Edgar Filing: HAWAIIAN ELECTRIC INDUSTRIES INC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2006

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


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

and Principal Subsidiary

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

State of Hawaii

(State or other jurisdiction of incorporation or organization)

900 Richards Street, Honolulu, Hawaii 96813

(Address of principal executive offices and zip code)

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

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

(Registrant’s telephone number, including area code)

Not applicable

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

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

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

Indicate by check mark whether Registrant Hawaiian Electric Industries, Inc. is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨

Indicate by check mark whether Registrant Hawaiian Electric Company, Inc. is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x

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 May 1, 2006
Hawaiian Electric Industries, Inc. (Without Par Value)		81,120,692 Shares
Hawaiian Electric Company, Inc. ($6-2/3 Par Value)		12,805,843 Shares (not publicly traded)

Hawaiian Electric Industries, Inc. and Subsidiaries

Hawaiian Electric Company, Inc. and Subsidiaries

Form 10-Q—Quarter ended March 31, 2006

INDEX


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

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Hawaiian Electric Industries, Inc. and Subsidiaries

	Consolidated Balance Sheets (unaudited) - March 31, 2006 and December 31, 2005	1

	Consolidated Statements of Income (unaudited) - three months ended March 31, 2006 and 2005	2

	Consolidated Statements of Changes in Stockholders’ Equity (unaudited) -three months ended March 31, 2006 and 2005	3

	Consolidated Statements of Cash Flows (unaudited) - three months ended March 31, 2006 and 2005	4

	Notes to Consolidated Financial Statements (unaudited)	5

	Hawaiian Electric Company, Inc. and Subsidiaries

	Consolidated Balance Sheets (unaudited) - March 31, 2006 and December 31, 2005	14

	Consolidated Statements of Income (unaudited) -three months ended March 31, 2006 and 2005	15

	Consolidated Statements of Retained Earnings (unaudited) -three months ended March 31, 2006 and 2005	15

	Consolidated Statements of Cash Flows (unaudited) -three months ended March 31, 2006 and 2005	16

	Notes to Consolidated Financial Statements (unaudited)	17

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32

	HEI Consolidated	32

	Electric Utilities	36

	Bank	48

	Certain Factors that May Affect Future Results and Financial Condition	51

	Material Estimates and Critical Accounting Policies	51

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	52

Item 4.	Controls and Procedures	53

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	53

Item 1A.	Risk Factors	53

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	54

Item 5.	Other Information	54

Item 6.	Exhibits	55

Signatures		56

Hawaiian Electric Industries, Inc. and Subsidiaries

Hawaiian Electric Company, Inc. and Subsidiaries

Form 10-Q—Quarter ended March 31, 2006

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.) and AdCommunications, Inc. Former subsidiaries include ASB Realty Corporation (dissolved in May 2005).

BLNR		Board of Land and Natural Resources of the State of Hawaii

CHP		Combined heat and power

Company		Hawaiian Electric Industries, Inc. and its direct and indirect subsidiaries, including, without limitation, Hawaiian Electric Company, Inc., Maui Electric Company, Limited, Hawaii Electric Light Company, Inc., HECO Capital Trust III, Renewable Hawaii, Inc., HEI Diversified, Inc., American Savings Bank, F.S.B. and its subsidiaries, Pacific Energy Conservation Services, Inc., HEI Properties, Inc., Hycap Management, Inc. (in dissolution), Hawaiian Electric Industries Capital Trust II, Hawaiian Electric Industries Capital Trust III, The Old Oahu Tug Service, Inc. and HEI Power Corp. and its subsidiaries (discontinued operations, except for subsidiary HEI Investments, Inc.). (unconsolidated subsidiaries)

Consumer Advocate		Division of Consumer Advocacy, Department of Commerce and Consumer Affairs of the State of Hawaii

D&O		Decision and order

DG		Distributed generation

DOD		Department of Defense — federal

DOH		Department of Health of the State of Hawaii

DRIP		HEI Dividend Reinvestment and Stock Purchase Plan

DSM		Demand-side management

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		Accounting principles generally accepted in the United States of America

HECO		Hawaiian Electric Company, Inc., an electric utility subsidiary of Hawaiian Electric Industries, Inc. and parent company of Maui Electric Company, Limited, Hawaii Electric Light Company, Inc., HECO Capital Trust III (unconsolidated subsidiary) and Renewable Hawaii, Inc.

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., Hycap Management, Inc. (in dissolution), Hawaiian Electric Industries Capital Trust II, Hawaiian Electric Industries Capital Trust III, The Old Oahu Tug Service, Inc. and HEI Power Corp. (discontinued operations, except for subsidiary HEI Investments, Inc.). (*unconsolidated subsidiaries)

HEIDI		HEI Diversified, Inc., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and the parent company of American Savings Bank, F.S.B.

HEIII		HEI Investments, Inc. (formerly HEI Investment Corp.), a subsidiary of HEI Power Corp.

HEIPC		HEI Power Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc., and the parent company of numerous subsidiaries, the majority of which were dissolved or otherwise wound up since 2002, pursuant to a formal plan to exit the international power business (formerly engaged in by HEIPC and its subsidiaries) adopted by the HEI Board of Directors in October 2001

HEIPC Group		HEI Power Corp. and its subsidiaries

HEIRSP		Hawaiian Electric Industries Retirement Savings Plan

HELCO		Hawaii Electric Light Company, Inc., an electric utility subsidiary of Hawaiian Electric Company, Inc.

IPP		Independent power producer

IRP		Integrated resource plan

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

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

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

SOX		Sarbanes-Oxley Act of 2002

SPRBs		Special Purpose Revenue Bonds

TOOTS		The Old Oahu Tug Service, a wholly owned subsidiary of Hawaiian Electric Industries, 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 of collateral underlying loans and mortgage-related securities) and decisions concerning the extent of the presence of the federal government and military in Hawaii;

•

the effects of weather and natural disasters;

•

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, relations with Iran and Iran’s nuclear activities;

•

the timing and extent of changes in interest rates;

•

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

•

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

•

demand for services and market acceptance risks;

•

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 American Savings Bank, F.S.B.’s (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 reserve margins on Oahu are lower than considered desirable;

•

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;

•

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 and their subsidiaries (including changes in taxation, environmental laws and regulations and governmental fees and assessments); decisions by the Public Utilities Commission of the State of Hawaii (PUC) in rate cases and other proceedings and by other agencies and courts on land use, environmental and other permitting issues; required corrective actions, restrictions and penalties (that may arise with respect to environmental conditions, capital adequacy and business practices);

•

increasing operations and maintenance expenses for the electric utilities and the possibility of more frequent rate cases;

•

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

•

the effects of changes in accounting principles applicable to HEI, HECO and their subsidiaries, including continued regulatory accounting under Statement of Financial Accounting Standards (SFAS) No. 71 (Accounting for the Effects of Certain Types of Regulation), 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 power purchase arrangements with independent power producers, and the possible effects of potential changes in the accounting for retirement benefits;

•

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 rights 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;

•

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

•

the ability of consolidated HEI to generate capital gains and utilize capital loss carryforwards on future tax returns;

•

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 and its 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 Balance Sheets (unaudited)


(dollars in thousands)	March 31, 2006			December 31, 2005
Assets
Cash and equivalents	$	155,382		$	151,513
Federal funds sold		85,232			57,434
Accounts receivable and unbilled revenues, net		228,771			249,473
Available-for-sale investment and mortgage-related securities		2,609,160			2,629,351
Investment in stock of Federal Home Loan Bank of Seattle, at cost		97,764			97,764
Loans receivable, net		3,618,246			3,566,834
Property, plant and equipment, net of accumulated depreciation of $1,567,621 and $1,538,836		2,558,800			2,542,776
Regulatory assets		111,438			110,718
Other		425,892			456,134
Goodwill and other intangibles, net		89,023			89,580

	$	9,979,708		$	9,951,577

Liabilities and stockholders’ equity
Liabilities
Accounts payable	$	183,852		$	183,336
Deposit liabilities		4,610,399			4,557,419
Short-term borrowings		182,584			141,758
Other borrowings		1,623,287			1,622,294
Long-term debt, net		1,133,041			1,142,993
Deferred income taxes		195,874			207,997
Regulatory liabilities		224,598			219,204
Contributions in aid of construction		260,692			256,263
Other		319,566			369,390

		8,733,893			8,700,654

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 100,000,000 shares; issued and outstanding: 81,059,892 shares and 80,983,326 shares		1,020,161			1,018,966
Retained earnings		242,605			235,394
Accumulated other comprehensive loss, net of tax benefits		(51,244	)		(37,730	)

		1,211,522			1,216,630

	$	9,979,708		$	9,951,577

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

Hawaiian Electric Industries, Inc. and Subsidiaries

Consolidated Statements of Income (unaudited)


(in thousands, except per share amounts and ratio of earnings to fixed charges)	Three months ended March 31
	2006			2005
Revenues
Electric utility	$	475,056		$	374,775
Bank		100,004			97,224
Other		(98	)		629

		574,962			472,628

Expenses
Electric utility		429,476			343,169
Bank		72,989			68,271
Other		3,346			4,517

		505,811			415,957

Operating income (loss)
Electric utility		45,580			31,606
Bank		27,015			28,953
Other		(3,444	)		(3,888	)

		69,151			56,671

Interest expense—other than bank		(19,117	)		(18,835	)
Allowance for borrowed funds used during construction		702			427
Preferred stock dividends of subsidiaries		(473	)		(476	)
Allowance for equity funds used during construction		1,548			1,087

Income before income taxes		51,811			38,874
Income taxes		19,474			14,779

Net income	$	32,337		$	24,095

Basic earnings per common share	$	0.40		$	0.30

Diluted earnings per common share	$	0.40		$	0.30

Dividends per common share	$	0.31		$	0.31

Weighted-average number of common shares outstanding		80,981			80,701
Dilutive effect of stock-based compensation		382			434

Adjusted weighted-average shares		81,363			81,135

Ratio of earnings to fixed charges (SEC method)
Excluding interest on ASB deposits		2.33			2.00

Including interest on ASB deposits		1.95			1.76

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

Hawaiian Electric Industries, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)


	Common stock			Retained earnings			Accumulated other comprehensive loss			Total
(in thousands, except per share amounts)	Shares	Amount		Retained earnings			Accumulated other comprehensive loss			Total
Balance, December 31, 2005	80,983	$	1,018,966	$	235,394		$	(37,730	)	$	1,216,630
Comprehensive income:
Net income	—		—		32,337			—			32,337
Net unrealized losses on securities arising during the period, net of tax benefits of $8,890	—		—		—			(13,466	)		(13,466	)
Minimum pension liability adjustment, net of tax benefits of $30	—		—		—			(48	)		(48	)

Comprehensive income (loss)	—		—		32,337			(13,514	)		18,823

Issuance of common stock, net	77		1,195		—			—			1,195
Common stock dividends ($0.31 per share)	—		—		(25,126	)		—			(25,126	)

Balance, March 31, 2006	81,060	$	1,020,161	$	242,605		$	(51,244	)	$	1,211,522

Balance, December 31, 2004	80,687	$	1,010,090	$	208,998		$	(8,143	)	$	1,210,945
Comprehensive income:
Net income	—		—		24,095			—			24,095
Net unrealized losses on securities arising during the period, net of tax benefits of $13,179	—		—		—			(28,661	)		(28,661	)

Comprehensive income (loss)	—		—		24,095			(28,661	)		(4,566	)

Issuance of common stock, net	25		1,914		—			—			1,914
Common stock dividends ($0.31 per share)	—		—		(25,020	)		—			(25,020	)

Balance, March 31, 2005	80,712	$	1,012,004	$	208,073		$	(36,804	)	$	1,183,273

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

Hawaiian Electric Industries, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)


	Three months ended March 31
(in thousands)	2006			2005
Cash flows from operating activities
Net income	$	32,337		$	24,095
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation of property, plant and equipment		35,261			33,505
Other amortization		2,196			(2	)
Reversal of allowance for loan losses		—			(3,100	)
Deferred income taxes		(2,839	)		(1,593	)
Allowance for equity funds used during construction		(1,548	)		(1,087	)
Excess tax benefits from share-based payment arrangements		(316	)		—
Changes in assets and liabilities, net of effects from the disposal of businesses
Decrease in accounts receivable and unbilled revenues, net		20,702			26,588
Decrease in federal tax deposit		30,000			—
Increase in accounts payable		516			14,144
Decrease in taxes accrued		(36,217	)		(22,356	)
Changes in other assets and liabilities		(9,293	)		(22,680	)

Net cash provided by operating activities		70,799			47,514

Cash flows from investing activities
Available-for-sale investment and mortgage-related securities purchased		(125,000	)		(50,006	)
Principal repayments on available-for-sale mortgage-related securities		121,632			169,580
Net increase in loans held for investment		(58,078	)		(81,887	)
Capital expenditures		(45,317	)		(39,103	)
Contributions in aid of construction		6,623			1,871
Other		1,177			1,248

Net cash provided by (used in) investing activities		(98,963	)		1,703

Cash flows from financing activities
Net increase in deposit liabilities		52,980			70,706
Net increase in short-term borrowings with maturities of three months or less		40,826			23,496
Net increase in retail repurchase agreements		7,864			5,428
Proceeds from other borrowings		206,490			352,950
Repayments of other borrowings		(214,300	)		(407,031	)
Proceeds from issuance of long-term debt		—			48,485
Repayment of long-term debt		(10,000	)		(47,000	)
Excess tax benefits from share-based payment arrangements		316			—
Net proceeds from issuance of common stock		103			—
Common stock dividends		(25,112	)		(25,006	)
Other		(6,294	)		(4,994	)

Net cash provided by financing activities		52,873			17,034

Cash flows from discontinued operations-net cash provided by (used in) operating activities (revised see Note 8)		6,958			(422	)

Net increase in cash and equivalents and federal funds sold		31,667			65,829
Cash and equivalents and federal funds sold, beginning of period		208,947			173,629

Cash and equivalents and federal funds sold, end of period	$	240,614		$	239,458

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 accounting principles generally accepted in the United States of America (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, 2005.

In the opinion of HEI’s management, the accompanying unaudited consolidated financial statements contain all material adjustments required by GAAP to present fairly the Company’s financial position as of March 31, 2006 and December 31, 2005 and the results of its operations and cash flows for the three months ended March 31, 2006 and 2005. All such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10–Q or other referenced material. Results of operations for interim periods are not necessarily indicative of results for the full year. When required, certain reclassifications are made to the prior period’s consolidated financial statements to conform to the current presentation.

(2) Segment financial information


(in thousands)	Electric Utility		Bank		Other			Total
Three months ended March 31, 2006
Revenues from external customers	$	474,986	$	100,004	$	(28	)	$	574,962
Intersegment revenues (eliminations)		70		—		(70	)		—

Revenues		475,056		100,004		(98	)		574,962

Profit (loss)*		34,097		27,015		(9,301	)		51,811
Income taxes (benefit)		13,109		10,188		(3,823	)		19,474

Net income (loss)		20,988		16,827		(5,478	)		32,337

Assets (at March 31, 2006, including net assets of discontinued operations)		3,076,673		6,864,915		38,120			9,979,708

Three months ended March 31, 2005
Revenues from external customers	$	374,775	$	97,224	$	629		$	472,628

Profit (loss)*		20,083		28,923		(10,132	)		38,874
Income taxes (benefit)		7,698		11,162		(4,081	)		14,779

Net income (loss)		12,385		17,761		(6,051	)		24,095

Assets (at March 31, 2005, including net assets of discontinued operations)		2,876,934		6,762,868		70,383			9,710,185

*	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 commitments and contingencies, see pages 14 through 31.

(4) Bank subsidiary

Selected financial information

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

Consolidated Balance Sheet Data (unaudited)


(in thousands)	March 31, 2006			December 31, 2005
Assets
Cash and equivalents	$	151,990		$	150,130
Federal funds sold		85,232			57,434
Available-for-sale investment and mortgage-related securities		2,609,160			2,629,351
Investment in stock of Federal Home Loan Bank of Seattle, at cost		97,764			97,764
Loans receivable, net		3,618,246			3,566,834
Other		213,623			244,443
Goodwill and other intangibles, net		88,900			89,379

	$	6,864,915		$	6,835,335

Liabilities and stockholder’s equity
Deposit liabilities–noninterest-bearing	$	641,844		$	624,497
Deposit liabilities–interest-bearing		3,968,555			3,932,922
Other borrowings		1,623,287			1,622,294
Other		79,721			98,189

		6,313,407			6,277,902

Common stock		321,792			321,538
Retained earnings		279,867			272,545
Accumulated other comprehensive loss, net of tax benefits		(50,151	)		(36,650	)

		551,508			557,433

	$	6,864,915		$	6,835,335

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

Consolidated Statements of Income Data (unaudited)


	Three months ended March 31
(in thousands)	2006		2005
Interest and dividend income
Interest and fees on loans	$	55,153	$	48,513
Interest and dividends on investment and mortgage-related securities		30,077		34,863

		85,230		83,376

Interest expense
Interest on deposit liabilities		15,393		12,017
Interest on other borrowings		17,162		17,748

		32,555		29,765

Net interest income		52,675		53,611
Reversal of allowance for loan losses		—		(3,100	)

Net interest income after reversal of allowance for loan losses		52,675		56,711

Noninterest income
Fees from other financial services		6,440		5,863
Fee income on deposit liabilities		4,189		4,171
Fee income on other financial products		2,437		2,435
Other income		1,708		1,379

		14,774		13,848

Noninterest expense
Compensation and employee benefits		17,837		16,627
Occupancy		4,463		4,018
Equipment		3,496		3,399
Services		3,717		3,667
Data processing		2,460		3,045
Other expense		8,461		10,850

		40,434		41,606

Income before minority interests and income taxes		27,015		28,953
Minority interests		—		27
Income taxes		10,188		11,162

Income before preferred stock dividends		16,827		17,764
Preferred stock dividends		—		3

Net income for common stock	$	16,827	$	17,761

Other borrowings consisted of securities sold under agreements to repurchase and advances from the Federal Home Loan Bank (FHLB) of Seattle of $724 million and $899 million, respectively, as of March 31, 2006 and $687 million and $935 million, respectively, as of December 31, 2005.

As of March 31, 2006, ASB had commitments to borrowers for undisbursed loan funds, loan commitments and unused lines and letters of credit of $1.1 billion.

In the first quarter of 2005, ASB recorded a $2 million reserve, net of taxes, for interest on the potential taxes related to the disputed timing of dividend income recognition because of a change in ASB’s 2000 and 2001 tax year-ends (see Note 10).

(5) Retirement benefits

For the first quarter of 2006, ASB paid $1 million and HECO paid $3 million of contributions to the retirement benefit plans, compared to $6 million and $3 million, respectively, in the first quarter of 2005. The Company’s current estimate of contributions to the retirement benefit plans in 2006 is $14 million, compared to contributions of $25 million in 2005.

The components of net periodic benefit cost were as follows:


	Three months ended March 31
	Pension benefits						Other benefits
(in thousands)	2006			2005			2006			2005
Service cost	$	8,091		$	7,283		$	1,271		$	1,273
Interest cost		13,476			13,058			2,732			2,808
Expected return on plan assets		(17,753	)		(18,374	)		(2,466	)		(2,485	)
Amortization of unrecognized transition obligation		1			1			784			784
Amortization of prior service cost (gain)		(156	)		(146	)		3			3
Recognized actuarial loss		3,111			1,594			224			159

Net periodic benefit cost	$	6,770		$	3,416		$	2,548		$	2,542

Of the net periodic benefit costs, the Company recorded expense of $7 million and $5 million in the first quarter of 2006 and 2005, respectively, and charged the remaining amounts primarily to electric utility plant.

(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 (5,358,572 shares unissued as of March 31, 2006) to officers and key employees as incentive stock options, nonqualified stock options, restricted stock, stock appreciation rights (SARs), stock payments or dividend equivalents. HEI has issued nonqualified stock options, SARs, restricted stock and dividend equivalents.

For the nonqualified stock options and SARs, the exercise price of each option or SAR generally equals the fair market value of HEI’s stock on or near the date of grant. Options and SARs and related dividend equivalents issued in the form of stock awarded 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 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.

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 method of accounting.

The Company recorded share-based compensation expense in the first quarters of 2006 and 2005 of $0.5 million and $1.2 million, respectively. The Company recorded related income tax benefit (including a valuation allowance due to limits on the deductibility of executive compensation) on share-based compensation expense in the first quarters of 2006 and 2005 of $0.2 million and $0.3 million, respectively. No share-based compensation cost has been capitalized.

In the first quarters of 2006 and 2005, no share-based compensation was granted, vested, forfeited or expired. See “Nonqualified stock options” below for first quarter of 2006 exercises. There were no exercises during the first quarter of 2005. Also, as a result of the changes for Section 409A of the Internal Revenue Code of 1986, as amended (Section 409A) in December 2005, a total of 61,482 dividend equivalent shares were paid out to SOIP participants in February 2006 for the stock option grants in 2001 to 2003 and SARs grants in 2004 and 2005. The gross amount of 69,737 dividend equivalent shares subject to 409A was reduced by 8,255 shares because the exercise prices of the SARs grants exceeded the value of the underlying common stock as of December 31, 2005. The intrinsic value of the 409A dividend equivalent payout was $1.6 million. The Company recorded related income tax benefits of $0.6 million. See “Restricted stock” for April 13, 2006 grant. For all share-based compensation, the estimated forfeiture rate is 1.4%.

Nonqualified stock options. Information about HEI’s nonqualified stock options are summarized as follows:


March 31, 2006			Outstanding				Exercisable
Year of grant	Range of exercise prices		Number of options	Weighted- average remaining contractual life	Weighted- average exercise price		Number of options	Weighted- average remaining contractual life	Weighted- average exercise price
1998	$	20.50	6,000	2.1	$	20.50	6,000	2.1	$	20.50
1999		17.61 - 17.63	65,000	3.3		17.62	65,000	3.3		17.62
2000		14.74	52,000	4.1		14.74	52,000	4.1		14.74
2001		17.96	140,500	5.1		17.96	140,500	5.1		17.96
2002		21.68	250,000	6.1		21.68	186,500	6.1		21.68
2003		20.49	409,500	7.1		20.49	195,500	7.1		20.49

	$	14.74–21.68	923,000	6.0	$	19.90	645,500	5.7	$	19.53

As of December 31, 2005, nonqualified stock option shares outstanding totaled 929,000, with a weighted-average exercise price of $19.88. During the first quarter of 2006, 6,000 shares were exercised, with a weighted-average exercise price of $17.31. Cash received from this exercise was $104,000 and the intrinsic value (amount by which the fair market value of the underlying stock exceeds the exercise price of the option plus the fair market value of the related dividend equivalents) of the shares was $109,000. The actual tax benefit realized for the tax deduction from this exercise was $42,000.

As of March 31, 2006, nonqualified stock option shares outstanding and exercisable had an aggregate intrinsic value (including dividend equivalents) of $10.8 million and $8.2 million, respectively.

As of March 31, 2006, there was $0.4 million of total unrecognized compensation cost related to nonvested stock options and that cost is expected to be recognized over a weighted average period of one year.

Stock appreciation rights. Information about HEI’s stock appreciation rights are summarized as follows:


March 31, 2006			Outstanding				Exercisable
Year of grant	Range of exercise prices		Number of underlying shares of SARs	Weighted- average remaining contractual life	Weighted- average exercise price		Number of underlying shares of SARs	Weighted- average remaining contractual life	Weighted- average exercise price
2004	$	26.02	325,000	8.1	$	26.02	81,250	8.1	$	26.02
2005		26.18	554,000	9.1		26.18	—	—		—

	$	26.02 – 26.18	879,000	8.7	$	26.12	81,250	8.1	$	26.02

As of December 31, 2005, stock appreciation rights shares outstanding totaled 879,000, with a weighted-average exercise price of $26.12. As of March 31, 2006, the stock appreciation rights shares outstanding and exercisable had an aggregate intrinsic value (including dividend equivalents) of $1.7 million and $0.2 million, respectively.

As of March 31, 2006, there was $2.2 million of total unrecognized compensation cost related to SARs and that cost is expected to be recognized over a weighted average period of 2.8 years.

The weighted-average fair value of each of the SARs granted during 2005 was $5.82 (at grant date). For 2005, the weighted-average assumptions used to estimate fair value include: risk-free interest rate of 4.1%, expected volatility of 18.1%, expected dividend yield of 5.9%, term of 10 years and expected life of 4.5 years. The weighted-average fair value of the SARs grant is estimated on the date of grant using a Binomial Option Pricing Model. See below for discussion of 2005 grant modification. The expected volatility is based on historical price fluctuations. The Company believes that historical volatility is appropriate based upon the Company’s business model and strategies.

Section 409A modification. As noted above, in December 2005, to comply with Section 409A, HEI modified certain provisions pertaining to the dividend equivalent rights attributable to the outstanding grants of nonqualified stock options and SARs held by 40 employees under the 1987 HEI Stock Option and Incentive Plan, as amended. The modifications apply to the nonqualified stock options granted in 2001, 2002, and 2003 and the SARs granted in 2004 and 2005. When a share-based award is modified, the Company recognizes the incremental compensation cost, which is measured as the excess, if any, of the fair value of the modified award over the fair value of the original award immediately before its terms are modified.

The assumptions used to estimate fair value at the time of the Section 409A modification for the 2005 SARs include: risk-free interest rate of 4.4%, expected volatility of 14.9%, expected dividend yield of 4.6%. The expected life used at the time of modification was 4.2 years for 2005. As of December 7, 2005, the fair value of modified 2005 SAR, the fair value of original 2005 SAR and the additional compensation cost to be recognized per grant was $5.07, $4.95 and $0.12, respectively. The additional compensation cost for the Section 409A modification was not material.

Restricted stock. As of December 31, 2005 and March 31, 2006, restricted stock shares outstanding totaled 41,000, with a weighted-average grant date fair value of $23.50.

The actual tax benefit realized for the tax deductions from restricted stock dividends totaled were immaterial for the first quarters of 2006 and 2005.

As of March 31, 2006, there was $0.4 million of total unrecognized compensation cost related to nonvested restricted stock. The cost is expected to be recognized over a period of 2.9 years.

In place of a SARs grant for 2006, on April 13, 2006, 60,800 shares of restricted stock were granted to officers and key employees with a fair market value of $1.6 million.

(7) Commitments and contingencies

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

(8) Cash flows

Supplemental disclosures of cash flow information

For the three months ended March 31, 2006 and 2005, the Company paid interest amounting to $39.1 million and $36.6 million, respectively.

For the three months ended March 31, 2006 and 2005, the Company paid income taxes amounting to $1.9 million and $11.8 million (including payment for bank franchise taxes for the three months ended March 31, 2005 related to a prior year settlement), respectively.

Supplemental disclosures of noncash activities

Noncash increases in common stock for director and officer compensatory plans were $0.8 million and $1.9 million for the three months ended March 31, 2006 and 2005, respectively.

Revised cash flows from discontinued operations

The Company has separately disclosed the operating, investing and financing portions of the cash flows attributable to its discontinued operations for the first quarter of 2006, which in the first quarter of 2005 were reported on a combined basis as a single amount. For the first quarter of 2006 and 2005, there were no cash flows from investing and financing activities from the Company’s discontinued operations.

(9) Recent accounting pronouncements and interpretations

For a discussion of a recent accounting pronouncement regarding variable interest entities (VIEs), see Note 7 of HECO’s “Notes to Consolidated Financial Statements.”

Other-than-temporary impairment and its application to certain investments

In March 2004, the FASB ratified EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF Issue No. 03-1 provides guidance for determining whether an investment in debt or equity securities is impaired, evaluating whether an impairment is other-than-temporary and measuring impairment. EITF Issue No. 03-1 also provides disclosure guidance. The recognition and measurement guidance would have applied prospectively to all current and future investments within the scope of EITF Issue No. 03-1 in reporting periods beginning after June 15, 2004. However, in September 2004, the FASB issued FASB Staff Position (FSP) EITF 03-1-1 to delay the effective date of the recognition and measurement guidance. At its June 29, 2005 meeting, the FASB decided not to provide additional guidance on the meaning of other-than-temporary impairment, but directed its staff to issue proposed FSP EITF 03-1-a as final (retitled as FSP FAS 115-1 and FAS 124-1). The guidance in FSP FAS 115-1 and FAS 124-1 addresses the determination of when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. The FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance in this FSP amends FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and FASB Statement No. 124, “Accounting for Certain Investments Held by Not-for-Profit Organizations,” and adds a footnote to APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.” The guidance in this FSP nullifies certain requirements of EITF

Issue No. 03-1 and supersedes EITF Abstracts, Topic D-44, “Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value.” The guidance in this FSP is required to be applied to reporting periods beginning after December 15, 2005. The Company adopted FSP FAS 115-1 on January 1, 2006 and the adoption had no effect on the Company’s financial statements.

Share-based payment

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment,” which requires companies to recognize the grant-date fair value of stock options and other equity-based compensation issued to employees in the income statement. In March 2005, the SEC issued Staff Accounting Bulletin (SAB) No. 107, which provides accounting, disclosure, valuation and other guidance related to share-based payment arrangements. The Company adopted the provisions of SFAS No. 123 (revised 2004) using a modified prospective application and the guidance in SAB No. 107 on January 1, 2006 and the net income impact of adoption was immaterial. Since the Company adopted the recognition provisions of SFAS No. 123 as of January 1, 2002, the only expense recognition change the Company made upon adoption of SFAS No. 123 (revised 2004) was how it accounts for forfeitures. The average annual forfeiture rate for 1996 through 2005 was 1.4% and historically has not been significant. In accordance with SFAS No. 123 (revised 2004), expanded disclosures are included in Note 6.

Accounting changes and error corrections

In June 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” This standard replaces APB Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” Among other changes, SFAS No. 154 requires that a voluntary change in accounting principle be applied retrospectively so that all prior period financial statements presented are based on the new accounting principle, unless it is impracticable to do so. SFAS No. 154 also provides that (1) a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a “restatement.” SFAS No. 154 is effective for accounting changes and error corrections made in fiscal years beginning after December 15, 2005. The Company adopted SFAS No. 154 on January 1, 2006 and the adoption had no effect on the Company’s financial statements.

Accounting for certain hybrid financial instruments

In March 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments.” This statement amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” This statement permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, and clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of the first fiscal year that begins after September 15, 2006. The Company will adopt SFAS No. 155 on January 1, 2007. Because the impact of adopting the provisions of SFAS No. 155 will be dependent on future events and circumstances, management cannot predict such impact.

Accounting for servicing of financial assets

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets.” This statement amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” This statement requires an entity to recognize in certain situations a servicing asset or servicing liability when it undertakes an obligation to service a financial asset, requires all separately recognized servicing assets and liabilities to be initially measured at fair value (if practicable), permits alternative subsequent measurement methods for each class of servicing assets and liabilities, permits a limited one-time reclassification of available-for-sale securities to trading securities at adoption, requires separate presentation of servicing assets and liabilities subsequently measured at fair value in the balance sheet and requires additional disclosures. SFAS No. 156 must be adopted by the beginning of the first fiscal year that begins after September 15, 2006. The Company will adopt SFAS

No. 156 on January 1, 2007 and management does not expect the impact of adoption will be material to the Company’s financial statements.

(10) Income taxes

In the first quarter of 2005, the Company recorded a $2 million reserve, net of taxes, for interest on the potential taxes related to the disputed timing of dividend income recognition because of a change in ASB’s 2000 and 2001 tax year-ends. In the second quarter of 2005, the Company made a $30 million deposit primarily to stop the further accrual of interest on the potential taxes related to the disputed timing of dividend income recognition. Also in the second quarter of 2005, $1 million of income taxes and interest payable, net of taxes, were reversed due to the resolution of audit issues with the Internal Revenue Service (IRS). In the fourth quarter of 2005, additional IRS audit issues were resolved, resulting in the reversal of $1 million of interest, net of taxes.

As of March 31, 2006, $1 million, net of tax effects, was reserved for unresolved tax issues and related interest. Although not probable, adverse developments on unresolved issues could result in additional charges to net income in the future. Based on information currently available, the Company believes it has adequately provided for unresolved income tax issues with federal and state tax authorities and related interest, and that the ultimate resolution of tax issues for all open tax periods will not have a material adverse effect on its results of operations, financial condition or liquidity.

(11) Investment in Hoku Scientific, Inc.

As of March 31, 2006, HEI Properties, Inc. (HEIPI) held shares of Hoku Scientific, Inc. (Hoku), a Hawaii fuel cell technology startup company. Prior to August 5, 2005, the investment had been accounted for under the cost method. Hoku went public and shares of Hoku began trading on the Nasdaq Stock Market on August 5, 2005. HEIPI was subject to certain “lockup” provisions that expired in February 2006. Since August 5, 2005, Hoku shares have been considered marketable and HEIPI has classified the shares as trading securities, carried at fair value with changes in fair value recorded in earnings. In the first quarter of 2006, HEIPI recognized a $0.4 million loss (unrealized and realized), net of taxes, on the Hoku shares. As of March 31, 2006, HEIPI had sold 11% of its Hoku shares and carried its remaining investment in Hoku shares at $4 million.

(12) Credit agreements

Effective April 3, 2006, HEI entered into a revolving unsecured credit agreement establishing a line of credit facility of $100 million, with a letter of credit sub-facility, expiring on March 31, 2011, with a syndicate of eight financial institutions. Any draws on the facility bear interest at the “Adjusted LIBO Rate” plus 50 basis points or the greater of (a) the “Prime Rate” and (b) the sum of the “Federal Funds Rate” plus 50 basis points, as defined in the agreement. Annual fees on undrawn commitments are 10 basis points. The agreement contains customary conditions which must be met in order to draw on it, including compliance with its covenants. In addition to customary defaults, HEI’s failure to maintain its nonconsolidated “Capitalization Ratio” (funded debt) of 50% or less and “Consolidated Net Worth” of $850 million, as defined in its agreement, or meet other requirements will result in an event of default.

Also effective April 3, 2006, HEI entered into a $75 million bilateral revolving unsecured credit agreement with Merrill Lynch Bank USA, which expires on December 27, 2006. Any draws on the facility bear interest at the “Adjusted LIBO Rate” plus 57.5 basis points or the greater of (a) the “Prime Rate” and (b) the sum of the “Federal Funds Rate” plus 50 basis points, as defined in the agreement. The agreement’s conditions precedent to drawing on the line and events of default are similar to HEI’s $100 million revolving unsecured credit agreement.

These two facilities, currently totaling $175 million, are maintained to support the issuance of commercial paper, but also may be drawn for general corporate purposes. The facilities contain provisions for revised pricing in the event of a ratings change and replaced HEI’s four bilateral bank lines of credit totaling $80 million, which were terminated concurrently with the effectiveness of the new facilities. The Company used the new facilities to support the issuance of commercial paper to refinance its $100 million of Series C medium-term notes, which matured on April 10, 2006. As of May 1, 2006, the $175 million of credit facilities were undrawn.

See Note 10 of HECO’s “Notes to Consolidated Financial Statements” for a discussion of HECO’s credit facility.

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidated Balance Sheets (unaudited)


(in thousands, except par value)	March 31, 2006			December 31, 2005
Assets
Utility plant, at cost
Land	$	33,188		$	33,034
Plant and equipment		3,816,070			3,749,386
Less accumulated depreciation		(1,482,595	)		(1,456,537	)
Plant acquisition adjustment, net		132			145
Construction in progress		123,530			147,756

Net utility plant		2,490,325			2,473,784

Current assets
Cash and equivalents		1,884			143
Customer accounts receivable, net		112,170			123,895
Accrued unbilled revenues, net		81,408			91,321
Other accounts receivable, net		10,156			14,761
Fuel oil stock, at average cost		93,283			85,450
Materials and supplies, at average cost		28,795			26,974
Prepaid pension benefit cost		101,378			106,318
Other		7,398			8,584

Total current assets		436,472			457,446

Other long-term assets
Regulatory assets		111,438			110,718
Unamortized debt expense		14,179			14,361
Other		24,259			25,152

Total other long-term assets		149,876			150,231

	$	3,076,673		$	3,081,461

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		299,186			299,186
Retained earnings		662,034			654,686

Common stock equity		1,046,607			1,039,259
Cumulative preferred stock – not subject to mandatory redemption		34,293			34,293
Long-term debt, net		766,041			765,993

Total capitalization		1,846,941			1,839,545

Current liabilities
Short-term borrowings–nonaffiliates		145,157			136,165
Accounts payable		115,465			122,201
Interest and preferred dividends payable		14,441			9,990
Taxes accrued		114,111			133,583
Other		31,761			37,132

Total current liabilities		420,935			439,071

Deferred credits and other liabilities
Deferred income taxes		203,972			208,374
Regulatory liabilities		224,598			219,204
Unamortized tax credits		56,242			55,327
Other		63,293			63,677

Total deferred credits and other liabilities		548,105			546,582

Contributions in aid of construction		260,692			256,263

	$	3,076,673		$	3,081,461

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

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidated Statements of Income (unaudited)


	Three months ended March 31
(in thousands, except ratio of earnings to fixed charges)	2006			2005
Operating revenues	$	473,971		$	373,690

Operating expenses
Fuel oil		175,338			115,626
Purchased power		117,720			101,216
Other operation		42,019			41,316
Maintenance		17,052			17,938
Depreciation		32,533			30,820
Taxes, other than income taxes		44,523			35,971
Income taxes		13,224			7,738

		442,409			350,625

Operating income		31,562			23,065

Other income
Allowance for equity funds used during construction		1,548			1,087
Other, net		909			843

		2,457			1,930

Income before interest and other charges		34,019			24,995

Interest and other charges
Interest on long-term debt		10,778			10,909
Amortization of net bond premium and expense		543			556
Other interest charges		1,913			1,073
Allowance for borrowed funds used during construction		(702	)		(427	)
Preferred stock dividends of subsidiaries		229			229

		12,761			12,340

Income before preferred stock dividends of HECO		21,258			12,655
Preferred stock dividends of HECO		270			270

Net income for common stock	$	20,988		$	12,385

Ratio of earnings to fixed charges (SEC method)		3.38			2.51

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidated Statements of Retained Earnings (unaudited)


	Three months ended March 31
(in thousands)	2006			2005
Retained earnings, beginning of period	$	654,686		$	632,779
Net income for common stock		20,988			12,385
Common stock dividends		(13,640	)		(9,933	)

Retained earnings, end of period	$	662,034		$	635,231

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 Statements of Cash Flows (unaudited)


(in thousands)	Three months ended March 31
(in thousands)	2006			2005
Cash flows from operating activities
Income before preferred stock dividends of HECO	$	21,258		$	12,655
Adjustments to reconcile income before preferred stock dividends of HECO to net cash provided by operating activities
Depreciation of property, plant and equipment		32,533			30,820
Other amortization		1,678			2,223
Deferred income taxes		(4,390	)		(1,398	)
Tax credits, net		1,229			693
Allowance for equity funds used during construction		(1,548	)		(1,087	)
Changes in assets and liabilities
Decrease in accounts receivable		16,330			15,509
Decrease in accrued unbilled revenues		9,913			13,527
Increase in fuel oil stock		(7,833	)		(6,874	)
Increase in materials and supplies		(1,821	)		(1,451	)
Decrease in prepaid pension benefit cost		4,940			1,901
Increase in regulatory assets		(1,119	)		(279	)
Decrease in accounts payable		(6,736	)		(9,507	)
Decrease in taxes accrued		(19,472	)		(23,519	)
Changes in other assets and liabilities		3,992			469

Net cash provided by operating activities		48,954			33,682

Cash flows from investing activities
Capital expenditures		(43,079	)		(37,757	)
Contributions in aid of construction		6,623			1,871
Other		108			1,423

Net cash used in investing activities		(36,348	)		(34,463	)

Cash flows from financing activities
Common stock dividends		(13,640	)		(9,933	)
Preferred stock dividends		(270	)		(270	)
Proceeds from issuance of long-term debt		—			48,485
Repayment of long-term debt		—			(47,000	)
Net increase in short-term borrowings from nonaffiliates and affiliate with original maturities of three months or less		8,992			22,002
Other		(5,947	)		(4,853	)

Net cash provided by (used in) financing activities		(10,865	)		8,431

Net increase in cash and equivalents		1,741			7,650
Cash and equivalents, beginning of period		143			327

Cash and equivalents, end of period	$	1,884		$	7,977

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, 2005.

In the opinion of HECO’s management, the accompanying unaudited consolidated financial statements contain all material adjustments required by GAAP to present fairly the financial position of HECO and its subsidiaries as of March 31, 2006 and December 31, 2005 and the results of their operations and cash flows for the three months ended March 31, 2006 and 2005. 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 Maui Electric Company, Limited (MECO) and Hawaii Electric Light Company, Inc. (HELCO) 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, MECO and HELCO under an expense agreement and HECO’s obligations under its trust guarantee and its guarantee of the obligations of MECO and HELCO under their respective debentures, are the sole assets of Trust III. Trust III has at all times been an unconsolidated subsidiary of HECO. Since HECO, as the common security holder, does not absorb the majority of the variability of Trust III, HECO is not the primary beneficiary and does not consolidate Trust III in accordance with FIN 46R, “Consolidation of Variable Interest Entities.” Trust III’s balance sheets as of March 31, 2006 and December 31, 2005 each consisted of $51.5 million of 2004 Debentures; $50.0 million of 2004 Trust Preferred Securities; and $1.5 million of trust common securities. Trust III’s income statements for three months ended March 31, 2006 and 2005 each consisted of $0.8 million of interest income received from the 2004 Debentures; $0.8 million of distributions to holders of the Trust Preferred Securities; and $25,000 of common dividends on the trust common securities to HECO. So long as the 2004 Trust Preferred Securities are outstanding, HECO is not entitled to receive any funds from Trust III other than pro rata distributions, subject to certain subordination provisions, on the trust common securities. In the event of a default by HECO in the performance of its obligations under the 2004 Debentures or under its Guarantees, or in the event HECO, HELCO or MECO elect to defer payment of interest on any of their respective 2004 Debentures, then HECO will be subject to a number of restrictions, including a prohibition on the payment of dividends on its common stock.

Purchase power agreements

As of March 31, 2006, the Company had six purchase power agreements (PPAs) for a total of 540 megawatts (MW) of firm capacity, and other PPAs with smaller independent power producers (IPPs) and Schedule Q providers that supplied as-available energy. Approximately 91% of the 540 MW of firm capacity is under PPAs, entered into before December 31, 2003, with AES Hawaii, Inc. (AES Hawaii), Kalaeloa Partners, L.P. (Kalaeloa), Hamakua Energy Partners, L.P. (HEP) and HPower. Purchases from all IPPs for the three months ended March 31, 2006 totaled $118 million, with purchases from AES Hawaii, Kalaeloa, HEP and HPower totaling $29 million, $46 million, $15 million and $11 million, respectively. The primary business activities of these IPPs are the generation and sale of power to the Company (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 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.

The Company has reviewed its significant PPAs and determined that the IPPs had no contractual obligation to provide such information. In March 2004, the Company 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. (The Company excluded their Schedule Q providers from the scope of FIN 46R because its variable interest in the provider would not be significant to the Company and they did not participate significantly in the design of the provider.) Some of the IPPs provided sufficient information for the Company 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 the Company to determine the applicability of FIN 46R, and the Company was unable to apply FIN 46R to these IPPs. In January 2005 and 2006 the Company again 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 again declined to provide the necessary information. Kalaeloa has since provided its information (see below).

As required under FIN 46R, the Company has continued its efforts to obtain from the IPPs the information necessary to make the determinations required under FIN 46R. If the requested information is ultimately received, a possible outcome of future analysis is the consolidation of an IPP 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.

Kalaeloa Partners, L.P. In October 1988, HECO entered into a power purchase agreement (PPA) with Kalaeloa, 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, which together effectively increased the firm capacity from 180 MW to 208 MW. The PPA and amendments have been approved by the PUC. 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 is a Delaware limited partnership formed on October 13, 1988 for the purpose of designing, constructing, owning and operating a 200 MW cogeneration facility on Oahu, which includes two 75 MW oil-fired combustion turbines, two waste heat recovery steam generators, a 50 MW turbine generator and other electrical, mechanical and control equipment. The two combustion turbines were upgraded during 2004 resulting in an increase in the facility’s nominal output rating to approximately 220 MW. Kalaeloa has a PPA with HECO (described above) and a steam delivery contract with another customer, the term of which coincides with the PPA. The facility has been certified by the Federal Energy Regulatory Commission as a Qualified Facility under the Public Utilities Regulatory Policies Act of 1978.

Pursuant to the provisions of FIN 46R, HECO is deemed to have a variable interest in Kalaeloa via 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 which affected 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 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 energy cost adjustment clause to the extent the fuel and fuel related energy payments are not included in base energy rates.

Apollo Energy Corporation and Kaheawa Wind Power, LLC In October 2004, HELCO and Apollo Energy Corporation (Apollo) executed a restated and amended PPA which enables Apollo to repower its 7 MW facility, and install additional capacity, for a total allowed capacity of 20 MW. The PUC approved the restated and amended PPA on March 10, 2005. Due to initial problems with securing wind turbines from its supplier, Apollo had earlier informed HELCO that the project may be delayed. However, Apollo recently informed HELCO that its wind turbine supply problems have been resolved and it can now meet the April 2007 target for commercial operation. In December 2004, MECO executed a new PPA with Kaheawa Wind Power, LLC (KWP), which is installing a 30 MW windfarm on Maui. The revised PPA with Apollo and new PPA with KWP were approved by the PUC in March 2005, and became effective in April 2005. The PPAs require Apollo and KWP to provide information necessary to (1) determine if HELCO and MECO must consolidate Apollo and KWP, respectively, under FIN 46R, (2) consolidate Apollo and/or KWP, if necessary under FIN 46R, and (3) comply with Section 404 of Sarbanes-Oxley Act of 2002 (SOX). Management is in the process of obtaining the information necessary to complete its determination of whether Apollo or KWP are VIEs and, if so, whether HELCO or MECO, respectively, is the primary beneficiary. Based on information currently available, management believes the impact on consolidated HECO’s financial statements of the consolidation of Apollo and/or KWP, if necessary, would not be material. However, depending on the magnitude of the improvements contemplated in the PPAs, the impact of a required consolidation of Apollo and KWP could be material in the future. If required to consolidate the financial statements of Apollo and/or KWP in the future and such consolidation had a material effect, HECO would retrospectively apply FIN 46R in accordance with SFAS No. 154, “Accounting Changes and Error Corrections.”

(3) Revenue taxes

HECO and its subsidiaries’ operating revenues include amounts for various revenue taxes. Revenue taxes are generally recorded as an expense in the period the related revenues are recognized. HECO and its subsidiaries’ payments to the taxing authorities are based on the prior year’s revenues. For the three months ended March 31, 2006 and 2005, HECO and its subsidiaries included approximately $42 million and $34 million, respectively, of revenue taxes in “operating revenues” and in “taxes, other than income taxes” expense.

(4) Retirement benefits

In each of the first quarters of 2006 and 2005, HECO and its subsidiaries paid contributions of $3 million to the retirement benefit plans. HECO and its subsidiaries’ current estimate of contributions to the retirement benefit plans in 2006 is $11 million, compared to their contributions of $18 million in 2005.

The components of net periodic benefit cost were as follows:


	Three months ended March 31
	Pension benefits						Other benefits
(in thousands)	2006			2005			2006			2005
Service cost	$	6,540		$	5,874		$	1,235		$	1,237
Interest cost		12,039			11,716			2,659			2,736
Expected return on plan assets		(15,932	)		(16,650	)		(2,427	)		(2,448	)
Amortization of unrecognized transition obligation		1			1			782			782
Amortization of prior service gain		(193	)		(188	)		—			—
Recognized actuarial loss		2,714			1,257			213			147

Net periodic benefit cost	$	5,169		$	2,010		$	2,462		$	2,454

Of the net periodic benefit costs, HECO and its subsidiaries recorded expense of $6 million and $3 million in the first quarter of 2006 and 2005, respectively, and charged the remaining amounts primarily to electric utility plant.

(5) Commitments and contingencies

Interim increases

On September 27, 2005, the PUC issued an Interim Decision and Order (D&O) granting a general rate increase on Oahu of 4.36%, or $53.3 million (3.33%, or $41.1 million excluding the transfer of certain costs from a surcharge line item on electric bills into base electricity charges). The tariff changes implementing the interim rate increase were effective September 28, 2005.

As of March 31, 2006, HECO and its subsidiaries had recognized $44 million of revenues with respect to interim orders ($18 million related to interim orders regarding certain integrated resource planning costs and $26 million related to an interim order with respect to Oahu’s general rate increase request), which revenues are subject to refund, with interest, if and to the extent they exceed the amounts allowed in final orders.

HELCO power situation

Historical context. In 1991, HELCO began planning to meet increased electric generation demand forecast for 1994. It 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 these units would be converted to a 56 MW (net) dual train combined-cycle unit. In January 1994, the PUC approved expenditures for CT-4. In 1995, the PUC allowed HELCO to pursue construction of and commit expenditures for CT-5 and ST-7, but noted that such costs are not to be included in rate base until the project is installed and “is used and useful for utility purposes.”

Status. Installation of CT-4 and CT-5 was significantly delayed as a result of land use and environmental permitting delays and related administrative proceedings and lawsuits. However, in 2003, the parties opposing the plant expansion project (other than Waimana Enterprises, Inc. (Waimana), which did not participate in the settlement discussions and opposes the settlement) 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 (Settlement Agreement). Subsequently, CT-4 and CT-5 were installed and put into limited commercial operation in May and June 2004, respectively. The Board of Land and Natural Resources’ (BLNR’s) construction deadline of July 31, 2005 has been met. Noise mitigation equipment has been installed on CT-4 and CT-5 and the need for additional noise mitigation work for CT-5 (not requiring any further construction) is being examined to ensure compliance with the night-time noise standard applicable to the plant. Currently, HELCO can operate the generating units at Keahole as required to meet its system needs.

Four appeals to the Hawaii Supreme Court by Waimana have been briefed and are awaiting decision. These are appeals to judgments of the Third Circuit Court involving (i) vacating of a November 2002 Final Judgment which had

halted construction; (ii) the BLNR 2003 construction period extension; (iii) the BLNR’s approval of a revocable permit allowing HELCO to use brackish well water as the primary source of water for operating the Keahole plant; and (iv) appeals (now consolidated) by Waimana and another party of judgments upholding the BLNR’s approval of the long-term lease allowing HELCO to use brackish well water. In the third appeal, additional briefs were filed on July 15, 2005 on the question of whether the appeal is moot given the granting by the BLNR of a long-term water lease allowing HELCO to use brackish water. Full implementation of the Settlement Agreement is conditioned on obtaining final dispositions of all litigation pending at the time of the Settlement Agreement. If the remaining dispositions are obtained, as HELCO believes they will be, then HELCO must undertake a number of actions under the Settlement Agreement, including expediting efforts to obtain the permits and approvals necessary for installation of ST-7 with selective catalytic reduction emissions control equipment, assisting the Department of Hawaiian Home Lands in installing solar water heating in its housing projects, supporting the Keahole Defense Coalition’s participation in certain PUC cases, and cooperating with neighbors and community groups (including a Hot Line service). Some of these actions have already commenced.

HELCO’s plans for ST-7 are progressing. In November 2003, HELCO filed a boundary amendment petition (to reclassify the Keahole plant site from conservation land use to urban land use) with the State Land Use Commission, which was approved in October 2005. HELCO obtained County rezoning to a “General Industrial” classification in May 2006, and will commence construction as other necessary permits are obtained.

Costs incurred; management’s evaluation. As of March 31, 2006, HELCO’s capitalized costs incurred in its efforts to put CT-4 and CT-5 into service and to support existing units (excluding costs for pre-air permit facilities) amounted to approximately $110 million, including $43 million for equipment and material purchases, $47 million for planning, engineering, permitting, site development and other costs and $20 million for allowance for funds used during construction (AFUDC) up to November 30, 1998, after which date management decided not to continue accruing AFUDC. The $110 million of costs was reclassified from construction in progress to plant and equipment in 2004 and 2005 and depreciated beginning January 1 of the year following the reclassification.

Management believes that the prospects are good that the remaining Settlement Agreement conditions will be satisfied and that any further necessary permits will be obtained and that the appeals will be favorably resolved. However, HELCO’s electric rates will not change specifically as a result of including CT-4 and CT-5 in plant and equipment until HELCO files a rate increase application and the PUC grants HELCO rate relief. In May 2006, HELCO filed a request for an electric rate increase in part to recover CT-4 and CT-5 costs. Management believes that no adjustment to costs incurred to put CT-4 and CT-5 into service is required as of March 31, 2006. However, if it becomes probable that the PUC will disallow some or all of the incurred costs for rate-making purposes, HELCO may be required to write off a material portion of these costs.

East Oahu Transmission Project (EOTP)

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

HECO continues to believe that the proposed reliability project (the East Oahu Transmission Project) is needed. In December 2003, HECO filed an application with the PUC requesting approval to commit funds (currently estimated at $57 million; see costs incurred below) for a revised EOTP using a 46 kV system. In March 2004, the PUC granted intervenor status to an environmental organization and three elected officials (collectively treated as one party), and a more limited participant status to four community organizations. The environmental review process has been completed and the PUC issued a Finding of No Significant Impact in April 2005. Subject to PUC approval and other construction permits, HECO plans to construct the revised project, none of which is in conservation district lands, in two phases, currently projected for completion in 2007 and 2009.

As of March 31, 2006, the accumulated costs recorded for the EOTP amounted to $27 million, including $12 million of planning and permitting costs incurred prior to 2003, when HECO was denied the approval necessary

for the partial underground/partial overhead 138 kV line, $4 million of planning and permitting costs incurred after 2002, and $11 million for AFUDC. In the written testimony filed in June 2005, the Consumer Advocate’s consultant 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 before 2003, and the related AFUDC of $5 million. In rebuttal testimony filed in August 2005, HECO contested the consultant’s recommendation, emphasizing that the originally proposed 138 kV line would have been a more comprehensive and robust solution to the transmission concerns the project addressed. The PUC held an evidentiary hearing on HECO’s application in November 2005. Just prior to the evidentiary hearing, the PUC approved that part of a stipulation between HECO and the Consumer Advocate that this proceeding should determine whether HECO should be given approval to expend funds for the EOTP provided that no part of the EOTP costs may be recovered from ratepayers unless and until the PUC grants HECO recovery in a rate case (which is consistent with other projects), and that the issue as to whether the pre-2003 planning and permitting costs, and related AFUDC, should be included in the project costs is reserved to, and may be raised in, the next HECO rate case (or other proceeding). Management believes no adjustment to project costs is required as of March 31, 2006. 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 and in the aggregate, on the Company’s or consolidated HECO’s financial statements.

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

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

Since 2001, subsurface investigation and assessment have been conducted and several preliminary oil removal tasks have been performed at the Iwilei Unit in accordance with notices of interest issued by the EPA and DOH. Currently, the Participating Parties are preparing Remedial Alternatives Analyses, which will identify and recommend remedial approaches. HECO routinely maintains its facilities and has investigated its operations in the Iwilei area and ascertained that they are not releasing petroleum.

In 2001, management developed a preliminary estimate of HECO’s share of costs for continuing investigative work, remedial activities and monitoring at the Iwilei Unit of approximately $1.1 million (which was expensed in 2001 and of which $0.6 million has been incurred through March 31, 2006). Because (1) the full scope and extent of additional investigative work, remedial activities and monitoring are unknown at this time, (2) the final cost allocation

method among the PRPs has not yet been determined and (3) management cannot estimate the costs to be incurred (if any) for the sites other than the Iwilei Unit (including its Honolulu power plant site), the cost estimate may be subject to significant change and additional material investigative and remedial costs may be incurred.

Regional Haze Rule amendments. In June 2005, the EPA finalized amendments to the July 1999 Regional Haze Rule that require emission controls known as best available retrofit technology (BART) for industrial facilities emitting air pollutants that reduce visibility in National Parks by causing or contributing to regional haze. States must develop BART implementation plans and schedules in accordance with the amended regional haze rule by December 2007. After Hawaii adopts its plan, HECO, HELCO and MECO will evaluate the impacts, if any, on them. If any of the utilities’ units are ultimately required to install post-combustion control technologies to meet BART emission limits, the capital and operations and maintenance costs could be significant.

Clean Water Act. Section 316(b) of the federal Clean Water Act requires that the EPA ensure that existing power plant cooling water intake structures reflect the best technology available for minimizing adverse environmental impacts. Effective September 9, 2004, the EPA issued a new rule, which establishes location and technology-based design, construction and capacity standards for existing cooling water intake structures. These standards will apply to HECO’s Kahe, Waiau and Honolulu generating stations unless the utility can demonstrate that at each facility implementation of these standards will result in costs either significantly higher than the EPA considered in establishing the standards for the facility or significantly greater than the benefits of meeting the standards. In either case, the EPA will then make a case-by-case determination of an appropriate performance standard. HECO has until March 2008 to make this showing or demonstrate compliance. HECO has retained a consultant to develop a cost effective compliance strategy and a preliminary assessment of technologies and operational measures. HECO is developing a monitoring program and plans to perform a cost-benefit analysis to demonstrate that HECO’s existing intake systems have minimal environmental impacts, which demonstration would exempt HECO from the standards. Concurrently, HECO will evaluate alternative compliance mechanisms allowed by the rule, some of which could entail significant capital expenditures to implement.

State of Hawaii, ex rel., Bruce R. Knapp, Qui Tam Plaintiff, and Beverly Perry, on behalf of herself and all others similarly situated, Class Plaintiff, vs. The AES Corporation, AES Hawaii, Inc., HECO and HEl

In April 2002, HECO and HEI were served with an amended complaint filed in the First Circuit Court of Hawaii alleging that the State of Hawaii and HECO’s other customers had been overcharged for electricity by over $1 billion since September 1992 due to alleged excessive prices in the PUC-approved amended PPA between HECO and AES Hawaii, Inc. The PUC proceedings in which the amended PPA was approved addressed a number of issues, including whether the terms and conditions of the PPA were reasonable.

As a result of rulings by the First Circuit Court in 2003, all claims for relief and causes of action in the amended complaint were dismissed. In October 2003, plaintiff Beverly Perry filed a notice of appeal on the grounds that the Circuit Court erred in its reliance on the doctrine of primary jurisdiction and the statute of limitations. A decision is pending from the Hawaii Supreme Court. In the opinion of management, the ultimate disposition of this matter will not have a material adverse effect on the Company’s or HECO’s consolidated financial position, results of operations or liquidity.

Collective bargaining agreements

Approximately 58% of the electric utilities’ employees are members of the International Brotherhood of Electrical Workers, AFL-CIO, Local 1260, Unit 8, which is the only union representing employees of the Company. The current collective bargaining and benefit agreements cover a four-year term, from November 1, 2003 to October 31, 2007, and provide for non-compounded wage increases (3% on November 1, 2003; 1.5% on November 1, 2004, May 1, 2005, November 1, 2005 and May 1, 2006; and 3% on November 1, 2006).

(6) Cash flows

Supplemental disclosures of cash flow information

For the three months ended March 31, 2006 and 2005, HECO and its subsidiaries paid interest amounting to $7.6 million and $7.7 million, respectively.

For the three months ended March 31, 2006 and 2005, HECO and its subsidiaries paid income taxes amounting to $4.9 million and $3.0 million, respectively.

Supplemental disclosure of noncash activities

The allowance for equity funds used during construction, which was charged to construction in progress as part of the cost of electric utility plant, amounted to $1.5 million and $1.1 million for the three months ended March 31, 2006 and 2005, respectively.

(7) Recent accounting pronouncements and interpretations

For a discussion of recent accounting pronouncements and interpretations regarding other-than-temporary impairment and its application to certain investments and accounting changes and error corrections, see Note 9 of HEI’s “Notes to Consolidated Financial Statements.”

Determining the variability to be considered in applying FIN 46R

In April 2006, the FASB issued FSP FIN 46R-6, “Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R).” This FSP provides guidance in applying FIN 46R, “Consolidation of Variable Interest Entities.” The variability that is considered can affect the determination of whether an entity is a VIE; which party, if any, is the primary beneficiary of the VIE; and calculations of expected losses and expected residual returns. A company is required to apply the guidance in the FSP prospectively to all entities (including newly created entities) with which that company first becomes involved and to all entities previously required to be analyzed under FIN 46R when a “reconsideration event” has occurred beginning the first day of the first reporting period beginning after June 15, 2006. Because the impact of adopting the provisions of FSP FIN 46R-6 will be dependent on future events and circumstances, management cannot predict such impact.

(8) Income taxes

At March 31, 2006, $0.2 million, net of tax effects, was reserved for unresolved tax issues and related interest. Although not probable, adverse developments on unresolved issues could result in additional charges to net income in the future. Based on information currently available, HECO and its subsidiaries believe they have adequately provided for unresolved income tax issues with federal and state tax authorities and related interest, and that the ultimate resolution of tax issues for all open tax periods will not have a material adverse effect on HECO’s consolidated results of operations, financial condition or liquidity.

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


	Three months ended March 31
(in thousands)	2006			2005
Operating income from regulated and nonregulated activities before income taxes (per HEI consolidated statements of income)	$	45,580		$	31,606
Deduct:
Income taxes on regulated activities		(13,224	)		(7,738	)
Revenues from nonregulated activities		(1,085	)		(1,085	)
Add:
Expenses from nonregulated activities		291			282

Operating income from regulated activities after income taxes (per HECO consolidated statements of income)	$	31,562		$	23,065

(10) Credit agreement

Effective April 3, 2006, HECO entered into a revolving unsecured credit agreement establishing a line of credit facility of $175 million with a syndicate of eight financial institutions. The agreement has an initial term which expires on March 29, 2007, but its term will automatically extend to 5 years if the longer-term agreement is approved by the PUC. Any draws on the facility bear interest at the “Adjusted LIBO Rate” plus 40 basis points or the greater of (a) the “Prime Rate” and (b) the sum of the “Federal Funds Rate” plus 50 basis points, as defined in the agreement. Annual fees on the undrawn commitments are 8 basis points. The agreement contains provisions for revised pricing in the event of a ratings change and customary conditions that must be met in order to draw on it, including compliance with several covenants. In addition to customary defaults, if HECO fails to maintain a “Consolidated Capitalization Ratio” (equity) of at least 35%, as defined in its agreement; if HECO’s as well as any of its subsidiaries’ guarantee of additional indebtedness of the subsidiaries would cause the subsidiary’s Consolidated Subsidiary Funded Debt to Capitalization Ratio to exceed 65%, as defined in its agreement; or if HECO fails to meet other requirements, an event of default would result.

This facility is maintained to support the issuance of commercial paper, but also may be drawn for capital expenditures and general corporate purposes. This facility replaced HECO’s six bilateral bank lines of credit totaling $175 million, which were terminated concurrently with the effectiveness of the new syndicated facility. HECO expects to file with the PUC in the second quarter of 2006 an application seeking approval to extend the termination date of this credit agreement from March 29, 2007, to March 31, 2011. As of May 1, 2006, the $175 million of credit facilities were undrawn.

(11) Consolidating financial information

HECO is not required to provide separate financial statements and 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.

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 Balance Sheet (unaudited)

March 31, 2006


(in thousands)	HECO			HELCO		MECO		RHI	Reclassi-fications and elimina- tions		HECO consoli- dated
Assets
Utility plant, at cost
Land	$	25,853		3,018		4,317		—	—		$	33,188
Plant and equipment		2,359,463		774,087		682,520		—	—			3,816,070
Less accumulated depreciation		(911,828	)	(282,023	)	(288,744	)	—	—			(1,482,595	)
Plant acquisition adjustment, net		—		—		132		—	—			132
Construction in progress		73,819		12,686		37,025		—	—			123,530

Net utility plant		1,547,307		507,768		435,250		—	—			2,490,325

Investment in subsidiaries, at equity		386,004		—		—		—	(386,004	)		—

Current assets
Cash and equivalents		1,504		3		290		87	—			1,884
Advances to affiliates		49,600		—		750		—	(50,350	)		—
Customer accounts receivable, net		75,426		19,917		16,827		—	—			112,170
Accrued unbilled revenues, net		55,860		13,499		12,049		—	—			81,408
Other accounts receivable, net		9,683		538		320		—	(385	)		10,156
Fuel oil stock, at average cost		70,930		8,557		13,796		—	—			93,283
Materials and supplies, at average cost		14,707		3,545		10,543		—	—			28,795
Prepaid pension benefit cost		78,964		14,843		7,571		—	—			101,378
Other		6,533		380		485		—	—			7,398

Total current assets		363,207		61,282		62,631		87	(50,735	)		436,472

Other long-term assets
Regulatory assets		82,430		14,236		14,772		—	—			111,438
Unamortized debt expense		9,657		2,336		2,186		—	—			14,179
Other		17,244		3,312		3,703		—	—			24,259

Total other long-term assets		109,331		19,884		20,661		—	—			149,876

	$	2,405,849		588,934		518,542		87	(436,739	)	$	3,076,673

Capitalization and liabilities
Capitalization
Common stock equity	$	1,046,607		189,919		196,014		71	(386,004	)	$	1,046,607
Cumulative preferred stock–not subject to mandatory redemption		22,293		7,000		5,000		—	—			34,293
Long-term debt, net		481,159		131,018		153,864		—	—			766,041

Total capitalization		1,550,059		327,937		354,878		71	(386,004	)		1,846,941

Current liabilities
Short-term borrowings–nonaffiliates		145,157		—		—		—	—			145,157
Short-term borrowings–affiliate		750		49,600		—		—	(50,350	)		—
Accounts payable		85,186		17,726		12,553		—	—			115,465
Interest and preferred dividends payable		9,819		1,907		2,918		—	(203	)		14,441
Taxes accrued		70,119		20,403		23,589		—	—			114,111
Other		20,468		3,806		7,653		16	(182	)		31,761

Total current liabilities		331,499		93,442		46,713		16	(50,735	)		420,935

Deferred credits and other liabilities
Deferred income taxes		158,358		24,550		21,064		—	—			203,972
Regulatory liabilities		152,878		41,211		30,509		—	—			224,598
Unamortized tax credits		31,717		12,788		11,737		—	—			56,242
Other		21,173		32,691		9,429		—	—			63,293

Total deferred credits and other liabilities		364,126		111,240		72,739		—	—			548,105

Contributions in aid of construction		160,165		56,315		44,212		—	—			260,692

	$	2,405,849		588,934		518,542		87	(436,739	)	$	3,076,673

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidating Balance Sheet (unaudited)

December 31, 2005


(in thousands)	HECO			HELCO		MECO		RHI	Reclassi- fications and eliminations		HECO consolidated
Assets
Utility plant, at cost
Land	$	25,699		3,018		4,317		—	—		$	33,034
Plant and equipment		2,304,142		766,714		678,530		—	—			3,749,386
Less accumulated depreciation		(898,351	)	(275,444	)	(282,742	)	—	—			(1,456,537	)
Plant acquisition adjustment, net		—		—		145		—	—			145
Construction in progress		108,060		11,414		28,282		—	—			147,756

Net utility plant		1,539,550		505,702		428,532		—	—			2,473,784

Investment in subsidiaries, at equity		383,715		—		—		—	(383,715	)		—

Current assets
Cash and equivalents		8		3		4		128	—			143
Advances to affiliates		49,700		—		5,250		—	(54,950	)		—
Customer accounts receivable, net		81,870		21,652		20,373		—	—			123,895
Accrued unbilled revenues, net		62,701		14,675		13,945		—	—			91,321
Other accounts receivable, net		10,212		2,772		1,185		—	592			14,761
Fuel oil stock, at average cost		64,309		7,868		13,273		—	—			85,450
Materials & supplies, at average cost		14,128		3,204		9,642		—	—			26,974
Prepaid pension benefit cost		82,497		15,388		8,433		—	—			106,318
Other		7,485		541		558		—	—			8,584

Total current assets		372,910		66,103		72,663		128	(54,358	)		457,446

Other long-term assets
Regulatory assets		81,682		14,596		14,440		—	—			110,718
Unamortized debt expense		9,778		2,362		2,221		—	—			14,361
Other		17,816		3,696		3,640		—	—			25,152

Total other long-term assets		109,276		20,654		20,301		—	—			150,231

	$	2,405,451		592,459		521,496		128	(438,073	)	$	3,081,461

Capitalization and liabilities
Capitalization
Common stock equity	$	1,039,259		189,407		194,190		118	(383,715	)	$	1,039,259
Cumulative preferred stock–not subject to mandatory redemption		22,293		7,000		5,000		—	—			34,293
Long-term debt, net		481,132		131,009		153,852		—	—			765,993

Total capitalization		1,542,684		327,416		353,042		118	(383,715	)		1,839,545

Current liabilities
Short-term borrowings–nonaffiliates		136,165		—		—		—	—			136,165
Short-term borrowings–affiliate		5,250		49,700		—		—	(54,950	)		—
Accounts payable		86,843		19,503		15,855		—	—			122,201
Interest and preferred dividends payable		7,217		1,311		1,664		—	(202	)		9,990
Taxes accrued		84,054		24,252		25,277		—	—			133,583
Other		24,971		3,566		7,791		10	794			37,132

Total current liabilities		344,500		98,332		50,587		10	(54,358	)		439,071

Deferred credits and other liabilities
Deferred income taxes		160,351		25,147		22,876		—	—			208,374
Regulatory liabilities		148,898		40,535		29,771		—	—			219,204
Unamortized tax credits		31,209		12,693		11,425		—	—			55,327
Other		21,522		31,781		10,374		—	—			63,677

Total deferred credits and other liabilities		361,980		110,156		74,446		—	—			546,582

Contributions in aid of construction		156,287		56,555		43,421		—	—			256,263

	$	2,405,451		592,459		521,496		128	(438,073	)	$	3,081,461

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidating Statement of Income (unaudited)

Three months ended March 31, 2006


(in thousands)	HECO			HELCO		MECO		RHI		Reclassi- fications and elimina- tions		HECO consoli- dated
Operating revenues	$	318,345		79,451		76,175		—		—		$	473,971

Operating expenses
Fuel oil		115,735		20,102		39,501		—		—			175,338
Purchased power		85,454		28,046		4,220		—		—			117,720
Other operation		28,201		7,252		6,566		—		—			42,019
Maintenance		10,557		3,616		2,879		—		—			17,052
Depreciation		18,693		7,431		6,409		—		—			32,533
Taxes, other than income taxes		29,896		7,403		7,224		—		—			44,523
Income taxes		9,057		1,171		2,996		—		—			13,224

		297,593		75,021		69,795		—		—			442,409

Operating income		20,752		4,430		6,380		—		—			31,562

Other income
Allowance for equity funds used during construction		1,077		40		431		—		—			1,548
Equity in earnings of subsidiaries		6,657		—		—		—		(6,657	)		—
Other, net		1,241		70		227		(47	)	(582	)		909

		8,975		110		658		(47	)	(7,239	)		2,457

Income (loss) before interest and other charges		29,727		4,540		7,038		(47	)	(7,239	)		34,019

Interest and other charges
Interest on long-term debt		6,743		1,808		2,227		—		—			10,778
Amortization of net bond premium and expense		339		100		104		—		—			543
Other interest charges		1,870		582		43		—		(582	)		1,913
Allowance for borrowed funds used during construction		(483	)	(19	)	(200	)	—		—			(702	)
Preferred stock dividends of subsidiaries		—		—		—		—		229			229

		8,469		2,471		2,174		—		(353	)		12,761

Income (loss) before preferred stock dividends of HECO		21,258		2,069		4,864		(47	)	(6,886	)		21,258
Preferred stock dividends of HECO		270		134		95		—		(229	)		270

Net income (loss) for common stock	$	20,988		1,935		4,769		(47	)	(6,657	)	$	20,988

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidating Statement of Retained Earnings (unaudited)

Three months ended March 31, 2006


(in thousands)	HECO			HELCO		MECO		RHI		Reclassi- fications and elimina- tions		HECO consoli- dated
Retained earnings, beginning of period	$	654,686		88,763		99,269		(363	)	(187,669	)	$	654,686
Net income (loss) for common stock		20,988		1,935		4,769		(47	)	(6,657	)		20,988
Common stock dividends		(13,640	)	(1,423	)	(2,945	)	—		4,368			(13,640	)

Retained earnings, end of period	$	662,034		89,275		101,093		(410	)	(189,958	)	$	662,034

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidating Statement of Income (unaudited)

Three months ended March 31, 2005


(in thousands)	HECO			HELCO		MECO		RHI		Reclassi- fications and elimina- tions		HECO consoli- dated
Operating revenues	$	246,128		63,865		63,697		—		—		$	373,690

Operating expenses
Fuel oil		70,884		15,307		29,435		—		—			115,626
Purchased power		78,226		19,782		3,208		—		—			101,216
Other operation		27,695		6,543		7,078		—		—			41,316
Maintenance		11,872		3,233		2,833		—		—			17,938
Depreciation		17,746		6,804		6,270		—		—			30,820
Taxes, other than income taxes		23,828		6,052		6,091		—		—			35,971
Income taxes		3,732		1,513		2,493		—		—			7,738

		233,983		59,234		57,408		—		—			350,625

Operating income		12,145		4,631		6,289		—		—			23,065

Other income
Allowance for equity funds used during construction		911		33		143		—		—			1,087
Equity in earnings of subsidiaries		6,393		—		—		—		(6,393	)		—
Other, net		1,033		59		66		(46	)	(269	)		843

		8,337		92		209		(46	)	(6,662	)		1,930

Income (loss) before interest and other charges		20,482		4,723		6,498		(46	)	(6,662	)		24,995

Interest and other charges
Interest on long-term debt		6,830		1,839		2,240		—		—			10,909
Amortization of net bond premium and expense		348		101		107		—		—			556
Other interest charges		1,003		280		59		—		(269	)		1,073
Allowance for borrowed funds used during construction		(354	)	(11	)	(62	)	—		—			(427	)
Preferred stock dividends of subsidiaries		—		—		—		—		229			229

		7,827		2,209		2,344		—		(40	)		12,340

Income (loss) before preferred stock dividends of HECO		12,655		2,514		4,154		(46	)	(6,622	)		12,655
Preferred stock dividends of HECO		270		134		95		—		(229	)		270

Net income (loss) for common stock	$	12,385		2,380		4,059		(46	)	(6,393	)	$	12,385

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidating Statement of Retained Earnings (unaudited)

Three months ended March 31, 2005


(in thousands)	HECO			HELCO		MECO		RHI		Reclassi- fications and elimina- tions		HECO consoli- dated
Retained earnings, beginning of period	$	632,779		85,861		94,492		(187	)	(180,166	)	$	632,779
Net income (loss) for common stock		12,385		2,380		4,059		(46	)	(6,393	)		12,385
Common stock dividends		(9,933	)	(1,676	)	(2,795	)	—		4,471			(9,933	)

Retained earnings, end of period	$	635,231		86,565		95,756		(233	)	(182,088	)	$	635,231

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidating Statement of Cash Flows (unaudited)

Three months ended March 31, 2006


(in thousands)	HECO			HELCO		MECO		RHI		Reclassi- fications and elimina- tions		HECO consoli- dated
Cash flows from operating activities
Income (loss) before preferred stock dividends of HECO	$	21,258		2,069		4,864		(47	)	(6,886	)	$	21,258
Adjustments to reconcile income (loss) before preferred stock dividends of HECO to net cash provided by (used in) operating activities
Equity in earnings		(6,682	)	—		—		—		6,657			(25	)
Common stock dividends received from subsidiaries		4,393		—		—		—		(4,368	)		25
Depreciation of property, plant and equipment		18,693		7,431		6,409		—		—			32,533
Other amortization		884		225		569		—		—			1,678
Deferred income taxes		(1,993	)	(597	)	(1,800	)	—		—			(4,390	)
Tax credits, net		720		142		367		—		—			1,229
Allowance for equity funds used during construction		(1,077	)	(40	)	(431	)	—		—			(1,548	)
Changes in assets and liabilities
Decrease in accounts receivable		6,973		3,969		4,411		—		977			16,330
Decrease in accrued unbilled revenues		6,841		1,176		1,896		—		—			9,913
Increase in fuel oil stock		(6,621	)	(689	)	(523	)	—		—			(7,833	)
Increase in materials and supplies		(579	)	(341	)	(901	)	—		—			(1,821	)
Decrease in prepaid pension benefit cost		3,533		545		862		—		—			4,940
Decrease (increase) in regulatory assets		(673	)	195		(641	)	—		—			(1,119	)
Decrease in accounts payable		(1,657	)	(1,777	)	(3,302	)	—		—			(6,736	)
Decrease in taxes accrued		(13,935	)	(3,849	)	(1,688	)	—		—			(19,472	)
Changes in other assets and liabilities		2,736		2,434		(207	)	6		(977	)		3,992

Net cash provided by (used in) operating activities		32,814		10,893		9,885		(41	)	(4,597	)		48,954

Cash flows from investing activities
Capital expenditures		(22,109	)	(9,554	)	(11,416	)	—		—			(43,079	)
Contributions in aid of construction		5,837		429		357		—		—			6,623
Advances to affiliates		100		—		4,500		—		(4,600	)		—
Other		108		—		—		—		—			108

Net cash used in investing activities		(16,064	)	(9,125	)	(6,559	)	—		(4,600	)		(36,348	)

Cash flows from financing activities
Common stock dividends		(13,640	)	(1,423	)	(2,945	)	—		4,368			(13,640	)
Preferred stock dividends		(270	)	(134	)	(95	)	—		229			(270	)
Net increase (decrease) in short-term borrowings from nonaffiliates and affiliate with original maturities of three months or less		4,492		(100	)	—		—		4,600			8,992
Other		(5,836	)	(111	)	—		—		—			(5,947	)

Net cash used in financing activities		(15,254	)	(1,768	)	(3,040	)	—		9,197			(10,865	)

Net increase (decrease) in cash and equivalents		1,496		—		286		(41	)	—			1,741
Cash and equivalents, beginning of period		8		3		4		128		—			143

Cash and equivalents, end of period	$	1,504		3		290		87		—		$	1,884

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidating Statement of Cash Flows (unaudited)

Three months ended March 31, 2005


(in thousands)	HECO			HELCO	MECO	RHI		Reclassi- fications and eliminations		HECO consolidated
Cash flows from operating activities
Income before preferred stock dividends of HECO	$	12,655		2,514	4,154	(46	)	(6,622	)	$	12,655
Adjustments to reconcile income (loss) before preferred stock dividends of HECO to net cash provided by (used in) operating activities
Equity in earnings		(6,418	)	—	—	—		6,393			(25	)
Common stock dividends received from subsidiaries		4,496		—	—	—

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