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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2001, for Hawaiian Electric Industries, Inc. (HEI) and its principal subsidiary, Hawaiian Electric Company, Inc. (HECO). HEI operates as a holding company with two core business segments: electric utilities serving the State of Hawaii and banking services through American Savings Bank, F.S.B. (ASB). The filing reflects a strategic shift as HEI formally adopted a plan in October 2001 to exit its international power business (HEI Power Corp.), which is now reported as a discontinued operation.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Consolidated revenues increased 3% to $1.31 billion compared to the prior year, driven by growth in the electric utility and bank segments, partially offset by losses in the "Other" segment.
• Net Income: Net income decreased 14% to $60.5 million. This decline was primarily due to a significant loss from discontinued operations ($22.1 million) and lower operating income in the utility segment.
• Discontinued Operations: HEI recognized a $20.8 million loss on the disposal of international power assets and a $24 million write-off of its investment in a China power project (Inner Mongolia). Additionally, a $2.7 million impairment loss was recorded for a Philippines investment.
• Bank Segment: Net income for the bank segment increased 9% to $33.2 million, aided by higher "other income" from gains on security sales and the acquisition of Bishop Insurance Agency, despite a compression in the interest rate spread.
• Utility Segment: Operating income decreased 3% to $152.4 million due to higher purchased power capacity payments and increased operation and maintenance expenses, despite a 1.6% increase in kilowatthour (KWH) sales.

Guidance, Outlook, and Risks

• Strategic Exit: HEI plans to dispose of all remaining international power projects over the next year. The Guam project is under negotiation for sale, while the China project investment has been written off.
• Terrorist Attack Impact: Management warns that the September 11, 2001 attacks have weakened Hawaii's economy, particularly the tourism sector. This is expected to reduce KWH sales and increase bad debt expenses. Management estimates a 1% drop in annual KWH sales would reduce net income by approximately $4 million.
• Regulatory Risks: Significant delays persist regarding the HELCO Keahole power plant expansion due to land use permit and air permit disputes. Approximately $74 million in costs are currently capitalized but subject to potential write-off if the project is not installed.
• Banking Risks: ASB is monitoring loan delinquencies related to the tourism slowdown. The bank also faces potential losses from "impermissible" trust certificates purchased in 2000, though HEI has indemnified ASB against these losses pending litigation recovery.
• Capital Needs: HEI estimates total financing requirements of $1.1 billion for 2001–2005. On October 31, 2001, HEI announced a plan to offer 1.5 million shares of common stock to repay debt and fund general corporate purposes.

Investor Verification Checklist

• Discontinued Operations: Verify the final valuation and sale price of the Guam power project and the status of litigation regarding the China project write-off.
• HELCO Keahole Project: Monitor the outcome of the contested case hearing regarding the land use permit extension and the resolution of air permit appeals, as these determine the recoverability of $74 million in capitalized costs.
• Tourism Sensitivity: Assess the actual impact of the post-9/11 economic downturn on Hawaii's tourism sector and its correlation to HEI's KWH sales and bad debt provisions in subsequent quarters.
• Bank Asset Quality: Review ASB's allowance for loan losses and the performance of its mortgage/asset-backed securities portfolio in a low-interest-rate environment.
• Common Stock Offering: Confirm the execution and pricing of the announced 1.5 million share common stock offering.