Hawaiian Electric Industries, Inc. Reports 2004 Year-End and Fourth Qu

    Business Editors

    HONOLULU--(BUSINESS WIRE)--Feb. 7, 2005--Hawaiian Electric Industries, Inc. (NYSE:HE) today reported 2004 income from continuing operations of $107.7 million, or $1.36 per share, compared with $118.0 million, or $1.58 per share in 2003 (adjusted for a 2-for-1 stock split in June 2004). Income from continuing operations for 2004 includes an after-tax charge of $20.3 million, or $0.25 per share, related to a state franchise tax dispute which was settled in December 2004 involving dividends received deductions taken by the bank for tax years 1999-2004 on dividends from its real estate investment trust subsidiary. Excluding this charge, 2004 income from continuing operations would have been $128.1 million.
    Net income for 2004 was $109.7 million, or $1.38 per share, compared with $114.2 million or $1.53 per share for 2003. Net income for 2004 included a $1.9 million net gain from discontinued operations recognized in the third quarter of 2004.
    "We had a good year. Excluding the effect of the bank franchise tax settlement charge which covered multiple tax years, all business units -- the utilities, the bank and the holding and other companies -- showed improved results compared with 2003," said Robert F. Clarke, HEI chairman, president and chief executive officer. "We delayed the announcement of our earnings to address the over-amortization of net premiums on the bank's mortgage-backed securities portfolio. I am happy to report that this issue has been resolved and resulted in an increase of $1.5 million in 2004 net income," added Clarke. "It is also important to note this issue does not represent a material weakness in internal controls over financial reporting at the bank."
    Electric utility net income was $81.2 million in 2004 versus $78.9 million in 2003. "Increases in usage and the number of customers, particularly residential customers, contributed to kilowatthour sales growth of 2.9% in 2004," said Clarke. Warmer weather also played a part, with cooling degree days up 1.9%. In addition to increases in kilowatthour sales, retirement benefits expense was lower by $7.6 million ($4.6 million, net of taxes) for 2004 compared with 2003 and interest and related charges for 2004 were lower by $2.4 million compared with 2003. Partially offsetting increases in kilowatthour sales and decreases in retirement benefits expense and interest and related charges were: $12.7 million of increases in maintenance expenses for overhauls, repairs and other maintenance, primarily to strengthen infrastructure; $9.2 million higher other operations expenses, excluding retirement benefits expense, due to higher general and administrative expenses and transmission and distribution expenses; and $4.4 million of increased depreciation due to additions to plant-in-service.
    Bank net income for 2004 was $41.1 million compared with $56.3 million for 2003. Bank results for 2004 included the $20.3 million after-tax charge related to the state franchise tax dispute covering multiple tax years mentioned above. Excluding the impact of this charge, the bank's 2004 net income would have been $61.4 million. The significant increase in 2004 bank net income excluding the $20.3 million after-tax charge resulted primarily from excellent asset quality due to the strong Hawaii economy and real estate market which allowed the bank to reduce its allowance for possible loan losses by $8.4 million ($5.1 million, net of taxes) in 2004 compared with additions to reserves in 2003 of $3.1 million ($2.0 million, net of taxes).
    "2004 bank earnings benefited from excellent asset quality," said Clarke. "Delinquent and nonaccrual loans and charge-offs have been well below historical norms all year."
    The interest rate spread held steady at 3.08% for 2004 and 2003 in spite of continued margin compression from a flattening yield curve, and net interest income increased by $4.8 million year-over-year. The increase resulted from lower amortization of premiums on mortgage-related securities and higher average earning assets funded by strong core deposit growth.
    The bank's other income was lower year-over-year by $1.3 million due to $4.1 million of gains on the sale of securities in 2003, partially offset by higher fee income in 2004. General and administrative expenses were also higher by $2.8 million year-over-year primarily due to costs associated with the Sarbanes-Oxley Act of 2002 (SOX) compliance efforts.
    The holding and other companies' results were ($14.5) million in 2004 versus ($17.1) million in 2003. Results improved year-over-year due to lower interest and legal costs and a $3.6 million after-tax gain on the sale of investments the holding company had acquired from the bank in 2001, partially offset by the favorable settlement of lawsuits in 2003 of $5.7 million, net of taxes.
    Consolidated net income for the fourth quarter was $24.8 million, or $0.31 per share, compared with $37.4 million, or $0.50 per share, for the fourth quarter of 2003.
    "The Company faced challenges in the fourth quarter," said Clarke. "Our Oahu utility experienced record peak loads in the fourth quarter, underscoring the need to invest in the reliability of our systems."
    Electric utility net income for the fourth quarter was $13.2 million compared with $22.3 million for the same quarter of 2003. The primary reason for the decline in fourth quarter net income was $10.4 million higher maintenance expenses quarter-over-quarter ($6.3 million, net of taxes) due to the larger scope and timing of overhauls, repairs and maintenance, including an unscheduled major overhaul of an Oahu generating unit. Other operation expenses were also higher in the quarter by $6.0 million ($3.6 million, net of taxes) due to increases in a number of items, including information technology system enhancements, insurance reserves, and costs related to SOX compliance, partially offset by a $3.1 million settlement charge ($1.9 million, net of taxes) related to the Keahole expansion project recorded in the fourth quarter of 2003 and $1.7 million lower retirement benefits expense ($1.1 million, net of taxes). Partially offsetting increased operations and maintenance expenses were the effects of a 1.6% increase in kilowatthour sales quarter-over-quarter.
    Bank net income for the fourth quarter of 2004 was $16.7 million compared with $14.0 million for the fourth quarter of 2003. Bank results for the fourth quarter of 2004 included a $3.5 million after-tax reversal of amounts previously charged to net income related to the settlement of the state franchise tax dispute mentioned above. Excluding the $3.5 million reversal, the bank's 2004 fourth quarter net income would have been $13.2 million, slightly lower than in the fourth quarter of 2003.
    Bank net interest income for the three months ended December 31, 2004, increased from the same period last year despite a 14 basis point decrease in the interest rate spread quarter-over-quarter to 3.02%. The increase in net interest income was due to the above-mentioned $2.5 million reduction of mortgage-related securities amortization and higher average earning assets funded by strong core deposit growth. In addition, the bank experienced a $2.3 million increase in other income in the fourth quarter of 2004 compared with the fourth quarter of 2003 primarily due to higher debit card fees. These increases were offset by $4.0 million higher general and administrative expenses excluding charges reversed due to the settlement of the state franchise tax issue quarter-over-quarter, primarily because of increases in SOX compliance costs. Taxes were also higher quarter-over-quarter in part due to a higher effective tax rate resulting from the settlement of the state franchise tax dispute.
    The holding and other companies' results from continuing operations were ($5.1) million in the fourth quarter of 2004 versus income from continuing operations of $1.1 million in the same quarter of 2003. The quarter-over-quarter decrease was primarily due to the favorable settlement of lawsuits in the fourth quarter of 2003 of $5.7 million, net of taxes.
    HEI and its subsidiaries are a critical part of Hawaii's economy. HEI supplies power to over 400,000 customers or 93% of the Hawaii electric public utility market through its electric utilities, Hawaiian Electric Company, Hawaii Electric Light Company and Maui Electric Company, and provides a wide array of banking and other financial services to consumers and businesses through American Savings Bank, the state's third largest financial institution based on asset size.

    Cautionary and Forward-Looking Statements

    This press release contains HEI consolidated income from continuing operations and bank net income for 2004 and the fourth quarter of 2004 with adjustments related to an adverse franchise tax ruling and subsequent settlement with the State of Hawaii Department of Taxation. These amounts are non-GAAP financial measures. See "ASB State Bank Franchise Tax Dispute and Settlement" disclosures in HEI's Form 8-K dated February 7, 2005 (to be filed) for further information, including a reconciliation of the difference between the non-GAAP financial measures with the comparable financial measures presented in accordance with U.S. GAAP.
    This release may 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, which may be provided by management, 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 assumptions about HEI 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.
    Forward-looking statements in this release should be read in conjunction with the "Forward-Looking Statements and Risk Factors" discussion (which is incorporated by reference herein) set forth on page 5 of HEI's Current Report on Form 8-K dated December 31, 2004, and filed on January 6, 2005, and in HEI's future periodic reports that discuss important factors that could cause HEI's results to differ materially from those anticipated in such statements. Forward-looking statements speak only as of the date of this release.

Hawaiian Electric Industries, Inc. (HEI) and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

Three months Year ended December 31, December 31, ------------------- ----------------------- (in thousands, except per share amounts) 2004 2003 2004 2003 --------------------------------------------------------------------- Revenues Electric utility $423,376 $353,994 $1,550,671 $1,396,685 Bank 94,748 89,745 364,284 371,320 Other 266 10,482 9,102 13,311 -------- -------- ---------- ---------- 518,390 454,221 1,924,057 1,781,316 -------- -------- ---------- ---------- Expenses Electric utility 392,240 307,625 1,376,768 1,220,120 Bank 65,424 66,893 259,310 278,565 Other 6,235 4,912 17,019 19,064 -------- -------- ---------- ---------- 463,899 379,430 1,653,097 1,517,749 -------- -------- ---------- ---------- Operating income (loss) Electric utility 31,136 46,369 173,903 176,565 Bank 29,324 22,852 104,974 92,755 Other (5,969) 5,570 (7,917) (5,753) -------- -------- ---------- ---------- 54,491 74,791 270,960 263,567 -------- -------- ---------- ---------- Interest expense-other than bank (18,247) (16,118) (77,176) (69,292) Allowance for borrowed funds used during construction 306 529 2,542 1,914 Preferred stock dividends of subsidiaries (476) (502) (1,901) (2,006) Preferred securities distributions of trust subsidiaries - (4,009) - (16,035) Allowance for equity funds used during construction 738 1,192 5,794 4,267 -------- -------- ---------- ---------- Income from continuing operations before income taxes 36,812 55,883 200,219 182,415 Income taxes 12,002 18,444 92,480 64,367 -------- -------- ---------- ---------- Income from continuing operations 24,810 37,439 107,739 118,048 Income (loss) from discontinued operations, net of income taxes - - 1,913 (3,870) -------- -------- ---------- ---------- Net income $ 24,810 $ 37,439 $ 109,652 $ 114,178 ======== ======== ========== ========== Per common share Basic earnings (loss) -Continuing operations $ 0.31 $ 0.50 $ 1.36 $ 1.58 -Discontinued operations - - 0.02 (0.05) -------- -------- ---------- ---------- $ 0.31 $ 0.50 $ 1.38 $ 1.53 ======== ======== ========== ========== Diluted earnings (loss) -Continuing operations $ 0.31 $ 0.49 $ 1.36 $ 1.57 -Discontinued operations - - 0.02 (0.05) -------- -------- ---------- ---------- $ 0.31 $ 0.49 $ 1.38 $ 1.52 ======== ======== ========== ========== Dividends $ 0.31 $ 0.31 $ 1.24 $ 1.24 ======== ======== ========== ========== Weighted-average number of common shares outstanding 80,630 75,542 79,562 74,696 ======== ======== ========== ========== Adjusted weighted-average shares 80,981 75,872 79,719 74,974 ======== ======== ========== ==========

Income (loss) from continuing operations by segment Electric utility $ 13,244 $ 22,339 $ 81,177 $ 78,911 Bank 16,706 13,984 41,062 56,261 Other (5,140) 1,116 (14,500) (17,124) -------- -------- ---------- ---------- Income from continuing operations $ 24,810 $ 37,439 $ 107,739 $ 118,048 ======== ======== ========== ==========

    This information should be read in conjunction with the consolidated financial statements and the notes thereto incorporated by reference in HEI's Annual Report on SEC Form 10-K for the year ended December 31, 2003 and 2004 (when filed) and the consolidated financial statements and the notes thereto in HEI's Quarterly Reports on SEC Form 10-Q for the quarters ended March 31, 2004, June 30, 2004 and September 30, 2004. In April 2004, the HEI Board of Directors approved a 2-for-1 stock split in the form of a 100% stock dividend with a distribution date of June 10, 2004. All share and per share information above reflects the stock split.
    In the first quarter of 2004, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities," and deconsolidated Hawaiian Electric Industries Capital Trust I, HEI Preferred Funding, LP, HECO Capital Trust I and HECO Capital Trust II. The Company did not elect to restate previously issued financial statements. Due to the deconsolidation, for the year ended December 31, 2004, the Company's consolidated statement of income reflected equity in earnings of Hawaiian Electric Industries Capital Trust I, HEI Preferred Funding, LP, HECO Capital Trust I and HECO Capital Trust II of $0.6 million, interest expense from borrowings related to these entities of $5.4 million, and no preferred securities distributions of trust subsidiaries. The trust preferred securities of Hawaiian Electric Industries Capital Trust I and HECO Capital Trusts I and II were redeemed in April 2004. In March 2004, HECO Capital Trust III issued $50 million of trust preferred securities, which were never consolidated.
    In 1998, ASB formed a subsidiary, which elected to be taxed as a real estate investment trust (REIT). In 2002, the State of Hawaii Department of Taxation (DOT) challenged ASB's position on the dividends received deduction and issued notices of tax assessment. ASB filed an appeal with the State Board of Review, First Taxation District, which issued its decision in favor of the DOT in 2003. ASB filed a notice of appeal with the Hawaii Tax Appeal Court. In June 2004, the Hawaii Tax Appeal Court ruled in favor of the DOT and against ASB. ASB appealed the decision. As a result of the Court's decision, ASB recorded an after-tax charge to net income in the second quarter of 2004 of $24 million for the potential cumulative bank franchise tax liability ($21 million) and interest ($3 million) since the REIT was formed through March 31, 2004. On December 31, 2004, ASB agreed to settle its dispute with the DOT and close the tax years 1999 through 2004 for purposes of audit, examination, assessment, refund and judicial review. Under the terms of the settlement, ASB agreed to pay the DOT $12 million, in addition to $17 million previously paid under protest, dismiss its appeal and not take the dividends received deduction in future years. As a result, ASB recognized $3 million in additional net income in the fourth quarter of 2004, representing a partial reversal of the $24 million previously charged against net income. The tax impact of the dividends received deductions taken in the fourth quarter of 2003 and for all of 2003 amounted to $0.6 million and $3.8 million, respectively. See page 43 of HEI's Form 10-Q for the quarter ended September 30, 2004 and the Form 8-K filed on January 6, 2005 for more information.

Hawaiian Electric Company, Inc. (HECO) and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

Three months Year ended December 31, December 31, ------------------- ----------------------- (in thousands) 2004 2003 2004 2003 ---------------------------------------------------------------------- Operating revenues $422,772 $353,257 $1,546,875 $1,393,038 -------- -------- ---------- ---------- Operating expenses Fuel oil 143,257 94,257 483,423 388,560 Purchased power 106,345 94,915 398,836 368,076 Other operation 46,901 40,927 157,198 155,531 Maintenance 27,188 16,838 77,313 64,621 Depreciation 28,846 27,690 114,920 110,560 Taxes, other than income taxes 39,164 33,154 143,834 130,677 Income taxes 6,605 13,310 50,059 50,175 -------- -------- ---------- ---------- 398,306 321,091 1,425,583 1,268,200 -------- -------- ---------- ---------- Operating income 24,466 32,166 121,292 124,838 -------- -------- ---------- ---------- Other income Allowance for equity funds used during construction 738 1,192 5,794 4,267 Other, net 246 1,156 3,132 1,903 -------- -------- ---------- ---------- 984 2,348 8,926 6,170 -------- -------- ---------- ---------- Income before interest and other charges 25,450 34,514 130,218 131,008 -------- -------- ---------- ---------- Interest and other charges Interest on long-term debt 10,827 9,965 42,543 40,698 Amortization of net bond premium and expense 565 511 2,289 2,131 Preferred securities distributions of trust subsidiaries - 1,919 - 7,675 Other interest charges 621 (190) 4,756 1,512 Allowance for borrowed funds used during construction (306) (529) (2,542) (1,914) Preferred stock dividends of subsidiaries 229 229 915 915 -------- -------- ---------- ---------- 11,936 11,905 47,961 51,017 -------- -------- ---------- ---------- Income before preferred stock dividends of HECO 13,514 22,609 82,257 79,991 Preferred stock dividends of HECO 270 270 1,080 1,080 -------- -------- ---------- ---------- Net income for common stock $ 13,244 $ 22,339 $ 81,177 $ 78,911 ======== ======== ========== ========== OTHER ELECTRIC UTILITY INFORMATION Kilowatthour sales (millions) 2,547 2,506 10,063 9,775 Cooling degree days (Oahu) 1,224 1,260 5,107 5,010 Average fuel cost per barrel $ 49.33 $ 34.72 $ 42.67 $ 36.23

    This information should be read in conjunction with the consolidated financial statements and the notes thereto incorporated by reference in HECO's Annual Report on SEC Form 10-K for the year ended December 31, 2003 and 2004 (when filed) and the consolidated financial statements and the notes thereto in HECO's Quarterly Reports on SEC Form 10-Q for the quarters ended March 31, 2004, June 30, 2004 and September 30, 2004.
    In the first quarter of 2004, HECO and its subsidiaries adopted the provisions of Financial Accounting Standards Board Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities," and deconsolidated HECO Capital Trust I and HECO Capital Trust II. HECO and its subsidiaries did not elect to restate previously issued financial statements. Due to the deconsolidation, for the year ended December 31, 2004, HECO's consolidated statement of income reflected equity in earnings of HECO Capital Trust I and HECO Capital Trust II of $0.1 million, interest expense from borrowings related to these trusts of $2.4 million, and no preferred securities distributions of trust subsidiaries. The trust preferred securities of HECO Capital Trusts I and II were redeemed in April 2004. In March 2004, HECO Capital Trust III issued $50 million of trust preferred securities, which were never consolidated.

American Savings Bank, F.S.B. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

Three months Year ended December 31, December 31, ----------------- ------------------- (in thousands) 2004 2003 2004 2003 --------------------------------- -------- -------- --------- -------- Interest and dividend income Interest and fees on loans $47,028 $48,393 $184,773 $198,948 Interest on mortgage-related securities 32,227 27,320 116,471 107,496 Interest and dividends on investment securities 844 1,648 5,876 6,384 ------- ------- -------- -------- 80,099 77,361 307,120 312,828 ------- ------- -------- -------- Interest expense Interest on deposit liabilities 11,850 12,626 47,184 53,808 Interest on Federal Home Loan Bank advances 11,314 11,213 43,301 48,280 Interest on securities sold under repurchase agreements 6,480 5,177 22,302 21,236 ------- ------- -------- -------- 29,644 29,016 112,787 123,324 ------- ------- -------- -------- Net interest income 50,455 48,345 194,333 189,504 Provision for loan losses - 300 (8,400) 3,075 ------- ------- -------- -------- Net interest income after provision for loan losses 50,455 48,045 202,733 186,429 ------- ------- -------- -------- Other income Fees from other financial services 5,838 4,853 23,560 22,817 Fee income on deposit liabilities 4,544 4,714 17,820 16,971 Fee income on other financial products 2,234 2,260 10,184 9,920 Fee income on loans serviced for others, net (118) (353) 252 155 Gain (loss) on sale of securities - - (70) 4,085 Other income 2,151 910 5,418 4,544 ------- ------- -------- -------- 14,649 12,384 57,164 58,492 ------- ------- -------- -------- General and administrative expenses Compensation and employee benefits 17,549 16,094 65,052 65,805 Occupancy 4,266 4,407 16,996 16,579 Equipment 3,392 3,452 13,756 13,967 Data processing 3,245 2,712 11,794 10,668 Consulting and other services 3,850 2,415 12,863 12,529 Other 3,478 8,497 34,462 32,618 ------- ------- -------- -------- 35,780 37,577 154,923 152,166 ------- ------- -------- -------- Income before minority interests and income taxes 29,324 22,852 104,974 92,755 Minority interests 24 10 97 124 Income taxes 11,241 7,505 58,404 30,959 ------- ------- -------- -------- Income before preferred stock dividends 18,059 15,337 46,473 61,672 Preferred stock dividends 1,353 1,353 5,411 5,411 ------- ------- -------- -------- Net income for common stock $16,706 $13,984 $ 41,062 56,261 ======= ======= ======== ========

Interest rate spread (%) 3.02 3.16 3.08 3.08

    This information should be read in conjunction with the consolidated financial statements and the notes thereto incorporated by reference in HEI's Annual Report on SEC Form 10-K for the year ended December 31, 2003 and 2004 (when filed) and the consolidated financial statements and the notes thereto in HEI's Quarterly Reports on SEC Form 10-Q for the quarters ended March 31, 2004, June 30, 2004 and September 30, 2004.
    In 1998, ASB formed a subsidiary, which elected to be taxed as a real estate investment trust (REIT). In 2002, the State of Hawaii Department of Taxation (DOT) challenged ASB's position on the dividends received deduction and issued notices of tax assessment. ASB filed an appeal with the State Board of Review, First Taxation District, which issued its decision in favor of the DOT in 2003. ASB filed a notice of appeal with the Hawaii Tax Appeal Court. In June 2004, the Hawaii Tax Appeal Court ruled in favor of the DOT and against ASB. ASB appealed the decision. As a result of the Court's decision, ASB recorded an after-tax charge to net income in the second quarter of 2004 of $24 million for the potential cumulative bank franchise tax liability ($21 million) and interest ($3 million) since the REIT was formed through March 31, 2004. On December 31, 2004, ASB agreed to settle its dispute with the DOT and close the tax years 1999 through 2004 for purposes of audit, examination, assessment, refund and judicial review. Under the terms of the settlement, ASB agreed to pay the DOT $12 million, in addition to $17 million previously paid under protest, dismiss its appeal and not take the dividends received deduction in future years. As a result, ASB recognized $3 million in additional net income in the fourth quarter of 2004, representing a partial reversal of the $24 million previously charged against net income. The tax impact of the dividends received deductions taken in the fourth quarter of 2003 and for all of 2003 amounted to $0.6 million and $3.8 million, respectively. See pages 57 and 58 of HEI's Form 10-Q for the quarter ended September 30, 2004 and the Form 8-K filed on January 6, 2005 for more information.

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CONTACT: Hawaiian Electric Industries, Inc. Suzy P. Hollinger, 808-543-7385 shollinger@hei.com

KEYWORD: HAWAII INDUSTRY KEYWORD: BANKING UTILITIES EARNINGS SOURCE: Hawaiian Electric Industries, Inc.

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