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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 1995, 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 and freight transportation.

Key Financial Metrics

Segment Performance:

• Electric Utility: Revenues of $232.5 million (up 16%) and Operating Income of $35.4 million (up 46%). Growth driven by rate relief and higher fuel costs passed to customers.
• Savings Bank: Revenues of $60.7 million (up 21%) but Operating Income of $10.2 million (down 4%) due to a compressed interest rate spread (3.10% vs 3.83% prior year).
• Other: Operating loss of $1.3 million, improved from $1.5 million in the prior year, primarily due to freight transportation results.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 16% year-over-year, primarily due to the electric utility segment benefiting from interim rate relief effective January 1, 1995, and higher fuel oil prices passed through to customers.
• Profitability: Net income surged 51% to $17.8 million. The electric utility segment saw a 70% increase in net income ($15.8 million) compared to the prior year.
• Cash Flow: Operating cash flow turned significantly positive ($37.6 million) compared to a negative $1.5 million in Q1 1994, driven by improved working capital management and higher net income.
• Banking Spread: The savings bank's net interest margin narrowed due to rising interest rates increasing the cost of liabilities faster than asset yields could reprice.

Outlook, Risks, and Management Commentary

Guidance and Capital Needs: HEI estimates consolidated financing requirements of $1.1 billion for 1995–1999, with approximately $800 million allocated to net capital expenditures. Internal sources are expected to fund 56% of these needs, with the remainder from debt and equity.

Regulatory and Operational Risks:

• Rate Cases: HECO, HELCO, and MECO have pending or recent rate cases. HECO received a final decision in December 1994 authorizing a 6.5% increase effective Jan 1, 1995. HELCO and MECO have filed for further increases for 1996 test years.
• Reliability Concerns: HELCO faces significant risk of capacity shortages on the island of Hawaii, potentially leading to rolling blackouts within the next year due to permitting delays for new generation units.
• Legal Proceedings: HECO is defending a class-action lawsuit regarding the April 1991 Oahu power outage, with trial set for January 1996. Management believes losses will not be material beyond the $1 million reserve already recorded.
• Discontinued Operations: The Hawaiian Insurance & Guaranty Co. (HIG) was sold to Vesta Fire Insurance Corp. for $35 million in April 1995, subject to court approval.
• Accounting Changes: The company must adopt SFAS No. 121 (Impairment of Long-Lived Assets) by January 1, 1996; the impact is currently undetermined.

Investor Verification Checklist

• Rate Case Outcomes: Verify the final approval and effective dates of pending rate increases for HELCO and MECO to confirm revenue projections.
• HELCO Reliability: Monitor the status of permitting for new generation units and the risk of rolling blackouts on the island of Hawaii.
• Banking Liquidity: Review the trend in deposit outflows and the reliance on higher-cost funding sources (FHLB advances, repurchase agreements) at American Savings Bank.
• Legal Reserves: Confirm the adequacy of the $1 million reserve for the 1991 power outage litigation as the trial approaches in 1996.
• Real Estate Exposure: Assess the progress of Malama Pacific Corp. (MPC) in liquidating real estate assets to improve cash flow, given the slow Hawaii real estate market.