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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 1998, 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. or ASB), and diversified businesses including real estate and freight transportation. The filing reflects the first full quarter of operations following the December 1997 acquisition of most of Bank of America's Hawaii operations by ASB.

Key Financial Metrics

Segment Performance:

• Electric Utility: Revenue decreased 6% to $258.3 million due to lower fuel prices, though operating income increased 10% to $42.6 million driven by cost containment.
• Savings Bank (ASB): Revenue surged 48% to $101.8 million and net income rose 18% to $8.4 million, primarily due to the BoA acquisition. Net interest margin spread improved to 3.21%.
• Other: Recorded an operating loss of $2.6 million, widening from $1.5 million in the prior year, largely due to real estate market softness.

Material Changes vs. Prior Period

• Acquisition Impact: The inclusion of BoA's Hawaii operations significantly boosted ASB's asset base and revenue. ASB assumed $1.7 billion in deposits and recorded $71 million in goodwill.
• Fuel Costs: Electric utility fuel oil expenses dropped 18% to $56.7 million as the average price per barrel fell from $28.12 to $23.59.
• Loan Loss Provisions: ASB increased its provision for loan losses by 146% to $2.9 million, reflecting a rise in nonaccrual loans in the slow Hawaii economy, though charge-offs remained low.
• Capital Structure: HEI's common stock equity increased to $821 million. The company issued long-term debt of $112.8 million in the quarter.

Outlook, Risks, and Contingencies

Guidance and Capital Needs: HEI estimates consolidated funding requirements of $819 million for 1998–2002, with approximately 80% expected to be met by internal sources. Electric utility net capital expenditures for 1998 are estimated at $151 million.

Regulatory and Legal Risks:

• HELCO Power Project: Construction of the Keahole combined-cycle unit faces delays due to pending appeals regarding Conservation District Use Permits (CDUP) and Prevention of Significant Deterioration (PSD) permits. Costs incurred to date total $57.7 million.
• Rate Cases: HELCO filed for an 11.5% rate increase in March 1998. MECO filed for a 15.3% increase in January 1998, though construction of its M17 unit is currently stayed by an EPA appeal.
• Environmental: Ongoing investigations into hazardous substance releases at Honolulu Harbor involve HECO and its subsidiaries; remediation costs are currently indeterminable.
• Insurance Litigation: HEI is pursuing a $32 million settlement reimbursement from directors and officers liability carriers regarding the rehabilitation of The Hawaiian Insurance & Guaranty Company (HIG). Trial is scheduled for July 1998.

Year 2000 Readiness: Management estimates incremental costs to address Year 2000 issues will not materially affect financial condition, though no assurance is given that all problems will be avoided.

Investor Verification Checklist

• BoA Integration: Verify the stability of the acquired deposit base, noting an $80 million outflow in Q1 1998.
• HELCO Permitting: Monitor the status of the EPA and Hawaii Supreme Court appeals regarding the Keahole power plant permits, which could delay revenue recovery for $57.7 million in costs.
• Loan Quality: Track ASB's nonaccrual loan trends and the adequacy of the allowance for loan losses (currently 1.07% of average loans) given the local economic slowdown.
• Rate Case Outcomes: Confirm PUC approval timelines and amounts for pending rate increases at HELCO and MECO to ensure cost recovery.
• Insurance Recovery: Watch for the outcome of the HIG litigation trial in July 1998 regarding the potential $32 million recovery.