Good day, ladies and gentlemen, and welcome to the Third Quarter 2013 Hawaiian Electric Industries, Inc. Earnings Conference Call. My name is Denise, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Shelee Kimura, Manager of Investor Relations. Please proceed.

Thank you, Denise. Welcome, everyone, to Hawaiian Electric Industries' Third 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. The unique combination of our businesses continues to deliver solid results. Our year-to-date consolidated earnings are in line with expectations for the year, and our consolidated core ROE for the trailing 12 months was 9.9%. American Savings Bank continued to focus on loan growth, strong risk management and expanded customer relationships. As a result, it continued to be a stable performer, with solid profitability metrics, despite the challenges of an increasingly restrictive regulatory environment and low interest rate. Hawaiian Electric continued its pursuit of more low-cost clean energy and cost efficiency in its effort to lower customer bills. In support of Hawaii's goal to reduce its dependence on imported oil, Hawaiian Electric is one of the nation's leaders in integrating clean energy, achieving record levels of renewable generation, which displays the use of approximately 2.2 million barrels of costly imported fuel oils year-to-date, the equivalent of $275 million. As shown on Slide 3, third quarter earnings were $0.48 per diluted share in 2013 compared to $0.49 per share in the prior year quarter. Slightly higher consolidated net income, driven by higher bank earnings, helped offset lower utility earnings. However, EPS declined by $0.01 due to the increased number of shares issued through our dividend reinvestment program to support the capital needs of our utility. Year-to-date through September 30, more than 18% of the electricity used by utility customers came from renewable resources, exceeding the state's 2015 goal of 15%. On Hawaii Island, renewable generation is up to 49%, and the Maui Electric is up to 30% year-to-date. Consistent with the system improvement and curtailment reduction plan that we filed in early September for Maui, Maui Electric integrated 91% of the wind energy produced on the island in September, up from approximately 70% in the…

Thank you, Connie. As a backdrop to our results and outlook, I'll briefly comment on Hawaii's economy. Year-to-date through September, visitor spending increased 4.1% to $11 billion. And visitor arrivals increased 4.5% to over $6 million. For the month of September, visitor arrivals fell for the first time in 2 years, and arrivals from the U.S. declined and spending dipped. Economists continue to monitor the impact of sequestrations and the federal shutdown and expect tourism growth will be moderate going forward as that industry has regained a high level of productivity. Statewide unemployment was 4.3%, with Honolulu at 3.8% in August, and remains low compared to the national average of 7.3% in August. Oahu single-family home sales and prices are up 7% and 3%, respectively, year-to-date through September 2013. And construction activity is adding to the economic rebalance. Private building permits increased 6% year-to-date through August. Going forward, we expect continued, but more moderate growth in the Hawaii economy. On Slide 7, utility net income for the third quarter of 2013 was $37.8 million compared to $38.4 million in the third quarter of 2012. The detailed variances are shown here, and I'll just highlight a few. Utility net revenues after tax were approximately $2 million higher. $4 million of increase at the Oahu utility for additional recovery of costs were offset by decreases at Maui Electric, primarily related to the 2012 final decision and order and lower fuel efficiency performance. Operations and maintenance expenses after tax were approximately $2 million higher in the third quarter of last year, largely due to the timing of plant overhauls and higher customer service expenses, partially offset by lower expenses for substation and generating station maintenance. In this year, we recorded a reversal of deferred tax liabilities of $3 million versus last year when…

Thanks, Jim. In summary, our utility continues to focus on reducing our customers' electricity bills in our a high-bill environment and on providing excellent customer service. And we are currently ahead of the state's renewable portfolio standards goals. Our bank continues to focus on stable performance through prudent loan growth and strong risk management. Turning to our quarterly dividend, on Wednesday, the board maintained the dividend of $0.31 per share. Our dividend yield remains attractive. And as of yesterday's close, it was 4.6%. We believe we are well positioned to continue to deliver a unique combination of stable earnings growth with an above-average dividend yield and relatively low risk and volatility through our unique combination of companies. And with that, we look forward to hearing your questions.

[Operator Instructions] Our first question comes from Charles Fishman with Morningstar.

Does the level of renewables on Maui, does that meet the commission's expectations now? I think you said it was 91%.

This is Dick Rosenblum. I think we're certainly making progress on meeting the commission's expectations. That's 91% of all the available energy is being accepted. The 2 areas where we have -- continue to have some challenges, and we continue to try to improve, are in the very early morning hours when the load is very, very low and the percentage of renewables can be very high. And surprisingly, in the midafternoon, when although the load is high, the production of rooftop photovoltaic is also very high. And when that combines with high winds, we have the same sort of situation where the available margin to utilize it is quite low. So we continue to work on those areas, but I think we are well on the way to meeting the expectations of the commission.

So that's the measurement that the commission is looking for, that percentage of the utilization?

Yes.

Okay. And then if you could also maybe give some color on the O&M now, it's 2% increase over '12 versus 1%, I think, last quarter. What's driving that?

Charles, this is Tayne Sekimura. What's driving that is our customer service expenses are higher than originally forecasted.

Okay. I guess just -- I mean, just all around the utility distribution is just higher. I mean, nothing really specific, it's not really benefits or numbers?

This is Dick Rosenblum. It's not benefits or even distribution. It's really the specific of customer service expenses particularly in our phone center where we've been focusing on improving the level of responsiveness in our phone centers. And typically, you do that among other things by simply adding more reps so that you can answer the calls faster. But clearly, that's what's going on.

But I think your phone centers are fairly new. And your phone centers are fairly new, aren't they? So you're still probably going down the cost curve on those, aren't you?

Well, the phone centers have been around a while, but you're exactly correct in that they are operating on the new CIS system, customer system. And as you'd expect, it's taking them a little longer as they are learning a new system and getting used to it. And that's a portion of what's driving that cost up.

[Operator Instructions] Our next question comes from Paul Patterson with Glenrock.

I wanted to go over the deferred income tax adjustment. That's non-recurring, is that correct?

It's Jim, Paul. Yes, it's non-recurring. It's a reconciliation of deferred tax accounts that occurred over quite so many years.

Okay. The lower cost associated with these contracts that you are negotiating the 9 utility contracts, why are they lower than the competitive bid process? Could you explain sort of the differential between those 2 things? And why that's -- could you elaborate a little bit more on that?

Sure. This is Dick Rosenblum. We have perceived for some time that the competitive bidding process we've been in is resulting in the bidders essentially bidding against our avoided cost of energy. And so in this round rather we put a price target out of $0.17 a kilowatt hour and said we would not accept any bids above that. We then went through several rounds of bidding, and we're able to produce a much lower price than we have been able to acquire through the traditional bidding process in the past.

Okay, okay. So it's sort of a new thing that you guys are coming up with. That should help you guys out going forward, I guess, in the cost side.

We certainly hope so. Yes, we think this sets pretty much a new benchmark for what price is acceptable. And we continue to look for decreases in renewable energy prices from here.

Okay. And then on the RAM review, you guys made a filing, I think, a couple of weeks ago indicating that you were somewhat concerned about the impact it could have on your credit quality. And I guess this is for the financial impact on the company. Could you elaborate a little bit more on -- or give us a little bit of flavor as to what you think -- I mean, this is Schedule A issues, too, as I recall. I mean, I think you also mentioned some of the concerns in Schedule B. But I was just wondering if you could describe sort of some of the concerns that you guys are worried about.

Paul, this is Tayne. What we did a few weeks ago is we provided some input on some of the issues that the PUC might want to look at. And in doing so, we just added a view to include what the credit rating agency impact may be for purposes of discussing issues in a more broader sense. But I wouldn't say it's a concern. It was more just providing more input in the types of issue that should be vetted in that proceeding.

Okay. I guess, we're looking at this. And we've got that case that we discussed before with their concern about you being unduly insulated perhaps. Have you guys any discussions with the commission or any flavor as to whether their concerns are more -- or have been -- whether their concerns that they've expressed -- have been -- ameliorated to some degree?

This is Dick Rosenblum. I think that's a very good question. Let me try to answer it in a couple of pieces. First and foremost, I want to point out that the PUC has been very visible in stating their policy support for decoupling as a process and in our environment. So that's sort of the backdrop for everything I'm going to say. I also think it's important to note that none of the present commissioners receded when the existing decoupling was debated and implemented. So they sort of come to this with the fresh set of eyes. And I think they both want the opportunity for input into the mechanism, which, of course, they didn't get because they were exceeded at that time and they perceived a need to make sure the mechanism remains relevant in light of current -- somewhat changed circumstances. For instance, we have almost 20% renewables today. Back then we had in the low-single digits. We have explosive growth of rooftop PV today that certainly was not the case back then. We have much higher oil prices and therefore, customer bills than we had back then. So it really is an attempt on their part, I think, to just take a fresh look at it, make sure it remains relevant. And I personally don't have any expectation that any particular changes are coming or currently or in their minds. But I do understand they comment this with new eyes and view the mechanism in light of changed circumstances. So I think it's truly an attempt to really take a hard look at it in light of the environment we're in today.

Okay. With respect to the IRP process, I guess, there was this independent evaluator who failed to certify it. What are the next steps that we should think about in terms of -- I don't know, what does that mean, I guess? And what does it mean for the process going forward in respect to the IRP process?

Paul, this is Dick again. The next step is really for the commission to consider both our IRP and our input and the independent observer's input and make a decision as to whether they want any additional action taken going forward, they want it changed going forward, or they view it as a good effort in meeting their needs and there's no need to redo anything. So it's really in the commission's hands to balance all the input.

Any timeline in terms of when we might get a commission response to that?

Again, this is Dick. There's no established timeline.

Okay. And then just finally, to the bank. Loan loss reserves looked very good. And you guys mentioned overall credit trends led to that. Is that because of real estate prices? Could you just elaborate a little bit more on that, and what your outlook for that might be going forward?

This is Rich Wacker. Thanks, Paul. Real estate prices have been moving up, and so, certainly, that's helpful in disposing of some of the REO. So we haven't had losses on additional REO disposals. We've also been resolving a lot of the portfolios. We've been able to run off our land loan portfolio a little faster than we had forecasted. And so that's helped us. And we resolved some of the larger commercial non-earnings that we had quite favorably. So it's been a combination of a long process of working through the riskier parts of the book, help from the economy and a bit of help from real estate prices here.

But low [indiscernible] going forward?

We think that, again, the revised guidance that Jim spoke to for this year says we should stay in a relatively favorable way through the end of the year. And next year, we don't think we'll have as much of the favorable effective running of those riskier parts of the book. We expect kind of the gross charge-off numbers to continue to come down, but some of the benefits that we had in recoveries of previous charge-offs or the provision reversals will probably not be as high as this year. And so you'll see some increase from those levels.

And Paul, I'd just add that those are what have been offsetting the need to reserve for the loan growth that Rich has been experiencing.

Our next question comes from Michael Goldenberg with Luminus.

I want to ask you a question. You mentioned something about CapEx decreasing $15 million in 2013. I didn't quite catch -- is that just being moved into '14 and you're going to do $15 million more in '14? Or if '14 is staying the same?

Michael, this is Tayne. I wanted to clarify that. We had mentioned -- Jim had mentioned on his comments that CapEx is decreasing in 2013 by $30 million.

I'm sorry, $30 million. Okay.

$30 million. Yes, 3-0. And the reason for that is we're taking a fresh look at what we spend in the generating area. You heard a little bit about our plans for deactivating some of our generating units. And in light of that, we're looking at what we pour into CapEx. So some of that is being moved on off to future years; others are being eliminated because of the deactivation that's going to be ahead of us.

And Michael, I'd just add that in Jim's comments, we also noted that we're expecting plant additions to be on target and also to meet the rate base growth of about 5% for the year.

So if we look at the numbers, is '14 changing at all based on this $30 million reduction in '13?

Michael, it's Jim. Well, we'll actually be reviewing our plans for '14 as we close the year and advise you of any changes as we come forward on the next earnings call.

But as of now, you just -- the slight decrease in '13 by $30 million, and that was it? Or did you increase '14 in the slides at least for that?

We actually haven't talked through '14 or any other forward-year plans as of yet. And it's under review right now.

Yes, but there's a slide of the CapEx, right?

Correct. So we haven't changed that slide for the balance of '13. And then as we get into '14 and the years after that, we'll update that if any updates are required in the next earnings call.

Okay. So the slide is exactly like it was previously, with that reflecting what you have verbally stated?

That's correct.

Yes, no updates to -- that's the one in the appendix on Slide 30. No updates to that. And as Tayne said in her verbal comments, some of the $30 million is gone away, some of it is transferred. So -- but we haven't broken that down for the year.

Michael, this is Shelee. I just want to clarify, and as we've talked about before, we update that CapEx forecast once a year, and our normal cycle is to do that in February. And through that normal cycle, we're going through a reevaluation of our 5-year CapEx plan right now. So we're not really speaking to anything beyond '13.

We have no further questions at this time. I would now like to turn the call back over to management for closing remarks. Please proceed.

Thank you, everyone, for joining us. We look forward to seeing you at EEI next week.

This concludes today's conference. You may now disconnect. Have a great day.