Hawaiian Electric Industries, Inc. (HE) Q2 2014 Earnings Report, Transcript and Summary

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'll 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 your host for today, Mr. Clifford Chen, Manager of Investor Relations and Strategic Planning

Thank you, Sarah. And welcome 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 first 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, 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.

Thank you, Cliff, and aloha to everyone. Before we discuss results, I wanted to update on the hurricane that was threatening last week which made national news. Last Thursday and Friday, hurricane Iselle in 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 the storm caused power audacious affecting about 25,000 customers or roughly 30% of all Hawaii Island customers and about 5% of our total customer base. (Inaudible) have made tremendous progress in restoring power to many of those affected, but as usual in severe storm situation, they are hampered by difficult access condition. With a wrap of restoration on the other Island, cruise, equipment and flies from Hawaii and Maui County are now on their way to Hawaii Island to help. As of this morning we’ve restored service to all, but about 8,100 customers. But many are heavily impacted areas and we’ve alerted them to expect to remain without power well into next week. We’re relieved that the second hurricane Julio continued on its northern path and is now not expected to impact our island. Bank operation which had delayed openings Friday morning as a precautionary measure for our customers and staff were back to normal by late Friday. We’re very proud of our dedicated employees 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 focused on what they do best, serving our customers. We appreciate all of the expressions of support we received and will continue our efforts to restore full service on Hawaii Island. Turning to our results which we announced which we announced earlier this morning, both our utility and bank are on track to meet our 2014 earnings guidance. At the utility, we’ve been intensely focused on preparing plans in alignment with the PUC’s April 2014 regulatory orders and aggressively pursuing opportunities to reduce customer bills and move to a cleaner energy future. At the bank a healthy local economy have contributed to a year-to-date annualized loan growth of 6.5% which has helped offset a continuing low interest rate environment and contributed a steady improvement in assets quality. At Hawaiian Electric we’re 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 our renewal sources. We also want to find ways to lower customer bills in the process of meeting our states renewable energy goals. 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’ve 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 change in Hawaii’s energy picture, the PUC’s April 2014 orders urged us to address the energy future of Hawaii’s by taking a comprehensive clean state approach to achieve Hawaii’s long term clean energy objective. We’ve been fully engaged in a planning process called for by the PUC and have already filed some other 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 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 maybe able to offer a customer option that will replace our need for additional seeking generation, system storage and other resources. And we’re targeting to implement the new and expanded demand response beginning in 2015 with the help of third party companies. We will file the power supply improvement plans, the integrated interconnection queue and the distributed generation interconnection plan. Together these plans will provide a roadmap for future additions to our system as well as guide us in others providing for a cleaner energy future for our state. In addition Hawaii electric had many ongoing initiatives that continued during the planning process. Few important initiatives that will fit well in these plans going forward or LNG as a replacement fuel for oil use and generators that will continue and use as we move to cleaner energy sources and energy storage. First on storage; energy storage is a key element of oil and electric plan to enhance a systems capability to reliably operate at high levels of instrumental renewable energy. We issued our storage RSP for Hawaii in April taking storage solutions up to an aggregate of 200 megawatts. Response to RSP has been robust and we’ve many competitive proposals under review. Next on LNG, liquid faction 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 liquid faction signing an agreement subject to PUC approval with Fortis DC for liquid faction capacity. We were also pleased with a response to our RSP for container LNG and are in the process of evaluating those fits and we’re targeting LNG delivering 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 bill as Asia Pacific oil prices have remained stubbornly high since (inaudible). In June, instead of filing for a rate increase, we filed no change in base rate filing with the PUC. While rate mechanism slight coupling are in place to provide more timely revenue adjustment 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 forego 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’re de-activating our older oil plant and have refinanced debt at lower rate and just last week, our PUC gave the green light to negotiate contracts with six additional renewable project 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 terms. Finally, I want to update you on the status of de-coupling review proceeding. The PUC recently modified the schedule to delay the August panel to late October. The commission also gave the parties an opportunity to schedule technical meetings and workshop prior to the panel hearing. So all in all, there is a lot going on. I’ll now ask Jim to cover our Hawaii’s economy and then our financial results and outlook for the economy.

Thanks Connie. First, I'll briefly comment on Hawaii's economy. Year-to-date, visitor arrivals were essentially flat, our 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 good position to match a break visitor arrivals and spending records set in 2013. Statewide unemployment remain low at 4.4% in June 2014, significantly below the national employment rate of 6.1%. Why real estate activity was strong in the first half of 2014 with 7.1% increase and medium 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 medium single family home price was $700,000. 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. 2014 state GDP is projected by the University of Hawaii in a research to increase by 2.5%. overall, we expect continuing growth in Hawaii’s economy in 2014, supported by continued recovering and construction industry and steady but slower growth in the visitor industry. Turning to our financial results as shown on slide 5, second quarter earnings with $0.41 for diluted share in 2014 consistent with prior year quarter as expected higher utility earnings offset lower bank earnings which were impacted by the challenging lower interest rates and bank regulatory environment. As you may see on slide 6, HEI’s core ROE for the last 12 months was 10.3% with the equivalent ROE contributions from the utility of 9% although bank continued to provide a strong 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 now I’ll just highlight a few. Utility 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 a while 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 in 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 cost 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 length 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 branch security expense product development cost and the timing 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 lower interchange fees due to the Durbin Amendment which became effective July 01, 2013 for American and $1 million lower mortgage banking income and $1 million lower gain on the sales of securities. Higher provision for loan losses primarily due $1 million release of reserves in connection with the decision to sell the credit card portfolio last year and the release of 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. The consolidated core utility ROE of 9% improved from 8.3% in June 30, primarily due to the impact of the 2013 and 2014 RAM revenues including Hawaiian Electrics incremental 2014 RAM revenues recorded from January 14 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 could see that American continue to deliver solid profitability metrics which were in line with the targets and peers. We’ve maintained a competitive return on assets 98 basis points to 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 manager resulted in a year-to-date net charge-off ratio of a recovery of 1 basis point, extremely attractive related to peers. .: On Slide 12, our net interest margin is at 3.55% in the second quarter of 2014 was 9 basis points lower than the linked quarter. Interest earnings asset yields declined by 9 basis points attributable to multiple factories including the store recognition of mortgage related fees as prepayment rates declined accounting for 3 basis point, the effect of the sale of the higher yielding municipal band securities in the first quarter accounting for 1 basis point. And the ongoing effect of the continuing low rate environment. A 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 non-interest income was lower than the linked quarter 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 second quarter consistent with the linked quarter but higher than the net credit of $1 million in the second quarter of ’13 driven by the reserve release in connection with our credit card portfolio sale. Full provision was $2 million year-to-date in the second quarter increases in reserve results for loan growth and charge-offs were offset by recoveries from two previously charged-off loans. Consistent with the improving credit quality trends 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 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 to $7 million. The allowance for loan losses was 0.99% of outstanding loans at quarter end consistent with the 0.98% for the linked quarter. The 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 to attractive assets and funding mixed relative to our peer banks. Americans June 30, 2014 balance sheet is fact again the last available dataset for our peers which is as of March 2014. 96% of our loan portfolio was funded low cost versus the aggregative of 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% of at June 30, 2014. In the second quarter American paid $9.75 million in dividends to HEI for maintaining capital levels are healthy. Turning to our 2014 outlook, we are reaffirming HEI’s earnings guidance range $1.57 to $1.67 per share. Our assumption of our 2014 equity needs also remains the same. We would note that this includes July 14 settlement of 1 million shares under the equity forward net proceeds of approximately $24 million. These proceeds were used to pay short term borrowings and will later this year be used to fund roughly $60 million of equity in 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 of utility or the bank, but noted the utility historically that utility earnings were weighed more towards the second half of the year, however, with the 2014 revenue adjustment mechanism for a while reported from July 01 instead of June the lower spending at the utility during the first half of the year. 2014 utility earnings are expected to be more expected to be more evenly distributed between the first and second half of the year. Jim, let me just interrupt. Recorded from January 01, I think it’s July 01.

Sorry January 01, right. Thank you. We are maintaining our O&M guidance of 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 2.6% to 2.7%, the bank assumed gradually rising interest rates in 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 from 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 renewable in this rapidly changing energy market and been on the leading edge that the challenge we enthusiastically of risk. We are aligned with the PUC and aggressively pursuing ways of lowering customer bills, integrating more cost effective renewable, strengthening great reliability and expanding customer options while providing cleaner, safer and more reliable service for our customers. We have been focused on responding to the PUCs 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 peers return. Our unique business model continues to provide HEI with financial resources to invest in the strategic growth of the company while supporting the continued stability of our dividend. On Thursday, the board maintained a quarterly dividend of $0.31, 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 Shelly, who will assume the position of VP Corporate Planning and Business Development at the utility and with that we look forward to hearing your questions.

[Operator Instructions] Our first question comes from Greg Gordon from ISI’s Group. Greg Gordon – ISI International Strategy & Investment Group: Thanks. How are you guys?

Hi Greg. Greg Gordon – ISI International Strategy & Investment Group: So I see, if I look on Page 24 of your presentation I see that regulatory response framework, I know you’ve also indicated the rate increase for EKO -- you’re not asking for base rate increase, understanding that it’s going take some time to work through these regulatory frameworks in that – how are you going to manage the cost profile at EKO such that you are going to able to avoid pressure on your earned ROE next year what can we expect in the interim until you can work out the regulatory framework that there will be some pressure on the earned ROE there?

Well, let me say two things and then I will turn it over to Rick or Chen 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 units and also with respect to the timing of the regulatory frameworks, I think that’s the tremendous opportunity that our commission gave us in April we’re, we have all got into the other and said, the situation in it’s changing very, very rapidly Hawaii 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 that 15% decrease in oil usage and that was really because of the very aggressive penetration of renewable, now as I said in the prepared remark that 18% are 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’s very important for us to put these regulatory framework in place as quickly as we can and the PUC sent that message that it’s a very urgent situation for us all to get together and resolve those issues, so we are not expecting this kind of process it’ll take years to do because our state needs it because our state needs its quickly, we will do it quickly. Greg Gordon – ISI International Strategy & Investment Group: Do you, in the context of getting with these four different sockets that the rate design will be changed in order to better grappa with the company’s fixed variable cost mix as it pertains to also stimulating that further penetration of renewable?

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 view of the energy future for Hawaii which includes all kinds of things including the demand response, the storage, better operations for the remaining welfare units which are being switched to gas, and so that we have to take all of those moving pieces into account as we do the rate design. We will be working at well ultimately would be the best arrangement and of course that we’ll have all the normal principles the cost allocations and rates being just reasonable and fair across all segments but we would do it in a very comprehensive fashion it won’t be done in a one off kind of discussion. Greg Gordon – ISI International Strategy & Investment Group: Okay my last question in two parts then I will go in the queue, so when you look at your current capital expenditure budget in terms of dollars, I know that what you are going to be spending on this problem we are going to changed quite dramatically as you rollout a new sort of framework that are regulators buy into in terms of privatization of what’s important, you expected to spend more or less about the same which is spending now on capital and you believe that you will be compensated adequately for that capital deployment vis-à-vis this new rate design such that you can earn a fair return on it?

In the very new term we are not expecting our capital expenditures to change significantly and we’ve got those on Slide 38 because most of the near term capital expenditures were already growing into the grid and particularly from modernization of the grid and strengthening of the grid and if you read the inclination paper of the commission the grid is still a very important center piece of Hawaii’s clean energy future and so those will not change. Greg Gordon – ISI International Strategy & Investment Group: And you are confident that whatever the regulatory frame give, you won’t see a impairment of your ability to earn a reasonable return on that capital?

We’re expecting as you know one of the key parts of our regulatory framework as the decoupling mechanism and the commission has already indicated their support behind the sales portion of that decoupling mechanism, the revenue balancing account or RBA. And we’re as I mentioned in the prepared remarks in the process of decoupling review proceeding and while we’re expecting some changes we’re not expecting massive changes to that mechanism. Greg Gordon – ISI International Strategy & Investment Group: Okay, thank you.

Our next question comes Glen F. Pruitt from Wells Fargo. Glen F. Pruitt – Wells Fargo Securities: Hi guys, glad to hear that you weathered the storm and that everyone is okay. My question is regarding CapEx associated with LNG and conversional of power plant. 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’ll turn it over to Tayne to tell you.

We do have some expenses associated with the preliminary work for LNG and that’s incorporated within our earnings guidance and our budget for O&M expenses this year. Glen F. Pruitt – Wells Fargo Securities: Okay. But that doesn’t necessarily as far as expenditure have to do with the conversion itself of plants or does it?

The expenses are only associated with all the preliminary work we’re doing on LNG. Glen F. Pruitt – Wells Fargo Securities: Okay, great. Can you give me some color of what kind of expenditure would be necessary to convert a power plant?

Glen, this is Rick Rosenblum. We only forecast capital once a year, so I can’t give specific numbers, but in the universal sizing of the small medium and large, converting a power plant, per plant generally is sort in a small to medium range, they are not terribly expensive. This is a process that’s been done for 30 or 40 years, it’s very straightforward. Glen F. Pruitt – Wells Fargo Securities: Okay, great, thank you.

Our next question comes from Andrew Weisel from Macquarie Capital. Andrew Weisel – Macquarie (USA) Equities Research: Hi, everyone. I wanted to first to ask a little bit more about the rate case, I think sort of following the line that Greg was asking about 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 request of a higher ROE, so if I leave the ROE unchanged, it’s a deficiency of about $42 million. My question is of that 42, how much is recoverable through trackers and mechanisms?

Andrew, this Tayne let me take that question, of the $56 million increase you can think about a third of that related to the ROE differential between a 10.75% ROE to our current 10% ROE. Those are the numbers that you have are very close, roughly a third of that relates to pension expenses and assuming that would go continue to be taking care of your existing pension tracking mechanism. And the last third of that increase relates to couple of 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’s really sort of geography on the bill sort of item and we have some miscellaneous changes in rate based so get adjusted as part of the normal rate case and we also had a reflected and there some refinancing saving that would be incorporated in our capital structure. And so that makes at the majority of the base rate increase 456 million. Andrew Weisel – Macquarie (USA) Equities Research: Okay, great. That’s 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 80 to 110 basis points for the next few years. I know there is a lot of other changes going on but if we assume the status quo without this rate case being filed? Should that regulatory lags to stay in that 80 to 110 range or that expand?

We actually changed the guidance on that particular, we call that the structural and that’s assumed to be about 100 to 130 basis points and that range depends on the level of baseline additions that we made during the year as well as the interest on the RBA sales portion of the covering. Andrew Weisel – Macquarie (USA) Equities Research: Okay, great. Maybe I missed that apologies. The 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’ll bring out Alan Oshima who is head of regulatory affairs at the utility.

We don’t have a roadmap following our filing yet. It will become clear as we approach the August 26 filing deadline. We are in touch with various stakeholders to see what the next step may be but at this time, we don’t have a clear roadmap. Andrew Weisel – Macquarie (USA) Equities Research: 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 what we’ll file will be very compressive of what the commission and others may chose to do with that, we have no inclination right now. As I said, as approach the filing, we may have more information. Andrew Weisel – Macquarie (USA) Equities Research: 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?

That forecast originally did not but we are evaluating that now and most of the work that we are doing in the storms will be capital not O&M, it’s mostly poles and wires down and other equipment damage. So I don’t anticipate a significant impact. Andrew Weisel – Macquarie (USA) Equities Research: Okay. Thank you very much.

Our next question comes from Charles Fishman from Morningstar. Charles Fishman – Morningstar: Jim, on slide nine, 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, did I hear that correctly?

There is absolutely no change in the utility ROE guidance of 8% to 8.3%. Charles Fishman – Morningstar: Okay, so right now it is at 8.3% and it could float a little lower to in 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 that will occur also towards this end of the year. So as the additional equity goes in about $60 million if you see in the appendix, we have source and uses slide that provides for the $60 million at the end of the year. So that’s on 42, so as that equity goes in and as more spending occurs by us toward the second half because O&M was spent below pace in the first half. So the combination of those two things will reduce the recorded ROE we recon to between 8% and 8.3% by the end of the year as they close the books. Charles Fishman – Morningstar: 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 realized you have a different housing mix with more multi-family. But is there 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 they are not able to access that opportunity. The government has instituted a GEMS program which would be a market rate or a little bit of subsidy of on financing to get other portions of our community to install solar and other energy saving devices. So that still in the works, we are working very closely with our department of business and economic development and tourism with project that may fit that criteria. Charles Fishman – Morningstar: Okay, that's all I have. Thank you.

Our next question comes from Paul Patterson from Glenrock Associates. Paul Patterson – Glenrock Associates: Good morning.

Hi, Paul. Paul Patterson – Glenrock Associates: Just to go over I think (inaudible) 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's correct and then also to—I mean there is a little bit more that we have to make up but we are – and we are going to be looking at 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 with only impact 2015 and beyond. Paul Patterson – Glenrock Associates: 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 testimony to support some of the exhibits but there are statutory requirements for what is considered to be rule-making requirement, what is considered to be a filing for rate increase. We met, we believe all of those requirements providing sufficient information to the commission and consumer advocate, to see – to a window into our operations at this time. So and we also filed annual reports of that as well. So it’s only – to the extent of the filing instead of 13 binders was probably one to two binders.

I don’t think any of that would speculate on the response time by the commission it’s really up to them and not something we speculate on. Paul Patterson – Glenrock Associates: And then you guys have done quite a bit of things the lower cost you have like them on the call, I’m wondering just being recognized mean do you – how the regulator has been so far as there’s been some acknowledgement that that you guys have made efforts and what have you, just wondering if there’s anything you could share with us about that and then I just wanted to ask the governor the regulatory results from the primary and what have you – whether that might mean any changes for the PUC?

We can't speculate, we don’t know who’s the next governor will be, three candidates and we just can't speculate about that. Paul Patterson – Glenrock Associates: I guess with respect to that whether or not just to refresh our memory, what the – how it works in other words if there’s a new governor, does that mean that they can change today, does it normally mean that the PUC membership can change when new governor comes in, some states like that and some states the people sort of fill out their terms, do you follow what I’m saying?

We have commissioners with specific terms, the chairmanship of the commission is at the discretion of the governor. Paul Patterson – Glenrock Associates: Okay, so that means that you could actually appoint somebody different to the chairmanship or does that mean you 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’s not something that’s high on our radar screen at the time. Paul Patterson – Glenrock Associates: Okay and then just in terms of the recognition, have you guys getting any of that, is there any feedback which you guys have been getting with this better, from pretty aggressive efforts here to low customer bills?

We are working with various stakeholder groups and the 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 between what we already hadn’t placed 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. Paul Patterson – Glenrock Associates: Okay but little too early to say perhaps if I got your comments correctly?

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.

Okay.

As per the process as you know we have three remaining filings to do and those are pretty major filings. So as Helen 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 commissioner has been closely tracking all of those discussions. Paul Patterson – Glenrock Associates: Okay, thanks a lot.

Before we take another question, I wanted to just go back and clarify on the capital expenditures, so there were a few questions about the numbers that are on Slide 38 and as Rick 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 16 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 this comprehensive new clean flight approach that we have incorporated and I think we have mentioned before for example the smart grid project is one that we had now taken out of our capital expenditures until we receive commission approval for that and the energy storage, ROC is in the same category. So we are proceeding with the ROC and once we have the selected solution or portfolio 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 expenditures forecast.

Our next question comes from Andy Levi from Avon Capital Advisors. Andy Levi – Avon Capital Advisors: Hi, good morning to you.

Morning. Andy Levi – Avon Capital Advisors: I have been thinking about that for a second. Its early morning. Just on the energy storage RFP, how many dollars and what timeframe are we talking about if you does just remind us what you took out of CapEx?

It’s Rick Rosenblum, the RFP is being evaluated right now, we had a robust response I would think probably by the end of the year, we’ll have some selections about how to go forward and we do not have any cost estimate or capital estimate right now. That will be held into our forecast. Andy Levi – Avon Capital Advisors: Okay, I thought that was in a prior forecast and then had been taking out and now was…

Not that effort. Andy Levi – Avon Capital Advisors: Okay, okay.

This energy storage RFP is new since April. Andy Levi – Avon Capital Advisors: Okay and this is the money that you would stand, right? For rate based purposes, right wouldn’t be the scenario 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 there but also for alternative structured and that’s 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 a customer we believe that there are lots of investment opportunities for us going forward because this move to clean energy and Hawaii is very aggressive and it is a effort that takes not only the utility but lots of other people including our customers. Andy Levi – Avon Capital Advisors: And again when, I know it’s not done but when would envision the program to begin spending?

The energy storage? Andy Levi – Avon Capital Advisors: Yes.

We are looking at it in around 2017. Andy Levi – Avon Capital Advisors: 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. Andy Levi – Avon Capital Advisors: Okay, and that you said, you did have in your private budget but can you just remind us how much that was?

Around 300 million. Andy Levi – Avon Capital Advisors: 300 million, over what timeframe?

Around three years. Andy Levi – Avon Capital Advisors: Three years. Got it. Okay, thank you. Just a few more if it’s okay? Again obviously you are 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 shall we continue to assume that you continue to write down on your forward sale?

Yes. Andy Levi – Avon Capital Advisors: 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 ’14 guidance right now?

We staying with the original range at this moment, as we get little further into the year we will consider whether we want to touch that up a little bit. Last we modestly changed that and tightened it in the third quarter. There is a whole series of things as you have heard going on that could impact. But just assume that $1.57 to $1.67 at present. Andy Levi – Avon Capital Advisors: So kind of assume the midpoint I guess for now. Or as you said, the range, 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 ’15, but what would be some of the drivers that would allow you to grow earnings in ’15 or is ’15 more of a flattish type of year?

The answer to that question and any form would get us into providing ’15 guidance. So will stay with the notion that we are providing ’14 guidance. We have got a very significant amount of work of work to do as we get to the fall here to incorporate all of these regulatory situations and the further capital needs and so we will maintain the process of reviewing everything in the fall and coming out in the February a conference call with an update if any. Good try. Andy Levi – Avon Capital Advisors: That is my job. Hey, I appreciate it.

Andy, I would just add that the list of factors that you mentioned earlier are indeed all in place and the once that would impact that estimate. Andy Levi – Avon Capital Advisors: Fair enough and thank you very much. I’ll see you guys soon.

Our next question comes from Greg Gordon from ISI Group. 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.

Correct. Greg Gordon – ISI Group: 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 answer that question. For Oahu if you were to exclude the base fuel and energy cost adjustments, 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. You have much smaller fixed charges for residential. Greg Gordon – ISI Group: 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.

Yes. Greg Gordon – ISI Group: 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; 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?

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 it. So it’s 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. Greg Gordon – ISI Group: Okay, thanks.

And 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 into my office. Have a great week.

Ladies and gentlemen that conclude today’s conference. Thank you for participation. You can disconnect and have a wonderful day.