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Hawaiian Electric Industries Inc  (NYSE:HE)
Q2 2019 Earnings Call
Aug. 02, 2019, 4:15 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Second Quarter 2019 Hawaiian Electric Industries Conference Call and Webcast. [Operator Instructions]. After today's presentation their will be an opportunity to ask questions. [Operator Instructions].

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

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

Thank you and welcome to Hawaiian Electric Industries Second Quarter 2019 Earnings Conference Call. Joining me today are Connie Lau, HEI President and Chief Executive Officer; Greg Hazelton, HEI Executive Vice President, Chief Financial Officer and Treasurer; Alan Oshima, Hawaiian Electric Company President and Chief Executive Officer; and Rich Wacker, American Savings Bank President and Chief Executive Officer as well as other members of senior management. Connie will provide an overview followed by Greg, who will update you on Hawaii's economy, our results for the first quarter and our outlook for the remainder of the year. Then, we will conclude with questions-and-answers.

During today's call, we will be using non-GAAP financial measures to describe our operating performance. Our press release and webcast presentation are posted on HEI's Investor Relations website and contain reconciliations of these measures to the equivalent GAAP measures.

Forward-looking statements will also be made on today's call. Factors that could cause actual results to differ materially from expectations can be found in our webcast slides, our filings with the SEC and on the HEI website.

I'll now ask our CEO, Connie Lau, to begin with an overview.

Constance Hee Lau -- President and Chief Executive Officer

Thanks, Julie, and aloha to everyone. We're making great strides on key strategies across our companies and in the second quarter delivered consolidated net income of $42.5 million and $0.39 per share of earnings, in line with our expectations for the year. We remain on track with our 2019 plans. While we are reaffirming our earnings guidance range for the year, we do have some updates, which Greg will address shortly.

Turning to our utility. Together with our commission and our stakeholders, we're working hard to reach our ambitious goals of 100% clean energy and a carbon neutral economy by 2045. We continue to look for the best ways to achieve these goals while providing greater customer value, including affordable, reliable, resilient energy and more customer options.

This requires a much more expansive and integrated approach. For example, our Stage 2 renewable energy RFP and our grid services RFP are moving forward concurrently, allowing us to compare a range of generation, storage, load management and other grid services solutions all at the same time. Similarly, our integrated grid planning process will enable us to simultaneously evaluate resources to meet generation, transmission and distribution and resilience needs rather than in siloed processes.

In line with this integrated approach, the commission denied two battery proposals that we have filed earlier last year. The West Loch PV battery denied in April and the CIP contingency and regulating reserve battery denied without prejudice this month.

These storage projects were proposed before the results of our Stage 1 renewable RFP and before the launch of integrated grid planning and our Stage 2 RFPs. Through these new processes, we have the ability to better assess alternatives and find the options that delivers the best value for our customers.

The commission has encouraged us to expand or accelerate procurement across all resources, both traditional and emergent to achieve our clean energy goals. Following guidance from the commission, we have dramatically expanded the scale to our Stage 2 renewable energy RFP.

In our recently filed final proposed RFPs, we're seeking up to about 900 megawatts of renewables, more than 500 gigawatt hours of storage and grid services, making this among the largest renewable energy and integrated procurement ever launched by a US utility. The additional renewable energy, storage and grid services from this procurement will accelerate our move away from fossil fuel.

In September 2022, the AES coal plant contract will expire. We also plan to retire the oil fired Kahului power plant no later than 2024. We are on track to exceed our 2020 renewable portfolio milestone of 30%. And this procurement has the potential to propel us even faster as a state toward our 100% clean energy and carbon neutrality goals.

As we said this before, this will take our whole community, it's not just about the utility. Particularly in a state like Hawaii with limited land, it's important that we all work together to add renewable resources and engage in energy efficiency and demand response programs. For example, while our hope is that projects contracted under Stage 2 will come online between 2022 and 2025, timing for the new projects depends on community acceptance and other factors as well.

Hawaiian Electric and renewable energy developers will move forward aggressively, but our progress can only be achieved in a larger community context. Our collective work to find the best path for achieving our clean energy goal extends to PBR, the performance-based regulation proceeding.

In May, the commission issued its decision on the first phase of PBR laying out a conceptual framework revolving our performance-based regulation, including guiding principles, goals and outcomes and structural elements. Throughout the PBR proceeding, the commission has consistently underscored the importance of maintaining the financial integrity of the utility, and that is one of the three guiding principles for Phase 2 along with customer-centric approach and administrative efficiency.

The regulatory goals and outcomes identified in the order aligned well with our own strategic goals, including affordability, cost-containment, customer engagement, greenhouse gas reduction, effective distributed energy resources integration, electrification and transportation and resilience. The conceptual framework the commission outlined appears balanced and reflects the thoughtful gradual approach the commission has pursued throughout the PBR process.

As we said for a while, the devil will be in the details, and PBR will really take shape in Phase 2 as the specifics of each mechanism are worked out. The commission released the Phase 2 time line last month with a series of proposals, technical workshops and working group sessions followed by discovery briefs and an evidentiary hearing and concluding with the commission decision anticipated in December 2020.

We're pleased with the process the commission has set out and believe it will continue the collaborative approach from Phase 1 and allow a reasonable opportunity to carefully develop the detail and reduce the risk of unintended consequences. We look forward to continuing to work with the other stakeholders in Phase 2.

I'll briefly mention here the timing for filing our Hawaiian Electric 2020 Oahu rate case, which was planned for July, but will likely be later this month or next. We're delaying the filling to sync up with our Phase 2 PBR initial proposal due August 14th and to incorporate the enterprise resource planning or ERP system benefits tracking and reporting process that we have been working on with the consumer advocates.

Our new platform is key to increasing efficiency of our everyday operations. We're becoming increasingly proficient with the new system since its launch 10-months ago. And so we recently committed to ramp up to the full annual ERP customer benefit level by 2020, a year earlier than planned.

Turning to our banks. American continues to execute well, although results for the quarter were lower than in recent quarters. This was due to volatility in American's investment portfolio driven by the lower interest rate environment as well as higher credit costs, including for one commercial exposure. It also includes the impact of certain nonrecurring costs relating to our move to the new campus.

While net interest margin for the quarter was lower due to increased premium amortization in the investment portfolio, on a year-to-date basis, it was a solid 3.9% well above peers. American's focus on deepening customer relationships helped drive strong annualized loan growth of 6.8% in the second quarter with increases across most of its portfolios.

American completed its move to its new campus during the second quarter and has already seen benefits from consolidating its nonbranch teammates into this base, including improved workflow and faster decision-making. We're confident that American will deliver even more benefits in the future for customers, shareholders and our community.

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

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

Thanks, Connie. Hawaii's economy remains healthy, although we have seen some softening, particularly in the tourism spending following last year's peak levels. Hawaii's unemployment rate has been relatively steady since the first quarter and stood at 2.8% in June, the fifth lowest in the nation and significantly below the national rate of 3.7%.

Tourism arrivals have continued to grow, although we're seeing slight declines in total expenditures versus the record highs reached in the first half of last year. June year-to-date arrivals were up 4.2% compared to the same period last year, while visitor expenditures were down 2%. Some of the expenditure decline reflects dollar appreciation given the international tourism we have here in Hawaii.

Hawaii real estate fundamentals remains sound. While sales volumes declined from the prior year by 3.7% for single-family homes and 8.8% for condos, median prices were relatively flat. We have had seven consecutive years of housing price appreciation for both single-family homes and condos and the longer-term trend remains positive despite slight declines in the first half of 2019. The state's economic outlook remains positive with Hawaii GDP expected to rise 1.2% in 2019.

Turning to our results, consolidated Q2 earnings were $0.39 per share compared to $0.42 per share in the prior year's quarter, as consolidated net income declined 8% versus last year. Year-over-year earnings grew at the utility while declining at the bank, and the holding company and other segment loss grew slightly for the quarter.

Pacific Current's operating portfolio continues to contribute positively to earnings, helping offset the cost of building out the platform. As highlighted on the right-hand side of the page, HEI's consolidated GAAP ROE for the last 12 months strengthened to 9.4%. Utility ROE for the last 12 months improved with new rates in place at all three utilities and full recovery on the Schofield Generating Station through the major project interim recovery mechanism or MPIR. Bank ROE for the quarter was down versus the prior year quarter, and I'll touch on that in more detail shortly.

On Slide 10, utility earnings were $32.6 million compared to $31.2 million in the second quarter of 2018. The most significant net income drivers were as follows, $7 million from rate increases and rate adjustment revenues largely at Hawaiian Electric and Maui Electric and $3 million in MPIR revenues for the Schofield project. These items are partially offset by the following after-tax items of $4 million higher O&M expenses, primarily due to higher overhaul expenses in generating station preventative maintenance and repairs. The increase in O&M was partially offset by the absence of Hawaii island lava eruption response cost experienced in 2018. $3 million higher depreciation expense due to increasing investments to integrate more renewable energy and improved customer reliability and system efficiency, and $1 million lower net income resulting from the inclusion of outages for preventative maintenance on underground circuits in the calculation of 2018 reliability performance incentive mechanism penalties.

Turning to the bank on Slide 11. American's earnings decreased in the second quarter with net income of $17 million, down from both the linked quarter and the same quarter last year. The decrease compared to the linked quarter was primarily due to lower net interest income resulting from higher amortization of premiums in the investment securities portfolio as well as higher provision for loan losses to the increased loss reserves for one commercial credit, increased reserves for loan portfolio growth and additional loss reserves for the personal unsecured loan portfolio.

Compared to the second quarter of 2018, the decrease in net income was primarily driven by a higher provision for loan losses for the personnel and secured loan portfolio and a lower provision in 2018 due to the release of reserves for improved credit quality in the commercial real estate and home equity line of credit portfolios.

Although, American remained profitable in the second quarter, the lower net income for the quarter did impact profitability ratios shown on Slide 12. Return on assets of 96 basis points was down from the 118 basis points in the first quarter and 120 basis points in the same quarter last year. American's return on equity was also down versus the link quarter and the prior year periods of about 10.5% for the quarter. However, that still compares favorably to peers. Increased occupancy costs impacted these ratios for the quarter and year-to-date due to the carrying costs for exited properties and one-time transition cost.

On Slide 13, net interest margin. The core driver of our net income remained solid in the second quarter and continues to compare favorably to peers at 3.82%, despite the lower-than-expected interest rate environment. Year-to-date, American's net interest margin is 3.90%. Interest earning asset yields fell 18 basis points over the linked quarter due to lower interest rates, while our cost of funds decreased only slightly from 31 basis points to 30 basis points. ASB's cost of funds remains best-in-class as it enters into the top decile of ASB's peer set.

On Slide 14, net interest income of $61.5 million was down 4% from the linked quarter and up about 3% compared to the same quarter last year. The decrease versus the linked quarter was due to higher amortization of premiums in the investment securities portfolio that I mentioned earlier, while yields were 12 basis points higher than the same quarter last year contributing to year-on-year increase in net interest income.

Noninterest income of $15.5 million was up approximately $1 million from the linked quarter and up $1.7 million from the prior year quarter. The linked quarter increase was primarily due to increases in mortgage banking, debit card interchange and fee income, while the increase versus the prior year quarter was primarily due to bank-owned life insurance proceeds received in Q2 2019.

Loan and deposit growth were both solid during the quarter. Total deposits were $6.3 billion as of June 30th and increased 3.2% annualized from December 31st. Total loans were $5 billion as of June 30th, up 6.8% annualized from December 31, 2018. With growth across our core portfolio, commercial loans, home equity lines of credit and residential loans all contributed with solid gains. We still expect to meet our target of low to mid-single digit earning asset growth for the year.

On Slide 15, credit quality remains sound due to prudent risk management and a healthy economic environment. The credit quality of our residential portfolio remains very strong and our commercial and commercial real estate portfolios are stable despite the higher provision in the first half of the year.

Second quarter provision was $7.7 million compared to $6.9 million in the linked quarter and $2.8 million in the second quarter of 2018. Most of the increase over the linked quarter was due to increased loss reserves for one commercial credit, increased reserves for loan portfolio growth and additional loss reserves for the personal unsecured loan portfolio.

American continued to manage its credit portfolio conservatively during the quarter. The net charge-off ratio decreased versus the linked quarter from 39 basis points to 29 basis points, while nonaccrual loans decreased as well, just 0.79%.

Although American's efficiency ratio did increase during the quarter on a year-to-date basis, it improved 50 basis points reflecting -- on a year-to-date basis, it improved 50 basis points, reflecting the bank's continued focus on greater efficiency. The year-to-date improvement is despite the increase in occupancy costs carried this year from the transition to the new campus. Those occupancy costs, as you can see from the chart on Slide 16, have nearly a 200 basis point impact on the efficiency ratio. Although these costs will be offset by gains later in the year as we complete the sale of our exited properties. The bank continues to target about 100 basis points of improvement per year through 2021 in its efficiency ratio.

Turning to the next slide, we're updating our projected utility CapEx for the year. As Connie touched on earlier, the denial of the West Loch battery energy storage project and the denial without prejudice of the CIP contingency and regulating reserve battery project have reduced our CapEx expectations for the year. We now expect 2019 CapEx to be about $370 million, approximately $30 million below our previously guided level of $400 million.

Although, the CapEx for the battery storage project was close to $150 million across 2019 and 2020, we expect reliability and resiliency projects as well as the acceleration of the already planned investments, such as grid modernization, to help close the gap.

The approximately $30 million reduction in CapEx will not impact the expected rate-based growth in 2019, although, we will realize an impact in 2020 when rate base is expected to be about $50 million lower than previous expectations. We expect no change in our long-term rate-based growth forecast, however, as the investments are needed to integrate increasing amounts of renewable projects, deliver more customer options and ensure reliability and resilience of our system. We continue to expect CapEx of roughly $400 million or more in 2020 and 2021.

Turning to Slide 18. We are reaffirming HEI's guidance of consolidated earnings guidance of $1.85 to $2.05 per share. While our overall EPS guidance range remains unchanged, we do have some updates to key assumptions. At the utility, we expect to remain well within the $1.40 to $1.47 range for the year. We also now forecast O&M to be 2% to 3% above 2018 levels, which excludes pension in 2018 one-time items. This increase above the previously guided 1% reflects unplanned expenses in the first half of the year for environmental reserves and write-offs for denied projects as well as higher expenses for the remainder of the year for planned initiatives and procurement efforts that enable significant customer benefits, which include the expansion of our Phase 2 renewable energy RFP and grid modernization efforts, broadened resiliency and reliability efforts and the extended time frame and increased workshops for the second phase of PBR.

The higher O&M level will be offset by other items that are expected to come in at year-end better than planned, including revenues from the Schofield project, AFUDC, overall PIM performance. As a result, we expect the utility to end the year well within its guidance range.

We expect bank earnings to be at the low end of the $0.79 to $0.85 guidance range for the year. This is driven by our expectation for the provision to be at the high end of the range and given the change in the interest rate outlook for net interest margin to be at the low end of the range.

Although, the bank is currently below its return on asset target of 1.15%, we do expect to meet this target for the year, particularly as gains from the sales of exited properties, which we expect later in the year, will offset occupancy and campus transition costs we are currently carrying.

Connie will now make her closing remarks.

Constance Hee Lau -- President and Chief Executive Officer

Thanks, Greg. In summary, we continue to advance our mission of being a catalyst for a better Hawaii through our strategies across our enterprise. Our utilities have accelerated our pace toward our state's 100% clean energy and carbon neutral economy goals. As we do so, we're focused on delivering increased customer value, ensuring affordability and reliability and strengthening resilience.

Our bank provides a strong platform to continue delivering value for customers, shareholders and our communities and continues to focus on making banking easy, deepening relationships with customers and strengthening efficiency. Pacific Current is optimizing existing assets and evaluating further sustainable investment opportunities. Our business model continues to provide the financial resources to invest in the strategic growth of our companies and our state's sustainable future while supporting our dividend, which our board maintained at $0.32 per share this quarter, continuing our history of uninterrupted dividends since 1901.

And now, we look forward to hearing your questions.

Questions and Answers:

Operator

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

Eric Lee -- Bank of America Merrill Lynch -- Analyst

Hey, good afternoon. Thanks for taking my question.

Constance Hee Lau -- President and Chief Executive Officer

Hi Eric.

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

Hello.

Eric Lee -- Bank of America Merrill Lynch -- Analyst

Hey. Maybe first off, could we just to talk about longer-term CapEx opportunity? I know you mentioned that there is more than plenty need for investments on a forward basis. Mainly in light of the battery storage CapEx rejection, I know you talked about being able to offset that for 2019 with grid modernization CapEx, but just in terms of the longer-term opportunity here, where do you see the investment opportunity?

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

We will turn that over to Tayne Sekimura, our CFO of the Utility to respond.

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

Hi, Eric. In terms of our longer-term forecast for 2020 and beyond, with our Stage 2 renewable RFPs going out, there will be need for infrastructure to support integration of more renewables onto our system. We're also looking at more investments in the grid to provide more customer options. So with our grid modernization efforts and that particular project in Phase I is already under way. We're looking at how we can advance that more rapidly as well. We're also looking at, in addition to that, other investments to address resilience in light of climate change and looking at how we incorporate that into our planning models and what types of projects are necessary to address resilience. So those are generally speaking the kinds of things we're looking at for the future years.

Eric Lee -- Bank of America Merrill Lynch -- Analyst

Got it. That's helpful. And maybe just touch upon Stage 2 of the renewable RFPs. I mean, can we talk about -- I think presumably, this is just would hypothetically be supportive of the ability to drive further renewable PIMs, right, similar to the success with Stage 1 on that front.

Constance Hee Lau -- President and Chief Executive Officer

Yes. Most definitely. Joe, do you want to talk about the schedule for the Phase 2 renewable?

Joseph P. Viola -- Vice President, Regulatory Affairs

Yes. So, we've just recently, we resubmitted our updated kind of proposed final RFP forms. The process now is that commission will review those. Part of our proposal had request for performance incentive mechanisms for both renewable energy acquisition and grid services piece [Indecipherable]. There will be no specific deadline for the commission to rule on those, but we expect that they'll rule on those fairly soon.

Eric Lee -- Bank of America Merrill Lynch -- Analyst

Got it.

Constance Hee Lau -- President and Chief Executive Officer

And if you recall on Stage 1, the commission did an amazing job of approving those in record time. So we're hopeful with our whole community wanting to move to renewable future quickly that momentum will be able to be sustained.

Eric Lee -- Bank of America Merrill Lynch -- Analyst

Got it. And just briefly on the grid service RFP. With the proposal there for the PIMs, would that be -- you would potentially be able to contract for safety capacity from an aggregate portfolio of like behind the meter storage assets and earn PIMs on that, just in terms of what the proposal is asking for, that's just what I thought -- that's what it sounded like to me. Yeah.

Joseph P. Viola -- Vice President, Regulatory Affairs

That's right.

Constance Hee Lau -- President and Chief Executive Officer

It does contemplate demand response aggregators behind the meter.

Eric Lee -- Bank of America Merrill Lynch -- Analyst

Got it. That's helpful. And then lastly, one more question before I proceed to the queue. Can you just talk about expectations for implementation of PBR given the protracted delay now to -- I believe, you said a December 2020 decision relative to expectations for about first quarter '20 decision prior? And what might you be able to do to minimize regulatory lag in the meantime? Thank you.

Joseph P. Viola -- Vice President, Regulatory Affairs

Again -- this is again, Joe Viola, Vice President of Regulatory Affairs. I don't know that I'd say it's a protracted delay. I think we were actually pretty supportive of a process that would allow all the parties and the commission to consider development details which Connie mentioned earlier, which should be very important. So we think the commission has set forth a pretty reasonable process to allow us to do that. And the other part of the question was?

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

The mechanisms to make up for any lag.

Joseph P. Viola -- Vice President, Regulatory Affairs

Yes, at least one of the proposals that the commission seems supportive, we'll have to see how -- what's approved in Phase 2 would be switching off of the current ramp to an annual adjusting mechanism, that has the potential to reduce lag in our accrual of revenues in between rate cases.

Constance Hee Lau -- President and Chief Executive Officer

Right now that if you were referring to lag because the PBR decision now will be expected in 2020, there is nothing that really changes because as we move forward, the existing mechanism, including the revenue balancing account and the rate adjustment mechanisms, the major project interim recovery mechanism, all of that still remains in place.

Eric Lee -- Bank of America Merrill Lynch -- Analyst

Right. Okay, yes that's helpful. I appreciate the chance. Thank you.

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

Thanks Eric.

Operator

Our next question comes from Andrew Levi of ExodusPoint. Please go ahead.

Andrew Levi -- ExodusPoint Capital Management -- Analyst

Good day.

Constance Hee Lau -- President and Chief Executive Officer

Hi Andy, how are you?

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

Hi Andy.

Andrew Levi -- ExodusPoint Capital Management -- Analyst

Good. How are you? Hey, Greg, how are you?

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

Good.

Andrew Levi -- ExodusPoint Capital Management -- Analyst

I'm going to be daring. I'm going to ask some questions on the bank.

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

You.

Constance Hee Lau -- President and Chief Executive Officer

Wow, all right. Rich is happy. He is cheering.

Andrew Levi -- ExodusPoint Capital Management -- Analyst

Nothing too technical. But I would just kind of, I guess, just first on a very high level. So obviously with interest rates dropping rapidly and the tenure at, where we got it now, 185-or-something and a slight yield curve. Can you just kind of go into more detail on how that may affect the rest of the year?

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

Sure. So first, it affected second quarter fairly dramatically because of the premium amortization on the mortgage-backed securities in the investment portfolio. So as interest rates dropped, the assumption on the prepayment rates on those securities comes into -- the time frame shortens and so you have to amortize the premium more quickly. And so that was actually a $3 million swing from first quarter to second quarter on that interest income line.

Just now we don't expect that'll shorten like that much further as we go forward so we'll get a little bit of relief there. But the new loan production will necessarily be priced lower as we come in. And so we're seeing new loan production coming on at lower than the existing book rates. And so that will feather in some additional pressure. And then the new investments that we might make in the investment portfolio as we grow deposits will obviously come on at lower rates than we been able to up until now. So it just creates an opportunity cost. We had come into the year expecting one rate increase, and may be more, and so it's a headwind against what might have been a tailwind coming into the year.

Andrew Levi -- ExodusPoint Capital Management -- Analyst

Yeah. In fact it increases too, and is difficult for us --

Constance Hee Lau -- President and Chief Executive Officer

Yeah. Andy, let me just elaborate too on what Rich said at the very start about us not expecting that FAS 91 premium amortization would continue to get as bad as it was in this quarter. Because what happens on the prepayment side is that, you'll get a big wave of prepayment upfront, but then you get to levels where there is just some people in a class that may be at a higher rate mortgage, but they don't have the capability to refinance for various reasons. So that's why it's not a straight-line curve on that.

Andrew Levi -- ExodusPoint Capital Management -- Analyst

Okay. And that's --

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

Sorry, Andy. Just one other point. The silver lining I guess, you see is a little bit of a bump in mortgage refinance production and the potential for gains on sale on those. So we think that helps partially offset some of the pressure. So it's not all bad news. There's some bright spots around it.

Constance Hee Lau -- President and Chief Executive Officer

Yeah. And if you also are looking at an American on a competitive basis, we've always talked about one of their real huge advantages is the core deposit base and the cost of funds. And so some other banks that don't have good of a deposit funding base might be seeing their cost of funds come down faster. But if you look at the base cost of funds of American, it's less than half that of the peer banks. So it's what, 40 basis points now. So that's a real benefit to keeping the stability of the earnings at the bank.

Andrew Levi -- ExodusPoint Capital Management -- Analyst

And just so I understand that first $3 million that you were talking about, I guess, that's almost like a true up so that you don't have a true up every quarter -- always --

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

That is correct. We do, but it shouldn't be as dramatic as.

Andrew Levi -- ExodusPoint Capital Management -- Analyst

Not as dramatic -- right, I got it. Okay, and that was marked as of what, June 30th?

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

Yes.

Andrew Levi -- ExodusPoint Capital Management -- Analyst

Okay. So anything that happened in July, like the rate cut or kind of rates moving down in general, I guess, would be trued up again.

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

Yes.

Andrew Levi -- ExodusPoint Capital Management -- Analyst

But I guess at the end of June. I can look and see where we were.

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

Yes. The markets don't always wait for the rate cuts and some of it get priced in on a forward basis, right.

Andrew Levi -- ExodusPoint Capital Management -- Analyst

Okay. So now, I'm going to do some dumb math, because I'm good at dumb math. So if I look at kind of where you are year-to-date and then actually let me just step back before I do that. How you have built in $0.03 to $0.05 from the gain of campus, you were going to sell the campus, the old campus. Can you guys give us any idea or timing on that because you got about five-months to go in the year, how is the sale process going?

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

So we actually moved out for four different properties into one, into our new campus. And so of those two were leased and two were owned. The leased properties, we were out of one of them at the end of May from a cost standpoint and physical standpoint. The second leased property, we are out of physically, but carried the cost through the end of third quarter. And then the two remaining properties are actively being marketed. One of them is very close and we are confident that, that should happen this year, which quarter, it's hard to call. But that is the property that contributes most to the gain. And the other, we'll see. It's also in process, but it may be -- it may slide to next year.

Andrew Levi -- ExodusPoint Capital Management -- Analyst

Okay. And you just have to -- you have to close on it to recognize the gain or you just have to announce the sale?

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

Yes. No, no, no. We will only recognize gain when money is in the bank.

Andrew Levi -- ExodusPoint Capital Management -- Analyst

Got it, OK. So I'm now back in my dumb math. So if you look at where you are year-to-date and then we'll throw in $0.04 for the gain, you have to do like $43 million or something like that in net income in the second half of the year. Again, assuming the gain to get to kind of a low end of the bank guidance and then kind of looking at the $17 million you did in the quarter and then the $20.8 million you did in the first quarter, and I think you did about the same in the fourth quarter. How do you get to that number? Is it possible I guess, is what I am asking.

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

The biggest contributor is --

Andrew Levi -- ExodusPoint Capital Management -- Analyst

Is it possible -- I guess, is what I meant.

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

Yeah, of course, we would not have made that statement. So -- no it is -- the biggest contributor will be some normalization of the provision line. We have been hot in the first and second quarters related to that one commercial property principally. There are other factors inside, but the rate that you are seeing for the year-to-date is hotter than we would expect for the second half.

Andrew Levi -- ExodusPoint Capital Management -- Analyst

Have you ever done $43 million in 2 quarters? I mean, that would be -- I don't recall.

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

So if you took fourth quarter and first quarter, we were $20 million each quarter and those didn't have gains on properties in it.

Andrew Levi -- ExodusPoint Capital Management -- Analyst

Yes, but I'm including the gain in that $43 million. So I'm stripping out the gain. So I am giving you the gain, plus where you are year-to-date you still need to do $43 million.

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

Right.

Andrew Levi -- ExodusPoint Capital Management -- Analyst

Okay. I'll let some else to ask the question. Thank you guys.

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

Okay. Yeah.

Constance Hee Lau -- President and Chief Executive Officer

Thanks Andy.

Operator

Our next question comes from Paul Patterson of Glenrock Associates. Please go ahead.

Paul Patterson -- Glenrock Associates LLC -- Analyst

Aloha.

Constance Hee Lau -- President and Chief Executive Officer

Aloha.

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

Aloha.

Paul Patterson -- Glenrock Associates LLC -- Analyst

So I just want to go back to the Phase 1 PBR order. And as we all know, not everything -- you never get everything you want in a regulatory decision. But there were number of things that didn't go the company's way. And I realize what you guys are expecting in the Phase 2 to be sort of where the implications financially might be. But I just wanted to sort of followup about how you guys see that? I mean, there were several items that they just didn't seem to go along with your positions and they still seem to be big on these day one savings or customer dividend thing. And I was just wondering if you could just elaborate a little bit more in terms of how you guys are feeling about this order?

Joseph P. Viola -- Vice President, Regulatory Affairs

Hi. This is Joe. Yes, I can't say that we feel like the Phase order didn't go our way. I think we're actually pretty pleased with Phase 1 decision order. It was consistent with the discussion throughout the talk and consistent with the PUC staff overall. The things that commission said they are going to pursue at this present time are things that we agreed with. A little bit more -- it will take a little bit more time to develop. The things they're intending to focus on in Phase 2, I think, are the right elements of our regulatory framework. So I can't say that we think it went against us.

Paul Patterson -- Glenrock Associates LLC -- Analyst

Okay. What I'm referring to is the five-year MRP you guys wanted to take a three-year one. The day one or the customer dividend, I don't think that went your way. Also the initial period at which the MRP would take place, didn't go to others. I mean, those are the things I thought were sort of lay betting [Phonetic] since you are buying into that. Again, they seem to want this day one savings, I mean, sort of to follow-up on that when -- the discussion previously about sort of like the grid mod and everything else. It seems like there is this big desire for lower rates as well as grid mod and environmental, do you follow what I am saying? And I guess, when I am reading the order, it's not clear to me how these things might be reconciled?

Joseph P. Viola -- Vice President, Regulatory Affairs

Just take a couple of those. The difference between the three to five years, the company's position was that we would consider going to five years, we were just -- we need to know what the changes would be. So we were conditionally supportive of going to a five-year so long as other elements of the multiyear rate plan were adjusted in a manner that allows us to pursue the outcome -- achieve the outcomes in interim period. In terms of the customer dividend, yes, this will be -- again, this is a comprehensive approach. We'll need to see where the other elements are decided for regulatory framework. There's a productivity factor, there are other factors involved. And we'll have to see what revenue opportunities that will be attributable to achieving the PIM. So really, I think, the verdict is out on it. And I think we feel pretty good at least, the commission has in their guiding principles and the factors they are going to look at as such was a reasonable approach. Yes, there's a desire for lower rates, we should have a desire as well. So again, a lot of pieces that will need to be determined for us to see how this will work.

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

Paul, this is Alan. I think from my level, I think people have to realize that not only it's a regulatory side transforming but the company has been transforming for a couple of years now. We just haven't realized all the benefits of the transformation yet internally, but we expect to realize operational savings, new products and services, other lines of revenue. So it's not the utility of the past, and I think we just have to discard looking at it through a lens of the old utility business model. And that's what we're preaching in-house, and I think that's where PBR will assist us in getting to.

Paul Patterson -- Glenrock Associates LLC -- Analyst

Well, that's awesome. And that's what I sort of wanted to sort of follow-up on. I mean, so when you're talking about all this opportunity for grid mod, the RFPs and everything else, how should we think about the impact on rates? So some utilities have sort of come up with, in some cases, not the majority, in which they're doing CapEx, there are certain fuel savings or something like come about, which actually lead to net decreases in rates or something of the sort. How should we think when we're hearing about this grid mod and these investments? What you guys are -- what are your expectations are in terms of the rate impact given sort of the unique situation that you guys have in Hawaii?

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

So Paul, good question. It's very complicated, because there are so many moving parts and we're updating all of our rate models to see the impact. When you move one thing, you add another thing and then how does it fallout to a customer bill. So we're updating all of those things as PBR moves forward, as grid transformation moves forward, as we get new renewables online, and we should be seeing the results as some of these dockets reach a more final stage. So we can have the inputs to give that analysis.

Constance Hee Lau -- President and Chief Executive Officer

And Paul, I think you remember, in general, just on the energy side, obviously as we move off of fossil generation to renewables, which has no fuel cost, that is a big savings to our customer in the energy.

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

It's a levelized cost at about $0.08 on the new RFPs that will be coming in relative to our fossil which is significantly higher based on $0.18.

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

Which is all the good news, right that's on the energy side. And we have to maintain capacity and resilience and then we have to weigh out the savings we're doing on fuel, which is a good thing, reduce our fuel burn and then we have to -- then have to have the investments to give customer choice. And then all the significant investments in the grid to allow all of these to be integrated and to do what we intended to do. So that's the model that we're developing and updating.

Paul Patterson -- Glenrock Associates LLC -- Analyst

Okay, and we'll get some sort of quantification I guess as these dockets progresses you said.

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

Yes.

Paul Patterson -- Glenrock Associates LLC -- Analyst

And that will be interesting to see what it comes up with. Just a sort of follow-up on I guess, Andy's, bank question, I apologize, if I missed this. But you talked about what the 2019 impact would be due to yield curve, et cetera. How should we think about the longer-term impact if these yield curve conditions, so to speak, continue? How should we think about the impact on the bank's situation if we keep seeing this kind of weird yield curve?

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

I think it's a little bit hard to tell right now. I think as we get to the end of the year, and we see how the curve settles out and the volatility settles out, we'll be able to give you more guidance. Obviously, lower and flatter is challenging for banks, lower and steep is not bad, because we can make money on the difference of over time on the steepness of the yield curve, lower stimulates activity and generally produce more loan growth. It also maybe creates a little bit less pressure on deposit cost because the money flows back into banks, if the markets aren't performing. So there is a lot of variables in it, and I think we'll watch how it plays out and we'll give you a little more guidance as we get to the end of the year.

Paul Patterson -- Glenrock Associates LLC -- Analyst

Okay.

Constance Hee Lau -- President and Chief Executive Officer

Paul, I'd add from my perspective, until the last year or so, when everybody started thinking that rates were going to rise, if you remember the period before that, that was a period which was low for longer, right. And we all kept saying, -- when are rates going to arise, when are rates going to rise and they didn't, which is low for long period of time. So I think we're kind of back in that situation and if you remember the banks earnings during that time frame, again, because they've got a great funding base through the deposits. They continue to perform well with quite solid earnings throughout that period.

Paul Patterson -- Glenrock Associates LLC -- Analyst

Okay great. And that's it for me. Have a great weekend.

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

Same to you.

Joseph P. Viola -- Vice President, Regulatory Affairs

Thanks Paul.

Operator

Our next question comes from Charles Fishman of Morningstar. Please go ahead.

Charles Fishman -- Morningstar Inc. -- Analyst

Thank you. I'm coming from the same direction, Paul Patterson is, and he asked a lot of the questions I was going to ask, but let me -- I have one more. A customer-centric approach to the utilities financial health does not give me a lot of comfort. There is a big gap between what a customer might think as a healthy utility and what a shareholder and a bond holder thinks as a healthy utility. In Phase 2, are there any working groups that try to establish benchmarks for what that might be? In other words, having a peer group of utilities, other US utilities and their financial metrics to establish what it means to be a financially healthy utility.

Joseph P. Viola -- Vice President, Regulatory Affairs

This is Joe again. Yes the customer centric approach is again, it's one of the three guiding principles, right. Financial integrity is one of the other two. Customer centric approach, I think, is broad and includes customer value as well. But to get to your specific question, I understand that the commission is established in November and will have a workshop on financial modeling. So that decisions made will have, will be informed by some type of financial analysis. So I think that's where we're starting out next week really to kick of Phase 2. There'll be a series of at least seven workshops over the next couple of months. And certainly, setting benchmarks and understanding the financial implications of proposed changes will be part of that process.

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

Charles, this is Tayne. I also wanted to add, as part of our Phase 1 workshop, the commission did bring on board and advisor that represented the capital markets to talk about the importance of the utilities financial integrity in a time where there needs to be access to the markets due to a lot of the renewables coming on and the infrastructure needed to support that. And so that advisor came to one of the workshop to actually have a discussion about that.

Joseph P. Viola -- Vice President, Regulatory Affairs

And continued access to low-cost funding and capital is in the customer's interest. It is the quickest way to get to a 100% renewable and facilitate the integration of all of the renewable projects. So as they have stated about the access to low-cost capital that is consistent with investment-grade metrics and appropriate returns to capital so that capital can be priced appropriately.

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

Let me just add one more element because it's so important in our jurisdiction. I think, there's an increasing awareness, as we move to third-party providers in getting to our renewable future. How important it is for those providers to get access to their capital needs based upon our financial integrity. So the third parties are all behind the utility in preserving our financial integrity otherwise they can't get access to low-cost capital for their projects.

Charles Fishman -- Morningstar Inc. -- Analyst

Yes. That's a very good point on the PPAs. I mean they really are leaning on your balance sheet.

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

Absolutely. And not many people understood that. And I think there's a growing realization of that and that's coming through the PBR docket and other means.

Charles Fishman -- Morningstar Inc. -- Analyst

Will this consultant, the financial consultant, will he still be part of process during Phase 2?

Joseph P. Viola -- Vice President, Regulatory Affairs

We're not sure what the commission plans in terms of their support or who they'll involve.

Charles Fishman -- Morningstar Inc. -- Analyst

Okay. I'm sorry for the lawn mower background here.That's all I have, thank you.

Constance Hee Lau -- President and Chief Executive Officer

Hey, Charles, it's Connie. I just point out that, on our Slide 5, which gives you the high level on the Phase 1 you know where it talks about advance societal outcomes and capital formation, that's really the point that Alan was referring to. The recognition that if we're going to go to renewable future and make it affordable for customers, cost of capital is important in that calculation for the utility, but also for third-party providers. We're now moving in a way just from IPPs to the whole demand response area, which has third-party aggregators. So that's a very important piece.

Charles Fishman -- Morningstar Inc. -- Analyst

Okay. Good point. I didn't see that capital formation there in the third box. Good point. Thank you. That's all I have.

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

Thanks Charles.

Operator

Our next question comes from Michael Weinstein of Credit Suisse. Please go ahead.

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

Michael --

Michael Weinstein -- UBS Investment Bank -- Analyst

Hey guys. Hello.

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

Hello.

Michael Weinstein -- UBS Investment Bank -- Analyst

I'll respond briefly to Charles, I was in that workshop in PBR 1 -- Phase 1 and to represent interest of the -- at least the equity investors and Moody's was there also for the debt investors. So, and I just had a conversation with Chairman, Jay Griffin at NARUC. He seems, very interested in making sure that investor interests are represented in these PBR workshops. So we'll see where that goes. The question I had though I wanted to ask -- I was actually also going to ask, the same thing that Paul Patterson asked, which is what do you think that means by customer dividend? I'm sure you guys have maybe some of your own ideas about what kinds of dividends could be provided to customers that might satisfy their requirement, I'm just wondering if you have any.

Joseph P. Viola -- Vice President, Regulatory Affairs

So this is Joe again. Actually the customer dividend, I understand that to be part of the regulatory framework, and I think it's in Massachusetts right now. So it's not something entirely new. I think the notion is that, the part of the PBR framework will incentivize cost control and actually will benefit the utility since it's realizing cost control between rate cases. So there'll be little bit of a payment upfront to benefit customers, a little bit of a down payment on the realization of those benefits. And again, during the interim period, the utility will benefit by achieving those cost containments as well.

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

Got you. Another question I have is the -- are you just seeing any impact on the economy or on tourism or anything else from the trade wars as they start to rear their ugly head once again at this point?

Constance Hee Lau -- President and Chief Executive Officer

So far for Hawaii, being that the major driver here is tourism and then also federal government expenditures. Greg had gone over what's happening in the tourism numbers. And from the standpoint of arrivals, it's still holding up, expenditures are down a little bit, but we've not seen it come through to impact the economy, yes.

Michael Weinstein -- UBS Investment Bank -- Analyst

Okay. Great. And -- when I understood, Connie, you are basically what you are trying to saying about the bank is that's its -- the customer deposit base insulates it from a flat yield curve or inverted yield curve?

Constance Hee Lau -- President and Chief Executive Officer

Yes. I don't know that I --

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

Yes. I wouldn't say it is insulated but it helps us in our markets, actually, because we've been able to have that kind of a cushion on our deposit cost and funding cost compared to our peers. So it helps us in our markets and the more room you have there, the better you are going to weather a flat yield curve than if you had higher costs, right.

Constance Hee Lau -- President and Chief Executive Officer

Yes. An example that might help you think about it is that they have a very strong checking base that is non-interest bearing and so not impacted by changes in interest rates. Alan, thank you.

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

First thing is, you're welcome.

Constance Hee Lau -- President and Chief Executive Officer

We haven't checking account. Okay, I'm interest.

Michael Weinstein -- UBS Investment Bank -- Analyst

Okay. Thank you very much and have a good weekend.

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

Thanks Mike.

Constance Hee Lau -- President and Chief Executive Officer

Thank you.

Operator

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

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

Thank you, everyone, for joining us today, and have a great weekend.

Constance Hee Lau -- President and Chief Executive Officer

Happy aloha Friday.

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

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

Constance Hee Lau -- President and Chief Executive Officer

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

Eric Lee -- Bank of America Merrill Lynch -- Analyst

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

Joseph P. Viola -- Vice President, Regulatory Affairs

Andrew Levi -- ExodusPoint Capital Management -- Analyst

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

Paul Patterson -- Glenrock Associates LLC -- Analyst

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

Charles Fishman -- Morningstar Inc. -- Analyst

Michael Weinstein -- UBS Investment Bank -- Analyst

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