Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 Hawaiian Electric Inc. Industries Earnings Conference Call. My name is Lizzy, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Ms. Shelee Kimura, Manager of Investor Relations and Strategic Planning.

Thank you, Lizzy, and welcome to Hawaiian Electric Industries second quarter 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 President and Chief Executive Officer; and Rich Wacker, American Savings Bank President and Chief Executive Officer, as well as other members of senior management. The webcast live and appendix for this call are located on our website at HEI.com under the headings Investor Relations, News and Events, and Presentations and Webcast. Forward-looking statements will be made on today's call. Please reference the accompanying disclosure to this webcast live. I'll now turn the call over to Connie Lau.

Thanks, Shelee, and aloha to everyone. First, I'll provide a few highlights and discuss our strategic progress. Jim will then provide more details on the economy and our results. Second quarter earnings were $0.28 per share compared to $0.31 per share in 2010. Year-to-date, earnings per share were down 5% over the same period last year as utility expenses increased to implement our clean energy and reliability strategies and our largest utility awaited rate relief. Now that interim rate relief has been granted and the HECO Oahu 2011 rate case, we expect our results to improve in the second half of the year. Resetting our base revenues and expenses for our largest utility in this interim decision was a critical step in narrowing the gap between our current under-earning situations and our allowed returns. We are continuing through the rate case process with several items pending for the review. Many of you have asked whether we will maintain our ROE goal for HECO Oahu of earning within 100 basis points of our allowed ROE in 2012. While it will be more difficult to achieve given recent regulatory outcome, at this time, we continue to maintain this target. At the bank, we continue to deliver solid performance even with the prolonged low interest rate environment and regulatory headwind on fee income. We achieved 3 consecutive quarters of loan growth and credit quality continue to improve. We are making progress on our strategies and commitments, and we believe we are well positioned to deliver attractive, risk-adjusted returns and earnings growth to our investors in 2011 and beyond. As shown on Slide 4, the utility continues to make progress on several fronts. HECO Oahu has now implemented both sales decoupling and RAM covering O&M and rate base. And the HECO 2011 rate case…

Thanks, Connie. I will first briefly address the Hawaii economy. Hawaii's tourism industry is a significant driver of Hawaii's economy continued to reflect a trend of positive growth from 2010. Year-to-date June, tourism continued its strong recovery with visitor arrivals up 4.7% and visitor expenditures up 18.4% as compared to last year. June 2011 was the 14th straight month of increases in visitor spending. Hawaii's visitor arrivals from Japan declined 9% year-to-date through June compared to the same period last year, but this decline was more than offset by the increase from all other markets, which was up 8%. The Hawaii Department of Business, Economic Development and Tourism expects 2011 visitor arrivals to increase by 3.8% from last year and visitor spending to increase 10.8% and believes visitor spending is currently on pace to reach the record level set in 2007. Some of the optimism surrounding the tourism recovery in the second half of 2011 revolves around the Asia-Pacific Economic Cooperation summit also known as APEC. Being held in Hawaii in November, APEC is estimated to bring in approximately 20,000 visitors to the islands. Hawaii's unemployment rate of 6% has come down 0.3% from the beginning of the year and continues to track significantly better than the national rate of 9.2% in June. Statewide residential home sales and median prices were down in June. Tighter inventory levels and mix of homes being sold and the elimination of the 2010 federal tax credit have often been sited of these factors in the softer sales in median prices. Overall, Hawaii's economic recovery is expected to strengthen as improvement spreads beyond the tourism sector over the remainder of 2011. Moving to Slide 7, at the utility, net income for the second quarter of 2011 was $17 million compared to $17.6 million in the…

Thanks, Jim. And finally on Slide 20, in summary, we continue to execute on our strategies. At our utility, we have seen meaningful regulatory progress to align our business with our clean energy goal. With the implementation of decoupling at our Oahu utility, interim rate relief granted in Oahu's 2011 rate case and the filing of MECO's 2012 rate case, we are making significant strides to narrow the gap to our allowed ROE. We continue to maintain our ROE goal for HECO Oahu to earn within 100 basis points of our allowed ROE in 2012. However, this goal will be more difficult to achieve than originally anticipated, and we are evaluating mitigating strategies to overcome this challenge. At the bank, with our focus on organic growth and maintaining our efficiency gain, we continue to deliver high-performing results despite the challenging interest rate and regulatory environment. We are on track to achieve mid-single-digit loan growth in 2011 and are focused on creating steady, profitable growth going forward. Turning to our dividend, our dividend yield remains attractive and is above the average for utility peers. As of yesterday's close, our dividend yield was 5.4% and with this morning's market correction, 5.5%. Overall, we continue to make progress on our strategies with solid opportunities to grow our business. We believe we are well positioned to continue to deliver attractive earnings growth, with reduced risk and volatility and an above average dividend yield. With that, we look forward to hearing your questions.

[Operator Instructions] And our first question will come from the line of Paul Patterson with Glenrock Associates.

Wanted to touch base with you on just a few items. One is, it looks like I guess, you're now betting on -- I'm sorry, planning on O&M growth rate of being basically flat in 2011 correct?

Correct.

And how should we think about that trending in 2012? And how should we think about your ability to control costs through that kind of time frame?

This is Dick Rosenblum. I think the way you ought to think about it is the way we think about it, which is that we're going to live within our means. So whatever our various regulatory mechanisms provide us is the level of spending we will attempt to achieve.

Okay. And is there anything in particular that you guys are doing now? I mean, is it a deferral sort of situation in terms of achieving these for 2011? Or is this something that you guys are instituting things that sort of on a run rate won't come back in the future, I guess?

We're not trying to do deferrals although there may be some of those primarily in response to external conditions. So if low growth remains low for instance, there's a certain amount of deferral of work we can do that would otherwise have been required by the loan growth. The heart of what we're doing is really focusing on the cost efficiency of what we do. So doing all the work but doing it cheaper, rebidding contracts, finding ways to increase internal efficiencies, reducing rework rates, sort of the standard spectrum of activities that one goes through to contain costs.

Okay, great. I wanted to also ask you about on the bank side, the asset yield. It seems that the asset yield is falling pretty significantly with respect to the liability cost. And it looks like you guys are probably replacing assets with lower yielding assets. Could you give us a little bit of flavor as to how we should think about that trend continuing? And what kind of type of loan activity is taking place?

Sure. This is Rich. Certainly that dynamic's true. the assets that we are originating are coming on at lower than the average yield in the book. We also have a dynamic where on a quarter-to-quarter comparison, you're seeing an impact of deferred loan fee recognition as Jim mentioned. Because in prior periods and prior year, we had higher rate of repayments on commercial loans, particularly with the dynamic this quarter that contributed a few basis points. We still think that we're going to be, for this year over 4% on our NIMs. We think that the repricings that we're seeing on the consumer side, on the HELOC book are giving us some benefit because we brought them on typically at 1% for the first year repricing to market, which is currently around 4.5%. And we are doing a pretty good job of holding those repricings and the assets associated with them as they come on. So we do expect that you'll continue to see a gradual mixing down of that NIM as we go but we feel pretty good about the pricing on the individual assets that we're bringing on. And as we've been describing to you in prior quarters, more of what we're bringing on are the variable-rate assets that when we get the uptick in interest rates eventually, we don't have that interest rate risk associated with them and we'll get the benefit in the rates up environment.

Okay. So when we're looking out, and of course, interest rates are kind of volatile here, but when we're looking out through 2012, if things stay sort of static, which I guess is a bit of the question in the market, how should we think about the asset yield as we get into next year?

I think you'll continue to see that gradual ticking down of the NIMs.

Okay. And then the $1 million in -- it sounds like you guys benefit from $1 million insurance and higher fees, and one of them seems like a nonrecurring item. And I would assume the higher fees were probably more ongoing. Could you break that down a little bit for us?

The $1 million was a bank on life insurance proceeds, and that is a nonrecurring item in this quarter.

Okay. And then the loan loss provisions, just the credit quality improved. Is that what happened specifically or was there anything else that we should be thinking about?

There's the general dynamic of every once in a while we've had a lumpy, we've described it as a lumpy quarter on the provisions in our commercial book if we have a larger exposure that has moved in and required some provisioning. We've had that in prior quarters. We didn't have that this time. In general, I think our non-performings, our overdues are all on a continuous modest decline. So we've had some general improvement there. And if there is a mix effect as we described because particularly some of higher risk books we've been running off more quickly, and we described the 3 parts of the portfolio. The land loan book was one that we're down already from the start of year, almost 25% as we continue to try to work that, those parts of the book off. So you'll get a benefit because lower asset's in the higher risk categories.

[Operator Instructions] And our next question will come from the line of Bryce Rowe with Robert W. Baird. Bryce Rowe - Robert W. Baird & Co. Incorporated: Just a couple more questions here on American Savings. Obviously, you guys are showing some loan growth against peers that are struggling to produce some loan growth. Can you talk about kind of the source of where the commercial loan growth, what the source of the commercial loan growth is? And then on the home equity growth, we had a point where you're still offering that same home equity product with the intro teaser rate.

Yes, on the home equity site we continue to promote our, what we call our equity express product, and we have good momentum on that, that we've been building up. Our branch staff are very comfortable selling it. We feel good about our underwriting criteria. The credit quality on it is quite good. And we do continue to offer the 1% for 12 months that bumps up after 12 months. As I mentioned in response to the previous question, we're seeing pretty good metrics as we hold those balances through the repricings, and that's given us on the consumer side some yield benefit as we go through that. And the next couple of quarters, we're going to see larger amounts going through that. In the market, we've seen our competitors come in and also promote home equity products. We continue to have, I think, a pretty strong position on that locally, and it continues to give us loan growth. On the commercial side, we're seeing a mix probably, we can get you the exact numbers but roughly half of our growth is coming out of the C&I portfolio split between -- I guess, it's about 2/3 is coming out of the C&I portfolio split between what we call our shared national credits and the domestic Hawaii credits. And we've had little bit of growth in our commercial real estate book as well. So we're trying to keep a good spread and diversification of the assets that we're growing over there. We're keeping good stability on our risk metrics. So we're not buying down the risk curve in order to get the growth. We're just continuing to hit the different pockets of the market. And try to get good priced assets that we can put on the book and hold. Bryce Rowe - Robert W. Baird & Co. Incorporated: Okay. And any -- without American Savings being hit by the Durbin Amendment and your 2 larger competitors on Hawaii having to deal with it, are you seeing any kind of competitive dynamic change with respect to deposit products, et cetera that you can take advantage of?

We'll watch that. We've continued to maintain our free checking as kind of our lead product into the market. That's continued to give us a good benefit on core deposit growth. The peers have not made a major shift in what their pricing strategies are though you do hear market feedback about additional fees coming in on that side, and we're watching to see if there's a window that we can take advantage of. But so far our basic proposition to our customers of free checking, good value and convenience continues to help us hold a good position on that.

[Operator Instructions] And our next question will come from the line of Jim Bellesa with D.A. Davidson. James Bellessa - D.A. Davidson & Co.: The description of the HECO gap in ROE said that there was challenges in closing that gap. What are those challenges?

Jim, I think as we mentioned with the RAMs coming out, we had anticipated that those would go into effect slightly earlier and it was June 1. And we also recently had the interim decision where there were significant reductions in the O&M. We still have some of the cost pending in the current rate case as we go into the finals. So we won't know on those. And then as we've described previously, there are other lags that our built in automatically into our current rate case process. James Bellessa - D.A. Davidson & Co.: Because there's more population on Oahu, is there any more political pushback that you're receiving there versus the other islands?

No, we're not seeing any difference. James Bellessa - D.A. Davidson & Co.: And then on the O&M discussion that you had, at what point can you no longer cut? You say you want to live within your budget but then, you have to maintain reliability, safety and good public relations in these things. What level can you no longer cut?

Well, this is Dick Rosenblum. It's really hard to answer that question in a numerical sort of way. It's easier to answer it in a principle sort of way, as long as the PUC is reducing things where we can reduce them. So they tell us, we're not going to give you any funding for X, we'll stop doing X. Those are very straightforward. The ones that are very difficult to deal with are where the PUC is reducing recovery in area where we have no control. An example is if they reduce recovery for benefits for our unionized workers, we're in a contract. Well, there's nothing we can do until that contract expires. So those are the ones that are very difficult to deal with, and so far, that has not occurred in our HECO Oahu rate case. We await the final because they have another bite at that apple. But as long as those sorts of changes don't come out of the commission, we are generally able to live within our means.

And our next question will come from the line of David Paz with Bank of America Merrill Lynch. David Paz - BofA/Merrill Lynch: Just had a question on utility CapEx year-to-date. I believe it's about $85 million. Is that correct?

Yes. David Paz - BofA/Merrill Lynch: Now and your target for the year is $300 million, so are we just looking at some timing issues for the utility CapEx?

David, this is Tayne. As we look at our CapEx, we're also reevaluating things like the costs for environmental controls, and there are some things that have been delayed. And so our CapEx is probably going to come in a little bit lower, which is why you're seeing the change in our rate base growth for 2011, more like 1% range versus 2%. David Paz - BofA/Merrill Lynch: Okay. Yes, so it's bonus D&A and lower CapEx.

Yes. And, David, I would add as Jim said in the remarks, that's another reason why we are moving to open market purchases in our DRIP and other stock plans, because we are actively managing the capital structure as against the CapEx. David Paz - BofA/Merrill Lynch: Got it. Okay. And roughly what's the split among strict to lease [ph] like the percentages on your annual CapEx projected, annual CapEx?

The split is roughly about 70% Oahu and about 15% each for the neighbor islands roughly speaking. David Paz - BofA/Merrill Lynch: Got it. Okay. Do you happen to have the equity balance at each utilities as of June 30, '11?

This is stated there in the -- This is Jim. They're in the Appendix slide. Each one of those tearsheets will provide you and I'll turn to one of the examples.

And while Jim's looking at that, also the CapEx as a planned addition to historically for the 3 utilities, you can see them on Slide 30.

Right. And so if you were to turn to 31, in fact the next Slide, you'll see the HECO rate case 2001 test year. On that queue, we provide the common equity capitalization. In this particular case, it's no different than the application of what's granted in interim D&O of 56.3%. And then if you proceed to the other utilities in back, in the appendix stack, you'll see that as well and we also -- Yes, the actual numbers are in the 10-Q. David Paz - BofA/Merrill Lynch: Okay. All right. And then just quickly on sales, I know you guys are assuming flat sales at HELCO and MECO for the year versus last year, and I believe those were at 2%, 1% respectively. And I understand your comments about the economy seems, while it still seems somewhat modest recovery and the insurance seems to be coming back. I guess, I'm just trying to tie those 2 together. I would expect still that maybe to stay at the level you had anticipated to be in a year if not better. Can you just expand on that again?

Yes, this is Dick Rosenblum. On the neighbor islands, we've just had remarkably cool weather in June and July. And just assuming normal weather for the rest of the year, they were sufficiently cool that -- we're almost the reverse of the mainland in this regard. It was sufficiently cool that it really dropped the sales. So it's all just weather.

And, David, just to confirm the prior guidance was 2% of MECO and 1% of HELCO. So you're correct on that. David Paz - BofA/Merrill Lynch: Okay. And just last question on the bank. Do you expect the $80 million of excess cash to come down this year? Is that maybe over time or the next year or 2?

It will come down a little bit even from next quarter, and we'll manage that. It's kind of something that we're looking at as you'd expect based on here's flows that we see and specific large customer planning. And so we'll see that start to tick down, but it's kind of a quarter-by-quarter thing, that you'll see a little bit of volatility. But you should start to see it come down from next quarter even.

And at this time, we have no questions in queue. I would like to turn the call back over to Shelee Kimura for any closing remarks.

Thank you everyone for joining us today. As always, call me if you have any follow-up questions and have a great day. Thanks.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day, everyone.