Hawaiian Electric Industries Inc (HE) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the 2011 and fourth-quarter Hawaiian Electric Industries earnings conference call. My name is Alicia and I'll be your Operator for today. We will conduct a Question-and-Answer session towards the end of the conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to introduce Ms. Shelee Kimura, Manager, Investor Relations and Strategic Planning. Please proceed, ma'am.

Thank you, Alicia, and welcome to Hawaiian Electric Industries 2011 year-end and fourth-quarter earnings conference call. I'm Shelee Kimura, and joining me today are Connie Lau, HEI's 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; 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 included on our website. I'll now turn the call over to our CEO, Connie Lau.

Thank you, Shelee, and aloha to everyone. I'm pleased to report that 2011 was a strong year for the Company. Earnings per share was up 19% for the year. Similarly, our 2011 consolidated ROE improved to 9.2% from 7.8% in 2010.

The Bank's strong ROE of 12% contributed to the consolidated results as the utilities' ROE of 7.3% continues to improve. The regulatory restructuring for our Oahu utilities was largely completed this year, but we also recognize there is more to do.

Our Bank continued to deliver strong performance and increased earnings in a challenging regulatory and economic environment. Profitability metrics remained strong. Credit quality improved, and our loan portfolio grew. Our Bank is one of the better performing banks in its class across the country. As a result, HE achieved a 22% total return to shareholders in 2011. We believe we are well positioned to continue to deliver attractive risk adjusted returns, good yield, and earnings growth to our investors in 2012 and beyond.

Turning to Slide 3, our utilities worked with the Hawaii Public Utilities Commission to achieve several key milestones in 2011. We initiated the regulatory restructuring needed to align with the state's Clean Energy Policy with the commencement of decoupling for our Oahu utility in March 2011.

In July, we were granted an interim rate increase in our Oahu 2011 rate case. Under the three-year cycle instituted under the coupling, Oahu will not file for another rate case until a 2014 test year. Our Maui utility filed a 2012 rate case. And we are currently preparing to file a 2013 rate case this summer for our Hawaii Island facility.

Late yesterday, we received HELCO's final decision for its 2010 rate case which included the following key items; approval of decoupling; an allowed ROE of 10% which is consistent with Pico Oahu's decoupling ROE; and the setting of heat rate targets in deadband, also similar to HECO Oahu. As noted previously, the deadband is expected to eliminate efficiency gains, which added 100 basis points to HELCO's earned return in 2011. We'll issue 8-K shortly which will provide more detail but we wanted to provide you with a quick summary now.

We also initiated other programs, reviewed and approved by the PUC, all of which contribute to our clean energy success, including lower time of use rates for electric vehicle charging, and now approximately 1/3 of new EV owners are taking advantage of this program, and Tier 3 of our feed-in tariff, which focuses on larger generating units, such as wind, with projects ranging from 501-kilowatts up to 5 megawatts.

In 2011, we added 146 megawatts of renewables for a total of approximately 550 megawatts. In 2011, renewable energy supplied more than 10% of our customers energy use and as high as 40% on the island of Hawaii. Much of the renewable energy we are contracting for today is cost competitive with our fossil fuel generation and will provide long term price stabilization for our customers.

In terms of customer bills, it has gotten much harder for the average customer in the last year, but not from rate increases. On the island of Oahu the typical electric bill went from $158 per month at the beginning of 2011, to $219 per month at the end of the year, an increase of 39%, with $57 due to rising fuel cost, and $4, or just about 2% from rate increases and other adjustments such as the public benefits fund. As this chart shows, oil price increases have dramatically increased what our customers pay and is the overwhelming reason for higher bills and the reason that our state policymakers want to reduce Hawaii's dependence on oil.

For those of you not familiar with the Hawaii oil situation, our prices are determined by the Asia Pacific market, and they have been significantly higher than the crude oil prices on the mainland US, owing to the disruption occasioned by the tragic earthquake and tsunami in Japan in March 2011. The dramatic reduction in nuclear production has increased regional demand for oil. As Slide 5 shows, while mainland US prices declined from a peak in April, our prices have remained consistently high for most of the year. In this environment, replacing imported oil with local renewable sources makes not only environmental but economic sense for our customers and our utilities.

Looking forward to 2012, we have three major regulatory priorities; decoupling implementation for our Maui County utility; the Maui County 2012 test year rate case; and resolution of the regulatory audits included in the HECO 2011 best year interim decision, one of which was recently settled, and which Jim will discuss later. The Utility continues to work with the Commission and others on the timely recovery of costs, as we continue to implement our new regulatory model.

However, the Commission continues to be resource constrained and burdened with numerous dockets stemming from Hawaii's Clean Energy Initiative. With HECO Oahu decoupled, our utility is focused on aligning its operations to the new business models across all three utilities, and we continue to target an 8.5% ROE for HECO Oahu, or 85% of our allowed returns in 2012.

Turning to the Bank on Slide 7, we outperformed the average of our high performing peers and met or exceeded almost all of our performance targets. We maintained the efficiency gains achieved in our 2010 performance improvement projects and achieved higher returns. All this, despite the headwinds of the prolonged low interest rate environment, flat yield curve, and regulatory impact. Return on assets was 1.23%, higher than last year and significantly higher than peers.

Net interest margin of 4.12% for 2011 was consistent with our target of plus 4% and exceeded our high performing peers. Non-interest expense of $143 million beat our targets and our efficiency ratio of 57% was also favorable to our high performing peers. Pre-tax pre-provision income was $107 million which is within the $105 million to $110 million range we guided last quarter. This is slightly below our original target, which did not assume the prolonged flat yield curve which became evident in mid 2011.

In executing the Bank's strategy to grow its loans, it made nice progress in the home equity line of credit or HELOC portfolio, ranking number one in HELOC production in the state, and growing the portfolio by 29%. And while home equity loans in other parts of the nation are exhibiting weakness, HELOCs remains an attractive asset class in Hawaii.

In addition, the Bank's commercial markets, or C&I portfolio, also grew by 30% in 2011. The Bank also introduced new products, such as its clean energy customer financing for PV and solar water installation vendors. The Bank continues to deliver strong performance while maintaining its low risk profile, strong balance sheet, terrific funding base, and straight forward business model.

Looking forward, the Bank continues to execute on its strategic plan to prudently grow the franchise and remain a safe and high performing community bank. For 2012, we are targeting return on assets of 115 basis points to 120 basis points; low to mid single digit loan growth; net interest margin of approximately 4%; and efficiency ratio in the mid 50s comparable to last year; and pre-tax pre-provision income of $100 million to $105 million. While our targets are slightly lower than last year, they reflect the sustained low interest rate environment and should continue to be attractive relative to peers.

I'll now ask Jim to provide additional details and insight to our results and outlook for 2012.

Thanks, Connie. As a back drop to our results and outlook, we are cautiously optimistic about the Hawaiian economy. Tourism industry, a significant driver of Hawaii's economy, maintained a positive growth trend in 2011. December visitor arrivals rose 7.8% and visitor expenditures grew an outstanding 20.5% compared to the same month last year.

This marks the 20th straight month of increases in visitor expenditures and the highest one-month total on record. December's strong performance resulted in the full year of visitor expenditures increasing to the second highest level of visitor spending in the islands just short of the 2007 peak. For the full year 2011, visitor arrivals were up 3.8% with double digit performance gains from Canada and Australia that enjoy favorable exchange rates. 2012 outlook for the visitor industry remains positive.

Hawaii's unemployment rate of 6.6% continues to track significantly better than the national rate of 8.5% in December. In Honolulu County, December unemployment rate dipped to 5.3% from 5.7% in November. December residential home prices were up and sales volumes were down on most islands. Overall, despite the downside risks in the mainland US and Europe, Hawaii economists expect modest growth in the Hawaii economy in 2012.

Turning to our earnings results on Slide 10. Full year 2011 EPS was $1.44, up 19% compared to $1.21 in 2010. Fourth Quarter 2011 EPS was $0.36 per share compared to $0.26 per share in the same quarter last year. At the Holding Company, fourth quarter included a $3 million contribution by the Holding Company to the HEI charitable foundation of 2011. On a net income basis, HEI earned $138 million in 2011, $25 million higher than 2010.

On Slide 11, Utility net income for the fourth quarter of 2011 was $25.8 million compared to $18.9 million in the Fourth Quarter of 2010. The $7 million increase was largely driven by $7 million of additional after-tax revenue attributed to the rate cases for our Oahu and Hawaii Island utility and the implementation of decoupling for Oahu. $9 million of lower O&M expenses, largely due to the timing of major overhauls occurring in the fourth quarter of 2010, regulatory changes associated with the capitalization of costs, higher retirement benefit expense, and a non-recurring insurance claim settlement in 2011 of $1 million.

These were partially offset by $6 million for non-recurring tax settlement items in 2010, $6 million for the partial write down of the East Oahu transmission project resulting from recent settlement agreements and subject to PUC approval.

At the Bank, net income for the fourth quarter of 2011 was $15.3 million, compared to $15.5 million in the linked quarter and $13.3 million in 2010. The linked quarter was essentially flat and the $2 million increase compared to the fourth quarter of 2010 is primarily attributable to lower provision for loan losses.

Now, we'll look at the utility more closely. Slide 13 shows our actual versus allowed ROEs for 2011, as a percent of allowed. Our consolidated utility ROE was 7.3% in 2011, improved from 5.8% in 2010. Our largest utility on Oahu earned 6.4% ROE, approximately 64% of its allowed return. As Connie mentioned, we are targeting to achieve an ROE of 8.5% for Oahu.

Turning to Slide 14, to continue our progress in narrowing the ROE gap beyond 2012, in addition to our expected normal three-year rate case cycle in each utility, we need to address the ROE leakage inherent in our new decoupled regulatory model. Two elements stand out as the primary focus. Eliminating the five-month lag in rate case interim decisions and the decoupling rounds, obtaining the appropriate mechanism for including large software projects into the rate base in a timely manner.

In particular, our customer information system is scheduled to go live in second quarter of 2012. Without an appropriate mechanism, recovery for each utility will not commence until each utility's next rate case. As of 2011 year-end, $43 million has been incurred on this project. In addition, we are focused on resolving the regulatory audits for our CT1 biofuel generating unit and our customer information system discussed above. Settlement agreements for the East Oahu transmission project is subject to the PUC approval.

We have increased our five-year capital expenditure forecast to approximately $2.6 billion to $3 billion which is about two to four times depreciation each year. There are significant items included in our five-year forecast that could change over time. These include $600 million to $800 million of new generation, $500 million to $600 million of environmental compliance, $250 million to $300 million for fuel infrastructure investment, and $70 million to $100 million for inter island wind shore-side facilities.

These expenditures depend on external factors, such as the ultimate timing and technical requirements for environmental compliance and regulatory approval, and timing of fuel infrastructure and inter island wind shore-side facilities which are also dependent on permitting and third party activities.

New generation is subject to competitive bidding. The balance of our capital expenditure forecast or approximately $1.2 billion is comprised mainly of routine system capital. As this forecast could change over time, the five-year compounded annual growth rate for rate base is estimated to range between 7% to 9%.

Slide 16 summarizes the key utility earnings drivers for 2012 that I discussed, as well as a few additional items. We expect to implement our Oahu RAMs effective June 2012 subject to PUC review. Having just received approval yesterday to implement decoupling at our Hawaii Island utility, kilowatt hour sales will only continue to be a key driver for MECO.

We expect MECO kilowatt hour sales to be 1% higher than 2011 which equates to about $1 million in net income impact. In 2012, O&M expenditures are expected to increase by 6% and rate based growth is expected to be 4% to 5%. Overall, our Utility continues to focus on the major regulatory tasks ahead, aligning its operations with the new regulatory model, and executing the clean energy and reliability CapEx program.

Now, we'll look more closely at the banks strong performance metrics. On Slide 18, our net interest margin was 4.12% in 2011 and 4.16% in the fourth quarter of 2011. Five basis points above the linked quarter and well above our high performing peers. The five basis point improvement in net interest margin for the linked quarter was primarily due to lower cost of funds and the recognition of deferred loan fees from higher residential mortgage refinancings. Our liability costs of 29 basis points in the fourth quarter 2011 is extremely low by industry comparison and is driven by our low cost deposit base. We do not expect our liability costs to decrease further.

The Bank recorded $4.1 million in provisions for loan losses in the fourth quarter compared to $3.8 million from linked quarter. The annual provision of $15 million improved by $5.9 million compared to 2010 and was consistent with our expectation of being in the lower end of our 2011 guidance of $15 million to $20 million.

The overall improvement is due to the improvement in the asset mix, with higher risk loans, specifically land loans being replaced with lower risk loans. In addition, we saw improved credit quality associated with the modest year-over-year recovery in the Hawaii economy.

We are very pleased with the bank's loan growth with five consecutive quarters of increases. In the fourth quarter, loans grew by $20 million. Growth primarily in commercial markets, or C&I, and the home equity lines of credit, more than offset the planned decline in residential mortgages related to controlling interest rate risk in this environment. For the year, loans increased by $148 million, or 4.2%, which was in line with our expectation of mid single digit loan growth in 2011.

Slide 21 is our balance sheet, which shows you the asset and funding mix of both ASB and our peer banks. 96% of our loan portfolio was funded with our low cost core deposits versus our peer bank at 84%. Over the year, deposits increased by $95 million. We were able to reduce our higher costing CDs by $122 million, or 18%, and grow our lower costing core deposits by $217 million, or 7%. This resulted in additional reduction in the cost of funds which benefited our NIM in 2011.

Going forward, we expect CDs to remain stable or gradually rise as we lengthen the duration of our liabilities in order to manage interest rate risk. We remain well-capitalized with a Tier 1 leverage ratio of 9%, tangible common equity to total assets of 8.3%, and total risk-based capital of 12.9% at December 31, 2011. In addition, ASB paid dividends of $58 million to HEI in 2011, or 97% of its earnings.

Turning to credit quality, ASB's non-performing assets ratio was 2.01% at the end of the fourth quarter and remained better than its high performance peers. The seven basis points increase from the linked quarter was primarily due to two commercial loans that remain payment current.

Our primary credit risk continued to be in three rapidly shrinking loan portfolios. These include $45 million in residential loans, primarily on the neighbor island, land loans on the neighbor island, $261 million of neighbor island 1-4 residential family mortgages produced from 2005 to 2007, and $77 million of self-amortizing portfolio of mainland residential loans purchased. These three portfolios, totaling $383 million, are down $83 million, or 18% from the prior year.

On Slide 23, our net loan charge off ratio was 48 basis points for the quarter and remains low and is an improvement from the 54 basis points in the linked quarter. The allowance for loan losses currently represents roughly 1% of outstanding loans at $37.9 million, essentially flat with the linked quarter, and $2.7 million lower than the prior year level of $40.6 million. The reduction in the allowance is due to the improvement in our asset mix, higher quality loans which require lower levels of allowance.

Looking forward, and with the solid 2011 to build on, the primary drivers for 2012 are recapped here on Slide 24. Net interest income will be driven by our ability to achieve continued modest loan growth. But based on our expectation of continued low interest rates, we expect pressure on our net interest income and NIM. We will focus on shorter duration adjustable rate products and control our interest rate risk to be well positioned to benefit when interest rates rise.

Non-interest income will be impacted by three primary drivers. First, the Bank is focusing on improving fee revenue through expanded fee-based products and services to better serve our customers. Second, we expect 2012 interchange revenues to be approximately $1 million lower due to recent changes from our interchange networks.

Lastly, gains on sale of loans are expected to be lower in 2012, as refinancings subside. But actual results will depend upon interest rate and loan origination volumes. On provision expense, we expect credit quality to gradually improve, and as the economy improves we expect provision in the range of $13 million to $16 million for 2012. The improvement in credit quality should result in lower provisions related to charge-offs, but will be somewhat offset by higher loan loss reserves associated with expected loan growth.

On non-interest expense, we expect to maintain our run rate of $145 million through disciplined spending and efficient operations, even as we grow the core franchise. Based on these expectations, net income is expected to be approximately 3% to 5% lower in 2012. Overall, we are targeting to deliver strong results compared to our industry peers, and our low cost funding base, efficient cost structure and lower risk profile.

Turning to our financing and liquidity picture. We continue to maintain a strong capital structure with a 52% consolidated equity, total capitalization. Effective last month, we switched back to new issuances of common stock to satisfy our dividend reinvestment plan and other stock plan purchases. We expect to raise approximately $45 million in 2012 from these plans to invest in the Utility.

Based on our current assumptions, we do not expect to require additional equity other than through DRIP through 2012. ASB will continue to pay a healthy dividend to HEI, but expects to reduce its $58 million in cash dividends paid in 2011 to $45 million in 2012 in order to fund its planned growth, while maintaining its target capital ratios of 9% Tier 1 leverage and 13% total risk-based capital.

While we do not expect any long term debt financing at the Holding Company, the Utility has PUC authorization to issue up to $170 million of new debt and to refinance up to $311 million of existing debt in 2012, subject to market conditions. In terms of our credit facilities, HEI and HECO amended and extended their respective $125 million and $175 million line of credit facilities from the original termination date in 2013 to 2016. Our financing plans assume consolidated pension contributions of $104 million in 2012, and $45 million in bonus depreciation cash tax benefits.

Many of you have asked about a dividend increase. We will consider an increase when we can consistently maintain a 65% payout ratio. At that point, we will balance a dividend decision with consideration for other capital allocation options, such as the capital expenditure program. We will also consider our relative yield.

And before I end, let me inform you that the Office of the Comptroller of Currency reporting requirements require our Bank to file its financial results with the OCC 30 days after the end of the quarter. As these filings are publicly available, we plan to issue a separate Bank Earnings Release concurrent with the OCC filing starting with the first quarter of 2012.

Now I'd like to turn the call back to Connie.

Thanks, Jim. In summary, we have made significant strategic progress and it is now being reflected in our financial results. The Utility continues to focus on successfully fulfilling our clean energy role in the state, and achieving returns that will enable us to compete for capital and fund the upfront investments necessary to support Hawaii's move to clean energy.

At the Bank, despite the significant challenges posed by the interest rate and regulatory environment, we continue to perform as a high performing community bank and are focused on modest loan growth. Our dividend yield remains attractive and above the average for utility peers. As of yesterday's close, our dividend yield was 4.7%. 2011 marked our 110th year of paying continuous dividends. Overall, we believe we are well positioned to continue to deliver attractive earnings growth with reduced risks and volatility and an above average dividend yield.

And with that, we look forward to hearing your questions.

(Operator Instructions) Ashar Khan; Visium.

Just wanted to go to Connie, one thing which you don't give us -- the EPS. I was just trying to, from the data that you provided, if you can just correct me, my different assumptions as we go along from the slides. One thing I heard at the end was that bank earnings could be, if I heard, 3% to 5% lower than '11. Is that correct?

Yes. That's correct.

So that would be something on average around $0.02 to $0.03?

That's correct. It's Jim Ajello, right.

Okay. Then just going back to, Jim, I'm just trying to use this as a kind of guide. And tell me if I'm doing this wrong or right. You mentioned your utility ROE improved from 5.8% to 7.3% from '10 to '11. And if I'm right, utility net income went up by $0.22 on 150 basis points improvement. Correct, if I'm doing my numbers right?

Okay.

So, I'm just trying to imputate a similar kind of relationship, if I'm not right, say you're going from 7.3% to now 8.5%. That would be like 120 BPS which could imply, if I use the same math, an $0.18 increase in utility earnings, if I use the same kind of mathematical relationship that happened last year, '10 over '11. Am I in the rough ballpark? Or am I doing something wrong, crazy in terms of interpreting one to the other?

I'll start, Ashar, and I'll look to Tayne for some support on the topic. It's not quite so correlated as that. There are different levels of expenditures, some year-over-year, that you'd have to take into account. For example, we guided here that O&M expenditures would be up about $6 million. We mentioned a number of things. For example, the continuation of expenditures on the customer information system that is not in a, right now, in a recovery mode. So it is not exactly easy to extrapolate between the two points that you gave and get an $0.18 increase in earnings straightforwardly.

And Ashar, this is Connie. Let me just add in, too, that if you'll recall we're now on a three year cycle for rate cases under the new decoupling model, and so it depends also on which utility is going in that year because the Oahu utility is so much larger than the other utilities.

Okay. So, Connie, what you're saying is because of the higher O&M and certain other stops, it might be because of the cycles it's harder to achieve this higher level. But then I guess it gets normalized as we go through it. But this might be a year where, because of these expenses and everything, it could be a harder to achieve that level. Am I missing something?

No, that's absolutely correct. And particularly in this year, as Jim pointed out, our customer information system, the software project is expected to go live this summer, and of course, AFUDC would stop at that point. And then we'll have to get recovery. And also, as Jim pointed out in his remarks, that recovery at the moment, absent some software rate adjustment mechanism around, would come in with each utility's rate case.

Okay. And then, Connie, how should we look at this CapEx thing. If I'm right, the projects you've mentioned, they aren't all approved as yet, which are supporting the higher capital growth rate. Is that correct? Or how should we look at the time line with this forecast is really sound? Is there dates which you can tell us how we should monitor it, in terms of the CapEx?

No. There are not. I mean particularly with the environmental costs, as you know that's really watching what the legislation is. Of course, our forecasts are anticipating that we would have to meet the most aggressive deadlines under the legislation, but that could change.

It's Jim, Ashar. I'll point out one other thing too. There's a very large amount of expenditures for new generation here. And I'll reemphasize that this is subject to competitive bidding. Our utility may or may not win some or all of that requirement. So that's a full $600 million to $800 million in the schedule.

And on that, you would see the RFP go out for the competitive bid on the generation, and then there would be a schedule and you could then track that. But, of course, it's too early for those RFPs.

Okay. And then, can I just ask if I can end up with, you mentioned your CapEx regarding things. So, the cash flow statement that you provided, how much DRIP is going on? So I'm assuming then that if you have to fund this higher CapEx, we would then require more equity, right? Am I thinking through this correctly?

Yes. That's correct.

Right. But we mentioned that, Ashar, that we would not need to issue equity through 2012.

I understand, but then CapEx is like doubling in some of the further years. I'm just trying to understand that then we have to issue equity in those years to support that CapEx rate because we don't get immediate recovery of some of these investments. Or I'm missing something.

You are not missing something. There will definitely need to be other than DRIP equity issued to support the CapEx plan presented on 15.

We'll be doing the same thing that you're doing, which is watching the capital expenditures, watching the development of the environmental regulations, going through the competitive bidding process. And when we know what the actual CapEx will be, then that will also determine whether we have to issue new equity or not for that particular year. Because what we will do is we will always manage to the balanced capital structure.

Right. And we have not issued equity since 2008. That's the other benchmark to remember.

I understand. Thank you so much. I'm sorry I took so much time.

Andrew Weisel; Macquarie Capital.

Hi, good morning guys. A couple quick ones on the Utility. First, I want to make sure I heard you right. Did you say HELCO got decoupling approved last night?

Yes. Correct.

Okay. Great. Congratulations. And then at MECO, you expect a positive 1% growth in kilowatt hour sales in '12 versus '11. Just curious what gives you that kind of optimism after a decline in 2011?

This is Dick Rosenblum. Really, we see a significant rebound in tourism and the economy and that's primarily what we're looking to.

Okay. Great. And then just two quick ones on the Bank. If I'm doing my math right, did the return on tangible equity in 2011 improve to about 14.5%?

No, I think that's too high. We're going to be pretty comparable to where we are now.

There's only about $80 million of goodwill in the equity number.

Okay. So what is that return then?

We'll get back to you, Andrew, on that.

Okay, that's fine. And then lastly, as far as market share dynamics, are you seeing any changes as far as share losses from First Hawaiian, given pressure from their parent company, or shared gains from Central Pacific, as they try to regain some share?

I think there's definitely pressure in the market because you know our market is not a fast growth -- fast loan growth market. It's fairly stable. So I think everyone has good liquidity and is quite interested to show that they're putting that liquidity to use. So we're seeing competition out there. We think that we'll be able to do the modest asset growth that we said at the net interest margin levels that we've indicated. So we're trying to make sure that competition, while healthy, stays -- doesn't damage the economics of the market.

Andrew, I'd just add. Hawaii has a long history of being a pretty disciplined banking market and so we're hoping that that continues forward, although as you note, it is getting more competitive. But certainly on our side, we will maintain our disciplined process of underwriting.

Great. Thank you very much.

Bryce Rowe; Robert W. Baird.

Hi, thanks. Just a few questions on the Bank here. Obviously, showing some nice growth in loans in 2011. The C&I growth that we saw, are there some syndicated loans within that bucket?

Yes. Right. About half the growth came out of the local market, about half came out of the shared national credit participations that we've done in there.

Okay. And what is the absolute level of the share national credits now?

I think it's $132 million.

Okay. And I take it you continue to see some level of pressure on the one to four family mortgage book. What kind of pressure did you see there in the fourth quarter on that portfolio?

Well when you say pressure, which aspect? We saw --

From a volume perspective, the prepayments.

Volume remained good. Our volume quarter-over-quarter was up strongly. We are not portfolioing as much because of the level of the rate, so we ended up selling more. That's one of the reasons we had a very good gain on sale number. We were up I think about $1.6 million in gains compared to the third quarter as we sold stuff. Our total volume, the residential mortgage portfolio was down I think $80 million quarter-over-quarter. Hold on, let's pull that number. Quarter-over-quarter. The total residential book was down $64 million because we added very little to the portfolio at these rates. So we continue -- over 2012, we think we'll hold that decline to somewhere in the range of $100 million and we'll try to manage the decline of that on it. We want it to be a smaller proportion of our book, but we need to make sure that that decline is not too rapid.

And Andrew, as Rich just mentioned, remember that we are, from a long term strategic standpoint shifting our asset mix because we're coming out of a stressed background that was very heavy in the mortgage portfolio, and so we have really been building the shorter duration, higher yielding assets that will move when interest rates move up. So the home equity loans, the C&I loans is what you're seeing us focus on and just holding the residential portfolio to a slight decline.

Right. I certainly understand that. As far as the prepayment, within the prepayment impact within the net interest margin -- Jim, do you have the basis point impact that that helped the margin for the quarter?

We had four basis points that came from the accelerated recognition of the fees associated with those paydowns.

Okay. And were there any bond sale gains in the quarter?

No.

Okay. Great. Thank you, guys. Appreciate it.

David Paz; Bank of America Merrill Lynch.

Just had a few questions. Just on the 2012 ROE target, that's for the full year, right? So that's on the average equity number, correct?

That's correct, and that's for Oahu.

Correct. Okay. And are you guys assuming in that target that those items that you have on Slide 14 are fixed or not? Or resolved I guess is a better way of putting it? So that's as if nothing -- the status quo?

Yes, that's correct.

Okay. And then on the O&M growth of 6%, how much of that gets recovered through the decoupling, I guess trackers that you have in place for labor and non-labor?

David, this is Tayne. Of that amount I would say maybe about half gets covered and remember now the RAM mechanism has a five month delay and then also we have to be aware of rate cases, which we get interim decisions half a year. So with that I would say about half of it.

Got it. And then just beyond 2012, if -- I guess you're not -- you didn't bring up the 2014 target that you had I guess earlier last year. Any, I guess a good way of putting it is, when do you expect to earn your allowed ROE at HECO, and then now I guess HELCO, now that you have decoupling?

Yes, David. I don't think we had put out guidance previously for 2014. But what we have said and this continues to be true is that the items that are typically disallowed, things like incentive compensation, are around 40 to 50 basis points for the Oahu utility, and 10 to 15 basis points for the neighbor island utility. We now have -- as you know, decoupling came in with a five month delay on the RAM. And so that's worth another 50 basis points roughly. And then also, as you know, our rate case cycle does not give us an interim decision until approximately another five month delay within a particular test year and that's worth roughly another 50 basis points. So that's going to kind of be the cycle depending on which utility is in for rate case in that calendar year.

Okay. And then on just year-end '11, what was the equity ratio at each of the utilities?

Year-end equity ratio for each utility?

You know, I can follow-up later on that.

Yes. Shelee can give you a call back on that.

Yes. Just turning to equity, Jim, I know you were discussing this, and I missed some of the discussion you had earlier with Ashar. Should we be expecting -- you guys are saying no equity needs through 2012. We see this ramp up in CapEx. Is it reasonable to assume that '13 would be the year you start looking at equity needs?

It really depends on whether the '13 or '14 schedule -- I mean we're reasonably confident about the '12 schedule, it's right before us that you see there. But you see the pretty big slope building in '13 to '14, so it is not an unreasonable assumption to expect it will be required at that point in time. That's really when the larger amount of expenditures increase.

Yes, and David, we really will manage to that balanced capital structure and with the DRIP, that gives us a lot of flexibility. As you saw us last year, we turned it off for the last two quarters. It's back on again now. But we will dial the capital ratios to the balanced capital structure.

Our reply here also assumes that the Bank continues at a steady level. Because the Bank is contributing significantly even in 2012 with the lower amount of dividends I've cited, so that's a significant support for the overall capitalization of the Company and our ability to support the utilities rate based growth.

And conversely, we also are expecting and targeting the Bank at a mid-single digit loan growth. If the economy happens to pick up and there's more that's available, we have always said that we will support the growth of the Banks. As you know, it's a very high performing Bank, it's doing well, and so we'll take advantage of that upward swing in the economy, should it come.

Okay. And the next to last question, Jim, just to clarify your comments on the dividend. Are you saying that you guys are going to keep the yield competitive? Maybe I missed that. Can you just clarify what you said on the dividend?

Sure, David. What I said was really a response to many questions we get, so I thought I would assemble a reply all in one spot for everybody to hear, and which is to say that we don't expect to change the dividend until we're consistently producing at a 65% payout ratio. I'm assuming basic utility industry payout ratios. So I'll just as a side step say that 4.7% yield in the banking sector, and we're 40% bank, is a very unusual number. So our yield at 4.7% is quite stout right now, I think you'd say. Either as compared to the mid cap utilities or considering the composition of the businesses. But bottom line is we'll keep it where it is until we consistently produce a 65% payout ratio and then, when we get to that point, I expect we'll have some capital allocation choices. We'll look at relative yield, which is actually what I said, and we'll look at further capital needs. There may be an opportunity to fund more growth at the utility as well. So there will be a number of options available to us and I look forward to that actually.

Great. Thank you so much.

Jim Krapfel; Morningstar.

So the 8.5% target you have for ROE for HECO, that's 210 basis points higher than what you achieved in 2011. Is that primarily coming from the annualized effect of the rate increase and the incremental RAM revenue? Or are there other things in there as well that drive that increase?

I think your qualitative statements are correct. The actual numbers are a little bit different because our 8.5% target is solely for Oahu, which is the largest utility. So the numbers don't quite match up, but you are correct that the qualitative reasons you gave are the right ones.

Okay. You did 6.4% though in 2011, right?

6.4% is for Oahu, is that what you're looking at?

Yes.

Compared to the 8.5% guidance, so that's what that is.

Yes.

Yes. That's correct.

Okay. That's all I had. Thank you.

Okay.

Jacque Chimera; KBW.

I had a question about the home equity loan growth that you saw in the quarter. Was that from a new customer base, or are you seeing higher utilization rates from existing customers?

Predominantly new account generation. We are increasing utilization over the year. We saw utilization pick up about three points, which is good for us. But we are continuing to generate new accounts and new customers for the Bank.

And is that more marketing on your part to diversify the portfolio? Or is it more of being able to take market share with just an increase in demand in general?

I think, in general, the lending is going up, we are leading the market on this. But the home equity lending is going up for all of the major participants.

Okay.

Jacque, if you remember, it wasn't just marketing, but Rich has been retooling all of the back office processes so that we can give very quick loan approvals. So it's a whole combination that it's making them much more competitive in the marketplace.

But well reviewed loan approvals.

Yes, quick, well reviewed.

Yes. I'm not concerned about your credit. So I assume that your underwriting standards are definitely above par.

And Jacque, it's Jim. I just wanted to qualify. You said in the quarter, the stats that we presented about growth in HELOC in C&I were actually the yearly stats.

Okay. So the three point increase in utilization is from a year ago?

Yes, and the growth rate as well overall in the portfolio.

Okay. Thank you for that clarification. And looking to the loan to deposit ratio, I'm calculating that around 90%. Is that a level that you're comfortable with? Or would you also allow it to go higher?

We like that level. We don't want to be bidding up deposit costs. We think it's a very good level for us overall from our HELCO strategy so we like it.

Okay. So I would assume then that deposit growth will match loan growth over the coming year?

Yes.

And did you see, you had mentioned interchange income effects in the next year I believe in your prepared remarks. Did you have an effect from Durbin in the fourth quarter?

Well, there's the indirect effect coming around. So the interchange networks -- also within Durbin, beyond the cap there were changes in the rules on who could direct transactions to which networks and things. The merchants have more decision-making around where they're directing and that's resulting in price competition among the networks. And so, we continue to periodically get price updates from the carriers and recently, the recent Visa price changes that come in for April are reductions in the rates on signature, particularly, and so we are seeing. That's what's driving the pressure on that.

Okay. So they did manage to find that loophole for the sub-$10 billion bank, then it sounds like?

Yes.

The law of unintended consequences.

I figured that they would. I did not figure it would happen this quickly.

Right.

We've been saying almost since the initiation of this rule, Jacque, that the indirect economic effects could occur but this is the first time they are starting to show up.

Yes. I had expected it, but this is a little sooner than I would have anticipated. Okay. Great. Thank you for the additional color. I appreciate it.

There are no more questions in the queue at this time.

Okay. We have just one other point for Andrew on the response on the return on tangible equity. We would look, based on the fact that we're going to be retaining a little bit more capital as we grow, we would see that return level probably be a shade under 14%, as we come into 2012.

David Paz; Bank of America Merrill Lynch.

Hi, sorry. Just one quick question on the $226 million of CapEx in 2011. How much of that was allocated to HECO as opposed to the other two?

This is Tayne. I think the $226 million you're referring to is from our statement of cash flows, right?

Right.

Yes. I just wanted to add in that this item is -- we take out some, back out non-cash items. You remember back in the third quarter we guided all of you that we would be underspending by about 10% and $270 million was our CapEx. Just wanted to point out that the $270 million -- where we ended up was at $284 million. And how the $284 million relates to the $226 million is that we back out non-cash items related to things like accruals for invoices or equity portion of AFUDC versus non-cash items. So I just wanted to make that point. That's point number one. Now in terms of HECO, it's roughly about 70% of that relates to Oahu.

Okay, great. Thank you.

Those are all the questions that we have, sir.

Thank you, everybody, for joining us today. And please feel free to call me if you have additional questions. Aloha.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a great day.