Hawaiian Electric Industries - Earnings Call - Q4 2019
February 13, 2020
Transcript
Speaker 0
Good day, and welcome to the Fourth Quarter twenty nineteen Hawaiian Electric Industries, Inc. Earnings Conference Call and Webcast. Participants will be in a listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Ms.
Julie Smolinski, Director of Investor Relations and Strategic Planning. Please go ahead.
Speaker 1
Thank you, Elisa, and welcome, everyone, to Hawaiian Electric Industries fourth quarter and full year twenty nineteen earnings conference call. Joining me today are Connie Lau, ATI's President and Chief Executive Officer Greg Hazelton, ATI's Executive Vice President and Chief Financial Officer Alan Oshima, Hawaiian Electric President and Chief Executive Officer Scott Fu, incoming Hawaiian Electric President and Chief Executive Officer and Rich Wacker, American Savings Bank President and Chief Executive Officer as well as other members of senior management. Connie will provide an overview, followed by Greg, who will update you on Hawaii's economy, our results for the fourth quarter and full year and our outlook for 2020. Then we'll conclude with questions and answers. During today's call, we'll be using non GAAP financial measures to describe our operating performance.
Our press release and webcast presentation are posted on ATI's Investor Relations website and can take 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 HAI website. And I'll now ask our CEO, Connie Lau, to begin with an overview. Thank you, Julie, and aloha to everyone.
2019 was a year of solid achievement for our company from financial to operational to environmental results. We achieved solid earnings at both our utility and bank and grew consolidated earnings 8%. We strengthened our consolidated return on equity to 9.8% and improved earned ROE at the utility and maintained a strong ROE at the bank. Our utility continued to deliver on key priorities of its five year plan. We're especially proud that Hawaiian Electric and the state of Hawaii were recognized for their leadership in transforming our state to a clean energy, carbon neutral economy.
Our state's leadership and innovation in clean energy transformation was highlighted in recent reports by the Rocky Mountain Institute and Public Utilities Fortnightly, and Hawaiian Electric was named 2019 Utility of the Year by Utility Dive. American Savings Bank also performed well, delivering 5.7% loan growth and maintaining a net interest margin above its peers. Excluding a onetime net gain on sale of properties the bank exited as it moved to its new campus, bank earnings were up slightly from 2018 despite lower than expected interest rates. Our Pacific Current team continued to focus on optimizing its existing project portfolio and pursuing additional sustainable investment opportunities. With our continued financial performance and our confidence in our future prospects, our Board approved a second consecutive annual increase in the dividend, raising the quarterly dividend per share from $0.32 to $0.33 or $1.32 annually.
At Hawaiian Electric, our 2019 accomplishments reflect goals and initiatives from our 2015 to 2020 strategic transformation plan, which focused on delivering a cost effective clean energy portfolio, improving customer experiences and offering innovative energy solutions, creating a modern grid and technology platform, strengthening stakeholder relationships and working with stakeholders to align regulatory and market models with the transformation of our industry and company, improving company culture and ensuring we have the financial strength to deliver on this transformation and our state's ambitious energy goals. At our utility, we made great strides on each of these priorities and have great momentum into 2020. On clean energy, energy sales from renewables reached 28%. Driven by new utility scale solar and a nearly 5% increase in private rooftop solar, we experienced our largest single year increase in solar capacity. We secured PUC approval of seven purchased power agreements for the lowest cost solar plus storage seen to date in Hawaii.
We launched our largest ever stage two combined renewables, storage and grid services RFP, which attracted more than 75 bidders, and we're hard at work evaluating those bids. We also renegotiated the Puna Geothermal PPA, which if approved by the PUC, is expected to reduce Hawaii Island customer bills. In our approval request, we've also proposed a shared savings performance incentive. We completed our company owned Westlock solar project, which is now delivering the lowest cost solar in the state. On customer experience, we achieved customer satisfaction scores in the top third of the industry.
We continue to develop new programs for customers to participate in the clean energy transformation. This includes our project footprint campaign to inspire customers to adopt sustainable practices and contribute to Hawaii's renewable energy goals, and it includes the approval of Hawaii's first community based renewable energy project. As we've mentioned in the past, with limited land, especially on Oahu, we cannot achieve 100% renewable energy without private rooftop solar and other customer sited resources. In recognition of the importance of customer resources, we've reorganized and created a dedicated customer energy resources department to serve customers connecting to their grid with their shop floor and other devices. Given our ambitious renewable plans, we need modernized grids with enhanced technologies capable of integrating large amounts of both utility scale and customer sited renewables.
In 2019, we reached an important milestone when the first phase of our grid modernization strategy was approved in March, and we're now executing on that strategy. Our expertise in developing and operating complex grids was recognized in October when we were awarded a competitively bid fifty year contract to own, operate, and maintain the army's electric lift solution system serving 12 installations here on Oahu. Our request for approval of that contract is now pending with the PUC. We continue to work together with our communities and stakeholders to find the best ways to achieve a clean energy future that's affordable, reliable and resilient. There are two Hawaiian words that describe the way in which Hawaii must work to achieve a clean energy future.
The first is kakou, meaning it will take our whole community working together. It also must be done in a way that is pono, that is right and just for our communities. In 2019, we have focused on stakeholder engagement. This includes workshops to gain stakeholder input as we undertake our next phase of resource and grid planning or integrated grid planning. It also includes ongoing community based resilience planning workshop on the Windward Side Of Oahu.
Stakeholder engagement has also been central to the evolution of our regulatory framework. In 2019, the Commission, the utility and stakeholders began the design phase of performance based regulation, or PVR, which will be implemented in 2021. Parties have submitted their PDR proposals, and we look forward to continued collaboration with stakeholders. We are encouraged that there have been no surprises as we progressed through the design phase. We also advanced efforts to improve the utility's culture, and a key accomplishment in 2019 was completing consolidation of functions across all three of our utilities under our One Company initiative.
Finally, we continue to improve the financial health of our utility as earnings and earned ROE improved, and we continue to pursue a number of cost management initiatives. Our bank also had a number of significant achievements in 2019. Although twenty nineteen's interest rate environment turns out to be very different from expectations when we started the year, American performed well, highlighting its stability and the consistency of its business and business model. Despite the challenging interest rate environment, bank net income, excluding the gains from the property sales, was slightly up from 2018, which was a record earnings year. American maintained an above peer net interest margin despite the low interest rate environment, net interest margin of 3.85% for the year, up slightly from 2018.
The bank is now operating in its new state of the art campus. This was an important move for our bank's team members, and the bank is focused on realizing the benefits of the consolidation into the new space, including increased collaboration and efficiency. 2019 was also a milestone year for Pacific Current, its first year with its own management team in place. Under their leadership, Pacific Current signed a contract to meet a portion of our Hamakua plant's fuel supply with locally sourced biodiesel. We are proud that Pacific Current is able to execute transactions that contribute to the sustainability and energy independence of our islands.
We also launched the Evercharge Hawaii joint venture to address the accessibility of EV charging for multiunit dwelling and high rise office buildings to encourage broader electric vehicle adoption. Construction for the University of Hawaii solar foot storage projects also move forward, and we will start seeing those projects become operational throughout the year. So as you can see, we've had a very active and productive year across our enterprise. I'll now ask Greg to update you on our 2019 financial results and also our 2020 guidance.
Speaker 2
Thanks, Connie. As shown on Slide seven, Hawaii's economy remained stable in 2019 and finished the year at a record level of visitors, exceeding 10,000,000 for the year. This represented a 5.4% increase over 2018 with visitor expenditures also up slightly. Unemployment remained low at 2.6% as of December, well below the national average. Hawaii real estate sales volumes were up for single family homes and prices on Oahu were flat.
Condo sales volumes were down while condo prices were up slightly over the prior year. The state's outlook is stable with moderate GDP growth expected at 0.9% in 2020 and one point one percent in 2021. I would note we are also closely monitoring the coronavirus developments and the potential impacts on our Hawaii economy and our businesses. Turning to our results. In 2019, we achieved solid consolidated financial performance with good results at both the bank and the utility.
2019 consolidated earnings increased 8% to approximately $218,000,000 or $1.99 per share. Our 2019 results included a $5,500,000 gain on sale, net of associated costs of two former bank properties. Year over year earnings grew at the bank even when excluding the net gain from the property sales. The holding company and other segment loss grew primarily due to higher interest expense from incremental long term debt issued in late twenty eighteen. On the right side of Slide eight, our consolidated ROE for the last twelve months was 9.8%, up 30 basis points from last year.
Utility ROE for the last twelve months improved 20 basis points, while bank ROE, including the impact of the gain on sale, was comparable to last year. Turning to Slide nine. Utility net income grew 9% to $157,000,000 contributing $1.43 to EPS, well within our guidance range of 1.4 to 1.47 On an after tax basis, the most significant net income drivers were $24,000,000 revenue increase from recovery under the RAM and from rate increases from our investments to integrate more renewable energy, improved customer reliability and increased system efficiency $11,000,000 revenue increase for recovery of the Schofield Generation project under the major project interim recovery mechanism dollars 2,000,000 of additional revenue earned under performance incentives for procuring low cost renewable energy for customers and achieving better reliability in call center performance, and $2,000,000 from lower interest expense due to debt refinancing. These were partially offset by $15,000,000 higher operations and maintenance expenses compared to 2018, primarily due to higher overhaul and maintenance expenses for generating facilities, higher support costs from outside services for asset management and energy management systems, enterprise resource planning software and support costs, costs related to grid modernization projects and a reset of pension costs included in rates on Oahu and in Maui County as part of rate case decisions.
Also $9,000,000 higher depreciation expense due to increasing investments to integrate more renewable energy, improved customer reliability and increased system efficiency and $5,000,000 lower net income versus 2018 due to favorable tax adjustments in 2018. On Slide 10, American's earnings grew about $1,000,000 over 2018 when excluding the onetime net gain from property sales. Including the net gain, the bank earned $89,000,000 contributing $0.81 to the consolidated EPS, within our guidance range of $0.79 to $0.85 which was also which also included the net gain on sale. The most significant after tax drivers of the variance from 2018 were $4,000,000 higher net interest income, driven by growth in interest earning assets, primarily from strong loan growth $6,000,000 higher provision for loan losses, reflecting additional reserves for the consumer loan portfolio and borrower specific circumstances requiring additional reserves on loans within the commercial and commercial real estate portfolios $13,000,000 higher noninterest income, primarily due to the $10,800,000 pretax gain on sales of former properties and increased mortgage banking income and $6,000,000 increase in noninterest expense, primarily due to higher compensation and benefit expenses as well as higher occupancy costs related to the campus move. Turning to Slide 11.
American remained solidly profitable in 2019. Including the impact on the net gain on property sales, return on assets was 125 basis points, up from 120 basis points in 2018. Return on equity continued to compare favorably to peers at 13.5%, equivalent to 2018. Let's turn to key elements that drove net income and profitability on slide 12. American's net interest margin has continued to perform well against both our similarly sized and Hawaii based peers.
Net interest margin of 3.85% for the year was flat compared to 2018 and at the low end of our guidance range of 3.85% to 3.95%. Fourth quarter net interest margin was 2.74 compared to 3.82% in the linked quarter and 3.95% in the 2018, with the decline primarily due to lower yields on interest earning assets. As you can see, our fourth quarter interest earning asset yield of 4% was lower than both the linked and prior year quarters. For the full year 2019, earning asset yield was 4.14%. Cost of funds has remained low as we continue to benefit from our disciplined approach and focus on relationship banking.
Our cost of funds was 26 basis points in the fourth quarter, well below peers. On Slide 13, total loans were $5,100,000,000 as of December 31, up 5.7% from the prior year, with retail loans up 4.1%. Total deposits grew to $6,300,000,000 as of December 31, an increase of 1.8% from the prior year, reflecting a strategic reduction in government CD funding, while core deposits grew a healthy 3.2%. Net interest income for the year increased 2.2 over 2018 to $248,100,000 while fourth quarter twenty nineteen net interest income of $60,900,000 was slightly lower than the linked in prior year quarters. Fourth quarter and full year noninterest income was elevated, primarily due to $10,800,000 in pretax gain on the sales of the former properties as well as increased mortgage banking income.
As we stated before, this resulted the sale resulted in a $5,500,000 after tax gain net of active asset costs. On Slide 14, credit quality remains sound in prudent risk management and the stable Hawaii economy. The credit quality of our residential portfolio remains solid with strong collateral values and low default rates, and our commercial and commercial real estate portfolios are stable. As previously mentioned, the higher provision in 2019 were related provision was related to consumer the consumer loan portfolio and borrower specific circumstances for certain commercial and commercial real estate loans. Allowance for loan losses of 53,400,000.0 was 1.04% of outstanding loans at year end, equivalent to the linked quarter and modestly lower than the same quarter last year.
Nonaccrual loans were 0.58%, down from the linked quarter and slightly above the same quarter last year. Our net charge off ratio increased to 45 basis points for the year compared to 34 basis points in 2018, driven by the personal unsecured loan portfolio and the partial charge off of the commercial credit. The net charge off ratio for the fourth quarter was down from the linked quarter, which included the partial charge off just the partial charge off we just mentioned. Let's turn to our expectations for future performance, starting with our utility CapEx forecast. In 2019, we invested $450,000,000 of CapEx, well above our revised CapEx guidance for the year as we accelerated certain investments originally planned for 2020.
This included, based on CapEx, projects focused on improving reliability, resilience as well as grid modernization projects. Our 2020 forecast of $360,000,000 reflects the partial acceleration of CapEx into 2019. While it's difficult to perfectly time capital expenditures over year end periods, on average, the 2019 and 2020 investments are consistent with the $400,000,000 per year of investments necessary to achieve our grid modernization resilience and reliability goals. In 2021 to 2022 period, we expect CapEx to average approximately $400,000,000 per year, the midpoint of our $350,000,000 to four fifty million dollars guidance range or about 2x depreciation. CapEx growth, starting with 2018 as a baseline through the end of the forecast period, translates to an average annual rate base growth of 4% to 6% through 2022.
This is slightly lower than the five percent to 7% rate base growth guidance range we provided for the 2019 to 'twenty one period due to the denial of the 2019 of two planned battery storage projects and a reevaluation of future utility battery storage investment opportunities in light of those decisions. Our capital investments remain focused on maintaining reliability and resilience as we integrate more renewable energy and modernize our grid. Importantly, we expect the utility to be able to continue to self fund its forecasted CapEx through 2020 via retained earnings and access to the debt capital markets. On Slide 16, our financing outlook for 2020 reflects our strong financial condition. The bank, which has long been self funding, has continued to provide strong dividends given its consistent performance.
In 2019, ASB's dividends to the holding company was $56,000,000 and in 2020, we expect that increase to increase to approximately $75,000,000 an increase of 33% from 2019. The utility is expected to be able to support a 65% industry average payout ratio to HEI, and HEI plans to invest approximately $35,000,000 of equity to support Hawaiian Electric's capital investment program and its PUC approved capital structure. With improved cash distributions from the bank and utility, we do not anticipate the need to issue any external equity in 2020 unless we identify significant additional accretive investment opportunities. Our improved earnings and cash flow outlook has allowed us to grow the ACI dividend while managing our capital structure to maintain our investment grade rating. On Slide 17, we are initiating our 2020 consolidated earnings guidance of 1.9 to $2.1 per share, consisting of $1.46 to $1.54 at the utility, dollars $0.07 3 to $0.80 at the bank and a loss of $0.27 to $0.29 at the holding company and other company segment.
Our 2020 utility guidance assumes no change to our major regulatory recovery mechanisms as we await the PUC's order expected at year end, including the final design of PVR. We also assume O and M expense increasing at or below inflation and no material impacts from performance incentive penalties or rewards. Utility guidance also includes approximately a $5,000,000 net income impact from continued customer benefits or bill reductions agreed to in the last Hawaiian Electric and Maui Electric rate cases as shown in our appendix. Our 2020 bank guidance reflects continued stability from the bank with earnings relatively consistent with excluding the one time $5,500,000 gain from the American property sales. The Bank guidance reflects American's disciplined approach to growth with earning asset growth targeted to low to mid single digits.
It also reflects expectations for continued a continued low interest rate environment as well as needed technology investments and upgrade to core systems. As we continue to build out the Pacific Current platform, we continue to expect that it will not contribute meaningfully to 2020 earnings. Connie will now make her closing remarks.
Speaker 1
Thanks, Greg. The accomplishments and financial guidance we've talked about today are part of our strategy to deliver sustainable long term value for all of our stakeholders. We've long viewed the success of our enterprise and the value we deliver to shareholders as inextricably linked with the value we deliver for our customers, our employees, our communities and the health of our environment, our economy and our state as a whole. With all of our operations here in Hawaii, an island state with ambitious renewable energy, carbon neutrality and clean transportation goals, we are very attuned to both the risks and also the opportunities presented by climate change. Last summer, our Board spent most of its strategic retreat on climate change as well as other environmental, social and governance, or ESG, considerations.
Since then, we've been formally integrating climate change and ESG into our strategic planning, enterprise risk management, and our disclosures. We've been reporting on certain key ESG metrics for some time, and one of our core strategies is to help Hawaii transition to 100% renewable energy. We'll be expanding our disclosures and are targeting to issue our first Sustainability Accounting Standards Board, or SASB, aligned report in 2020 and also plan to add TCFD, or task force on climate related financial disclosures, thereafter. To further align management incentives with our strategic goals, our Board has increased the proportion of performance based executive compensation to include the achievement of renewable portfolio standards ahead of state mandated time lines, and you'll see that in our upcoming proxy. Our Board is always focused on strong governance, and in our proxy statement, you'll also see our Board's proposals to enhance our governance policies by adopting majority voting and reclassifying the Board over the next three years.
We see these initiatives as further enhancing our core strategies and governance profile across our companies to reflect best practices. In summary, 2019 financial performance was in line with expectations and guidance, and we look forward to continuing to deliver consistent results in 2020. Our utilities will continue to focus on achieving our state's 100% clean energy and carbon neutral company goals while ensuring affordable, reliable and resilient energy. Our bank continues to provide a strong platform to deliver stable, sustained value for customers, shareholders and our communities. Pacific Current is a promising platform and will continue pursuing further sustainable investment opportunities.
Our company allows us to create value for our communities here in Hawaii while creating long term sustainable value for our shareholders everywhere. Finally, before turning to Q and A, I want to welcome Zlotnikka to our Board of Directors. As we announced yesterday, Eva joins our Board from the ValueAct Spring Fund as we believe that we and ValueAct are committed to the same goals, including Hawaii's ambitious renewable energy and carbon neutral goals and the desire to serve our customers and communities well. With that said, we're here today to discuss our 2019 results and 2020 guidance and ask that you focus your questions on those topics. Finally, this is Alan Oshima's last webcast, so I want to thank him for his amazing leadership of our utility during this time of great change.
Scott Fu succeeds Alan on February 15, and we are confident that he will continue our leading edge work of helping our state achieve this ambitious goal. And with that, we look forward to your questions.
Speaker 0
We will now begin the question and answer session. Begin question We
Speaker 1
and
Speaker 0
And the first question today comes from Art Lee of Bank of America Merrill Lynch. Please go ahead.
Speaker 3
Hey, good afternoon. Thanks for taking my question.
Speaker 0
Hi, Jerry.
Speaker 3
Maybe first off, I just wanted to check-in for ASP. How should we think about average interest earning asset growth? I see that it's about 1% for 2019. Can you just discuss the drivers there and expectations for that portfolio growth on a forward basis?
Speaker 4
Yes. This is Rich. Thanks for the question. We're targeting mid single low to mid single digits. So that would be in the kind of 34% range typically there.
And if you see what we did this year, and I think Greg highlighted, core deposit growth was about 3% last year. We offset that with some reductions in some of the higher government CD that brought us back down to kind of the 1% overall. So we think we've got adjustments done. So it's kind of normal course business trying to keep that consistent. We've had it for multiple years, that 3% to 5% range.
And that's through just everything we're doing around relationship expansion and growing primary customer primary bank customers.
Speaker 3
Got it. So we should expect this to normalize back to that's the case for 2020 at least within guidance is the normalization brought towards that. Right. Okay. That's helpful.
And then maybe shifting to utility a little bit. Can you just discuss the CapEx outlook a bit more? It seems like there was a bit of a decrease there as well as other outlook subsequently. Could you discuss the drivers towards the low and high end? I know that there was a little bit of pull forward into 'nineteen to 'twenty, but it seems like 'twenty one and 'twenty two are lower relative to prior April to 500 guidance?
Speaker 2
Yes. We've revised the guidance range, as you've seen, to $350,000,000 to $450,000,000 on a forward basis with a point estimate about $360,000,000 for 2020. And as I highlighted mentioned previously, you've got to look at that in conjunction with 2019 because you really Q1 projects being accelerated and the timing of those really puts you just slightly above $400,000,000 and that's consistent with our midpoint of our guidance range on a going forward basis. That level that's down a bit from what we had previously shown before, 400 to 500,000,000 as we look forward at the major capital investments across the system, which also included a couple of battery several actually battery energy storage projects
Speaker 3
that were
Speaker 2
on the planning board. As you know, the two projects were declined this last year, and we've, I think, conservatively reevaluated how much of those projects we put into our forward CapEx as we think some of them may be competitively procured versus utility bills. And we will update the forecast as we get clarity relative to those types of projects. Is that so those are the major drivers.
Speaker 3
Yes. That's certainly helpful. So it seems like the battery storage is what would be towards the high end presumably.
Speaker 2
In all major any major projects, they come in a bit lumpy, and they and that's why you have a range from year to year. I've seen Yes.
Speaker 1
And adding to what Greg said, what would thrust this more into the higher end of the range are like the acceleration of some of the project expenditures, for example, with the Army privatization. We've got a schedule for that with commission decision making. And depending on when that decision comes out, we may be able to accelerate some of those expenditures. And then also on the grid modernization, we do put our best forecast forward. But depending the pace of that project, there could be some acceleration.
And as you may know, the grid modernization projects, they don't come in, in one big chunk. They come in smoothly over the period. So we have some of that that could support the higher end of the range.
Speaker 5
Got it. That's helpful.
Speaker 3
And just one more question before I pass it on perhaps. So I know you mentioned rooftop solar earlier in your conversations towards leading the RPS goals. Could you just discuss plans on DER integration broadly and how discussions there have been going around potential incentives with PVR? That maybe also ties into grid mod spend given presumably need for grid mod to support the yard integration. This
Speaker 6
is Alan. I think we can just speak in generalities. We are dependent on an increased percentage of private rooftop solar given our very small relative land base in Hawaii that's available for renewable projects. We've recently combined our Doctor, demand response and DER activities, seeing the benefit of both offsetting each other or complementing each other. We look forward to increased penetration of rooftop, private rooftop combined with behind the meter storage.
So there's so many moving parts to our total renewable efforts, and we're looking at many different generating resources to get to our 100%. Does that answer your question? Or did you have a different question in mind?
Speaker 3
Yes. I was just wondering, in addition to that, just how discussions have been going around potential incentive attempts with PVR, performance incentive mechanisms for supporting VR integration. I know that that was one of the pillars discussed within PVR. Just wondering if there's anything to point you.
Speaker 5
This is Joe Vaiola.
Speaker 2
I'm with the regulatory affairs at Hawaiian Electric.
Speaker 7
So as you've identified, that's correct. Currently, the PVR docket is in a phase two, as we call it, the kind of the design phase. The commission has asked all the parties to develop a proposed incentive mechanism specifically related to DER integration. So, that's in process. Parties have been developing proposals.
The client electric companies have submitted proposals. Several other stakeholders have. And the commission has indicated it expects to have the decision on those proposals collectively in December. So we're still we're waiting.
Speaker 3
Okay. Thank you. Appreciate it.
Speaker 2
Thanks, Eric.
Speaker 0
The next question today comes from Paul Patterson of Benrock Associates.
Speaker 5
Good morning. Hello.
Speaker 3
Hi, Hi,
Speaker 5
How are you doing? So just to sort of follow-up on that base question. I'm a little bit when you look at 2021, before we just get without going into all the CapEx, timing and acceleration, what have you, the base itself seems to be like substantially lower than what your expectations were before. Is that because of the battery storage? Can you just clarify what's causing the substantial increase in the expectation for 2021?
Speaker 1
Paul, this is Tane. Yes, in terms of what's causing that decline, it was a battery energy storage project for slated for completion in that time frame. And what we had in the forecast and what you previously saw was about $140,000,000 of investments of battery storage here in Oahu. So Paul, if you remember that those were going to be company's done projects, and they were put into the competitive bid RFP.
Speaker 5
Okay. I got you. And then with respect to TBR, you guys mentioned a constructive process that collaborative or stakeholder process that you guys have going on. Do you think there's a potential for a settlement given where you are now? Or you comment a little bit on that?
Or just any more color on how that's proceeding?
Speaker 7
This is Joe Viola again. So I'm not sure. We're still actually we just had a I just came over from a workshop today. So the schedule in the doc calls for continuing exchange between the parties to better understand positions. The commission has encouraged all of the parties and stakeholders to focus on developing their own proposals.
We certainly see many areas of alignment, but I don't know that we expect any type of settlement. We expect parties to do what the Commission has asked us to do, to provide very comprehensive detailed proposals to address the outcomes they want to promote in this proceeding.
Speaker 5
Okay. Alan, congratulations. I wanted to want to follow-up on it. Good. So you missed these calls, Kyle.
So but but, you know, a few a few quarters ago, I think I asked you about the the potential for rate increases with respect to with PBR, with the transformation, etcetera. And it was a little too early, I think, you guys felt comfortable in terms of commenting on what the potential rate increase or rate outlook might be getting fuel and stuff out of the picture. And I'm just wondering, given how things have been coming in, so just do you have an update on how we should think about the rate impact you guys are looking at now with now that you're further along in the PVR, further along in the rate case and outlook and what have you? Paul, this will
Speaker 6
be an unsatisfactory answer to a very good question. I don't think we have an update. As Joe mentioned, we're still in PVR. We won't get the results of the full docket until the end of this year. We're seeing I think the most comforting aspect of the process is that the environmental, utility, financial aspects are all being discussed.
At the same time, and there's some true understanding of the totality of, as Connie mentioned earlier, how this has to be hot coal, that it's all of us together operating towards a very ambitious state energy policy, which we are all fully committed to. But underlying it is a realization, and I think it's always been emphasized by our regulators as one of the guiding principles, and that is the financial integrity of the utility because it is the grid that makes it all possible. So
Speaker 3
with that,
Speaker 6
I mean, as unsatisfactory as that may be in terms of a metrics driven answer, I don't think we can give any more color to it than that. But it's been a good process so far.
Speaker 5
No problem. And just finally, on the coronavirus, I know that obviously the virus can travel and what have you, guys have a substantial amount of Asian tourism. But how much do you have, like, the top of your head, the percentage of tourism that comes China as opposed to Asia in general?
Speaker 2
Yes. We've looked at that. As you know, we get about 10,000,000 visitors annually. We just broke through that threshold. From Mainland China and Hong Kong, it's approximately 1% or slightly below.
So it's pretty minimal overall. So the things we'd be concerned about is travel in general, people's willingness to get on planes and travel, which could impact the economy somewhat.
Speaker 5
Okay, great. Thanks so much.
Speaker 2
Thank you. Thanks, Paul.
Speaker 0
Your next question comes from Charles Fishman of Morningstar.
Speaker 6
Hi. Well, first, Alan, good luck to you. Thank you very much.
Speaker 8
And then let me make sure I got these. I'm thinking about this right. The bank generated about 81¢, but a nickel of that was from the headquarter sale, leaving $0.76 for this year or last year, which is about midpoint of guidance. So essentially, excluding the gain, the bank's roughly flattish, yet you're projecting a dividend increase that is like onethree higher. What can you give a little more color on that?
What's going on?
Speaker 4
So thanks for the question. So if you'll notice, our capital levels ticked up across the second half of the year. We were in the process we're adopting CECL, the new accounting standard for provisions this year. And so we were retaining a little bit more capital. So when that adjustment comes through, which is an adjustment to the provision level, a onetime adjustment to the provision level offset to capital, that we end up in a good spot relative to our overall capitalization.
And so with that, we have the ability to dividend up a little bit more of our earnings as we go through the year and stay in a good spot.
Speaker 1
And Charles, I'll just add that so the bank will still be targeting what has been our long time target of about 8.5% on the Tier one leverage ratio. So as Rich just noted, they had trended above that towards the 2019, and now they'll be coming back down to that.
Speaker 8
So the $75,000,000 of dividend that you're projecting for 2020 is pretty much a new base going forward?
Speaker 3
No.
Speaker 4
Don't. We think on an ongoing basis, you'd expect our traditional levels to be about the right component of earnings that we would. And we have a little bit of an adjustment this year in 2020 projected as we reset to the ongoing leverage ratio that we've been in the past.
Speaker 2
And remember that we're anticipating consistent earnings performance through this period of time, so there'll be some level of consistency to the dividend capabilities of the bank going forward.
Speaker 8
Got it. That's helpful. Just another question on or a question on the utility. Last quarter, we talked a lot about the CapEx, especially because of the cycling of the diesel units. And that's understandable with the I mean, you're sort of the canary here with what's going on with renewable in the country, if not the world.
And hearing you talk about that was certainly a concern and of something that maybe nobody in the industry is fully appreciating, at least on the analyst side. I didn't hear you talk about that this time. In fact, you said on the guidance O and M at or below inflation. So is that something that was just a one timer? Or
Speaker 5
you just didn't talk about it?
Speaker 2
Well, we so we did show it as an increase year over year increase 2018 to 'nineteen. So that was in some of our results this year. Ultimately, you're absolutely right. Those units have to be kept in good work in order to back stop all of the renewable energy, and it's a cycle however we have to operate in them. And if we cycle them higher levels, we have to have the appropriate maintenance for those.
But I think prospectively, we've gone through a series of periods with major overhauls. And those the major overhauls don't have to be done annually. Is that right, Tate?
Speaker 1
Yes. So Charles, this is Tate Seki Moore. So when we look at our overhauls, they're planned overhauls that it depends on run hours, and they can be lumpy in between years. And so and if you link it to what we see from a recovery standpoint, I mean, it can also be a little lumpy as you look at it over a period of time. As you look into 2020, though, and trying to understand the O and M forecast being at or below inflation, how to think about it, we did talk about our completion of our one company initiative where we restructured functions to allow more standardization and consistency of work.
And that will help us in terms of bringing more efficiencies to our utility as well as enabling us to do things like strategic sourcing in our purchasing area. In this forecast for 2020, we also have embedded our benefits from use of our new system using SAP, which went live in the 2018. Those efficiencies are also embedded in 2020 as well. So you can see that's how we're allowed to forecast an O and M level And Charles, I'd add to what Tane said about the SAP ERP savings because those are now fully ramped up.
They were ramping up over 2019. So they're fully ramped up now for the 2020.
Speaker 3
Okay. I forgot about that SAP. That's right. Well, that's good to hear
Speaker 8
that it's providing benefit. That's all I had. Thank you very much.
Speaker 2
Thanks, Charles.
Speaker 0
The last question today comes from Andy Levi of Exodus Point.
Speaker 2
Andy?
Speaker 3
Just two very quick ones. Just following up on Paul just on the coronavirus. So how specifically does it I know you guys are decoupled. How does it affect, I mean, I understand the tourism part, but how does it affect the earnings number?
Speaker 2
Well, potentially through economic activity that could impact the commercial enterprises where the bank has deployed capital and is lending into the community, it could slow down commercial activity somewhat. That would be one concern. We've also keeping a close eye on the supply chain for procurement of our renewable projects, if that gets either constrained or the cost of those go up. We haven't seen anything to date, but it's something we continue to monitor because bringing those projects online is very important to us.
Speaker 3
That's more project related and tech related? I would think so. Okay. And then just for 2020, in your forecast for the utility, what ROE current ROE are you embedding in that?
Speaker 2
We haven't actually disclosed that. But if you use the midpoint of the range, it would be a slight improvement to where we're at today. As you know, we closed at 7.8% the year, and we would see some improvement over that if we assuming the midpoint of the range. I would say a modest improvement. Don't anticipate we do have a couple of rate cases going on.
We have an interim decision on HELCO, and the ongoing potential interim will expect the interim here in about July time frame on the HECO rate case, which may provide some benefit. But beyond that, for significant improvements in the achieved ROE, we'll have to see how PBR plays out in 'twenty in the implementation in 2021.
Speaker 3
Okay. My last question. Just on the rate base slide on 15. So 4% to
Speaker 6
six is off to 18%,
Speaker 3
is that how it kind of works?
Speaker 2
It is because we were trying to normalize the differentials between 'nineteen and 'twenty. And also to align that with the guidance how we had done our previous guidance range using 'eighteen as a base as well for comparability.
Speaker 3
So it's three to five off of 'nineteen, four to six off of 18. Okay. I get that. And thank you for moving the call to Wednesday afternoon. We
Speaker 2
did it just for you, Andy.
Speaker 1
It's your Valentine's present, Andy. It's Valentine's present.
Speaker 3
My wife will be happy.
Speaker 2
You. Thanks for dialing in.
Speaker 1
Thank you.
Speaker 0
This concludes the question and answer session. I would like to turn the conference back over to Julie Solinski for any closing remarks.
Speaker 1
Just thank you all for joining us today. And most of all, mahalo and congratulations to Alan on your last webcast. Thank you. And hope you all have a great rest of the week.
Speaker 2
Thank you.
Speaker 0
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.