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

Thank you, and welcome to Hawaiian Electric Industries’ third quarter 2018 earnings conference call. Joining me today are Connie Lau, HEI President and Chief Executive Officer and Chairman of the Boards of Hawaiian Electric Company and American Savings Bank; Greg Hazelton, HEI Executive Vice President and Chief Financial Officer; and Rich Wacker, American Savings Bank President and Chief Executive Officer, as well as other members of senior management. Alan Oshima, Hawaiian Electric Company President and Chief Executive Officer is travelling and unable to join us on today’s call. Connie will provide an overview, followed by Greg, who will update you on Hawaii’s economy, our results for the third quarter and our outlook for the remainder of the year. Then, we 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 will now ask our CEO, Connie Lau, to begin with an overview.

Thanks, Julie, and aloha to everyone. In the third quarter, we continue to make significant progress on our strategies across the enterprise and delivered solid results, with consolidated net income of $66 million and earnings per share of $0.60. Our utilities continue to work towards Hawaii’s 100% renewable energy and carbon neutral goals. As we do so, we’re focused on ensuring our communities move forward together and that all customers have access to renewable, but also affordable and reliable energy. American continue to perform well achieving another consecutive quarter of strong net income growth, as it remains focused on making banking easier for customers and improving operational efficiency. As we approach the end of the year, we are reaffirming our earnings guidance range and Greg will go over that in more detail later. Our energy transformation has moved very quickly over the past year, with the core policy framework established through commission acceptance of our power supply improvement plan and approval to proceed with our grid modernization strategy, as well as our filing of our electrification of transportation roadmap, we have now been able to move forward more quickly on implementation. We launched the state’s largest ever renewable energy initiative and are now negotiating power purchase agreement in Phase 1 of that effort for seven solar plus storage projects on three islands to add 260 megawatts of solar and over a gigawatt hour of storage. If approved by our commission, these projects will displace another 1.2 million barrels of fossil fuel per year, provide renewable energy at some of the lowest prices we’ve seen to date, and be eligible for performance incentive mechanisms. This year, we also filed for approval to add 180 megawatt hours of grid scale battery storage on Oahu and for Phase 1 of our grid modernization…

Thanks, Connie. Overall, Hawaii’s economy remains healthy and continues to grow. Hawaii has maintained one of the nation’s lowest unemployment rates at 2.2% in September, significantly below the national rate of 3.7%. Tourism has shown continued strength, with visitor expenditures up 9.8% and arrivals up 6.5% through the first three quarters compared to the same-period last year. Hawaii real estate fundamentals remain sound, while sales volumes declined from the prior year by 3.7% for single-family homes and 0.1% for condos. Median prices continued to rise, with year-to-date September increases on Oahu of 4.2% for single-family homes and 5.5% for condos. Hawaii’s estate GDP is expected to rise 1.8% in 2018, and the state’s economic outlook remains positive. Turning to our financial results as shown on Slide 7. Third quarter earnings increased to $0.60 per share, compared to $0.55 per share in the third quarter of 2017, with solid performance across the enterprise. Earnings grew at both the utility and bank, while the holding company and other segment results were flat, given our efficient capital structure and net income growth translated into 9% – over 9% EPS growth. Pacific Current, which is included in the holding company and other segment, has contributed positively to net income and operating cash flow for the year-to-date period, offsetting some of the holding company expenses and our investment in the new strategy. On Slide 8, HEI’s consolidated GAAP ROE for the last 12 months was 3.7%, with contributions of 7.2% from the utility and 12.7% from the bank. Excluding the one-time impacts of tax reform recorded in the fourth quarter of 2017, HEI’s core consolidated ROE for the last 12 months strengthened approximately 90 basis points to 9.4% versus 8.5% for 2017. Our utility ROE for the September 2018 LTM period reflects the ongoing transition…

Thanks, Greg. In summary, we continue to focus on our mission of being a catalyst for a better Hawaii. Now that we have the core policy frameworks in place, our utilities have quickly advanced our renewable energy and grid transformations. As we advance towards 100% clean energy, we’re focused on ensuring our communities move forward together and that all customers have access to affordable, reliable, renewable energy. Our bank’s strong performance continues as it remains focused on making banking easy, deepening relationships with customers and strengthening efficiency. The bank will be even better positioned to do with its move to its new campus. We are excited to have Scott Valentino join us as Pacific Current President. We are confident, he will help us build a strong team and position for Pacific Current to advance Hawaii’s environmental and economic goals through investments in sustainable infrastructure. Our business model continues to provide the financial resources to invest in the strategic growth of our company and our state’s sustainable future, while supporting our dividend, which our Board maintained at $0.31 per share this quarter, continuing our history of uninterrupted dividends since 1901. The dividend yield continues to be attractive at 3.3% 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.

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Julien Dumoulin-Smith with Bank of America Merrill Lynch. Please go ahead with your question.

Hey, good afternoon, everyone.

Hi, Julien, how are you?

Hey, Julien.

Hey, looking forward to seeing you all soon.

Yes.

Yes.

Excellent. Perhaps the first quick question – perhaps a little bit of a higher-level. Connie, how do you think about some of the new investors in the stock? And are you evaluating any changes on the Board or from a governance perspective or even with respect to your investment strategy? Just wanted to hit that one out of the gate if you don’t mind.

Sure. Julien, we’ve always thought that Hawaii has been on the forefront of renewable energy and climate change and reducing emissions, lots of good things have been happening in our state and you’ve seen all the new policies that our lawmakers have put in place, both at the state level and at the county level. So it’s really great that there are folks – there are investors who have been taking note of the wonderful changes that have been happening in Hawaii. And so we are moving forward with our plans and we don’t have any major changes that we are looking at since a lot of what we’ve been doing is very consistent with those of you and we’re just trying to move as fast as we can. I would add a tag line to that. I think, as most of you know, it’s really important in a small community, in a small state like Hawaii, for all of us to move forward together. It can’t only be the electric utility, particularly as we build out demand response markets and all the distributed energy resources, we have to all work together and that includes all the way down to our communities that have to host the renewable projects. So we’re really pleased that in this most recent RFP solicitation, we’ve been able to begin negotiations with seven projects that will bring the most renewable energy onto our grids very shortly.

Excellent. Well, maybe to pickup off of that. How are you thinking about Pacific Current as sort of an alternative investment vehicle? And even in tandem with that, how would you think about financing that incrementally for – given the capital plan that you already have under way?

Yes, sure. I think, as we’ve explained before, one of the reasons that we formed Pacific Current was that, we’ve got the two strong operating companies in both the utility and the bank, but both are very highly regulated, and we have seen opportunities here in Hawaii to help move the whole clean energy transformation forward more quickly. Hence, the reason for starting this third kind of leg of the stool to allow us to do that. And as you’ve seen from the first two projects that Pacific Current has done, both of those were done with investment-grade credits on the other side. And so we’ve actually been able to finance those based on the credit of the project itself and we would be looking to do that going forward. Having said that, we are looking Hawaii as a smaller market, and so there may be opportunities for us to do some of the smaller projects that other sources outside of the state might be less interested in, in which case, we would aggregate them and portfolio them and then finance them.

Got it. Excellent. Can you elaborate a little bit further on just the rate base changes? Looking out to 2020, it looks like there has been a slight reduction as well even on 2018. What’s that driven by? Is that a regulatory change or project change or tax issue?

Yes, it was primarily a tax issue. During the fourth quarter, we were able to benefit from bonus depreciation that – there was a clarification of the tax reform act law, which went into effect December 22, but it made the law effective as of the end of September. So, it was unclear that we would have bonus depreciation during the fourth quarter. As a result of a clarification that came out in August by the Treasury, we were able to take an additional $66 million of the tax deductions, which as you know, that creates deferred taxes, which then is a reduction to rate base for those deferred taxes, but it also increased our cash flow. It was a net positive. We had increased cash flow overall, but just a temporary impact or one-time impact from that. Going forward, we’ve got our rate base growth model based on the new tax reform act going forward, which is still a higher-level than it had been on – from a pre-tax reform basis.

Got it. Maybe just to clarify, though, on 2020, was is the same thing?

2020 was, we stay with – we’ve stayed within the – yes, I’m not aware that we had change. There’s not really a change on the 2020 period from our prior guidance.

No, I thought you pulled down the top-end. That was – sorry about that.

Yes. No, we still continue to forecast our $400 million to $500 million. We will clarify that going forward now with our after our year-end in terms of our CapEx, trajectory, as well as our rate base growth as we complete our year-end reporting process and our forecasting process this year.

Got it. And just to make sure I heard the last question correctly. With respect to capital needs, as you’re looking at Pacific Current or just in general into 2019, what are the expectations right now given the CapEx budget that you have already in front of you and some of these additional projects that you’re contemplating?

Yes. Well, so relative to Pacific Current, we don’t see ourselves capital constrained for incremental investments overall. That is – it’s a smaller company. We’re continued to look at projects and we’ll invest in those as the projects are adequately developed. Those tend to be less problematic at this time, as we reviewed the marketplace, look at investment opportunities, partner with other partners here to do the development and other work and we will fund those as those projects are mature and as the investment opportunity yields itself. We have tended, as Connie has mentioned previously, to fund those projects within Pacific Current contributing the equity from HEI and then project – typically project financing those projects within the Pacific Current entity, while maintaining an overall investment-grade profile. So we will – Scott has just been brought on as President. He is responsible for driving that strategy. We’ll be working closely with him to develop our projections for 2018 and beyond, and we’ll have more on that as we come back to you at the year-end time and talk about our expectations going forward.

Excellent. I’ll leave it there. Thank you all very much.

Okay. Thanks, Julien.

See you next week.

And our next question comes from Paul Patterson with Glenrock Associates. Please go ahead with your question.

Hello.

Hi, Paul.

Hey, Paul.

Hey, how are you doing? Okay, sorry about that. I apologize, I think, you might have gone over this, Julie, just the bonus depreciation and its impact on rate base. What caused that to happen, I guess, this quarter, I guess? I’m a little bit confused as to how that – why that impacted rate base it seems at this point in time?

Sure. It was nothing more than a clarification of the application of the tax reform act. As you recall, last year it went into law on December 22, I believe. It had specified that the application of that law was as of the end of September, I think, September 27, prospectively. It was unclear, in fact, we believe that bonus depreciation from September 27 forward was no longer applicable, we’re now under the tax reform act. So at the utility, we did not forecast for bonus depreciation for project plant in service that was closed during the fourth quarter of last year. With the clarification coming out from the treasury this August, we were able to take bonus depreciation for the fourth quarter, that was a total of $66 million of additional tax deduction that resulted in 21% of that in additional deferred tax – taxes – additional deferred taxes that is a reduction to our rate base. And the benefit of all of that, despite the lower rate base growth for the – for 2018, given the deferred tax portion of that was that we saw increased cash flow as a result.

Okay. Just the PBR proceeding, it seems everything that I’ve seen so far, I think, has been so procedural. Has there been anything else or any sort of feedback that you’d be getting in the process that you want to share with us or anything?

So, Paul, we actually have Joe Viola, who runs our Regulatory Group with us today. And so I’m going to let Joe make some comments on that.

Hi, Paul. Again, this is Joe. I think, you’re right. I mean, the way the commission [Technical Difficulty] and we’ve gone through the first step in the process was really a collective examination of what PBR is and what it offers. The second step, which took place and finished up in the October timeframe, was an evaluation of our existing regulatory framework with an eye towards how it impacts potential prioritized outcomes. And we’re moving into the next step, step three, which will begin at the end of this month and we’ll start examining potential mechanisms or changes that might affect and further encourage prioritized outcome. So I think you’re right. There has been a fair amount of kind of discussion and evaluation for the first part of this proceeding. I think, we’ll be getting into details starting pretty soon and the second phase of the docket, it will take place in 2019, that’s when we’ll actually begin developing potential changes to our regulatory framework to support prioritized outcomes. Now those prioritized outcomes that we were still in the middle of actually examining what those should be. There are 10 intravenous in the docket, along with the Hawaiian Electric companies and the consumer advocate and really we’ve been spending time – the commission has been soliciting input on what the type of prioritized outcome should be. Generally, those are consistent with what our plans are anyway. But the commission has acknowledged that it is in the process of trying to narrow what those outcomes would be and those will be the focus of the Phase 2, as I mentioned earlier in the docket.

Okay, thanks so much. That’s all from me.

Yes. Hey, Paul, I would also just add that, as you know, some of the current performance incentive mechanisms had begun to be put in place actually starting as early as 2017 and a few more earlier in 2018. We’re actually in the first year of implementation of the ones that went in place in 2017 and those were on reliability, safety and the customer service. So that’s also playing out alongside of the docket as it goes forward.

Okay, great. Thanks so much.

And our next question comes from Charles Fishman with Morningstar Research. Please go ahead with your question.

Hey, thank you. If I could go over guidance, again I’m sorry it was going faster and I couldn’t write it down. Utility, the Slide 17. utility EPS low-end of our range because of the higher O&M and there was a revenue impact. What was that again?

We’ll, what we’re referring to is certain customer benefits that were part of the agreed settlements through the rate case processes for HECO and Maui, Hawaiian Electric and Maui. And what those essentially were agreed upon reductions in our revenue requirement that we agreed to with unidentified and yet to be achieved savings through O&M and other measures at the utility to achieve and provide those consumer benefits. That in addition to some of what I had referenced with some of the headwinds of some one-time costs during this year, some unplanned events actually impacted the utility significantly enough that we’ve now moved our forecast to the lower-end of the utility range or the lower-half of the utility range.

Okay. And then bank high-end, I got that and then consolidated stays the same?

Correct.

Okay. And then moving to Maui, the interim case, I see – it was on one of the slides, you’re using a 9.5% ROE was the settlement ROE for Maui?

Yes.

And is that, I realize this as the final has to be approved by the commission. But I guess that’s a positive, because aren’t you currently get a 9% ROE that’s sort of, as I recall, is a punitive ROE for some problems that occurred at Maui a few years ago?

Yes.

I guess, we’re over that then, I guess is…

Well, that’s well behind us in terms of the issue that caused that long time resolved. So it’s good to see the ROE at a corresponding level to the other utilities.

Okay. And then last question, besides Scott, how many full-time employees are at Pacific Current at this time?

Actually Scott is the first.

Okay, excellent. I thought that might be the case.

As an employee – but we do have a number of – he gets sufficient support from others for the back office, accounting, structuring, tax and others. But there he also – we also have some contract employees that are effectively supporting the efforts there, as well as we carefully make hiring decisions.

Yes. Okay, but it’s a signal that the fact that you’re – you have one now would be a signal that there is potentially a bright future for Pacific Current with respect to growth? Correct?

Yes, Charles. What we have done was to incubate that strategy here at the holding company. And you’re correct, we have now reached the point, where we believe that, that strategy is viable and that we should stand-up a separate dedicated team at that subsidiary. And so that’s – Scott’s first order of business is get that subsidiary completed and he has got all kinds of things he has to do with separate HR systems and separate facilities, separate technology and the like. So he is going to be focusing on some of those issues, as well as continuing to look at projects that are now frankly finding us in the marketplace.

Got it, okay. I got a couple more, but all same free. Thank you.

Okay.

We’ll see you then.

And the next question comes from Jonathan Reeder with Wells Fargo. Please go ahead with your question.

Hey, my questions have actually been asked already and answered. So I appreciate that and see you guys in a couple of days.

Okay, see you soon.

Thanks, Jonathan.

And the next question comes with Jackie Bohlen with KBW. Please go ahead with your question.

Hi. Good afternoon, everyone.

Hi, Jackie, how are you?

I wanted to switch gears and change over to the bank. A couple of questions for you, Rich. Just looking at the provision first with the – I understand that the consumer portfolio is the driver of that. But just wondering if it’s a change in anything within that portfolio, or if it was driven by growth?

It’s driven by growth and it’s driven by a couple of vintages, where as we test out different pricing and response models, we got a little bit higher yield and a little bit higher loss rate on those vintages than the rest of the book. And so those will move through the system and then we learn from those and we make some adjustments. So that’s why you see both the yields at the high-end and you see the loss rate moving up a little bit.

Okay. So as you go forward to the extent, you continue to book more consumer generation. Is it fair to say that the provision would be a little closer to the current quarter’s level rather than historical levels?

Pluses and minuses on that depending on whether you’re talking the rate or the dollar level, because that will affect the volumes and the mix that we bring on. So I think, it’d be in the range in-between them.

Okay, that’s helpful.

Okay.

And then as the consumer book does continue to grow, assuming that funding cost, you’ve done an excellent job in keeping that steady despite the rising rates. Is it fair to say we could see a little bit more margin expansion from here if those rates stay pretty flat and the consumer book continues to be stepped on loan yield side?

We probably – we’re – appetite-wise, as we’ve grown it, we’ve grown it to a proportion of the book that we kind of like. So I wouldn’t expect to see it grow too much more relative to the overall book proportion-wise. So I think, we’re kind of approaching a steady state on that.

Okay. Are there any more composition chips within the book that you’re working toward?

We’ve got – as you know, our product set is a little bit narrower than some of our peers, and so we’re looking at things all the time. We’ll – as we get them, we’ll let you know about them. But we would expect over the coming year or two to continue to introduce some new things, but nothing imminent that would affect the next quarter or two.

Okay. And how was payoff activity in the quarter versus where it’s been previously?

Pretty consistent, I think, the – which lines are you looking at?

I guess, mainly, either commercial or commercial real estate, I know those both had declines in the quarter. But just in general, if you’re seeing any elevated payoff activity overall?

Everything is pretty consistent, the C&I and CRE are a little bit lumpier, right? And we’ve had on the CRE side, there has been construction…

Hello?

Sorry, we got an accidental hit at the mute button.

Okay.

So we were saying – I don’t know where I cut out. But the C&I and CRE are a little bit lumpier and the construction component of CRE has been more of our recent additions than say the investor exposure. And so, as those have paid off, you’ve seen a little bit more volatility in the CRE piece. In C&I, the payoffs have generally been related to credit quality resolving either criticized assets or the like. On the retail side, it’s been pretty consistent. So we’ll get you some of the numbers. There’s is nothing particularly notable to point out on the rate of payoffs other than that normal lumpiness. And as you can tell from our margins, we’ve done pretty well on the production versus the portfolio rate. So that’s contributed across the Board, except for res to higher yields.

Okay. Yes, I know that, that definitely shows through in the results.

Yes.

And then just one last one, the BOLI income in the quarter, did that include any insurance proceeds?

Yes, there was one debt benefit of about $1.3 million that we realized in the quarter.

Great. That’s all from me and congrats on getting closer to moving into your new building. I’m sure that must be exciting.

Yes, we’re very excited about it. It’s – I’m going to move in with milk cartons and a cardboard box, I think, to get in there and help everybody else get moved in.

You have to come visit him, Jackie.

Yes, I definitely will. Thanks, everyone.

Thanks.

And the next question comes from Andrew Levi with ExodusPoint. Please go ahead with your question.

Hey, Connie. Hi, everyone. How are you?

Hi, Andy.

Just a few questions to make sure that I heard everything. So just on the guidance that you’re going to be at the low-end of the utility guidance and at the high-end of the bank guidance? And then how should we think about the fourth quarter? Will there be growth over last year?

Well, we have a couple moving parts, we would expect continued growth because of new revenues at the utility and with the settlement of the rate cases. I had mentioned that, with those rate cases behind us, we’ll continue to benefit from higher revenues, higher recoveries. Again, obviously, you know, those rate cases also come with the reset of some of the underlying costs, including pension and so forth. But on a period – quarter-over-quarter, period-over-period, you would expect to see continued improvement on the bank. Again, it will be a quarter-over – we would anticipate the strength in – from a net interest margin perspective, but we haven’t forecasted that in detail, but we continue to see strong benefits at the bank from tax reform, strong net interest margin and a well-managed and well-performing bank. And I do want to clarify, as we talked about the lower-end of the range, I would say, that’s the lower-half of the range for the utility, not providing really a point estimate on that.

Okay, so you’re at $1.39 year-to-date, right? So you come in like around $0.45, which is like $0.04 growth or something over last year’s fourth quarter you’re probably kind of trending around the $1.85 or something like that. I know you can’t give the exact number, but that by looking at kind of the low to midpoint for the consolidated numbers, that’s kind of the way to think about it on an annual basis?

Yes. Well, you are the analyst, you have a pretty good sense of it. Okay. I wonder how you think out loud, but unfortunately, I can’t give you a point estimate on that.

Okay.

But I would approach it…

[indiscernible]

Yes, it’s kind of on – it is a little bit on some of the parts as you look at the bank dynamics, the utility dynamics, we’ve provided specific guidance around the dynamics for each of those, as well as the consolidated range.

Okay. And then, like in 2020 you look at the changes in rate base. I just want to make sure that I heard it correctly. So the reduction in rate base, as you get out to like 2020, that all relates to the tax change, is that correct?

Yes, we remember, we went from originally from $450 million estimate of CapEx for 2018 to $400 million. So that does impact the base at which you grow from as well. In addition to the impact of the tax reform benefit that we received, which reduced the underlying rate base growth in 2018 and also a lower base to start from as you project forward.

Okay. So the combo of lower CapEx and the taxes changed rate base by about $100 million?

Yes, and remember that lower CapEx is really signaling just for 2018. We haven’t revised or forecast or provided any additional revisions as we extend out.

Okay. And then I also want to make sure that I heard something correctly. So I think, you had gotten a question relative to the activist that had come in and pushing you to do more renewables or whatever it may be. But I guess that – what you’re saying is, which I agree with if I heard it correctly, is that that’s kind of been your strategy already, is that correct?

Yes, that’s correct. And it’s also reflecting the whole environment in Hawaii.

Right, right. Okay. That’s what I thought when I first saw it announced. And then relative to Pacific Current, what type of risks are you willing to take there, or will it be kind of utility type contracts and projects, or how will that work? How would you envision that like in a better way?

Yes, probably the best way for me to explain that, Andy, is we are very conscious of maintaining investment-grade ratings for the utility and for the holding company. And as you know, the bank is not rated, but if it were actually and when it was, it was actually rated higher than both the utility and the bank. So we are not looking to develop a strategy that would significantly change that overall profile of our company, because I think that is what investors look to and depend upon. And so as we develop it, we are going to be very conscious of that overall principle. As I mentioned earlier, the first two projects are investment-grade credits on the other side. So, as Greg mentioned, we were able to project finance most of that on the debt side with a small amount of equity coming in from the holding company. But as we go forward, there may be some opportunities where we see the need in our local market to finance smaller projects in which case we might then aggregate and portfolio them and then finance them.

Okay. So just to understand, so these mainly be smaller projects with contracts, is that what you’re basically saying?

Yes, possibly. I don’t want to be too specific, because there’s so much happening here in Hawaii that can give opportunities and our ultimate objective is help accelerate transformations here in the island. And so that could very much include not just the energy side, but very much the transportation side as well.

And then the last question I have, obviously, you said very clearly no equity for this year and the years over. But as you look out to 2019 and 2020 and 2021 and then with the addition of Pacific Current, obviously, we don’t know or you don’t know how much you’re going to be spending there. How should we think about equity needs going forward in conjunction with Pacific Current and obviously, your CapEx program at the utility?

Yes. Well, as you’re doing this on a model basis, we continue to maintain our regulatory capital structure at the utility at 57% equity capitalization. We continue to target and will maintain investment-grade ratings at the holding company, which currently is essentially 51% equity capitalization on a consolidated basis and those are what – and we have clear dialog with our rating agencies, we talk about our plans and those are – and our investment-grade ratings are fresh and we have ongoing dialog. So we’ll continue to target those type – that type of capitalization structure. As you’ve seen in Pacific Current and as Connie mentioned, we’ve put in place non-recourse financing, arranged for non-recourse financing for both the investment projects that we have currently and we’ll continue to look for an appropriate credit profile of our investments going forward that will ensure that we maintain that investment-grade profile. So as you think about it on a – as you model out your earnings growth, your dividends and so forth, we’ll continue to maintain those targets. The good thing is that, we’ve seen increasing dividends from the bank in the post-tax reform this year, which continues to provide capital to the holding company for incremental investments, offsetting the need for external equity to keep our capital structure in balance. We’ve now been through a full rate case cycle and we’ll be starting our new triennial rate case cycle again here with the next Hawaii Electric Light rate case filing in process in 2019. So with the – with anticipation of earnings improvement going forward, that also drives additional retained earnings for investment at the utility as well. So, as you’ve seen, our external equity needs have been relatively modest. We also, as we consider how we raise equity capital, we have a very strong, continued strong demand through our dividend reinvestment program, which we’re currently using open market purchases to meet that demand. But that provides a very low-cost access to equity overtime somewhere between $30 million, $35 million annually is what we’d anticipate. So those are the components as we model this out and we’ll come back to you with further clarification of our capital expenditure program, a little more clarity at year-end around Pacific Current and what we see on the horizon for that, as well as the utility performance going forward, and we’ll clarify what our equity needs will be going into 2019 and beyond.

And, Andy, I’d just add on the triennial rate case cycle. We – as Greg mentioned, the HELCO case that we will file by year-end. And I think, if you remember our cycle from before, typically we would file at mid-year. So we would have normally filed that case in July of this year. But with the big SAP conversion on the enterprise resource planning and enterprise asset management, we did delay that until after the go-live that was October 1. So that’s a little delayed. We would hope to be back on schedule next July with the big Hawaiian Electric case for Oahu.

Hey, Andy, before we leave you, I just wanted to make one small correction. The S&P does actually rate our bank. They haven’t published here since I think November of last year, but they’ve got a BBB and we have an investment-grade rating at the bank. They just haven’t published recently.

Right, and higher than the utility rating.

Yes.

And I apologize, I actually have one more question, because it’s hard to try to get you guys [indiscernible], why not? But – so just you were talking about the year and if I remember correctly, when we met in New York, there were some regulatory issues that caused a little bit of a drag in the year and you mentioned that, which I understand and we went over those in New York. But then you also mentioned on the call that there were some other operational issues. I don’t know if that was related to the hurricane or the volcano or something separate. It also caused a little bit of a drag for this year. Can you kind of just give us some details on that?

Yes, there has been a number and we’ve disclosed some of the operation and maintenance expenses, some of which have been unplanned for the year that have caused headwinds and has actually moved our guidance to the lower-half of the range for the utility. And part of this is doing the right thing. We had some underground circuits that had some failures in the core downtown Kakaako area, and we accelerated some of the repair work there. None of that, which was not budgeted, which caused about $3 million of additional expenses reported through O&M. We had the write-off of some smart grid costs along with the rate case settlement of a couple of million. We had some one-time rent expense. I think, some of this we talked about on the last quarter’s earnings call as well.

Okay.

Our team or the utility has been doing their best to offset a lot of these one-time items, as well as some of the customer benefit concessions that we’ve made. But cumulatively, they have impacted our earnings guidance for 2018.

And not lava and storm response. That actually – the companies came through very well in their response efforts there.

Great, thank you. And then, by the way the lei or the leis that you gave me went over well at home. So thank you very much for that.

Great, glad to hear that.

They were beautiful. Thank you and have a great next couple of days in California.

Okay, see you soon.

Thanks, Andy.

And our next question comes from Ashar Khan with Verition. Please go ahead with your question.

Hi, I just want to – most of my questions have been answered. But I just want to clarify, you said that higher O&M was one-time in nature. So as we build for next year, we should think that these one-time costs should not repeat next year and you would have under normal circumstances been at the midpoint of the utility guidance. Is that a fair assumption?

Well, here’s what I would say is, the higher year-over-year O&M expense is a mixture of things. As you go through rate cases and you get certain other recovery mechanism reset, including our pension recovery costs, that in and of itself increased O&M, but we also had increased revenue to offset that O&M. So there was no compression of operating margin. So some of the increases that you’re seeing is as a result of the new rate case cycle. But we have had and I think we disclosed it in our 10-Q, the list of the O&M increases on Slide 69 or Page 69 of our 10-Q. And what we’ve highlighted are some of the one-time and the unplanned activities in 2018 that increased that, and you’re looking at $8 million approximately or so?

Approximately $1 million of that.

Yes, which we would consider – which we would have anticipated as one-time and/or not expect those to be reoccurring.

Maybe in pre-tax, right? Am I correct?

Yes, that’s…

So that’s about $0.05 or so, right? So – okay. Thank you so much.

Great. Thank you.

And our next question comes from Frank Gordon with Evercore. Please go ahead with your question.

Hey, it’s Greg Gordon, but Frank is okay, too. How are you?

Hi, Greg.

So, Ashar, I think he just sort of kind of asked my question. I’m looking at Slide 21. And I’m looking at the core ROE, LTM contributed 7.7%. So as I’m thinking about where you think you are on a run rate basis, as you exit this year go into next year. First and foremost, we should be $8 million – all things equal $8 million better on O&M run-rate at the utilities, is that fair?

Yes.

I think, that’s fair. That’s because those were attributable to one-time. Yes, so that would be a fair statement.

And I guess, I’m asking, as you think about the lay of the land today, and I kind of ask this question every time we talk, whether it’s on the phone or in person. What is the runway that you would hope under constructive engagement with your regulators over the next several years that you can get to – that eliminate these lag items and get to that sustainable ROE in the mid to high-8% range that you should by all rights be allowed to earn that they’re not letting you earn before the structural offsets?

Yes. It’s – as you know, our triennials – part of closing and addressing some of those issues is a continuation of the rate case cycle, some of the lag, even some of the customer benefits that were part of our rate case settlements will continue on until the new rate cases as well. We’ve tried to be pretty clear about what we think are the peer structural items, which you tend not to get recovery of through the rate case process and those that can’t be cured through rate case processes. So…

Can I add to that?

Well, Tayne is elbowing me here. I’ll let our utility CFO answer the question.

Yes.

So, Greg, I would look at it as the persistent item, it would be the structural items that you’ve seen, it’s roughly 70 basis points. In addition to that, we are expecting also some drags there from the West Loch PV project that will be placed into service in the early part of Q2 next year. And under that mechanism, as you’ve seen in Schofield, the first year that that project is in service, the recovery is on the half of that investment and that is secured in the following year where the full investment is folded in, in terms of recovery. So we’ll see some drag there with the West Loch project. In addition to that, with the Hawaii Electric rate case filing happening towards the end of this year, there’s going to be some leakage there just due to having working through the rate case and expecting an interim later in 2019. As Connie mentioned, as – moving forward with these triennial – next set of triennial rate cases and as we move towards filing our rate cases in the middle part of the year, we should see some of that drag go away. But with the implementation of our new ERP system, we did delay the Hawaii Electric rate filing to later this year.

So, Andy, if you looked on your Slide 21 under the structural items, you’re looking at about 70 basis points, plus you see that MPIR related to Schofield, that, of course, will go away in 2019, but will be replaced by the one that Tayne mentioned for West Loch, because that project will be coming online.

Thanks for a such a extremely detailed answer. I appreciate and see you in a few days.

Okay. See you soon.

Thank you.

And this concludes our question-and-answer session, I’d like to turn the conference back over to Julie for any closing remarks.

Thank you all for your questions and for joining us today, and have a great rest of the week.

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