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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 1997, 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 operations including real estate and freight transportation.

Key Financial Metrics (Six Months Ended June 30, 1997)

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenue increased 7% year-over-year, driven by higher electric utility rates (recovering fuel and IRP costs) and increased savings bank interest income.
• Net Income Decline: Despite higher operating income, consolidated net income decreased 2% to $39.5 million. This was primarily due to increased preferred securities distributions following the issuance of $150 million in trust preferred securities in early 1997.
• Utility Segment: Operating income fell 4% due to a 0.5% decrease in kilowatthour sales (cooler weather, soft tourism) and higher expenses for fuel, maintenance, and depreciation. Fuel oil prices rose 18% to $26.98 per barrel.
• Savings Bank Segment: Net income increased 22% to $14.3 million, aided by a reduction in deposit insurance premiums following the Deposit Insurance Funds Act of 1996 and an improved interest rate spread.
• Other Segment: Operating losses narrowed slightly, impacted by the absence of a one-time real estate land sale gain recorded in the prior year.

Guidance, Outlook, and Risks

• Bank Acquisition: ASB entered a Purchase and Assumption Agreement with Bank of America, FSB to acquire Hawaii operations. The deal is estimated to add $1.7 billion in assets and $1.6 billion in deposits, requiring a $160 million capital infusion from HEI. Closing is expected in late 1997 pending regulatory approval.
• Utility Generation Delays: HELCO faces delays in obtaining permits for its Keahole combined-cycle unit. The company is pursuing parallel negotiations with independent power producers (KCP and Enserch) to ensure capacity reliability. Costs incurred for the delayed project reached $51.9 million as of June 30, 1997.
• Regulatory Risks: The Public Utilities Commission (PUC) issued a "show cause" order to HECO regarding 1996 returns exceeding authorized levels, though management expects no material refund. Rate cases for MECO and HELCO are ongoing or recently finalized.
• Legal Contingencies: HEI is involved in litigation regarding the Hawaiian Insurance & Guaranty Company (HIG) rehabilitation and environmental remediation at Honolulu Harbor. Management believes losses, if any, will not be material.
• Capital Requirements: HEI estimates $1.0 billion in financing needs for 1997-2001, with internal sources expected to cover 61%. Additional equity needs are estimated at $158 million over the five-year period.

Investor Verification Checklist

• Bank Deal Closing: Verify the status of the Bank of America acquisition and the $160 million capital infusion plan.
• Utility Permits: Monitor the status of HELCO's Keahole project permits and the outcome of negotiations with KCP and Enserch.
• Rate Case Outcomes: Track the PUC's final decision on the HECO "show cause" order and the MECO 1997 rate case stipulation.
• Preferred Securities: Confirm the impact of the new $150 million trust preferred securities on future earnings per share.
• Environmental Liabilities: Review updates on the Honolulu Harbor contamination investigation and potential remediation costs.