Hawaiian Electric Industries Inc (HE) 2008 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the first quarter 2008 Hawaiian Electric Industries earnings and outlook conference call. My name is Katie, and I will be your conference coordinator for today. At this time all participants will be in a listen-only mode. We will conducting a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS).

I would like to now turn the call over to your host Ms. Suzy Hollinger, Manager, Treasury and Investor Relations. Ma'am you may proceed.

Aloha and good afternoon. Thank you for joining us for an update on HEI.

Here with me from senior management speaking today, are Connie Lau, HEI President and CEO, Mike May, HECO President and CEO, and Tim Schools, ASB President. Curt Harada, HEI's Acting Financial Vice President, Treasurer and CFO, Eric Yeaman, HECO Executive Senior Vice President and COO, Tayne Sekimura, SVP Finance, and Alvin Sakamoto, ASB Finance, are also on the call.

Connie will start today's presentation with a few comments on first quarter earnings. Mike will follow with an update on the utility. Tim will then join into the presentation, and discuss the bank, and Connie will make some closing remarks. At the end of the presentation, we will 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 page 4 of our first quarter Form 10-Q that was filed on Tuesday, for information on these statements, and now let me turn the call over to Connie to begin the comment.

Thanks Suzy. Aloha and good afternoon. We were pleased to announce solid first quarter earnings on Monday. Better results from both the utility and banking operations helped first quarter earnings recover from depressed levels a year ago. Interim rate relief and the a $7 million write-off in the first quarter of 2007 that does not recur this quarter, was a key reason for the quarter-over-quarter increase in utility earnings.

Bank earnings were up 26% quarter-over-quarter, due to margin expansion, continued good asset quality, and increased non-interest income and lower non-interest expenses. Holding and other companies losses were basically flat quarter-over-quarter. The financial details of the quarter were included in the earnings release, and our first quarter Form 10-Q that was filed yesterday. We would be happy to answer any questions you have on the quarter at the end of the formal presentation.

Let me now update you on the Hawaii economy. Our Hawaii State Department of Business Economic Development and Tourism lowered their outlook for economic growth slightly during the quarter to 2.5%, from 2.8%. However, subsequent to this forecast revision, several events have clouded the horizon for our Hawaii economy. Two airlines serving our market announced shut downs, and the Regent Cruise Line moved two of their three ships to Europe and Asia.

Near term, this is impacting our visitor industry, but economists are uncertain of the long-term impact as other airline carriers are adding seat capacity, to fill the voids left by Aloha Airlines and ATA, and our Hawaii Tourism Authority has increased their marketing and other commercial activities. We expect them to revise their outlook further in the next quarterly forecast on May 15th.

On a more positive note, Federal government spending especially for the military, continues to be a favorable source of revenue for businesses and jobs for residents. The recent decision by the Army to permanently station a striker brigade in Hawaii, will bring $250 million more of new construction projects to Oahu and the Big Island, to offset the negative impact to tourism.

Our real estate market has also remained relatively stable. Home prices on our main island of Oahu have been holding, although we are experiencing some weakness on the nearby islands. And while unemployment has risen, it is still relatively low at 3.1%. Hawaii's bankruptcies are also among the lowest in the nation. Overall Hawaii is fairing well comparing to the nation, but our operating companies are monitoring conditions carefully. Mike and Tim will be discussing the impact we have seen in our businesses thus far, as they review our utilities and banking operations.

In addition, in Tim's review of the bank he will be presenting slightly different information that we have in the past. Tim has added information about the bank's linked quarter results comparing this quarter's results with the bank's fourth quarter results, to give you a better sense of how the bank's key metrics are trending. As we mentioned last time, the bank is also embarking on a performance improvement project, and will be showing results against select peer groups, comprised more of commercial banks than thrift, to demonstrate the opportunity that America has, to generate additional shareholder value as it continues to transform their full service community bank.

Let me now ask Mike to discuss our utilities.

Thanks Connie. Aloha and good afternoon. As Connie mentioned results this quarter reflect interim rate relief received primarily late in 2007 for all three of our utilities. This added $14 million to net income this quarter.

These additional revenues are helping our utilities to recover higher levels of O&M cost, and earn on the significant number of capital projects completed in the last several years. And bringing much needed closure to this case, last week we received the final D&O for the HECO 2005 test year rate case. As you recall, the PUC issued a proposed final D&O in this case back in October of 2007. There are no material differences between this final D&O, and the proposed D&O, and you may recall the expected refund was already accrued in the third quarter of 2007.

Looking ahead we still face some challenges. As we have experienced for the last couple of years, we expect sales to remain relatively flat. Although our number of customers continue to grow, as this chart indicates, the rate of increase has started to slow in the last couple of years, and in the first quarter of this year. In addition, our customers are conserving and using energy more efficiently, as we have been encouraging them to do so. However, despite relatively flat sales growth, peak demand remains high, near record levels set a few years ago. The ongoing need to meet this level of demand continues to put pressure on our generating units, especially on Oahu where generation reserves remain tight.

Also as with any equipment, as our system ages, maintenance costs are increasing, as a result O&M expenses have continued to increase, and we expect the cost to remain high, given our tight generation reserves, and our aging assets. As mentioned earlier, recent rate relief for all three utilities, will allow recovery of most of these higher O&M costs.

To address these needs, and to modernize our infrastructure, we are making major capital investments in generation and transmission capacity. This includes new generating units, planned for Oahu and the island of Hawaii in 2009. In total, over the next five years, we are forecasting approximately $1.3 billion in gross capital expenditures for these reliability investments. We will continue to focus on recovery of the increased investments and earning a reasonable return, through the rate case process.

Just as important is our strategic emphasis on increasing renewal energy, and reducing our dependence on fossil fuels. There is a lot happening here, but just as a couple of examples. In the past quarter, the U.S. Department of Energy and the State of Hawaii, launched a major partnership called the Hawaii Clean Energy Initiative. It brings the key energy stake holders in Hawaii together, to identify policies and projects to increase the use of renewable energy in Hawaii. And most recently in April, the U.S. Department of Energy announced the selection of a distribution automation project for our Maui subsidiary. The University of Hawaii will receive a $7 million grant, to study ways technology could help reduce peak demand, and integrate more intimate renewable on the Maui Electric grid.

To sum up, interim rate relief has helped to recovery higher levels of O&M, and earn a return on our capital projects. Just as important, we continue to execute on our critical renewable strategy. These are challenging times, but we are positioning our utilities well for the long term success for our investors, our customers, and our state.

Now I would like to call on Tim to discuss the bank.

Thanks Mike. Good morning everyone and thank you for joining us. I am happy to report that while the current environment remains volatile, and the economic outlook is uncertain, we are off to a solid start in 2008. Importantly adjusting for the prior quarters, $8.8 million non-recurring benefit from a change in ASB's defined benefit plan, both net income and return on assets improved over the fourth quarter and the first quarter of last year.

As you would imagine with Connie's comments on the Hawaiian economy at the outset, revenue growth has slowed somewhat, but we still experienced positive growth over the prior quarter. This was partly driven by improvements in our net interest margin, due to favorable balance sheet trends, and changes in interest rates. Our efficiency ratio also improved, as we experienced positive operating leverage, with revenue increasing 1.8% from the prior quarter, while non-interest expense adjusted for the pension benefit declined by 5.8%.

And our net charge-off ratio declined following the elevation from the single credit written down in the prior quarter. Last quarter I shared several key ratios with you, based on bank and thrift industry data from the FDIC. This data is asset weighted, and hence primarily tracks performance of only the largest banks and thrifts, such as Bank of America, Citigroup, Countrywide, JPMorgan, and so forth.

I am in the process of developing a more meaningful industry and high-performing peer group to use for benchmarking purposes going forward. In the interim, today's results will be compared against the median performance of the 50 public banks and thrifts, that exist between $4 billion in assets and $9 billion in assets, and a subset of the 15 banks and thrifts that appear to have the greatest and more consistent profitability based on return on assets.

As I communicated, we are off to a good start. This quarter we earned higher net income on a smaller average asset base, as we are working diligently to reduce our non-earning or low earning assets. This in turn will increase capital ratios, allowing us to evaluate the possibility of returning more capital over time to HEI. In a minute I will detail plans we have initiated to bring our profitability in-line with the peer groups.

As you can see ASB has held up well over the last year, as indicated by the peer groups sharp declines in 2007 profitability, primarily related to increased provisioning for credit losses. Our recent stability has been helped by the strength of the Hawaiian economy, but it also speaks to the successful diversification strategy that Connie and our team has executed over the last five to ten years. Having a thrift heritage, great progress has been made to lessening our exposure to solely mortgages.

Now I would like to quickly walk through our four key drivers. As Connie mentioned, most of my comments will focus on linked quarter results, to provide you a better understanding of our current trends and outlook, as we do not have the seasonality trends that many of you are used to on the electric utility side.

Revenue which banks define as net interest income plus non-interest income increased $1.2 million from the prior quarter to 68.5 million. The increase reflect as 1.5 million increase in net interest income, partially offset by a $300,000 decrease in non-interest income. As it relates to net interest income the first quarter net interest income totaled $50.5 million, up from 49.1 million in the fourth quarter.

Importantly this occurred in spite of our strategies to reduce lower yielding earning assets, and higher costing wholesale funding. The increase resulted from a higher net interest margin, which benefited from an improved earning asset mix, deposit mix, and the recent interest rate reductions. This chart shows the volatility of linked quarter revenue growth for ASB in the industry over the last five years, as rates moved sharply down, and then up and now down again, over a fairly short amount of time. Hopefully with shorter term rates having come down recently, and longer term rates holding up relatively steady, we will continue to benefit throughout the year.

Next our net interest margin improved 8 basis points to 316. The net interest margin increased due to an 18 basis points decrease in total funding cost, compared with an 8 basis points decrease in earning asset yields. The lower funding cost resulted from three things, average core deposit growth of $13 million versus the prior quarter, a reduction in our higher cost average wholesale funding balances of $8.9 million, and higher cost single service CDs that have been able to decline, due to our strategy to reduce lower yielding earning assets, and much of our funding benefited from the reduction in interest rates.

Within earning assets, we were able to reduce lower yielding investments by an average balance of $111.9 million, while increasing our loans by 98.7 million. I will add that the Company experienced pretty even loan growth across most loan categories. As the chart shows our net interest margin has been stable over the years, and we are working on plans to move it closer to the peer group average.

Next efficiency. As we discussed previously, fourth quarter 2007 non-interest expense included an $8.8 million benefit, related to changes to the bank's defined benefit plan, which reduced that period's non-interest expense. Excluding this non-recurring benefit first quarter non-interest expenses declined approximately $2.7 million, or 5.8% from the prior quarter, to $44.2 million.

In combination with the 1.8% linked quarter revenue growth, our efficiency ratio improved from approximately 70% for the fourth quarter, to 65% this quarter, compared to an adjusted fourth quarter, improvements occurred in other expenses, services, and equipment categories. The remaining expense categories were basically in-line with the prior quarter's level.

Our internal target is to achieve a 55 to 60% efficiency ratio. In the first quarter we heightened the overall awareness and accordance of expense control, and began monthly controller meetings to review the actual versus budget results with each senior officer in the Company. In a minute I will talk further about specific plans we have put in place to further improve our efficiency ratio.

Lastly credit quality. The provision for credit loss is in the first quarter was $900,000, compared with 1.8 million for the prior quarter. Net loan charge-offs in the first quarter totaled $484,000, or 5 basis points of average loans held for investment, compared to 53 basis points for the fourth quarter of 2007. The charge-offs were comprised of a broad array of consumer and business banking loans. Each of our credit quality indicators have begun to increase, albeit off of historical low levels.

By all measures our indicators remain significantly below industry levels for banking thrifts. However we remain cautious about the national and Hawaiian economic outlook. Therefore we have and continue to review our underwriting policies and procedures, and have increased monitoring in our special assets and collections area. At March 31st, 2008 non-performing assets increased to 7.5 million, or 0.18% of loans held for investment and foreclosed property, from 3.2 million, or 8 basis points at December 31st, 2007.

The increase in non-performing assets was primarily attributable to the increase delinquencies of traditional residential first mortgages and two commercial loans. The allowance for credit losses totaled $30.6 million, or 74 basis points of loans held for investment at quarter end, compared to 30.2 million, or 78 basis points at year end. This allowance coverage of nonperformance loans totaled 4.15 times March 31st, 2008 levels, compared with 9.46 times at December 31st.

In closing, we just announced an employee-led project within American Savings Bank, to improve our net income profitability and shareholder value. Specifically we will be focused on improving our net interest margin efficiency ratio and return on assets, while maintaining strong credit quality. This project will entail a comprehensive review of the entire company, to identify ways to earn more revenue with reduced expense, and use less capital. Projects such as this are not uncommon in the banking industry, and we plan to do this with special attention placed, on ensuring we do not disrupt our highly regarded customer service or special ASB culture.

I expect this to be a multi-year project and while specific targets and opportunities are being finalized, you can expect general targets to be a return on assets of greater than 1%, and net interest margin greater than 3.5%, and an efficiency ratio of 55 to 60%. We will update you on specific targets and initiatives in the coming quarters, and we will keep you apprised of our progress towards our goals throughout the project. Now I will turn it back to Connie for closing remarks.

Thanks Tim.

Overall in summary, we are pleased with the Company's performance in the quarter. After a tough first quarter last year due to the Keahole write-off and pending rate case decision, our utilities are now in a better position to earn a more reasonable return for investors. We continue work on critical reliability projects, and are focused on recovery of these investments, and earning a reasonable return through the rate case process.

We are very excited about our leadership role in reducing Hawaii's dependence on fossil fuels, and supporting more energy from renewable sources and continued execution of this strategy. At American Savings Bank, our bank turned in solid results this quarter, as the Fed interest rate had a positive impact on our margin, non-interest income, and expense improvement, and credit quality remained good. And as you have just heard from Tim, the Bank has just announced a new performance improvement project, to improve both operating and capital efficiency, and we will report on specific strategies and targets in future updates.

We continue to recognize the important of the dividends to shareholders, and we are committed to continuing them. That said, our Board of Directors meets quarterly to review and approve the dividend. On Monday, we announced that they declared a continuation of the quarterly dividend of $0.31 per share, payable on June 10th to shareholders of record on May 16th. The ex-dividend date will be made May 14th. At 4.8% our dividend yields remain attractive.

This concludes our formal comments, and we are happy to answer any questions you may have. Thank you.

(OPERATOR INSTRUCTIONS). Your first question comes from the line of Tom [Wolfe, Satu] Investment Management. Please proceed.

Aloha and thank you for holding the call today. I wonder if you can tell us if you foresee any detrimental impact upon the tourism business there as a result of the volcanic fog, or vog that you are experiencing on some of the islands?

That doesn't seem to have impacted the tourism count. Actually in some respects many people are coming to see the volcano, and take advantage of this very unique opportunity. We on Oahu of course as the vog has been blown over this way, we have a few days that has been a little muggier than usual, but it really has not had a major impact.

Thank you very much.

Your next question comes from the line of Paul Patterson from Glenrock Associates. Please proceed.

Good morning guys.

Good morning.

First of all, just a small item here. The other interest charges at the utility, what was going on there? I see a decrease substantially.

Paul, this is Tayne Sekimura on the line, can you hold on a second?

Sure. The other question that I wanted to ask you guys about was just in general sort of, what the regulatory outlook is in terms of future needs for rate relief, and what you guys might be thinking about that, and what we should be expecting, in terms of future regulatory activity, if any.

Paul, we will answer the interest question first, and then I will talk will about the regulatory.

The variance there is due to lower short-term interest. We had lower commercial paper borrowing balances, as well as lower interest rates, compared to the prior year.

Okay.

Paul, with regard to the regulatory scene, as I mentioned in my prepared remarks, we are looking at a capital expansion program of 1.3 billion over the next several years. One might reasonably expect that as we go through that capital investment program, that we would be seeking rate relief, to seek recovery on that capital program.

As far as timing, I think the PUC has been very responsive in terms of timing, and one of the things that I had mentioned is that the Hawaii Clean Energy Initiative, one of the components of the review there, is looking at ways that we might change the regulatory compact. So those things all say to me that there are positive things that are moving forward, in terms of the regulatory front.

Okay. But I guess what I am wondering, how do you feel about your ability to earn acceptable ROE over the next year or two? How do you see that outlook considering these cost that you guys have coming here? You have obviously got some rate relief and what have you. How should we think about that?

I think you have asked the appropriate question. It really comes down to getting timely recovery on the investments that we are making, both at the timing of the filing, and timing of action by the PUC in getting timely D&O.

I think you are seeing since mid-2006 we have filed a number of rate cases. So the utilities team has been focusing in great detail on a number of different regulatory mechanisms, that can assist in speeding recovery of cost and recovery on our investment, so they actually have been talking about a number of different ideas with the Commission that we may be able to share with you in future calls.

Okay. Great. And then just sort of a bigger picture. The working capital is a little bit of a drain this quarter, if I looked at the 10-Q correctly. Anything particular there that we should be thinking about, or I would assume that this will just be sort of ebbs and flows that we are seeing from quarter to quarter?

Paul, are you referring to the utility?

I am referring to the company as a whole.

Okay.

You guys have different, maybe I am looking at a different income statement. It seems that in the cash flow statement there were, the changes in assets and liabilities seem to be pretty strong. It probably was mostly with the utility, accrual and unbilled revenues, or whatever.

Let me speak to the utilities and then anybody can add. The utilities fuel costs have been rising. So as fuel cost rises our fuel inventory rises, because we need to maintain a certain minimum level of inventory, and then also Accounts Receivable, our unbilled revenues go up because the prices are higher. So that has been the biggest driver on the working capital side for the utilities.

Okay. That makes sense. And then --

Paul, I'm going to ask Tim to add on the bank because actually there is a very good positive story on the bank side.

On the bank side, we don't really use the term working capital. We focus on liquidity to be able to fund our balance sheet, and any deposits that are exiting the bank. So one of the things we are looking at is banks have a certain level. If you look at balance sheet what it is call cash and due from, and then there will also be some interest-bearing deposit accounts, and that is really what is used for short-term liquidity, and there are some sophisticated systems that are out there, that monitor the amount of volume from ATM machines, the amount of cash that is needed at branches.

Not only at the absolute level, but by bill types. What if you have a ton of 5s in the branch, but a lot of people need 20s. So we are working diligently to last year per month to monitor the trends of the last year or two, installing these systems, to reduce our cash levels, and we are optimistic. If you think about it this way, we probably have, I don't have the exact number, but say we have 150 or 170 million of cash from due from. If we got that down $20 million off of that big base, that is about $1 million directly to our bottom line.

Okay. Great. And then just on the loan loss position, you said that was like 5 basis points off of 53, but the 53 had some specific loans that went bad or something. What was your normalized number quarter-over-quarter? How has that been directionally?

Yes. I don't know if you are able to show the slides again, but the slide we showed that was slide #7 was a five-year net charge trend, and you are correct. It looks like based on this charge our Company is operating between zero and 15 basis points, which is probably normal for a thrift-like balance sheet.

Most commercial banks well running commercial banks will run in the 30 basis points range. So you are correct. Last year in the fourth quarter we had an anomaly, we had a large commercial loan that was in that 53 basis point charge-off. That was a single credit.

Okay.

Right now in the short run with our balance sheet, I would estimate that at 5 to 15 basis points.

And then the performance employee program. I know you have a multi-year target here for the net interest margin and ROA and what have you, but any sense of what we might be seeing? How soon might some of these improvements start to show up?

Hopefully every quarter, but it is a little bit like a ramp, because we have to identify the opportunities, prioritize them, get teams on them. We already have some that live right now, the cash project is one, it has been only two or three months, and as I have said, that is an exciting one that can reduce our balance sheet. So that will be a double whammy for ROA, it will give you more net income. It will help the numerator and the denominator.

We have got a lot more I will share with you in time. Hopefully in the July or August conference call, I can give you some specific targets on net income that we are targeting, and by area, but typically what you see on these, there are some others that are out there if you want to research them, Suntrust is doing one right now, Webster Bank, and Connecticut is doing one right now, [Ampor] in Chicago. There are a lot of examples and it will a multi-year project.

If you back into the numbers quickly, for the quarter we had annualized $272 million of revenue. So if that was your base and you were going to do it just on the expense side, which we are not going to do, we would have to reduce our annual expenses $12.5 million, for a 60% efficiency ratio, or $26 million, for a 55% efficiency rate ratio. That is if you are going to do it all on the expense side.

If you think about our current expense level annualized at $176 million, if you wanted to get it all on the revenue side, you would have to add $20 million of annualized revenue for a 60% efficiency ratio, or $48 million in annual revenue, for a 55% ratio. What that shows is that it is obviously easier to get on the expense side.

Sure. But it seems like not only is this a multi-year thing, but we will probably see some benefit of this in the year, term within a year or so as well. This is beginning to show up. If I understand your comments correctly, we should start seeing improvements in the near term as well longer term.

Without a doubt. It is not something that will come in four quarters from now. Without a doubt, I think third and fourth quarter you will definitely start to see things coming through.

Excellent. Thank a lot guys.

(OPERATOR INSTRUCTIONS). Your next question comes from the line of James Bellessa from D.A. Davidson & Co.. Please proceed.

Good morning.

Good morning.

The utility evidently must have filed it's intentions to have a rate case on Oahu. Can you give us some color on that?

The process just requires us any time we are anticipating the possibility of filing a rate case, we have to give notice. We are evaluating the content and details of that rate filing now.

So if you have given notice, it is likely you will file here in two months?

I would just leave it that we are evaluating the details of that at this point, Jim.

Okay. On the bank side I would like to ascertain the profitability that you reached in the first quarter here. Your line item called services went down, and you say in your press release that it was due partly because of lower litigation costs, and attorneys fees, things like that. Is this a new maintainable level, or did you get it to a low point, and it will be higher than that going forward?

I hope it is not maintainable because I hope it goes down a lot from here, but a lot of it is because of some of the litigation that has been discussed over the last year. I think you are looking a lot year-over-year, even linked quarter it went down, but you are correct. There was a lot of litigation last year, that we optimistically don't expect to have any other item like that pop up. There is a lot of other stuff that we want to work hard to try and eliminate as well. So I would use that.

The banks numbers for most of you that are following utilities, for modeling bank numbers when you are doing your models, I would look at the prior quarter, and banks are a financial balance sheet, and if you don't have undue interest rate risk in your balance sheet, those existing numbers should be able to just be rolled over in your model. So I wouldn't look year-over-year for the banks. I would look to the quarter.

Do you think we can bank on this 14.5 million of net income level going forward? Or are there risks to this?

There is risk in every number in every company. I would tell you that 85 basis point ROA, I would think there is more upside than downside if I was buying a stock, but that is a decision you would have to make on your own. If you look at all banks and thrift between 4 billion in size and 9 billion in size, the last five years their ROA averaged about 1.05.

I would add one of the headwinds that we are very carefully monitoring is credit costs, and will those rises, as we shared with you earlier, we have actually been experiencing extremely good asset quality in Hawaii, and that always is a function of what happens in the economy.

Somewhere in your literature you indicated that it is possible that reserves, loan loss reserves may be higher in the future. Is this $900,000 level for the first quarter a low point, and maybe higher from there?

Yes. That is just a prudent disclosure based on what is happening in the economy. If you think about our NPAs our non-performing assets, which is a key indicators for banks on the Company's horizon, our NPAs are 0.18%. Okay.

Every commercial bank I have worked at, very well commercial banks, their NPAs averaged about 0.6%. So with our balance sheet being a legacy print balance sheet it is just fairly high quality low-risk assets. I am not saying we won't have charge-offs, but if Hawaii got hit hard, and tourism really sank, and hotels laid off, and people had a hard time with their cash flows, people would go past due on their mortgages, but mortgages typically are the very last thing that goes in there. If you stack up 0.18 versus the industry, it will be I forget the Hawaii word for it but it would be very small.

Manini.

My little son always talks about the Manini fish. He knows more Hawaiian than me.

That is pretty small then?

That is very small. Nominal.

And on the utility side, you have indicated that rate relief allowed you to have net income $14 million higher than it would have been. Can you give us a picture of what it might be in the future quarters?

Let me take that question. In terms of if we look at all three cases, the incremental impact would be about $42 million to the bottom line. This is for all three cases, incremental 2008.

So you only have one-third of it taken down?

This is an annual incremental to the 2008 number that I just provided, and Jim that is incremental considering when the decisions came in in 2007.

But for the whole year of '08 we should be looking for $42 million of incremental income, and you have already posted $14 million, is that correct? Is that what am I hearing?

Yes. Assuming costs don't go up and I think as we reported we are seeing costs rise, the 2007 test year so there was higher depreciation. We have to take all of those things into consideration.

Jim just for your information the higher O&M in the first quarter was $2.8 million, about $0.03 per share, and the higher depreciation about $700,000, or $0.01 a share.

To say it differently Jim, the annualized effect of the rate cases in the year is $60 million of net income.

Did you say 60 or 16?

60 like 60. Like senior citizen.

Right. That is not the incremental.

No. That is the annualized.

Thank you very much.

At this time I am showing you have no further questions. I would like to turn the call back to management for closing remarks.

Hi everyone. This is Suzy again. Thank you very much for being on the call with us today. If you have any follow-up questions, please contact me at area code 808-543-7385, and I will be happy to answer any questions you might have. Thanks again. Aloha.

Ladies and gentlemen, thank you for your participation in today's call. This concludes the call. You may now disconnect. Have a wonderful day.