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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 1995, 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, MECO, HELCO), a savings bank (American Savings Bank, F.S.B.), and diversified operations (real estate, maritime, and investments).

Key Financial Metrics (Nine Months Ended Sept 30, 1995)

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenue increased 11% year-over-year, driven by a 10% increase in electric utility revenue (due to rate increases and higher fuel costs passed to customers) and an 18% increase in savings bank revenue.
• Profitability: Net income rose 19% to $61.9 million. The electric utility segment saw a 26% increase in operating income, while the savings bank segment saw an 8% decline in operating income due to a compressed interest rate spread.
• Segment Performance:
  • Electric Utility: Benefited from interim rate increases totaling approximately $40 million in the first nine months of 1995.
  • Savings Bank: Net interest income declined as the cost of interest-bearing liabilities rose faster than the yield on assets. The interest rate spread narrowed from 3.67% to 2.93%.
  • Other: Recorded an operating loss of $7.1 million, primarily due to a $1.3 million loss on the disposition of a leveraged lease investment and startup costs for HEI Power Corp.
• Liquidity: HEI's cash position decreased slightly to $85.3 million, while HECO's cash position was minimal ($0.3 million) due to heavy capital deployment.

Outlook, Risks, and Contingencies

• Regulatory Proceedings:
  • Rate Cases: HECO received interim rate relief in 1995. MECO and HELCO have filed applications for significant rate increases (17.4% and 18.7%, respectively) with hearings scheduled for January 1996.
  • HELCO Power Shortage: HELCO faces potential capacity shortages on the island of Hawaii. Delays in permitting for a planned 56-MW combined-cycle unit have forced negotiations with independent power producers. Management warns of a risk of rolling blackouts within the next year if capacity is not secured.
• Legal Contingencies:
  • 1991 Power Outage: A class action lawsuit regarding the April 1991 Oahu outage is set for trial in January 1996. HECO has recorded a $1 million liability; management believes further losses will not be material.
  • HIG Discontinued Operations: HEI settled a lawsuit regarding the Hawaiian Insurance & Guaranty Co. for $32 million in 1994. HEI is seeking reimbursement from insurance carriers, but recoveries are uncertain.
• Legislative Risks: Proposed legislation regarding the merger of the Savings Association Insurance Fund (SAIF) and Bank Insurance Fund (BIF) could impose a one-time assessment on ASB estimated at $18 million (pre-tax) and restrict holding company activities.
• Management Changes: On September 1, 1995, Harwood D. Williamson retired as HECO President and CEO, succeeded by T. Michael May.

Investor Verification Checklist

• Verify the outcome of the pending rate cases for MECO and HELCO scheduled for January 1996, as these are critical for future revenue stability.
• Monitor the resolution of the HELCO power capacity issue, specifically the permitting status of the 56-MW unit and negotiations with independent power producers, to assess blackout risks.
• Review the status of the 1991 power outage litigation trial scheduled for January 1996 to confirm the adequacy of the $1 million reserve.
• Assess the impact of proposed federal legislation on thrift institutions (SAIF/BIF merger) on ASB's capital requirements and competitive position.
• Confirm the timeline for the implementation of SFAS No. 121 (Impairment of Long-Lived Assets) effective January 1, 1996, and its potential impact on asset valuations.