Hawaiian Electric Industries Inc (HE) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2011 Hawaiian Electric Industries earnings conference call.

My name is Marissa and I will be your coordinator for today. At this time, all participants are in a listen only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today's call, Shelee Kimura, the Manager of Investor Relations and Strategic Planning. Please go ahead.

Thank you, Marissa, and welcome to Hawaiian Electric Industries' first-quarter earnings conference call. I am Shelee Kimura, and joining me today are Connie Lau, HEI President and Chief Executive Officer; Jim Ajello, HEI Executive Vice President, Chief Financial Officer and Treasurer; Dick Rosenblum, Hawaiian Electric Company President and Chief Executive Officer; and Rich Wacker, American Savings Bank President and Chief Executive Officer, as well as other members of senior management.

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

I will now turn the call over to Connie Lau.

Thanks, Shelee, and aloha to everyone. First, I will provide a few highlights for the quarter and discuss our strategic progress, and then Jim will provide more details on the economy and our results.

First quarter 2011 was a solid quarter for HEI. Earnings per share were up 3% over last year. We achieved a 10% total return to shareholders in the quarter, more than three times the 3% return of the EEI index. At our utility, we achieved another significant milestone in transitioning to our new regulatory model. With the PUC's approval to implement sales decoupling starting March 1 for Oahu, more than two-thirds of total utility revenues are no longer linked to kilowatt hour sales. This was an important step to align our regulatory model with our state's Clean Energy Policy. As we've said before, the transition will take several years, as we focus on closing the gap between our current under earning situation and our allowed return.

At the bank, we continued to deliver strong performance, with a return on assets of 1.15%, net interest margin of 4.16%, and improved credit costs. In summary, we are executing on our strategy and commitment, and we believe we are well positioned to deliver attractive, risk-adjusted returns and earnings growth to our investors in 2011 and beyond.

First-quarter earnings were $0.30 per share, compared to $0.29 per share in 2010. On a net income basis, HEI earned $28.5 million in 2011, versus $27.1 million in first quarter 2010.

On slide four, we summarize the utility's strategic progress in the quarter. In addition to sales decoupling, we filed the first tariff for the annual revenue adjustment mechanism, or RAM, for Oahu on March 31. This represents the 2011 adjustments for O&M and rate pay under the new decoupling model. The PUC has 60 days to comment on the filing, and we are in ongoing discussions with the consumer advocate, given this is the very first RAM filing.

We continued to advance our Clean Energy Initiatives in the first quarter, with several new power purchase agreements. Consistent with our strategy to pursue a diversified portfolio of renewable sources, these agreements included solar, geothermal and wind projects. In addition, a purchase power agreement was approved last year, with First Wind's Kahuku Wind Power, and it came to fruition in the first quarter, when the 30-megawatt project commenced commercial operations on March 24.

We also continued to pursue a multi-faceted approach to modernize our electric grids, including preparing them for the adoption of electric vehicles. HECO is partnering with both Aero Environment and Better Place, under the Hawaii EV Ready Grant Program. Under this program, over 250 charging stations will be installed across the state over 2011 and 2012. Once the deployment is complete, Hawaii will have one of the nation's first statewide public EV charging networks.

Turning to the bank, we continue our focus on being a high-performing community bank with a targeted return on assets of 120, net interest margin above 4%, an efficiency ratio in the mid-50s and pre-tax, pre-provision of $110 million to $120 million a year.

The bank had a solid first quarter and is exceeding the performance of its high-performance years. Return on assets improved 5 basis points over last quarter to 115 and is within 5 basis points of our 120 target for the year. Net interest margin remains above 4% and exceeds the average of our high-performance years. While we are pleased that annualized non-interest expense was lower than our target, we are focused on improving revenues to meet our efficiency and annualized pre-tax, pre- provision income target.

We are encouraged by the fact we have had two consecutive quarters of loan growth, and the first quarter of growth in total assets since 2007. Specifically, we continue to see loan growth in the commercial markets and home equity portfolios, and a slower rate of decline in our mortgage portfolio, as refinancings taper off and we retain a growing percentage of loan originations in our portfolio. This supports our expectation for mid-single digit loan growth for the year.

And finally, I'd like to recognize the bank for being selected as one of Hawaii's best places to work for the second year in a row. This is a wonderful validation of the investments made by our bank in its people and culture.

Jim will now provide additional detail and insight to our results, and our outlook for 2011.

Thanks, Connie.

I will first briefly address the Hawaii economy. Hawaii's tourism industry continued to reflect a trend of positive growth in 2010. Year-to-date through March, tourism continued its strong recovery, with visitor arrivals up 9.1% and visitor expenditures up 16.9% compared to last year.

Hawaii's unemployment rate of 6.3% has remained steady for the first three months of this year, and continues to track significantly better than the national rate of 8.8% in March and the recent uptick to 9% in April. Notable is Hawaii's unemployment -- Honolulu's unemployment rate, which was down to 5.1% in March, making it the ninth lowest amongst the nation's metropolitan areas.

On Oahu, residential home median prices were up 3.5% in April for the first time this year, but home sales were down 19.6% compared to last year, primarily reflecting tighter inventory levels. On the neighbor islands in March compared to the prior year, sales volumes were up, but prices have not yet begun to recover on a broad basis.

Many of you have asked about the impact of the disaster in Japan on our Hawaii economy and our companies. So, let me take a moment to comment on that. While Hawaii's visitor arrivals from Japan declined 18% in March, the recent release of March's Hawaii Tourism Authority statistics indicate that tourism continues to appreciate considerably over last year, with continuing strength in other visitor segments largely offsetting the reduction in Japanese tourists. Even with the decline in Japanese visitors in the last half of March, Hawaii's hotel occupancy grew by 3.4 percentage points to 79.2%, and the statewide hotel occupancy increased 4.8 percentage points to 75.2%.

For 2011, local economists forecast a 10.8% decline in Japanese visitors, and a 2.7% increase in overall visitor arrivals. They expect Hawaii's economic recovery will continue to build strength, provided there's not another or further spike in oil prices.

Current University of Hawaii Economic Research Organization estimates of gross state domestic product have it growing at 2.6%, slightly less than the 2.7% growth forecasted in February, before the earthquake and tsunami sharply reduced tourism from Japan. We are closely monitoring the situation. But based on early indications, we are hopeful that the Hawaii economy is able to continue its strong recovery.

At the utility, net income for Q1 2011 was $19.2 million, compared to $18.1 million in the first quarter of 2010. The improvement was primarily due to $4 million in higher kilowatt hour sales before the implementation of decoupling, largely due to warmer and more humid weather, $3 million of rate relief granted in our 2010 Hawaii Island and Maui County rate cases, and the 2009 Oahu rate case.

These were offset by $4 million, or 8% higher O&M expense, generally in line with our annual expectation of a 7% increase, and $1 million lower allowance for funds used during construction, as a result of projects placed in service in 2010.

At the bank, net income for the first quarter of 2011 was $13.9 million, versus $13.7 million in 2010. On an after-tax basis, the $2 million lower non-interest expense was largely offset by approximately $2 million in lower NSF fee income as a result of Regulation E. Compared to the linked quarter, bank net income was $600,000 higher. On an after-tax basis, the $2 million lower provision for loan losses was partially offset by $1 million in lower non-interest income from lower gains on sales of mortgages.

Now, let's take a closer look at the utility. Slide nine reflects key earnings drivers for the remainder of the year. As we are still earning well below our allowed return, the timing and outcome of the HECO 2011 rate case continues to be the most significant driver in improving earnings and addressing this issue. This will set the base revenue, O&M, and rate base for decoupling for the next three years.

With sales decoupling effective for the Oahu utility, net revenues at HECO are pegged to its 2009 rate case. The 2011 RAM tariff filed for HECO amounted to $12.7 million for the period from March 1 through December 31, 2011. HECO will begin accruing the revenues when the PUC approves the tariff. Although the PUC approved decoupling implementation starting March 1, we have conservatively opted not to recognize the RAM revenues until there is greater clarity on the PUC's position on certain issues associated with HECO's March 31 RAM filing.

We continue to expect O&M to be 7% higher for the year, compared to last year, due to the execution of our Clean Energy Plan. The increase is largely included in the tariff for the O&M RAM and HECO's 2011 rate request. Until our O&M spending is approved in our Oahu 2011 rate case interim decision, earnings will remain substantially below what is authorized. In 2011, we expect rate base growth of approximately 2%, with 5-year compounded annual growth rate remaining at 5%.

Slide 10 shows our actual ROEs for the trailing 12 months, and demonstrates the opportunity we have to repair the under earning situation and close the gap to our allowed ROEs. With the implementation of decoupling, including the revenue adjustment mechanism, our goal for our Oahu utility is to achieve an ROE within 100 basis points of our allowed by the end of 2012. A significant factor in our ability to meet this goal is the outcome of the HECO 2011 rate case.

Now we will look more closely at the bank performance metrics. On slide 12, our net interest margin was 4.16% and continues to exceed our internal performance target of plus-4%. The decline from 4.21% last quarter was primarily due to lower deferred loan fees from the passing of the refinancing wave that occurred in the third and fourth quarter of last year.

The bank recorded $4.6 million provision for loan losses in the first quarter, which was $4 million lower than the fourth-quarter 2010 provision and in line with our expectation. The $4 million decline in the provision from the fourth quarter was primarily due to that quarter's provision being elevated due to a $1.2 million specific commercial loan that was charged off, and approximately $1.4 million related to a one-time adjustment for enhancements to our reserve methodology for our declining portfolio of residential lot loans. The majority of the provision in the first quarter 2011 reflected net charge-offs in the neighbor island vacant lot loans and run-off of our portfolio of mainland residential loans.

On slide 14, you can see our efficiency ratio of 57% remains solid. Non-interest expense remained low at $35 million, or $140 million annualized. The ratio ticked up from last quarter as a result of slightly lower revenues, discussed earlier.

Turning to our balance sheet, here we show you peer bank from ASB in terms of asset and funding mix. Since the last complete available data set for our peers is as of December 31, 2010, we used that data here compared to ASB's March 31 balance sheet. A key differentiator for ASB and the Hawaii banking market versus the industry as a whole is our low-cost deposit base. Our average cost of funds of 38 basis points in the first quarter and 41 basis points in the fourth quarter is very low compared to an average of 103 basis points for the industry in the fourth quarter. First-quarter cost of funds declined further as we grew core deposits and higher costing CDs were reduced.

Core deposits increased by $96 million in the quarter, up to $3.4 billion, up $217 million compared to the same quarter last year. Total loans were $3.5 billion at the end of the quarter, $60 million higher than the end of last quarter. As of March 31, 2011, 95% of our loan portfolio was funded with core deposits. We also remain strongly capitalized, with a tier one leverage ratio of 9.1%, tangible common equity to total assets of 8.4%, and a total risk-based capital ratio of 13.5% as of March 31, 2011.

At the same time, ASB continues to pay a healthy dividend to HEI. In the fourth quarter, ASB paid $14 million of dividends, and expects to pay annual dividends of almost $60 million to HEI in 2011.

Looking at non-performing assets, ASB's non-performing assets ratio remained low at 1.82%, compared to industry averages. The 5 basis point increase from the linked quarter was due primarily to increases in the land loan and residential lot loans.

Our primary credit risk continued to be in three loan portfolios that now total $442 million, down $98 million or 18% over last year. They include $61 million of residential lot loans, primarily on the neighbor islands, $289 million of neighbor island one- to four-family mortgages, produced from 2005 to 2007, and $92 million of run-off portfolio mainland residential lot loans purchased.

Our net loan charge-off ratio remains low and improved on a quarter-by-quarter basis by 23 basis points to 49 basis points. Net charge-offs to $4.4 million were roughly equal to our provision expense of $4.6 million in the quarter. Allowance for loan losses was $40.8 million, relatively unchanged from the linked quarter at $40.6 million, and the prior year quarter at $41.3 million. The allowance currently represents 1.1% of outstanding loans.

Consistent with our guidance provided last quarter, we continue to see short-term downward pressure on net interest margin and income. While we expect this downward pressure to continue, we expect our net interest margin will remain slightly above 4%. In addition to continuing our expense management discipline, we will focus on loan growth in shorter durations and adjustable rate products, such as home equity line of credit and commercial accounts, and moderating the rate of decline in our residential portfolio.

In 2011, NSF fee income is expected to decline by approximately $8 million compared to 2010, as a result of the full-year impact of Regulation E, which became effective on August 15, 2010, for existing accounts. We continue to pursue opportunities to provide offsets to this decline.

As we mentioned last quarter, the bank may also be impacted by regulatory changes to interchange fees. Although the proposed regulations exempt banks with less than $10 billion in assets, we continue to monitor the legislation, since market pressures could push the impact down to all banks. Legislative bills recently introduced could delay implementation by one to two years, and it's too early to predict the impacts, if any, for our bank.

Provision may continue to be lumpy, and is still expected to be approximately $15 million to $20 million for the year, as we had previously guided. We continue to target non interest expense of $145 million for the year. Despite the revenue pressures across the industry, we expect our low-cost funding base, reduced cost structure and lower risk profile to continue to deliver strong performance, compared to the industry.

Now, on to an update of HEI's balance sheet, since we did some refinancings in the quarter. In late March, HEI issued $125 million of privately placed notes. This was made up of $75 million in 5-year notes and $50 million in 10-year notes. The proceeds were used to refinance $50 million of notes that matured in March, 2011. It will also be used to refinance part of the $100 million notes that mature in August, 2011, at which point we will have reduced the holding company's long-term debt by $25 million.

With respect to short-term borrowing capacity between the holding company and the utility, we have $300 million of capacity with nothing outstanding as of March 31, 2011.

We continue to maintain a solid capital structure, with consolidated common equity capitalization of 50%. And based on current assumptions, we do not require any equity issuances beyond our dividend reinvestment plan for the next two years.

Now, let me turn the call back over to Connie.

Thanks, Jim.

In summary, we are executing on our strategy. At our utility, we are taking the first step to implement the new regulatory model, which will reward energy efficiency, encourage investment in our grids to support clean energy, and attract capital for clean energy investments. At the bank, we expect to maintain our productivity gain, while growing our bank franchise.

Turning to our dividend, our dividend yield remains attractive and above the average for utility peers. As of yesterday's close, our dividend yield was 4.8%. Overall, we look forward to the opportunities we have to grow our business, and believe we remain well positioned to deliver attractive risk-adjusted returns to our investors.

With that, we look forward to hearing your questions.

(Operator Instructions)

The first question comes from Greg Reiss from Catapult. Please proceed.

Hi, guys. Congrats on a good quarter.

Hi, Greg.

Have you guys ever --- or have you guys given any thought now that, I guess, you are starting to get this decoupling mechanism, about initiating guidance?

Greg, I think we've talked quite a bit about that, and there are still some key regulatory decisions that need to come down to fully put the mechanism in place. And so while we look at doing that, I don't think the time has quite come just yet.

Got it.

So would you guys want to wait for a decision on decoupling at the two other subsidiaries before planning on initiating guidance?

Yes.

Okay. So that is that the big gating item, at this point.

Right. And for the mechanism to be fully in place.

Got it.

And, any updates on how those two processes are going?

The best that we know is those decisions are ready for a decision by the Commission, and it's just a matter of the Commission moving them out. But beyond that, we don't have any additional information.

Okay. Thank you.

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

Good morning, guys.

Hi, Paul.

I wanted to just circle back on the Durbin Amendment. I know you guys don't know exactly what's going to happen there, but -- and I know that it doesn't necessarily apply to you guys, but the competitive pressure issue that you brought up. You mention in the 10-Q that the $0.52 versus the $0.12 that the Fed is suggesting per transaction, could you just give us a little bit of a flavor as to the sensitivity as to what would happen there if the, I don't know, $0.10 per transaction would change or what have you?

Paul, actually, you've got it right. It's the $0.52 and it would be reduced down to the $0.12. So for us on an annualized basis, I believe the number is $8.7 million. It would be approximately the same kind of reduction that we are experiencing now from Regulation E.

Okay.

And then, the foreclosure legislation, last time on the call you, I think you indicated that you did not expect that to have any impact. Is that still the case? I'm talking about the Hawaiian foreclosure legislation.

Yes. We believe that the impact will still be moderated. It's not a significant impact on us. It will go through the judicial foreclosure route.

Okay.

And then, in terms of the RAM filing, it sounded to me like you guys were not actually booking the revenue in income, is that correct? And that you were going to plan on doing that later, for some conservative reasons. Is that the case?

Yes, that's correct.

Could you describe what the impact of that is?

Sure. I'm going to let Tayne tell you about that.

Hi, Paul, this is Tayne.

In terms of the RAM filing, we filed the tariff for PUC approval on March 31, and that included $12.7 million of revenue effective for the period March 1 through December 31. Given that decoupling implementation was effective March 1, we did -- that would include one month of RAM revenue, or about $1.3 million in revenues that we did not record for the first quarter.

Okay. And when are we going to get a decision on that, that makes you guys feel more comfortable with booking it?

We expect a decision in the June timeframe. The PUC has 60 days from the filing of the tariff, so that would bring it to the beginning of June.

Okay. Thanks for reminding me.

Okay. So, I guess that's it. Thanks so much.

(technical difficulty). David, your line is open. Please proceed with your question.

Good morning.

Good morning.

I just had a question on -- can you remind me how much cash tax savings you expect from bonus D&A this year and in 2012?

Yes. For this year, it is $55 million, and for 2012, $30 million.

Okay.

How much did you get last year?

Last year -- this is Tayne. Last year it was $25 million.

$25 million? Okay.

Does any of the cash tax savings, or the bonus D&A, impact your pending rate cases? Whether it's the HECO, or the other ones that you're awaiting a final decision?

It impacts our current case being adjudicated. That is the HECO 2011 rate case, which we filed last July.

And the numbers need to be updated for the impact to rate base. We're going through that process right now.

I see. Okay.

And then, on CapEx, I believe you guys are projecting $300 million this year at the utility, and I guess last year you spent about $180 million or $182 million, is that about right?

Last year we spent closer to $200 million.

Okay.

I'm just curious what type of projects make up the $300 million you expect this year? Can you maybe the bigger projects, can you elaborate on those?

Yes, we have some details on that. It actually includes a major program, like our asset management program. We also have some expenditures, pretty much maintenance CapEx, about 50% of that budget is just maintenance CapEx. If I can refer you to slide 24 in the appendix, we've got some detail there.

Okay.

So most of that spend will be -- let's see, you spent about $40 million to date, so a lot of these projects, I guess, are just timing?

That's correct.

Okay. Great. Thank you so much.

(Operator Instructions)

Your next question comes from the line of James Bellessa from D.A. Davidson. Please proceed.

Good morning.

Hi, Jim.

Can you hear me?

Yes, we can.

Good.

The deferred RAM benefit that was described earlier, is that a pre-tax or after-tax amount that was talked about?

That was a pre-tax amount.

And the goal of reaching a return on average common equity 100 basis points within your allowed 10% ROE, by the end of 2012, does that suggest that you're going to have a run rate at the end of 2012 of 9%, or do you expect to have a return on average common equity of 9% for the whole year?

That's for the full year.

Thank you very much.

At this time, you have no further questions.

Okay, with no other questions, I would like to thank everyone for joining our call today, and thank you for your interest in Hawaiian Electric Industries. As always, call me if you have any other questions.

Thanks so much. Have a great day.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the presentation. You may now disconnect. Have a great day.