Hawaiian Electric Industries Inc (HE) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2014 Hawaiian Electric Industries earnings conference call. My name is Lisa, and I'll 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. (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, Ms. Shelee Kimura, Manager, Investor Relations and Strategic Planning.

Thank you, Lisa. Welcome, everyone, to Hawaiian Electric Industries' first quarter 2014 earnings conference call. Joining me this morning are Connie Lau, HEI President and Chief Executive Officer, Jim Ajello, HEI Executive Vice President and Chief Financial Officer, Dick Rosenblum, Hawaiian Electric Industries President and Chief Executive Officer, and Rich Wacker, American Savings Bank President and Chief Executive Officer, as well as other members of senior management. Connie will provide an overview of the year and an update on our strategies. Jim will then update you on Hawaii's economy, our results for the first quarter and outlook for the remainder of the year. We'll continue with questions and answers.

In today's presentation, management will be using non-GAAP financial measures to describe the Company's operating performance. Our press release and webcast presentation materials, 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 measures. Forward-looking statements will also be made on today's call. Actual results could differ materially from what is described in those statements. Please reference the forward-looking statements disclosure accompanying the webcast slides, which provides additional information on important factors that could cause results to differ. The Company undertakes no obligation to publicly update or revise any forward-looking statements, including EPS guidance, whether it's a result of new information, future events or otherwise. I'll now turn the call over to our CEO, Connie Lau.

Thanks, Shelee. Aloha to everyone. HEI and both our operating segments delivered solid financial results in the first quarter of 2014, on track to meet our 2014 earnings guidance. At the Bank, the healthy Hawaiian economy continues to support loan growth and strong credit quality. At the utility, we are proud of our efforts to be leaders in the nation's Clean Energy transformation, as we integrate higher percentages of renewable and distributed generation than any states across the nation. These efforts are core to our long-term Clean Energy strategy to reduce the costs and volatility of our customers' electricity bills.

Last week the Hawaii PUC issued a comprehensive set of energy policies and guidelines. Foundational to these were the PUC's stated objectives -- lower, more stable electric bills, expanding customer energy options, and reliable energy service. They stated, and I quote, by embracing cost effective Clean Energy opportunities that displace today's high-cost oil-fire generation, Hawaii's electric utilities can stabilize and lower customer bills, while expanding customer choices for customers to manage their energy use. Hawaiian Electric Industries' Clean Energy strategy is based upon these very principles, and we look forward to working collaboratively with the PUC and other stakeholders to aggressively advance these common objectives. The PUC also provided directives in last week's four decisions and orders which make clear their energy policy priorities. We welcome this clarity.

We've already been working on many of these priority initiatives, such as smart grid, demand response, efficient operations, energy storage, as well as the ongoing evaluation of other options to integrate more variable generation, Lower-cost fuel, and we recently issued an RFP for LNG and are in the process of receiving bids.

LNG can be an effective bridge strategy to generate substantial savings and reduce environmental impacts as we transition to a Clean Energy future. At the same time, the progress we've made on Clean Energy has allowed us to start deactivating older, more expensive oil-fired plants, a total of five units and 131 megawatts to date. We are closely reviewing the PUC decisions and developing our action plans to respond within the 30 to 120-day deadlines established. These guidelines are a road map and an opportunity to move aggressively as we solve important energy challenges for Hawaii.

In light of recent weeks, we would like to review the decoupling model and the trend in residential PV adoption in our state. Our decoupling model was implemented in 2011 and 2012. And it was designed to align the utility's business model with the state's Clean Energy goals, including lower sales from aggressive energy efficiency and distributed generation, such as PV. There are three main components of decoupling. First is the revenue balancing account, which is the mechanism to delink revenues from electricity usage -- in other words, reported sales revenues are fixed at the last rate case level. Whether kilowatt hour sales decline or go up, our revenues do not change. This was adopted by our Commission and implemented for our utilities in 2011 and 2012, to remove the disincentive to the utility to support energy efficiency and self-generation from developments like rooftop PV.

Second is the revenue adjustment mechanism for expenses, which annually adjusts rates to account for index changes in costs. This mechanism provides financial incentive to control expenses at lower than inflationary level. Last is the revenue adjustment mechanism for capital addition, which annually adjusts rates to recover costs related to infrastructure investments. This mechanism allows for a more timely recovery of reasonable expenditures, an important consideration for attracting the up-front funding for these investments.

One of the intended objectives of the decoupling model was to improve the financial integrity of the utilities, so that the necessary investments could be made to facilitate the transition to clean energy, and to attract renewable energy developers with lower cost financing based on the credit of a financially strong utility. Last year, and as expected after the initial years of decoupling, the PUC opened an investigative docket to review whether the decoupling mechanisms are functioning as intended. In that docket, the Commission affirmed its support for the continuation of a sales decoupling mechanism.

A portion of the decoupling proceeding is ongoing. The next major step in this proceeding is the statement of position, which will be filed later this month, and with reply statement of positions occurring in July. Hearings are scheduled for August, and the PUCs review will occur after the filings they have ordered in last week's decision and order. We share the PUC's vision that utility scale and customer sited distributed generation will increasingly help us transition from fossil fuel to renewable energy.

As you can see from this slide, for the past five years, we have been consistently reducing our usage of imported oil, while increasing our use of renewables. At the end of 2013, 18% of sales were met with renewable sources, already surpassing our 2013 RPS, up 15%. Hawaiian Electric continues to lead the nation in the integration of customer sited solar, with 11% of Oahu residential customers having rooftop solar year-to-date. By the end of the first quarter this year, we integrated 326 megawatts of PV statewide, compared to only 12 megawatts in 2008. And we now have over 40,000 customers, compared to 850 in 2008. As a result, we were recently ranked number ten in the nation in total megawatts of PV installed, a major accomplishment given the small relative size of our state. Critical to continuing this transition is a modernized grid, which we and the PUC believe is the backbone of the utility of the future, and will require important investments to move forward quickly.

Such investments include smart grid and energy storage. In addition, the PUC has indicated that they are, and I quote, generally supportive of the utilities' efforts to cost effectively upgrade the generation system to enable integration of renewables. This includes investments to improve the flexibility of existing generation, and the addition of new units with specific characteristics to accommodate substantial renewable energy in the future. And with Hawaii leading the nation in integration of renewables and distributed generation, our regulatory model must evolve as well. As the PUC indicated in its recent white paper, the current electric utility rate structures in Hawaii may not be well suited for our future environment, where there are significant quantities of variable renewable energy, customer sited distributed energy resources and increasingly smart grid technologies.

The PUC offered for consideration unbundled rate structures, which could more appropriately fit customer preferences for varying levels of electricity service and adjust the relative cost sharing of utility fixed costs between customers with distributed generation and those without. In addition, the PUC recognized the importance of incentives to expedite the evolution of the oil-fired generation fleet to lower cost renewables. Last year, and as referred to by the PUC in its recent guidelines, Hawaii adopted Act 37, which provides the PUC with, among other mechanisms, options to protect the utility against stranded assets. It will take time to achieve the utility of the future, but we are committed to doing so expeditiously and responsibly. And view it as a collective evolution of our utilities and public policy.

We're all very focused on reducing Hawaii customer bills as quickly as possible. Looking at the breakdown of our customer bills, roughly 75% is fuel related, unlike our mainland utility peers, where fuel costs are a significantly smaller percentage of the total bill. We're aggressively seeking to reduce fuel costs, and issued an RFP in March for the supply of LNG by early 2017. We had a robust response to the RFP with final bids expected later this month. The proposals received to date appear potentially promising, and we will provide an update as soon as commercial discussions mature. In parallel to this RFP, we continue to pursue options for longer term, large-scale importation of LNG into Hawaii.

Just last week we issued an RFP seeking energy storage to support more lower cost renewables for Oahu. The requested proposals are for large scale energy storage systems to be owned by the utility, and able to provide 60 to 200 megawatts of power for up to 30 minutes. The utility is targeting to file the applications for energy storage projects with the PUC by the end of 2014, and to place systems in service by early 2017. In addition, we are very focused on managing internal operating costs, which are about 15% of the total bill to our customers. Our strategy is to target expense reduction in order to strategically increase spending in priority areas, such as support for the customer information system upgrade, and to the smart grid program. Both are part of the utilities grid modernization efforts to further improve service, to provide customers with more choices and integrate more low-cost renewable energy.

The deactivation of our older, less efficient oil-burning generating units is part of this cost reduction strategy as well. Five deactivations initiated in 2013 and 2014 are expected to deliver annualized savings of $7 million to $9 million. In addition, there are numerous individually small but meaningful initiatives that are being executed in order to keep total O&M flat compared to last year. Lowering our customers' costs is an integral part of our strategy to improve the value proposition to our customers. Jim will now cover our first quarter financial results.

Thanks, Connie. First I'll briefly comment on factors driving Hawaii's economy. Year-to-date visitor arrivals and expenditures moderated down roughly 3% from last year's all-time highs, but still robust after consecutive years of strong growth. Statewide unemployment remained low at 4.5%, with Honolulu at 4% in March of 2014, significantly below the national unemployment rate of 6.7%.

Hawaii real estate activity was strong in the first quarter of 2014 -- a 9.2% increase in the median sales price for single-family, residential homes on Oahu, and a 1.9% increase in the total number of closed sales over the first quarter of last year. The Hawaii construction industry exhibited strong growth in the first quarter of 2014, as the value of private building permits increased 21% over the same period in 2013. Overall, we expect continuing growth in Hawaii's economy in 2014, supported by continuing recovery in the construction industry and steady but slower growth in the visitor industry.

As shown on slide ten, first quarter earnings were $0.45 per diluted share in 2014, up from $0.34 in the prior-year quarter. Turning to slide 11, HEI's core ROE for the last 12 months was 10.4%, with the equivalent ROE contributions from the utility of 8.7%, while the Bank continued to provide a strong ROE of 11.2%, maintaining a conservative risk profile. On slide 12, utility earnings were $35.4 million for the first quarter of 2014, compared to $24.4 million in the first quarter of 2013. The detailed variances are shown on the slide, and I'll just highlight a few.

The utility net revenues after tax were $6 million higher than the prior-year quarter, largely driven by the recovery of infrastructure investments. In the first quarter of 2014, we began recording the estimated revenue adjustment mechanism revenues for Oahu on January 1st, versus June 1st. These were partially offset by lower cost recovery at Maui Electric due to the 2012 final decision, and reduced fuel efficiency performance of the generation units on Oahu, which were run at lower levels compared to 2013, in part to allow for greater integration of renewable energy. Operations and maintenance expense was $8 million lower, or about 14% lower compared to the prior-year quarter, largely due to the timing of overhauls, lower production maintenance expense, including lower overtime costs, and lower customer service costs, which were elevated in the first quarter last year during the stabilization period for the new customer information system. We are maintaining our O&M guidance of flat compared to 2013 levels.

At the Bank, net income for the first quarter of 2014 was $14.5 million, $2.4 million higher than the linked quarter. Non-interest income was higher, driven mainly by the $2 million after-tax gain on the sale of the municipal bond portfolio. Sale of the portfolio was due to the strategic shift towards higher quality liquid assets, due to the recent guidance on liquidity standards, and the likelihood of higher interest rates. About half of the after-tax gain is expected to be partially offset by a lower investment income for the remainder of the year. This investment gain was partially offset by $1 million after-tax lower fee income, including lower mortgage banking income. Lower non-interest expense was the result of elevated fourth quarter 2013 expenses, primarily due to the timing of performance-related compensation costs and higher marketing expenses in the quarter.

Turning to the utility on slide 14, it shows the utility's actual ROEs for the last 12 months. Consolidated core ROE of 8.7% improved from 8.4% in March of 2013, primarily due to the impact of the 2013 and 2014 RAM revenues, including Hawaiian Electric's 2014 RAM revenues in the first quarter of 2014, as well as lower O&M.

I'll now discuss the Bank. American delivered solid profitability metrics, and we're in line with targets and peers. The Bank's year-to-date annualized return on assets was 110 basis points above our annual target of approximately 95 to 100 basis points and attractive compared to our Bank peers. We are on track to achieve our financial targets for net interest margin, loan growth, and net chargeoffs.

Overall, the Bank continues to maintain its low risk profile, a strong balance sheet, terrific funding base, and straightforward business model. On slide 17, our net interest margin of 3.64% in the first quarter of 2014 was 3 basis points lower than the linked quarter. Total asset yield declined by 4 basis points, due to faster amortization of premiums in the investment portfolio and lower yields on loans, as loans continue to reprice down in this low interest rate environment, albeit it at a slower pace. Our liability cost of 23 basis points in the first quarter of 2014 was unchanged from the linked quarter, and is still extremely low.

We expect NIM compression to continue in the near term, but anticipate NIM will begin to recover by year end, based upon market expectation of rising interest rates. In the first quarter of 2014, non-interest income was elevated due to the $2.8 million gain on the sale of a municipal bond portfolio which we discussed earlier. Compared to the linked quarter, as expected, mortgage banking income was lower as the refinancing markets slowed, and interchange fees were lower, reflecting seasonality. We expect lower mortgage banking income going forward, due to lower refinancing volumes and our intent to retain the current loan portfolio production to maintain targeted loan portfolio mix.

Turning to credit quality, the Bank recorded $1 million provision for loan losses in the first quarter of 2014 compared to $600,000 in the linked quarter and $1.9 million in the prior quarter. The $900,000 decline in provision from the prior quarter was roughly due to lower net chargeoffs in the first quarter of 2014. Net chargeoffs were $200,000, or 0.02% in the first quarter of 2014, compared to 0.15% in the linked quarter and 0.12% in the prior-year quarter, consistent with ongoing improvement in credit quality of the loan portfolio in Hawaii's healthy real estate market.

Nonperforming assets ratio of 1.12% continued its improving trend. It was 8 basis points lower compared to the linked quarter and remains better than its high-performing peers. At $40.9 million, the allowance for loan losses was 0.98% of outstanding loans at March 31st, consistent with 0.97% in the linked quarter and 1.11% as of the prior-year quarter end. Results are consistent with the overall performance in credit quality, effective risk management, shrinking land and mainland residential loan portfolios.

Slide 20 illustrates American's continued attractive asset and funding mix relative to our peer banks. American's March 31st, 2014, balance sheet is stacked against the last complete available data set for our peers, which is December 31st, 2013. 98% of our loan portfolio was funded with low-cost core deposits versus the aggregate of our peers at 94%. In the first quarter, core deposits increased $101 million to $4 billion, which helped to fund our loan growth while maintaining an average cost of funds of 23 basis points, consistent with the linked prior-year quarter, and lower than the median of our peers. American remains well capitalized with a leverage ratio of 9%, tangible common equity to total assets of 8.4%, and total risk based capital of 12.7%, all as of March 31st, 2014. Management's analysis to date indicates that its current capital structure is more than adequate to satisfy the new capital rules for the Basel III framework, which will become effective on January 31st, 2015.

In the first quarter, American paid $8.75 million in dividends at HEI, while maintaining solid capital loans. Before we address HEI's outlook for 2014, I will summarize recent financing activities. On April 2nd, 2014, both Hawaiian Electric and Hawaiian Electric Industries amended and extended their respective bank lines of credit to take the advantage of attractive market rates. The maturities were extended to April 2nd, 2019, and each line was increased by $25 million, such that credit available is now $150 million and $200 million respectively. On May 2nd, 2014, HEI entered into a $125 million two-year loan agreement at considerably lower rates and interest savings, primarily to pay off $100 million of maturing medium term notes at 6.51%. Both of these financings, aggregating up to $475 million of new credit commitments over the past five weeks, are consistent with our target equity capitalization of 51%, and our expectation for a growing total capitalization base.

We are reaffirming HEI's guidance range of $1.57 to $1.67. This includes the cessation of original issue share issuances under the dividend reinvestment plan as of March 6th, 2014, and the expected use of the equity forward in the first quarter of 2014 to raise net proceeds of approximately $30 million to $40 million to fund roughly $60 million of equity into Hawaiian Electric by year end. There is no change to the EPS guidance range at the utility or the Bank. The guidance assumes 2014 revenue adjustment mechanisms that were filed in March and will be effective on June 1st.

Before I turn the call back to Connie for closing remarks, I would like to announce that Shelee Kimura is taking on a new role at the Company. She'll be assuming the position of Vice President of Corporate Planning and Business Development at our utility. While we and I suspect you will miss Shelee in her present role, this is a terrific opportunity for Shelee, and you can rely upon me and Carol Imai, who has been shoulder to shoulder with Shelee for three years, to help you in the IR function in this transition. We are very happy for Shelee and congratulate her on her new role. Connie, back to you.

Thanks, Jim. And I can just reiterate what Jim said about Shelee. We are really going to miss her, and I know you all will miss her too. But Carol is here to help out, and we have a new person, Jared who is also coming up to speed, and of course, there's always Jim, who as we all know has everything down pat. So in summary, our utility is at the forefront of the industry in integrating renewable and distributed generation. Being on the leading edge is always challenging, but together with our regulators, policymakers, and other stakeholders, we are intent on solving those challenges and keeping Hawaii at the forefront of changes in our industry.

As we continue to transition to a Clean Energy future, our utility continues to be focused on reducing costs and providing safe, reliable service for all of our customers. Our Bank continues to be a solid performer and will continue to focus on its core banking business, targeting mid-single digit loan growth, strong credit quality and above-average peer returns. Our unique business model continues to provide HEI with the financial resources to invest in the strategic growth of the Company while supporting the continued stability of our dividend. And yesterday the Board maintained the quarterly dividend of $0.31 per share. And our dividend yield continues to be attractive at 5.3% based upon yesterday's close. Finally again, I'd like to congratulate Shelee on a very well-deserved promotion. And with that, we look forward to hearing your questions.

(Operator Instructions). Your first question comes from the line of Andrew Weisel with Macquarie Capital.

Thanks. My first one is the Commission's orders and inclination report last week had a lot of specific ideas and a lot of criticism, as well as a lot of homework for you guys, in terms of what they're asking you to put together over the next few months. Can you sort of describe how you see this process going, in terms of the long-range planning? Will there be a clearly defined replacement plan for your IRPs, or will it be sort of an ongoing evolution? And what might we be able to watch from the outside as far as how the long term energy policy comes together?

Thanks, Andrew, for the question. I'm going to let Dick answer this. He's actually grabbed hold of those PUC orders. As you can imagine, his shop is extremely busy organizing to respond to these orders in a very short period of time. So, Dick?

Thank you, Connie. Let me preface my comments by saying we're still digesting the orders. They are voluminous, and we want to make sure we get even the very fine detail out of them. Nevertheless, we can answer your question. I really anticipate perhaps both of the things you described coming out of it, which is an overarching path forward that integrates all the various elements of a future in a high renewable environment, and at the same time more detailed plans that, although they stretch out a period of time, are probably accurate only in the nearer term. Our supply improvement plans, for instance, might be good for three, four, five years, six years. Then conditions can change and would probably have to be redone periodically. I actually see a combination of both, both the overarching umbrella path forward vision and strategy, and then lower level, more detailed plans, which are many of the products they specifically asked for.

Okay. Next question is about the generation. Thank you for the disclosure in the 10-Q this morning, that it's about 25% of your utility PP&E. Of that, how much of the book value relates to the older, inefficient, high heat rate plants, and how much of that generation do you think potentially could be on the accelerated retirement plan path, based on what you think the Commission wants, not necessarily what you were previously planning?

Andrew, this is Tayne Sekimura. Let me respond to your question. Roughly 3% of our total net book value assets relate to generation that has been deactivated or is planned for deactivation or decommissioning.

Right. I guess I was asking of the remaining 25% of your PP&E, how much of those assets are older plants that maybe you're not planning to retire yet, but the Commission might want to see those gone?

Yes.

Yes. This is Dick Rosenblum. That would require some judgment about which are and which might not in the future. Really we need to get through the 120-day plans the PUC has asked for, to have a better view of what that is. So I wouldn't want to speculate. I would say that some of that is made up of relatively newer plants. One, a peaker that we have on Oahu, and one combined cycle on the big island of Hawaii, that obviously being newer, have much higher undepreciated bases.

Okay. Fair enough.

But, Andrew, I would add that some of those newer units, too, are some of our faster acting units. And the peaker that Dick mentioned here on Oahu, actually that was the first unit that we built on Oahu after 26 years. So a lot of the other generation is much older, with lower undepreciated base.

Okay. Thank you. Next question is on the rooftop solar penetration. A lot of attention being paid to this 11% current penetration level. The question is how quickly did we get to 11%? What did it look like over the past few years? And how high do you think that could go in the next several years, in terms of what the grid, the current grid would be able to physically handle safely and reliably?

This is Dick Rosenblum again. I think Connie mentioned some of the numbers in the webcast about how fast it's grown. But, yes, as an overview, it has been roughly doubling every year for the last several years, with a slowdown to some extent this year. And the exact numbers are actually in the slides and the webcast. The question of how high could it go and how fast is really to some extent unknowable for the following reason -- it really depends on the economics of both our utility generation -- for instance, if it's the cost of our generation, because we could get LNG and it goes down, the economics shift. If federal credits or state credits change over time, the economics can shift. If the rate structure changes, the economics can shift. So it's really interactive to a great many things, all of which are in flux and somewhat speculative.

Having said that, if you think about rooftop solar, and I don't mean to be trivial, but just to break it down to a logical chain. First, you need a rooftop, so if you are an apartment dweller, or a condo dweller or a renter, for instance, you probably don't have the ability to put something on the roof. Second, you need the financial wherewithal to be credit-worthy enough to support the investment, whether it's leased or bought. And, third, you need the desire to put it on your roof; to some extent that would depend on the age of the roof and the type of occupancy you have. For instance, if you're a vacation occupant, and only here a few weeks a year, or a month a year, you probably don't have the desire to do that. So there are limiting factors that are pretty clear. And at some point those dominate the trend.

Andrew, I would just add in, if you look back at slide five, we've got a couple of lines there -- a yellow line that shows renewable energy, including distributed PV; and the green line below that excludes the PV, running from 2008 up to 2013. So you can really see that acceleration that Dick was referring to in overall renewable generation, but in particular in the solar area. And I think what's really exciting to us, and I think this relates back to your very first question, is that the whole energy picture today is a really dynamic picture. And so in addition to the factors that Dick mentioned, there are so many other things that are happening. And frankly, there's a lot of innovation that's happening in the Clean Energy space. It reminds me very much of, when I'd look at this curve, at some of the adoption curves that you see in technology. And that's really exciting.

It's challenging for us as the utility, because we've got to kind of keep track of all of those trends, because at the end of the day, our job is to integrate as much as we can, based on what our customers choose to do. I mean, for example, there are customers that really want PV and have the kinds of rooftops in order to have the PV. But there are other customers, like my neighbor, who has a tile, a clay tile roof and doesn't want to touch his roof, because the PV panels would potentially harm his clay tiles. So that's the new world that we're in. It's customer choice. It's going to be much different than in the past, where customers just thought of having electricity electrons come into the home, and just thought of it as power. Now there are so many other options out there. And I think that's the exciting part of Hawaii. You're seeing a lot of that actually play out, whereas in other parts of the nation, people are still speculating about it.

Great. Thank you very much.

Your next question comes from the line of Glenn Pruitt with Wells Fargo.

Hi, guys. A couple of my questions that I was going to ask have already been asked. I will go ahead touch on the recent RFP that you submitted in regard to electricity storage. I was wondering if you could give me any color on whether you guys are allowed to bid on that RFP, and if so, whether you did?

This is Dick Rosenblum again. That was an RFP issued by us, for us to purchase storage to be owned by the utility. So it really wouldn't make any sense for us to bid into our own RFP; it is utility owned is the concept underlying the RFP.

Okay. And on the O&M front, you indicated that you intend to keep O&M flat, 13% to 14%. Can you give some color moving forward on potentially where you think the O&M trajectory might point?

Great. It's Jim Ajello. With respect to our earnings guidance and all of the constituent parts, we have provided you 2014 guidance; and that's the limits of the guidance right now, and all of that remains intact. So we'll remain at 2014 guidance levels until we update it again, which would likely be next February.

Okay. Great. Thank you. That's all I have.

Your next question comes from the line of Charles Fishman with Morningstar.

Thank you. The trailing 12 month ROE for the utility was 8.7. Your guidance is 8 to 8.3. Should we expect utility ROE to come down, or is it just a case that you don't want to make a change in guidance, because one quarter does not make a year? Or what should we expect?

The expectation is at the end of the year, we expect that ROE to be in the 8% to 8.3% range. The reason why it dropped like that is ATI generally does their equity infusion in the month of December, so that tends to bring it down.

Okay. And then the equity needs going from $45 million to $35 million. Again, why? I didn't completely understand why that was?

Charles, this is Jim Ajello. Are you asking why, how do we derive that number?

I mean, yes. Maybe. Last conference call you were talking $45 million of equity needed for 2014. And now on the same slide it's $35 million. And I'm just wondering what moved that?

Right. Thanks for the clarification. So back in the Appendix of the sources and uses statement, the modification has to do with the change in our plans. But after the last earnings call, we issued an 8-K clarifying that we've been using the settlement under the equity forward to satisfy our need to raise capital to invest in the utility. And if it you'll look on page 42, or slide 42, you'll see the equity forward is delineated for the use of equity. It says $35 million because we chose the midpoint, as these back bars have to balance. So it's $30 million to $40 million; in this example, $35 million to be sourced from the equity forward in the latter part of this year.

Okay. Thank you.

Sure.

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

Good morning.

Hi, Paul.

Hi. Just to sort of follow up, and I'm sorry if I sort of missed this -- how should we think about your capital expense outlook, given the order in late April, the orders in late April; and the rejection of the IRP; and sort of the whole question and sort of cloud of questions they had regarding what they feel might be an appropriate or a more appropriate way to go about planning for system needs, and what have you?

Hi, Paul. As you know, most of our capital over the years has really related to the transmission distribution system, because Hawaii Electric has always had a very long history of working with independent power producers, even before that became popular, dating back actually into the sugar plantation days, when a lot of Hawaii's energy was provided by the sugar plantations and sold to the utility. And so a lot of what we've always invested in is T&D. And in the near term, you're still going to see a lot of that to be the case. But I'll let Tayne give you some details on that.

Paul, a little bit of background here and further details. Our CapEx plans for 2014 should not be significantly affected, because as Connie mentioned, much of our spend is on the T&D system to modernize the grid. This is consistent with the PUCs priority in the orders that you've seen. Looking ahead at 2015 through 2016, we're currently assessing the impact that our plans will have on this CapEx for those years. But again, because roughly three-quarters of our CapEx is for T&D and modernizing the grid, we don't expect any major changes there.

Okay.

I do want to point out, one more thing, Paul, initiatives such as smart grid are not included in this forecast here. So that would be additive, and we're currently working on a PUC application, so it's premature to put out any CapEx numbers for that initiative.

Okay. I'm sorry. I missed it. What was the percentage of the 2015-2016 numbers that you felt were sort of set in stone -- or not set in stone, but you know what I'm saying -- likely to change?

Well, what I said was roughly 70% to 75% of our CapEx spend in those years would be for T&D efforts.

You don't expect any of this to change, not much of it, because of its nature?

This is Dick Rosenblum. We wouldn't really expect the total to change. It is certainly possible that things will come in and things will go out, sort of under the cover of the total amount. But I wouldn't really expect the totals to change in any meaningful way.

Okay.

I also wanted to address the non-T&D part of it, because we still need to operate our older power plants. There are capital overhauls. There is, in fact, support in the decisions for doing the capital work necessary to make them more maneuverable. And a significant percentage of the balance of that are those items that really are already endorsed. There really wasn't anything in there to speak of for building a whole new generation like the old ones.

Okay. But when we read this order, there are elements of it that appear very critical really. And I'm just sort of trying to get a sense as to -- I mean, they're saying things like, this looks like a whole bunch of unrelated capital expenditures. You've read it. You know the headlines that come out of it.

I'm just wondering, in general, how we should think about the comfort level, when they are questioning customer value and all this other stuff, of how we should think about it strategically, with respect to the ability to communicate, to get on the same page with the PUC. Just to make sure policies are sort of in line with one another, if you follow me?

Yes. This is Dick again. I think you've very adroitfully pointed out the issue that we do have to work on, and the Commission sending a message that we need to work on, which is painting this bigger, longer term picture; and then as we go in for individual projects or initiatives, starting those discussions with -- and this is how that fits into that bigger picture. The nature of regulation in the past was that we sort of put them in bit by bit, and they were truly unrelated in many respects, initiatives -- replace a transformer, or do something else. What this PUC is asking for and what we all need is that larger picture, and then the link into it, so they can have the assurance they need: that we are, in fact, doing the right things, and going to the future that we both envision and are both working towards as quickly as we can.

Okay.

Paul, I'll just add. It's not just us choosing, not just making sure that we are doing the right thing. But in this new energy world, there are many players that are now included. When you're looking at distributed generation, it isn't all owned by us -- witness rooftop solar. And so one of the challenges of the Commission to us is to look at that bigger picture, and not plan just only for our own Company, but actually to look at the entire energy landscape in Hawaii, and help envision that future and where all of those pieces fit into the puzzle.

That's exactly what I wanted -- what I wanted to sort of follow up on, and that is: how should we think of rooftop solar in terms of its impact on electric rates on the system, its cost effectiveness, as it goes to utility? Obviously is cheaper -- utility scale solar. How should we think about -- I've noticed there's been some delays with some of this rooftop solar. How should we think about rooftop solar and its impact on the unique Hawaii situation?

I think the way you/we have to think about rooftop solar is that it goes back to the customer choice issue. If this is something that customers want, then we have to figure a way to incorporate all of that. But it isn't -- when you ask about how should we think about it from a cost perspective, we can talk about how the system is set up today, and as you know, we have net energy metering in Hawaii at the full retail rate. And I think that's one of the other things that the Commission is saying in these orders, is to let's as a community rethink the entire renewable, distributed energy generation picture and figure out exactly the place that rooftop solar should have. And I don't think there's any disagreement on anyone's part that rooftop solar does have a place in the whole energy picture, because that is what customers want.

But how does it fit with everything else? Because as a state, we have a very strong desire to get off of imported oil. And the whole, as you say, strategic concept behind that was oil is very expensive. And in Hawaii renewables have for a long time made economic sense. I don't know if you remember us saying it would make economic sense, as well as environmental sense. And so we want to make sure, though, as we move to that renewable future, that it actually does end up reducing customer bills and reducing that 75% of our bill that is related to that fuel cost. Because that's the real promise of renewables that we have to recognize for our state. How do we get renewables in that are economic in Hawaii to reduce the very high oil prices, but also then result in a lower bill to customers.

I'll give you an example. In the early days of IPPs, utilities purchased independent power at a voided cost. Well, if we also stayed on a voided cost and our cost is oil, we are not going to achieve the ultimate goal of lowering the bills to our customers by replacing the higher priced oil with any other kind of generation, if it's going to cost the same to our customers. So that is the kind of discussions that we have to have within our state. And that's why I point out: it is not just about the utility. It's got to be a community-wide effort, where we all talk, and we all agree on the tradeoffs that are to be made; but ultimately those tradeoffs should always keep in mind the customer and getting the customer the benefit of the lower-cost renewables.

Your next question comes from the line of Steve Fleischman with Wolfe Research.

Yes, hi. Hi Connie. Just with respect to timelines, can you give us a sense when we could have outcomes, both in the reaction to the orders from a couple of weeks ago as well as decoupling?

Well, the timelines really to a large extent are specified by the four PUC orders. I'm sure you all have gone through them in quite a bit of detail, as have Dick's folks, and we're still going through them. And there are timelines as short as 30 days, running out to 120 days. And so we will be working towards all of those deadlines. And then with respect to decoupling, as I said in the presentation, our expectation is that those decisions will be coming out or the Commission will be debating those after many of the filings that are required by these four orders.

Okay. In one of the orders, from a week or two ago, there almost seemed to be a little bit of kind of questioning or fraying of the regulatory compact, so to speak. Could you just kind of address that issue? And I assume you obviously disagree with that. But just how you're kind of looking at that language?

Sure. I actually don't disagree with that. And I think some of the things that I've already been saying is that there will be -- and I shouldn't call it a new regulatory compact; our view is that this is an evolutionary situation. And maybe even, I could use the word revolutionary relative to the nation in total. That's the really exciting thing about Hawaii, is that we have that opportunity here in Hawaii, because we're actually faced with some of the issues today, versus them being theoretical issues for the rest of the nation to wrestle with: what are the best regulatory structures to allocate the costs and benefits across our community? So there will be changes in the regulatory compact, and that is part of what we all will be attacking over the next few months.

Okay. And just I guess one other question on the residential solar. As you noted, there's been a slowdown in the additions. And there have been some articles kind of arguing that some of that's due to kind of a longer process for you to convert people onto the system as residential solar. Would you agree with that? Would you say that's inaccurate? And has there become a big backlog of people waiting, because these timelines have taken longer?

Hey, Steve. The first thing that I would absolutely say is I think we get painted with the wrong brush when people say it's us, that we are against solar. We are absolutely not against solar. I mean, if we were against solar, we wouldn't be at the kinds of levels that we are at today. But we are approaching the level where reliability becomes an issue, and so that's really what the engineers have been wrestling with for these last four years, as solar has doubled every single year. They've continued to innovate our grid, and we actually have many people that come from as far away as Germany and Canada to look at what we're doing here in Hawaii to integrate such incredibly high levels of solar.

So that's the first thing I would say, is we get painted with the wrong brush if people think that we're not in favor of solar. In fact, we are. And we are actually working every day to figure out how to do that. And what I think people need to recognize is that as I say, now we're getting to the levels of renewables, where some of the other technologies that are out there may actually be able to help us integrate even more. That is the reason why we just put out the energy storage RFP, to see what might be out there that can assist us.

And so there's a lot of innovation that is going on here. It's one of the reasons why we have been supporting a group in Hawaii called Energy Accelerator, which is working with entrepreneurs to actually -- and it's different than other technology accelerators, in the sense that because we all see specific problems in the energy picture here, we're able to direct the efforts of some of these entrepreneurs to attack those problems specific to Hawaii. Those problems that are specific to our grid here. And if we are able to do it here, then it's possible that some of that may be able to be exported out of Hawaii and used elsewhere to help increase the integration of renewables.

Great. Thank you.

I would now like to turn the presentation back over to Ms. Shelee Kimura for closing remarks.

Thanks, everyone, for joining us today. I apologize that we weren't able to get to everybody's questions. But we do have our Annual Shareholders Meeting today. And I'm happy to take your questions by phone or email throughout the day. Thanks so much, everybody. Take care.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.