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Hawaiian Electric Industries Inc (HE) Q1 2019 Earnings Call Transcript

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Hawaiian Electric Industries Inc (NYSE: HE)
Q1 2019 Earnings Call
May. 7, 2019, 1:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Hawaiian Electric Industries Incorporated First Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Julie Smolinski, Director of Investor Relations and Strategic Planning. Please go ahead.

Julie R. Smolinski -- Director, Investor Relations & Strategic Planning

Thank you, and welcome to Hawaiian Electric Industries First Quarter 2019 Earnings Conference Call. Joining me today are Connie Lau, HEI President and Chief Executive Officer; Greg Hazelton, HEI Executive Vice President and Chief Financial Officer and Treasurer; 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 will conclude with questions-and-answers.

During today's call, we will 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 in 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 inner view -- overview.

Constance H. Lau -- President and Chief Executive Officer

Thanks, Julie and aloha to everyone. In the first quarter, we continued to make significant progress on our strategy across the enterprise and delivered solid results in line with our expectations for the year. Consolidated net income for the quarter was $45.7 million and $0.42 of EPS. At our utilities, continued cooperation among energy stakeholders, the Public Utilities Commission, customers and our companies is helping us move forward together to achieve Hawaii's 100% renewable energy and carbon neutrality goal. The Commission's approval this March in record time of contracts for the largest amount of solar-plus-storage procured in Hawaii to-date was a big step toward our collective goal. A recent statewide opinion poll found that residents give high marks to the state's renewable energy transition, and we're excited to play a key role in that effort.

American continued to perform well expanding net interest margin, while remaining focused on disciplined growth, improving operational efficiency and deepening customer relationships. The bank is almost fully moved into its new campus, which opens new possibilities for it to deliver value for customers and strengthen efficiency. Following a solid first quarter, we are reaffirming our earnings guidance range for the year, and Greg will go over that in more detail later.

In Hawaii, we are all working to achieve our 100% renewable energy and carbon neutral economy goals. As we do so, the utility and the commission are thinking carefully about the best way to do so affordably and reliably. This is reflected in recent commission decisions. As I touched on a moment ago, in March, the Commission approved 6 solar-plus-storage power purchase agreements that will bring 247 megawatts of solar and nearly a gigawatt hour of storage to our grids on Maui, Oahu and Hawaii Island. The power purchase agreements were approved within just three months of filing. The hard work of the Commission and its staff to expeditiously review these contracts will help these projects come online and start delivering renewable energy as soon as possible. When placed in operation and together with the other renewables projects in the pipeline, these new PPAs will help us reach a 50% renewable portfolio standard in advance of the mandated target and reduce greenhouse gas emissions by 50% compared to a 2010 baseline roughly by 2022.

The six new projects will provide renewable energy at prices well below the cost of fossil fuel generated energy. And in the first quarter, we recognized the first half of performance incentive rewards related to customer savings from these contracts. Two more PPAs that are part of the same RFP process are pending Commission decision.

In addition, the Commission approved a groundbreaking pilot program through which we will offer special time of use rate for up to 20 bus fleet customers to charge during the day when solar energy is most abundant. Last week after considering the cost implications, the Commission declined to approve our proposed addition of a battery storage system to the West Loch PV system. The PV system was approved in 2017 and construction is to be completed this year. So adding the storage after the fact proved less economics and other options.

The Commission has encouraged us to expand or accelerate other resources to help us reach 100% clean energy here in Hawaii. In the first quarter, the Commission approved Phase 1 of our grid modernization implementation allowing investment of $86 million to deploy technology to collect, communicate and manage energy and information across our system and enable us to provide more information and options for our customers.

The Commission encouraged us to deploy more advanced meters, faster and more broadly than proposed. So we are working to expand our planned develop -- deployment. This year, we are launching RFPs for both Phase II of the renewable energy resource procurement and grid services. We and the Commission are working to move these RFP processes forward together, so options can be considered and compared across types of resources, whether generation on grid services, such as demand, response, aggregation. This aligns well with our integrated grid planning approach, which takes a holistic view of the resources that will be needed to achieve our goals rather than segregating certain types of resources into siloed processes.

The Commission has also encouraged us to consider increasing the size of the Phase II of our renewables procurement and our grid services procurement. So we are in discussion with the Commission to meaningfully up-size those compared to what was originally planned, accelerating renewables and grid services announced originally targeted for 2025. As a result, we anticipate that the RFPs we will issue will seek to procure another significant amount of renewables in Phase II, as well as a significant amount of demand response services.

These efforts will allow us to add more renewable dispatchable generation onto our grid sooner, accelerate our RPS achievements and reduce our fossil fuel use and greenhouse gas emissions more quickly, reducing our use of fossil fuels will also stabilize bills for our customers. We look forward to continued efforts with the Commission and other stakeholders to

work toward achieving 100% clean energy on the safest, most efficient path (ph) possible.

Turning to Slide 5, our collective effort to create the best path forward achieving Hawaii's policy goal is also reflected in the performance based regulation process. This docket continues to progress and is expected to conclude by early next year. The PUC Staff issued its proposal in early February and the utility and other stakeholders filed statements of position in reply over the last couple of months. We are now awaiting Commission's decision and order on this first phase of the process. Phase II will then focus on implementation.

The PUC Staff made clear in its proposal that the financial integrity of the utility is a essential and must be maintained in order for us to continue to provide affordable, reliable electricity for our customers and achieve our state's important and ambitious goals. We agree and we are pleased that we, the PUC Staff and many key stakeholders in the process are aligned on this key issue. Our Company's proposals in the PBR docket emphasize how important it is that any PBR framework helped progressed state renewable energy and carbon neutrality efforts, especially given the progress we have made to-date.

Turning to the Bank, American achieved continued solid financial performance for the quarter with strong year-over-year net income growth supporting an increased dividend to the holding company. The Bank continued expanding net interest margin benefiting from increased yields on assets and the low funding costs. We look forward to the opportunities, the Bank's consolidation of its team into its new campus offers for the Bank to work better together for customers and realize greater operational effectiveness and cost efficiencies. American continues to maintain its low risk profile, prudently manage credit and grow assets in a disciplined manner. The Bank also continues to maintain a strong balance sheet and a lower cost funding base than peers. Greg will discuss the Bank's performance in more detail shortly.

At Pacific current, we now have a dedicated team in place and they are focusing on completing Pacific Current's ongoing solar-plus-storage project for the University of Hawaii and optimizing operations on the Hamakua Energy plant, as well as developing local partnerships and identifying opportunities to invest in Hawaii sustainable future. Pacific Current's existing portfolio provides a solid foundation for our new team, and we look forward to continued growth of the platform.

I'll now ask Greg to cover Hawaii's economy, our first quarter financial results and 2019 outlook. Greg?

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

Thanks, Connie. Despite some indications of cooling, Hawaii's economy remains healthy at 2.8% in March Hawaii's unemployment rate remains among the nation's lowest and is below the national rate of 3.8%. Tourism arrivals continue to grow, although expenditures have slowed somewhat. March year-to-date arrivals were up 2.6% compared to the same period last year, while visitor expenditures were down 2.4%. In total, annual spend is expected to grow.

Hawaii real estate fundamentals remain sound, while sales volume declined from the prior year by 5.7% for single family homes, and 10.5% for condos. Median prices were mixed with single family home prices up 2% and condos down 3.2%. Overall, the State's economic outlook remains positive with Hawaii GDP expected to rise 1% in 2019.

Turning to our results. Q1 earnings increased to $0.42 per share compared to $0.37 per share in the prior year with solid performance across the enterprise. Year-over-year earnings grew at both the utility and bank, while the holding company and other segment loss grew slightly. Net income rose 13.7% and consolidated EPS grew 13.5% versus the -- versus last year. Pacific Current's operating portfolio continues to contribute positively to earnings, helping offset the cost of building out the platform. On the right side of the slide, HEI's consolidated GAAP ROE for the last 12 months was 9.7%. Utility ROE for the last 12 months improved 40 basis points with new rates in place at all three utilities and full recovery on -- of the Schofield Generating Station. Bank ROE for the quarter was 50 basis points higher than the prior year driven by continued low cost funding and strong net interest margin.

On Slide 10 utility earnings were $32.1 million compared to $27.5 million in the first quarter of 2018. The most significant net income drivers were are as follows: $9 million from rate increases in the Hawaiian Electric 2017 and now final Maui Electric 2018 test year rate cases. $4 million from items that were one-time in nature. This includes $2 million of expenses incurred last year, they did not recur this year, such as the write-off of smart grid costs and the one-time rent expense adjustment for existing substation land. In addition in Q1, 2019, the utility reduced O&M by $2 million due to the Commission granting recovery for previously incurred expenses to modify existing generating units on Maui to enable the integration of more renewable generation.

Drivers included $3 million in major project interim recovery revenues for the Schofield project; $1 million from the first half -- from the first half of performance incentive rewards related to the six Commission approved solar-plus-storage contracts; and $1 million from incremental pole attachment fees resulting from the pole ownership agreement announced in 2018.

These items were partially offset by the following after tax items, a $11 million higher O&M expenses, primarily due to the reset of pension costs, which are included in rate, as part of the rate case decisions; higher costs for continued cleanup of our asset management data after the go-live of our Enterprise Resource Management System; and higher personnel expenses; and $3 million higher depreciation expense due to increasing investments to integrate more renewable energy; and improved customer reliability and system efficiency.

On Slide 11, turning to the Bank. As Connie mentioned, American achieved another quarter of healthy financial performance. Net income of $20.8 million was down about $1 million from the linked quarter, but up $2 million compared to the same quarter last year. The variance compared to linked quarter was primarily driven by favorable credit events that reduced the provision for loan losses in late 2018 and prudent credit quality management fee into additional reserves for two loans in the commercial and commercial real estate portfolios in the first quarter of 2019. Compared to the first quarter of 2018, American's $2 million higher net income was primarily driven by higher yields on earnings -- earning assets combined with funding costs that have remained relatively low and stable.

American's consistent profitability continued in the first quarter with the return on assets of 118 basis points for the quarter below the 125 basis points in the linked quarter, but above the 112 basis points in the same quarter last year. American's return on average equity continues to compare well versus peers at 13.1% in the first quarter.

On Slide 13, net interest margin continued to strengthen in the first quarter reaching 3.99% with interest earning asset yields rising 7 basis points over the linked quarter due to higher interest rates. While our cost of funds remained low at 31 basis points, just 3 basis points above the linked quarter and well below peers. As a reminder, 100% of ASBs loan portfolio is funded with low-cost core deposits.

On Slide 14, net interest income of $63.7 million was up slightly from the linked quarter and up 8.8% compared to the same quarter last year, largely due to the higher asset yields and continued low cost -- low funding costs, I just mentioned. Noninterest income of $14.6 million was approximately $1 million above each of the linked and prior quarters -- prior year quarters, with the increase primarily due to higher amounts of bank-owned life insurance proceeds recorded during the quarter.

As of March 31st, total loans were up 1.2% annualized from the December 31st amount, largely due to growth in residential and home equity loan portfolios, partially offset by declines in commercial and commercial real estate portfolios. We still expect to meet our target of low to mid-single digit earning asset growth for the year. Total deposits increased by over 3% annualized from December 31st, 2018 with low-cost core deposits growing 7.1%.

On Slide 15, credit quality remain sound due to prudent risk management and a healthy economic environment. The credit quality of our residential portfolio remains very strong and our commercial and commercial real estate portfolios are stable despite the higher provision this quarter. First quarter provision of $6.9 million compared to $2.4 million in the linked quarter and $3.5 million in the first quarter of 2018. Most of the increase over the linked quarter was due to additional reserves for two loans in our commercial real estate portfolios along with lower-than-expected fourth quarter 2018 provision due to positive credit events, notably the pay-off of the sizable criticized loans.

Nonaccrual loans, as a percentage of total loans receivable held for investment increased to 0.83% reflecting the same factors that led to the higher provision. Our net charge-off ratio was relatively flat compared to the linked quarter.

American's continued focus on strengthening efficiency is reflected in its first quarter efficiency ratio of 57.8%. This represents an improvement of 170 basis points from the linked quarter and over 320 basis points from the prior year quarter. The Bank continues to target 100 basis point improvement per year through 2021.

Regarding the utility capital expenditures. In the first quarter, we executed on approximately $100 million -- million of investment in line with plan. Looking forward to the remainder of the year, we are maintaining the 2019 utility CapEx and rate base growth forecast we communicated on our fourth quarter 2018 earnings call, while excluding the West Loch battery storage project. As mentioned earlier, the $86 million of CapEx for Phase 1 of our grid modernization implementation included in our forecast has now been approved by the Commission with potential to increase the size of the program.

Turning to Slide 17, as Connie -- Connie previously mentioned, we are reaffirming -- reaffirming HEI's 2019 consolidated earnings guidance of $1.85 to $2.05 per share. Connie will now make her closing remarks.

Constance H. Lau -- President and Chief Executive Officer

Thanks, Greg.

In summary, we continue to focus on our mission of being a catalyst for a better Hawaii, which is integral to our strategies across our enterprise. Our utilities continue to focus on achieving 100% clean energy and helping move Hawaii toward a carbon neutral economy, as we work with stakeholders and the Commission to develop the best path to do so, we're evolving and in some cases, accelerating our plans.

We are also working to build resilience of our systems and our communities and ensure that all customers have access to affordable, reliable, renewable energy. Our Bank's healthy financial performance continues, as it remains focused on making banking easy, deepening relationships with customers and strengthening efficiency, which the Bank will be even better positioned to do now that it has moved into its new campus. With its team now in place, Pacific Current is well positioned to invest in opportunities to further Hawaii's sustainable future. Our business model continues to provide the financial resources to invest in the strategic growth of our companies and our state's sustainable future, while supporting our dividend, which our Board maintained at $0.32 per share this quarter, continuing our history of uninterrupted dividends since 1901.

And now, we look forward to hearing your questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. (Operator Instructions) The first question comes from Julien Dumoulin-Smith with Bank of America Merrill Lynch. Please go ahead.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Hi, good morning or good afternoon. Can you hear me?

Constance H. Lau -- President and Chief Executive Officer

Hi. Julien. We can.

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

Yes, Julien.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Excellent. Thank you very much. So I wanted to first dig in a little bit on the battery storage side of the equation and CapEx, I know, you guys have ranges for a reason. Would be curious to get a sense here on the West Loch impact, but I suppose there has been some developments on that specific project. What does it mean to your CapEx plan, given the rejection (ph) and more importantly, I suppose, what does it mean from a policy perspective looking forward right whether it relates to the CIP project and others. Is there an ability to rate base these kinds of assets going forward?

Constance H. Lau -- President and Chief Executive Officer

Yeah. So Julien, let me -- let me start with that and then I'll ask Alan, if he wants to add anything. I don't think it means anything really from the standpoint -- well, let me -- let me start over. As we said what the Commission is trying to do is look at the system holistically now, which is also something that we are trying to do and to balance all the resources across the system, whether they are generation resources, whether they are battery resources, which sometimes are generation and sometimes are grid support and grid services, and because of that, it's important to take a holistic look, when you look at individual projects.

And so specifically, in the case of the West Loch PV project, as I mentioned in the prepared remarks that had originally been approved as the lowest-cost solar on our grid. And then when we went out for the renewable RFP Phase 1, what we actually got in response to our new renewable dispatchable PPA was solar-plus-storage. And as you know, you know that it was the trend it was all renewable and then people started pairing storage with the renewables in a very economic way. And so the Commission had asked, if we would add a storage element, but it's not as easy to do that with a project that has already been -- begun as renewable only. So I don't think there's any other message in that -- in their than that.

And it's just -- it's going to be the same thing with the CIP BESS that it will be looked at holistically both by us and by the Commission as to what is the best way to get Hawaii to the renewable future, but very importantly in Hawaii affordably for our customers and reliably for our customers. And I don't know Alan, if you want to add.

Alan M. Oshima -- President and Chief Executive Officer-Hawaiian Electric Company, Inc.

Well, the only thing I would add is that shows you the dramatic shift in pricing and how fast things are changing in the marketplace. So I don't think you can read any kinds of policy issues here. It's really a matter of timing. And -- and as Connie had pointed out, we're readying our Phase 2 of our RFP and we expect even better pricing.

Constance H. Lau -- President and Chief Executive Officer

Yeah. That's the good thing, Julien that's happening in Hawaii is that we are now able to move forward to the renewable future, but take advantage of all of the market changes that are occurring. And I think that's a really, really good thing. And for your question about how does that impact our capital. It's not changing our capital forecast because as we have said, we have provided to you guidelines, as to what we think the CapEx should be for the year. And there are some projects that we have held in abeyance we would put into the mix to still hit the targets that we set forth.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Just to make sure you accelerate forward, you're talking into 2019 to hit the 400 despite some of the shifts in West Loch?

Constance H. Lau -- President and Chief Executive Officer

Correct, yes.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Got it. Excellent. And then just to be extra clear about this, it was related to West Loch being an adjacent project with solar-plus-storage that's one of the core reasons here rather than being battery storage?

Constance H. Lau -- President and Chief Executive Officer

Wait, ask your question again.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

The reason for the reduction at its essence, it was -- it was tied to the recognition of ITCs and is that a fair way to characterize it as being co-located with solar?

Constance H. Lau -- President and Chief Executive Officer

No, it was -- it was that the -- we originally proposed West Loch just as a PV project. And so that was actually at the time the market was primarily doing just renewable. And then the market has now moved to renewable plus storage and so then the West Loch storage project was looked at to combine that with the PV. But the economics when you try to do it that way versus doing it as solar-plus-storage from the beginning is different.

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

It's a bolt-on.

Constance H. Lau -- President and Chief Executive Officer

Yeah.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Okay. Understood. Those nuance about that specific procurement. Understood. All right. Sorry. If I can move on to PBRs real quickly obviously that continues to garner a good amount of attention here. Can you discuss the balance between sort of incentives and penalties (ph) PIMs today right the pluses and minuses, any -- any developments off late. Obviously, there have been some shall we say commentary out there in the marketplace from various stakeholders, any evolution off late as best you see it.

Joseph P. Viola -- Vice President, Regulatory Affairs

This is Joe Viola from Hawaiian Electric for regulatory. No, nothing really to report lately. We finished up our brief on (ph) Phase 1 and pretty -- I think -- I think, I mentioned at our last call pretty balanced constructive report from the Commission staff. Now, what we're waiting to see is how the Commission will -- will rule and asked and define (ph) what will work on in Phase 2. So, no, no real significant development since last time. Other than in the renewable procurement docket, the Commission again encourage us to and we have suggested some performance incentive mechanisms relating to those procurements.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Last quick question. The LEI report, I think is due out next week at this point. Any -- any commentary or thoughts in anticipation of that or we should just be ready for?

Constance H. Lau -- President and Chief Executive Officer

No, not -- nothing that we're aware of.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Okay. Fair enough. Thank you all very much.

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

Thanks, Julien.

Operator

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

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

Good morning, Greg.

Greg Gordon -- Evercore -- Analyst

Hey, how are you?

Constance H. Lau -- President and Chief Executive Officer

Hi.

Greg Gordon -- Evercore -- Analyst

Congratulations on the progress with the -- with the Commission Staff. I don't know if you've noticed, but I just ran some -- some numbers and your stock is like the second best performing utility stocks and the staff document actually came out saying that they actually think you deserve to earn reasonable return, so the market is noticed. So it begs the question, if you think that everything gets -- as you go through this next rate cycle and everything gets adjusted along the lines of the way, the way, the constructs are evolving, what is the -- what is the structural regulatory lag that you think is sort of -- is permanent and how much do you think you can offset. So for instance by 2022, your authorized ROEs are averaging around 9.5% how much below that would you earn because of structural things that are not sort of are not fixable even with the very constructive perspective that the Staff is now taking toward rate making?

Tayne S. Y. Sekimura -- Senior Vice President and Chief Financial Officer-Hawaiian Electric Company

Hi, Greg, this is Tayne Sekimura. Let me respond to your question. So if we look at 2019 and then I'll go into this Easter (ph) . For 2019, we will still have some of that structural lag with us and that's because we have the non-probable items, those are items that are not typically included in our rates. So that's about -- that together with the RAM accrual lag that we have as well as some of the other things we've talked about previously with the short-term interest debt rate on the RBA and also the returns we're getting on our ERP project as well as the MPIR, OK.

So having said that for 2019, it looks roughly to be about 90 basis points in structural lag. You may recall, we also have 40 basis points related to our customer benefit adjustment and we scheduled that out in previous slides. And then also this year with our Hawaii Electric Light rate case currently in progress that's the case we filed late last year, we're making progress through the rate case process, and we expect a decision sometime in the fourth quarter. And so, we'll see some -- some drag there. So that would be sort of an overall for 2019.

But moving forward as -- as we think about PBR and taking a look at the construct, for example something like a RAM accrual, looking at what the PUC Staff paper talked about an escalator, and then also that would help address the RAM -- the Ram lag that we have. So there are opportunities to -- to address some of that -- some of the RAM lag. And the Ram lag is roughly 30 basis points. So it is a meaningful part of the structural lag that we have today.

Greg Gordon -- Evercore -- Analyst

Great. So -- so as I look in your slides -- on Slide 22 in the appendix, I think you've done a pretty good job showing the different -- many different things that impacted that it sounds to me like in a world, where you're being treated sort of more like the Mainland utilities are treated on an ongoing basis that you could eliminate most of this lag, except for maybe the -- the first three things or four things and get the -- get the ROE lag down to somewhere between 50 basis points and 75 basis points, is that a fair summary or am I making an implication that -- that's too far that you want to go?

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

Well to that level would take -- it take some adjustments to the regulatory process including the RAM element. The -- we have provided by the way schedules around the customer benefit adjustment in that roll off, which as we -- as we proceed through over the next couple of years, you should see improvement there.

Constance H. Lau -- President and Chief Executive Officer

Yeah. And in addition to that the expectation is, we do need to continue our cost efficiency efforts as well. That's all part of the PBR. And when we take a look at the escalators and increases in between rate cases, cost efficiencies are really important part of that.

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

I would note this is -- this quarter, we recorded incremental revenues associated with our performance on the renewable procurement program, which are independent of these -- of the rate case settled revenue requirement. So that -- those type of elements that we are likely to see more of including in our Phase 2 potentially should also help offset some of the structural lag that we're talking about, Greg.

Greg Gordon -- Evercore -- Analyst

Great. Quick question on ASB regarding the additional provisioning year-over-year. Were there commonalities between the two commercial and CRE loans that you -- that you took reserves against?

Richard F. Wacker -- President and Chief Executive Officer-American Savings Bank

No, this is Rich. No, there -- they just happened. The only commonality is the outlooks deteriorated in the same quarter, but very different exposures and customers.

Greg Gordon -- Evercore -- Analyst

Okay. Thank you. Congratulations. Bye.

Constance H. Lau -- President and Chief Executive Officer

Thanks, Greg.

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

Thanks, Greg.

Operator

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

Paul Patterson -- Glenrock Associates -- Analyst

Hey, good morning.

Constance H. Lau -- President and Chief Executive Officer

Hi, Paul.

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

Good morning, Paul.

Paul Patterson -- Glenrock Associates -- Analyst

So to follow up on -- on Greg's and Julien's PBR questions. What's the outlook for a settlement in this case?

Joseph P. Viola -- Vice President, Regulatory Affairs

Yeah. Hi, this is Joe Viola again. I'm not sure there is -- we don't expect that kind of formal settlement per se. What we are looking and what we've been achieving, I think to some extent is trying to build consensus that the Commission can base its ruling upon. So I don't know if we're looking for a formal settlement. Again, trying to have the process, have to be a collaborative one, where we can rally around positions.

Paul Patterson -- Glenrock Associates -- Analyst

Okay.

Constance H. Lau -- President and Chief Executive Officer

And I just -- and I just add a very transparent process as well. I mean you've seen everyone's positions come forward. So -- so far, it's been a very collaborative process it shows. So I think Alan, you had a --

Alan M. Oshima -- President and Chief Executive Officer-Hawaiian Electric Company, Inc.

Paul, I think what you have to go back to is the Commission's first (inaudible) that this will be a gradual process. There is -- there is not going to be a cliff. So I think the Commission is holding true to that in this process, in the procedures. So no settlement per se, but as it's proceeding you're very transparent you're seeing everyone positions, and these include the staffs. So we're hopeful for a gradual process that will lead to something that preserves our ability to earn and provide customer value.

Paul Patterson -- Glenrock Associates -- Analyst

Okay. I have been looking at some of these position statements, and what have you in rebuttal and it seems that there is some sort of sticking point here on the inception of the MRP and I guess on the RAM cap as well. And I'm just sort of wondering when you're in your discussions with them. I mean, when you talk about like building a consensus, it seems like those are sticking points. Am I my wrong about that or are we coming to some sort of -- are you in your discussions with the other parties, are you feeling that you're coming to some sort of closure in those issues?

Joseph P. Viola -- Vice President, Regulatory Affairs

Again, this is Joe Viola . We'll see. I mean I think conceptually, we have a fair amount of consensus. Now that we've always said the details matter a great deal. So we'll see in that -- you want to see what the Commission says on this, but I think we are agreeable generally to having changes to our multi-year rate plan. We proposed the conditions that we think would be helpful to us and achieve what the Commission has identified as one of the guideposts in maintaining our financial integrity. So the details will matter. We have some differences, certainly on how we would execute on somebody's conceptual consensus.

So we'll have to see on those. We'll never have perfect agreement, but I think we're making progress.

Paul Patterson -- Glenrock Associates -- Analyst

Is there a definition that's been defined as to what the financial integrity -- have they quantified what that actually means?

Joseph P. Viola -- Vice President, Regulatory Affairs

There was a definition in the Commission staff reports on how they define financial integrity and financial health.

Paul Patterson -- Glenrock Associates -- Analyst

Could you remind us what the ROE was or what that metric is?

Joseph P. Viola -- Vice President, Regulatory Affairs

I don't think they defined a metric for ROE. It's a traditional ROE --

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

Yeah, we go through the ROE, and gauge the appropriate ROE for the return through our rate case process.

Paul Patterson -- Glenrock Associates -- Analyst

But I guess when we look at PBR mechanisms in other places and what have you, often, it seems that there is sort of a carrot-and-stick approach. In other words, there's more variation that can happen. And I guess what I'm sort of concerned about is when we're talking about financial integrity, it's one thing to say that right.

But I mean, the question is of course what are they willing to see you guys potentially injure default -- I mean, just to step back a second, it seems like there is some issue concerning rates and affordability as I am sure you guys are very much aware, very focused on. And it seems that there's some sort of effort to sort of how you guys have more skin in the game, kind of thing. And I guess what I'm trying to sense here, is there a floor on what we can reasonably expect that the commission might be willing -- at a point where they, they don't want to see you guys earn something too low, do you follow what I'm saying? Do you have any idea what that might be?

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

We'll be speculating on that. Obviously we just go with what the Commission has been saying that they're concerned about -- they are obviously well aware of what our current ROE is and what the industry ROEs are but anything beyond that we would be speculating.

Constance H. Lau -- President and Chief Executive Officer

Paul, let me help you understand because they did have a little bit of discussion in the PEC staff paper of what they meant by utility financial integrity. And basically a couple of things that they noted is that we would have to be as an essential credit-worthy off-taker for contracts for non-utility power purchases. And now as you can see with the amount of PPAs that are before the commission and recently approved, they did recognize the importance of a credit-worthy off-taker.

The other point they made is in their framework, they talk about helping to reduce regulatory lag and really preserving seen the utility's opportunity to earn a fair return on its investment. And so they recognize the need for the company to be able to go out and attract capital competitively at low cost in the capital markets. So they did talk about those fundamentals in their staff paper.

Paul Patterson -- Glenrock Associates -- Analyst

Okay. So just moving along. Just one last sort of question. As we are seeing a combination, renewable and storage decreasing cost rapidly as you were just mentioning, do you see a competitive threat on the part of institutions or commercial players in Hawaii potentially going off the grid or simply reducing their use of Hawaiian Electric Power on your system? Do you follow what I am saying? Do you see any threat of distributed generation with storage? What are your thoughts on that? I know you guys are focused on the future here, when you look at these trends and when we look at your cost structure, it does, it does come to mind.

Alan M. Oshima -- President and Chief Executive Officer-Hawaiian Electric Company, Inc.

Yeah, Paul, that's -- this is Alan. That's always a threat. I would --

Paul Patterson -- Glenrock Associates -- Analyst

Is it more of a threat, (multiple speakers) I guess what I am saying is if you look at the trends there, I mean I know it's always a threat. But when you talk about just the dramatic changes that we're seeing here, is there any change in the outlook on that?

Alan M. Oshima -- President and Chief Executive Officer-Hawaiian Electric Company, Inc.

I don't know that there's an outlook, but let me tell you what -- how we're addressing it. It's really we're different in Hawaii because we an isolated system with no access to other grids. So each item is (ph) stand-alone. And I think one of our efforts is to emphasize everyone's role in reaching a 100% on what we're after in the state is for the whole state to be totally off carbon producing energy. So everybody has to play a role. As people go off the grid, it raises the costs and really impedes our efforts to get more renewables at an affordable price for everyone.

And so part of our effort is to continue that education process bring all the policies together, and really help our customers see the value to retain grid connectivity and there are things that we're doing in our transformation to add value to that connectivity, other types of ancillary services we can provide to large customers for example that they would miss if they just go off on their own. There are many things going on. So it would be unfair for me to say that that's not a concern. It's a big concern, but we try to address it in a positive way.

Paul Patterson -- Glenrock Associates -- Analyst

Okay, great. I really appreciate it, guys. Thank you.

Operator

Your next question comes from Jackie Bohlen with KBW. Please go ahead.

Jackie Bohlen -- KBW -- Analyst

Hi, good morning everyone.

Constance H. Lau -- President and Chief Executive Officer

Hi, Jackie.

Jackie Bohlen -- KBW -- Analyst

I wanted to ask for an update, Rich, just on -- I know I ask this every quarter, but how the move is going, it sounds like it's nearing completion. If there were any direct moving costs that you incurred in the quarter and then where you stand in terms of the depreciation run rate on the new facility.

Richard F. Wacker -- President and Chief Executive Officer-American Savings Bank

Yeah. Great. So we did the move basically during April, and we moved about 600 teammates into building from four other locations. We've emptied out three of them and we're working on the last one by the end of the third quarter, which has some data center operations in it. So that's going to lag a little bit. So it's been great. We are already seeing the benefits that we hoped to see in terms of the speed of decision making collaboration and the like. So it's been a successful so far, and we're excited about what it represents.

So yeah, we did have in the first quarter, we had about $1.03 million (ph) of costs that would be attributed to the move, moving costs, shredding costs, getting rid of paper and stuff at the other places and this cost of carrying the other properties that we exited, that we are exiting. So that's in the first quarter's reported results. We would expect that the run rate of depreciation on the campus is -- it's about a $1 million a quarter for the campus and the F&E in that campus and that's an increase of about $400,000 to $500,000 over the straight depreciation of the other properties.

We've got savings on the other lines on things like carrier and telecommunications and parking and other things that cuts that about in half that net increase. So the cost, the hard cost at that level before other efficiencies we find is about $1 million overall for the year.

Jackie Bohlen -- KBW -- Analyst

Okay, that -- so that -- sorry, I just want to make sure I understand the difference between the net savings and the $1 million. So the $1 million will be reduced by lower carrier and all the other savings you've got from being in one building. Okay.

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

Right. Yeah.

Jackie Bohlen -- KBW -- Analyst

That makes sense. And was any of that in the first quarter's number, or does that start in 2Q, given the April move?

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

Yeah. That those things start to kick in from April. We are exiting. The exit of the lease cost comes during this quarter from the two leased properties. We've got two properties that are for sale and we'll have some carrying costs on those until they sell.

So if you remember the original guidance, we had $0.03 to $0.05 net benefit that we estimated for the year. What we expect to be gains on the sale of those two properties, net of the costs of carrying and the move and all that stuff. So in total for the year, we expect the move to be a positive to the reported financials because of the gains on those properties that we expect to sell.

Jackie Bohlen -- KBW -- Analyst

Okay. And then the BOLI income moved up quite a bit in the quarter. Was there any onetime insurance proceeds included in that?

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

Yeah, there is about $1 million, that's benefit in there.

Jackie Bohlen -- KBW -- Analyst

And then, overall just in terms of growth, I know you reiterated guidance for earning assets. It sounds like steady as it goes, no surprises. Just continued level of lending and deposit gathering?

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

Correct. And we are working hard to continue that core deposit growth. The relationship expansion with the customers is the big focus and we've been able to keep control on the cost of funds, because we're doing a good job on that. The teams are really working hard on those core deposits in the customer relationships to control the cost of funds.

Jackie Bohlen -- KBW -- Analyst

It shows given how low your funding costs have remained. All right. And then in that light, If I look at the margin for the quarter and then I look at the 385 to 395 (ph) guidance, what would it take to move you back into that range? What would be the driver of that.

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

FAS 91. We continue to end up with lower costs on amortization fees that we are forecasting and we do expect it to bounce up. First quarter was a little bit lower than fourth quarter and we expect that, that'll normalize again during the remaining quarters and we would have -- it's probably a couple, 3 or 4 basis points for the quarter that we were that we benefited from lower FAS 91.

Jackie Bohlen -- KBW -- Analyst

Okay, thank you. That's helpful. I appreciate all the color.

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

Yeah.

Operator

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

Charles Fishman -- Morningstar Research -- Analyst

If I could circle back to slide 23, that's the waterfall chart that gets you from allowed ROE at core, and hearing the answer to a previous question, I'm concerned that I have a misconception about the very last item, the other net, in this case for the trailing 12 months, it was $0.15 positive. I thought that was for things like joint pool (ph) revenues and the benefit from many PPAs that you're allowed. It sounded like from the way you answered the previous question, that's not the case, what is that other than?

Tayne S. Y. Sekimura -- Senior Vice President and Chief Financial Officer-Hawaiian Electric Company

Yeah, Charles, this is Tay. So what can be in the other categories are just miscellaneous items like things that are included in rate base. Like for example, you've got your inventory set at a certain level in your rate case and they fluctuate every quarter. So we have things like that, that just vary, but in terms of joint pool, that's not included in that other category.

Charles Fishman -- Morningstar Research -- Analyst

So that, like the benefit from the PPAs that's not in your core ROE that -- I mean obviously it's going to be included in your consolidated ROE, but that doesn't mean this chart, correct.

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

No it does --this is a reconciliation to our actual. So I think we have included most of the -- all of those actual elements in here. So I think maybe on the confusion though is that if we were talking about structural elements, that create lag, you always have things to the right hand side -- of the far right hand side of the chart during the current period that create one time advance, pluses and minuses relative to your allowed, which are not structural and embedded as part of the regulatory rate-making process and other, other types of elements.

And that's we -- when we talk about those, those are on the left-hand side and that's -- those are either have to be addressed through further rate making activity and dialog with the Commission and so forth. And that's what we're trying to identify is how to eliminate or reduce. I would say, how to overcome some of that structural lag whether they are performance incentive mechanisms, incremental revenues, but as it adds in our quarterly reporting, we often do a reconciliation to provide transparency, that includes both the structural as well as the current one-time elements and dynamics. Does that help?

Charles Fishman -- Morningstar Research -- Analyst

Yeah, OK. That does. And then just real quick second question, it's my understanding with the PBR Phase II does not have to go back for any additional legislation. I mean it's, it's sort of in the commissions wheelhouse here, it's up for them. It's up to them to decide. Correct?

Alan M. Oshima -- President and Chief Executive Officer-Hawaiian Electric Company, Inc.

That's correct.

Charles Fishman -- Morningstar Research -- Analyst

Okay, that's all I had. Thank you very much.

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

Thanks, Charles.

Operator

(Operator Instructions) The next question comes from Vedula Murti with Avon. Please go ahead.

Vedula Murti -- Avon Capital -- Analyst

Hello.

Constance H. Lau -- President and Chief Executive Officer

Hi, Vedula.

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

Hi Vedula.

Vedula Murti -- Avon Capital -- Analyst

A few things, one probably fairly straightforward. I want to make sure, when do you expect the actual order on PBR from the commission that then would set the terms and then moves in next phase for how to implement everything of that.

Joseph P. Viola -- Vice President, Regulatory Affairs

This is Joe Viola, there is no stated deadline for the commission to come out with that order. We do know when they opened up the docket about a year ago, the schedule they had laid out would call for the fees to be concluded early in 2020. So we would expect they are going to get an order out on Phase 1 fairly soon. We know it's a high priority docket for the commission.

Vedula Murti -- Avon Capital -- Analyst

Okay. Let's see, you mentioned I think on the Big Island, there is a rate case currently going on, that's going to be resolved at the end of the year. Do you have interim rates in place there, like, I think you did in Maui?

Constance H. Lau -- President and Chief Executive Officer

No, not yet.

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

Just started.

Alan M. Oshima -- President and Chief Executive Officer-Hawaiian Electric Company, Inc.

November is actually the target for the interim rate adjustment for that case.

Vedula Murti -- Avon Capital -- Analyst

Okay, but the filing's already been made.

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

Correct.

Alan M. Oshima -- President and Chief Executive Officer-Hawaiian Electric Company, Inc.

Yeah, filed at the end of the year.

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

In December, December of 2018.

Constance H. Lau -- President and Chief Executive Officer

And Vedula, that's the one that is also still on a lag as we are catching up to the regular cycle.

Vedula Murti -- Avon Capital -- Analyst

Okay if I take a look at slide 10, when you go through these plus and minuses here, the O&M excluding net income, neutral items, one of the factors you mentioned was a pension reset, and I would have figured that a pension reset would likely be a net income neutral type of item. So one, I want to make sure I understand that, but two it is $11 million after-tax in 1Q, what should we then be expecting for that kind of an item over the course of 2019?

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

Well, first of all, Vedula, those costs are embedded in our forecast and our guidance. Too this -- when you say net income neutral, what I would say -- that's different terminology for different types of elements that we collect and remit as opposed to parts that are part of our overall core operating costs and expenses such as employee benefits reflected here. But the reset of the pension costs were included in the revenue requirement that we collected.

So in some sense you're seeing this is a reconciliation by line item. We have increased revenues and we also have increased costs, but they were all embedded in part of the calculation of our revenue requirement, that is part --

Vedula Murti -- Avon Capital -- Analyst

No that's what I was kind of getting at, so that would be a net income neutral item.

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

Well, then you could talk about generating cost you could talk about headquarters cost and everything, you could consolidate the whole financial statement just talk about (multiple speakers)

Vedula Murti -- Avon Capital -- Analyst

I know I'm only referring to the fact that that slide simply says O&M excluding net income, neutral items, that's all.

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

I think it's more about the definition of net income neutral items from that perspective, again not -- which we don't tend to wrap into that or operating expenses, employee expenses as part of that definition, it's just a definitional difference.

Tayne S. Y. Sekimura -- Senior Vice President and Chief Financial Officer-Hawaiian Electric Company

This is Tayne, how we define net income neutral items as one, items that are coming from a surcharge or from a third party reimbursed and so for pension, like Greg mentioned the higher pension costs, we said in the rate case were included in the revenues. So I think that's how we define it.

Vedula Murti -- Avon Capital -- Analyst

Okay. So if I was to then take a look over the course of 2019, if this was a minus 11 in 1Q, kind of what we should we be basically expecting because the range in aggregate for that over the course of 2019, although I recognize it's already been reflected in your forecast.

Tayne S. Y. Sekimura -- Senior Vice President and Chief Financial Officer-Hawaiian Electric Company

Yeah, so in our guidance we did call out on our guidance slide, we have there on our O&M, and we are -- we are anticipating a 1% year-over-year excluding one-time items from last year.

Vedula Murti -- Avon Capital -- Analyst

Okay. I'm wondering, also Pacific Current, can you -- I saw -- I just wanted to have a sense like what type of income you're expecting from that and kind of like what the asset base is some -- just some basic data as to kind of -- how -- what kind of size. It is now and kind of, if you can help us think, qualitatively, where it's going.

Alan M. Oshima -- President and Chief Executive Officer-Hawaiian Electric Company, Inc.

Yeah, we haven't -- well we haven't broken out Pacific Current because it's still early stage. The operating asset, Hamakua is performing well and providing positive earnings and cash flow, which is helping fund Pacific Current's development efforts. As you know, so that you -- Hamakua was acquired in November of 2017. And then we did a second acquisition or investment in early February timeframe of 2018 collectively. I think that's -- I'm not sure that we've reported that. But it's about $130 million or so of total investment and they're continuing to look at other potential investment opportunities.

The second project, which is not yet operating and therefore not in position to contribute to earnings growth and so forth because it's under construction, are the UH, PV and battery storage projects across University of Hawaii, Community College Campuses. Those are in construction going well. The Pacific Current team is focused on completing those in partnership with JCI, and the University of Hawaii, as well as expanding and developing their -- building out their the core strategies and business plans. So it will be some -- it'll be a while before we actually start providing specific guidance, information relative to Pacific Current as it continues to scale up.

Vedula Murti -- Avon Capital -- Analyst

Okay. And I guess one last thing relating to -- following up on Paul Patterson's question about kind of distributed generation and large power users. And we've seen this in Nevada in terms of the casinos choosing to leave the system with an exit fee and things of that nature. Is there are mechanisms already set up for that -- are their appropriate exit fees in place like a major hotel, complex choose to do something similar to -- like a major casino in Las Vegas has done or have you had any experiences so far in either dealing with that or being able to address the parties' concerns such that the initial interest basically was ameliorated by your own efforts.

Alan M. Oshima -- President and Chief Executive Officer-Hawaiian Electric Company, Inc.

There are no exit fees to date. We continue work with our customers very closely and the associations as well as the commission and advocate. Unlike Nevada -- at least on Oahu, our hotels are in a very concentrated area in Waikiki and installing their own generation eliminating (ph) gas emissions and going off on fossil fuel. It's not in alliance with our state's policy and I think we can provide alternatives to that aligned with state policy, the green visitor that people come to Hawaii expecting, and so there's a customer by customer outreach and we go to extraordinary lengths with our large customers to make sure that they are satisfied and see the value of seeing connected to the grid.

But it's not something that we're not unaware of and we're working on other kinds of solutions for our large customers.

Vedula Murti -- Avon Capital -- Analyst

Thank you very much.

Operator

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

Julie R. Smolinski -- Director, Investor Relations & Strategic Planning

Thank you all for your questions and for joining us today. Have an excellent week.

Operator

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

Duration: 64 minutes

Call participants:

Julie R. Smolinski -- Director, Investor Relations & Strategic Planning

Constance H. Lau -- President and Chief Executive Officer

Gregory C. Hazelton -- Executive Vice President and Chief Financial Officer

Alan M. Oshima -- President and Chief Executive Officer-Hawaiian Electric Company, Inc.

Joseph P. Viola -- Vice President, Regulatory Affairs

Tayne S. Y. Sekimura -- Senior Vice President and Chief Financial Officer-Hawaiian Electric Company

Richard F. Wacker -- President and Chief Executive Officer-American Savings Bank

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Greg Gordon -- Evercore -- Analyst

Paul Patterson -- Glenrock Associates -- Analyst

Jackie Bohlen -- KBW -- Analyst

Charles Fishman -- Morningstar Research -- Analyst

Vedula Murti -- Avon Capital -- Analyst

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