Hawaiian Electric Industries Inc (HE) 2002 Q4 法說會逐字稿

Good day, and welcome everyone to the Hawaiian Electric Industries Incorporated fourth quarter end year end 2002 conference call and Web cast. This call is being recorded. With us today is Chairman, President, and Chief Executive Officer of Hawaiian Electric Industries, Mr. Robert F. Clarke, the President and Chief Executive officer of Hawaiian Electric Companies Incorporated, Mr. T. Michael May, the President and Chief Executive officer of American Savings Bank FSB, Mrs. Constance H. Lau and the Finance Vice President, Treasurer and Chief Financial Officer of Hawaiian Electric Industries Incorporated, Mr. Eric Yeaman. At this time, I would like to turn the call over to Mrs. Susie Hollinger. Please go ahead ma'am.

Hello and good morning. Thanks for joining us for an update on HEI. My name is Susie Hollinger, and I'm HEI's Manager of Investor Relations. In addition to those already mentioned, here with me from senior management is Rick Lonaton (ph), Financial Vice President, Hawaiian Electric Company, Alvin Sokamoto (ph), Financial Vice President, American Savings Bank and Curtis Harada (ph), Controller, Hawaiian Electric Industries.

Before I turn the call over to our Chairman, Bob Clarke, I would like to point out that certain forward-looking statements will be made on today's call, including comments on retirement benefits. Please reference page Roman five of our September 30, 2002 form 10-Q for information about forward-looking statements and important factors that could cause actual results to differ materially from those forward-looking statements discussed today. With that, I will hand it over to Bob.

Thanks, Susie, and good morning and aloha, everyone. What I will do is cover the results from operations last year, and then I'll talk a little about the Hawaiian economy and then talk about what we expect for pension expense next year, and I think we have alerted a lot of you folks that there's going to be a big swing in our pension situation, so we'll cover that at the end of the call.

We'll just start on the earnings. You know, we had a great year in 2002. Our income from continuing operations was $118.2 million, up 10 percent from 107.7 million in 2001. Earnings per share at $3.26 were up two percent from the $3.19 in 2001. Now, the reason that earnings per share were up less than net income is because we had a seven percent increase in the number of shares outstanding, and you remember that we issued some stock at the end of the 2001 and that had the effect of diluting the earnings per share growth.

All sectors of the company contributed to the increase in net income. Utility net income was up two percent. Bank net income, up 16 percent and holding company losses were down three percent. Electric utility net income was $90.2 million last year, compared to $88.3 million in 2001. Kilowatt hours sales were up 1.9 percent in spite of the fact we had somewhat cooler weather. Increasing net income was caused by the higher sales by lower interest expense and by increases in efficiency. Partially offsetting that was increases in O&M cost, higher depreciation and lower pension credits. Pension credits were $6.9 million less in 2002, that's pre-tax, compared to 2001, and I'll cover that in more detail in a minute.

At the bank, they had a terrific year. Net income was $56.2 million compared to $48.5 million in 2001, and they really had contributions across the board. The spread, which was 3.24 percent in 2002 compared to 3.17 percent in 2001, because of a strong economy and strong real estate market, our provision for loan losses was down. Our fee income was up. We had lower losses from our investment portfolio, and because of the change in accounting, we had no more -- we had lower good will amortization.

On the minus side of the bank we had - we had some loss on sales of securities. We had to write-down our mortgage servicing rights because of increased prepayments on loans and we had somewhat higher G&A. The higher G&A is because the bank is going through a major transformation from an old-fashioned, traditional thrift into a full-service community bank.

Delinquencies in 2002 reached five-year lows because of the strong real estate market, and we expect that to continue through early 2003. Holding company losses were down, primarily because of lower interest expense, and that was caused by two factors, one is obviously lower rates but we also paid off $60 million in debt in 2002, in part from the $50 million we raised from our common stock offering late in 2001.

Let me move now to a brief update on the economy. We don't have the final numbers yet, but the estimates from our local economists were that gross state product grew by 2.1 percent in 2002 and we expect another 2.1 percent growth in 2003. At November, the unemployment rate was four percent compared to 5.7 percent for the rest of the country. Visitor arrivals were up 1.8 percent, and that's primarily due to really strong market off the West coast, and Japan continues to be soft. The people who forecast these things are expecting visitor arrivals to grow by 6.1 percent. Again that is off a low base for 2003.

Military and federal government spending remains stable. Construction has been extremely strong. It was up 13.4 percent for the first 10 months of 2002, compared with the first 10 months of 2001, and the real estate market continues strong. On Oahu, home sales were up 14.7 percent, and medium home resale prices are up 11.7 percent over 2001. The medium home resale price in December was $350,000, which was reasonably high.

Let me talk now about pension expense, and I think for those of you we met with in the fall, we have you a heads up that we expect our pension expenses to be going up because of the poor stock market returns over the last three years. The numbers I'm going to give you reflect the fact that we have reduced our discount rate from seven and a quarter percent down to 6.75 percent. We have also reduced our long-term rate of return assumption on plan assets. It was 10 percent. We reduced it to nine percent, and we have also, reflecting the actual results on the plan through December 31, 2002, we expect retirement benefit expense for HEI, consolidated net of taxes will be $12.6 million and last year we had a credit of $4.5 million, so we expect a swing of $17.1 million for the total company.

For the utility, we expect an expense of $8.9 million versus a credit or an income after tax of 6.4 million last year or $15.3 million swing from prior year. We will attempt to offset as much of the swing as we can through cost savings and productivity improvements, but we're not going to jeopardize reliability or the pursuit of our strategic programs to mindlessly just offset all of it. So you can see that there's going to have an impact on net income next year from our pension expense. Having said that now we would like to open it up for your questions. Operator?

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please press the star key followed by the digit one on your touch-tone phone. If you're using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again that's star one to ask a question, and we do have a question from Paul Debbas at Value Line.

Hi. Can you please update us on the status of the Kayahola (ph) project?

Thanks Paul. I'll ask Mike to do that. Mike?

Yes, in the fall of year, we were basically stopped our construction on the project. We have filed with the state Supreme Court to look the stay on the project so we can continue construction. We have not heard anything back from the Supreme Court, but are working that very diligently.

Any best guess as to when you might hear something from the court?

Unfortunately, there's no time period for action on the part of the court. We continue to monitor and continue to keep in touch, not with the court but with the project, but I cannot give you a specific time line.

Included in the filings that we made to the court were some declarations brought up from the director of the Department of Health, the Director of Safety and also the Governor, expressing their concern about the power situation on the big island, and hopefully that will attract the attention of the justices on the court and give this some expedited treatment. But as Mike said, there's no guarantees.

There's no question about the need for the project. We have experienced on a pretty regular basis rolling brownouts, boarding on blackouts on the island, so the need is clearly there. We just have to get through the legal process.

And refresh my memory, how much do you have invested in the project right now?

We have approximately $82 million in the project.

That's essentially 85 percent complete.

All right, thank you.

We will take our next question from Vedula Murti, SAC Capital.

Good morning.

Good morning, Vedula.

Let's see, a couple of things. One, in terms of the pension swing, the 17.1 million net of tax, you indicated 15.3, you said was at the utility. Are there any prospects for regulatory rate recovery of the utility portion?

We certainly have that under evaluation, Vedula. The issue that we have to weigh is that our commission does not entertain single point issue rates cases so we're putting together a comprehensive look in our evaluating the merits of doing that.

At this point, can you kind of tell us how you finished on a ROE basis, I guess for at the utilities and whether you feel like you realistically have any room or is there any chance to try to do, like an accounting order or deferral or anything like that without going to a full rate case?

Again the commission typically does not entertain -- when we go in for a rate case, there's a comprehensive look. To answer your question about return on equities, we're pretty much, for both Oahu and our Maui utilities, we were approaching our allowed returns. We still have some room, also associated with the Kayahola (ph) to grow earnings when we get through our Kayahola (ph) project on the big island.

Just to give you those numbers, Vedula, at HECO we were 10.7 percent, MICO (ph) was at 10.2 percent, and HELCO (ph) was at 7.3 percent.

OK. I'm wondering, can you talk a little about where the interest rate spread finished in the fourth quarter at American Savings Bank and kind of what you're thinking there going forward? I think you indicated at the November analysts' meetings in that there might be pressure on the interest rate spread in '03 versus '02.

Hi Vedula, it's Connie. You can see the compression that we are talking about in the bank's income statement, which is the last page of the earnings release in the net interest income line. And to give you the spreads for the quarter, the spread for the 2002 last quarter was 312 versus 332 in 2001.

OK. And I guess my last question is, I'm looking at the run rate at the holding company now. Is that indicative of what we ought to be expecting in 2003, if I take a look at the fourth quarter, given, you know, the benefit of lower interest rates and your pay down in debt or do you anticipate paying down more debt at the holding company in '03?.

We expect to be moderately cash flow positive at the holding company but we don't expect a large pay down in debt this year.

So it's fair, is it,. so then is it fair to say that the run rate that we saw here in the fourth quarter, I think it was about seven and half million - $7.4 million is representative probably of what on an annualized basis that we ought to see in '03?

I would guess so, yes.

OK, thank you very much.

We will take our next question from David Schanzer at Janney, Montgomery, Scott.

Yes, hi everybody. Several questions - one is, can you give me, aside from the comments you've made up until now about the regulatory situation there, give us an update if there are any changes in your plans as far as rate cases are concerned or any other regulatory changes that you think might be of interest to us? Secondly, if you can comment on your oil supply, and then lastly, you mentioned kilowatt-hour sales and if you could, just give us an update on whether you're seeing any significant changes in the classes of customers, particularly small commercial, if you could.

Yes. As far as the rate case activity, as I indicated, our last D&O for Oahu utility was actually in 1995. We are now looking, in light of the pension, in light of some of the other matters that we've talked about, we're evaluating whether to go in for a comprehensive rate case. We have not made that decision yet, but it's under evaluation.

I think the second part of your question was oil supply. Sort of to go right to the point, we get very little of our oil from the Middle East. A lot of it goes from Alaska, Venezuela, Indonesia, so there's not a risk of Middle East oil. I might add that we keep about 35 days of inventory on hand should there be some disruption, and because of our island location and this inventory is a matter that is included in our rate activity as well.

In terms of kilowatt-hour sales, we have seen a major shift this year. Most of our sales activity in 2002 was driven by the residential sector. I think that's a reflection of what we see going on in the construction, residential growth and low interest rates that we're experiencing here in Hawaii and throughout the U.S. As a matter of fact, there's two components to that. There's the number of the customers and we're also seeing the consumption, the usage per capita, as well, is increasing. As a matter of fact, most of the that was driven by per capita consumption.

We think part of that has to do with the fact that new homes that are going in because of their location in the plains area of our state require more central air conditioning and this is not something that we have typically seen in housing activity in Hawaii, and we believe that is a driving factor in the per capita consumption.

There were - if I recall correctly, the majority of oil comes from Alaska with a slug of it coming from Indonesia. To my knowledge, and correct me if I'm wrong, you don't get your oil supply from Venezuela either, do you?

There might be a modest component.

OK.

We buy the oil from two refiners ...

Right.

... Chevron and Tosoro (ph).

I can't give you the specific amount but I know historically, we have sourced some oil from Venezuela. I cannot give you the specifics.

OK, thank you.

Once again that is star one if you would like to ask a question. We take our next question from David Dickens (ph), Deep Haven (ph) Capital Management.

Hello. Can you - a couple of questions on the bank, if I may. First off, I notice that the loan loss provision was down here in the -- both the quarter and the year. Can you comment on that, given everything we're seeing about increase in delinquencies, really across the country in the credit markets, and my second question is, can you give us anything up dated on your outlook, a little more detail on your outlook for spreads, really given the fact that it's tough to go much lower on the interest you're paying on deposits?

Yes, on the loan delinquencies, Hawaii market is actually decoupled from the national market. So, as Bob mentioned in his introductory comments, our delinquency rates are actually at five year lows and the delinquency rate has been dropping all year. That is principally driven by the fact that most of our loans are mortgages and the mortgage -- the real estate market here in Hawaii has been extremely strong, and Bob give you some of that data earlier, and so even on our foreclosed property, when we convert those and sell them, we have actually been realizing gains on the sale of the foreclosed properties.

As far as the outlook on spreads, when we were back in November, we talked about the compression on the spread. That is primarily being driven bit fact that refinancing rate has been very high with interest rates at the 41 year low. We are beginning to see some relief in the refinancing, but it's still at a fairly high level, and the interest rates are still pretty low right now. They have also somewhat decoupled from the 10 year treasury rate, because those of you who follow the fixed income market know that many of the fixed income investors have been switching out of corporate to avoid event risk and moving into the mortgage market.

So that has kept our mortgage rates low. Until that refinancing slows down, we will continue to experience compression.

OK. Thank you. The follow up I have got is, given the fact that your pension outlook came in kind of at the more negative end of the range your talked about on the last call, the interest rate out look here, do you think the current street estimates out there, which are right around three and quarter take - fully take those factors into account? .

We don't forecast earnings so we won't - we're not in a position to comment on what the street estimates are.

All right, thanks.

We will take our next question from Dave Parker at Robert W. Baird.

Hi, good morning everyone. A question for Connie, I think. You talked about Bob mentioned in this comments about ASB and, you know, why the efforts have gone in the last 18 months to sort of convert to transform that, you know, American Savings Bank and some of the increases in the G&A expenses there as a result. How much, Connie, does that spill over into '03.

That will definitely spill over into '03 and also into '04 because we're going through such a major transformation and it's really a cultural change, and those can easily take three, four, sometimes five years to actually implement. So, as you noted, Dave, we went through quite a big transformation in 2002, and we will still be doing that in 2003 and 2004.

Thanks for that. One follow up, just any kind of comments on fee income and where you sort of expect that to go in this current environment?

As you know, the fee income increased very significantly in 2002. We are -- a lot of our transformation focuses on continuing to expand services to particularly the business customers, which they typically will pay for with fees, and so we would continue to be looking for increases in the fee income. However, it will not be nearly as dramatic as it was in 2002 because a lot of the 2002 increase was driven by a restructuring of our deposit products, and that is a one-time event.

I see. OK.

If I can just add to that, it's not all just G&A increases, because the whole point of this is to increase our services to our more lucrative customers and therefore increase free income in our spreads. Because as you increase, for example, business banking, we will be pricing a lot of those loans off of prime rather than, you know, our traditional mortgage market. So, over time as we make this transformation, there ought to be an offsetting increase in spreads and also in fee income to compensate us for the investments we're making in G&A.

You say that's our spread out, Bob, then over the next couple of years, you'll pick up - I guess those margins will slowly improve as you increase that portion of the fee income?

That's the plan.

OK. Congratulations on a good year.

Thanks, Dave.

Once again, if you would like to ask a question, please press star one on your touch-tone phone. Again, that is star one. Mr. Clarke, it appears there are no further questions at this time.

Well, thanks everybody for joining us. As we said earlier, we had a great year and wish you all the best in the new year, and we will be seeing many of you in the spring. Thank you.

Once again that concludes today's conference. We thank you for your participation and you may now disconnect.

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