10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2004

OR

¨ 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 the registrant (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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

Indicate by check mark whether Registrant Hawaiian Electric Company, Inc. is an accelerated filer (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 issuer’s classes of common stock, as of the latest practicable date.

Class of Common Stock	Outstanding August 2, 2004
Hawaiian Electric Industries, Inc. (Without Par Value)	80,520,051 Shares
Hawaiian Electric Company, Inc. ($6 2/3 Par Value)	12,805,843 Shares (not publicly traded)

Hawaiian Electric Industries, Inc. and Subsidiaries

Hawaiian Electric Company, Inc. and Subsidiaries

Form 10-Q—Quarter ended June 30, 2004

INDEX

		Page No.
Glossary of terms		ii
Forward-looking statements and risk factors		v
PART I. FINANCIAL INFORMATION
Item 1.	Financial statements	1
	Hawaiian Electric Industries, Inc. and Subsidiaries
	Consolidated balance sheets (unaudited)—June 30, 2004 and December 31, 2003	1
	Consolidated statements of income (unaudited)—three and six months ended June 30, 2004 and 2003	2
	Consolidated statements of changes in stockholders’ equity (unaudited)—six months ended June 30, 2004 and 2003	3
	Consolidated statements of cash flows (unaudited)—six months ended June 30, 2004 and 2003	4
	Notes to consolidated financial statements (unaudited)	5
	Hawaiian Electric Company, Inc. and Subsidiaries
	Consolidated balance sheets (unaudited)—June 30, 2004 and December 31, 2003	16
	Consolidated statements of income (unaudited)—three and six months ended June 30, 2004 and 2003	17
	Consolidated statements of retained earnings (unaudited)—three and six months ended June 30, 2004 and 2003	17
	Consolidated statements of cash flows (unaudited)—six months ended June 30, 2004 and 2003	18
	Notes to consolidated financial statements (unaudited)	19
Item 2.	Management’s discussion and analysis of financial condition and results of operations	41
Item 3.	Quantitative and qualitative disclosures about market risk	65
Item 4.	Controls and procedures	66
PART II. OTHER INFORMATION
Item 1.	Legal proceedings	66
Item 2.	Changes in securities, use of proceeds and repurchases of equity securities	66
Item 5.	Other information	67
Item 6.	Exhibits and reports on Form 8-K	70
Signatures		72

i

Hawaiian Electric Industries, Inc. and Subsidiaries

Hawaiian Electric Company, Inc. and Subsidiaries

Form 10-Q—Quarter ended June 30, 2004

GLOSSARY OF TERMS

Terms	Definitions
AES Hawaii	AES Hawaii, Inc., formerly known as AES Barbers Point, Inc.
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 since March 15, 2001, Bishop Insurance Agency of Hawaii, Inc.), ASB Service Corporation (dissolved in January 2004), AdCommunications, Inc., American Savings Mortgage Co., Inc. (dissolved in July 2003), and ASB Realty Corporation
BLNR	Board of Land and Natural Resources of the State of Hawaii
CDUP	Conservation District Use Permit
CEPALCO	Cagayan Electric Power & Light Co., Inc.
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 I (dissolved in April 2004)*, HECO Capital Trust II (dissolved in April 2004)*, 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 District Cooling, Inc. (dissolved in October 2003), ProVision Technologies, Inc. (sold in July 2003), HEI Properties, Inc., HEI Leasing, Inc. (dissolved in October 2003), Hycap Management, Inc., Hawaiian Electric Industries Capital Trust I (dissolved in April 2004)*, Hawaiian Electric Industries Capital Trust II*, Hawaiian Electric Industries Capital Trust III*, HEI Preferred Funding, LP (dissolved in April 2004)*, The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp.), HEI Power Corp. and its subsidiaries** and Malama Pacific Corp.** (*unconsolidated subsidiaries as of January 1, 2004; **discontinued operations)
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
DLNR	Department of Land and Natural Resources of the State of Hawaii
DOH	Department of Health of the State of Hawaii

ii

GLOSSARY OF TERMS, continued

Terms	Definitions
DRIP	HEI Dividend Reinvestment and Stock Purchase Plan
EIS	Environmental Impact Statement
EITF	Emerging Issues Task Force
EPA	Environmental Protection Agency—federal
FASB	Financial Accounting Standards Board
Federal	U.S. Government
FHLB	Federal Home Loan Bank
FIN	FASB 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 I (dissolved in April 2004)*, HECO Capital Trust II (dissolved in April 2004)*, HECO Capital Trust III* and Renewable Hawaii, Inc. (*unconsolidated subsidiaries as of January 1, 2004)
HEI	Hawaiian Electric Industries, Inc., direct parent company of Hawaiian Electric Company, Inc., HEI Diversified, Inc., Pacific Energy Conservation Services, Inc., HEI District Cooling, Inc. (dissolved in October 2003), ProVision Technologies, Inc. (sold in July 2003), HEI Properties, Inc., HEI Leasing, Inc. (dissolved in October 2003), Hycap Management, Inc., Hawaiian Electric Industries Capital Trust I (dissolved in April 2004)*, Hawaiian Electric Industries Capital Trust II*, Hawaiian Electric Industries Capital Trust III*, The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp.), HEI Power Corp.** and Malama Pacific Corp.** (*unconsolidated subsidiaries as of January 1, 2004; **discontinued operations)
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, several of which were dissolved or otherwise wound up in 2002 and 2003 pursuant to a formal plan to exit the international power business (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
HEI’s 2003 Annual Report	Hawaiian Electric Industries, Inc.’s 2003 Annual Report to Shareholders (HEI Exhibit 13.1 to HEI’s Current Report on Form 8-K dated February 26, 2004, File No. 1-8503)
HELCO	Hawaii Electric Light Company, Inc., an electric utility subsidiary of Hawaiian Electric Company, Inc.

iii

GLOSSARY OF TERMS, continued

Terms	Definitions
HTB	Hawaiian Tug & Barge Corp. In November 1999, HTB sold substantially all of its operating assets and the stock of Young Brothers, Limited, and changed its name to The Old Oahu Tug Services, Inc.
IPP	Independent power producer
IRP	Integrated resource plan
kV	Kilovolt
KWH	Kilowatthour
LUC	Hawaii State Land Use Commission
MECO	Maui Electric Company, Limited, an electric utility subsidiary of Hawaiian Electric Company, Inc.
MW	Megawatt
NII	Net interest income
NPV	Net portfolio value
OTS	Office of Thrift Supervision, Department of Treasury
PPA	Power purchase agreement
PRPs	Potentially responsible parties
PUC	Public Utilities Commission of the State of Hawaii
RHI	Renewable Hawaii, Inc., a wholly owned subsidiary of Hawaiian Electric Company, Inc.
ROACE	Return on average common equity
SEC	Securities and Exchange Commission
SFAS	Statement of Financial Accounting Standards
SPRB	Special Purpose Revenue Bonds
TOOTS	The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp.), a wholly owned subsidiary of Hawaiian Electric Industries, Inc. On November 10, 1999, HTB sold the stock of YB and substantially all of HTB’s operating assets and changed its name.
VIE	Variable interest entity
YB	Young Brothers, Limited, which was sold on November 10, 1999, was formerly a wholly owned subsidiary of Hawaiian Tug & Barge Corp.

iv

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

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 (including future revenues, expenses, earnings or losses or growth rates), 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 (including HECO and its subsidiaries), 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 the military presence 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 and potential conflict or crisis with North Korea;

• 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;

• capacity and supply constraints or difficulties;

• 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 independent power producers to deliver the firm capacity anticipated in their power purchase agreements;

• 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’s subsidiaries (including HECO 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 and governmental fees and assessments); decisions by the Hawaii Public Utilities Commission (PUC) in rate cases and other proceedings and by other agencies and courts on land use, environmental and other permitting issues; required corrective actions (such as with respect to environmental conditions, capital adequacy and business practices);

• 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 No. 71 and the possible effects of applying new accounting principles applicable to variable interest entities (VIEs) to power purchase arrangements with independent power producers;

• the effects of changes by securities rating agencies in their ratings of the securities of HEI and HECO;

• 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 American Savings Bank, F.S.B. (ASB);

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

• the ultimate net proceeds from the disposition of assets and settlement of liabilities of discontinued or sold operations;

• the final outcome of tax positions taken by HEI and its subsidiaries, including with respect to ASB’s real estate investment trust subsidiary;

• the risks of suffering losses that are uninsured; and

• other risks or uncertainties described elsewhere in this report and in other periodic reports 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.

v

PART I—FINANCIAL INFORMATION

Item 1.  Financial  statements

Hawaiian Electric Industries, Inc. and Subsidiaries

Consolidated balance sheets (unaudited)

(dollars in thousands)	June 30, 2004			December 31, 2003
Assets
Cash and equivalents	$	192,481		$	223,310
Federal funds sold		20,087			56,678
Accounts receivable and unbilled revenues, net		184,300			187,716
Available-for-sale investment and mortgage-related securities		1,870,117			1,787,177
Available-for-sale mortgage-related securities pledged for repurchase agreements		1,000,681			941,571
Held-to-maturity investment securities		96,516			94,624
Loans receivable, net		3,096,010			3,121,979
Property, plant and equipment, net of accumulated depreciation of $1,416,847 and $1,367,538		2,344,396			2,311,888
Other		376,486			382,228
Goodwill and other intangibles		93,200			93,987
	$	9,274,274		$	9,201,158
Liabilities and stockholders’ equity
Liabilities
Accounts payable	$	153,071		$	132,780
Deposit liabilities		4,078,228			4,026,250
Short-term borrowings		14,197			—
Securities sold under agreements to repurchase		870,098			831,335
Advances from Federal Home Loan Bank		965,052			1,017,053
Long-term debt, net		1,166,602			1,064,420
Deferred income taxes		209,805			226,590
Regulatory liabilities, net		77,191			71,882
Contributions in aid of construction		231,551			233,969
Other		304,072			273,442
		8,069,867			7,877,721
Minority interests
HEI-  and HECO-obligated preferred securities of trust subsidiaries		—			200,000
Preferred stock of subsidiaries—not subject to mandatory redemption		34,406			34,406
		34,406			234,406
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: 80,373,804 shares and 75,837,588 shares		1,004,329			888,431
Retained earnings		191,464			197,774
Accumulated other comprehensive income (loss)		(25,792	)		2,826
		1,170,001			1,089,031
	$	9,274,274		$	9,201,158

See accompanying “Notes to consolidated financial statements.”

1

Hawaiian Electric Industries, Inc. and Subsidiaries

Consolidated statements of income (unaudited)

	Three months ended June 30,						Six months ended June 30,
(in thousands, except per share amounts and ratio of earnings to fixed charges)	2004			2003			2004			2003
Revenues
Electric utility	$	370,605		$	354,529		$	717,218		$	683,441
Bank		89,982			92,703			179,240			187,805
Other		1,211			1,524			2,450			2,146
		461,798			448,756			898,908			873,392
Expenses
Electric utility		324,691			311,944			627,164			599,881
Bank		66,971			70,342			130,121			143,018
Other		3,190			5,017			6,840			9,952
		394,852			387,303			764,125			752,851
Operating income (loss)
Electric utility		45,914			42,585			90,054			83,560
Bank		23,011			22,361			49,119			44,787
Other		(1,979	)		(3,493	)		(4,390	)		(7,806	)
		66,946			61,453			134,783			120,541
Interest expense—other than bank		(19,106	)		(17,879	)		(40,553	)		(35,859	)
Allowance for borrowed funds used during construction		733			446			1,377			889
Preferred stock dividends of subsidiaries		(475	)		(501	)		(950	)		(1,003	)
Preferred securities distributions of trust subsidiaries		—			(4,009	)		—			(8,018	)
Allowance for equity funds used during construction		1,673			989			3,122			1,977
Income before income taxes		49,771			40,499			97,779			78,527
Income taxes		38,533			14,739			55,609			28,440
Income from continuing operations		11,238			25,760			42,170			50,087
Discontinued operations-loss from operations, net of income tax benefits		—			(3,870	)		—			(3,870	)
Net income	$	11,238		$	21,890		$	42,170		$	46,217
Basic earnings per common share
Continuing operations	$	0.14		$	0.34		$	0.54		$	0.67
Discontinued operations		—			(0.05	)		—			(0.05	)
	$	0.14		$	0.29		$	0.54		$	0.62
Diluted earnings per common share
Continuing operations	$	0.14		$	0.34		$	0.53		$	0.67
Discontinued operations		—			(0.05	)		—			(0.05	)
	$	0.14		$	0.29		$	0.53		$	0.62
Dividends per common share	$	0.31		$	0.31		$	0.62		$	0.62
Weighted-average number of common shares outstanding		80,350			74,390			78,544			74,094
Dilutive effect of stock options and dividend equivalents		357			364			351			350
Adjusted weighted-average shares		80,707			74,754			78,895			74,444
Ratio of earnings to fixed charges (SEC method)
Excluding interest on ASB deposits								2.20			1.92
Including interest on ASB deposits								1.92			1.69

See accompanying “Notes to consolidated financial statements.”

2

Hawaiian Electric Industries, Inc. and Subsidiaries

Consolidated statements of changes in stockholders’ equity (unaudited)

	Common stock			Retained earnings			Accumulated other comprehensive income (loss)			Total
(in thousands, except per share amounts)	Shares	Amount
Balance, December 31, 2003	75,838	$	888,431	$	197,774		$	2,826		$	1,089,031
Comprehensive income:
Net income	—		—		42,170			—			42,170
Net unrealized losses on securities:
Net unrealized losses arising during the period, net of tax benefits of $13,344	—		—		—			(28,609	)		(28,609	)
Less: reclassification adjustment for net realized gains included in net income, net of taxes of $6	—		—		—			(10	)		(10	)
Minimum pension liability adjustment, net of tax benefits of $19	—		—		—			1			1
Comprehensive income (loss)	—		—		42,170			(28,618	)		13,552
Issuance of common stock, net	4,536		115,898		—			—			115,898
Common stock dividends ($0.62 per share)	—		—		(48,480	)		—			(48,480	)
Balance, June 30, 2004	80,374	$	1,004,329	$	191,464		$	(25,792	)	$	1,170,001
Balance, December 31, 2002	73,618	$	839,503	$	176,118		$	30,679		$	1,046,300
Comprehensive income:
Net income	—		—		46,217			—			46,217
Net unrealized losses on securities:
Net unrealized losses arising during the period, net of tax benefits of $4,146	—		—		—			(8,989	)		(8,989	)
Less: reclassification adjustment for net realized gains included in net income, net of taxes of $481	—		—		—			(992	)		(992	)
Comprehensive income (loss)	—		—		46,217			(9,981	)		36,236
Issuance of common stock, net	1,220		24,535		—			—			24,535
Common stock dividends ($0.62 per share)	—		—		(45,884	)		—			(45,884	)
Balance, June 30, 2003	74,838	$	864,038	$	176,451		$	20,698		$	1,061,187

See accompanying “Notes to consolidated financial statements.”

3

Hawaiian Electric Industries, Inc. and Subsidiaries

Consolidated statements of cash flows (unaudited)

Six months ended June 30	2004			2003
(in thousands)
Cash flows from operating activities
Income from continuing operations	$	42,170		$	50,087
Adjustments to reconcile income from continuing operations to net cash provided by operating activities
Depreciation of property, plant and equipment		62,826			60,187
Other amortization		9,646			17,195
Provision for loan losses		(4,600	)		2,175
Deferred income taxes		(2,793	)		(4,665	)
Allowance for equity funds used during construction		(3,122	)		(1,977	)
Changes in assets and liabilities
Decrease (increase) in accounts receivable and unbilled revenues, net		3,410			(2,215	)
Increase in accounts payable		20,316			39,347
Increase in taxes accrued		42,647			10,849
Changes in other assets and liabilities		(14,987	)		(34,949	)
Net cash provided by operating activities		155,513			136,034
Cash flows from investing activities
Available-for-sale mortgage-related securities purchased		(633,813	)		(1,110,129	)
Principal repayments on available-for-sale mortgage-related securities		431,484			910,982
Proceeds from sale of available-for-sale mortgage-related securities		11,427			164,125
Loans receivable originated and purchased		(612,294	)		(739,258	)
Principal repayments on loans receivable		613,466			596,977
Proceeds from sale of loans		39,367			14,595
Proceeds from sale of real estate acquired in settlement of loans		580			1,700
Capital expenditures		(86,643	)		(60,222	)
Contributions in aid of construction		3,448			7,905
Distributions from unconsolidated subsidiaries		24,379			—
Other		(178	)		(1,748	)
Net cash used in investing activities		(208,777	)		(215,073	)
Cash flows from financing activities
Net increase in deposit liabilities		51,978			86,070
Net increase in short-term borrowings with maturities of three months or less		14,197			—
Net increase in retail repurchase agreements		6,645			8,925
Proceeds from securities sold under agreements to repurchase		513,350			962,160
Repayments of securities sold under agreements to repurchase		(483,000	)		(798,910	)
Proceeds from advances from Federal Home Loan Bank		50,200			126,000
Principal payments on advances from Federal Home Loan Bank		(102,201	)		(262,700	)
Proceeds from issuance of long-term debt		102,073			167,089
Repayment of long-term debt		(223,165	)		(210,000	)
Preferred securities distributions of trust subsidiaries		—			(8,018	)
Net proceeds from issuance of common stock		106,000			16,125
Common stock dividends		(43,942	)		(37,329	)
Other		(8,234	)		(3,716	)
Net cash provided by (used in) financing activities		(16,099	)		45,696
Net cash provided by discontinued operations		1,943			2,592
Net increase (decrease) in cash and equivalents and federal funds sold		(67,420	)		(30,751	)
Cash and equivalents and federal funds sold, beginning of period		279,988			244,525
Cash and equivalents and federal funds sold, end of period	$	212,568		$	213,774

See accompanying “Notes to consolidated financial statements.”

4

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 and with 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 HEI’s Annual Report on SEC Form 10-K/A for the year ended December 31, 2003 and the unaudited consolidated financial statements and the notes thereto in HEI’s Quarterly Report on SEC Form 10-Q for the quarter ended March 31, 2004.

In the opinion of HEI’s management, the accompanying unaudited consolidated financial statements contain all material adjustments required by GAAP to present fairly the Company’s financial position as of June 30, 2004 and December 31, 2003 and the results of its operations for the three and six months ended June 30, 2004 and 2003, and its cash flows for the six months ended June 30, 2004 and 2003. All such adjustments are of a normal recurring nature, unless otherwise disclosed in this note or other notes to accompanying unaudited consolidated financial statements, in this Form 10-Q or in 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. For example, the assets in note (2) at June 30, 2003 have been restated for the reclassification of the accrual for cost of removal (expected to exceed salvage value in the future) of $170 million from accumulated depreciation to regulatory liabilities.

All share and per share amounts in the accompanying unaudited financial statements and related notes, and in this Form 10-Q, have been adjusted for all periods presented to reflect the stock split described in note 9 (unless otherwise noted).

5

(2) Segment financial information

Segment financial information was as follows:

(in thousands)	Electric Utility		Bank		Other		Total
Three months ended June 30, 2004
Revenues from external customers	$	370,605	89,982		1,211		$	461,798
Profit (loss)*	$	35,439	21,635		(7,303	)	$	49,771
Income taxes (benefit)		13,704	28,584		(3,755	)		38,533
Net income (loss)	$	21,735	(6,949	)	(3,548	)	$	11,238
Six months ended June 30, 2004
Revenues from external customers	$	717,218	179,240		2,450		$	898,908
Profit (loss)*	$	68,122	46,365		(16,708	)	$	97,779
Income taxes (benefit)		26,364	37,387		(8,142	)		55,609
Net income (loss)	$	41,758	8,978		(8,566	)	$	42,170
Assets (at June 30, 2004, including net assets of discontinued operations)	$	2,644,820	6,537,409		92,045		$	9,274,274
Three months ended June 30, 2003
Revenues from external customers	$	354,529	92,703		1,524		$	448,756
Profit (loss)*	$	30,232	20,977		(10,710	)	$	40,499
Income taxes (benefit)		11,676	7,483		(4,420	)		14,739
Net income (loss)—continuing operations	$	18,556	13,494		(6,290	)	$	25,760
Six months ended June 30, 2003
Revenues from external customers	$	683,439	187,805		2,148		$	873,392
Intersegment revenues (eliminations)		2	—		(2	)		—
Revenues	$	683,441	187,805		2,146		$	873,392
Profit (loss)*	$	59,040	42,016		(22,529	)	$	78,527
Income taxes (benefit)		22,828	15,014		(9,402	)		28,440
Net income (loss)—continuing operations	$	36,212	27,002		(13,127	)	$	50,087
Assets (at June 30, 2003, including net assets of discontinued operations)	$	2,507,382	6,476,626		83,489		$	9,067,497

* Income (loss) from continuing operations before income taxes.

Revenues attributed to foreign countries and long-lived assets located in foreign countries as of the dates and for the periods identified above were not material.

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.

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(3) Electric utility subsidiary

For HECO’s consolidated financial information, including its commitments and contingencies, see pages 16 through 40.

(4) Bank subsidiary

Selected financial information

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

Consolidated balance sheet data (unaudited)

(in thousands)	June 30, 2004			December 31, 2003
Assets
Cash and equivalents	$	167,445		$	209,598
Federal funds sold		20,087			56,678
Available-for-sale investment and mortgage-related securities		1,860,788			1,775,053
Available-for-sale mortgage-related securities pledged for repurchase agreements		1,000,681			941,571
Held-to-maturity investment securities		96,516			94,624
Loans receivable, net		3,096,010			3,121,979
Other		202,682			221,718
Goodwill and other intangibles		93,200			93,987
	$	6,537,409		$	6,515,208
Liabilities and stockholders’ equity
Deposit liabilities—noninterest bearing	$	488,436		$	469,272
Deposit liabilities—interest bearing		3,589,792			3,556,978
Securities sold under agreements to repurchase		870,098			831,335
Advances from Federal Home Loan Bank		965,052			1,017,053
Other		113,264			97,429
		6,026,642			5,972,067
Minority interests		3,466			3,417
Preferred stock		75,000			75,000
		78,466			78,417
Common stock		245,127			244,568
Retained earnings		215,132			221,109
Accumulated other comprehensive loss		(27,958	)		(953	)
		432,301			464,724
	$	6,537,409		$	6,515,208

7

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

Consolidated statements of income (unaudited)

	Three months ended June 30,						Six months ended June 30,
(in thousands)	2004			2003			2004			2003
Interest and dividend income
Interest and fees on loans	$	45,832		$	50,425		$	92,241		$	100,898
Interest on mortgage-related securities		27,559			26,023			54,636			55,300
Interest and dividends on investment securities		1,665			1,551			3,413			3,308
		75,056			77,999			150,290			159,506
Interest expense
Interest on deposit liabilities		11,464			13,653			23,674			28,083
Interest on Federal Home Loan Bank advances		10,347			12,052			20,844			25,618
Interest on securities sold under repurchase agreements		5,231			5,431			10,477			10,772
		27,042			31,136			54,995			64,473
Net interest income		48,014			46,863			95,295			95,033
Provision for loan losses		(3,000	)		1,025			(4,600	)		2,175
Net interest income after provision for loan losses		51,014			45,838			99,895			92,858
Other income
Fees from other financial services		6,160			6,264			11,742			11,949
Fee income on deposit liabilities		4,276			3,964			8,657			7,834
Fee income on other financial products		2,646			2,379			5,622			5,234
Fee income on loans serviced for others, net		907			(442	)		577			(1,444	)
Gain on sale of securities		—			1,554			16			2,366
Other income		937			985			2,336			2,360
		14,926			14,704			28,950			28,299
General and administrative expenses
Compensation and employee benefits		15,704			16,701			31,459			32,794
Occupancy		4,273			4,082			8,529			7,916
Equipment		3,378			3,394			7,045			6,752
Data processing		2,777			2,603			5,600			5,407
Professional services		2,221			2,303			3,861			5,500
Interest on income taxes		5,324			195			5,324			195
Other		9,252			8,903			17,908			17,806
		42,929			38,181			79,726			76,370
Income before minority interests and income taxes		23,011			22,361			49,119			44,787
Minority interests		23			32			49			66
Income taxes		28,584			7,483			37,387			15,014
Income (loss) before preferred stock dividends		(5,596	)		14,846			11,683			29,707
Preferred stock dividends		1,353			1,352			2,705			2,705
Net income (loss) for common stock	$	(6,949	)	$	13,494		$	8,978		$	27,002

At June 30, 2004, ASB had commitments to borrowers for undisbursed loan funds, loan commitments and unused lines and letters of credit of $0.9 billion.

8

ASB Realty Corporation

In March 1998, ASB formed a subsidiary, ASB Realty Corporation, which elects to be taxed as a real estate investment trust (REIT). This reorganization had reduced Hawaii bank franchise taxes, net of federal income tax benefits, recognized on the financial statements of HEI Diversified, Inc. (HEIDI) and ASB by $21 million (through March 31, 2004) as a result of ASB taking a dividends received deduction on dividends paid to it by ASB Realty Corporation. The State of Hawaii Department of Taxation (DOT) challenged ASB’s position on the dividends received deduction and issued notices of tax assessment for 1999, 2000 and 2001. In October 2002, ASB filed an appeal with the State Board of Review, First Taxation District (Board). In May 2003, the Board heard ASB’s case and issued its decision in favor of the DOT and ASB filed a notice of appeal with the Hawaii Tax Appeal Court. As required under Hawaii law, ASB paid the bank franchise taxes and interest assessed at that time ($17 million) in June 2003, but recorded this payment as a deposit rather than an expense for financial statement purposes.

On May 14, 2004, the parties stipulated to certain factual matters. On May 17, 2004, the DOT and ASB each filed a motion for summary judgment, and both motions were heard on June 7, 2004. At the conclusion of this hearing, the Hawaii Tax Appeal Court orally announced a decision in favor of the DOT and against ASB for tax assessed years 1999 through 2001 and a written judgment against ASB was filed on June 22, 2004. ASB continues to believe that its tax position is proper and has appealed the judgment to the Hawaii Supreme Court. However, as a result of the Tax Appeal Court’s decision, ASB wrote off the deposit recorded in June 2003 and expensed the related bank franchise taxes and interest for subsequent periods through March 31, 2004 related to this issue, resulting in a cumulative charge to net income in the second quarter of 2004 of $24 million ($21 million for the bank franchise taxes and $3 million for interest). In the second quarter of 2004, ASB accrued $0.2 million of interest, net of taxes, and state bank franchise tax of $0.6 million, net of taxes, related to this tax issue for the period from April 1 to June 30, 2004.

Restructuring of Federal Home Loan Bank Advances

Because of the low interest rate environment, ASB restructured a total of $389 million of Federal Home Loan Bank (FHLB) advances during the second quarter of 2003. The restructurings involved paying off existing, higher rate FHLB advances with advances that have lower rates and longer maturities. The restructurings were executed in two transactions, with $258 million of advances restructured in April 2003 and $131 million of advances restructured in June 2003. In the April 2003 restructuring, the FHLB advances that were paid off had an average rate of 7.17% and an average remaining maturity of 2.02 years. The new advances had an average rate of 5.57% and an average maturity of 4.80 years at the time of the restructuring. The April 2003 restructuring resulted in a reduction of interest expense on these FHLB advances of approximately $3 million for the remainder of 2003. In the June 2003 restructuring, the FHLB advances that were paid off had an average rate of 5.21% and an average remaining maturity of 0.93 years. The new advances had an average rate of 3.21% and an average maturity of 4.12 years at the time of the restructuring. The June 2003 restructuring resulted in a reduction of interest expense on these FHLB advances of approximately $1.5 million for the remainder of 2003.

(5) Discontinued operations

HEI Power Corp. (HEIPC)

On October 23, 2001, the HEI Board of Directors adopted a formal plan to exit the international power business (engaged in by HEIPC and its subsidiaries, the HEIPC Group). HEIPC management has been carrying out a program to dispose of all of the HEIPC Group’s remaining projects and investments. Accordingly, the HEIPC Group has been reported as a discontinued operation in the Company’s consolidated statements of income.

In 1998 and 1999, the HEIPC Group invested $9.7 million to acquire shares in Cagayan Electric Power & Light Co., Inc. (CEPALCO), an electric distribution company in the Philippines. The HEIPC Group recognized impairment losses of approximately $3 million in 2001 and $5 million in the second quarter of 2003 to adjust this investment to its estimated net realizable values at the time of approximately $7 million and $2 million, respectively. In the first quarter of 2004, the HEIPC Group sold HEIPC Philippine Development, LLC, the HEIPC Group company that held an interest in CEPALCO, for a nominal gain.

The HEIPC Group is pursuing the recovery of a substantial portion of the costs incurred in connection with the China joint venture interest. As part of its recovery efforts, in March 2004, the HEIPC Group entered into an

9

agreement to transfer its interest in a China joint venture to its partner and another entity, subject to certain conditions. If the conditions are met, the HEIPC Group expects to receive the transfer price in the third quarter of 2004.

As of June 30, 2004, the remaining net assets of the discontinued international power operations amounted to $9 million (included in “Other” assets) and consisted primarily of deferred taxes receivable, reduced by a reserve for losses from operations during the phase-out period (primarily for legal fees). HEIPC increased its reserve for future expenses by $1 million in each of the second quarter of 2003 and the first quarter of 2004. If the HEIPC Group is successful in recovery of the transfer price and all or part of the remaining costs incurred in connection with its China joint venture interest, such recoveries would be recorded as a gain on disposal of discontinued operations. Further losses may be sustained if the expenditures made in seeking recovery of the costs incurred in connection with the China joint venture interest exceed the total of any recovery ultimately achieved and the amount provided for in HEI’s reserve for discontinued operations.

(6) Medium-term notes

On March 17, 2004, HEI sold $50 million of 4.23% notes, Series D, due March 15, 2011 under its registered medium-term note program. The net proceeds from this sale were ultimately used to make short-term loans to HECO, to assist HECO and HELCO in redeeming $50 million aggregate principal amount of 7.30% Cumulative Quarterly Income Preferred Securities of HECO Capital Trust I in April 2004 and for other general corporate purposes. It is anticipated that HECO will repay the short-term loans by the end of 2004 primarily with funds saved from reducing dividends to HEI in 2004.

(7) HEI- and HECO-obligated preferred securities of trust subsidiaries; common stock sale and redemption of trust preferred securities

Through December 31, 2003, HEI had included the financial statements of its subsidiary trust, Hawaiian Electric Industries Capital Trust I (the Trust) and its subsidiary, HEI Preferred Funding, LP (the Partnership), and the financial statements of HECO’s subsidiary trusts, HECO Capital Trusts I and II (see note (2) in HECO’s “Notes to consolidated financial statements”), in its consolidated financial statements, with the trust preferred securities issued by the trusts being classified in HEI’s consolidated balance sheet under the heading “HEI- and HECO-obligated preferred securities of trust subsidiaries.”

In December 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. (FIN) 46R, “Consolidation of Variable Interest Entities,” which addresses whether a business enterprise should consolidate an entity. HEI and its subsidiaries adopted the provisions of FIN 46R in the first quarter of 2004. Under FIN 46R, HEI deconsolidated the Trust and the Partnership and HECO deconsolidated HECO Capital Trusts I and II and never consolidated HECO Capital Trust III (whose trust preferred securities were issued in March 2004). In April 2004, the securities of the Trust, the Partnership and HECO Capital Trusts I and II were redeemed.

10

Trust preferred securities issued by HEI’s and HECO’s unconsolidated (effective January 1, 2004) financing subsidiaries were as follows:

(in thousands, except per security amounts and number of securities)	June 30, 2004		December 31, 2003		Liquidation value per security
Hawaiian Electric Industries Capital Trust I* 8.36% Trust Originated Preferred Securities (4,000,000 securities)**	$	—	$	100,000	$	25
HECO Capital Trust I* 8.05% Cumulative Quarterly Income Preferred Securities, Series 1997 (2,000,000 securities)***		—		50,000		25
HECO Capital Trust II* 7.30% Cumulative Quarterly Income Preferred Securities, Series 1998 (2,000,000 securities)***		—		50,000		25
HECO Capital Trust III* 6.50% Cumulative Quarterly Income Preferred Securities, Series 2004 (2,000,000 securities)****		50,000		—		25
	$	50,000	$	200,000

* Delaware grantor trust.

** Fully and unconditionally guaranteed by HEI and redeemed in April 2004 without premium.

*** Fully and unconditionally guaranteed by HECO and redeemed in April 2004 without premium.

**** Fully and unconditionally guaranteed by HECO; 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 redeemable at the issuer’s option without premium beginning on March 18, 2009.

The Trust, which was dissolved in April 2004 and is winding up its affairs, existed for the exclusive purposes of (i) issuing in 1997 trust securities, consisting of 8.36% Trust Originated Preferred Securities ($100 million) issued to the public and trust common securities ($3 million) issued to HEI, (ii) investing the gross proceeds of the trust securities in 8.36% Partnership Preferred Securities issued by the Partnership, (iii) making distributions on the Trust Originated Preferred Securities and the trust common securities and (iv) engaging in only those other activities necessary or incidental thereto. All expenses resulting from the limited activities of the Trust, other than the payments by the Trust on its trust preferred securities, have been borne by HEI, either directly or through Hycap Management, Inc. (Hycap), its wholly owned subsidiary.

The Partnership, which was dissolved in April 2004 and is winding up its affairs, was a Delaware limited partnership managed by Hycap, its sole general partner, and existed for the exclusive purposes of (a) purchasing certain eligible debt instruments of HEI and its subsidiaries (collectively, the Affiliate Investment Instruments) in the amount of $120 million and certain U.S. government obligations and commercial paper of unaffiliated entities (Eligible Debt Securities) with the proceeds from (i) the 1997 sale of its 8.36% Partnership Preferred Securities to the Trust, its sole limited partner, and (ii) a capital contribution in exchange for the general partner interest, (b) receiving interest and other payments on the Affiliate Investment Instruments and Eligible Debt Securities, (c) making distributions on the 8.36% Partnership Preferred Securities and general partner interest if, as, and when declared by the general partner, (d) making authorized additional investments in Affiliate Investment Instruments and Eligible Debt Securities and disposing of any such investments, and (e) other activities necessary for carrying out the purposes of the Partnership.

On March 16, 2004, HEI completed the issuance and sale of 2 million shares of its common stock in a registered public offering. HEI used the net proceeds from the sale, along with other corporate funds, to effect the redemption of the 8.36% Partnership Preferred Securities and the 8.36% Trust Originated Preferred Securities in April 2004. The redemptions resulted in the dissolution of the Trust and the Partnership, and the Trust, the Partnership and Hycap are expected to complete the winding up of their affairs by late 2004 or early 2005.

11

(8) Retirement benefits

For the six months ended June 30, 2004, the Company paid contributions of $6 million to the retirement benefit plans, compared to $11 million in the same period of 2003. The Company’s current estimate of contributions to the retirement benefit plans in 2004 is $11 million, compared to contributions of $48 million in 2003.

The components of net periodic benefit cost were as follows:

	Three months ended June 30												Six months ended June 30
	Pension benefits						Other benefits						Pension benefits						Other benefits
(in thousands)	2004			2003			2004			2003			2004			2003			2004			2003
Service cost	$	6,350		$	5,823		$	1,171		$	874		$	13,101		$	11,645		$	2,265		$	1,748
Interest cost		12,721			11,940			2,801			2,572			25,331			23,881			5,385			5,145
Expected return on plan assets		(18,254	)		(14,859	)		(2,736	)		(1,910	)		(36,463	)		(29,700	)		(4,845	)		(3,821	)
Amortization of unrecognized transition obligation		1			239			749			820			2			477			1,569			1,639
Amortization of prior service cost (gain)		(148	)		(153	)		4			4			(297	)		(307	)		7			7
Recognized actuarial loss (gain)		373			875			(308	)		—			592			1,750			—			—
Net periodic benefit cost	$	1,043		$	3,865		$	1,681		$	2,360		$	2,266		$	7,746		$	4,381		$	4,718

Of the net periodic benefit costs, the Company recorded expense of $5 million and $10 million in the first six months of 2004 and 2003, respectively, and charged the remaining amounts primarily to electric utility plant.

In July 2004, the Company’s Pension Investment Committee approved a new target weighted-average asset allocation of pension and other postretirement benefit defined benefit plans as follows: equity securities—70% (previously 74%) and debt securities—30% (previously 25% and 1% of “other”). A plan to move toward these targets is being developed and is expected to be approved by the Pension Investment Committee by December 31, 2004.

(9) Common stock split

On April 20, 2004, the HEI Board of Directors approved a 2-for-1 stock split in the form of a 100% stock dividend with a record date of May 10, 2004 and a distribution date of June 10, 2004. All share and per share information in the accompanying financial statements, notes and elsewhere in this Form 10-Q have been adjusted to reflect the stock split for all periods presented (unless otherwise noted).

(10) Commitments and contingencies

See note (4), “Bank subsidiary,” and note (5), “Discontinued operations,” above and note (5), “Commitments and contingencies,” in HECO’s “Notes to consolidated financial statements.”

(11) Cash flows

Supplemental disclosures of cash flow information

For the six months ended June 30, 2004 and 2003, the Company paid interest amounting to $84.1 million and $95.3 million, respectively.

For the six months ended June 30, 2004 and 2003, the Company paid income taxes amounting to $2.5 million and $12.6 million, respectively. In the second quarter of 2004, ASB expensed a $17 million deposit related to bank franchise taxes (see note 4 under “ASB Realty Corporation”). The $17 million is not included in cash income taxes paid in either 2003 or 2004 because it was paid as a deposit in 2003 and reclassified to income tax expense in 2004.

Supplemental disclosures of noncash activities

Under the HEI Dividend Reinvestment and Stock Purchase Plan (DRIP), common stock dividends reinvested by shareholders in HEI common stock in noncash transactions amounted to $4.5 million and $8.6 million for the six months ended June 30, 2004 and 2003, respectively. Beginning in March 2004, HEI began satisfying the requirements of the HEI DRIP and the Hawaiian Electric Industries Retirement Savings Plan (HEIRSP) by acquiring for cash its common shares through open market purchases rather than the issuance of additional shares.

12

Other noncash increases in common stock for director and officer compensatory plans were $1.9 million and $1.8 million for the six months ended June 30, 2004 and 2003, respectively.

(12) Recent accounting pronouncements and interpretations

Consolidation of variable interest entities (VIEs)

In January 2003, the FASB issued FASB Interpretation No. (FIN) 46, “Consolidation of Variable Interest Entities,” which addresses the consolidation of VIEs as defined. The Company was required to apply FIN 46 immediately to variable interests in VIEs created after January 31, 2003. For variable interests in VIEs created before February 1, 2003, FIN 46 was to be applied no later than the end of the first reporting period ending after December 15, 2003. The Company adopted the provisions (other than the already adopted disclosure provisions) of FIN 46 relating to VIEs created before February 1, 2003 as of December 31, 2003 with no effect on the Company’s financial statements.

In December 2003, the FASB issued revised FIN 46 (FIN 46R), “Consolidation of Variable Interest Entities,” which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaced FIN 46. In the first quarter of 2004, the Company adopted the provisions of FIN 46R and deconsolidated Hawaiian Electric Industries Capital Trust I, HEI Preferred Funding, LP, HECO Capital Trust I and HECO Capital Trust II from their consolidated financial statements for the period ended, and as of, March 31, 2004. The Company did not elect to restate previously issued financial statements. See note (7) for additional information. Also, see note (7) of HECO’s “Notes to consolidated financial statements” for a discussion of the application of FIN 46R to the electric utilities’ purchase power agreements.

Amendment of SFAS No. 133

In April 2003, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” which amends and clarifies financial accounting and reporting for derivative instruments and hedging activities and will result in more consistent reporting of contracts as either derivatives or hybrid instruments. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 (with some exceptions) and for hedging relationships designated after June 30, 2003. The Company adopted the provisions of SFAS No. 149 on July 1, 2003 with no effect on the Company’s historical financial statements.

Financial instruments with characteristics of both liabilities and equity

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” to establish standards for how an issuer classifies and measures these financial instruments. For example, a financial instrument issued in the form of shares that are mandatorily redeemable would be required by SFAS No. 150 to be classified as a liability. SFAS No. 150 was immediately effective for financial instruments entered into or modified after May 31, 2003. SFAS No. 150 was effective for financial instruments existing as of May 31, 2003 at the beginning of the first interim period beginning after June 15, 2003. In October 2003, however, the FASB indefinitely deferred the effective date of the provisions of SFAS No. 150 related to classification and measurement requirements for mandatorily redeemable financial instruments that become subject to SFAS No. 150 solely as a result of consolidation. The Company adopted the non-deferred provisions of SFAS No. 150 for financial instruments existing as of May 31, 2003 in the third quarter of 2003 and the adoption had no effect on the Company’s financial statements.

Determining whether an arrangement contains a lease

In May 2003, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 01-8, “Determining Whether an Arrangement Contains a Lease.” Under EITF Issue No. 01-8, companies may need to recognize service contracts, such as power purchase agreements for energy and capacity, or other arrangements as leases subject to the requirements of SFAS No. 13, “Accounting for Leases.” The Company adopted the provisions of EITF Issue No. 01-8 in the third quarter of 2003. Since EITF Issue No. 01-8 applies prospectively to arrangements agreed to, modified or acquired after June 30, 2003, the adoption of EITF Issue No. 01-8 had no effect on the Company’s historical financial statements. If any new power purchase agreement or a reassessment of an existing agreement required under

13

certain circumstances (such as in the event of a material amendment of the agreement) falls under the scope of EITF Issue No. 01-8 and SFAS No. 13, and results in the classification of the agreement as a capital lease, a material effect on the Company’s financial statements may result, including the recognition of a significant capital asset and lease obligation.

Investments in other than common stock

In July 2004, the FASB ratified EITF Issue No. 02-14, “Whether an Investor Should Apply the Equity Method of Accounting to Investments Other Than Common Stock If the Investor Has the Ability to Exercise Significant Influence Over the Operating and Financial Policies of the Investee.” EITF Issue No. 02-14 requires that companies that have the ability to exercise significant influence over the investee apply the equity method of accounting when it has either common stock or “in-substance” common stock of a corporation. EITF Issue No. 02-14 will be effective in reporting periods beginning after September 15, 2004. The Company will adopt EITF Issue No. 02-14 in the fourth quarter of 2004, but management has not yet determined the impact, if any, of adoption.

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 requires the use of fair values calculated for cost method investments in connection with SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” or other activities, to be used to determine whether an investment is impaired in the reporting periods in which the investor estimates fair value. Also, for reporting periods where the fair value of a cost method investment is not estimated in connection with SFAS No. 107 or other activities, a determination would have to be made as to whether an impairment indicator is present. The impairment model would be applied prospectively to all current and future investments, within the scope of EITF Issue No. 03-1, effective in reporting periods beginning after June 15, 2004. The Company adopted these provisions of EITF Issue No. 03-1 on July 1, 2004 and the adoption had no effect on the Company’s financial statements. EITF Issue No. 03-1 further specifies disclosures that should be provided about unrealized losses that have not been recognized as other-than-temporary impairments for cost method investments. These disclosure requirements are effective for annual periods for fiscal years ending after June 15, 2004.

Participating securities and the two-class method under SFAS No. 128

In March 2004, the FASB ratified EITF Issue No. 03-6, “Participating Securities and the Two-Class Method under FASB Statement No. 128.” EITF Issue No. 03-6 addresses various questions related to calculating earnings per share (EPS) in accordance with FASB Statement No. 128, “Earnings per Share,” including questions related to: (a) the types of securities that should be considered participating, (b) the application of the two-class method, and (c) the allocation of undistributed earnings and losses to participating securities. EITF No. 03-6 is effective for reporting periods beginning after March 31, 2004 and, if its application results in different EPS for prior periods, the previously-reported EPS should be restated. The Company adopted EITF Issue No. 03-6 in the second quarter of 2004 and the adoption had no effect on the Company’s financial statements.

Investments in limited liability companies

In March 2004, the FASB ratified EITF Issue No. 03-16, “Accounting for Investments in Limited Liability Companies.” EITF Issue No. 03-16 requires that an investment in a limited liability company (LLC) that maintains a “specific ownership account” for each investor (similar to a partnership capital account structure) to be viewed as similar to an investment in a limited partnership for purposes of determining whether a noncontrolling investment in an LLC should be accounted for using the cost method or equity method of accounting. EITF No. 03-16 will be effective in reporting periods beginning after June 15, 2004. The Company adopted EITF Issue No. 03-16 on July 1, 2004 and the adoption had no effect on the Company’s financial statements.

14

Medicare Prescription Drug, Improvement and Modernization Act of 2003

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 was signed into law on December 8, 2003. The Act expanded Medicare to include for the first time coverage for prescription drugs. The Act provides that persons eligible for Medicare benefits can enroll in Part D, prescription drug coverage, for a monthly premium. Alternatively, if an employer sponsors a retiree health plan that provides benefits determined to be actuarially equivalent to those covered under the Medicare standard prescription drug benefit, the employer will be paid a subsidy of 28 percent of a participant’s drug costs between $250 and $5,000 if the participant does not elect to be covered under Medicare Part D.

In May 2004, the FASB issued FASB Staff Position (FSP) No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” When an employer is able to determine that benefits provided by its plan are actuarially equivalent to the Medicare Part D benefits, the FSP requires (a) treatment of the effects of the federal subsidy as an actuarial gain like similar gains and losses, and (b) certain financial statement disclosures related to the impact of the Act for employers that sponsor postretirement health care plans providing prescription drug benefits. The FASB’s related initial guidance, FSP No. 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” is superseded upon the effective date of FSP No. 106-2. The effective date of the new FSP for public companies is the first interim or annual period beginning after June 15, 2004.

In the Company’s current disclosure, the accumulated postretirement benefit obligation and net periodic postretirement benefit cost do not reflect any amount associated with the federal subsidy because the Company is unable to conclude whether the benefits it provides are actuarially equivalent to Medicare Part D benefits under the Act. Currently there is no guidance on how actuarial equivalence is to be determined. Should the federal subsidy apply, the Company expects the impact on costs associated with the subsidy to be immaterial.

The new Medicare legislation could impact the Company’s measures of accumulated postretirement benefit obligation and net periodic postretirement benefit cost in two ways: (1) as described above, the subsidy would reduce the obligation for benefits provided by the postretirement health plan, and (2) to the extent election into Medicare Part D coverage causes retirees to elect out of the Company’s plan, such measures will be lower. The Company does expect that fewer retirees will opt for drug coverage in the future because (1) the premiums retirees pay to participate in the plan has increased substantially, and (2) retirees may opt for coverage under Medicare Part D instead of the Company’s plan. The Company’s measures of accumulated postretirement benefit obligation and net periodic postretirement benefit cost reflect lower participation rates than in prior years, based on a study of current participation. The measures are expected to decrease in the future if experience unfolds showing further evidence of lower participation rates.

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Hawaiian Electric Company, Inc. and Subsidiaries

Consolidated balance sheets (unaudited)

(in thousands, except par value)	June 30, 2004			December 31, 2003
Assets
Utility plant, at cost
Land	$	29,663		$	29,627
Plant and equipment		3,414,432			3,306,128
Less accumulated depreciation		(1,335,568	)		(1,290,929	)
Plant acquisition adjustment, net		224			249
Construction in progress		167,335			195,295
Net utility plant		2,276,086			2,240,370
Current assets
Cash and equivalents		9,742			158
Customer accounts receivable, net		94,503			91,999
Accrued unbilled revenues, net		64,175			60,372
Other accounts receivable, net		2,083			2,333
Fuel oil stock, at average cost		48,915			43,612
Materials and supplies, at average cost		23,804			21,233
Prepayments and other		89,420			86,763
Total current assets		332,642			306,470
Other long-term assets
Unamortized debt expense		15,022			14,035
Other		21,070			20,381
Total other long-term assets		36,092			34,416
	$	2,644,820		$	2,581,256
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		298,933			295,841
Retained earnings		593,360			563,215
Common stock equity		977,680			944,443
Cumulative preferred stock—not subject to mandatory redemption		34,293			34,293
HECO-obligated mandatorily redeemable trust preferred securities of subsidiary trusts holding solely HECO and HECO-guaranteed debentures		—			100,000
Long-term debt, net		751,602			699,420
Total capitalization		1,763,575			1,778,156
Current liabilities
Short-term borrowings—nonaffiliate		14,198			—
Short-term borrowings—affiliate		63,115			6,000
Accounts payable		69,257			72,377
Interest and preferred dividends payable		10,800			11,303
Taxes accrued		94,460			93,303
Other		30,641			34,015
Total current liabilities		282,471			216,998
Deferred credits and other liabilities
Deferred income taxes		176,928			170,841
Regulatory liabilities, net		77,191			71,882
Unamortized tax credits		48,625			47,066
Other		64,479			62,344
Total deferred credits and other liabilities		367,223			352,133
Contributions in aid of construction		231,551			233,969
	$	2,644,820		$	2,581,256

See accompanying notes to HECO’s consolidated financial statements.

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Hawaiian Electric Company, Inc. and Subsidiaries

Consolidated statements of income (unaudited)

	Three months ended June 30,						Six months ended June 30,
(in thousands, except for ratio of earnings to fixed charges)	2004			2003			2004			2003
Operating revenues	$	369,393		$	353,385		$	715,337		$	681,346
Operating expenses
Fuel oil		114,496			102,168			211,582			193,007
Purchased power		94,267			95,264			186,506			180,618
Other operation		36,877			38,317			71,146			76,844
Maintenance		15,910			15,476			32,906			29,758
Depreciation		28,744			27,633			57,488			55,245
Taxes, other than income taxes		34,198			32,810			67,082			63,887
Income taxes		13,779			11,676			26,666			22,891
		338,271			323,344			653,376			622,250
Operating income		31,122			30,041			61,961			59,096
Other income
Allowance for equity funds used during construction		1,673			989			3,122			1,977
Other, net		1,088			869			1,729			1,636
		2,761			1,858			4,851			3,613
Income before interest and other charges		33,883			31,899			66,812			62,709
Interest and other charges
Interest on long-term debt		10,825			10,436			20,895			20,760
Amortization of net bond premium and expense		577			528			1,146			1,041
Preferred securities distributions of trust subsidiaries		—			1,919			—			3,838
Other interest charges		980			407			3,392			749
Allowance for borrowed funds used during construction		(733	)		(446	)		(1,377	)		(889	)
Preferred stock dividends of subsidiaries		229			229			458			458
		11,878			13,073			24,514			25,957
Income before preferred stock dividends of HECO		22,005			18,826			42,298			36,752
Preferred stock dividends of HECO		270			270			540			540
Net income for common stock	$	21,735		$	18,556		$	41,758		$	36,212
Ratio of earnings to fixed charges (SEC method)								3.53			3.13

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidated statements of retained earnings (unaudited)

	Three months ended June 30,					Six months ended June 30,
(in thousands)	2004		2003			2004			2003
Retained earnings, beginning of period	$	571,625	$	544,389		$	563,215		$	542,023
Net income for common stock		21,735		18,556			41,758			36,212
Common stock dividends		—		(13,242	)		(11,613	)		(28,532	)
Retained earnings, end of period	$	593,360	$	549,703		$	593,360		$	549,703

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 in HECO’s consolidated financial statements.

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Hawaiian Electric Company, Inc. and Subsidiaries

Consolidated statements of cash flows (unaudited)

Six months ended June 30	2004			2003
(in thousands)
Cash flows from operating activities
Income before preferred stock dividends of HECO	$	42,298		$	36,752
Adjustments to reconcile income before preferred stock dividends of HECO to net cash provided by operating activities
Depreciation of property, plant and equipment		57,488			55,245
Other amortization		4,448			4,211
Deferred income taxes		6,142			1,347
Tax credits, net		2,282			1,571
Allowance for equity funds used during construction		(3,122	)		(1,977	)
Changes in assets and liabilities
Increase in accounts receivable		(2,254	)		(3,717	)
Increase in accrued unbilled revenues		(3,803	)		(303	)
Increase in fuel oil stock		(5,303	)		(3,392	)
Increase in materials and supplies		(2,571	)		(2,879	)
Increase in regulatory assets		(656	)		(1,409	)
Increase (decrease) in accounts payable		(3,120	)		366
Increase (decrease) in taxes accrued		1,157			(5,267	)
Changes in other assets and liabilities		(9,133	)		(1,154	)
Net cash provided by operating activities		83,853			79,394
Cash flows from investing activities
Capital expenditures		(84,430	)		(51,943	)
Contributions in aid of construction		3,448			7,905
Other		1,547			—
Net cash used in investing activities		(79,435	)		(44,038	)
Cash flows from financing activities
Common stock dividends		(11,613	)		(28,532	)
Preferred stock dividends		(540	)		(540	)
Preferred securities distributions of trust subsidiaries		—			(3,838	)
Proceeds from issuance of long-term debt		52,073			67,089
Repayment of long-term debt		(103,092	)		(74,000	)
Net increase in short-term borrowings from nonaffiliates and affiliate with original maturities of three months or less		71,313			7,900
Other		(2,975	)		(1,767	)
Net cash provided by (used in) financing activities		5,166			(33,688	)
Net increase in cash and equivalents		9,584			1,668
Cash and equivalents, beginning of period		158			1,726
Cash and equivalents, end of period	$	9,742		$	3,394

See accompanying notes in HECO’s consolidated financial statements.

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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 and with 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 Annual Report on SEC Form 10-K/A for the year ended December 31, 2003 and the unaudited consolidated financial statements and the notes thereto in HECO’s Quarterly Report on SEC Form 10-Q for the quarter ended March 31, 2004.

In the opinion of HECO’s management, the accompanying unaudited consolidated financial statements contain all material adjustments required by GAAP to present fairly the financial position of HECO and its subsidiaries as of June 30, 2004 and December 31, 2003 and the results of their operations for the three and six months ended June 30, 2004 and 2003 and their cash flows for the six months ended June 30, 2004 and 2003. 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) HECO-obligated mandatorily redeemable trust preferred securities of subsidiary trusts holding solely HECO and HECO-guaranteed debentures

Through December 31, 2003, HECO had included the financial statements of its subsidiary trusts, HECO Capital Trust I and HECO Capital Trust II, in its consolidated financial statements, with the quarterly income preferred securities issued by those trusts being classified in HECO’s consolidated balance sheet under the heading “HECO-obligated mandatorily redeemable trust preferred securities of subsidiary trusts holding solely HECO and HECO-guaranteed debentures.”

In December 2003, the FASB issued FIN 46R, “Consolidation of Variable Interest Entities,” which addresses whether a business enterprise should consolidate an entity. HECO adopted the provisions of FIN 46R in the first quarter of 2004. Under FIN 46R, HECO deconsolidated both HECO Capital Trust I and II and did not consolidate HECO Capital Trust III, which issued preferred securities in the first quarter of 2004. In April 2004, the securities of both HECO Capital Trusts I and II were redeemed and HECO Capital Trust I and HECO Capital Trust II were dissolved.

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Trust preferred securities issued by HECO’s unconsolidated (effective January 1, 2004) financing subsidiaries were as follows:

(in thousands, except per security amounts and number of securities)	June 30, 2004		December 31, 2003	Liquidation value per security
HECO Capital Trust I* 8.05% Cumulative Quarterly Income Preferred Securities, Series 1997 (2,000,000 securities)**	$	—	$  50,000	$25
HECO Capital Trust II* 7.30% Cumulative Quarterly Income Preferred Securities, Series 1998 (2,000,000 securities)**		—	50,000	25
HECO Capital Trust III* 6.50% Cumulative Quarterly Income Preferred Securities, Series 2004 (2,000,000 securities)***		50,000	—	25
	$	50,000	$100,000

* Delaware grantor trust and finance subsidiary of HECO.

** Fully and unconditionally guaranteed by HECO and redeemed in April 2004 without premium.

*** Fully and unconditionally guaranteed by HECO; 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 redeemable at the issuer’s option without premium beginning on March 18, 2009.

HECO Capital Trust I (Trust I), which was dissolved in April 2004 and is winding up its affairs, existed for the exclusive purposes of (i) issuing in 1997 trust securities, consisting of 8.05% Cumulative Quarterly Income Preferred Securities, Series 1997 (1997 Trust Preferred Securities) ($50 million) issued to the public and trust common securities ($1.5 million) issued to HECO, (ii) investing the proceeds of the trust securities in 8.05% Junior Subordinated Deferrable Interest Debentures, Series 1997 (1997 Debentures) issued by HECO in the principal amount of $31.5 million and issued by each of MECO and HELCO in the respective principal amounts of $10 million, (iii) making distributions on the 1997 Trust Preferred Securities and trust common securities and (iv) engaging in only those other activities necessary or incidental thereto. The 1997 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, were the sole assets of Trust I. As of January 1, 2004, Trust I became an unconsolidated subsidiary of HECO under FIN 46R. In March 2004, HECO, HELCO and MECO issued 6.50% Junior Subordinated Deferrable Interest Debentures, Series 2004 (2004 Debentures) to HECO Capital Trust III and, in April 2004, used the proceeds to redeem their 1997 Debentures and to cause the redemption of the 1997 Trust Preferred Securities of Trust I. Trust I is expected to wind up its affairs and be terminated in 2004.

HECO Capital Trust II (Trust II), which was dissolved in April 2004 and is winding up its affairs, existed for the exclusive purposes of (i) issuing in 1998 trust securities, consisting of 7.30% Cumulative Quarterly Income Preferred Securities, Series 1998 (1998 Trust Preferred Securities) ($50 million) issued to the public and trust common securities ($1.5 million) issued to HECO, (ii) investing the proceeds of the trust securities in 7.30% Junior Subordinated Deferrable Interest Debentures, Series 1998 (1998 Debentures) issued by HECO in the principal amount of $31.5 million and issued by each of MECO and HELCO in the respective principal amounts of $10 million, (iii) making distributions on the 1998 Trust Preferred Securities and trust common securities and (iv) engaging in only those other activities necessary or incidental thereto. The 1998 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, were the sole assets of Trust II. As of January 1, 2004, Trust II became an unconsolidated subsidiary of HECO under FIN 46R. In April 2004, HECO and HELCO used funds primarily from short-term borrowings from HEI and from the issuance of commercial paper by HECO (and related short-term loans by HECO to HELCO), and MECO used funds temporarily invested with HECO to redeem their respective 1998 Debentures and to cause the redemption of the 1998 Trust Preferred Securities of Trust II. Trust II is expected to wind up its affairs and be terminated in 2004.

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HECO Capital Trust III (Trust III) exists for the exclusive purposes of (i) issuing in 2004 trust securities, consisting of 6.50% Cumulative Quarterly Income Preferred Securities, Series 2004 (2004 Trust Preferred Securities) ($50 million) issued to the public and trust common securities ($1.5 million) issued to HECO, (ii) investing the proceeds of the trust securities in 2004 Debentures issued by HECO in the principal amount of $31.5 million and issued by each of MECO and HELCO in the respective principal amounts of $10 million, (iii) making distributions on the 2004 Trust Preferred Securities and trust common securities and (iv) engaging in only those other activities necessary or incidental thereto. 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 is an unconsolidated subsidiary of HECO. Trust III’s balance sheet as of June 30, 2004 consisted of $51.5 million of 2004 Debentures; $50.0 million of 2004 Trust Preferred Securities; and $1.5 million of common equity. Trust III’s income statement for the six months ended June 30, 2004 consisted of $1.0 million of interest income received from the 2004 Debentures; $0.9 million of distributions to holders of the Trust Preferred Securities; and $29,000 of common dividends 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 on the common securities, and in certain circumstances, HECO’s right to receive such distributions is subordinate to the right of the holders to receive distributions on their 2004 Trust Preferred 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.

(3) Revenue taxes

HECO and its subsidiaries’ operating revenues include amounts for various revenue taxes. Revenue taxes are recorded as an expense in the period the related revenues are recognized. HECO and its subsidiaries payments to the taxing authorities are based on the prior year’s revenues. For the six months ended June 30, 2004 and 2003, HECO and its subsidiaries included approximately $63 million and $60 million, respectively, of revenue taxes in “operating revenues” and in “taxes, other than income taxes” expense.

(4) Retirement benefits

For the six months ended June 30, 2004, HECO and its subsidiaries paid contributions of $5 million to the retirement benefit plans, compared to $10 million in the same period of 2003. HECO and its subsidiaries’ current estimate of contributions to the retirement benefit plans in 2004 is $9 million, compared to their contributions of $31 million in 2003.

The components of net periodic benefit cost were as follows:

	Three months ended June 30												Six months ended June 30
	Pension benefits						Other benefits						Pension benefits						Other benefits
(in thousands)	2004			2003			2004			2003			2004			2003			2004			2003
Service cost	$	5,146		$	4,836		$	1,139		$	846		$	10,723		$	9,673		$	2,203		$	1,692
Interest cost		11,503			10,851			2,731			2,509			22,888			21,703			5,251			5,019
Expected return on plan assets		(16,708	)		(13,870	)		(2,699	)		(1,881	)		(33,341	)		(27,740	)		(4,777	)		(3,762	)
Amortization of unrecognized transition obligation		—			238			749			816			1			476			1,565			1,632
Amortization of prior service gain		(186	)		(187	)		—			—			(372	)		(375	)		—			—
Recognized actuarial loss (gain)		82			660			(295	)		—			108			1,320			—			—
Net periodic benefit cost	$	(163	)	$	2,528		$	1,625		$	2,290		$	7		$	5,057		$	4,242		$	4,581

Of the net periodic benefit costs, HECO and its subsidiaries recorded expense of $3 million and $7 million in the first six months of 2004 and 2003, respectively, and charged the remaining amounts primarily to electric utility plant.

In July, 2004, the Company’s Pension Investment Committee approved a new target weighted-average asset allocation of pension and other postretirement benefit defined benefit plans as follows: equity securities—70%

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(previously 74%) and debt securities—30% (previously 25% and 1% of “other”). A plan to move toward these targets is being developed and is expected to be approved by the Pension Investment Committee by December 31, 2004.

(5) Commitments and contingencies

HELCO power situation

After several years of opposition to, and resulting delays in, the efforts of HELCO to expand its Keahole power plant site to add new generation, HELCO entered into a conditional settlement agreement in November of 2003 (Settlement Agreement) with all but one of the parties (Waimana Enterprises, Inc. (Waimana), which had actively opposed the project) and with several regulatory agencies. The Settlement Agreement is intended to permit HELCO to complete the plant expansion, subject to satisfaction of the terms and conditions of the Settlement Agreement. The nominal 20 megawatt (MW) combustion turbines (CT-4 and CT-5) have been installed and were put into limited commercial operation in May and June 2004, respectively. Under the Settlement Agreement, CT-4 and CT-5 must have noise mitigation measures installed before they can be operated full-time. The noise mitigation measures are expected to be installed by the end of 2004. To date, HELCO has reclassified $81 million of capital costs for CT-4, CT-5 and related pre-air permit facilities from construction in progress to plant and equipment of which $74 million was reclassified in the second quarter of 2004. HELCO’s electric rates, however, will not change specifically as a result of including CT-4 and CT-5 in HELCO’s plant and equipment until HELCO files a rate increase application and the PUC grants HELCO rate relief.

The following is a summary of the status of HELCO’s efforts to obtain certain of the permits required for the Keahole expansion project and related proceedings that have impeded and delayed HELCO’s efforts to construct the plant, a description of the Settlement Agreement and its implementation to date and a discussion (under “Management’s evaluation; costs incurred”) of the potential financial statement implications of this project.

Historical context. In 1991, HELCO began planning to meet increased electric generation demand forecast for 1994. HELCO’s plans were to install at its Keahole power plant CT-4 and CT-5, followed by an 18 MW heat steam recovery 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, which HELCO had planned to install in late 1994. In 1995, the PUC allowed HELCO to pursue construction of and commit expenditures for CT-5 and ST-7, but noted in its decision that such costs are not to be included in rate base until the project is installed and “is used and useful for utility purposes.” The PUC at that time also ordered HELCO to continue negotiating with independent power producers (IPPs) that had proposed generating facilities that they claimed would be a substitute for HELCO’s planned expansion of the Keahole plant, stating that the facility to be built should be the one that can be most expeditiously put into service at “allowable cost.”

Installation of CT-4 and CT-5 was significantly delayed, however, as a result of (a) delays in obtaining an amendment of a land use permit from the Hawaii Board of Land and Natural Resources (BLNR), which was required because the Keahole power plant is located in a conservation district, and a required air permit from the Department of Health of the State of Hawaii (DOH) and the U.S. Environmental Protection Agency (EPA) and (b) lawsuits and administrative proceedings initiated by IPPs and other parties contesting the grant of these permits and objecting to the expansion of the power plant on numerous grounds, including contentions that (i) operation of the expanded Keahole site would not comply with land use regulations (including noise standards) and the conditions of HELCO’s land patent; (ii) HELCO cannot operate the plant within current air quality standards; (iii) HELCO could alternatively purchase power from IPPs to meet increased electric generation demand; and (iv) HELCO’s land use entitlement expired in April 1999 because it had not completed the project within an alleged three-year construction deadline.

IPP complaints; related PPAs. Three IPPs—Kawaihae Cogeneration Partners (KCP), which is an affiliate of Waimana, Enserch Development Corporation (Enserch) and Hilo Coast Power Company (HCPC)—filed separate complaints with the PUC in 1993, 1994 and 1999, respectively, alleging that they were each entitled to a power purchase agreement (PPA) to provide HELCO with additional capacity. KCP and Enserch each claimed that the generation capacity they would provide under their proposed PPAs would be a substitute for HELCO’s planned expansion of the Keahole plant.

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The Enserch and HCPC complaints were resolved by HELCO’s entry into PPAs with each of these parties. The term of the PPA with Enserch is 30 years from December 31, 2000. The term of the PPA with HCPC extended from January 2000 through December 2004 and would have continued on a year-to-year basis unless terminated. On May 28, 2004, HELCO gave written notice to HCPC that it would terminate the PPA effective December 31, 2004.

With respect to KCP, due to subsequent developments, including a ruling by the Hawaii Circuit Court for the Third Circuit (Third Circuit Court) that the lease for KCP’s proposed plant site was invalid, HELCO believes that KCP’s proposal for a PPA is not viable.

Air permit. Following completion of all appeals from an air permit issued by the DOH in 1997 and then reissued in July 2001, a final air permit from the DOH became effective on November 27, 2001.

Land use permit amendment and related proceedings. The Third Circuit Court ruled in 1997 that, because the BLNR had failed to render a valid decision on HELCO’s application to amend its land use permit before the statutory deadline in April 1996, HELCO was entitled to use its Keahole site for the expansion project (HELCO’s “default entitlement”). The Third Circuit Court’s 1998 final judgment on this issue was appealed to the Hawaii Supreme Court by several parties. On July 8, 2003, the Hawaii Supreme Court issued its opinion affirming the Third Circuit Court’s final judgment on the basis that the BLNR failed to render the necessary four votes either approving or rejecting HELCO’s application.

While the Hawaii Supreme Court’s July 2003 decision validated the Third Circuit Court’s 1998 final judgment confirming HELCO’s default entitlement, construction of the expansion project had been delayed for much of the intervening period that had followed the 1998 final judgment, first because HELCO had not yet obtained its final air permit and then because of other rulings made by the Third Circuit Court in several related proceedings.

The Third Circuit Court’s 1998 final judgment confirming HELCO’s default entitlement provided that HELCO must comply with the conditions in its application and with the standard land use conditions insofar as those conditions were not inconsistent with the default entitlement. Numerous proceedings were commenced before the Third Circuit Court and the BLNR in which parties opposed to the project claimed that HELCO had not or could not comply with the conditions applicable to its default entitlement. The Third Circuit Court issued a number of rulings in these proceedings which further delayed or otherwise adversely affected HELCO’s ability to construct and efficiently operate CT-4 and CT-5. These rulings have now been, or are expected to be, resolved under the terms of the Settlement Agreement, as follows:

• Based on a change by the DOH in its interpretation of the noise rules it promulgated under the Hawaii Noise Pollution Act, the Third Circuit Court ruled that a stricter noise standard applied to HELCO’s Keahole plant. HELCO filed a separate complaint for declaratory relief against the DOH seeking the invalidation of the noise rules on constitutional and other grounds. The Third Circuit Court ruled against HELCO in that separate complaint, and HELCO appealed the Third Circuit Court’s final judgment to this effect (Noise Standards Judgment) in August 1999. In the Settlement Agreement, HELCO agrees that the Keahole plant will comply during normal operations with the stricter noise standards and that it will not begin full-time operations of CT-4 and CT-5 until it has installed noise mitigation equipment to meet these standards. In accordance with the Settlement Agreement, the parties filed a stipulation to dismiss HELCO’s appeal of the Noise Standards Judgment and the stipulation was approved in January 2004.

• In other litigation in the Third Circuit Court brought by Keahole Defense Coalition (KDC) and two individuals (Individual Plaintiffs), the Third Circuit Court denied plaintiff’s motions made on several grounds to enjoin construction of the Keahole plant and plaintiffs appealed these rulings to the Hawaii Supreme Court in June 2002. Pursuant to the Settlement Agreement, KDC filed a motion in the Hawaii Supreme Court to dismiss this appeal and the motion was granted on April 12, 2004.

• In November 2000, the Third Circuit Court entered an order that, absent an extension authorized by the BLNR, the three-year construction period during which expansion of the Keahole plant should have been completed under the standard land use conditions of the Department of Land and Natural Resources of the State of Hawaii (DLNR) expired in April 1999. In December 2000, the Third Circuit Court granted a motion to stay further construction of the Keahole plant until an extension of the construction deadline was obtained. After an administrative hearing, in March 2002, the BLNR granted HELCO an extension of the construction deadline through December 31, 2003 (the

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March 2002 BLNR Order), subject to a number of conditions. In April 2002, based on the March 2002 BLNR Order, the Third Circuit Court lifted the stay it had imposed on construction and construction activities on CT-4 and CT-5 were restarted.

KDC and the Individual Plaintiffs appealed the March 2002 BLNR Order to the Third Circuit Court, as did the Department of Hawaiian Home Lands (DHHL). In September 2002, the Third Circuit Court issued a letter to the parties indicating its decision to reverse the March 2002 BLNR Order and the Third Circuit Court issued a final judgment to this effect in November 2002 (November 2002 Final Judgment). As a result of the letter ruling and November 2002 Final Judgment, the construction of CT-4 and CT-5 was once again suspended. HELCO appealed this ruling to the Hawaii Supreme Court.

The Settlement Agreement. With installation of CT-4 and CT-5 halted and the proceedings described above pending and unresolved, the parties that opposed the Keahole power plant expansion project (other than Waimana, which did not participate in the settlement discussions and opposes the settlement), including KDC, the Individual Plaintiffs and DHHL, engaged in a mediation process with HELCO and several Hawaii regulatory agencies in an attempt to achieve a resolution of the matters in dispute that would permit the project to be constructed and put in service. This process led to an agreement in principle ultimately embodied in the Settlement Agreement, executed by the last party to it on November 6, 2003, under which, subject to satisfaction of several conditions, HELCO would be permitted to proceed with installation of CT-4 and CT-5, and, in the future, ST-7. In addition to KDC, the Individual Plaintiffs, DHHL and HELCO, parties to the Settlement Agreement also include the DOH, the Director of the DOH, the DLNR and the BLNR.

In connection with efforts to implement the agreement in principle and Settlement Agreement:

• On October 10, 2003, the BLNR conditionally approved a 19-month extension of the previous December 31, 2003 construction deadline, but subject to court action allowing construction to proceed (BLNR 2003 Construction Period Extension).

• On October 14, 2003, the Hawaii Supreme Court granted a motion to remand the pending appeal of the November 2002 Final Judgment (which was halting construction) in order to permit the Third Circuit Court to consider a motion to vacate that judgment.

• On October 17, 2003, a motion to vacate the November 2002 Final Judgment was filed in the Third Circuit Court by KDC and DHHL.

• On November 12, 2003, the motion to vacate the November 2002 Final Judgment was granted by the Third Circuit Court, over Waimana’s objections, and, on November 28, 2003, the Third Circuit Court entered its first amended final judgment (November 2003 Final Judgment) vacating the November 2002 Final Judgment.

• On November 17, 2003, HELCO resumed construction of CT-4 and CT-5.

• On January 13, 2004, the Hawaii Supreme Court granted, over Waimana’s objection, HELCO’s motion to dismiss HELCO’s original appeal of the November 2002 Final Judgment (since that judgment had been vacated).

Full implementation of the Settlement Agreement is conditioned on obtaining final dispositions of all litigation and proceedings pending at the time the Settlement Agreement was entered into. While substantial progress continues to be made in achieving such dispositions, final dispositions of all such proceedings have not yet been obtained. If the remaining dispositions are obtained, as HELCO believes they will be, then HELCO has agreed in the Settlement Agreement that it will undertake a number of actions, in addition to complying with the stricter noise standards, to mitigate the impact of the power plant in terms of air pollution and potable water and aesthetic concerns. These actions relate to providing additional landscaping, expediting efforts to obtain the permits and approvals necessary for installation of ST-7 with selective catalytic reduction (SCR) emissions control equipment, operating existing CT-2 at Keahole within existing air permit limitations rather than the less stringent limitations in a pending air permit revision, using primarily brackish instead of potable water resources, assisting DHHL in installing solar water heating in its housing projects and in obtaining a major part of HELCO’s potable water allocation from the County of Hawaii, supporting KDC’s participation in certain PUC cases, paying legal expenses and other costs of various parties to the lawsuits and other proceedings, and cooperating with neighbors and community groups, including a Hot Line service for communications with neighboring DHHL beneficiaries.

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Since the time construction activities resumed in November 2003, HELCO has laid the groundwork for implementation of many of its commitments under the Settlement Agreement. However, despite the numerous rulings against Waimana described above, Waimana has continued to pursue efforts to stop or delay the Keahole project and to interfere with implementation of the Settlement Agreement, including (a) filing a notice of appeal to the Hawaii Supreme Court of the Third Circuit Court’s November 2003 Final Judgment (vacating the November 2002 Final Judgment), (b) appealing to the Third Circuit Court the BLNR 2003 Construction Period Extension, (c) appealing to the Third Circuit Court the BLNR’s approval, on December 12, 2003, of HELCO’s request for a revocable permit to use brackish well water as the primary source of water for operating the Keahole plant and (d) along with a group representing DHHL beneficiaries, appealing to the Third Circuit Court the BLNR’s approval in March 2004 of HELCO’s request for a long-term water lease to use the brackish well water (subject to conditions including a public auction of qualified bidders, which occurred on July 1, 2004 with HELCO, the sole and prevailing bidder). In January 2004, the Third Circuit Court denied Waimana’s motion to stay the effectiveness of the BLNR 2003 Construction Period Extension, and granted HELCO’s motion (joined in by the BLNR) to dismiss Waimana’s appeal of that extension. On April 15, 2004, Waimana appealed that ruling to the Supreme Court. In February 2004, the Third Circuit Court denied Waimana’s motion to stay the effectiveness of the revocable permit to use brackish water, and granted HELCO’s motion (joined in by the BLNR) to dismiss Waimana’s appeal of that permit. The final judgment was entered on April 7, 2004. Waimana appealed that judgment to the Supreme Court on April 22, 2004. With regard to the appeal of the water lease, both Waimana and the other party filed motions to stay the effectiveness of the lease. Those motions will be heard on August 11, 2004. The lease was fully executed as of July 19, 2004 and by its terms takes effect on August 1, 2004. The three Supreme Court appeals described in this paragraph, and the appeal to the Third Circuit Court described in (d) above, remain pending.

Land Use Commission petition. After previously submitting and withdrawing a petition, HELCO submitted to the Hawaii State Land Use Commission (LUC) on November 25, 2003 a new petition to reclassify the Keahole plant site from conservation land use to urban land use. The installation of ST-7, with SCR as contemplated by the Settlement Agreement, is dependent upon this reclassification. In December 2003, Waimana filed a Notice of Intent to Intervene in the LUC proceeding. On February 5, 2004, the LUC issued an order, with which HELCO concurred, that an environmental impact statement (EIS) be prepared in connection with the reclassification petition. Work on the EIS was already in progress before the ruling was issued. HELCO intends to file the draft EIS in the third quarter of 2004 and to request the LUC to consider it for approval in early 2005. The entire reclassification process could take several years.

Management’s evaluation; costs incurred. The probability that HELCO will be allowed to complete the installation of CT-4 and CT-5, including noise mitigation measures, during 2004 has been substantially enhanced by the Settlement Agreement, the Third Circuit’s November 2003 Final Judgment, and the decisions of the BLNR to extend the construction deadline by 19 months from December 31, 2003, to grant to HELCO a revocable permit to use brackish water for the plant and to grant HELCO’s request for a long-term lease of the brackish water. Although additional steps must be completed under the Settlement Agreement to satisfy its remaining conditions and HELCO must obtain the further permits necessary to allow full-time operation of CT-4 and CT-5 (and, eventually, to allow installation and operation of ST-7), management believes that the prospects are good that those conditions will be satisfied and that any further necessary permits will be obtained. Nevertheless, Waimana has continued its efforts to stop or delay the construction and there could be further delays in achieving full-time operation. Until such full-time operation is achieved, HELCO’s management remains concerned with the condition and performance of certain aging generators on the HELCO system, which were intended to be retired or to be operated less frequently once CT-4 and CT-5 were installed and fully operational, as well as the current operating status of various IPPs, which provide approximately 43% of HELCO’s generating capacity under power purchase agreements. A related concern is the possibility of power interruptions under exigent circumstances, including rolling blackouts, as IPPs and/or HELCO’s generating units become unavailable or less available (i.e., available at lower capacity) due to forced outages or planned maintenance. HELCO is continuing its efforts to avert power interruptions, but there can be no assurance that power interruptions will not occur.

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Based on management’s expectation that the remaining conditions under the Settlement Agreement will be satisfied, HELCO recorded, as expenses in November 2003, approximately $3.1 million of legal fees and other costs required to be paid under the Settlement Agreement. If the Settlement Agreement is implemented and ST-7 is installed, HELCO will have incurred approximately $21 million of capital expenditures relating to noise mitigation, visual mitigation and air pollution control at the Keahole power plant site (approximately $8 million for CT-4 and CT-5, approximately $9 million for ST-7, when installed, and approximately $4 million for other existing units). Other miscellaneous incidental expenses may also be incurred.

As of June 30, 2004, HELCO’s costs incurred in its efforts to put CT-4 and CT-5 into service and to support existing units (excluding costs the PUC permitted to be transferred to plant-in-service for pre-air permit facilities) amounted to approximately $93 million, including $34 million for equipment and material purchases, $39 million for planning, engineering, permitting, site development and other costs and $20 million for an allowance for funds used during construction (AFUDC) up to November 30, 1998, after which date management decided not to continue to accrue AFUDC in light of the delays that had been experienced, even though management believes that it has acted prudently with respect to the Keahole project. As of June 30, 2004, estimated additional costs of approximately $8 million will be required to complete the installations of CT-4 and CT-5, including the costs necessary to satisfy the requirements of the Settlement Agreement pertaining to those units. To date, HELCO has reclassified $81 million of capital costs for CT-4, CT-5 and related pre-air permit facilities from construction in progress to plant and equipment and depreciation will be recorded beginning in January 2005. HELCO’s electric rates, however, will not change specifically as a result of including CT-4 and CT-5 in HELCO’s plant and equipment until HELCO files a rate increase application and the PUC grants HELCO rate relief.

The recovery of costs relating to CT-4 and CT-5 is subject to the rate-making process governed by the PUC. Management believes no adjustment to costs incurred to put CT-4 and CT-5 into service is required as of June 30, 2004. 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 the costs incurred in its efforts to put these units into service.

HELCO’s plans for ST-7 are pending until it obtains the contemplated reclassification of the Keahole plant site from conservation to urban and obtain the necessary permits, which HELCO has agreed to seek promptly. The costs of ST-7 will be higher than originally planned, not only by reason of the change in schedule in its installation, but also by reason of additional costs that will be incurred to satisfy the requirements of the Settlement Agreement.

East Oahu transmission system

HECO’s power sources are located primarily in West Oahu, but the bulk of HECO’s system load is in the Honolulu/East Oahu area. Accordingly, HECO transmits bulk power to the Honolulu/East Oahu area over two major transmission corridors (Northern and Southern). HECO had planned to construct a part underground/part overhead 138 kilovolt (kV) transmission line from the Kamoku substation to the Pukele substation in order to close the gap between the Southern and Northern corridors and provide a third 138 kV transmission line to the Pukele substation. Construction of the proposed transmission line in its originally proposed location required the BLNR to approve a Conservation District Use Permit (CDUP) for the overhead portion of the line that would have been in conservation district lands. Several community and environmental groups opposed the project, particularly the overhead portion of the line and, in June 2002, the BLNR denied HECO’s request for a CDUP.

HECO continues to believe that the proposed project (the East Oahu Transmission Project) is needed to improve the reliability of the Pukele substation, which serves approximately 16% of Oahu’s electrical load, including Waikiki, and to address future potential line overloads under certain contingencies. In 2003, HECO completed its evaluation of alternative ways to accomplish the project (including using 46 kV transmission lines). As part of its evaluation, HECO conducted a community-based process to obtain public views of the alternatives. In December 2003, HECO filed an application with the PUC requesting approval to commit funds (currently estimated at $56 million, which amount could increase to $61 million if the City and County of Honolulu’s curb-to-curb repaving directive is enforced and includes $21 million of costs already incurred and disclosed below) for its revised East Oahu Transmission Project. In March 2004, the PUC granted intervenor status to an environmental organization and three elected officials, granted a more

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limited participant status to four community organizations, and denied intervention sought by two individuals in the PUC proceeding.

At HECO’s request, the PUC has agreed to be the accepting agency for an environmental assessment (EA) of HECO’s East Oahu Transmission Project to be voluntarily prepared by HECO. An Environmental Impact Statement (EIS) would be prepared if the PUC finds that the proposed action may have a significant effect on the environment. In May 2004, the PUC modified and then adopted a stipulated prehearing order submitted by the parties and participants, which set a public hearing date of September 1, 2004 for the proposed project. The testimonies of the other parties and the evidentiary hearing before the PUC are scheduled under the stipulated order to follow the completion of an environmental review process. That process will be deemed to be complete when the PUC reviews the EA and either determines that an EIS is not required or, if an EIS is required, when the final EIS is accepted.

Subject to PUC approval, the revised project, none of which is in conservation district lands, will be built in two phases. Completion of the first phase, currently projected for 2007, will address future potential transmission line overloads in the Northern and Southern corridors and improve the reliability of service to many customers in the Pukele substation service area, including Waikiki. The second phase, projected to take an additional two years to complete, will improve service to additional customers in the Pukele substation service area by minimizing the duration of service interruptions that could occur under certain contingencies.

On March 3, 2004, approximately 40,000 of HECO’s customers in the Honolulu/East Oahu area, including Waikiki, lost power. The Pukele substation serves the affected areas. One of the two transmission lines serving the Pukele substation was out for scheduled maintenance when the second transmission line went out of service and resulted in the power outage. Management believes that the sustained outage would have been prevented if the East Oahu Transmission Project had been completed. Many of the customers affected on March 3, 2004 would not have seen any interruption in service, while the other affected customers would have experienced a momentary interruption of service lasting only seconds.

As of June 30, 2004, the accumulated costs related to the East Oahu Transmission Project amounted to $21 million, including $14 million for planning, engineering and permitting costs and $7 million for AFUDC. These costs are recorded in construction in progress. The recovery of costs relating to the project is subject to the rate-making process administered by the PUC. Management believes no adjustment to project costs incurred is required as of June 30, 2004. 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.

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 Circuit Court for the First Circuit of Hawaii alleging that the State of Hawaii and HECO’s other customers have been overcharged for electricity as a result of alleged excessive prices in the amended PPA between defendants HECO and AES Hawaii, Inc. (AES Hawaii). AES Hawaii is a subsidiary of The AES Corporation (AES), which guarantees certain obligations of AES Hawaii under the amended PPA.

The amended PPA, which has a 30-year term, was approved by the PUC in December 1989, following contested case hearings in October 1988 and November 1989. The PUC proceedings addressed a number of issues, including whether the terms and conditions of the amended PPA were reasonable.

The amended complaint alleged that HECO’s payments to AES Hawaii for power, based on the prices, terms and conditions in the PUC-approved amended PPA, have been “excessive” by over $1 billion since September 1992, and that approval of the amended PPA was wrongfully obtained from the PUC as a result of alleged misrepresentations and/or material omissions by the defendants, individually and/or in conspiracy, with respect to the estimated future costs of the amended PPA versus the costs of hypothetical HECO-owned units. The amended complaint included four claims for relief or causes of action: (1) violations of Hawaii’s Unfair and Deceptive Practices Act, (2) unjust enrichment/restitution, (3) fraud and (4) violation of Hawaii’s False Claim Act, otherwise known as qui tam claims (asserting that the State declined to take over the action). The amended complaint sought treble damages, attorneys’ fees, rescission of the amended PPA and punitive damages against HECO, HEI, AES Hawaii and AES.

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In December 2002, HECO and HEI filed a motion to dismiss the amended complaint on the grounds that the plaintiffs’ claims either arose prior to enactment of the Hawaii False Claims Act, which does not have retroactive application, or are barred by the applicable statute of limitations. At a hearing on the motion in early 2003, the First Circuit Court ordered dismissal of the qui tam claims relating to actions prior to May 26, 2000, the effective date of the Hawaii False Claims Act, on the ground that the Act did not have retroactive application. Subsequently, the First Circuit Court issued a minute order dismissing Plaintiffs’ claims for (1) violations of Hawaii’s Unfair and Deceptive Practices Act, (2) unjust enrichment/restitution and (3) fraud, which claims were purportedly brought as a class action, on the ground that all of these claims were barred by the applicable statutes of limitations.

As a result of these rulings by the First Circuit Court, the only remaining claim was under the Hawaii False Claims Act based on allegations that false bills or claims were submitted to the State after May 26, 2000. Under the False Claims Act, a defendant may be liable for treble damages, plus civil penalties of a minimum of $5,000 for each false claim, plus attorneys’ fees and costs incurred in the action.

In March 2003, HECO and HEI filed a motion for judgment on the pleadings, asking for dismissal of the remaining claims pursuant to the doctrine of primary jurisdiction or, in the alternative, exhaustion of administrative remedies. On April 21, 2003, the court granted in part and denied in part HECO/HEI’s motion for judgment on the pleadings, on the ground that under the doctrine of primary jurisdiction any claims should first be brought before the PUC. The court stayed the action until August 21, 2003, and ruled that the case would be dismissed if plaintiffs failed to provide proof of having initiated an appropriate PUC proceeding by then. No such PUC proceeding was initiated.

On August 25, 2003, the First Circuit Court issued an order dismissing with prejudice the amended complaint, including all of the Plaintiffs’ remaining claims against the defendants for violations under the Hawaii False Claims Act after May 26, 2000. The final judgment was entered on September 17, 2003. On October 15, 2003, plaintiff Beverly J. Perry filed a notice of appeal to the Hawaii Supreme Court and the Intermediate Court of Appeals, on the grounds that the Circuit Court erred in its reliance on the doctrine of primary jurisdiction and the statute of limitations. AES subsequently filed a cross-appeal of the order denying its motion to dismiss the action, which it had filed on February 24, 2003. Final briefing of the issues on the appeal and cross-appeal was completed in May 2004. By order filed on July 16, 2004, the Supreme Court retained jurisdiction of the appeal (rather than assign it to the Intermediate Court of Appeals for disposition).

Environmental regulation

HECO, HELCO and MECO, like other utilities, periodically identify leaking petroleum-containing equipment and other releases into the environment from its generation plants and other facilities. Each subsidiary reports these releases when and as required by applicable law and addresses impacts due to the releases in compliance with applicable regulatory requirements. Except as otherwise disclosed herein, the Company believes that each subsidiary’s costs of responding to any such releases to date will not have a material adverse effect, individually and in the aggregate, on the Company’s or consolidated HECO’s financial statements.

Honolulu Harbor investigation. In 1995, the DOH issued letters indicating that it had identified a number of parties, including HECO, Hawaiian Tug & Barge Corp. (HTB) and Young Brothers, Limited (YB), who appear to be potentially responsible for the contamination and/or operated their facilities upon contaminated land at or near Honolulu Harbor. Certain of the identified parties formed a work group, which entered into a voluntary agreement with the DOH to determine the nature and extent of any contamination, the potentially responsible parties and appropriate remedial actions. The work group submitted reports and recommendations to the DOH and engaged a consultant who identified 27 additional potentially responsible parties (PRPs). The EPA became involved in the investigation in June 2000. Later in 2000, the DOH issued notices to additional PRPs. A new voluntary agreement and a joint defense agreement were signed by the parties in the work group and some of the new PRPs, which parties are known as the Iwilei District Participating Parties (Participating Parties). The Participating Parties agreed to fund remediation work using an interim cost allocation method (subject to a final allocation) and have organized a limited liability company to perform the work.

Under the terms of the 1999 agreement for the sale of assets of HTB and the stock of YB, HEI and The Old Oahu Tug Service, Inc. (TOOTS, formerly HTB) have specified indemnity obligations, including obligations with respect to the Honolulu Harbor investigation. In April 2003, TOOTS agreed to pay $250,000 (for TOOTS and HEI) to the

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Participating Parties to fund response activities in the Iwilei Unit of the Honolulu Harbor site, as a one-time cash-out payment in lieu of continuing with further response activities.

Since 2001, subsurface investigation and assessment has 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. Currently, the Participating Parties are preparing a Remediation Alternatives Analysis which will identify and recommend remedial technologies and will further analyze the anticipated costs to be incurred.

In addition to routinely maintaining its facilities, HECO had previously investigated its operations and ascertained that they were not releasing petroleum in the Iwilei Unit. In October 2002, HECO and three other companies (the Operating Companies) entered into a voluntary agreement with the DOH to evaluate their facilities to determine whether they are currently releasing petroleum to the subsurface in the Iwilei Unit. Pursuant to the agreement, the Operating Companies retained an independent consultant to conduct the evaluation. Based on available data, its own evaluation, as well as comments by the EPA, DOH and Operating Companies, the independent consultant issued a final report in the fourth quarter of 2003 that confirmed that HECO’s facilities in the Iwilei Unit are functioning properly, not leaking, operating in compliance with all regulatory requirements and not contributing to contamination in the Iwilei District. In view of the final report, HECO does not anticipate that further work will be necessary under the 2002 voluntary agreement.

Management developed a preliminary estimate of HECO’s share of costs primarily from 2002 through 2005 for continuing investigative work, remedial activities and monitoring at the Iwilei Unit of approximately $1.1 million (of which $0.4 million has been incurred through August 1, 2004). The $1.1 million estimate was expensed in 2001. Also, individual companies have incurred costs to remediate their facilities which will not be allocated to the Participating Parties. 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 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.

Maalaea Units 12 and 13 notice and finding of violation. On September 5, 2003, MECO received a Notice of Violation (NOV) issued by the DOH alleging violations of opacity conditions in permits issued under the DOH’s Air Pollution Control Law for two generating units at MECO’s Maalaea Power Plant. The NOV ordered MECO to immediately take corrective action to prevent further opacity incidents. The NOV also ordered MECO to pay a penalty of $1.6 million, unless MECO submitted a written request for a hearing. In September 2003, MECO submitted a request for hearing and accrued $1.6 million for the potential penalty. An environmental penalty or a settlement of an environmental penalty is not tax deductible.

In December 2003, the DOH and MECO reached a conditional settlement of the NOV (reducing the penalty to approximately $0.8 million) and MECO reduced the initial September 2003 accrual of $1.6 million to $0.8 million. In late March 2004, after a public notice and comment period, the Consent Order was formally signed and approved by both the DOH and MECO, and MECO paid the fine of approximately $0.8 million. The Consent Order also requires MECO to come into full compliance with the opacity rules for the units by December 31, 2004. The Consent Order resolves all civil liability of MECO to the DOH for all opacity violations from February 1, 1999 to December 31, 2004.

Collective bargaining agreements

On November 7, 2003, members of the International Brotherhood of Electrical Workers (IBEW), AFL-CIO, Local 1260, Unit 8, ratified new collective bargaining and benefit agreements with HECO, HELCO and MECO. Of the electric utilities’ approximately 1,860 employees, about 1,100 are members of IBEW, AFL-CIO, Local 1260, Unit 8, which is the only union representing employees of the Company. The new 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, 1.5% on May 1, 2005, 1.5% on November 1, 2005, 1.5% on May 1, 2006, and 3% on November 1, 2006) and include changes to medical, drug, vision and dental plans and increased employee contributions.

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(6) Cash flows

Supplemental disclosures of cash flow information

For the six months ended June 30, 2004 and 2003, HECO and its subsidiaries paid interest amounting to $23.8 million and $21.4 million, respectively.

For the six months ended June 30, 2004 and 2003, HECO and its subsidiaries paid income taxes amounting to $6.4 million and $16.5 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 $3.1 million and $2.0 million for the six months ended June 30, 2004 and 2003, respectively.

(7) Recent accounting pronouncements and interpretations

Consolidation of variable interest entities

In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities,” which addresses the consolidation of VIEs as defined. HECO and its subsidiaries were required to apply FIN 46 immediately to variable interests in VIEs created after January 31, 2003. For variable interests in VIEs created before February 1, 2003, FIN 46 was to be applied no later than the end of the first reporting period ending after December 15, 2003. HECO and subsidiaries adopted the provisions (other than the already adopted disclosure provisions) of FIN 46 relating to VIEs created before February 1, 2003 as of December 31, 2003 with no effect on consolidated HECO’s financial statements.

In December 2003, the FASB issued FIN 46R, “Consolidation of Variable Interest Entities,” which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaced FIN 46. In the first quarter of 2004, HECO and its subsidiaries adopted the provisions of FIN 46R and deconsolidated HECO Capital Trust I and HECO Capital Trust II from their consolidated financial statements for the period ended, and as of, March 31, 2004. HECO and its subsidiaries did not elect to restate previously issued financial statements. See note (2) for additional information.

As of June 30, 2004, HECO and its subsidiaries had seven PPAs for a total of 534 MW of firm capacity, and other PPAs with smaller IPPs and Schedule Q providers that supplied as-available energy. Approximately 87% of the 534 MW of firm capacity is under PPAs, entered into before December 31, 2003, with AES Hawaii, Kalaeloa Partners, L.P. (Kalaeloa), Hamakua Energy Partners, L.P. (Hamakua) and H-POWER. Purchases from all IPPs for the six months ended June 30, 2004 totaled $187 million, with purchases from AES Hawaii, Kalaeloa, Hamakua and H-POWER totaling $65 million, $60 million, $23 million and $14 million, respectively. The primary business activities of these IPPs are the generation and sale of power to HECO and its subsidiaries. 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 is not required to apply FIN 46R to that entity if the enterprise is unable to obtain, after making an exhaustive effort, the information necessary to (1) determine whether the entity is a VIE, (2) determine whether the enterprise is the VIE’s primary beneficiary, or (3) perform the accounting required to consolidate the VIE for which it is determined to be the primary beneficiary.

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

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largest, declined to provide the information necessary for HECO and its subsidiaries to determine the applicability of FIN 46R, and HECO and its subsidiaries are unable to apply FIN 46R to these IPPs.

As required under FIN 46R, HECO and its subsidiaries will continue their efforts to obtain the information necessary to make the determinations required under FIN 46R. If the requested information is ultimately received, a possible outcome of future analyses is the consolidation of an IPP in HECO’s consolidated financial statements. The consolidation of any significant IPP would 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, the potential recognition of such losses.

Financial instruments with characteristics of both liabilities and equity

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” to establish standards for how an issuer classifies and measures these financial instruments. For example, a financial instrument issued in the form of shares that are mandatorily redeemable would be required by SFAS No. 150 to be classified as a liability. SFAS No. 150 was immediately effective for financial instruments entered into or modified after May 31, 2003. SFAS No. 150 was effective for financial instruments existing as of May 31, 2003 at the beginning of the first interim period beginning after June 15, 2003. In October 2003, however, the FASB indefinitely deferred the effective date of the provisions of SFAS No. 150 related to classification and measurement requirements for mandatorily redeemable financial instruments that become subject to SFAS No. 150 solely as a result of consolidation. HECO and its subsidiaries adopted the non-deferred provisions of SFAS No. 150 for financial instruments existing as of May 31, 2003 in the third quarter of 2003 and the adoption had no effect on the consolidated HECO’s financial statements.

Determining whether an arrangement contains a lease

In May 2003, the FASB ratified EITF Issue No. 01-8, “Determining Whether an Arrangement Contains a Lease.” Under EITF Issue No. 01-8, companies may need to recognize service contracts, such as power purchase agreements for energy and capacity, or other arrangements as leases subject to the requirements of SFAS No. 13, “Accounting for Leases.” HECO and its subsidiaries adopted the provisions of EITF Issue No. 01-8 in the third quarter of 2003. Since EITF Issue No. 01-8 applies prospectively to arrangements agreed to, modified or acquired after June 30, 2003, the adoption of EITF Issue No. 01-8 had no effect on consolidated HECO’s historical financial statements. If any new PPA or a reassessment of an existing agreement required under certain circumstances (such as in the event of a material amendment of the agreement) falls under the scope of EITF Issue No. 01-8 and SFAS No. 13, and results in the classification of the agreement as a capital lease, a material effect on HECO’s consolidated financial statements may result, including the recognition of a significant capital asset and lease obligation.

Medicare Prescription Drug, Improvement and Modernization Act of 2003

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 was signed into law on December 8, 2003. The Act expanded Medicare to include for the first time coverage for prescription drugs. The Act provides that persons eligible for Medicare benefits can enroll in Part D, prescription drug coverage, for a monthly premium. Alternatively, if an employer sponsors a retiree health plan that provides benefits determined to be actuarially equivalent to those covered under the Medicare standard prescription drug benefit, the employer will be paid a subsidy of 28 percent of a participant’s drug costs between $250 and $5,000 if the participant does not elect to be covered under Medicare Part D.

In May 2004, the FASB issued FSP No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” When an employer is able to determine that benefits provided by its plan are actuarially equivalent to the Medicare Part D benefits, the FSP requires (a) treatment of the effects of the federal subsidy as an actuarial gain like similar gains and losses, and (b) certain financial statement disclosures related to the impact of the Act for employers that sponsor postretirement health care plans providing prescription drug benefits. The FASB’s related initial guidance, FSP No. 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” is superseded upon the effective date of FSP No. 106-2. The effective date of the new FSP for public companies is the first interim or annual period beginning after June 15, 2004.

31

In HECO and its subsidiaries’ current disclosure, the accumulated postretirement benefit obligation and net periodic postretirement benefit cost do not reflect any amount associated with the federal subsidy because HECO and its subsidiaries are unable to conclude whether the benefits it provides are actuarially equivalent to Medicare Part D benefits under the Act. Currently there is no guidance on how actuarial equivalence is to be determined. Should the federal subsidy apply, HECO and its subsidiaries expect the impact on costs associated with the subsidy to be immaterial.

The new Medicare legislation could impact HECO consolidated’s measures of accumulated postretirement benefit obligation and net periodic postretirement benefit cost in two ways: (1) as described above, the subsidy would reduce the obligation for benefits provided by the postretirement health plan, and (2) to the extent election into Medicare Part D coverage causes retirees to elect out of HECO consolidated’s plan, such measures will be lower. HECO and its subsidiaries do expect that fewer retirees will opt for drug coverage in the future because (1) the premiums retirees pay to participate in the plan has increased substantially, and (2) retirees may opt for coverage under Medicare Part D instead of HECO consolidated’s plan. HECO consolidated’s measures of accumulated postretirement benefit obligation and net periodic postretirement benefit cost reflect lower participation rates than in prior years, based on a study of current participation. The measures are expected to decrease in the future if experience unfolds showing further evidence of lower participation rates.

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

	Three months ended June 30,						Six months ended June 30,
(in thousands)	2004			2003			2004			2003
Operating income from regulated and nonregulated activities before income taxes (per HEI consolidated statements of income)	$	45,914		$	42,585		$	90,054		$	83,560
Deduct:
Income taxes on regulated activities		(13,779	)		(11,676	)		(26,666	)		(22,891	)
Revenues from nonregulated activities		(1,212	)		(1,144	)		(1,881	)		(2,095	)
Add:
Expenses from nonregulated activities		199			276			454			522
Operating income from regulated activities after income taxes (per HECO consolidated statements of income)	$	31,122		$	30,041		$	61,961		$	59,096

(9) 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 since these securities have been fully and unconditionally guaranteed, on a subordinated basis, by HECO and consolidating information is provided for these and other HECO subsidiaries. HECO also unconditionally guarantees HELCO’s and MECO’s obligations (a) to the State of Hawaii for the repayment of principal and interest on their Special Purpose Revenue Bonds and (b) relating to the trust preferred securities of HECO Capital Trust III. Also, see note (2). HECO is also obligated 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.

For consolidating financial information for HECO and its subsidiaries for the periods ended and as of the dates indicated, see pages 33 through 40.

32

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidating balance sheet (unaudited)

June 30, 2004

(in thousands)	HECO			HELCO		MECO		RHI	Reclassifi- cations and eliminations		HECO consolidated
Assets
Utility plant, at cost
Land	$	23,045		3,018		3,600		—	—		$	29,663
Plant and equipment		2,109,995		669,250		635,187		—	—			3,414,432
Less accumulated depreciation		(840,165	)	(247,176	)	(248,227	)	—	—			(1,335,568	)
Plant acquisition adjustment, net		—		—		224		—	—			224
Construction in progress		122,461		36,993		7,881		—	—			167,335
Net utility plant		1,415,336		462,085		398,665		—	—			2,276,086
Investment in subsidiaries, at equity		374,459		—		—		—	(374,459	)		—
Current assets
Cash and equivalents		4,847		1,177		3,391		327	—			9,742
Advances to affiliates		27,000		—		13,200		—	(40,200	)		—
Customer accounts receivable, net		63,767		15,567		15,169		—	—			94,503
Accrued unbilled revenues, net		43,158		10,945		10,072		—	—			64,175
Other accounts receivable, net		1,231		628		317		—	(93	)		2,083
Fuel oil stock, at average cost		34,398		3,776		10,741		—	—			48,915
Materials and supplies, at average cost		11,743		2,722		9,339		—	—			23,804
Prepayments and other		72,797		11,369		5,254		—	—			89,420
Total current assets		258,941		46,184		67,483		327	(40,293	)		332,642
Other long-term assets
Unamortized debt expense		10,081		2,522		2,419		—	—			15,022
Other		14,975		3,697		2,398		—	—			21,070
Total other long-term assets		25,056		6,219		4,817		—	—			36,092
	$	2,073,792		514,488		470,965		327	(414,752	)	$	2,644,820
Capitalization and liabilities
Capitalization
Common stock equity	$	977,680		180,407		193,731		321	(374,459	)	$	977,680
Cumulative preferred stock—not subject to mandatory redemption		22,293		7,000		5,000		—	—			34,293
Long-term debt, net		466,960		130,888		153,754		—	—			751,602
Total capitalization		1,466,933		318,295		352,485		321	(374,459	)		1,763,575
Current liabilities
Short-term borrowings—nonaffiliates		14,198		—		—		—	—			14,198
Short-term borrowings—affiliate		76,315		27,000		—		—	(40,200	)		63,115
Accounts payable		51,338		10,753		7,166		—	—			69,257
Interest and preferred dividends payable		8,352		1,126		1,358		—	(36	)		10,800
Taxes accrued		57,293		14,552		22,615		—	—			94,460
Other		19,007		6,416		5,269		6	(57	)		30,641
Total current liabilities		226,503		59,847		36,408		6	(40,293	)		282,471
Deferred credits and other liabilities
Deferred income taxes		141,583		22,768		12,577		—	—			176,928
Regulatory liabilities, net		45,312		20,170		11,709		—	—			77,191
Unamortized tax credits		28,195		9,777		10,653		—	—			48,625
Other		22,760		28,247		13,472		—	—			64,479
Total deferred credits and other liabilities		237,850		80,962		48,411		—	—			367,223
Contributions in aid of construction		142,506		55,384		33,661		—	—			231,551
	$	2,073,792		514,488		470,965		327	(414,752	)	$	2,644,820

33

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidating balance sheet (unaudited)

December 31, 2003

(in thousands)	HECO			HELCO		MECO		RHI	HECO Capital Trust I	HECO Capital Trust II	Reclassi- fications and eliminations		HECO consolidated
Assets
Utility plant, at cost
Land	$	23,010		3,017		3,600		—	—	—	—		$	29,627
Plant and equipment		2,086,383		589,360		630,385		—	—	—	—			3,306,128
Less accumulated depreciation		(814,699	)	(238,320	)	(237,910	)	—	—	—	—			(1,290,929	)
Plant acquisition adjustment, net		—		—		249		—	—	—	—			249
Construction in progress		93,450		95,879		5,966		—	—	—	—			195,295
Net utility plant		1,388,144		449,936		402,290		—	—	—	—			2,240,370
Investment in subsidiaries, at equity		364,973		—		—		—	—	—	(364,973	)		—
Current assets
Cash and equivalents		9		4		87		58	—	—	—			158
Advances to affiliates		10,800		—		25,500		—	51,546	51,546	(139,392	)		—
Customer accounts receivable, net		63,227		16,077		12,695		—	—	—	—			91,999
Accrued unbilled revenues, net		41,200		10,697		8,475		—	—	—	—			60,372
Other accounts receivable, net		2,030		754		443		—	—	—	(894	)		2,333
Fuel oil stock, at average cost		32,060		3,526		8,026		—	—	—	—			43,612
Materials and supplies, at average cost		10,331		2,536		8,366		—	—	—	—			21,233
Prepayments and other		69,051		11,621		6,091		—	—	—	—			86,763
Total current assets		228,708		45,215		69,683		58	51,546	51,546	(140,286	)		306,470
Other long-term assets
Unamortized debt expense		9,492		2,328		2,215		—	—	—	—			14,035
Other		14,658		3,366		2,357		—	—	—	—			20,381
Total other long-term assets		24,150		5,694		4,572		—	—	—	—			34,416
	$	2,005,975		500,845		476,545		58	51,546	51,546	(505,259	)	$	2,581,256
Capitalization and liabilities
Capitalization
Common stock equity	$	944,443		174,639		187,195		47	1,546	1,546	(364,973	)	$	944,443
Cumulative preferred stock—not subject to mandatory redemption		22,293		7,000		5,000		—	—	—	—			34,293
HECO-obligated mandatorily redeemable trust preferred securities of subsidiary trusts holding solely HECO and HECO-guaranteed debentures		—		—		—		—	50,000	50,000	—			100,000
Long-term debt, net		497,915		140,868		163,729		—	—	—	(103,092	)		699,420
Total capitalization		1,464,651		322,507		355,924		47	51,546	51,546	(468,065	)		1,778,156
Current liabilities
Short-term borrowings—affiliate		31,500		10,800		—		—	—	—	(36,300	)		6,000
Accounts payable		49,423		10,593		12,361		—	—	—	—			72,377
Interest and preferred dividends payable		7,890		1,387		2,057		—	—	—	(31	)		11,303
Taxes accrued		58,562		16,523		18,218		—	—	—	—			93,303
Other		20,752		7,772		6,343		11	—	—	(863	)		34,015
Total current liabilities		168,127		47,075		38,979		11	—	—	(37,194	)		216,998
Deferred credits and other liabilities
Deferred income taxes		137,919		20,079		12,843		—	—	—	—			170,841
Regulatory liabilities, net		42,235		18,935		10,712		—	—	—	—			71,882
Unamortized tax credits		27,703		8,633		10,730		—	—	—	—			47,066
Other		21,525		27,341		13,478		—	—	—	—			62,344
Total deferred credits and other liabilities		229,382		74,988		47,763		—	—	—	—			352,133
Contributions in aid of construction		143,815		56,275		33,879		—	—	—	—			233,969
	$	2,005,975		500,845		476,545		58	51,546	51,546	(505,259	)	$	2,581,256

34

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidating statement of income (unaudited)

Three months ended June 30, 2004

(in thousands)	HECO			HELCO		MECO		RHI		Reclassi- fications and eliminations			HECO consolidated
Operating revenues	$	250,857		57,349		61,187		—			—		$	369,393
Operating expenses
Fuel oil		80,165		8,516		25,815		—			—			114,496
Purchased power		69,106		22,125		3,036		—			—			94,267
Other operation		24,957		5,722		6,198		—			—			36,877
Maintenance		10,090		2,842		2,978		—			—			15,910
Depreciation		17,381		5,291		6,072		—			—			28,744
Taxes, other than income taxes		23,230		5,320		5,648		—			—			34,198
Income taxes		8,137		2,123		3,519		—			—			13,779
		233,066		51,939		53,266		—			—			338,271
Operating income		17,791		5,410		7,921		—			—			31,122
Other income
Allowance for equity funds used during construction		1,492		71		110		—			—			1,673
Equity in earnings of subsidiaries		8,880		—		—		—			(8,880	)		—
Other, net		1,058		92		46		(9	)		(99	)		1,088
		11,430		163		156		(9	)		(8,979	)		2,761
Income before interest and other charges		29,221		5,573		8,077		(9	)		(8,979	)		33,883
Interest and other charges
Interest on long-term debt		6,746		1,855		2,224		—			—			10,825
Amortization of net bond premium and expense		370		100		107		—			—			577
Other interest charges		756		189		134		—			(99	)		980
Allowance for borrowed funds used during construction		(656	)	(34	)	(43	)	—			—			(733	)
Preferred stock dividends of subsidiaries		—		—		—		—			229			229
		7,216		2,110		2,422		—			130			11,878
Income before preferred stock dividends of HECO		22,005		3,463		5,655		(9	)		(9,109	)		22,005
Preferred stock dividends of HECO		270		133		96		—			(229	)		270
Net income for common stock	$	21,735		3,330		5,559		(9	)	$	(8,880	)	$	21,735

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidating statement of retained earnings (unaudited)

Three months ended June 30, 2004

(in thousands)	HECO		HELCO	MECO	RHI		Reclassi- fications and eliminations		HECO consolidated
Retained earnings, beginning of period	$	571,625	76,434	93,250	(151	)	(169,533	)	$	571,625
Net income for common stock		21,735	3,330	5,559	(9	)	(8,880	)		21,735
Common stock dividends		—	—	—	—		—			—
Retained earnings, end of period	$	593,360	79,764	98,809	(160	)	(178,413	)	$	593,360

35

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidating statement of income (unaudited)

Three months ended June 30, 2003

(in thousands)	HECO			HELCO		MECO		RHI		HECO Capital Trust I	HECO Capital Trust II	Reclassi- fications and elimina-   tions		HECO consoli-   dated
Operating revenues	$	245,332		53,154		54,899		—		—	—	—		$	353,385
Operating expenses
Fuel oil		72,349		8,029		21,790		—		—	—	—			102,168
Purchased power		72,562		20,263		2,439		—		—	—	—			95,264
Other operation		25,501		6,047		6,769		—		—	—	—			38,317
Maintenance		9,248		3,092		3,136		—		—	—	—			15,476
Depreciation		16,790		5,057		5,786		—		—	—	—			27,633
Taxes, other than income taxes		22,674		5,003		5,133		—		—	—	—			32,810
Income taxes		7,548		1,278		2,850		—		—	—	—			11,676
		226,672		48,769		47,903		—		—	—	—			323,344
Operating income		18,660		4,385		6,996		—		—	—	—			30,041
Other income
Allowance for equity funds used during construction		837		55		97		—		—	—	—			989
Equity in earnings of subsidiaries		6,483		—		—		—		—	—	(6,483	)		—
Other, net		844		105		78		(63	)	1,038	940	(2,073	)		869
		8,164		160		175		(63	)	1,038	940	(8,556	)		1,858
Income before interest and other charges		26,824		4,545		7,171		(63	)	1,038	940	(8,556	)		31,899
Interest and other charges
Interest on long-term debt		6,493		1,869		2,074		—		—	—	—			10,436
Amortization of net bond premium and expense		340		88		100		—		—	—	—			528
Preferred securities distributions of trust subsidiaries		—		—		—		—		—	—	1,919			1,919
Other interest charges		1,545		509		425		1		—	—	(2,073	)		407
Allowance for borrowed funds used during construction		(380	)	(27	)	(39	)	—		—	—	—			(446	)
Preferred stock dividends of subsidiaries		—		—		—		—		—	—	229			229
		7,998		2,439		2,560		1		—	—	75			13,073
Income before preferred stock dividends of HECO		18,826		2,106		4,611		(64	)	1,038	940	(8,631	)		18,826
Preferred stock dividends of HECO		270		133		96		—		1,007	912	(2,148	)		270
Net income for common stock	$	18,556		1,973		4,515		(64	)	31	28	(6,483	)	$	18,556

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidating statement of retained earnings (unaudited)

Three months ended June 30, 2003

(in thousands)	HECO			HELCO		MECO		RHI		HECO Capital Trust I		HECO Capital Trust II		Reclassi- fications and elimina-   tions		HECO consoli- dated
Retained earnings, beginning of period	$	544,389		75,641		88,855		—		—		—		(164,496	)	$	544,389
Net income for common stock		18,556		1,973		4,515		(64	)	31		28		(6,483	)		18,556
Common stock dividends		(13,242	)	(3,651	)	(3,534	)	—		(31	)	(28	)	7,244			(13,242	)
Retained earnings, end of period	$	549,703		73,963		89,836		(64	)	—		—		(163,735	)	$	549,703

36

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidating statement of income (unaudited)

Six months ended June 30, 2004

(in thousands)	HECO			HELCO		MECO		RHI		Reclassi- fications and elimina-   tions		HECO consoli- dated
Operating revenues	$	488,235		111,403		115,699		—		—		$	715,337
Operating expenses
Fuel oil		148,661		16,018		46,903		—		—			211,582
Purchased power		138,858		42,383		5,265		—		—			186,506
Other operation		48,159		10,771		12,216		—		—			71,146
Maintenance		19,616		6,703		6,587		—		—			32,906
Depreciation		34,761		10,582		12,145		—		—			57,488
Taxes, other than income taxes		45,761		10,490		10,831		—		—			67,082
Income taxes		16,186		3,976		6,504		—		—			26,666
		452,002		100,923		100,451		—		—			653,376
Operating income		36,233		10,480		15,248		—		—			61,961
Other income
Allowance for equity funds used during construction		2,784		132		206		—		—			3,122
Equity in earnings of subsidiaries		16,292		—		—		—		(16,292	)		—
Other, net		1,898		166		(123	)	(26	)	(186	)		1,729
		20,974		298		83		(26	)	(16,478	)		4,851
Income before interest and other charges		57,207		10,778		15,331		(26	)	(16,478	)		66,812
Interest and other charges
Interest on long-term debt		13,051		3,523		4,321		—		—			20,895
Amortization of net bond premium and expense		734		200		212		—		—			1,146
Other interest charges		2,357		649		572		—		(186	)		3,392
Allowance for borrowed funds used during construction		(1,233	)	(65	)	(79	)	—		—			(1,377	)
Preferred stock dividends of subsidiaries		—		—		—		—		458			458
		14,909		4,307		5,026		—		272			24,514
Income before preferred stock dividends of HECO		42,298		6,471		10,305		(26	)	(16,750	)		42,298
Preferred stock dividends of HECO		540		267		191		—		(458	)		540
Net income for common stock	$	41,758		6,204		10,114		(26	)	(16,292	)	$	41,758

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidating statement of retained earnings (unaudited)

Six months ended June 30, 2004

(in thousands)	HECO			HELCO		MECO		RHI		Reclassi- fications and elimina-   tions		HECO consoli- dated
Retained earnings, beginning of period	$	563,215		74,629		92,909		(134	)	(167,404	)	$	563,215
Net income for common stock		41,758		6,204		10,114		(26	)	(16,292	)		41,758
Common stock dividends		(11,613	)	(1,070	)	(4,214	)	—		5,284			(11,613	)
Retained earnings, end of period	$	593,360		79,763		98,809		(160	)	(178,412	)	$	593,360

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Hawaiian Electric Company, Inc. and Subsidiaries

Consolidating statement of income (unaudited)

Six months ended June 30, 2003

(in thousands)	HECO			HELCO		MECO		RHI		HECO Capital Trust I		HECO Capital Trust II		Reclassifi- cations and eliminations		HECO consolidated
Operating revenues	$	472,524		103,992		104,830		—		—		—		—		$	681,346
Operating expenses
Fuel oil		136,388		16,330		40,289		—		—		—		—			193,007
Purchased power		141,167		35,202		4,249		—		—		—		—			180,618
Other operation		51,794		11,654		13,396		—		—		—		—			76,844
Maintenance		19,588		4,899		5,271		—		—		—		—			29,758
Depreciation		33,559		10,114		11,572		—		—		—		—			55,245
Taxes, other than income taxes		44,278		9,752		9,857		—		—		—		—			63,887
Income taxes		12,641		4,397		5,853		—		—		—		—			22,891
		439,415		92,348		90,487		—		—		—		—			622,250
Operating income		33,109		11,644		14,343		—		—		—		—			59,096
Other income
Allowance for equity funds used during construction		1,703		88		186		—		—		—		—			1,977
Equity in earnings of subsidiaries		16,123		—		—		—		—		—		(16,123	)		—
Other, net		1,633		161		109		(63	)	2,075		1,881		(4,160	)		1,636
		19,459		249		295		(63	)	2,075		1,881		(20,283	)		3,613
Income before interest and other charges		52,568		11,893		14,638		(63	)	2,075		1,881		(20,283	)		62,709
Interest and other charges
Interest on long-term debt		12,831		3,678		4,251		—		—		—		—			20,760
Amortization of net bond premium and expense		665		176		200		—		—		—		—			1,041
Preferred securities distributions of trust subsidiaries		—		—		—		—		—		—		3,838			3,838
Other interest charges		3,094		971		843		1		—		—		(4,160	)		749
Allowance for borrowed funds used during construction		(774	)	(41	)	(74	)	—		—		—		—			(889	)
Preferred stock dividends of subsidiaries		—		—		—		—		—		—		458			458
		15,816		4,784		5,220		1		—		—		136			25,957
Income before preferred stock dividends of HECO		36,752		7,109		9,418		(64	)	2,075		1,881		(20,419	)		36,752
Preferred stock dividends of HECO		540		267		191		—		2,013		1,825		(4,296	)		540
Net income for common stock	$	36,212		6,842		9,227		(64	)	62		56		(16,123	)	$	36,212
Hawaiian Electric Company, Inc. and Subsidiaries Consolidating statement of retained earnings (unaudited) Six months ended June 30, 2003
(in thousands)	HECO			HELCO		MECO		RHI		HECO Capital Trust I		HECO Capital Trust II		Reclassifi- cations and eliminations		HECO consolidated
Retained earnings, beginning of period	$	542,023		71,414		87,092		—		—		—		(158,506	)	$	542,023
Net income for common stock		36,212		6,842		9,227		(64	)	62		56		(16,123	)		36,212
Common stock dividends		(28,532	)	(4,293	)	(6,483	)	—		(62	)	(56	)	10,894			(28,532	)
Retained earnings, end of period	$	549,703		73,963		89,836		(64	)	—		—		(163,735	)	$	549,703

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Hawaiian Electric Company, Inc. and Subsidiaries

Consolidating statement of cash flows (unaudited)

Six months ended June 30, 2004

(in thousands)	HECO			HELCO		MECO		RHI		Reclassifi- cations and eliminations		HECO consolidated
Cash flows from operating activities
Income before preferred stock dividends of HECO	$	42,298		6,471		10,305		(26	)	(16,750	)	$	42,298
Adjustments to reconcile income before preferred stock dividends of HECO to net cash provided by operating activities
Equity in earnings		(16,427	)	—		—		—		16,292			(135	)
Common stock dividends received from subsidiaries		5,419		—		—		—		(5,284	)		135
Depreciation of property, plant and equipment		34,761		10,582		12,145		—		—			57,488
Other amortization		2,308		389		1,751		—		—			4,448
Deferred income taxes		3,725		2,689		(272	)	—		—			6,142
Tax credits, net		981		1,254		47		—		—			2,282
Allowance for equity funds used during construction		(2,784	)	(132	)	(206	)	—		—			(3,122	)
Changes in assets and liabilities
Decrease (increase) in accounts receivable		259		636		(2,348	)	—		(801	)		(2,254	)
Increase in accrued unbilled revenues		(1,958	)	(248	)	(1,597	)	—		—			(3,803	)
Increase in fuel oil stock		(2,338	)	(250	)	(2,715	)	—		—			(5,303	)
Increase in materials and supplies		(1,412	)	(186	)	(973	)	—		—			(2,571	)
Decrease (increase) in regulatory assets		241		291		(1,188	)	—		—			(656	)
Increase (decrease) in accounts payable		1,915		160		(5,195	)	—		—			(3,120	)
Increase (decrease) in taxes accrued		(1,269	)	(1,971	)	4,397		—		—			1,157
Changes in other assets and liabilities		(7,899	)	(488	)	(1,542	)	(5	)	801			(9,133	)
Net cash provided by (used in) operating activities		57,820		19,197		12,609		(31	)	(5,742	)		83,853
Cash flows from investing activities
Capital expenditures		(54,381	)	(22,230	)	(7,819	)	—		—			(84,430	)
Contributions in aid of construction		2,213		624		611		—		—			3,448
Investment in subsidiary		(1,846	)	—		—		—		300			(1,546	)
Distributions from unconsolidated subsidiaries		3,093		—		—		—		—			3,093
Advances to (repayments from) affiliates		(16,200	)	—		12,300		—		3,900			—
Net cash provided by (used in) investing activities		(67,121	)	(21,606	)	5,092		—		4,200			(79,435	)
Cash flows from financing activities
Common stock dividends		(11,613	)	(1,070	)	(4,214	)	—		5,284			(11,613	)
Preferred stock dividends		(540	)	(267	)	(191	)	—		458			(540	)
Preferred securities distributions of trust subsidiaries		—		—		—		—		—			—
Proceeds from issuance of long-term debt		32,073		10,000		10,000		—		—			52,073
Repayment of long-term debt		(63,092	)	(20,000	)	(20,000	)	—		—			(103,092	)
Proceeds from issuance of common stock		—		—		—		300		(300	)		—
Net increase in short-term borrowings from affiliate with original maturities of three months or less		59,013		16,200		—		—		(3,900	)		71,313
Other		(1,702	)	(1,281	)	8		—		—			(2,975	)
Net cash provided by (used in) financing activities		14,139		3,582		(14,397	)	300		1,542			5,166
Net increase in cash and equivalents		4,838		1,173		3,304		269		—			9,584
Cash and equivalents, beginning of period		9		4		87		58		—			158
Cash and equivalents, end of period	$	4,847		1,177		3,391		327		—		$	9,742

39

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidating statement of cash flows (unaudited)

Six months ended June 30, 2003

(in thousands)	HECO			HELCO		MECO		RHI		HECO Capital Trust I		HECO Capital Trust II		Reclassifi- cations and eliminations		HECO consolidated
Cash flows from operating activities
Income before preferred stock dividends of HECO	$	36,752		7,109		9,418		(64	)	2,075		1,881		(20,419	)	$	36,752
Adjustments to reconcile income before preferred stock dividends of HECO to net cash provided by operating activities
Equity in earnings		(16,123	)	—		—		—		—		—		16,123			—
Common stock dividends received from subsidiaries		10,894		—		—		—		—		—		(10,894	)		—
Depreciation of property, plant and equipment		33,559		10,114		11,572		—		—		—		—			55,245
Other amortization		2,031		379		1,801		—		—		—		—			4,211
Deferred income taxes		481		1,302		(395	)	(41	)	—		—		—			1,347
Tax credits, net		568		931		72		—		—		—		—			1,571
Allowance for equity funds used during construction		(1,703	)	(88	)	(186	)	—		—		—		—			(1,977	)
Changes in assets and liabilities
Decrease (increase) in accounts receivable		177		(1,533	)	(1,315	)	—		—		—		(1,046	)		(3,717	)
Increase in accrued unbilled revenues		(209	)	(71	)	(23	)	—		—		—		—			(303	)
Decrease (increase) in fuel oil stock		(3,855	)	85		378		—		—		—		—			(3,392	)
Increase in materials and supplies		(1,750	)	(200	)	(929	)	—		—		—		—			(2,879	)
Decrease (increase) in regulatory assets		(376	)	255		(1,288	)	—		—		—		—			(1,409	)
Increase (decrease) in accounts payable		3,068		(1,115	)	(1,587	)	—		—		—		—			366
Increase (decrease) in taxes accrued		(3,939	)	(2,004	)	676		—		—		—		—			(5,267	)
Changes in other assets and liabilities		(3,060	)	(2,943	)	(140	)	105		—		—		4,884			(1,154	)
Net cash provided by operating activities		56,515		12,221		18,054		—		2,075		1,881		(11,352	)		79,394
Cash flows from investing activities
Capital expenditures		(34,256	)	(11,333	)	(6,354	)	—		—		—		—			(51,943	)
Contributions in aid of construction		3,476		3,574		855		—		—		—		—			7,905
Investment in subsidiary		(1	)	—		—		—		—		—		1			—
Advances to (repayments from) affiliates		(1,200	)	—		3,000		—		—		—		(1,800	)		—
Net cash used in investing activities		(31,981	)	(7,759	)	(2,499	)	—		—		—		(1,799	)		(44,038	)
Cash flows from financing activities
Common stock dividends		(28,532	)	(4,293	)	(6,483	)	—		(62	)	(56	)	10,894			(28,532	)
Preferred stock dividends		(540	)	(267	)	(191	)	—		—		—		458			(540	)
Preferred securities distributions of trust subsidiaries		—		—		—		—		(2,013	)	(1,825	)	—			(3,838	)
Proceeds from issuance of long-term debt		41,252		25,837		—		—		—		—		—			67,089
Repayment of long-term debt		(40,000	)	(26,000	)	(8,000	)	—		—		—		—			(74,000	)
Proceeds from issuance of common stock		—		—		—		1		—		—		(1	)		—
Net increase in short-term borrowings from affiliate with original maturities of three months or less		4,900		1,200		—		—		—		—		1,800			7,900
Other		(1,615	)	(150	)	(2	)	—		—		—		—			(1,767	)
Net cash used in financing activities		(24,535	)	(3,673	)	(14,676	)	1		(2,075	)	(1,881	)	13,151			(33,688	)
Net increase (decrease) in cash and equivalents		(1	)	789		879		1		—		—		—			1,668
Cash and equivalents, beginning of period		9		4		1,713		—		—		—		—			1,726
Cash and equivalents, end of period	$	8		793		2,592		1		—		—		—		$	3,394

40

Item 2. Management’s discussion and analysis of financial condition and results of operations

The following discussion should be read in conjunction with the consolidated financial statements of HEI and HECO and accompanying notes.

RESULTS OF OPERATIONS

HEI Consolidated

	Three months ended June 30,					% change		Primary reason(s) for significant change*
(in thousands, except per share amounts)	2004		2003
Revenues	$	461,798	$	448,756		3	%	Increase for the electric utility segment, partly offset by decreases for the bank and “other” segments
Operating income		66,946		61,453		9		Improvement for all segments
Income (loss) from:
Continuing operations	$	11,238	$	25,760		(56	)	Higher income taxes (including a $21 million net charge for cumulative bank franchise taxes through March 31, 2004 due to an adverse tax ruling as discussed in note 4 to HEI’s “Notes to consolidated financial statements” under “ASB Realty Corporation”), partly offset by higher operating income and AFUDC and lower fixed charges
Discontinued operations		—		(3,870	)	100		HEIPC writedown of investment in CEPALCO by $5 million and increase in reserve for future expenses of $1 million (primarily for legal fees during the longer than expected disposal period) in the second quarter of 2003
Net income	$	11,238	$	21,890		(49	)
Basic earnings per common share—
Continuing operations	$	0.14	$	0.34		(59	)
Discontinued operations		—		(0.05	)	100
	$	0.14	$	0.29		(52	)	See explanation for income above and weighted-average number of common shares outstanding below
Weighted-average number of common shares outstanding		80,350		74,390		8		Issuances of shares under a common stock offering in March 2004 (4 million shares, split-adjusted) and other plans

41

	Six months ended June 30,					% change		Primary reason(s) for significant change*
(in thousands, except per share amounts)	2004		2003
Revenues	$	898,908	$	873,392		3	%	Increases for the electric utility and “other” segments, slightly offset by a decrease for the bank segment
Operating income		134,783		120,541		12		Improvement for all segments
Income (loss) from:
Continuing operations	$	42,170	$	50,087		(16	)	Higher income taxes (including a $21 million net charge for cumulative bank franchise taxes through March 31, 2004 due to an adverse tax ruling as discussed in note 4 to HEI’s “Notes to consolidated financial statements” under “ASB Realty Corporation”), partly offset by higher operating income and AFUDC and lower fixed charges
Discontinued operations		—		(3,870	)	100		HEIPC writedown of investment in CEPALCO by $5 million and increase in reserve for future expenses of $1 million (primarily for legal fees during the longer than expected disposal period) in the second quarter of 2003
Net income	$	42,170	$	46,217		(9	)
Basic earnings per common share—
Continuing operations	$	0.54	$	0.67		(19	)
Discontinued operations		—		(0.05	)	100
	$	0.54	$	0.62		(13	)	See explanation for income above and weighted-average number of common shares outstanding below
Weighted-average number of common shares outstanding		78,544		74,094		6		Issuances of shares under a common stock offering in March 2004 (4 million shares, split-adjusted), the DRIP and other plans

* Also see segment discussions which follow.

The results of operations for the second quarter of 2004 include a net charge of $24 million, or $0.30 per share, due to an adverse tax ruling as discussed in note 4 to HEI’s “Notes to consolidated financial statements” under “ASB Realty Corporation.” The $24 million net charge includes a net $21 million of cumulative bank franchise taxes through March 31, 2004, plus a net $3 million of interest (which gross interest of $5 million is included in general and administrative expenses of ASB). Also in the second quarter of 2004, ASB accrued $0.2 million of interest, net of taxes, and state bank franchise tax of $0.6 million, net of taxes, related to this tax issue for the period from April 1 to June 30, 2004. The following table presents a reconciliation of HEI’s consolidated net income to net income excluding this $24 million charge and including additional bank franchise taxes in prior periods as if the Company had not taken

42

a dividends received deduction on income from its REIT subsidiary. The Company believes the adjusted information below presents results from continuing operations on a more comparable basis for the periods shown. However, net income, or earnings per share, including these adjustments is not a presentation defined under GAAP and may not be comparable to other companies or more useful than the GAAP presentation included in HEI’s consolidated financial statements.

	Three months ended June 30,					Six months ended June 30,
(in thousands, except per share amounts)	2004		2003			2004			2003
Income from continuing operations	$	11,238	$	25,760		$	42,170		$	50,087
Basic earnings per share—continuing operations	$	0.14	$	0.34		$	0.54		$	0.67
Cumulative franchise tax charge, net	$	23,955	$	—		$	23,955		$	—
Additional franchise taxes, net (if recorded in prior periods)		—		(1,019	)		(634	)		(2,017	)
Total adjustments	$	23,955	$	(1,019	)	$	23,321		$	(2,017	)
As adjusted
Income from continuing operations	$	35,193	$	24,741		$	65,491		$	48,070
Basic earnings per share—continuing operations	$	0.44	$	0.33		$	0.83		$	0.65

Taking into account the adjustments in the table above, HEI’s consolidated income from continuing operations would have increased 42% and 36% for the three months and six months ended June 30, 2004, respectively, compared to the same periods last year as ASB would have had significantly improved operating results, as did the other segments.

Based on reported net income for prior periods, Hawaii bank franchise taxes related to the dividends received deduction, net of federal income tax benefits, would have been as follows for the periods indicated:

	2003				2004
(in thousands)	Quarter		Year-to-date		Quarter
First quarter	$	998	$	998	$	634
Second quarter		1,019		2,017
Third quarter		1,150		3,167
Fourth quarter		626		3,793

On April 20, 2004, HEI announced a 2-for-1 stock split in the form of a 100% stock dividend with a record date of May 10, 2004 and a distribution date of June 10, 2004. All share and per share information above, in the accompanying financial statements and notes and elsewhere in the Form 10-Q have been adjusted to reflect the stock split (unless otherwise noted). See notes (1) and (9) to HEI’s “Notes to consolidated financial statements.”

For consolidated HEI, directors and officers insurance premiums for policy year 2004 (from February 1, 2004 through January 31, 2005) will be approximately $1.5 million higher ($0.8 million for HEI corporate, $0.2 million for consolidated HECO and $0.5 million for consolidated ASB) than policy year 2003 for the same level of coverage. Premium increases in 2004 for other lines of insurance coverage were not as substantial.

The Company currently estimates that retirement benefits expense, net of amounts capitalized and income taxes, will be $6.8 million in 2004, as compared to $12.1 million in 2003, primarily due to an increase in the fair value of plan assets at December 31, 2003. Of the $6.8 million of net retirement benefits expense, it is projected that HECO and its subsidiaries will record an estimated $3.8 million in 2004, as compared to $8.4 million in 2003, and ASB will record an estimated $2.0 million in 2004, compared to $2.7 million in 2003.

While not substantial for the first half of 2004, the Company expects to continue to incur additional costs for security at its facilities and to comply with the requirements of the Sarbanes-Oxley Act of 2002. Also, internal efforts

43

to improve the security of the Company’s information technology systems are on-going, but are not currently expected to result in significantly increased costs for 2004.

Economic conditions

Because its core businesses provide local electric utility and banking services, HEI’s operating results are significantly influenced by the strength of Hawaii’s economy, which has been growing modestly.

Tourism is widely acknowledged as the largest component of the Hawaii economy. Total visitor arrivals were up 9.0% through May 2004, compared to the same period in 2003. Since 9/11, domestic arrivals have been growing and keeping tourism relatively stable. However, key to tourism growth is the return of Japanese tourists to pre-9/11 levels. In 2003, Japan’s economy showed growth for the first time since 2000 and the outlook is for continued growth in 2004 and 2005. Japanese visitor arrivals increased by 14.8% through May 2004 compared with the same period last year, with arrivals in May 2004 up 54.3%. The 54.3% increase results in part because May 2003 Japanese arrivals were depressed due to the Iraq war and the threat of SARS.

Key non-tourism sectors in Hawaii, particularly the military and residential real estate, are fueling economic growth. After remaining relatively stable over the last five years, the military is growing its presence in Hawaii. A $1.5 billion brigade of 291 Stryker vehicles was approved for Hawaii, resulting in a projected $693 million in construction projects, the planned acquisition of 1,400 acres on Oahu and 23,000 acres on the Big Island of Hawaii, and the addition of approximately 480 soldiers.

Median home prices on Oahu hit a record-high of $481,000 at the end of June 2004. Home resales for the first half of 2004 increased by 9.3% as compared to the same period last year contributing to over $2 billion in sales volume, a 39% increase over the $1.5 billion produced during the same period of 2003.

Construction activity in Hawaii continues to be strong, with private building permits on Oahu up 62% for the first four months of 2004 compared with the same period of 2003.

Strength in Hawaii’s economy is also reflected in other general economic statistics. Total salary and wage jobs increased by 2.1% through May 2004 compared with the same period in 2003. Hawaii’s unemployment rate of 3.0% is the lowest in nearly 13 years and well below the national average of 5.6% at the end of May 2004.

Given these positive trends in tourism, key non-tourism sectors and overall economic indicators, the State of Hawaii Department of Business, Economic Development and Tourism (DBEDT) expects Hawaii’s economy to grow moderately by 2.6% in 2004 excluding inflation (compared to 2.7% and 2.8% growth in 2002 and 2003, respectively). The 2004 estimate is as of March 23, 2004, and is expected to be revised by DBEDT on August 10, 2004. Future growth in Hawaii’s economy is expected to be related primarily to the rate of expansion in the mainland U.S. and Japan economies and its effects on tourism, continued strength in real estate and construction activity and increased military spending, and remains vulnerable to uncertainties in the world’s geopolitical environment.

ASB’s operating results are largely impacted by the existing interest rate environment. Evidence of sustainable economic growth at the national level has led to a consensus amongst Wall Street economists that the overall level of interest rates will rise through the remainder of 2004 and into 2005. While there is a consensus regarding the overall direction of interest rates, the speed and magnitude with which interest rates will increase remains uncertain. See “Quantitative and qualitative disclosures about market risk.”

Dividends

HEI and its predecessor company, HECO, have paid dividends continuously since 1901. On July 20, 2004, HEI’s Board maintained the quarterly dividend of $0.31 per common share (split-adjusted). The payout ratio for 2003 and the first half of 2004 was 81% and 115% (payout ratio of 78% and 115% based on income from continuing operations), respectively. The high payout ratio for the first half of 2004 was primarily due to the charge to net income in the second quarter of 2004 of $24 million for cumulative bank franchise taxes and interest through March 31, 2004 due to an adverse tax ruling and an increased number of shares outstanding from the sale of 2 million shares (pre-split) of common stock in March 2004 and the issuance of new common shares to satisfy the requirements of the DRIP and other plans. In March 2004, the Company began purchasing common shares on the open market to satisfy the requirements of its DRIP and HEIRSP. HEI’s Board and management believe HEI should achieve a 65% payout ratio before it considers increasing the common stock dividend above its current level.

Following is a general discussion of the results of operations by business segment.

44

Electric utility

	Three months ended June 30,				% change		Primary reason(s) for significant change
(dollars in thousands, except per barrel amounts)	2004		2003
Revenues	$	370,605	$	354,529	5	%	2.8% higher KWH sales ($11 million) and higher fuel oil and purchased energy fuel costs, the effects of which are generally passed on to customers ($7 million)
Expenses
Fuel oil		114,496		102,168	12		Higher fuel oil costs and more KWHs generated
Purchased power		94,267		95,264	(1	)	Lower capacity charges and less KWHs purchased, partially offset by higher fuel costs
Other		115,928		114,512	1		Higher maintenance expense, depreciation and taxes, other than income taxes, partly offset by lower other operation expense (including lower retirement benefit expenses)
Operating income		45,914		42,585	8		Higher KWH sales and lower other operation expense, partly offset by higher maintenance expense, depreciation and taxes, other than income taxes
Net income		21,735		18,556	17		Higher operating income and AFUDC and lower interest and other charges, partly offset by higher income taxes
Kilowatthour sales (millions)		2,473		2,407	3
Cooling degree days (Oahu)		1,320		1,283	3
Fuel oil cost per barrel		$40.43		$38.76	4

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	Six months ended June 30,				% change		Primary reason(s) for significant change
(dollars in thousands, except per barrel amounts)	2004		2003
Revenues	$	717,218	$	683,441	5	%	3.3% higher KWH sales ($23 million) and higher fuel oil and purchased energy fuel costs, the effects of which are generally passed on to customers ($14 million)
Expenses
Fuel oil		211,582		193,007	10		Higher fuel oil costs and more KWHs generated
Purchased power		186,506		180,618	3		Higher fuel costs and more KWHs purchased
Other		229,076		226,256	1		Higher maintenance expense, depreciation and taxes, other than income taxes, partly offset by lower other operation expense (including lower retirement benefit expenses)
Operating income		90,054		83,560	8		Higher KWH sales and lower other operation expense, partly offset by higher maintenance expense, depreciation and taxes, other than income taxes
Net income		41,758		36,212	15		Higher operating income and AFUDC and lower interest and other charges, partly offset by higher income taxes
Kilowatthour sales (millions)		4,841		4,686	3
Cooling degree days (Oahu)		2,232		2,111	6
Fuel oil cost per barrel		$39.08		$37.36	5

Kilowatthour (KWH) sales in the second quarter of 2004 increased 2.8% from the same quarter in 2003, primarily due to an increase in the number of customers and higher customer usage due in part to the strength in Hawaii’s economy (higher visitor arrivals, increased military activity and strong real estate market) and warmer weather (more air conditioning usage). Electric utility operating income increased 8% from the second quarter 2003, primarily due to higher KWH sales and lower other operation expense, partly offset by higher maintenance and depreciation expenses and taxes, other than income taxes. Other operation expense decreased 4% primarily due to lower pension and other postretirement benefit expenses, and lower emission fees, partly offset by higher workers compensation claims. Pension and other postretirement benefit expenses for the electric utilities decreased $2.3 million from the same period in 2003 ($1.1 million expense in the second quarter of 2004 versus $3.4 million in the second quarter of 2003) due primarily to an increase in the value of plan assets in 2003. Maintenance expense increased by 3% due to higher substation and distribution line repairs and maintenance. Higher depreciation expense was attributable to additions to plant in service in 2003.

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KWH sales in the first half of 2004 increased 3.3% over the first half of 2003, primarily due to higher residential and commercial customer usage due in part to the strength in Hawaii’s economy (higher visitor arrivals, increased military activity and strong real estate market) and warmer weather (more air conditioning usage). Electric utility operating income increased 8% from the first half of 2003, primarily due to higher KWH sales and lower other operation expense, partly offset by higher maintenance and depreciation expenses and taxes, other than income taxes. Other operation expense decreased 7% primarily due to lower pension and other postretirement benefit expenses, and lower emissions fees, partly offset by higher workers compensation claims. Pension and other postretirement benefit expenses for the electric utilities decreased $3.9 million over the same period in 2003 ($3.1 million expense in the first half of 2004 versus $7.0 million in the first half of 2003) due primarily to an increase in the value of plan assets in 2003. Maintenance expense increased by 11% due to increased generating unit overhauls and storm-related expenses in the first quarter of 2004 and lower insurance reimbursements. Higher depreciation expense was attributable to additions to plant in service in 2003.

Competition

The electric utility industry in Hawaii is increasingly competitive. Although several IPPs have established power purchase agreements with the electric utilities, competition in the generation sector in Hawaii has been moderated by the scarcity of generation sites, various permitting processes and lack of interconnections to other electric utilities. However, customer self-generation, with or without cogeneration, is a continuing competitive factor.

Competitive bidding proceeding. In October 2003, the PUC opened investigative dockets on competitive bidding and distributed generation (DG) to move toward a more competitive electric industry environment under cost-based regulation. The stated purpose of the competitive bidding investigation is to evaluate competitive bidding as a mechanism for acquiring or building new generating capacity in Hawaii. The PUC stated it would consider related filings on a case-by-case basis pending completion of these dockets.

The current parties/participants in the competitive bidding proceeding include the Consumer Advocate, HECO, HELCO, MECO, Kauai Island Utility Cooperative, the Gas Company, DBEDT, the Counties of Maui and Kauai, a renewable energy organization and vendors of DG equipment and services. In April 2004, the parties and participants entered into and filed a proposed stipulated prehearing order, and the PUC adopted the issues and procedures proposed for consideration in the stipulated order and the proposed schedule with modifications. The issues to be addressed in the proceeding include the benefits and impacts of competitive bidding, whether a competitive bidding system should be developed for acquiring or building new generation, and revisions that should be made to integrated resource planning. If competitive bidding is adopted, the proceeding will address specific bidding guidelines and requirements that encourage broad participation but do not place ratepayers at undue risk. The procedural schedule includes testimonies by all parties in January 2005, and evidentiary hearings in July 2005. Management cannot predict the ultimate outcome of this proceeding.

Distributed generation proceeding. Historically, HECO and its subsidiaries have been able to compete by offering customers economic alternatives that, among other things, employ energy efficient electrotechnologies such as the heat pump water heater. However, the number of customer self-generation projects that are being proposed or installed in Hawaii, particularly those involving combined heat and power (CHP) systems, is growing. CHP systems are a form of DG, and produce electricity and thermal energy from gas, propane or diesel-fired engines. In Hawaii, the thermal energy generally is used to heat water and, through an absorption chiller, drive an air conditioning system. The electric energy generated by these systems is usually lower in output than the customer’s load, which results in continued connection to the utility grid to make up the difference in electricity demand and to provide back up electricity.

The electric utilities have a small CHP demonstration project on Maui as part of an on-going evaluation of DG. The electric utilities also have made proposals to customers, subject to PUC review and approval, to install and operate utility-owned CHP systems at the customers’ sites. The electric utilities have executed a number of letters of intent and one memorandum of understanding to conduct preliminary engineering for potential CHP projects. Incremental generation from such customer-sited CHP systems, and other DG, is expected to complement traditional central station power, as part of the electric utilities’ plans to serve their forecast load growth. To facilitate the offering

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of CHP systems, the electric utilities signed a teaming agreement for CHP systems with ratings up to 1 MW, in early 2003, with a manufacturer of packaged CHP systems, but the teaming agreement does not commit the electric utilities to make any CHP system purchases. As a result of the docket on DG, the electric utilities are developing a new CHP equipment procurement process to be applicable to such systems as well as larger systems.

In July 2003, three vendors of DG/CHP equipment and services proposed, in an informal complaint to the PUC, that the PUC open a proceeding to investigate the electric utilities’ provision of CHP services and the teaming agreement with another vendor, and to issue rules or orders to govern the terms and conditions under which the electric utilities will be permitted to engage in utility-owned DG at individual customers sites. In August 2003, the electric utilities responded to the informal complaint, and to information requests from the PUC on the CHP demonstration project and teaming agreement.

In October 2003, the PUC opened an investigative docket to determine the potential benefits and impact of DG on Hawaii’s electric distribution systems and markets and to develop policies and a framework for DG projects deployed in Hawaii. The parties and participants to the proceeding include the Consumer Advocate, HECO, HELCO, MECO, Kauai Island Utility Cooperative, the Counties of Maui and Kauai, a renewable energy organization, vendors of DG equipment and services and an environmental organization. In April 2004, the PUC issued an order in the proceeding, based in large part on a stipulated order proposed by the parties and participants that includes 13 planning, impact and implementation issues. The planning issues address (1) forms of DG (e.g., renewable energy facilities, hybrid renewable energy systems, generation, cogeneration) that may be feasible and viable for Hawaii, (2) who should own and operate DG projects, and (3) the role of regulated electric utility companies and the PUC in the deployment of DG in Hawaii. The impact issues address (1) the impacts, if any, DG will have on Hawaii’s electric transmission and distribution systems and market, (2) the impacts of DG on power quality and reliability, (3) utility costs that can be avoided by DG, (4) externalities costs and benefits of DG, and (5) the potential for DG to reduce the use of fossil fuels. Implementation issues include (1) matters to be considered to allow a DG facility to interconnect with the electric utility’s grid, (2) appropriate rate design and cost allocation issues that must be considered with the deployment of DG facilities, (3) revisions that should be made to the integrated resource planning process, and (4) revisions that should be made to PUC rules and utility rules and practices to facilitate the successful deployment of DG. The parties and participants can also address issues raised in the informal complaint, but not specific claims made against any of the parties named in the complaint. The procedural schedule for the proceeding includes testimonies by all parties in July 2004 and evidentiary hearings in December 2004. Management cannot predict the ultimate outcome of this proceeding.

In October 2003, the electric utilities filed an application for approval of a CHP tariff, under which they would provide CHP services to eligible commercial customers. Under the tariff, the electric utilities would own, operate and maintain customer-sited, packaged CHP systems (and certain ancillary equipment) pursuant to a standard form of contract with the customer. In March 2004, the PUC issued an order in which it suspended the CHP tariff application until, at a minimum, the matters in the investigative docket on DG have been addressed. Pending approval of a CHP tariff, the electric utilities plan to request approval for individual CHP projects.

Regulation of electric utility rates

The PUC has broad discretion in its regulation of the rates charged by HEI’s electric utility subsidiaries and in other matters. Any adverse decision and order (D&O) by the PUC concerning the level or method of determining electric utility rates, the authorized returns on equity or other matters, or any prolonged delay in rendering a D&O in a rate or other proceeding, could have a material adverse effect on the Company’s results of operations and financial condition. Upon a showing of probable entitlement, the PUC is required to issue an interim D&O in a rate case within 10 months from the date of filing a completed application if the evidentiary hearing is completed (subject to extension for 30 days if the evidentiary hearing is not completed). There is no time limit for rendering a final D&O. Interim rate increases are subject to refund with interest, pending the final outcome of the case. Through June 30, 2004, HECO and its subsidiaries had recognized $17 million of revenues with respect to interim orders regarding certain integrated resource planning costs, which revenues are subject to refund, with interest, to the extent they exceed the amounts allowed in final orders. The Consumer Advocate has objected to the recovery of $2.5 million (before interest) of the $10.3 million of incremental integrated resource planning costs incurred during the 1995-2002 period, and the PUC’s decision is pending on this

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matter. In addition, HECO and MECO incurred approximately $0.6 million of incremental integrated resource planning costs for 2003. The Consumer Advocate has not yet stated its position on the 2003 costs incurred.

Management cannot predict with certainty when D&Os in future rate cases will be rendered or the amount of any interim or final rate increase that may be granted. There are no rate cases pending at this time. HECO, however, has submitted its notice of intent to file a rate increase application in the second half of 2004, using a 2005 test year.

The rate schedules of the electric utility subsidiaries include energy cost adjustment clauses under which electric rates charged to customers are automatically adjusted for changes in the weighted-average price paid for fuel oil and certain components of purchased power, and the relative amounts of company-generated power and purchased power. In 1997 PUC decisions approving the electric utilities’ fuel supply contracts, the PUC noted that, in light of the length of the fuel supply contracts and the relative stability of fuel prices, the need for continued use of energy cost adjustment clauses would be the subject of investigation in a generic docket or in a future rate case. The electric utility subsidiaries believe that the energy cost adjustment clauses continue to be necessary. These clauses were continued in the most recent HELCO and MECO rate cases (final D&O’s issued in February 2001 and April 1999, respectively).

The utilities have reached agreement with their suppliers on amendments to their existing fuel supply contracts that will extend the contracts through December 2014 on substantially the same terms and conditions, including market-related pricing. In May 2004, the utilities filed the amendments to the fuel supply contracts with the PUC and are awaiting approval.

Consultants periodically conduct depreciation studies for the electric utilities to determine whether the existing approved rates and methods used to calculate depreciation accruals are appropriate for the production, transmission, distribution and general plant accounts. If it is determined that the existing rates and methods are no longer appropriate, changes to those rates are recommended as part of the study. In October 2002, HECO filed an application with the PUC for approval to change its depreciation rates and to change to vintage amortization accounting for selected plant accounts. See the discussion below under “Most recent rate requests.”

In May 2004, the PUC issued a D&O authorizing an increase from $0.5 million to $2.5 million, effective July 1, 2004, in the threshold for capital improvement projects requiring advance PUC review. This increase generally reflects the cumulative effects of inflation on the value of the dollar since the review requirement was originally established in 1965.

PUC Commissioners and Consumer Advocate. After serving 14 months on the PUC, Carlito P. Caliboso was reappointed to the PUC, confirmed by the state senate for a six year term expiring June 30, 2010, and continues to serve as Chairman of the PUC. Also continuing as commissioners are Janet E. Kawelo (term expiring June 30, 2006) and Wayne H. Kimura (term expiring June 30, 2008).

John E. Cole was named Executive Director of the Division of Consumer Advocacy effective May 17, 2004. Prior to becoming the Executive Director, Mr. Cole was a member of the Governor of the State of Hawaii’s Policy Team, which serves as advisor to the Governor on state-wide policy matters. Mr. Cole is an attorney.

Most recent rate requests

HEI’s electric utility subsidiaries initiate PUC proceedings from time-to-time to request electric rate increases to cover rising operating costs (e.g., higher purchased power capacity charges) and the cost of plant and equipment, including the cost of new capital projects to maintain and improve service reliability. The return on average common equity (ROACE) found by the PUC to be reasonable in the most recent final rate decision for each utility was 11.40% for HECO (D&O issued on December 11, 1995, based on a 1995 test year), 11.50% for HELCO (D&O issued on February 8, 2001, based on a 2000 test year) and 10.94% for MECO (amended D&O issued on April 6, 1999, based on a 1999 test year). For 2003, the actual simple average ROACEs (semiannually calculated under the rate-making method and reported to the PUC) for HECO, HELCO and MECO were 9.20%, 6.61% and 10.08%, respectively. HELCO’s 6.61% ROACE for 2003 compared to its allowed ROACE of 11.50%, reflects in part HELCO’s decision to discontinue accruing AFUDC, effective December 1, 1998, on its CT-4 and CT-5 generating units that are being installed at the Keahole power plant. The non-accrual of AFUDC continued to have a negative impact on HELCO’s ROACE for the first half of 2004. As a significant portion of the costs for CT-4 and CT-5 has been transferred from construction in progress to plant in service in 2004, however, the non-accrual of AFUDC on the remaining CT-4 and CT-5 costs in construction in progress is expected to have a smaller negative impact on HELCO’s ROACE for 2004.

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Nevertheless, HELCO’s ROACE may be negatively impacted as electric rates will not change for the additions of CT-4 and CT-5 until HELCO files a rate increase application and the PUC grants HELCO rate relief. For the twelve months ended June 30, 2004, the weighted average ROACEs (rate-making method) for HECO, HELCO and MECO were 9.94%, 6.13% and 10.34%, respectively.

The return on average rate base (ROR) found by the PUC to be reasonable in the most recent final rate decision for each utility was 9.16% for HECO, 9.14% for HELCO and 8.83% for MECO (D&Os noted above). For 2003, the actual RORs (semiannually calculated under the rate-making method and reported to the PUC) for HECO, HELCO and MECO were 7.95%, 8.65% and 8.79%, respectively. For the twelve months ended June 30, 2004, the weighted average RORs (rate-making method) for HECO, HELCO and MECO were 8.35%, 8.03% and 9.18%, respectively.

Hawaiian Electric Company, Inc. HECO has not initiated a rate case since 1993, but in 2001 it committed to initiate a rate case within three years, using a 2003 or 2004 test year. The PUC later approved HECO’s request that the time for initiating the rate case be extended by 12 months, with the result that the rate case is to be initiated in the second half of 2004, using a 2005 test year. In May 2004, HECO’s Notice of Intent to file a general rate increase application was filed with the PUC. See the discussion below under “Other regulatory matters, Demand-side management programs—agreements with the Consumer Advocate.”

In October 2002, HECO filed an application with the PUC for approval to change its depreciation rates based on a study of depreciation expense for 2000 and to change to vintage amortization accounting for selected plant accounts. In its application, HECO requested that the effective date of the proposed changes coincide with the effective date of the rates established in HECO’s next rate case proceeding so that HECO’s financial results would not be negatively impacted by the depreciation rates and method ultimately approved by the PUC. In July 2003, the Consumer Advocate submitted its direct testimony and recommended depreciation expense approximately $31.8 million, or 45%, less than HECO’s requested $70.8 million in annual 2000 depreciation expense. In March 2004, HECO and the Consumer Advocate reached an agreement, subject to PUC approval, under which HECO would change its depreciation rates and change to vintage amortization accounting for selected plant accounts, effective with the PUC’s final decision and order on HECO’s application. If approved by the PUC, the new rates and method of accounting under the settlement agreement would change depreciation expense in periods following the effective date from amounts that would have been accrued if the current depreciation rates and method of accounting remained in effect. For example, if the settlement agreement had been in effect in 2000, it would have resulted in an estimated $65.0 million in annual depreciation expense based on the study of depreciation expense for 2000, compared to recorded depreciation expense of $66.5 million.

Hawaii Electric Light Company, Inc. The timing of a future HELCO rate increase request to recover costs relating to the delayed installation of two combustion turbines (CT-4 and CT-5) at Keahole will depend on future circumstances. See “HELCO power situation” in note (5) of HECO’s “Notes to Consolidated Financial Statements.”

Other regulatory matters

Demand-side management programs—lost margins and shareholder incentives. HECO, HELCO and MECO’s energy efficiency DSM programs, currently approved by the PUC, provide for the recovery of lost margins and the earning of shareholder incentives.

Lost margins are accrued and collected prospectively based on the programs’ forecast levels of participation, and are subject to two adjustments based on (1) the actual level of participation and (2) the results of impact evaluation reports. The difference between the adjusted lost margins and the previously collected lost margins are subject to refund or recovery, with any over- or under-collection accruing interest at HECO, HELCO or MECO’s authorized rate of return on rate base. HECO, HELCO and MECO plan to file the impact evaluation report for the 2000-2002 period with the PUC in the fourth quarter of 2004 and adjust the lost margin recovery as required. Past adjustments required for lost margins have not had a material effect on HECO, HELCO or MECO’s financial statements.

Shareholder incentives are accrued currently and collected retrospectively based on the programs’ actual levels of participation for the prior year. Beginning in 2001, shareholder incentives collected are subject to retroactive adjustment based on the results of impact evaluation reports, similar to the adjustment process for lost margins.

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Demand-side management programs—agreements with the Consumer Advocate. In October 2001, HECO and the Consumer Advocate finalized agreements, subject to PUC approval, for the continuation of HECO’s three commercial and industrial DSM programs and two residential DSM programs until HECO’s next rate case, which HECO committed to file using a 2003 or 2004 test year. These agreements were in lieu of HECO continuing to seek approval of new 5-year DSM programs. Any DSM programs to be in place after HECO’s next rate case will be determined as part of the case. Under the agreements, HECO will cap the recovery of lost margins and shareholder incentives if such recovery would cause HECO to exceed its current “authorized return on rate base” (i.e. the rate of return on rate base found by the PUC to be reasonable in the most recent rate case for HECO). HECO also agreed it will not pursue the continuation of lost margins recovery and shareholder incentives through a surcharge mechanism in future rate cases. In October 2001, HELCO and MECO reached similar agreements with the Consumer Advocate and filed requests to continue their four existing DSM programs. In November 2001, the PUC issued orders (one of which was later amended) that, subject to certain reporting requirements and other conditions, approved (1) the agreements regarding the temporary continuation of HECO’s five existing DSM programs until HECO’s next rate case and (2) the agreements regarding the temporary continuation of HELCO’s and MECO’s DSM programs until one year after the PUC makes a revenue requirements determination in HECO’s next rate case. Under the orders, however, HELCO and MECO are allowed to recover only lost margins and shareholder incentives accrued through the date that interim rates are established in HECO’s next rate case, but may request to extend the time of such accrual and recovery for up to one additional year.

One of the conditions to the temporary continuation of the DSM programs requires the utilities and the Consumer Advocate review, every six months, the economic and rate impacts resulting from implementing the agreement. In reviewing HELCO’s ROR for 2003, the Consumer Advocate raised an issue as to whether the Keahole settlement expenses accrued in November 2003 should be included in the rate-making calculation for HELCO’s ROR for the purpose of determining whether HELCO’s ROR exceeded its current “authorized” ROR due to its recovery of lost margins and shareholder incentives. Excluding the $3.1 million amount accrued in November 2003, HELCO’s ROR for 2003 would have exceeded HELCO’s current authorized ROR by an amount greater than HELCO’s lost margins and shareholder incentives for the year. In order to resolve any issue of whether HELCO’s recovery of lost margins and shareholder incentives allowed HELCO to exceed its current authorized ROR, HELCO agreed to refund, with interest, all of the lost margins and shareholder incentives earned in 2003. In June 2004, HELCO recorded reduced revenues of $1.1 million to reflect the lost margins and shareholder incentives for 2003 that will be refunded to customers. No issues have been raised regarding the lost margins and shareholder incentives earned by HECO or MECO in 2003.

As part of HECO’s agreement with the Consumer Advocate regarding HECO’s commercial, industrial and residential DSM programs, the parties agreed in August 2003, and the PUC approved, that HECO could delay the filing of its next rate case by approximately 12 months, with the result that the rate case will be filed in the second half of 2004 using a 2005 test year. The other components of the existing agreements, as approved by the PUC, would be continued under the new agreements.

Collective bargaining agreements

See “Collective bargaining agreements” in note (5) in HECO’s “Notes to consolidated financial statements.”

Legislation

Congress and the Hawaii legislature periodically consider legislation that could have positive or negative effects on the utilities and their customers. For example, although it is currently stalled in a House-Senate conference committee, comprehensive energy legislation is still before Congress that could increase the domestic supply of oil as well as increase support for energy conservation programs and mandate the use of renewables by utilities.

The 2004 Hawaii Legislature amended the renewable portfolio standards law which was originally enacted in 2001. The current law requires electric utilities to meet a renewable portfolio standard of 8% by December 31, 2005, 10% by December 31, 2010, 15% by December 31, 2015 and 20% by December 31, 2020, but contains no penalties if the standards are not met. HECO, HELCO and MECO are permitted to aggregate their renewable portfolios in order to achieve these standards. The PUC has to determine if an electric utility is not able to meet the standard in a cost-effective manner or due to circumstances beyond its control. If such a determination is made, the utility is

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relieved of its responsibility to achieve the standard for that period of time. The law also requires participation by the State to support and facilitate achievement of the renewable portfolio standards and directs the PUC to develop and implement a rate structure to encourage the use of renewable energy. An independent, peer-reviewed study will be conducted by the Hawaii Natural Energy Institute. The study will look at the electric utilities’ capability of achieving the standards based on a number of factors including impact on consumer rates, utility system reliability and stability, costs and availability of appropriate renewable energy resources and technologies, permitting approvals, and impacts on the economy, culture, community and environment.

The Company currently supports renewable sources in various ways, including their solar water heating and heat pump programs and their purchased power contracts with nonutility generators using renewable sources (e.g., refuse-fired, geothermal, hydroelectric and wind turbine generating systems). On December 30, 2003, HELCO signed an approximately 10 MW as-available wind power contract with Hawi Renewable Development. The electric utilities continue to initiate and support many renewable energy research and development projects to help develop these technologies (e.g., photovoltaic projects). They are also conducting integrated resource planning to evaluate the use of more renewables and, in December 2002, HECO formed a nonregulated subsidiary, Renewable Hawaii, Inc. (RHI), to invest in renewable energy projects. In 2003 and 2004, RHI solicited competitive proposals for investment opportunities in projects (1 MW or larger) to supply renewable energy on the islands of Oahu, Maui, Molokai, Lanai and Hawaii. RHI is currently reviewing and evaluating the proposals received. RHI is seeking to take a passive, minority interest in such projects to help stimulate the addition of cost-effective, commercially viable renewable energy generation in the state of Hawaii. Over 8% of the utilities’ consolidated electricity sales for 2003 were from renewable resources (as defined under the renewable portfolio standards law). While the Company thus met the 7% target for 2003 provided for in Hawaii’s renewable portfolio standard law, it believes it may be difficult to meet the standard in future years, particularly if sales of electricity increase as projected. Thus, at this time, management cannot predict the impact of this law or of other proposed congressional and Hawaii legislation on the Company or its customers.

Hawaii has a net energy metering law, which requires that electric utilities offer net energy metering to eligible customer generators (i.e. a customer generator may be a net user or supplier of energy and will make payment to or receive credit from the electric utility accordingly). The 2004 Legislature amended the net energy metering law by expanding the definition of “eligible customer generator” to include government entities, increasing the size of eligible net metered systems from 10 kilowatts (kw) to 50 kw, and limiting exemptions from additional requirements for systems meeting safety and performance standards to systems of 10 kw or less. These amendments could have a negative effect on electric utility sales. However, based on experience under the 10 kw limit and assessment of market opportunity for 50 kw applications, management does not expect any such effect to be material.

The 2004 legislature also passed legislation that clarifies that the accepting agency or authority for an EIS is not required to be the approving agency for the permit or approval and also requires an environmental assessment for proposed wastewater facilities except individual wastewater systems, waste-to-energy facilities, landfills, oil refineries, and power-generating facilities greater than 5 MW. This legislation could result in an increase in project costs.

Other developments

HECO is evaluating the merits and feasibility of the “Broadband over Power Line” technology with a small-scale trial in Honolulu. HECO is actively assessing integration of utility applications enabled by a distribution grid that could transmit and receive information and remotely monitor and control equipment.

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Bank

	Three months ended June 30,						% change		Primary reason(s) for significant change
(in thousands)	2004			2003
Revenues	$	89,982		$	92,703		(3	)%	Lower interest income (resulting from lower weighted-average yields on loans and investments, partly offset by the impact of higher average asset balances)
Operating income		23,011			22,361		3		Higher net interest income and reversal of $3 million of provision for loan losses, partly offset by higher general and administrative expenses (including $5 million of interest accrued on cumulative bank franchise taxes as a result of an adverse tax ruling)
Net income (loss)		(6,949	)		13,494		NM		Higher income taxes (including $21 million net charge for cumulative bank franchise taxes through March 31, 2004 as a result of an adverse tax ruling), partly offset by higher operating income
Interest rate spread		3.08	%		3.02	%	2		33 basis points decrease in the weighted-average rate on interest-bearing liabilities, partly offset by a 27 basis points decrease in the weighted-average yield on interest-earning assets

NM Not meaningful.

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	Six months ended June 30,						% change		Primary reason(s) for significant change
(in thousands)	2004			2003
Revenues	$	179,240		$	187,805		(5	)%	Lower interest income (resulting from lower weighted-average yields, partly offset by the impact of higher average asset balances)
Operating income		49,119			44,787		10		Reversal of $4.6 million of provision for loan losses, partly offset by higher general and administrative expenses (including $5 million of interest accrued on cumulative bank franchise taxes as a result of an adverse tax ruling)
Net income		8,978			27,002		(67	)	Higher income taxes (including $21 million net charge for cumulative bank franchise taxes through March 31, 2004 as a result of an adverse tax ruling), partly offset by higher operating income
Interest rate spread		3.06	%		3.08	%	(1	)	43 basis points decrease in the weighted-average yield on interest-earning assets, largely offset by a 41 basis points decrease in the weighted-average rate on interest-bearing liabilities

The results of operations for the second quarter of 2004 include a net charge of $24 million due to an adverse tax ruling as discussed in note 4 to HEI’s “Notes to consolidated financial statements” under “ASB Realty Corporation.” The $24 million net charge includes a net $21 million of cumulative bank franchise taxes through March 31, 2004, plus a net $3 million of interest (which gross interest of $5 million is included in general and administrative expenses). Also in the second quarter of 2004, ASB accrued $0.2 million of interest, net of taxes, and state bank franchise tax of $0.6 million, net of taxes, related to this tax issue for the period from April 1 to June 30, 2004. The following table presents a reconciliation of ASB’s net income to net income excluding the $24 million charge and including additional bank franchise taxes in prior periods as if ASB had not taken a dividends received deduction on income from its REIT subsidiary. Management believes the adjusted information below presents ASB’s net income on a more comparable basis for the periods shown. However, net income, including these adjustments, is not a presentation defined under GAAP and may not be comparable to other companies or more useful than the GAAP presentation included in HEI’s consolidated financial statements.

	Three months ended June 30,						Six months ended June 30,
(in thousands)	2004			2003			2004			2003
Net income (loss)	$	(6,949	)	$	13,494		$	8,978		$	27,002
Cumulative franchise tax and interest, net	$	23,955		$	—		$	23,955		$	—
Additional franchise taxes, net (if recorded in prior periods)		—			(1,019	)		(634	)		(2,017	)
Total adjustments	$	23,955		$	(1,019	)	$	23,321		$	(2,017	)
Net income—as adjusted	$	17,006		$	12,475		$	32,299		$	24,985

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Taking into account the adjustments in the table above, ASB’s net income would have increased 36% and 29% for the three months and six months ended June 30, 2004, respectively, compared to the same periods last year.

Based on reported net income for prior periods, Hawaii bank franchise taxes related to the dividends received deduction, net of federal income tax benefits, would have been as follows for the periods indicated:

	2003				2004
(in thousands)	Quarter		Year-to-date		Quarter
First quarter	$	998	$	998	$	634
Second quarter		1,019		2,017
Third quarter		1,150		3,167
Fourth quarter		626		3,793

Earnings of ASB depend primarily on net interest income, which is the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities. ASB’s loan volumes and yields are affected by market interest rates, competition, demand for financing, availability of funds and management’s responses to these factors. At June 30, 2004, ASB’s loan portfolio mix consisted of 78% residential loans, 9% business loans, 7% consumer loans and 6% commercial real estate loans, which was similar to ASB’s loan portfolio mix at December 31, 2003. ASB’s mortgage-related securities portfolio consists primarily of shorter duration assets and is affected by market interest rates and demand. High prepayments have adversely impacted the yield of the mortgage-related securities portfolio. Deposits continue to be the largest source of funds and are affected by market interest rates, competition and management’s responses to these factors. Advances from the FHLB of Seattle and securities sold under agreements to repurchase continue to be significant sources of funds. At June 30, 2004, ASB’s costing liabilities consisted of 50% core deposits, 19% term certificates and 31% FHLB advances and other borrowings. At December 31, 2003, ASB’s costing liabilities consisted of 48% core deposits, 20% term certificates and 32% FHLB advances and other borrowings. Other factors primarily affecting ASB’s operating results include gains or losses on sales of securities available for sale, fee income, provision for loan losses, changes in the value of mortgage servicing rights and expenses from operations (including interest accrued on the unfunded cumulative bank franchise tax liability).

Low interest rates and high mortgage refinancing volume in 2003 and the first half of 2004 have put pressure on ASB’s interest rate spread as the loan portfolio repriced upon refinancing at lower interest rates, while at the same time deposit rates were already at low levels in 2003 and the first half of 2004 (i.e., at levels difficult to reduce further without loss of deposits). Although higher long-term interest rates could reduce the market value of mortgage-related securities and reduce stockholder’s equity through a balance sheet charge to AOCI, this reduction in the market value of mortgage-related securities would not result in a charge to net income in the absence of an “other-than-temporary” impairment in the value of the securities. At June 30, 2004 and December 31, 2003, the unrealized losses, net of tax benefits, on available-for-sale mortgage-related securities (including securities pledged for repurchase agreements) in AOCI was $28 million and $1 million, respectively, reflecting the impact of higher interest rates in 2004. See “Item 3. Quantitative and qualitative disclosures about market risk.”

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The following table sets forth average balances, interest and dividend income, interest expense and weighted-average yields earned and rates paid, for certain categories of interest-earning assets and interest-bearing liabilities for the periods indicated.

	Three months ended June 30,							Six months ended June 30,
($ in thousands)	2004		2003		Change			2004		2003		Change
Loans receivable
Average balances(1)	$	3,094,905	$	3,058,597	$	36,308		$	3,097,207	$	3,025,417	$	71,790
Interest income(2)		45,832		50,425		(4,593	)		92,241		100,898		(8,657	)
Weighted-average yield (%)		5.92		6.59		(0.67	)		5.96		6.67		(0.71	)
Mortgage-related securities
Average balances	$	2,772,060	$	2,730,816	$	41,244		$	2,724,645	$	2,714,992	$	9,653
Interest income		27,559		26,023		1,536			54,636		55,300		(664	)
Weighted-average yield (%)		3.98		3.81		0.17			4.01		4.07		(0.06	)
Investments(3)
Average balances	$	239,594	$	219,609	$	19,985		$	259,104	$	202,237	$	56,867
Interest and dividend income		1,665		1,551		114			3,413		3,308		105
Weighted-average yield (%)		2.78		2.82		(0.04	)		2.64		3.29		(0.65	)
Total interest-earning assets
Average balances	$	6,106,559	$	6,009,022	$	97,537		$	6,080,956	$	5,942,646	$	138,310
Interest and dividend income		75,056		77,999		(2,943	)		150,290		159,506		(9,216	)
Weighted-average yield (%)		4.92		5.19		(0.27	)		4.94		5.37		(0.43	)
Deposit liabilities
Average balances	$	4,068,047	$	3,850,430	$	217,617		$	4,042,376	$	3,823,441		218,935
Interest expense		11,464		13,653		(2,189	)		23,674		28,083		(4,409	)
Weighted-average rate (%)		1.13		1.42		(0.29	)		1.17		1.48		(0.31	)
Borrowings
Average balances	$	1,831,495	$	1,896,740	$	(65,245	)	$	1,824,227	$	1,850,394		(26,167	)
Interest expense		15,578		17,483		(1,905	)		31,321		36,390		(5,069	)
Weighted-average rate (%)		3.41		3.69		(0.28	)		3.44		3.96		(0.52	)
Total interest-bearing liabilities
Average balances	$	5,899,542	$	5,747,170	$	152,372		$	5,866,603	$	5,673,835		192,768
Interest expense		27,042		31,136		(4,094	)		54,995		64,473		(9,478	)
Weighted-average rate (%)		1.84		2.17		(0.33	)		1.88		2.29		(0.41	)
Net average balance, net interest income and interest rate spread
Net average balance	$	207,017	$	261,852	$	(54,835	)	$	214,353	$	268,811	$	(54,458	)
Net interest income		48,014		46,863		1,151			95,295		95,033		262
Interest rate spread (%)		3.08		3.02		0.06			3.06		3.08		(0.02	)

⁽¹⁾ Includes nonaccrual loans.

⁽²⁾ Includes interest accrued prior to suspension of interest accrual on nonaccrual loans and loan fees of $1.8 million and $2.1 million for the three months ended June 30, 2004 and 2003, respectively, and $3.3 million and $3.7 million for the six months ended June 30, 2004 and 2003, respectively.

⁽³⁾ Includes stock in the FHLB of Seattle.

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Three months ended June 30, 2004

Net interest income before provision for losses for the second quarter of 2004 increased by $1.2 million, or 2.5%, from the same period in 2003. Net interest spread increased from 3.02% for the second quarter of 2003 to 3.08% for the second quarter of 2004 as ASB’s yield on interest-earning assets decreased slower than the cost of interest-bearing liabilities. The average loan portfolio balance increased (primarily in the residential loan portfolio) as strong demand for homes and limited supply continued to add strength to the Hawaii real estate market. The increases in the average investment and mortgage-related securities portfolios in the second quarter of 2004 compared to the second quarter in 2003 were due to the reinvestment of excess liquidity into short-term investments. The increase in average deposit balances in the second quarter of 2004 compared to the second quarter in 2003 was due to an increase of $314 million in average core deposit balances offset by a decrease of $96 million in average term certificate balances. The higher deposit balances enabled ASB to repay some of its maturing, higher costing FHLB advances.

As of June 30, 2004, delinquent and nonaccrual loans to total loans continued to trend downward to 0.4%, a level well below historical norms. The continued strength in the credit profile of the loan portfolio lowered ASB’s historical loss ratios and decreased its classified assets, allowing ASB to recognize a $3.0 million recovery of the allowance for loan losses during the second quarter of 2004. This compares with a provision for loan losses of $1.0 million for the same period in the previous year.

Other income for the second quarter of 2004 increased by $0.2 million, or 1.5%, over the same period in 2003. Higher fee income on deposit liabilities and financial products and $1.2 million lower writedowns of ASB’s mortgage servicing rights in the second quarter of 2004 compared to the same period in 2003 were partly offset by $1.6 million lower gains on sales of investments and mortgage-related securities.

General and administrative expenses for the quarter ended June 30, 2004 increased by $4.8 million, or 12.4%, compared to the same period in 2003, mostly related to $5 million of interest accrued on cumulative bank franchise taxes through March 31, 2004 as a result of an adverse tax ruling. Compensation and employee benefits expense was 6.0% lower primarily due to lower workers’ compensation expense and lower commissions paid to residential loan officers. In addition, in the second quarter of 2004, ASB accrued $0.3 million in interest related to the potential bank franchise taxes. ASB also accrued $0.6 million of additional bank franchise taxes, net of tax benefits, because ASB did not take a dividends received deduction in the second quarter of 2004.

Six months ended June 30, 2004

Net interest income before provision for losses for the first six months of 2004 compared to the same period in 2003 was flat. Net interest spread decreased from 3.08% for the first six months of 2003 to 3.06% for the first six months of 2004 as ASB’s yield on interest-earning assets decreased faster than the cost of interest-bearing liabilities. The increase in the average loan portfolio balance (primarily an increase in the residential loan portfolio) was due to the strong Hawaii real estate market and low interest rates, which resulted in increased affordability of housing for consumers and higher loan refinancings. The increase in the average investment securities portfolio was due to the reinvestment of excess liquidity into short-term investments. The increase in average deposit balances was due to an increase of $304 million in average core deposit balances offset by a decrease of $85 million in average term certificate balances. The higher deposit balances enabled ASB to repay some of its maturing, higher costing FHLB advances.

As of June 30, 2004, delinquent and nonaccrual loans to total loans continued to trend downward to 0.4%, a level well below historical norms. Given the continued strength in the credit profile of the loan portfolio, ASB recognized a $4.6 million recovery of allowance for loan losses during the first six months of 2004. This compares with a provision for loan losses of $2.2 million for the same period in the previous year. As of June 30, 2004, ASB’s allowance for loan losses was 1.25% of average loans outstanding, compared to 1.50% at June 30, 2003. The following table presents the changes in the allowance for loan losses for the periods indicated:

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Six months ended June 30	2004			2003
(in thousands)
Allowance for loan losses, January 1	$	44,285		$	45,435
Provision for loan losses		(4,600	)		2,175
Net charge-offs		(929	)		(2,156	)
Allowance for loan losses, June 30	$	38,756		$	45,454

Other income for the first six months of 2004 increased by $0.7 million, or 2.3%, over the same period in 2003. Higher fee income on deposit liabilities and lower writedowns of ASB’s mortgage servicing rights in the first six months of 2004 compared to the same period in 2003 were partly offset by lower gains on sales of investments and mortgage-related securities.

General and administrative expenses for the six months ended June 30, 2004 increased by $3.4 million, or 4.4%, from the same period in 2003, mostly related to the $5.3 million of interest on cumulative bank franchise taxes accrued in the second quarter of 2004, partly offset by lower compensation and employee benefits expense of $1.3 million and lower professional services expense of $1.6 million. The decrease in compensation and employee benefits expense was primarily as a result of lower workers’ compensation expense and lower commissions paid to residential loan officers. Professional service expense incurred in the transformation of ASB from a traditional retail thrift to a full-service community bank was lower due to the timing of certain transformation activities.

ASB continues to manage the volatility of its net interest income by managing the relationship of interest-sensitive assets to interest-sensitive liabilities. To accomplish this, ASB management uses simulation analysis to monitor and measure the relationship between the balances and repayment and repricing characteristics of interest-sensitive assets and liabilities. Specifically, simulation analysis is used to measure net interest income and net market value fluctuations in various interest-rate scenarios. See “Item 3. Quantitative and qualitative disclosures about market risk.” In order to manage its interest-rate risk profile, ASB has utilized the following strategies: (1) increasing the level of low-cost core deposits; (2) originating relatively short-term or variable-rate business banking and commercial real estate loans; (3) investing in mortgage-related securities with short average lives; and (4) taking advantage of the lower interest-rate environment by lengthening the maturities of interest-bearing liabilities. The shape of the yield curve and the difference between the short-term and long-term rates are also factors affecting profitability. For example, if a long-term fixed rate earning asset was funded by a short-term costing liability, the interest rate spread would be higher in a “steep” yield curve than a “flat” yield curve interest-rate environment.

Because of the low interest rate environment, ASB restructured a total of $389 million of FHLB advances during the second quarter of 2003. See “Restructuring of Federal Home Loan Bank Advances” in note (4) of HEI’s “Notes to consolidated financial statements.” The restructuring resulted in a reduction of interest expense on these FHLB advances for 2003 and the first half of 2004, which partially offset the reduction in interest income that ASB has been experiencing.

For a discussion of an ongoing dispute with state tax authorities relating to the tax treatment of dividends paid to ASB by ASB Realty Corporation, see “ASB Realty Corporation” in note (4) of HEI’s “Notes to consolidated financial statements.”

Regulation

ASB is subject to extensive regulation, principally by the Office of Thrift Supervision (OTS) and the Federal Deposit Insurance Corporation. Depending on ASB’s level of regulatory capital and other considerations, these regulations could restrict the ability of ASB to compete with other institutions and to pay dividends to its shareholders. See the discussions below under “Liquidity and capital resources—Bank.”

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Other

	Three months ended June 30,						% change		Primary reason(s) for significant change
(in thousands)	2004			2003
Revenues	$	1,211		$	1,524		(21	)%	Prior year revenues from ProVision Technologies, Inc. (which was sold in July 2003) and gain on interest rate swap in 2003, partly offset by higher income from investments in 2004.
Operating loss		(1,979	)		(3,493	)	43		See explanation for revenues and lower legal, stock option and charitable contribution expenses.
	Six months ended June 30,						% change		Primary reason(s) for significant change
(in thousands)	2004			2003
Revenues	$	2,450		$	2,146		14	%	Higher income from investments in 2004 and equity in earnings of unconsolidated financing entities, partly offset by 2003 revenues from ProVision Technologies, Inc. and gain on interest rate swap and 2004 writedown of an investment.
Operating loss		(4,390	)		(7,806	)	44		See explanation for revenues and lower legal, stock option and charitable contribution expenses.

The “other” business segment includes results of operations of HEI Investments, Inc., a company primarily holding investments in leveraged leases; Pacific Energy Conservation Services, Inc., a contract services company primarily providing windfarm operational and maintenance services to an affiliated electric utility; HEI Properties, Inc. (HEIPI), a company holding passive investments; Hawaiian Electric Industries Capital Trust I and its subsidiary (HEI Preferred Funding, LP), which were deconsolidated on January 1, 2004 and dissolved in April 2004, and Hycap Management, Inc., financing entities formed to effect the issuance of 8.36% Trust Originated Preferred Securities; The Old Oahu Tug Service, Inc. (TOOTS), a maritime freight transportation company that ceased operations in 1999; HEI and HEIDI, holding companies; and eliminations of intercompany transactions. The first six months of 2003 also includes the results of operations for ProVision Technologies, Inc., a company formed to sell, install, operate and maintain on-site power generation equipment and auxiliary appliances in Hawaii and the Pacific Rim, which was sold for a nominal loss in July 2003; and two other inactive subsidiaries, HEI Leasing, Inc. and HEI District Cooling, Inc., which were dissolved in October 2003.

Discontinued operations

See note (5) in HEI’s “Notes to consolidated financial statements.”

Contingencies

See note (10) in HEI’s “Notes to consolidated financial statements.”

Recent accounting pronouncements and interpretations

See note (12) and note (7) in HEI’s and HECO’s respective “Notes to consolidated financial statements.”

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FINANCIAL CONDITION

Liquidity and capital resources

HEI and HECO believe that their ability to generate cash, both internally from electric utility and banking operations and externally from issuances of equity and debt securities, commercial paper and bank borrowings, is adequate to maintain sufficient liquidity to fund its capital expenditures and investments and to cover debt, retirement benefits and other cash requirements in the foreseeable future.

The consolidated capital structure of HEI (excluding ASB’s deposit liabilities, securities sold under agreements to repurchase and advances from the FHLB of Seattle) was as follows:

(in millions)	June 30, 2004				December 31, 2003
Short-term borrowings	$	14	1	%	$	—	—	%
Long-term debt		1,167	49			1,065	45
HEI- and HECO-obligated preferred securities of trust subsidiaries		—	—			200	8
Preferred stock of subsidiaries		34	1			34	1
Common stock equity		1,170	49			1,089	46
	$	2,385	100	%	$	2,388	100	%

See notes (7) and (12) of HEI’s “Notes to consolidated financial statements” for an explanation of the deconsolidation of financing entities and refinancing transactions.

As of August 1, 2004, the Standard & Poor’s (S&P) and Moody’s Investors Service’s (Moody’s) ratings of HEI and HECO securities were as follows:

	S&P	Moody’s
HEI
Commercial paper	A-2	P-2
Medium-term notes	BBB	Baa2
HECO
Commercial paper	A-2	P-2
Revenue bonds (senior unsecured, insured)	AAA	Aaa
HECO-obligated preferred securities of trust subsidiaries	BBB-	Baa2
Cumulative preferred stock (selected series)	NR	Baa3

NR Not rated.

The above ratings are not recommendations to buy, sell or hold any securities; such ratings may be subject to revision or withdrawal at any time by the rating agencies; and each rating should be evaluated independently of any other rating.

The rating agencies use a combination of qualitative measures (i.e., assessment of business risk that incorporates an analysis of the qualitative factors such as management, competitive positioning, operations, markets and regulation) as well as quantitative measures (e.g., cash flow, debt, interest coverage and liquidity ratios) in determining the ratings of HEI and HECO securities.

On March 16, 2004, HEI completed the sale of 2 million shares (pre-split) of common stock. The shares were issued under an omnibus shelf registration statement registering up to $200 million of debt, equity and/or other securities. The net proceeds from the sale of approximately $99 million were ultimately used, along with other corporate funds, to effect the redemption of $100 million aggregate principal amount of 8.36% Trust Originated Preferred Securities of Hawaiian Electric Industries Capital Trust I on April 16, 2004. At June 30, 2004, an additional $96 million of debt, equity and/or other securities were available for offering by HEI under the omnibus shelf registration.

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On March 17, 2004, HEI completed the sale of $50 million of 4.23% notes, Series D, due March 15, 2011 under its registered medium-term note program. The net proceeds from this sale were ultimately used to make short-term loans to HECO, to assist HECO, HELCO and MECO in redeeming $50 million aggregate principal amount of 7.30% Cumulative Quarterly Income Preferred Securities in April 2004 and for other general corporate purposes. It is anticipated that HECO will repay the short-term loans by the end of 2004 primarily with funds saved from reducing dividends to HEI in 2004.

On March 7, 2003, HEI sold $50 million of 4% notes, Series D, due March 7, 2008, and $50 million of 5.25% notes, Series D, due March 7, 2013 under its registered medium-term note program. The net proceeds from the sales, along with other corporate funds, were ultimately used to repay $100 million of notes, Series C, (which effectively bore interest at three-month LIBOR plus 376.5 basis points after taking into account two interest rate swaps entered into by HEI with Bank of America) at maturity on April 15, 2003. At June 30, 2004, an additional $150 million principal amount of Series D notes were available for offering by HEI under the registered medium-term note program.

From time-to-time, HEI and HECO each utilizes short-term debt, principally commercial paper, to support normal operations and for other temporary requirements. From time-to-time, HECO also borrows short-term from HEI for itself and on behalf of HELCO and MECO, and HECO may borrow from or loan to HELCO and MECO short-term. At June 30, 2004, HECO had $63 million and $13 million of short-term borrowings from HEI and MECO, respectively, and HELCO had $27 million of short-term borrowings from HECO. HEI had no commercial paper borrowings during the first six months of 2004. HECO had an average outstanding balance of commercial paper for the first six months of 2004 of $13 million and had $14 million of commercial paper outstanding at June 30, 2004.

At June 30, 2004, HEI and HECO maintained bank lines of credit totaling $80 million and $90 million, respectively (all maturing in 2005, except $10 million maturing in October 2004 and $20 million maturing in December 2004). These lines of credit are principally maintained by HEI and HECO to support the issuance of commercial paper, but also may be drawn for general corporate purposes. Accordingly, the lines of credit are available for short-term liquidity in the event a rating agency downgrade were to reduce or eliminate access to the commercial paper markets. Lines of credit to HEI totaling $40 million contain provisions for revised pricing in the event of a ratings change (e.g., a ratings downgrade of HEI medium-term notes from BBB/Baa2 to BBB-/Baa3 by S&P and Moody’s, respectively, would result in a 25 to 50 basis points higher interest rate; a ratings upgrade from BBB/Baa2 to BBB+/Baa1 by S&P and Moody’s, respectively, would result in a 12.5 to 20 basis points lower interest rate). There are no such provisions in the other lines of credit available to HEI and HECO. Further, none of HEI’s or HECO’s line of credit agreements contain “material adverse change” clauses that would affect access to the lines of credit in the event of a ratings downgrade or other material adverse events. At June 30, 2004, the lines were unused. To the extent deemed necessary, HEI and HECO anticipate arranging similar lines of credit as existing lines of credit mature.

For the first six months of 2004, net cash provided by operating activities of consolidated HEI was $156 million. Net cash used in investing activities was $209 million, due to ASB’s purchase of mortgage-related securities, net of repayments and sales, HECO’s consolidated capital expenditures and distributions from unconsolidated financing entities, partly offset by ASB’s repayments and sales of loans, net of originations and purchases. Net cash used in financing activities was $16 million as a result of several factors, including net repayments of advances from the Federal Home Loan Bank, long-term debt and nonrecourse debt of leveraged leases and the payment of common dividends, partly offset by net increases in deposit liabilities, short-term borrowings and securities sold under agreements to repurchase and proceeds from the issuance of common stock.

Forecast HEI consolidated “net cash used in investing activities” (excluding “investing” cash flows from ASB) for 2004 through 2008 consists primarily of the net capital expenditures of HECO and its subsidiaries. In addition to the funds required for the electric utilities’ construction program (see discussion below), approximately $208 million will be required during 2004 through 2008 to repay maturing HEI long-term debt, which is expected to be repaid with the proceeds from the sale of medium-term notes, common stock or other securities. Additional debt and/or equity financing may be required to fund unanticipated expenditures not included in the 2004 through 2008 forecast, such as increases in the costs of or an acceleration of the construction of capital projects of the electric utilities, unbudgeted acquisitions or investments in new businesses, significant increases in retirement benefit funding

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requirements that might be required if there were significant declines in the market value of pension plan assets or changes in actuarial assumptions and higher tax payments that would result if tax positions taken by the Company do not prevail. Existing debt may be refinanced (potentially at more favorable rates) with additional debt or equity financing (or both).

Following is a discussion of the liquidity and capital resources of HEI’s largest segments.

Electric utility

HECO’s consolidated capital structure was as follows:

(in millions)	June 30, 2004				December 31, 2003
Short-term borrowings	$	77	4	%	$	6	—	%
Long-term debt		752	41			699	39
HECO-obligated preferred securities of trust subsidiaries		—	—			100	6
Preferred stock		34	2			34	2
Common stock equity		978	53			945	53
	$	1,841	100	%	$	1,784	100	%

See notes (2) and (7) of HECO’s “Notes to consolidated financial statements” for an explanation of the non-consolidation of trust subsidiary financing entities and refinancing transactions.

Operating activities provided $84 million in net cash during the first six months of 2004. Investing activities used net cash of $79 million primarily for capital expenditures, net of contributions in aid of construction. Financing activities provided net cash of $5 million, primarily due to the $71 million net increase in short term borrowings, partly offset by the net repayment of long-term debt of $51 million and payment of $12 million in common and preferred dividends.

As of June 30, 2004, approximately $13 million of proceeds from the sale by the Department of Budget and Finance of the State of Hawaii of Series 2002A Special Purpose Revenue Bonds (SPRB) issued for the benefit of HECO remain undrawn.

On May 1, 2003, the Department of Budget and Finance of the State of Hawaii issued, at a small discount, Refunding Series 2003A SPRB in the aggregate principal amount of $14 million with a maturity of approximately 17 years and a fixed coupon interest rate of 4.75% (yield of 4.85%), and loaned the proceeds from the sale to HELCO. Also on May 1, 2003, the Department of Budget and Finance of the State of Hawaii issued, at par, Refunding Series 2003B SPRB in the aggregate principal amount of $52 million with a maturity of approximately 20 years and a fixed coupon interest rate of 5.00% and loaned the proceeds from the sale to HECO and HELCO. On June 2, 2003, the proceeds of these Refunding SPRB, together with additional funds provided by HECO and HELCO, were applied to refund a like principal amount of SPRB bearing higher interest coupons (HELCO’s $4 million of 7.60% Series 1990B SPRB and $10 million of 7.375% Series 1990C SPRB with original maturities in 2020, and HECO’s and HELCO’s aggregate $52 million of 6.55% Series 1992 SPRB with original maturities in 2022).

On March 18, 2004, HECO Capital Trust III issued and sold 2 million of its 6.50% Cumulative Quarterly Income Preferred Securities ($50 million aggregate liquidation preference). Also on March 18, 2004, HECO, HELCO and MECO issued 6.50% Junior Subordinated Deferrable Interest Debentures to HECO Capital Trust III in the aggregate principal amount of approximately $51.5 million and directed that the proceeds from the issuance of the debentures be deposited with the trustee for HECO Capital Trust I and ultimately be used in April 2004 to redeem its 8.05% Cumulative Quarterly Income Preferred Securities ($50 million aggregate liquidation preference) and its common securities (owned by HECO) of approximately $1.5 million. The financial statements of HECO Capital Trust III are not consolidated in the HECO consolidated financial statements and the Junior Subordinated Deferrable Interest Debentures are included in “Long-term debt, net” in the HECO consolidated financial statements. Also in April 2004, HECO Capital Trust II redeemed $50 million aggregate liquidation preference of its 7.30% Cumulative Quarterly Income Preferred Securities primarily using funds from short-term borrowings from HEI and from the issuance of commercial paper.

The electric utilities’ net capital expenditures for 2004 through 2008 are estimated to total $760 million. HECO’s consolidated cash flows from operating activities (net income, adjusted for noncash income and expense items such

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as depreciation, amortization and deferred taxes), after the payment of common stock and preferred stock dividends, are expected to provide cash to cover the forecast consolidated net capital expenditures, except for a slight increase in short-term borrowings and in long-term debt from the drawdown of outstanding revenue bond proceeds. Short-term borrowings are expected to fluctuate during this forecast period. Additional debt and/or equity financing may be required for various reasons, including increases in the costs of or an acceleration of the construction of capital projects, unbudgeted acquisitions or investments in new businesses, significant increases in retirement benefit funding requirements that may be required if the market value of pension plan assets does not increase or there are changes in actuarial assumptions and other unanticipated expenditures not included in the 2004 through 2008 forecast. The PUC must approve issuances, if any, of equity and long-term debt securities by HECO, HELCO and MECO.

Capital expenditures include the costs of projects that are required to meet expected load growth, to improve reliability and to replace and upgrade existing equipment. Net capital expenditures for the five-year period 2004 through 2008 are currently estimated to total $760 million. Approximately 52% of forecast gross capital expenditures (which includes the allowance for funds used during construction and capital expenditures funded by third-party contributions in aid of construction) is for transmission and distribution projects and 36% for generation projects, with the remaining 12% for general plant.

For 2004, electric utility net capital expenditures are estimated to be $194 million. Gross capital expenditures are estimated to be $216 million, including approximately $102 million for transmission and distribution projects, approximately $88 million for generation projects and approximately $26 million for general plant and other projects. Investment in renewable projects through RHI in 2004 is estimated to be an additional $1 million. Drawdowns of $2 million of proceeds from the sale of Series 2002A tax-exempt special purpose revenue bonds, cash flows from operating activities and short-term borrowings are expected to provide the cash needed for the net capital expenditures in 2004.

Management periodically reviews capital expenditure estimates and the timing of construction projects. These estimates may change significantly as a result of many considerations, including changes in economic conditions, changes in forecasts of KWH sales and peak load, the availability of purchased power and changes in expectations concerning the construction and ownership of future generating units, the availability of generating sites and transmission and distribution corridors, the ability to obtain adequate and timely rate increases, escalation in construction costs, the impacts of DSM programs and CHP installations, the effects of opposition to proposed construction projects and requirements of environmental and other regulatory and permitting authorities.

Bank

(in millions)	June 30, 2004		December 31, 2003		% change
Total assets	$	6,537	$	6,515	—	%
Available-for-sale investment and mortgage-related securities		2,861		2,717	5
Held-to-maturity investment securities		97		95	2
Loans receivable, net		3,096		3,122	(1	)
Deposit liabilities		4,078		4,026	1
Securities sold under agreements to repurchase		870		831	5
Advances from Federal Home Loan Bank		965		1,017	(5	)

As of June 30, 2004, ASB was the third largest financial institution in Hawaii based on total assets of $6.5 billion and deposits of $4.1 billion.

ASB’s principal sources of liquidity are customer deposits, borrowings, the sale of mortgage loans into secondary market channels and the maturity and repayment of portfolio loans and mortgage-related securities. ASB’s principal sources of borrowings are advances from the FHLB and securities sold under agreements to repurchase from broker/dealers. ASB is approved to borrow from the FHLB up to 35% of ASB’s assets to the extent it provides qualifying collateral and holds sufficient FHLB stock. At June 30, 2004, ASB’s unused FHLB borrowing capacity was approximately $1.3 billion. ASB utilizes growth in deposits, advances from the FHLB and securities sold under agreements to repurchase to fund maturing and withdrawable deposits, repay maturing borrowings, fund existing and

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future loans and make investments. At June 30, 2004, ASB had commitments to borrowers for undisbursed loan funds and unused lines and letters of credit of $0.9 billion. Management believes ASB’s current sources of funds will enable it to meet these obligations while maintaining liquidity at satisfactory levels.

In September 2003, ASB entered into an arrangement to have excess funds in its correspondent bank account with Bank of America swept into a Federal Funds Sold facility. Funds earn the overnight fed funds rate and are re-deposited into ASB’s correspondent bank account the next day. This automatic sweep facility offers ASB an operationally efficient method for investing its liquidity and provides a slightly higher rate of return than methods used in the past (deposits with the FHLB). In addition, efficiencies gained using this method have enabled ASB to expand its wire transfer operating hours.

For the first six months of 2004, net cash provided by ASB’s operating activities was $54 million. Net cash used in ASB’s investing activities was $152 million, due to the purchase of mortgage-related securities, net of repayments and sales, partly offset by repayments and sales of loans, net of originations and purchases. Net cash provided by financing activities was $19 million largely due to a net increase of $52 million in deposit liabilities and $37 million in securities sold under agreements to repurchase, partly offset by a net decrease of $52 million in advances from the FHLB and the payment of $18 million in common and preferred stock dividends.

ASB believes that a satisfactory regulatory capital position provides a basis for public confidence, affords protection to depositors, helps to ensure continued access to capital markets on favorable terms and provides a foundation for growth. FDIC regulations restrict the ability of financial institutions that are not well-capitalized to compete on the same terms as well-capitalized institutions, such as by offering interest rates on deposits that are significantly higher than the rates offered by competing institutions. As of June 30, 2004, ASB was well-capitalized (ratio requirements noted in parentheses) with a leverage ratio of 6.9% (5.0%), a Tier-1 risk-based capital ratio of 14.2% (6.0%) and a total risk-based capital ratio of 15.3% (10.0%).

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION

The Company’s results of operations and financial condition can be affected by numerous factors, many of which are beyond its control and could cause future results of operations to differ materially from historical results. Such factors include international, national and local economic conditions; competition in its principal segments; developments in the U.S. capital markets; interest-rate environment; technological developments; final costs of exits from discontinued operations; asset dispositions; insurance coverages; environmental matters; regulation of electric utility rates; deliveries of fuel oil and purchased power; other electric utility regulatory and permitting contingencies; and regulation of ASB. For additional information about these factors, see pages 24 to 31 of HEI’s 2003 Annual Report and pages 60 to 64 of 2003 Form 10-K/A (in HECO’s 2003 Management’s Discussion and Analysis of Financial Condition and Results of Operations).

Additional factors that may affect future results and financial condition are described on page v under “Forward-looking statements and risk factors.”

MATERIAL ESTIMATES AND CRITICAL ACCOUNTING POLICIES

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ significantly from those estimates.

Material estimates that are particularly susceptible to significant change in the case of the Company include the amounts reported for investment securities; property, plant and equipment; pension and other postretirement benefit obligations; contingencies and litigation; income taxes; regulatory assets and liabilities; electric utility revenues; allowance for loan losses; and reserves for discontinued operations. For example, in the second quarter of 2004, a significant change in estimated income taxes occurred. As a result of the Tax Appeal Court’s decision, ASB wrote off the deposit for assessed bank franchise taxes recorded in June 2003 and expensed the related bank franchise taxes and interest for subsequent periods through March 31, 2004 related to the REIT, resulting in a cumulative charge to net income in the second quarter of 2004 of $21 million for the bank franchise taxes.

In accordance with SEC Release No. 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies,” management has identified the accounting policies it believes to be the most critical to the

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Company’s financial statements—that is, management believes that these policies are both the most important to the portrayal of the Company’s financial condition and results of operations, and currently require management’s most difficult, subjective or complex judgments. For information about these policies, see pages 31 to 35 of HEI’s 2003 Annual Report and pages 64 to 67 of HEI and HECO’s Annual Report on Form 10-K/A for 2003 (in HECO’s 2003 Management’s Discussion and Analysis of Financial Condition and Results of Operations).

Item 3. Quantitative and qualitative disclosures about market risk

The Company manages various risks in the ordinary course of business, including credit risk and liquidity risk (see “Results of operations—Bank” and “Liquidity and capital resources” in “Management’s discussion and analysis of financial condition and results of operations”).The Company is not exposed to significant market risk from trading activities because the Company does not have a portfolio of trading assets. The Company is exposed to some commodity price risk primarily related to its fuel supply and IPP contracts. The Company’s commodity price risk is mitigated by the electric utilities’ energy cost adjustment clauses in their rate schedules. The Company currently has no hedges against its commodity price risk.

The Company considers interest-rate risk (a non-trading market risk) to be a very significant market risk for ASB as it could potentially have a significant effect on the Company’s financial condition and results of operations. For additional quantitative and qualitative information about the Company’s market risks, see pages 35 to 38 of HEI’s 2003 Annual Report.

ASB’s interest-rate risk sensitivity measures as of June 30, 2004 and December 31, 2003 constitute “forward-looking statements” and were as follows:

	June 30, 2004						December 31, 2003
	Change in net interest income (NII)		Net portfolio value (NPV) ratio		NPV ratio sensitivity (change from base case in basis points)		Change in NII		NPV ratio		NPV ratio sensitivity (change from base case in basis points)
Change in interest rates (basis points)
+300	(7.1	)%	5.63	%	(416	)	(5.8	)%	6.30	%	(345	)
+200	(4.7	)	7.09		(270	)	(3.2	)	7.63		(212	)
+100	(2.0	)	8.52		(127	)	(0.9	)	8.82		(93	)
Base	—		9.79		—		—		9.75		—
–100	(2.9	)	10.50		71		(4.3	)	10.24		49

Management believes that ASB’s interest rate risk position at June 30, 2004 represents a reasonable level of risk. The change in ASB’s NII profile from December 31, 2003 to June 30, 2004 is primarily due to the increase in the level of interest rates during the second quarter of 2004. The June 30, 2004 NII profile shows the balance sheet to be “liability-sensitive” in all rising interest rate scenarios. This is because as interest rates rise, the overall rate on liabilities increases more than the overall rate on ASB’s assets. In rising interest rate environments, an expectation of slower prepayment speeds reduces the runoff of the existing mortgage assets, which reduces the amount available for reinvestment at the higher market rates. This constrains the speed with which the yield on the mortgage assets can adjust upwards to market levels. At the same time, the cost of the liabilities is projected to increase with each increase in the level of rates. As a result, the net interest margin is compressed, and the NII falls in each of the rising rate scenarios. In this analysis, the magnitude of the decline in NII is very sensitive to modeling assumptions about the speed and magnitude with which the rate on ASB’s core deposits will change in response to changes in the overall level of interest rates.

In the –100 basis point scenario, NII drops relative to the base case because expectations of faster mortgage prepayments and lower reinvestment rates cause the yield on mortgage assets to decline faster than in the base case. The cost of the liabilities, however, does not fall as much because the low level of interest rates limits the ability to lower the rate on retail deposits, causing NII to fall.

The same factors that affected ASB’s NII sensitivity profile also caused its NPV ratio sensitivity measures to be higher on June 30, 2004 compared to December 31, 2003. Higher interest rates and an expectation of slower

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prepayment speeds extend the expected average lives of the mortgage-related assets, and increases the market value sensitivity of the assets to changes in interest rates. This caused ASB’s NPV ratio to be more sensitive to changes in interest rates.

ASB’s NPV ratio in the base scenario was essentially unchanged on June 30, 2004 compared to December 31, 2003.

The computation of the prospective effects of hypothetical interest rate changes on the NII sensitivity, NPV ratio, and NPV ratio sensitivity analyses is based on numerous assumptions, including relative levels of market interest rates, loan prepayments, balance changes and pricing strategies, and should not be relied upon as indicative of actual results. To the extent market conditions and other factors vary from the assumptions used in the simulation analysis, actual results may differ materially from the simulation results. Furthermore, NII sensitivity analysis measures the change in ASB’s twelve-month, pre-tax NII in alternate interest rate scenarios, and is intended to help management identify potential exposures in ASB’s current balance sheet and formulate appropriate strategies for managing interest rate risk. The simulation does not contemplate any actions that ASB management might undertake in response to changes in interest rates. Further, the changes in NII vary in the twelve-month simulation period and are not necessarily evenly distributed over the period. These analyses are for analytical purposes only and do not represent management’s views of future market movements, the level of future earnings, or the timing of any changes in earnings within the twelve month analysis horizon. The actual impact of changes in interest rates on NII will depend on the magnitude and speed with which rates change, as well as management’s responses to the changes in interest rates.

Item 4. Controls and procedures

HEI

Robert F. Clarke, HEI Chief Executive Officer, and Eric K. Yeaman, HEI Chief Financial Officer, have evaluated the disclosure controls and procedures of HEI as of June 30, 2004. Based on their evaluations, as of June 30, 2004, they have concluded that the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective.

HECO

T. Michael May, HECO Chief Executive Officer, and Richard A. von Gnechten, HECO Chief Financial Officer, have evaluated the disclosure controls and procedures of HECO as of June 30, 2004. Based on their evaluations, as of June 30, 2004, they have concluded that the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective.

PART II—OTHER INFORMATION

Item 1. Legal proceedings

There are no significant developments in pending legal proceedings except as set forth in HEI’s and HECO’s “Notes to consolidated financial statements” and management’s discussion and analysis of financial condition and results of operations. With regard to any pending legal proceeding, alternative dispute resolution, such as mediation or settlement, may be pursued where appropriate, with such efforts typically maintained in confidence unless and until a resolution is achieved.

Item 2. Changes in securities, use of proceeds and repurchases of equity securities

On May 1, 2004, HEI issued an aggregate of 8,400 shares (pre-split) of unregistered common stock pursuant to the HEI 1990 Nonemployee Director Stock Plan, as amended and restated effective April 20, 2004 (the HEI Nonemployee Director Plan). Under the HEI Nonemployee Director Plan, each HEI nonemployee director receives, in addition to an annual cash retainer, an annual stock grant of 700 shares (pre-split) of HEI common stock (1,000 shares (pre-split) for the first time grant to a new HEI director) and each nonemployee subsidiary director who is not also an HEI nonemployee director receives an annual stock grant of 300 shares (pre-split) of HEI common stock. The HEI Nonemployee Director Plan is currently the only plan for nonemployee directors and provides for annual stock grants (described above) and annual cash retainers for nonemployee directors of HEI and its subsidiaries.

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HEI did not register the shares issued under the director stock plan since their issuance did not involve a “sale” as defined under Section 2(3) of the Securities Act of 1933, as amended. Participation by nonemployee directors of HEI and subsidiaries in the director stock plans is mandatory and thus does not involve an investment decision.

Purchases of HEI common shares were made as follows:

ISSUER PURCHASES OF EQUITY SECURITIES

Period*	(a) Total Number of Shares Purchased**	(b) Average Price Paid per Share**		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
April 1 to 30, 2004	260,116	$	25.11	—	—
May 1 to 31, 2004	97,246		23.43	—	—
June 1 to 30, 2004	480,267		24.99	—	—
	837,629	$	24.84	—	—

* Trades (total number of shares purchased) are reflected in the month in which the order is placed, except for 34,476 shares (split-adjusted) for which orders were placed on March 30, 2004 and settlement occurred on April 2, 2004.

** All information has been adjusted for the 2-for-1 stock split with a distribution date of June 10, 2004. The purchases were made to satisfy the requirements of the DRIP and HEIRSP for shares purchased for cash or by the reinvestment of dividends by participants under those plans and none of the purchases were made under publicly announced repurchase plans or programs. Average prices per share are calculated exclusive of any commissions payable to the brokers making the purchases for the DRIP and HEIRSP. Of the shares listed in column (a), 194,916 of the 260,116 shares, 62,046 of the 97,246 shares and 415,667 of the 480,267 shares were purchased for the DRIP and the remainder were purchased for the HEIRSP.

Item  5.  Other information

A. Ratio of earnings to fixed charges

HEI and Subsidiaries

Ratio of earnings to fixed charges excluding interest on ASB deposits

Six months ended June 30,		Years ended December 31,
2004	2003	2003	2002	2001	2000	1999
2.20	1.92	2.11	2.03	1.82	1.76	1.83

Ratio of earnings to fixed charges including interest on ASB deposits

Six months ended June 30,		Years ended December 31,
2004	2003	2003	2002	2001	2000	1999
1.92	1.69	1.84	1.72	1.52	1.49	1.50

For purposes of calculating the ratio of earnings to fixed charges, “earnings” represent the sum of (i) pretax income from continuing operations (excluding undistributed net income or net loss from less than 50%-owned persons) and (ii) fixed charges (as hereinafter defined, but excluding capitalized interest). “Fixed charges” are calculated both excluding and including interest on ASB’s deposits during the applicable periods and represent the sum of (i) interest, whether capitalized or expensed, but excluding interest on nonrecourse debt from leveraged leases which is not included in interest expense in HEI’s consolidated statements of income, (ii) amortization of debt expense and discount or premium related to any indebtedness, whether capitalized or expensed, (iii) the interest

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factor in rental expense, (iv) the preferred stock dividend requirements of HEI’s subsidiaries, increased to an amount representing the pretax earnings required to cover such dividend requirements and (v) in 2003 and prior years when the trust subsidiaries were consolidated, the preferred securities distribution requirements of trust subsidiaries.

HECO and Subsidiaries

Ratio of earnings to fixed charges

Six months ended June 30,		Years ended December 31,
2004	2003	2003	2002	2001	2000	1999
3.53	3.13	3.36	3.71	3.51	3.39	3.09

For purposes of calculating the ratio of earnings to fixed charges, “earnings” represent the sum of (i) pretax income before preferred stock dividends of HECO and (ii) fixed charges (as hereinafter defined, but excluding the allowance for borrowed funds used during construction). “Fixed charges” represent the sum of (i) interest, whether capitalized or expensed, incurred by HECO and its subsidiaries, (ii) amortization of debt expense and discount or premium related to any indebtedness, whether capitalized or expensed, (iii) the interest factor in rental expense, (iv) the preferred stock dividend requirements of HELCO and MECO, increased to an amount representing the pretax earnings required to cover such dividend requirements and (v) in 2003 and prior years, when the trust subsidiaries were consolidated, the preferred securities distribution requirements of the trust subsidiaries.

B. Amendments to Plans

The Board of Directors approved an amendment to the 1987 Stock Option and Incentive Plan of HEI on April 20, 2004 that permits dividend equivalent rights to be awarded by the Company in connection with the awarding of stock appreciation rights. See HEI Exhibit 10.1.

The Board of Directors approved an amendment to the HEI 1990 Nonemployee Director Stock Plan on April 20, 2004 that transferred setting director compensation for nonemployee directors from the HEI Compensation Committee to the HEI Nominating & Corporate Governance Committee. See HEI Exhibit 10.2.

C. HECO’s integrated resource plan

In September 2003, the PUC, at the joint request of HECO and the Consumer Advocate, opened a docket to commence HECO’s third integrated resource plan (IRP), which is required to be submitted no later than October 31, 2005.

HECO expects its third IRP will propose multiple solutions to meet Oahu’s future energy needs, including renewable energy resources, energy efficiency, conservation, technology (such as CHP) and central station generation. Given the lead times needed for permitting and regulatory approvals, in October 2003, HECO submitted a covered source permit application with the DOH for a 107 MW simple cycle combustion turbine in Campbell Industrial Park on Oahu, which could be added as a peaking unit in the event new central generation will be required in 2009, or earlier if reductions in energy use achieved by DSM programs are less than currently planned, as indicated in HECO’s second IRP. The application specifies that the unit would use diesel fuel oil or naphtha, with ability to convert to a bio-fuel, like ethanol, when it becomes commercially available.

In February of 2004, HECO conducted an updated long-term sales and peak forecast for Oahu that projects increased system peak requirements based on the island’s strengthening economy. Based on this forecast, HECO supplied information to the PUC in its annual Adequacy of Supply letter, filed on March 31, 2004. This letter concluded that HECO’s generation capacity for Oahu for the next three years (2004-2006) is sufficiently large to meet all reasonably expected demands for service if there is expeditious review and approval of the DSM load management programs and of either the CHP Program currently pending before the PUC or individual CHP contracts to be proposed to the PUC. The letter also concluded that, since additional firm capacity from new central station generation is not likely to be installed before 2009, if the higher forecast for system peak demand does occur, there is an increased risk to generation system reliability by or before 2006 and beyond if other measures, such as demand-side management, distributed generation, combined heat and power or other firm capacity supply-side resources, fall

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short of achieving the forecasted benefits of those programs or are otherwise insufficient to reduce or meet the forecast increased peak demand. The Adequacy of Supply letter points out that should the process for the third IRP find that the timing, characteristics or size of the next increment of generation capacity are different from those identified in the letter, that the circumstances will be examined at that time to determine the appropriate course of action. In mid-2004, HECO and the Consumer Advocate reached agreement on a commercial and industrial load management program and a residential load management program and filed the agreements with the PUC requesting expedited approval.

D. PGV

In April 2004, Constellation Energy, parent company of PGV, signed a definitive agreement for the sale of PGV to Ormat Nevada Inc. Under the terms of the agreement, a wholly owned subsidiary of Ormat Nevada Inc. acquired the 30 MW geothermal plant and associated assets. The transaction was completed on June 3, 2004. As part of the transaction, outstanding bank debt on the facility was paid in full. The transaction did not require HELCO’s consent or PUC approval. PGV has indicated its intent to pursue improvements to the plant to increase its capacity, and to pursue negotiations with HELCO for a new or amended PPA. In the first quarter of 2004, HELCO deducted approximately $0.2 million from its capacity payment to PGV as an availability sanction for PGV’s failure to meet its 30 MW capacity obligation for 2003.

E. HECO Financial Vice President

On July 23, 2004, HECO announced that Richard A. von Gnechten, HECO Financial Vice President, has decided for personal reasons to relocate from Hawaii and resign from HECO effective October 18, 2004. Tayne S.Y. Sekimura, current HECO Director, Corporate and Property Accounting, has been appointed by the HECO Board of Directors to succeed Mr. von Gnechten, effective October 18, 2004.

F. Hamakua Energy Partners, L.P. (Hamakua Partners)

In October 1997, HELCO entered into an agreement with Encogen, a limited partnership whose general partners at the time were wholly-owned special-purpose subsidiaries of Enserch and Jones Capital Corporation. Enserch Corporation and J.A. Jones, Inc. (Jones), the parent companies of Enserch and Jones Capital Corporation, respectively, guaranteed certain of Encogen’s obligations. The agreement provides that HELCO will purchase up to 60 MW (net) of firm capacity for a period of 30 years. On November 8, 1999, HELCO entered into a PPA Novation with Encogen and Hamakua Partners, which recognizes the transfer of the obligations of Encogen under the PPA to Hamakua Partners. Hamakua Partners was formed as a result of the sale of the general partner and limited partner partnership interests of Enserch to entities affiliated with TECO Energy Inc., which is a Florida-based energy company and parent company of Tampa Electric Company, a regulated electric utility. TECO Energy Inc. has replaced the guarantee of Enserch Corporation of certain of Hamakua Partners’ obligations. In September 2003, Jones filed for reorganization in bankruptcy in North Carolina. Jones is the parent company of the managing general partner and a limited partner of Hamakua Partners, and is one of the two co-guarantors of the Hamakua Partners project. Jones had been attempting to sell its interest in Hamakua Partners under the supervision of the bankruptcy court. In June 2004, under a court approved motion, substantially all of the assets of Jones including its interest in Hamakua Partners was sold to Black River Energy, an affiliate of United States Power Fund L. P. (USPF). In July 2004, the remaining 50% ownership in Hamakua Partners was sold by TECO Energy Inc. to an affiliate of Black River Energy. As a result of both sales, USPF is now the sole owner of the Hamakua facility.

G. Hawi Renewable Development, LLC (HRD)

On December 30, 2003, HELCO and HRD entered into a PPA under which HRD would sell energy from an expanded wind farm (approximately 10.6 MW) at HRD’s 5 MW wind farm site (which can accommodate the expanded wind farm). The energy that the 10.6 MW wind farm supplies may be limited on occasion due to various factors. In May 2004, the PUC approved the PPA.

H. Proposed air quality regulations

HECO recently submitted comments to the EPA on two proposed air quality regulations. Management believes that, if adopted as currently proposed, the EPA’s proposal to regulate nickel emissions from oil-fired boilers may require capital investments for HECO’s steam generating units in amounts which may be significant. The EPA has announced that it intends to promulgate final regulations by March 2005. Management also believes that a recently

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revised proposal to control regional haze impacts at National Parks, if adopted as currently proposed, may require installation of costly Best Available Retrofit Technology on one or more generating units operated by the utilities. Due to the complexity of the current proposal to control haze impacts and the latitude that states will be granted in applying the proposed regulation, management is unable to determine, at this time, to which utility generating units, if any, the rule will apply or the cost of compliance, which could be significant.

I. MECO’s IRP

MECO’s second IRP identified changes in key forecasts and assumptions since the development of MECO’s initial IRP. On the supply side, MECO’s second IRP focused on the planning for the installation of approximately 150 MW of additional generation through the year 2020 on the island of Maui, including 38 MW of generation at its Maalaea power plant site in increments from 2000-2005. MECO completed the installation of a 20 MW increment (the second) at Maalaea in September 2000. In August 2004 MECO received the necessary air permit, subject to a 30-day appeal period, for the final increment of 18 MW, which was originally expected to be installed in 2005, and is currently expected to be installed in September 2006.

Item 6. Exhibits and reports on Form 8-K

(a) Exhibits

HEI Exhibit 10.1	1987 Stock Option and Incentive Plan of HEI as amended and restated effective April 20, 2004
HEI Exhibit 10.2	HEI 1990 Nonemployee Director Stock Plan as amended and restated effective April 20, 2004
HEI Exhibit 12.1	Hawaiian Electric Industries, Inc. and Subsidiaries Computation of ratio of earnings to fixed charges, six months ended June 30, 2004 and 2003 and years ended December 31, 2003, 2002, 2001, 2000 and 1999
HEI Exhibit 31.1	Certification Pursuant to Section 13a-14 of the Securities and Exchange Act of 1934 of Robert F. Clarke (HEI Chief Executive Officer)
HEI Exhibit 31.2	Certification Pursuant to Section 13a-14 of the Securities and Exchange Act of 1934 of Eric K. Yeaman (HEI Chief Financial Officer)
HEI Exhibit 32.1	Written Statement of Robert F. Clarke (HEI Chief Executive Officer) Furnished Pursuant to 18 U.S.C. Section 1350, as Adopted by Section 906 of the Sarbanes-Oxley Act of 2002
HEI Exhibit 32.2	Written Statement of Eric K. Yeaman (HEI Chief Financial Officer) Furnished Pursuant to 18 U.S.C. Section 1350, as Adopted by Section 906 of the Sarbanes-Oxley Act of 2002
HECO Exhibit 12.2	Hawaiian Electric Company, Inc. and Subsidiaries Computation of ratio of earnings to fixed charges, six months ended June 30, 2004 and 2003 and years ended December 31, 2003, 2002, 2001, 2000 and 1999
HECO Exhibit 31.3	Certification Pursuant to Section 13a-14 of the Securities and Exchange Act of 1934 of T. Michael May (HECO Chief Executive Officer)
HECO Exhibit 31.4	Certification Pursuant to Section 13a-14 of the Securities and Exchange Act of 1934 of Richard von Gnechten (HECO Chief Financial Officer)
HECO Exhibit 32.3	Written Statement of T. Michael May (HECO Chief Executive Officer) Furnished Pursuant to 18 U.S.C. Section 1350, as Adopted by Section 906 of the Sarbanes-Oxley Act of 2002
HECO Exhibit 32.4	Written Statement of Richard von Gnechten (HECO Chief Financial Officer) Furnished Pursuant to 18 U.S.C. Section 1350, as Adopted by Section 906 of the Sarbanes-Oxley Act of 2002

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(b) Reports on Form 8-K

Subsequent to March 31, 2004, HEI and/or HECO filed Current Reports on Forms 8-K with the SEC as follows:

Dated (filing date)	Registrant/s	Items reported
April 19, 2004 (April 20, 2004)	HEI/HECO	Items 5 and 12. HEI’s April 19, 2004 news release (HEI reports first quarter 2004 earnings)
April 20, 2004 (April 21, 2004)	HEI/HECO	Item 5. HEI’s April 20, 2004 news release (HEI maintains cash dividend and announces 2-for-1 stock split effected in the form of a 100% stock dividend)
May 3, 2004 (May 4, 2004)	HEI/HECO	Item 5. HEI’s May 3, 2004 news release (HEI to webcast and teleconference financial analyst presentation on Monday, May 10, 2004)
May 17, 2004 (May 18, 2004)	HEI	Items 5. ASB Realty Corporation update
May 28, 2004 (June 8, 2004)	HEI/HECO	Item 5. Agreement of Resignation, Appointment and Acceptance among HEI, Bank of Hawaii and BNY Western Trust Company (BNY Western); HELCO power situation update; and fuel contracts; and Item 7. Exhibits: Agreement of Resignation, Appointment and Acceptance by and among HEI, Bank of Hawaii and BNY Western; and fuel contracts amendments
June 7, 2004 (June 8, 2004)	HEI	Item 5. Reports on adverse tax ruling with respect to ASB’s deduction for dividends received from ASB Realty Corporation
June 10, 2004 (June 10, 2004)	HEI	Item 5. HEI 2-for-1 stock split
July 19, 2004 (July 20, 2004)	HEI/HECO	Items 5 and 12. HEI’s July 19, 2004 news release (HEI reports second quarter 2004 earnings)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized. The signature of the undersigned companies shall be deemed to relate only to matters having reference to such companies and any subsidiaries thereof.

HAWAIIAN ELECTRIC INDUSTRIES, INC. (Registrant)		HAWAIIAN ELECTRIC COMPANY, INC. (Registrant)
By	/S/    ROBERT F. CLARKE	By	/S/    T. MICHAEL MAY
	Robert F. Clarke Chairman, President and Chief Executive Officer (Principal Executive Officer of HEI)		T. Michael May President and Chief Executive Officer (Principal Executive Officer of HECO)
By	/S/    ERIC K. YEAMAN	By	/S/    RICHARD A. VON GNECHTEN
	Eric K. Yeaman Financial Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer of HEI)		Richard A. von Gnechten Financial Vice President (Principal Financial Officer of HECO)
By	/S/    CURTIS Y. HARADA	By	/S/    ERNEST T. SHIRAKI
	Curtis Y. Harada Controller (Chief Accounting Officer of HEI)		Ernest T. Shiraki Controller (Chief Accounting Officer of HECO)
Date: August 5, 2004		Date: August 5, 2004

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EX-10.1

HEI Exhibit 10.1

1987 Stock Option and Incentive Plan of

Hawaiian Electric Industries, Inc.

(as amended and restated effective April 20, 2004)

I. General Provisions

    1.1 Purposes of the Plan

The purposes of the 1987 Stock Option and Incentive Plan of Hawaiian Electric Industries, Inc. (the “Company”) are to provide a means to attract and retain high caliber personnel and to provide to participating employees long-term incentives for sustained high levels of performance for the Company and its subsidiaries. These purposes may be achieved through the granting of Incentive Awards under the Plan.

    1.2 Definitions

(a) “Average Fair Market Value” means, as of any determination date, the average of the daily high and low sales prices of the Common Stock on the composite tape for stocks listed on the New York Stock Exchange as quoted in the New York Stock Exchange Composite Transactions published in the Western Edition of The Wall Street Journal for all trading days during the calendar month preceding the determination date. If the Common Stock is not admitted to trade on the New York Stock Exchange, the Average Fair Market Value shall be determined by the Committee in such other reasonable manner as the Committee shall decide.

(b) “Board” means the Board of Directors of Hawaiian Electric Industries, Inc.

(c) “Code” means the Internal Revenue Code of 1986, as amended.

(d) “Committee” means the Compensation Committee of the Board of Directors. The Committee shall be composed entirely of members who meet the requirements of Section 1.4(a) hereof.

(e) “Common Stock” means the Common Stock of Hawaiian Electric Industries, Inc.

(f) “Company” means Hawaiian Electric Industries, Inc. and any successor corporation.

(g) “Employee” means any regular full-time employee of the Company or any of the Company’s present or future parent or subsidiary corporations (as defined in Section 424 of the Code), or any successor of such corporation.

(h) “Exchange Act” means the Securities Exchange Act of 1934, as amended.

(i) “Fair Market Value” means, as of any determination date, the average of the daily high and low sales prices of the Common Stock on the composite tape for stocks listed on the New York Stock Exchange as quoted in the New York Stock Exchange Composite Transactions published in the Western Edition of The Wall Street Journal on the date as of which Fair Market Value is to be determined, or if there is no trading of Common Stock on such date, the average of

the daily high and low sales prices of the Common Stock as quoted in such Composite Transactions on the next preceding date on which there was trading in such shares, or if the Common Stock is not admitted to trade on the New York Stock Exchange, the Fair Market Value shall be determined by the Committee in such other reasonable manner as the Committee shall decide.

(j) “Incentive Award” means a Stock Option, Restricted Stock, Stock Appreciation Right, Stock Payment, Dividend Equivalent, Restricted Stock Unit or Performance Award granted or sold under the Plan.

(k) “Incentive Stock Option” means an incentive stock option, as defined under Section 422 of the Code and the regulations thereunder.

(l) “Nonqualified Stock Option” means a stock option other than an Incentive Stock Option.

(m) “Option” means a right to purchase Common Stock and refers to both Incentive Stock Options and Nonqualified Stock Options.

(n) “Participant” means any Employee or, in the case of death of the Employee, the Employee’s beneficiary, selected to receive an Incentive Award pursuant to Section 1.5 hereof.

(o) “Payment Event” means the occurrence of the event or events giving rise to the right to payment of a Performance Award.

(p) “Performance Award” means an award, payable in cash or Common Stock or combination thereof, the value of which is based on the achievement of Performance Goals or such other criteria as may be determined by the Committee.

(q) “Performance Goal” shall mean one or more of the following business criteria applied to a Participant and/or a business unit or the Company and/or a parent or subsidiary of the Company: (1) total return to shareholders; (2) earnings per share of Common Stock; (3) net income (before or after taxes); (4) earnings before all or any interest, taxes, depreciation and/or amortization (“EBIT”, “EBITA”, or “EBITDA”); (5) gross revenue; (6) return on assets; (7) market share; (8) cost reduction goals; (9) earnings from continuing operations, levels of expense, cost or liability; (10) performance against operational budgets; (11) a Participant’s individual operational project goals; (12) return on average common equity; (13) individual performance goals; and (14) any combination of, or a specified increase or decrease of one or more of the foregoing over a specified period, in each case, as applicable, as determined in accordance with generally accepted accounting principles, where applicable.

(r) “Plan” means the Company’s 1987 Stock Option and Incentive Plan as amended and restated and set forth herein, as amended from time to time.

(s) “Purchase Price” means the purchase price to be paid by a Participant for Restricted Stock as determined by the Committee.

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(t) “Restricted Stock” means Common Stock that the Participant may purchase at a price determined by the Committee, or Common Stock to which the Participant may become entitled without payment of any price upon the lapse of restrictions specified in the restricted stock agreement under which Common Stock is granted, in either case which Common Stock is nontransferable and subject to substantial risk of forfeiture until specific restrictions are satisfied or lapse. Restrictions may be based on continuing employment or achievement of preestablished performance objectives or both.

(u) “Restricted Stock Unit” means the right to receive a share of the Company’s Common Stock or the Fair Market Value or Average Fair Market Value thereof in cash (as determined by the Committee) granted pursuant to Section VIII of the Plan.

(v) “Rule 16b-3” means Rule 16b-3 promulgated under Section 16 of the Exchange Act (or any other comparable provisions in effect at the time or times in question).

(w) “Stock Appreciation Right” or “Right” means a right granted pursuant to Section V of the Plan to receive a number of shares of Common Stock, or an amount of cash, or a combination of shares and cash, based on the increase in the Fair Market Value of the share subject to the right.

(x) “Stock Payment” means a payment in shares of the Company’s Common Stock (valued at Fair Market Value or Average Fair Market Value, as determined by the Committee) to replace all or any portion of the compensation (other than base salary) that would otherwise become payable to a Participant in cash.

    1.3 Shares of Common Stock Subject to the Plan

(a) Subject to the provisions of Section 1.3(c) and Section 9.1 of the Plan, the aggregate number of shares of Common Stock that may be issued pursuant to Incentive Awards under the Plan shall be 4,650,000 shares; provided that of these shares, the 2,000,000 shares that were added to the Plan by amendment effective January 21, 2003, shall not be subject to any Incentive Awards other than Options and Stock Appreciation Rights. Notwithstanding the foregoing, but subject to Section 9.1 of the Plan, (i) commencing with the 2003 calendar year, the aggregate number of shares of Common Stock with respect to which Incentive Awards (including Incentive Awards payable in cash but denominated in Common Stock, e.g., cash-settled Rights or Restricted Stock Units) may be granted to any individual Participant during any calendar year shall not exceed 100,000, and (ii) the total number of shares that may be made subject to awards of Restricted Stock, Stock Payments, or stock-settled Restricted Stock Units granted under the Plan on or after April 22, 2003, shall not exceed 5% of the total number of shares of Common Stock authorized under the Plan as of such date but not subject to an Incentive Award immediately before such date. The grant of any Incentive Award that may be settled only in cash shall not reduce the number of shares of Common Stock with respect to which Incentive Awards may be granted under the Plan.

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(b) The Common Stock to be issued under the Plan will be made available, at the discretion of the Board or the Committee, either from authorized but unissued shares of Common Stock or from previously issued shares of Common Stock reacquired by the Company, including shares purchased on the open market.

(c) If any shares of Common Stock subject to an Option (and related Stock Appreciation Right, if any) terminate without being exercised, then shares subject to such Option shall be available again for the grant of Options or other Incentive Awards under the Plan. If any shares subject to a Restricted Stock Award are forfeited, expire or are otherwise cancelled or terminated, then shares subject to such Restricted Stock Award shall be available again for the grant of Restricted Stock Awards or other Incentive Awards under the Plan. Shares of Common Stock with reference to which Stock Appreciation Rights have been granted shall be available for granting of Incentive Awards to the extent the Stock Appreciation Rights are exercised for cash, or, with respect to Stock Appreciation Rights not related to Options, to the extent the Stock Appreciation Rights terminate without being exercised. If any other Incentive Award shall expire or be forfeited, cancelled or terminated for any reason, the shares of Common Stock available under such Incentive Award shall be available again for the granting of Incentive Awards to the maximum extent consistent with Rule 16b- 3. To the extent that payment for an Option upon exercise is made with shares of Common Stock or shares of Common Stock are withheld from payment of an Incentive Award in satisfaction of any federal, state or local tax withholding requirements, such shares of Common Stock shall again be available for issuance in connection with future Incentive Awards granted under the Plan.

    1.4 Administration of the Plan

(a) The Plan will be administered by the Committee, which will consist of two or more persons who are “disinterested persons” within the meaning of Rule 16b-3 and “outside directors” within the meaning of Section 162(m) of the Code.

(b) Subject to the express provisions of the Plan, the Committee has and may exercise such powers and authority of the Board as may be necessary or appropriate for the Committee to carry out its functions as described in the Plan. The Committee has authority in its discretion to determine the Employees to whom, and the time or times at which, Incentive Awards may be granted or sold, the nature of the Incentive Award, the number of shares of Common Stock that make up each Incentive Award, the performance criteria (which need not be identical) utilized to measure the value of Performance Awards, the form of payment (cash or Common Stock or a combination thereof) payable upon the event or events giving rise to payment of an Incentive Award and such other terms and conditions applicable to each individual Incentive Award as the Committee shall determine. Subject to Section 9.7(c) of the Plan, the Committee may grant at any time new Incentive Awards to a Participant who has previously received Incentive Awards or other grants (including other stock options) whether such prior Incentive Awards or such other grants are still outstanding, have previously been exercised in whole or in part, or are forfeited or otherwise canceled in whole or in part. The purchase price or initial value of the Incentive Awards may be established by the Committee without regard to the existing Incentive Awards or such other grants.

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(c) Each Incentive Award will either be evidenced by a written instrument or granted pursuant to a written plan adopted by the Committee and may include any other terms and conditions consistent with the Plan as the Committee may in its discretion determine, including without limitation terms and conditions that would prohibit a Participant from transferring or otherwise disposing of a share of Common Stock issued under an Incentive Award for a period identified in the Incentive Award Agreement or require the forfeiture of a share of Common Stock issued under an Incentive Award if the Participant engages in any conduct that is identified in the Incentive Award agreement. Each Option award agreement shall designate the Option as either an Incentive Stock Option or Nonqualified Stock Option. The Committee may permit a Participant to elect to defer receipt of all or any portion of the cash or shares of Common Stock that are payable under an Incentive Award and provide that such deferred amount shall be credited with an interest rate or such other rate of return as shall be specified by the Committee, all on such terms and conditions as may be established by the Committee.

(d) The Committee in its discretion may condition entitlement to an Incentive Award in whole or in part on the attainment of one or more Performance Goals. The Committee shall establish any such Performance Goal not later than 90 days after the commencement of the period of service to which the Incentive Award relates (or if less, 25% of such period of service), and once granted, the Committee may not have discretion to increase the amount payable under such Award, provided, however, that whether or not an Incentive Award is intended to constitute qualified performance based compensation within the meaning of Section 162(m) of the Code, the Committee shall have the authority to make appropriate adjustments in Performance Goals under an Incentive Award to reflect the impact of extraordinary items not reflected in such Performance Goals. For purposes of the Plan, extraordinary items shall be defined as (1) any profit or loss attributable to acquisitions or dispositions of stock or assets, (2) any changes in accounting standards that may be required or permitted by the Financial Accounting Standards Board or adopted by the Company after the goal is established, (3) all items of gain, loss or expense for the year related to restructuring charges for the Company, (4) all items of gain, loss or expense for the year determined to be extraordinary or unusual in nature or infrequent in occurrence or related to the disposal of a segment of a business, (5) all items of gain, loss or expense for the year related to discontinued operations that do not qualify as a segment of a business as defined in APB Opinion No. 30, (6) such other items as may be prescribed by Section 162(m) of the Code and the Treasury Regulations thereunder as may be in effect from time to time, and any amendments, revisions or successor provisions and any changes thereto, and (7) with respect to Incentive Awards not intended to constitute qualified performance based compensation within the meaning of Section 162(m) of the Code, such other items as the Committee may deem appropriate.

(e) Subject to the express provisions of the Plan, the Committee has the authority to interpret the Plan, to determine the terms and provisions of the Incentive Award agreements, and to make all other determinations necessary or advisable for the administration of the Plan. The Committee has authority to prescribe, amend, and rescind rules and regulations relating to the Plan. All interpretations, determinations, and actions by the Committee will be final, conclusive, and binding upon all parties. Any action of the Committee with respect to the administration of the Plan shall be taken pursuant to a majority vote or by the unanimous written consent of its members.

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(f) No member of the Board or the Committee or designee thereof will be liable for any action, determination or interpretation made in good faith by the Board or the Committee with respect to the Plan or any transaction arising under the Plan, and all members of the Board or the Committee and each and any officer or employee of the Company or other designee acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company in respect of any such action, determination or interpretation.

    1.5 Participation

(a) Such employees of the Company and its subsidiaries as may be selected by the Committee in its discretion are eligible to participate in the Plan. An individual who has been granted or sold an Incentive Award may, if otherwise eligible, be granted or sold additional Incentive Awards if the Committee so determines.

(b) No person who owns (or is deemed to own) immediately before the grant of such Incentive Stock Option, directly or indirectly, stock possessing more than 10% of the total combined voting power of all classes of stock of the Company will be eligible for the grant of an Incentive Stock Option. This restriction does not apply if, at the time such Incentive Stock Option is granted, the Incentive Stock Option exercise price is at least 110% of the Fair Market Value on the date of grant and the Incentive Stock Option by its terms is not exercisable after the expiration of five (5) years from the date of grant.

(c) In no event may any member of the Board who is not an Employee be granted an Incentive Award.

II. Terms and Conditions of Options

    2.1 Option Plan

The purchase price of Common Stock under each Incentive Stock Option will be determined by the Committee but may not be less than the Fair Market Value on the date of grant. The purchase price of Common Stock under each Nonqualified Stock Option will be determined by the Committee but may not be less than the lesser of the Fair Market Value or Average Fair Market Value on the date of grant. To the extent that the aggregate Fair Market Value of shares of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by a Participant during any calendar year under the Plan and any other stock option plan of the Company shall exceed $100,000, such Options shall be treated as Nonqualified Stock Options; for such purposes, Fair Market Value shall be determined as of the date on which each such Incentive Stock Option is granted.

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    2.2 Exercisability

Options granted pursuant to this Plan shall be exercisable at such times and under such conditions as shall be determined by the Committee; provided, however that no Option shall be exercisable after the expiration of ten (10) years from the date the Option is granted. Unless the applicable Option award agreement provides otherwise, upon a Participant’s termination of employment for any reason, all of the Participant’s Options remaining subject to restrictions on the date of such termination of employment shall be forfeited and shall be available again for grant of Incentive Awards under the Plan.

    2.3 Exercise of Option

Options may be exercised by written notice to the Company specifying the number of shares of Common Stock with respect to which the option has been exercised. At the time of exercise of an Option, the purchase price shall be paid in full in cash or its equivalent acceptable to the Committee. To the extent provided by the Option agreement executed by the Participant, the purchase price may be paid by the assignment and delivery to the Company of shares of Common Stock or a combination of cash and shares of Common Stock equal in value to the exercise price, or in such other manner acceptable to the Committee. Any shares assigned and delivered to the Company in payment or partial payment of the purchase price will be valued at their Fair Market Value on the exercise date. No fractional shares will be issued pursuant to the exercise of an Option, but the Committee in its discretion, may make a cash payment.

III. Terms and Conditions of Performance Awards

    3.1 Grant of Performance Awards

The Committee may grant Performance Awards to Employees subject to the provisions of this Section III. The Committee shall determine the Payment Event, which shall be based on the attainment of Performance Goals and such other criteria as the Committee may determine (which need not be identical for each Participant), and the other terms and conditions of such Performance Awards (including without limitation the form and time of payment of Performance Awards). The specific terms and conditions of each Performance Award shall be set forth in a written instrument evidencing the grant of a Performance Award, or in a performance plan adopted by the Committee. Notwithstanding the foregoing, commencing with the 2003 calendar year, (i) no Performance Award may relate to a performance period in excess of three years, (ii) no more than two Performance Awards may be granted to any individual Participant during any calendar year, (iii) with respect to any Performance Award that relates to a performance period of not more than one year, the maximum value of the Performance Award shall not exceed $2,000,000 (to the extent payable in shares of Common Stock, based on either Fair Market Value or Average Fair Market Value at the time of award or payment, as determined by the Committee), and (iv) with respect to any Performance Award that relates to a performance period of more than one year, the maximum value of the Performance Award shall not exceed $2,500,000 (to the extent payable in shares of Common Stock, based on either Fair Market Value or Average Fair Market Value at the time of award or payment, as determined by the Committee).

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    3.2 Payment of Performance Awards

Payment of Performance Awards may be in cash or in shares of Common Stock valued at Fair Market Value or Average Fair Market Value on the date of payment, or a combination of Common Stock and cash, as the Committee in its discretion may determine. The Committee may impose a limitation on the amount payable upon the occurrence of a Payment Event, which limitation shall be set forth in the written instrument evidencing the grant of a Performance Award.

    3.3 Expiration of Performance Awards

If any Participant’s employment with the Company is terminated for any reason prior to the occurrence of the Payment Event, all of the Participant’s rights under the Performance Award shall expire and terminate unless the applicable performance award agreement or plan provides otherwise.

IV. Restricted Stock

    4.1 Award of Restricted Stock

The Committee may grant awards of Restricted Stock to Employees. The Committee shall determine the Purchase Price, the terms of payment of the Purchase Price, the restrictions upon the Restricted Stock, and when such restrictions shall lapse. The Committee may determine that Restricted Stock may be awarded without requiring payment of a Purchase Price. The terms and conditions of the Restricted Stock shall be set forth in a written agreement.

    4.2 Conditions of Restricted Stock

All shares of Restricted Stock (including shares received as a result of stock dividends, stock splits or other forms of recapitalization) sold pursuant to the Plan will be subject to the following conditions:

(a) The shares may not be sold, transferred or otherwise alienated or hypothecated until the restrictions are removed or expire.

(b) The Participant shall enter into an escrow agreement (which agreement may be part of the written agreement setting forth the terms and conditions of the Restricted Stock and may specify the Secretary of the Company as escrow holder), providing that the certificates representing the Restricted Stock sold to a Participant pursuant to the Plan will remain in the physical custody of an escrow holder until all restrictions are removed or expire.

(c) Each certificate representing Restricted Stock sold to a Participant pursuant to the Plan will bear a legend making appropriate reference to the restriction imposed.

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(d) Such other conditions as the Committee may deem advisable including, without limitation, restrictions designed to facilitate compliance with or exemption from the Exchange Act, the requirements of any stock exchange on which shares of the same class are listed, and with any Blue Sky or securities laws which may be applicable to such shares.

    4.3 Lapse of Restrictions

The restrictions imposed upon Restricted Stock under Section 4.2 above will lapse in accordance with such conditions as are determined by the Committee and set forth in a written instrument describing the terms of the sale of the Restricted Stock.

    4.4 Rights of Participant

Subject to the provisions of Section 4.2 above, and the restrictions imposed pursuant to Section 4.2, the Committee may determine that the Participant will have all rights of a stockholder with respect to the Restricted Stock sold to the Participant, including the right to vote the shares and receive all dividends and other distributions paid or made with respect thereto. Each Participant who has an outstanding award of Restricted Stock that is subject to restrictions shall deposit with the Company any stock, securities or other property which the Participant is entitled to receive with respect to the Participant’s shares of Restricted Stock by reason of an event described in Section 9.1(a) hereof, and such stock, securities or other property will be subject to the restrictions imposed on such Restricted Stock.

    4.5 Termination of Employment

Unless the applicable Restricted Stock award agreement provides otherwise, upon a Participant’s termination of employment for any reason, all of the Participant’s Restricted Stock remaining subject to restrictions on the date of such termination of employment shall be forfeited and shall be available again for grant of Incentive Awards under the Plan.

V. Stock Appreciation Rights

    5.1 Granting of Stock Appreciation Rights

The Committee may approve the grant of Stock Appreciation Rights in connection with Options or the grant of Stock Appreciation Rights independent of any Options, subject to the following terms and conditions:

(a) A Stock Appreciation Right that is granted independent of any Option may be granted at any time. A Stock Appreciation Right that is granted in connection with an Option may be granted:

(i) either at the time of grant, or at any time thereafter during the Option term if related to a Nonqualified Stock Option; or

(ii) only at the time of grant if related to an Incentive Stock Option.

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(b) A Stock Appreciation Right granted in connection with an Option will entitle the holder of the related Option, upon exercise of the Stock Appreciation Right, to surrender such Option with respect to the number of shares as to which such Stock Appreciation Right is exercised, and to receive payment of an amount computed pursuant to Section 5.1(d). Such Option will, to the extent surrendered, then cease to be exercisable. A Stock Appreciation Right granted in connection with an Option hereunder will be exercisable at such time or times, and only to the extent that a related Option is exercisable, and will not be transferable except to the extent that such related Option may be transferable.

(c) Upon the exercise of a Stock Appreciation Right granted independent of any Option, the holder will be entitled to receive payment of an amount determined by multiplying:

(i) the difference obtained by subtracting the grant price of a share of Common Stock specified in the Stock Appreciation Right award agreement from the Fair Market Value of a share of Common Stock on the date of exercise of such Stock Appreciation Right, by

(ii) the number of shares as to which such Stock Appreciation Right has been exercised.

(d) Upon the exercise of a Stock Appreciation Right granted in connection with an Option, the holder will be entitled to receive payment of an amount determined by multiplying:

(i) the difference obtained by subtracting the purchase price of a share of Common Stock specified in the related Option from the Fair Market Value of a share of Common Stock on the date of exercise of such Stock Appreciation Right, by

(ii) the number of shares as to which such Stock Appreciation Right has been exercised.

(e) Payment of the amount determined under Section 5.1(c) or (d), as the case may be, may be made in whole shares of Common Stock in a number determined at their Fair Market Value (or, in the case of Rights granted independent of any Option or in connection with a Nonqualified Stock Option, Average Fair Market Value), as determined by the Committee, on the date of exercise of the Stock Appreciation Right or, alternatively, at the sole discretion of the Committee, in cash or in a combination of cash and shares as the Committee deems advisable. If the Committee decides to make full payment in shares of Common Stock, and the amount payable results in a fractional share, payment for the fractional share will be made in cash.

VI. Stock Payment

The Committee may approve Stock Payments of the Company’s Common Stock (valued at Fair Market Value or Average Fair Market Value at the time of payment, as determined by the Committee) to an Employee for all or any portion of the compensation (other than base salary) that would otherwise become payable to an Employee in cash.

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VII. Dividend Equivalents

A Participant may also be granted at no additional cost “Dividend Equivalents” based on the dividends declared on the Common Stock on record dates during the period between the date an Option or Stock Appreciation Right is granted and the date such Option or Stock Appreciation Right is exercised, or such other period, as determined by the Committee. Such Dividend Equivalents shall be converted to additional shares or cash by such formula as may be determined by the Committee.

Dividend Equivalents shall be computed, as of each dividend record date, both with respect to the number of shares under the Option or Stock Appreciation Right and with respect to the number of Dividend Equivalent shares previously credited to the Participant (or Participant’s successor in interest) and not issued during the period prior to the dividend record date.

VIII. Restricted Stock Units

(a) At the time of the grant of Restricted Stock Units, the Committee may impose such restrictions or conditions to the vesting of such Restricted Stock Units as it, in its sole discretion, deems appropriate, to be contained in the award agreement evidencing the grant of the Restricted Stock Units. The Committee may divide such Restricted Stock Units into classes and assign different vesting conditions for each class. Provided that all conditions to the vesting of a Restricted Stock Unit are satisfied, upon the satisfaction of all vesting conditions with respect to a Restricted Stock Unit, such Restricted Stock Unit shall vest. Unless the applicable Restricted Stock Unit award agreement provides otherwise, upon a Participant’s termination of employment for any reason, all of the Participant’s Restricted Stock Units remaining subject to restrictions on the date of such termination of employment shall be forfeited and shall be available again for grant of Incentive Awards under the Plan.

(b) Upon the vesting of a Restricted Stock Unit, the Participant shall be entitled to receive an amount in cash or Common Stock with a Fair Market Value or Average Fair Market Value, as determined by the Committee, equal to the sum of (1) the Fair Market Value (or Average Fair Market Value, as the case may be) of a share of Common Stock on the date on which such Restricted Stock Unit vests and (2) the aggregate amount of cash dividends paid with respect to a share of Common Stock during the period commencing on the date on which the Restricted Stock Unit was granted and terminating on the date on which such Restricted Stock Unit vests.

IX. Other Provisions

9.1 Adjustment Provisions

(a) Subject to Section 9.1(b) below, if the outstanding shares of Common Stock of the Company are increased, decreased, or exchanged for a different number or kind of shares or other securities or property, or if additional shares or new or different shares or other securities or property are distributed with respect to such shares of Common Stock or other securities through merger, consolidation, sale of all or substantially all of the property of the Company, reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other distribution with respect to such shares of Common Stock or other securities, an

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appropriate and proportionate adjustment may be made in (i) the maximum number and kind of shares provided in Section 1.3, (ii) the number and kind of shares or other securities or property subject to the outstanding Incentive Awards, and (iii) the price for each share or other unit of any other securities or property subject to outstanding Incentive Awards without material change in the aggregate purchase price or value as to which such Incentive Awards remain exercisable or subject to restrictions.

(b) In addition to the adjustments covered under Section 9.1(a) above, any Incentive Award may contain provisions to the effect that, upon the occurrence of certain events, any outstanding Incentive Awards not theretofore vested, exercisable, payable or free from restrictions, as the case may be, shall either immediately, or upon a further determination made by the Committee at the time of the event, become fully vested, exercisable, payable, or free from restrictions. Except as otherwise provided in an Incentive Award agreement, plan or other written instrument, upon a change in control of the Company (as defined in Section 9.1(d) below), any outstanding Incentive Awards not theretofore vested, exercisable, payable or free from restrictions, as the case may be, shall immediately become fully vested, exercisable, payable, or free from restrictions.

(c) Adjustments and determinations under Section 9.1(a) and 9.1(b) will be made by the Committee, whose determination will be final, binding, and conclusive. No fractional interests will be issued under the Plan resulting from any such adjustments, but the Committee in its discretion may make a cash payment in lieu of fractional shares.

(d) For purposes of Section 9.1(b) above, a “change in control of the Company” shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied:

(i) any Person is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or any of its affiliates) representing more than 30% of the combined voting power of the Company’s then outstanding securities; or

(ii) during any period of two (2) consecutive years (not including any period prior to the grant of the Incentive Award subject to this provision), individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a Person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii), or (iv) of this Section 9.1(d) whose election by the Board or nomination for election by the Company’s shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority thereof; or

(iii) the shareholders of the Company approve a merger or consolidation of the Company with any other company, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the

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surviving entity), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its affiliates, at least 75% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person acquires more than 50% of the combined voting power of the Company’s then outstanding securities, or

(iv) the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets.

For purposes of this Section 9.1(d), “Person” shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof; provided, however, a Person shall not include the Company or any of its subsidiaries, a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, an underwriter temporarily holding securities pursuant to an offering of such securities, or a company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company.

9.2 Continuation of Employment

Nothing in the Plan or in any instrument executed pursuant to the Plan will confer upon any Participant any right to continue in the employ of the Company or affect the right of the Company to terminate the employment of any Participant at any time with or without cause.

9.3 Compliance with Government Regulations

No shares of Common Stock will be issued pursuant to an Incentive Award unless and until all applicable requirements imposed by Federal and State securities and other laws, rules and regulations and by any regulatory agencies having jurisdiction and by any stock exchanges upon which the Common Stock may be listed have been fully met. As a condition precedent to the issuance of shares of Common Stock pursuant to an Incentive Award, the Company may require the Participant to take any reasonable action to comply with such requirements. The Company shall be under no obligation to effect the registration pursuant to the Securities Act of 1933, as amended, of any interests in the Plan or any shares of Common Stock to be issued hereunder or to effect similar compliance under any state laws.

9.4 Privileges of Stock Ownership

No Participant and no beneficiary or other person claiming under or through such Participant will have any right, title or interest in or to any shares of Common Stock allocated or reserved under the Plan or subject to any Incentive Award except as to such share of Common Stock, if any, that have been issued to such Participant.

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9.5 Withholding

The Company may make such provisions as it deems appropriate to withhold any taxes the Company determines it is required to withhold in connection with any Incentive Award. The Company may require the Participant to satisfy any relevant tax requirements before authorizing any issuance of Common Stock to the Participant. To the extent permitted by the applicable Incentive Award agreement a Participant may satisfy any such withholding tax obligation by any of the following means or by a combination of such means: (a) tendering a cash payment; (b) authorizing the Company to withhold from the Common Stock otherwise issuable to the Participant, a number of shares having a Fair Market Value, as of the date the withholding tax obligations arises, less than or equal to the amount of withholding tax obligations; or (c) delivering to the Company already owned and unencumbered shares of Common Stock having a Fair Market Value, as of the date the withholding tax obligation arises, less than or equal to the amount of the withholding tax obligation.

9.6 Transferability of Incentive Awards

The Committee shall provide that (a) no Option or Right may be exercised during the life of the Participant other than by the Participant or the Participant’s duly appointed guardian or personal representative, and (b) no Incentive Award and no Right under the Plan, contingent or otherwise, will be assignable or subject to any encumbrance, pledge, or charge of any nature except that, under such rules as the Committee may establish pursuant to the terms of the Plan, a beneficiary may be designated with respect to an Incentive Award in the event of death of a Participant. If such beneficiary is the executor or administrator of the estate of the Participant, any rights with respect to such Incentive Award may be transferred to the person or persons or entity (including a trust) entitled thereto under the will of the Participant of such Incentive Award. Notwithstanding the foregoing, the Committee may permit transferability of Incentive Awards to the extent permitted by the applicable provisions of Rule 16b-3; provided, however, that the Committee, in its discretion, may impose any restrictions on transferability of Incentive Awards as it deems appropriate.

9.7 Amendment and Termination of Plan; Amendment of Incentive Award

(a) The Board will have the power, in its discretion, to amend, suspend, or terminate the Plan at any time; provided, however, that no amendment to the Plan may be made without approval of the stockholders of the Company to the extent stockholder approval of the amendment is required to comply with the requirements of Rule 16b-3 or, if applicable, Section 162(m) of the Code, and no amendments to the Plan may be made that would impair the rights of a Participant under any Incentive Award theretofore granted without such Participant’s consent.

(b) Except as otherwise provided by the applicable Incentive Award agreement or by Section 1.4, the Committee may amend the terms of any Incentive Award theretofore granted, prospectively or retroactively, but, subject to Section 9.1(a) of Plan, no such amendment shall impair the rights of any Participant without his or her consent.

14

(c) Notwithstanding any other provision of the Plan to the contrary, neither the Plan nor any outstanding Option shall be amended to decrease the purchase price of any outstanding Option unless first approved by the requisite vote of stockholders.

X. Interpretation

The Plan is designed and intended to comply with Rule 16b-3 and, to the extent applicable, Section 162(m) of the Code, and all provisions hereof shall be construed in a manner to so comply. If any provision of the Plan is held to be invalid or unenforceable, the other provisions of the Plan shall not be affected but shall be applied as if the invalid or unenforceable provision had not been included in the Plan. The Plan and all Awards shall be governed by the laws of the State of Hawaii without regard to its principles of conflict of laws.

XI. Duration of Plan

Unless previously terminated by the Board of Directors, the Plan will terminate on January 20, 2013, but Incentive Awards theretofore granted may extend beyond that date.

15

EX-10.2

HEI Exhibit 10.2

HAWAIIAN ELECTRIC INDUSTRIES, INC.

1990 Nonemployee Director Stock Plan

As Amended and Restated

1. Purposes of the Plan

The purposes of this Hawaiian Electric Industries, Inc. 1990 Nonemployee Director Stock Plan are to provide participating directors with additional incentives to improve the Company’s performance by increasing the level of stock owned by such nonemployee directors to reinforce the participating directors’ role in enhancing shareholder value, and to provide an additional means of attracting and retaining such nonemployee directors through the issuance of Common Stock under the Plan as compensation to Nonemployee Directors. As amended and restated herein, this Plan incorporates all amendments effective on or before May 1, 2002, including provisions formerly memorialized in the Hawaiian Electric Industries, Inc. 1999 Nonemployee Company Director Stock Grant Plan, which is hereby superceded.

2. Definitions

When used herein, the following terms shall have the respective meanings set forth below:

(a) “Annual Retainer” means the annual fee payable to all Nonemployee Company Directors and Nonemployee Participating Company Directors as provided in Section 6 below (exclusive of any expense reimbursements).

(b) “Annual Meeting of Shareholders” means the annual meeting of shareholders of the Company, or any Participating Company, at which directors of the Company or the Participating Company, as the case may be, are elected.

(c) “Board” means the Board of Directors of the Company.

(d) “Committee” means the Nominating and Corporate Governance Committee of the Board or such other committee appointed from time to time by the Board to administer the Plan in accordance with Section 4(a) hereof.

(e) “Common Stock” means the common stock, without par value, of the Company.

(f) “Company” means Hawaiian Electric Industries, Inc., a Hawaii corporation, and any successor corporation.

(g) “Employee” means any officer or employee of the Company or any of its direct or indirect subsidiaries or affiliates (whether or not such subsidiary or affiliate participates in the Plan).

(h) “Nonemployee Company Director” means any person who is elected or appointed to the Board of Directors of the Company and who is not an employee.

(i) “Nonemployee Participating Company Director” means any person who is elected or appointed to the Board of Directors of any one or more Participating Companies and who is not an Employee.

(j) “Participating Company” means any direct or indirect subsidiary or affiliate of the Company whose participation in the Plan has been approved by the Board.

(k) “Plan” means the Company’s 1990 Nonemployee Director Stock Plan, as amended and restated as set forth herein, as it may be further amended from time to time.

(l) “Stock Payment” means the grant of shares of Common Stock to Nonemployee Company Directors or Nonemployee Participating Company Directors for services rendered as a director of the Company or a Participating Company, as provided in Section 7 hereof.

3. Shares of Common Stock Subject to the Plan

Subject to adjustment as provided in Section 9 below, the maximum aggregate number of shares of Common Stock that may be issued under the Plan, when taken together with any shares ever granted under the provisions of the Hawaiian Electric Industries, Inc. 1999 Nonemployee Company Director Stock Grant Plan, is 100,000 shares. The Common Stock to be issued under the Plan will be made available from authorized but unissued shares of Common Stock, and the Company shall set aside and reserve for issuance under the Plan said number of shares.

4. Administration of the Plan

(a) The Plan will be administered by the Committee, which will consist of three or more persons. Members of the Committee need not be members of the Board. The Company shall pay all costs of administration of the Plan.

(b) Subject to the express provisions of the Plan, the Committee has and may exercise such powers and authority of the Board as may be necessary or appropriate for the Committee to carry out its functions under the Plan. Without limiting the generality of the foregoing, the Committee shall have full power and authority (i) to determine all questions of fact that may arise under the Plan, (ii) to interpret the Plan and to make all other determinations necessary or advisable for the administration of the Plan, and (iii) to prescribe, amend, and rescind rules and regulations relating to the Plan, including, without limitation, any rules which the Committee determines are necessary or appropriate to ensure that the Company, each Participating Company and the Plan will be able to comply with all applicable provisions of any federal, state or local law, including securities laws and laws relating to the withholding of tax. All interpretations,

2

determinations, and actions by the Committee will be final, conclusive, and binding upon all parties. Any action of the Committee with respect to the administration of the Plan shall be taken pursuant to a majority vote at a meeting of the Committee (at which members may participate by telephone) or by the unanimous written consent of its members.

(c) Neither the Company, nor any Participating Company, nor any representatives, employees or agents of the Company or any Participating Company, nor any member of the Board or the Committee or any designee thereof will be liable for any damages resulting from any action or determination made by the Board or the Committee with respect to the Plan or any transaction arising under the Plan or any omission in connection with the Plan in the absence of willful misconduct or gross negligence.

5. Participation in the Plan

(a) All Nonemployee Company Directors and Nonemployee Participating Company Directors shall participate in the applicable provisions of the Plan, subject to the conditions and limitations of the Plan, so long as they remain eligible to participate in the Plan.

(b) Nonemployee Company Directors and Nonemployee Participating Company Directors shall be eligible for Annual Retainers pursuant to the terms of Section 6 of the Plan and for Stock Payments pursuant to the terms of Section 7 of the Plan.

6. Determination of Nonemployee Directors’ Annual Retainers

The Committee shall meet annually to determine the Annual Retainer for all Nonemployee Directors, subject to approval by the Board. Unless there are material changes in the duties of a Nonemployee Company Director or a Nonemployee Participating Company Director during the course of any calendar year, the Annual Retainer shall not be determined more than once each calendar year. The Annual Retainer shall be paid to each Nonemployee Company Director and each Nonemployee Participating Company Director by the respective company for which the person serves as a director. The Annual Retainer shall be paid at such times and in such manner as may be determined by the Board or the Committee.

7. Determination of Nonemployee Directors’ Stock Payments

(a) Each Nonemployee Company Director who serves in that capacity immediately following the date of the Annual Meeting of Stockholders of the Company shall receive, in addition to the Annual Retainer payable to such Nonemployee Company Director, a Stock Payment equal to seven hundred (700) shares of Common Stock for serving as a Nonemployee Company Director (one thousand (1,000) shares in the case of the first Stock Payment to a Nonemployee Company Director pursuant to this sentence). Each Nonemployee Participating Company Director (who is not also a director of the Company) who serves in that capacity immediately following the date of the Annual

3

Meeting of Stockholders of one or more Participating Companies shall receive, in addition to the Annual Retainer payable to such Nonemployee Participating Company Director, a Stock Payment equal to three hundred (300) shares of Common Stock for serving as a Nonemployee Participating Company Director. Each Director who during any calendar year thereafter becomes a Nonemployee Company Director or Nonemployee Participating Company Director for the first time (whether by election or appointment as a director of the Company or a Participating Company), shall receive, in addition to any Annual Retainer payable, a Stock Payment equal to one thousand (1,000) shares of Common Stock (in the case of the Company) or three hundred (300) shares of Common Stock (in the case of a Participating Company), for serving as a Nonemployee Company Director or Nonemployee Participating Company Director, as the case may be. Such Stock Payments shall be paid by the Company as soon as practicable following the date such director is first elected or appointed to the Board of Directors of the Company or the Board of Directors of a Participating Company, as the case may be.

(b) No Nonemployee Company Director or Nonemployee Participating Company Director shall be required to forfeit or otherwise return to the Company any shares of Common Stock issued to him or her as a Stock Payment pursuant to the Plan notwithstanding any change in status of such director which renders him or her ineligible to continue as a participant in the Plan.

8. Shareholder Rights

(a) Nonemployee Company Directors and Nonemployee Participating Company Directors shall not be deemed for any purpose to be or have rights as shareholders of the Company with respect to any shares of Common Stock except as and when such shares are issued and then only from the date of the certificate therefor. No adjustment shall be made for dividends or distributions or other rights for which the record date precedes the date of such stock certificate.

(b) Subject to the provisions of Section 8(a) above, Nonemployee Company Directors and Nonemployee Participating Company Directors will have all rights of a shareholder with respect to Common Stock issued, including the right to vote the shares and receive all dividends and other distributions paid or made with respect thereto.

9. Adjustment for Changes in Capitalization

If the outstanding shares of Common Stock of the Company are increased, decreased, or exchanged for a different number or kind of shares or other securities, or if additional shares or new or different shares or other securities are distributed with respect to such shares of Common Stock or other securities, through merger, consolidation, sale of all or substantially all of the property of the Company, reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split, combination of shares, rights offering, distribution of assets or other distribution with respect to such shares of Common Stock or other securities or other change in the corporate structure or shares of Common Stock, the maximum number of shares and/or the kind of shares that may be

4

issued under the Plan may be appropriately adjusted by the Committee. Any determination by the Committee as to any such adjustment will be final, binding, and conclusive. The maximum number of shares issuable under the Plan as a result of any such adjustment shall be rounded up to the nearest whole share.

10. Continuation of Director or Other Status

Nothing in the Plan or in any instrument executed pursuant to the Plan or any action taken pursuant to the Plan shall be construed as creating or constituting evidence of any agreement or understanding, express or implied, that the Company or any other Participating Company, as the case may be, will retain a Nonemployee Company Director or Nonemployee Participating Company Director as a director or in any other capacity for any period of time or at a particular retainer or other rate of compensation, as conferring upon any director any legal or other right to continue as a director or in any other capacity, or as limiting, interfering with or otherwise affecting the right of the Company or a Participating Company to terminate a director in his or her capacity as a director or otherwise at any time for any reason, with or without cause, and without regard to the effect that such termination might have upon him or her as a participant under the Plan.

11. Compliance with Government Regulations

Neither the Plan nor the Company shall be obligated to issue any shares of Common Stock pursuant to the Plan at any time unless and until all applicable requirements imposed by any federal and state securities and other laws, rules, and regulations, by any regulatory agencies or by any stock exchanges upon which the Common Stock may be listed have been fully met. As a condition precedent to any issuance of shares of Common Stock and delivery of certificates evidencing such shares pursuant to the Plan, the Board or the Committee may require a Nonemployee Company Director or Nonemployee Participating Company Director to take any such action and to make any such covenants, agreements and representations as the Board or the Committee, as the case may be, in its discretion deems necessary or advisable to ensure compliance with such requirements. The Company shall in no event be obligated to register the shares of Common Stock issued or issuable under the Plan pursuant to the Securities Act of 1933, as now or hereafter amended, or to qualify or register such shares under any securities laws of any state upon their issuance under the Plan or at any time thereafter, or to take any other action in order to cause the issuance and delivery of such shares under the Plan or any subsequent offer, sale or other transfer of such shares to comply with any such law, regulation or requirement. Nonemployee Company Directors and Nonemployee Participating Company Directors are responsible for complying with all applicable federal and state securities and other laws, rules and regulations in connection with any offer, sale or other transfer of the shares of Common Stock issued under the Plan or any interest therein including, without limitation, compliance with the registration requirements of the Securities Act of 1933, as amended (unless an exemption therefrom is available), or with the provisions of Rule 144 promulgated thereunder, if available, or any successor provisions.

5

12. Nontransferability of Rights

No Nonemployee Company Director or Nonemployee Participating Company Director shall have the right to assign the right to receive any Stock Payment or any other right or interest under the Plan, contingent or otherwise, or to cause or permit any encumbrance, pledge or charge of any nature to be imposed on any such payment (prior to the issuance of stock certificates evidencing such Stock Payment) or any such right or interest.

13. Amendment and Termination of Plan

(a) The Board will have the power in its discretion, to amend, suspend or terminate the Plan at any time. No such amendment will, without approval of the shareholders of the Company:

(i) Change the class of persons eligible to receive Stock Payments under the Plan or otherwise modify the requirements as to eligibility for participation in the Plan; or

(ii) Increase the number of shares of Common Stock which may be issued under the Plan (except for adjustments as provided in Section 9 hereof).

(b) No amendment, suspension or termination of the Plan will, without the consent of the Nonemployee Company Director or Nonemployee Participating Company Director, alter, terminate, impair, or adversely affect any right or obligations under any Stock Payment previously granted under the Plan to such Participant, unless such amendment, suspension or termination is required by applicable law.

(c) Notwithstanding the foregoing, the Board may, without further action by the shareholders of the Company, amend the Plan or modify Stock Payments under the Plan (i) in response to changes in securities or other laws, or rules, regulations or regulatory interpretations thereof, applicable to the Plan, or (ii) to comply with stock exchange rules or requirements.

14. Governing Law

The laws of the State of Hawaii shall govern and control the interpretation and application of the terms of the Plan.

15. Effective Date and Duration of the Plan

The Plan, as amended and restated herein, will become effective as of April 20, 2004. Unless previously terminated by the Board, the Plan will terminate on April 27, 2010.

6

EX-12.1

HEI Exhibit 12.1 (page 1 of 3)

Hawaiian Electric Industries, Inc. and Subsidiaries

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

(unaudited)

Six months ended June 30	2004(1)			2004(2)			2003(1)			2003(2)
(dollars in thousands)
Fixed charges
Total interest charges (3)	$	77,198		$	100,872		$	72,249		$	100,332
Interest component of rentals		2,002			2,002			2,168			2,168
Pretax preferred stock dividend requirements of subsidiaries		1,463			1,463			1,561			1,561
Preferred securities distributions of trust subsidiaries		—			—			8,018			8,018
Total fixed charges	$	80,663		$	104,337		$	83,996		$	112,079
Earnings
Pretax income	$	97,779		$	97,779		$	78,527		$	78,527
Fixed charges, as shown		80,663			104,337			83,996			112,079
Interest capitalized		(1,377	)		(1,377	)		(889	)		(889	)
Earnings available for fixed charges	$	177,065		$	200,739		$	161,634		$	189,717
Ratio of earnings to fixed charges		2.20			1.92			1.92			1.69

⁽¹⁾ Excluding interest on ASB deposits.

⁽²⁾ Including interest on ASB deposits.

⁽³⁾ Interest on nonrecourse debt from leveraged leases is not included in total interest charges nor in interest expense in HEI’s consolidated statements of income.

HEI Exhibit 12.1 (page 2 of 3)

Hawaiian Electric Industries, Inc. and Subsidiaries

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

(unaudited)

(continued)

Years ended December 31	2003(1)			2003(2)			2002(1)			2002(2)			2001(1)			2001(2)
(dollars in thousands)
Fixed charges
Total interest charges (3)	$	138,808		$	192,616		$	151,543		$	225,174		$	175,780		$	292,311
Interest component of rentals		4,214			4,214			4,501			4,501			4,268			4,268
Pretax preferred stock dividend requirements of subsidiaries		3,082			3,082			3,069			3,069			3,069			3,069
Preferred securities distributions of trust subsidiaries		16,035			16,035			16,035			16,035			16,035			16,035
Total fixed charges	$	162,139		$	215,947		$	175,148		$	248,779		$	199,152		$	315,683
Earnings
Pretax income from continuing operations	$	182,415		$	182,415		$	181,909		$	181,909		$	165,903		$	165,903
Fixed charges, as shown		162,139			215,947			175,148			248,779			199,152			315,683
Interest capitalized		(1,914	)		(1,914	)		(1,855	)		(1,855	)		(2,258	)		(2,258	)
Earnings available for fixed charges	$	342,640		$	396,448		$	355,202		$	428,833		$	362,797		$	479,328
Ratio of earnings to fixed charges		2.11			1.84			2.03			1.72			1.82			1.52

⁽¹⁾ Excluding interest on ASB deposits.

⁽²⁾ Including interest on ASB deposits.

⁽³⁾ Interest on nonrecourse debt from leveraged leases is not included in total interest charges nor in interest expense in HEI’s consolidated statements of income.

HEI Exhibit 12.1 (page 3 of 3)

Hawaiian Electric Industries, Inc. and Subsidiaries

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

(unaudited)

(continued)

Years ended December 31	2000(1)			2000(2)			1999(1)			1999(2)
(dollars in thousands)
Fixed charges
Total interest charges (3)	$	196,980		$	316,172		$	158,947		$	279,285
Interest component of rentals		4,332			4,332			4,370			4,370
Pretax preferred stock dividend requirements of subsidiaries		3,109			3,109			3,407			3,407
Preferred securities distributions of trust subsidiaries		16,035			16,035			16,025			16,025
Total fixed charges	$	220,456		$	339,648		$	182,749		$	303,087
Earnings
Pretax income from continuing operations	$	170,495		$	170,495		$	155,129		$	155,129
Fixed charges, as shown		220,456			339,648			182,749			303,087
Interest capitalized		(2,922	)		(2,922	)		(2,576	)		(2,576	)
Earnings available for fixed charges	$	388,029		$	507,221		$	335,302		$	455,640
Ratio of earnings to fixed charges		1.76			1.49			1.83			1.50

⁽¹⁾ Excluding interest on ASB deposits.

⁽²⁾ Including interest on ASB deposits.

⁽³⁾ Interest on nonrecourse debt from leveraged leases is not included in total interest charges nor in interest expense in HEI’s consolidated statements of income.

EX-31.1

HEI Exhibit 31.1

Certification Pursuant to Section 13a-14 of the Securities Exchange Act of 1934 of Robert F. Clarke (HEI Chief Executive Officer)

I, Robert F. Clarke, certify that:

1. I have reviewed this report on Form 10-Q for the quarter ended June 30, 2004 of Hawaiian Electric Industries, Inc. (“registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 5, 2004

/S/    ROBERT F. CLARKE        

Robert F. Clarke

Chairman, President and Chief Executive Officer

EX-31.2

HEI Exhibit 31.2

Certification Pursuant to Section 13a-14 of the Securities Exchange Act of 1934 of Eric K. Yeaman (HEI Chief Financial Officer)

I, Eric K. Yeaman, certify that:

1. I have reviewed this report on Form 10-Q for the quarter ended June 30, 2004 of Hawaiian Electric Industries, Inc. (“registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 5, 2004

/S/    ERIC K. YEAMAN        

Eric K. Yeaman

Financial Vice President, Treasurer and

Chief Financial Officer

EX-32.1

HEI Exhibit 32.1

Hawaiian Electric Industries, Inc.

Written Statement of Chief Executive Officer Furnished Pursuant to

18 U.S.C. Section 1350,

as Adopted by

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Hawaiian Electric Industries, Inc. (HEI) on Form 10-Q for the quarter ended June 30, 2004 as filed with the Securities and Exchange Commission (the Report), I, Robert F. Clarke, Chief Executive Officer of HEI, certify, pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:

(1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and

(2) The consolidated information contained in the Report fairly presents, in all material respects, the financial condition as of June 30, 2004 and results of operations for the three and six months ended June 30, 2004 of HEI and its subsidiaries.

/S/    ROBERT F. CLARKE        

Robert F. Clarke

Chairman, President and Chief Executive Officer of HEI

Date: August 5, 2004

A signed original of this written statement required by Section 906 has been provided to Hawaiian Electric Industries, Inc. and will be retained by Hawaiian Electric Industries, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

HEI Exhibit 32.2

Hawaiian Electric Industries, Inc.

Written Statement of Chief Financial Officer Furnished Pursuant to

18 U.S.C. Section 1350,

as Adopted by

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Hawaiian Electric Industries, Inc. (HEI) on Form 10-Q for the quarter ended June 30, 2004 as filed with the Securities and Exchange Commission (the Report), I, Eric K. Yeaman, Chief Financial Officer of HEI, certify, pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:

(1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and

(2) The consolidated information contained in the Report fairly presents, in all material respects, the financial condition as of June 30, 2004 and results of operations for the three and six months ended June 30, 2004 of HEI and its subsidiaries.

/S/    ERIC K. YEAMAN        

Eric K. Yeaman

Financial Vice President, Treasurer and

Chief Financial Officer of HEI

Date: August 5, 2004

A signed original of this written statement required by Section 906 has been provided to Hawaiian Electric Industries, Inc. and will be retained by Hawaiian Electric Industries, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-12.2

HECO Exhibit 12.2 (page 1 of 2)

Hawaiian Electric Company, Inc. and Subsidiaries

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

(unaudited)

Six months ended June 30	2004			2003
(dollars in thousands)
Fixed charges
Total interest charges	$	25,433		$	22,550
Interest component of rentals		434			430
Pretax preferred stock dividend requirements of subsidiaries		740			712
Preferred securities distributions of trust subsidiaries		—			3,838
Total fixed charges	$	26,607		$	27,530
Earnings
Income before preferred stock dividends of HECO	$	42,298		$	36,752
Income taxes (see note below)		26,365			22,828
Fixed charges, as shown		26,607			27,530
AFUDC for borrowed funds		(1,377	)		(889	)
Earnings available for fixed charges	$	93,893		$	86,221
Ratio of earnings to fixed charges		3.53			3.13
Note: Income taxes is comprised of the following
Income tax expense relating to operating income from regulated activities	$	26,666		$	22,891
Income tax benefit relating to results from nonregulated activities		(301	)		(63	)
	$	26,365		$	22,828

HECO Exhibit 12.2 (page 2 of 2)

Hawaiian Electric Company, Inc. and Subsidiaries

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

(unaudited)

(continued)

Years ended December 31	2003			2002			2001			2000			1999
(dollars in thousands)
Fixed charges
Total interest charges	$	44,341		$	44,232		$	47,056		$	49,062		$	48,461
Interest component of rentals		820			663			728			696			784
Pretax preferred stock dividend requirements of subsidiaries		1,430			1,434			1,433			1,438			1,479
Preferred securities distributions of trust subsidiaries		7,675			7,675			7,675			7,675			7,665
Total fixed charges	$	54,266		$	54,004		$	56,892		$	58,871		$	58,389
Earnings
Income before preferred stock dividends of HECO	$	79,991		$	91,285		$	89,380		$	88,366		$	76,400
Fixed charges, as shown		54,266			54,004			56,892			58,871			58,389
Income taxes (see note below)		49,824			56,658			55,416			55,375			48,047
Allowance for borrowed funds used during construction		(1,914	)		(1,855	)		(2,258	)		(2,922	)		(2,576	)
Earnings available for fixed charges	$	182,167		$	200,092		$	199,430		$	199,690		$	180,260
Ratio of earnings to fixed charges		3.36			3.71			3.51			3.39			3.09
Note:
Income taxes is comprised of the following:
Income tax expense relating to operating income from regulated activities	$	50,175		$	56,729		$	55,434		$	55,213		$	48,281
Income tax expense (benefit) relating to results from nonregulated activities		(351	)		(71	)		(18	)		162			(234	)
	$	49,824		$	56,658		$	55,416		$	55,375		$	48,047

EX-31.3

HECO Exhibit 31.3

Certification Pursuant to Section 13a-14 of the Securities Exchange Act of 1934 of T. Michael May (HECO Chief Executive Officer)

I, T. Michael May, certify that:

1. I have reviewed this report on Form 10-Q for the quarter ended June 30, 2004 of Hawaiian Electric Company, Inc. (“registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 5, 2004

/S/    T. MICHAEL MAY        

T. Michael May

President and Chief Executive Officer

EX-31.4

HECO Exhibit 31.4

Certification Pursuant to Section 13a-14 of the Securities Exchange Act of 1934 of Richard A. von Gnechten (HECO Chief Financial Officer)

I, Richard A. von Gnechten, certify that:

1. I have reviewed this report on Form 10-Q for the quarter ended June 30, 2004 of Hawaiian Electric Company, Inc. (“registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 5, 2004

/S/    RICHARD A. VON GNECHTEN        

Richard A. von Gnechten

Financial Vice President

EX-32.3

HECO Exhibit 32.3

Hawaiian Electric Company, Inc.

Written Statement of Chief Executive Officer Furnished Pursuant to

18 U.S.C. Section 1350,

as Adopted by

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Hawaiian Electric Company, Inc. (HECO) on Form 10-Q for the quarter ended June 30, 2004 as filed with the Securities and Exchange Commission (the HECO Report), I, T. Michael May, Chief Executive Officer of HECO, certify, pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:

(1) The HECO Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and

(2) The HECO consolidated information contained in the HECO Report fairly presents, in all material respects, the financial condition as of June 30, 2004 and results of operations for the three and six months ended June 30, 2004 of HECO and its subsidiaries.

/S/    T. MICHAEL MAY        

T. Michael May

President and Chief Executive Officer of HECO

Date: August 5, 2004

A signed original of this written statement required by Section 906 has been provided to Hawaiian Electric Company, Inc. and will be retained by Hawaiian Electric Company, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.4

HECO Exhibit 32.4

Hawaiian Electric Company, Inc.

Written Statement of Chief Financial Officer Furnished Pursuant to

18 U.S.C. Section 1350,

as Adopted by

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Hawaiian Electric Company, Inc. (HECO) on Form 10-Q for the quarter ended June 30, 2004 as filed with the Securities and Exchange Commission (the HECO Report), I, Richard A. von Gnechten, Chief Financial Officer of HECO, certify, pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:

(1) The HECO Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and

(2) The HECO consolidated information contained in the HECO Report fairly presents, in all material respects, the financial condition as of June 30, 2004 and results of operations for the three and six months ended June 30, 2004 of HECO and its subsidiaries.

/S/    RICHARD A. VON GNECHTEN        

Richard A. von Gnechten

Financial Vice President of HECO

Date: August 5, 2004

A signed original of this written statement required by Section 906 has been provided to Hawaiian Electric Company, Inc. and will be retained by Hawaiian Electric Company, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.