Shelee M. T.

Kimura - Manager of Investor Relations and Strategic Planning Constance H. Lau - Chief Executive Officer, President, Director, Member of Executive Committee, Chairman of American Savings Bank, Chairman of Hawaiian Electric Company Inc, Chief Executive Officer of American Savings Bank and President of American Savings Bank James A.

Ajello - Chief Financial Officer, Executive Vice President and Treasurer Richard M. Rosenblum - Chief Executive Officer of Hawaiian Electric Company, President of Hawaiian Electric Company and Director of Hawaiian Electric Company Richard F.

Wacker - Chief Executive Officer, President and Director

Andrew Weisel - Macquarie Research

Thank you, Darcel, and welcome, everyone, to Hawaiian Electric Industry's Third 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 an update on our strategy. Jim will then update you on Hawaii's economy, our financial results for the quarter and outlook for the remainder of the year.

Then we will conclude with questions 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.

Thanks, Shelee, and aloha to everyone, and hope to see many of you at the HEI financial conference. We had a strong quarter as we continue to execute on our strategies and improve the fundamentals of our businesses.

This quarter marked the first full quarter of decoupling at all 3 utilities, and thus the start of more stable and predictable utility revenues. After several years of repair, the utilities ROE has notably improved although we recognize there is still more to do.

Our bank continued to perform well in a tough rate environment through disciplined loan growth and market share gains, including in our mortgage banking activities. In addition, asset quality continued to improve, consistent with Hawaii's gradual economic recovery.

On a consolidated basis, our unique business structure and combination of utility and banking businesses continues to serve us well, and we achieved a consolidated 10.1% ROE for the trailing 12 months, up from 8.5% 1 year ago. We continue to make progress on our strategies and believe we are well-positioned to continue to deliver attractive and stable earnings growth to our investors.

Third quarter 2012 earnings were $0.49 per share compared to $0.50 per share in the same quarter last year. The utility continues to make significant progress in implementing its clean energy strategies.

The Hawaii PUC has issued several important decisions this year, all of which are key steps to supporting Hawaii's efforts to reduce our dependence on oil and ensure reliability for customers. Through September 30, the utilities have achieved a renewable portfolio standard measure of more than 13%, primarily through a comprehensive portfolio of renewable energy power purchase agreement, net energy metering programs and biofuel.

Our 2012 capital projects are on track for the year. Year-to-date, the utilities have invested approximately $240 million of their $300 million budget for the year, primarily in local infrastructure to modernize the electric grid and reliably integrate increasing amounts of renewable energy.

Turning to American Savings Bank. We continue to post strong profitability metrics relative to our publicly traded peers.

American's year-to-date annualized return on assets was very attractive at 119 basis points compared to the median of our peers at 94 basis points and the median for our high-performing peers at 113 basis points. American continued its disciplined strategy in this low interest rate environment and its financial performance was in line with its 2012 target for return on assets, loan growth, net interest margin and pretax pre-position income.

In the quarter, American's residential loan production more than doubled compared to the same quarter of the prior year, gaining market share and outpacing the growth of the overall Hawaii market. Year-to-date, the higher production resulted in higher gains on sales of residential mortgages and allowed the bank to increase spending on the development of new products and projects aimed at longer-term growth.

This was a key driver for the higher noninterest expense and resulting efficiency ratio relative to target. It is important to note that given the current difficult environment for banking, we are maintaining very disciplined growth strategies.

First, to grow our loan portfolio with quality loans in the mid to low single-digit range. And second, to increase noninterest expense judiciously to position the bank for additional growth.

Our focus continues to be on strengthening our core banking franchise in Hawaii. Year-to-date, annualized return on equity was an attractive 11.8%.

Overall, the bank continues to maintain its low risk profile, strong balance sheet, terrific funding base and straightforward business model. And now Jim will discuss the details of our third quarter results and drivers for the year.

Jim?

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

Tourism industry, a significant driver of Hawaii's economy, maintained a positive growth trend. Visitor spending has grown year-over-year for 29 consecutive months.

Year-to-date, visitor arrivals were up 9.6% and expenditures are up 19.5% compared to last year. In the 2012 outlook the visitor industry remains positive.

Local economists expect construction to begin to recover in 2013 due to an increase in nonresidential and public sector projects. Statewide unemployment is at 5.7% in September, and remains low compared to the national average of 7.8%.

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

Turning to the financial highlights. At utility, net income for the third quarter of 2012 was $38.4 million compared to $38 million in the third quarter of 2011.

And looking at changes in utility revenues between periods, we focus on net revenues. The net revenues as shown on this slide refer to operating revenues, net of fuel oil, purchase power and taxes other than income taxes.

In the quarter, net revenues after-tax were $5 million higher than the same quarter last year, largely driven by on an after-tax basis, $6 million of additional recovery of costs, which is attributable to the Oahu 2011 and Maui County 2012 rate cases and the implementation of the decoupling for our Maui County and Hawaii island utilities in the second quarter of 2012, and of $3 million overstatement of revenues in the third quarter of last year, which was corrected in the following quarter. This was offset by $2 million lower heat rate earnings, which are driven both by the regulatory heat rate targets set in the actual performance of the units.

Operations and maintenance expense after-tax was $4 million higher compared to the prior year quarter. This was largely driven by higher customer service expenses and partially offset by lower overhaul expenses due to timing of work within the year.

At the bank, net income for the third quarter of 2012 was $14.2 million, consistent with the linked quarter. $1 million higher after-tax revenues in the third quarter of 2012 compared to the linked quarter were driven by higher gains on sale of loans.

Net interest income was flat and lowered net interest margins were offset by loan growth, and then higher revenues were offset by slightly higher provision for loan losses in noninterest expense. Relative to the third quarter of 2011, bank net income declined by $1 million.

On an after-tax basis, there were $1 million higher revenues driven by $2 million higher gains on sales of loans related to the record quarter of residential mortgage production. This was offset by $1 million in lower net interest income from declining yields on assets, which were partially offset by loan growth.

And then $2 million higher noninterest expense was largely driven by spending for new products and projects and higher benefit expense. Now we'll look more closely at utility.

Slide 9 shows our utility's actual ROEs for the trailing 12 months as of September 2012 compared to September of 2011. Consolidated ROE of 8.64% compared to 6.95% 1 year ago reflects the constructive transformation of our regulatory model over the last 2 years.

As the utility's ROEs improved to competitive levels, we will be better positioned to raise capital needed in the future to fund the infrastructure investment, clean energy and reliability. Our largest utility, HECO Oahu earned a 9.4% ROE over the last 12 months compared to 6.04% 1 year ago.

This improvement was driven by cost recovery in the HECO 2011 rate case under the new regulatory model, and the delays in O&M spending in 2012. With O&M spending expected to increase in the equity infusion from HEI in the fourth quarter, we expect the full year 2012 ROE to decline, but we expect to slightly exceed our 2012 ROE goal of 8.5% for the HECO Oahu unit.

The combined 2012 ROE for our Hawaii Island and Maui County utility is expected to generally track their year-to-date ROE approximately 7%. HECO's 12 month trailing ROE compares -- continues to improve over the prior year due to the impact of the interim decision in order received in June 2012.

As expected, HELCO's returns continue to be lower than the prior year due to the April 2012 implementation of the heat rate deadbands and the timing of O&M projects weighted for the second half of the year. On Slide 10, we summarize for you the key utility earnings drivers for the remainder of the year, and I'll focus on just a few that I've not yet discussed.

The regulatory audits for CT-1 and the customer information system implemented last year are still pending. Consequently, we do not expect resolution of these audits in 2012.

Full year O&M is expected to be approximately 4% higher than 2011. This is moderated from the 6% increase previously expected largely due to the revised timing of various studies.

Our utility remains focused on effectively executing its new regulatory model and clean energy and reliability CapEx program. Now we'll look more closely at the bank's strong performance metrics.

Our net interest margin was 3.92% in the third quarter of 2012. The 5 basis points decline from the linked quarter was primarily due to lower yields on interest-earning assets due to the low interest rate environment and in line with our expectation of 5 to 7 points linked quarter.

Our liability cost of 25 basis points in the third quarter of 2012 declined from 27 basis points in the second quarter and is extremely low by industry comparisons, driven by our stable low-cost deposit base. The bank recorded a $3.6 million provision for loan losses in the third quarter of 2012, up from $2.4 million in the linked quarter.

The higher provision for loan losses compared to the linked quarter was primarily due to growth in the loan portfolio and it covers third quarter net charge-offs of $3.2 million. However, year-to-date provision for loan losses was $9.5 million, down from $10.9 million in the prior year, which is consistent with our overall credit quality trend and the improvement in the Hawaii economy.

As shown on Slide 14, loan growth continued in the third quarter with the year-to-date annualized loan growth of 2.3%. Growth continued to be driven by American home equity lines of credit and commercial real estate offset by a controlled decline in long-term fixed rate residential mortgages and land loans, consistent with the American strategy to improve its interest rate risk.

Slide 15 is our balance sheet, which shows you the attractive asset and funding mix of American relative to our peer banks. 97% of our loan portfolio was funded with low-cost core deposits versus our peer banks of 87%.

Our core deposits increased by $13 million in the quarter to $3.6 billion, which helped fund our loan growth while maintaining a very low average cost of fund of 25 basis point, 2 basis points lower than the linked quarter. American remains well-capitalized with a leverage ratio of 9.3%, tangible common equity to total assets of 8.7% and total risk-based capital of 12.9% all at September 30, 2012.

Year-to-date, American paid $30 million in dividends to HEI and expect to pay an additional $15 million by year end while maintaining a leverage ratio of at least 9%. Turning to credit quality American, nonperforming assets ratio declined to 1.73% at the end of the third quarter versus 1.84% at the end of the second quarter and 1.94% at the end of the same quarter last year, and remains better than its high performing peers.

Our third quarter 2012 net loan charge-off ratio was 0.35% compared to 0.19% in the linked quarter. The increase is primarily due to higher charge-offs in the commercial markets portfolio and the rapidly shrinking land portfolio.

Year-to-date, the net loan charge-offs ratio was lower at 0.27% compared to 0.50% in the same period last year. While provisions were higher in the net loan charge-offs for the quarter and year-to-date, the allowance for loan losses remained at 1.06% at quarter end, unchanged from the linked quarter.

Looking forward, our overall expectations for the full year 2012 remained unchanged for the bank. For the full year 2012, we still expect that bank net income will be 3% or 5% lower than 2011.

While we expect continued NIM compression, we still expect full-year NIM to be close to 4%. Non-interest income will continue to be positively impacted by gains on sales of loans due to our high loan origination volumes compared to last year more than offsetting decline in interchange revenues.

Although provision expense can increase due to loan growth and can be lumpy due to commercial charge-offs, given our year-to-date results, we expect provision expense to be at the lower end of our expected range of $13 million to $16 million for the year. We expect noninterest expense for 2012 to be in line with our year-to-date annualized run rate of $149 million as we invest in resources for future growth.

We are targeting to deliver strong results for a low-cost funding base, efficient cost structure and lower risk profile. In terms of consolidated earnings in capital, we continue to expect second half earnings to be generally in line with the first half of 2012, subject to the earning drivers we've discussed, primarily O&M, the utility and lower bank net income.

We continue to maintain a strong capital structure with consolidated common equity to total capitalization of 51%. As we stated before, we will not require any equity issuances beyond our dividend reinvestment plan in 2012.

Now I'll turn the call back over to Connie.

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

All 3 of the utilities are now decoupled, and they continue to focus on fulfilling their clean energy mandate for Hawaii. The bank has continued to deliver solid results.

And in this interest rate environment, we are focused on disciplined loan growth and controlled spending to strengthen our core franchise and position the bank for more growth as conditions improve. Our dividend yield remains attractive relative to the average for our utility peers.

As of yesterday's close, our dividend yield was 4.9%. 2012 marks our 111th year of paying continuous dividends.

We believe we are well positioned to continue to deliver a unique investment combination of attractive and stable earnings growth, with reduced risks and volatility and an above-average dividend yield. With that, we look forward to hearing your questions.

Just a few questions. If you could elaborate a bit on the O&M.

It sounds like there's some timing within 2012, but then the full year -- the forecast was dropped from 6% to 4%. I'm wondering, is that likely -- how much of that is going to spill into 2013 versus ways to avoid certain O&M costs?

Let me ask Dick if he you would address that question for you.

Andrew, this is Dick Rosenblum. Some of the reduced O&M is associated with delayed decisions coming out of the PUC, that would drive us doing some studies.

So that we would expect to carry over into 2013. Some other part of it, and I'm going to arbitrarily say it's roughly half-and-half, would be associated with true efficiencies and reduced costs in the utility.

Okay, great that's helpful. And then on the bank side, you got a bit of help as you have in the past few quarters from gains of sale of the new residential mortgages.

I understand that's all related to refinancings. Just wondering if you have any sense in the outlook of how sustainable these gains are and kind of just what you think you are in terms of future mortgage gains?

Yes, Andrew, I think you hit it in the head. It really is related very much to the interest rate environment.

And so what we're seeing is that the environment is likely to continue to encourage refis at least through the end of the year and maybe into part of the first quarter. And then I'll let Rich address some of the things that he's been doing in the mortgage banking operations that has significantly increased the volumes of production from that team.

Rich?

Yes, thanks, Connie. Yes, Andrew, so our pipeline is pretty good right now and so I think that supports the outlook Connie gave you.

We've been able to gain share by keeping the cycle times on our underwriting and approval process is pretty low. We've been bringing in some good new originators and also guys that we think have a chance to help us grow our share on the purchase side as the purchase business picks up in the future.

So we've seen a little bit of lift on the purchase market on Oahu. And we know that when the refis turn down, it should be because the economy is improving and the purchase market is improving, so we're trying to position for that a little bit ahead.

Great. And then my last question, I'm not sure if you have any thoughts on bit of back-and-forth recently between the FDIC and one your competitors Central Pacific Financial, any thoughts on your own kind of compliance systems, as well as any potential to get market share from one of your competitors being distracted?

We're complying with everything we know to do. And we're trying to gain market share as we just described.

So we're hopeful that we can continue to do what we've been doing.

Thank you, everybody, for joining us today. We look forward to seeing many of you next week at EEI.

If you have questions before then, please, as always, feel free to reach out to me. Thanks so much.

Bye.