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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 1999, for Hawaiian Electric Industries, Inc. (HEI) and its principal subsidiary, Hawaiian Electric Company, Inc. (HECO). HEI operates as a holding company with three primary segments: electric utilities (HECO, HELCO, MECO), a savings bank (American Savings Bank, F.S.B. or ASB), and other diversified operations including maritime freight and independent power projects.

Key Financial Metrics

Segment Performance (Nine Months 1999)

• Electric Utility: Revenues of $767.3 million; Net income of $56.6 million. Kilowatthour sales increased 1.4% year-over-year.
• Savings Bank (ASB): Revenues of $304.7 million; Net income of $26.1 million. Interest rate spread improved to 3.17%.
• Other: Operating loss of $8.3 million, driven by an estimated $2 million loss on the sale of maritime assets.

Material Changes vs. Prior Period

• Net Income: HEI consolidated net income increased 2% to $65.1 million compared to $63.7 million in the prior year period. This increase was driven by the absence of discontinued operations losses in 1999 (which totaled $9.8 million in 1998) and higher savings bank income, offset by lower electric utility earnings.
• Electric Utility Earnings: Net income for the utility segment decreased 10% to $56.6 million. This decline was primarily due to a 30% increase in maintenance expenses, a 9% increase in depreciation, and a 63% decrease in the Allowance for Funds Used During Construction (AFUDC) due to delays in the HELCO Keahole project.
• Discontinued Operations: The real estate subsidiary (Malama Pacific Corp.) was reported as a discontinued operation in 1998. In 1999, there were no discontinued operations, as the company continues to wind down these assets.
• Asset Sales: HEI signed agreements to sell its maritime freight transportation operations (Young Brothers, Limited and Hawaiian Tug & Barge Corp. assets) in August 1999, closing in November 1999. An after-tax loss of approximately $2 million was accrued in Q3 1999.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Capital Requirements: HEI estimates total financing requirements of $1.2 billion for 1999–2003, with approximately $0.8 billion for net capital expenditures. Internal sources are expected to fund 68% of these needs.
• Electric Utility Generation: New generation capacity is expected to be added in July 2000 (Encogen 22 MW) and November 2000 (remaining Encogen capacity). HELCO's own CT-4 and CT-5 units are targeted for early 2001.
• Rate Cases: HELCO filed a request in October 1999 for a 9.6% rate increase. MECO received a final rate increase of 8.2% in April 1999.

Material Risks and Contingencies

• HELCO Keahole Project Delays: Significant regulatory and legal delays persist regarding the Conservation District Use Permit (CDUP) and Prevention of Significant Deterioration (PSD) permit. As of September 30, 1999, $77.3 million in costs have been incurred. Management believes these costs are recoverable, but a material write-off could occur if the project is not installed.
• Environmental Liabilities: HEI faces ongoing investigations regarding hazardous substances at Honolulu Harbor and Kahe power plant sludge drying beds. Cleanup costs are estimated at approximately $100,000 for the Kahe site, while Honolulu Harbor costs remain indeterminable.
• China Project: HEI Power Corp. has invested $17 million and is committed to invest up to $83 million in a 200 MW coal-fired power plant in Inner Mongolia, China. Completion depends on grid interconnection agreements.
• Year 2000 Compliance: Remediation costs are estimated at $10.9 million total, with $9.9 million incurred by September 30, 1999. Management believes systems are ready, with contingency plans in place.

Investor Verification Checklist

• Keahole Project Status: Verify the resolution of the CDUP and PSD permit disputes and the likelihood of the $77.3 million in capitalized costs being recovered.
• Maritime Asset Sale: Confirm the final closing and actual loss realization on the sale of Young Brothers and HTB assets.
• ASB Loan Quality: Monitor the allowance for loan losses (1.28% of average loans) and nonperforming loan trends given the weak Hawaii economy.
• Rate Case Outcomes: Track the PUC's final decision on HELCO's October 1999 rate increase request and the approval of the HCPC power purchase agreement.
• Environmental Cleanup Costs: Assess potential future costs related to the Honolulu Harbor investigation and Kahe sludge remediation.