Hawaiian Electric Industries Inc (HE) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the 2006 Hawaiian Electric earnings conference call. My name is Danielle and I will be your coordinator for today. [OPERATOR INSTRUCTIONS].

I would now like the turn the presentation over to your host for today's call, Ms. Suzy Hollinger, Manager, Treasury and Investor Relations. Please proceed.

Thanks, Danielle. Aloha and good morning and thank you for joining us for an update on HEI. Here with me from senior management and speaking today are Connie Lau, HEI and ASB President and CEO, Mike May, HECO President and CEO, and Eric Yeaman, HEI's Financial Vice President and CFO. Also, with me today but not speaking are Alvin Sakamota and Tayne Sekimura, the Financial Vice President and CFO of the bank and utility company. Connie will start the presentation today with a recap of 2006 earnings and then Mike will follow with an update on the utility. Connie will come back to discuss the bank and Eric will cover the holding company and 2007 financial plans. Connie will make some closing remarks, and then open it up for your questions.

Before I hand the call over to Connie, 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-K for information about forward-looking statements. I would also like to point out that copies of the slides, including the notes pages were filed on 8-K this morning just prior to the start of this call. Now let me turn the call over to Connie to begin the formal comments.

Thanks, Suzy. Aloha and good afternoon to those of you on the East Coast. Hopefully most of you have had a chance to read through our year end and fourth-quarter earnings that we released Friday.

For those of how didn't, let me briefly summarize those results. 2006 earnings were $108 million, or $1.33 per share, compared to $127 million or $1.58 per share in 2005. The earnings decline was primarily due to $2 million of after-tax investment losses in 2006 at our holding and other companies, compared with $12 million of after-tax investment gains in 2005. At our operating companies, a $9 million decrease in bank earnings was only partially offset by a $2 million increase in utility earnings. Our utility earned $75 million in 2006 compared with $73 million in 2005. Year-over-year operations and maintenance expenses grew by $21 million, and depreciation expenses were higher by $7 million. These expenses substantially offset increased revenues from rate relief granted to our Oahu utility in September 2005. Kilowatt hour sales were essentially flat.

Our bank earned $56 million in 2006 compared with $65 million in 2005. Bank earnings continued to be challenged by margin compression and rising interest costs, which caused its net interest income to be lower year-over-year by $7 million. Net interest margin was 3.18% in 2006 versus 3.29% for 2005. In addition, the bank recorded $1.4 million of provisions for loan losses in 2006 compared with $3.1 million of reversals in 2005. Lastly, the bank experienced higher non-interest expenses.

Now let me hand the call to Mike to discuss results and trends at our utility.

Thank you, Connie. Aloha and good morning or good afternoon, where appropriate.

Overall sales for the year were basically flat, up only 0.3% from 2005. However, fourth quarter sales were up slightly by 1.4 percentage points from the same quarter in 2005, due to the increase in the number of customers and the warmer and more humid weather, but partially offset by customer conservation. In 2007 and 2008, we are currently estimating sales to be modestly higher over the prior year by 0.6% and 1.6% respectively.

Although 2006 sales were only slightly above 2005 levels, several years of economic growth in our state have increased overall demand for electricity. On Oahu and Maui, generation reserves continue to be strained. As a result, we have been running our generating units harder, which has required more extensive and frequent maintenance.

Also contributing to the rising O&M expenses are the increased retirement benefit expenses. In 2006, these expenses, net of capitalization and taxes, were about $9 million higher compared to 2005. As we discussed in our prior quarters, rainy weather, especially a period of 41 consecutive days of rain earlier last year has also increased vegetation management expenses for the fourth quarter and for the year.

In our last briefing, we mentioned that comprehensive impact assessments were being performed to determine the amount of damage that the utility sustained as a result of the 6.7 and 6.0 magnitude earthquakes last October. Assessments conducted to date indicate relatively low repair costs to the utility system. The trend of increasing O&M over the past several years is a big reason why we are seeking rate relief at all three utilities. For these reasons, we expect O&M expenses to continue to rise in '07.

Operationally, capital investments are being made to address the need for additional generation and to modernize our facilities. These investments are translating into rate-based growth. Over the next five years, we are focusing our forecasting approximately $1.2 billion in gross capital expenditures to increase generation capacity and maintain and improve reliable electric service for Oahu, or in Hawaii at large.

This slide shows the anticipated utility capital expenditures by year, and the percentage expected to be financed with internal sources of funds. As you can see, a majority of our capital expenditures are expected to be financed with internal sources of funds. However, borrowing levels will need to increase to finance a portion of the capital expenditures projects. Eric will discuss our financing plans later in the presentation.

We continue to address our under-earning situation by executing a strategic plan that focuses on recovery of these increased costs and reliability investments through the rate case process. To date, we have four open rate cases, two on Oahu, one for Maui County and one for the big island. Let me update on you the state of our rate cases. For its 2005 rate case, our Oahu utility received an interim increase of 3.3% in September of 2005. Since then, we have been recording about $41 million in revenue increases on an annualized basis, or about $23 million net of taxes. We are awaiting a final decision and order. There is no statutory deadline for the PUC to issue a final order. The details of the case are shown on this slide.

As some of you may remember, when we originally filed our Oahu rate case, it included proposed cost recovery for our energy efficiency programs. The PUC bifurcated that issue out of the original case and opened a separate energy efficiency docket. Final DNO was issued by the PUC in February of in year. The DNO approves the continuation of all of our proposed DSM programs and provides for program cost recovery and performance-based DSM incentives. Under the order we also continue to administer the DSM program to say January of 2009. At that time the program will transition to a third party administrator, although we could compete to implement some of the programs going forward. The load management programs will remain with us.

In December, we also filed a 2007 test year rate case for HECO on Oahu. We were requesting a 7.1% increase, or $99.6 million in increased revenues and an 11.25% return on common equity. The case proposes a tiered rate structure to encourage energy efficiency and time of use rates for residential and commercial customers. These are also features in the HECO and MECO rate cases which I will be talking about next. Evidentiary hearings will likely be held in late 2007.

Last October, on February 23rd, we filed a rate case for our Maui County subsidiary, MECO, with a 2007 test year. We are requesting $19 million, or a 5.3% increase in revenues and an 11.25% return on common equity. Also, back in May of last year, we filed a rate case for our Hawaii island subsidiary, HELCO, with a 2006 test year. We are requesting $30 million, or a 9.2% increase in revenue, as well as an 11.25% return on common equity. Evidentiary hearings are scheduled for May of 2007.

For all of these three rate cases, state law requires that our PUC issue an interim decision within ten months after the rate case application is filed. If an evidentiary hearing is held, that is. However, the PUC may postpone an interim D&O until up to 30 days, if a hearing has not been completed. This would mean possible interim decisions in the period ranging from mid-2007 to early 2008.

As you know, in September of 2006, the Financial Accounting Standards Board issued its statement number 158. This changes the measurement of our retirement benefit plan obligations and requires the recognition of funded status as of year end. Our utility recorded a non-cash charge to accumulated other comprehensive income of $127 million, net of taxes. This charge to equity assumes a discount rate of 6%, and an expected return on planned assets of 8.5%. While an application with the PUC is open, we're seeking regulatory treatment for the charge for for financial reporting purposes.

On January 26, 2007, the PUC issued a DN order on the AOCI docket which denied the electric utilities request to record a regulatory asset for financial reporting purposes. There was no immediate impact on our net income as a result of the DNO. We will continue to seek a return on the pension assets through the inclusion in the rate base for each of our rate cases going forward. On the expense side, retirement benefit expenses net of taxes and capitalization at the utility are estimated to be $2.6 million higher in 2007 when compared to 2006.

To sum up, a growing Hawaiian economy has impacted our utility's reserve margin from from a financial perspective our earnings. To address this situation, we are increasing our capital expenditures program to increase generation capacity and maintain and improve reliable electric service for Hawaii. We expect this earnings pressure from the increasing O&M to continue in 2007 due to the items I discussed earlier. We are focused on improving our earned rates of return to get closer to our allowed returns. I want to emphasize that our plan will take several years and will involve all three utilities. Over time, we expect to improve our earnings.

Now I would like to call Connie back to discuss the bank.

Thanks, Mike.

At our bank operating conditions remained challenging due to the interest rate environment. The area that was most directly impacted was our effort to retain and grow deposits. While we produced good growth in our loan portfolio, and credit quality remained strong, deposit balances were flat for the year, and high short-term interest rates continued to put upward pressure on our funding costs. Our lending businesses posted another solid year, growing by 6%. The continued diversification of our business mix enabled us to overcome the slowdown in the residential real estate market. About 60% of the loan growth was in our commercial banking, commercial real estate and consumer portfolios.

As we discussed throughout the year, high short-term interest rates and the inverted yield curve made it a challenge to retain deposits and control our funding costs. We experienced net deposit outflows in the middle of the year, and responded with a combination of tactical repricings of deposits, promotions, and the introduction of new product and is services. We closed with a strong fourth quarter and ended the year with deposits essentially flat compared to the prior year end, but deposit retention and growth will remain a challenge in the current environment. Overall funding costs increased due to the combination of deposit repricing, the continued shift in mix from lower costing deposits to higher costing time deposits, and higher rates on our wholesale borrowings. Non-interest expense was $7.6 million higher in 2006 than 2005, primarily due to increased legal and litigation-related expenses and occupancy expenses.

As American Savings Bank, we are expecting the difficult interest rate environment to persist through 2007. The market now appears to be expecting the Federal Reserve to remain on hold for most of the year, and the yield curve to remain flat or inverted. This will continue to pressure our net interest margin.

An ongoing challenge in this environment is to grow deposits while managing deposit costs. To support this, we will continue to develop new products and services, and also focus on growing the less interest rate sensitive types of accounts such as consumer checking accounts. On the lending side, we expect moderate growth in loan balances in 2007. Continued growth in commercial loans may be partially offset by a slight decline in the commercial real estate portfolio. The scheduled repayment of some large construction loans and the shift in emphasis back towards income property lending is expected to result in a slight decline in the size of the commercial real estate portfolio. The slowing residential real estate market is expected to result in modest growth in residential loan balances.

We expect overall credit quality to remain strong. However, factors such as growth in the loan portfolio, situations with specific borrowers, or changes in outlook for the economy may cause credit costs to increase. The outlook for the residential real estate market remains good, although transaction volumes have fallen off, prices have remained stable, and we have not experienced the declines in values seen in many mainland markets. Given the outlook for the continued health of the economy, we also expect businesses to continue to do well.

In addition, the commercial real estate market, while coming off of its peak, is expected to remain strong. We are also working to offset net interest margin pressure by focusing on growing non-interest income and managing expenses. Initiatives such as our combined rewards program for personal and business checking and credit cards which we rolled out in 2006, provide us with opportunities to deepen our relationship with our customers and have the potential for increasing non-interest income by encouraging card use. The initial response to this introduction of this program far exceeded our expectations, and we hope to leverage off of that momentum and continue to grow the program in 2007.

Now let me ask Eric to cover the holding and other company results and discuss our financing plans for 2007.

Thanks, Connie. Good afternoon. The holding and other companies net loss for 2006 was $23 million, compared to $10 million in 2005. The comparability of year-over-year results is primarily affected by the sale of a nonstrategic asset in 2005 and sales and mark-to-market adjustments related to our investment in Hoku Scientific. As an update, in January 2007, we sold our entire remaining interest in Hoku Scientific for an after-tax gain of just under $1 million.

Now let me turn it to our financing plans. As Mike indicated, the utility's borrowing levels will increase in 2007 to support their capital expenditures program. To that end, they contemplate issuing up to $160 million of revenue bonds in the first quarter of this year. There are no plans to increase long-term debt at the holding company. However, beginning in early March 2007, HEI will start issuing shares of common stock to satisfy the requirements of our dividend reinvestment and 401(k) plans. In 2006, HEI purchased 1.5 million shares on the open market to satisfy the requirements of these plans. Additionally, at the end of March we plan to register 3.75 million of additional shares for the dividend reinvestment plan.

Now let me turn the presentation back to Connie for some closing remarks.

Thanks, Eric.

As you know, we pay an attractive dividend yield of 4.6%. You may have seen our dividend release, dated February 15th, 2007, announcing the Board's approval of a $0.31 per share dividend on our common stock. The dividend is payable on March 13th to shareholders of record on February 26th, today. A few of you have asked about the timing of the year end earnings release and dividend declaration. You may have noticed over the last couple of quarters that we have been moving toward issuing our earnings and filing our 10-Q on the same date, so that investors have a more complete picture of what has happened at the company in the previous quarter. Because we moved our earnings release date to February 23rd to be closer to our 10-K filing date, the dividend declaration was delayed.

In summary, several key factors will continue to affect our core businesses in 2007. We expect the trend of rising utility operations and maintenance expense to continue, due to the factors that Mike covered in detail, and as Mike pointed out, it will take a while for all three utilities to be able to earn closer to their allowed rates of return. At the bank, the inverted yield curve and higher funding costs will continue to put pressure on net interest margins. The bank's focus will remain on gathering low cost deposits, growing the loan portfolio, maintaining credit quality, growing non-interest income, and controlling expenses. At the holding company, we don't expect significant sales of any more nonstrategic assets.

In summary, 2007 will continue to be another challenging year for HEI. Challenges aside, our core operating companies remain sound and their long term prospects are good. This concludes our formal comments, and we will be happy to answer any questions you may have.

[OPERATOR INSTRUCTIONS].Your first question is from the line of Paul Patterson with Glenrock associates. Please proceed.

Hi. Can you hear me?

Yes, we can, Paul.

First of all, I was wondering if you can tell us what the regulated ROE was at your divisions for the last twelve months ended '07?

Hang on just a moment, Paul, we're going to get that for you.

I guess a follow-up to that, it sounds like this is going to go -- the O&M and the CapEx and everything else -- sounds like there is a potential for regulatory lag to go into 2008 and beyond that, and I am wondering whether or not you guys are thinking of some sort of regulatory approach that might sort of mitigate that lag, or what the potential for that might be?

Paul, to your question, this is Mike. Good morning by the way.

Good morning.

We are working with the PUC and will be framing some possibilities in terms of how we would have adjustment clauses for things like capital. The clear issue is that once you put a project into the asset base, you stop booking the AFUDC. And until you have rate recovery, there is a lag effect. One of the things that we'll be working to do over time is have an adjustment clause to capture that lag, just by example.

Okay. And then the regulated ROEs that we had at the end of '06?

Paul, this is Eric. We cannot disclose that at this time, Paul, but we'll filing our 10-K in a few days, just because of reg FD, but I think it is safe to say that the actual ROEs are well below the allowance.

When do you guys expect -- you mentioned it will be a couple years until you get to your regulated ROEs or what your authorized ROEs are or will be. Can you give us an idea how many years that might be?

Well, this year we would hope to have some forms of interim relief which would have us giving partial year recoveries if we meet the time lines that we suggested in my prepared comments, and then we would expect more of a full year effect in 2008, and then there would be other rate activities that would occur along with other Capital Investments that would follow in a subsequent year.

Okay. In the meantime we have more O&M, and -- do you follow what I am saying? Seems to be sort of a catch-up issue here as well.

That's correct.

I guess what's a little hard for us to predict here is okay, whatever recovery you get, you get, but on top that, it seems like you might need even more after that, and the commission takes some time to give it to you. I mean, any idea when we might get to a more normalized -- a more normal earnings level with respect to your equity levels and what have you?

I think first of all, I think we have seen the commission being more responsive, Paul. If you look at our last decision on our 2005 rate case, after we went to hearing, we got a decision on our interim within two weeks, so we see some movement in terms of responsiveness from our PUC in timely decisions.

Okay. Finally on the bank, non-interest income was around $1.6 million, and non-interest expense was $7.6 million, and I was wondering if you can give us an idea about what the outlook in terms of the recurring nature of those might be, sounds like the legal expenses might be sort of nonrecurring or what have you, if you could give us a little bit of a feeling for that?

Yes, that's correct, Paul. I think the trends that you've seen from our non-interest income and our non-interest expense before the legal litigation costs are pretty much what we would expect going forward, and so you're exactly correct in your interpretation.

Okay. So finally on the loan loss, looks like your expectation seems to be that because the housing market although slowing, is kind of stable in terms of pricing and loan quality. There was a single commercial loan that I guess made you sort of book a provision in the last quarter, but other than that, you pretty much expect that to be essentially a non-item, so to speak, in that you have had basically no loan loss provisions for some time now?

We've been looking -- we always look very carefully at the credit costs, and we're not expecting, at least not what we can see in the current portfolio and in the economic trends, that would make us think that credit costs will increase significantly.

Okay. Thanks a lot, guys.

Thanks, Paul.

Your next question comes from the line of Doug Fischer with AG Edwards. Please proceed.

Good morning, all.

Good morning, Doug.

Just a few questions, Paul covered some of what I wanted to ask about, but on the fuel front, where do we stand on the whole issue of fuel cost recovery and the clause and possibly putting the Company at more risk in terms of fuel recovery, and then I have a follow-up or two.

Doug, as you may recall, at the end of the legislative session last year, just to catch up all the callers on the subject, on June 2nd, about the time we would have expected some decision on our DNO, there was a state law passed called Act 162 that asked the PUC to look at mechanisms for deciding the appropriateness of the ECAC clause and how the risks should be allocated if at all, but at the same time preserving the financial integrity of the utility. What has happened, is there has been no decision related to the ECAC, and we would expect that that matter would be taken up in the existing rate cases that we have on the roster for this year, so we don't have any clear indications, but the clause is working until a decision is made, as it has been historically.

What's the level of DSM in incentive related revenues that are at risk in '09 and beyond if I recall correctly the timing that far?

I think that's a difficult and imprecise answer I can give you, Doug, because what happens at the end of -- at the beginning of 2009, the DNO will appoint another administrator for the program. That does not preclude us from competing bidding on and competing for DSM projects. What we have to do is decide how or in what areas we will continue to participate, but one of the good news things is that the load management program, which is one of the larger parts of our conservation energy efficiency continues to be administered by the Company on the continuum.

Can you quantify for '06 or '05 whatever you have available, the amount of -- the costs that you recovered and then the incentive revenues that you recovered or either DSM as a whole or DSM minus load management?

Well, first of all, as you may recall, and one of our last calls we indicated that the Public Utilities Commission had suspended our earnings on shareholder incentive and loss margin, and so what happened from around the April period through year end we actually did not have any booking. We had a detriment to what we had experienced year-over-year in terms of our DSM earnings. That amounted to, Tayne, maybe you can --

This is Tayne. For HECO on Oahu, it amounted to $1.2 million after tax and for HELCO and MECO it amounted to $0.9 million after tax.

Those were the amounts disallowed or not allowed.

If you recall the timing, Doug, the Oahu utility was from May and the two neighboring islands from September.

These were the amounts booked were booked or the amounts that --

Or denied.

Or denied. So what were the dates again, Connie? It is April --

April of last year -- starting in May, and then that's for Oahu. For the neighbor islands it was September. And end of September.

So that will be an ongoing impact -- is that an impact, then, until these new cases are decided? Or when --

No. The DNO allows us -- there is a new incentive mechanism that has been put in place for the DSM programs, that will be in place until the new administrator is appointed at the beginning of 2009, so there is an incentive program that has a tiered, based upon the benefits that you achieve in the program, there is a tiered plan that takes you from no benefit for no achievement up to a possible 5% net benefit achievement. There is an absolute dollar cap on the program of $4 million per year.

Doug, I think in summary we have the opportunity again to earn some incentive, but I don't know that we can actually quantity if I that for you, but as Mike says, the top number would be $4 million.

Okay. And the total number in '06 was what?

Negative. We had a reversal.

That was the number that we gave you previously.

Okay. That's not just the end of the year, that's the total decrement for the year.

Roughly $2.1 million.

Yes.

Net of taxes.

Okay. And then you talked about a rider for -- or some kind of mechanism for more timely recovery capital costs. What about the chronic lag in recovery of O&M that we're experiencing because of the use of test years, or is that -- or do you think there is something that will allow you to be basically made whole for that?

I think that's one of the principle, as I said in my prepared remarks. One of the principle drivers for the one of two principle drivers for the rate case process is to seek recovery for the O&M levels that we're having to incur to maintain system reliability, and the second component is to recover on the capital program where we're just making new capital additions which will further improve our reserve margin, so we expect the rate case process to be the mechanism by which we can get fair and balanced recovery on O&M and capital projects.

Do the current regulatory principles give you the ability to fully recover your O&M?

Well, yeah, we have to -- as you well understand, we have to go through the rate case process, but we think there is very good reason and cause for that to happen.

Even with the historic test year and some adjustment for known unmeasurables, you think that's going to be sufficient?

Well, --

We actually have a forward test year, Doug, although the interim doesn't come until ten to eleven months after the filing of that case, so right now the Oahu case and the Maui case are actually on a 2007 test year, so when it is filed, it is clearly a forward test year as we get into the rated case process often we will end up being in that current year as we are --

During the year as those adjustments occur there is usually rebuttal testimony that brings it even more current, Doug.

Okay. Thanks.

Your next question will come from the line of Steven Gambuzza with Longbow Capital. Please proceed.

Good morning.

Good morning.

I was wondering if you can tell me what the consolidated debt to capital was at the end of the year?

HEI consolidated?

Yes, percentage of total capital?

Yeah, about 50%.

So the balance sheet is roughly 50% equity, 50% debt?

Yes.

Correct. Roughly. We will be disclosing our -- that in our 10-K in a few days.

Okay. And then it says that you registered some shares for the option program, or sorry for the 401(k) or the dividend --

Dividend reinvestments, yes.

3.75 million shares. Over what time period would you expect those to hit the share count?

I will just give you history. For the last, 2006 we utilized about 1.5 million shares, and then for 2005 we utilized 1.8 million shares.

You expect a similar run rate?

Yes.

Okay. And I just had a question regarding some of these pension related issues. In terms of I guess there is really two issues here. One is the ability to defer the charge to equity from implementation of the new FASB, which has essentially been decided for you and then there's the issue of being able to include prepaid pension assets in rate base. Given the commission order on the former issue, do you expect any -- are there any implications about your ability to earn on the pension assets are are these totally unrelated issues?

Steve, this is Tayne Sekimura from the utility. Let me answer that question. In terms of the -- I just want it to be clear that the application that we filed for the commission that had sought regulatory asset treatment for the amount that would have been charge to do AOCI, the request was made for financial reporting purposes only. In terms of the rate-making treatment, that would have been reserved for the rate cases, so what we're doing now is the Companies are seeking to earn a return on their pension assets by including these assets in rate base in all three of the cases, and in addition to that, we are proposing to restore equity for these AOCI charges for rate-making purposes in all three cases.

Okay. So essentially meaning that whatever degradation resulted from the financial reporting issue, you would invest additional equity from the holding company?

No. For rate-making purposes we would restore equity, and for rate-making purposes we would include the net pension assets in rate base. This is a rate-making issue.

Can you tell me how much -- when you look across the three utilities, what the amount of prepaid pension asset you're looking to include in rate base is?

I have the consolidated amount of the prepaid pension asset that written off, and I also have the liabilities as of year end. Is that what you're looking for?

I am trying to understand how much rate base, how much -- in all of these cases your filings are earned on a rate base. I just want to understand what the prepaid pension asset component of rate base is in the cases that you filed.

Steve, let me just answer it this way because some of the information has been already disclosed, and some of it hasn't, and will be in our 10-K. We stated that about $127 million charge was made to equity at year end, and the majority of that relates to the write off of the prepaid pension asset.

The amount and rate base should be roughly equivalent to that?

Yes, and the specific numbers you will see when we issue our 10-K.

Okay. And the debt to cap that you quoted me takes into account that charge?

I actually need to correct myself. It does not take into consideration that charge, and I gave you the amounts as of 2005 primarily because we haven't yet filed our balance sheet.

When will that be filed?

What's that?

When do you expect to have the K filed?

On the 28th, two days.

Thank you very much.

Thank you.

[Operator Instructions] Your next question comes from the line of James Bellessa with D.A. Davidson. Please proceed.

Good morning.

Good morning.

Were you surprised and might you be the only utility in the nation who was denied in accounting treatment that you asked for for the defined benefit pension and other post retirement plans?

Well, I don't think it is over. I think as we talked earlier, it is going to be a matter that we're going to pursue in our rate filings which are before us, so this is not the end of the story.

Let me add to Mike's comment. This is Tayne. In terms of the application that we had before the commission of seeking this treatment for financial reporting purposes, this comes based on guidance that we got from our external auditors, that in order to book a regulatory asset, we needed to do get commission approval for doing so.

And it is our understanding, Jim, that we're not aware of any other EEI companies that were in a position to have to request for that treatment.

Regarding this third party -- I am not certain an appraiser of third party --

Administrator.

There is the right word, administrator. What is the politics behind that? I would imagine the Company wasn't a proponent of that. Can you go through the background why it had to be a third party administrator?

I think it was part first of all, part of a comprehensive energy pact that I mentioned previously, called Act 162, passed in last year's legislature. The overall intent of the law was to promote a more aggressive renewable energy, energy efficiency and conservation mandate in the state. We are only responding to those mandates because the way the law was written, is that the legislature requested that our public utilities commission take the intent of the law and convert that into a regulatory process.

This is still a work in progress if you will. We're trying to understand this, and we're trying to be responsive to it. I think the encouraging thing is that it did not, as I said in my prepared remarks, it did not opt us out of being a participant in the 2009 and beyond programs. It just wanted to give a broader application. We happen to feel that we have a duty and responsibility to be a key player in energy efficiency conservation demand side management programs, and I would imagine that we are continue to go play a role in that future beyond who is administering the program.

You said you sold your position in Hoku and had a little less than a $1 million gain. Was there a much difference between the year end valuation and what you sold it for?

Yes.

Favor between the end of the year and the January period?

Yes, it almost doubled.

At the bank, there were some line items that looked kind of interesting, so I will ask about them in the fourth quarter. The compensation employee benefits went down $2 million. Can you explain that, please?

Yes. All of our incentives are directly performance related, and therefore they are related to the drop in earnings.

And has that annualized in the fourth quarter or is that just a fourth quarter event that stands alone, independent of the rest of the year?

That is the reversal of the accruals for the year.

Could you further elaborate on the services line item and the other line items, which were up sharply or percentage-wise fairly significant?

In the services, that is primarily relating to the legal and litigation related expenses that we talked about earlier, and in the other line, there are actually a number of items that are all not significant that resulted in that net increase?

These two line item services and others, the fourth quarter levels probably won't be replicated in future quarters?

We do not expect that for the services line. In the other expense line, as I indicated, there were a number of items that will move up and down, and you will see that if you look at that particular line item for many quarters going back, that is true, so it is not possible for me to really predict that.

And you said that the assessment of the earthquake damage suggested that you had low repair costs, so there wasn't too much costs that way, but you had outages and other costs restoration did it not have a material impact on the quarter?

It was not material to the quarter. I would think how we arrived at the determination that there was not material damage to the system and further what was the appropriate conduct for us to go forward. We hired an independent consulting firm from the mainland to come in and look at all our practices and procedures and review the events of the day, and they concluded that we acted responsibly and appropriately under the events of an earthquake that hit our utility, so there was some modest cost associated with having investigation done. That investigation extends not only to our Oahu utility but also our neighbor island utilities. The commission required that we have a study done for Oahu, our largest service territory done by year end '06, and by the end of the first quarter for the two neighbor island territories, Maui and HELCO.

Your kilowatt hours increased what was it, 1.8% for the quarter or --

1.4.

1.4. Had it not been for this outage, could you have been at 2%?

That might be a little on the high side. I wouldn't want to speculate because there are a lot of circumstances and factors that -- and on top of that, the earthquake occurred -- the good news is that the earthquake occurred on a Sunday morning. Had it been a normal workday, I think the impact and the consequences both in terms of sale and impact to the community would have been quite a bit larger.

Thank you very much.

Your next question comes from the line of Michael Gresens with Robert W. Baird. Please proceed.

Good morning. In terms of the reserve margin, what are your current plans or intentions to reduce the strain on the system and secure some new power sources?

We have a number of things going. We have generation planned for all three islands. We have a large peaking unit that we have targeted to go in service in mid-2009, and in the interim, we have been adding distributed generation at our substation sites. We've been promoting a conservation imperative, and we have also been doing demand side management, load management, programs to all intended to reduce the pressure on the reserve margin.

Do you have any plans as to what the expected reserve margin for '08 or '07 I should say, should be?

Of course that's going to be a function of our sales and peak loads, and of course that varies by weather and particular circumstances. We believe in general terms, that our reserve margins will continue to be tight until we have our additional units online, so there is not going to be any magic transformation in 2009 or 2008 resulting from the efforts that we have underway. We see it as mitigating but not resolving.

How many of those future units need approval yet from the commission?

Well, one of the things we had to do for the large peaking unit on this island is we had to commit to 100% biofuels, and so there was just an absolute community opposition to doing anything that suggested fossil fuels. We have committed to running that plant on a combination of ethanol, biofuels, biodiesel, which obviously is going to be good for global warming, good for environmental and also good for our community, so that was a condition, and we're still waiting the final PUC approval. We have basically all the permits that are necessary to go forward on the plant. We just need the final PUC concurrence on this.

Thank you.

There are no more questions in the queue at this time. I would now like the turn the presentation back to Connie Lau for closing remarks.

Actually this is Suzy. Thanks, everyone, for being on the call. If you have any questions, follow-up questions that you would like to ask, my number is 808-543-7385. Thanks for being on today.

Ladies and gentlemen, this concludes your presentation. You may now disconnect. Have a great day.