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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 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.), and diversified businesses including real estate, freight transportation, and independent power projects.

Key Financial Metrics

Segment Performance:

• Electric Utility: Revenues of $273.8 million; Operating income flat at $38.6 million due to higher fuel costs ($69.2 million) offset by rate recovery.
• Savings Bank: Revenues of $68.9 million; Net income rose 23% to $7.1 million, driven by lower deposit insurance premiums and improved interest spreads.
• Other: Operating loss narrowed to $1.5 million from $2.0 million.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 10% year-over-year, driven by higher electric utility rates (recovering fuel and IRP costs) and increased savings bank interest income.
• Cost Pressures: Electric utility fuel oil expenses surged 29% to $69.2 million as fuel prices rose to $28.12 per barrel from $22.50.
• Capital Structure: HEI issued $100 million in trust preferred securities in February 1997, and HECO issued $50 million in March 1997. These proceeds were used to repay short-term borrowings, reducing short-term debt by approximately $113 million compared to the prior year.
• Deposit Insurance: The Savings Bank benefited from the Deposit Insurance Funds Act of 1996, reducing its assessment rate from 23 cents to 6.5 cents per $100 of deposits effective January 1, 1997.

Outlook, Risks, and Contingencies

Management Commentary & Guidance:

• Management projects 1997 through 2001 consolidated financing requirements of approximately $1.0 billion, with internal sources expected to cover 67%.
• Electric utility net capital expenditures for 1997 are estimated at $118 million.
• HECO projects a 1997 rate of return on rate base of 9.39%, which management believes is within the "zone of reasonableness."

Material Risks and Contingencies:

• Regulatory Proceedings: The Hawaii Public Utilities Commission (PUC) issued a "show cause" order to HECO regarding 1996 returns exceeding authorized levels, potentially requiring refunds or rate reductions. Management disputes the necessity of a refund.
• HELCO Power Situation: Delays in obtaining permits for a new combined-cycle unit at Keahole have led to ongoing negotiations with independent power producers (KCP and Enserch). Costs incurred to date total $50.6 million.
• Environmental Liabilities: Ongoing investigations by the Department of Health regarding hazardous substance releases at Honolulu Harbor and fuel oil leaks at HELCO facilities. Costs are currently indeterminable.
• Legal: Pending litigation regarding insurance coverage for the Hawaiian Insurance & Guaranty Company (HIG) rehabilitation settlement, with a trial scheduled for July 1997.

Investor Verification Checklist

• Regulatory Risk: Monitor the outcome of the PUC "show cause" order regarding HECO's 1996 rate of return and potential refunds.
• Permitting Delays: Track the status of the HELCO Keahole combined-cycle unit permits and the resolution of negotiations with independent power producers.
• Environmental Costs: Assess potential future liabilities from the Honolulu Harbor contamination and HELCO fuel oil leak investigations.
• Capital Markets: Verify the utilization of the $150 million in trust preferred securities issued in Q1 1997 and their impact on the debt profile.
• Real Estate Exposure: Review the valuation of Malama Pacific Corp.'s (MPC) real estate inventory, which is subject to market volatility in Hawaii.