HAWAIIAN ELECTRIC INDUSTRIES INC - Quarter Report: 2012 September (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

 

For the quarterly period ended September 30, 2012

 

OR

 

 

 

State of Hawaii

(State or other jurisdiction of incorporation or organization)

 

Hawaiian Electric Industries, Inc. – 1001 Bishop Street, Suite 2900, Honolulu, Hawaii 96813

Hawaiian Electric Company, Inc. – 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.

 

Hawaiian Electric Industries Inc. Yes x No o

Hawaiian Electric Company, Inc. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Hawaiian Electric Industries Inc. Yes x No o

Hawaiian Electric Company, Inc. Yes x No o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Hawaiian Electric Industries Inc. Yes o No x

Hawaiian Electric Company, Inc. Yes o No x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Hawaiian Electric Industries Inc.

 

 

Hawaiian Electric Company, Inc.

 

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuers’ classes of common stock, as of the latest practicable date.

 

Class of Common Stock		Outstanding October 26, 2012
Hawaiian Electric Industries, Inc. (Without Par Value)		97,500,496 Shares
Hawaiian Electric Company, Inc. ($6-2/3 Par Value)		14,233,723 Shares (not publicly traded)

 

 

Table of Contents

 

Hawaiian Electric Industries, Inc. and Subsidiaries

Hawaiian Electric Company, Inc. and Subsidiaries

Form 10-Q—Quarter ended September 30, 2012

 

INDEX

 

Page No.
ii		Glossary of Terms
iv		Forward-Looking Statements
		PART I.	FINANCIAL INFORMATION
1		Item 1.	Financial Statements
			Hawaiian Electric Industries, Inc. and Subsidiaries
1			Consolidated Statements of Income - three and nine months ended September 30, 2012 and 2011
2			Consolidated Statements of Comprehensive Income - three and nine months ended September 30, 2012 and 2011
3			Consolidated Balance Sheets - September 30, 2012 and December 31, 2011
4			Consolidated Statements of Changes in Shareholders’ Equity - nine months ended September 30, 2012 and 2011
5			Consolidated Statements of Cash Flows - nine months ended September 30, 2012 and 2011
6			Notes to Consolidated Financial Statements
			Hawaiian Electric Company, Inc. and Subsidiaries
26			Consolidated Statements of Income - three and nine months ended September 30, 2012 and 2011
26			Consolidated Statements of Comprehensive Income - three and nine months ended September 30, 2012 and 2011
27			Consolidated Balance Sheets - September 30, 2012 and December 31, 2011
28			Consolidated Statements of Changes in Common Stock Equity - nine months ended September 30, 2012 and 2011
29			Consolidated Statements of Cash Flows - nine months ended September 30, 2012 and 2011
30			Notes to Consolidated Financial Statements
51		Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
51			HEI Consolidated
55			Electric Utilities
64			Bank
72		Item 3.	Quantitative and Qualitative Disclosures About Market Risk
73		Item 4.	Controls and Procedures
		PART II.	OTHER INFORMATION
74		Item 1.	Legal Proceedings
74		Item 1A.	Risk Factors
74		Item 5.	Other Information
76		Item 6.	Exhibits
77		Signatures

 

i

Table of Contents

 

Hawaiian Electric Industries, Inc. and Subsidiaries

Hawaiian Electric Company, Inc. and Subsidiaries

Form 10-Q—Quarter ended September 30, 2012

 

GLOSSARY OF TERMS

 

Terms		Definitions
AFUDC		Allowance for funds used during construction
AOCI		Accumulated other comprehensive income
ARO		Asset retirement obligation
ASB		American Savings Bank, F.S.B., a wholly-owned subsidiary of American Savings Holdings, Inc.
ASHI		American Savings Holdings, Inc., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and the parent company of American Savings Bank, F.S.B.
CIP CT-1		Campbell Industrial Park 110 MW combustion turbine No. 1
Company		Hawaiian Electric Industries, Inc. and its direct and indirect subsidiaries, including, without limitation, Hawaiian Electric Company, Inc. and its subsidiaries (listed under HECO); American Savings Holdings, Inc. and its subsidiary, American Savings Bank, F.S.B.; HEI Properties, Inc.; Hawaiian Electric Industries Capital Trust II and Hawaiian Electric Industries Capital Trust III (inactive financing entities); and The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp.).
Consumer Advocate		Division of Consumer Advocacy, Department of Commerce and Consumer Affairs of the State of Hawaii
DBEDT		State of Hawaii Department of Business, Economic Development and Tourism
D&O		Decision and order
Dodd-Frank Act		Dodd-Frank Wall Street Reform and Consumer Protection Act
DOH		Department of Health of the State of Hawaii
DRIP		HEI Dividend Reinvestment and Stock Purchase Plan
DSM		Demand-side management
ECAC		Energy cost adjustment clauses
EIP		2010 Equity and Incentive Plan
EGU		Electrical generating unit
Energy Agreement		Agreement dated October 20, 2008 and signed by the Governor of the State of Hawaii, the State of Hawaii Department of Business, Economic Development and Tourism, the Division of Consumer Advocacy of the Department of Commerce and Consumer Affairs, and HECO, for itself and on behalf of its electric utility subsidiaries committing to actions to develop renewable energy and reduce dependence on fossil fuels in support of the HCEI
EPA		Environmental Protection Agency — federal
EPS		Earnings per share
EVE		Economic value of equity
Exchange Act		Securities Exchange Act of 1934
FDIC		Federal Deposit Insurance Corporation
federal		U.S. Government
FHLB		Federal Home Loan Bank
FHLMC		Federal Home Loan Mortgage Corporation
FNMA		Federal National Mortgage Association
FRB		Federal Reserve Board
FSS		Forward Starting Swaps

 

ii

Table of Contents

 

GLOSSARY OF TERMS, continued

 

Terms		Definitions
GAAP		U.S. generally accepted accounting principles
GHG		Greenhouse gas
GNMA		Government National Mortgage Association
HCEI		Hawaii Clean Energy Initiative
HECO		Hawaiian Electric Company, Inc., an electric utility subsidiary of Hawaiian Electric Industries, Inc. and parent company of Hawaii Electric Light Company, Inc., Maui Electric Company, Limited, HECO Capital Trust III (unconsolidated subsidiary), Renewable Hawaii, Inc. and Uluwehiokama Biofuels Corp.
HEI		Hawaiian Electric Industries, Inc., direct parent company of Hawaiian Electric Company, Inc., American Savings Holdings, Inc., HEI Properties, Inc., Hawaiian Electric Industries Capital Trust II, Hawaiian Electric Industries Capital Trust III and The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp.)
HEIRSP		Hawaiian Electric Industries Retirement Savings Plan
HELCO		Hawaii Electric Light Company, Inc., an electric utility subsidiary of Hawaiian Electric Company, Inc.
HPOWER		City and County of Honolulu with respect to a power purchase agreement for a refuse-fired plant
IPP		Independent power producer
Kalaeloa		Kalaeloa Partners, L.P.
KW		Kilowatt
KWH		Kilowatthour
LTIP		Long-term incentive plan
MAP-21		Moving Ahead for Progress in the 21st Century Act
MECO		Maui Electric Company, Limited, an electric utility subsidiary of Hawaiian Electric Company, Inc.
MW		Megawatt/s (as applicable)
NII		Net interest income
NQSO		Nonqualified stock option
O&M		Other operation and maintenance
OCC		Office of the Comptroller of the Currency
OPEB		Postretirement benefits other than pensions
PPA		Power purchase agreement
PPAC		Purchased power adjustment clause
PUC		Public Utilities Commission of the State of Hawaii
RAM		Revenue adjustment mechanism
RBA		Revenue balancing account
RFP		Request for proposal
REIP		Renewable Energy Infrastructure Program
RHI		Renewable Hawaii, Inc., a wholly owned subsidiary of Hawaiian Electric Company, Inc.
ROACE		Return on average common equity
RORB		Return on average rate base
RPS		Renewable portfolio standard
SAR		Stock appreciation right
SEC		Securities and Exchange Commission
See		Means the referenced material is incorporated by reference
SOIP		1987 Stock Option and Incentive Plan, as amended
TDR		Troubled debt restructuring
UBC		Uluwehiokama Biofuels Corp., a non-regulated subsidiary of Hawaiian Electric Company, Inc.
VIE		Variable interest entity

 

iii

Table of Contents

 

FORWARD-LOOKING STATEMENTS

 

This report and other presentations made by Hawaiian Electric Industries, Inc. (HEI) and Hawaiian Electric Company, Inc. (HECO) and their subsidiaries contain “forward-looking statements,” which include statements that are predictive in nature, depend upon or refer to future events or conditions, and usually include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “predicts,” “estimates” or similar expressions. In addition, any statements concerning future financial performance, ongoing business strategies or prospects or possible future actions are also forward-looking statements. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties and the accuracy of assumptions concerning HEI and its subsidiaries (collectively, the Company), the performance of the industries in which they do business and economic and market factors, among other things. These forward-looking statements are not guarantees of future performance.

 

Risks, uncertainties and other important factors that could cause actual results to differ materially from those described in forward-looking statements and from historical results include, but are not limited to, the following:

 

·            international, national and local economic conditions, including the state of the Hawaii tourism, defense and construction industries, the strength or weakness of the Hawaii and continental U.S. real estate markets (including the fair value and/or the actual performance of collateral underlying loans held by American Savings Bank, F.S.B. (ASB), which could result in higher loan loss provisions and write-offs), decisions concerning the extent of the presence of the federal government and military in Hawaii, the implications and potential impacts of U.S. and foreign capital and credit market conditions and federal, state and international responses to those conditions, and the potential impacts of global developments (including global economic conditions and uncertainties, unrest, conflict and the overthrow of governmental regimes in North Africa and the Middle East, terrorist acts, the war on terrorism, continuing U.S. presence in Afghanistan and potential conflict or crisis with North Korea or Iran);

 

·            weather and natural disasters (e.g., hurricanes, earthquakes, tsunamis, lightning strikes and the potential effects of global warming, such as more severe storms and rising sea levels), including their impact on Company operations and the economy (e.g., the effect of the March 2011 natural disasters in Japan on its economy and tourism in Hawaii);

 

·            the timing and extent of changes in interest rates and the shape of the yield curve;

 

·            the ability of the Company to access credit markets to obtain commercial paper and other short-term and long-term debt financing (including lines of credit) and to access capital markets to issue HEI common stock under volatile and challenging market conditions, and the cost of such financings, if available;

 

·            the risks inherent in changes in the value of the Company’s pension and other retirement plan assets and ASB’s securities available for sale;

 

·            changes in laws, regulations, market conditions and other factors that result in changes in assumptions used to calculate retirement benefits costs and funding requirements;

 

·            the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) and of the rules and regulations that the Dodd-Frank Act requires to be promulgated;

 

·            increasing competition in the banking industry (e.g., increased price competition for deposits, or an outflow of deposits to alternative investments, which may have an adverse impact on ASB’s cost of funds);

 

·            the implementation of the Energy Agreement with the State of Hawaii and Consumer Advocate (Energy Agreement) setting forth the goals and objectives of a Hawaii Clean Energy Initiative (HCEI), revenue decoupling and the fulfillment by the electric utilities of their commitments under the Energy Agreement (given the Public Utilities Commission of the State of Hawaii (PUC) approvals needed; the PUC’s potential delay in considering (and potential disapproval of actual or proposed) HCEI-related costs; reliance by the Company on outside parties like the state, independent power producers (IPPs) and developers; potential changes in political support for the HCEI; and uncertainties surrounding wind power, the proposed undersea cables, biofuels, environmental assessments and the impacts of implementation of the HCEI on future costs of electricity);

 

·            capacity and supply constraints or difficulties, especially if generating units (utility-owned or IPP-owned) fail or measures such as demand-side management (DSM), distributed generation, combined heat and power or other firm capacity supply-side resources fall short of achieving their forecasted benefits or are otherwise insufficient to reduce or meet peak demand;

 

·            the risk to generation reliability when generation peak reserve margins on Oahu are strained;

 

·            fuel oil price changes, performance by suppliers of their fuel oil delivery obligations and the continued availability to the electric utilities of their energy cost adjustment clauses (ECACs);

 

·            the impact of fuel price volatility on customer satisfaction and political and regulatory support for the utilities;

 

iv

Table of Contents

 

·            the risks associated with increasing reliance on renewable energy, as contemplated under the Energy Agreement, including the availability and cost of non-fossil fuel supplies for renewable energy generation and the operational impacts of adding intermittent sources of renewable energy to the electric grid;

 

·            the ability of IPPs to deliver the firm capacity anticipated in their power purchase agreements (PPAs);

 

·            the ability of the electric utilities to negotiate, periodically, favorable fuel supply and collective bargaining agreements;

 

·            new technological developments that could affect the operations and prospects of HEI and its subsidiaries (including HECO and its subsidiaries and ASB) or their competitors;

 

·            cyber security risks and the potential for cyber incidents, including potential incidents at HEI, ASB and HECO and their subsidiaries (including at ASB branches and at the electric utility plants) and incidents at data processing centers they use, to the extent not prevented by intrusion detection and prevention systems, anti-virus software, firewalls and other general information technology controls;

 

·            federal, state, county and international governmental and regulatory actions, such as changes in laws, rules and regulations applicable to HEI, HECO, ASB and their subsidiaries (including changes in taxation, increases in capital requirements, regulatory changes resulting from the HCEI, environmental laws and regulations, the regulation of greenhouse gas (GHG) emissions, governmental fees and assessments (such as Federal Deposit Insurance Corporation assessments), and potential carbon “cap and trade” legislation that may fundamentally alter costs to produce electricity and accelerate the move to renewable generation);

 

·            decisions by the PUC in rate cases and other proceedings (including the risks of delays in the timing of decisions, adverse changes in final decisions from interim decisions and the disallowance of project costs as a result of adverse regulatory audit reports or otherwise);

 

·            decisions by the PUC and by other agencies and courts on land use, environmental and other permitting issues (such as required corrective actions and restrictions and penalties that may arise, such as with respect to environmental conditions or renewable portfolio standards (RPS));

 

·            potential enforcement actions by the Office of the Comptroller of the Currency, the Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC) and/or other governmental authorities (such as consent orders, required corrective actions, restrictions and penalties that may arise, for example, with respect to compliance deficiencies under existing or new banking and consumer protection laws and regulations or with respect to capital adequacy);

 

·            ability to recover increasing costs and earn a reasonable return on capital investments not covered by revenue adjustment mechanisms;

 

·            the risks associated with the geographic concentration of HEI’s businesses and ASB’s loans, ASB’s concentration in a single product type (i.e., first mortgages) and ASB’s significant credit relationships (i.e., concentrations of large loans and/or credit lines with certain customers);

 

·            changes in accounting principles applicable to HEI, HECO, ASB and their subsidiaries, including the possible adoption of International Financial Reporting Standards or new U.S. accounting standards, the potential discontinuance of regulatory accounting and the effects of potentially required consolidation of variable interest entities (VIEs) or required capital lease accounting for PPAs with IPPs;

 

·            changes by securities rating agencies in their ratings of the securities of HEI and HECO and the results of financing efforts;

 

·            faster than expected loan prepayments that can cause an acceleration of the amortization of premiums on loans and investments and the impairment of mortgage-servicing assets of ASB;

 

·            changes in ASB’s loan portfolio credit profile and asset quality which may increase or decrease the required level of allowance for loan losses and charge-offs;

 

·            changes in ASB’s deposit cost or mix which may have an adverse impact on ASB’s cost of funds;

 

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

 

·            the risks of suffering losses and incurring liabilities that are uninsured (e.g., damages to the utilities’ transmission and distribution system and losses from business interruption) or underinsured (e.g., losses not covered as a result of insurance deductibles or other exclusions or exceeding policy limits); and

 

·            other risks or uncertainties described elsewhere in this report and in other reports (e.g., “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K) previously and subsequently filed by HEI and/or HECO with the Securities and Exchange Commission (SEC).

 

Forward-looking statements speak only as of the date of the report, presentation or filing in which they are made. Except to the extent required by the federal securities laws, HEI, HECO, ASB and their subsidiaries undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

v

Table of Contents

 

PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

Hawaiian Electric Industries, Inc. and Subsidiaries

Consolidated Statements of Income (unaudited)

 

		Three months						Nine months
		ended September 30						ended September 30
(in thousands, except per share amounts)		2012			2011			2012			2011
Revenues
Electric utility		$	801,095		$	820,254		$	2,340,257		$	2,194,327
Bank		66,596			66,100			196,569			197,731
Other		29			1			22			(751		)
Total revenues		867,720			886,355			2,536,848			2,391,307
Expenses
Electric utility		726,276			745,298			2,146,688			2,031,645
Bank		44,974			42,931			130,161			128,988
Other		4,768			3,636			13,075			9,148
Total expenses		776,018			791,865			2,289,924			2,169,781
Operating income (loss)
Electric utility		74,819			74,956			193,569			162,682
Bank		21,622			23,169			66,408			68,743
Other		(4,739		)	(3,635		)	(13,053		)	(9,899		)
Total operating income		91,702			94,490			246,924			221,526
Interest expense–other than on deposit liabilities and other bank borrowings		(20,020		)	(19,949		)	(58,758		)	(64,266		)
Allowance for borrowed funds used during construction		688			658			2,451			1,731
Allowance for equity funds used during construction		1,611			1,570			5,548			4,131
Income before income taxes		73,981			76,769			196,165			163,122
Income taxes		25,804			27,894			69,926			57,700
Net income		48,177			48,875			126,239			105,422
Preferred stock dividends of subsidiaries		471			471			1,417			1,417
Net income for common stock		$	47,706		$	48,404		$	124,822		$	104,005
Basic earnings per common share		$	0.49		$	0.50		$	1.29		$	1.09
Diluted earnings per common share		$	0.49		$	0.50		$	1.29		$	1.09
Dividends per common share		$	0.31		$	0.31		$	0.93		$	0.93
Weighted-average number of common shares outstanding		97,157			95,873			96,674			95,365
Dilutive effect of share-based compensation		361			227			423			306
Adjusted weighted-average shares		97,518			96,100			97,097			95,671

 

The accompanying notes are an integral part of these consolidated financial statements.

 

1

Table of Contents

 

Hawaiian Electric Industries, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (unaudited)

 

		Three months ended September 30						Nine months ended September 30
(in thousands)		2012			2011			2012			2011
Net income for common stock		$	47,706		$	48,404		$	124,822		$	104,005
Other comprehensive income (loss), net of taxes:
Net unrealized gains on securities:
Net unrealized gains on securities arising during the period, net of taxes of $689 and $1,917 for the three months ended September 30, 2012 and 2011 and $1,261 and $4,258 for the nine months ended September 30, 2012 and 2011, respectively		1,043			3,013			1,910			6,448
Less: reclassification adjustment for net realized gains included in net income, net of taxes of nil and $146 for the three months ended September 30, 2012 and 2011 and $53 and $148 for the nine months ended September 30, 2012 and 2011, respectively		—			(221		)	(81		)	(224		)
Derivatives qualified as cash flow hedges:
Net unrealized holding losses arising during the period, net of taxes (benefits) of $5 and $(4) for the three and nine months ended September 30, 2011, respectively		—			(5		)	—			(8		)
Less: reclassification adjustment to net income, net of tax benefits of $37 and $37 for the three months ended September 30, 2012 and 2011 and $112 and $78 for the nine months ended September 30, 2012 and 2011, respectively		59			58			177			122
Retirement benefit plans:
Less: amortization of net loss, prior service gain and transition obligation included in net periodic benefit cost, net of tax benefits of $2,443 and $1,405 for the three months ended September 30, 2012 and 2011 and $7,321 and $3,513 for the nine months ended September 30, 2012 and 2011, respectively		3,826			2,068			11,467			5,556
Less: reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes of $2,129 and $1,074 for the three months ended September 30, 2012 and 2011 and $6,386 and $3,875 for the nine months ended September 30, 2012 and 2011, respectively		(3,342		)	(1,732		)	(10,026		)	(6,084		)
Other comprehensive income, net of taxes		1,586			3,181			3,447			5,810
Comprehensive income attributable to common shareholders		$	49,292		$	51,585		$	128,269		$	109,815

 

The accompanying notes are an integral part of these consolidated financial statements.

 

2

Table of Contents

 

Hawaiian Electric Industries, Inc. and Subsidiaries

Consolidated Balance Sheets (unaudited)

 

(dollars in thousands)		September 30, 2012			December 31, 2011
Assets
Cash and cash equivalents		$	168,512		$	270,265
Accounts receivable and unbilled revenues, net		374,932			344,322
Available-for-sale investment and mortgage-related securities		664,051			624,331
Investment in stock of Federal Home Loan Bank of Seattle		96,893			97,764
Loans receivable held for investment, net		3,705,748			3,642,818
Loans held for sale, at lower of cost or fair value		16,495			9,601
Property, plant and equipment, net of accumulated depreciation of $2,109,478 in 2012 and $2,049,821 in 2011		3,506,489			3,334,501
Regulatory assets		715,994			669,389
Other		573,523			519,296
Goodwill		82,190			82,190
Total assets		$	9,904,827		$	9,594,477
Liabilities and shareholders’ equity
Liabilities
Accounts payable		$	234,304		$	216,176
Interest and dividends payable		27,907			25,041
Deposit liabilities		4,126,788			4,070,032
Short-term borrowings—other than bank		82,219			68,821
Other bank borrowings		211,219			233,229
Long-term debt, net—other than bank		1,429,869			1,340,070
Deferred income taxes		438,886			354,051
Regulatory liabilities		319,330			315,466
Contributions in aid of construction		387,863			356,203
Retirement benefits liability		497,388			530,410
Other		507,626			521,979
Total liabilities		8,263,399			8,031,478
Preferred stock of subsidiaries - not subject to mandatory redemption		34,293			34,293
Commitments and contingencies (Notes 3 and 4)
Shareholders’ equity
Preferred stock, no par value, authorized 10,000,000 shares; issued: none		—			—
Common stock, no par value, authorized 200,000,000 shares; issued and outstanding: 97,425,467 shares in 2012 and 96,038,328 shares in 2011		1,389,607			1,349,446
Retained earnings		233,218			198,397
Accumulated other comprehensive loss, net of tax benefits		(15,690		)	(19,137		)
Total shareholders’ equity		1,607,135			1,528,706
Total liabilities and shareholders’ equity		$	9,904,827		$	9,594,477

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3

Table of Contents

 

Hawaiian Electric Industries, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity (unaudited)

 

		Common stock					Retained			Accumulated other comprehensive
(in thousands, except per share amounts)		Shares		Amount			earnings			loss			Total
Balance, December 31, 2011		96,038		$	1,349,446		$	198,397		$	(19,137	)	$	1,528,706
Net income for common stock		—		—			124,822			—			124,822
Other comprehensive income, net of tax benefits		—		—			—			3,447			3,447
Issuance of common stock, net		1,387		40,161			—			—			40,161
Dividend equivalents paid on equity-classified awards		—		—			(99		)	—			(99		)
Common stock dividends ($0.93 per share)		—		—			(89,902		)	—			(89,902		)
Balance, September 30, 2012		97,425		$	1,389,607		$	233,218		$	(15,690	)	$	1,607,135
Balance, December 31, 2010		94,691		$	1,314,199		$	178,667		$	(12,472	)	$	1,480,394
Net income for common stock		—		—			104,005			—			104,005
Other comprehensive income, net of taxes		—		—			—			5,810			5,810
Issuance of common stock, net		1,284		33,056			—			—			33,056
Common stock dividends ($0.93 per share)		—		—			(88,750		)	—			(88,750		)
Balance, September 30, 2011		95,975		$	1,347,255		$	193,922		$	(6,662	)	$	1,534,515

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4

Table of Contents

 

Hawaiian Electric Industries, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

 

Nine months ended September 30		2012			2011
(in thousands)
Cash flows from operating activities
Net income		$	126,239		$	105,422
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation of property, plant and equipment		112,946			111,516
Other amortization		4,811			14,552
Provision for loan losses		9,504			10,927
Loans receivable originated and purchased, held for sale		(304,289		)	(137,507		)
Proceeds from sale of loans receivable, held for sale		302,844			127,163
Change in deferred income taxes		82,582			60,957
Change in excess tax benefits from share-based payment arrangements		(65		)	(39		)
Allowance for equity funds used during construction		(5,548		)	(4,131		)
Change in cash overdraft		—			(2,688		)
Changes in assets and liabilities
Increase in accounts receivable and unbilled revenues, net		(30,610		)	(75,905		)
Increase in fuel oil stock		(31,372		)	(4,592		)
Decrease in accounts, interest and dividends payable		(5,905		)	(57,746		)
Change in prepaid and accrued income taxes and utility revenue taxes		(5,121		)	40,418
Contributions to defined benefit pension and other postretirement benefit plans		(64,006		)	(56,395		)
Change in other assets and liabilities		(70,406		)	(30,863		)
Net cash provided by operating activities		121,604			101,089
Cash flows from investing activities
Available-for-sale investment and mortgage-related securities purchased		(146,794		)	(202,061		)
Principal repayments on available-for-sale investment and mortgage-related securities		104,310			283,931
Proceeds from sale of available-for-sale investment and mortgage-related securities		3,548			32,799
Net increase in loans held for investment		(75,982		)	(153,745		)
Proceeds from sale of real estate acquired in settlement of loans		9,659			5,298
Capital expenditures		(225,961		)	(148,107		)
Contributions in aid of construction		33,106			15,106
Other		865			(2,923		)
Net cash used in investing activities		(297,249		)	(169,702		)
Cash flows from financing activities
Net increase in deposit liabilities		56,756			87,429
Net increase in short-term borrowings with original maturities of three months or less		13,398			26,272
Net increase (decrease) in retail repurchase agreements		(22,011		)	614
Proceeds from issuance of long-term debt		457,000			125,000
Repayment of long-term debt		(368,500		)	(150,000		)
Change in excess tax benefits from share-based payment arrangements		65			39
Net proceeds from issuance of common stock		16,881			14,861
Common stock dividends		(71,966		)	(77,070		)
Preferred stock dividends of subsidiaries		(1,417		)	(1,417		)
Other		(6,314		)	(4,283		)
Net cash provided by financing activities		73,892			21,445
Net decrease in cash and cash equivalents		(101,753		)	(47,168		)
Cash and cash equivalents, beginning of period		270,265			330,651
Cash and cash equivalents, end of period		$	168,512		$	283,483

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5

Table of Contents

 

Hawaiian Electric Industries, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1 · Basis of presentation

 

The accompanying unaudited consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (GAAP) for interim financial information, the instructions to SEC Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenues and expenses for the period. Actual results could differ significantly from those estimates. The accompanying unaudited consolidated financial statements and the following notes should be read in conjunction with the audited consolidated financial statements and the notes thereto in HEI’s Form 10-K for the year ended December 31, 2011 and the unaudited consolidated financial statements and the notes thereto in HEI’s Quarterly Reports on SEC Form 10-Q for the quarters ended March 31, 2012 and June 30, 2012.

 

In the opinion of HEI’s management, the accompanying unaudited consolidated financial statements contain all material adjustments required by GAAP to fairly state the Company’s financial position as of September 30, 2012 and December 31, 2011, the results of its operations for the three and nine months ended September 30, 2012 and 2011 and cash flows for the nine months ended September 30, 2012 and 2011. 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. The December 31, 2011 balance sheet information has been derived from the HEI 2011 financial statements. When required, certain reclassifications are made to the prior period’s consolidated financial statements to conform to the current presentation.

 

The Company has revised its electric utilities’ previously issued financial statements to correct an error that resulted in the understatement of franchise taxes, net of tax benefits, that should have been recorded in years prior to 2010. The Company determined the cumulative impact for periods prior to 2010 to be a charge to its earnings of $3.2 million. These adjustments were not considered to be material individually or in the aggregate to previously issued financial statements. The table below illustrates the effects of this revision on the Company’s Consolidated Financial Statements for those line items affected (these revisions have no impact on the Company’s Consolidated Statements of Income and Cash Flows for the periods reported):

 

(in thousands)		As previously filed			As revised			Difference
December 31, 2011
Consolidated Balance Sheet
Other assets		$	517,550		$	519,296		$	1,746
Total assets		9,592,731			9,594,477			1,746
Other liabilities		516,990			521,979			4,989
Total liabilities		8,026,489			8,031,478			4,989
Retained earnings		201,640			198,397			(3,243		)
Total shareholders’ equity		1,531,949			1,528,706			(3,243		)
Total liabilities and shareholders’ equity		9,592,731			9,594,477			1,746
Consolidated Statement of Changes in Shareholders’ Equity
Retained earnings		201,640			198,397			(3,243		)
Total shareholders’ equity		1,531,949			1,528,706			(3,243		)
December 31, 2010
Consolidated Statement of Changes in Shareholders’ Equity
Retained earnings		181,910			178,667			(3,243		)
Total shareholders’ equity		1,483,637			1,480,394			(3,243		)

 

6

Table of Contents

 

2 · Segment financial information

 

(in thousands)		Electric utility			Bank			Other			Total
Three months ended September 30, 2012
Revenues from external customers		$	801,089		$	66,596		$	35		$	867,720
Intersegment revenues (eliminations)		6			—			(6		)	—
Revenues		801,095			66,596			29			867,720
Income (loss) before income taxes		61,268			21,627			(8,914		)	73,981
Income taxes (benefit)		22,395			7,419			(4,010		)	25,804
Net income (loss)		38,873			14,208			(4,904		)	48,177
Preferred stock dividends of subsidiaries		498			—			(27		)	471
Net income (loss) for common stock		38,375			14,208			(4,877		)	47,706
Nine months ended September 30, 2012
Revenues from external customers		2,340,202			196,569			77			2,536,848
Intersegment revenues (eliminations)		55			—			(55		)	—
Revenues		2,340,257			196,569			22			2,536,848
Income (loss) before income taxes		154,976			66,964			(25,775		)	196,165
Income taxes (benefit)		58,429			22,690			(11,193		)	69,926
Net income (loss)		96,547			44,274			(14,582		)	126,239
Preferred stock dividends of subsidiaries		1,496			—			(79		)	1,417
Net income (loss) for common stock		95,051			44,274			(14,503		)	124,822
Assets (at September 30, 2012)		4,961,715			4,952,850			(9,738		)	9,904,827
Three months ended September 30, 2011
Revenues from external customers		$	820,218		$	66,100		$	37		$	886,355
Intersegment revenues (eliminations)		36			—			(36		)	—
Revenues		820,254			66,100			1			886,355
Income (loss) before income taxes		62,244			23,166			(8,641		)	76,769
Income taxes (benefit)		23,787			7,709			(3,602		)	27,894
Net income (loss)		38,457			15,457			(5,039		)	48,875
Preferred stock dividends of subsidiaries		498			—			(27		)	471
Net income (loss) for common stock		37,959			15,457			(5,012		)	48,404
Nine months ended September 30, 2011
Revenues from external customers		2,194,219			197,731			(643		)	2,391,307
Intersegment revenues (eliminations)		108			—			(108		)	—
Revenues		2,194,327			197,731			(751		)	2,391,307
Income (loss) before income taxes		122,114			68,699			(27,691		)	163,122
Income taxes (benefit)		46,446			24,196			(12,942		)	57,700
Net income (loss)		75,668			44,503			(14,749		)	105,422
Preferred stock dividends of subsidiaries		1,496			—			(79		)	1,417
Net income (loss) for common stock		74,172			44,503			(14,670		)	104,005
Assets (at December 31, 2011)		4,674,007			4,909,974			10,496			9,594,477

 

Intercompany electricity sales of the electric utilities 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 for common stock.

 

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 for common stock.

 

3 · Electric utility subsidiary

 

For consolidated HECO financial information, including its commitments and contingencies, see HECO’s consolidated financial statements beginning on page 26 through Note 9 on page 41.

 

7