Shelee Kimura - Manager, IR and Strategic Planning Connie Lau - President & CEO, HEI Jim Ajello - EVP & CFO, HEI Rich Wacker - President & CEO, American Savings Bank

Paul Patterson - Glenrock Associates James Bellessa - D.A. Davidson & Company Charles Fishman - Morningstar

Thank you Jasmine and welcome to Hawaiian Electric Industries’ second quarter 2012 earnings conference call. Joining me today are Connie Lau HEI President and Chief Executive Officer, Jim Ajello HEI Executive Vice President, Chief financial officer and Treasurer, Dick Rosenblum, Hawaiian Electric Company's 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 quarter and update on our strategies. Jim will then update you on Hawaii's economy, our financial results for the quarter and outlook for the remainder of the year and then we will conclude with question and answers.

Forward-looking statements will be made on today’s call. Please reference the accompanying disclosure to the webcast slides located on our website.

I’ll now turn the call over to our CEO, Connie Lau.

Thank you, Shelee and aloha to everyone. We closed the first half of the year with strong results and consistent with our 2012 objectives.

Many constructive regulatory milestones were achieved during the first half of the year. Most significantly all three utilities are now decoupled under Hawaii's new regulatory framework.

Our bank continued to perform well in this very low interest rate environment with steady loan growth for a 7th consecutive quarter. In addition credit and asset quality continued to improve consistent with Hawaii's gradual economic recovery.

We continue to make progress on our strategies and believe we are well positioned to continue to the deliver attractive and stable earnings growth to our investors. Second quarter 2012 earnings were $0.40 per share consistent with $0.40 in the linked quarter and $0.28 per share in the same quarter last year.

This increase from last year was largely driven by the recovery of costs for our Oahu utility which commenced in July of last year for its 2011 test year. As we close the first half of the year, we are pleased with the utility’s strategic progress.

During the second quarter, the Hawaii Public Utilities Commission rendered over 50 decisions that affected our company including issuing the 2011 Oahu final decision and order and Maui County’s 2012 interim decision and order. With these decisions, all three utilities are fully decoupled and each will go in for a rate case one every three years.

Under the new regulatory model, our utilities received annual revenue balancing account RBA and RAM rate adjustment mechanism, adjustments between rate cases among other changes. Our 2012 capital projects are on track for the year.

In 2012, these continue to be routine capital expenditures critical to strengthening our grid and integrating more renewalable sources. On the clean energy front, our adoption rate of additional renewable energy has continued to grow.

Year-to-date through June 30, over 13% of our electric sale came from renewable sources ahead of our projections. In addition the procurement process for an additional 200 megawatts of renewable energy for Oahu from renewable developers is progressing and is scheduled to be launched in the second half of the year.

Turning to the bank we are on track to meet our 2012 performance targets. While margins are gradually eroding in a very low and challenging interest rate environment, we continue to grow our loan portfolio at a steady and disciplined rate.

Year-to-date annualized return on asset was 1.22% and year-to-date annualized ROE was 12.1%. While the bank's efficiency ratio and non-interest expense rose in this quarter, this was largely due timing of project expenses.

The first half run rate for expenses remains consistent with our annual target of $145 million. Year-to-date bank's earning to $30 million is in line with our expectations.

We continue to believe 2012 full-year earnings will be 3% to 5% lower than 2011 as this extremely low interest rate environment will continue to exert downward pressure on net interest margins during the second half of the year. Overall the bank continues to maintain its low risk profile, strong balance sheet, terrific funding base and straight forward business model.

Jim, will now discuss the details of our second quarter results and drivers for the year.

Thanks, Connie. As a backdrop to our results and outlook, I'll briefly comment on Hawaii's economy which continues its gradual improvement.

The tourism industry, a significant driver of Hawaii's economy posted record arrivals and spending in the month of June. Visitor spending has grown year-over-year for 26 consecutive months.

Year-to-date visitor arrival were up 10.2% and expenditures were up 21.4% compared to last year. In the 2012 outlook, the visitor industry remains very positive.

Local economists expect construction to begin to recover in 2013 due to an increase in non-residential and public sector projects. Statewide, unemployment is at 6.4% in June, and remains very low compared to the national average of 8.3%.

Overall, we continue to see gradual improvement in the Hawaii economy. However the gains in the tourism sector have largely not spilled over to the rest of the economy.

At the utility, net income for the second quarter of 2012 was $29.4 million, compared to $27.3 million in the linked quarter and $17 million in the second quarter of 2011. In looking at changes in utility revenues between periods, we focused on net revenues.

The net revenues as shown on this slide refer to operating revenues, net of fuel oil, purchase dollar and taxes other than income tax. In the quarter, net revenues after tax were $9 million higher than the same quarter last year, largely driven by the recovery of costs or our reliability in clean energy investment in [Oahu] which became effective in July 2011.

Operations and maintenance expense after tax was $2 million lower than the prior year. This was primarily due to $2 million lower A&G expense from a change associated with the capitalization of costs in July 2011.

The deferral of Interisland Wind project cost were offset by $1 million of higher customer servicing costs related to our new customer information system, which went into service in late May. At the bank, net income for the second quarter of 2012 was $14.2 million compared to $15.9 in the first quarter of 2012.

Net income declined by $1.7 million compared to the linked quarter which included the release of tax related reserves of approximately $1 million. The remainder of the decrease was largely due to higher non-interest expenses or new products business projects, some of which were originally expected to incur in the first quarter, partially offset by lower provisions for loan losses from the continued improvement and credit quality and portfolio mix, compared to the second quarter of 2011, bank net income declined by $1 million primarily due to $1 million non-recurring insurance gains in the second quarter of last year.

Higher gains on sales of loans of $1 million after-tax were offset by higher non-interest expense. Now we will look more closely at utility.

Slide nine shows our actual ROEs within trailing 12 months as a percentage of allowed ROE. As of June 2012, the utilities’ last 12 months consolidated ROE of 8.7% improved from 5.8% a year ago, significantly narrowing the gap to our allowed return.

Although our largest utility on Oahu earned 9.4% ROE over the last 12 months. We still expect the full year 2012 ROE to be 8.5%.

We expect the decline is largely driven by the timing of O&M project which are [weighted] to the second half of the year. With regard to our Hawaii Island and Maui utilities, we expect their combined ROE in the second half of 2012 to be generally in line with the first half which was 6.4% annualized.

While MECO should improve over the first half of this year due to the impact of the interim precision in order received in June HELCO’s return are expected to be lower than the first half. HELCO’s ROE will be negatively impacted by the elimination of heat rate saving and lower allowed ROE resulting from the implementation of decoupling in April.

In addition, the timing of O&M projects is weighted to the second half of the year. We expect to file HELCO’s 2013 test year rate case this month.

The approval of the near regulatory model by the PUC has helped improve the timing of cost recovery and will help our utility to gradually improve its consolidated ROE beyond 2012. This facilitates the ability to effectively raise capital for our needed infrastructure investment.

As we have stated before however, we continue to expect an ongoing GAAP to our allowed return. The timing of our general rate case vision and the effective date of the revenue adjustment mechanism, together with expenses that are consistently excluded from rate, is estimated to have a consolidated ROE impact of 120 basis points to 150 basis points in a typical year.

In addition, there are other items which are not covered by our annual revenue adjustment mechanism that could also have an ongoing impact on our allowed return. For example, investments in software projects, O&M in excess index escalation and changes in fuel inventory must be addressed in general rate case.

Well, the specific magnitude of the impact fluctuates depending on size of project and factors, we anticipate that these items could incrementally impact consolidated ROE by 50 basis points to 75 basis points in each of the next two years. On slide 10, we summarized for you the key utility earnings drivers for the second half of 2012.

Effective June 1, PUC approved $13.1 million increase in annual revenues for Maui county utility. The recovery of $32 million of cost for (inaudible) and approximately $59 million for the customer information system is pending regulatory audit.

There has been no schedule yet for these audits. With all of the three utilities decoupled to our sales no longer impact revenues.

2012 revenue adjustment mechanisms allowed undue decoupling model were implemented in June and an annual revenue amount of $4.9 million. In addition, HELCO's heat rate savings which were $1.5 million in the second half of 2011 are expected to be eliminated in the second half of 2012 with the new heat rate deadband implemented when HELCO was decoupled.

With respect to O&M, the cost initiatives are (inaudible) for the second half of the year; we expect the second half O&M expenses to be 15% higher than the same period last year. This will result in full year 2012 O&M to be 6% higher than last year consistent with our original expectation.

There is no change to our expectations 4% to 5% rate based growth for the year. Overall, we continue to be focused on effectively executing new regulatory model and our on our clean energy and reliability CapEx programs.

Now we'll look more closely at the bank's strong performance metrics. Our net interest margin was 3.97% in the second quarter of 2012, a seven basis point decline in the linked quarter was primarily due to lower yield on interest earning asset due to the lower interest rate environment and the shift in the portfolio mix in favor of short duration adjustable rate product.

Our liability cost was 27 basis points in the second quarter of 2012 is extremely low by industry comparisons and is driven by our stable low cost deposit base. Note that there can be volatility in net interest margin between quarters as a result of the accounting recognition of fee income on loan and investment prepayments and other factors.

However, it had no significant impact between the first and second quarters of 2012. The bank recorded $2.4 million provision for loan losses in the second quarter of 2012 down from $3.5 million in the linked quarter.

The decline in provision was due to lower net charge offs particularly in the residential, land and commercial market portfolios and improved consumer credit quality associated with the gradual improvement into Hawaii’s economy. As shown on slide 14, loans have been growing steadily for seven consecutive quarters.

In the second quarter of 2012, loans grew by $23 million or 2.5% annualized. In year-to-date, loans increased by $53 million or 2.9% annualized.

Growth continues to be driven by Americans home equity line of credit and commercial real estate. Slide 15 is our balance sheet which shows you the attractive asset funding mix of Americans relative to our peer bank.

97% of the loan portfolio is funded with low cost deposits versus our peer bank at 86%. Our core deposit increased by $25 million in the quarter to $3.6 billion which helped fund our loan growth while maintaining a very low average cost of funds at 27 basis points.

American remains well capitalized with tier-one leverage ratio of 9.2%, tangible common equity to total asset of 8.6% and total risk based capital of 12.8%, all at June 30, 2012. Year-to-date, American paid $20 million in dividends to HEI and expects to pay an additional $25 million by year end, while maintaining its capital ratio of 9% tier-one leverage to 18% total risk based capital.

Turning to credit quality, Americans' non-performing assets ratio declined to 1.84% at the end of the second quarter versus 2.02% at the end of the first quarter and remained better than high performing peers. $6.3 million decrease in non-performing assets was primarily due to the reduction of the residential loan portfolio, land loan portfolio and the payoff of one large non-performing commercial loan.

Consistent with the improvement in non-performing assets, our net loan charge-off ratio decline to 0.19% from 0.28% in the linked quarter. The decline is primarily due to lower charge-offs in the commercial markets portfolio and the rapidly shrinking residential land portfolio.

Provision exceeded charge off for the quarter and year-to-date. As a result, the allowance for loan loss is up slightly at 1.06% outstanding loans compared to 1.05% at the end of the first quarter and 1.03% at year-end.

Looking forward, our 2012 expectations for the bank remain unchanged. We continue to expect 2012 net income to be approximately 3% to 5% lower than 2011.

As explained last quarter, we expect to see continued downward pressure on net interest margins quarter-over-quarter. Full year NIM is expected to be close to 4% with first half of the year slightly higher and the second half of the year slightly lower than 4%.

Non-interest income will be impacted by gains on sales of loan, which will fluctuate depending upon interest rates and loan origination volumes. We expect approximately $750,000 of lower interchange revenues in the second half of 2012 compared to last year due to changes from our interchange network.

We expect this to be partially offset by volume increases from account growth. We expect provision expense to be between $13 million to $16 million for the year, as provision will increase with loan growth.

Commercial charge-offs maybe lumpy throughout the year, but we remain cautiously optimistic about continued improvement in the Hawaii economy. Overall, we are targeting to deliver strong results with our low cost funding base, [efficient] cost structure and lower risk profile.

I will wrap up my comments with views on consolidated earnings and capital. We expect second half earnings to be generally in line with the first half of 2012 subject to the earnings drivers we have discussed, primarily utility O&M and lower bank net income.

This is in contrast to many years in which the annual earnings distribution was significantly more weighted in the second half of the year. We continue to maintain a strong capital structure with consolidated common equity total capitalization of 50% and based on our current assumptions.

We will not require any equity issuances beyond our dividend reinvestment plan through 2012. Now I will turn the call back over to Connie.

Thanks Jim. In summary, we have made significant progress on our strategies.

Our utility continues to focus on fulfilling its clean energy mandate per Hawaii while achieving returns that will enable us to attract capital for our clean energy investments. At the bank, we’ve continued to deliver solid results and through the first half of the year and are on-track to meet are 2012 targets.

Our dividend yield remains attractive relative to the average for our utility peers and as of yesterday’s close our dividend yield was 4.4% with 2012 marking our 111th years of paying continuous dividends. We believe we are well positioned to continue to deliver our unique investment combination of attractive earnings growth with reduced risk and volatility and an above average dividend yield.

And with that we look forward to hearing your questions.

I just wanted to touch basically on a few things; I might have missed this, I think you did say what the provisions, what the outlook for provisions for loan losses was and I think it was improved, is that right going forward?

We had given some guidance between 13 and 16 and actually that remains our guidance although the second quarter provision was a little lower than the first.

Okay. And then just in terms of the Hawaiian economy, I noticed on slide 43 that the University of Hawaii, it looks to me if I am reading it right, really decreased the outlook and I am really not sure you did mentioned how strong these numbers were and I guess it looks like there is some covering between related to the economy and I just was wondering if you can elaborate a little bit on that and how that strikes you in terms of your cautious feeling, the positive outlook you have with the line economy, just as a big revision (inaudible).

I don’t know the real ins and outs of their modeling, but I can tell you that from my observations of what they do in their forecasting is they tend to be a very influenced by national economic projection and also because we draw a lot of tourism from the Asian economies as well from that area and some of the other economies that tend to feed us tourism. And I think right now because of all the uncertainty that’s been felt from a global perspective that seems to also be leading into their forecast.

You know, you heard Jim talk about Hawaii’s tourism number had been pretty amazing, but we’re not seeing that generally translate into the rest of the economy yet.

Not to get too much into this, but I guess I am wondering, why is that; in fact the University of Hawaii sees the number increasing substantially as it appears for next couple of years, so this year next for visitors, if I am meeting it right, but yet you see gross state product going down by almost half than the gross rate that I had before, I am just sort of, is it something in particular that’s happen with the economy that’s been going on, is it lower spending in tourism, I am just sort of wondering briefly what that might be?

No, I don't think we noticed anything particular to Hawaii itself. I really think its being influence more by the views of what's happening generally in the world and the markets from which the tourists are coming.

And then just, Dodd-Frank, just sort of anything that you’re seeing out of the promulgation of the rule making, that you have any update in terms of how that might financially impact you guys?

Generally, we have not had much impact from Dodd-Frank; of course, Dodd-Frank did implement the Consumer Finance Protection Bureau, the CFPB and they’re coming out with promulgations particularly around consumer protection and consumer lending and so undoubtedly some of that will filter through to all of the banks, but thus far it hasn’t been unusually so, I think that we talked previously about the Durban amendment that American is exempt because it’s a smaller bank of $10 billion of assets or less. However, we are seeing as we had telegraphed previously changes in the marketplace that are somewhat of a drag on Americans' interchange income as we've seen the interchange network begin to change pricing according to the markets.

But in general, I think we feel that we've able to adjust through the regulatory environment even under Dodd-Frank. I think you will also know under Dodd-Frank we changed the regulators because our old regulator was actually abolished in Dodd-Frank and that with the office of supervision.

So we are now under OCC at the bank level and the Federal Reserve, at the holding company level and we've filed new style reports with both agencies over the last year and it all seems to be going pretty smoothly.

Great and then net interest margins of interest, any outlook here for 2013, how we might think about that, how that might be trending or I mean in that we are serving in August now, just sort of trying to get a sense as to how this trend might be continuing with the current interest rate environment that we see?

Yeah, let me start that answer and then I will turn it over to Rich to give you his thoughts, you know from a targeting perspective, we've really wanted Rich and his team to target about 4% but the very, very low interest rate environment that has just gone on for long period I think way longer than anyone had expected, has really impacted that net interest margin and you can already see the deterioration in the second quarter is slightly below 4%. I think Rich and his team has been running really hard to build the loan block to make some of that margin up but it's really quite a challenging environment.

You also have to watch your expenses quite closely, because it's very hard to grow revenues. So let me just ask Rich, he might share some of his thoughts on that.

I think as Connie mentioned earlier in the call, we kind of expect the continued trip of (inaudible) in the neighborhood of 5 basis points to 7 basis points a quarter as we go, and that's the combination of lower yields on the things that are coming on in that environment its just lower than what's on the floor plus we continue to kind of and what we've described as our control path on the mix to the portfolio taking a lower composition of residential mortgages because we don’t clearly like holding third year fixed mortgages at these rates and so we have mixed into (inaudible) and more B&I and other adjustable rate of products but just today have lower nominal rates but you have a combination of sort of line by line erosion in the yield with that mixed dynamic too. So wrap it all together we kind of think about 5 to 7 a quarter right now.

And how do you offset that is there anything that we should be thinking about in terms of additional non-interest expense cost or something or how should we think about that?

Over time you control expenses as Connie said, but in consistent we expect we think that the total result for the year will be 3% to 5% lower than last year and part of that attributable to that dynamic.

Okay. We are trying to – it doesn’t look like it’s changing in the near term while we expect here so…

Not much; you have got some good news for me.

And of course as I mentioned Paul, Rich and the team have really got to run hard and put more loans on the book, so that we can keep the earnings up there too and that’s not easy, because if we are set and past by the economy as well.

Looking at this loan loss provision guidance of $13 million to $16 million, and you are indicating that partly that’s a function of going forward loan growth that you will be increasing that some for loan growth. What is your target for loan growth?

I think as we have said before it’s in the mid single-digit range, so we are year-to-date just under 3%.

And when you say year-to-date, how do you measure that year-to-date, six months versus six months ago or a year ago?

Yes correct.

Thank you. I am looking at the slide 23 on the appendix and what struck me is that it looks like your typical rate case cycle is about two to three years.

Do you anticipate that changing with the decoupling?

Actually, the decoupling established as the rate case cycle at three years. So once every year, each utility will go in for a rate case.

Hi everyone, this is Shelee. Thank you so much for joining us today.

And as always if you have any other questions about today’s webcast, please feel free to contact me. Have a great weekend.