Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2010

 

OR

 

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

 

Exact Name of Registrant as

 

Commission

 

I.R.S. Employer

Specified in Its Charter

 

File Number

 

Identification No.

HAWAIIAN ELECTRIC INDUSTRIES, INC.

 

1-8503

 

99-0208097

and Principal Subsidiary

 

 

 

 

HAWAIIAN ELECTRIC COMPANY, INC.

 

1-4955

 

99-0040500

 

State of Hawaii

(State or other jurisdiction of incorporation or organization)

 

900 Richards Street, Honolulu, Hawaii 96813

(Address of principal executive offices and zip code)

 

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

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

(Registrant’s telephone number, including area code)

 

Not applicable

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

 

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

 

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

 

Indicate by check mark whether Registrant Hawaiian Electric Industries, Inc. 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).  Yes   x  No o

 

Indicate by check mark whether Registrant Hawaiian Electric Company, Inc. 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).  Yes o  No o

 

Indicate by check mark whether Registrant Hawaiian Electric Industries, Inc. is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

 

Indicate by check mark whether Registrant Hawaiian Electric Company, Inc. is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

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

 

Class of Common Stock

 

Outstanding July 30, 2010

 

Hawaiian Electric Industries, Inc. (Without Par Value)

 

93,680,089 Shares

 

Hawaiian Electric Company, Inc. ($6-2/3 Par Value)

 

13,786,959 Shares (not publicly traded)

 

 

Indicate by check mark whether Registrant Hawaiian Electric Industries, Inc. 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. 

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether Registrant Hawaiian Electric Company, Inc. 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. 

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

 

 



Table of Contents

 

Hawaiian Electric Industries, Inc. and Subsidiaries

Hawaiian Electric Company, Inc. and Subsidiaries

Form 10-Q—Quarter ended June 30, 2010

 

INDEX

 

Page No.

 

 

ii

 

Glossary of Terms

iv

 

Forward-Looking Statements

 

 

 

 

 

PART I.

FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Hawaiian Electric Industries, Inc. and Subsidiaries

1

 

 

Consolidated Statements of Income (unaudited) - three and six months ended June 30, 2010 and 2009

2

 

 

Consolidated Balance Sheets (unaudited) - June 30, 2010 and December 31, 2009

3

 

 

Consolidated Statements of Changes in Stockholders’ Equity (unaudited) - six months ended June 30, 2010 and 2009

4

 

 

Consolidated Statements of Cash Flows (unaudited) - six months ended June 30, 2010 and 2009

5

 

 

Notes to Consolidated Financial Statements (unaudited)

 

 

 

 

 

 

 

Hawaiian Electric Company, Inc. and Subsidiaries

21

 

 

Consolidated Statements of Income (unaudited) - three and six months ended June 30, 2010 and 2009

22

 

 

Consolidated Balance Sheets (unaudited) - June 30, 2010 and December 31, 2009

23

 

 

Consolidated Statements of Changes in Common Stock Equity (unaudited) - six months ended June 30, 2010 and 2009

24

 

 

Consolidated Statements of Cash Flows (unaudited) - six months ended June 30, 2010 and 2009

25

 

 

Notes to Consolidated Financial Statements (unaudited)

50

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

50

 

 

HEI Consolidated

57

 

 

Electric Utilities

73

 

 

Bank

83

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

85

 

Item 4.

Controls and Procedures

 

 

 

 

 

 

PART II. OTHER INFORMATION

86

 

Item 1.

Legal Proceedings

86

 

Item 1A.

Risk Factors

86

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

86

 

Item 5.

Other Information

87

 

Item 6.

Exhibits

88

 

Signatures

 

 

i



Table of Contents

 

Hawaiian Electric Industries, Inc. and Subsidiaries

Hawaiian Electric Company, Inc. and Subsidiaries

Form 10-Q—Quarter ended June 30, 2010

 

GLOSSARY OF TERMS

 

Terms

 

Definitions

 

 

 

AFUDC

 

Allowance for funds used during construction

AOCI

 

Accumulated other comprehensive income

ASB

 

American Savings Bank, F.S.B., a wholly-owned subsidiary of American Savings Holdings, Inc. and parent company of American Savings Investment Services Corp. (and its subsidiary, Bishop Insurance Agency of Hawaii, Inc., substantially all of whose assets were sold in 2008).

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.

CEIS

 

Clean Energy Infrastructure Surcharge

CHP

 

Combined heat and power

CIP CT-1

 

Campbell Industrial Park combustion turbine No. 1

Company

 

When used in Hawaiian Electric Industries, Inc. sections, the “Company” refers to 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. and its subsidiaries (listed under ASB); Pacific Energy Conservation Services, Inc.; HEI Properties, Inc.; HEI Investments, Inc. (dissolved 2008); 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.). When used in Hawaiian Electric Company, Inc. sections, the “Company” refers to Hawaiian Electric Company, Inc. and its direct subsidiaries.

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

DBF

 

State of Hawaii Department of Budget and Finance

D&O

 

Decision and order

DG

 

Distributed generation

DOD

 

Department of Defense — federal

Dodd-Frank Act

 

Dodd-Frank Wall Street Reform and Consumer Protection Act

DOE

 

Department of Energy — federal

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

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

Exchange Act

 

Securities Exchange Act of 1934

FASB

 

Financial Accounting Standards Board

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

 

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., Pacific Energy Conservation Services, Inc., HEI Properties, Inc., HEI Investments, Inc. (dissolved 2008), Hawaiian Electric Industries Capital Trust II, Hawaiian Electric Industries Capital Trust III and The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp.).

HEIII

 

HEI Investments, Inc. (dissolved in 2008), a wholly owned subsidiary of Hawaiian Electric Industries, Inc.

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

IRP

 

Integrated resource plan

Kalaeloa

 

Kalaeloa Partners, L.P.

kV

 

Kilovolt

kW

 

Kilowatt

KWH

 

Kilowatthour

MECO

 

Maui Electric Company, Limited, an electric utility subsidiary of Hawaiian Electric Company, Inc.

MW

 

Megawatt/s (as applicable)

MWh

 

Megawatthour

NII

 

Net interest income

NPV

 

Net portfolio value

NQSO

 

Nonqualified stock option

O&M

 

Operation and maintenance

OPEB

 

Postretirement benefits other than pensions

OTS

 

Office of Thrift Supervision, Department of Treasury

PBF

 

Public benefits fund

PPA

 

Power purchase agreement

PRPs

 

Potentially responsible parties

PUC

 

Public Utilities Commission of the State of Hawaii

RAM

 

Revenue adjustment mechanism

RBA

 

Revenue balancing account

REG

 

Renewable Energy Group Marketing and Logistics, LLC

RFP

 

Request for proposal

RHI

 

Renewable Hawaii, Inc., a wholly owned subsidiary of Hawaiian Electric Company, Inc.

ROACE

 

Return on average common equity

ROR

 

Return on average rate base

RPS

 

Renewable portfolio standards

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

SPRBs

 

Special Purpose Revenue Bonds

TOOTS

 

The Old Oahu Tug Service, a wholly owned subsidiary of Hawaiian Electric Industries, Inc.

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 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 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, and the implications and potential impacts of current capital and credit market conditions and federal and state responses to those conditions, such as the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009;

·            weather and natural disasters, such as hurricanes, earthquakes, tsunamis, lightning strikes and the potential effects of global warming (such as more severe storms and rising sea levels);

·            global developments, including terrorist acts, the war on terrorism, continuing U.S. presence in Iraq and Afghanistan, potential conflict or crisis with North Korea or in the Middle East and Iran’s nuclear activities;

·            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 pension and other retirement plan assets and 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 (Dodd-Frank Act) and of the rules and regulations that the Dodd-Frank Act requires to be promulgated over the next several months;

·            increasing competition in the electric utility and banking industries (e.g., increased self-generation of electricity may have an adverse impact on HECO’s revenues and increased price competition for deposits, or an outflow of deposits to alternative investments, may have an adverse impact on 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 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 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 cable, 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 (DG), combined heat and power (CHP) or other firm capacity supply-side resources fall short of achieving their forecasted benefits or are otherwise insufficient to reduce or meet peak demand;

·            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;

 

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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 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 and its subsidiaries) or their competitors;

·            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, regulatory changes resulting from the HCEI, environmental laws and regulations, the regulation of greenhouse gas emissions (GHG), healthcare reform, governmental fees and assessments (such as Federal Deposit Insurance Corporation assessments), 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);

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

·            enforcement actions by the OTS (or its regulatory successors, the Office of the Comptroller of the Currency and the Federal Reserve Board) and 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 regulations or with respect to capital adequacy);

·            increasing operation and maintenance expenses and investment in infrastructure for the electric utilities, resulting in the need for more frequent rate cases;

·            the risks associated with the geographic concentration of HEI’s businesses and ASB’s loans, ASB’s concentration in a single product type (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 adoption of International Financial Reporting Standards (IFRS) or new U.S. accounting standards, the potential discontinuance of regulatory accounting and the effects of potentially required consolidation of variable interest entities 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; 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

 

Six months

 

 

 

ended June 30

 

ended June 30

 

(in thousands, except per share amounts)

 

2010

 

2009

 

2010

 

2009

 

Revenues

 

 

 

 

 

 

 

 

 

Electric utility

 

$

584,095

 

$

450,417

 

$

1,132,206

 

$

912,214

 

Bank

 

71,632

 

75,499

 

142,546

 

157,531

 

Other

 

(63

)

(15

)

(48

)

(47

)

 

 

655,664

 

525,901

 

1,274,704

 

1,069,698

 

Expenses

 

 

 

 

 

 

 

 

 

Electric utility

 

542,660

 

418,254

 

1,048,162

 

848,982

 

Bank

 

45,857

 

69,993

 

95,000

 

134,904

 

Other

 

3,516

 

2,599

 

7,204

 

6,099

 

 

 

592,033

 

490,846

 

1,150,366

 

989,985

 

Operating income (loss)

 

 

 

 

 

 

 

 

 

Electric utility

 

41,435

 

32,163

 

84,044

 

63,232

 

Bank

 

25,775

 

5,506

 

47,546

 

22,627

 

Other

 

(3,579

)

(2,614

)

(7,252

)

(6,146

)

 

 

63,631

 

35,055

 

124,338

 

79,713

 

Interest expense—other than on deposit liabilities and other bank borrowings

 

(20,520

)

(17,910

)

(40,901

)

(35,743

)

Allowance for borrowed funds used during construction

 

790

 

1,727

 

1,569

 

3,349

 

Allowance for equity funds used during construction

 

1,847

 

4,120

 

3,620

 

7,725

 

Income before income taxes

 

45,748

 

22,992

 

88,626

 

55,044

 

Income taxes

 

16,013

 

7,040

 

31,292

 

18,224

 

Net income

 

29,735

 

15,952

 

57,334

 

36,820

 

Preferred stock dividends of subsidiaries

 

473

 

473

 

946

 

946

 

Net income for common stock

 

$

29,262

 

$

15,479

 

$

56,388

 

$

35,874

 

Basic earnings per common share

 

$

0.31

 

$

0.17

 

$

0.61

 

$

0.39

 

Diluted earnings per common share

 

$

0.31

 

$

0.17

 

$

0.61

 

$

0.39

 

Dividends per common share

 

$

0.31

 

$

0.31

 

$

0.62

 

$

0.62

 

Weighted-average number of common shares outstanding

 

93,159

 

91,384

 

92,867

 

90,996

 

Dilutive effect of share-based compensation

 

255

 

110

 

292

 

92

 

Adjusted weighted-average shares

 

93,414

 

91,494

 

93,159

 

91,088

 

 

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

 

1



Table of Contents

 

Hawaiian Electric Industries, Inc. and Subsidiaries

Consolidated Balance Sheets (unaudited)

 

(dollars in thousands)

 

June 30,
2010

 

December 31,
2009

 

Assets

 

 

 

 

 

Cash and cash equivalents

 

$

278,324

 

$

503,922

 

Accounts receivable and unbilled revenues, net

 

266,701

 

241,116

 

Available-for-sale investment and mortgage-related securities

 

623,965

 

432,881

 

Investment in stock of Federal Home Loan Bank of Seattle

 

97,764

 

97,764

 

Loans receivable, net

 

3,573,131

 

3,670,493

 

Property, plant and equipment, net of accumulated depreciation of $1,996,286 and $1,945,482

 

3,106,812

 

3,088,611

 

Regulatory assets

 

424,614

 

426,862

 

Other

 

426,860

 

381,163

 

Goodwill, net

 

82,190

 

82,190

 

 

 

$

8,880,361

 

$

8,925,002

 

Liabilities and stockholders’ equity

 

 

 

 

 

Liabilities

 

 

 

 

 

Accounts payable

 

$

164,538

 

$

159,044

 

Interest and dividends payable

 

30,829

 

27,950

 

Deposit liabilities

 

4,001,534

 

4,058,760

 

Short-term borrowings—other than bank

 

55,012

 

41,989

 

Other bank borrowings

 

256,515

 

297,628

 

Long-term debt, net—other than bank

 

1,364,879

 

1,364,815

 

Deferred income taxes

 

187,809

 

188,875

 

Regulatory liabilities

 

293,299

 

288,214

 

Contributions in aid of construction

 

326,050

 

321,544

 

Other

 

698,970

 

700,242

 

 

 

7,379,435

 

7,449,061

 

 

 

 

 

 

 

Preferred stock of subsidiaries - not subject to mandatory redemption

 

34,293

 

34,293

 

Stockholders’ equity

 

 

 

 

 

Preferred stock, no par value, authorized 10,000,000 shares; issued: none

 

 

 

Common stock, no par value, authorized 200,000,000 shares; issued and outstanding: 93,619,909 shares and 92,520,638 shares

 

1,289,471

 

1,265,157

 

Retained earnings

 

183,015

 

184,213

 

Accumulated other comprehensive loss, net of tax benefits

 

(5,853

)

(7,722

)

 

 

1,466,633

 

1,441,648

 

 

 

$

8,880,361

 

$

8,925,002

 

 

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

 

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Table of Contents

 

Hawaiian Electric Industries, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

 

 

 

Common stock

 

Retained

 

Accumulated
other
comprehensive

 

 

 

(in thousands, except per share amounts)

 

Shares

 

Amount

 

earnings

 

loss

 

Total

 

Balance, December 31, 2009

 

92,521

 

$

1,265,157

 

$

184,213

 

$

(7,722

)

$

1,441,648

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

Net income for common stock

 

 

 

56,388

 

 

56,388

 

Net unrealized gains (losses) on securities:

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gains on securities arising during the period, net of taxes of $1,747

 

 

 

 

2,646

 

2,646

 

Unrealized losses on derivatives qualified as cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding loss arising during the period, net of tax benefits of $662

 

 

 

 

(1,039

)

(1,039

)

Retirement benefit plans:

 

 

 

 

 

 

 

 

 

 

 

Amortization of net loss, prior service gain and transition obligation included in net periodic benefit cost, net of taxes of $1,248

 

 

 

 

1,959

 

1,959

 

Less: reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of tax benefits of $1,080

 

 

 

 

(1,697

)

(1,697

)

Comprehensive income

 

 

 

56,388

 

1,869

 

58,257

 

Issuance of common stock, net

 

1,099

 

24,314

 

 

 

24,314

 

Common stock dividends ($0.62 per share)

 

 

 

(57,586

)

 

(57,586

)

Balance, June 30, 2010

 

93,620

 

$

1,289,471

 

$

183,015

 

$

(5,853

)

$

1,466,633

 

Balance, December 31, 2008

 

90,516

 

$

1,231,629

 

$

210,840

 

$

(53,015

)

$

1,389,454

 

Cumulative effect of adoption of a standard on other-than- temporary impairment recognition, net of taxes of $2,497

 

 

 

3,781

 

(3,781

)

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

Net income for common stock

 

 

 

35,874

 

 

35,874

 

Net unrealized gains (losses) on securities:

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gains on securities arising during the period, net of taxes of $14,237

 

 

 

 

21,561

 

21,561

 

Net unrealized losses related to factors other than credit during the period, net of tax benefits of $5,147

 

 

 

 

(7,794

)

(7,794

)

Less: reclassification adjustment for net realized losses included in net income, net of tax benefits of $2,202

 

 

 

 

3,335

 

3,335

 

Retirement benefit plans:

 

 

 

 

 

 

 

 

 

 

 

Amortization of net loss, prior service gain and transition obligation included in net periodic benefit cost, net of taxes of $3,718

 

 

 

 

5,827

 

5,827

 

Less: reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of tax benefits of $3,333

 

 

 

 

(5,233

)

(5,233

)

Comprehensive income

 

 

 

35,874

 

17,696

 

53,570

 

Issuance of common stock, net

 

1,046

 

15,199

 

 

 

15,199

 

Common stock dividends ($0.62 per share)

 

 

 

(56,477

)

 

(56,477

)

Balance, June 30, 2009

 

91,562

 

$

1,246,828

 

$

194,018

 

$

(39,100

)

$

1,401,746

 

 

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

 

3



Table of Contents

 

Hawaiian Electric Industries, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

 

Six months ended June 30

 

2010

 

2009

 

(in thousands)

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

57,334

 

$

36,820

 

Adjustments to reconcile net income to net cash provided by operating activities

 

 

 

 

 

Depreciation of property, plant and equipment

 

79,606

 

76,999

 

Other amortization

 

2,149

 

2,484

 

Provision for loan losses

 

6,349

 

21,800

 

Loans receivable originated and purchased, held for sale

 

(136,197

)

(291,500

)

Proceeds from sale of loans receivable, held for sale

 

167,583

 

322,692

 

Net gain on sale of investment and mortgage-related securities

 

 

(44

)

Other-than-temporary impairment of available-for-sale mortgage-related securities

 

 

5,581

 

Changes in deferred income taxes

 

(2,381

)

3,973

 

Changes in excess tax benefits from share-based payment arrangements

 

97

 

318

 

Allowance for equity funds used during construction

 

(3,620

)

(7,725

)

Decrease in cash overdraft

 

(302

)

 

Changes in assets and liabilities

 

 

 

 

 

Decrease (increase) in accounts receivable and unbilled revenues, net

 

(25,012

)

88,308

 

Decrease (increase) in fuel oil stock

 

(49,759

)

22,383

 

Increase (decrease) in accounts, interest and dividends payable

 

8,373

 

(20,748

)

Changes in prepaid and accrued income taxes and utility revenue taxes

 

(30,699

)

(56,397

)

Changes in other assets and liabilities

 

11,732

 

(24,633

)

Net cash provided by operating activities

 

85,253

 

180,311

 

Cash flows from investing activities

 

 

 

 

 

Available-for-sale investment and mortgage-related securities purchased

 

(379,896

)

(190,095

)

Principal repayments on available-for-sale investment and mortgage-related securities

 

203,783

 

248,109

 

Proceeds from sale of available-for-sale investment and mortgage-related securities

 

 

44

 

Net decrease in loans held for investment

 

61,017

 

305,381

 

Proceeds from sale of real estate acquired in settlement of loans

 

2,118

 

 

Capital expenditures

 

(83,673

)

(175,092

)

Contributions in aid of construction

 

9,430

 

4,917

 

Other

 

(10

)

86

 

Net cash provided by (used in) investing activities

 

(187,231

)

193,350

 

Cash flows from financing activities

 

 

 

 

 

Net decrease in deposit liabilities

 

(57,226

)

(11,467

)

Net increase in short-term borrowings with original maturities of three months or less

 

13,023

 

55,000

 

Net decrease in retail repurchase agreements

 

(41,112

)

(24,592

)

Proceeds from other bank borrowings

 

 

310,000

 

Repayments of other bank borrowings

 

 

(577,517

)

Proceeds from issuance of long-term debt

 

 

3,168

 

Changes in excess tax benefits from share-based payment arrangements

 

(97

)

(318

)

Net proceeds from issuance of common stock

 

10,789

 

8,786

 

Common stock dividends

 

(46,246

)

(51,127

)

Preferred stock dividends of subsidiaries

 

(946

)

(946

)

Decrease in cash overdraft

 

 

(962

)

Other

 

(1,805

)

(1,190

)

Net cash used in financing activities

 

(123,620

)

(291,165

)

Net increase (decrease) in cash and cash equivalents

 

(225,598

)

82,496

 

Cash and cash equivalents, beginning of period

 

503,922

 

183,435

 

Cash and cash equivalents, end of period

 

$

278,324

 

$

265,931

 

 

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

 

4



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 incorporated by reference in HEI’s Form 10-K for the year ended December 31, 2009 and the unaudited consolidated financial statements and the notes thereto in HEI’s Quarterly Report on SEC Form 10-Q for the quarter ended March 31, 2010.

 

In the opinion of HEI’s management, the accompanying unaudited consolidated financial statements contain all material adjustments required by GAAP to present fairly the Company’s financial position as of June 30, 2010 and December 31, 2009, the results of its operations for the three and six months ended June 30, 2010 and 2009 and cash flows for the six months ended June 30, 2010 and 2009. All such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q or other referenced material. Results of operations for interim periods are not necessarily indicative of results for the full year. When required, certain reclassifications are made to the prior period’s consolidated financial statements to conform to the current presentation.

 

5



Table of Contents

 

2 · Segment financial information

 

(in thousands)

 

Electric Utility

 

Bank

 

Other

 

Total

 

Three months ended June 30, 2010

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

$

584,048

 

$

71,632

 

$

(16

)

$

655,664

 

Intersegment revenues (eliminations)

 

47

 

 

(47

)

 

Revenues

 

584,095

 

71,632

 

(63

)

655,664

 

Profit (loss)*

 

28,354

 

25,747

 

(8,353

)

45,748

 

Income taxes (benefit)

 

10,213

 

9,616

 

(3,816

)

16,013

 

Net income (loss)

 

18,141

 

16,131

 

(4,537

)

29,735

 

Preferred stock dividends of subsidiaries

 

499

 

 

(26

)

473

 

Net income (loss) for common stock

 

17,642

 

16,131

 

(4,511

)

29,262

 

Six months ended June 30, 2010

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

$

1,132,123

 

$

142,546

 

$

35

 

$

1,274,704

 

Intersegment revenues (eliminations)

 

83

 

 

(83

)

 

Revenues

 

1,132,206

 

142,546

 

(48

)

1,274,704

 

Profit (loss)*

 

57,866

 

47,483

 

(16,723

)

88,626

 

Income taxes (benefit)

 

21,174

 

17,616

 

(7,498

)

31,292

 

Net income (loss)

 

36,692

 

29,867

 

(9,225

)

57,334

 

Preferred stock dividends of subsidiaries

 

998

 

 

(52

)

946

 

Net income (loss) for common stock

 

35,694

 

29,867

 

(9,173

)

56,388

 

Assets (at June 30, 2010)

 

3,994,068

 

4,874,809

 

11,484

 

8,880,361

 

Three months ended June 30, 2009

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

$

450,381

 

$

75,499

 

$

21

 

$

525,901

 

Intersegment revenues (eliminations)

 

36

 

 

(36

)

 

Revenues

 

450,417

 

75,499

 

(15

)

525,901

 

Profit (loss)*

 

24,666

 

5,482

 

(7,156

)

22,992

 

Income taxes (benefit)

 

8,672

 

1,461

 

(3,093

)

7,040

 

Net income (loss)

 

15,994

 

4,021

 

(4,063

)

15,952

 

Preferred stock dividends of subsidiaries

 

499

 

 

(26

)

473

 

Net income (loss) for common stock

 

15,495

 

4,021

 

(4,037

)

15,479

 

Six months ended June 30, 2009

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

$

912,142

 

$

157,531

 

$

25

 

$

1,069,698

 

Intersegment revenues (eliminations)

 

72

 

 

(72

)

 

Revenues

 

912,214

 

157,531

 

(47

)

1,069,698

 

Profit (loss)*

 

47,749

 

22,574

 

(15,279

)

55,044

 

Income taxes (benefit)

 

17,124

 

7,671

 

(6,571

)

18,224

 

Net income (loss)

 

30,625

 

14,903

 

(8,708

)

36,820

 

Preferred stock dividends of subsidiaries

 

998

 

 

(52

)

946

 

Net income (loss) for common stock

 

29,627

 

14,903

 

(8,656

)

35,874

 

Assets (at December 31, 2009)

 

3,978,392

 

4,940,985

 

5,625

 

8,925,002

 

 


*      Income (loss) before income taxes.

 

Intercompany electric sales of consolidated HECO to the bank and “other” segments are not eliminated because those segments would need to purchase electricity from another source if it were not provided by consolidated HECO, the profit on such sales is nominal and the elimination of electric sales revenues and expenses could distort segment operating income and net income.

 

Bank fees that ASB charges the electric utility and “other” segments are not eliminated because those segments would pay fees to another financial institution if they were to bank with another institution, the profit on such fees is nominal and the elimination of bank fee income and expenses could distort segment operating income and net income.

 

6



Table of Contents

 

3 · Electric utility subsidiary

 

For HECO’s consolidated financial information, including its commitments and contingencies, see pages 21 through 49.

 

4 · Bank subsidiary

 

Selected financial information

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

Consolidated Statements of Income Data (unaudited)

 

 

 

Three months ended
June 30

 

Six months ended
June 30

 

(in thousands)

 

2010

 

2009

 

2010

 

2009

 

Interest and dividend income

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

49,328

 

$

55,363

 

$

99,073

 

$

113,455

 

Interest and dividends on investment and mortgage-related securities

 

3,646

 

7,143

 

6,963

 

14,819

 

 

 

52,974

 

62,506

 

106,036

 

128,274

 

Interest expense

 

 

 

 

 

 

 

 

 

Interest on deposit liabilities

 

3,852

 

9,902

 

8,275

 

21,467

 

Interest on other borrowings

 

1,418

 

2,241

 

2,844

 

5,505

 

 

 

5,270

 

12,143

 

11,119

 

26,972

 

Net interest income

 

47,704

 

50,363

 

94,917

 

101,302

 

Provision for loan losses

 

990

 

13,500

 

6,349

 

21,800

 

Net interest income after provision for loan losses

 

46,714

 

36,863

 

88,568

 

79,502

 

Noninterest income

 

 

 

 

 

 

 

 

 

Fee income on deposit liabilities

 

7,891

 

7,462

 

15,411

 

14,173

 

Fees from other financial services

 

6,649

 

6,443

 

13,063

 

12,362

 

Fee income on other financial products

 

1,735

 

1,628

 

3,260

 

2,672

 

Net losses on available-for-sale securities

 

 

(5,537

)

 

(5,537

)

Other income

 

2,383

 

2,997

 

4,776

 

5,587

 

 

 

18,658

 

12,993

 

36,510

 

29,257

 

Noninterest expense

 

 

 

 

 

 

 

 

 

Compensation and employee benefits

 

18,907

 

17,991

 

36,309

 

37,351

 

Occupancy

 

4,216

 

5,922

 

8,441

 

11,051

 

Data processing

 

4,564

 

3,481

 

8,902

 

6,668

 

Services

 

1,845

 

3,801

 

3,573

 

7,219

 

Equipment

 

1,640

 

2,540

 

3,349

 

5,330

 

Loss on early extinguishment of debt

 

 

60

 

 

101

 

Other expense

 

8,453

 

10,579

 

17,021

 

18,465

 

 

 

39,625

 

44,374

 

77,595

 

86,185

 

Income before income taxes

 

25,747

 

5,482

 

47,483

 

22,574

 

Income taxes

 

9,616

 

1,461

 

17,616

 

7,671

 

Net income

 

$

16,131

 

$

4,021

 

$

29,867

 

$

14,903

 

 

7



Table of Contents

 

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

Consolidated Balance Sheets Data (unaudited)

 

(in thousands)

 

June 30,
2010

 

December 31,
2009

 

Assets

 

 

 

 

 

Cash and cash equivalents

 

$

265,464

 

$

425,896

 

Federal funds sold

 

794

 

1,479

 

Available-for-sale investment and mortgage-related securities

 

623,965

 

432,881

 

Investment in stock of Federal Home Loan Bank of Seattle

 

97,764

 

97,764

 

Loans receivable, net

 

3,573,131

 

3,670,493

 

Other

 

231,501

 

230,282

 

Goodwill, net

 

82,190

 

82,190

 

 

 

$

4,874,809

 

$

4,940,985

 

Liabilities and stockholder’s equity

 

 

 

 

 

Deposit liabilities—noninterest-bearing

 

$

824,004

 

$

808,474

 

Deposit liabilities—interest-bearing

 

3,177,530

 

3,250,286

 

Other borrowings

 

256,515

 

297,628

 

Other

 

109,458

 

92,129

 

 

 

4,367,507

 

4,448,517

 

Common stock

 

330,218

 

329,439

 

Retained earnings

 

179,522

 

172,655

 

Accumulated other comprehensive loss, net of tax benefits

 

(2,438

)

(9,626

)

 

 

507,302

 

492,468

 

 

 

$

4,874,809

 

$

4,940,985

 

 

Other assets

 

(in thousands)

 

June 30,
2010

 

December 31,
2009

 

Bank-owned life insurance

 

$

115,433

 

$

113,433

 

Premises and equipment, net

 

56,671

 

54,428

 

Prepaid expenses

 

21,766

 

24,353

 

Accrued interest receivable

 

15,544

 

15,247

 

Mortgage-servicing rights

 

4,943

 

4,200

 

Real estate acquired in settlement of loans, net

 

3,764

 

3,959

 

Other

 

13,380

 

14,662

 

 

 

$

231,501

 

$

230,282

 

 

Other liabilities

 

(in thousands)

 

June 30,
2010

 

December 31,
2009

 

Accrued expenses

 

$

30,838

 

$

17,270

 

Federal and state income taxes payable

 

28,596

 

19,141

 

Cashier’s checks

 

25,788

 

26,877

 

Advance payments by borrowers

 

10,533

 

10,989

 

Other

 

13,703

 

17,852

 

 

 

$

109,458

 

$

92,129

 

 

Other borrowings consisted of securities sold under agreements to repurchase and advances from the Federal Home Loan Bank (FHLB) of Seattle of $192 million and $65 million, respectively, as of June 30, 2010 and $233 million and $65 million, respectively, as of December 31, 2009.

 

Bank-owned life insurance is life insurance purchased by ASB on the lives of certain employees, with ASB as the beneficiary. The insurance is used to fund employee benefits through tax-free income from increases in the cash value of the policies and insurance proceeds paid to ASB upon an insured’s death.

 

8



Table of Contents

 

As of June 30, 2010, ASB had commitments to borrowers for undisbursed loan funds, loan commitments and unused lines and letters of credit of $1.2 billion.

 

Investment and mortgage-related securities portfolio.

 

Available-for-sale securitiesThe book value and aggregate fair value by major security type were as follows:

 

 

 

June 30, 2010

 

December 31, 2009

 

 

 

 

 

Gross

 

Gross

 

Estimated

 

 

 

Gross

 

Gross

 

Estimated

 

 

 

Book

 

unrealized

 

unrealized

 

fair

 

Book

 

unrealized

 

unrealized

 

fair

 

(in thousands)

 

value

 

gains

 

losses

 

value

 

value

 

gains

 

losses

 

value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities — federal agency obligations

 

$

307,328

 

$

853

 

$

(3

)

$

308,178

 

$

104,091

 

$

109

 

$

(156

)

$

104,044

 

Mortgage-related securities — FNMA, FHLMC and GNMA

 

291,424

 

11,379

 

(7

)

302,796

 

319,642

 

7,967

 

(88

)

327,521

 

Municipal bonds

 

12,972

 

19

 

 

12,991

 

1,300

 

16

 

 

1,316

 

 

 

$

611,724

 

$

12,251

 

$

(10

)

$

623,965

 

$

425,033

 

$

8,092

 

$

(244

)

$

432,881

 

 

The following tables detail the contractual maturities and yields of available-for-sale securities. All positions with variable maturities (e.g., callable debentures and mortgage backed securities) are disclosed based upon the bond’s contractual maturity. Actual average maturities may be substantially shorter than those detailed below.

 

 

 

 

 

Weighted

 

Maturity<1 year

 

Maturity 1-5 years

 

Maturity 5-10 years

 

Maturity>10 years

 

 

 

Book

 

average

 

Book

 

Yield

 

Book

 

Yield

 

Book

 

Yield

 

Book

 

Yield

 

(dollars in thousands)

 

value

 

yield (%)

 

value

 

(%)

 

value

 

(%)

 

value

 

(%)

 

value

 

(%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities — federal agency obligations

 

$

307,328

 

1.31

 

$

10,000

 

0.30

 

$

258,870

 

1.22

 

$

38,458

 

2.15

 

$

 

 

Mortgage-related securities — FNMA, FHLMC and GNMA

 

291,424

 

3.81

 

 

 

4,177

 

2.29

 

120,318

 

3.79

 

166,929

 

3.87

 

Municipal bonds

 

12,972

 

3.14

 

500

 

1.92

 

800

 

2.50

 

11,116

 

3.24

 

556

 

3.00

 

 

 

$

611,724

 

2.54

 

$

10,500

 

0.38

 

$

263,847

 

1.24

 

$

169,892

 

3.38

 

$

167,485

 

3.87

 

December 31, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities — federal agency obligations

 

$

104,091

 

1.08

 

$

 

 

$

94,091

 

1.01

 

$

10,000

 

1.80

 

$

 

 

Mortgage-related securities — FNMA, FHLMC and GNMA

 

319,642

 

3.85

 

 

 

5,787

 

2.32

 

138,617

 

3.80

 

175,238

 

3.94

 

Municipal bonds

 

1,300

 

2.27

 

500

 

1.92

 

800

 

2.50

 

 

 

 

 

 

 

$

425,033

 

3.17

 

$

500

 

1.92

 

$

100,678

 

1.10

 

$

148,617

 

3.67

 

$

175,238

 

3.94

 

 

The net losses on available for sale securities for the three and six months ended June 30, 2009 of $5.5 million included impairment losses of $5.6 million, which consisted of $18.5 million of total other-than- temporary impairment losses, net of $12.9 million of non-credit losses recognized in other comprehensive income.

 

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Gross unrealized losses and fair value.  The gross unrealized losses and fair values (for securities held in available for sale by duration of time in which positions have been held in a continuous loss position) were as follows:

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

 

 

Gross
unrealized

 

Fair

 

Gross
unrealized

 

Fair

 

Gross
unrealized

 

Fair

 

(in thousands)

 

losses

 

value

 

losses

 

value

 

losses

 

value

 

June 30, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities — federal agency obligations

 

$

(3

)

$

13,864

 

$

 

$

 

$

(3

)

$

13,864

 

Mortgage-related securities — FNMA, FHLMC and GNMA

 

(7

)

2,391

 

 

 

(7

)

2,391

 

Municipal bonds

 

 

 

 

 

 

 

 

 

$

(10

)

$

16,255

 

$

 

$

 

$

(10

)

$

16,255

 

December 31, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities — federal agency obligations

 

$

(156

)

$

54,834

 

$

 

$

 

$

(156

)

$

54,834

 

Mortgage-related securities — FNMA, FHLMC and GNMA

 

(88

)

15,352

 

 

 

(88

)

15,352

 

Municipal bonds

 

 

 

 

 

 

 

 

 

$

(244

)

$

70,186

 

$

 

$

 

$

(244

)

$

70,186

 

 

The unrealized losses on ASB’s investments in obligations issued by federal agencies were caused by interest rate movements. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because ASB does not intend to sell the securities and has determined it is more likely than not that it will not be required to sell the investments before recovery of their amortized costs bases, which may be at maturity, ASB does not consider these investments to be other-than-temporarily impaired at June 30, 2010.

 

The fair values of ASB’s investment securities could decline if interest rates rise or spreads widen.

 

Federal Deposit Insurance Corporation restoration plan.  Under the Federal Deposit Insurance Reform Act of 2005 (the Reform Act), the Federal Deposit Insurance Corporation (FDIC) may set the designated reserve ratio within a range of 1.15% to 1.50%. The Reform Act requires that the FDIC’s Board of Directors adopt a restoration plan when the Deposit Insurance Fund (DIF) reserve ratio falls below 1.15% or is expected to within six months. Financial institution failures have significantly increased the DIF’s loss provisions, resulting in declines in the reserve ratio.

 

In May 2009, the board of directors of the FDIC voted to levy a special assessment on deposit institutions to build the DIF and restore public confidence in the banking system. ASB’s special assessment was $2.3 million and ASB recorded the charge in June 2009.

 

In November 2009, the Board of Directors of the FDIC approved a restoration plan that required banks to prepay, on December 30, 2009, their estimated quarterly, risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012. For the fourth quarter of 2009 and all of 2010, the prepaid assessment rate was assessed according to a risk-based premium schedule adopted earlier in 2009. The prepaid assessment rate for 2011 and 2012 was the current assessment rate plus 3 basis points. The prepaid assessment was recorded as a prepaid asset as of December 30, 2009, and each quarter thereafter ASB will record a charge to earnings for its regular quarterly assessment and offset the prepaid expense until the asset is exhausted. Once the asset is exhausted, ASB will record an accrued expense payable each quarter for the assessment to be paid. If the prepaid assessment is not exhausted by December 30, 2014, any remaining amount will be returned to ASB. ASB’s prepaid assessment was approximately $24 million. For each of the quarters ended June 30, 2010 and 2009, ASB’s assessment rate was 14 basis points of deposits, or $1.5 million.

 

The FDIC may impose additional special assessments in the future if it is deemed necessary to ensure the DIF ratio does not decline to a level that is close to zero or that could otherwise undermine public confidence in federal deposit insurance. Management cannot predict with certainty the timing or amounts of any additional assessments.

 

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Deposit insurance coverage.  In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act permanently raised the current standard maximum deposit insurance amount to $250,000. Previously, the standard maximum deposit insurance amount of $100,000 had been temporarily raised to $250,000 through December 31, 2013. The Dodd Frank Act also redefines the assessment base as average total consolidated assets less average tangible equity (previously the assessment base was based on deposits).

 

5 · Retirement benefits

 

Defined benefit plans.  For the first six months of 2010, the utilities contributed $16.4 million and HEI contributed $0.4 million to their respective retirement benefit plans, compared to $15.7 million and $0.7 million, respectively, in the first six months of 2009. The Company’s current estimate of contributions to its retirement benefit plans in 2010 is $32 million ($31 million to be made by the utilities and $1 million by HEI), compared to contributions of $25 million in 2009 ($24 million made by the utilities and $1 million by HEI). In addition, the Company expects to pay directly $2 million of benefits in 2010, compared to the $1 million paid in 2009.

 

The components of net periodic benefit cost were as follows:

 

 

 

Three months ended June 30

 

Six months ended June 30

 

 

 

Pension benefits

 

Other benefits

 

Pension benefits

 

Other benefits

 

(in thousands)

 

2010

 

2009

 

2010

 

2009

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

7,095

 

$

6,388

 

$

1,168

 

$

1,171

 

$

14,048

 

$

12,729

 

$

2,291

 

$

2,227

 

Interest cost

 

16,093

 

15,514

 

2,652

 

2,838

 

32,133

 

31,052

 

5,336

 

5,685

 

Expected return on plan assets

 

(17,221

)

(14,295

)

(2,766

)

(2,222

)

(34,415

)

(28,571

)

(5,518

)

(4,437

)

Amortization of unrecognized transition obligation

 

 

 

 

784

 

1

 

1

 

 

1,569

 

Amortization of prior service cost (credit)

 

(97

)

(95

)

(52

)

4

 

(194

)

(188

)

(104

)

7

 

Recognized actuarial loss (gain)

 

1,791

 

3,964

 

(2

)

107

 

3,507

 

7,933

 

(3

)

223

 

Net periodic benefit cost

 

7,661

 

11,476

 

1,000

 

2,682

 

15,080

 

22,956

 

2,002

 

5,274

 

Impact of PUC D&Os

 

2,020

 

(4,107

)

1,333

 

(407

)

5,028

 

(8,198

)

2,621

 

(732

)

Net periodic benefit cost (adjusted for impact of PUC D&Os)

 

$

9,681

 

$

7,369

 

$

2,333

 

$

2,275

 

$

20,108

 

$

14,758

 

$

4,623

 

$

4,542

 

 

The Company recorded retirement benefits expense of $19 million and $15 million in the first six months of 2010 and 2009, respectively, and charged the remaining amounts primarily to electric utility plant.

 

Also, see Note 4, “Retirement benefits,” of HECO’s Notes to Consolidated Financial Statements.

 

Defined contribution plan.  On May 7, 2009, the ASB 401(k) Plan was spun-off from the existing Hawaiian Electric Industries Retirement Savings Plan (HEIRSP). The new Plan allows ASB employees the opportunity to defer a portion of their earnings on a pre-tax basis and receive a matching contribution (AmeriMatch) after one year with ASB. AmeriMatch equals 100% of the first 4% of the participant’s eligible pay that is deferred to the plan and is fully vested. In addition, participants are eligible for an annual discretionary profit sharing contribution (AmeriShare) that is based on ASB’s performance and achievement of its financial goals for the year. On May 15, 2009, ASB contributed $2.1 million to fund AmeriShare for the 2008 plan year. This AmeriShare contribution was allocated pro-rata to accounts of eligible participants based on a flat 4% percent of eligible pay. On March 17, 2010, ASB contributed $1.9 million to fund AmeriShare for the 2009 plan year. This contribution equated to 3.6% of eligible pay for eligible participants. For the first six months of 2010 and 2009, ASB’s total expense for its employees participating in the HEIRSP and the new ASB 401(k) Plan combined was $1.9 million and $1.3 million, respectively. For the first six months of 2010 and 2009, ASB’s cash contributions were $2.8 million and $3.0 million, respectively.

 

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Table of Contents

 

6 · Share-based compensation

 

The 2010 Equity and Incentive Plan (EIP) was approved by shareholders in May 2010 and allows HEI to issue an aggregate of 4 million shares of common stock as additional incentive to selected employees in the form of stock options, stock appreciation rights, restricted shares, deferred shares, performance shares and other share-based and cash-based awards. Through June 30, 2010, 77,500 deferred shares were granted under the EIP.

 

Under the 1987 Stock Option and Incentive Plan, as amended (SOIP), grants and awards of 1.2 million shares of common stock (estimated based on assumptions, including LTIP awards at maximum levels and the use of the June 30, 2010 market price of shares as the price on the exercise/payment dates) were outstanding as of June 30, 2010 to selected employees in the form of nonqualified stock options (NQSOs), stock appreciation rights (SARs), restricted stock units, LTIP performance and other shares and dividend equivalents. As of May 11, 2010, no new awards may be granted under the SOIP. After the shares of common stock for the outstanding SOIP grants and awards are issued, the remaining registered shares under the SOIP will be deregistered and delisted.

 

For the NQSOs and SARs, the exercise price of each NQSO or SAR generally equaled the fair market value of HEI’s stock on or near the date of grant. NQSOs, SARs and related dividend equivalents issued in the form of stock awarded generally became exercisable in installments of 25% each year for four years, and expire if not exercised ten years from the date of the grant. NQSOs and SARs compensation expense has been recognized in accordance with the fair value-based measurement method of accounting. The estimated fair value of each NQSO and SAR grant was calculated on the date of grant using a Binomial Option Pricing Model.

 

Restricted stock awards generally become unrestricted four years after the date of grant and are forfeited for terminations of employment during the vesting period, except that pro-rata vesting is provided for terminations by reason of death, disability or termination without cause. Restricted stock awards compensation expense has been recognized in accordance with the fair-value-based measurement method of accounting. Dividends on restricted stock awards are paid quarterly in cash.

 

Deferred shares and restricted stock units generally vest and will be issued as unrestricted stock four years after the date of the grant and are forfeited for terminations of employment during the vesting period, except that pro-rata vesting is provided for terminations due to death, disability and retirement. Deferred shares and restricted stock units expense has been recognized in accordance with the fair-value-based measurement method of accounting. Dividend equivalent rights are accrued quarterly and are paid in cash at the end of the restriction period when the deferred shares and restricted stock units vest.

 

Stock performance awards granted under the 2009-2011 and 2010-2012 Long-Term Incentive Plans (LTIP) entitle the grantee to shares of common stock with dividend equivalent rights once service conditions and performance conditions are satisfied at the end of the three-year performance period. LTIP awards are forfeited for terminations of employment during the performance period, except that pro-rata participation is provided for terminations due to death, disability and retirement based upon completed months of service after a minimum of 12 months of service in the performance period. Compensation expense for the stock performance awards portion of the LTIP has been recognized in accordance with the fair-value-based measurement method of accounting for performance shares.

 

The Company’s share-based compensation expense and related income tax benefit are as follows:

 

 

 

Three months ended
June 30

 

Six months ended
June 30

 

($ in millions)

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation expense (1)

 

0.8

 

 

1.4

 

0.4

 

Income tax benefit

 

0.2

 

 

0.4

 

0.1

 

 


(1)                                  The Company has not capitalized any share-based compensation cost.

 

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Table of Contents

 

Nonqualified stock options.  Information about HEI’s NQSOs is summarized as follows:

 

June 30, 2010

 

Outstanding & Exercisable (Vested)

 

Year of
grant

 

Range of
exercise prices

 

Number
of options

 

Weighted-average
remaining
contractual life

 

Weighted-average
Exercise price

 

 

 

 

 

 

 

 

 

 

 

2001

 

$

17.96

 

64,000

 

0.8

 

$

17.96

 

2002

 

21.68

 

122,000

 

1.6

 

21.68

 

2003

 

20.49

 

123,500