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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2004, for Hawaiian Electric Industries, Inc. (HEI) and its principal subsidiary, Hawaiian Electric Company, Inc. (HECO). HEI operates primarily through two segments: electric utilities (HECO, Maui Electric Company, and Hawaii Electric Light Company) and banking (American Savings Bank, F.S.B.). The company serves the State of Hawaii and is subject to significant regulatory oversight by the Hawaii Public Utilities Commission (PUC) and federal banking regulators.

Key Financial Metrics

Note: EPS and share counts are presented on a pre-split basis. A 2-for-1 stock split was announced in April 2004.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 3% year-over-year, driven by a 5% increase in electric utility revenues (due to higher kilowatthour sales and fuel costs passed to customers) and a 99% increase in "Other" segment revenues. Bank revenues declined 6% due to lower interest income.
• Profitability: Net income rose 27% to $30.9 million. Operating income increased 15% to $67.8 million. The electric utility segment saw an 8% increase in operating income, while the bank segment saw a 16% increase.
• Accounting Changes: HEI adopted FASB Interpretation No. 46R (FIN 46R) in Q1 2004, resulting in the deconsolidation of certain trust subsidiaries. This reclassified $275 million of trust preferred securities to long-term debt and removed $200 million of preferred securities from the balance sheet.
• Capital Structure: HEI issued 2 million shares of common stock in March 2004, raising approximately $99 million in net proceeds, which were used to redeem $100 million of trust preferred securities in April 2004.

Guidance, Outlook, and Risks

• Electric Utility Outlook: Management forecasts kilowatthour sales growth of 2.5% for 2004. Net capital expenditures for 2004-2008 are estimated at $760 million. HECO plans to file a rate increase application in the second half of 2004.
• Banking Outlook: American Savings Bank (ASB) faces pressure on interest rate spreads due to low interest rates and high mortgage refinancing volumes. However, loan volumes remain strong due to the Hawaii real estate market.
• Regulatory and Legal Risks:
  • HELCO Keahole Project: A settlement agreement was reached to allow expansion of the Keahole power plant, though opposition from Waimana Enterprises continues. Costs incurred to date are approximately $88 million.
  • Tax Dispute: ASB is appealing a Hawaii tax assessment regarding its REIT subsidiary. If the appeal fails, a potential charge of approximately $24 million to net income may be required.
  • Environmental: Ongoing investigations regarding Honolulu Harbor contamination and a resolved $0.8 million penalty for opacity violations at MECO's Maalaea plant.
• Market Risks: ASB is exposed to interest rate risk; the balance sheet is currently "asset-sensitive" to small rate increases but "liability-sensitive" to larger increases or rate declines.

Investor Verification Checklist

• Stock Split Impact: Verify that all per-share data is adjusted for the 2-for-1 stock split announced in April 2004 (record date May 10, 2004).
• Accounting Reclassification: Confirm understanding of the FIN 46R adoption, which shifted $275 million from preferred securities to long-term debt, affecting leverage ratios.
• HELCO Project Viability: Monitor the status of the Keahole power plant expansion settlement and potential write-offs of the $88 million in incurred costs if PUC approval is denied.
• ASB Tax Contingency: Track the outcome of the Hawaii tax appeal regarding the REIT subsidiary, which could result in a $24 million charge.
• Rate Case Timing: Watch for the filing of HECO's rate increase application in the second half of 2004 to recover rising costs.