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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 1996, 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 Company, and Hawaii Electric Light Company), a savings bank (American Savings Bank, F.S.B.), and diversified operations (real estate, freight transportation, and power projects).

Key Financial Metrics (Nine Months Ended Sept 30, 1996)

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenue increased 8% year-over-year, driven by a 3.5% increase in kilowatthour sales, higher fuel oil prices (passed through to customers), and rate increases.
• Net Income Decline: Consolidated net income decreased 7% to $57.6 million. This decline was primarily due to a one-time $13.8 million FDIC special assessment accrued by the savings bank subsidiary (ASB) in September 1996.
• Adjusted Performance: Excluding the FDIC assessment, "as adjusted" operating income increased 12% and net income increased 14% compared to the prior year.
• Utility Segment: Electric utility operating income rose 6% to $132.2 million, aided by higher sales and rates, though offset by increased fuel and purchased power costs.
• Savings Bank Segment: Reported a net loss of $2.6 million for the quarter and net income of $9.1 million for the nine months, heavily impacted by the FDIC assessment. Without this charge, the bank's performance remained stable.

Outlook, Risks, and Management Commentary

• Dividend Increase: On October 15, 1996, the Board increased the quarterly dividend to $0.61 per share. Management aims to reduce the payout ratio from the current 94% to below 80% by growing earnings faster than dividends.
• Regulatory Risks (HELCO): Hawaii Electric Light Company (HELCO) faces significant permitting delays for a planned 56-MW combined-cycle unit at Keahole. Delays in the Conservation District Use Permit (CDUP) and EPA air quality permits have created uncertainty. If the project is not installed, HELCO may be required to write off approximately $47.7 million in incurred costs.
• Regulatory Risks (MECO): Maui Electric Company (MECO) delayed the in-service date of generating unit M17 to 1998 due to permit delays. A rate case agreement was filed to recover $1.5 million in annual revenues.
• Environmental Contingencies: The Department of Health is investigating potential hazardous substance releases at Honolulu Harbor involving HECO and other parties. Costs for remediation are currently indeterminable.
• Legal Proceedings: Ongoing litigation regarding the Hawaiian Insurance & Guaranty Company (HIG) settlement. A District Court ruling in October 1996 was mixed; a trial is necessary to determine the allocation of the settlement between covered and uncovered claims.
• Capital Requirements: HEI estimates consolidated financing requirements of $1.0 billion for 1997–2001, with approximately $0.8 billion for net capital expenditures. Internal sources are expected to fund 68% of these needs.

Investor Verification Checklist

• FDIC Assessment Impact: Verify the final calculation of the one-time FDIC special assessment and the projected annual savings of ~$2 million starting in 1997.
• HELCO Permitting Status: Monitor the outcome of the CDUP and EPA PSD permit proceedings for the Keahole combined-cycle unit to assess the risk of a $47.7 million write-off.
• Rate Case Outcomes: Track the final decisions on rate cases for HECO, HELCO, and MECO, particularly regarding the recovery of costs and allowed returns on equity.
• Environmental Liability: Review updates on the Honolulu Harbor investigation to estimate potential remediation costs.
• Dividend Sustainability: Assess whether earnings growth can outpace dividend increases to achieve the target payout ratio of below 80%.