Hawaiian Electric Industries Inc (HE) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2014 Hawaiian Electric Industries, Inc. earnings conference call. My name is Sarah and I will be your operator for today. (Operator Instructions). Just as a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Clifford Chen, Manager of Investor Relations and Strategic Planning.

Thank you, Sarah. Welcome to Hawaiian Electric Industries' second-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 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.

Connie will provide an overview followed by Jim who will update you on Hawaii's economy, our results for the quarter and outlook for the remainder of the year. We will conclude with a round of 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 HEI's 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 where we provide 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 as a result of new information, future events or otherwise. We will now turn the call over to our CEO, Connie Lau.

Thank you, Cliff, and aloha to everyone. Before we discuss results I wanted to update you on the hurricanes that were threatening Hawaii last week which made national news. Last Thursday and Friday Hurricane Iselle aimed directly at our island chain, but dissipated to a tropical storm before making landfall. Although all islands were affected Hawaii Island took the brunt of the storm.

At its peak the storm caused power outages affecting about 25,000 customers or roughly 30% of all Hawaii Island customers and about 5% of our total customer base. Our crews on Hawaii Island have made tremendous progress in restoring power to many of those affected. But as is usual in severe storm situations, they are hampered by difficult access conditions.

With the wrap up of restoration on the other islands, crews, equipment and supplies from Oahu and Maui County are now on their way to Hawaii Island to help. As of this morning we have restored service to all but about 8,100 customers, but many are in heavily impacted areas and we have alerted them to expect to remain without power well into next week.

We are relieved that the second hurricane, Julio, continued on its northerly path and is now not expected to impact our island.

Bank operations, which had delayed openings Friday morning as a precautionary measure for our customers and staff, were back to normal by late Friday.

We are very proud of our dedicated employees and their families for their tremendous efforts to help our island state get back to normal. And fortunately all of our people are safe and are focused on what they do best, serving our customers. We appreciate all of the expressions of support we received and we'll continue our efforts to restore full service on Hawaii Island.

Turning to our results which we announced earlier this morning, both our utility and bank are on track to meet our 2014 earnings guidance. At the utility we have been intensely focused on preparing plans in alignment with the PUC's April 2014 regulatory order and aggressively pursuing opportunities to reduce customer bills and move Hawaii to a cleaner energy future.

At the bank a healthy local economy has contributed to a year-to-date annualized loan growth of 6.5% which has helped offset a continuing low interest rate environment and contributed to a steady improvement in asset quality.

At Hawaiian Electric we are moving aggressively to plan for how we can best serve our customers in the future and to apply lessons learned from our rapid integration of intermittent renewable sources. We also want to find ways to lower customer bills in the process of meeting our state's renewable energy goal.

In 2008 we agreed to help our customers and our state, the most oil dependent state in the nation, become less reliant on expensive imported oil by using more renewable resources which are abundant in Hawaii and can make economic as well as environmental sense here. In cooperation with our regulators and our customers we have already met the aggressive 15% renewable resource goal for 2015 using about 18% renewable resources to meet our customers' needs.

In light of the rapid changes in Hawaii's energy picture, the PUC's April 2014 orders urged us to address the energy future of Hawaii by taking a comprehensive clean slate approach to achieve Hawaii's long-term clean energy objective. We have been fully engaged in the planning process called for by the PUC and have already filed some of the plans and documents to meet the deadlines of the four orders with the remaining plans do on August 26.

Among the earlier filings called for by the orders, at the end of July we filed our integrated demand response portfolio plan. Demand Response can be an important resource for our island grid beyond its current contribution, especially with the substantial penetration of intermittent renewable sources.

While we don't have the large load customers who are the usual optimal users of demand response, demand response may be able to offer customer options that will replace our need for additional peaking generation, system storage and other resources. And we are targeting to implement the new and expanded demand response program beginning in 2015 with the help of third-party companies.

Soon we will file the power supply improvement plans, the integrated interconnection Q and the distributed generation interconnection plan. Together these plans will provide a roadmap for future additions to our system as well as guide us and others in providing for a cleaner energy future for our state.

In addition, Hawaiian Electric had many ongoing initiatives that continued during the planning process. Two important initiatives that will fit well in these plans going forward are LNG as a replacement fuel for the oil used in generators that will continue in use as we move to cleaner energy sources and energy storage.

First, on storage -- energy storage is a key element of Hawaiian Electric's plan to enhance the system's capability to reliably operate with high levels of intermittent renewable energy. We issued our storage RFP for Oahu in April seeking storage solutions up to an aggregate of 200 megawatts. Response to the RFP has been robust and we have many competitive proposals under review.

Next on LNG -- liquefaction is a critical element of our plan to bring natural gas to Hawaii in order to comply with upcoming air-quality regulations and to reduce cost to our customers. Recently we acted quickly to secure a source of natural gas liquefaction signing an agreement subject to PUC approval with FortisBC for liquefaction capacity.

We were also pleased with the response to our RFP for containerized LNG and are in the process of evaluating those bids and we are targeting LNG delivery in 2017. Initiatives such as these on storage and LNG will help in many ways as we continue to move to cleaner energy. But, as I said earlier, it is also crucial for us to find ways to minimize the current burden on our customers of high oil-based bills as Asia-Pacific oil prices have remained stubbornly high since Fukushima.

In June instead of filing for a rate increase, we filed a no change at base rate filing with the PUC. While rate mechanisms like decoupling are in place to provide more timely revenue adjustments for the Company, there are other costs and items that may not be recovered which can then be requested in rate cases.

We offered to forgo the opportunity to ask for those additional revenues at this time. We were able to do this because our utilities are aggressively focused on managing costs by pursuing operational and financial efficiencies. For example, we are deactivating our older oil fired power plants and have refinanced debt at lower rates.

And just last week our PUC gave the green light to negotiate contracts with six additional renewable projects totaling 210 megawatts, which can produce power at about one-third lower cost than our average cost of generation. The PUC will need to approve final term.

Finally, I want to update you on the status of the decoupling review proceeding. The PUC recently modified the schedule to delay the August panel hearing to late October. The commission also gave the parties an opportunity to schedule technical meetings and workshops prior to the panel hearing. So all in all there is a lot going on.

I will now ask Jim to cover Hawaii's economy and then our financial results and outlook for the economy.

Thanks, Connie. First I will briefly comment on Hawaii's economy. Year-to-date visitor arrivals were essentially flat while expenditures were up 2.5% from last year's all-time highs and still robust after many years of strong growth. Hawaii's tourism sector is in a good position to match or break visitor arrivals and spending records set in 2013.

Statewide unemployment remained low at 4.4% in June 2014, significantly below the national employment rate of 6.1%. Hawaii real estate activity was strong in the first half of 2014, a 7.1% increase in median sales price for single-family residential homes on Oahu with a slight 0.2% decrease in the number of closed sales over the first half of last year. The June 2014 Oahu median single-family home price was $700,000.

The Hawaii construction industry exhibit strong growth in the first quarter of 2014 as the value of private building permits increased 21% over the same period in 2013. 2014 state GDP is projected by the University of Hawaii economic research organization to increase by 2.5%. Overall, we expect continuing growth in Hawaii's economy in 2014 supported by a continued recovery in construction industry and study but slower growth in the visitor industry.

Turning to our financial results as shown on slide 5, second-quarter earnings were $0.41 per diluted share in 2014 consistent with prior year quarter. As expected higher utility earnings offset lower bank earnings which were impacted by the challenging low interest rate and bank regulatory environment.

As you may see on slide six HEI's core ROE for the last month with 10.3% with the equivalent ROE contributions from the utility of 9% while the bank continued to provide a strong ROE of 10.4% as they continue to maintain a conservative risk profile.

On slide 7 utility earnings were $34.2 million for the second quarter of 2014 compared to $28.7 million in the second quarter of 2013. The detailed variances are shown on the slide and I will just highlight a few. Utility net revenues after tax were $11 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 1 versus June 1. And last year in the second quarter we recorded the Maui electric customer refund from the 2012 final decision and order.

O&M expenses excluding net income neutral items after tax were $2 million higher or 3.5% higher compared to the prior year quarter largely due to installing smart grid technologies as part of our grid modernization program and reversals in the second quarter of 2013 of previously expensed costs partially offset by savings from the deactivation of generating units.

Although our year-to-date O&M expense is lower than the prior year by about $10 million pretax, we are maintaining our O&M guidance of flat compared to 2013 levels as we expect higher smart grid plant overhauls and consulting expenses in the second half of the year.

At the Bank net income for the second quarter of 2014 was $11.7 million, $2.9 million lower than the linked quarter. Noninterest income was lower driven mainly by the $2 million after-tax gain on the sale of the municipal bond portfolio in the first quarter and higher noninterest expense due to higher grant security expense, product development cost and timing of debit card related expenses.

Compared to the second quarter of 2013 net income was $4.2 million lower, the primary after-tax drivers were: $1 million in lower interchange fees due to the Durban amendment which became effective July 1, 2013 for American, and $1 million lower Mortgage Banking income and $1 million lower gain on the sales of securities.

Higher provisions for loan losses primarily due to $1 million release of reserves in connection with the decision to sell the credit card portfolio last year and the release of the allowance associated with specific commercial loan pay downs.

Turning to the utility on slide 9 shows the utility's actual ROEs for the last 12 months, but consolidated core utility ROE was 9% improved from 8.3% in June 2013 primarily due to the impact of the 2013 and 2014 RAM revenues including Hawaiian Electric's incremental 2014 RAM revenues recorded from January 2014 and lower O&M. However, we expect the full year 2014 to be 8.0% to 8.3% after the fourth quarter equity infusion from HEI to Hawaiian Electric.

Turning to American, on slide 11 you can see that American continued to deliver solid profitability metrics which were in line with its targets and peers. We have maintained a competitive return on assets of 98 basis points through the first half of the year. Year to date annualized loan growth was 6.5% in line with our mid single-digit target for the year.

In the second quarter loan growth was driven primarily by higher commercial real estate loans, residential loans and home equity lines of credit. Year to date annualized deposit growth was 7%, keeping pace with our loan growth.

Year to date credit costs were extremely low. Our continued excellent asset quality and strong risk management resulted in a year-to-date net charge-off ratio of a recovery of 1 basis point, extremely attractive relative to peers. Overall the bank continues to maintain its low risk profile, strong balance sheet and straightforward Community Banking business model.

On slide 12 our net interest margin of 3.55% in the second quarter of 2014 was 9 basis points lower than the linked quarter. Interest-earning asset yields declined by 9 basis points attributable to multiple factors including the slower recognition of mortgage-related fees as prepayment rates declined accounting for 3 basis points.

The effect of the sale of the higher yielding municipal bond securities in the first quarter accounting for 1 basis point in the ongoing effect of the continuing low rate environment. Our liability cost of 22 basis points was 1 basis point lower than the linked quarter supported by growth of our core deposit base.

In the second quarter of 2014 noninterest income was lower than the linked quarter due to a $2.8 million gain on the sale of the municipal bond portfolio in the first quarter we discussed earlier. In addition, as expected, Mortgage Banking income was lower as the refinancing market continues to slow and more production was dedicated to the portfolio.

Turning to credit quality, provision for loan losses was $1 million in the second quarter consistent with the linked quarter, but higher than the net credit of $1 million in the second quarter of 2013, driven by the reserve release in connection with our credit card portfolio sale.

Toll provision was $2 million year to date. In the second quarter increases in reserves for loan growth and charge-offs were offset by recoveries of two previously charged-off loans. Consistent with the improving credit quality trend American had a net recovery of $0.4 million in the second quarter as compared to net charge-offs of $0.2 million in the linked quarter and $0.8 million in the prior year quarter.

Second quarter of 2014 net loan charge-off was especially low at a recovery of 4 basis points compared to a charge-off of 2 basis points in the linked quarter and 8 basis points in the prior year quarter. We now expect provision expense to be at the lower end of our 2014 guidance range of $5 million-$7 million. The allowance for loan losses was 0.99% of outstanding loans at quarter end, consistent with the 0.98% from the linked quarter.

Asset quality continues to improve reflecting the healthy local economy and strong risk management practices. The nonperforming assets ratio on slide 15 of 1.05% was 7 basis points lower compared to the end of the first quarter and lower than the 1.56% at the end of the second quarter last year. This is consistent with our improved credit quality, effective credit risk management and strong loan growth.

Slide 16 illustrates American's continued attractive asset and funding mix relative to our peer banks. Americans June 30, 2014 balance sheet stacked against the last available dataset for our peers, which is as of March 2014. 96% of our loan portfolio was funded with low cost core deposits versus the (inaudible) our peers of -- at 91%.

In the second quarter total deposits increased $47 million or 4% annualized to $4.5 billion. American remains well-capitalized with a leverage ratio of 9%; tangible common equity to total assets of 8.5%; and total risk-based capital ratio of 12.6% all at June 30, 2014. In the second quarter American paid $9.75 million in dividends to HEI while maintaining capital levels that are healthy.

Turning to our 2014 outlook, we are reaffirming HEI's earnings guidance range of $1.57 to $1.67 per share. Our assumption of our 2014 equity needs also remains the same. We would note that this includes the July 14 settlement of 1 million shares under the equity forward net proceeds of approximately $24 million.

These proceeds will be used to repay short-term borrowings and will later this year be used to fund roughly $60 million of equity into Hawaiian Electric by year-end. There are currently 4.7 million shares left under the equity forward.

There is no change in the EPS guidance range at the utility or the Bank. But note at the utility historically that utility earnings were weighted more towards the second half of the year. However, with the 2014 revenue adjustment mechanism for Oahu recorded from July 1 instead of June 1 and lower spending at the utility turning the first half of the year 2014 utility earnings are expected to be more evenly distributed between the first and second half of the year.

Jim, let me just interrupt -- recorded from January 1, I think you said July 1.

Sorry, January 1, right, thank you. We are maintaining our O&M guidance for flat O&M compared to 2013 levels as lower O&M in the first half will be offset by increases in the second half of the year. At the Bank our original net interest margin guidance of 3.6% to 3.7%, the Bank assumes gradually rising interest rates through 2014.

Based on the persistent low interest rate environment we are revising our net interest margin guidance to 3.5% to 3.6%. However, we now expect provision for loan losses to be at the lower end of our guidance range of $5 million to $7 million. I'll now turn the call back to Connie.

Thanks, Jim. In summary our utility is a nationwide leader in integrating renewables in this rapidly changing energy market and being on the leading edge is a challenge we enthusiastically embrace. We are aligned with the PUC in aggressively pursuing ways of lowering customer bills, integrating more cost effective renewables, strengthening grid reliability and expanding customer options while providing cleaner, safer and more reliable service for our customers.

We have been focused on responding to the PUC's April 2014 regulatory orders. These orders have provided us with the opportunity to take a comprehensive, clean slate approach to addressing Hawaii's clean energy objectives.

Our Bank continues to focus on its core banking business, targeting mid-single-digit loan growth, strong credit quality and above average peer return. 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.

On Thursday the Board maintained the quarterly dividend of $0.31 per share. Our dividend yield continues to be attractive at 5.2% based on Friday's close.

And finally, I would like to welcome Cliff Chen to our Company. He comes to us with a strong investment banking, corporate finance and financial market background working for the past 11 years in New York. We brought him home to Hawaii and he has done a great job this quarter replacing Shelee Kimura who assumed the position of VP Corporate Planning and Business Development at the utility. And with that we look forward to hearing your questions.

(Operator Instructions). Greg Gordon, ISI Group.

So I see -- if I look on page 24 of your presentation, I see the regulatory response framework. I know you have also indicated the rate increase for HECO -- or for the rate filing at HECO that you are not asking for a base rate increase.

Understanding that it's going to take some time to work through these regulatory frameworks and that you -- how are you going to manage the cost profile at HECO such that you are going to be able to avoid pressure on your earned ROE next year? Or could we expect in the interim until you can work out the regulatory framework that there would be some pressure on the earned are we there?

Well, let me say two things and then I will turn it over to Dick or Tayne if they would like to add any additional comments. First on keeping the earnings stable. As you heard me say in our prepared remarks, we are aggressively pursuing financial and operational efficiencies and making some major reductions in cost primarily from the deactivation of some of the oil fired units.

And also, with respect to the timing of the regulatory framework, I think that is the tremendous opportunity that our commission gave us in April where we have all gotten together and said the situation in Hawaii is changing very, very rapidly.

I think if you look at some of the other charts that we have in the back, in fact, immediately before the regulatory response framework you can see that we had over the last five years a 15% decrease in oil usage and that was really because of the very aggressive penetration of renewables. Now, as I said in the prepared remarks, at 18% of our generation sources.

And so that rapidly, and if you look at the trajectory of that yellow bar -- I'm sorry yellow line, you can see that it really has accelerated over the last two years. So it is very important for us to put these regulatory frameworks in place as quickly as we can. And the PUC sent that message that it is a very urgent situation for us all to get together and resolve those issues. So we are not expecting that this kind of process will take years to do, because our state needs it quickly we will do it quickly.

Do you believe that in the context of -- with these four different dockets that the rate design will be changed in order to better grapple with the Company's fixed variable cost mix as it pertains to also stimulating further penetration of renewables?

Yes. And I think the difference in Hawaii is that it will not be done in isolation. As I noted, we are taking a very comprehensive few of energy future for Hawaii, which includes all kinds of things including the demand response, the storage, better operations for the remaining oil fired units which are being switched to gas. And so, we have to take all of those moving pieces into account as we do the rate design.

We will be looking at what ultimately would be the best arrangement and of course it will have all the normal principals of the cost allocations and rates being just and reasonable and fair across all segments. But we will do it in a very comprehensive fashion. It won't be done one off kind of discussion.

Okay, my last question in two parts and then I will go to the back of the queue. So when you look at your current capital expenditure budget in terms of dollars, I know that what you're going to be spending on is probably going to change quite dramatically as you roll out a new sort of framework that the regulators buy into in terms of prioritization of what is important.

You expected to spend more, less about the same of what you're spending now on capital? And do you believe that you will be compensated adequately for that capital deployment vis-a-vis this new rate design such that you can earn a fair return on it?

So, Greg, first a -- in the very near term we are not expecting our capital expenditures to change significantly. And we have got those on slide 38. Because most of the near-term capital expenditures were already going into the grid particularly for modernization of the grid and strengthening of the grid. And if you read the inclinations paper of the commission, the grid is still a very important centerpiece of Hawaii's clean energy future. And so those will not change.

And do you -- and you're confident that whatever the new regulatory framework is you won't see an impairment of your ability to earn a reasonable return on that capital?

We are not expecting -- as you know, one of the key parts of our regulatory framework is the decoupling mechanism. And the commission has already indicated their support behind the scale portion of that decoupling mechanism, the revenue balancing account, or RBA. And we are, as I mentioned in the prepared remarks, in the process of the decoupling review proceeding. And while we are expecting some changes we are not expecting massive changes to that mechanism.

Okay, thank you.

Glen Pruitt, Wells Fargo.

Hello, guys, glad to hear that you weathered the storm and that everyone is okay. My question is regarding CapEx associated with LNG and conversion of the power plants. first of all, do you have any CapEx included in your guidance for conversion of power plants to natural gas?

The guidance of course only affects this year, 2014. But we do have some expenditures and I will turn it over to Tayne to tell you.

Yes, so we do have some expenses associated with the preliminary work for LNG and that is incorporated within our earnings guidance and our budget for O&M expenses this year.

Okay. So -- but that doesn't necessarily as far as expenditure have to do with the conversion itself of plants or does it?

No. The expenses are only associated with all the preliminary work we are doing on LNG, not the (multiple speakers).

Okay. Great. And can you give me some color of what kind of expenditure would be necessary to convert a power plant?

Glen, this is Dick Rosenblum. We only forecast capital once a year. So I can't give you specific numbers. But in the universal sizing of small, medium and large converting a power plant per plant generally is sort of in the small to medium range, they are not terribly expensive. This is a process that is been done for 30 or 40 years, it is very straightforward.

Okay, great. Thank you.

Andrew Weisel, Macquarie Capital.

I want to first ask a little bit more about the rate case. I think sort of following the line that Greg was asking about but a little more numerically maybe. If I strip out -- when you talked about the revenue deficiency of $56 million, part of that, I believe $14 million was related to a request of a higher ROE. So if I leave the ROE unchanged it is a deficiency of about $42 million. My question is, of that $42 million how much is recoverable through trackers and mechanisms?

Andrew, this is Tayne, let me take that question. Of the $56 million increase, you can think about a third of it related to the ROE differential between 10.75% ROE to our current 10% ROE. So the numbers that you have are very close. Roughly 1/3 of it relates to pension expenses and assuming that would go -- continue to be taken care of through our existing pension tracking mechanism.

And the last third of that increase relates to a couple more things. One is the DSM, demand side management expenses. The commission had requested that we move this from surcharge to base rate. So it is really sort of geography on the build sort of item.

And we have some miscellaneous changes in rate base that get adjusted as part of the normal rate case. We also had reflected in there some refinancing savings that would be incorporated in our capital structure. And so that makes up the majority of the base rate increase of $56 million.

Okay, great, that is very helpful. Then kind of related to that, you talked in the past about a regulatory lag between the earned ROE and the allowed ROE of 100 -- or sorry, 80 to 110 basis points for the next few years. I know there is a lot of other changes going on, but if we assumed status quo without this rate case being filed should that regulatory lag stay in that 80 to 110 range or would that expand?

We actually changed the guidance on that particular -- we call that the structural lag and that is assumed to be about 100 to 130 basis points. And that range depends on the level of base line additions that we make during the year as well as the interest on the RBAs, the sales portion of decoupling.

Okay, great. Maybe I missed that, apologies. Next question is three big reports coming on August 26. Can you describe your expectations for what the next steps will be and maybe how long the review process may take before the new long-term plans become more finalized?

Hold on one sec, we will bring up Alan Oshima who is head of regulatory affairs at the utility.

We don't have a roadmap following our filings yet. It will become clearer as we approach the August 26 filing deadline. We are in touch with various stakeholders to see what the next steps may be, but at this time we don't have a clear roadmap.

Maybe a higher level, I mean are you thinking this will be months or quarters or years?

We don't have an opinion on that. I know that what we will file will be very comprehensive. What the commission and others may choose to do with that we have no inclination right now. As I said, as we approach the filing we may have more information.

Fair enough. Then lastly just a short-term one. Your reiterated the guidance for flat O&Ms for the full year, does that include any impact from the storms this past weekend?

This is Dick Rosenblum, that forecast originally did not. But we are evaluating that now and most of the work we are doing in the storms will be capital, not O&M. It is mostly poles and wires down and other equipment damage. So I don't anticipate a significant impact.

Okay, thank you very much.

Charles Fishman, Morningstar.

Jim, on slide 9, I just want to make sure I heard this correctly. Because in the notes it said that you are giving guidance for utility ROE consolidated, utility ROE of 8% to 8.3%. But I thought you said because of the forward equity issuance it would fall down towards 8% you are predicting now, is that -- did I hear that correctly?

Charles, Jim. There is absolutely no change in the utility ROE guidance of 8% to 8.3%.

Okay, so right now it is at 8.3% and it could float a little lower to the -- and between the range of 8% to 8.3% because of the equity issue?

And what you should have heard me say is that the current recorded ROE is higher pending the equity infusion that would occur traditionally and it will occur this year also towards the end of the year. So as the additional equity goes in about $60 million. If you see in the appendix we have sources and uses slide that provides for the $60 million at the end of the year. So that is on the $42 million.

So as that equity goes in and as more spending occurs biased toward the second half because O&M was spent below pace in the first half. But the combination of those two things will reduce the recorded ROE we reckon to between 8% and 8.3% by the end of the year as they close the books.

Okay, thanks for clarifying that. And the second question -- recently in Arizona the utility there has proposed leasing rooftop space and giving customers a credit. And I realize you have a different housing mix with more multi-family. But is that something that has ever been considered between Hawaiian Electric and the regulators, has that ever been discussed?

I think a lot of things are going to be considered. We have such a high penetration of rooftop PV as it is, but there are segments that are not able to access that opportunity. The government has instituted a GEMS program which would be a market rate for a little bit of a subsidy on financing to get other portions of our community to install solar and other energy-saving devices.

So that is still in the works. We are working very closely with our department of business and economic development and tourism with projects that may fit that criteria.

Okay, that is all I had. Thank you.

Paul Patterson, Glenrock Associates.

Just to go over I think Tayne was answering this question about the abbreviated rate case. It sounds like one-third is associated with ROE and the other two-thirds are essentially recoverable in trackers for the most part. Is that correct?

That is correct. And also to -- there is a little bit more that we have to make up, but we are -- and we are going to be looking at it as we reforecast 2015. Just as a reminder, this does not affect 2014 results. And because we had always expected any interim relief or results would only impact 2015 and beyond.

Okay. And then it is abbreviated, is the schedule abbreviated at all or is it pretty much the same schedule we should think about?

It's abbreviated only to the extent that we did not file as many materials, a testimony to support some of the exhibits. But there are statutory requirements for what is considered to be -- and rule making requirements of what is considered to be a filing for a rate increase.

We met, we believe, all of those requirements providing sufficient information to the commission and consumer advocate to have a window into our operations at this time. So we also file annual reports of that as well. So it is only abbreviated to the extent that the filing in sort of 13 binders was probably one to two binders.

I don't think any of us would speculate on the response time by the commission. It is really up to them and not something we speculate on.

Okay. And then you guys have done quite a bit of things to lower costs, you outlined them on the call. I am wondering is this being recognized. I mean do you -- how have the regulators been so far? Has there been some acknowledgment that you guys have made efforts and what have you?

I'm just wondering if there's anything you could share with us about that. And then I just wanted to ask the governor -- the gubernatorial results in the primary and what have you, whether that might mean any changes for the PUC?

We can't speculate, we don't know who the next governor will be --.

Right.

There are three candidates. And we just can't speculate at this time.

Sure, well I guess what I meant with respect to that was whether or not just to refresh our memory what -- how it works. In other words, if there is a new governor does that mean that they can change -- does it normally mean that the PUC membership can change when a new governor comes in? In some states it is like that, in some states the people sort of fill out their terms. Do you follow what I am saying?

We have commissioners with specific terms. The chairmanship of the commission is at the discretion of the governor.

Okay, so that means that he could actually appoint somebody different to the chairmanship or does that mean he could select among the commissioners that are there?

Select from among the commissioners that are there. But frankly I haven't taken a very close look at this. It is not something that is high on our radar screen at the time.

Okay. And then just in terms of the recognition, have you guys been getting any of that? Has there been any feedback that you guys have been getting with respect to some pretty aggressive efforts here to lower customer bills?

We are working with various stakeholder groups and Department of Business, Economic Development and Tourism. We have presentations made to these groups and we feel that there is substantial alignment. As we said from the beginning when we got the four DNOs, we felt there was substantial alignment between what we already had in place and what the commission was asking us to do in a much faster fashion. And we are doing that. So we are hoping that there will be a positive reaction to our efforts.

Okay. But it is a little too early to say perhaps? If I gather your comments correctly.

Yes, yes. I think until everything is done. I don't think we want to speculate as to what the reaction may or may not be.

And, Paul, of course as you know, we have three remaining filings to do and those are pretty major filings. So as Alan said -- and I said there is a lot of activity going on, a lot of outreach across our entire community and we do know that the commissioners have been closely tracking all of those discussions.

Okay. Thanks a lot.

Before we take another question, I want to just go back and clarify on the capital expenditures because there were a few questions about the numbers that are on slide 38. And as Dick said, we only do our forecast once a year. And as I said, in the very near term for this year we are on track with the current CapEx number that is in there for 2014.

With respect to 2015 and 2016, as I said, much of that is also related to the strengthening of the grid. But there are projects that are proposed or discussed in the comprehensive new clean slate approach that we have incorporated and I think we have mentioned before, for example, the smart grid project is one that we had taken out of our capital expenditures until we received commission approval for that.

And the energy storage, RFP, is in the same category. So we are proceeding with the RFP and once we have the selected solution or portfolio of solutions we will propose those to the commission and make a filing for approval of those and then we will incorporate them in the capital expenditure forecast.

Andy Levi, Avon Capital Advisors.

On the energy storage RFP, how many dollars and what time frame are we talking about if you just could remind us what you took out of CapEx?

This is Dick Rosenblum, the RFP is being evaluated right now, we had a robust response. I would think probably by the end of the year we will have some selections about how to go forward and we do not have any cost estimate or capital estimate right now. That will be folded into our next forecast.

Oh, okay, I thought I heard that that was in a prior forecast and that had been taken out and now it was --.

Not this effort.

Okay, okay. And when we -- go ahead, I'm sorry.

This energy storage RFP is new since April.

Okay. And this it would be money that you would spend, right? For rate base purposes, right? It wouldn't be just an RFP for somebody else to do it for you?

Well, it could be a combination because we did ask not only for projects that we would rate base but also for alternative structures. And that is part of our new approach to really focusing on our customer here to determine what is the best solution for the customer agnostic as to particular ownership.

If it is right for our customer we believe that there are lots of investment opportunities for us going forward because this move to clean energy in Hawaii is very aggressive. And it is an effort that takes not only the utility but lots of other people including our customers.

And again, I know it is not done, but when would you envision the program to begin spending?

The energy storage?

Yes.

We are looking at it in around 2017.

Got it. Thank you. And then on the smart grid, kind of same question as the energy storage.

Andy, that would also be in the same timeframe.

Okay, and that you said you did have in your prior budget but pulled it out. Can you just remind us how much that was?

Around $300 million.

$300 million, over what time frame?

Around three years.

Three years got it. Okay, thank you. Just a few more if that is okay. Again, obviously you haven't given guidance for next year. And I understand that the majority of the rate filing that you kind of pulled back on is clause related. So you have -- just kind of looking at some drivers.

You have the RAM obviously at this stage, but then I assume you probably have some costs, some financing expenses, and then you have no rate increases beyond the RAM and the other clauses. and I just want to make sure should we continue to assume that you continue to draw down on your forward sale?

Yes.

Okay. So with that being the case, and I kind of look at consensus estimates for 2015, which again I know you don't endorse or not endorse but you are looking at like 6% to 7% growth off kind of your midpoint for this year. And actually let me step back before I finish this question. Are you trending towards the bottom half, midpoint or high end of your 2014 guidance right now?

Andy, it is Jim. We are staying with the original range at this moment. As we get a little further into the year we will consider whether we want to touch that up a little bit. Last year we modestly changed that and tightened it in the third quarter. There is a whole series of things that you have heard going on that could impact. But just assume $1.57 to $1.67 (multiple speakers).

So kind of assume the midpoint I guess for now.

Up to you.

Or as you said, the range. But -- so kind of looking at the consensus, there is like 6% to 7% earnings growth of your midpoint. Again, I know you are not talking about 2015, but what would be some of the drivers that would allow you to grow earnings in 2015 or is 2015 more of a flattish type of year?

Andy, it is Jim. The answers to that question in any form would get us into providing 2015 guidance. So we will stay with the notion that we are providing 2014 guidance. We have got a very significant amount of work to do as we get into the fall here to incorporate all of these regulatory situations and the further capital needs. So we will maintain the process of reviewing everything in the fall and coming out in the February conference call with an update, if any. Good try.

That is my job. Hey, I appreciate it.

And Andy, I would just add that the list of factors that you mentioned earlier are indeed all in place and are the ones that would impact that [incident].

Fair enough. Thank you very much. I will see you guys soon.

Greg Gordon, ISI Group.

Thanks. My follow up question is on what you are seeing in terms of cross subsidies on rooftop solar. So when we look at the penetration I guess it is at 11% now, is that correct?

Correct.

And you look at the amount of your rate that is non-fuel but variable. What is the average increase right now in the customer bill for those that do not have rooftop solar? How much are they paying in sort of dollars per month to pay for the non-fuel variable charges that are being offset by net metering?

So let me answer that question. For Oahu if you were to exclude the base fuel and energy cost adjustment, a typical residential customer monthly bill would increase about 2% around $2.60 per month.

This is Dick Rosenblum. Let me remind you that we have a $17 a month minimum bill. So the cost transfer here is somewhat less than you might see in most of the mainland utilities who have much smaller fixed charges for residential.

No, that number is more or less in line with what I had estimated I just wanted to make sure. And the average customer bill is obviously over $200 a month, correct?

Correct.

So they are paying a couple dollars more currently. What is the practical limit on the amount of rooftop solar -- right now you are at 11%. When you look at the number of homes that are practically eligible for a rooftop solar panel, they face the right direction, they are owned -- the homeowner can make that decision themselves.

You obviously, because you have a lot of multi-family -- at what point is sort of the maximum practical penetration of rooftop solar as a percentage of your total residential customers?

Yes, this is Dick Rosenblum. We really do not have an estimate of that and let me just say that it doesn't necessarily require a roof that is oriented the right way. We have seen many cases in which the panels are on the wrong side of the roof and they just put a lot more panels on. So it is really impossible to forecast that right now.

Greg, I would also add that, as you know, technology continues to change rapidly in that area. And so there are advances continually. So I think we would not do a very good job at forecasting that adoption curve.

Okay. Thanks.

Great. And it looks like there are no further questions in queue. So I will turn the call back over to Cliff for closing remarks.

Thank you, Sarah. we would like to thank everyone for participating on our call. And as usual, if you have any follow-up questions in the forthcoming days please direct them to my office. Have a great week.

Ladies and gentlemen, that concludes today's conference. Thanks for your participation. You can disconnect. And have a wonderful day.