Hawaiian Electric Industries, Inc. (NYSE:HE) Q1 2008 Earnings Call Transcript May 7, 2008 2:00 am ET

Suzy Hollinger – Manager, Treasury and IR Connie Lau – President and CEO Mike May – President and CEO, HECO Tim Schools – President, ASB Tayne Sekimura – SVP, Finance and Administration, HECO

Tom Wolfe [ph] – Spatu Investment Management [ph] Paul Patterson – Glenrock Associates James Bellessa – D.A. Davidson & Co.

Aloha and good afternoon. Thank you for joining us for an update on HEI.

Here with me from senior management speaking today are Connie Lau, HEI President and CEO; Mike May, HECO President and CEO; and Tim Schools, ASB President. Curt Harada, HEI's Acting Financial Vice President, Treasurer and CFO; Eric Yeaman, HECO Executive Senior Vice President and COO; Tayne Sekimura, HECO SVP Finance; and Alvin Sakamoto, ASB EVP, Finance are also on the call.

Connie will start today's presentation with a few comments on first quarter earnings and Hawaii economy. Mike will follow with an update on the utility.

Tim will then join into the presentation and discuss the bank, and Connie will make some closing remarks. At the end of the presentation, we will open it up for your questions.

Before I hand the call over to Connie, I would like to alert you that forward-looking statements will be made on today's call. Please reference (inaudible) of our first quarter Form 10-Q that was filed on Tuesday for information about forward-looking statements.

And now, let me turn the call over to Connie to begin the formal comments.

Thanks Suzy. Aloha and good afternoon.

We were pleased to announce solid first quarter earnings on Monday. Better results from both the utility and banking operations helped first quarter earnings recover from depressed levels a year ago.

Interim rate relief and the $7 million write-off in the first quarter of 2007 that does not recur this quarter were key reasons for the quarter-over-quarter increase in utility earnings. Bank earnings were up 26% quarter-over-quarter due to margin expansion, continued good asset quality, and increased non-interest income and lower non-interest expenses.

Holding and other companies losses were basically flat quarter-over-quarter. The financial details of the quarter were included in the earnings release and our first quarter Form 10-Q that was filed yesterday.

We would be happy to answer any questions you have on the quarter at the end of the formal presentation. Let me now update you on the Hawaii economy.

Our Hawaii State Department of Business Economic Development and Tourism lowered their outlook for economic growth slightly during the quarter to 2.5% from 2.8%. However, subsequent to this forecast revision, several events have clouded the horizon for our Hawaii economy.

Two airlines serving our markets announced shutdowns and the Regent Cruise Lines moved two of their three ships to Europe and Asia. Near term, this is impacting our visitor industry, but economists are uncertain of a long-term impact as other airline carriers are adding seat capacity to fill the void left by Aloha Airlines and ATA, and our Hawaii Tourism Authority has increased their marketing and other promotional activities.

We expect them to revise their outlook further in their next quarterly forecast on May 15th. On a more positive note, federal government spending especially for the military continues to be a stable source of revenue for businesses and jobs for residents.

The recent decision by the Army to permanently station a striker brigade in Hawaii, will bring $250 million more of new construction projects to Oahu and the Big Island to offset the negative impact to tourism. Our real estate market has also remained relatively stable.

Home prices on our main island of Oahu have been holding, although we are experiencing some weakness on the neighbor islands. And while unemployment has risen, it is still relatively low at 3.1%.

Hawaii's bankruptcies are also among the lowest in the nation. Overall, Hawaii is fairing well comparing to the nation, but our operating companies are monitoring conditions carefully.

Mike and Tim will be discussing the impact we have seen in our businesses thus far, as they review our utilities and banking operations. In addition, in Tim's review of the bank, he will be presenting slightly different information than we have in the past.

Tim has added information about the bank's linked quarter results, comparing this quarter's results with the bank's fourth quarter results to give you a better sense of how the bank's key metrics are trending. As we mentioned last time, the bank is also embarking on a performance improvement project and will be showing results against select peer groups, comprised more of commercial banks than thrift to demonstrate the opportunity that American has to generate additional shareholder value as it continues to transform to full service community bank.

Let me now ask Mike to discuss our utility.

Thanks, Connie. Aloha and good afternoon.

As Connie mentioned results, this quarter reflect interim rate relief received primarily late in 2007 for all three of our utilities. This added $14 million to net income this quarter.

These additional revenues are helping our utilities to recover higher levels of O&M cost and earn on the significant number of capital projects completed in the last several years. And bringing much needed closure to this case, last week we received the final D&O for the HECO 2005 test year rate case.

As you recall, the PUC issued a proposed final D&O in this case back in October of 2007. There are no material differences between this final D&O and the proposed D&O, and you may recall the expected refund was already accrued in the third quarter of 2007.

Looking ahead, we still face some challenges. As we have experienced for the last couple of years, we expect sales to remain relatively flat.

Although our number of customers continue to grow, as this chart indicates, the rate of increase has started to slow in the last couple of years and in the first quarter of this year. In addition, our customers are conserving and using energy more efficiently, as we have been encouraging them to do so.

However, despite relatively flat sales growth, peak demand remains high, near record levels set a few years ago. The ongoing need to meet this level of demand continues to put pressure on our generating units, especially on Oahu where generation reserves remain tight.

Also as with any equipment, as our system ages, maintenance costs are increasing. As a result, O&M expenses have continued to increase and we expect the cost to remain high given our tight generation reserves and our aging assets.

As mentioned earlier, recent rate relief for all three utilities will allow recovery of most of these higher O&M costs. To address these needs and to modernize our infrastructure, we are making major capital investments in generation and transmission capacity.

This includes new generating units planned for Oahu and the island of Hawaii in 2009. In total, over the next five years, we are forecasting approximately $1.3 billion in gross capital expenditures for these reliability investments.

We will continue to focus on recovery of the increased investments and earning a reasonable return through the rate case process. Just as important is our strategic emphasis on increasing renewal energy and reducing our dependence on fossil fuels.

There is a lot happening here, but just as a couple of examples, in the past quarter, the U.S. Department of Energy and the State of Hawaii, launched a major partnership called the Hawaii Clean Energy Initiative.

It brings the key energy stakeholders in Hawaii together to identify policies and projects to increase the use of renewable energy in Hawaii. And most recently in April, the U.S.

Department of Energy announced the selection of a distribution automation project for our Maui subsidiary. The University of Hawaii will receive a $7 million grant to study ways technology could help reduce peak demand, and integrate more intimate renewable on the Maui electric grid.

To sum up, interim rate relief has helped to recovery higher levels of O&M and earn a return on our capital projects. Just as important, we continue to execute on our critical renewable strategy.

These are challenging times, but we are positioning our utilities well for the long term success for our investors, our customers, and our state. Now, I would like to call on Tim to discuss the bank.

Thanks Mike. Good morning everyone and thank you for joining us.

I am happy to report that while the current environment remains volatile and the economic outlook is uncertain, we are off to a solid start in 2008. Importantly, adjusting for the prior quarters, $8.8 million non-recurring benefit from a change in ASB's defined benefit plan, both net income and return on assets improved over the fourth quarter and the first quarter of last year.

As you would imagine with Connie's comments on the Hawaiian economy at the outset, revenue growth has slowed somewhat, but we still experienced positive growth over the prior quarter. This was partly driven by improvements in our net interest margin due to favorable balance sheet trends and changes in interest rates.

Our efficiency ratio also improved, as we experienced positive operating leverage, with revenue increasing 1.8% from the prior quarter, while non-interest expense adjusted for the pension benefit declined by 5.8%. And our net charge-off ratio declined following the elevation from the single credit written down in the prior quarter.

Last quarter, I shared several key ratios with you based on bank and thrift industry data from the FDIC. This data is asset weighted and hence primarily tracks the performance of only the largest banks and thrifts such as Bank of America, Citigroup, Countrywide, JPMorgan, and so forth.

I am in the process of developing a more meaningful industry and high performing peer group to use for benchmarking purposes going forward. In the interim, today's results will be compared against the median performance of the 50 public banks and thrifts that exist between $4 billion in assets and $9 billion in assets, and a subset of the 15 banks and thrifts that appear to have the greatest and more consistent profitability based on return on assets.

As I communicated, we are off to a good start. This quarter, we earned higher net income on a smaller average asset base, as we are working diligently to reduce our non-earning or low earning assets.

This in turn will increase capital ratios, allowing us to evaluate the possibility of returning more capital over time to HEI. In a minute, I will detail plans we have initiated to bring our profitability in line with the peer groups.

As you can see, ASB has held up well over the last year as indicated by the peer group's sharp declines in 2007 profitability, primarily related to increased provisioning for credit losses. Our recent stability has been helped by the strength of the Hawaiian economy, but I think it also speaks to the successful diversification strategy that Connie and our team has executed over the last five to ten years.

Having a thrift heritage, great progress has been made in lessening our exposure to solely mortgages. Now, I would like to quickly walk through our four key drivers.

As Connie mentioned, most of my comments today will focus on linked quarter results to provide you a better understanding of our current trends and outlook, as we do not have the seasonality trends that many of you are used to on electric utility side. Revenue, which banks define as net interest income plus non-interest income, increased $1.2 million from the prior quarter to $68.5 million.

The increase reflect a $1.5 million increase in net interest income, partially offset by a $300,000 decrease in non-interest income. As it relates to net interest income, first quarter net interest income totaled $50.5 million, up from $49.1 million in the fourth quarter.

Importantly, this occurred in spite of our strategies to reduce lower yielding earning assets and higher costing wholesale funding. The increase resulted from a higher net interest margin, which benefited from an improved earning asset mix, deposit mix, and the recent interest rate reductions.

This chart shows the volatility of linked quarter revenue growth for ASB in the industry over the last five years, as rates moved sharply down and then up and now down again over a fairly short amount of time. Hopefully, with shorter term rates having come down recently and longer term rates holding up relatively steady, we will continue to benefit throughout the year.

Next, our net interest margin improved 8 basis points to 316. The net interest margin increased due to an 18 basis point decrease in total funding cost compared with an 8 basis point decrease in earning asset yields.

The lower funding cost resulted from three things, average core deposit growth of $13 million versus the prior quarter, a reduction in our higher cost average wholesale funding balances of $8.9 million, and higher cost single service CDs that have been able to decline due to our strategy to reduce lower yielding earning assets and much of our funding benefited from the reduction in interest rates. Within earning assets, we were able to reduce lower yielding investments by an average balance of $111.9 million, while increasing our loans by $98.7 million.

I will add that the company experienced pretty even loan growth across most loan categories. As the chart shows our net interest margin has been stable over the years and we are working on plans to move it closer to the peer group average.

Next, efficiency, as we discussed previously, fourth quarter 2007 non-interest expense included an $8.8 million benefit related to changes to the bank's defined benefit plan, which reduced that period's non-interest expense. Excluding this non-recurring benefit, first quarter non-interest expenses declined approximately $2.7 million or 5.8% from the prior quarter to $44.2 million.

In combination with the 1.8% linked quarter revenue growth, our efficiency ratio improved from approximately 70% for the fourth quarter to 65% this quarter. Compared to an adjusted fourth quarter, improvements occurred in other expenses, services, and equipment categories.

The remaining expense categories were basically in-line with the prior quarter's level. Our internal target is to achieve a 55% to 60% efficiency ratio.

In the first quarter, we heightened the overall awareness and importance of expense control and began monthly controller meetings to review actual versus budget results with each senior officer in the company. In a minute, I will talk further about specific plans we are putting in place to further improve our efficiency ratio.

Lastly, credit quality. The provision for credit losses in the first quarter was $900,000 compared with $1.8 million for the prior quarter.

Net loan charge-offs in the first quarter totaled $484,000 or 5 basis points of average loans held for investment compared to 53 basis points for the fourth quarter of 2007. The charge-offs were comprised of a broad array of consumer and business banking loans.

Each of our credit quality indicators have begun to increase, albeit off of historically low levels. By all measures, our indicators remain significantly below industry levels for banks and thrifts.

However, we remain cautious about the national and Hawaiian economic outlook. Therefore, we have and continue to review our underwriting policies and procedures, and have increased monitoring in our special assets and collections area.

At March 31, 2008, non-performing assets increased to $7.5 million or 0.18% of loans held for investment and foreclosed property, from $3.2 million or 8 basis points at December 31, 2007. The increase in non-performing assets was primarily attributable to the increased delinquencies of traditional residential first mortgages and two commercial loans.

The allowance for credit losses totaled $30.6 million or 74 basis points of loans held for investment at quarter end compared to $30.2 million or 78 basis points at year end. This allowance coverage of nonperformance loans totaled 4.15 times at March 31, 2008 levels compared with 9.46 times at December 31.

In closing, we just announced an employee-led project within American Savings Bank to improve our net income, profitability, and shareholder value. Specifically, we will be focused on improving our net interest margin, efficiency ratio, and return on assets, while maintaining strong credit quality.

This project will entail a comprehensive review of the entire company to identify ways to earn more revenue, reduce expense, and use less capital. Projects such as this are not uncommon within the banking industry and we plan to do this with special attention placed on ensuring we do not disrupt our highly regarded customer service or special ASB culture.

I expect this to be a multi-year project, and while specific targets and opportunities are being finalized, you can expect general targets to be return on assets of greater than 1% and net interest margin greater than 3.5%, and an efficiency ratio of 55% to 60%. We will update you on specific targets and initiatives in the coming quarters and will keep you apprised of our progress towards our goals throughout the project.

Now, I will turn it back to Connie for closing remarks.

Thanks Tim. Overall, in summary, we are pleased with the company's performance in the quarter.

After a tough first quarter last year due to the Keahole write-off and pending rate case decision, our utilities are now in a better position to earn a more reasonable return for investors. We continue work on critical reliability projects and are focused on recovery of these investments and earning a reasonable return through the rate case process.

We are very excited about our leadership role in reducing Hawaii's dependence on fossil fuels and supporting more energy from renewable sources and continued execution of this strategy. At American Savings Bank, our bank turned in solid results this quarter, as the fed easing of interest rates had a positive impact on our margin, non-interest income, and expense improvement, and credit quality remained good.

And as you have just heard from Tim, the Bank has just announced a new performance improvement project, to improve both operating and capital efficiency, and we will report on specific strategies and targets in future updates. We continue to recognize the importance of the dividends to shareholders and we are committed to continuing it.

That said, our Board of Directors meets quarterly to review and approve the dividend. On Monday, we announced that they declared a continuation of the quarterly dividend of $0.31 per share payable on June 10 to shareholders of record on May 16.

The ex-dividend date will be made May 14. At 4.8%, our dividend yields remain attractive.

This concludes our formal comments and we are happy to answer any questions you may have. Thank you.

Aloha and thank you for holding the call today. I am wondering if you can tell us if you foresee any detrimental impact upon the tourism business there as a result of the volcanic fog or vog that you are experiencing on some of the islands.

That doesn't seem to have impacted the tourism count. Actually in some respects, many people are coming to see the volcano and take advantage of this very unique opportunity.

We on Oahu of course as the vog has been blown over this way, we have a few days that have been a little muggier than usual, but it really has not had a major impact.

Okay, thank you very much.

Good morning guys.

Hi Paul.

First of all, just a small item here, the other interest charges at the utility, what was going on there? I see a decrease pretty substantially.

Paul, this is Tayne Sekimura on the line, can you hold on a second?

Sure. The other question that I wanted to ask you guys about was just in general sort of what the regulatory outlook is in terms of future needs for rate relief and what you guys might be thinking about that, and what we should be expecting in terms of future regulatory activity if any.

Paul, I will answer the interest question first and then I will talk will about regulatory.

Hey Paul, this is Tayne. The variance there is due to lower short-term interest.

We had lower commercial paper borrowing balances as well as lower interest rates compared to the prior year.

Okay.

Paul, with regard to the regulatory scene, as I mentioned in my prepared remarks, we are looking at a capital expansion program of $1.3 billion over the next several years. One might reasonably expect that as we go through that capital investment program that we would be seeking rate relief to seek recovery on that capital program.

As far as timing, I think the PUC has been very responsive in terms of timing, and one of the things that I had mentioned is that the Hawaii Clean Energy Initiative, one of the components of the review there is looking at ways that we might change the regulatory compact. So those things all say to me that there are positive things that are moving forward in terms of the regulatory front.

Okay. But I guess what I am wondering in terms of, how do you feel about your ability to earn an acceptable ROE over the next year or two?

How do you see that outlook considering the cost that you guys have coming here? You guys obviously got some rate relief and what have you, how should we think about that?

I think you have asked the appropriate question. I think it really comes down to getting timely recovery on the investments that we are making, both as the timing of the filing and timing of action by the PUC in getting timely D&Os.

Paul, let me just add. I think you have seen since mid-2006 we have actually filed a number of rate cases.

And so the team at the utility actually has been focusing in great detail on a number of different regulatory mechanisms that can assist in speeding recovery of cost and recovery on our investment. And so they actually have been talking about a number of different ideas with the commission that we may be able to share with you in future calls.

Okay, great. And then just sort of a bigger picture.

The working capital I guess was a little bit of a drain this quarter, if I looked at the 10-Q correctly. Anything particular there that we should be thinking about or I would assume that this will just be sort of ebbs and flows that we are seeing from quarter to quarter?

Paul, are you referring to the utility?

I am referring to the company as a whole.

Okay.

I mean, you guys have different – maybe I am looking at the wrong income statement, I think it's the whole – sorry, cash flow statement. It seems that there was a – changes in assets and liabilities seem to be pretty strong.

But, I think it probably was mostly with the utility, accrual and unbilled revenues or whatever.

Let me speak to the utility and then anybody can add for the bank and the holding company. The utility, as you know, fuel costs have been rising.

So as fuel cost rises, our fuel inventory rises because we need to maintain a certain minimum level of inventory. And then also accounts receivable, our unbilled revenues go up because the prices are higher.

So that has been the biggest driver on the working capital side for the utility.

Okay. That makes sense.

And then …

Paul, hold on a minute, I'll ask Tim to add on the bank because actually there is a very good positive story on the bank side.

On the bank side, we don't really use the term working capital. We focus on liquidity to be able to fund our balance sheet and any deposits that are exiting the bank.

So, one of the things we are looking at is banks have a certain level. If you look at a balance sheet, what is called cash in due from, and then there will also be some interest-bearing deposit accounts and that is really what you use for short-term liquidity.

And there are some sophisticated systems that are out there that monitor the amount of volume from ATM machines, the amount of cash that is needed in branches. It not only looks at the absolute level, but it looks at it by bill type.

So, what if you have a ton of 5s in the branch, but a lot of people will need 20s. So we are working diligently the last three or four months to monitor the trends of the last year or two in installing these systems to reduce our cash levels, and we are optimistic.

If you think about it this way, we probably have, I don't have the exact number, but say we have $150 million, $170 million of cash in due from, if we got that down $20 million off of that big base, that is about $1 million directly to our bottom line.

Okay, great. And then just on the loan loss provisions, you said that was like 5 basis points off of 53, but the 53 I think had some specific loans that went bad or something.

What would be a more normalized number quarter-over-quarter, I mean, how has that been directionally?

Yes. Suzy, I don't know if you are able to show the slides again, but the slide we showed that was slide number seven was sort of a five-year net charge-off trend, and you are correct.

It looks like based on this charge, our company has operated between 0 and 15 basis points, which is probably normal for a thrift-like balance sheet. Most commercial banks, well run commercial banks, would run in the 30 basis point range.

So you are correct. Last year in the fourth quarter we had an anomaly, we had a large commercial loan that attributed to that 53 basis point charge-off.

That was a single credit.

Okay.

Right now, in the short run with our balance sheet, I would estimate that 5 to 15 basis points.

Okay. And then the performance employee program, just any flavor, I know you guys have a multi-year target here for the net interest margin and ROA and what have you, but any sense as to sort of what we might be seeing, meaning how soon some of these improvements might start showing up?

Hopefully every quarter, but it is a little bit like a ramp, right, because we have to identify the opportunities, prioritize them, get teams on them. But hopefully – and we already have some that are live right now, the cash project is one.

I've been on that for two or three months, and as I have said, that is an exciting one that can reduce our balance sheet. So it's going to be a double whammy to the ROA, it is going to give you more net income.

It is going to help with numerator and the denominator. We have got a lot more I will share with you in time.

Hopefully in the July or August conference call, I can give you specific targets on net income that we are targeting and by area. But typically what you see on these, there are some others that are out there if you want to research them, SunTrust is doing one right now, Webster Bank in Connecticut is doing one right now, Amcore in Chicago, so there is a lot of examples and it will be a multi-year project.

If you back into the numbers quickly, for the quarter, we had annualized $272 million of revenue. So if that was your base and you were going to do it just on the expense side, which we are not going to do, we would hopefully get some of both, we have to reduce our annual expenses $12.5 million for a 60% efficiency ratio, or $26 million for a 55% efficiency ratio.

That's if you are going to do it all on the expense side. If you think about our current expense level, it is annualized at $176 million.

So, if you wanted to get it all on the revenue side, you would have to add $20 million of annualized revenue for 60% efficiency ratio or $48 million in annual revenue for 55% ratio. So, what that shows is it is obviously easier to get on the expense side.

Sure. But it seems like not only is this a multi-year thing, but we will probably see some benefits of this in the near-term within a year or so as well.

I mean, this is beginning to show up. If I understand your comments correctly, we should start seeing improvements in the near term as well as longer term.

Without a doubt. It is not something that is going to come in four quarters from now.

Without a doubt, I mean, I think third and fourth quarter you will definitely start to see things coming through.

Excellent. Thank a lot guys.

Good morning.

Good morning.

The utility evidently must have filed its intentions to have a rate case on Oahu. Can you give us some color on that?

The process just requires us any time we are anticipating the possibility of filing a rate case, we have to give notice. We are evaluating the content and details of that rate filing now.

So if you have given notice, it is likely you will file here in two months?

I would just leave it that we are evaluating the details of that at this point, Jim.

Okay. On the bank side, I would like to ascertain the profitability that you reached in the first quarter here.

Your line item called services went down and you say in your press release that it was due partly because of lower litigation costs and attorney's fees, things like that. Is this a new maintainable level or did you get it to a low point and it will be higher than this going forward?

I hope it is not maintainable because I hope it goes down a lot more from here, but a lot of it is because of some of the litigation that has been discussed over the last year. I think you are looking a lot year-over-year, even linked quarter it went down.

But, you are correct, there was a lot of litigation last year that we optimistically, knock on wood, don't expect to have any other item like that pop up. There is a lot of other stuff in there that we are going to work hard to try and eliminate as well.

So I would use that. And the bank numbers, again for those of you that have followed the utility, for modeling bank numbers, when you are doing your models, I would look at the prior quarter and banks are a financial balance sheet, and if you don't have undue interest rate risk in your balance sheet, those existing numbers should be able to just be rolled over in your model.

So I wouldn't look year-over-year for the bank. I would look linked quarter.

Do you think we can bank on this $14.5 million of net income level going forward, or are there risks to this?

There is risk in every number, right, in every company. I would tell you that 85 basis point ROA, I would think there is more upside than downside if I was buying the stock, but that is a decision you would have to make on your own.

But, as I showed you, if you look at all banks and thrifts between 4 billion in size and 9 billion in size, the last five years their ROA averaged about 1.05.

Jim, I would just add though, one of the headwinds that we are very carefully monitoring of course is credit costs and will those rise? As Jim we shared with you earlier, we have actually been experiencing extremely good asset quality in Hawaii and that always is just a function of what happens in the economy.

Somewhere in your literature you indicated that it is possible that loan loss reserves may be higher in the future. Is this $900,000 level for the first quarter a low point, and maybe higher from there?

Yes. That is just a prudent disclosure based on what is happening in the economy.

If you think about our NPAs, our non-performing assets, which is sort of a key indicator for banks on the coming horizon, our NPAs are 0.18%, okay? Every commercial bank I have worked at, very well run commercial banks, our NPA has averaged about 0.6%.

So, with our balance sheet being a legacy balance sheet, it is just – it is fairly high quality low-risk assets. I am not saying we are not going to have charge-offs, but if Hawaii got hit hard and the tourism really sank and hotels laid off and people had a hard time with their cash flows, people would go past due on their mortgages, but mortgages typically are the very last thing that goes delinquent.

And so, if you stack up 0.18% versus the industry, it would be, I forget the Hawaii word for it, but it would be very small.

Manini.

My little son always talks about the Manini fish. He knows more Hawaiian than me.

That is pretty small then?

That is very small, nominal.

And on the utility side, you have indicated that rate relief allowed you to have net income $14 million higher than it would have been. Can you give us a picture of what it might be in the future quarters?

Let me take that question. In terms of, if we look at all three cases, the incremental impact would be about $42 million to the bottom line.

This is for all three cases, incremental 2008.

And so, you only have one-third of it taken down there?

Yes, this is an annual incremental to 2008 number that I just provided, and Jim that is incremental considering when the decisions came in in 2007.

But for the whole year of '08, we should be looking for $42 million of incremental income and you have already posted $14 million, is that correct, is that what am I hearing?

Yes. Assuming costs don't go up and I think as we reported, we are seeing costs rise.

Their test year was the 2007 test year, so there is higher depreciation. So, you have to take all of those things into consideration.

Jim, just for your information, the higher O&M in the first quarter was $2.8 million, about $0.03 a share and higher depreciation about $700,000 or $0.01 a share.

To say it differently, Jim, the annualized effect of the rate cases in the year is $60 million of net income.

Did you say $60 million or $16 million?

$60 million, like 60, like senior citizen.

Right.

But, that is not the incremental.

That is the annualized.

Thank you very much.

Hi everyone. This is Suzy again.

Thanks very much for being on the call with us today. If you have any follow-on questions, please contact me at area code 808-543-7385, and I will be happy to answer any questions you might have.

Thanks again. Aloha.