of a 2013 settlement agreement; $5 million of interim rate relief for Hawaiian Electric's 2017 year interim rates effective mid-February and a full year of benefits from Hawaiian Electric Light 2016 test year interim rates, which became effective in August 2017; and $1 million higher allowance for funds used during construction mainly from the Schofield Generating Station to be completed in the second quarter.

These amounts were partially offset by $7 million higher O&M expenses compared to 2017, primarily due to the reset of pension costs as part of rate case interim decisions, higher overhaul costs for generation, a write-off of certain smart grid costs that were incurred before the approval of a revised grid modernization strategy and a onetime expense -- rent expense adjustment for an existing substation land lease, partially offset by an additional reserve for environmental costs in 2017. Also, $2 million higher depreciation expense for increasing investments in integration of more renewable energy, improved customer reliability and greater system efficiency, and $2 million lower net income, primarily representing the difference between first quarter 2018 accrued tax reform net benefits to customers and our first quarter tax savings.

Turning to the bank on Slide 9. In the first quarter of 2018, American saw its highest quarterly net income ever at $19 million, $3 million -- $3.1 million higher than the first quarter of 2017 and $2.1 million higher than the fourth or linked quarter. Compared to the linked quarter, the increase was primarily driven by higher net interest income, which was mainly due to higher yields on green assets and strong deposit growth that funded increases in the investment and retail portfolios.

The first quarter also included $3 million in benefits from lower federal tax rates compared to the onetime tax benefit of $1.7 million recognized in the linked quarter.

In the linked quarter, American awarded $1 million to its employees through a $1,000 cash bonus. American's wage rate increase for entry-level and lower-wage positions beginning in 2018 increased compensations cost for the quarter and the year.

Compared to the first quarter of 2017, the $3.1 million higher net income was primarily driven by higher net interest income, partially offset by lower noninterest income.

Noninterest expense in the first quarter of 2018 was higher than the same period in 2017 due to higher compensation expense and benefit expense, reflecting the wage increases mentioned a moment ago, along with higher performance-based incentives and annual merit increases, substantially offset by the impact of lower taxes.

On Slide 10, we see American's solid profitability reflected in increases in both its return on assets and net interest margin. We achieved a return on assets of 112 basis points, exceeding our 2018 annual target of over 110 basis points.

Our net interest margin was 3.76%, within our guidance range of 3.7% to 3.8%. Our strong interest -- net interest margin is primarily due to higher yields on interest-earning assets and strong low-cost deposit growth that funded earning asset growth in the investment and retail portfolio.

On Slide 11, our net interest margin of 3.76% in the first quarter of 2018 was 8 basis points higher than the linked quarter. Our interest-earning asset yield increased 10 basis points from the linked quarter, primarily due to increases in yields in the investment and loan portfolios. And our liability costs at 23 -- remained low at 23 basis points although it increased by 2 basis points compared to the linked quarter as deposit costs have increased in the rising interest rate environment, primarily due to term certificates.

On Slide 12, net interest income was approximately 3% higher compared to the linked quarter, driven by low-cost deposit growth that funded our investment growth as well as higher yields on loans.

Noninterest income of $13.4 million was lower than linked quarter, mainly due to lower net debit charge -- interchange fee income, resulting primarily from a reclassification of expenses due to a new accounting standard.

Total loans as of the quarter end increased by $71 million at a 6.1% annualized growth rate, primarily driven by increases in commercial and commercial real estate loans of $63 million. We expect to meet our target of low to mid-single-digit earning asset growth for the year.

Our deposit growth in the first quarter was 12.8% annualized, including approximately $100 million in repurchase agreements that were transferred into deposit accounts. Excluding such transfers, deposit growth was 6%.

Credit quality remains sound due to prudent risk management and a healthy local economy. Our residential portfolio remains very clean, consumer unsecured credit quality is in line with expectations, and the commercial and commercial real estate portfolios are stable with improving trends.

First quarter 2018 provision for loan losses included reserves for loan growth. Additional reserves for the consumer loan portfolio were partially offset by the release of reserves for the commercial loan portfolio due to a recovery on a previously charged-off commercial loan and improved credit quality.

Our net charge-off ratio was 28 basis points for the quarter of -- first quarter of 2018 compared to 26 basis points in the linked quarter.

Nonaccrual loans as a percentage of total loans receivable held for investment was 0.53% compared to 0.51% at the end of the linked quarter. The allowance for loan losses of $54 million was 1.14% of outstanding loans at the quarter end compared to 1.15% in the linked quarter and 1.19% as of the prior year -- prior quarter.

Slide 14 illustrates American's continued attractive asset and funding mix relative to our peer banks. American's March 31, 2018 balance sheet is compared to the last available data for our peers from the fourth quarter. 100% of our loan portfolio was funded with low-cost core deposits versus the aggregate of our peer banks at 88%. In the first quarter, total deposits increased by $188 million, while we maintained a very low cost of funds of 23 basis points, 36 basis points lower than our peer median.

American paid $11 million in dividends to HEI in the first quarter and remains well capitalized at March 31, with a leverage ratio of 8.6%, a tangible common equity to tangible asset ratio of 7.7% and total risk-based capital ratio of 14%.

On Slide 15, we are reaffirming HEI's 2018 earnings guidance in the range of $1.80 to $2 per share. There are no changes to the guidance ranges for the utility and the bank at this time.

I'll turn it over to Connie to make her closing remarks.

Thanks, Greg. In summary, our companies continue to focus on our enterprise-wide mission of being a catalyst for a better Hawaii. At the utility, we are providing tax reforms, net benefits to customers and are on course to meet or exceed the state's 2020 target of 30% renewable energy. We look forward to participating alongside other stakeholders in the PUC's PBR docket as we work together to achieve our state's goals.

We are focused on our role in creating resilient, sustainable communities through technology, smart use of resources and building partnerships and providing more value to customers. At the bank, we look to build on its record earnings and profitability as we continue our work to make banking easier, deepen customer relationships, strengthen efficiency and enhance asset quality while growing the asset portfolio. And we very much look forward to the new campus opening later this year.

At Pacific Current, we are pleased to have 2 great projects in place and are prudently investing in the build-out of the organization.

Finally, our board yesterday maintained our quarterly dividend of $0.31 per share, continuing our history of uninterrupted dividend since 1901. The dividend yield continues to be attractive at 3.7% as of yesterday's market close. As always, 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 Instructions) The first question comes from Julien Dumoulin-Smith of Bank of America Merrill Lynch.

This is [Claire] for Julian. I wanted to first talk about Pacific Current. So I was hoping you could give a little more color beyond what you've provided so far, particularly earnings contribution, earnings cadence. And second, to follow up, if you can give a little more color on the strategic view for Pacific Current and the competitive dynamics for solar plus storage in the state.

Sure. Thanks for your question, Claire. Frankly, Pacific Current is in a nascent stage right now, and as we indicated, we're really building that out. So we may have more of those specifics for you later in the year, but frankly, at this time, we're not in a position to provide those to you. However, we see that there are great opportunities within the state for us to help advance clean energy, and that's frankly why we started the Pacific Current strategy, is that when you have a state that has a very aggressive goal of 100% clean energy, and now we're also starting to work on the transportation side, we actually see that there's lots of opportunities to do things that frankly haven't been done in other places. And that's the reason why we needed another vehicle besides the utility and the bank to try to fill those gaps in our community. We actually have a number of folks in Hawaii that are very excited about clean energy and coming up with lots of different innovative proposals, and new companies, some of which you've seen transfer into the California market, like a Stem that has been involved in storage. And so we think that having this additional vehicle can allow us to support some of those efforts and work together in ways in Hawaii that you may never have seen elsewhere as we collaborate with everyone to do some pretty innovative things in energy. So stay tuned later this year.

Great. That's really helpful. And just to quickly follow up, if there's any more color you can provide on the University of Hawaii project?

Sure. I'm going to turn that over to Greg, who was involved in negotiating that transaction with UH and also our partner there, Johnson Controls.

Yes, Claire, so I can provide a little bit of additional color. We are -- the project now has been -- is in a notice to proceed stage, develop -- the final development, permits, transmission, interconnects and processes underway. JCI, who was the developer and also our EPC contractor, is proceeding with its work plan, which should deliver the project by mid-2019. I would caution that there are actually 5 different campuses, and frankly, each campus kind of has its own timeline. They're moving forward as quickly as they can on those, but we expect the vast majority of them to be online or COD by 2019, plus or minus a few months. We -- as I've mentioned previously, the contract with JCI is on a fixed price and strong performance guarantees backed by JCI, so we are funding -- currently funding the project and the construction phase, but we're not taking a construction risk. So you'll see us continue to fund that throughout the period of time until it reaches COD and is recapitalized at that point in time. Beyond that, things are progressing according to plan with good coordination among all the parties between us, University of Hawaii and JCI.

Yes, so Claire, just to add, so we have typical construction financing in place through the banking market, but not American Savings Bank. As Rich would say, geez, how come? But through another banking consortium here in Hawaii. And then on COD, there will be nonrecourse financing that takes that out, typical project financing. But here is an example of what I was talking about. Because in Hawaii, it's not only the power sector that has great desires to go green and renewable. The University of Hawaii itself has a goal to be net 0 by 2035. And so this is part of their plan that they've actually been working on for quite a while to get their campuses to that net 0 stage. And we're very happy to be able to partner and be a catalyst, which is our mission for Hawaii, to be a catalyst to help get the University of Hawaii to their mandated 2035 net 0 goal.

Excellent. That's really helpful color. And lastly, just a -- I know you've already given great detail on the PBR docket. If you can give a little more detail on what exactly needs to be in place by 2020 or at least what you can provide at this time.

Let me just -- this is Alan. We have Joe Viola here, our VP of Regulatory, if we need more detail. But in general, it's broken down into 2 phases, and by the end of 2020, we expect to have a PUC road map for PBR. PUC opened the docket -- has been working on it for quite a while. We've been advocating for PBR for decades. So I think what we have is a rational docket with all stakeholders that will be around the table, going through a very complex regulatory mechanism. And by the end of the 2-year period, we should have a road map that is rational and, we hope, continues to live by preserving the financial integrity of the utility, and PUC has mentioned in its order opening the docket.

The next question comes from Paul Patterson with Glenrock Associates.

Just if we can get a little bit more clarity on SB 2939 and how it relates to the PBR docket? I mean, how are they different, I guess? Or how should we think of SB 2939 in the context of the docket at the PUC currently and outside of it?

Well, I think you can think of it as the PUC's order actually predated the signing of 2939, and in the order, it covered most of the relevant, substantive matters discussed in 2939 and it even adopted a schedule that seemed to comply with the intent of 2939. But the PUC was very careful in its media release and in the order to say that this is not a wholesale change to the regulatory environment. We already have performance incentive mechanisms, but PUC is moving in that direction. We have filed testimony in our rate cases on PBR. We have suggested certain kinds of actions. And I think the PUC was very careful to say that Hawaii is unique, and there will not be a wholesale adoption of other areas' PBR mechanisms to the very unique circumstances in Hawaii. I think they comply. And even in the docket itself, some of the parties who were advocating for 2939 have recognized that the PUC's process seems to comply with the intent of 2939.

Okay. There were some reports that you guys weren't supportive of 2939. Were your concerns resolved during the legislative process? Or are there any concerns that you guys have now?

Our concerns are the unintended consequences and a rush to judgment. We have strongly advocated for the notion of PBR. We want a rational process with all stakeholders around the table, not just some. And I think the IPP community, for example, has already filed letters with the Governor, saying that the unintended consequence, if you destroy or greatly impact the utility's financial integrity is their ability to access reasonable financing as we move forward with our 100% RPS. We have a 300-megawatt RFP out there right now, and people have indicated interest in it. They have to access financing based upon our ability to pay as their customer. So these are some of the unintended consequences if PBR is not done rationally, and they've registered their concerns about it. But I think the PUC understands that.

Okay. Let me tell you where it's a little confusing to me, and that is, first of all, as you mentioned, this PUC order came out just before it seemed the Governor signing the bill or within days before. And I don't know if that was a coincidence or not. And I guess what I'm sort of wondering is -- I mean, I understand that you think that the PUC is complying with 2939, but I guess what I'm wondering is if the PUC was doing this, et cetera, why was 2939 necessary? And what drove that? Could you help us out a little bit on that?

I won't speculate as to why it's necessary. We have made our positions clear. I will say that the PUC order was not done in a week. It's been in the process for months. And while the bill was being processed, the PUC had continued its quarterly deliberations to issue an order. So the timing may be coincidence or the timing may be as a result of the bill arriving on the Governor's desk, I cannot say. We are pleased that the PUC took the action it took.

Paul, I think what you have to understand about Hawaii is that it's kind of like what I was saying about the University of Hawaii, is that across our communities, it is no longer just about the utility and just about moving clean energy forward through the utility process. As you know, with distributed energy resources, there are so many parties that need to come together to work through regulatory frameworks, rational frameworks that can actually best advance the state's goals to get to the ultimate goal line. And another example of that is on the transportation side, we have our 4 county mayors who have said that they want all ground transportation to be nonfossil as well. So like I say, we've got our whole community moving, and our position is that frankly, the Public Utilities Commission process, similar to what we went through in doing the grid modernization strategy when we -- where we were able to bring in and the PUC was able to bring in all relevant parties in our community to work through something that would work best for everyone and for the state, that's the nature of this PBR docket. But there are -- the good thing is there's a lot of people in our community who want to see that happen sooner, rather than later. And that's what you see in the intent of 2939 is that desire within the community to move all of these things forward as quickly as possible.

But I will put a side note on that. 2939 does a lot -- require the PUC to implement it. It's not the legislature that's going to implement this. They set the policy, but PUC will implement. As I mentioned earlier, the PUC had already been working on this for months. It was not as a result of 2939.

No, I'm aware of that. I guess what surprises me, I guess, is that there's this PUC process underway. I assume that the legislature was informed of that, and yet they moved ahead with their own legislation, which my understanding was you guys weren't supportive of. So I guess what I'm wondering -- I mean, I guess, and I don't want to belabor this topic. So I mean, I guess what my question sort of is, is what is it that 2939 does that the PUC wasn't doing or that -- I guess, what was the purpose of 2939 policy-wise? If there's a short answer to that, I don't mean to -- do you follow what I'm saying? It's a little confusing that you had this process underway that you guys think is basically compliant with...

Thank you, Paul. We understand your question. We have the same question, frankly, and we advocated to allow the PUC to do its job in our testimony as is the consumer advocate. So why it was passed and why the Governor moved to it is really speculation on our part. It's there, but we are very, very comfortable that the PUC will implement it in a rational way.

Awesome. Okay. And then, I'm going to now ask a bank question. The debit card interest -- the interchange fee and the change in accounting, could you just elaborate a little bit? I apologize if I forgot what that is, [and generally] where that now shows up or how that's -- if you could just elaborate a little more on that.

Yes. This is Rich. Thanks for the question, Paul. So there's 2 pieces in the income statement that come from our customers using their debit card. One is in the noninterest income. When they swipe, we get a fee on the transactions governed by the caps on Durbin, as we've talked to you in the past. And that comes through, and there's the volume-related component. The more swipes, the more income we get. Within other expense, we've had the charges that come with it, right? So there is a similar -- under the card agreement and the association agreements, there's a similar charge that comes through. And so they've just been in 2 pieces. What this does is it brings them together so that within noninterest income, you see the net of debit card income, net of the expenses associated with those swipes.

Okay. And what's changed?

Geography. So no bottom line impact. It's bringing them that expense up from the noninterest expense line and other expense to noninterest income, where you're offsetting some of the debit card interchange income.

The next question comes from Rose-Lynn Armstrong with UBS.

Just 2 more process-related questions on the PBR docket and the legislation. Did I hear you correctly that the PBR docket, the 2 phases would be completed by the end of 2020?

Roughly, yes. And it's left up to some allowance for some slippage or advancement. The docket has just been opened. Intervenors have filed for intervention. There's going to be a convening of all the parties, we think, in a few months or so. So we'll know more once that's done.

Okay. So then how does that work in with the timeline for the legislation, which I believe calls for implementation by January 1, 2020? And then secondly, who will decide if the PUC outcome on PBR implementation complies with the intent of the legislation?

This is Joe Viola from Hawaiian Electric Regulatory. Actually, the PUC schedule.

Can you all hear Joe?

Yes.

Okay. All right.

As for the PUC schedule, it largely complies with the statute. It's not at the end of 2020. The PUC schedule actually completes these 2 basically in the first months of 2020. The bill called for implementation of PBR by January of 2020, so it's pretty much aligned right there. As far as who will judge it, I mean, we can't speculate on that, but again, as Alan said earlier, we think the process that the commission set out satisfies the intent of the statute.

The next question comes from Jonathan Reeder with Wells Fargo.

Just to follow up again on the legislation. I think part of the language [said] it is to break the direct link between the allowed revenues and investment levels, so CapEx, rate base. Like how do you envision, I guess, complying with that aspect of it without, I guess, kind of turning the current rate base models on its head?

We don't -- the statute says that. The PUC order does not say that. The PUC was charged with implementing. The newspapers, within days of the signing, called for amendments to the law. We don't know if that's going to happen to give the PUC more flexibility in this very complex area and to avoid unintended consequences. The road has been -- I mean, the goal has been set. The PUC has been working on it for a while. We'll see how this develops. There are changes that may come about as people understand the complexities of moving to PBR.

And Jonathan, I'd add that if you look at the PUC order, an example of what you're talking about is that they specifically say that they want to make it neutral between capital expenditures and also services that are provided because that is what's happening in the energy landscape is you're starting to see lots of other products and services that customers want. And if you look at the recent incentive that was provided to us on renewable procurement, there's an example of potential revenues and incentives that can come from us not making a capital investment but instead procuring competitively priced purchase power, right? So there's where we could potentially have a 20% of the savings against to target benchmarks of procurement.

Which we already do, but we don't have the incentive built into the regulation.

Right.

Right. So I mean, I guess, in your view that, I guess, sharing of the savings breaks the direct link between kind of revenues and investment levels? I mean, even if it's in, say, the utility favor, so to speak, but you still have the underlying kind of rate base model, and then you layer on perhaps that kind of service component as well as checking the boxes, plus or minus on certain performance metric achievements, and you kind of get to this new framework that's being contemplated?

Yes, exactly.

You said it well. You want to testify in the docket?

No, I don't think I'd do that. I think I'll pass. But maybe I'll come out and visit and listen to some of the hearings and enjoy the beach.

Yes, you may want to do that because, frankly, Hawaii is leading the nation in lots of these new frameworks that will lead us to clean -- 100% clean energy.

The next question comes from Charles Fishman with Morningstar Research.

I think my question is going to be directed to Greg. Greg, is there anything in the electrification of transportation road map? Is there anything in 2939? Is there anything in the ongoing commission docket with respect to PBR that gets you more excited about the opportunities for Pacific Current? Or does any of those things make it harder for Pacific Current? If you could comment on that.

Yes. Thanks, Charles. No, I think Connie said it well in that Pacific Current was created to help move the state forward on its renewable energy goals. A lot of the investment that will get us there is going to be made in the competitive market, not just purely through the utility. And consequently, being a local player, our ability to partner with local developers, local teams that are pursuing renewable energy, we create a good platform for capital formation in partnering with those parties. Tax reform was clearly a benefit to Pacific Current if you think about after-tax cash flows from a nonregulated enterprise. So I see that as a benefit. But I'm not concerned about any of the regulatory dynamics overall at the utility. Those will progress on pace. We'll be focused on other activities and other opportunities working locally with other partners.

Like on the UH project, you are the equity behind that, not the university, not Johnson Controls?

Yes, we're the ones that funded -- that are funding that project, and we're the ones that provided the lowest cost to the university relative to a large number of competitors that were looking at that same project. So our involvement resulted in a very -- a lower cost than otherwise would have been obtained by the university. And so we're proud of our involvement there, and we're proud to have brought together a local team to accomplish that.

So I mean, really what drives the Pacific Current opportunities are more of the RPS, the aggressive RPS goals of Hawaii rather than this PBR noise?

Charles, it's not just the RPS but it's all the other things that I was talking about. All those policy moves like on the transportation side, for example, the net 0 for the University itself. So that's what I was trying to describe earlier. We've got our entire community here in Hawaii moving towards cleaning -- clean energy. And if you remember back to one of the principles of the Hawaii Clean Energy Initiative back in 2008, it's because our entire state is very dependent on imported fossil fuel. So we're an island. We don't -- back then with the technologies, you might have indigenous resources like the sun and the wind, but the technology is really not in the money, so to speak. So oil was the least expensive way to generate power here, and also to provide gasoline for the cars and the jet fuel for the airplane. That made Hawaii really dependent on oil. And then when you had the oil price shock flare in April of 2008, you started seeing oil prices climb, and then, boy, when you had Fukushima occur, that just jacked up all of the oil prices in the whole Asia Pacific region. The Hawaii economy really took a hit from the standpoint of that oil expense going through the roof, and that was just not power generation. That was across the board.

The next question comes from Jackie Bohlen with KBW.

I'll switch it over. I'm giving Rich a little bit of air time here, for my usual. I guess focusing first on the net interest margin. I know it's within the range that you had spoken about it. It certainly came in above my expectations. Just if you could talk about how you're thinking about asset repricing and deposit repricing in light of March's increase and then if we were to get any additional increases later this year.

Yes, we're expecting one more increase this year. That's kind of our plan. And as we -- I think you've observed, we're fighting pretty hard to control the cost on the funding side, and we've been able to do that pretty well. A lot of it is through the approaches that we're taking, particularly in the retail network on our relationship banking. So we want to keep pushing that. We are seeing pressure in the market, particularly on the commercial side, where the pricing is getting more competitive. And so we were up a couple of basis points in the quarter. We're trying to keep it at that level and control the upward pressure there. On the asset side, again, commercial pricing is competitive as is residential because there's just no movement on the volume in the market on residential, with refis flat and limited inventory on that side. So those are going to remain fairly competitive. But in the investment portfolio, we're getting nice movement on the yields there as we reprice.

And do you know -- do you happen to know what the reinvestment differential is on where the portfolio stands versus what you're purchasing?

It's -- right now, we're plus 80 basis points.

Okay. And that was as of 1Q? Or is that current?

Yes, that's as of 1Q.

Okay. And then if you wouldn't mind providing an update on where you stand in terms of intended portfolio runoff and how much more you expect to come this year and kind of where you're seeing most of your growth in terms of new generation.

So the new generation has been pretty good. Last year was challenging for us on the commercial side as we were repositioning that book on some of the leverage lending and national credit. And we got through that in the fourth quarter, so you saw us get the growth started up again as we came into the first quarter. We were -- loan growth was at about 6, and we want to keep playing in that mid-single-digit range on loan growth. And then obviously, the investment portfolio will depend on deposit growth.

Okay, fair enough. And then just one last one. If you could provide an update on your expectations for the timing and perhaps the amount on any costs you're going to have associated with the capitalization of the new campus.

So the campus, we would expect to be completed with the investment on that this year. We're hoping to get the building in the early fourth quarter to fit it out with furniture and everything and then be able to start moving in towards the end of the year and the first part of next year. So we're excited about that. As Connie mentioned that earlier on, we're moving from 5 different locations for people who are in the branches to one, and we think that helps us a lot on a go-forward basis in terms of how efficiently and nimbly we can operate. So we're looking forward to that. We'll probably have on the order of $1 million of costs -- sort of project-related costs associated with moving in and beginning to exit those other properties. That will come through this year and you'll see that in the noninterest income line. And about -- that will come -- noninterest expense line, sorry.

And what about any future capitalized cost that might be depreciating, when would that start?

Depreciation would probably start either December fourth quarter or first quarter next year, depending on the completion of the construction.

Okay. And I would guess there will likely be some offsetting benefits just from consolidating from other areas?

Yes, and we've got a couple of the properties that we're in that we own that we would expect to see sales at positive -- with positive effect on the income statement. We should see gains on the properties that we sell. Timing, hard to call.

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

Thank you, Gary. Thank you, everyone, for participating in today's call. Have a good rest of the week.

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