Edgar Filing: HAWAIIAN ELECTRIC INDUSTRIES INC

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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 June 30, 2008

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

HAWAIIAN ELECTRIC INDUSTRIES, INC.

Exact Name of Registrant as Specified in Its Charter


Commission File Number		I.R.S. Employer Identification No.
1-8503		99-0208097

and Principal Subsidiary

HAWAIIAN ELECTRIC COMPANY, INC.

Exact Name of Registrant as Specified in Its Charter


Commission File Number		I.R.S. Employer Identification No.
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):

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):

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 July 30, 2008
Hawaiian Electric Industries, Inc. (Without Par Value)		84,725,379 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 June 30, 2008

INDEX


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

	PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements

		Hawaiian Electric Industries, Inc. and Subsidiaries
1		Consolidated Statements of Income (unaudited) - three and six months ended June 30, 2008 and 2007
2		Consolidated Balance Sheets (unaudited) - June 30, 2008 and December 31, 2007
3		Consolidated Statements of Changes in Stockholders’ Equity (unaudited) - six months ended June 30, 2008 and 2007
4		Consolidated Statements of Cash Flows (unaudited) - six months ended June 30, 2008 and 2007
5		Notes to Consolidated Financial Statements (unaudited)

		Hawaiian Electric Company, Inc. and Subsidiaries
16		Consolidated Statements of Income (unaudited) - three and six months ended June 30, 2008 and 2007
17		Consolidated Balance Sheets (unaudited) – June 30, 2008 and December 31, 2007
18		Consolidated Statements of Changes in Common Stock Equity (unaudited) - six months ended June 30, 2008 and 2007
19		Consolidated Statements of Cash Flows (unaudited) - six months ended June 30, 2008 and 2007
20		Notes to Consolidated Financial Statements (unaudited)
38	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
38		HEI Consolidated
44		Electric Utilities
65		Bank
70	Item 3.	Quantitative and Qualitative Disclosures About Market Risk
71	Item 4.	Controls and Procedures

	PART II. OTHER INFORMATION
72	Item 1.	Legal Proceedings
72	Item 1A.	Risk Factors
72	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds
72	Item 4.	Submission of Matters to a Vote of Security Holders
73	Item 5.	Other Information
74	Item 6.	Exhibits
75	Signatures

Hawaiian Electric Industries, Inc. and Subsidiaries

Hawaiian Electric Company, Inc. and Subsidiaries

Form 10-Q - Quarter ended June 30, 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.). Former subsidiaries include ASB Service Corporation (dissolved in January 2004), ASB Realty Corporation (dissolved in May 2005) and AdCommunications, Inc. (dissolved in May 2007).

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 HEI Power Corp. (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

DBEDT		State of Hawaii Department of Business, Economic Development and Tourism

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

ECAC		Energy cost adjustment clauses

EITF		Emerging Issues Task Force

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, Renewable Hawaii, Inc., Uluwehiokama Biofuels Corp. and HECO Capital Trust III. Former subsidiaries include HECO Capital Trust I (dissolved and terminated in 2004)* and HECO Capital Trust II (dissolved and terminated in 2004). (unconsolidated subsidiaries as of January 1, 2004).

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 (other than those sold or dissolved prior to 2004) 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 wholly owned subsidiary of Hawaiian Electric Industries, Inc.

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

IPP		Independent power producer

IRP		Integrated resource plan

Kalaeloa		Kalaeloa Partners, L.P.

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

NQSO		Nonqualified stock option

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

SAR		Stock appreciation right

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, continued regulatory accounting under Statement of Financial Accounting Standards (SFAS) No. 71, “Accounting for the Effects of Certain Types of Regulation,” and the possible effects of applying Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 46R, “Consolidation of Variable Interest Entities,” and Emerging Issues Task Force (EITF) 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 June 30						Six months ended June 30
(in thousands, except per share amounts and ratio of earnings to fixed charges)	2008			2007			2008			2007
Revenues
Electric utility	$	688,121		$	492,712		$	1,312,010		$	940,390
Bank		85,950			107,526			191,794			211,986
Other		(16	)		525			(132	)		2,410

		774,055			600,763			1,503,672			1,154,786

Expenses
Electric utility		632,725			463,923			1,205,631			898,609
Bank		116,942			87,832			199,423			173,864
Other		2,786			3,699			6,270			8,463

		752,453			555,454			1,411,324			1,080,936

Operating income (loss)
Electric utility		55,396			28,789			106,379			41,781
Bank		(30,992	)		19,694			(7,629	)		38,122
Other		(2,802	)		(3,174	)		(6,402	)		(6,053	)

		21,602			45,309			92,348			73,850

Interest expense - other than on deposit liabilities and other bank borrowings		(18,186	)		(19,282	)		(37,435	)		(39,793	)
Allowance for borrowed funds used during construction		835			586			1,597			1,184
Preferred stock dividends of subsidiaries		(473	)		(473	)		(946	)		(946	)
Allowance for equity funds used during construction		2,105			1,202			4,006			2,434

Income from before income taxes		5,883			27,342			59,570			36,729
Income taxes		747			9,793			20,467			12,416

Net income	$	5,136		$	17,549		$	39,103		$	24,313

Basic earnings per common share	$	0.06		$	0.21		$	0.47		$	0.30

Diluted earnings per common share	$	0.06		$	0.21		$	0.47		$	0.30

Dividends per common share	$	0.31		$	0.31		$	0.62		$	0.62

Weighted-average number of common shares outstanding		84,052			81,907			83,762			81,679
Dilutive effect of stock-based compensation		103			217			60			227

Adjusted weighted-average shares		84,155			82,124			83,822			81,906

Ratio of earnings to fixed charges (SEC method)
Excluding interest on ASB deposits								1.75			1.44

Including interest on ASB deposits								1.52			1.29

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

Hawaiian Electric Industries, Inc. and Subsidiaries

Consolidated Balance Sheets (unaudited)


(dollars in thousands)	June 30, 2008			December 31, 2007
Assets
Cash and equivalents	$	147,774		$	145,855
Federal funds sold		10,433			64,000
Accounts receivable and unbilled revenues, net		323,011			294,447
Available-for-sale investment and mortgage-related securities		887,162			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		4,121,379			4,101,193
Property, plant and equipment, net of accumulated depreciation of $1,800,911, and $1,749,386		2,782,950			2,743,410
Regulatory assets		278,645			284,990
Other		449,998			338,405
Goodwill, net		83,080			83,080

	$	9,182,196		$	10,293,916

Liabilities and stockholders’ equity
Liabilities
Accounts payable	$	248,173		$	202,299
Deposit liabilities		4,270,470			4,347,260
Short-term borrowings - other than bank		221,952			91,780
Other bank borrowings		634,148			1,810,669
Long-term debt, net - other than bank		1,206,965			1,242,099
Deferred income taxes		162,892			155,337
Regulatory liabilities		275,835			261,606
Contributions in aid of construction		302,925			299,737
Other		527,703			573,409

		7,851,063			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: 84,646,451 shares and 83,431,513 shares		1,099,948			1,072,101
Retained earnings		212,275			225,168
Accumulated other comprehensive loss, net of tax benefits		(15,383	)		(21,842	)

		1,296,840			1,275,427

	$	9,182,196		$	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			Accumulated other comprehensive
(in thousands, except per share amounts)	Shares	Amount		earnings			loss			Total
Balance, December 31, 2007	83,432	$	1,072,101	$	225,168		$	(21,842	)	$	1,275,427
Comprehensive income:
Net income	—		—		39,103			—			39,103
Net unrealized losses on securities:
Net unrealized losses on securities arising during the period, net of tax benefits of $2,847	—		—		—			(4,312	)		(4,312	)
Less: reclassification adjustment for net realized losses included in net income, net of tax benefits of $6,915	—		—		—			10,473			10,473
Retirement benefit plans:
Amortization of net loss, prior service gain and transition obligation included in net periodic benefit cost, net of taxes of $1,848	—		—		—			2,916			2,916
Less: reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes of $1,668	—		—		—			(2,618	)		(2,618	)

Comprehensive income	—		—		39,103			6,459			45,562

Issuance of common stock, net	1,214		27,847		—			—			27,847
Common stock dividends ($0.62 per share)	—		—		(51,996	)		—			(51,996	)

Balance, June 30, 2008	84,646	$	1,099,948	$	212,275		$	(15,383	)	$	1,296,840

Balance, December 31, 2006	81,461	$	1,028,101	$	242,667		$	(175,528	)	$	1,095,240
Comprehensive income:
Net income	—		—		24,313			—			24,313
Net unrealized losses on securities arising during the period, net of tax benefits of $1,989	—		—		—			(3,012	)		(3,012	)
Retirement benefit plans - amortization of net loss, prior service cost and transition obligation included in net periodic benefit cost, net of taxes of $2,622	—		—		—			4,108			4,108

Comprehensive income	—		—		24,313			1,096			25,409

Adjustment to initially apply a PUC D&O related to defined benefit retirement plans, net of taxes of $11,595	—		—		—			18,205			18,205
Adjustment to initially apply FIN 48	—		—		(228	)		—			(228	)
Issuance of common stock, net	930		20,461		—			—			20,461
Common stock dividends ($0.62 per share)	—		—		(50,689	)		—			(50,689	)

Balance, June 30, 2007	82,391	$	1,048,562	$	216,063		$	(156,227	)	$	1,108,398

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

Hawaiian Electric Industries, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)


Six months ended June 30	2008			2007
(in thousands)
Cash flows from operating activities
Net income	$	39,103		$	24,313
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation of property, plant and equipment		75,733			74,057
Other amortization		4,203			4,576
Provision for loan losses		2,055			1,200
Writedown of utility plant		—			11,701
Deferred income taxes		(585	)		(12,120	)
Allowance for equity funds used during construction		(4,006	)		(2,434	)
Excess tax benefits from share-based payment arrangements		(613	)		(259	)
Loans receivable originated and purchased, held for sale		(114,591	)		(19,174	)
Proceeds from sale of loans receivable, held for sale		124,526			27,439
Net loss on sale of investment and mortgage-related securities		17,388			—
Changes in assets and liabilities
Increase in accounts receivable and unbilled revenues, net		(28,564	)		(2,351	)
Increase in fuel oil stock		(69,254	)		(24,148	)
Increase in accounts payable		45,874			6,436
Change in prepaid and accrued taxes		(68,490	)		(7,136	)
Changes in other assets and liabilities		(6,327	)		(2,685	)

Net cash provided by operating activities		16,452			79,415

Cash flows from investing activities
Available-for-sale investment and mortgage-related securities purchased		(376,809	)		(199,315	)
Principal repayments on available-for-sale investment and mortgage-related securities		329,669			258,625
Proceeds from sale of available-for-sale investment and mortgage-related securities		1,291,609			—
Proceeds from sale of investments		—			8,775
Net increase in loans held for investment		(29,359	)		(114,094	)
Capital expenditures		(101,976	)		(79,886	)
Contributions in aid of construction		7,263			7,576
Other		750			458

Net cash provided by (used in) investing activities		1,121,147			(117,861	)

Cash flows from financing activities
Net decrease in deposit liabilities		(76,790	)		(143,207	)
Net increase (decrease) in short-term borrowings with original maturities of three months or less		130,172			(50,807	)
Net increase (decrease) in retail repurchase agreements		(20,380	)		35,199
Proceeds from other bank borrowings		508,584			550,897
Repayments of other bank borrowings		(1,662,119	)		(436,385	)
Proceeds from issuance of long-term debt		14,802			221,327
Repayment of long-term debt		(50,000	)		(126,000	)
Excess tax benefits from share-based payment arrangements		613			259
Net proceeds from issuance of common stock		15,473			8,341
Common stock dividends		(41,497	)		(40,480	)
Decrease in cash overdraft		(8,582	)		(9,098	)
Other		477			(1,594	)

Net cash provided by (used in) financing activities		(1,189,247	)		8,452

Net decrease in cash and equivalents and federal funds sold		(51,648	)		(29,994	)
Cash and equivalents and federal funds sold, beginning of period		209,855			257,301

Cash and equivalents and federal funds sold, end of period	$	158,207		$	227,307

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 and the unaudited consolidated financial statements and the notes thereto in HEI’s Quarterly Report on SEC Form 10-Q for the quarter ended March 31, 2008.

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 June 30, 2008 and December 31, 2007 and the results of its operations for the three and six months ended June 30, 2008 and 2007 and its cash flows for the six months ended June 30, 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 June 30, 2008
Revenues from external customers	$	688,087	$	85,950		$	18		$	774,055
Intersegment revenues (eliminations)		34		—			(34	)		—

Revenues		688,121		85,950			(16	)		774,055

Profit (loss)*		44,329		(31,014	)		(7,432	)		5,883
Income taxes (benefit)		16,897		(12,921	)		(3,229	)		747

Net income (loss)		27,432		(18,093	)		(4,203	)		5,136

Six months ended June 30, 2008
Revenues from external customers		1,311,936		191,794			(58	)		1,503,672
Intersegment revenues (eliminations)		74		—			(74	)		—

Revenues		1,312,010		191,794			(132	)		1,503,672

Profit (loss)*		84,135		(7,673	)		(16,892	)		59,570
Income taxes (benefit)		32,118		(4,156	)		(7,495	)		20,467

Net income (loss)		52,017		(3,517	)		(9,397	)		39,103

Assets (at June 30, 2008)		3,586,441		5,585,278			10,477			9,182,196

Three months ended June 30, 2007
Revenues from external customers	$	492,651	$	107,526		$	586		$	600,763
Intersegment revenues (eliminations)		61		—			(61	)		—

Revenues		492,712		107,526			525			600,763

Profit (loss)*		17,168		19,746			(9,572	)		27,342
Income taxes (benefit)		6,518		7,164			(3,889	)		9,793

Net income (loss)		10,650		12,582			(5,683	)		17,549

Six months ended June 30, 2007
Revenues from external customers		940,259		211,986			2,541			1,154,786
Intersegment revenues (eliminations)		131		—			(131	)		—

Revenues		940,390		211,986			2,410			1,154,786

Profit (loss)*		17,308		38,145			(18,724	)		36,729
Income taxes (benefit)		6,205		13,967			(7,756	)		12,416

Net income (loss)		11,103		24,178			(10,968	)		24,313

Assets (at June 30, 2007)		3,128,278		6,817,246			12,032			9,957,556

*	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 16 through 37.

(4) Bank subsidiary

Selected financial information

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

Consolidated Statements of Income Data (unaudited)


	Three months ended June 30					Six months ended June 30
(in thousands)	2008			2007		2008			2007
Interest and dividend income
Interest and fees on loans	$	61,747		$	60,093	$	125,212		$	120,374
Interest and dividends on investment and mortgage-related securities		22,729			30,428		47,180			58,593

		84,476			90,521		172,392			178,967

Interest expense
Interest on deposit liabilities		15,619			20,832		33,839			41,570
Interest on other borrowings		16,265			18,581		35,414			36,987

		31,884			39,413		69,253			78,557

Net interest income		52,592			51,108		103,139			100,410
Provision for loan losses		1,155			1,200		2,055			1,200

Net interest income after provision for loan losses		51,437			49,908		101,084			99,210

Noninterest income
Fees from other financial services		5,413			6,885		12,236			13,386
Fee income on deposit liabilities		6,767			6,457		13,561			12,512
Fee income on other financial products		1,639			1,856		3,443			3,868
Loss on sale of securities		(18,323	)		—		(17,388	)		—
Other income		5,978			1,807		7,550			3,253

		1,474			17,005		19,402			33,019

Noninterest expense
Compensation and employee benefits		19,039			18,164		37,279			36,560
Occupancy		5,390			5,341		10,787			10,289
Equipment		3,221			3,785		6,335			7,263
Services		4,170			7,895		9,843			16,253
Data processing		2,609			2,646		5,225			5,203
Loss on early extinguishment of debt		39,843			—		39,843			—
Other expense		9,653			9,336		18,847			18,516

		83,925			47,167		128,159			94,084

Income (loss) before income taxes		(31,014	)		19,746		(7,673	)		38,145
Income taxes (benefit)		(12,921	)		7,164		(4,156	)		13,967

Net income (loss)	$	(18,093	)	$	12,582	$	(3,517	)	$	24,178

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

Consolidated Balance Sheet Data (unaudited)


(in thousands)	June 30, 2008			December 31, 2007
Assets
Cash and equivalents	$	135,471		$	140,023
Federal funds sold		10,433			64,000
Available-for-sale investment and mortgage-related securities		887,162			2,140,772
Investment in stock of Federal Home Loan Bank of Seattle		97,764			97,764
Loans receivable, net		4,121,379			4,101,193
Other		249,989			234,661
Goodwill, net		83,080			83,080

	$	5,585,278		$	6,861,493


Liabilities and stockholder’s equity
Deposit liabilities - noninterest-bearing	$	709,658		$	652,055
Deposit liabilities - interest-bearing		3,560,812			3,695,205
Other borrowings		634,148			1,810,669
Other		112,994			108,800

		5,017,612			6,266,729

Common stock		327,251			325,467
Retained earnings		252,419			287,710
Accumulated other comprehensive loss, net of tax benefits		(12,004	)		(18,413	)

		567,666			594,764

	$	5,585,278		$	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 $307 million and $327 million, respectively, as of June 30, 2008 and $765 million and $1.0 billion, respectively, as of December 31, 2007. The $1.2 billion decrease in other borrowings was primarily due to the early extinguishment of certain borrowings from the balance sheet restructuring described below.

As of June 30, 2008, ASB had commitments to borrowers for undisbursed loan funds, loan commitments and unused lines and letters of credit of $1.3 billion.

Balance sheet restructure. In June 2008, ASB undertook and substantially completed the restructuring of its balance sheet through the sale of mortgage-related securities and agency notes and the early extinguishment of certain borrowings to strengthen future profitability ratios and enhance future net interest margin, while remaining “well-capitalized” and without significantly impacting future net income and interest rate risk. As a result of the restructuring, it is expected that ASB will, over the next one to three quarters, pay a special dividend of approximately $75 million to HEI (through HEI Diversified, Inc.), subject to regulatory approval. When such approval is received, HEI will use the funds from the dividend to reduce its short-term borrowings and for other corporate purposes.

On June 25, 2008, ASB completed a series of transactions which resulted in the sales to various broker/dealers of available-for-sale agency and private issue mortgage-related securities and agency notes with a weighted average yield of 4.33% for approximately $1.3 billion. ASB used the proceeds from the sales of these mortgage-related securities and agency notes to retire debt with a weighted average cost of 4.70%, comprised of approximately $0.9 billion of FHLB advances and $0.3 billion of securities sold under agreements to repurchase. These transactions resulted in a charge to net income of $36 million in the second quarter of 2008 ($12 million after-tax attributable to realized losses on the sales of the mortgage-related securities and $24 million after-tax attributable to fees associated with the early retirement of the FHLB advances and securities sold under agreements to repurchase). Although the sales of the mortgage-related securities resulted in losses in the second quarter of 2008, a portion of the losses on these available-for-sale securities had been previously recognized in ASB’s equity as a result of mark-to-market charges to other comprehensive income in earlier periods. ASB does

not currently expect to sell additional mortgage-related securities or prepay additional borrowings in the near future.

ASB subsequently purchased approximately $0.3 billion of short-term agency notes and entered into approximately $0.2 billion of FHLB advances to facilitate the timing of the release of certain collateral. ASB anticipates that the notes and advances will mature over the remainder of 2008.

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

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	June 30, 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	$	887	$	—	$	887	$	—

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 unobservable market assumptions. 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	June 30, 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	$	9.8	$	—	$	0.2	$	9.6

Specific reserves for the first six months of 2008 were $4.9 million and were included in loans receivable held for investment, net. For the six months ended June 30, 2008, there were no adjustments to fair value for ASB’s loans held for sale.

(5) Retirement benefits

Defined benefit plans. For the first six months of 2008, HECO contributed $4.8 million and HEI contributed $0.4 million to their respective retirement benefit plans, compared to $4.2 million and less than $0.1 million, respectively, in the first six months of 2007. The Company’s current estimate of contributions to its retirement benefit plans in 2008 is $14.5 million (including $13.7 million to be made by the utilities and $0.8 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 six months of 2008, the Company’s defined benefit retirement plans’ assets generated a loss, including investment management fees, of 7.8%. The market value of the defined benefit retirement plans’ assets as of June 30, 2008 was $1.0 billion compared to $1.1 billion at December 31, 2007, a decline of approximately $103 million. During the first six months of 2008, the trusts distributed $28 million in benefits to, or on behalf of, plan participants and beneficiaries.

The components of net periodic benefit cost were as follows:


	Three months ended June 30												Six months ended June 30
	Pension benefits						Other benefits						Pension benefits						Other benefits
(in thousands)	2008 (1)			2007			2008 (1)			2007			2008			2007			2008			2007
Service cost	$	6,989		$	7,751		$	1,182		$	1,209		$	13,845		$	15,504		$	2,347		$	2,440
Interest cost		14,915			14,444			2,790			2,774			29,791			28,864			5,628			5,634
Expected return on plan assets		(18,269	)		(17,098	)		(2,742	)		(2,404	)		(36,501	)		(34,200	)		(5,482	)		(4,702	)
Amortization of unrecognized transition obligation		1			1			784			784			2			2			1,569			1,569
Amortization of prior service cost (gain)		(99	)		(49	)		4			4			(189	)		(98	)		7			7
Recognized actuarial loss (gain)		1,691			2,835			—			—			3,381			5,690			—			—

Net periodic benefit cost		5,228			7,884			2,018			2,367			10,329			15,762			4,069			4,948
Impact of PUC D&Os		1,547			—			230			—			3,204			—			423			—

Net periodic benefit cost (adjusted for impact of PUC D&Os)	$	6,775		$	7,884		$	2,248		$	2,367		$	13,533		$	15,762		$	4,492		$	4,948

(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 $14 million and $17 million in the first six months 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 by ASB 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 six months of 2008, ASB’s total expense for its employees participating in the HEI retirement savings plan was $2.2 million and contributions were $0.9 million. ASB’s current estimate of contributions to the retirement savings plan in 2008 is $1.9 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 (4,511,199 shares available for issuance under outstanding and future grants and awards as of June 30, 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 June 30			Six months ended June 30
($ in millions)	2008		2007	2008	2007
Share-based compensation expense ¹	(0.1	)	0.4	0.2	0.7
Income tax benefit	—		0.1	—	0.2

The Company has not capitalized any share-based compensation cost. For the second quarter of 2008, the estimated forfeiture rate for SARs was 14.3% and the estimated forfeiture rate for restricted stock was 30.6%. In the second quarter of 2008, the cumulative effect of the change in estimated forfeitures was recorded, resulting in negative share-based compensation expense.

Nonqualified stock options. Information about HEI’s NQSOs is summarized as follows:


June 30, 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	1,000	0.8	$	17.61
2000		14.74	46,000	1.8		14.74
2001		17.96	71,000	2.7		17.96
2002		21.68	122,000	3.7		21.68
2003		20.49	151,500	4.3		20.49

	$	14.74 – 21.68	391,500	3.5	$	19.72

As of December 31, 2007, NQSOs outstanding totaled 603,800, with a weighted-average exercise price of $19.68. As of June 30, 2008, exercisable NQSO had an aggregate intrinsic value (including dividend equivalents) of $3.4 million.

NQSO activity and statistics are summarized as follows:


	Three months ended June 30				Six months ended June 30
($ in thousands, except prices)	2008		2007		2008		2007
Shares granted		—		—		—		—
Shares forfeited		—		—		—		—
Shares expired		—		—		—		—
Shares vested		—		77,500		—		79,000
Aggregate fair value of vested shares		—	$	343		—	$	350
Shares exercised		200,300		36,700		212,300		56,200
Weighted-average exercise price	$	19.56	$	18.77	$	19.61	$	19.70
Cash received from exercise	$	3,918	$	689	$	4,164	$	1,107
Intrinsic value of shares exercised ¹	$	2,101	$	433	$	2,185	$	575
Tax benefit realized for the deduction of exercises	$	818	$	169	$	851	$	224
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 June 30, 2008, all NQSOs were vested.

Stock appreciation rights. Information about HEI’s SARs is summarized as follows:


June 30, 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	3.1	$	26.02	325,000	3.1	$	26.02
2005		26.18	502,000	4.6		26.18	200,000	1.2		26.18

	$	26.02 -26.18	827,000	4.0	$	26.12	525,000	2.4	$	26.08

As of December 31, 2007, the shares underlying SARs outstanding totaled 857,000, with a weighted-average exercise price of $26.12. As of June 30, 2008, the SARs outstanding and exercisable (including dividend equivalents) had no intrinsic value.

SARs activity and statistics are summarized as follows:


	Three months ended June 30				Six months ended June 30
($ in thousands, except prices)	2008		2007		2008		2007
Shares granted		—		—		—		—
Shares forfeited		30,000		—		30,000		—
Shares expired		—		—		—		—
Shares vested		46,000		45,000		61,000		51,000
Aggregate fair value of vested shares	$	242	$	234	$	329	$	269
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 June 30, 2008, there was $0.2 million of total unrecognized compensation cost related to SARs and that cost is expected to be recognized over a weighted average period of 0.8 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 six months ended June 30, 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 June 30, 2008, restricted stock shares outstanding totaled 170,200, with a weighted-average grant date fair value of $25.52. 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 six months of 2008, no restricted stock shares vested, 18,500 shares of restricted stock with a grant date fair market value of $0.5 million were forfeited, and 42,700 shares of restricted stock with a grant date fair market value of $1.1 million were granted. During the second quarter of 2008, no restricted stock shares vested, 12,500 shares of restricted stock with a grant date fair market value of $0.3 million were forfeited and 42,700 shares of restricted stock with a grant date fair market value of $1.1 million were granted. During the first six months of 2007, 16,000 restricted stock shares vested, no restricted stock shares were forfeited, and 66,400 shares of restricted stock with a grant date fair market value of $1.7 million were granted. During the second quarter of 2007, 16,000 restricted stock shares vested and 57,700 shares of restricted stock with a grant date fair market value of $1.5 million were granted. The tax benefits realized for the tax deductions from restricted stock dividends were $47,000 and $0.2 million for the first six months of 2008 and 2007, respectively.

As of June 30, 2008, there was $2.2 million of total unrecognized compensation cost related to nonvested restricted stock. The cost is expected to be recognized over a weighted-average period of 3.0 years.

(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 six months ended June 30, 2008 and 2007, the Company paid interest (net of amounts capitalized and including bank interest) to non-affiliates amounting to $104 million and $110 million, respectively.

For the six months ended June 30, 2008 and 2007, the Company paid income taxes amounting to $91 million and $3 million, respectively. The significant increase in taxes paid in the first half of 2008 versus 2007 was due primarily to the increase in operating income and the change in the Treasury regulations governing the calculation of estimated taxes due in 2008. The new regulations generally require a more ratable payment of estimated taxes. In calculating 2007 estimated taxes, 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 $1.3 million and $1.7 million for the six months ended June 30, 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 $10 million for each of the six months ended June 30, 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 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

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.

Participating Securities. In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities,” according to which unvested share-based-payment awards that contain non-forfeitable rights to dividends or dividend equivalents are “participating securities” as defined in EITF 03-6 and therefore should be included in computing earnings per share using the two-class method. The Company must adopt FSP EITF 03-6-1 in the first quarter of 2009 retrospectively. Management has not yet determined the impact the adoption of FSP EITF 03-6-1 will have on the Company’s financial statements. Management believes the Company’s restricted stock grants (170,200 unvested shares outstanding as of June 30, 2008) will be considered “participating securities,” but its stock options and stock appreciation rights will not be considered “participating securities” as the associated dividend equivalents are contingent on the exercise of the option or right.

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidated Statements of Income (unaudited)


	Three months ended June 30						Six months ended June 30
(in thousands, except for ratio of earnings to fixed charges)	2008			2007			2008			2007
Operating revenues	$	686,647		$	491,249		$	1,309,141		$	938,046

Operating expenses
Fuel oil		273,755			167,121			523,298			327,050
Purchased power		177,226			133,727			328,021			245,243
Other operation		59,422			53,643			115,001			100,836
Maintenance		23,990			29,869			47,603			57,205
Depreciation		35,401			34,272			70,835			68,539
Taxes, other than income taxes		62,371			44,903			119,857			87,450
Income taxes		17,094			6,492			32,472			10,998

		649,259			470,027			1,237,087			897,321

Operating income		37,388			21,222			72,054			40,725

Other income
Allowance for equity funds used during construction		2,105			1,202			4,006			2,434
Other, net		1,111			1,049			2,207			(5,149	)

		3,216			2,251			6,213			(2,715	)

Income before interest and other charges		40,604			23,473			78,267			38,010

Interest and other charges
Interest on long-term debt		11,810			11,390			23,534			22,886
Amortization of net bond premium and expense		639			646			1,270			1,192
Other interest charges		1,059			874			2,045			3,015
Allowance for borrowed funds used during construction		(835	)		(586	)		(1,597	)		(1,184	)
Preferred stock dividends of subsidiaries		229			229			458			458

		12,902			12,553			25,710			26,367

Income before preferred stock dividends of HECO		27,702			10,920			52,557			11,643
Preferred stock dividends of HECO		270			270			540			540

Net income for common stock	$	27,432		$	10,650		$	52,017		$	11,103

Ratio of earnings to fixed charges (SEC method)								3.90			1.58

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)	June 30, 2008			December 31, 2007
Assets
Utility plant, at cost
Land	$	37,789		$	38,161
Plant and equipment		4,196,655			4,131,226
Less accumulated depreciation		(1,694,524	)		(1,647,113	)
Plant acquisition adjustment, net		14			41
Construction in progress		177,920			151,179

Net utility plant		2,717,854			2,673,494

Current assets
Cash and equivalents		10,342			4,678
Customer accounts receivable, net		173,198			146,112
Accrued unbilled revenues, net		122,983			114,274
Other accounts receivable, net		6,441			6,915
Fuel oil stock, at average cost		161,125			91,871
Materials and supplies, at average cost		36,962			34,258
Prepayments and other		15,557			9,490

Total current assets		526,608			407,598

Other long-term assets
Regulatory assets		278,645			284,990
Unamortized debt expense		15,017			15,635
Other		48,317			42,171

Total other long-term assets		341,979			342,796

	$	3,586,441		$	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		762,632			724,704
Accumulated other comprehensive income, net of income taxes		1,272			1,157

Common stock equity		1,148,505			1,110,462
Cumulative preferred stock - not subject to mandatory redemption		34,293			34,293
Long-term debt, net		899,965			885,099

Total capitalization		2,082,763			2,029,854

Current liabilities
Short-term borrowings - nonaffiliates		117,427			28,791
Accounts payable		183,529			137,895
Interest and preferred dividends payable		15,403			14,719
Taxes accrued		153,167			189,637
Other		47,451			57,799

Total current liabilities		516,977			428,841

Deferred credits and other liabilities
Deferred income taxes		158,588			162,113
Regulatory liabilities		275,835			261,606
Unamortized tax credits		58,761			58,419
Other		190,592			183,318

Total deferred credits and other liabilities		683,776			665,456

Contributions in aid of construction		302,925			299,737

	$	3,586,441		$	3,423,888

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

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidated Statements of Changes in Common Stock Equity (unaudited)


	Common stock			Premium on capital stock		Retained earnings			Accumulated other comprehensive income (loss)			Total
(in thousands, except per share amounts)	Shares	Amount		Premium on capital stock		Retained earnings			Accumulated other comprehensive income (loss)			Total
Balance, December 31, 2007	12,806	$	85,387	$	299,214	$	724,704		$	1,157		$	1,110,462
Comprehensive income:
Net income	—		—		—		52,017			—			52,017
Retirement benefit plans:
Amortization of net loss, prior service gain and transition obligation included in net periodic benefit cost, net of taxes of $1,741	—		—		—		—			2,733			2,733
Less: reclassification adjustment for impact of D&Os of the PUC included in regulatory asset, net of taxes of $1,668	—		—		—		—			(2,618	)		(2,618	)

Comprehensive income	—		—		—		52,017			115			52,132

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

Balance, June 30, 2008	12,806	$	85,387	$	299,214	$	762,632		$	1,272		$	1,148,505

Balance, December 31, 2006	12,806	$	85,387	$	299,214	$	700,252		$	(126,650	)	$	958,203
Comprehensive income:
Net income	—		—		—		11,103			—			11,103
Retirement benefit plans - amortization of net loss, prior service gain and transition obligation included in net periodic benefit cost, net of taxes of $2,337	—		—		—		—			3,669			3,669

Comprehensive income	—		—		—		11,103			3,669			14,772

Adjustment to initially apply a PUC D&O related to defined benefit retirement plans, net of taxes of $11,595							—			18,205			18,205
Adjustment to initially apply FIN 48	—		—		—		(620	)		—			(620	)

Balance, June 30, 2007	12,806	$	85,387	$	299,214	$	710,735		$	(104,776	)	$	990,560

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

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)


Six months ended June 30	2008			2007
(in thousands)

Cash flows from operating activities
Income before preferred stock dividends of HECO	$	52,557		$	11,643
Adjustments to reconcile income before preferred stock dividends of HECO to net cash provided by operating activities
Depreciation of property, plant and equipment		70,835			68,539
Other amortization		4,303			3,836
Writedown of utility plant		—			11,701
Deferred income taxes		(3,598	)		(12,484	)
Tax credits, net		888			1,116
Allowance for equity funds used during construction		(4,006	)		(2,434	)
Changes in assets and liabilities
Increase in accounts receivable		(26,612	)		(8,483	)
Decrease (increase) in accrued unbilled revenues		(8,709	)		8,997
Increase in fuel oil stock		(69,254	)		(24,148	)
Increase in materials and supplies		(2,704	)		(3,054	)
Increase in regulatory assets		(1,095	)		(1,628	)
Increase (decrease) in accounts payable		45,634			(133	)
Change in prepaid and accrued taxes		(43,085	)		(14,746	)
Changes in other assets and liabilities		2,211			7,262

Net cash provided by operating activities		17,365			45,984

Cash flows from investing activities
Capital expenditures		(99,924	)		(77,769	)
Contributions in aid of construction		7,263			7,577
Other		733			—

Net cash used in investing activities		(91,928	)		(70,192	)

Cash flows from financing activities
Common stock dividends		(14,089	)		—
Preferred stock dividends		(540	)		(540	)
Proceeds from issuance of long-term debt		14,802			221,327
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		88,636			(60,481	)
Decrease in cash overdraft		(8,582	)		(9,096	)

Net cash provided by financing activities		80,227			25,210

Net increase in cash and equivalents		5,664			1,002
Cash and equivalents, beginning of period		4,678			3,859

Cash and equivalents, end of period	$	10,342		$	4,861

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 and the unaudited consolidated financial statements and the notes thereto in HECO’s Quarterly Report on SEC Form 10-Q for the quarter ended March 31, 2008.

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 June 30, 2008 and December 31, 2007 and the results of their operations for the three and six months ended June 30, 2008 and 2007 and their cash flows for the six months ended June 30, 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 June 30, 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 six months ended June 30, 2008 and 2007 each consisted of $1.7 million of interest income received from the 2004 Debentures; $1.6 million of distributions to holders of the Trust Preferred Securities; and $0.1 million 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 June 30, 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 six months ended June 30, 2008 totaled $328 million, with purchases from AES Hawaii, Kalaeloa, HEP and HPOWER totaling $70 million, $127 million, $42 million and $29 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 six months ended June 30, 2008 and 2007, HECO and its subsidiaries included approximately $115 million and $83 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 six months of 2008, HECO and its subsidiaries contributed $4.8 million to their retirement benefit plans, compared to $4.2 million in the first six months of 2007. HECO and its subsidiaries’ current estimate of contributions to their retirement benefit plans in 2008 is $13.7 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 half of 2008, HECO and its subsidiaries’ defined benefit retirement plans’ assets generated a loss, including investment management fees, of 7.8%. The market value of the defined benefit retirement plan’s assets as of June 30, 2008 was $0.9 billion compared to $1.0 billion at December 31, 2007, a decline of approximately $95 million. During the first six months of 2008, the trusts distributed $27 million in benefits to, or on behalf of, plan participants and beneficiaries.

The components of net periodic benefit cost were as follows:


	Three months ended June 30												Six months ended June 30
	Pension benefits						Other benefits						Pension benefits						Other benefits
(in thousands)	2008			2007			2008			2007			2008			2007			2008			2007
Service cost	$	6,643		$	6,360		$	1,150		$	1,179		$	13,176		$	12,691		$	2,285		$	2,379
Interest cost		13,473			12,864			2,709			2,696			26,918			25,686			5,464			5,483
Expected return on plan assets		(16,277	)		(15,254	)		(2,697	)		(2,364	)		(32,528	)		(30,478	)		(5,392	)		(4,621	)
Amortization of unrecognized transition obligation		—			1			783			783			—			1			1,565			1,565
Amortization of prior service gain		(190	)		(191	)		—			—			(381	)		(381	)		—			—
Recognized actuarial loss (gain)		1,644			2,620			—			—			3,289			5,236			—			—

Net periodic benefit cost		5,293			6,400			1,945			2,294			10,474			12,755			3,922			4,806
Impact of PUC D&Os		1,547			—			230			—			3,204			—			423			—

Net periodic benefit cost (adjusted for impact of PUC D&Os)	$	6,840		$	6,400		$	2,175		$	2,294		$	13,678		$	12,755		$	4,345		$	4,806

HECO and its subsidiaries recorded retirement benefits expense of $14 million in each of the first six months 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. HECO reflected the continuation of the pension and OPEB tracking mechanisms in its rate increase application based on a 2009 test year.

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. HECO’s pension asset was not included in rate base, and amortization of the pension asset was not included in revenue requirements, in HECO’s rate increase application based on a 2009 test year.

(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 $25 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 $70 million in annual revenues over rates effective at the time of the interim decision ($78 million in annual revenues over rates granted in the final decision in HECO’s 2005 test year rate case).

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 million in annual revenues, or a 3.7% increase.

As of June 30, 2008, HECO and its subsidiaries had recognized $99 million of revenues with respect to interim orders ($15 million related to interim orders regarding certain integrated resource planning costs and $84 million related to interim orders with respect to interim surcharges to recover general rate increase requests).

Energy cost adjustment clauses (ECACs). Act 162 was signed into law in June 2006 and requires that any automatic fuel rate adjustment clause requested by a public utility in an application filed with the PUC be designed, as determined in the PUC’s discretion, to (1) fairly share the risk of fuel cost changes between the utility and its customers, (2) provide the utility with incentive to manage or lower its fuel costs and encourage greater use of renewable energy, (3) allow the utility to mitigate the risk of sudden or frequent fuel cost changes that cannot otherwise reasonably be mitigated through commercially reasonable means, such as through fuel hedging contracts, (4) preserve the utility’s financial integrity, and (5) minimize the utility’s need to apply for frequent

general rate increases for fuel cost changes. While the PUC already had reviewed the automatic fuel adjustment clauses in rate cases, Act 162 requires 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 agreed with the parties’ stipulation in the proceeding that it would not require the parties in the proceeding to submit a stipulated procedural schedule to address the Act 162 factors in the 2005 test year rate case proceeding, and stated it expects HECO and HELCO to develop information relating to the Act 162 factors for examination during their next rate case proceedings.

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. In April and December 2007, the PUC issued interim D&Os in the HELCO 2006 and MECO 2007 test year rate cases that reflected for purposes of the interim order the continuation of their ECACs, consistent with agreements reached between the Consumer Advocate and HELCO and MECO, respectively. The Consumer Advocate and MECO agreed that no further changes are required to MECO’s ECAC in order to comply with the requirements of Act 162.

In September 2007, HECO, the Consumer Advocate and the federal Department of Defense (DOD) agreed that the ECAC should continue in its present form for purposes of an interim rate increase in the HECO 2007 test year rate case 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 October 2007, the PUC issued an interim D&O, which reflected the continuation of HECO’s ECAC for purposes of the interim increase.

Management cannot predict the ultimate effect of the required Act 162 analysis on the continuation of the utilities’ existing ECACs.

Major projects. Many public utility projects require PUC approval and various permits from other governmental agencies. Difficulties in obtaining, or the inability to obtain, the necessary approvals or permits can result in significantly increased project costs or even cancellation of projects. Further, completion of projects is subject to various risks, such as problems or disputes with vendors. In the event a project does not proceed, or if the PUC disallows cost recovery for all or part of the project, project costs may need to be written off in amounts that could result in significant reductions in HECO’s consolidated net income. Significant projects (capitalized and deferred costs accumulated through June 30, 2008 noted in parentheses) include HELCO’s ST-7 ($23 million) and HECO’s East Oahu Transmission Project ($35 million), Customer Information system ($16 million) and generating unit in and transmission line to Campbell Industrial Park ($37 million).

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 June 30, 2008, HELCO’s cost estimate for ST-7 was $92 million (of which $23 million had been incurred) and outstanding commitments for materials, equipment and outside services totaled $30 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 had planned a project (EOTP) to construct a part underground 138 kilovolt (kV) line in order to close the gap between the Southern and Northern transmission corridors on Oahu and provide a third transmission line to a major substation. However, in 2002, an application for a permit, which would have allowed construction in a route through conservation district lands, was denied.

HECO continued to believe that the proposed reliability project was needed and, in 2003, filed an application with the PUC requesting approval to commit funds (currently estimated at $74 million; see costs incurred below) for an EOTP, revised to use a 46 kV system and modified route, none of which is in conservation district lands. The environmental review process for the EOTP, as revised, was completed in 2005.

In written testimony filed in 2005, a 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 of the permit in 2002, and the related allowance for funds used during construction (AFUDC) of $5 million at the time. 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 addresses. In October 2007, the PUC issued a final D&O approving HECO’s request to expend funds for the EOTP, 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 EOTP in two phases. The first phase is currently in construction and projected to be completed in 2010. The projected completion date of the second phase is being evaluated.

As of June 30, 2008, the accumulated costs recorded for the EOTP amounted to $35 million, including (i) $12 million of planning and permitting costs incurred prior to 2003, (ii) $6 million of planning, permitting and construction costs incurred after 2002 and (iii) $17 million for AFUDC. Management believes no adjustment to project costs is required as of June 30, 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 response to inquiries by the Hawaii Department of Health (DOH), HECO has been involved since 1995 in a work group with several other potentially responsible parties (PRPs), including oil companies, in investigating and responding to historical subsurface petroleum contamination in the Honolulu Harbor area. The U.S. Environmental Protection Agency (EPA) became involved in the investigation in June 2000. Some of the PRPs (the Participating Parties) entered into a joint defense agreement and ultimately entered an Enforceable Agreement with the DOH. The Participating Parties are funding the 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. Although the Honolulu Harbor investigation involves four units—Iwilei, Downtown, Kapalama and Sand Island, to date all the investigative and remedial work has focused on the Iwilei Unit.

Besides subsurface investigation, assessments and preliminary oil removal tasks that have been conducted by the Participating Parties, HECO and others investigated their ongoing operations in the Iwilei Unit in 2003 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.

For administrative management purposes, the Iwilei Unit has been subdivided into four subunits. The Participating Parties have developed analyses of various remedial alternatives for the four subunits. The DOH uses the analyses to make a final determination of which remedial alternatives the Participating Parties will be required to implement. The DOH has completed remedial determinations for two subunits to date. The Participating Parties anticipate that the DOH will complete the remaining remediation determinations during the remainder of 2008.

Through June 30, 2008, HECO has accrued a total of $3.3 million (including $0.6 million in the third quarter of 2007 and $0.4 million in the first quarter of 2008) for estimates of HECO’s share of costs for continuing investigative work, remedial activities and monitoring for the Iwilei unit. As of June 30, 2008, the remaining accrual (amounts expensed less amounts expended) for the Iwilei unit was $1.9 million. Because (1) the full scope of work remains 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 located in the Downtown unit of the Honolulu Harbor site), the cost estimate may be subject to significant change and additional material 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’s request for a rehearing was denied. The EPA is thus 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. In 2004, the EPA issued a rule, which established design, construction and capacity standards for existing cooling water intake structures, such as those at HECO’s Kahe, Waiau and Honolulu generating stations, and required demonstrated compliance by March 2008. The rule provided a number of compliance options, some of which were far less costly than others. HECO had retained a consultant that was developing a cost effective compliance strategy.

In January 2007, the U.S. Circuit Court of Appeals for the Second Circuit issued a decision that remanded for further consideration and proceedings significant portions of the rule and found other portions to be impermissible. In July 2007, the EPA formally suspended the rule and 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. HECO facilities are subject to permit renewal in mid-2009 and may be subject to new permit conditions to address cooling water intake requirements at that time. In April 2008, the U. S. Supreme Court agreed to review the Court of Appeal’s rejection of a cost-benefit test to determine compliance options. If the Supreme Court affirms the Court of Appeal’s decision, the compliance options available to HECO are reduced. 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. It is now expected that the Supreme Court will hear the case in November 2008, with a decision issued in the first half of 2009.

Collective bargaining agreements. As of June 30, 2008, approximately 57% 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 six months ended June 30, 2008 and 2007, HECO and its subsidiaries paid interest amounting to $24 million and $23 million, respectively.

For the six months ended June 30, 2008 and 2007, HECO and its subsidiaries paid income taxes amounting to $80 million and $5 million, respectively. The significant increase in taxes paid in the first half of 2008 versus 2007 was due primarily to the increase in operating income and the change in the Treasury regulations governing the calculation of estimated taxes due in 2008. The new regulations generally require a more ratable payment of estimated taxes. In calculating 2007 estimated taxes, 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 $4.0 million and $2.4 million for the six months ended June 30, 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) Reconciliation of electric utility operating income per HEI and HECO consolidated statements of income


	Three months ended June 30						Six months ended June 30
(in thousands)	2008			2007			2008			2007
Operating income from regulated and nonregulated activities before income taxes (per HEI consolidated statements of income)	$	55,396		$	28,789		$	106,379		$	41,781
Deduct:
Income taxes on regulated activities		(17,094	)		(6,492	)		(32,472	)		(10,998	)
Revenues from nonregulated activities		(1,474	)		(1,463	)		(2,869	)		(2,344	)
Add: Expenses from nonregulated activities		560			388			1,016			12,286

Operating income from regulated activities after income taxes (per HECO consolidated statements of income)	$	37,388		$	21,222		$	72,054		$	40,725

(9) 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 June 30, 2008


(in thousands)	HECO			HELCO		MECO		RHI		UBC		Reclassifications and eliminations		HECO consolidated
Operating revenues	$	469,075		105,429		112,143		—		—		—		$	686,647

Operating expenses
Fuel oil		188,374		25,000		60,381		—		—		—			273,755
Purchased power		126,914		40,586		9,726		—		—		—			177,226
Other operation		42,762		7,466		9,194		—		—		—			59,422
Maintenance		16,158		3,595		4,237		—		—		—			23,990
Depreciation		20,552		7,802		7,047		—		—		—			35,401
Taxes, other than income taxes		42,662		9,568		10,141		—		—		—			62,371
Income taxes		9,936		3,716		3,442		—		—		—			17,094

		447,358		97,733		104,168		—		—		—			649,259

Operating income		21,717		7,696		7,975		—		—		—			37,388

Other income
Allowance for equity funds used during construction		1,633		351		121		—		—		—			2,105
Equity in earnings of subsidiaries		11,464		—		—		—		—		(11,464	)		—
Other, net		1,160		330		52		(17	)	(68	)	(346	)		1,111

		14,257		681		173		(17	)	(68	)	(11,810	)		3,216

Income (loss) before interest and other charges		35,974		8,377		8,148		(17	)	(68	)	(11,810	)		40,604

Interest and other charges
Interest on long-term debt		7,587		1,958		2,265		—		—		—			11,810
Amortization of net bond premium and expense		400		117		122		—		—		—			639
Other interest charges		926		366		113		—		—		(346	)		1,059
Allowance for borrowed funds used during construction		(641	)	(145	)	(49	)	—		—		—			(835	)
Preferred stock dividends of subsidiaries		—		—		—		—		—		229			229

		8,272		2,296		2,451		—		—		(117	)		12,902

Income (loss) before preferred stock dividends of HECO		27,702		6,081		5,697		(17	)	(68	)	(11,693	)		27,702
Preferred stock dividends of HECO		270		133		96		—		—		(229	)		270

Net income (loss) for common stock	$	27,432		5,948		5,601		(17	)	(68	)	(11,464	)	$	27,432

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidating Statement of Income (unaudited)

Three months ended June 30, 2007


(in thousands)	HECO			HELCO		MECO		RHI		Reclassifications and eliminations		HECO consolidated
Operating revenues	$	319,652		86,644		84,953		—		—		$	491,249

Operating expenses
Fuel oil		109,775		15,667		41,679		—		—			167,121
Purchased power		92,419		33,420		7,888		—		—			133,727
Other operation		36,845		8,156		8,642		—		—			53,643
Maintenance		17,639		5,405		6,825		—		—			29,869
Depreciation		19,745		7,523		7,004		—		—			34,272
Taxes, other than income taxes		29,264		7,944		7,695		—		—			44,903
Income taxes		3,085		2,326		1,081		—		—			6,492

		308,772		80,441		80,814		—		—			470,027

Operating income		10,880		6,203		4,139		—		—			21,222

Other income
Allowance for equity funds used during construction		1,044		68		90		—		—			1,202
Equity in earnings of subsidiaries		5,764		—		—		—		(5,764	)		—
Other, net		1,250		171		251		(14	)	(609	)		1,049

		8,058		239		341		(14	)	(6,373	)		2,251

Income (loss) before interest and other charges		18,938		6,442		4,480		(14	)	(6,373	)		23,473

Interest and other charges
Interest on long-term debt		7,324		1,915		2,151		—		—			11,390
Amortization of net bond premium and expense		400		106		140		—		—			646
Other interest charges		802		608		73		—		(609	)		874
Allowance for borrowed funds used during construction		(508	)	(34	)	(44	)	—		—			(586	)
Preferred stock dividends of subsidiaries		—		—		—		—		229			229

		8,018		2,595		2,320		—		(380	)		12,553

Income (loss) before preferred stock dividends of HECO		10,920		3,847		2,160		(14	)	(5,993	)		10,920
Preferred stock dividends of HECO		270		133		96		—		(229	)		270

Net income (loss) for common stock	$	10,650		3,714		2,064		(14	)	(5,764	)	$	10,650

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidating Statement of Income (unaudited)

Six months ended June 30, 2008


(in thousands)	HECO			HELCO		MECO		RHI		UBC		Reclassifications and eliminations		HECO consolidated
Operating revenues	$	883,588		210,621		214,932		—		—		—		$	1,309,141

Operating expenses
Fuel oil		360,526		49,046		113,726		—		—		—			523,298
Purchased power		226,693		81,945		19,383		—		—		—			328,021
Other operation		80,731		16,360		17,910		—		—		—			115,001
Maintenance		31,434		8,300		7,869		—		—		—			47,603
Depreciation		41,104		15,636		14,095		—		—		—			70,835
Taxes, other than income taxes		81,110		19,187		19,560		—		—		—			119,857
Income taxes		19,430		6,303		6,739		—		—		—			32,472

		841,028		196,777		199,282		—		—		—			1,237,087

Operating income		42,560		13,844		15,650		—		—		—			72,054

Other income
Allowance for equity funds used during construction		3,135		606		265		—		—		—			4,006
Equity in earnings of subsidiaries		20,765		—		—		—		—		(20,765	)		—
Other, net		2,571		597		110		(40	)	(322	)	(709	)		2,207

		26,471		1,203		375		(40	)	(322	)	(21,474	)		6,213

Income (loss) before interest and other charges		69,031		15,047		16,025		(40	)	(322	)	(21,474	)		78,267

Interest and other charges
Interest on long-term debt		15,112		3,910		4,512		—		—		—			23,534
Amortization of net bond premium and expense		800		224		246		—		—		—			1,270
Other interest charges		1,788		771		195		—		—		(709	)		2,045
Allowance for borrowed funds used during construction		(1,226	)	(262	)	(109	)	—		—		—			(1,597	)
Preferred stock dividends of subsidiaries		—		—		—		—		—		458			458

		16,474		4,643		4,844		—		—		(251	)		25,710

Income (loss) before preferred stock dividends of HECO		52,557		10,404		11,181		(40	)	(322	)	(21,223	)		52,557
Preferred stock dividends of HECO		540		267		191		—		—		(458	)		540

Net income (loss) for common stock	$	52,017		10,137		10,990		(40	)	(322	)	(20,765	)	$	52,017

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidating Statement of Income (unaudited)

Six months ended June 30, 2007


(in thousands)	HECO			HELCO		MECO		RHI		Reclassifications and eliminations		HECO consolidated
Operating revenues	$	608,342		165,453		164,251		—		—		$	938,046

Operating expenses
Fuel oil		210,837		35,705		80,508		—		—			327,050
Purchased power		170,719		60,482		14,042		—		—			245,243
Other operation		70,330		15,322		15,184		—		—			100,836
Maintenance		34,017		10,973		12,215		—		—			57,205
Depreciation		39,484		15,047		14,008		—		—			68,539
Taxes, other than income taxes		56,966		15,307		15,177		—		—			87,450
Income taxes		5,055		2,864		3,079		—		—			10,998

		587,408		155,700		154,213		—		—			897,321

Operating income		20,934		9,753		10,038		—		—			40,725

Other income
Allowance for equity funds used during construction		2,131		133		170		—		—			2,434
Equity in earnings of subsidiaries		2,827		—		—		—		(2,827	)		—
Other, net		2,735		(6,692	)	257		(29	)	(1,420	)		(5,149	)

		7,693		(6,559	)	427		(29	)	(4,247	)		(2,715	)

Income (loss) before interest and other charges		28,627		3,194		10,465		(29	)	(4,247	)		38,010

Interest and other charges
Interest on long-term debt		14,449		3,772		4,665		—		—			22,886
Amortization of net bond premium and expense		748		205		239		—		—			1,192
Other interest charges		2,824		1,365		246		—		(1,420	)		3,015
Allowance for borrowed funds used during construction		(1,037	)	(65	)	(82	)	—		—			(1,184	)
Preferred stock dividends of subsidiaries		—		—		—		—		458			458

		16,984		5,277		5,068		—		(962	)		26,367

Income (loss) before preferred stock dividends of HECO		11,643		(2,083	)	5,397		(29	)	(3,285	)		11,643
Preferred stock dividends of HECO		540		267		191		—		(458	)		540

Net income (loss) for common stock	$	11,103		(2,350	)	5,206		(29	)	(2,827	)	$	11,103

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidating Balance Sheet (unaudited)

June 30, 2008


(in thousands)	HECO			HELCO		MECO		RHI	UBC	Reclassifications and Eliminations		HECO Consolidated
Assets
Utility plant, at cost
Land	$	28,461		4,982		4,346		—	—	—		$	37,789
Plant and equipment		2,532,218		849,108		815,329		—	—	—			4,196,655
Less accumulated depreciation		(1,008,362	)	(338,716	)	(347,446	)	—	—	—			(1,694,524	)
Plant acquisition adjustment, net		—		—		14		—	—	—			14
Construction in progress		127,108		41,663		9,149		—	—	—			177,920

Net utility plant		1,679,425		557,037		481,392		—	—	—			2,717,854

Investment in wholly owned subsidiaries, at equity		425,034		—		—		—	—	(425,034	)		—

Current assets
Cash and equivalents		6,702		1,213		2,232		154	41	—			10,342
Advances to affiliates		61,700		—

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company