Hawaiian Electric Industries Inc (HE) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2004 Hawaiian Electric Industries conference call. (Caller Instructions)

I would now like to turn the presentation over to Ms. Suzy Hollinger. Please proceed.

Aloha and good morning. I want to thank everyone on the call for joining us for an update on Hawaiian Electric Industries.

I’m Suzy Hollinger and I’m HEI’s Manager of Investor Relations. Here with me today from management are --

* Bob Clarke, HEI’s Chairman, President and CEO * Mike May, President and CEO Hawaiian Electric Company * Connie Lao, President and CEO American Savings Bank * Eric Yeaman, HEI Financial VP, Treasurer and CFO, * Tayne Sekimura, Financial VP and CFO Hawaiian Electric Company * Alvin Sakamoto, EVP Finance American Savings Bank * Curtis Harada, Corporate Controller at HEI.

Before I turn the call over to Bob to start today’s presentation, I’d like to alert you that forward-looking statements will be made on today’s call. Please reference HEI’s current report on Form 8-K dated December 31, 2004 and filed on January 6, 2005 for information about forward-looking statements.

Now I’d like to turn the call over to Bob.

Good morning. We’re here mostly to answer your questions, but let me begin with some brief comments about the earnings we announced last night.

As you know, we delayed the release of our earnings due to an accounting issue having to do with an accounting pronouncement called FAS 91 on the amortization of premiums and discounts on our mortgage-backed security portfolio at the bank. In fact, this resulted in a $1.5 million increase in net income from continuing operations or $0.02 a share. Importantly, this did not represent a material weakness in internal controls over financial reporting at the bank.

The adjustment was made to interest on mortgage-related securities and it boosted our 2004 interest rate spread to 3.08%, which was even with 2003. Without the adjustment, the 2004 interest rate spread would have been 3.04%, down 4 BP from the prior year.

Importantly, we are continuing to feel the affects of margin compression, resulting in a flattening yield curve. As you know, the Fed has been raising short-term rates and long-term rates have just really not gone up very much and we look at the difference between the 2- and a 10-year treasury curve and that has narrowed. It was 1.2% at year-end and as of February 4th it was down to 0.8%, so we’re continuing to feel that compression into 2005.

Now we cannot predict the impact on future earnings, because the rate of future amortization - this is a fact on FAS 91 - is affected by market condition, mostly by prepayment speeds on the portfolio and that’s a function, obviously, of interest rates. And the number got to be what it is because of the high rate of prepayments in the last couple years. We would hope that that’s not going to occur this year.

Let me review our overall results for the year --

* 2004 income from continuing operations was $108 million, compared with $118 million in 2003.

* EPS from continuing operations was $1.36 versus $1.58 last year.

* At our utility net income was $81 million versus $79 million in 2003.

* At the bank net income was $41 million versus $56 million for 2003. Now that excludes a $20 million charge to settle the state franchise tax dispute. Excluding that, bank net income would have been $61 million compared with the $56 million last year.

Obviously there are lots of plusses and minuses going on year-to-year, but let me summarize some of the major plusses and minuses that have impacted consolidated earnings - and all of these items I’m going to give you are after tax.

* As I mentioned earlier, we had the $20 million charge to settle the bank’s state franchise tax dispute.

* We had $25 million favorable at the utility due to higher kilowatt-hour sales and a $5.0 million benefit from lower retirement benefit expenses, partially offset by $13 million of higher operations and maintenance expenses and $3.0 million higher depreciation at the utility.

* At the bank we had a favorable variance of $7.0 million due to a provision for loan losses.

* We had $5.0 million lower interest-related expenses at the holding company

* We had $4.0 million on the gain on sale of some investments in CDO’s that we’re holding at the holding company. Originally we’d acquired those from the bank.

* In the prior year, in 2003, we had a favorable $6.0 million from the settlement of lawsuits and a $3.0 million gain on the sale of bank securities.

* Now, in the quarter, net income for the fourth quarter was $25 million, compared with $37 million in 2003.

* Fourth quarter EPS were $0.31 versus $0.50 for the fourth quarter of 2003.

* At the utility, in the fourth quarter net income was $13 million versus $22 million for the same quarter in 2003.

* At the bank, net income was $17 million versus $14 million in the same quarter last 2003.

The variances in the quarter --

* At the utility we had $4.0 million of higher kilowatt-hour sales and $1.0 million of lower retirement benefit expenses, offset by $10 million in higher O&M and I know in the Q&A we’ll be talking about the reasons for that.

* At the bank we had a $3.0 million reversal of a charge taken in the second quarter related to the bank’s state franchise tax dispute and that was a credit.

* We also had a credit of $1.5 million due to the over-amortization of net premiums on our mortgage-backed security portfolio that I discussed earlier. And that was offset by higher taxes at the bank, in part due to a higher effective tax rate and that reflects the settlement we had with the State.

* In 2003, we had a $6.0 million favorable settlement of lawsuits.

Let me briefly give you an update on the Hawaiian economy. It’s doing well. We estimate the gross state product grew in 2004 by 2.6% and we expect growth in this year to be roughly the same at 2.7%.

Visitor days hit a record in 2004. They were up 5.0% and they’re expected to continue growing by about 2.4% this year.

Construction has been particularly strong. It was up 6.2% in 2004 and we expect it to be up about almost 14% in 2005.

Our unemployment rate in Hawaii continues to be well below the national average. At the end of November it was 3.3% compared with 5.4% for the rest of the country. And the outlook is for growing military and federal government spending continuing into 2005.

The real estate market continues to be strong. Oahu home sales were up 6.4% in 2004 compared to the prior year. And the medium home resale price is now almost $500,000, up 24% from the prior year.

Finally, let me give you an update on our retirement benefit expenses --

* We, at the end of the year, had to adjust, as you know, the discount rate and we’ve adjusted that downward by 25 BP to 6.0%.

* We’ve kept the long-term rate of return on the plan assets the same at 9.0%. In fact, we had an actual return in 2004 of 10.5%.

* We made a contribution last year of $37 million and at the end of the year our retirement assets stood at $893 million.

* Our consolidated 2005 retirement benefit expense, net of taxes and net of capitalization, is estimated to be $11.4 million -- $1.0 million at HEI, $7.8 million at HECO and $2.6 million at the bank.

* We estimate the 2005 retirement benefit expenses will be $4.6 million higher than the $6.8 million recorded last year.

* There’s no change at the holding company, but at the utility we expect to be $4.0 million higher and at the bank, $0.06 million higher at the bank.

* We described to you when we were back in New York, a potential that we might have an OCI charge. In fact, we were able to avoid that by making a small contribution at year-end and by the favorable performance of our portfolio during the year.

Well, that’s a brief summary of our earnings release that went out and I’d like now to ask the operator, Ann Marie, to have the Q&A period.

Thank you. (Caller Instructions.) David Thickens with Deephaven Capital Management.

Good morning, everyone.

Good morning.

A couple of questions. Is there going to be any kind of ongoing benefit from the resolution or impact of any sort from the resolution of the state franchise dispute?

Well, just the opposite. It’s actually going to increase our taxes on a going forward basis and probably that was running at about -- was it $4.0 million in the year?

Yes.

Okay, about $4 million a year.

You may want to look, David, at the second page of the 8-K that was filed with the earnings release and that will give you a breakdown of what its been running over the last few years.

Okay and how did you treat it in -- does that discuss how it was treated in 2004? Was 2004 the whole catch-up or was that roughly $4.0 million separate from the $20 million?

Well, we took the charge in the second quarter, when we lost the case in court, and then we took a credit in the fourth quarter when we settled. There was a small credit that we took. And then, if you’re going back and looking at prior years, we’ve been running about $1.0 million a quarter in benefit. That’s going to go away on a going forward basis.

Okay and of the increase in kilowatt-hour sales that you mentioned earlier and the revenue benefit from that, have you been able to break down how much of that was weather versus normal and how much is just the improving economy and usage.

Let me ask Mike and Tayne to respond to that.

As far as looking at the total kilowatt-hour sales, if you look at the revenue, we’re looking at $153 million for the year. I just want to remind you, a big part of that, $113 million is the fuel adjustment, the higher fuel cost from year-to-year.

Plus the increase.

We also -- the increase, yes. Looking at kilowatt-hour sales, 2.9% increase, which is about $41 million of the increase and 1.9% is the weather component.

Okay, so about two-thirds of that $41 million?

Yes.

Okay and as far as your fuel increase and the fuel pass through, I just want to verify that that is indeed a delivered price and it includes freight? We’ve just seen ocean freight rates skyrocket over the past couple of months. They’ve pulled back somewhat but they’re much higher and I want to make sure that that is included in the component that you can pass through.

Yes it is a delivered cost. Yes.

Okay and the last question I have is can you talk a little bit about the change in the loan loss provisions? It went from a benefit -- I’m sorry. It went from a drag last year to a benefit of about $0.06 on the course of the year. Any idea of how we should look at this on a going forward basis?

Well, it’s a function, obviously, of the real estate market and the real estate market was extremely strong and values went up in 2004. And [technical difficulty at 13:58] whether or not that continues into the future. Normally you would expect to make provisions and having credits is unusual. So we would expect the normal situation to be that we would have to make provisions as we go forward.

Okay and that was about $5.0 million after tax was the benefit this year?

Yes. That’s right.

All right. Thank you much.

Dave Parker, Robert W. Baird & Co.

Good morning. The most important part of this is not a question but a comment. Congratulations, Eric. Just remember the little people now that you’re a superstar. And secondly, just a question on the O&M component for 2004 and what we should expect sort of the delta or the change going into 2005. I assume that a lot of that won’t reoccur?

Dave, that’s correct. Let me just take a minute for all listeners and just characterize the fourth quarter if I may and just talk about some significant events

Due to a combination of growing demand driven by our strengthening economy, coupled with the hot and humid weather that we talked about earlier, in October our system was faced with a record high peak, which was 1,327 megawatts. And this is compared to our system capacity of 1,669. This represented a 3.3% increase in peak demand over 2003.

As you can well appreciate, this puts pressure on our reserve margins. With the growing demand for power on Oahu, additional operations and maintenance were undertaken during the slower load period, in the latter part of the fourth quarter, to ensure that we launched the new year with added confidence of adequate supply within our limitations.

As we completed our overhaul work in the fourth quarter, we also did extended work to ensure that we would have added reliability in our tight supply situation in the coming year. Many of these expenses were related to timing and extended scope of work to support our growing load and economy.

Additionally, in the fourth quarter, we had an unexpected catastrophic failure of one of our two cycling units here on Oahu, which is used to meet our peak load and also added to our expenses. An overhaul of that cycling unit was originally planned in early 2005. But with the repairs of the cycling unit underway - since we already had it apart - we did an extended scope of repairs to include overhaul work that was initially planned to occur in 2005.

And then finally, in the fourth quarter, we also had the expense associated with filing our first rate case in 10 years and also the compliance requirements for SOX 404, which put a lot of strain and resources on our resources.

Can you, along those lines, Mike or anyone else or Tayne, just talk a little bit about the rate case and where we stand and just sort of expected timing as that moves through the system?

Yes, sure, but let me add one more bit of information to what Mike had said about our fourth quarter. Some of our expenses will carry over into the first quarter of 2005, as well as we do see a little bit of higher operations and maintenance and expenses at our production and transmission and distribution areas, as we continue to maintain our system.

With respect to the rate case timing, not a lot has changed with that. In terms of when we expect our evidentiary hearing to be conducted, that would be in the third quarter of 2005 and we hope to get an interim decision by the fourth quarter. In terms of final decision, that timeframe is undetermined and that would be up to the Public Utilities Commission to determine.

Tayne, can you give me any kind of estimate what the Sarbanes-Oxley costs were for 2004?

They’re expensive

$3.1 million on a consolidated basis, Dave.

I’m sorry, I missed that. What was it?

$3.1 million.

But that understates it, because that’s just what we’ve been billed in 2004 and that work continued into this year. So we expect it’s going to be fairly material in the first quarter.

So that $2.1 million was what was billed, Bob, but does that also incur your estimate of what it would cost you, employee man hour-wise?

No. This is just $3.1 million, Dave, and that was just the external cost. It doesn’t include what was internal.

All right, great. Thanks very much.

Doug Fischer, A.G. Edwards.

Thank you and good morning.

Good morning, Doug.

Some of my questions have been asked, but is the adjustment for the over-amortization, is that just an amount related to 2004 or is that some kind of catch-up? How should we look at that? Are you restating any other years?

We are not restating and the amount was immaterial. There is a little bit of catch-up in there from prior years, but it’s immaterial. That’s why we took it all in the fourth quarter. There’s no restatement.

Okay.

Doug, this is Eric. I would also add that the majority of what was booked, the majority of the amount related to the fourth quarter as well.

Okay, good, good and then just maybe a little bit more. I’m a little bit confused about what you were saying about O&M in response to some of Dave’s questions. We had some very exceptional O&M. Can you parse out at all, even in broad terms, what might carry forward and what was of a more onetime nature and does the moving forward of this overhaul give us a positive offset for ‘05?

Starting at the back, Doug, the catastrophic failure, as I’d indicated earlier, was planned for early in 2005.

The overhaul (inaudible) --

(Multiple speakers)

The overhaul. We expect the unit to be back in service, actually, like this week. So obviously we have planned that to be in our overhaul schedule in 2005 and would see that as an offset. We wouldn’t expect to have to do that again.

We did include a lot of overhaul work, system line work during the fourth quarter when we had some sort of lighter sales during the December time period. And took advantage of that period to sort of front load because of our tight reserve and tight supply situation, so that we could in fact buy down reliability risk in 2005.

And Tayne, you might want to --

Adding to what Mike has mentioned, he mentioned the catastrophic failure of a cycling unit. In addition to the overhaul cost that we incurred we also incurred costs to repair that particular issue and we had to book a reserve. We have an insurance deductible on that.

In addition to that, over at HELCO, our CP4 and 5 units were placed in limited operation during the year. This was in the second quarter, so we did incur additional production operation expenses there. We also had some additional overhead, transmission and distribution line inspections that we had engaged in, as well as a number of common structure maintenance items in the production area.

In addition to that, we talked about our SOX external cost, for SOX compliance. And we also had increased costs in our information technology area. We had some -- the engagements and work to harden up our IT security as well as our detection intrusion systems there.

Tayne, can you -- obviously the costs were - I guess you were talking about Keahole - go on. But what approximately was the cost of the overhaul and what was the cost of the repairs? And reserve, was the reserve sort of your deductible on the insurance? I’m sorry, maybe I’m giving you too many there at once.

That’s correct. The reserve is the deductible on our property insurance.

Can you quantify that? Can you disclose what that amount was?

$750,000.

$750,000, that’s pre-tax?

That’s correct.

And then the overhaul cost approximately what?

The overhaul costs were above $1.0 million and that work continues in 2005, as Mike had pointed out.

And that’s pre-tax as well?

Correct.

And then the repair cost? You said there was some repair cost associated with the unit.

The repair costs, we are only responsible up to the deductible.

Oh, okay, I got you. And then -- but you do expect a significant decrease in your Sarbanes-Oxley costs, even though there will be something higher than say ‘03?

Well, unfortunately the accounting firms are unwilling to give you a budget and stick to it, so that’s somewhat of a moving target, frankly. Hopefully we will have another big slug in the first quarter and then hopefully it should back off in the second and third quarter of this year. But you’re right, in the aggregate you would expect that after going through this once that it’s not going to be repeated at the same level forever.

Okay, well thanks. I appreciate that. Can you give us a little guidance as to what your CapEx was in ‘04 and what the budget looks like for ‘05?

Sure. Hold on.

Okay. Let me start with the CapEx for the 5-year period 2005 to 2009 for the HECO utilities. We’re looking at $800 million.

(Inaudible - microphone inaccessible)

Last year we were close to $200 million.

What about this year? Hold on a second.

This is all just utility?

That’s correct.

That’s correct.

In terms of what we’re expecting for 2005, our net capital expenditures are looking in the area of $173 million.

$173 million for the utilities?

That’s correct.

2005. And anything about holding company and bank or --?

Well, the holding company would be virtually nil, but the bank -- it’s not a big number at the bank. It’s pretty much at the utility.

Okay and then financing plans for the year. Any comment on those, Eric or Tayne?

We don’t have any plans to do any financing.

At the utility company we are looking to get legislative authorization to issue special purpose revenue bonds. That needs, again, legislative authorization and after that we would require PUC approval to proceed with any plans.

(Multiple speakers)

Okay. Thank you so much.

James Bellessa, DA Davidson & Co.

Good morning. The delay in reporting as a result of the ruling technical accounting adjustments that you had to make there for a 2-week period, tell me. If it’s not a material weakness in internal controls, how do you describe it? What is it that happened?

Well it had to do with the way the banks amortize premiums and discounts on their marketable security portfolio, having to do with prepayments fees. And essentially the bank was using a methodology that we understood is used by the majority of financial institutions and in fact, it didn’t comply with the full technical way you’re supposed to do it.

You’re supposed to go back and instead of adjusting your amortization on a prospective basis, you’re supposed to go back and recalculate it from day one and recalculate that way. So, in fact, we’re over-amortizing the premiums, the net premiums that were on the balance sheet. And it’s just an adjustment and its not a material weakness because it wasn’t material.

But it was something that you had to correct?

We had to figure out whether it was material and then, because we knew the number, we made the adjustment. Yes.

Okay. Now you were saying that some of the costs of these overhauls and improving your generation will carry over into the first quarter?

Yes.

What are we talking about in magnitude of cost?

We don’t have that information right now. Our overhaul is still in progress so we don’t have that info.

And when did the overhaul start and how long is it expected to last?

The overhaul started in late November and its continuing through mid-February.

And just to reiterate, it was something that was originally planned in our budget for 2005 and so what we’ve done is offset part of that into 2004, the magnitude of which I can’t quantify exactly here.

Good and this outage that’s occurred as a result from this plant, what is the size of this plant relative to your total generation capacity?

Well, it did not cause an outage. We were able to keep from having any kind of a system loss. But the size of the plant is 50 megawatts. It’s one of our two peaking units that we use for cycling.

One of the factors that’s going on here is because of the heavy loads that we’ve had. We had to run our peaking units longer than normal and that’s putting stress on some of the peaking units and this is really going to be something we’re going to have to live with until we can new base load or peaking generation on site.

Given this need to do this overhaul, possibility that weather will go back towards normal, and you have a late 2005 rate decision, do you expect your electric utility segment earnings to be flat or up?

Well, we don’t give guidance on earnings. So I’m not really able to answer that.

Thank you.

Michael Weinstein, Nimmer Lucas.

Hi, how are you doing?

Good morning.

Hey, regarding the peaker outage, it looks like you had said, I think, was an increase of $6.3 million of maintenance costs there, overall, for the year. Now that includes $750,000 for the insurance deductible and you said that you did $1.0 million of scheduled maintenance on the peaker that was originally scheduled for ‘05. Is that it, just $1.0 million of that $6.3 million?

More than $1.0 million is what we said.

Okay, now does that represent anything you spent in ‘04 that was pushed back into ‘04 from ‘05? Does that represent a reduction to the historical levels of O&M for ‘05, the same amount?

Possibly it could be an offset.

Okay.

You talked about a $6.0 million figure. I think the number I gave for year was a higher O&M of $13 million after tax.

Oh, is that included? Yes. That includes operations, right. I’m just talking about the maintenance.

Yes.

Okay and loan loss provisions, just wondering. I’m just looking at that. It looks to me like it was a reversal -- or not a reversal but an actual provision taken in the fourth quarter. Is that correct?

No.

No.

No?

No.

So we haven’t gotten into that point. Did you reverse anything in the fourth quarter?

No.

So it was just flat, zero, right. Okay, that’s it, thanks.

David Schanzer, Janney Montgomery Scott.

Dave Schanzer -- a couple of questions. First of all, you mentioned the peak number of 1,327. The capacity number you mentioned, was that available capacity at the time of peak?

Yes.

Okay. As far as the rate case is concerned, have there been any preliminary discussions with the Commission and/or staff, sort of like a workshop environment that we’re seeing in a lot of other states? And if so, could you give us a rough idea of what some of the major issues are?

Dave, as far as major activities that have taken place, on January 12th we had our first public hearing held by the PUC. There were 9 you might say “public testifiers” at that public hearing. The comments were pretty light and not particularly onerous for us.

The other activities underway are the intervenors, determining the status of the intervenors. The PUC has entertained all the intervenors’ status and has not ruled finally on the intervenors for the rate case.

Other than that, we have been working closely with the consumer advocate providing access to our witnesses and making information available, such that we would cut down on the IR’s and amount of paperwork in the case.

I think that’s important, what Mike was saying, that in the old days we used to get just tons of information requests and paper would be flying back and forth and they’ve changed the approach somewhat. And we think it’s a pretty good one and that is they actually are going in and interviewing our witnesses to determine whether or not there are areas they want to push further. So that’s helpful.

But along those lines, are there any issues that are surfacing as being focal points for either the intervenors and/or the consumer advocate?

Not so far, David.

Okay, thanks. Now, as far as the bank is concerned, could you give us an idea of whether or not the higher debit card fees that we’re seeing would be sustainable in ‘05 and going forward from there?

Yes, Dave, that would be.

Okay. Along the same rates, sort of, give or take a few percent?

It should be about the same rate, because we’re basically building up our card base.

Okay and could you give us a little color on loan growth outlook and expectations and net interest margins for ‘05?

With the loan growth, actually our production numbers in 2004 were very strong. Repayments were also quite strong, particularly in the mortgage area earlier in the year. So we didn’t start seeing net growth in the portfolios until quite late in the year.

On the commercial side, the strong Hawaii economy has put a lot of liquidity into the businesses here and so we actually had pretty heavy pay downs in the commercial portfolios and again, it wasn’t until late in the year that we began seeing some net growth in the portfolios. So I am expecting that with the strong economy here that we should still have good production numbers and hopefully businesses here will start investing and we’ll begin getting some C&I loan growth.

On the net interest margins, you know that we are basically liability-sensitive and so the flattening, continued flattening in the yield curve is not good for us. Bob noted, in his introductory comments that the spread between the 10 and the 2 has already narrowed since year-end and this week has narrowed even more. So that will not be good for the spread.

So we’ll still be struggling to cover the margin compression. You notice that the year-over-year spread did not decline and that was largely due to the strong loan growth at the end of the year.

You may have mentioned this in your comments earlier and I may have missed it, but could you remind us, if you did, what the gain on securities were for the full 12 months as opposed to ‘03?

I don’t think we took any gains in 2004.

No.

And we should (inaudible - background noise) one in 2003.

Okay. Thank you very much.

John Hanson, Imperium Capital.

Good morning.

Good morning.

Just two questions here, one on the catastrophic outage. Will any of those costs be able to be rolled in to the rate case?

No, not usually. Normally you would normalize. In a rate case, you normalize your expenses. So something like that that is viewed, perhaps, as a one-off thing typically would not.

Okay. With how tight you are, it sounds like, on supply and all, is this going to require some increased CapEx in the upcoming years in order to kind of get the system up with more reserve on both the generation and the T&D side?

Actually, that isn’t in our CapEx and it isn’t our plan. We are trying to add new generation. Couple that with the fact that our rate case is working on a combination of conservation/energy efficiency programs to crank down demand.

And we were also successful in December of finalizing a deal to buy an additional 20-, almost 30-megawatts of power from one of our independent power producers here on Oahu. Which is not the complete answer, but it does help buy down part of the risk of supply.

Our next base load unit or next large unit is not planned till 2009.

Okay. In terms of the power contract, do you get any kind of margin or any kind of compensation in terms of Cap structure for that in your rates at all?

No. We get recovery of the cost, but there was no -- it’s a pass-through cost directly to the customer, no gain for the Company on that.

No risk, no additional equity or something like that computed in your Cap structure, anything like that?

There is, of course, the imputed debt component that the rating agencies usually look at for the additional capacity.

But not in customer rates, just in terms of credit and that’s about it. Okay.

If you look at our capital structure of the utility, over time we’ve increased the equity component of the capital structure and that’s in part due, as Mike said, to the imputed debt that the rating agencies use. So we consciously moved our equity ratios up at the utility, in light of those imputations.

Okay, shifting to bank for just a moment, I want to follow-up on the statement again that was just mentioned, reiterated a moment ago about the flattening yield curve. What’s the outlook for that for the rest of the year and what does that imply for the bank business, in terms of how that outlook goes?

Well, people have been forecasting long rates to go up for quite some time and they haven’t done it and there was an article yesterday in the Wall Street Journal that everybody still expects it, but it hasn’t happened. So you know your guess is as good as ours as to when the long rates are going to start to move. What we would be hoping for is a gradual increase in the long rates over time.

And what’s the ability -- you kind of indicated that you were able to do pretty well in spite of that, here recently. But what’s the outlook and if that flattening yield curve continues what’s the outlook for being able to continue to do well in that business despite that?

Well, as Connie said, we we’re able to offset that negative impact of the margin compression with increased loan volumes and I would guess, as long as the economy continues to be reasonably good, that trend should continue. But it’s a very competitive marketplace and everybody’s got sharp elbows trying to take their customers away from each other, so it’s a competitive market.

Okay. Well, good luck. Thanks.

Dave Parker, Robert W. Baird & Co.

Just a couple questions left, I guess. We’ve peppered you with a lot. Number one, Connie, can you address maybe where the trend may be for 2005 versus 2004 for just your overall A&G expense?

A&G expense?

Your administrative expenses. Because I know they’ve been a little higher with your conversion efforts that are going on. Is that wrapping up and should we expense that to move down or not?

Well, you know, Dave, we will actually be doing the same thing that we did in 2004, which is that with the margin compression we’ll be offsetting that by pretty much holding the G&A as steady as we can. And as we go through transformation, every project will have to add more revenues than it adds expense. So, as I’ve indicated previously, we’ll be managing the efficiency ratios to keep the increasing revenues in balance with increasing expenses.

That’s one of the levers that we can push to try and offset this margin compression.

Right, okay and one last question for you, Mike. Did you lay out what you expected kilowatt-hour sales to improve or increase this year, I guess where they’re normalized?

We generally always say that our utility will grow consistent with gross state product. Gross state product, I believe, is forecasted at 2.6%, 2.7%. We’ve been following pretty closely with that.

So this year you’re up 2.9% and I think Bob laid out that the state grew at close to 3.0%. So but then we had 1.9% weather --

It’s 2.6%. But we also had a bit of a weather component in there, Dave.

Yes. Okay.

One of the things that we’re noticing, Dave, that has been an interesting phenomena, we’re seeing per-capita consumption of electricity increase on our residential sector. We believe part of that is driven by the fact that the new home construction has more air conditioning loads than we historically have seen in our usage pattern. And that’s something that, with the weather that we’ve seen, the hot, humid weather has been one of the unique phenomenons that we’ve seen in terms of our econometrics.

Well, it’s probably inappropriate, then, to think of, when I look at kilowatt-hour sales in ‘05 versus ’04, assuming that the state’s growing at 2.6% to 2.9% or whatever and then we had warmer or more humid weather that was above normal, to back off the close to 2.0% improvement you had in kilowatt sales for that? See what I’m trying to get at?

I think the best estimate, as Mike said, would be that the increase in gross state product is probably the highest correlation. Obviously we can’t forecast what the weather’s going to look like.

Right. Okay. I just want to make sure I get a good base from which to grow or a good understanding of what the 2004 base sort of looked like, sales base. All right. Thank you.

Doug Fischer, A.G. Edwards.

Thank you. Just a little bit of confusion between what you talked to Dave about and what you talked to Dave Thickens about, in terms of kilowatt-hour sales growth, because, if I understood correctly, to Mr. Thickens’ question, you talked about a 2.9.0% kilowatt-hour increase for the year. Did I understand correctly that you were saying two-thirds of that increase was due to weather? That doesn’t jibe with what you said about the gross state product being sort of the underlying weather normalized growth rate. I’m a little confused there.

Hold on. We’re looking at our number here.

My guess is that weather impact is less than what --

We could. Let us -- we’re looking through the numbers here, Doug. Let us look at this off line and have Suzy get back to you on the particular details. I don’t want to give you a bad number here, based on something we’re looking at.

That sounds fair enough. That was --

And you have no further questions at this time.

Okay. Well, thanks everybody. I appreciate your interest and if you have any further questions please give Suzy Hollinger a call. Thank you.

Thank you all for your participation in today’s conference. This does conclude the presentation. You may now disconnect. Have a great day. 3