Hawaiian Electric Industries, Inc. (HE) Q2 2013 Earnings Report, Transcript and Summary

Shelee M. T. Kimura - Manager of Investor Relations and Strategic Planning Constance H. Lau - Chief Executive Officer, President, Director, Member of Executive Committee, Chairman of American Savings Bank, Chairman of Hawaiian Electric Company Inc, Chief Executive Officer of American Savings Bank and President of American Savings Bank James A. Ajello - Chief Financial Officer, Executive Vice President and Treasurer Richard F. Wacker - Chief Executive Officer, President and Director Richard M. Rosenblum - Chief Executive Officer of Hawaiian Electric Company, President of Hawaiian Electric Company and Director of Hawaiian Electric Company Tayne S. Y. Sekimura - Chief Financial Officer of Hawaiian Electric Company Inc and Senior Vice President of Hawaiian Electric Company Inc

Paul Patterson - Glenrock Associates LLC Nicholas Yuelys Charles J. Fishman - Morningstar Inc., Research Division Bryce W. Rowe - Robert W. Baird & Co. Incorporated, Research Division Andrew M. Weisel - Macquarie Research

Good day, ladies and gentlemen, and welcome to the Q2 2013 Hawaiian Electric Industries, Inc. Earnings Conference Call. My name is Allison, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I'd now like to turn the call over to Ms. Shelee Kimura, Manager, Investor Relations and Strategic Planning. Please proceed, ma'am.

Thank you, Allison, and welcome to Hawaiian Electric Industries' Second Quarter 2013 Earnings Conference Call. Joining me today are Connie Lau, HEI President and Chief Executive Officer; Jim Ajello, HEI Executive Vice President and Chief Financial Officer; Dick Rosenblum, 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, and then Jim will update you on Hawaii's economy, our results for the quarter and outlook for the remainder of the year. We will conclude with questions and answers. In today's presentation, management will be using non-GAAP financial measures to describe the company's operating performance. Our webcast presentation materials, which are posted on our Investor Relations website, contain additional disclosures regarding these non-GAAP measures, including reconciliations of these measures to the equivalent GAAP measures. Forward-looking statements will also be made on today's call. Actual results could differ materially from what is described in those statements. Please reference the forward-looking statements disclosure accompanying the webcast slides, which provides additional information on important factors that could cause results to differ. The company undertakes no obligation to publicly update or revise any forward-looking statements, including EPS guidance, whether as a result of new information, future events or otherwise. I'll now turn the call over to our CEO, Connie Lau.

Thanks, Shelee, and aloha to everyone. Our second quarter earnings were solid and came in as expected. Higher earnings from our bank more than offset slightly lower utility earnings. Our businesses are operating in a strong local economy here in Hawaii, which continued to strengthen. And we are seeing the positive impacts at American Savings Bank through lower credit costs. The bank's earnings continued to be challenged by the continued low interest rate environment and increasingly restrictive regulations, including regulation on fee income. In response, the management team is working hard to deliver prudent loan growth, strong risk management and efficient operation. And as a result, the bank has been a steady performer and again delivered strong profitability metrics and stable earnings. At Hawaiian Electric Company, we have made good progress towards the state's renewable energy goal. Renewable generation is at record level and already exceeds our 2015 RPS. Second quarter was also an active regulatory quarter at the utility. With customer bills remaining high due to high oil prices, reducing our customers' electricity bills and providing excellent customer service continue to be our primary focus. Hawaii's average electricity price is much higher than the mainland U.S., which principally uses lower cost and less volatile natural gas, coal, hydro and nuclear generation. While Hawaii's utility customers have had to contend with brief oil price spikes in the past, we are currently in a prolonged period of high prices. Thus, our highest priority is to find ways to lower customer bills as quickly as possible. To do this, our utility management team is addressing every part of the electric customer's bill. For example, we are renegotiating relatively expensive, older avoided cost contracts; negotiating new low-cost renewable contracts; reducing internal costs; refinancing debt at lower rates; deactivating older power plants, which are being displaced by energy efficiency and renewable generation; and working with the state of Hawaii and other stakeholders to bring lower-cost LNG to Hawaii, as well as many other initiatives. Unlike the mainland, in Hawaii, renewable generation often costs less than oil-based generation. This critical fact underpins our pursuit for renewable generation. Year-to-date, nearly 18% of our customers' electricity needs were met with renewable generation. This is already greater than our 2015 RPS target of 15% and has about doubled since 2010. The percentage varies by island and is even higher on Hawaii Island at 49% and Maui at 28%. At night, renewables on Hawaii Island can supply up to 70% of our generation. This is unprecedented in the industry. In the last 6 months, Hawaiian Electric solicited renewable energy proposal with a breakthrough average cost about 30% lower than our generation cost and substantially lower than previously offered. We are now beginning to see periods of the day on some island grids when renewable sources are competing against each other because supply is growing rapidly, while customer demand for electricity is declining. This is most pronounced during early morning when overall usage is lowest and early afternoon when residential PV systems reach peak output. Solving this is not a situation where the industry has ready answers. We are needing to use information and lessons learned in a relatively short period of time to forge new ground in integrating renewables, making Hawaiian Electric a recognized leader in integrating variable renewable generation into the traditional utility grid. During the second quarter, there were also a number of regulatory decisions and filings. In May, we received the final decision in order for our Maui Electric 2012 test year rate case. The final decision was $7.8 million less than the interim increase, largely due to a 100 basis point reduction in the allowed ROE for our Maui utility. The reduction is composed of 50 basis points due to the lower interest rate environment and 50 basis points for system inefficiencies associated with not integrating more wind energy from the new wind farms on Maui. Since receiving the decision, we are putting a great deal of focus on accelerating our learning curve further to reliably integrate even greater levels of variable renewable energy. And we expect to share our new plans with our commission by early September. In May, the PUC also approved the 2013 annual revenue adjustment mechanism for our 3 utilities and opened an anticipated investigative docket to review the decoupling mechanism. The PUC also approved our request to refinance up to $166 million of debt and to issue up to $70 million in new debt. We will seek lower-cost financing in 2013 as we did in 2012. In June, Hawaiian Electric submitted its proposal for its integrated resource plan for further action by the PUC. Among other items, the plan calls for accelerating the deactivation of older oil-fired generators, deployment of the smart grid technology to help customers make informed decisions about energy usage and procuring low-cost, fast-track, utility-scale renewable energy sources. As you can tell, the energy landscape in Hawaii is changing rapidly, and our utilities are working hard to meet customers' needs for clean, reliable, less volatile and lower-cost electricity. I'll now ask Jim to go over the Hawaii economy and our financial results.

Thanks, Connie. As a backdrop to our results and outlook, I'll briefly comment on Hawaii's economy, which continues to improve. Tourism industry surpassed last year's record-breaking numbers year-to-date through June, continuing the positive growth trend from 2012. Year-to-date, visitor arrivals were up 5.6%, and expenditures were up 6.9% compared to 2012. The 2013 outlook for the visitor industry remains positive. Statewide unemployment was 4.6%, with Honolulu at 4.1% in June, continuing its declining trend and remains low compared to the national average of 7.6% in June. Oahu single-family home sales and prices were up 10.4% and 9.2%, respectively, for the month of June 2013. And now, construction activity is adding to the economic rebound. Private building permits increased 15% year-to-date through May, and total commitments to build are expected to increase over 20% in 2013. The full effects of sequestration, however, which began in early July, still remain unclear. Overall, we expect to see strengthening growth in the Hawaii economy, with expectations of recovery in the construction industry and continued expansion of the visitor industry. As shown on Slide 7, second quarter earnings were $0.41 per share in 2013 compared to $0.40 per share in the prior quarter. On Slide 8, you can see that utility net income for the second quarter of 2013 was $28.7 million compared to $29.4 million in the second quarter of 2012. The detailed variances are shown here, and I'll just highlight a few. Utility net revenues after tax were flat. $3 million in increases at the Oahu utility for the additional recovery of costs were offset by a net $3 million decrease at Maui Electric Company, primarily related to the refund from the 2012 final decision and order. Operations and maintenance expenses after tax were lower than the second quarter last year, largely due to delays in plant overhauls and the reversals of previously expensed pension and integrated resource planning costs resulting from the weak OD&O. This was partially offset by higher customer service expenses. At the bank, net income for the second quarter of 2013 was $15.9 million or $1.8 million higher than the linked quarter and $1.7 million higher than the prior year quarter. Compared to the linked quarter, the primary after-tax driver for the increase was $2 million in lower provision for loan losses, which resulted in a $1 million release of reserves in the second quarter related to the strategic sale of our credit card portfolio in conjunction with the introduction of a new, more competitive credit card offering for our customers, which closed on August 1, 2013. For the year, the net earnings impact of the sale is not expected to be material. Other after-tax drivers at the bank were a $1 million gain from the sale of investment securities; $1 million in lower mortgage banking income, as a large portion of new residential mortgages were allocated to the portfolio rather than sold; and $1 million of higher noninterest expense, largely due to timing of marketing and service expenses and additional reserves on unfunded commercial lines of credit. Compared to the second quarter of 2012, provision for loan losses was $2 million lower, and gains on sale of securities were $1 million higher, consistent with the linked-quarter variance. This is primarily -- or partially offset by $1 million in higher noninterest expense due to the targeted staffing increases to support increased business volumes, IT and risk management capabilities. As shown on Slide 9, HEI's core ROE for the last 12 months was 10%, with the utility contributing an ROE of 8.3% and the bank of 11.7%. Since we've had an extensive discussion about the utility, I'll now look more closely at the bank. Turning to Slide 11, year-to-date, American recorded very good performance. We continued to grow the bank in a prudent manner and delivered year-to-date annualized loan growth of 9.1%. This was primarily driven by residential mortgages, as more of the continued strong production was added to the portfolio rather than sold. Strong loan growth helped mitigate the impact of the low interest rate environment. And our continued good asset quality and strong risk management resulted in very low net charge-offs and credit costs year-to-date. The bank delivered solid profitability metrics relative to our targets and the median of our publicly traded peers. Year-to-date, annualized return on assets was 119 basis points. Excluding the release of reserves related to the credit card sale discussed earlier, the bank's year-to-date annualized return on assets would have been 116 basis points, slightly better than expectations and remains attractive compared to our peers. Year-to-date net interest margin was 3.79%, higher than our expectations, due to the favorable loan mix and loan fees. Overall, the bank continues to maintain its low-risk profile, strong balance sheet, terrific funding base and straightforward business model. On Slide 12, our net interest margin of 3.79% in the second quarter of 2013 was 1 basis point higher than the linked quarter. Total asset yield was unchanged, and our liability cost declined by 1 basis point to 22 basis points. This is extremely low by industry comparisons and continues to reflect the value of our stable, low-cost deposit base. While stated rates continue to decline and reduce net interest margin by 5 basis points compared to the linked quarter, this was more than offset by loan growth and higher-yielding assets, particularly in residential mortgages, and higher fees associated with prepayments of commercial loans. The rate of growth in the residential portfolio in the quarter is a function of timing and is expected to moderate in the remainder of the year. As such, we continue to expect yields to decline in the second half of 2013. The impact from a higher interest rate environment will gradually feather into the portfolio over time as assets reprice higher. Thus, we do not expect a meaningful impact in 2013. For the year, we expect net interest margin to be -- in the higher end of our guidance of 3.6% to 3.7%. Turning to credit quality. Provision for loan losses was a net credit of $1 million. Excluding the release of the $1 million reserves related to the credit card portfolio, no additional provision expense was incurred. Increases in reserves for loan growth and net charge-offs were offset by $2 million release of reserves associated with specific commercial loan pay-downs. Net charge-offs were $0.8 million in the second quarter, down from the linked and prior year quarter. The net loan charge-off ratio remained low at 8 basis points compared to 12 basis points in the linked quarter and 19 basis points in the prior year quarter. The allowance for loan losses was 1.04% of outstanding loans at quarter end, a decline from 1.11% from the linked quarter, reflecting the release of reserves discussed above. On Slide 14, American's nonperforming assets ratio was 1.56%. That was 33 basis points lower compared to the end of the first quarter and lower than 1.84% at the end of the second quarter last year, better than its high-performing peers and consistent with our improved credit quality. On Slide 15, you can see that American's continued attractive asset and funding mix relative to our peer banks. American's June 30, 2013, balance sheet is stacked against the last complete available data for our peers, which is as of March 31, 2013. 97% of our loan portfolio was funded with low-cost core deposits versus an aggregate of 94% for peer banks. In the second quarter, total deposits declined by $36 million to $4.3 billion. However, average balances increased by $60 million. American remains well capitalized with a leverage ratio of 9.3%, tangible common equity to total assets of 8.4% and total risk-based capital of 12.5% at June 30, 2013. In the second quarter, American paid $10 million in dividends to HEI while maintaining solid capital levels. With respect to regulatory developments impacting capital levels, the rules implementing the Basel III capital framework were finalized on June 3 -- July 3, 2013 and became effective on July 1, 2015. Management believes that its current capital structure is more than adequate to satisfy the new capital rules. HEI continues to make a strong capital structure with consolidated common equity to total capitalization of 51% as of June 30, 2013. On August 1, Moody's issued its annual update for HEI and Hawaiian Electric Company and reaffirmed our ratings with a stable outlook. Now I'll turn to HEI's outlook for 2013. We are reaffirming HEI's 2013 earnings guidance of $1.52 to $1.62 per share, which is on a GAAP basis. At the utility, there are no changes to our assumption. Based on our results to date and outlook for the year, we expect the utility ROE to be in the 7.8% to 8% range in 2013, which assumes an estimated $115 million equity infusion from HEI in the fourth quarter. At the bank, our earnings guidance is unchanged. Our year-to-date trends and recent developments resulted in the following updates to the underlying assumptions: We expect year-over-year noninterest income to be lower in 2013. For the first half of the year, noninterest income was on track, with our original expectations to be higher for the year. However, with HEI's consolidated assets crossing the $10 billion threshold at the end of 2012, effective July 1, 2013, we are no longer exempt from the regulatory limitation on interchange fees under the Durbin Amendment of the Dodd–Frank Wall Street Reform and Consumer Protection Act. We now expect $3 million after-tax lower interchange fees for the second half of 2013. In 2013, the Durbin impact is more than offset by our updated expectation for a provision for loan losses. Due to the overall improvement in credit quality of the bank's loan portfolio and positive results in the Hawaii economy, we are revising our 2013 guidance on provision for loan losses to $5 million to $7 million pretax, a reduction of $5 million, or $3 million after tax, from our prior guidance. We expect loan growth to moderate in the second half of the year, but may end up on the high end of our guidance range of mid-single-digit growth by year end. I'll now turn the call back to Connie.

Thanks, Jim. In summary, our utility has made good progress on its renewable energy goals, and the bank continues to be a solid and stable performer. Our utility's primary focus continues to be reducing our customers' electricity bills and providing excellent service. Our bank continues to focus on the stability of its performance through prudent loan growth and strong risk management. Turning to our quarterly dividend. On Tuesday, the board maintained the dividend of $0.31 per share. Our dividend yield remains attractive, and as of yesterday's close, it was 4.7%. We believe we are well positioned to continue to deliver a unique investment combination of attractive and stable earnings growth, with reduced risk and volatility and an above-average dividend yield. And with that, we look forward to hearing your questions.

[Operator Instructions] And your first question comes from the line of Paul Patterson of Glenrock Associates.

Just wanted to touch base with you on the bank. The loan loss has improved, and I guess that's being offset in terms of your guidance by the Durbin legislation. Is that -- did I get that right?

Yes, that's correct.

Okay. And I guess when we look at these loan loss provisions, I mean, they seem remarkably beneficial. How should we think about the run rate, generally speaking, of that post this year?

This is Rich Wacker. I think that, obviously, that goes with the economy. And we've got to see how the economy looks as we get to the end of the year before we can talk much about next year. But the guidance that we're -- the first half has been affected, as we mentioned, by some good recoveries as we resolved some specific large commercial exposures. And the run rate that we're talking about for the second half doesn't assume any large recoveries of any kind. It's more of what we would look at as a run rate.

Okay. So all things being equal, we probably should expect it to go up. But we should expect the loan loss numbers to be more higher in 2014, right?

Higher than 20...

'13.

'13, yes, slightly. But again, we're not talking 2014 yet. But if you simply doubled the second half run rate that we're talking about, that it would work out that way because...

Well, this is -- I mean, could you tell me -- I'm sorry, could you tell me what the second half run rate is?

Well, we've guided 5 to 7 for the full year.

And Paul, that was down from the 10 to 12...

That's right. Right, I see that. Okay. Going back to the MECO and the decoupling thing. Obviously, that was sort of a disappointing order that came out. And I'm just sort of wondering in terms of customer perceptions, how you feel that got that way, and what efforts you're making to sort of change the communication efforts? I mean, I saw what you outlined on Page 3 -- on Slide 3, excuse me. Could you also sort of maybe give us an idea about how much savings that could actually bring about?

Paul, this is Dick Rosenblum. There were about 5 questions there, so let me try to answer them separately. You talked a little bit about decoupling. The decoupling review that the commission is embarking on was something that was completely expected. It was always part of the process. But after a number of years of operation, the PUC would go back and review how it was working. And this is a pretty appropriate time since all 3 utilities are now decoupled. You mentioned the MECO decision, Maui Electric decision. And yes, certainly, it's always disappointing when a final is different than an interim. We are in conditions where interest rates have changed and the commission chose to recognize that. And in particular, there was real motivation in that decision from the commission for us to increase our learning curve on integrating renewables on Maui, where we have a relatively high percentage of variable generation that has increased dramatically this year. And I don't want to say it was expected, but in a very high rate environment, certainly, commissions really do recognize areas where you can improve. I think the third part of your question was the public response, and the public is responding to high interest -- the high electric bills. As Connie mentioned, although we've had spikes before, this is the first time in quite a while we've had sustained high oil prices, and it’s really having impact on the community. We have stepped up our communications with the community at all levels and with public leaders and really are working quite hard for people to understand that we have the same goal they do, which is to maintain the lowest cost that we possibly can of electricity and still have a reliable supply for our customers and meet all our other requirements like the RPS.

I think -- let me just -- well, I mean, when I read the MECO order, it seemed to basically call into question how the company was performing with respect to decoupling, and how that was impacting costs and customers' bills. It didn't seem to me that they were solely interested in the curtailment or the integration issue, as you mentioned, between renewables. I mean, it seemed, at least from my recollection, it's been several weeks now. But I mean, as I recall, there was whole section about how they were saying that they didn't feel that the company was making -- it appeared to me at least, from my reading, they were making enough of an effort to control costs, I guess, or something of the sort. And I guess that's what I was referring to in terms of, yes, I mean, they've got this review going on in terms of decoupling, but it seemed that their words were somewhat sharp in terms of how they were characterizing the performance so far. And I just -- that's what I was wondering in terms if you're addressing that. And have you gotten any feedback since then that might make us feel better about what they said?

I think you're entangling 2 issues that probably shouldn't be connected. The review of decoupling, I think, is just that, and I perceive it as I described it. Certainly, the commission is concerned about the costs of operating the utility. And there were certainly some sharp encouragement for us to focus very hard on trying to reduce those costs, rather than view even inflation, for instance, as an acceptable benchmark. And we've clearly heard that and are clearly working on it. The reality, of course, is -- and I -- you referred to Slide 3 and I would, too, that the operating cost of the company is about 12% of the total costs of the bill in round numbers. And certainly, we can make progress on that and are making progress on it. Just compensating for the settlement and for the change in MECO is an example of working on those things. But the real key is mostly in the other areas, getting on lower-cost generation, reforming some of the older, relatively higher-cost generation and a wide range of other things we're doing.

Can you quantify any of that at this point? Or is it just too early or is it hard to do in terms of just...

I think it's speculative at this point to quantify how effective we'll be on many of those areas.

Okay. And then just on 2 items, I didn't see really anything about energy efficiency on the customer's side. Just wondering if that's just all that low-hanging fruit and that's been picked or -- I mean, because one sort of thinks that, that might be one way. I realize it's not a kilowatt hour, it's more of a total bill impact perhaps. But I was just wondering -- I didn't -- I missed it maybe, but I didn't see that. And also, the renegotiation of the PPAs, what would -- in terms of the -- what you guys mentioned there, how would you be able -- what would be the incentive of the other parties to do that?

Let me talk a little bit about energy efficiency. I think all of us would agree that energy efficiency is overwhelmingly the highest payback way of reducing cost to customers. In Hawaii, energy efficiency was split off from the utility role and given to a third party. So the reason we don't really talk about it is, it's not per se in our scope. We do, in fact, work with our customers on it. But we have a very limited portfolio of things we can do, that's largely removed to a third party, as I said. The other part of your question, I think we're up to about 10 parts now.

Okay. I'll just -- I won't ask anymore.

Okay. I mean, I'm having to write them down really fast, is why would someone who already has a PPA with us have an interest in renegotiating? And it really comes down to the specifics of the contract. I'll give you some kind of generic reasons. The provider may well be able to produce more than the nameplate on the contract. But because they're relatively high cost, we're limiting to what their nameplate is on the contract. In return for negotiating a lower rate from us, they may actually be able to produce more. That allows them to have higher earnings and us share that benefit with our customers in lower rates overall. I mean, that's one example. Sometimes, they want to extend the length of their contract because their plan is holding up fairly well, and they see an opportunity where we can extend it at an appropriate price, get a lower price through the period and, again, share that increased value with both customers and the providers. So it really depends on the specifics. But there are certainly many cases in which we've already been successful and several more where we're working on it.

And Paul, I'm going to break in here. This is Connie, and I'm going to ask Tayne to also comment because she's been leading the project for Dick internally on the internal costs. And I think you've heard us talk about in the past about the new asset management programs under which we've been doing things like replacing poles in an entire area rather than when they give out, so that we can have net savings to customers over a period of time. And so a lot of the analysis spans time periods as opposed to being reductions that you can point to at a point in time. But I want Tayne to give you some other examples of the kinds of things that the utility has been working on.

So some of the efficiency that we are pursuing on a day-to-day operational basis are things like changing our maintenance outage practices, as customers are using less electricity. And what this has resulted in is reduced operations and changes in the scheduling that we do to help reduce our expenses in the power supply area. We've also took a look at our purchasing contracts for both grids and expenses, and it has helped to lower our purchasing costs in 2012 and on a go-forward basis as well. We also continue to look at refinancing our debt. We've got over $1.1 billion of debt. Last year, we refinanced close to $0.5 billion worth of debt, and that reduced our average cost of debt by roughly 40 basis points. And then looking forward, we're also looking at plans which include deactivating our older, less-efficient oil-fired units to help lower our costs and to also increase the use of renewable generation. Those are just a few of our examples, Paul.

And Paul, just that list alone could be roughly about $30 million a year. So these are not small numbers, but there are a lot of these kinds of programs that are ongoing.

That sounds great. I really appreciate it.

The caveat on that quantification is some of that is capital and some of it is O&M, so some appears immediately, some over a longer period of time. Materials, for instance, largely goes to capital.

Your next question comes from the line of Nick Yuelys of Gabelli & Company.

Just 2 quick questions here. Can you just repeat the ROE level embedded for guidance and the capital infusion level? I just missed those. And I've got...

Nick, it's Jim Ajello. So on the capital level implied in the guidance, the infusion that we expect in December from HEI into HECO would be about $115 million.

And the ROE for the utility is 7.8% to 8%, is the revised guidance.

Okay. And then, I guess, just where the other -- I can see in the guidance you're going to issue $75 million under the forward agreement. Where does the other $40 million come from?

So approximately 3 million shares, as we said here on Slide 17, equates to about $75 million. And then, keep in mind, we also have a dividend reinvestment program, which should generate about $45 million. So when you look at that sources and uses slide in the back of the deck in the appendix, you'll see those all added together for the capitalization. So that's on Slide 38 in the appendix.

And Nick, that also includes the roughly $40 million in dividends from the bank.

Okay, great. And then just on the CapEx plan a little bit, can you talk about the -- on the second half of the year, how you get from the $140 million you spent so far to the $340 million, and then moving any of the projects from being major initiatives to going into the official CapEx plan?

This is Tayne. We're still on track for spending roughly $340 million of CapEx this year. As we take a look at things that are evolving, we are looking to updating our guidance in the normal course of business, which is in the February time frame.

Our next question comes from the line of Charles Fishman from Morningstar.

In your recent meetings with the commission, have you been given a clear path of how you go about eliminating the 50 basis points penalty in the Maui decision?

This is Dick Rosenblum. It is really an issue for the commissions on their own to determine when and if they believe that should be reversed. Clearly, they've indicated that the issue is how effectively we are and will incorporate lower-cost renewable generation on Maui. We have, in early September, a submittal to them on that subject. I think a lot will depend on their view of how aggressive and how effective that program will be, or they could wait to see how effective it will be. So the short answer is there's not a clear path. It is largely in the commission's purview to determine when and if they reverse that.

So they really haven't given you fix A, fix B, fix C, is what I'm hearing?

No.

It's more subjective?

No, I wouldn't say subjective. I think it's really dependent on our performance. It's not the commission's role to tell us how to do our job. It's the commission's role to tell us what we need to achieve and then us to figure out how to achieve it, and then judge how effectively and how aggressively we're doing that. So I kind of view this as a normal situation insofar as how to get out of this problem.

And Charles, as we tried to point out in the prepared comments, we're in uncharted territory to a large extent because Hawaii is really leading the way on integration of renewable. So we...

No, you're right, your levels are certainly higher than anybody else's, you ought to be, given a little bit of credit for that, I would think.

Yes. And frankly, that's the reason why we have to work so closely with our commission, because overall, Hawaii as a state is plowing new ground here.

Yes. This is Dick Rosenblum again. I just want to be clear that we have very high electric rates, and our customers are suffering. So the fact that we may be on uncharted ground is interesting and important. But what the commission is really looking for and what we are committed to is doing the very best job that can possibly be done even if that's in uncharted ground. We simply cannot do enough to help our customers deal with the high price of oil. That's our job.

Okay. Then my second question was, you indicated, to the best of your ability, to analyze this, the sequester was having very little impact. And I just thought that was interesting. I -- comments made by a utility in the D.C. area specifically pointed to the U.S. Navy as it's causing them an issue in the first half of the year. And obviously, you have a big presence with the U.S. Navy. But I guess, they do a lot of their own self-generation. So is that why you're not being impacted by that?

Charles, it's Jim Ajello. A couple of points to your question. Number one, this has really begun only recently here. So what I did say specifically was that we're gauging this and watching this, but the impacts are not yet apparent. We do have a number of parts of the armed forces that are not going to be affected by the sequester based on the kind of service that they do. But these are early days to determine that. In terms of the military generation, I'll turn to Dick to see if he has any offering on that.

Again, this is Dick. The military has relatively little self-generation, although, a lot of their housing does have residential PV on it. So depending on whether you're thinking of the base or the housing on the base, you might end up with very different answers. But the operations in the military are really shifting, as President Obama said to the Pacific. And that really, I think, has had minimized the impact on the military here, particularly in the short term, which is not to say there might not be a larger impact in the future.

Charles, in particular, because we have Pearl Harbor here, as the furloughs started, the shipyard workers here in Hawaii at Pearl were not included in those furloughs. Now other military personnel here, of course, had been affected. But as Jim said, it's relatively early for that. We also have looked across the company, and I'll turn it to Rich in just a moment, because the other thing that we had to do with the furloughs starting is to evaluate the potential impact on our loan portfolio. And I'll let Rich comment on that.

Yes. So far, again, we are calm. We don't think that there's a big impact on that. We do have programs if we need to, to work with borrowers who are -- as we would. There are private sector cutbacks and things as well. So, so far, we continue to see improvement in the overall scores of our borrowers, and we're watching it closely.

And our next question comes from Bryce Rowe of Robert W. Baird. Bryce W. Rowe - Robert W. Baird & Co. Incorporated, Research Division: Just wanted to clarify a couple of things. One, the Durbin impact you mentioned, was that an annualized number, or was that for the second half of this year?

This is Rich. That's the second half. Bryce W. Rowe - Robert W. Baird & Co. Incorporated, Research Division: Okay. So annualized, it's about $6 million?

Correct. Bryce W. Rowe - Robert W. Baird & Co. Incorporated, Research Division: Okay. The size of the credit card portfolio, Rich?

It was about $25 million combined, about 20% of that is small business; about 80% of it, consumer. Bryce W. Rowe - Robert W. Baird & Co. Incorporated, Research Division: Okay. And the specific reserve held against that portfolio was what?

The net that we released was $1 million. We -- and in connection with that, we also charged off about $0.5 million of assets that were not going to be sold. And we're writing them down to what we think we're going to get out of those. So there was about $1.5 million against that. Bryce W. Rowe - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then last question. The prepayment and interest income, can you guys quantify what that was?

It was about $600,000 worth of prepayment fees in the quarter.

Our next question comes from Andrew Weisel of Macquarie Capital.

Okay. Can I hold your question for just a moment?

Sure.

I'm going to ask Rich to continue to comment on the credit card portfolio sales. And there will be a minor impact in Q3 as well.

Right. So -- and third quarter ends up with the actual sale, as Jim mentioned, that closed. We received the funds last week, Friday. And so in the third quarter, we actually record the gain. The second quarter had the release of the provision as we moved the assets to held-for-sale. We do have also some exit costs associated with our servicing of our portfolio with our IT provider. So net-net, you'll see a gain of termination penalty that will basically wash out the -- what the income was expected to be for the rest of the year on that portfolio.

Okay, Kaylynn [ph], please proceed -- oh, I'm sorry, Andrew.

My first question is, you mentioned that you expect the loan growth to moderate in the second half. Just curious, how much of that is conservatism or something you're actually seeing? You mentioned that you've not seen much on the sequester, and the economy in the state seems to be doing well. So what makes you think it will moderate from the -- from the first half's 9%?

The biggest factor is, as we mentioned, we put more of the retail residential mortgage production into the book versus selling it. So we had a higher proportion going in. We had faster growth in retail. And we see the refinancing volumes coming down, like everybody else does. And so you'll -- and as we sell a little bit more of what we produce and have somewhat lower volumes in production, we think that the residential piece will slow down. We still hope to get reasonable growth on the commercial and CRE side, though that's fairly competitive right now. But the main driver of the moderation back to kind of that mid-single-digit level will be just the residential side.

And Andrew, I'd just comment because there's always questions about the rate of loan growth for the bank. And as Richard explained, to a large extent, we manage that growth very carefully and the mix of the portfolio because the real focus of the strategy is to maintain a diversified loan portfolio and continue to manage the interest rate risk going forward. So we have had, for example, in the past, very strong mortgage production levels. As you know, in 2012, we were basically doubled in the production area, but we did not put all of that into the portfolio.

Okay, great. My next question is just on the credit card sale. You've answered most of my questions. The only one I have left is why sell it? I think you mentioned an expanded offering that the purchaser will be able to offer. Why couldn't you do that yourself, or why didn't you want to do that yourself?

It's -- the program just continue to move. We're not a big institution. A $25 million portfolio is not really a very big base to make a lot of investment on. We wanted to sell it because we wanted to have something that was much more competitive for our customers. We really haven't been originating many new accounts other than secured accounts. And as we want to give our customers more reasons to do all their banking with us, we don't want to give them any reason to get a bank card from one of the other peers. And so we have a very good set of products that we can introduce now to the consumers. We also have a small business solution that's much better than we have. And we have a commercial solution, a set of commercial solutions that we didn't have before. So it's really do what's right for our customers, that will do what's right for the bank.

Great. Then quickly on the utility side, the renewables, you are clearly well ahead of targets, and I'm sure people appreciate the cost savings on that front. Just curious, how much have you vetted these plans with regulators and politicians, and how supportive are they of you going so far above and beyond the RPS requirements?

Well, I think you're referring to the IRP report we submitted, integrated resource plan, and that is in review at the PUC right now. It was quite extensive. I think the entire plan is about 2,200 pages, if I remember. It will require a fair amount of review and public discourse. But generally speaking, because renewables in Hawaii are less expensive than base generation on oil, the more, the merrier. Every little bit we can get, that contributes to reducing costs to our customers is a good thing for the environment, it's a good thing for the cost to our customers and it's a good thing for our economy. And we should go as far as we possibly can.

We have no further questions at this time, so I'd now like to turn the call over to Shelee Kimura for closing remarks.

Thank you, everybody, for joining us. And I'll be available for calls should any of you have additional questions. Thanks so much. Bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and good day.