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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 1997, 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, Maui Electric, Hawaii Electric Light), a savings bank (American Savings Bank, F.S.B. or ASB), and diversified businesses (real estate, freight transportation, and power projects).

Key Financial Metrics (Nine Months Ended Sept 30, 1997)

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenue increased 4% to $1.09 billion, driven by growth in all segments. The savings bank segment saw a 5% revenue increase due to higher average loan balances.
• Profitability: Consolidated net income rose 10% to $63.6 million. This was primarily due to higher operating income in the savings bank segment and lower net interest expense, partially offset by higher preferred securities distributions.
• Utility Segment: Electric utility operating income decreased 4% to $127.1 million. This decline was caused by a 0.5% decrease in kilowatthour (KWH) sales (due to cooler weather and a slow economy) and higher operating expenses (fuel, maintenance, and depreciation), despite rate increases recovering higher fuel costs.
• Savings Bank Segment: Operating income surged 125% to $36.4 million. This significant improvement is largely attributable to the absence of the one-time $13.8 million FDIC special assessment recorded in the prior year, alongside a reduction in deposit insurance premiums and higher net interest income.
• Other Segment: Operating loss widened to $7.7 million (from $5.5 million) due to a $4.2 million non-cash write-off on a real estate investment by the Malama Pacific Corp. (MPC) subsidiary.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Capital Requirements: HEI estimates consolidated financing requirements of $1.2 billion for 1997–2001. Internal sources are expected to fund 61% of this, with the remainder from debt and equity. HECO estimates a need for approximately $23 million in new common equity over the same period.
• Bank Acquisition: ASB is scheduled to close the acquisition of Bank of America, FSB's Hawaii operations on December 6, 1997. This transaction is expected to increase ASB's assets by approximately $1.7 billion and deposits by $1.6 billion, requiring a $160 million capital infusion from HEI.
• Utility Expansion: HELCO continues to face permitting delays for its Keahole combined-cycle unit. Management is pursuing parallel negotiations with independent power producers (KCP and Enserch) to ensure capacity needs are met. A settlement with Enserch was approved by the PUC in August 1997.

Risks and Contingencies

• Regulatory Risk: The Public Utilities Commission (PUC) issued a "show cause" order regarding HECO's 1996 return on rate base, which exceeded authorized levels. While management believes a refund is unlikely, the outcome remains uncertain.
• Environmental Liabilities: Ongoing investigations by the Hawaii Department of Health regarding contamination at Honolulu Harbor involve HECO and its subsidiaries. Costs for remediation cannot currently be estimated.
• Legal Proceedings: HEI is involved in litigation regarding the rehabilitation of The Hawaiian Insurance & Guaranty Company (HIG), with a trial scheduled for July 1998. HEI is seeking reimbursement for a $32 million settlement payment from insurance carriers.
• Stockholder Rights Plan: On October 28, 1997, HEI adopted a poison pill plan to deter coercive takeover tactics, distributing rights to shareholders of record on November 10, 1997.

Investor Verification Checklist

• Bank Acquisition Closing: Verify the successful closing of the Bank of America, FSB acquisition and the associated $160 million capital infusion into ASB.
• Utility Rate Cases: Monitor the PUC's final decision on the HECO "show cause" order regarding excess earnings and the status of HELCO's Keahole permitting and IPP negotiations.
• Real Estate Exposure: Review the status of MPC's real estate portfolio and the impact of the recent $4.2 million non-cash write-off on future earnings.
• Environmental Costs: Track the outcome of the Honolulu Harbor contamination investigation to assess potential future remediation liabilities.
• Capital Structure: Confirm the utilization of the $150 million in trust preferred securities issued in early 1997 and the $100 million in tax-exempt revenue bonds issued in October 1997.