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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2006, for Hawaiian Electric Industries, Inc. (HEI) and its principal subsidiary, Hawaiian Electric Company, Inc. (HECO). HEI operates as a holding company with two primary segments: electric utilities (HECO and subsidiaries serving Oahu, Maui, and Hawaii islands) and banking (American Savings Bank, F.S.B. or ASB). The company also holds an "Other" segment comprising investments and discontinued operations.

Key Financial Metrics

Segment Performance:

• Electric Utility: Revenues of $475.06 million (up 27%); Net Income of $20.99 million (up 69%).
• Bank (ASB): Revenues of $100.00 million (up 3%); Net Income of $16.83 million (down 5%).
• Other: Net Loss of $5.48 million.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 22% primarily due to higher fuel oil and purchased power costs passed through to customers ($77 million), a 1.8% increase in kilowatthour (KWH) sales, and interim rate relief granted by the Public Utilities Commission (PUC).
• Utility Profitability: Electric utility operating income rose 44% driven by interim rate relief, higher sales volume, and lower capacity charges from independent power producers (IPPs). Fuel oil costs per barrel increased 39% to $63.59.
• Bank Performance: ASB operating income declined 7% due to lower net interest income and the absence of a $3.1 million reversal of allowance for loan losses recorded in Q1 2005. Net interest margin compressed slightly to 3.29% from 3.36%.
• Investment Losses: The "Other" segment reported a $0.4 million loss on Hoku Scientific, Inc. shares.

Guidance, Outlook, and Risks

Management Commentary & Outlook:

• Rate Cases: HECO received interim rate relief in September 2005; a final decision is pending. HELCO filed a rate increase request in May 2006 to recover costs for new generating units (CT-4 and CT-5).
• Supply Adequacy: HECO projects a reserve capacity shortfall of 170-200 MW between 2006 and 2009 due to load growth and lower unit availability. A new 100 MW combustion turbine is planned for 2009.
• Dividends: HEI maintained the quarterly dividend at $0.31 per share. Management targets a sustainable payout ratio of 65%.
• Banking Strategy: ASB continues to grow loans and deposits. Management notes potential margin compression if interest rates remain elevated.

Risks and Contingencies:

• Regulatory Risk: Pending PUC decisions on rate cases, demand-side management (DSM) incentives, and the recovery of integrated resource planning (IRP) costs.
• Environmental & Legal: Ongoing investigations regarding Honolulu Harbor contamination and litigation regarding AES Hawaii power purchase agreements.
• Interest Rate Risk: ASB faces exposure to interest rate fluctuations affecting net interest income and the fair value of available-for-sale securities.
• Generation Reliability: Lower reserve margins on Oahu increase the risk of generation-related outages until new capacity is added.

Investor Verification Checklist

• Rate Case Outcomes: Monitor the final PUC decision on HECO's rate case and the approval of HELCO's new rate increase to confirm revenue recovery.
• Generation Capacity: Verify progress on the 100 MW Campbell Industrial Park combustion turbine project and the status of the East Oahu Transmission Project (EOTP).
• DSM Incentives: Review the impact of the PUC's April 2006 Interim Decision discontinuing recovery of lost margins and shareholder incentives for DSM programs.
• Bank Asset Quality: Track ASB's allowance for loan losses and net interest margin trends in a rising rate environment.
• Environmental Liabilities: Assess potential costs associated with the Honolulu Harbor investigation and Regional Haze Rule compliance.