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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2002, 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, Maui Electric, and Hawaii Electric Light) and a diversified financial services segment anchored by American Savings Bank (ASB). The company is actively exiting its international power business (HEI Power Corp.), which is reported as discontinued operations.

Key Financial Metrics

Segment Performance:

• Electric Utility: Revenues of $278.3 million (down 13%); Net income of $20.4 million (down 5%).
• Bank (ASB): Revenues of $98.8 million (down 15%); Net income of $13.4 million (up 12%).

Material Changes vs. Prior Period

• Revenue Decline: Consolidated revenues decreased 13% primarily due to lower fuel oil prices (passed through to customers) and a 0.8% decrease in kilowatthour (KWH) sales driven by cooler weather (10% fewer cooling degree days).
• Bank Profitability: Despite lower revenues, the bank segment saw a 12% increase in net income. This was driven by a wider interest rate spread (3.27% vs. 3.01%) and the elimination of goodwill amortization following the adoption of SFAS No. 142.
• Cash Position: Cash and equivalents dropped significantly from $450.8 million to $211.0 million, largely due to net cash used in investing activities ($337.7 million) driven by ASB's purchase of mortgage/asset-backed securities.
• Discontinued Operations: The international power segment (HEIPC) is being exited. No loss from discontinued operations was recorded in Q1 2002, compared to a $19,000 loss in Q1 2001.

Outlook, Risks, and Contingencies

Guidance and Outlook:

• HECO projects KWH sales growth of 1.1% for 2002. Management estimates that a 1% drop in annual KWH sales would reduce net income by approximately $4 million.
• Dividends were maintained at $0.62 per share. Management targets a 65% payout ratio before considering dividend increases.
• Five-year financing requirements (2002-2006) are estimated at $1.2 billion, with internal sources expected to cover 73%.

Key Risks and Contingencies:

• HELCO Power Plant Expansion: Construction of CT-4 and CT-5 at the Keahole plant is proceeding after a BLNR extension was granted in March 2002. However, legal challenges regarding land use permits and noise regulations remain. Approximately $75 million in costs are at risk if the project is not completed or costs are disallowed by the PUC.
• Transmission Line Permitting: The Kamoku to Pukele transmission line on Oahu faces opposition regarding the Conservation District Use Permit. A decision is expected by July 2002. If denied, HECO must pursue an all-underground alternative.
• Legal Proceedings: A qui tam lawsuit filed in April 2002 alleges HECO overcharged customers by over $1 billion under a power purchase agreement with AES Hawaii. Management intends to vigorously defend the suit.
• Environmental Liabilities: Ongoing investigations at Honolulu Harbor regarding contamination. Preliminary cost estimates for remediation are $1.1 million for HECO and $0.1 million for TOOTS, though final costs are uncertain.

Investor Verification Checklist

• HELCO Project Status: Verify the outcome of the May 8, 2002, Circuit Court hearing regarding injunctions on the Keahole power plant expansion.
• Transmission Permit: Monitor the BLNR decision on the Kamoku to Pukele transmission line CDUP expected by July 14, 2002.
• Litigation Exposure: Assess the potential financial impact of the AES Hawaii qui tam lawsuit alleging $1 billion in excessive charges.
• Bank Asset Quality: Review ASB's allowance for loan losses (1.57% of average loans) and the status of the litigation regarding impermissible trust certificate investments.
• Regulatory Assets: Confirm the recoverability of $110 million in regulatory assets and $13 million in interim revenues subject to refund.