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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2009, for Hawaiian Electric Industries, Inc. (HEI) and its principal subsidiary, Hawaiian Electric Company, Inc. (HECO). HEI operates primarily through two segments: the electric utility segment (HECO and its subsidiaries serving Oahu, Maui, and the Big Island) and the bank segment (American Savings Bank, F.S.B. or ASB). The company is a large accelerated filer headquartered in Honolulu, Hawaii.

Key Financial Metrics (Nine Months Ended Sept 30, 2009)

Material Changes vs. Prior Period

• Revenue Decline: Consolidated revenues decreased 30% year-over-year (YoY) to $1.69 billion. The utility segment saw a 32% decline driven by significantly lower fuel oil costs (passed through to customers) and a 4% drop in kilowatthour (KWH) sales due to the slowing economy and customer conservation. The bank segment revenues fell 18% due to lower interest income from reduced earning asset balances and yields.
• Profitability: Consolidated net income for common stock decreased 9% to $69.4 million. Utility operating income dropped 26% due to lower sales and higher operation and maintenance (O&M) expenses, partially offset by interim rate relief. Bank operating income increased 136% compared to the prior year, primarily because the 2008 period included a $35.6 million charge related to a balance sheet restructuring.
• Bank Asset Quality: ASB's allowance for loan losses increased to $45.9 million (from $35.8 million at year-end 2008) due to higher delinquencies in residential and land loans. Nonperforming assets rose to $61.7 million (1.61% of total loans and REO) from $20.5 million.
• Investment Impairments: ASB recorded other-than-temporary impairment (OTTI) charges of $15.4 million on mortgage-related securities for the nine months ended September 30, 2009.

Guidance, Outlook, and Risks

• Regulatory Outlook: HEI and HECO are heavily dependent on the Public Utilities Commission (PUC) of Hawaii. HECO received an interim rate increase of $61.1 million (4.7%) in August 2009, but the final decision on the 2009 test year rate case remains pending. The company is pursuing a "decoupling" mechanism to separate revenues from KWH sales to support renewable energy investments.
• Clean Energy Initiative (HCEI): The company is committed to the Hawaii Clean Energy Initiative, aiming for 70% clean energy by 2030. This involves significant capital investment in renewable projects (wind, solar, biofuels) and grid modernization, which may strain cash flows and require future rate increases.
• Banking Risks: ASB faces risks from the deteriorating U.S. and Hawaii housing markets, which have increased loan delinquencies and OTTI charges on private-issue mortgage-related securities. The bank is executing a performance improvement initiative to reduce costs.
• Rating Outlook: Both S&P and Moody's have placed HEI and HECO on a "negative" outlook, citing the weakened Hawaii economy, lower electric sales, and high dividend payout ratios. A downgrade could increase borrowing costs.
• Dividends: HEI maintains a dividend of $0.31 per share per quarter. The payout ratio for the first nine months of 2009 was 122%.

Investor Verification Checklist

• Rate Case Finalization: Verify the final outcome of HECO's 2009 test year rate case and the approval of the proposed revenue decoupling mechanism.
• Bank Asset Quality: Monitor ASB's nonperforming loan ratios and the trajectory of OTTI charges on its private-issue mortgage-related securities portfolio.
• Capital Expenditures: Track the cost recovery status of major utility projects, specifically the Campbell Industrial Park (CIP) combustion turbine and the East Oahu Transmission Project.
• Regulatory Capital: Confirm ASB maintains its "well-capitalized" status under OTS regulations to ensure continued dividend eligibility.
• Renewable Integration: Assess the progress and cost implications of integrating large-scale renewable energy (e.g., neighbor island wind) into the Oahu grid.