Hawaiian Electric Industries Inc (HE) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2009 Hawaiian Electric industries Inc. earnings conference call. My name is Kianna and I will be your operator for today.

At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session towards the end of the conference. (Operator Instructions)

I would now like to turn the call over to your host for today Ms. Shelee Kimura, Manager of Investor Relations and Strategic Planning. You may proceed.

Thank you, Kianna, and welcome everyone to Hawaiian Electric Industries 2009 year-end earnings release conference call. I am Shelee Kimura and joining me today are Connie Lau, HEI President and Chief Executive Officer; Jim Ajello, HEI Senior Financial Vice President, Treasure, and Chief Financial Officer; or Dick Rosenblum Hawaiian Electric Company President and Chief Executive Officer; and Tim Schools, American Savings Bank President, as well as other members of senior management.

Connie will begin with an overview of 2009 and our strategic accomplishments. Then Jim will take you through an update of the Hawaii economy and financial highlights. Connie will close with key investment points before opening it up for Q&A.

In today's presentation management will be using non-GAAP financial measures to describe the Bank's operating performance. Our press release and the slides accompanying this webcast, which are posted on our investor relations website, contain additional disclosures regarding these non-GAAP measures including reconciliations of these measures to the equivalent GAAP measure.

Forward-looking statements will also be made on today's call. Please reference the accompanying disclosure to the webcast slides located on our website at HEI.com.

Lastly, you will notice that yesterday's press release referenced GAAP earnings as well as earnings excluding losses from specific strategic transactions that management elected to execute at the bank for long-term performance benefits.

As shown here GAAP earnings were $83 million or $0.91 per share in 2009 and $90.3 million or $1.07 per share in 2008. In 2009, excluding the $19.3 million or $0.21 per share after-tax loss related to the previously disclosed liquidation of the private issue mortgage-related securities, adjusted earnings were $102.3 million or $1.12 per share.

In 2008, excluding the after-tax impact of the Bank's previously disclosed balance sheet restructuring charge of $35.6 million, net income was $125.9 million or $1.49 per share.

Management believes that these are significant transactions which we do not expect to recur in the future. As a result throughout this call we will discuss earnings excluding the impact of these transactions at the Bank.

I will now turn the call over to Connie Lau.

Thank you, Shelee. Aloha and welcome to everyone on our call. As you can see from the information we released yesterday, we had a good quarter and a solid year considering the unprecedented economic challenges we faced at all (technical difficulty) and lower and later than expected rate relief as the utility.

Fourth-quarter earnings were $0.36 per share compared to $0.16 per share in the fourth quarter of 2008. Full-year earnings were $1.12 per year compared to $1.49 per share in 2008.

Given the headwinds we faced, we are pleased that we were able to preserve 2009 earnings through aggressive cost control and efficiency efforts across all companies. At the same time we were able to continue to move forward on our key strategic initiatives positioning us for improved performance in the future.

At the outset of 2009 we anticipated a challenging year. We expected tough economic conditions and aggressive customer conservation efforts to reduce kilowatt hour sales at the utility and we expected credit expenses to be elevated at the Bank. We also expected that O&M would be higher for the year and that utility earnings would be lower in the first half of the year as we awaited rate relief in the second half.

At the utility we ended the year with kilowatt hour sales down 2.5% compared to last year, and while we received much needed rate relief lower and later than expected (technical difficulty) responded promptly by (technical difficulty) and deferring spending to offset lower revenues.

At the Bank we were impacted by the economic recession that dipped deeper than most anticipated. We experienced higher (technical difficulty) loan losses and other than temporary impairment, or OTTI, charges on our securities. Fortunately, ongoing progress on the Bank's performance improvement project provided additional cost savings to partially offset the negative impacts of the credit cycle and we strengthened our capital ratios over the course of the year.

In addition, in the fourth quarter when we saw a market opportunity we made the strategic decision referenced earlier to liquidate the Bank's private issue mortgage-related security eliminating the risk of future OTTI charges from those securities.

Despite the many challenges in 2009, we stayed focused on executing our longer-term strategies to improve the fundamental operating and financial performance of our operating company. We remain confident these are still the best strategies, both for the near term and for the longer-term health of the Company.

Before Jim goes through the economic update and financial results I would like to share some of the highlights of our strategic progress throughout the year.

At the utility the Hawaii Clean Energy Initiative remained foundational to a fundamental change in our business model. The new model will provide us a better opportunity to earn appropriate returns on needed investments to strengthen our flexibility to accept high levels of renewable resources helping to reduce our state's dependence on imported oil.

In 2009 we moved forward on many fronts toward achieving one of the most aggressive clean energy goals in the nation. Many of the first steps require regulatory approval and we have received commission decisions on several components with others awaiting a decision.

First, the commission approved the guidelines for new feed-in tariffs which will provide standardized prices for various types of renewable energy sources, a critical component to building the renewable market in Hawaii.

Near the end of 2009 we deposited commission decision on a renewable energy infrastructure surcharge. You may have heard us refer to this as the clean energy infrastructure surcharge. This approval supports more timely cost recovery for renewable-related projects and facilitates getting more renewable energy projects online faster to help us meet our (technical difficulty) goals.

With this surcharge framework in place we can file requests [on a] project-by-project [basis] to include renewable projects [using] this mechanism.

The Interisland Wind, or Big Wind, project is a significant contributor to our state's future renewable energy resources. It is a collaborative effort with the independent power producers who are planning wind projects on the islands Lanai and Molokai. The state of Hawaii is responsible for the undersea cables to transmit the wind power to Oahu and our utility is responsible for the related transmission and infrastructure to integrate those levels of wind power on Oahu.

Implementation studies are proceeding as planned and in a recent decision the PUC allowed for deferred treatment of Interisland Wind study costs. As a result we reclassified $2.4 million of 2009 expenses to a deferred regulatory asset. Once the studies are done this will [probably] be one of the first projects that will seek PUC approval to recover through the renewable energy infrastructure surcharge.

Next is our decoupling docket. Briefly, in October of 2009 our utility and the state consumer advocate completed all requirements for their joint proposal to the PUC. The docket is now complete and we are awaiting a decision.

While we had anticipated getting a decision sooner on these mechanisms, these are major de novo decisions in our commission and we are hopeful that the commission will complete its review and support the joint proposal [with a decision] soon.

We have also been very busy with rate cases. As you know, we received approval to implement a partial interim rate increase in our Oahu 2009 rate case in August 2009 and are seeking additional rate relief for our new combustion turbine CT-1 through a second interim decision.

In the second half of 2009 we also filed 2010 rate cases for our other two utilities serving the tri-island county of Maui and the county of Hawaii. All of these rates cases are intended to set the base for sales decoupling as well as the associated revenue adjustment mechanism for both O&M and capital. Jim can walk you through the details of decoupling and the rate cases in a few minutes.

At the Bank we remain focused on the performance improvement project that we announced in 2008. This project is aimed at improving the Bank's net income and profitability over a multi-year period concluding at the end of 2010 with the full results anticipated in 2011. The first significant improvements were achieved as a result of the balance sheet restructuring in 2008 and we continue to build on those achievements through our focus on operating efficiencies and revenue growth.

I will put our progress into perspective for you. The original targets we shared with you in the earlier stages of our performance improvement project are shown on this slide. As you can see, as of the fourth quarter and on the adjusted annualized basis we use to track the Bank's quarterly progress, we exceeded our expectations by meeting or beating our targets in just a little over a year.

In addition, you can see that we produced significantly improved results over the first quarter of 2008, the last quarter before the balance sheet restructuring.

Our success in this project is the culmination of many initiatives. It is not only the balance sheet restructuring but our ongoing priority focus on operational efficiency for which you can see the specific benefits to non-interest expense on this slide. In addition, we are building our core franchise value with market-leading products resulting in double-digit account and core deposit growth benefiting our net interest margin and fee income. At the same time we were able to reduce our interest rate risk and improved our capital levels.

Last, but not least, we are very proud to be named one of the best places to work in Hawaii in an annual survey published in Hawaii Business magazine.

Our achievements and executing each of the components of our performance improvement project are allowing us to build more earnings through our core banking operations on a 28% smaller asset base and using less capital than we had two years ago. Pretax pre-provision income is a measure we focus on to help us gauge our progress on this front, removing the effects of the credit (technical difficulty).

Over a two-year period we have driven our adjusted pretax pre-provision income from $92 million in the first quarter of 2008 to $120 million in the fourth quarter of 2009, a $28 million increase in the potential earnings power of the Bank. In the short term this improvement has been offset by (technical difficulty) credit provisions and the cost associated with the performance improvement project. Once the project is complete and the economic environment improves we expect the Bank's earnings to benefit.

And now let me break here and ask Jim to update you on the Hawaii economy financial results.

Thanks, Connie. First, the economic backdrop. Hawaii saw continuing contraction in 2009 with weakness in one of our largest industries and one of our largest facility customer segments, tourism.

You can see from this slide that we have experienced a significant decline in tourism since it peaked in 2007. However, arrivals appear to have stabilized near the 2002/2003 level with an increase of 1.7% in the second half of the year over 2008.

Hawaii unemployment is low at 6.9% in December 2009 compared with the national average of 10%. This statistic is for Hawaii as a whole. Oahu is relatively stronger which stands at 5.9% than the neighbor islands.

For all of 2009 the median home sales price declined 8% and volume declined 6%. January 2010 Oahu home sales were just released and are very encouraging. Oahu home sales volumes increased by 33% and the median price rose 11% to $597,000 compared to January 2009.

This slide shows local economists' expectations for key economic indicators. The gradual recovery expected to begin in 2010 would predict the impacts of Hawaii's weak economic conditions on electric sales and bank credit-related provisions to persist but modestly improve over the course of the year.

Turning to our financial results, HEI earned $102.3 million or $1.12 per share in 2009 compared to $125.9 million or $1.49 per share in 2008. Both operating company's earnings were down for the year reflecting the impacts of the economic crisis and lower and later than expected rate relief at the utility.

Although earnings were down for the year, earnings were up in the fourth quarter. In 2009 HEI earned $33 million or $0.36 per share compared to $13.9 million or $0.16 per share for the fourth quarter of 2008. Both operating company's earnings reflected growth over 2008.

At the utility, net income was $23.3 million for the quarter compared to $14 million in the fourth quarter of 2008. The primary driver for the increase was $9 million of incremental interim rate relief. Kilowatt hour sales were 1.1% above the same quarter last year, primarily due to soft sales in the fourth quarter of 2008. Lower fuel prices and warmer weather of this year partially offset by energy conservation.

As a result of our aggressive cost containment and deferral efforts, we were able to hold O&M essentially flat for the quarter excluding the effects of DSM expenses which are recovered in a surcharge.

For the full-year 2009 the utility earned $79.4 million compared to $92 million in 2008. Primary drivers for the decline were $13 million in higher O&M and $13 million lower sales partially offset by $14 million or five months of interim rate relief for Oahu.

Kilowatt hour sales for the year were 2.5% below the prior year. Absent the impact of weather, 2009 sales would have been about 1% below 2008.

With continuing weakness in Hawaii's economy, rising fuel prices, and positive efforts by Hawaii residents to conserve we expect weather-normalized kilowatt hours sales to decline about the 0.9% in 2010. Last quarter we expected 2009 O&M expenses to be approximately 6% higher than 2008 including DSM. However, management was able to achieve greater cost containment in the quarter than we anticipated. As a result, O&M expenses for the year were only 3% higher than 2008 including DSM or 7% and excluding DSM.

In 2010 we expect O&M expense to increase by 11% including DSM or 16% excluding DSM. This level of inquiries increase reflects multiple factors -- the short-term nature of some of 2009's cost reductions, some 2009 costs deferred into 2010, increased levels of work to address our aging infrastructure, higher retirement benefit costs, and a full-year of [CT] (technical difficulty) costs.

On the regulatory front I will now update you on decoupling starting with a recap of the three main components of the Company and consumer advocates joint proposal. First is the revenue balancing account which is the mechanism to delink revenues from electricity usage and allow for a periodic true-up of sales revenues.

In other words, under this proposed mechanism reported sales revenues would not be impacted by changes in kilowatt hour sales. This helps the utilities to support energy efficiency, conservation, and renewable distributed generation.

Second is the revenue adjustment mechanism, or RAM, for expenses which is the annual adjustment in rates to account for indexed changes in costs. Last is the revenue adjustment mechanism for capital additions, which adjust our rates in a more timely fashion to account for approved additions during the year.

Due to the importance of our rate cases to the implementation of decoupling as proposed, let me first give you an overview of the timing of the rate cases we have in process and planned before I go into each one.

As you know, we received an interim decision on our 2009 Oahu rate case and we have requested a second interim decision for CT-1. We filed Maui and Hawaii Island 2010 rate cases in 2009 and we expect interim decisions on those in the latter part of this year.

Lastly, consistent with our agreement with the consumer advocate in the decoupling docket we anticipate filing a 2011 Oahu rate case in the second half of this year with an interim decision in 2011. This case is required under decoupling to reset base revenues up or down.

On the 2009 Oahu rate case the partial interim rate increase of $61.1 million that became effective in August 2009 did not include several significant items included in a stipulation with the major parties. These items were instead considered in the evidentiary hearings that concluded in November of 2009. The primary deferred item was roughly $13 million of revenue requirement for our new Oahu generating unit, CT-1.

In December 2009 after initial operation of CT-1 on biofuels we requested a second interim decision to include CT-1 in rates. There is no statutory schedule for this request.

Continuing with our rate cases, Maui Electric filed a 2010 rate case on September 30 requesting an overall revenue increase of 9.7% or $28.2 million. The request is based on a 10.75% return on common equity and an 8.75% return on rate case. This case is intended to set the base for sales decoupling for Maui County.

Without a decoupling mechanism our requested return on common equity is 25 basis points higher at 11%. The statutory deadline for interim PUC decision is August 2010.

Hawaii Electric Light Company also filed a 2010 test year rate case on December 9 requesting an overall revenue increase of 6% or $20.9 million. This request is based on a 10.75% return on common equity and an 8.73% return on rate base. Like the Maui rate case, this case is also intended to set the base for sales decoupling for Hawaii Island. Without a decoupling mechanism our requested return on common equity is 25 basis points higher at 11%. The statutory deadline for interim PUC decision is November of 2010.

Total gross capital expenditures remain at historically high levels with $1.6 billion planned for the next five years providing attractive opportunities for growth in rate base. Clean energy related expenditures are included in this forecast and may span over the categories shown here. In addition, this forecast does not include the cost of the Oahu infrastructure in support of the Interisland Wind as the state begins to develop plans for the undersea cable.

Now I will sum up the key earnings drivers for 2010 for the utility. The regulatory outcomes and their timing will drive our financial results in 2010 and beyond. Getting requested decisions on our rate cases is important, not only because of the rate relief itself, but because they provide the basis for sales decoupling.

A secondary driver is sales levels pending approval and full implementation of decoupling as we are forecasting an additional 0.9% decline. O&M is expected to be up 11% in 2010 including DSM or 16% excluding DSM. The revenue adjustment mechanism proposed in the decoupling docket, if approved, would provide a partial offset for the O&M increases in 2010.

Turning to the Bank. Fourth-quarter 2009 earnings were $14.9 million versus $5.9 million in 2008. Primary driver for the increase was $5 million of OTTI charges in the fourth quarter of 2008 which we did not have in the fourth quarter of 2009 due to the liquidation of the private issue mortgage-related securities portfolio.

2009 earnings were $41.1 million, approximately $12 million lower than last year. The major drivers were $13 million higher provision for loan losses, $3 million lower net interest income, and $5 million higher OTTI partially offset by lower non-interest expense of $5 million.

The Company's net interest margin expanded in the fourth quarter to 4.27% and remains above our high-performing pure bank averages. Our margin is driven by our large, high-quality deposit funding base.

At the end of the fourth quarter over 25% of assets were funded with free or low-cost checking accounts. This is an extremely strong number in the banking industry. Equally strong 63% of our assets are funded with core deposits and 85% are funded with customer deposits.

When you consider our equity levels, we essentially have very little wholesale funding which increases our margin and markedly reduces the liquidity risk of the Bank.

Core deposits increased $393 million in 2009 and $144 million in the fourth quarter. Much of it due to our continued success with our market-leading checking accounts introduced last year. In addition, funding costs remain very low with core deposits at 16 basis points and total deposits at 52 basis points, down 1 and 18 basis points, respectively, from the third quarter.

Because of the historically low interest rate environment, at the end of 2008 the bank began selling its originations of one- to four-family mortgages. Booking these loans would increase the interest rate credit risk and credit risk.

Along with the normal cash flows from payments on other loans and limited investment opportunities, our decision to sell the recent mortgage production as well as our private issue mortgage-related securities portfolio has resulted in large amounts of cash on hand compared to normal periods. High cash levels are a consistent occurrence across the industry and will likely put temporary downward pressure on net interest margin and income in 2010.

To mitigate some of these effects to date management has been proactive in reducing higher costing CD balances, putting the Bank's cash to use without taking additional credit risk. We continue to monitor the interest rate environment and will redeploy our cash to higher earning asset categories when we think it is appropriate in light of our interest rate risk parameters.

Moving on to non-interest income, 2009 includes $15.4 million of OTTI charges we took through the third quarter of 2009 on the private issue mortgage-related securities portfolio. This is up $7.6 million for the year. Because we liquidated this portfolio in the fourth quarter of 2009 we do not have these types of charges in the quarter and we eliminated the risk of future charges from these securities.

Excluding OTTI, non-interest income was up $4 million for the year and $3 million for the quarter.

In the fourth quarter the Bank recorded $5 million of provisions for loan losses, essentially even with the third quarter. This brings the 2009 annual provision to $32 million, of which $10 million is one commercial credit. The remainder was largely due to an increase in non-performing residential lot loans and one- to four-family mortgages, primarily on the neighbor islands.

The fourth quarter's provision was primarily due to increases in historical loss ratios used in computing the allowance for loan losses on commercial market loans and home equity lines of credit caused by a change in the timing of the charge-offs, as I will explain further in a moment.

A key profitability driver for the Bank is efficiency. Over the last year we have achieved improvements in both revenue as well as expense. The largest impact has been a lower expense base. As you can, see fourth-quarter 2009 adjusted non-interest expenses are running at about $38 million for the quarter or $152 million annualized. And the adjusted efficiency ratio is 56%.

The slight uptick in the fourth quarter is primarily due to $1 million of year-end adjustments to non-interest expense and the effect of annualizing that increase. In either case fourth-quarter adjusted results reflect nice progress since we started this initiative and are approaching the Bank's goal of $140 million to $145 million annualized adjusted non-interest expense by the end of 2010.

However, we are planning to expand our mortgage banking business. If it is successful it will generate additional non-interest expense over time, primarily related to commissions. Thus any increase should be more than offset by the corresponding revenues.

For our bank and the banking industry as a whole, the key uncertainty continues to be around asset quality. We believe our credit risk profile is on the conservative side compared with other banks because we have a high concentration of lower-risk one- to four-family mortgage loans and significantly less exposure than other banks to higher risk commercial real estate construction, residential construction, auto, and credit card loans.

We continue to believe in the quality of our assets and that our primary credit risks are in the $343 million of neighbor island one- to four-family mortgages produced from 2005 to 2007, $120 million of mainland residential loans purchased in 2007, and $96 million of lot loans which have a three-year life.

In total non-performing assets ratio increased 24 basis points in the fourth quarter to 185 basis points, reflecting a rise in non-performing residential lot and commercial market loans. However, this is more than 40% better than the industry fourth quarter of 2009 median rate of 323 basis points recently cited by KBW for a sample of 154 banking institutions. We continue to believe [in the] overall good quality of our loan portfolio.

Our net loan charge-off ratio was 98 basis points in the fourth quarter compared to 19 basis points in the third quarter. In the fourth quarter of 2009, the Bank reported charge-offs of $9.2 million related to residential one- to four-family residential lot and home equity lines of credit. This is primarily due to the timing of taking these charge-offs.

Starting in the fourth quarter we elected to charge-off specific loan loss reserves at the time of provisioning. The increase in the fourth quarter primarily reflects an adjustment of the amounts for which we reserved and provisioned for earlier in the year. Absent the adjustment net charge-offs would have been 36 basis points for the quarter.

On a full-year basis our net charge-off ratio [remains] low as 66 basis points. This is over 50% lower than the industry which was recently reported at 148 basis points by KBW for our 154 banks.

I will now sum up the Bank's earnings drivers for 2010. As with all banks across the country, we are keeping a close eye on the economy, the credit cycle, and interest rates. Our net interest margin, given the current interest rate environment, we are pursuing our long-term performance opportunities by not chasing yield for short-term earnings benefits.

On the funding side we have been fortunate to have a low-costing and loyal customer base relative to the industry and we expect that to continue. Based on the economic outlook for a gradual recovery starting in 2010, we expect provision expense to remain high, with measured improvement over the year.

The execution of the final year of the performance improvement project will continue to be key to some expenses expected for 2010 from the implementation of long-term cost efficiencies. The largest reduction opportunity remaining is an additional $6 million in annual savings expected from the Fiserv conversion that is expected to be complete on June 1. Once the project is completed this year, we expect to reach our target of an annualized non-interest expense run rate of $140 million to $145 million, subject to an increase as we build our mortgage banking business, with this commission expense to be covered with increased revenues.

The Company has a strong capital base, with both operating companies solidly capitalized. Our overall consolidated common equity to total capitalization is 50% at the end of the fourth quarter. Utilities common equity layer is 55%.

At the bank, we increased our capital ratios throughout 2009 to further strengthen financial soundness in a difficult economic environment. At the end of 2008, we maintained a Tier 1 leverage ratio of 8.5% and ended 2009 50 basis points higher at 9%. We brought up our total risk-based capital ratio from 12.8% at the end of 2008 to 14.1% at the end of 2009, after paying $50 million in dividends in HEI in 2009.

As planned, HEI contributed $93 million to the utility in the fourth quarter of 2009 and expects to contribute $55 million in 2010 to support the utilities CapEx program.

With respect to short-term borrowing capacity between the holding company and the utility, we have $233 million of remaining capacity at year-end. In addition, the utility had $94 million of cash and equivalents. Our $275 million of syndicated credit facilities expire in 2011, and we are in the process of putting new multiyear credit facilities in place by the end of the second quarter this year.

At this time and based on our current assumptions, we do not anticipate any equity requirements beyond our dividend reinvestment plan for at least the next three years.

We continue to have very good access to liquidity in the capital markets.

I will now update you on support of the dividend. This slide shows the simple sources and uses of cash at the holding company. As you can see, we expect primary support for the dividend to come from the operating companies. We will be financing uncovered portions and holding company expenses with equity issuances, through our dividend reinvestment program and via short-term borrowings.

In 2011, we expect dividends from the operating companies to increase as the economy improves and the utility completes its rate case cycle.

That brings me to the fourth-quarter dividend. The Board declared the dividend payable on March 10 to holders of record on February 22 at $1.31 a share for the year and $0.31 for the quarter. The ex-dividend date is February 18.

Now I will turn the call back over to Connie.

Thanks, Jim. We continue to see the opportunity for investment and improved returns in our company as multi-fold. At our utility we continue to pursue a comprehensive redesign of our regulatory model to ensure a financially viable utility, strong enough to attract the capital necessary to execute our state's public policy of reducing Hawaii's dependence on imported oil.

We expect to narrow the gap between our earned and allowed rates of return as the model is implemented over the next two years. In addition, we [expect the] rate base to grow over time as we strengthen our system to accept increasing renewable generation and increase equipment replacement rates to address our aging infrastructure.

The core business is performing very well and strengthening every day. Our bank has a low risk profile and a simple business model. Given our profitability improvements to date and expectations over the next year, the Bank is close to finalizing a business model whereby we can achieve pretax pre-provision income of $120 million to $130 million per year on the current asset base.

This would be an improvement in the range of 30% to 40% over the equivalent run rate for the first quarter of 2008. This estimate is subject to no material changes in the yield curve which could affect net interest income. We expect to realize this value in earnings as the Hawaii economy and credit environment improve.

Both operating companies are well along in implementing their strategies and are strongly positioned to benefit when the Hawaii economy recovers.

I will now up the call up to questions and ask Jim, Dick, and Tim, and also Tayne, our CFO at the utility, to join me in answering your questions.

(Operator Instructions) Paul Patterson, Glenrock Associates.

Good morning, guys. I wanted to ask you about a couple of things. First of all, O&M at the utility I think you guys are saying an 11% increase. What is driving that?

The increase in the O&M in 2009 is really related to bringing on CT-1 and also increases that was implemented in the replacement of our aging infrastructure. So it's really very much the same story that we have had all along, Paul.

Okay. I thought you guys were expecting an increase in O&M by, up to 11%.

Yes, that is correct. What I think we -- let me ask Tayne or Dick to go over the O&M numbers because it is somewhat confusing because of the DSM impacts. And if you recall the DSM programs were transferred over to the third-party administrator in the beginning of 2009 so that makes some of the numbers a little more difficult to explain.

So either Dick or Tayne?

Paul, this is Tayne Sekimura. I wanted to clarify your question, you are asking about the increase '09 versus '08 or are you asking about --?

No, 2010 drivers. On slide 26 you guys said that O&M levels are expected to be up 11%, 16% excluding DSM.

That is correct.

Okay. So in addition to what [Connie mentioned] about the full cost of CT-1 and higher O&M for aging infrastructure, the other thing that is happening is we had some costs that were deferred in 2009 as part of our cost reduction measures that we will need to incur in 2010. So that is also a driver of our increase in 2010.

Okay. How much of that would you say is -- because it's sort of a large jump here, how much would you say is because it has been deferred?

Let me just break in here, Tayne. It might be helpful to Paul if you would give him some proportions as to what relates to things like the deferred overhauls or short-term initiatives that we don't expect to continue.

In general, if you take a look at the cost reduction measures, the large majority of those measures are not sustainable. Roughly two-thirds of those costs are deferral in nature such as some of our overhaul work that was deferred as a result of lower operating hours as a result of lower sales.

We also deferred some of our software project work. We have a total IT strategy that we are looking at going forward and that is part of the increase as well. In addition, we also used very judicious use of our overtime hours in 2009 and that will also come back in 2010. The overtime hours that I am speaking of is we reduced hours in our call center and those hours will come back in 2010.

Okay. Now with respect to the decoupling case, I know there is no statutory timeframe and I know you guys are weighting it, but it does seem like it's taking some time here. Do we have any sort of flavor as to when we might see this finally be -- I mean, you got a settlement and everything else. It seems like it's taking a little bit longer than one would think.

First of all, Paul, the decoupling docket doesn't have a statutory timeline. The only statutory deadlines are on the rate cases for interim decisions.

Right.

But we believe that everything has been filed with the commission now and so it's just a matter of them coming out with a decision. We are expecting the decision for decoupling as well as CT-1 very shortly. Both decisions or both dockets are ready for decision by the commission, but they really need to go through their process to ensure that they are comfortable with the dockets before they issue a decision.

Okay. Then on the non-interest expense, the $140 million to $150 million run rate, you guys have some expenses that you mentioned here in terms of the Fiserv and what have you I guess. The implementation expenses I get of about $2.3 million.

But is there anything else we should be thinking about here? Are we winding down now to the point where when we look at the Bank it should be, I guess, for 2010 about $140 million to $145 million or are we still going to be incurring some expenses other than this $2.3 million one that you guys mentioned here?

As Jim said in the remarks, we believe that apples-to-apples we would be at the $140 million to $145 million run rate as of the end of '10, which is when the performance improvement project was always intended to complete. But we are beginning to build a mortgage banking line of business that would have commission expense associated with that that may bump up the reported GAAP numbers when you actually see them within 2010 or 2011.

Okay. So when we are looking at this, so we are going to see still some more expenses? You guys were around $160-something million on a non-adjusted basis and the about $152 million on an adjusted basis. So should we think that it would be -- when we look at this other than the $2.3 million that you guys are mentioning for implementation is there anything else we should be thinking about?

No, and I will let Tim comment in just a moment but I should also mention that as Jim did in the prepared remarks that although you might see non-interest expense go up because of the commission expense from mortgage banking, you would also see revenues go up as well. Because obviously we wouldn't be paying commissions if we weren't getting revenues from building that line of business as well.

But let me give Tim a chance to comment on the run rate.

Paul, it's Tim. Any time we are doing a big change like this in 18 months it's hard to get at stuff because we are spending money to make money. Our current run rate -- we have to show certain things to the [core and everything], our current run rate is about $145 million right now.

And so we, as Jim said, will have another $6 million coming in when we convert from Metavante to Fiserv and so that is sort of underlying core run rate right now. Then on top of that you need to lay -- this year we have about $2.3 million at least to convert and finish the Fiserv. And then there is still likely some potential for some real estate buyout costs and some level of severance.

It's hard to determine and we don't have a set number. We started with 338,000 of non-branch space, square feet, and we estimate that we need about 140,000 square feet. So as we whittle that down to the appropriate number we need to buy out of leases.

I just had a presentation given to me about two weeks ago that if we -- it takes a while to get there, right? We have got to move people around. But if we can get down to our 140,000 square feet, it's about a one-time expense of $3 million to break all those leases but it saves $1.75 million a year going forward. So it's an 18-month payback.

We don't have a lot of those type of projects left, but as Connie and Jim said we should be done with all that kind of stuff by the end of this year.

Okay, great. Thanks a lot, guys.

Bobby Bohlen, KBW.

And I have another question for Tim. If I am looking at the balance sheet and I am trying to figure out where do you stand on asset sensitivity as short-term interest rates move, it looks like your borrowings are down significantly year-over-year and your securities portfolio is down pretty significantly. You have a big cash drag, but I guess how nimble can you be to reinvest that cash when rates start to -- as short rates start moving up by year-end or early next year?

Well, good question. In general, just in isolation, ASB would generally have more interest rate risk than a typical commercial bank. So I would imagine as an example in our market that our interest rate risk -- it's not magnitudes higher, but I would imagine that our interest rate risk is modestly more higher than like a First Hawaiian and a Bank of Hawaii.

That is due to our heritage of being a thrift. We have got, say, 47% of our loans in 30-year fixed-rate mortgages. So it's a trade-off that benefits us on a credit risk side; it hurts you a little bit on the interest rate risk side.

We have done a lot of stuff over the last year to improve our interest rate risk. We look at it two ways. We look at sort of an economic value of equity where you discount the value of your assets and your liabilities and you sort of a get a net present value position. And then you shock that on rates and does that net present value go up or down.

Then we look at the impact of just changes in net interest income. Both measures have come in a lot over the last 12 months and we have gotten a lot of compliments from the OTS on doing that. So what we have done is a couple of things.

One is tremendous core deposit growth over the last year replacing wholesale funds. That is number one. Number two is I think our 30-year fixed-rate mortgages peaked at about $3 billion. I don't remember the number but it's at about $2.4 billion now. So we have drastically reduced our 30-year fixed-rate assets.

And then the third thing is that our cash levels have increased significantly. We need probably $100 million of general cash on hand to run the Bank and right now I have got $425 million. So I have $25 million that I can reinvest when rates come up and we are really trying to reinvest that.

I could generate you guys, if you own our stock, I could generate you $10 million more of earnings this year by going and spending that today and you are going to hate me in three years when rates go up. So we are trying to be really patient and do the right thing long term for the Bank.

And so one of the opportunities we see is home equity. Our bank has been late to the game. There is $1.9 billion worth of balances, earning balances at Bank of Hawaii, CPB, and First Hawaiian. We only have $300 million so we want to try and get our share of that that is prudently underwritten. They had a 70% LTV, high FICO score.

And that is a way, Bobby, that we could put that cash to work. Then when rates go up that asset reprices because it's a variable rate product. So we are going at that on all fronts.

Okay. And could you talk about -- I would assume that we are pretty close to being finished with the securities repositioning. Could you talk about where the duration currently stands on that?

On our securities portfolio?

Yes.

It's low. It's like two years. It's low.

Okay.

And it's all pretty much now in agency mortgage-backed securities.

Okay. All right, thank you very much.

[Shin Fukuda], Catapult.

Good morning, everyone. Just a quick question on the potential CapEx for the HICO utilities from the Interisland Wind projects that you were mentioning earlier.

Yes? I am sorry, Shin, your full question is how much capital expenditures is in there for the wind projects?

I guess in your CapEx forecast that you laid out their 2014 you said that any spending related to the Interisland Wind project was excluded.

Yes.

So I am just trying to get a gauge of what the potential CapEx is from the project itself.

Okay. Well, let me ask Tayne or Dick to address that.

Right now the anticipation is that the wind projects will be PPAs so we would not have any CapEx associated with them. The cable itself is anticipated to be a state infrastructure project because the state can get, we anticipate, the far better financing and therefore lower customer costs than we could.

So at least for those two pieces we do not anticipate any CapEx at the utility. It is possible that we could step in in some position on the cable if we view that as in our customers' interest and an attractive investment for the utility. But it's far too early to see that today.

Dick, I think there is also the transmission facilities that we would -- the part of the project that we would be responsible for, Shin, is taking the power from the cable then integrating it into our system. And that is where our capital expenditures would go in. Maybe, Dick, can help you with some very rough estimates on that. It's pretty far out at this time.

Connie is exactly correct. The integration side of it would involve both transmission upgrades as well as potentially some capital investment elsewhere, including in our generating assets in the system. But we do not yet have sufficient identification of those to have a forecast of how large those investments might be.

Okay.

Shin, I think the way that we view it is that -- and now we are talking about 2015 and out -- is that that is part of the major benefit that we see to the whole Hawaii Clean Energy Initiative for us is that by the time we get out into that timeframe, and by then we should have all the pieces of this new regulatory model in place, that that actually creates great investment opportunity for us as we do improve (technical difficulty) and our system in order to take those renewable resources.

But currently no numbers in the capital plan today.

Right. And I know we are looking a few years out now, but any sort of spending related to this would be recovered under the clean energy surcharge, if my understanding is correct. And that does not require rate cases. Is that right?

That is correct. What it requires is that we file for approval of each project for inclusion in the renewable energy infrastructure surcharge.

Okay. So you would have a preapproval process. And then once the project -- once you start spending on the project you would get more immediate returns on your capital?

The timing is not necessarily preapproval. For example, as we said in the remarks, the commission approved deferral of the costs for the Big Wind study. And so when those studies are complete then we would be anticipating filing for now surcharging them through the clean energy infrastructure surcharge. (multiple speakers) cost deferring them.

Okay, thank you very much.

(Operator Instructions) Michael Goldberg, Luminous Management.

Had a question on the decoupling process. So you and the CA have recent agreement on all three points of decoupling, is that correct?

Yes, there is a joint proposal.

Okay. Now given that last time during HICO settlement the commission still went ahead and decided for themselves what is appropriate, what is not, do you feel like commission will be taking the decoupling order as a whole or they are likely to take each one of the three major points by itself and rule whether each one of them makes sense or not?

And if that is the case, how would you rank them from what you believe to be the least risky, as in the most safe and likely to be adopted, to one that is more likely to get some scrutiny from the commission?

Michael, I love your question. But I wish I could always anticipate what the commission would do. That is a very difficult thing because it really is in their total purview to study all the elements and then make independent decisions. So let me just, with that prefatory comment, ask Tayne or Dick if they have some comments on this issue.

This is Dick Rosenblum. I believe the commission understands the importance of all three pieces of decoupling. Having said that, the commission needs to make its own decision. I would expect them to make their own decision. And in the fine detail some parts of what was proposed certainly might change. I wouldn't attempt to handicap what might change.

Okay. Would you at least be willing to venture and say whether commissions like to look at it as one proposal or three individual ones?

This is Dick Rosenblum again. My anticipation is it will be a single decision, but certainly they could do something different than I anticipate.

Got it. Thank you.

With no further questions in the queue I would now like to turn the call back over to Shelee Kimura for final remarks.

Thank you for joining us today. If you have additional questions, please call me at 808-543-7384. Aloha, everyone.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.