Hawaiian Electric Industries Inc (HE) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Hawaiian Electric Industries, Incorporated fourth quarter and year-end earnings conference call. My name is Jen, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of today's conference. If at any time during the call you require assistance, please press star 0, and a coordinator will be happy to assist you. As a reminder, this conference call is being recorded for replay purposes.

I would now like to turn the presentation over to Ms. Suzy Hollinger. Please proceed, ma'am.

Aloha and good morning, and good afternoon to those of you on the East Coast. Thank you for joining us for an update on Hawaiian Electric Industries. My name is Suzy Hollinger, and I'm HEI's Manager of Treasury and Investor Relations. Here with me today from senior management is Bob Clarke, HEI's Chairman, President and CEO, Mike May, HECO President and CEO, Connie Lau, ASB President and CEO, and Eric Yeaman, HEI's Financial Vice President, Treasurer and CFO. Also participating and in the room today is Curt Harada, HEI Controller, Tayne Sekimura, HECO Financial Vice President, and Alvin Sakamoto, ASB Executive Vice President, Finance.

Bob Clarke will start today's call with some comments about 2005, and some of the challenges we may encounter in 2006. He will also discuss the outlook for the Hawaiian economy, and update you on a couple of items mentioned at our November analyst meeting in New York City, namely financing plans at the utility and pension items. Bob will then open it up for your questions.

Before I turn the call over to Bob, I would like to alert you that forward-looking statements will be made on today's call. Please reference Roman IV of our third quarter Form 10-Q for information about forward-looking statements.

Now I'd like to call on Bob to begin the formal call.

Thanks, Suzy, and good morning. I assume you've all read the press release, so I won't go over that in detail. If there are any questions, obviously we will handle those in the Q&A.

Our utility company struggled this year, as a strong economy in Hawaii put stress on our system. I'm happy to say, we're able to maintain reliability in spite of this stress, although we had higher O&M expenses to achieve that reliability. On a positive note, the rate case we filed on Oahu in 2004, resulted in interim rate relief with an annual $41 million of increased revenue, and a 10.7% return on equity.

Although kilowatt hour sales at the utility were essentially flat from the year before, 2004 itself showed strong growth in sales. This continued into 2005. Growth has resulted in tighter generation reserves during the peak periods, and has increased O&M expenses to maintain reliability.

The trend of higher O&M will continue as the marginal cost of supply and demand increases, due to our narrow reserve margins. Our bank was able to increase net interest margin in 2005, despite rising short-term interest rates, and a flattening yield curve. It was able to achieve the increased earnings because of progress from its strategic transformation to a full service community bank. As you know, we've been emphasizing business commercial lending and commercial real estate, and these areas made a significant contribution to the growth and diversification of our loan portfolio.

The loan portfolio grew by 10% during the year, with commercial and commercial real estate portfolios responsible for almost half of that growth. Equally important, deposits grew by 6%. And this enabled the bank to replace some higher cost wholesale borrowings with these lower-cost deposits. At the holding company 2005 results were better by $4 million, due to investment gains offset by lower preferred dividends from our bank. Let me now talk about some challenges we're facing in 2006.

At the utility, our peak generating reserve margin continues to narrow, and will be a challenge into our next planned rate generating unit is installed in 2009. We're seeking to mitigate this stress by continuing our successful energy efficiency and conservation programs. We're also adding some distributed generation to some of our substations to meet peak demand. Our capital expenditure budget for the next five years is $788 million, and it includes the planned generating unit in 2009.

We continue to evaluate the need to seek future rate relief, to help cover both our increased O&M, and the capital investments we will be making in our operating system. In December, we filed a notice of intent before the Public Utilities Commission, to notify them that we will be filing a rate case for our Hawaii island subsidiary in 2006. We're also evaluating the need for future rate cases on Oahu and Maui.

At American Savings Bank, we continue to be challenged by the shape of the yield curve. The curve remains essentially flat and it actually inverted a few weeks ago. As you know, a flat yield curve is a difficult environment for banks that have a large percentage of mortgages in their portfolio.

Another challenge will be to continue to grow our deposits as short-term rates increase, and depositors have other choices they can make for their funds. While deposits grew in 2005, the rate of increase slowed in the fourth quarter. These forces increase our resolve to continue the transformation of the bank. The transformation is essentially complete for commercial banking and commercial real estate, and our focus now is on retail banking, which includes consumer and small business.

Our intention is to make the retail area more relationship-focused, rather than product or transaction-focused. We're also emphasizing cross-selling to increase the number of products and services per customer, with a hope to increase deposits and loan balances. We're also seeking to develop new products that will help us attract and retain customers.

Let me shift gears now and make some comments on Hawaii's economy. The short answer is, it's in good shape. Hawaii's economy grew by about 3.5% in 2005, and is expected to grow about 2.8% this year. And unlike the strong economy in 1989 and '90, which was fueled by investment capital from Japan, the economy today is much more balanced.

The key drivers today are federal and military spending, tourism, and construction. Federal and military spending accounted for over $12 billion in 2004, which is the latest data that we have available. Assets and personnel have been moved to Hawaii, so that they will be forward deployed, to better advance the War on Terrorism. The outlook is for continued military and federal government investment this year, and for several years to come. And the good news is that this type of investment is not cyclical.

The tourism industry was quite strong last year, setting a record for arrivals of 7.5 million people, with visitor days up 6.5%, and visitor expenditures at $11.5 billion. Both visitor days and expenditures are expected to increase again in 2006. The Housing market was strong in 2005, with prices up on average of 28%. We saw some softening of prices in December, but we expect moderate growth this year. The increased prices are obviously good for the bank, as credit quality at the bank has never been better. On the other side, the strong economy puts pressure on our utilities reserve margins, as economic growth usually leads to increased kilowatt hour sales.

At our November analyst meetings, we talked about some special items that I would like to now update you on. First, with respect to the capital expenditures at the utility, our 5-year net capital expenditure forecast, as I said earlier is $788 million, of that 50% is for transmission and distribution. 42% is for generation, and 8% is for general plant and other. We recently filed an 8-K, disclosing we plan to issue $165 million of taxable long-term debt at the utility, to repay short-term borrowings and to fund capital expenditures.

In the November meetings, we gave you a matrix of our expectations on retirement benefit expense, and the potential of an OCI write-off. In the matrix, we showed you the impact of a discount rate varying between 5.5% and 6%. And as you know, in 2004, the assumption we had was 6%. In fact, we ended the year at 5.75%. Our long-term rate of return on plan assets continues to be 9%. Our actual return on plan assets in 2005 was 7.2%, and the net value of retirement assets was $931 million at year-end.

We contributed $25 million to our pension plans in 2005. Consolidated retirement benefit expense net of taxes, is estimated to be $18 million in 2006, which is $7 million higher than the $11 million recorded in 2005. $6 million of the increase relates to our utilities.

Finally, because of the combination of return on plan assets, and the contributions we made in 2005, we were were able to avoid an OCI charge. Thank you, and we'd now like to open it up to your questions. Jen?

Thank you, sir. [OPERATOR INSTRUCTIONS] Your first question comes from Dave Parker with Robert W. Baird.

Hi, good morning and congratulations on a nice rebound.

Good morning, Dave.

Good morning! A couple of questions, you answered the majority of them in your commentary, thanks. But if you could, maybe we could focus on the bank for a second. The interest spread, you know, improved nicely and I have to say kudos to everyone who was part of that, but what should we look for? You talked about a flattening yield curve, or even inverted at times. What environment do you think, or expect to see in 2006? And maybe you could give us a little color about why fourth quarter, and I guess why even third quarter was stronger than I expected.

Let me ask Connie to answer that, Dave.

Hi, Dave.

Hi, Connie.

What's really interesting about the increase in the net interest margin, is that it's driven by the organic growth. So, the flattening yield curve and, and in fact as Bob mentioned, the inversion, really just gives us a very difficult operating environment, but with a strategic plan that has a major focus on building out the two new lines of business.

That has really helped drive the organic growth, and when we can get very low-cost deposits to fund very good loans, particularly the commercial and real estate loans that have a shorter duration and higher yield, that naturally increases the spread. So, the primary issue for us going into 2006 is can we keep that growth going? Fortunately, as Bob mentioned, the economy is pretty strong. So that is helping us.

Is it fair to characterize that Bob's comments talked about, you know, the conversion of the bank that you've talked about, now focused on retail. So, with additional efforts and maybe bringing in more deposits, so we could see some upside? Or is that too aggressive?

Well, we definitely hope to continue the same growth that we've had historically. You know, the deposit, the growth rates are not impacted solely by our own efforts, though, but by what happens in the economy around us. And so, for example, with the loan production, we had similarly strong loan production in 2004, but the growth in the portfolio didn't come through, because businesses also had very high liquidity, and paid us down.

And on the mortgage side, rates were so low that people refinanced. And so, you know, whether we will get that same rate of growth in the portfolio this year, really kind of depends on whether people are going to be borrowing, and not paying down debt.

Does the reduction of the Federal Home Loan Bank advance help, too?

Yes, it will, definitely.

Yes, that should.

Yes, anytime we can replace the wholesale borrowings with deposit funding, that's always great for us.

Okay. The increase in the retirement expense, and Bob, I think you identified $6 million of that was at the utility. Was any of that recovered in the rate case?

Right. Generally not, because we had a 2005 test year, and we're talking about expenses for 2006, and in a rate case, you can't anticipate the year that's not part of the rate case.

Okay. And could you elaborate what the reserve margin is, maybe on Oahu, and you obviously highlighted that as a challenge in '06 and beyond.

I will ask Mike to answer that.

Yes, good morning, Dave.

Hi, good morning, Mike.

Our reserve margin on Oahu is 25%. We feel comfortable and have in our rates and in our regulation, 30% and again, as we're talking about the reserve margin, we're talking about peak reserves, not base load. We have adequate power to meet our needs. It's just that during the peak time of the day, and any cycle is what we are trying to manage with the reserve discussion. And as you heard, some of the things we're doing to manage the reserve shortfall is that we have capital additions planned. You heard those comments relative to our capital expenditures.

We're looking at spending about 42% of our capital plan on planned additions. We also have some major targeted overhaul activity. We're continuing our effort to add distributed generation at select sites, particularly substations, to give us added reserve capacity. We're working on some particular maintenance activities. Load management, we continue to do our demand site management programs, all of which are targeted to reduce the demand.

And in an anecdotal way, we had a very successful program last year of installing what's called an Energy Scout. This gives us the ability to cut off customers' hot water heaters during the time of either peak demand, or overload conditions on the system. We were able to install about 6,000 of those, and have a program in place to install 25,000 over the next several years.

Finally, and last but not least, is a very aggressive renewable energy program. We signed last year two wind projects for the neighbor islands, and have a wind site identified on Oahu, with a potential for an additional 50 megawatts of wind energy there.

When would that come online, Mike?

It depends on when we get, the sooner the better. Our desired timeline would be sometime in 2007.

And with prevailing winds there, probably a little bit better than where you'd and in other places on the mainland, what would you expect as sort of the capacity? Or I guess the productivity of that coming out, as far as a percentage of the total year --

We're looking at something in the neighborhood of 30%.

Okay. And if my recollection serves me correctly, you've been doing a fair amount of overhauls of units, particularly on Oahu, and it looks like your expenditures on CapEx would continue that trend. Is that a fair assessment?

We will do more targeted, one of the keys, until we get our 2009 unit, is we have to have all of the units that we have on our system, up and running to the best condition we can. So, one of the tricks of this is managing equivalent forced outage rates, and we are targeting our capital program and our maintenance activities, to go into our most efficient units as a first priority, and to improve their availability.

Typically in the past, when we would do an overhaul, we had enough reserve margin that you could say that, we will scope the overhaul to be X, and will catch this dimension the next time around. What we're doing now because of the tight reserve margin, is when we have the lid off, either a turbine, or we're looking into the particulars of a boiler, we do more extensive work, so we can assure that its availability will be up.

Maybe one last question, if you don't mind. When we look at just regulatory activity, you'll already filed a notification for rates on the big island. I think there's some ramp-up to do with the bifurcated case on Oahu, is that correct?

That's correct. What the Commission did last year, is when we filed our rate case for Oahu, they chose to bifurcate out the energy efficiency component of the rate case that we had filed. That is supposed to go to hearing this summer as a separate action, rating action.

Also, Dave, we did receive an interim, but we don't have the final yet on the basic rate case. We don't expect any surprises on that, but we still don't have the actual final D&O.

Any expectation when that will arrive, Bob?

No. Not really.

There's no statute on when they have to render it a final decision.

All right, great, thanks.

We don't sense that there's any particular issues of controversy, but no timeline.

All right, good. Well, congratulations and thanks again.

Thanks.

Your next question is from Doug Fischer with A.G. Edwards.

Good morning.

Good morning, Doug.

Good morning, Bob. Just a few questions that Dave didn't cover. One of the issues is sort of the regulatory lag issue with O&M and pension in particular, given the historic test year. Any thoughts on proposals to the Commission, et cetera, to try and close some of that gap?

You mean from a, like a legislative standpoint?

Is the test year a legislative issue, or is it a Commission rule issue?

It's a Commission rule, and really there's, you know, the Commission was actually quite responsive. As soon as the hearings were finished, within a matter of weeks, we got the interim relief. But it's the nature of regulatory lag that, you know, these things just take a long time to play out.

And in a few states, we have better circumstances with more projected test year, et cetera. Any consideration of pushing that more aggressively with the Commission?

We haven't in the past.

Doug, it's reasonable to assume, as you heard our discussion about our capital plan and so forth, you know, the last time we had a rate case was over 10 years ago. And if you look at the expansion period we're in now, one could reasonably assume that we will be evaluating and looking for more rate opportunities as we go forward, because of the capital expenditure and the situation that we find ourselves in now.

It will not be another 10 years before we file for a rate increase on Oahu.

Certainly prices have been up because oil prices are materially higher. Are you seeing price-induced conservation? I know weather was more mild than last year, than '04. But are you seeing price-induced conservation at this point?

We have actively promoted a program of conservation, Doug. The program had a street name of Energy Lite, and we literally ran a campaign about promoting conservation, and when you have to use energy, use it wisely through energy efficiency. Some things that we've done is we've always had an aggressive solar water heating program. The fourth quarter of this year, we ran a compact fluorescent light program.

In a typical year in Hawaii, you'd sell maybe 30,000 compact fluorescent lights, and we ran a special program with local retailers and General Electric, and sold over 100,000 compact fluorescent lights. It is a very conscious effort on our part to get our customers to use their energy wisely and promoting conservation.

Is there some price elasticity effect in that?

It could be, but it's very difficult to quantify unless you do a demand to rights household by household, you know, test. And we gone down on a sample basis and believe that is the case, but to your point about the cost of electricity, we tend to not look at rates here.

We tend to look at the bill. The bill still tends to be low. Typical user in our territory uses less than 700 kilowatt-hours in a given month. That typically makes the electric bill something in the neighborhood of 100 to $120. So, it's still not a large, while the rate is high, because we don't have seasonal heating loads, we have seen an increase in air conditioning load. Those are not typical factors, and therefore it doesn't drive our bill up, like you would expect on the [main] line.

Okay, thank you. That's helpful. The O&M level, I guess, not just the pension, but O&M levels you're going to be expended at the Oahu utility, are going to be higher than the amount that's provided in rates, is that a fair assumption given regulatory lag?

I think we're going see some of that, Doug. We're targeting efforts, we've launched a continuous improvement program to kind of counterbalance that. We've got some as I mentioned in my remarks earlier, some distributed generation. The whole idea is, if we have more distributed generation during the peak period of time, we will have more flexibility to get some of the work done on our units.

Because if you're running a tight reserve margin, the difficulty is, you can never take your units out of service and you have to derate or run less efficient units, just to make your load. So, by having the DG there, it will give us more flexibility, so that we can keep our more effective heat rate, reheat and more energy-efficient units online.

And one final question. The net interest margin, came in at 3.29% in '05. Would you, is it your general expectation that there's room for that to improve, or does the flat yield curve lead you to believe that that might compress? I know there's a lot of uncertainty associated with that, but just sort of talk around that issue to the degree you can.

Doug, I say that the yield curve can't get more difficult for us. I mean it's just flat, flat, flat. So, the way we have to increase the spread is through organic growth. For me, 2005 was really kind of strategic plan in motion, and if you recall our strategic plan, it was to, on the asset side replace the investment portfolio with loan growth, and particularly growth in commercial banking and commercial real estate loans, which occurred in 2005, and on the funding side, to replace wholesale borrowings with pure deposit growth. So, if we can keep those two engines going, that will be good for the spread.

Is it fair to say that deposit growth issue is the most challenging one, sitting where you are today?

Yes, that's correct. And as Bob mentioned in the fourth quarter, we really did not see growth in that deposit base. We had good growth for the full year, but as the short-term rates continue to rise, that continues to put pressure on people keeping their money in deposits, versus moving it out into other kinds of instruments.

Okay. Thank you, Connie. That's it from me.

Your next question is from Paul Patterson with Glenrock Associates.

Good morning, guys, how are you doing?

Hi, Paul.

I wanted to follow up on that last question, I guess. You know, looking at the fourth quarter, we see, you know, a big improvement on the spread. And yet you mention that one of your biggest challenges is this deposit growth, that you've done an incredible job on, in terms of the low cost on that deposit, on those deposits. Are you saying that you think that that might have come to an end here because of the recent, I mean in other words, we're not really seeing a slowdown, or a shrinkage of the net interest margin in the fourth quarter, right? So it sounds like you're seeing things that might cause that to get more narrow in 2006. Am I right about that?

I think what you saw in the fourth quarter was what we began experiencing, even in the third quarter, which is that at some point, when the short rates get so high, the market short rates get so high relative to the deposit rates, then it has sent people to start moving out of deposit, and into other kinds of cash instruments. So, that's really what occurred in the fourth quarter. Our loan growth continued into the fourth quarter. And so, you know, we had that increase in the margin from the loan portfolio growth.

Okay, if that's the case, though, then that interest, I mean if you were able to continue to do that, that should basically overcome this issue of the core deposit growth. Is that correct?

You know, we have to fund the deposit growth, or we have to fund the loan growth, either with deposits or with wholesale borrowings. So another point will come, Paul, when deposit growth -- I'm sorry, loan growth is so strong, that we may have to go back and borrow in the wholesale markets.

Okay. And then allowance for loan losses. Obviously still neutral results here in the last three months. What are you guys thinking about 2006? Do you think that's still possible? Do you think you can, the allowance for loan losses will essentially be neutral, or do you think we might start to see that increase, as well. What's your crystal ball say about that?

I think as I've said before, you know, the quality of the loan portfolio has just been absolutely pristine, and I think I've been saying that probably for about two years now, that I didn't think it could get much better and it's continued to get much better. You know, it's really a function of consumer behavior, and whether you start to see consumer delinquencies go up, or mortgage delinquencies go up on the commercial side, but you know, normally you would be seeing credit via costs, that's normally a cost for banks. And to have reversals in the last two years that have added to income is very unusual.

And then the unrealized gains of assets held for sale at the parent, I guess, how should we think about that going forward? And also in light of the coal plant sale, which obviously benefited things, I mean should we expect to see anything like that really going into 2006, or what have you? Or are those sort of unusual?

Those are unusual, Paul. The Company had made some passive investments back in the mid-'80s, where essentially tax-advantage investments, one of which was at Oglethorpe coal plant in Georgia.

It's been our recent strategy to try and sell off noncore assets, of which this was the largest and the most profitable. And we have a few more of those assets, but we don't expect anywhere near the same size of gain, if we're able to sell the assets in the foreseeable future. That's kind of a one-off kind of thing.

And the unrealized gains, and what have you?

That came from a venture capital investment we made in a small fuel cell company that went public in 2005. We will be looking at our strategy to move that from an unrealized gain to a realized gain here in the first half of 2006, and we made some other small venture capital investments in local startups. None of them, at least as far as I know, is anywhere near to an IPO. So, this is kind of a patient capital, it's a really small program. We devoted a total of $2.5 million to the whole program.

Okay, so we should probably pretty much back those out for '06?

Yes, I think so.

And then the $7 million of pretax, I mean that's a pretax, the $7 million associated with pension, that's a pretax number, correct?

No, that's after-tax.

That's an after-tax number?

Right.

And so outside of that, what are your expectations I wasn't clear on this, I apologize. What are your expectations speaking about O&M and at the utility, and what have you? You have some initiatives going forward and have expenses coming up. Outside of the pension, what should we think about that doing, that trending?

As I said in response to Doug's question, we are working on a combination of things. The capital additions, the major targeted overhauls to reduce the "D" ratings, our forced outage. We're looking at additional distribution units, at substations to give us more flexibility to work on our units.

We have some targeted maintenance expense that we will be working on. In combination, we're working, load management, demand side management and renewable, all designed to give us more flexibility.

In terms of what that's going to translate into cost, I think we can expect some higher marginal cost, as we go through that period of keeping adequate reserve available.

Okay.

And that is our expectation.

So, we should expect it to sort of trend upwards, still, even with the efforts on your part to keep them down? They would have been higher than they would have been otherwise, but will still be higher than they were, than they were in 2005.

Well, there's always some anomaly events. As you recall in the fourth quarter of 2004, we had a catastrophic failure of Waiau 9. That carried over into the first quarter of '05. So that event, we hope we don't have to incur catastrophic failures of units like that, but that was our most expensive overhaul. We had in the first quarter of '05, follow-on expenses to complete that unit refurbishment.

I'm sorry to be so slow on this so, when we take all of this into account, and we look at inflation and everything else, generally speaking, should we expect this O&M number to trend higher with respect to, or do you think because of the absence of this unusual thing, what you just mentioned, and because of the cost effective, all the things you mentioned to Doug and what have you, do you see what I'm saying? I'm trying to get an idea of what the general trend would be.

I think the key will be when we add our 2009 units, you're going to see a marginal change, or a major change in that cost. What we're doing in the meantime is improvising, and modifying where we can to keep it together, and the programs I just outlined, were the ways we're doing that. The capital addition, the targeted overhauls, DG, et cetera.

I think, Paul, the trend is going to be for higher O&M and the challenge the management is facing in the next couple of years, is to really mitigate that to the extent that we can through the programs that Mike has mentioned. But the trend certainly is to somewhat higher O&M.

Okay. Thanks a lot, guys.

Thanks.

Your next question comes from Alex Kania with Merrill Lynch.

Good, I guess really early morning, guys! [laughter]

The sun just came up! [laughter]

Amazing! Just a couple of questions, I guess just on rate cases and things like that. There was some mention in the opening remarks about potentially looking at really going in for additional rate relief at Oahu. Is there kind of any restriction on, you know, when the next time you'd be able to go in, obviously waiting for the current outstanding case to be resolved?

No, there is no restriction. In fact -- in the past, quite a few years ago, we actually had had pancake rate cases, where we had two active rate cases going on at once. We don't anticipate obviously, that this time, but there is no restriction on it.

Got it. And on the, I guess the big island rate case notice of intent, I guess the two pieces I'd be interested in knowing is, what are the most recent earned ROEs you've been getting there?

And secondarily, kind of how the new power plants there kind of fit in with respect to kind of what incremental addition that would be toward rate base, or actually maybe there end rate base, I forget, exactly, but kind of what that size is?

The earned return is just under 7%. In terms of the capital additions, I think the plan in particular that you might be referring to is the Keahole power plant.

Yes.

The Keahole power plant has been completed and put into service, but it is, we have to go in for the rate case to get into our rates. That will be one of the factors in the rate case that we filed notice for. We'd expect to go file the particulars on that rate case sometime in the spring of this year.

And just a last question would be what was kind of the cost of the Keahole plant?

About $119 million.

Okay. Thanks very much, guys.

Your next question comes from James Bellessa with DA Davidson and Company.

Good morning.

Good morning.

I have a follow-up questions about the prepayment of the advance FHLB advance and the charge you took for that, how much was that pretax, that charge?

Jim, that was 1.7 before tax, and about a million after.

And the timing of that prepayment, this is beneficial to your future results, you say. Was it advantageous to do it now? Or is this the first time you could do it? Or why didn't you do it in previous periods?

We actually have. If you look back into the disclosures, we always look at managing our funding costs, and in both 2003 and 2004, we refinanced a number of our wholesale borrowings. So are this is something we do continually.

The tax rate at the bank was a little shy of what I thought it was going to be. Did this FHLB prepayment on the advance, change the tax rate some?

No, it did not.

Is there an explanation why the tax rate might have been lower than it had been running for the quarters previously?

I don't think so.

Thank you very much.

Your next question comes from Ashar Khan, SAC Capital.

Good morning.

Good morning.

Can I ask you, you mentioned that the interim hike helped you by $10 million in operating revenues in 2005.

Yes.

Could you mention what the effect in '06 should be?

Well, it's going to be the full, it's going to be $41 million less the increment that we got in '05, which is 10. So, it will be a net increase of $31 million.

Okay. And Bob, I know kilowatt hour sales were flat for this year, but for planning purposes, what kind of growth in kilowatt hour sales do you project?

Well, we're looking at growth, typically, and 2005 was an anomaly. Typically you would look at kilowatt sales growth mirroring the growth in the state's economy. And we expect the economy to grow 2.5 to 2.8% or so in 2006. So everything else being equal, you would expect kilowatt hour sales to go up by that same amount. Now, Mike talked about some measures that we've been taking to increase conservation, and those are having some effects. So I would suspect that with our demand side management and conservation programs, the growth in kilowatt hours sales, would be less than you would otherwise expect.

And in the expenses in 2005, there were some overhauls of some units which you mentioned, which I thought were like one-time items, because they went through pretty long outages. Do you expect, you mentioned further overhauls, similar overhauls in '06, in terms of expenses or timing?

Sometimes you don't know until you open the equipment and look at it, the full extent of what you know, we don't have anything that qualifies, that I can tell you right now would be a catastrophic failure that we would expect, but as far as the extent of the overhaul, we really don't know until we get in and open it, look at the turbine, look at the boiler. The particulars that we will encounter. But I can tell you that we are, when we typically open a unit now, we're trying to do more extensive overhaul work, because of the tight reserve margin that we're faced with.

Okay. But would you agree that the overhauls done in '05 were, they were a little bit. the expenses were a little bit higher than normal? Is that a fair statement? Or no.

Well, the in fact we were finishing up on a catastrophic failure that occurred in '04, I think one is safe in saying on that particular case, it was more expensive. It was actually our most expensive overhaul ever.

But you should know we have overhauls every year.

I understand. But, you know, they were pretty big in '05. I just thought they were more than average, so I wanted to clarify that point.

And then if I can follow up, just going to the rate cases, Bob, you mentioned that you're reviewing the rate cases in the other jurisdictions. Could you just mention the period of those review, and if you could also tell us what the ROEs were in all the jurisdictions? I know you mentioned it for one of the companies, the big island. But can you report on an '05 basis what were the ROEs were for the other two jurisdictions? And this rate review process, when does this end? And can we assume that you would be filing letters of intent by the end of the year? And hence we have some rate activity increases in '07, if you could elaborate more on that, as well as the earned ROE.

We have announced as you know, we said earlier we're going to file a rate case for the big island in a few months. We continue to evaluate the need for a rate case on Oahu and Maui. You know, when you get a test year like we had in 2005, it is an average test year, and when your O&M is increasing, because it's an average, you cannot earn your run rate at the end of the year. So then you have to look again. As you heard earlier, we will have an increased pension expense in 2006, and you know, depending on what happens with interest rates and the stock market, that increase could continue in future years. So, we will be evaluating it throughout the year of what the strategy would be for the other jurisdictions. And Mike, do you have the numbers?

Yes, the earned return for Maui Electric was 9.68, and for Oahu it was 6.92.

6.92. Okay. Bob, just if I could just end up just on the utilities side, I know you mentioned all you face challenges in your opening remarks, but I guess I just want to factor in the positives are there, that you have the positive effect of the Oahu rate case, you will have a positive effect of growth rate, which was absent in '05. And I guess those positive effects get hit by this higher pension and higher O&M, but there are some positive effects on the revenue side, which could allow for growth and earnings at the utility. Or am I missing something?

No, no, you're right.

Okay. Thank you.

[OPERATOR INSTRUCTIONS] Your next question comes from Heike Doerr , Janney Montgomery Scott.

Good morning. A quick question about weather. I'm wondering if you can tell me on an EPS basis, what the year-over-year weather impact was?

No. We really can't.

All I can tell you is that with a growing presence of air conditioning, which historically hasn't been a factor that we've dealt with in Hawaii, we have seen that when you have humidity more so than weather, humidity has been a key determinant affecting air conditioning load, and we're starting to see that, as some of the new homes that are coming online have central air conditioning. So, it is a factor. It is very difficult to quantify it.

And a quick question on the bank side. Is the deposit growth you're seeing related at all to market share gains? Are the two related at all?

Possibly. Although, you know, on the retail side, our strategies are not acquisition-based, they're really based on, as Bob mentioned, building out relationships with our customers. And so what we're seeing is, that our customers are beginning to consolidate accounts with us, and so that is helping deposit growth. We are getting some new accounts from the build-out of the two new lines of business, and so much as we have seen loan growth from commercial real estate, and commercial banking customers, we're also seeing some deposit growth there.

Okay, thank you. That's all I had.

Your next question is a follow-up question from James Bellessa with DA Davidson and Company. Please proceed.

Excuse me. On the balance sheet, there's not much in the way in the release about balance sheet items. Can you tell us what the asset base at the bank was?

We don't have our 10K ready yet. So, we're not ready to release that information.

Can you go through the total interest earning assets, and total interest earning liabilities, the year-over-year growth you have in those items?

No, I'm afraid we can't until we release our 10K.

Thank you.

Your next question is a follow-up question from Ashar Khan, SAC Capital.

Bob, could you just tell us what was the depreciation in the '05 results, and what the CapEx is for '06?

Well, the CapEx, do you have that, Mike?

Total depreciation?

Yes.

$122 million.

Okay. And the --

And the CapEx for the total company is 207, I believe.

207?

Yes.

Okay. So, that would imply you are slightly the negative free cash flow position, am I right, after payment of dividends?

Given those two numbers, you could assume that.

Okay. Thank you.

Go ahead, Connie.

I wanted to just follow up, Jim, on your question on our balance sheet, and just remind you that in our strategic plan, if you remember that it is not really to grow the asset size of the bank, it is really to replace wholesale borrowings with core deposits, and on the asset side, to shift from the investment portfolio to the loan portfolio.

[OPERATOR INSTRUCTIONS] As there are no further questions at this time, I will hand the presentation back to Mr. Robert Clarke for closing remarks.

I'd just like to thank everybody for participating in the call this morning, and if you have any further follow-up questions that you want to ask, please give Suzy Hollinger a call, she will be in the office this morning, and we will see you folks in May. Aloha.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes your presentation, and you may now disconnect. Have a great day.