Good day, ladies and gentlemen, and welcome to the Hawaiian Electric Industries, Incorporated Q2 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to introduce your host for the conference call Mr. Cliff Chen. You may begin.

Thank you, and welcome everyone to Hawaiian Electric Industries second quarter 2015 earnings conference call. Joining me this morning are Connie Lau, HEI President and Chief Executive Officer; Jim Ajello, HEI Executive Vice President and Chief Financial Officer; Alan Oshima, Hawaiian Electric Company President and Chief Executive Officer as well as other members of senior management. Connie will provide an overview of followed by James, who will update you on Hawaii's economy, our results for the quarter and outlook for the remainder of the year. Then we will conclude with questions-and-answers. In today's presentation, management will be using non-GAAP financial measures to describe the company's operating performance. Our press release and webcast presentation materials, which are posted on HEI's Investor Relations website, contain additional disclosures regarding these non-GAAP measures, including reconciliations of those measures to the equivalent GAAP measures. Forward-looking statements will also be made on today's call. Actual results could differ materially from what is described in those statements. Please refer to the forward-looking statements disclosure accompanying the webcast slides, which provides additional information on important factors that could cause results to differ. The company undertakes no obligation to publicly update or revise any forward-looking statements, including EPS guidance, whether as a result of new information, future events or otherwise. I'll now turn the call over to our CEO, Connie Lau.

Thank you, Cliff and aloha to everyone. Turning to our results announced earlier today, both our utility and bank are on track to meet our 2015 earnings guidance. At the utility, we have been working hard to advance the energy transformation plans that we filed with our commission last August, which would triple distributed generation including rooftop solar in Hawaii by 2030. Increased renewable energy to 65% by 2030 and also position us to achieve Hawaii's new goal of 100% renewable energy by 2045. At the bank, we are working hard to deliver stable, profitable performance. Year-to-date deposit growth was strong and credit quality remained sound. On June 10, we achieved an important milestone for our pending banks spin and utility merger with HEI shareholders approving the merger with NextEra Energy with a 90% mandate from shares voted. In addition the process to obtain Hawaii's Public Utilities Commission approvals and other approvals is underway. As many of you know the governor of Hawaii made public statements regarding the proposed merger following testimony that was filed on July 20 by interveners to the merger. In a press conference, the governor said the state is taking the position of opposing the merger as proposed. Later today, the consumer advocate is expected to file his position with the Public Utilities Commission that will complete filings by all parties and we and NextEra Energy will file our rebuttal to those positions on August 31. We believe that as we and NextEra Energy, provide more information and engage in additional discussions, the commission and others will conclude that our merger will provide significant benefits for our customers and the entire state and will further underscore Hawaii's global leadership in clean energy. The governor also stressed the importance of having a partner who shares the vision…

Thanks, Connie. I'll begin by briefly commenting on Hawaii's economy. June 2015 visitor arrivals on expenditures were up 6% and 4.4%, respectively from the same month last year and still robust after many years of strong growth. Year-to-date June 2015 visitor arrivals reached 4.3 million with total spending at $7.6 billion. Tourism is on a record trajectory in 2015. Statewide unemployment edged downward to 4% in June 2015, compared to 4.4% a year ago and still significantly below the national unemployment rate of 5.2% as of June. Recent Hawaii real estate activity remained strong during July 2015 with the median sales price for single-family homes on Oahu at $710,000, up 4% from last year and up 2.3% year-to-date July. This year through July, the pace home sales on Oahu is up 4.8%. Year-to-date May 2015 construction activity was reflective of value private building permits increased 41% compared to year-to-date May 2014. This increase is reflected by the increase in new residential, commercial and industrial projects. Overall, Hawaii's year-to-date economic performances is being sustained by continuing strong activity in the construction and tourism industry and the University of Hawaii forecasters expect state GDP to grow 3.8% this year. As shown on slide eight second quarter 2015 GAAP earnings per share were $0.33. Core earnings per share which excluded merger expenses were $0.39 compared to $0.41 in the second quarter of 2014. Consolidated core net income was $0.9 billion higher than the prior year, but EPS was $0.02 lower due to the increased number of shares settled due to equity forward agreement. On slide nine, utility earnings were $32.8 million in the second quarter of 2015 compared to $34.2 million in the second quarter 2014, the detailed variances are shown on the slide and I'll just highlight a few. Depreciation expense was…

Thanks, Jim. In summary, our utility is leading the industry and integrating renewables and distributed generation and continues to be focused on expanding customer options and lowering customer bills. Our bank continues to be a solid performer and will continue to focus on its core banking business targeting mid-single-digit loan growth and strong credit quality. Last Friday our board maintained our quarterly dividend of $0.31 per share. The dividend yield continues to be attractive at 4% as of Friday's market close and we have paid our dividend uninterrupted since 1901. Finally, we firmly believe that as the Hawaii Public Utilities Commission merger review process continues that we NextEra Energy have the opportunity to provide more information and engage in additional discussions with the PUC, the commission and others, should conclude that this merger can and will provide significant benefits for our customers and can help accelerate achievement of the clean energy future that we all want for Hawaii. And with that, we look forward to hearing your questions.

[Operator Instructions] Our first question comes from Paul Patterson with Glenrock Associates.

Aloha.

Hi, Paul. How are you?

All right. How is it going?

Good.

On the merger, and the governor's comments and everything, what is the outlook for the potential for settlement versus a fully litigated case? Could you just give us a little bit of a flavor for that?

I'm not sure I can really an answer that question Paul, because we're still in that discovery phase and so there's quite a bit of discussion that still needs to occur. I think as the Public Utilities Commission order that came out establishing the remainder of the process, it shows that a lot of that will occur this fall. I think as we go forward, we will probably get greater clarity in that question. Later today, CA needs to file, so we still need to see his testimony as well.

Sure. Okay, but I mean, so should we think, maybe after discovery processes completed that that might be a more likely time that settlement discussions could take place. Does that make sense?

As you know settlement discussions can occur any time along the way, but certainly we would think that you we would at least want to see the initial positions of all the parties.

Okay. And then on the RAM order, in the PSIP. I guess, the changes that they made, my understanding was that that was pending the outcome of the PUCs review of the PSIP. I'm wondering what the schedule looks like regarding that and what we might see if you have gossip out there?

Sure. And actually I think Alan is with us and perhaps I can turn that question over to him on the PSIPs.

Yeah, Paul, good morning.

Good morning.

Actually the RAM decoupling and the PSIPs, we don't believe are connected at all. I think the PSIP will go on its separate track. It's more of a technical discussion as to our power supply moving forward. The RAM is more financial based and operational, so I think it's a transition year this year, it's a first year that we're having to comply with some of the new changes to the decoupling and we're doing that, as we speak.

Okay. So I mean, my understanding that the RAM was being amended on interim basis, pending the outcome of PUCs review PSIP plans. I mean, I believe I read that in the order, I guess. I guess, so I'm wondering is is how do you think the - I mean, are you saying they're not connected. I mean, that's what I'm sort of a little bit confused on.

Capital expenditures are always connected and how the RAM decoupling will operate. Of course, will be somewhat affected by what PSIPs come up with. But they're separate dockets and they're not directly connected.

Okay. Just one final one here, a couple of things. You guys have pushed back the LNG stuff and oil prices are down. I'm wondering one of the reasons why you wanted to do the LNG was that you thought it would have environmental, but also substantial cost benefits for the ratepayers and that was an issue that I think the PUC was concerned about. How should we think about the pushback in the LNG importation? The lower price of oil in terms of what we're seeing in terms of customer's rates and stuff right now.

So Paul, I think as with any major project and this would be quite a major project for Hawaii to be bringing another fuel source. You only have to take into account the changing conditions and as you pointed out there was a pretty significant change in some of the basic assumptions with the shift in the oil prices. So I think the way you want to look at it is that we are continuing forward, but we've got to make sure that bringing LNG into Hawaii still makes sense because at the end of the day, our ultimate goal is to bring it into lower cost for our customers. I think as you know, you know the commodity price with LNG is only a very small portion of the total cost to customers. A lot of it really is in building what I call the virtual pipeline across the water and it's really the logistics that are most important in designing this project. So there's been quite a bit of work that's been going on in that regard in advancing the ideas on the most economical and efficient way to bring the liquefied natural gas into the state, while still assuring reliability of supply. So we are proceeding forward. I think we still believe that there is benefit for our customers, but we need to work through all of the changing analysis. I'll ask Alan, if he'd like to add anything to that.

No. That's totally correct. I mean, we're looking at all the environmental benefits as well. I mean, it's not a one-sided view of this, we have to look at it from all sides.

Sure. Any timeframe in terms of when might hear about what your revised analysis or any key date we should be thinking about?

Yeah, we'll be I think making some decisions later this year and then probably moving forward. Depending on those decisions in early 2016.

Okay. Great. I'll let people ask questions. Thanks a lot.

Our next question comes from Charles Fishman with Morningstar.

Thank you. If you'd give me some help here I think my notes on your status of the Public Service Commissioners might be out of date. Were all three commissioners, the current reserve appointed by the former governor?

No, the Chair is new and was appointed by our new governor earlier this year.

And previous governor was Democrat as well, Connie. Wasn't he?

Yes, correct.

Okay. And then is Champley is still on and his term is up next year.

Yes. Commissioner Champley is still on and also Commissioner Akiba.

Okay. Well, thanks for updating me. Just one other comment. I was at my church yesterday, an electrical engineer came up to me and said that the local utility in St. Louis had a meeting last week among electrical engineers and the integration of solar going on in Hawaii was a big topic of discussion. So you can pass on to your operation people that what they're doing has some very far reaching input to other places.

Thanks, Charles. As I mentioned in my comments, particularly on the use of the advanced inverters, we really are setting a tone for the nation and better use of that technology to help in the integration of rooftop PV.

Good luck on the merger.

Thank you.

Our next question comes from Michael Weinstein with UBS.

Hi, Connie, how are you doing.

Hi, Michael, how are you?

Good. My question, I don't want to prejudice the merger outcome or anything like that. But I was just curious how separate is the spin of ASB from the merger process with NextEra? Is it possible that, for instance, and just really hypothetical of the Commissioner rejected, the merger would you still want to spin ASB in, could that still happen, given the tax implications?

That we would go back to the analysis that we normally have had with respect to the separation of the two companies and we'd have to analyze it at that point in time. But at the moment the spin of the bank is cross conditional with the merger application, so that that would only occur if the merger goes forward. As you know a real key piece of the agreement with NextEra is that they will be paying the tax on the spin for our shareholders, so that our shareholders can receive the shares tax free, plus there is a great benefit to the bank in the step up of the tax basis. So it's very positive transaction when it is combined with the merger with NextEra. If there is no merger, we'd have to analyze it as a standalone transaction.

Got you. Okay, thank you so much.

Sure.

Our next question comes from Nick Yuelys with Gabelli & Company.

Congratulations on a good quarter.

Thanks, Nick.

I was just wondering following up on that last question, if all the regulatory approvals necessary for the bank spin off weren't completed by the time the PUC approves the merger. What would happen?

So let me just address that basic proposition because we really haven't talked much about all the preparations going on at the bank for the spin. We are not expecting that the bank will not be prepared for a spin. As you know, we've got a very, very good team in at the bank. Many of whom have been with publicly traded companies previously. So we feel that there are quite well prepared to handle the bank when it spins off. And they have been having ongoing discussions with their regulators, the office of the Comptroller of the Currency and Jim Ajello has been having similar discussions with the Federal Reserve Board on behalf of the holding company. So we're expecting that the bank will be quite well prepared for the spin. There may be some timing issues with respect to closing of quarters and years and that. But otherwise we believe the bank will be quite well prepared.

Okay. Great. Then my guess is, do you need to make a filing with the FCC or how will that approval process work?

On the FCC, the utility has some licenses with respect to communications that need to be transferred. So that one is while we mentioned that it's one of a lot of little approvals that need to occur, but it's not a major one at all.

Okay. Great. Then my last one on the four solar project that the PUC approved at the end of July. Are those included in the CapEx numbers or are those some a little bit of upside to that?

So those are actually by IPPs. Remember we had that so-called waiver group of projects where we went out for an RFP and so those are all by independent developers.

Okay. Good, that's all I have. Thank you very much.

Our next question comes from Andy Levi with Avon Capital.

Hi, good morning.

Hi, Andy.

Just two quick questions, if as we look at your CapEx numbers and you included the transformational piece as well in '16 and '17, which CapEx in the $700 million range. What would and again, assuming standalone. What would the equity needs of the company be?

So Andy, let me ask Jim to address that because we've looked at that, not with respect to the transformational capital, but the overall picture. So, Jim?

Thanks, Connie, and hi, Andy. So we haven't yet sketched out the capital needs entirely yet. We'll make sure that the utilities, regulatory ratio is about 58% equity, and 42%, 43% debt will be observed. I will tell you in general, I think there will be well under $200 million, but we haven't put a fine point on that as yet.

And that would be for both years or …?

I'm just talking about prompt year 2016.

Okay. And then just on the RAM, could you just explain to us kind of what was changed in the order, the preliminary order relative to how the RAM worked before.

Sure. Jim, I don't know if, Tayne, is there, she's probably the best to go into those details.

I'm here. So basically the change in the RAM, what the commission did was, it focused on a target level of revenues and was based on what was included in the last rate cases and the last RAMs, and basically escalated it for inflation and that served as the cap for the RAM. And that's a lot different from the previous RAM that was in effect, which actually went through a series of looking at, what was included in the rate case with escalated by the components of O&M, rate base and depreciation. So what commission did in the revised RAM was not make any differentiation between the RAM component, but just calculated based on a level of revenue.

So, Andy, I don't know, if you remember under the capital RAM they were looking at both the major projects and in the so-called baseline projects. The baseline projects went in at a historical five-year average. What they did was they just and talked about CapEx in total with as James said an inflationary adjustment similar to the inflator on the O&M side. Then said, we want to take a look at all the projects over that and review and that's where we're now looking at any projects that would be above that cap and reviewing whether to submit additional filings. They actually left the door open to design additional processes to process those amounts that are over the cap.

And so with that being the case, the $11 million increase that you talk about in your handout, was that under the new method or the old method?

That was the $11 million is under the new method.

Okay and what was the increase the year before, I'm just curious, if you remember, I don't if you have that number, but. So under the old method.

So, Andy, we'll follow-up with you after the call.

Yeah, that's fine. And then just one last question, and I'll let somebody else go. So under the new method, I guess, if I'm not mistaken the way you describe and having read a little bit about it, that would I guess, lead to more frequent rate filings, is that how we should view it, so you could recover your capital cost on more timely basis?

No. Not necessarily. The RAM mechanism still provides for the triennial review, but what it may mean is that we may be processing some of the CapEx under mechanisms that are supplemental to the RAM.

And that's I guess, what they're working on now?

Correct.

Perfect. Thank you very much.

Yeah, that's part of that transitional issue that Alan alluded to.

I understand now. Thank you.

Our next question comes from Sachin Shah with Albert Fried.

Hi, good morning. Thanks for taking call. Just to understand the governor's recommendation. From past precedence, is there any past precedence of the governor making such a recommendation and the PUC going along with the governor or going against the governor? I know that you're going to make a compelling case, the companies are going to make compelling case against that recommendation and other opposition. But just trying to understand you know how much influence does the governor's recommendation subjectively have on the PUC?

Yeah, so this is a very new process within our Commission because while there has been some utility mergers throughout Hawaii's history. They really have been much smaller than this proposed transaction. And particularly for this governor, this governor just came in this year, so everybody is really looking very carefully, but I'd say with new eyes at this particular transaction because they really haven't been a lot of other transactions that one can point to.

Okay. So this is just new process, new ground for everybody and so the contentions as that we may be seeing are opposition comes along with the territory of this new process I guess.

Yes, yeah. It's part of the process and as the governor also said, it's early in the process and he's sure that there will be lots more discussion and that we haven't heard the last on it yet.

Okay. Fair enough. Thank you.

Hi, Connie, this is Alan, it's not a new process per sequential, it's a process in this case, but there are regulatory frameworks for this from past transactions, that I think the electrical regulatory process will continue as they have described that in the filings.

Yeah, thanks Alan.

And this is company operator; I'm actually showing no further questions at this time.

Thank you, Kevin. If there are no further questions, I would like to thank everyone for their participation today and have a good week. Bye-bye.