Hawaiian Electric Industries Inc (HE) 2003 Q4 法說會逐字稿

Good day and welcome everyone to the Hawaiian Electric Industries 2003 year end earnings conference call and webcast this call is being recorded. At this time I'd like to turn the call over to the manager of Investor Relations, Mrs. Suzy Hollinger.

Hello and good morning to those of you on the East Coast good afternoon. Thanks for joining us for an update on HEI. My name is Susie Hollinger, and I'm the manager of investor relation.

Here with me is Bob Clarke, chairman, president, and CEO, Hawaiian Electric Industries. Mike May, president and CEO Hawaiian Electric company, Connie Lau, President and CEO, American Savings Bank, Eric Yemen, Financial Vice President, Treasurer, and CFO Hawaiian Electric Industries. Rick VonEpten, Financial Vice President, Hawaiian Electric Company, Alvan Sokomoto, Financial Vice President, American Savings Bank, and Curtis Hurada, Controller Hawaiian Electric Industries.

Before I hand the call over to Bob for his formal comments I'd like to point out that certain forward-looking statement will be made on today's call, including information about pension, retirement benefits expenses, for 2004. Please refer to V of our September 30, 2003 10-Q for information about those forward-looking statements and other important factors that could cause actual results to differ materially from forward-looking statements discussed today.

With that I'm going to hand it over to Bob.

Well, good morning.

What I'd like to do this morning is first of all summarize our earnings for the year, then I'll discuss several nonrecurring items which are included in the 2003 earnings. I'll give you a brief update on the economy, then give you an update on what we expect for retirement benefit expenses for 2004, and then we'll open it up for your questions.

Our net income from continuing operation in 2003 was $18 million, compared to $18.2 million in 2002. Earnings per share were $3.16 compared with $3.26 per share in 2002.

I think we had a very good year in 2003 considering the numerous challenges we faced. Of course, the biggest challenge was in the increase in retirement benefit expenses. We swung from a credit in 2002 to an expense in 2003. The total swing was 16.4 million, or 45 cents a share.

Also at the bank, we experienced margin compression with the lowest interest rates in 40 years and the margin compression squeezed bank net income by $3.8 million.

Net income at our utility was 78.9 million, versus $90.2 million in 2002. As I mentioned earlier we had an increase in pension expense and the impact at the utility was $14.6 million after tax. The utility did experience warmer weather and we had increased usage and an increased number of residential customers which contributed to a growth in kilowatt hour sales of 2.4% in 2003.

One of the focuses of the utility last year was to increase capital expenditures to invest to ensure greater reliability and in doing that they were able to decrease maintenance expenses by $1.9 million pretax, also we had an increase of depreciation of $5.1 million, and $3.1 million due to charges related to the settlement reached in the Keahole expansion project on the island of Hawaii.

At the bank net income was 56.3 million, which essentially was the same as 2002 record earnings of $56.2 million. Despite the margin compression. The interest rate spread was 16 basis points lower at 3.08 in 2003 versus 3.24 in 2002.

In the first half of the year the bank refinanced certain advances from the federal home load bank to lower interest costs and lengthen maturities of outstanding advances. That resulted in lower interest expense of $4.6 million for the year. And that, of course, was part of their asset liability management program.

Loan delinquencies and charge-offs during the year were lower which translated into a 16.7 million lower provision for loan losses compared with the prior year. This was possible because of the strong real-estate market and strengthening economy here in Hawaii.

Noninterest income was also higher as the bank sold securities at a $4.1 million gain versus a $600,000 loss the year before. The bank's G&A was $8.4 million higher due to the increased cost of transforming from a traditional thrift to a full-service community bank, and those investments will continue in 2004. The bank's efficiency ratio, which is the cost of earning one dollar, was 61% compared with 58% in 2002, and we expect that ratio will continue to be above what our normal target are while we make these investments to transform the bank.

Let me now talk about several nonrecurring items which were included in earnings in 2003.

First is we had some settlement of lawsuits, and that produced a 5.8 million after-tax credit to net income, offsetting in that part was the charges due to the settlement of the Keahole matter, and that was a $1.9 million after-tax charge. Also included was the notice -- the assessment for the notice of violation at Maui Electric, and that's an after-tax charge of $800,000. Then we had gains on sale of securities at the bank, and it's hard to know whether this is really nonrecurring or not because as part of the bank's business, but included in earnings was $2.7 million after tax from securities gains from our available for sale portfolio.

Let me switch now brief toll talk about the economy. A real growth state product was 2.9% in 2003, that's the early estimate, and it is forecast to be 2.8% in 2004.

Visitor arrivals were down slightly at 0.6% reduction in 2003 and are forecasted an increase of 6% in 2004. Probably the more -- a better statistic to look at is visitor days. This incorporates how long people actually stay, rather than just how many people come. Visitor days were up 3.8% in 2003 and are expected to go up by 5.1% in 2004.

Construction spending was up 7% in 2003 and we expect it to be up 17% or more in 2004. At November, our unemployment was 4.2% compared with 5.6% for the rest of the country.

Real-estate market is strong. Home sales were up 13% versus 2002 and December medium home resale prices were up 14% over 2002, to $400,000.

I've talked earlier in the last meetings we've had with analysts about the growing military presence in Hawaii, and that long-term trend is continuing. But I will tell you that we just recently had the beginning of a deployment of 5,000 army personnel from the 25th infantry to Iraq and Afghanistan, and they expect to be out of the state for about a year. So that is going to have an impact on certain communities here in Honolulu.

Let me move now to our pension. Some of you know we were potentially facing charge to other comprehensive income. I'm happy to report that we were able to avoid that basically for two reasons. When we were last in wall street we had a year to date return through the third quarter of around 13%. We actually came in at 25% for the year. And we were able to make a modest $12 million contribution to the pension plan in the fourth quarter to be able to not have that OCI charge.

As you recall we had a discount rate in the year before of 6.75, and we now at year end have lowered that to 6.25. We continue to have our assumption of a 9% long-term return on plan assets although our actual return is, as I said earlier, was 25% last year. We made $48 million in contributions in 2003, and our retirement plan assets stood at $822 million at year end.

We have run the model for what the retirement benefit expenses will be for 2004, and on a consolidated basis, we expect those expenses to be lower by $4.7 million, $3.8 million of that will be at the utility, $700,000 at the bank, and $200,000 at the holding company. So we're happy about that.

Yeah, those are all after-tax numbers. Well, with that brief summary, we'll be happy to open it up to your questions, and, Phillip, if you could start taking the questions, we're prepared to answer them.

Thank you, sir. If you'd like to ask a question today please press star 1 on your touch-tone phone. If you're using a speakerphone please be sure to take your mute function off in order to signal to reach our equipment. Please press the star key followed by the digit 1.

We'll pause a moment to assemble our question roster.

We go first to Paul Patterson with Glenn Rock Associates.

Good morning. How are you?

Good morning, Paul.

Just wanted to touch base with you on a couple of items. Just going through those one-time items that you mentioned associated with the lawsuit and the Maui charge, et cetera, et cetera, I came up with something like 3.1 million after tax if you net all those out before the 2.7 million associated with the sale of securities from the bank. Is that about right?

That's correct, that's correct.

Okay. And then the other thing I wanted to ask you was, in terms of the $8.4 million which are transforming expenses which you expect to be going -- to be there in 2004, when do you guys expect those to go away? I mean, when should we see those transforming expenses -- when will the transformation be at such a level that those spends might drop off?

Let me ask Connie to comment on that.

Hi, Paul.

You will not see the expenses drop off to the extent that they relate to higher level positions and more skilled work force that we are bringing in.

You will see a line item in there that talks about consulting expenses, and those probably will drop after we get through the transformation. They have already come down slightly. In 2003. And 2004, but we are adding to the cost base as we make this transformation because the business market requires a higher cost structure in order to service it properly.

Okay.

What we should see is offsetting that is increased interest income as we get more business banking and commercial real-estate lending.

Right. So, in other words, those expenses are pretty much -- they will be built into the call structure, I guess, but when you mentioned the consulting fees, how much are those that you think mine be dropping off in '04 or '05?

It will usually swing by maybe a couple million. It won't be a large number.

And then the loan loss provision that you mentioned, the reduction in those, any outlook for -- I mean, is there still room for improvement in 2004, or, you know, can you give us any color as to you know what, with we might be seeing there?

You mentioned the real-estate environment, sounds like construction is strong. Is all that reflect in '03 or is there still some room for improvement in your loan loss reserves for 2004?

As you know we didn't book very much of a provision this year at all.

Right.

The reserves throughout, and it's a really strong real-estate market keeps up the reserves currently are adequate and we'd probably maintain them at that level. But things are already pretty good here in Hawaii.

The asset quality is very strong, and much better than historical norms. So we're pretty close to the bottom there. I think, as you know, we just booked about $3 million in provision this past year. This is not a lot considering the size of the total loan portfolio.

No, but you guys don't expect to see that change much at all, I guess. Okay. I appreciate that very much. Thank you.

Thank you.

We go next to James Dalapa with D.A. Davidson & Company.

Good morning.

The operating income at your utility and bank appeared like they were in line with my expectations, but the operating income from other was way in excess of what I would have thought. Would you please dissect the revenues of 10 million plus that came in to other and give us an idea what they are comprised of?

Well, the biggest element of that was the settlement of lawsuits.

And what lawsuits are we talking about?

Well, I'm not really at liberty to go into details on that because we've signed some confidentiality agreements but I think it's important to note they're obviously nonrecurring.

Thank you very much.

We go next to David Chandler.

Hi, good morning, and congratulations on a really good quarter.

Good morning, Dave.

Good morning.

Could you give us a little bit more information? We caught some information on the weekend about the storms in Oahu and Maui. Could you give us an idea of the preliminary estimates of damage for you guys? Is it significant?

Well, we had a real screamer, and Mike was really busy last week. I'll let him get into that.

We add storm, arguably it was a hurricane, and we had probably six hours advanced notice. At the height of the storm, we had something like 57,000 customers that were out of power. I'm happy to report that within a matter of maybe -- we had very little advanced notice but we set up our incident commands and responded as quickly as possible.

As far as the impacts and consequences, it's really too early to say, but that extended not only to Oahu but our utilities on Maui and the big island. We had winds that were gusting up to 92 miles an hour. There was extensive tree downs, roofs removed from homes. It was far beyond the impact just on the utility. It was quite a storm.

I'll say this, it was a short storm. Unlike some we've seen in the past, it was pretty intense when it was here, then the day afterwards, it was beautiful. And we also budget for, you know, higher levels of O & M during the winter months obviously. But we didn't budget for this.

There's nothing that specifically stands out as a potential, you know, capital expense that -- and or extraordinary expense that you're going to have to deal with in the next rate case? Is that correct?

That is correct.

Okay. Another couple of odds and ends. The carrier group that you guys talked about, what's the status of that? Is that still something that's feasible coming to Oahu?

It's feasible, but there are some hurdles. Probably the biggest hurdle is they've got to find a place for the air wing to be locate, and the most logical place would be Barber's Point, but that's a decommissioned site, and the military is reluctant to recommission sites that have been decommissioned.

But it's, you know, people are still moving forward on it. It's a long-term issue. It's something that's probably not going to happen in the next year or two but it certainly is within the horizon of perhaps the next five years.

Okay. Then the last thing is, -- has to do with if bank.

Concerning fee income, in general, I mean, fee income comes from, obviously, different places, but if you look at fee income overall, it was down a little bit from the fourth quarter last year, but probably not down as much as maybe some people had anticipated, and I guess my question is where do you think fee income is headed sequentially going forward into the first and second quarters of '04.

Dave, I'd say that the decline in the fourth quarter is not indicative of a trend, and really had to do with timing of recognition of some processing fees, and, therefore, if you look at the full year number, that is more indicative of what is happening to our fee income overall, and that is that it is gradually increasing. As we build the deposit base and add more customers on.

Okay. Great. Thank you.

We go next to Dave Parker with Robert W. Baird.

Good morning, and congratulation on another good year.

First off, I was wondering if we could get an update on the Keahole construction project.

As you know, we reached a settlement last year. We are moving aggressively, we should have our first unit up in a test state by February 9th, and the second unit soon to follow in about a month. So we're making extraordinary progress in bringing the Keahole plan into service.

Any estimates or guesstimates, Mike, on when you may seek some kind of rate recovery for that or if you're going to seek rate recovery?

Our priority right now is to get to a rate case for our main service territory. As you know we will be filing later this year on Oahu then we will look at the timing thereafter specifically for Keahole and the big island.

Thank you. Another question.

I guess we've asked all the questions, Connie, except for any trend? It's good to see interest rate spreads move back in a positive direction quarter over quarter. Is that something we ought to expect to continue in 2004 or what's your outlook at this point in time?

Steve, I wish I could tell you definitively. As you know, that spread really depends on what happens with interest rates and, you know, last Friday the ten-year went a little bit under 4% but it seems to have come up a bit, and perhaps we're back into that trading range of 4, 4.5, so we had seen, as we had expected, some alleviation of the margin compression in the fourth quarter, and as you noted, you see that in the spread numbers. I'm hoping that that will continue, but it very much depends on the interest rates and particularly on the refinancing rate.

We seem to have had interest rates drop back down again without a huge increase in refinancings again, but if we got another large wave of refinancings that's what would really pressure our spread as a mortgage lender.

Okay.

And last, I would assume that kilowatt sales out to be over 2% again given the forecast for the economy's growth in Hawaii again next year. Is that a fair assessment, or a fair guess?

Yeah, I would expect so. We're looking at that time economy growing, as I said, about 2.8% and there's a very high correlation between the growth state project and kilowatt sales. Absent swing in weather.

Weather and also the military deployment that Bob had mentioned early every.

Great. Congratulation again.

Thanks, Dave.

We go next to Asher Cohn with Fore Sight Investment.

Good morning and congradulations.

If you look at 2004, just going back to your comment, Rob, can we expect a similar gain on sale of securities on the banking side as we look at earnings?

Those are opportunistic, and it depends on what the portfolio looks like and what interest rates do. And we will, you know, from time to time take those gains, but there's really -- it's a funny situation because when you take the gain, if interest rates have gone down, then you've got to reinvest those proceeds at lower rates, so we will be oppotunistic, but it is all going to all depend on the interest rates and how individual securities are performing.

Could you share with us what ROEs were on the utility companies what you earned exactly for the year?

Hold on. (ROE )

If you look at our main service territory , -- I'm going to read them off. For HECO, 8.62. For HELCO, 6.44, and for Maui, 9.88, for a consolidated 8.45.

For the bank it was 12.06.

Okay. I appreciate it.

We go next to Paul Devalt with Value Line.

What's the latest between your company and the state tax department?

Could you repeat the question, Paul?

What's the latest with the state tax department?

There's really no change. We're expected to go to trial this summer, and nothing has really changed since then. Or since we last talked to you folks.

So until then you're going to continue to back those credits?

Yes, we will.

All right. Thank you.

We go next to David Pickens with Deep Haven Capital.

Hi. Just a couple of questions following up to the line of questioning that Jim opened on the really kind of startling departure from past results in the other segment.

I want to make sure. The Keahole settlement was at the utility was reflected in the operating income at the utility and not in other, is that correct?

That's correct.

Okay. I guess I just am having a hard time accepting that we've got a departure in the quarter of from last year of 20 cents a share, roughly in the swing we've seen in the earnings from operating income from the other segment and greater than that, more like a quarter, on a full-year basis, and we're just kind of told, we can't tell you about it.

Can you at least tell us -- is there any more flavor you can give on that? And if they were settlements, is it fair to assume that next year we would look for a number going back closer to what we saw in 2002 than in 2003 in that other line?

Yeah, the answer is yes.

Basically there were two things going on in other.

One is lower interest expense, which we would expect would probably continue, assuming interest rates don't do anything crazy. And on a year by year basis, that was $3 million pretax improvement. And in the settlement of lawsuits, that added about $4.5 million after tax, and, of course, we wouldn't expect that to -- and we also didn't have any write-downs on our portfolio of those investments, so we would expect that would not be recurring in 2004.

Would you expect that the benefit from not having the write-downs would not recur, so would expect write-downs again next year?

Wouldn't expect write-downs but we wouldn't expect a gain from the settlement of the lawsuits.

Okay. That's still only explains about half of the departure year-over-year.

Were the write-downs that large last year? Or let me ask, what was the number for the write-downs?

Well, I think it does explain it, because 4.5 after tax and the pretax amount was greater.

Oh, okay, okay. I'm adding an after-tax on the pretax. Okay. That helps.

Okay.

Thank you.

We return to James Dulase.

In terms of your bank, can you give us some flavor on the components of net interest income going forward? What might your average earnings assets grow, what might your interest berg and liabilities grow or decline?

We don't expect major growth in assets at the bank. What we're really trying to do is shift those assets from those which are traditionally held by a thrift, which are basically home mortgages, into greater concentration of business loans and commercial real-estate loans.

We would expect the growth in the balance sheet to be rather modest. And so we would be looking for an improved interest rate spread just because of change in the mix of business.

That's helpful.

In your newspaper last week there was something related to this storm that caused me to ask this question. Do you reimburse your electric customers for damages during outages?

The tariff and regulations suggest that only where we did not exercise reasonable care and performance, and, of course, the circumstances here was a -- the equivalent of a hurricane. That was certainly beyond our reasonable control. So that is something we will be looking at in terms of our regulation or tariff, in terms of our responsibilities.

You have an opportunity in a public forum today to give us characterization where you think earnings might go in the next year. Can you do that?

We have chosen for a long time not to forecast earnings. It's been a longstanding policy of the company.

Do you believe that there is growth in earnings?

I just could -- I just said we don't forecast earnings, so I'm not able to answer that.

Thank you very much.

We return to Paul Devalt with Value Line.

Where did capital spending wind up last year, and what are your expectations for '04?

200 million next year. And we're looking up the precise number for 2003.

We expect to continue to make investments in reliability project, and as we talked about in our equity analyst trip, we're making investments in technology and upgrades to our system, consistent with our equity analysts trip we expect to continue that program.

You know, I think the important thing to always highlight is the fact that we expect our capital plan to be financed out of our own cash flow over the five-year planning period. 160. 160 million in 2003.

Thank you.

We return to David Pickens with Deep Haven Capital.

Hi. Can you give us an update on where you are in the regulatory process?

My understanding is we've got one rate case that's about to be filed, or has either just been filed, and another one to be filed in '05. Am I remembering that correctly?

No, what we've announced is we will be filing a rate case for this summer for 2005 test year, and we've only decided at this point in time to file the one for Oahu. As Mike said earlier, we will evaluate at a later date whether we -- whether and when we want to file a rate case for the island of Hawaii.

Okay. So is there any other kind of mechanism besides a generate case to enable you to start earning on Keahole if it gets -- when it gets finished?

No.

Okay.

Although it can go in rate base but we can't include it in higher rates until we file a generate case.

So it's undetermined at what point that will happen.

That's correct.

All right. And can you also talk about the -- a little bit more detail on the increase in depreciation at the utility this year of about $5 million? Give us a little more color on, was that just evenly spread throughout the year? I'm just trying to figure out how we should look at that for next year.

Let me ask Rick VonEpten, the financial vice president for the utility to respond to that. Rick.

Hi, good morning.

That principally reflects additions that we had at the end of last year and that was spread out through course of this year. So any additions that we have made in 2003 would contribute to an increase in depreciation beginning this year, and again would be spread out evenly through this year.

Can you give us an idea what those additions were during the year?

160 is the capital expenditures. Not necessarily the additions. I don't have addition. I can get it. But I think it's relatively comparable to what we've seen this year.

So probably, I mean, if we assume, you know, a 30-year life on that stuff, roughly another incremental 5 million is not out of hand?

What you might want to do is call Suzy Hollinger later this morning and we can get that data for you.

Okay, thank you.

That concludes our question-and-answer session today. I'd like to turn the call back over to senior management for any additional closing comments.

Well, we want to thank you all for joining us. We're happy about the year we had in 2003 and we look forward to a successful 2004 and we will see many of you when we make our trip back East in the springtime. Thanks very much.

That concludes today's conference call, thank you for your participation. You may now disconnect.