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. [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. And 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 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 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 will 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 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. I'll now turn the call over to our CEO, Connie Lau.

Thanks, Shelee, and 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 cost 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 objective: 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-fired generation, Hawaii's electric utilities can stabilize and lower customer bills while expanding customer choices for customers to manage their energy use." Hawaiian Electric's 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 forward 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…

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 remains low at 4.5%, with Honolulu at 4% in March 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 10, 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. 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 1 versus June 1. These were…

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's here to help out. And they just have a new person, Jared [ph], who's 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 dividends. 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.

A couple questions. 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. And 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. We're -- 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. The -- 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 and 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. Power supply improvement plans, for instance, might be good for 3, 4, 5 years, 6 years, and then, conditions can change, and would probably have to be redone periodically. So 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 ask 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. So 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, it...

Yes, that -- I mean, that -- this is Dick Rosenblum. That wouldn't require some judgment about which are and which might not in the future. And 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.

Andrew, I -- 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.

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 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 the cost of our generation, because we could get LNG in, 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're a -- 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 -- to be creditworthy 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 5, we've got a couple of lines there: a yellow line that shows renewable energy, including distributed PV; and a green line below that, 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 is happening in the clean energy space. It reminds me very much of, when I 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 a 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, ask my neighbor, who has a tiled -- 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 where, as in other parts of the nation, people are still speculating about it.

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

A couple of my questions I was going to ask have already been asked, but I will go ahead and 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 or -- 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?

Greg (sic) [Glen], it's Jim Ajello. With respect to our earnings guidance on all the constituent parts, we have provided you '14 guidance, and that's the limit to 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.

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

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 the case that you don't want to make a change in guidance because 1 quarter does not make 1 year? Or what should we expect?

The expectation is that, at the end of the year, we expect the ROE to be in the 8% to 8.3% range. The reason why it drops like that is HEI 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 did we derive that number?

I mean, yes, maybe. I -- last conference call, you were talking $45 million of equity needed for '14. And now on the same slide, it's $35 million. And I just wondered what moved that.

Right. Okay, no, thanks for the clarification. So back in the appendix of the sources and uses statement and the modification has to do with the change in our plans. After the last earnings call, we issued an 8-K clarifying that we were using the settlement under the equity forward to satisfy our needs to raise capital to invest in the utility. And if you'll look on Page 42 or Slide 42, you'll see that the equity forward is delineated for the use of equity. It says $35 million because we chose the midpoint, as these stack 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.

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

Just a sort of follow-up, and I'm sorry if I did sort of missed this. How should we think about your capital expense outlook given the order in late April -- or the orders in late April and sort of 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?

Paul, I think, as you know, most of our capital over the years has really related to the transmission distribution system because Hawaiian 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.

So Paul, a little bit 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. And this is consistent with the PUC's priorities and in the orders that you've seen. Looking ahead at 2015 through 2016, we're currently assessing the impacts that our plans will have on this CapEx for those years. But again, because roughly 3/4 of our CapEx is for T&D and modernizing the grid, we don't expect, like, any major changes there. 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 that's premature to put out any CapEx number 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, not 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.

Okay, and you don't expect any of this to change, really, or 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. 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's, in fact, support in the decisions for doing the capital work necessary to make them more maneuverable. And significant percentage of the balance of that are those items that really are already endorsed. There wasn't really anything in there to speak of for building a whole new generation like the old ones.

Okay. But I mean, 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. I mean 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're questioning customer value and all this other stuff, of -- how we should think about this strategically with respect to the ability to communicate and to sort of get on the same page with the PUC, just to serve -- 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 jointly pointed out the issue we do have to work on and the commission's 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 envisioned and are both working toward as quickly as we can.

And 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 to -- you -- 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 opposed to utility. Obviously, it's cheaper, utility-scale solar. So how should we think about -- I mean I've noticed there's been some delays in terms of rooftop solar. How should we think of rooftop solar and its impact on the unique Hawaii situation?

I think the way you -- we have to think about rooftop solar is 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 they 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 avoided cost. Well, if we all still stayed on avoided cost and our cost is oil, we're 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's the kind of discussions that we have to have within our state. And that's why I point out it isn't just about the utility. It's got to be a community-wide effort where we all talk and we all agree on the trade-offs that are to be made. But ultimately, those trade-offs 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 Fleishman with Wolfe Research.

Connie, just with respect to timelines, can you give us a sense if -- when we could have outcomes both in the reaction to the orders from a couple of weeks ago, as well as decoupling?

The -- well, the timelines really, to a large extent, are specified by the 4 PUC orders. I'm sure you all have gone through them in quite a bit of detail, as our -- 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 4 orders.

Okay. In one of the orders from a week or 2 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 are kind of looking at that language?

Sure. I actually don't disagree with that. And I think some of the things I have already been saying, it's 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. And 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 cost and benefits across our communities. 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. So 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 to and -- onto the system. Is -- residential solar, is that -- would you agree with that? Would you say that, that's inaccurate? And is there -- has there become like a big backlog of people waiting because these timelines have taken longer?

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 4 years. Since solar has doubled every single year, they've continued to innovate our spread. And we actually have many people that come from as far away as Germany and Canada to look at what we are 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 are not in favor of solar. In fact, we are. And we are actually working everyday 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 Excelerator, which is working with entrepreneurs to actually -- and it's a -- it's different than other technology accelerators in the sense that they -- 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 the renewables.

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.