Hawaiian Electric Industries Inc (HE) 2008 Q3 法說會逐字稿

Good day, and welcome to the third-quarter 2008 financial results and outlook conference call. My name is Shemica, and I will be your coordinator for today. All participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) I will now like to turn the presentation over to your host for today's call, Miss Suzy Hollinger, Manager Treasury and Investor Relations. Please proceed.

Aloha. And good afternoon. Thanks for joining up for an update on Hawaiian Electric Industries.

Here with me from Senior Management is speaking today are Connie Lau, HEI President and CEO, and Robbie Alm, HECO Executive Vice President and Tim Schools, ASB President. Curt Harada, HEI acting Financial Vice President, Treasurer, and CFO, Tayne Sekimura, HECO Financial Vice President., and Alvin Sokimoto, ASP Executive Vice President., Finance are also on the call.

Connie will start today's presentation with a few comments on third quarter earnings, our continued focus on positioning the Company for improved profitability and the Hawaii economy. Connie will then move to an update on the utility operations and Robbie will discuss the Hawaii Clean Energy Initiative. initiative. Tim will come on the phone and update you on 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 our third quarter Form 10-Q that was filed this morning for information about forward-looking statements. Now, let me turn the call over to Connie.

Thank you, Suzy. And aloha to everyone and thank you for joining us on the third quarter update. I am pleased that HEI reported another good quarter.

Earnings were 0.44 per share. $0.20 ahead of last year, when their quarter results were impacted by a $0.10 per share utility customer refund accrual. All segments contributed to solid third quarter results. The key drivers were continued restoration of the utilities financial health from rate release, primarily received in the last quarter of 2007.

31% higher bank net income from a steeper yield curve, continued good credit quality and lower expenses resulting from performance improvement initiatives and lower interest expenses for holding and other companies.

As I have noted in prior quarters, strategically, our two core operating companies have been keenly focused on improving fundamental and operating and financial performance.

As reported last quarter, the bank restructured its balance sheet to reduce its less profitable wholesale business and began a performance improvement project focused on improving operating efficiency.

On this call, we are pleased to announce that our utility has recently entered into a historic agreement with our governor, consumer advocate and Department of Business and Economic development and Tourism to establish a vision and framework to make Hawaii's energy future clean, renewable, and sustainable. The key initiatives in the agreement focus on developing energy sources indigenous to our islands.

As a hedge against having to rely almost exclusively on imported oil and coal. The islands have abundant renewable energy sources in the wind, waves, sun, geothermal, biomath and more.

The agreement acknowledges the need for a strong and financial viable utility to help attract the investment dollars necessary to lessen the dependence on imported fossil fuels, have positive impact for our precious island environment, and lessen the volatility of the fuel component in our customer's bills.

The Hawaii Clean Energy Initiative has the potential to significantly change our utility business model and create additional value for shareholders, as we take advantage of the that the Hawaii Clean Energy Initiative creates for us.

We firmly believe that achieving energy Independence for the state of Hawaii is good not only for the state, our rate payers but also for our shareholders. These strategic actions at the bank and utility come at a good time for us. And are helping us weather these volatile financial markets, the weakening national economy and declining Hawaii economy.

They prove that the right long-term strategic actions can help insulate a company against difficult short-term conditions and markets. As you are well aware. The financial markets melted in late September and October causing the credit markets to freeze.

Fortunately, there are no significant credit and liquidity impacts to the company. Both AGI and HECO were able to access the commercial paper market, albeit higher rates than pre-September 15th and varying maturities, including overnight maturity, HEI was able to draw on the syndicated credit facility to lengthen maturities. Both HEI and HECO continue to have capacity on those facility totaling $87 million at the end of October.

Additionally, our long-term debt is at fixed rates and well-insulated from the current rate volatility. One key impact of the financial crisis has been to the retirement plan assets which experienced significant declines.

This could result in an increase to the 2009 minimum required contribution to the qualified plans of between $21 million and $46 million. With cash funding between $6 million and $12 million. Assuming plan assets of September 30th, 2008, and assuming a further 20% decline from the September 30 plan asset values. More detail on this subject can be found on pages 12 and 46 of our third quarter 10-Q. Despite market volatility, our stock has continued to perform well.

The national financial crisis, high oil prices and slowing of the national economy has not been good, however, for Hawaii's tourism industry. Year to date, through September, air arrivals were down 9% compared with the same period last year driven primarily by double-digits decline on our neighbor islands of Kauai, Maui, and Lanai and the big island. Conditions worsened in the third quarter with air arrivals down 15% compared to the third quarter of 2007.

Hotel occupancies, another indicator of tourism sector health, are down. Especially on Maui and the big island. Statewide figure show September 2008 occupancy rates at 63% compared with 74% for September 2007. September 2008 occupancy rates on Oahu were the highest in the state at 69.4%. A 9.9% decline from September 2007. Rates for Maui and the big island declined more significantly.

September 2008 occupancies from Maui and the big island were 56.8% and 49.9% respectively. Representing percentage point declines from September 2007, a 14.8 and 9.5 respectively. Visitor expenditures are also off their record pace. Year-to-date through September, down 7% compared with the same period last year.

Several travel related business closures and lower arrivals caused unemployment to rise to 4.5% at the end of September. On the real estate front, Hawaii is beginning to see declines in home prices on Oahu. The median price fell slightly below 600,000 in September and foreclosures have also risen, especially on the neighbor islands.

At the same time, however, federal government and military spending as well as state infrastructure projects are providing stability in the important construction sector. Permanent private construction has softened but projects like a new Disney Resort development on Oahu will help. Overall, state economist expect a decline in the Hawaii economy but magnitudes and length of decline have not yet been determined.

Now, let me turn to an update of the utility. I have noted earlier at our utility overall results for the quarter were positive. Continuing recovery from a year ago.

At the same time, we have begun to see the impacts of high oil prices and Hawaii slowing economy on the sales. As we move forward, the recently signed Hawaii Clean Energy Initiative strives to provide for a natural price hedge against oil to encouraging and facilitating the implementation of renewables. Through mechanisms to accelerate cost recovery of capital investments to strengthen the grid and integrate these renewable sources.

And through a mechanism to decouple revenues from sales to reduce the disincentive for encourage energy efficiency and conservation and recouple them based on cost escalation factors. The significant quarter over quarter improvement in earnings reflect the fact that interim rate relief was largely received in the fourth quarter of 2007 for our Oahu and Maui county utilities.

On a net income basis, rate relief accounted for $11.5 million net of taxes for the third quarter and helping our utilities recover higher levels of OEM expenses and earn on the significant number of capital projects completed in the last several years. As you know, the 2009 Oahu rate case is in progress and an interim decision in that case is expected in mid-2009.

As I noted earlier, high oil prices in the financial crisis impacted kilowatt hour sales in the third quarter. Year to date through September, kilowatt hour sales were down 1.2% as compared to 0.4% through the first six months. Looking ahead, we believe that these recent trends will continue.

Lower usage by both residential and commercial customers due to increased conservation and energy efficiency has offset, continued but modest growth in the number of customers. In the last two months, high fuel prices and the slowing economy, along with heightened awareness with the importance of conservation have further impacted customer usage.

We expect the trend to continue. Even as more recent declines in fuel prices show up in lower customer bills. Given these factors, we expect annual sales to be down slightly more than a year to date decline of 1.2%.

We do expect a further decline at 2009 but at a slowing rate which we expect will be taken into account at the decoupling of revenue from sales. The need for scheduled overhauls for the generating unit has continued to put pressure on the remaining units. Especially, on Oahu where generation reserves are needed to meet peak demand. O&M expenses in the quarter were up 5% compared to the same period last year.

Operation expenses were higher due to higher demand site management expense and higher production operations expense.

Although maintenance expenses were lower in the third quarter, primarily due to changes in generating unit overhauling schedules, as we noted on the second quarter call, we continued to expect higher planned O&M in the fourth quarter 2008, plus catch up overhaul work originally scheduled for the third quarter.

As a result, we continue to expect full year O&M to be around 6% over 2007. Our 2009 rate case will help us recover and earn a return on some of these costs and investments and in the long run, we they it is important to implement a different regulatory model that is designed to support aggressive Clean Energy goals for our state and realize the importance for financially healthy utilities in achieving these goals.

As I noted earlier, I am happy to report that last month, we signed a major agreement to help reach these goals. The Hawaii Clean Energy Initiative agreement aims to dramatically increase energy efficiency and renewable generation for our three utilities. Fundamental to the agreement is keeping the Hawaiian Electric utilities vertically integrated and adding new IPP and utility owned renewable regeneration.

The agreement also commits to the addition of strong T&D infrastructure to integrate the renewable resources. Just as important is a commitment in the agreement to expand programs which will give customers more choices and more information on how they use electricity. Allowing them to take greater control over their electric bill. I would like to ask Robbie Alm, our Executive Vice President, who was the chief negotiator for the initiative to explain it to you. Robbie.

Thank you, Connie. Good morning.

The generation resource strategy of HCI is displaced petroleum based generation with new renewable generation and couple these intermittent fixed cost resources with renewable generation, such as biofuels and biomass and geothermal. Transmission and distribution improvements will be necessary to integrate the resources. This strategy is expected to have two benefits.

One, reduction in the exposure to the volatility of oil prices. And two, in the long term, a reduction in bills as lower priced nonpetroleum based generation is combined with customer choice programs to off set the cost of infrastructure required to add the renewable generation sources. The agreement was covered extensively in the 8-Ks. I don't discuss all the elements but I would like to highlight some of them.

First, the parties agreed to seek legislative changes to the existing renewable portfolio standard law establishing new RPS goals of 25% by 2020 and 40% by 2030. Unlike most utilities in the nation, Hawaiian Electric has the potential to modify most of the existing generation fleet, which is fueled by liquid petroleum to burn a compatible liquid renewable biofuel. And allows for an increase in renewable regeneration using existing assets and only in current cost to convert with biofuels.

In addition to renewable regeneration commitments, the agreement also includes key changes in regulation to support the renewable generation strategy. Some key regulatory elements include a recommendation by all parties to establish a decoupling mechanism similar to those adopted by the california utilities. The mechanisms which separate utility revenues from sales and removing the inherent disincentive for energy and conservation, as well as customer cited generation. Periodic cost based adjustments could be made.

The agreement also recognizes that the utility must be able to provide new generation resources to back up renewable wind and solar energy and that the utilities infrastructure must be upgraded to facilitate the integration of intermittent renewable resources. And to help recover investments faster, it includes a Clean Energy infrastructure surcharge, similar to the renewable energy infrastructure program surcharge already under consideration by the PUC, under which renewable and investments by the utilities, such as smart meters which enable customer choice options to be recovered more quickly.

Also, includes an option for the utility to seek construction work in progress. In rate based treatment for large Clean Energy projects so the cost recovery period can begin earlier. The majority of the terms can be implemented through the regulatory process. Some of the terms such as the change to the RPS law may require legislation.

We believe they are open to the elements of the agreement. And the agreement will streamline a regulatory process. So these initiatives and the projects and programs they represent can be implemented quickly. Let me ask Connie to return to summarize remarks for our activity.

Confirming the infrastructure additions that Robbie mentioned and customer programs, such as advanced meter and infrastructure or EMI will require new capital investments, which support the Hawaii Clean Energy Initiative.

The slowing local economy could delay some new customer projects providing some offset in the need for capital expenditure. As a result, our current forecast of $1.2 billion in net capital expenditures over the next five years is currently being evaluated.

So, to sum up, our utility operations, earnings are recovering with interim rate release for all three utilities. Most of which was granted in late 2007. O&M expenses were up 5% in the quarter are expected to rise further in the fourth quarter to approximately 6% on a full year basis.

At the same time, the out look for kilowatt hour sales is slowing down and Hawaii's slowing economy is expecting to put further downward pressure on sales. Through the first nine months, sales were down 1.2% and we are expected to end the year slightly below that.

The Hawaii Clean Energy Initiative provides a rare opportunity to jump start regulations. To facilitate a rapid rise in the level of renewable and distributed generation on the systems. Over the next several quarters, we will begin the many regulatory and legislative processes needed to put the terms of the agreement into effect.

Overall, our utilities have an exciting future and opportunity to lead our nation in the integration of renewable sustainable energy.

We believe we are doing what it takes to be well positioned for the long term success of or investors, our customers, and our community. Now, I would like to turn the call over to Tim to discuss the bank.

Thanks, Connie. Good morning, everyone. And thank you for joining us. I am very proud the third-quarter results for the bank.

We were able to observe the impact of the second quarter rebalance sheet restructuring and results are in line with the expectations.

We maintained our net income level on reduced balance sheet allowing us to increase the level ratio and return capital to HEI. This resulted in a significant improvement of ASBs net interest margin percentage and return on assets. We continued to build on the momentum from the wave of services and products we recently introduced into the market.

This quarter we introduced what we believe to be the market-leading interest checking product to allow us to further simplify our product set and consolidate the seven checking accounts into two. As we approach the new year, we are developing plans and adjusting incentives to increase our products per household by soliciting more business from our large base of single product households.

Before we get into the details of the third quarter, here is a snapshot of our results versus the prior and year-over-year quarters. Keep in mind, the second quarter financial results have been adjusted for the impact of the balance sheet restructuring.

It is important to also note, the second quarter benefited from insurance recoveries and securities gains that we do not anticipate. This provided a temporary benefit to second quarter net income. Return on assets and revenue growth and the efficiency ratio. As you can see, we have begun to make process and improving the trends of our net income, return on assets, net interest margin and efficiency ratio. If you were to annualize, the third-quarter net income, our current run rate is $62 million. That includes an annualized $8 million of provision expense.

While credit costs remain the wild card, we are optimistic that we could improve our financial operating performance over the next two years. As you are aware, the banking industry has had a difficult 12 to 18 months.

Industry profitability has been greatly impacted by a sharp increase in credit costs. Fortunately to this point, Hawaii has remained rather immune. This has allowed American Savings to remain focused on our cooperation in recently announced performance improvement project. With the balance sheet restructuring complete and many revenue and expense initiatives under weigh, our third quarter return on assets is now in line with the historical peer level in current high-performing peer level. We have a ways to go.

We recently completed the 2009 budget, which includes a number of opportunities that has been identified to continue our improvement. Now, for the four key drivers. Starting with revenue growth, revenue decreased 4.4 million from the prior quarter to 69 million. Net interest income was generally in line with the expectations down only $280,000 in spite of our $1.1 billion reduction in earning average assets. Non-interest income declined 4.1 million from the prior quarter. As I mentioned previously, second quarter non-interest income included $5.3 million related to insurance recoveries and securities gains. Adjusting for this third-quarter revenue growth would be 1.3% savable versus the second quarter.

We are excited about the success of the recent product rollouts and allowed us to increase the total households as we enter 2009. We are adjusting incentives for the large base of single households. We measure our products per household based on core products, such as checking, savings, CDs, mortgages and consumer loans.

We have slightly over two product per household. The opportunity to increase the number is tremendous. As an example, 35% of the checking and savings customers have only one product with American Savings Bank. That equates to 120,000 individuals. When you look at checking, approximately 65,000 of our customers have two products or less.

Next, our net interest margin improved 72 basis points to 4.80%. As you can see, this stacks up very well. And the net interest margin increased due to a 66% basis point decline in the cost of interest bearing liabilities. And strong non-interest bearing deposit growth and 12 basis point increase on the yield in earning assets.

Lots of moving pieces from the prior quarter and little difficult to describe the third quarters natural movement of the margin. As you would expect, we had large declines and average securities and wholesale borrowings. They were the primary contributor to the improved margin. general.

Additionally, average loans declined modestly as our residential mortgage production tapered off. We expect it to remain at a lower level than our recent history for some time. We are seeing select opportunities but are cautious in the current environment. We also continue to see growth and non-interest bearing deposits in savings which are two of our lowest costs liability categories.

This is largely the result of our new free checking account that is introduced in the second quarter. And declines in the two higher cost categories. CDs and money market offset this growth, leading to a total decline in deposits.

Next, efficiency. We made some improvements. This is clearly the driver that we need to focus on over the next two years. . Our long-term goal is to operate between 55% and 60%. Assuming the revenue stays constant, it will take about $2.5 million reduction in expenses for the efficiency ratio to decline 100 basis points.

That means we need about a 10 to $15 million reduction in expenses from the current run rate to our targeted level. That certainly will not happen overnight but we have already identified a number of initiatives that will lead us in that direction. Lastly, net chargeoffs. Net loan chargeoffs decreased to $262,000 or seven basis points of average loans held for invest ment. Compared to $1.4 million on 13 basis points for the second quarter.

While our net chargeoffs improved and remained low in absolute turns and relative to peers, the impact of Hawaii's slowing economy is beginning to show in many of our key asset quality indicators. Increases in past due, watched, criticized in nonperforming loans increased the likelihood of potential losses.

At September 30, 2008, nonperforming assets increased to $10.5 million or 25 basis points for loans held for investment and foreclosed property. From 8.6 million and 21 basis points to June 30, 2008. The increase in nonperforming assets was primarily attributable to an increase in delinquencies in our residential loan portfolio.

As a result of the trends, the provision for credit losses in the third quarter increased to 2 million compared with 1.2 million for the prior quarter. The allowances for credit loss is increased to 31.6 million or 75 basis points of loans held for investment at the end of the quarter from 30.4 million or 73 basis points at the end of the prior quarter. The allowance coverage of nonperforming loans totaled three times at the ends of the quarter. Compared with three and a half times at the ends of the prior quarter. In summary, we feel there is great potential to improve the profitability of the bank. It is an exciting time to be part of ASB as a shareholder, employee, or customer. In a short term, however, we are very mindful of the slowing economy and its potential impact on the customers. Now, I will turn it back over to Connie for

Thanks, Tim. To sum up, all segments of the company contributed to a strong third quarter. We had been focused on positioning the companies for improved operating and financial performance, which is even more critical in a declining economic environment.

The agreement we signed on the Hawaii Clean Energy Initiative in October will help insure the financial viability of our utility, facilitate the execution of our renewable strategy and give us attractive renewable investment opportunities. Work on critical renewable reliability projects continues and we are focused on recovery of these investments and earning a reasonable return through the regulatory process.

We are in the discovery phase of the Oahu 2009 test year rate case and in accordance with the Hawaii Clean Energy Initiative, we will file 2009 test year rate cases for both HELCO and MICO to reset base rates and decouple sales. In addition, we expect a decision shortly on the Clean Energy Infrastructure surcharge which would provide for accelerated recovery of Clean Energy investments. I am impressed with the progress the bank has made its performance improvement initiatives.

The June balance sheet restructuring is producing desired outcomes, including increasing managers margin and return on assets in line or above peers. Tim and his team continue to work on lowering the efficiency ratio and bringing new products and services to the Hawaii market and see meaningful opportunities on both frontes.

You may have seen the Board declared a quarterly dividend yesterday of $0.31 per share. Payable on December 10 to holders of record on November 17th. As a closing price of $26.90 yesterday, our yield is 4.6% remains attractive and the stock has been performing well this year.

Through yesterday, our total return to shareholders in 2008 was 23%. Now with that, I would like to end this formal portion of the program and we would be happy to take your questions.

Thank you. (OPERATOR INSTRUCTIONS) Your first question comes from the line of Paul Patterson of Glenrock. Please proceed.

How are you.

Hi, Paul.

On the loan lost reserves because you are having less chargeoffs it is decreasing loan loss reserves, I guess, year-over-year. Is that right?

I mean, why aren't they going -- what is the outlook for the loan loss reserves as the economy is weakening and all the others are negative credit indicators that you went over.

Let me ask Tim to answer that.

From a banking standpoint, we don't look year-over-year. Last year was actually related to one credit. In the fourth quarter, we had a sizeable chargeoff of $5 million. That was to prepare for the chargeoff and that is now through the system. Our provisions have increased from second quarter. Our outlook is, I don't want to mislead anyone.

We don't see anything scary but the trends are negatives and past dues are increasing. And our both 30 day and 90 days look at two measures. On the commercial side. There is a risk rating scale, if they are not past due. You are looking at the fundamentals of your customer and you have a risk rating system. Where you will grade them 1-10. We certainly are seeing a credit migration to lower ratings. Nothing scary, but the movement is downward. Under the ALLL methodology, you have factors that you provide for increased levels of chargeoffs. If you take this quarter. 2 million times four. That's a $8 million run rate. If you take the second quarter. It was at 14 or 12. So maybe it was a 4 or $5 million run rate. So certainly the annualized run rate increasing.

The reason I mentioned last year. That was a better environment. And I guess what you are saying. Is because of preparing for the 5 million, that $5 million number, that's what is skewing it. Is that why?

That was an isolated credit where as the provision from the second quarter to this one is granular credit. It is really across the scale. We are seeing group migration. Again, if everything in their life is relative. We are a threat, so we have low numbers. We are fairly conservation. Our charge offs will go up. And I will not mislead you. If you look at our 30 day past due. And 90 day past due. Our percentage would be way near the bottom of the national average. Because of the profile of the balance sheet.

In terms of us. In terms of us thinking about these loan loss provisions, we should expect them to increase. Any idea about how much we should expect them to increase?

No. That's hard to estimate. You really don't know. We are on top of the customers and actively working with them. Things change so fast, as you know out in the capital markets. They could change quarter to quarter. We have a good outlook a quarter or two out, but it is hard to determine. I think we certainly anticipating that they will be at this level or slightly higher at this point for some time.

The second thing, the deposit interest cost that you guys have, have you guys, you mentioned there is some falloff in CDs and money markets. Why is that. Is that because of competition. Is that because, you lowered the rate, the rates you are paying on the deposits.

What happens in banking today. I guess. Ten years ago or so. You used to always see one year, three year, five year CD rates. You don't see a lot of people going out with that much term. So typically CDs on average, the bulk of them are 12 months or less. The fed really started lowering rates. I think third or fourth quarter last year and I think fed funds is at one now. So what has happened is interest rates have come down so much that nationally most of the CDs that are maturing, that money is not choosing to go back into CDs. Typically, they will park money when rates are this low in savings or checking account and that is probably where we are seeing some of the migration. Some of our growth in non-interest bearing is probably coming from our CDs.

And some are shopping for rates. We always try and price our CDs. At least at the median to our market. If not higher. We don't want to be the highest. We don't want to be the lowest, so we try to stay competitive.

Is the going from the CD's and money market into the free checking. Or other things.

It is hard to track deposit flows but a good percentage is going into free checking.

Okay.

Out of the money market. That is interesting. And then with respect to the outlook for the rate cases, you mentioned HELCO and MICO. When do you expect to file those. I guess. And I just wanted to follow up on the Clean Energy Initiative.

Paul, it is fairly new agreement under Clean Energy to be looking at filing the HELCO and MICO 2009 rate cases and we are evaluating the timing right now. Most likely if we file it, given the filing schedule. We will not be looking at relief probably until late in 2009. More likely 2010.

Okay. When we are looking at the Clean Energy Initiative. You should showed a chart in which customer bills were suppose to go down. Just a few quick questions here. On biofuel costs, compared to the price of a barrel of oil on a BT comparable basis. What are we talking about? Could you give the comparison of that?

And just in general, what is the cost when you throw in the cost of alternative energy, vis-a-vis, what your traditional cost is. Burning fuel and oil.

Okay. Let me ask Robbie to answer that, because that is one we had to study as we did the Clean Energy Initiative. .

There are two parts to it. The first part is what are biofuel costs. We are probably talking about two different sets. One is biodiesel, where our neighbor island systems are heavily diesel in the orientation. And the diesel costs has been ahead of -- biodiesel has been ahead of diesel. The Oahu units you are looking at less refined oil and those are few oil expense. It is hear to predict the market. It is a developing market.

And we don't have any particular reason to be you know, worried that either biofuels are not available or we won't be able to get them at a decent cost. Particularly , the less refined oils. If you look at the chart, what is is really based on is the notion that the intermittent local sources of power. Primarily wind, can be bought at long term fixed price contracts. And reflecting capital costs of installing the wind farm without any fuel costs. So, when you are hedging, fluctuating oil prices with. Is an increasing amount of renewable energy purchased at long-term fixed priced contract detached by Hawaii law from any reference to the avoided cost of oil. So, it is a form of hedging. And unlike most states in the country, our renewable energy prices come in below fuel oil and certainly as of recently. And so, we are in a different environment than many other places where the reference fuel is coal or hydro. Ours is petroleum. And some have had significant prices. And play the renewable

What price of oil is the break even part of the renewable contracts. Versus fuel. What price per barrel. Right.

At $140 or I think it was $133 a barrel. That's one thing. What would it be. And where is it not competitive?

We haven't figured out the precise number. And what we are looking at is the long term trend on oil costs based on the Department of Energy numbers and own assessments of it. Up against fixed term, and fixed long term wind contracts that were in the process of negotiating right now and comparing those two numbers to look overall at what it looks like going out 10 and 20 years. So, you know. Both numbers are changing. And wind costs have gone up. As turbine availability is down. And we are in a hot wind market. So, our wind numbers are changing. So, we don't have a specific number where that is. If you look at long term fuels projections by anybody. Even the more conservative numbers that we won't have any trouble justifying the notion of using these long term fixed priced contracts as a head.

Paul, I would add, when you think of the biofuel side of it, the benefit for us is a diversification so that we aren't totally petroleum based. And we have the opportunity to look at what happened in the market or the vegetable oil market. The two are not moving together. As Robbie said, the biodiesel prices have been higher than the diesel prices. And the reverse has been true on crude palm oil. The second part of the biofuels for us is, as you know I mentioned that one of the under pinings of Clean Energy Initiative was to develop indigenous resources in Hawaii. Whether it be the sun or wind or waves. But the other one, as you know, we were originally an agrarian society and we have agricultural industry that has struggled. In sugar and pineapple. And one of the other potentials for our state is to rejuvenate the agricultural industry and to begin producing oil props. And where we are testing out the use of basically, the first crush of the oil props.

That could be very beneficial for both our agricultural industry and the energy industry where we can grow those sources locally, not have to refine them tremendously. And use that in our steam plants. The final thing I would add. The question on renewables. The whole point of the Clean Energy Initiative to really give us a whole portfolio of potential renewables. Frankly, we are going to have to track what happens with the cost of wave technology. And wind technology.

And solar and gives us the opportunity to build a diversified portfolio and we will have to be looking at the cost of each of those projects as they come to fruition. Frankly, right now, one thing effecting the cost of renewables is what is happening in the capital markets and the availability of project financing for a lot of the projects. It is a situation that we have to evaluate on a continuing basis.

Paul, this is Tayne. In addition to what Connie and Robbie talked about. Fossil fuels will be getting more expensive once you look at carbon taxes and other penalties that are enacted as part of federal or state greenhouse gas legislation. That is a consideration to us as we plan all of this.

Thanks a lot guys.

Your next question comes from the line of James Bellessa. From DA Davidson and Company.

Good morning, the green initiative in your state. What legislative changes are required?

Jim, at the moment, the only legislative changes will be in the RPS changes as Robbie indicated. Most of the initiative, we believe, can be implemented on the regulatory side.

When is the proposed RPS and would you review that again.

It would be 40% in 2030 and there was also an increase in the 2020 number. To 25% from 20%.. And that will be based on peer renewables. Not counting energy efficiency.

What are the regulatory changes that you think is required to accomplish this?

Well, basically, a lot of the agreement, as Robbie sketched it out, will require regulatory changes. Of course, decoupling mechanisms and the recoupling through cost adjustment mechanism will require decisions by the public utilities commission.

And the Clean Energy infrastructure surcharge that would give us accelerated recovery for Clean Energy type investments would require PC approval. So much of what you see there, really has to go through the commission to the extent that we have any major capital projects that go forward and under today's regulation, we are required to file for approval of those projects. With the commission. And we will still be doing that.

What is the time line that you expect on the regulatory changes?

The -- much of it is moving forward already. And as Robbie indicated in the Clean Energy Infrastructure surcharge, there is a pending document now.

And that is very similar to this surcharge mechanism and so we will be incorporating the concepts of the Clean Energy infrastructure surcharge in that existing docket and a lot of the decoupling and recoupling, we are looking at presently filed 2009 rate case for Oahu as setting the base for Oahu.

And as I indicated we would be filing rate cases for the other two facilities on 2009 tests as well to decouple and recouple them.

So, a lot of the regulatory mechanism we are -- one of the tenants of the Clean Energy Initiative was to do that on an accelerated basis and we are working closely with the commission and the consumer advocate to incorporate as much as we can in existing dockets.

So, I would say the next, you know, 12 to 18 month will be a busy time for us. Let me just ask. And Robbie does this on a daily basis. If you want to add anything on it, Robbie.

You covered major ones. The commission has ordered us to come up with straw decoupling mechanisms to facilitate forward movement on that. And filing the advanced meter infrastructure. Filing by year end. The energy cost adjustment cause issues can be handled within the current rate cases.

And some of the issues, and suspension of docket and others and parties to the commission which will give them a basis to act. You know, so I think the agreement is designed to have all of the major elements before the Public Utilities Commission and in their hands to adopt by the end of '08 or the first six months of '09. So regulatory action. Could be accommodated in '09.

You said that the five year CapEx plan is being re-evaluated. I didn't catch why.

The reason for that is, under Clean Energy now, we will move ahead with the advanced metering infrastructure. And we will be incorporating that into the capital budgets going forward and preparing for a transition to a smart grid.

And the other major reason frankly, is because of the financial crisis. Where we really have to look at the capital projects that we had in there to support customer installations and customer developments as to whether those customer developments will be going forward.

I think as you know, many companies are re-evaluating the company expenditure programs and really looking to see what the right timing is for the programs and adjust the portion of the capital budget that is set aside for customer installations.

I understand that it is under evaluation but do you think the CapEx budget is going down or up, just directionally.

You know, we have had a lot of discussion about that. And you know, I think in the very, very near term, there is probably not a major difference in the CapEx. But for the longer term, there could be some significant changes.

And you have three segments. The other segment. Can you give us any out look there. Do you see the earnings drag subsiding over time or is this the level that it is going to be at for some time.

Well, before we go on to that question. I think Tayne wanted to add something.

I wanted to add something related to Clean Energy and CapEx.

We are currently engaged in planning an implementation study as part of the agreement. Because there are some technical requirement that we will need to look at. That is why our CapEx is so under development right now.

Thank you. And the outlook for the other segment?

I don't know if I can give you too much of an outlook there. And what is in the other segment is primarily personnel costs. At the holding company and then the debt that is at the holding company level. Most of which is as I said earlier. Longer term fixed rate and major maturities that we have there are not until 2011.

Thank you.

Your next question comes from the line of Jonathan Arnold for Hawaiian Electric.

Good afternoon. Jonathan Arnold of Merrill Lynch. My question is I noticed you filed a a self registration today.

And which brings on the question of why are you filing that at this point and what are your plans for issuance on the capital markets in the next year or so?

Yes, and that really kind of relates back to Jim's questions, Jim Bellessa's question. We frankly have been evaluating the funding requirements for the company given all the recent changes in capital markets over the last six weeks.

And so that has to be put together also, with the capital expenditure side that we just talked about. And you know, we frankly are evaluating that situation. As you know and I mentioned the stock is performing very well. And you know, we are looking at the prudency of whether it makes sense for us to look at some longer term financing.

I think as you noted, Jonathan in that section, where we talked about filing a new (inaudible) which replaces the new shelf which would expire at the end of this month. And we also made note of the fact that the utility is looking at its revenue bond financing. And the timing of that. So, you know, we are evaluating all of the financing plans for the company right now.

Given your come minutes about the stock. Are you suggesting you might be looking at equity as one of the possible options.

I think that is a possibility. And we have a major capital expenditure program that is still under way and as I have noted the HOI Clean Energy Initiative gives us the opportunity to make renewable investments and recover them and earn on them in rates and so, those opportunities are one that longer term that go beyond the current crisis in the financial markets. And if we can have the ability to make those investments, we are going to want to do that. That's a good thing for our shareholders.

Is it fair to say. If you did issue equity it would be in conjunction with growth that are not currently in the base plan?

I would say. It would be bold. It could be what is already in the base plan. But also, additions into that base plan. It assumes all. And because, you know, in the base plan, we do have investment opportunities already.

Okay.

As you know, we are building out CT1 on Oahu and ST7 on the big island and east Oahu transmission project right behind both of those and there are already significant investment opportunities in the current CapEx.

Thank you.

I don't know. Kurt, if you would like to add anything or Suzy?

I think you covered it well. It is dependent on the need of the utilities for equity.

Monitoring market conditions.

Your next question comes from the line of [Asher Kaun] of SAC Capital. Please proceed.

Good day. Just commenting on that, Connie. In the queue, you clearly say that you are contemplating an equity issuance. Can you, is there, the shelf is that effective right now. If you want to come in market tomorrow. The day after, can you come in?

Yes. The shelf would be effective because it is an (inaudible) shelf. .

The wording in the queue seems to indicate a more eminent equity offering. Or am I reading some old language which is there. Or is it just the way it is phrased.

No, I think, it is. As Suzy mentioned, we are monitoring market conditions. Frankly, since about six weeks ago, you know, we have been watching the markets carefully because we are in a real incredibly unprecedented time when you have trillion dollar commercial paper markets freezing up and having to fund short term debt just on an overnight basis. You know, we are taking all of that market risk and uncertainty in the financial markets into consideration, as we look at what is best for our company and shareholders over the long term.

Then, if I can go over what you just said. If I understand. We have for the 4th quarter, you said sales would be down which would hurt utility net welcome and we have a portion of the interim hike. For MECO and then you say sales will be down and you get a hike in the middle of the year and if I am right, the decoupling mechanisms are not going to be there until 2010.

So, are we going to see, utility earnings going down and then starting to pick up in the second half of the year. And then to get with the decoupling mechanism coming up in 2010 and just becomes a rate base or the Clean Energy Initiative growth increments going forward.

Yes, I think that all that you cited, is you know, what we had said. And with one exception that on the decoupling mechanism. My comment about 2010 really related to Maui and the Big Island and it is possible that we would see decoupling for Oahu in the 2009 interim that has already - The rate case that has been filed for Oahu.

Could you give us a ball point. What is a 1% decline in sales impact to earnings per share?

I think if I can ask Tayne. If you give that.

Maybe I can answer it in terms for the earnings for the quarter. And also, year-to-date. To give you a feel for where we stand. For year-to-date, our sale are down to September 1.2%.

Okay.

And that has had an impact to earnings of about $4 million.

That's after tax earnings?

That's correct. And I am comparing 2008 year-to-date sales compared to 2007 year-to-date September sales.

Okay.

1.2% down.

That is for the nine months you mentioned, right.

That is correct.

Thank you very much.

This is Curt Harada. I wanted to add to Connie's comment on the omnibus. We are evaluating on a daily basis. And it really is contingent on market conditions. I guess the answer to your question is, we look at it daily and could occur at any time.

And a lot of that relates to a judgement call about the liquidity of the markets frankly. We have the capital expenditure program to finance currently plan to be financed with longer term financing.

Your next question comes from the line of James Heckler from Levin Capital Strategies.

It is Neal Stein at Levin Capital. I think I got the question answered. It sounds like this could happen potentially this year. You know, it is not like you are going to take a few months to make the decision. It could happen I guess at any time.

That is correct.

Yes, it could happen at any time. But the shelf is good for a period of time.

Then, I know at the bank. There is, you know, all banks have the ability to access the tarp facility set up by the federal government. Is that something you would consider.

It is something that we are evaluating. At first, if you look at American, it doesnt need additional capital and in fact, as we reported earlier. American just returned excess capital to the holding company. But, the tarp legislation and the implementing regulations are still being fleshed out and it is something we are monitoring.

Okay. Thanks very much and congratulations on your strong stock performance.

Next question comes from the line of Steve Gambuzza, please proceed.

Good morning.

Good morning.

In terms of the actual need, in terms of the balance sheet, looks like you were at 47% equity at the consolidated level at the ends of the quarter; is that right?

That's correct.

And how should we think, what Holco equity ratio are you targeting. I know there is some off-balance sheet adjustments applied debt from PPAs and other things. How much implied debt is there and what is the target there at Holco.

Again, that's currently under evaluation given the current conditions of the capital markets. We believe that additional equity may be prudent. And if the markets don't return to normal. We really are evaluating it. Based on the capital markets.

Is it given by you know, your equity ratio over time has been pretty consistent. Has there been some change in terms of what they rated for you or run at?

No. Definitely not. The thing that is, and as you can tell, we are hedging a lot on this. And it is primarily because the underlying conditions for the company have not changed. But what has changed significantly for everyone is the capital markets. And just judgement calls about the liquidity of the capital markets.

Your equity ratio has been 48%. Plus or minus 1% for the last four or five years.

Maybe I can answer it this way, Steve. Maybe, had the events of the last six weeks not occurred, we probably would not be having this conversation.

That's helpful, thanks very much.

Your next question comes from the line of Craig Wise of Nirvana Capital.

I wanted to follow up on Paul's question about the losses from the bank. And take a different angle on it. One of the peer Hawaiian banks reported their earnings last week, their non-performing assets are half of yours. but they raised their loans and loss reserves again to more than double yours. Tim, you were calling credit the wild card for the bank and if it goes against you, and you had to raise it the same as the peer. That would be $40 million out the bottom line. What would happen to the capital ratios at the bank and could you be in a situation where you have to return capital back down at the bank?

Tim, you want to address the first part?

Sure. I think you are referencing Bank of Hawaii and they are a great operator. Their chargeoffs are significantly higher than ours. They are close to 40 basis points. Provision is an indication for future losses. So their loss is. I don't follow their portfolio but their loss is running higher than ours. Part of that is not because of anything of bad credit. We have different balance sheet. We are largely, residential mortgages that have lower credit losses and so you would seem to have a lower reserve percentage. And if you look at the reserve percentage. It is like a commercial bank. And in the 130 range, that's what I am used to. Here, it is 75, 80 basis points. It is hard to look because we are both in Hawaii and in provisions. But I would imagine. That on their, they have a larger commercial portfolio. And I am not sure what is driving the increased reserve for them.

Yes, just, I just add, if you follow us for awhile. You would have seen where we have charted the, or the reserve percentage against banks and thrift.

We began increasing the reserve ratio from a thrift level closer to a commercial bank level. As Tim points out, the primary difference between us and the other institutions, in Hawaii that are reporting is the -- the composition of the balance sheet.

Other thing would be on the consumer side of the balance sheet. I don't follow the balance sheets at first Hawaiian or Bank or Bank of Hawaii. It is my understanding that they have more traditional consumer loans. They may have more auto loans. They may have more credit cards. We are largely residential first mortgages. Certainly, the delinquencies of auto loans have risen. I am not sure of their situation.

Okay. You feel better because you have more residential mortgages than them?

Without a doubt. I think our loss and there are tradeoffs. If you look at their loan yield, I bet it is higher than ours. It is hard to compare bank to bank. They earn more. They run with higher charge offs. And we earn less. We run with lower charge offs. It is hard to argue which model is best. They have a very high return of assets and very well run organization. So, just different models.

You started to see housing prices starting to turn negative in Oahu.

Yes, that's correct.

Thank you very much.

We are down from the 650,000 generally to -- just under 600 now.

Should the bank ever need capital. I am never going to say never. Look at the mainland and those banks. It is unprecedented time. They are in need of capital. We don't see that on horizon. Could it get that bad in Hawaii? Of course.

I relate that back to the question on tarp. And that question, at this point in time from a holding company perspective. The holding company has always supported the bank. And it has always supported the capital rate and the capital ratio and in fact, we have the capital agreement with the regulators for the bank.

And right now what we would do, is look closely at tarp should the bank need capital.

Hey, Craig, this is Suzy Hollinger. I just wanted to let you know that the October numbers have come out for Oahu sales and median sale prices have come up to $625,000.

Okay. Thank you very much.

Your next question is a follow up from the line of Paul Patterson.

Hey, Paul, before you ask your question. Let me comment on the median prices. I think we made this comment to you all previously, which is not as much the Oahu numbers but the neighbor island numbers. Can swing pretty significantly just on a month to month basis because of the mix of the projects and the kinds of resales that are going through the numbers. Since we don't, we don't have a hugely deep market in Hawaii.

But, I would say overall, you know, we are seeing the housing prices on the main island of Oahu and I think about two-thirds of the bank loans are on the island of Oahu and the residential prices have been holding fairly well and you are seeing some decreases in prices. There are just not as many buyers in the market now.

Okay. Hello?

Yes. Sorry. Go ahead, Paul.

Well, just to follow up on here is the equity question. Realistic, within the parameters of what you are looking at. What is the total equity you could be issuing. Would it be the entire shelf?

It is unlikely to be the entire shelf.

There is no stated amount with the shelf, Paul. Sorry this is Suzy.

Because, I mean the -- Suzy. Excuse me.

It is a wixy shelf.

I got it. And what kind of numbers are we thinking about here when you mention the equity potential. Equity issuance?

Paul, this is Suzy again. That would depend on market conditions.

Okay. Is there anything that we should be looking at? I mean, is there any financing coming up that you believe that the equity would be likely to be use for? Or, I am just trying to get some sort of sense here - it has been put out there and wondering if there are any parameters in terms of the potential level of equity that might be issued.

Paul, I guess another way to think about it and go back to what, the answer that I gave before. That if the last six weeks hadn't happened, we wouldn't be having this conversation. So, if you think about it from that perspective, if we were to, issue equity, it would really be to keep a similar kind of balance going forward. To you know, maintain sort of the general credit quality of the company.

You would be looking at, one of the things that I can tell you is that we are not -- we have a current filed rate case for the utility that has a capital structure, some what similar to what we have previously used. I think, you know, of the relative balance, between debt and both common and preferred equity. We are not anticipating any major changes from that perspective on a long term basis.

Is preferred equity or stock something you are also thinking about?

We currently had that in the capital structure. But as I say, we are reevaluating all the financing plans to and to look at what is the optimal financing for the company.

cause as you know, all the relationships, the traditional relationships between debt, equity, hybrid. Preferreds. Even the difference between taxable debt tax exempt debt. All of those relationships have been changing in the last few weeks.

Right. Okay. Well, I will stay tuned. I appreciate it.

This conclude the Q&A portion of the conference. I would like to turn the call back over to management for closing remarks.

Hi, everyone, this is Suzy. Thanks for being on the call and for your questions today. If you have further questions please contact me at 808-543-7385. Thanks and aloha.

Thank you for your participation in today's conference. This concludes the presentation. Good day.