Hawaiian Electric Industries Earnings Call Insights: O&M, ROE at MECO

On Wednesday, Hawaiian Electric Industries Inc (NYSE:HE) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite revealed.

O&M

Asar Khan – Visium: I just wanted to go over this a Slide 11, if I can. I guess I’m just trying to get a sense of the positives and the negatives for the rest of the kind of the year. So, am I right, the 6% higher O&M, right, we had flat O&M for the first quarter is that still expected in the remaining three quarters is that equal to something like 24 million or something or could you quantify that?

James A. Ajello – EVP, CFO and Treasurer: Sure, it’s Jim Ajello, I’ll start by saying that yes the short answer is that we expect to have a 6% O&M increase year-over-year.

A Closer Look: Hawaiian Electric Earnings Cheat Sheet>>

Asar Khan – Visium: Jim, is that it create to like 24 million or am I number wrong?

James A. Ajello – EVP, CFO and Treasurer: It is very close to that number, yes. You are correct on that.

Asar Khan – Visium: Then we would have the MECO rate case, right, that would be in effect starting like July 1 like we’ve got something more than half of that in additional revenues in the last half of the year. Is that correct?

James A. Ajello – EVP, CFO and Treasurer: That is correct.

Asar Khan – Visium: So, that’s not in one of these bullets or am I missing it somewhere or it’s in the top bullet, is that what it is the MECO…

James A. Ajello – EVP, CFO and Treasurer: The reference on Slide 11 to the very first point is the MECO.

Asar Khan – Visium: Is this the updated interim the 5.5 million is that incremental or is that just the same of what we had before?

Constance H. Lau – President and CEO: This has changed. 5.5 million is incremental.

Asar Khan – Visium: So, that’s incremental, that’s what I thought. So, that’s incremental this year and that started when at January 1 or when did that start?

Constance H. Lau – President and CEO: That started in the beginning of the second quarter. 5.5 million this is generally due to recovery of remaining cost for the East Oahu Transmission Project. It was a second quarter item.

Asar Khan – Visium: Okay. So, that will show up in the second quarter going forward?

Constance H. Lau – President and CEO: Correct.

James A. Ajello – EVP, CFO and Treasurer: Correct.

Asar Khan – Visium: Then, the next bullet if I can just follow through is, you said there’s revenue reduction of $4.4 million but 2.3 year’s depreciation. So from earnings perspective, it’s only negative $2 million. Is that correct?

Tayne S. Y. Sekimura – SVP and CFO, Hawaiian Electric Company, Inc.: In terms of how to look at that, it’s really offsetting, it’s not a negative because lower rate increase is equal to the lower depreciation expense. In other words, we didn’t need the revenue to cover that lower depreciation expense. So, it’s the net income that’s your item. Then also the other piece in that is the lower ROE as decoupling begins. So yes, it does go down by that $2 million, but then we do have decoupling mechanism that will kick in.

Asar Khan – Visium: That will then kick in, okay. So the RAMs are all positive, right, the 5.7 is like a positive starting from June, right, that’s additional revenue, right?

Tayne S. Y. Sekimura – SVP and CFO, Hawaiian Electric Company, Inc.: Yes, that’s right.

Asar Khan – Visium: Then, am I right, the higher CapEx, that should lead to higher AFUDC or no?

Tayne S. Y. Sekimura – SVP and CFO, Hawaiian Electric Company, Inc.: Yes, if we build out the project, there’s AFUDC on that.

Asar Khan – Visium: So I’m just trying to get a sense, as we look at, I guess, the last three quarters we’re doing addition or subtraction, it seems like utility earnings should still be able to go up. Am I missing something or wrong?

Constance H. Lau – President and CEO: I think what you’re missing there is a couple of items write-off and then if Jim wants to add anything. As you note on that Slide 11, now that we have the HELCO final decision that will reset the heat rate and we had been getting heat rate savings previously because we had installed the steam unit that was very efficient since the last rate case. So, those heat rate savings will go away with the reset of the heat rate and the rate case. Then as we talked about before we have a very large Customer Information System that is going in for all three utilities. The actual cut over date is scheduled for Memorial Day weekend and once that goes into service we then would have to recover those costs through the normal rate case process which now is every three years on a staggered basis for each utility. So, that will be a drag and so we can get it into each rate case.

James A. Ajello – EVP, CFO and Treasurer: I will just say or clarify, Jim, that we estimate the reduction in the heat rate associated with the deadbands of about $83 million items just to put a number on that. And then to add to what Connie said the both the CIS system and the $32 million of CT-1 expense are still pending a regulatory audit or review. So, the timing of the recovery of those is a bit uncertain right now, because there is no precise schedule for those reviews yet to (bet up).

Constance H. Lau – President and CEO: CIS is a $60 million figure.

Asar Khan – Visium: Connie, now you’ve gotten, I guess, decoupling in all the three jurisdictions, if I’m right. You had mentioned that you would think about giving – introducing guidance once you achieve that. Any thought on that process?

Constance H. Lau – President and CEO: Asar, because we just got the final decisions in the last week. We actually don’t have an update for you today, and that is something that we are looking at doing and we will likely talk about that in the next webcast.

ROE at MECO

James Krapfel – Morningstar: It looks like 12 month trailing ROE at MECO declined about 130 basis points quarter-over-quarter, what drove that, and then where do you expect ROEs to trend at MECO once the new rate case revenues go into effect later this year?

Tayne S. Y. Sekimura – SVP and CFO, Hawaiian Electric Company, Inc.: This is Tayne. In terms of the ROE is lower and trending, you see that downward trend I mean that’s mostly because we are awaiting the MECO 2012 rate increase decision that we talked about expected sometime later this month. So, that’s the main reason for that. Thereafter, we do expect ROE to pop a bit in 2012.

James Krapfel – Morningstar: Maybe about what rate do you expect, once those rates are into effect, what ROE you can generate?

James A. Ajello – EVP, CFO and Treasurer: It is Jim Ajello. We don’t provide that particular information, but the allowed ROEs across sulfur utility units are 10%. So, our goal is to obviously achieve as much as we possibly can on those allowed ROE.

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