The following discussion updates "Management's Discussion and Analysis of Financial Condition and Results of Operations" incorporated by reference in HEI's and HECO's Form 10-K for the year ended December 31, 2008 and should be read in conjunction with the annual (as of and for the year ended December 31, 2008) and the quarterly (as of and for the three months ended March 31, 2009) consolidated financial statements of HEI and HECO and accompanying notes.

HEI Consolidated

                             RESULTS OF OPERATIONS



                                             Three months ended
                                                 March 31,            %           Primary reason(s) for
(in thousands, except per share amounts)      2009        2008      change         significant change*
Revenues                                   $  543,797   $ 729,617      (25 )   Decrease for the electric
                                                                               utility and the bank
                                                                               segments

Operating income                               44,658      70,746      (37 )   Decrease for the electric
                                                                               utility and the bank
                                                                               segments

Net income                                     20,395      33,967      (40 )   Lower operating income,
                                                                               partly offset by higher
                                                                               AFUDC, lower "interest
                                                                               expense-other than on
                                                                               deposit liabilities and
                                                                               other bank borrowings" and
                                                                               lower income taxes**

Basic earnings per common share            $     0.23   $    0.41      (44 )   Lower net income and higher
                                                                               weighted average shares
                                                                               outstanding

Weighted-average number of common shares       90,604      83,472        9     Issuances of shares under a
outstanding                                                                    common stock offering in
                                                                               December 2008 and the HEI
                                                                               Dividend Reinvestment and
                                                                               Stock Purchase Plan and
                                                                               other Company plans

* Also, see segment discussions which follow.

** The Company's effective tax rates (federal and state) for the first quarters of 2009 and 2008 were 35% and 37%, respectively.

Dividends. The payout ratios for 2008 and the first quarter of 2009 were 116% and 135%, respectively. Excluding the $35.6 million net charge related to ASB's balance sheet restructuring (and disregarding other adjustments to net income that would be necessary to more fully reflect the impact on net income if the restructuring had not occurred), the payout ratio for 2008 would have been 83%. HEI currently expects to maintain the dividend at its present level; however, the HEI Board of Directors evaluates the dividend quarterly and considers many factors in the evaluation, including but not limited to the Company's results of operations, the long-term prospects for the Company, and current and expected future economic conditions.

Economic conditions

Note: The statistical data in this section is from public third-party sources (e.g., Department of Business, Economic Development and Tourism; University of Hawaii Economic Research Organization; Hawaii Department of Labor and Industrial Relations; Honolulu Board of Realtors; Blue Chip Financial Forecasts; Bloomberg and local newspapers).

As a consequence of deteriorating financial conditions within the banking industry, a series of events occurred in the last four months of 2008 that resulted in unprecedented global capital market volatility and decline that continues in 2009.

The Hawaii economy continued to decline in the first quarter of 2009 due to the pressures created by volatile capital markets and the depressed national economy. State economists now expect a much deeper and longer Hawaii recession. Hawaii economic growth as measured by the change in real personal income is expected to be lower by 2.5% in 2009 compared to 2008 and by 0.2% in 2010 compared to 2009.

Weakness is most notable in one of the state's largest industries, tourism. The closure of Aloha and ATA Airlines, departure of two Norwegian Cruise Line cruise ships from Hawaii, record-high oil prices and downturn in the national economy impacted the visitor industry in 2008. The severity of the global downturn and constraints to consumer spending are expected to cause tourism to remain at a low level through 2010, with only a gradual recovery thereafter. Visitor arrivals were down 14% for the first quarter of 2009 compared to the same quarter in 2008. Arrivals in 2009 are expected to be down from 2008 levels by approximately 5% and flat in 2010. Visitor expenditures were down 18% quarter over quarter.

Local tourism authorities continue to increase marketing efforts in Hawaii's base market, the western U.S., to help stimulate travel to the state.

At 7.1%, seasonally-adjusted Hawaii unemployment at the end of March 2009 remains below the national average of 8.5%, but is much higher than the average annual rates of 2.6% for 2007 and 4% for 2008. Declines in tourism and in consumer spending are expected to cause job losses in 2009, with the largest job losses expected in the construction, accommodation and food services sectors. The job base is expected to contract by 2.4% in 2009 and 0.3% in 2010. The Hawaii unemployment rate is expected to be 7.0% in 2009 and 7.6% in 2010.

The Oahu housing market continued to contract in the first quarter of 2009. Home sales for the first quarter were down 35%, and the median sales price for the quarter of $570,000 was down 8.1% compared with the first quarter of 2008. Foreclosures in Hawaii are on the rise, increasing by a record 503% in March 2009 compared to March 2008. However, the State of Hawaii foreclosure ranking fell back to 30th in March 2009, compared to 27th in February 2009 and 30th in January 2009.

The global credit crisis and deepening recession have impacted the Hawaii construction industry. Commercial and resort building are hampered by financing constraints and a bleak national outlook. Residential construction is expected to decline as income and wealth losses undermine housing demand. Government spending initiatives may provide substantial support for the industry in the medium term. Construction activity, as measured by permitting activity (excluding military construction) declined 27% in the first quarter of 2009 compared with the same period in 2008.

On a national level, the Blue Chip economic consensus dated April 1, 2009 predicts real gross domestic product (GDP) to decline by 5.3% and 2.4% for the first and second quarters of 2009 compared to the immediately preceeding quarter, respectively. Recovery is expected to resume in the second half of 2009. Consumer confidence has been adversely affected and credit is tight, which in turn has and will continue to negatively impact consumer spending.

The price of a barrel of crude oil has fallen sharply, with prices dropping from a peak of $145.29 per barrel on July 3, 2008, and closing at $50.97 per barrel on April 29, 2009.

Interest rates remained low during the first quarter of 2009, including relatively low mortgage rates. The low level of interest rates continued to put downward pressure on yields on loans and investments, but also contributed to lower deposit and borrowing costs.

Overall, the Hawaii economy continues to weaken as the U.S. and Japan economies continue to weaken and relief is not expected until late 2010, or possibly late 2009 at the earliest.

Emergency Economic Stabilization Act of 2008 and American Economic Recovery and Reinvestment Act of 2009. The Emergency Economic Stabilization Act of 2008 (the 2008 Act) was signed into law on October 3, 2008. The principal parts of the 2008 Act are: (1) a $700 billion financial markets stabilization plan; and
(2) $150 billion in tax benefits, which are partially offset by $40 billion in revenue raisers. As part of its energy and conservation related incentives, the 2008 Act allows public utility property to qualify for the energy credit for periods after February 13, 2008 and extends the credit for solar energy property, fuel cell property and microturbine property through December 31, 2016. In addition, the 2008 Act allows the credit for combined heat and power (CHP) system property as energy property for periods after October 3, 2008. Further, the 2008 Act extends the renewable production credit through December 31, 2009 for qualified wind and refined coal production facilities and through December 31, 2010 for other sources. The 2008 Act also provides for a 10-year accelerated depreciation period for smart electric meters and smart electric grid equipment for property placed in

service after October 3, 2008. Finally, the 2008 Act extends the per-gallon incentives for biodiesel and alternative fuels through December 31, 2009. The tax provisions of the 2008 Act did not have a material effect on the Company's results of operations for 2008. These tax provisions, however, may influence the Company's decisions to invest in the various properties entitled to credits and favorable depreciation. The Company will continue to analyze the 2008 Act for its impacts on results of operations, financial condition and liquidity and for the opportunities it presents.

The American Economic Recovery and Reinvestment Act of 2009 (the 2009 Act) was signed into law on February 17, 2009 at a total cost of $787 billion. The 2009 Act, which is intended to provide a stimulus to the U.S. economy in the midst of the global financial crisis, is comprised of tax relief, spending on infrastructure, health care and alternative energy and aid to states and local governments. The 2009 Act includes more than $300 billion in tax relief, which is focused primarily on low and middle income taxpayers and small businesses. The energy provisions set in motion President Obama's campaign promises to implement a "green' economic recovery.

The extension through 2009 of bonus depreciation, as originally provided in the 2008 Economic Stimulus Act, has the most direct and immediate impact on the Company. Although not quantified, the additional tax depreciation deduction will increase deferred income taxes and provide positive cash flow. The energy related provisions of the 2009 Act may impact utility operations indirectly. Some of the energy incentives are as follows: (1) a 30% tax credit of up to $1,500 for the purchase of highly efficient residential air conditioners, heat pumps or furnaces, (2) $0.3 billion in rebates for purchases of efficient appliances, (3) $20 billion for "green" jobs to make wind turbines and solar panels and to improve energy efficiency in schools and federal buildings, (4) $6 billion in loan guarantees for renewable energy projects, (5) $5 billion to help low-income homeowners make energy improvements, (6) $11 billion to modernize and expand the U.S. electric power grid, (7) $2 billion for research into batteries for future electric cars and (8) the extension of existing energy incentives and the addition of a few new ones. Finally, the 2009 Act temporarily eliminates the alternative minimum tax preference item for private activity bond interest for bonds (such as special purpose revenue bonds issued by HECO and its subsidiaries) issued in 2009 and 2010. This favorable change may influence the utilities' decision to issue such bonds before the end of 2010.

The Company will continue to analyze the 2009 Act for its impacts on results of operations, financial condition and liquidity and for the opportunities it presents.

Retirement benefits. For the first quarter of 2009, the Company's defined benefit retirement plans' assets generated a loss, including investment management fees, of 6.3%. The market value of the defined benefit retirement plans' assets as of March 31, 2009 was $676 million compared to $726 million at December 31, 2008, a decline of approximately $50 million.

Additional guidance on funding relief for qualified defined benefit pension plans was received in March 2009 including: (1) IRS Notice 2009-22 related to the application of new asset valuation rules included in the "Worker, Retiree, and Employer Recovery Act of 2008" and (2) publication of a "Special Edition March 2009 employee plans news" related to yield curve selection for the target liability calculation. As a result, the Company estimates that the cash funding for the qualified defined benefit pension plans in 2009 and 2010 will be about $16 million and $42 million, respectively, which should fully satisfy the minimum required contribution, including requirements of the utilities pension tracking mechanisms and the Plan's funding policy. Prior to the March 2009 funding relief measures, cash funding to satisfy the minimum required contribution in 2009 and 2010 was estimated to be $21 million and $64 million, respectively.

Other factors could cause changes to the required contribution levels. The Pension Protection Act provides that if a pension plan's funded status falls below certain levels more conservative assumptions must be used to value obligations and restrictions on participant benefit accruals may be placed on the plans.

The credit rating agencies consider many factors when assigning their ratings. The distress in the worldwide financial market has significantly increased the unfunded status of the Company's pension plans, and may be a factor considered by the credit rating agencies in their evaluations. The associated increase in pension plan

funding requirements will negatively impact certain financial metrics utilized by the credit rating agencies in determining the Company's credit ratings and could result in a reduction of the Company's credit ratings from their current levels.

Commitments and contingencies. See Note 7 of HEI's "Notes to Consolidated Financial Statements."

Recent accounting pronouncements and interpretations. See Note 9 of HEI's "Notes to Consolidated Financial Statements."

"Other" segment



                                   Three months ended
                                        March 31,              %          Primary reason(s) for
(in thousands)                      2009          2008       change        significant change
Revenues                         $      (32 )   $   (116 )     NM     Lower unrealized losses on
                                                                      venture capital investments

Operating loss                       (3,532 )     (3,600 )     NM     See explanation for revenues
                                                                      and lower proxy costs
                                                                      (expected to be higher in the
                                                                      second quarter), partly
                                                                      offset by higher consulting
                                                                      and other administrative and
                                                                      general expenses

Net loss                             (4,619 )     (5,194 )     NM     See explanation for operating
                                                                      loss and lower interest
                                                                      expense

NM Not meaningful.

The "other" business segment includes results of operations of HEI and HEI Diversified, Inc. (HEIDI), holding companies; HEI Investments, Inc. (HEIII), a company previously holding investments in leveraged leases; Pacific Energy Conservation Services, Inc., a contract services company primarily providing wind farm operational and maintenance services to an affiliated electric utility; HEI Properties, Inc., a company holding passive, venture capital investments; The Old Oahu Tug Service, Inc., a maritime freight transportation company that ceased operations in 1999; and eliminations of intercompany transactions. Since HEIII sold all of its leveraged lease investments by the end of 2007, HEIII has filed articles of dissolution and is winding up its affairs.

Liquidity and capital resources

Despite the recent unprecedented deterioration in the capital markets and tightening of credit, the Company believes that its 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 contractual obligations and commercial commitments, its forecasted capital expenditures and investments, its expected retirement benefit plan contributions and other cash requirements in the foreseeable future.

The consolidated capital structure of HEI (excluding ASB's deposit liabilities and other borrowings) was as follows as of the dates indicated:

   (in millions)                            March 31, 2009         December 31, 2008
   Short-term borrowings-other than bank   $       -      -  %   $         -         -  %
   Long-term debt, net-other than bank          1,215     46            1,212        46
   Preferred stock of subsidiaries                 34      1               34         1
   Common stock equity                          1,404     53            1,389        53

$ 2,653 100 % $ 2,635 100 %

As of May 1, 2009, the Standard & Poor's (S&P) and Moody's Investors Service's (Moody's) ratings of HEI securities were as follows:

                                               S&P   Moody's
                       Commercial paper        A-2   P-2
                       Senior unsecured debt   BBB   Baa2

The above ratings reflect only the view of the applicable rating agency at the time the ratings are issued, from whom an explanation of the significance of such ratings may be obtained. Such 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.

HEI's overall S&P corporate credit rating is BBB/Stable/A-2. HEI's issuer rating by Moody's is Baa2 and Moody's outlook for HEI is "stable."

The rating agencies use a combination of qualitative measures (e.g., 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 securities. In November 2008, S&P affirmed its corporate credit ratings and "stable" outlook for HEI. S&P's ratings outlook indicates the potential direction of a possible rating change in the coming 6 to 24 months. S&P stated:

The stable outlook reflects our expectation that, for now, HECO appears to have reasonable but not certain prospects for maintaining its existing financial profile, which is weak for the rating. Multiple near-term challenges face the company and include the uncertainties of the cost and feasibility impacts of the CEI [Clean Energy Initiative], the potential for a significant reduction in electric sales in 2009 (due to economic contraction, energy efficiency initiatives, and customer response to high prices), and a recent softening in leading economic indicators. These challenges suggest that a negative outlook or downward revision to the ratings could be possible over the outlook horizon, as further weakening in the financial profile will not support ratings, and near-term business risk will be elevated until the particulars of the CEI are in place and prove to be supportive. Consistent, timely rate relief will continue to be key, and could offset or mitigate the effects of a declining economic environment, but decoupling or other measures are not expected to be available to the company before late 2009 or early 2010. Given these challenges, higher ratings are not foreseen during the outlook horizon and would need to be accompanied by sustained and improved financial performance.

S&P designates business risk profiles as "excellent," "strong," "satisfactory," "weak" or "vulnerable." In November 2008, S&P designated HEI's business profile as 'strong' and noted that it reflects a degree of diversification afforded by ASB's banking business. However, S&P noted that the consolidated profile's strengths are tempered by the reliance of both businesses on Hawaii's economy. S&P further observed that structural shifts in HECO's business contemplated under the Hawaii Clean Energy Initiative is the largest challenge facing HEI's consolidated operations, along with the potential of ASB credit losses as a function of a weakening Hawaii economy.

S&P's financial risk designations are "minimal," "modest," "intermediate," "aggressive" and "highly leveraged." In November 2008, S&P indicated that "[t]he consolidated financial profile is 'aggressive,' reflecting in part the very heavy debt imputation we apply to the three utilities for power purchase agreements (PPA)."

In September 2008, Moody's affirmed its credit ratings and "stable" outlook for HEI. Moody's stated, "[t]he rating could be downgraded should weaker than expected economic growth and regulatory support emerge at HECO which ultimately causes earnings and sustainable cash flows to suffer over an extended period." Consequently, Moody's indicated that a shift in its expectations regarding the company's future sustainable levels of consolidated financial ratios such as Funds From Operations (net cash flow from operations less net changes in working capital items) to Adjusted Debt below 16% (16% as of June 30, 2008 - latest reported by Moody's) or Funds From Operations to Adjusted Interest of less than 3.5x (3.9x as of June 30, 2008 - latest reported by Moody's) could result in a lowering of the Company's rating.

See the electric utilities' and bank's respective "Liquidity and capital resources" sections below for the ratings of HECO and ASB.

Information about the Company's short-term borrowings and HEI's line of credit facility was as follows:

                                                        Three months ended
                                                          March 31, 2009
                                                   Average        End-of-period      December 31,
(in millions)                                      balance           balance             2008
Short-term borrowings
HEI commercial paper                              $       -      $            -      $          -
HEI line of credit draws                                  -                   -                 -
HECO commercial paper                                      1                  -                 -

                                                  $        1     $            -      $          -

Line of credit facility (expiring March 31,
2011) 1                                                          $           100     $         100
Undrawn capacity under HEI's line of credit
facility 2                                                                   100               100

1 In the future, the Company may seek to enter into new lines of credit and may also seek to increase the amount of credit available under such lines as management deems appropriate. This table does not include HECO's separate line of credit facilities.

2 At May 1, 2009, there was no outstanding commercial paper balance and the line of credit facility was undrawn.

HEI utilizes short-term debt, typically commercial paper, to support normal operations, to refinance commercial paper, to retire long-term debt and for other temporary requirements. HEI also periodically makes short-term loans to HECO to meet HECO's cash requirements, including the funding of loans by HECO to HELCO and MECO. As of March 31, 2009, HEI had no short-term borrowings outstanding and had short-term loans to HECO of $29 million. HEI expects to sell commercial paper in the latter half of 2009. Management believes that if HEI's commercial paper ratings were to be downgraded, or if credit markets for commercial paper with HEI's ratings or otherwise were to further tighten, it would be more difficult and expensive to sell commercial paper or it might not be able to sell commercial paper in the future.

In November 2008, HEI filed an omnibus registration statement to register an indeterminate amount of debt, equity and hybrid securities. Under Securities and Exchange Commission (SEC) regulations, this registration statement expires on November 4, 2011. On December 2, 2008, HEI offered and priced under the registration a public offering of 5,000,000 shares of its common stock at $23 per share for gross proceeds of $115 million. HEI used the net proceeds of approximately $110 million, after deduction of underwriting discounts and commissions and estimated HEI expenses, to repay its outstanding short-term indebtedness, to make loans to HECO and for working capital and other general corporate purposes. An over-allotment option granted to the underwriters was not exercised.

For the first three months of 2009, net cash provided by operating activities of consolidated HEI was $115 million. Net cash provided by investing activities for the same period was $157 million, primarily due to net decreases in investment and mortgage-related securities and loans receivable at ASB, partly offset by HECO's consolidated capital expenditures. Net cash used in financing activities during this period was $294 million as a result of several factors, including net decreases in deposit liabilities, retail repurchase agreements, other bank borrowings and cash overdrafts and the payment of common stock dividends, partly offset by proceeds from the issuance of common stock under HEI plans and funds from the drawdown of revenue bond proceeds.

Forecasted HEI consolidated "net cash used in investing activities" (excluding "investing" cash flows from ASB) for 2009 through 2011 consists primarily of the net capital expenditures of HECO and its subsidiaries. In addition to the funds . . .