Edgar Filing: HAWAIIAN ELECTRIC CO INC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Exact Name of Registrant as Specified in Its Charter	Commission File Number	I.R.S. Employer Identification No.
HAWAIIAN ELECTRIC INDUSTRIES, INC.	1-8503	99-0208097

and Principal Subsidiary

HAWAIIAN ELECTRIC COMPANY, INC.	1-4955	99-0040500

State of Hawaii

(State or other jurisdiction of incorporation or organization)

900 Richards Street, Honolulu, Hawaii 96813

(Address of principal executive offices and zip code)

Hawaiian Electric Industries, Inc. — (808) 543-5662

Hawaiian Electric Company, Inc. — (808) 543-7771

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether Registrant Hawaiian Electric Industries, Inc. (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether Registrant Hawaiian Electric Company, Inc. (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether Registrant Hawaiian Electric Industries, Inc. is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨

Indicate by check mark whether Registrant Hawaiian Electric Company, Inc. is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x (Do not check if a smaller reporting company) Smaller reporting company ¨

Indicate by check mark whether Registrant Hawaiian Electric Industries, Inc. is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate by check mark whether Registrant Hawaiian Electric Company, Inc. is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuers’ classes of common stock, as of the latest practicable date.


Class of Common Stock		Outstanding April 30, 2008
Hawaiian Electric Industries, Inc. (Without Par Value)		84,077,675 Shares
Hawaiian Electric Company, Inc. ($6-²/3 Par Value)		12,805,843 Shares (not publicly traded)

Hawaiian Electric Industries, Inc. and Subsidiaries

Hawaiian Electric Company, Inc. and Subsidiaries

Form 10-Q—Quarter ended March 31, 2008

INDEX


		Page No.
Glossary of Terms		ii
Forward-Looking Statements		iv

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements
	Hawaiian Electric Industries, Inc. and Subsidiaries
	Consolidated Statements of Income (unaudited) - three months ended March 31, 2008 and 2007	1
	Consolidated Balance Sheets (unaudited) - March 31, 2008 and December 31, 2007	2
	Consolidated Statements of Changes in Stockholders’ Equity (unaudited) - three months ended March 31, 2008 and 2007	3
	Consolidated Statements of Cash Flows (unaudited) - three months ended March 31, 2008 and 2007	4
	Notes to Consolidated Financial Statements (unaudited)	5

	Hawaiian Electric Company, Inc. and Subsidiaries
	Consolidated Statements of Income (unaudited) - three months ended March 31, 2008 and 2007	15
	Consolidated Balance Sheets (unaudited) - March 31, 2008 and December 31, 2007	16
	Consolidated Statements of Changes in Stockholder’s Equity (unaudited) - three months ended March 31, 2008 and 2007	17
	Consolidated Statements of Cash Flows (unaudited) - three months ended March 31, 2008 and 2007	18
	Notes to Consolidated Financial Statements (unaudited)	19
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
	HEI Consolidated	36
	Electric Utilities	41
	Bank	62
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	65
Item 4.	Controls and Procedures	67

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	68
Item 1A.	Risk Factors	68
Item 5.	Other Information	68
Item 6.	Exhibits	69
Signatures		70

Hawaiian Electric Industries, Inc. and Subsidiaries

Hawaiian Electric Company, Inc. and Subsidiaries

Form 10-Q—Quarter ended March 31, 2008

GLOSSARY OF TERMS


Terms		Definitions
AFUDC		Allowance for funds used during construction
AOCI		Accumulated other comprehensive income
ASB		American Savings Bank, F.S.B., a wholly-owned subsidiary of HEI Diversified, Inc. and parent company of American Savings Investment Services Corp. (and its subsidiary, Bishop Insurance Agency of Hawaii, Inc.). AdCommunications, Inc. (dissolved in May 2007) is a former subsidiary.
CHP		Combined heat and power
Company		When used in Hawaiian Electric Industries, Inc. sections, the “Company” refers to Hawaiian Electric Industries, Inc. and its direct and indirect subsidiaries, including, without limitation, Hawaiian Electric Company, Inc. and its subsidiaries (listed under HECO); HEI Diversified, Inc. and its subsidiary, American Savings Bank, F.S.B. and its subsidiaries (listed under ASB); Pacific Energy Conservation Services, Inc.; HEI Properties, Inc.; HEI Investments, Inc.; Hawaiian Electric Industries Capital Trust II and Hawaiian Electric Industries Capital Trust III (inactive financing entities); and The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp.). Former subsidiaries of HEI (other than former subsidiaries of HECO and ASB and former subsidiaries of HEI sold or dissolved prior to 2004) include Hycap Management, Inc. (dissolution completed in 2007); Hawaiian Electric Industries Capital Trust I (dissolved and terminated in 2004), HEI Preferred Funding, LP (dissolved and terminated in 2004), Malama Pacific Corp. (discontinued operations, dissolved in June 2004), and HEIPC (discontinued operations, dissolved in 2006) and its dissolved subsidiaries. (*unconsolidated subsidiaries as of January 1, 2004). When used in Hawaiian Electric Company, Inc. sections, the “Company” refers to Hawaiian Electric Company, Inc. and its direct subsidiaries.
Consumer Advocate		Division of Consumer Advocacy, Department of Commerce and Consumer Affairs of the State of Hawaii
D&O		Decision and order
DG		Distributed generation
DOD		Department of Defense -- federal
DOH		Department of Health of the State of Hawaii
DRIP		HEI Dividend Reinvestment and Stock Purchase Plan
DSM		Demand-side management
EPA		Environmental Protection Agency -- federal
Exchange Act		Securities Exchange Act of 1934
FASB		Financial Accounting Standards Board
federal		U.S. Government
FHLB		Federal Home Loan Bank
FIN		Financial Accounting Standards Board Interpretation No.
GAAP		U.S. generally accepted accounting principles
HECO		Hawaiian Electric Company, Inc., an electric utility subsidiary of Hawaiian Electric Industries, Inc. and parent company of Hawaii Electric Light Company, Inc., Maui Electric Company, Limited, HECO Capital Trust III (unconsolidated subsidiary), Renewable Hawaii, Inc. and Uluwehiokama Biofuels Corp.

GLOSSARY OF TERMS, continued


Terms		Definitions
HEI		Hawaiian Electric Industries, Inc., direct parent company of Hawaiian Electric Company, Inc., HEI Diversified, Inc., Pacific Energy Conservation Services, Inc., HEI Properties, Inc., HEI Investments, Inc., Hawaiian Electric Industries Capital Trust II, Hawaiian Electric Industries Capital Trust III and The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp.). Former subsidiaries are listed under Company.
HEIDI		HEI Diversified, Inc., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and the parent company of American Savings Bank, F.S.B.
HEIII		HEI Investments, Inc. (formerly HEI Investment Corp.), a subsidiary of HEI Power Corp.
HEIRSP		Hawaiian Electric Industries Retirement Savings Plan
HELCO		Hawaii Electric Light Company, Inc., an electric utility subsidiary of Hawaiian Electric Company, Inc.
HPOWER		City and County of Honolulu with respect to a power purchase agreement for a refuse-fired plant
HREA		Hawaii Renewable Energy Alliance
IPP		Independent power producer
IRP		Integrated resource plan
kV		Kilovolt
kw		Kilowatts
KWH		Kilowatthour
MECO		Maui Electric Company, Limited, an electric utility subsidiary of Hawaiian Electric Company, Inc.
MW		Megawatt/s (as applicable)
NII		Net interest income
NPV		Net portfolio value
OPEB		Postretirement benefits other than pensions
OTS		Office of Thrift Supervision, Department of Treasury
PPA		Power purchase agreement
PRPs		Potentially responsible parties
PUC		Public Utilities Commission of the State of Hawaii
RHI		Renewable Hawaii, Inc., a wholly owned subsidiary of Hawaiian Electric Company, Inc.
ROACE		Return on average common equity
ROR		Return on average rate base
RPS		Renewable portfolio standards
SEC		Securities and Exchange Commission
See		Means the referenced material is incorporated by reference
SFAS		Statement of Financial Accounting Standards
SOIP		1987 Stock Option and Incentive Plan, as amended
SPRBs		Special Purpose Revenue Bonds
TOOTS		The Old Oahu Tug Service, a wholly owned subsidiary of Hawaiian Electric Industries, Inc.
UBC		Uluwehiokama Biofuels Corp., a newly formed, non-regulated subsidiary of Hawaiian Electric Company, Inc.
VIE		Variable interest entity

iii

FORWARD-LOOKING STATEMENTS

This report and other presentations made by Hawaiian Electric Industries, Inc. (HEI) and Hawaiian Electric Company, Inc. (HECO) and their subsidiaries contain “forward-looking statements,” which include statements that are predictive in nature, depend upon or refer to future events or conditions, and usually include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “predicts,” “estimates” or similar expressions. In addition, any statements concerning future financial performance, ongoing business strategies or prospects and possible future actions are also forward-looking statements. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties and the accuracy of assumptions concerning HEI and its subsidiaries (collectively, the Company), the performance of the industries in which they do business and economic and market factors, among other things. These forward-looking statements are not guarantees of future performance.

Risks, uncertainties and other important factors that could cause actual results to differ materially from those in forward-looking statements and from historical results include, but are not limited to, the following:

•

the effects of international, national and local economic conditions, including the state of the Hawaii tourist and construction industries, the strength or weakness of the Hawaii and continental U.S. real estate markets (including the fair value and/or the actual performance of collateral underlying loans and mortgage-related securities held by American Savings Bank, F.S.B. (ASB)) and decisions concerning the extent of the presence of the federal government and military in Hawaii;

•

the effects of weather and natural disasters, such as hurricanes, earthquakes, tsunamis and the potential effects of global warming;

•

global developments, including the effects of terrorist acts, the war on terrorism, continuing U.S. presence in Iraq and Afghanistan, potential conflict or crisis with North Korea and in the Middle East, Iran’s nuclear activities and potential avian flu pandemic;

•

the timing and extent of changes in interest rates and the shape of the yield curve;

•

the ability of the Company to access credit markets to obtain financing;

•

the risks inherent in changes in the value of and market for securities available for sale and in the value of pension and other retirement plan assets;

•

changes in assumptions used to calculate retirement benefits costs and changes in funding requirements;

•

increasing competition in the electric utility and banking industries (e.g., increased self-generation of electricity may have an adverse impact on HECO’s revenues and increased price competition for deposits, or an outflow of deposits to alternative investments, may have an adverse impact on ASB’s cost of funds);

•

capacity and supply constraints or difficulties, especially if generating units (utility-owned or independent power producer (IPP)-owned) fail or measures such as demand-side management (DSM), distributed generation (DG), combined heat and power (CHP) or other firm capacity supply-side resources fall short of achieving their forecasted benefits or are otherwise insufficient to reduce or meet peak demand;

•

increased risk to generation reliability as generation peak reserve margins on Oahu continue to be strained;

•

fuel oil price changes, performance by suppliers of their fuel oil delivery obligations and the continued availability to the electric utilities of their energy cost adjustment clauses (ECACs);

•

the ability of IPPs to deliver the firm capacity anticipated in their power purchase agreements (PPAs);

•

the ability of the electric utilities to negotiate, periodically, favorable fuel supply and collective bargaining agreements;

•

new technological developments that could affect the operations and prospects of HEI and its subsidiaries (including HECO and its subsidiaries and ASB and its subsidiaries) or their competitors;

•

federal, state and international governmental and regulatory actions, such as changes in laws, rules and regulations applicable to HEI, HECO, ASB and their subsidiaries (including changes in taxation, environmental laws and regulations, the potential regulation of greenhouse gas emissions and governmental fees and assessments); decisions by the Public Utilities Commission of the State of Hawaii (PUC) in rate cases (including decisions on ECACs) and other proceedings and by other agencies and courts on land use, environmental and other permitting issues (such as required corrective actions, restrictions and penalties that may arise, for example with respect to environmental conditions or renewable portfolio standards (RPS)); enforcement actions by the Office of Thrift Supervision (OTS) and other governmental authorities (such as consent orders, required corrective actions, restrictions and penalties that may arise, for example, with respect to compliance deficiencies under the Bank Secrecy Act or other regulatory requirements or with respect to capital adequacy);

•

increasing operation and maintenance expenses for the electric utilities, resulting in the need for more frequent rate cases, and increasing noninterest expenses at ASB;

•

the risks associated with the geographic concentration of HEI’s businesses;

•

the effects of changes in accounting principles applicable to HEI, HECO, ASB and their subsidiaries, including the adoption of new accounting principles (such as the effects of Statement of Financial Accounting Standards (SFAS) No. 158 regarding employers’ accounting for defined benefit pension and other postretirement plans and Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 48 regarding uncertainty in income taxes), continued regulatory accounting under SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation,” and the possible effects of applying FIN 46R, “Consolidation of Variable Interest Entities,” and Emerging Issues Task Force Issue No. 01-8, “Determining Whether an Arrangement Contains a Lease,” to PPAs with independent power producers;

•

the effects of changes by securities rating agencies in their ratings of the securities of HEI and HECO and the results of financing efforts;

•

faster than expected loan prepayments that can cause an acceleration of the amortization of premiums on loans and investments and the impairment of mortgage servicing assets of ASB;

•

changes in ASB’s loan portfolio credit profile and asset quality which may increase or decrease the required level of allowance for loan losses;

•

changes in ASB’s deposit cost or mix which may have an adverse impact on ASB’s cost of funds;

•

the final outcome of tax positions taken by HEI, HECO, ASB and their subsidiaries;

•

the risks of suffering losses and incurring liabilities that are uninsured; and

•

other risks or uncertainties described elsewhere in this report and in other periodic reports (e.g., “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K) previously and subsequently filed by HEI and/or HECO with the Securities and Exchange Commission (SEC).

Forward-looking statements speak only as of the date of the report, presentation or filing in which they are made. Except to the extent required by the federal securities laws, HEI, HECO, ASB and their subsidiaries undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Hawaiian Electric Industries, Inc. and Subsidiaries

Consolidated Statements of Income (unaudited)


Three months ended March 31	2008			2007
(in thousands, except per share amounts and ratio of earnings to fixed charges)
Revenues
Electric utility	$	623,889		$	447,678
Bank		105,844			104,460
Other		(116	)		1,885

		729,617			554,023

Expenses
Electric utility		572,906			434,686
Bank		82,481			86,032
Other		3,484			4,764

		658,871			525,482

Operating income (loss)
Electric utility		50,983			12,992
Bank		23,363			18,428
Other		(3,600	)		(2,879	)

		70,746			28,541

Interest expense—other than on deposit liabilities and other bank borrowings		(19,249	)		(20,511	)
Allowance for borrowed funds used during construction		762			598
Preferred stock dividends of subsidiaries		(473	)		(473	)
Allowance for equity funds used during construction		1,901			1,232

Income before income taxes		53,687			9,387
Income taxes		19,720			2,623

Net income	$	33,967		$	6,764

Basic earnings per common share	$	0.41		$	0.08

Diluted earnings per common share	$	0.41		$	0.08

Dividends per common share	$	0.31		$	0.31

Weighted-average number of common shares outstanding		83,472			81,448
Dilutive effect of stock-based compensation		142			265

Adjusted weighted-average shares		83,614			81,713

Ratio of earnings to fixed charges (SEC method)
Excluding interest on ASB deposits		2.31			1.22

Including interest on ASB deposits		1.90			1.14

See accompanying “Notes to Consolidated Financial Statements” for HEI.

Hawaiian Electric Industries, Inc. and Subsidiaries

Consolidated Balance Sheets (unaudited)


(dollars in thousands)	March 31, 2008			December 31, 2007
Assets
Cash and equivalents	$	189,959		$	145,855
Federal funds sold		17,184			64,000
Accounts receivable and unbilled revenues, net		298,304			294,447
Available-for-sale investment and mortgage-related securities		2,086,037			2,140,772
Investment in stock of Federal Home Loan Bank of Seattle (estimated fair value $97,764)		97,764			97,764
Loans receivable, net		4,153,950			4,101,193
Property, plant and equipment, net of accumulated depreciation of $1,775,790 and $1,749,386		2,761,396			2,743,410
Regulatory assets		283,498			284,990
Other		351,408			338,405
Goodwill, net		83,080			83,080

	$	10,322,580		$	10,293,916

Liabilities and stockholders’ equity
Liabilities
Accounts payable	$	213,966		$	202,299
Deposit liabilities		4,330,356			4,347,260
Short-term borrowings—other than bank		199,281			91,780
Other bank borrowings		1,789,157			1,810,669
Long-term debt, net—other than bank		1,202,028			1,242,099
Deferred income taxes		154,988			155,337
Regulatory liabilities		268,890			261,606
Contributions in aid of construction		300,847			299,737
Other		524,764			573,409

		8,984,277			8,984,196

Minority interests
Preferred stock of subsidiaries—not subject to mandatory redemption		34,293			34,293

Stockholders’ equity
Preferred stock, no par value, authorized 10,000,000 shares; issued: none		—			—
Common stock, no par value, authorized 200,000,000 shares; issued and outstanding: 83,956,023 shares and 83,431,513 shares		1,084,267			1,072,101
Retained earnings		233,213			225,168
Accumulated other comprehensive loss, net of tax benefits		(13,470	)		(21,842	)

		1,304,010			1,275,427

	$	10,322,580		$	10,293,916

See accompanying “Notes to Consolidated Financial Statements” for HEI.

Hawaiian Electric Industries, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)


	Common stock			Retained earnings			Accumulated other comprehensive
(in thousands, except per share amounts)	Shares	Amount		Retained earnings			loss			Total
Balance, December 31, 2007	83,432	$	1,072,101	$	225,168		$	(21,842	)	$	1,275,427
Comprehensive income:
Net income	—		—		33,967			—			33,967
Net unrealized gains on securities
Net unrealized gains on securities arising during the period, net of taxes of $5,808	—		—		—			8,796			8,796
Less: reclassification adjustment for net realized gains included in net income, net of taxes of $372	—		—		—			(563	)		(563	)
Retirement benefit plans:
Amortization of net loss, prior service gain and transition obligation included in net periodic benefit cost, net of taxes of $923	—		—		—			1,448			1,448
Less: reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes of $834	—		—		—			(1,309	)		(1,309	)

Comprehensive income	—		—		33,967			8,372			42,339

Issuance of common stock, net	524		12,166		—			—			12,166
Common stock dividends ($0.31 per share)	—		—		(25,922	)		—			(25,922	)

Balance, March 31, 2008	83,956	$	1,084,267	$	233,213		$	(13,470	)	$	1,304,010

Balance, December 31, 2006	81,461	$	1,028,101	$	242,667		$	(175,528	)	$	1,095,240
Comprehensive income:
Net income	—		—		6,764			—			6,764
Net unrealized gains on securities arising during the period, net of taxes of $6,406	—		—		—			9,701			9,701
Defined benefit pension plans—amortization of net loss, prior service gain and transition obligation included in net periodic pension cost, net of taxes of $1,400	—		—		—			2,200			2,200

Comprehensive income	—		—		6,764			11,901			18,665

Adjustment to initially apply FIN 48	—		—		(228	)		—			(228	)
Issuance of common stock, net	363		8,148		—			—			8,148
Common stock dividends ($0.31 per share)	—		—		(25,257	)		—			(25,257	)

Balance, March 31, 2007	81,824	$	1,036,249	$	223,946		$	(163,627	)	$	1,096,568

See accompanying “Notes to Consolidated Financial Statements” for HEI.

Hawaiian Electric Industries, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)


Three months ended March 31	2008			2007
(in thousands)
Cash flows from operating activities
Net income	$	33,967		$	6,764
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation of property, plant and equipment		37,882			36,856
Other amortization		2,860			2,680
Provision for loan losses		900			—
Writedown of utility plant		—			11,701
Deferred income taxes		(5,874	)		(5,908	)
Allowance for equity funds used during construction		(1,901	)		(1,232	)
Excess tax benefits from share-based payment arrangements		(28	)		(233	)
Loans receivable originated and purchased, held for sale		(66,664	)		(11,017	)
Proceeds from sale of loans receivable, held for sale		67,223			17,749
Changes in assets and liabilities
Decrease (increase) in accounts receivable and unbilled revenues, net		(3,857	)		27,745
Increase in fuel oil stock		(9,269	)		(2,403	)
Increase in accounts payable		11,667			7,049
Decrease in taxes accrued		(41,888	)		(34,828	)
Changes in other assets and liabilities		950			(4,022	)

Net cash provided by operating activities		25,968			50,901

Cash flows from investing activities
Available-for-sale investment and mortgage-related securities purchased		(66,145	)		(132,195	)
Principal repayments on available-for-sale investment and mortgage-related securities		132,885			108,556
Proceeds from sale of available-for-sale investment and mortgage-related securities		935			—
Net proceeds from sale of investments		—			2,536
Net increase in loans held for investment		(52,401	)		(41,232	)
Capital expenditures		(48,882	)		(35,521	)
Contributions in aid of construction		3,836			2,495
Other		(57	)		1

Net cash used in investing activities		(29,829	)		(95,360	)

Cash flows from financing activities
Net increase (decrease) in deposit liabilities		(16,904	)		1,525
Net increase (decrease) in short-term borrowings with original maturities of three months or less		107,501			(65,866	)
Proceeds from short-term borrowings with original maturities of greater than three months		—			13,008
Net increase in retail repurchase agreements		14,432			23,370
Proceeds from other bank borrowings		152,500			238,988
Repayments of other bank borrowings		(188,600	)		(238,813	)
Proceeds from issuance of long-term debt		9,897			215,679
Repayment of long-term debt		(50,000	)		(126,000	)
Excess tax benefits from share-based payment arrangements		28			233
Net proceeds from issuance of common stock		6,314			2,411
Common stock dividends		(20,676	)		(20,166	)
Decrease in cash overdraft		(8,582	)		(11,280	)
Other		(4,761	)		(5,034	)

Net cash provided by financing activities		1,149			28,055

Net decrease in cash and equivalents and federal funds sold		(2,712	)		(16,404	)
Cash and equivalents and federal funds sold, beginning of period		209,855			257,301

Cash and equivalents and federal funds sold, end of period	$	207,143		$	240,897

See accompanying “Notes to Consolidated Financial Statements” for HEI.

Hawaiian Electric Industries, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Basis of presentation

The accompanying unaudited consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (GAAP) for interim financial information, the instructions to SEC Form 10-Q and Article 10 of Regulation S–X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenues and expenses for the period. Actual results could differ significantly from those estimates. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in HEI’s Form 10-K for the year ended December 31, 2007.

In the opinion of HEI’s management, the accompanying unaudited consolidated financial statements contain all material adjustments required by GAAP to present fairly the Company’s financial position as of March 31, 2008 and December 31, 2007 and the results of its operations and cash flows for the three months ended March 31, 2008 and 2007. All such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10–Q or other referenced material. Results of operations for interim periods are not necessarily indicative of results for the full year. When required, certain reclassifications are made to the prior period’s consolidated financial statements to conform to the current presentation.

(2) Segment financial information


(in thousands)	Electric Utility			Bank		Other			Total
Three months ended March 31, 2008
Revenues from external customers	$	623,849		$	105,844	$	(76	)	$	729,617
Intersegment revenues (eliminations)		40			—		(40	)		—

Revenues		623,889			105,844		(116	)		729,617

Profit (loss)*		39,806			23,341		(9,460	)		53,687
Income taxes (benefit)		15,221			8,765		(4,266	)		19,720

Net income (loss)		24,585			14,576		(5,194	)		33,967

Assets (at March 31, 2008)		3,468,599			6,844,494		9,487			10,322,580

Three months ended March 31, 2007
Revenues from external customers	$	447,608		$	104,460	$	1,955		$	554,023
Intersegment revenues (eliminations)		70			—		(70	)		—

Revenues		447,678			104,460		1,885			554,023

Profit (loss)*		140			18,399		(9,152	)		9,387
Income taxes (benefit)		(313	)		6,803		(3,867	)		2,623

Net income (loss)		453			11,596		(5,285	)		6,764

Assets (at March 31, 2007)		3,050,554			6,845,576		26,446			9,922,576

*	Income (loss) before income taxes.

Intercompany electric sales of consolidated HECO to the bank and “other” segments are not eliminated because those segments would need to purchase electricity from another source if it were not provided by consolidated HECO, the profit on such sales is nominal and the elimination of electric sales revenues and expenses could distort segment operating income and net income.

Bank fees that ASB charges the electric utility and “other” segments are not eliminated because those segments would pay fees to another financial institution if they were to bank with another institution, the profit on such fees is nominal and the elimination of bank fee income and expenses could distort segment operating income and net income.

(3) Electric utility subsidiary

For HECO’s consolidated financial information, including its contingencies, see pages 15 through 35.

(4) Bank subsidiary

Selected financial information

American Savings Bank, F.S.B. and Subsidiaries

Consolidated Statements of Income Data (unaudited)


Three months ended March 31	2008		2007
(in thousands)
Interest and dividend income
Interest and fees on loans	$	63,465	$	60,281
Interest and dividends on investment and mortgage-related securities		24,451		28,165

		87,916		88,446

Interest expense
Interest on deposit liabilities		18,220		20,738
Interest on other borrowings		19,149		18,406

		37,369		39,144

Net interest income		50,547		49,302
Provision for loan losses		900		—

Net interest income after provision for loan losses		49,647		49,302

Noninterest income
Fees from other financial services		6,823		6,501
Fee income on deposit liabilities		6,794		6,055
Fee income on other financial products		1,804		2,012
Gain on sale of securities		935		—
Other income		1,572		1,446

		17,928		16,014

Noninterest expense
Compensation and employee benefits		18,240		18,396
Occupancy		5,397		4,948
Equipment		3,114		3,478
Services		5,673		8,358
Data processing		2,616		2,557
Other expense		9,194		9,180

		44,234		46,917

Income before income taxes		23,341		18,399
Income taxes		8,765		6,803

Net income for common stock	$	14,576	$	11,596

American Savings Bank, F.S.B. and Subsidiaries

Consolidated Balance Sheet Data (unaudited)


(in thousands)	March 31, 2008			December 31, 2007
Assets
Cash and equivalents	$	173,230		$	140,023
Federal funds sold		17,184			64,000
Available-for-sale investment and mortgage-related securities		2,086,037			2,140,772
Investment in stock of Federal Home Loan Bank of Seattle		97,764			97,764
Loans receivable, net		4,153,950			4,101,193
Other		233,249			234,661
Goodwill, net		83,080			83,080

	$	6,844,494		$	6,861,493

Liabilities and stockholder’s equity
Deposit liabilities–noninterest-bearing	$	678,934		$	652,055
Deposit liabilities–interest-bearing		3,651,422			3,695,205
Other borrowings		1,789,157			1,810,669
Other		123,646			108,800

		6,243,159			6,266,729

Common stock		326,193			325,467
Retained earnings		285,088			287,710
Accumulated other comprehensive loss, net of tax benefits		(9,946	)		(18,413	)

		601,335			594,764

	$	6,844,494		$	6,861,493

Other borrowings consisted of securities sold under agreements to repurchase and advances from the Federal Home Loan Bank (FHLB) of Seattle of $807 million and $982 million, respectively, as of March 31, 2008 and $765 million and $1 billion, respectively, as of December 31, 2007.

As of March 31, 2008, ASB had commitments to borrowers for undisbursed loan funds, loan commitments and unused lines and letters of credit of $1.3 billion.

Guarantees

In October 2007, ASB, as a member financial institution of Visa U.S.A. Inc., received restricted shares of Visa, Inc. (Visa) as a result of a restructuring of Visa U.S.A. Inc. in preparation for an initial public offering by Visa. As a part of the restructuring, ASB entered into judgment and loss sharing agreements with Visa in order to apportion financial responsibilities arising from any potential adverse judgment or negotiated settlements related to indemnified litigation involving Visa. In November 2007, Visa announced that it had reached a settlement with American Express regarding certain of this litigation. In the fourth quarter of 2007, ASB recorded a charge of $0.3 million for its proportionate share of this settlement and a charge of approximately $0.6 million for potential losses arising from indemnified litigation that has not yet settled, which estimated fair value is highly judgmental. In March 2008, Visa funded an escrow account designed to address potential liabilities arising from litigation covered in the Retrospective Responsibility Plan and, based on the amount funded in the escrow account, ASB recorded a receivable of $0.4 million for its proportionate share of the escrow account. Because the extent of ASB’s obligations under this agreement depends entirely upon the occurrence of future events, ASB’s maximum potential future liability under this agreement is not determinable.

Regulatory compliance

ASB is subject to a range of bank regulatory compliance obligations. In connection with ASB’s review of internal compliance processes and OTS examinations, certain compliance deficiencies were identified. ASB has and continues to take steps to remediate these deficiencies and to strengthen ASB’s overall compliance programs. ASB agreed to a consent order (Order) issued by the OTS on January 23, 2008 as a result of issues relating to ASB’s compliance with certain laws and regulations, including the Bank Secrecy Act and Anti-Money Laundering (BSA/AML). The Order does not impose restrictions on ASB’s business activities; however it requires, among other things, various actions by ASB to strengthen its BSA/AML Program and its Compliance Management Program. ASB has implemented several initiatives to enhance its BSA/AML Program that address the requirements of the Order, and is on course with its remediation efforts. ASB is also implementing initiatives to enhance its Compliance Management Program in accordance with the requirements of the Order.

ASB has also consented to the concurrent issuance of an order by the OTS for the assessment of a Civil Money Penalty of $37,730 related to non-compliance with certain flood insurance laws and regulations and paid the penalty in January 2008.

ASB is unable to predict what other actions, if any, may be initiated by the OTS and other governmental authorities against ASB as a result of these deficiencies, or the impact of any such measures or actions on ASB or the Company.

SFAS No. 157, Fair Value Measurements

SFAS No. 157 (which defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements) was adopted prospectively and only partially applied as of the beginning of 2008. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. ASB grouped its financial assets measured at fair value in three levels outlined in SFAS No.157 as follows:


Level 1:		Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

Level 2:		Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by observable market data by correlation or other means.

Level 3:		Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

In accordance with FASB Staff Position No. FAS 157-2, the Company has delayed the application of SFAS No. 157 to ASB’s goodwill.

Assets Measured at Fair Value on a Recurring Basis

Available-for-sale investment and mortgage-related securities. While securities held in ASB’s investment portfolio trade in active markets, they do not trade on listed exchanges nor do the specific holdings trade in quoted markets by dealers or brokers. All holdings are valued using market-based approaches that are taken from identical or similar market transactions. Inputs to these valuation techniques reflect the assumptions market participants would use in pricing the asset based on market data obtained from independent sources.

The table below presents the balances of assets measured at fair value on a recurring basis:


			Fair value measurements using
Description	March 31, 2008		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
(in millions)
Available-for-sale securities	$	2,086	$	—	$	2,086	$	—

Unrealized gains for the first quarter of 2008 were $15 million and were included in other comprehensive income.

Assets Measured at Fair Value on a Nonrecurring Basis

Loans. ASB does not record loans at fair value on a recurring basis. However, from time to time, ASB records nonrecurring fair value adjustments to loans to reflect specific reserves on loans based on the current appraised value of the collateral or an unobservable market assumption. These adjustments to fair value usually result from the application of lower-of-cost-or-market accounting or write-downs of individual loans. Unobservable assumptions reflect ASB’s own estimate of the fair value of collateral used in valuing the loan.

The table below presents the balances of assets measured at fair value on a nonrecurring basis:


			Fair value measurements using
Description	March 31, 2008		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
(in millions)
Loans	$	9.0	$	—	$	0.2	$	8.8

Specific reserves for the first quarter of 2008 were $5.6 million and were included in loans receivable held for investment, net. For the three months ended March 31, 2008, there were no adjustments to fair value for ASB’s loans held for sale.

Subsequent event.

In the second quarter of 2008, ASB shifted its strategy on an existing technology project designed to automate many of its workflows. ASB determined that alternatives are available that would result in lower net expenses compared to costs necessary to complete and maintain the current project. ASB made a decision to terminate further work on the project and redeploy its internal resources on other solutions designed to improve ASB’s efficiency. A pretax write-off of $1.9 million ($1.2 million after tax) for the disposal of software was recorded in the second quarter of 2008.

(5) Retirement benefits

Defined benefit plans.

For the first quarter of 2008, HECO contributed $0.9 million and HEI contributed $0.2 million to their respective retirement benefit plans, compared to $0.3 million and nil, respectively, in the first quarter of 2007. The Company’s current estimate of contributions to its retirement benefit plans in 2008 is $14.3 million (including $13.6 million to be made by the utilities and $0.7 million by HEI), compared to contributions of $13.1 million in 2007 (including $12.1 million made by the utilities, $0.9 million by ASB and $0.1 million by HEI). In addition, the Company expects to pay directly $1 million of benefits in 2008, comparable to the $1 million paid in 2007.

For the first quarter of 2008, the Company’s defined benefit retirement plans’ assets generated a loss, including investment management fees, of 7.7%. The market value of the defined benefit retirement plans’ assets as of March 31, 2008 was $1.0 billion compared to $1.1 billion at December 31, 2007, a decline of approximately $93 million.

The components of net periodic benefit cost were as follows:


	Pension benefits						Other benefits
Three months ended March 31	2008 (1)			2007			2008			2007
(in thousands)
Service cost	$	6,856		$	7,753		$	1,165		$	1,231
Interest cost		14,876			14,420			2,838			2,860
Expected return on plan assets		(18,232	)		(17,102	)		(2,740	)		(2,298	)
Amortization of unrecognized transition obligation		1			1			785			785
Amortization of prior service cost (gain)		(90	)		(49	)		3			3
Recognized actuarial loss		1,690			2,855			—			—

Net periodic benefit cost		5,101			7,878			2,051			2,581
Impact of PUC D&Os		1,657			—			193			—

Net periodic benefit cost (adjusted for impact of PUC D&Os)	$	6,758		$	7,878		$	2,244		$	2,581

(1)	Due to the freezing of ASB’s defined benefit plan as of December 31, 2007 (see below), there are no amounts for ASB employees for certain components (service cost, amortizations and recognized actuarial loss).

The Company recorded retirement benefits expense of $7 million and $8 million in the first quarters of 2008 and 2007, respectively, and charged the remaining amounts primarily to electric utility plant.

Also, see Note 4, “Retirement benefits,” of HECO’s Notes to Consolidated Financial Statements.

Effective December 31, 2007, ASB ended the accrual of benefits in, and the addition of new participants to, ASB’s defined benefit pension plan. The change to the plan did not affect the vested pension benefits of former participants, including ASB retirees, as of December 31, 2007. All active participants who were employed on December 31, 2007 became fully vested in their accrued pension benefit as of December 31, 2007.

Defined contribution plan

On January 1, 2008, ASB began providing for employer contributions for ASB employees to HEI’s retirement savings plan with two contribution components in addition to employee contributions: 1) 401(k) matching of 100% on the first 4% of eligible pay contributed by participants; and 2) a discretionary employer value-sharing contribution (based on the participant’s number of years of vested service) up to 6% of eligible pay that is not contingent on contributions by participants. For the first quarter of 2008, ASB’s total expense for its employees participating in the HEI retirement savings plan was $1.1 million and contributions were $0.5 million. ASB’s current estimate of contributions to the retirement savings plan in 2008 is $2.1 million.

(6) Share-based compensation

Under the 1987 Stock Option and Incentive Plan, as amended (SOIP), HEI may issue an aggregate of 9.3 million shares of common stock (4,768,791 shares available for issuance under outstanding and future grants and awards as of March 31, 2008) to officers and key employees as incentive stock options, nonqualified stock options (NQSOs), restricted stock, stock appreciation rights (SARs), stock payments or dividend equivalents. HEI has issued new shares for NQSOs, restricted stock (nonvested stock), SARs and dividend equivalents under the SOIP. All information presented has been adjusted for the 2-for-1 stock split in June 2004.

For the NQSOs and SARs, the exercise price of each NQSO or SAR generally equaled the fair market value of HEI’s stock on or near the date of grant. NQSOs, SARs and related dividend equivalents issued in the form of stock awarded prior to and through 2004 generally become exercisable in installments of 25% each year for four years, and expire if not exercised ten years from the date of the grant. The 2005 SARs awards, which have a ten year exercise life, generally become exercisable at the end of four years (i.e., cliff vesting) with the related dividend equivalents issued in the form of stock on an annual basis. Accelerated vesting is provided in the event of a change-in-control or upon retirement. NQSOs and SARs compensation expense has been recognized in accordance with the fair value-based measurement method of accounting. The estimated fair value of each NQSO and SAR grant was calculated on the date of grant using a Binomial Option Pricing Model.

Restricted stock grants generally become unrestricted three to five years after the date of grant and restricted stock compensation expense has been recognized in accordance with the fair value-based measurement method of accounting. Dividends on restricted stock are paid quarterly in cash.

The Company’s share-based compensation expense and related income tax benefit (including a valuation allowance due to limits on the deductibility of executive compensation) are as follows:


	Three months ended March 31
($ in millions)	2008	2007
Share-based compensation expense ¹	0.3	0.3
Income tax benefit	0.1	0.1

¹	The Company has not capitalized any share-based compensation cost. The estimated forfeiture rate for SARs was 5.0% and the estimated forfeiture rate for restricted stock was 12.7%.

Nonqualified stock options.

Information about HEI’s NQSOs is summarized as follows:


March 31, 2008			Outstanding & Exercisable
Year of grant	Range of exercise prices		Number of options	Weighted- average remaining contractual life	Weighted- average exercise price
1999	$	17.61 –17.63	48,300	1.3	$	17.62
2000		14.74	52,000	2.1		14.74
2001		17.96	83,000	2.9		17.96
2002		21.68	134,000	3.8		21.68
2003		20.49	274,500	4.7		20.49

	$	14.74 –21.68	591,800	3.7	$	19.67

As of December 31, 2007, NQSOs outstanding totaled 603,800, with a weighted-average exercise price of $19.68. As of March 31, 2008, NQSO shares outstanding and NQSOs exercisable had an aggregate intrinsic value (including dividend equivalents) of $4.6 million.

NQSO activity and statistics are summarized as follows:


	Three months ended March 31
($ in thousands, except prices)	2008		2007
Shares granted		—		—
Shares forfeited		—		—
Shares expired		—		—
Shares vested		—		1,500
Aggregate fair value of vested shares		—	$	7
Shares exercised		12,000		19,500
Weighted-average exercise price	$	20.49	$	21.47
Cash received from exercise	$	246	$	419
Intrinsic value of shares exercised ¹	$	84	$	142
Tax benefit realized for the deduction of exercises	$	33	$	55
Dividend equivalent shares distributed under Section 409A		6,125		21,892
Weighted-average Section 409A distribution price	$	22.38	$	26.15
Intrinsic value of shares distributed under Section 409A	$	137	$	572
Tax benefit realized for Section 409A distributions	$	53	$	223

¹	Intrinsic value is the amount by which the fair market value of the underlying stock and the related dividend equivalents exceeds the exercise price of the option.

As of March 31, 2008, all NQSOs were vested.

Stock appreciation rights.

Information about HEI’s SARs is summarized as follows:


March 31, 2008			Outstanding				Exercisable
Year of grant	Range of exercise prices		Number of shares underlying SARs	Weighted- average remaining contractual life	Weighted- average exercise price		Number of shares underlying SARs	Weighted- average remaining contractual life	Weighted- average exercise price
2004	$	26.02	325,000	3.8	$	26.02	283,000	3.5	$	26.02
2005		26.18	532,000	5.0		26.18	196,000	1.4		26.18

	$	26.02 –26.18	857,000	4.5	$	26.12	479,000	2.6	$	26.09

As of December 31, 2007, the shares underlying SARs outstanding totaled 857,000, with a weighted-average exercise price of $26.12. As of March 31, 2008, the SARs outstanding and exercisable (including dividend equivalents) had no intrinsic value.

SARs activity and statistics are summarized as follows:


	Three months ended March 31
($ in thousands, except prices)	2008		2007
Shares granted		—		—
Shares forfeited		—		—
Shares expired		—		—
Shares vested		15,000		6,000
Aggregate fair value of vested shares	$	87	$	36
Shares exercised		—		4,000
Weighted-average exercise price		—	$	26.18
Cash received from exercise		—		—
Intrinsic value of shares exercised ¹		—	$	3
Tax benefit realized for the deduction of exercises		—	$	1
Dividend equivalent shares distributed under Section 409A		—		23,760
Weighted-average Section 409A distribution price		—	$	26.15
Intrinsic value of shares distributed under Section 409A		—	$	621
Tax benefit realized for Section 409A distributions		—	$	242

¹	Intrinsic value is the amount by which the fair market value of the underlying stock and the related dividend equivalents exceeds the exercise price of the right.

As of March 31, 2008, there was $0.4 million of total unrecognized compensation cost related to SARs and that cost is expected to be recognized over a weighted average period of 1.0 years.

Section 409A modification

As a result of the changes enacted in Section 409A of the Internal Revenue Code of 1986, as amended (Section 409A), for the three months ended March 31, 2008 and 2007 a total of 6,125 and 45,652 dividend equivalent shares for NQSO and SAR grants were distributed to SOIP participants, respectively. Section 409A, which amended the rules on deferred compensation, required the Company to change the way certain affected dividend equivalents are paid in order to avoid significant adverse tax consequences to the SOIP participants. Generally dividend equivalents subject to Section 409A will be paid within 2¹/2 months after the end of the calendar year. Upon retirement, an SOIP participant may elect to take distributions of dividend equivalents subject to Section 409A at the time of retirement or at the end of the calendar year.

Restricted stock

As of December 31, 2007, restricted stock shares outstanding totaled 146,000, with a weighted-average grant date fair value of $25.82. As of March 31, 2008, restricted stock shares outstanding totaled 140,000, with a weighted-average grant date fair value of $25.80. The grant date fair value of a grant of a restricted stock share was the closing or average price of HEI common stock on the date of grant.

During the first quarter of 2008, no shares of restricted stock were granted, no restricted stock shares were vested and 6,000 shares of restricted stock with a grant date fair market value of $0.2 million were forfeited. During the first quarter of 2007, 8,700 shares of restricted stock with a grant date fair market value of $0.2 million were granted, no shares of restricted stock vested and no restricted stock shares were forfeited. The tax benefit realized for the tax deductions from restricted stock dividends were immaterial for the first quarters of 2008 and 2007.

As of March 31, 2008, there was $2.1 million of total unrecognized compensation cost related to nonvested restricted stock. The cost is expected to be recognized over a weighted-average period of 2.8 years.

In April 2008, 42,700 shares of restricted stock were granted to officers and key employees with a grant date fair market value of $1.1 million.

(7) Commitments and contingencies

See Note 4, “Bank subsidiary,” above and Note 5, “Commitments and contingencies,” of HECO’s “Notes to Consolidated Financial Statements.”

(8) Cash flows

Supplemental disclosures of cash flow information

For the three months ended March 31, 2008 and 2007, the Company paid interest (net of amounts capitalized and including bank interest) to non-affiliates amounting to $50 million and $56 million, respectively.

For the three months ended March 31, 2008 and 2007, the Company paid income taxes amounting to $38 million and $3 million, respectively. The significant increase in taxes paid in the first quarter of 2008 versus 2007 was due primarily to the difference in the taxes due with the extensions for tax years 2007 and 2006. Estimated taxes paid during the year are based on the timing of taxable income generated during the year. In 2007, taxable income was significantly larger in the fourth quarter when compared to the first three quarters, resulting in a larger portion of the 2007 taxes paid with the extension filed in the first quarter of 2008.

Supplemental disclosures of noncash activities

Noncash increases in common stock for director and officer compensatory plans of the Company were $0.6 million and $0.5 million for the three months ended March 31, 2008 and 2007, respectively.

Under the HEI Dividend Reinvestment and Stock Purchase Plan (DRIP), common stock dividends reinvested by shareholders in HEI common stock in noncash transactions amounted to $5 million for each of the three months ended March 31, 2008 and 2007. From March 23, 2004 to March 5, 2007, HEI satisfied the requirements of the HEI DRIP and the Hawaiian Electric Industries Retirement Savings Plan (HEIRSP) by acquiring for cash its common shares through open market purchases rather than the issuance of additional shares. On March 6, 2007, HEI began satisfying those requirements by the issuance of additional shares.

(9) Recent accounting pronouncements and interpretations

The fair value option for financial assets and financial liabilities

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value, which should improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Company adopted SFAS No. 159 on January 1, 2008 and the adoption had no impact on the Company’s financial statements as the Company did not choose to measure additional items at fair value.

Business combinations

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations.” SFAS No. 141R requires an acquiring entity to recognize all the assets acquired and liabilities assumed at the acquisition-date fair value with limited exceptions. Under SFAS No. 141R, acquisition costs will generally be expensed as incurred, noncontrolling interests will be valued at acquisition-date fair value, and acquired contingent liabilities will be recorded at acquisition-date fair value and subsequently measured at the higher of such amount or the amount determined under existing guidance for non-acquired contingencies. The Company must adopt SFAS No. 141R for all business combinations for which the acquisition date is on or after January 1, 2009. Because the impact of adopting SFAS No. 141R will be dependent on future acquisitions, if any, management cannot predict such impact.

Noncontrolling interests

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements.” SFAS No. 160 requires the recognition of a noncontrolling interest (i.e., a minority interest) as equity in the consolidated financial statements, separate from the parent’s equity, and requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the income statement. Under SFAS No. 160, changes in the parent’s ownership interest that leave control intact are accounted for as capital transactions (i.e., as increases or decreases in ownership), a gain or loss will be recognized when a subsidiary is deconsolidated based on the fair value of the noncontrolling equity investment (not carrying amount), and entities must provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and of the noncontrolling owners. The Company must adopt SFAS No. 160 on January 1, 2009 prospectively, except for the presentation and disclosure requirements which must be applied retrospectively. Thus, beginning January 1, 2009, “Preferred stock of subsidiaries—not subject to mandatory redemption” will be presented as a separate component of “Stockholders’ equity,” rather than as “Minority interests” in the mezzanine section between liabilities and equity. Management has not yet determined what further impact, if any, the adoption of SFAS No. 160 will have on the Company’s financial statements.

Written loan commitments

In November 2007, the SEC issued Staff Accounting Bulletin (SAB) No. 109, “Written Loan Commitments Recorded at Fair Value through Earnings,” which supersedes SAB No. 105, “Application of Accounting Principles to Loan Commitments.” SAB No. 109 states that the expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. Previously, SAB No. 105 stated that in measuring the fair value of a derivative loan commitment, a company should not incorporate the expected net future cash flows related to the associated servicing of the loan. SAB No. 109 is effective for loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. ASB adopted SAB No. 109 in the first quarter of 2008 and the adoption had an immaterial impact on the Company’s financial statements.

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidated Statements of Income (unaudited)


	Three months ended March 31
(in thousands, except ratio of earnings to fixed charges)	2008			2007
Operating revenues	$	622,494		$	446,797

Operating expenses
Fuel oil		249,543			159,929
Purchased power		150,795			111,516
Other operation		55,579			47,193
Maintenance		23,613			27,336
Depreciation		35,434			34,267
Taxes, other than income taxes		57,486			42,547
Income taxes		15,378			4,506

		587,828			427,294

Operating income		34,666			19,503

Other income (loss)
Allowance for equity funds used during construction		1,901			1,232
Other, net		1,096			(6,198	)

		2,997			(4,966	)

Income before interest and other charges		37,663			14,537

Interest and other charges
Interest on long-term debt		11,724			11,496
Amortization of net bond premium and expense		631			546
Other interest charges		986			2,141
Allowance for borrowed funds used during construction		(762	)		(598	)
Preferred stock dividends of subsidiaries		229			229

		12,808			13,814

Income before preferred stock dividends of HECO		24,855			723
Preferred stock dividends of HECO		270			270

Net income for common stock	$	24,585		$	453

Ratio of earnings to fixed charges (SEC method)		3.77			.99

HEI owns all the common stock of HECO. Therefore, per share data with respect to shares of common stock of HECO are not meaningful.

See accompanying “Notes to Consolidated Financial Statements” for HECO.

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidated Balance Sheets (unaudited)


(in thousands, except par value)	March 31, 2008			December 31, 2007
Assets
Utility plant, at cost
Land	$	38,159		$	38,161
Plant and equipment		4,160,730			4,131,226
Less accumulated depreciation		(1,671,134	)		(1,647,113	)
Plant acquisition adjustment, net		28			41
Construction in progress		165,020			151,179

Net utility plant		2,692,803			2,673,494

Current assets
Cash and equivalents		15,250			4,678
Customer accounts receivable, net		153,923			146,112
Accrued unbilled revenues, net		110,456			114,274
Other accounts receivable, net		7,006			6,915
Fuel oil stock, at average cost		101,140			91,871
Materials and supplies, at average cost		35,239			34,258
Prepayments and other		8,378			9,490

Total current assets		431,392			407,598

Other long-term assets
Regulatory assets		283,498			284,990
Unamortized debt expense		15,325			15,635
Other		45,581			42,171

Total other long-term assets		344,404			342,796

	$	3,468,599		$	3,423,888

Capitalization and liabilities
Capitalization
Common stock, $6 ²/3 par value, authorized 50,000 shares; outstanding 12,806 shares	$	85,387		$	85,387
Premium on capital stock		299,214			299,214
Retained earnings		735,200			724,704
Accumulated other comprehensive income, net of income taxes		1,214			1,157

Common stock equity		1,121,015			1,110,462
Cumulative preferred stock – not subject to mandatory redemption		34,293			34,293
Long-term debt, net		895,028			885,099

Total capitalization		2,050,336			2,029,854

Current liabilities
Short-term borrowings–nonaffiliates		89,108			28,791
Accounts payable		138,349			137,895
Interest and preferred dividends payable		17,883			14,719
Taxes accrued		148,531			189,637
Other		51,124			57,799

Total current liabilities		444,995			428,841

Deferred credits and other liabilities
Deferred income taxes		156,197			162,113
Regulatory liabilities		268,890			261,606
Unamortized tax credits		58,581			58,419
Other		188,753			183,318

Total deferred credits and other liabilities		672,421			665,456

Contributions in aid of construction		300,847			299,737

	$	3,468,599		$	3,423,888

See accompanying “Notes to Consolidated Financial Statements” for HECO.

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholder’s Equity (unaudited)


	Common stock			Premium on capital		Retained			Accumulated other comprehensive
(in thousands, except per share amounts)	Shares	Amount		stock		earnings			income (loss)			Total
Balance, December 31, 2007	12,806	$	85,387	$	299,214	$	724,704		$	1,157		$	1,110,462
Comprehensive income:
Net income	—		—		—		24,585			—			24,585
Retirement benefit plans:
Amortization of net loss, prior service gain and transition obligation included in net periodic benefit cost, net of taxes of $870	—		—		—		—			1,366			1,366
Less: reclassification adjustment for impact of D&Os of the PUC included in regulatory asset, net of taxes of $834	—		—		—		—			(1,309	)		(1,309	)

Comprehensive income	—		—		—		24,585			57			24,642

Common stock dividends	—		—		—		(14,089	)		—			(14,089	)

Balance, March 31, 2008	12,806	$	85,387	$	299,214	$	735,200		$	1,214		$	1,121,015

Balance, December 31, 2006	12,806	$	85,387	$	299,214	$	700,252		$	(126,650	)	$	958,203
Comprehensive income:
Net income	—		—		—		453			—			453
Defined benefit retirement plans— amortization of net loss, prior service gain and transition obligation included in net periodic benefit cost, net of taxes of $1,268	—		—		—		—			1,961			1,961

Comprehensive income	—		—		—		453			1,961			2,414

Adjustment to initially apply FIN 48	—		—		—		(620	)		—			(620	)

Balance, March 31, 2007	12,806	$	85,387	$	299,214	$	700,085		$	(124,689	)	$	959,997

See accompanying “Notes to Consolidated Financial Statements” for HECO.

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)


Three months ended March 31	2008			2007
(in thousands)
Cash flows from operating activities
Income before preferred stock dividends of HECO	$	24,855		$	723
Adjustments to reconcile income before preferred stock dividends of HECO to net cash provided by operating activities
Depreciation of property, plant and equipment		35,434			34,267
Other amortization		2,163			1,306
Writedown of utility plant		—			11,701
Deferred income taxes		(5,953	)		(8,166	)
Tax credits, net		435			583
Allowance for equity funds used during construction		(1,901	)		(1,232	)
Changes in assets and liabilities
Decrease (increase) in accounts receivable		(7,902	)		12,118
Decrease in accrued unbilled revenues		3,818			14,980
Increase in fuel oil stock		(9,269	)		(2,403	)
Increase in materials and supplies		(981	)		(1,926	)
Increase in regulatory assets		(2,326	)		(1,603	)
Increase (decrease) in accounts payable		454			(2,475	)
Decrease in taxes accrued		(41,106	)		(36,961	)
Changes in other assets and liabilities		9,528			7,706

Net cash provided by operating activities		7,249			28,618

Cash flows from investing activities
Capital expenditures		(47,729	)		(34,822	)
Contributions in aid of construction		3,836			2,495
Other		(57	)		—

Net cash used in investing activities		(43,950	)		(32,327	)

Cash flows from financing activities
Common stock dividends		(14,089	)		—
Preferred stock dividends		(270	)		(270	)
Proceeds from issuance of long-term debt		9,897			215,679
Repayment of long-term debt		—			(126,000	)
Net increase (decrease) in short-term borrowings from nonaffiliates and affiliate with original maturities of three months or less		60,317			(65,865	)
Decrease in cash overdraft		(8,582	)		(11,280	)

Net cash provided by financing activities		47,273			12,264

Net increase in cash and equivalents		10,572			8,555
Cash and equivalents, beginning of period		4,678			3,859

Cash and equivalents, end of period	$	15,250		$	12,414

See accompanying “Notes to Consolidated Financial Statements” for HECO.

Hawaiian Electric Company, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Basis of presentation

The accompanying unaudited consolidated financial statements have been prepared in conformity with GAAP for interim financial information, the instructions to SEC Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenues and expenses for the period. Actual results could differ significantly from those estimates. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto incorporated by reference in HECO’s Form 10-K for the year ended December 31, 2007.

In the opinion of HECO’s management, the accompanying unaudited consolidated financial statements contain all material adjustments required by GAAP to present fairly the financial position of HECO and its subsidiaries as of March 31, 2008 and December 31, 2007 and the results of their operations and cash flows for the three months ended March 31, 2008 and 2007. All such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q or other referenced material. Results of operations for interim periods are not necessarily indicative of results for the full year. When required, certain reclassifications are made to the prior period’s consolidated financial statements to conform to the current presentation.

(2) Unconsolidated variable interest entities

HECO Capital Trust III

HECO Capital Trust III (Trust III) was created and exists for the exclusive purposes of (i) issuing in March 2004 2,000,000 6.50% Cumulative Quarterly Income Preferred Securities, Series 2004 (2004 Trust Preferred Securities) ($50 million aggregate liquidation preference) to the public and trust common securities ($1.5 million aggregate liquidation preference) to HECO, (ii) investing the proceeds of these trust securities in 2004 Debentures issued by HECO in the principal amount of $31.5 million and issued by each of Hawaii Electric Light Company, Inc. (HELCO) and Maui Electric Company, Limited (MECO) in the respective principal amounts of $10 million, (iii) making distributions on the trust securities and (iv) engaging in only those other activities necessary or incidental thereto. The 2004 Trust Preferred Securities are mandatorily redeemable at the maturity of the underlying debt on March 18, 2034, which maturity may be extended to no later than March 18, 2053; and are redeemable at the issuer’s option without premium beginning on March 18, 2009. The 2004 Debentures, together with the obligations of HECO, HELCO and MECO under an expense agreement and HECO’s obligations under its trust guarantee and its guarantee of the obligations of HELCO and MECO under their respective debentures, are the sole assets of Trust III. Trust III has at all times been an unconsolidated subsidiary of HECO. Since HECO, as the common security holder, does not absorb the majority of the variability of Trust III, HECO is not the primary beneficiary and does not consolidate Trust III in accordance with FIN 46R, “Consolidation of Variable Interest Entities.” Trust III’s balance sheets as of March 31, 2008 and December 31, 2007 each consisted of $51.5 million of 2004 Debentures; $50.0 million of 2004 Trust Preferred Securities; and $1.5 million of trust common securities. Trust III’s income statements for three months ended March 31, 2008 and 2007 each consisted of $0.8 million of interest income received from the 2004 Debentures; $0.8 million of distributions to holders of the Trust Preferred Securities; and $25,000 of common dividends on the trust common securities to HECO. So long as the 2004 Trust Preferred Securities are outstanding, HECO is not entitled to receive any funds from Trust III other than pro rata distributions, subject to certain subordination provisions, on the trust common securities. In the event of a default by HECO in the performance of its obligations under the 2004 Debentures or under its Guarantees, or in the event HECO, HELCO or MECO elect to defer payment of interest on any of their respective 2004 Debentures, then HECO will be subject to a number of restrictions, including a prohibition on the payment of dividends on its common stock.

Purchase power agreements

As of March 31, 2008, HECO and its subsidiaries had six PPAs for a total of 540 megawatts (MW) of firm capacity, and other PPAs with smaller IPPs and Schedule Q providers that supplied as-available energy. Approximately 91% of the 540 MW of firm capacity is under PPAs, entered into before December 31, 2003, with AES Hawaii, Inc. (AES Hawaii), Kalaeloa Partners, L.P. (Kalaeloa), Hamakua Energy Partners, L.P. (HEP) and HPOWER. Purchases from all IPPs for the three months ended March 31, 2008 totaled $151 million, with purchases from AES Hawaii, Kalaeloa, HEP and HPOWER totaling $36 million, $51 million, $20 million and $13 million, respectively. The primary business activities of these IPPs are the generation and sale of power to HECO and its subsidiaries (and municipal waste disposal in the case of HPOWER). Current financial information about the size, including total assets and revenues, for many of these IPPs is not publicly available.

Under FIN 46R, an enterprise with an interest in a variable interest entity (VIE) or potential VIE created before December 31, 2003 (and not thereafter materially modified) is not required to apply FIN 46R to that entity if the enterprise is unable to obtain, after making an exhaustive effort, the necessary information.

HECO reviewed its significant PPAs and determined in 2004 that the IPPs at that time had no contractual obligation to provide such information. In March 2004, HECO and its subsidiaries sent letters to all of their IPPs, except the Schedule Q providers, requesting the information that they need to determine the applicability of FIN 46R to the respective IPP, and subsequently contacted most of the IPPs to explain and repeat its request for information. (HECO and its subsidiaries excluded their Schedule Q providers from the scope of FIN 46R because their variable interest in the provider would not be significant to the utilities and they did not participate significantly in the design of the provider.) Some of the IPPs provided sufficient information for HECO to determine that the IPP was not a VIE, or was either a “business” or “governmental organization” (HPOWER) as defined under FIN 46R, and thus excluded from the scope of FIN 46R. Other IPPs, including the three largest, declined to provide the information necessary for HECO to determine the applicability of FIN 46R, and HECO was unable to apply FIN 46R to these IPPs.

As required under FIN 46R, since 2004 HECO has continued its efforts to obtain from the IPPs the information necessary to make the determinations required under FIN 46R. In January 2005, 2006, 2007 and 2008, HECO and its subsidiaries sent letters to the IPPs that were not excluded from the scope of FIN 46R, requesting the information required to determine the applicability of FIN 46R to the respective IPP. All of these IPPs declined to provide necessary information, except that Kalaeloa provided the information pursuant to the amendments to the PPA (see below) and an entity owning a windfarm provided information as required under the PPA. Management has concluded that the consolidation of two entities owning windfarms was not required as MECO and HELCO do not have variable interests in the entities because the PPAs do not require them to absorb any variability of the entities.

If the requested information is ultimately received from the other IPPs, a possible outcome of future analysis is the consolidation of one or more of such IPPs in HECO’s consolidated financial statements. The consolidation of any significant IPP could have a material effect on HECO’s consolidated financial statements, including the recognition of a significant amount of assets and liabilities, and, if such a consolidated IPP were operating at a loss and had insufficient equity, the potential recognition of such losses. If HECO and its subsidiaries determine they are required to consolidate the financial statements of such an IPP and the consolidation has a material effect, HECO and its subsidiaries would retrospectively apply FIN 46R in accordance with SFAS No. 154, “Accounting Changes and Error Corrections.”

Kalaeloa Partners, L.P. In October 1988, HECO entered into a PPA with Kalaeloa, subsequently approved by the PUC, which provided that HECO would purchase 180 MW of firm capacity for a period of 25 years beginning in May 1991. In October 2004, HECO and Kalaeloa entered into amendments to the PPA, subsequently approved by the PUC, which together effectively increased the firm capacity from 180 MW to 208 MW. The energy payments that HECO makes to Kalaeloa include: 1) a fuel component, with a fuel price adjustment based on the cost of low sulfur fuel oil, 2) a fuel additives cost component, and 3) a non-fuel component, with an adjustment based on changes in the Gross National Product Implicit Price Deflator. The capacity payments that HECO makes to Kalaeloa are fixed in accordance with the PPA. Kalaeloa also has a steam delivery contract with another

customer, the term of which coincides with the PPA. The cogeneration facility has been certified by the Federal Energy Regulatory Commission as a Qualifying Facility under the Public Utility Regulatory Policies Act of 1978.

Pursuant to the provisions of FIN 46R, HECO is deemed to have a variable interest in Kalaeloa by reason of the provisions of HECO’s PPA with Kalaeloa. However, management has concluded that HECO is not the primary beneficiary of Kalaeloa because HECO does not absorb the majority of Kalealoa’s expected losses nor receive a majority of Kalaeloa’s expected residual returns and, thus, HECO has not consolidated Kalaeloa in its consolidated financial statements. A significant factor affecting the level of expected losses HECO would absorb is the fact that HECO’s exposure to fuel price variability is limited to the remaining term of the PPA as compared to the facility’s remaining useful life. Although HECO absorbs fuel price variability for the remaining term of the PPA, the PPA does not currently expose HECO to losses as the fuel and fuel related energy payments under the PPA have been approved by the PUC for recovery from customers through base electric rates and through HECO’s ECAC to the extent the fuel and fuel related energy payments are not included in base energy rates.

(3) Revenue taxes

HECO and its subsidiaries’ operating revenues include amounts for various revenue taxes. Revenue taxes are generally recorded as an expense in the period the related revenues are recognized. HECO and its subsidiaries’ payments to the taxing authorities are based on the prior year’s revenues. For the three months ended March 31, 2008 and 2007, HECO and its subsidiaries included approximately $55 million and $40 million, respectively, of revenue taxes in “operating revenues” and in “taxes, other than income taxes” expense.

(4) Retirement benefits

Defined benefit plans

For the first quarter of 2008, HECO and its subsidiaries contributed $0.9 million to their retirement benefit plans, compared to $0.3 million in the first quarter of 2007. HECO and its subsidiaries’ current estimate of contributions to their retirement benefit plans in 2008 is $13.6 million, compared to contributions of $12.1 million in 2007. In addition, HECO and its subsidiaries expect to pay directly $0.5 million of benefits in 2008, compared to $0.1 million paid in 2007.

For the first quarter of 2008, HECO and its subsidiaries’ defined benefit retirement plans’ assets generated a loss, including investment management fees, of 7.7%. The market value of the defined benefit retirement plan’s assets as of March 31, 2008 was $0.9 billion compared to $1.0 billion at December 31, 2007, a decline of approximately $85 million.

The components of net periodic benefit cost were as follows:


	Pension benefits						Other benefits
Three months ended March 31	2008			2007			2008			2007
(in thousands)
Service cost	$	6,533		$	6,331		$	1,135		$	1,200
Interest cost		13,445			12,822			2,755			2,787
Expected return on plan assets		(16,251	)		(15,224	)		(2,695	)		(2,257	)
Amortization of unrecognized transition obligation		—			—			782			782
Amortization of prior service gain		(191	)		(190	)		—			—
Recognized actuarial loss		1,645			2,616			—			—

Net periodic benefit cost		5,181			6,355			1,977			2,512
Impact of PUC D&Os		1,657			—			193			—

Net periodic benefit cost (adjusted for impact of PUC D&Os)	$	6,838		$	6,355		$	2,170		$	2,512

HECO and its subsidiaries recorded retirement benefits expense of $7 million in each of the first quarters of 2008 and 2007. The electric utilities charged a portion of the net periodic benefit costs to plant.

In HELCO’s 2006, HECO’s 2007 and MECO’s 2007 test year rate cases, the utilities and the Consumer Advocate proposed adoption of pension and postretirement benefits other than pensions (OPEB) tracking mechanisms, which are intended to smooth the impact to ratepayers of potential fluctuations in pension and OPEB costs. Under the tracking mechanisms, costs determined under SFAS Nos. 87 and 106, as amended, that are over/under amounts allowed in rates are charged/credited to a regulatory asset/liability. The regulatory asset/liability for each utility will be amortized over 5 years beginning with the respective utility’s next rate case.

The pension tracking mechanisms generally require the electric utilities to fund only the minimum level required under the law until the existing pension assets are reduced to zero, at which time the electric utilities would make contributions to the pension trust in the amount of the actuarially calculated net periodic pension costs, except when limited by the ERISA minimum contribution requirements or the maximum contribution limitation on deductible contributions imposed by the Internal Revenue code. The OPEB tracking mechanisms generally require the electric utilities to make contributions to the OPEB trust in the amount of the actuarially calculated net periodic benefit costs.

A pension funding study was filed in the HECO rate case in May 2007. The conclusions in the study were consistent with the funding practice proposed with the pension tracking mechanism.

In its 2007 interim decisions for HELCO’s 2006, HECO’s 2007 and MECO’s 2007 test year rate cases, the PUC approved the adoption of the proposed pension and OPEB tracking mechanisms on an interim basis (subject to the PUC’s final decision and orders (D&Os)) and established the amount of net periodic benefit costs to be recovered in rates by each utility.

Under HELCO’s interim order, a regulatory asset (representing HELCO’s $12.8 million prepaid pension asset as of December 31, 2006 prior to the adoption of SFAS No. 158) was allowed to be recovered (and is being amortized) over a period of five years and was allowed to be included in HELCO’s rate base, net of deferred income taxes. In the interim PUC decisions in HECO’s and MECO’s 2007 test year rate cases, their pension assets ($51 million and $1 million, respectively, as of December 31, 2007) were not included in their rate bases and amortization of the pension assets was not included as part of the pension tracking mechanisms adopted in the proceedings on an interim basis. The issue of whether to amortize HECO’s prepaid pension asset, if allowed to be included in rate base by the PUC, has been deferred until HECO’s next rate case proceeding.

(5) Commitments and contingencies

Interim increases

On April 4, 2007, the PUC issued an interim D&O in HELCO’s 2006 test year rate case granting a general rate increase on the island of Hawaii of 7.58%, or $24.6 million, which was implemented on April 5, 2007.

On October 22, 2007, the PUC issued, and HECO immediately implemented, an interim D&O in HECO’s 2007 test year rate case, granting HECO an increase of $69.997 million in annual revenues over current effective rates at the time of the interim decision.

On December 21, 2007, the PUC issued, and MECO immediately implemented, an interim D&O in MECO’s 2007 test year rate case, granting MECO an increase of $13.2 million in annual revenues, or a 3.7% increase.

As of March 31, 2008, HECO and its subsidiaries had recognized $72 million of revenues with respect to interim orders ($15 million related to interim orders regarding certain integrated resource planning costs and $57 million related to interim orders with respect to interim surcharges to recover general rate increase requests.)

Energy cost adjustment clauses

On June 19, 2006, the PUC issued an order in HECO’s 2005 test year rate case indicating that the record in the pending case had not been developed for the purpose of addressing the factors in Act 162, signed into law by the Governor of Hawaii on June 2, 2006. Act 162 states that any automatic fuel rate adjustment clause requested by a public utility in an application filed with the PUC shall be designed, as determined in the PUC’s discretion, to (1) fairly share the risk of fuel cost changes between the public utility and its customers, (2) provide the public utility with sufficient incentive to reasonably manage or lower its fuel costs and encourage greater use of renewable energy, (3) allow the public utility to mitigate the risk of sudden or frequent fuel cost changes that cannot otherwise reasonably be mitigated through other commercially available means,

such as through fuel hedging contracts, (4) preserve, to the extent reasonably possible, the public utility’s financial integrity, and (5) minimize, to the extent reasonably possible, the public utility’s need to apply for frequent applications for general rate increases to account for the changes to its fuel costs. While the PUC already had reviewed the automatic fuel rate adjustment clause in rate cases, Act 162 required that these five specific factors be addressed in the record. In May 2008, the PUC issued a final D&O in HECO’s 2005 test year rate case in which the PUC stated it would not require the parties in the rate case proceeding to file a stipulated procedural schedule on this issue, but that it expects HECO and HELCO to develop information relating to the Act 162 factors for examination during their next rate case proceedings.

The ECAC provisions of Act 162 were reviewed in the HELCO rate case based on a 2006 test year and are being reviewed in the HECO and MECO rate cases based on 2007 test years. In the HELCO 2006 test year rate case, the filed testimony of the Consumer Advocate’s consultant concluded that HELCO’s ECAC provides a fair sharing of the risks of fuel cost changes between HELCO and its ratepayers in a manner that preserves the financial integrity of HELCO without the need for frequent rate filings. On April 4, 2007, the PUC issued an interim D&O in the HELCO 2006 test year rate case which reflected the continuation of HELCO’s ECAC, consistent with a settlement agreement reached between HELCO and the Consumer Advocate.

In an order issued on August 24, 2007, the PUC added as an issue to be addressed in HECO’s 2007 test year rate case whether HECO’s ECAC complies with the requirements of Act 162 as codified in the Hawaii Revised Statutes. On September 6, 2007, HECO, the Consumer Advocate and the federal Department of Defense (DOD) (the Parties) executed and filed an agreement on most of the issues in HECO’s 2007 test year rate case proceeding. In the settlement agreement, the Parties agreed that the ECAC should continue in its present form for purposes of an interim rate increase and stated that they are continuing discussions with respect to the final design of the ECAC to be proposed for approval in the final D&O in this proceeding. On October 22, 2007, the PUC issued an interim D&O in HECO’s 2007 test year rate case which reflected the continuation of HECO’s ECAC for purposes of the interim increase, consistent with the agreement reached among the Parties. The Parties will file proposed findings of fact and conclusions of law on all issues in this proceeding, including the ECAC, and the schedule for that filing is being determined. The Parties have agreed that their resolution of the ECAC issue will not affect their agreement regarding revenue requirements in the proceeding. Management cannot predict the ultimate effect of the required Act 162 analysis on the continuation of the electric utilities’ existing ECACs.

In an order issued on June 19, 2007, the PUC approved a procedural order for MECO’s 2007 test year rate case and required MECO and the Consumer Advocate (the parties) to address an additional issue of whether MECO’s ECAC complies with the requirements of Act 162 as codified in the Hawaii Revised Statutes. In its direct testimony, the Consumer Advocate concluded that the ECAC’s fixed efficiency factors are an effective means of sharing the operating and performance risks between MECO’s ratepayers and shareholders and that MECO’s ECAC provides a fair sharing of the risks of fuel cost changes between MECO and its ratepayers in a manner that preserves the financial integrity of MECO without the need for frequent rate filings. On December 7, 2007, the parties filed a stipulated settlement letter for this proceeding in which the parties agreed, among other things, that no further changes are required to MECO’s ECAC in order to comply with the requirements of Act 162. On December 21, 2007 the PUC issued an interim D&O in MECO’s 2007 test year rate case which reflected the continuation of MECO’s ECAC for purposes of the interim increase, consistent with the agreement reached among the parties.

On April 23, 2007, the PUC issued an order denying HECO’s proposal to recover $2.4 million, including revenue taxes, of distributed generation fuel and trucking and low sulfur fuel oil (LFSO) trucking costs since January 1, 2006 through the reconciliation process for the ECAC. However, the PUC allowed HECO to establish and implement a new and separate interim surcharge to recover its additional DG and LFSO costs on a going forward basis. HECO implemented an interim surcharge to recover such costs incurred from May 1, 2007.

HELCO generating units

In 1991, HELCO began planning to meet increased demand for electricity forecast for 1994. HELCO planned to install at its Keahole power plant two 20 MW combustion turbines (CT-4 and CT-5), followed by an 18 MW heat recovery steam generator (ST-7), at which time the units would be converted to a 56 MW (net) dual-train combined-cycle unit. There were a number of environmental and other permitting

challenges to construction of the units, including several lawsuits, which resulted in significant delays. However, in 2003, all but one of the parties actively opposing the plant expansion project entered into a settlement agreement with HELCO and several Hawaii regulatory agencies intended in part to permit HELCO to complete CT-4 and CT-5. The settlement agreement required HELCO to undertake a number of actions, which have been completed or are ongoing. As a result of the final resolution of various proceedings due primarily to the Settlement Agreement, there are no pending lawsuits involving the project.

CT-4 and CT-5 became operational in mid-2004 and additional noise mitigation work is ongoing to ensure compliance with the applicable night-time noise standard. Currently, HELCO can operate CT-4 and CT-5 as required to meet its system needs.

HELCO has commenced engineering, design and certain construction work for ST-7 and anticipates an in-service date in mid-2009. As of March 31, 2008, HELCO’s cost estimate for ST-7 was $92 million (of which $19 million had been incurred) and outstanding commitments for materials, equipment and outside services totaled $28 million, a substantial portion of which are subject to cancellation charges.

CT-4 and CT-5 costs incurred and allowed. HELCO’s capitalized costs for CT-4 and CT-5 and related supporting infrastructure amounted to $110 million. HELCO sought recovery of these costs as part of its 2006 test year rate case.

In March 2007, HELCO and the Consumer Advocate reached a settlement of the issues in the 2006 rate case proceeding, subject to PUC approval. Under the settlement, HELCO agreed to write-off approximately $12 million of the costs relating to CT-4 and CT-5, resulting in an after-tax charge to net income in the first quarter of 2007 of $7 million (included in “Other, net” under “Other income (loss)” on HECO’s consolidated statement of income).

In April 2007, the PUC issued an interim D&O granting HELCO a 7.58% increase in rates, which D&O reflected the agreement to write-off $12 million of the CT-4 and CT-5 costs. However, the interim D&O does not commit the PUC to accept any of the amounts in the interim increase in its final D&O.

If it becomes probable that the PUC will disallow for rate-making purposes additional CT-4 and CT-5 costs in its final D&O or disallow any ST-7 costs, HELCO will be required to record an additional write-off.

East Oahu Transmission Project (EOTP)

HECO transmits bulk power to the Honolulu/East Oahu area over two major transmission corridors (Northern and Southern). HECO had planned to construct a partial underground/partial overhead 138 kilovolt (kV) line from the Kamoku substation to the Pukele substation, which serves approximately 16% of Oahu’s electrical load, including Waikiki, in order to close the gap between the Southern and Northern corridors and provide a third transmission line to the Pukele substation. In total, this additional transmission capacity would benefit an area that comprises approximately 56% of the power demand on Oahu. However, in June 2002, an application for a permit which would have allowed construction in the originally planned route through conservation district lands was denied.

HECO continued to believe that the proposed reliability project (the East Oahu Transmission Project) was needed and, in December 2003, filed an application with the PUC requesting approval to commit funds (currently estimated at $74 million; see costs incurred below) for a revised EOTP using a 46 kV system. In March 2004, the PUC granted intervener status to an environmental organization and three elected officials (collectively treated as one party), and a more limited participant status to four community organizations. The environmental review process for the revised EOTP was completed and the PUC issued a Finding of No Significant Impact in April 2005.

In written testimony filed in June 2005, the consultant for the Consumer Advocate contended that HECO should always have planned for a project using only the 46 kV system and recommended that HECO be required to expense the $12 million incurred prior to the denial in 2002 of the approval necessary for the partial underground/partial overhead 138 kV line, and the related allowance for funds used during construction (AFUDC) of $5 million. In rebuttal testimony filed in August 2005, HECO contested the consultant’s recommendation, emphasizing that the originally proposed 138 kV line would have been a more comprehensive and robust solution to the transmission concerns the project addressed. The PUC held an evidentiary hearing on HECO’s application in November 2005, and post-hearing briefing was completed in March 2006. Just prior to the November 2005 evidentiary hearing, the PUC approved that part of a stipulation between HECO and the Consumer Advocate providing that (i) this proceeding should determine whether HECO should be given approval to expend funds for

the EOTP, but with the understanding that no part of the EOTP costs may be recovered from ratepayers unless and until the PUC grants HECO recovery in a rate case (which is consistent with other projects) and (ii) the issue as to whether the pre-2003 planning and permitting costs, and related AFUDC, should be included in the project costs is reserved to, and may be raised in, the next HECO rate case (or other proceeding) in which HECO seeks approval to recover the EOTP costs. In October 2007, the PUC issued a final D&O approving HECO’s request to expend funds for a revised EOTP using a 46 kV system, but stating that the issue of recovery of the EOTP costs would be determined in a subsequent rate case, after the project is installed and in service.

Subject to obtaining other construction permits, HECO plans to construct the revised project, none of which is in conservation district lands, in two phases. The first phase is currently projected to be completed in 2010 and the projected completion date of the second phase is being evaluated.

As of March 31, 2008, the accumulated costs recorded for the EOTP amounted to $34 million, including (i) $12 million of planning and permitting costs incurred prior to 2003, (ii) $6 million of planning and permitting costs incurred after 2002 and (iii) $16 million for AFUDC. Management believes no adjustment to project costs is required as of March 31, 2008. However, if it becomes probable that the PUC will disallow some or all of the incurred costs for rate-making purposes, HECO may be required to write off a material portion or all of the project costs incurred in its efforts to put the project into service whether or not it is completed.

Environmental regulation

HEI and its subsidiaries are subject to environmental laws and regulations that regulate the operation of existing facilities, the construction and operation of new facilities and the proper cleanup and disposal of hazardous waste and toxic substances.

HECO, HELCO and MECO, like other utilities, periodically identify petroleum or other chemical releases into the environment associated with current operations and report and take action on these releases when and as required by applicable law and regulations. Except as otherwise disclosed herein, the Company believes the costs of responding to its subsidiaries’ releases identified to date will not have a material adverse effect, individually or in the aggregate, on the Company’s or consolidated HECO’s financial statements.

Additionally, current environmental laws may require HEI and its subsidiaries to investigate whether releases from historical operations may have contributed to environmental impacts, and, where appropriate, respond to such releases, even if they were not inconsistent with law or standard industrial practices prevailing at the time when they occurred. Such releases may involve area-wide impacts contributed to by multiple potentially responsible parties.

Honolulu Harbor investigation. In 1995, the Department of Health of the State of Hawaii (DOH) issued letters indicating that it had identified a number of parties, including HECO, who appeared to be potentially responsible for historical subsurface petroleum contamination and/or operated their facilities upon petroleum-contaminated land at or near Honolulu Harbor in the Iwilei district of Honolulu. Certain of the identified parties formed a work group to determine the nature and extent of any contamination and appropriate response actions, as well as to identify additional potentially responsible parties (PRPs). The U.S. Environmental Protection Agency (EPA) became involved in the investigation in June 2000. Later in 2000, the DOH issued notices to additional PRPs. The parties in the work group and some of the new PRPs (collectively, the Participating Parties) entered into a joint defense agreement and signed a voluntary response agreement with the DOH. The Participating Parties agreed to fund investigative and remediation work using an interim cost allocation method (subject to a final allocation) and have organized a limited liability company to perform the work.

In 2001, management developed and expensed a preliminary estimate of HECO’s share of costs for continuing investigative work, remedial activities and monitoring at the Iwilei Unit of $1.1 million. Since 2001, subsurface investigation and assessment have been conducted and several preliminary oil removal tasks have been performed at the Iwilei Unit in accordance with notices of interest issued by the EPA and the DOH.

In 2003, HECO and other Participating Parties with active operations in the Iwilei area investigated their operations to evaluate whether their facilities were active sources of petroleum contamination in the area. HECO’s investigation concluded that its facilities were not then releasing petroleum. Routine maintenance and inspections of HECO facilities since then confirm that they are not currently releasing petroleum.

During 2006 and the beginning of 2007, the Participating Parties developed analyses of various remedial alternatives for two of the four remedial subunits of the Iwilei Unit. Draft analyses of remedial alternatives for the remaining two subunits of the Iwilei Unit were prepared in late 2007 and early 2008. The DOH will use the analyses to make a final determination of which remedial alternatives the PRPs will be required to implement. The DOH was scheduled to complete the final remediation determinations for all remedial subunits of the Iwilei Unit by the end of the first quarter of 2008, but has only approved two to date. HECO management developed an estimate of HECO’s share of the costs associated with implementing the Participating Parties’ recommended remedial approaches for the two subunits covered by the analyses of $1.2 million, which was expensed in 2006. Subsequently, based on the estimated costs for the remaining two subunits, as well as updated estimates for total remediation costs, HECO management expensed an additional $0.6 million in the third quarter of 2007. In April 2008, the Participating Parties’ consultant issued for review a draft Iwilei District Program Cost Estimate Report, a 30-year forecast of future program and remediation costs for all four subunits. Based on this draft report, in the first quarter of 2008, HECO accrued $0.4 million for additional future remediation costs. As of March 31, 2008, the remaining accrual (amounts expensed less amounts expended) related to the Iwilei Unit was $2 million.

Because (1) the full scope of additional investigative work, remedial activities and monitoring remain to be determined, (2) the final cost allocation method among the PRPs has not yet been established and (3) management cannot estimate the costs to be incurred (if any) for the sites other than the Iwilei Unit (such as its Honolulu power plant, which is located in the “Downtown” unit of the Honolulu Harbor site), the cost estimate may be subject to significant change and additional material investigative and remedial costs may be incurred.

Regional Haze Rule amendments. In June 2005, the EPA finalized amendments to the July 1999 Regional Haze Rule that require emission controls known as best available retrofit technology (BART) for industrial facilities emitting air pollutants that reduce visibility in National Parks by causing or contributing to regional haze. States were to adopt BART implementation plans and schedules in accordance with the amended regional haze rule by December 2007. After Hawaii adopts its plan, which it has not done to date, HECO, HELCO and MECO will evaluate the plan’s impacts, if any. If any of the utilities’ generating units are ultimately required to install post-combustion control technologies to meet BART emission limits, the resulting capital and operation and maintenance costs could be significant.

Hazardous Air Pollutant (HAP) Control. In February 2008, the federal Circuit Court of Appeals for the District of Columbia vacated the EPA’s Delisting Rule, which had removed coal- and oil-fired electric generating units (EGUs) from the list of sources requiring control under Section 112 of the Clean Air Act. The EPA has filed for a rehearing. If the ruling stands, however, the EPA will be required to develop Maximum Achievable Control Technology (MACT) standards for oil-fired EGU HAP emissions, including nickel compounds. Depending on the MACT standards developed (and the success of a potential challenge, after the MACT standards are issued, that the EPA inappropriately listed oil-fired EGUs initially), costs to comply with the standards could be significant. The Company is currently evaluating its options regarding potential MACT standards for applicable HECO steam units.

Clean Water Act. Section 316(b) of the federal Clean Water Act requires that the EPA ensure that existing power plant cooling water intake structures reflect the best technology available for minimizing adverse environmental impacts. Effective September 9, 2004, the EPA issued a rule, which established location and technology-based design, construction and capacity standards for existing cooling water intake structures. These standards applied to HECO’s Kahe, Waiau and Honolulu generating stations, unless the utility could demonstrate that at each facility implementation of these standards would result in costs either significantly higher than projected costs the EPA considered in establishing the standards for the facility (cost-cost test) or significantly greater than the benefits of meeting the standards (cost-benefit test). In either case, the EPA would then make a case-by-case determination of an appropriate performance standard. The regulation also would have allowed restoration of aquatic organism populations in lieu of meeting the standards. The rule required covered facilities to demonstrate compliance by March 2008. HECO had retained a consultant that was developing a cost effective compliance strategy and a preliminary assessment of technologies and operational measures under the rule.

On January 25, 2007, the U.S. Circuit Court for the Second Circuit issued a decision in Riverkeeper, Inc. v. EPA that remanded for further consideration and proceedings significant portions of the rule and found other portions of the rule to be impermissible. In particular, the Court determined that restoration and the cost-benefit test provisions of the rule were impermissible under the Clean Water Act. It also remanded the best technology available determination to permit the EPA to provide a reasoned explanation for its decision or a new determination. It remanded the cost-cost test for the EPA’s further consideration based on the best technology available determination and to afford adequate notice. On July 9, 2007, the EPA formally suspended the rule. In the suspension announcement, the EPA provided guidance to federal and state permit writers that they should use their “best professional judgment” in determining permit conditions regarding cooling water intake requirements at existing power plants. Currently, this guidance does not affect the HECO facilities subject to the cooling water intake requirements because none of the facilities are subject to permit renewal until mid-2009. On April 14, 2008, the U. S. Supreme Court agreed to review the Court of Appeal’s decision. If the Court of Appeal’s decision stands, however, the ruling reduces the compliance options available to HECO. Due to the uncertainties regarding the Court of Appeal’s decision, management is unable to predict which compliance options, some of which could entail significant capital expenditures to implement, will be applicable to its facilities.

Collective bargaining agreements

As of March 31, 2008, approximately 58% of the electric utilities’ employees were members of the International Brotherhood of Electrical Workers, AFL-CIO, Local 1260, Unit 8, which is the only union representing employees of the Company. On March 1, 2008, members of the union ratified new collective bargaining and benefit agreements with HECO, HELCO and MECO. The new agreements cover a three-year term, from November 1, 2007 to October 31, 2010, and provide for non-compounded wage increases of 3.5% effective November 1, 2007, 4% effective January 1, 2009 and 4.5% effective January 1, 2010.

Limited insurance

HECO and its subsidiaries purchase insurance coverages to protect themselves against loss or damage to their properties against claims made by third-parties and employees. However, the protection provided by such insurance is limited in significant respects and, in some instances, there is no coverage. HECO, HELCO and MECO’s overhead and underground transmission and distribution systems (with the exception of substation buildings and contents) have a replacement value roughly estimated at $4 billion and are uninsured. Similarly, HECO, HELCO and MECO have no business interruption insurance. If a hurricane or other uninsured catastrophic natural disaster were to occur, and if the PUC were not to allow the utilities to recover from ratepayers restoration costs and revenues lost from business interruption, their results of operations and financial condition could be materially adversely impacted. Also, certain insurance has substantial “deductibles”, limits on the maximum amounts that may be recovered and exclusions or limitations of coverage for claims related to certain perils. If a series of losses occurred, such as from a series of lawsuits in the ordinary course of business, each of which were subject to the deductible amount, or if the maximum limit of the available insurance were substantially exceeded, HECO, HELCO and MECO could incur losses in amounts that would have a material adverse effect on its results of operations and financial condition.

(6) Cash flows

Supplemental disclosures of cash flow information

For the three months ended March 31, 2008 and 2007, HECO and its subsidiaries paid interest amounting to $9 million and $11 million, respectively.

For the three months ended March 31, 2008 and 2007, HECO and its subsidiaries paid income taxes amounting to $33 million and $6 million, respectively. The significant increase in taxes paid in the first quarter of 2008 versus 2007 was due primarily to the difference in the taxes due with the extensions for tax years 2007 and 2006. Estimated taxes paid during the year are based on the timing of taxable income generated during the year. In 2007, taxable income was significantly larger in the fourth quarter when compared to the first three quarters, resulting in a larger portion of the 2007 taxes paid with the extension filed in the first quarter of 2008.

Supplemental disclosure of noncash activities

The allowance for equity funds used during construction, which was charged to construction in progress as part of the cost of electric utility plant, amounted to $1.9 million and $1.2 million for the three months ended March 31, 2008 and 2007, respectively.

(7) Recent accounting pronouncements and interpretations

For a discussion of recent accounting pronouncements and interpretations, see Note 9 of HEI’s “Notes to Consolidated Financial Statements.”

(8) Subsequent event

On May 1, 2008, the PUC issued the final D&O for HECO’s 2005 test year rate case, which was consistent with the stipulated revised results of operations filed by the parties on March 28, 2008. The final D&O authorized an increase of $44.9 million in annual revenues, or a 3.67% increase (or a net increase of $33 million or 2.7%), based on a 10.7% return on average common equity and an 8.66% return on rate base of $1.060 billion. As a result of the final D&O, HECO will be required to refund to customers certain differences between the amount that HECO has collected pursuant to the interim decision and the increase authorized in the final decision, retroactive to September 28, 2005 (the date the interim increase became effective), with interest through the refund period. Customer refunds, including interest, of approximately $16 million, which have been fully accrued (except for interest from April 1, 2008 to the time of the refund), will be reflected as a credit to customer bills, following approval by the PUC of HECO’s refund plan.

(9) Reconciliation of electric utility operating income per HEI and HECO consolidated statements of income


Three months ended March 31	2008			2007
(in thousands)
Operating income from regulated and nonregulated activities before income taxes (per HEI consolidated statements of income)	$	50,983		$	12,992
Deduct:
Income taxes on regulated activities		(15,378	)		(4,506	)
Revenues from nonregulated activities		(1,395	)		(881	)
Add:
Expenses from nonregulated activities		456			11,898

Operating income from regulated activities after income taxes (per HECO consolidated statements of income)	$	34,666		$	19,503

(10) Consolidating financial information

HECO is not required to provide separate financial statements or other disclosures concerning HELCO and MECO to holders of the 2004 Debentures issued by HELCO and MECO to Trust III since all of their voting capital stock is owned, and their obligations with respect to these securities have been fully and unconditionally guaranteed, on a subordinated basis, by HECO. Consolidating information is provided below for these and other HECO subsidiaries for the periods ended and as of the dates indicated. As of the dates and for the periods presented for 2007, there were no amounts for Uluwehiokama Biofuels Corp., a newly-formed, unregulated HECO subsidiary.

HECO also unconditionally guarantees HELCO’s and MECO’s obligations (a) to the State of Hawaii for the repayment of principal and interest on Special Purpose Revenue Bonds issued for the benefit of HELCO and MECO and (b) relating to the trust preferred securities of Trust III. Also, see Note 2. HECO is also obligated, after the satisfaction of its obligations on its own preferred stock, to make dividend, redemption and liquidation payments on HELCO’s and MECO’s preferred stock if the respective subsidiary is unable to make such payments.

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidating Statement of Income (unaudited)

Three months ended March 31, 2008


(in thousands)	HECO			HELCO		MECO		RHI		UBC		Reclassifications and eliminations		HECO consolidated
Operating revenues	$	414,513		105,192		102,789		—		—		—		$	622,494

Operating expenses
Fuel oil		172,152		24,046		53,345		—		—		—			249,543
Purchased power		99,779		41,359		9,657		—		—		—			150,795
Other operation		37,969		8,894		8,716		—		—		—			55,579
Maintenance		15,276		4,705		3,632		—		—		—			23,613
Depreciation		20,552		7,834		7,048		—		—		—			35,434
Taxes, other than income taxes		38,448		9,619		9,419		—		—		—			57,486
Income taxes		9,494		2,587		3,297		—		—		—			15,378

		393,670		99,044		95,114		—		—		—			587,828

Operating income		20,843		6,148		7,675		—		—		—			34,666

Other income
Allowance for equity funds used during construction		1,502		255		144		—		—		—			1,901
Equity in earnings of subsidiaries		9,301		—		—		—		—		(9,301	)		—
Other, net		1,411		267		58		(23	)	(254	)	(363	)		1,096

		12,214		522		202		(23	)	(254	)	(9,664	)		2,997

Income (loss) before interest and other charges		33,057		6,670		7,877		(23	)	(254	)	(9,664	)		37,663

Interest and other charges
Interest on long-term debt		7,525		1,952		2,247		—		—		—			11,724
Amortization of net bond premium and expense		400		107		124		—		—		—			631
Other interest charges		862		405		82		—		—		(363	)		986
Allowance for borrowed funds used during construction		(585	)	(117	)	(60	)	—		—		—			(762	)
Preferred stock dividends of subsidiaries		—		—		—		—		—		229			229

		8,202		2,347		2,393		—		—		(134	)		12,808

Income (loss) before preferred stock dividends of HECO		24,855		4,323		5,484		(23	)	(254	)	(9,530	)		24,855
Preferred stock dividends of HECO		270		134		95		—		—		(229	)		270

Net income (loss) for common stock	$	24,585		4,189		5,389		(23	)	(254	)	(9,301	)	$	24,585

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidating Statement of Income (unaudited)

Three months ended March 31, 2007


(in thousands)	HECO			HELCO		MECO		RHI		Reclassifications and eliminations		HECO consolidated
Operating revenues	$	288,690		78,809		79,298		—		—		$	446,797

Operating expenses
Fuel oil		101,062		20,038		38,829		—		—			159,929
Purchased power		78,300		27,062		6,154		—		—			111,516
Other operation		33,485		7,166		6,542		—		—			47,193
Maintenance		16,378		5,568		5,390		—		—			27,336
Depreciation		19,739		7,524		7,004		—		—			34,267
Taxes, other than income taxes		27,702		7,363		7,482		—		—			42,547
Income taxes		1,970		538		1,998		—		—			4,506

		278,636		75,259		73,399		—		—			427,294

Operating income		10,054		3,550		5,899		—		—			19,503

Other income
Allowance for equity funds used during construction		1,087		65		80		—		—			1,232
Equity in earnings of subsidiaries		(2,937	)	—		—		—		2,937			—
Other, net		1,485		(6,863	)	6		(15	)	(811	)		(6,198	)

		(365	)	(6,798	)	86		(15	)	2,126			(4,966	)

Income (loss) before interest and other charges		9,689		(3,248	)	5,985		(15	)	2,126			14,537

Interest and other charges
Interest on long-term debt		7,125		1,857		2,514		—		—			11,496
Amortization of net bond premium and expense		348		99		99		—		—			546
Other interest charges		2,022		757		173		—		(811	)		2,141
Allowance for borrowed funds used during construction		(529	)	(31	)	(38	)	—		—			(598	)
Preferred stock dividends of subsidiaries		—		—		—		—		229			229

		8,966		2,682		2,748		—		(582	)		13,814

Income (loss) before preferred stock dividends of HECO		723		(5,930	)	3,237		(15	)	2,708			723
Preferred stock dividends of HECO		270		134		95		—		(229	)		270

Net income (loss) for common stock	$	453		(6,064	)	3,142		(15	)	2,937		$	453

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidating Balance Sheet (unaudited)

March 31, 2008


(in thousands)	HECO			HELCO		MECO		RHI	UBC	Reclassifications and Eliminations		HECO Consolidated
Assets
Utility plant, at cost
Land	$	28,831		4,982		4,346		—	—	—		$	38,159
Plant and equipment		2,521,374		835,187		804,169		—	—	—			4,160,730
Less accumulated depreciation		(998,826	)	(331,639	)	(340,669	)	—	—	—			(1,671,134	)
Plant acquisition adjustment, net		—		—		28		—	—	—			28
Construction in progress		114,743		39,088		11,189		—	—	—			165,020

Net utility plant		1,666,122		547,618		479,063		—	—	—			2,692,803

Investment in wholly owned subsidiaries, at equity		417,551		—		—		—	—	(417,551	)		—

Current assets
Cash and equivalents		10,495		3,043		1,504		170	38	—			15,250
Advances to affiliates		43,000		—		500		—	—	(43,500	)		—
Customer accounts receivable, net		102,630		27,444		23,849		—	—	—			153,923
Accrued unbilled revenues, net		77,175		17,334		15,947		—	—	—			110,456
Other accounts receivable, net		5,558		2,690		3,479		—	—	(4,721	)		7,006
Fuel oil stock, at average cost		74,033		10,116		16,991		—	—	—			101,140
Materials & supplies, at average cost		17,029		4,709		13,501		—	—	—			35,239
Prepayments and other		5,821		1,463		1,094		—	—	—			8,378

Total current assets		335,741		66,799		76,865		170	38	(48,221	)		431,392

Other long-term assets
Regulatory assets		209,195		39,627		34,676		—	—	—			283,498
Unamortized debt expense		10,355		2,403		2,567		—	—	—			15,325
Other		31,902		6,576		6,924		—	179	—			45,581

Total other long-term assets		251,452		48,606		44,167		—	179	—			344,404

	$	2,670,866		663,023		600,095		170	217	(465,772	)	$	3,468,599

Capitalization and liabilities
Capitalization
Common stock equity	$	1,121,015		206,014		211,194		159	184	(417,551	)	$	1,121,015
Cumulative preferred stock–not subject to mandatory redemption		22,293		7,000		5,000		—	—	—			34,293
Long-term debt, net		574,482		146,834		173,712		—	—	—			895,028

Total capitalization		1,717,790		359,848		389,906		159	184	(417,551	)		2,050,336

Current liabilities
Short-term borrowings-nonaffiliates		89,108		—		—		—	—	—			89,108
Short-term borrowings-affiliate		500		43,000		—		—	—	(43,500	)		—
Accounts payable		96,136		26,063		16,150		—	—	—			138,349
Interest and preferred dividends payable		11,103		3,213		3,683		—	—	(116	)		17,883
Taxes accrued		92,136		26,710		29,685		—	—	—			148,531
Other		35,583		10,116		9,986		11	33	(4,605	)		51,124

Total current liabilities		324,566		109,102		59,504		11	33	(48,221	)		444,995

Deferred credits and other liabilities
Deferred income taxes		126,548		17,639		12,010		—	—	—			156,197
Regulatory liabilities		186,031		47,619		35,240		—	—	—			268,890
Unamortized tax credits		32,749		13,042		12,790		—	—	—			58,581
Other		107,356		52,222		29,175		—	—	—			188,753

Total deferred credits and other liabilities		452,684		130,522		89,215		—	—	—			672,421

Contributions in aid of construction		175,826		63,551		61,470		—	—	—			300,847

	$	2,670,866		663,023		600,095		170	217	(465,772	)	$	3,468,599

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidating Balance Sheet (unaudited)

December 31, 2007


(in thousands)	HECO			HELCO		MECO		RHI	UBC	Reclassifications and Eliminations		HECO Consolidated
Assets
Utility plant, at cost
Land	$	28,833		4,982		4,346		—	—	—		$	38,161
Plant and equipment		2,504,389		830,237		796,600		—	—	—			4,131,226
Less accumulated depreciation		(988,732	)	(324,517	)	(333,864	)	—	—	—			(1,647,113	)
Plant acquisition adjustment, net		—		—		41		—	—	—			41
Construction in progress		114,227		26,262		10,690		—	—	—			151,179

Net utility plant		1,658,717		536,964		477,813		—	—	—			2,673,494

Investment in wholly owned subsidiaries, at equity		410,911		—		—		—	—	(410,911	)		—

Current assets
Cash and equivalents		203		3,069		773		198	435	—			4,678
Advances to affiliates		36,600		—		2,000		—	—	(38,600	)		—
Customer accounts receivable, net		98,129		26,554		21,429		—	—	—			146,112
Accrued unbilled revenues, net		82,550		16,795		14,929		—	—	—			114,274
Other accounts receivable, net		6,657		2,481		3,025		—	—	(5,248	)		6,915
Fuel oil stock, at average cost		57,289		12,494		22,088		—	—	—			91,871
Materials & supplies, at average cost		15,723		4,404		14,131		—	—	—			34,258
Prepayments and other		6,946		1,239		1,305		—	—	—			9,490

Total current assets		304,097		67,036		79,680		198	435	(43,848	)		407,598

Other long-term assets
Regulatory assets		209,034		40,663		35,293		—	—	—			284,990
Unamortized debt expense		10,555		2,458		2,622		—	—	—			15,635
Other		30,449		5,671		6,051		—	—	—			42,171

Total other long-term assets		250,038		48,792		43,966		—	—	—			342,796

	$	2,623,763		652,792		601,459		198	435	(454,759	)	$	3,423,888

Capitalization and liabilities
Capitalization
Common stock equity	$	1,110,462		201,820		208,521		182	388	(410,911	)	$	1,110,462
Cumulative preferred stock–not subject to mandatory redemption		22,293		7,000		5,000		—	—	—			34,293
Long-term debt, net		567,657		145,811		171,631		—	—	—			885,099

Total capitalization		1,700,412		354,631		385,152		182	388	(410,911	)		2,029,854

Current liabilities
Short-term borrowings-nonaffiliates		28,791		—		—		—	—	—			28,791
Short-term borrowings-affiliate		2,000		36,600		—		—	—	(38,600	)		—
Accounts payable		97,699		21,810		18,386		—	—	—			137,895
Interest and preferred dividends payable		9,774		2,370		2,738		—	—	(163	)		14,719
Taxes accrued		119,032		35,380		35,225		—	—	—			189,637
Other		41,792		9,835		11,194		16	47	(5,085	)		57,799

Total current liabilities		299,088		105,995		67,543		16	47	(43,848	)		428,841

Deferred credits and other liabilities
Deferred income taxes		130,573		17,791		13,749		—	—	—			162,113
Regulatory liabilities		180,725		46,460		34,421		—	—	—			261,606
Unamortized tax credits		32,664		12,941		12,814		—	—	—			58,419
Other		103,876		51,972		27,470		—	—	—			183,318

Total deferred credits and other liabilities		447,838		129,164		88,454		—	—	—			665,456

Contributions in aid of construction		176,425		63,002		60,310		—	—	—			299,737

	$	2,623,763		652,792		601,459		198	435	(454,759	)	$	3,423,888

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidating Statement of Changes in Stockholder’s Equity (unaudited)

Three months ended March 31, 2008


(in thousands)	HECO			HELCO		MECO		RHI		UBC		Reclassifications and eliminations		HECO consolidated
Balance, December 31, 2007	$	1,110,462		201,820		208,521		182		388		(410,911	)	$	1,110,462
Comprehensive income:
Net income		24,585		4,189		5,389		(23	)	(254	)	(9,301	)		24,585
Retirement benefit plans:
Amortization of net loss, prior service gain and transition obligation included in net periodic benefit cost, net of taxes		1,366		190		153		—		—		(343	)		1,366
Less: reclassification adjustment for impact of D&Os of the PUC included in regulatory asset, net of taxes		(1,309	)	(185	)	(147	)	—		—		332			(1,309	)

Comprehensive income (loss)		24,642		4,194		5,395		(23	)	(254	)	(9,312	)		24,642
Common stock dividends		(14,089	)	—		(2,722	)	—		—		2,722			(14,089	)
Issuance of common stock		—		—		—		—		50		(50	)		—

Balance, March 31, 2008	$	1,121,015		206,014		211,194		159		184		(417,551	)	$	1,121,015

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidating Statement of Changes in Stockholder’s Equity (unaudited)

Three months ended March 31, 2007


(in thousands)	HECO			HELCO		MECO		RHI		Reclassifications and eliminations		HECO consolidated
Balance, December 31, 2006	$	958,203		175,099		192,231		265		(367,595	)	$	958,203
Comprehensive income:
Net income		453		(6,064	)	3,142		(15	)	2,937			453
Defined benefit retirement plans—amortization of net loss, prior service gain and transition obligation included in net periodic benefit cost, net of tax benefits		1,961		263		219		—		(482	)		1,961

Comprehensive income (loss)		2,414		(5,801	)	3,361		(15	)	2,455			2,414

Adjustment to initially apply FIN 48, net of tax benefits		(620	)	(32	)	(42	)	—		74			(620	)

Balance, March 31, 2007	$	959,997		169,266		195,550		250		(365,066	)	$	959,997

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidating Statement of Cash Flows (unaudited)

Three months ended March 31, 2008


(in thousands)	HECO			HELCO		MECO		RHI		UBC		Reclassifications and eliminations		HECO Consolidated
Cash flows from operating activities
Income before preferred stock dividends of HECO	$	24,855		4,323		5,484		(23	)	(254	)	(9,530	)	$	24,855
Adjustments to reconcile income before preferred stock dividends of HECO to net cash provided by operating activities:
Equity in earnings		(9,326	)	—		—		—		—		9,301			(25	)
Common stock dividends received from subsidiaries		2,747		—		—		—		—		(2,722	)		25
Depreciation of property, plant and equipment		20,552		7,834		7,048		—		—		—			35,434
Other amortization		792		197		1,174		—		—		—			2,163
Deferred income taxes		(4,055	)	(154	)	(1,744	)	—		—		—			(5,953	)
Tax credits, net		264		142		29		—		—		—			435
Allowance for equity funds used during construction		(1,502	)	(255	)	(144	)	—		—		—			(1,901	)
Changes in assets and liabilities:
Increase in accounts receivable		(3,402	)	(1,099	)	(2,874	)	—		—		(527	)		(7,902	)
Decrease (increase) in accrued unbilled revenues		5,375		(539	)	(1,018	)	—		—		—			3,818
Decrease (increase) in fuel oil stock		(16,744	)	2,378		5,097		—		—		—			(9,269	)
Decrease (increase) in materials and supplies		(1,306	)	(305	)	630		—		—		—			(981	)
Decrease (increase) in regulatory assets		(1,765	)	151		(712	)	—		—		—			(2,326	)
Increase (decrease) in accounts payable		(1,563	)	4,253		(2,236	)	—		—		—			454
Increase in taxes accrued		(26,896	)	(8,670	)	(5,540	)	—		—		—			(41,106	)
Changes in other assets and liabilities		7,286		850		884		(5	)	(14	)	527			9,528

Net cash provided by (used in) operating activities		(4,688	)	9,106		6,078		(28	)	(268	)	(2,951	)		7,249

Cash flows from investing activities
Capital expenditures		(23,006	)	(17,819	)	(6,904	)	—		—		—			(47,729	)
Contributions in aid of construction		1,629		1,406		801		—		—		—			3,836
Advances from (to) affiliates		(6,400	)	—		1,500		—

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