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Business Context and Reporting Period

Company: Hawaiian Electric Industries, Inc. (HEI) and principal subsidiary Hawaiian Electric Company, Inc. (HECO).
Reporting Period: Quarterly report (Form 10-Q) for the period ended June 30, 2000.
Business Segments: Electric Utility (HECO, HELCO, MECO), Savings Bank (American Savings Bank, F.S.B.), International Power (HEI Power Corp.), and Other (including discontinued real estate and sold maritime operations).

Key Financial Metrics (Six Months Ended June 30, 2000)

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 13% year-over-year, driven by the Electric Utility and Savings Bank segments. Utility revenues rose 22% due to higher fuel oil prices passed to customers and a 2.6% increase in kilowatthour (KWH) sales.
• Net Income: Consolidated net income increased 10% to $48.1 million. This was supported by higher operating income and Allowance for Funds Used During Construction (AFUDC), partially offset by higher interest expenses from the March 2000 Philippines acquisition and higher income taxes.
• Segment Performance:
  • Electric Utility: Operating income increased 21% to $103.2 million. Fuel oil costs rose 80% due to price increases, but these were largely recovered through rate adjustments.
  • Savings Bank: Operating income increased 15% to $35.5 million. Net interest income improved, though a $3.3 million loss was recorded from the reclassification and writedown of four debt securities deemed impermissible by the Office of Thrift Supervision (OTS).
  • International Power: Recorded an operating loss of $8.9 million (vs. $2.1 million loss in 1999) primarily due to equity losses from the East Asia Power Resources Corporation (EAPRC) investment in the Philippines, exacerbated by high fuel costs and currency devaluation.
  • Other: Operating loss widened to $4.5 million due to the absence of maritime freight revenues following the November 1999 sale of those assets.

Guidance, Outlook, Risks, and Contingencies

• Outlook: Management expects the International Power segment to incur net losses for the remainder of 2000, which will likely cause HEI's full-year 2000 earnings to be lower than 1999. The Electric Utility segment anticipates adding new generation capacity (Hamakua Partners) in late 2000 and CT-4/CT-5 units in early 2002.
• Regulatory & Legal Risks (HELCO Keahole Project): Significant delays persist in obtaining the Prevention of Significant Deterioration (PSD) permit and resolving Conservation District Use Permit (CDUP) litigation. As of June 30, 2000, $80.6 million in costs have been incurred for the CT-4/CT-5 project. Management believes these costs are recoverable but notes that if the project is not installed, a material write-off may be required.
• International Risks: The China project (Baotou Tianjiao) faces uncertainty as the local grid operator has refused an interconnection arrangement. HEI may withdraw from the project and seek recovery of its ~$25 million investment. The Philippines investment faces exposure to fuel price volatility and Philippine peso devaluation.
• Banking Compliance: ASB must address OTS findings regarding impermissible investments and is implementing an action plan to improve interest rate risk management.
• Environmental: Ongoing investigation into Honolulu Harbor contamination; costs for remediation are currently indeterminable.

Investor Verification Checklist

• Keahole Project Viability: Verify the status of the PSD permit and CDUP litigation to assess the risk of writing off the $80.6 million in capitalized costs.
• International Power Exposure: Monitor the interconnection status of the China project and the financial performance of the Philippines investment (EAPRC) given currency and fuel price risks.
• Banking Asset Quality: Review the impact of the OTS-impermissible securities writedown and the adequacy of the allowance for loan losses (1.15% of average loans).
• Rate Case Progress: Track the outcome of HELCO's pending rate case filed in October 1999 to recover costs for the Hamakua Partners agreement and pre-PSD facilities.
• Capital Requirements: Confirm the ability to fund the estimated $1.2 billion in financing requirements through 2004, particularly given the reliance on internal sources for 66% of needs.