Edgar Filing: HAWAIIAN ELECTRIC INDUSTRIES INC

HE-9.30.2014-10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2014

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)

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.	Large accelerated filer x	Hawaiian Electric Company, Inc.	Large accelerated filer o
	Accelerated filer o		Accelerated filer o
	Non-accelerated filer o		Non-accelerated filer x
	(Do not check if a smaller reporting company)		(Do not check if a smaller reporting company)
	Smaller reporting company o		Smaller reporting company o

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 31, 2014
Hawaiian Electric Industries, Inc. (Without Par Value)		102,562,464 Shares
Hawaiian Electric Company, Inc. ($6-2/3 Par Value)		15,429,105 Shares (not publicly traded)

Hawaiian Electric Industries, Inc. (HEI) is the sole holder of Hawaiian Electric Company, Inc. (Hawaiian Electric) common stock.

This combined Form 10-Q is separately filed by HEI and Hawaiian Electric. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. No registrant makes any representation as to information relating to the other registrant, except that information relating to Hawaiian Electric is also attributed to HEI.

Hawaiian Electric Industries, Inc. and Subsidiaries

Hawaiian Electric Company, Inc. and Subsidiaries

Form 10-Q—Quarter ended September 30, 2014

TABLE OF CONTENTS



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, 2014 and 2013
2		Consolidated Statements of Comprehensive Income - three and nine months ended September 30, 2014 and 2013
3		Consolidated Balance Sheets - September 30, 2014 and December 31, 2013
4		Consolidated Statements of Changes in Shareholders’ Equity - nine months ended September 30, 2014 and 2013
5		Consolidated Statements of Cash Flows - nine months ended September 30, 2014 and 2013
		Hawaiian Electric Company, Inc. and Subsidiaries
6		Consolidated Statements of Income - three and nine months ended September 30, 2014 and 2013
6		Consolidated Statements of Comprehensive Income - three and nine months ended September 30, 2014 and 2013
7		Consolidated Balance Sheets - September 30, 2014 and December 31, 2013
8		Consolidated Statements of Changes in Common Stock Equity - nine months ended September 30, 2014 and 2013
9		Consolidated Statements of Cash Flows - nine months ended September 30, 2014 and 2013
10		Notes to Consolidated Financial Statements
58	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
58		HEI consolidated
63		Electric Utilities
74		Bank
82	Item 3.	Quantitative and Qualitative Disclosures About Market Risk
83	Item 4.	Controls and Procedures

	PART II.	OTHER INFORMATION
84	Item 1.	Legal Proceedings
84	Item 1A.	Risk Factors
84	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds
84	Item 5.	Other Information
85	Item 6.	Exhibits
86	Signatures

Hawaiian Electric Industries, Inc. and Subsidiaries

Hawaiian Electric Company, Inc. and Subsidiaries

Form 10-Q—Quarter ended September 30, 2014

GLOSSARY OF TERMS



Terms		Definitions
AFUDC		Allowance for funds used during construction
AOCI		Accumulated other comprehensive income/(loss)
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.
ASU		Accounting Standards Update
CIP CT-1		Campbell Industrial Park 110 MW combustion turbine No. 1
CIS		Customer Information System
Company		Hawaiian Electric Industries, Inc. and its direct and indirect subsidiaries, including, without limitation, Hawaiian Electric Company, Inc. and its subsidiaries (listed under Hawaiian Electric); 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, as amended and restated
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 Hawaiian Electric, 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
ERISA		Employee Retirement Income Security Act of 1974, as amended
EVE		Economic value of equity
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
FRB		Federal Reserve Board

GLOSSARY OF TERMS, continued



Terms		Definitions
GAAP		Accounting principles generally accepted in the United States of America
GHG		Greenhouse gas
GNMA		Government National Mortgage Association
HCEI		Hawaii Clean Energy Initiative
Hawaiian Electric		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 financing subsidiary), Renewable Hawaii, Inc. and Uluwehiokama Biofuels Corp.
Hawaii Electric Light		Hawaii Electric Light Company, Inc., an electric utility subsidiary of Hawaiian Electric Company, Inc.
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
HELOC		Home equity line of credit
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 planning
Kalaeloa		Kalaeloa Partners, L.P.
kW		Kilowatt
KWH		Kilowatthour
LTIP		Long-term incentive plan
LGD		Loss given default
Maui Electric		Maui Electric Company, Limited, an electric utility subsidiary of Hawaiian Electric Company, Inc.
MW		Megawatt/s (as applicable)
NII		Net interest income
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
PV		Photovaltaic
RAM		Revenue adjustment mechanism
RBA		Revenue balancing account
RFP		Request for proposals
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
TDR		Troubled debt restructuring
Trust III		HECO Capital Trust III
Utilities		Hawaiian Electric Company, Inc., Hawaii Electric Light Company, Inc. and Maui Electric Company, Limited
VIE		Variable interest entity

iii

FORWARD-LOOKING STATEMENTS

This report and other presentations made by Hawaiian Electric Industries, Inc. (HEI) and Hawaiian Electric Company, Inc. (Hawaiian Electric) 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, ongoing conflicts in North Africa and the Middle East, terrorist acts, potential conflict or crisis with North Korea or Iran, developments in the Ukraine and potential pandemics);


•	the effects of future actions or inaction of the U.S. government or related agencies, including those related to the U.S. debt ceiling and monetary policy;


•	weather and natural disasters (e.g., hurricanes, earthquakes, tsunamis, lightning strikes, lava flows and the potential effects of climate change, such as more severe storms and rising sea levels), including their impact on the Company's and Utilities' operations and the economy;


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


•	the ability of the Company and the Utilities to access the credit and capital markets (e.g., to obtain commercial paper and other short-term and long-term debt financing, including lines of credit, and, in the case of HEI, to issue 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), 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 (and potential disapproval of actual or proposed) HCEI-related costs; reliance by the Utilities on outside parties such as the state, independent power producers (IPPs) and developers; potential changes in political support for the HCEI; and uncertainties surrounding wind power, proposed undersea cables, biofuels, environmental assessments and the impacts of implementation of the HCEI on future costs of electricity);

•

the ability of the Utilities to develop, implement and recover the costs of implementing the Utilities’ action plans and business model changes that are being developed in response to the four orders that the PUC issued in April 2014, in which the PUC: directed the Utilities to develop, among other things, Power Supply Improvement Plans, a Demand Response Portfolio Plan and a Distributed Generation Interconnection Plan; described the PUC’s inclinations on the future of Hawaii’s electric utilities and the vision, business strategies and regulatory policy changes required to align the Utilities’ business model with customer interests and the state’s public policy goals; and emphasized the need to “leap ahead” of other states in creating a 21st century generation system and modern transmission and distribution grids;


•	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;


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


•	the continued availability to the electric utilities of other cost recovery mechanisms, including the purchased power adjustment clauses (PPACs), revenue adjustment mechanisms (RAMs) and pension and postretirement benefits other than pensions (OPEB) tracking mechanisms, and the continued decoupling of revenues from sales to mitigate the effects of declining kilowatthour sales;


•	the impact of fuel price volatility on customer satisfaction and political and regulatory support for the Utilities;


•	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 growing risk that energy production from renewable generating resources may be curtailed and the interconnection of additional resources will be constrained as more generating resources are added to the Utilities' electric systems and as customers reduce their energy usage;


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


•	the ability of the Utilities to negotiate, periodically, favorable agreements for significant resources such as fuel supply contracts and collective bargaining agreements;


•	new technological developments that could affect the operations and prospects of HEI and ASB or their competitors;


•	new technological developments, such as the commercial development of energy storage and microgrids, that could affect the operations of the Utilities;


•	cyber security risks and the potential for cyber incidents, including potential incidents at HEI, ASB and the Utilities (including at ASB branches and 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 existing, new and changes in laws, rules and regulations applicable to HEI, the Utilities and ASB (including changes in taxation, increases in capital requirements, regulatory policy changes, environmental laws and regulations (including resulting compliance costs and risks of fines and penalties and/or liabilities), 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);


•	developments in laws, regulations, and policies governing protections for historic, archaeological, and cultural sites, and plant and animal species and habitats, as well as developments in the implementation and enforcement of such laws, regulations, and policies;


•	discovery of conditions that may be attributable to historical chemical releases, including any necessary investigation and remediation, and any associated enforcement, litigation, or regulatory oversight;


•	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, 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 (OCC), 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);


•	the ability of the Utilities 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, the Utilities and ASB, including the adoption of 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 Hawaiian Electric 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 provision for loan losses, 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, the Utilities and ASB;


•	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 Hawaiian Electric 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, Hawaiian Electric, 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.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Hawaiian Electric Industries, Inc. and Subsidiaries

Consolidated Statements of Income (unaudited)



	Three months ended September 30						Nine months ended September 30
(in thousands, except per share amounts)	2014			2013			2014			2013
Revenues
Electric utility	$	803,565		$	764,054		$	2,262,056		$	2,210,020
Bank	63,536			65,058			187,771			195,841
Other	(5		)	56			(325		)	106
Total revenues	867,096			829,168			2,449,502			2,405,967
Expenses
Electric utility	727,409			694,201			2,045,166			2,030,071
Bank	43,964			42,223			129,528			126,550
Other	4,621			4,706			13,125			12,276
Total expenses	775,994			741,130			2,187,819			2,168,897
Operating income (loss)
Electric utility	76,156			69,853			216,890			179,949
Bank	19,572			22,835			58,243			69,291
Other	(4,626		)	(4,650		)	(13,450		)	(12,170		)
Total operating income	91,102			88,038			261,683			237,070
Interest expense, net—other than on deposit liabilities and other bank borrowings	(19,170		)	(19,043		)	(58,648		)	(56,216		)
Allowance for borrowed funds used during construction	740			498			1,877			1,626
Allowance for equity funds used during construction	1,937			1,255			4,933			4,030
Income before income taxes	74,609			70,748			209,845			186,510
Income taxes	26,323			22,041			73,265			62,590
Net income	48,286			48,707			136,580			123,920
Preferred stock dividends of subsidiaries	471			471			1,417			1,417
Net income for common stock	$	47,815		$	48,236		$	135,163		$	122,503
Basic earnings per common share	$	0.47		$	0.49		$	1.33		$	1.24
Diluted earnings per common share	$	0.46		$	0.48		$	1.32		$	1.23
Dividends per common share	$	0.31		$	0.31		$	0.93		$	0.93
Weighted-average number of common shares outstanding	102,416			99,204			101,768			98,670
Net effect of potentially dilutive shares	610			614			710			620
Adjusted weighted-average shares	103,026			99,818			102,478			99,290

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

Hawaiian Electric Industries, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (unaudited)



	Three months ended September 30						Nine months ended September 30
(in thousands)	2014			2013			2014			2013
Net income for common stock	$	47,815		$	48,236		$	135,163		$	122,503
Other comprehensive income (loss), net of taxes:
Net unrealized gains (losses) on securities:
Net unrealized gains (losses) on securities arising during the period, net of (taxes) tax benefits of $1,094, $1,049, ($2,249) and $7,081 for the respective periods	(1,657		)	(1,589		)	3,406			(10,724		)
Less: reclassification adjustment for net realized gains included in net income, net of taxes of nil, nil, $1,132 and $488 for the respective periods	—			—			(1,715		)	(738		)
Derivatives qualified as cash flow hedges:
Less: reclassification adjustment to net income, net of tax benefits of $37, $37, $112 and $112 for the respective periods	59			59			177			177
Retirement benefit plans:
Less: amortization of transition obligation, prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits of $1,900, $3,697, $5,438 and $11,173 for the respective periods	2,829			5,789			8,515			17,490
Less: reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes of $1,619, $3,284, $4,858 and $9,852 for the respective periods	(2,542		)	(5,156		)	(7,627		)	(15,468		)
Other comprehensive income (loss), net of taxes	(1,311		)	(897		)	2,756			(9,263		)
Comprehensive income attributable to Hawaiian Electric Industries, Inc.	$	46,504		$	47,339		$	137,919		$	113,240

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

Hawaiian Electric Industries, Inc. and Subsidiaries

Consolidated Balance Sheets (unaudited)



(dollars in thousands)	September 30, 2014			December 31, 2013
Assets
Cash and cash equivalents	$	192,555		$	220,036
Accounts receivable and unbilled revenues, net	365,728			346,785
Available-for-sale investment and mortgage-related securities	531,603			529,007
Investment in stock of Federal Home Loan Bank of Seattle	75,063			92,546
Loans receivable held for investment, net	4,291,960			4,110,113
Loans held for sale, at lower of cost or fair value	2,328			5,302
Property, plant and equipment, net of accumulated depreciation of $2,241,677 and $2,192,422 at the respective dates	4,048,106			3,865,514
Regulatory assets	575,712			575,924
Other	505,226			512,627
Goodwill	82,190			82,190
Total assets	$	10,670,471		$	10,340,044
Liabilities and shareholders’ equity
Liabilities
Accounts payable	$	177,495		$	212,331
Interest and dividends payable	26,051			26,716
Deposit liabilities	4,533,797			4,372,477
Short-term borrowings—other than bank	150,576			105,482
Other bank borrowings	263,204			244,514
Long-term debt, net—other than bank	1,517,946			1,492,945
Deferred income taxes	585,432			529,260
Regulatory liabilities	357,090			349,299
Contributions in aid of construction	448,811			432,894
Defined benefit pension and other postretirement benefit plans liability	274,909			288,539
Other	499,459			524,224
Total liabilities	8,834,770			8,578,681
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: 102,562,464 shares and 101,259,800 shares at the respective dates	1,519,256			1,488,126
Retained earnings	296,146			255,694
Accumulated other comprehensive loss, net of tax benefits	(13,994		)	(16,750		)
Total shareholders’ equity	1,801,408			1,727,070
Total liabilities and shareholders’ equity	$	10,670,471		$	10,340,044

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

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			income (loss)			Total
Balance, December 31, 2013	101,260	$	1,488,126	$	255,694		$	(16,750	)	$	1,727,070
Net income for common stock	—	—		135,163			—			135,163
Other comprehensive income, net of taxes	—	—		—			2,756			2,756
Issuance of common stock, net	1,302	31,130		—			—			31,130
Common stock dividends ($0.93 per share)	—	—		(94,711		)	—			(94,711		)
Balance, September 30, 2014	102,562	$	1,519,256	$	296,146		$	(13,994	)	$	1,801,408

Balance, December 31, 2012	97,928	$	1,403,484	$	216,804		$	(26,423	)	$	1,593,865
Net income for common stock	—	—		122,503			—			122,503
Other comprehensive loss, net of tax benefits	—	—		—			(9,263		)	(9,263		)
Issuance of common stock, net	1,614	40,099		—			—			40,099
Common stock dividends ($0.93 per share)	—	—		(91,739		)	—			(91,739		)
Balance, September 30, 2013	99,542	$	1,443,583	$	247,568		$	(35,686	)	$	1,655,465

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

Hawaiian Electric Industries, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)



Nine months ended September 30	2014			2013
(in thousands)
Cash flows from operating activities
Net income	$	136,580		$	123,920
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation of property, plant and equipment	129,574			120,355
Other amortization	5,454			2,352
Provision for loan losses	3,566			953
Loans receivable originated and purchased, held for sale	(102,523		)	(199,772		)
Proceeds from sale of loans receivable, held for sale	106,918			223,221
Gain on sale of credit card portfolio	—			(2,251		)
Increase in deferred income taxes	48,900			60,580
Excess tax benefits from share-based payment arrangements	(271		)	(469		)
Allowance for equity funds used during construction	(4,933		)	(4,030		)
Change in cash overdraft	(1,038		)	—
Changes in assets and liabilities
Decrease (increase) in accounts receivable and unbilled revenues, net	(18,943		)	12,740
Decrease in fuel oil stock	15,784			24,332
Increase in regulatory assets	(17,531		)	(53,314		)
Decrease in accounts, interest and dividends payable	(75,812		)	(21,708		)
Change in prepaid and accrued income taxes and utility revenue taxes	(2,044		)	(19,212		)
Decrease in defined benefit pension and other postretirement benefit plans liability	(2,594		)	(509		)
Change in other assets and liabilities	(47,677		)	(20,462		)
Net cash provided by operating activities	173,410			246,726
Cash flows from investing activities
Available-for-sale investment and mortgage-related securities purchased	(130,578		)	(39,721		)
Principal repayments on available-for-sale investment and mortgage-related securities	52,678			84,487
Proceeds from sale of available-for-sale investment securities	79,564			71,367
Redemption of stock from Federal Home Loan Bank of Seattle	17,482			2,609
Net increase in loans held for investment	(184,766		)	(293,996		)
Proceeds from sale of real estate acquired in settlement of loans	2,930			8,777
Capital expenditures	(236,003		)	(247,392		)
Contributions in aid of construction	21,740			23,633
Proceeds from sale of credit card portfolio	—			26,386
Other	(39		)	426
Net cash used in investing activities	(376,992		)	(363,424		)
Cash flows from financing activities
Net increase in deposit liabilities	161,320			80,926
Net increase in short-term borrowings with original maturities of three months or less	45,094			47,648
Net decrease in retail repurchase agreements	(6,306		)	(6,314		)
Proceeds from other bank borrowings	90,000			120,000
Repayments of other bank borrowings	(65,000		)	(70,000		)
Proceeds from issuance of long-term debt	125,000			50,000
Repayment of long-term debt	(100,000		)	(50,000		)
Excess tax benefits from share-based payment arrangements	271			469
Net proceeds from issuance of common stock	26,910			18,383
Common stock dividends	(94,674		)	(73,584		)
Preferred stock dividends of subsidiaries	(1,417		)	(1,417		)
Other	(5,097		)	(4,033		)
Net cash provided by financing activities	176,101			112,078
Net decrease in cash and cash equivalents	(27,481		)	(4,620		)
Cash and cash equivalents, beginning of period	220,036			219,662
Cash and cash equivalents, end of period	$	192,555		$	215,042

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

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidated Statements of Income (unaudited)



	Three months ended September 30						Nine months ended September 30
(in thousands)	2014			2013			2014			2013
Revenues	$	803,565		$	764,054		$	2,262,056		$	2,210,020
Expenses
Fuel oil	309,432			283,360			865,989			877,738
Purchased power	192,882			194,861			546,121			526,669
Other operation and maintenance	108,313			104,513			295,483			300,723
Depreciation	41,594			38,995			124,790			115,865
Taxes, other than income taxes	75,188			72,472			212,783			209,076
Total expenses	727,409			694,201			2,045,166			2,030,071
Operating income	76,156			69,853			216,890			179,949
Allowance for equity funds used during construction	1,937			1,255			4,933			4,030
Interest expense and other charges, net	(16,414		)	(15,033		)	(48,989		)	(43,960		)
Allowance for borrowed funds used during construction	740			498			1,877			1,626
Income before income taxes	62,419			56,573			174,711			141,645
Income taxes	23,042			18,258			64,686			49,210
Net income	39,377			38,315			110,025			92,435
Preferred stock dividends of subsidiaries	228			228			686			686
Net income attributable to Hawaiian Electric	39,149			38,087			109,339			91,749
Preferred stock dividends of Hawaiian Electric	270			270			810			810
Net income for common stock	$	38,879		$	37,817		$	108,529		$	90,939

HEI owns all of the common stock of Hawaiian Electric. Therefore, per share data with respect to shares of common stock of Hawaiian Electric are not meaningful.

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

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (unaudited)



	Three months ended September 30						Nine months ended September 30
(in thousands)	2014			2013			2014			2013
Net income for common stock	$	38,879		$	37,817		$	108,529		$	90,939
Other comprehensive income, net of taxes:
Retirement benefit plans:
Less: amortization of transition obligation, prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits of $1,626, $3,295, $4,878 and $9,885 for the respective periods	2,552			5,173			7,659			15,520
Less: reclassification adjustment for impact of D&Os of the PUC included in regulatory assets, net of taxes of $1,619, $3,284, $4,858 and $9,852 for the respective periods	(2,542		)	(5,156		)	(7,627		)	(15,468		)
Other comprehensive income, net of taxes	10			17			32			52
Comprehensive income attributable to Hawaiian Electric Company, Inc.	$	38,889		$	37,834		$	108,561		$	90,991

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

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidated Balance Sheets (unaudited)



(dollars in thousands, except par value)	September 30, 2014			December 31, 2013
Assets
Property, plant and equipment
Utility property, plant and equipment
Land	$	52,344		$	51,883
Plant and equipment	5,902,397			5,701,875
Less accumulated depreciation	(2,167,545		)	(2,111,229		)
Construction in progress	179,190			143,233
Utility property, plant and equipment, net	3,966,386			3,785,762
Nonutility property, plant and equipment, less accumulated depreciation of $1,229 and $1,223 at respective dates	6,561			6,567
Total property, plant and equipment, net	3,972,947			3,792,329
Current assets
Cash and cash equivalents	18,387			62,825
Customer accounts receivable, net	189,733			175,448
Accrued unbilled revenues, net	143,153			144,124
Other accounts receivable, net	19,508			14,062
Fuel oil stock, at average cost	118,303			134,087
Materials and supplies, at average cost	60,639			59,044
Prepayments and other	50,270			52,857
Regulatory assets	54,700			69,738
Total current assets	654,693			712,185
Other long-term assets
Regulatory assets	521,012			506,186
Unamortized debt expense	8,619			9,003
Other	67,891			67,426
Total other long-term assets	597,522			582,615
Total assets	$	5,225,162		$	5,087,129
Capitalization and liabilities
Capitalization
Common stock ($6 2/3 par value, authorized 50,000,000 shares; outstanding 15,429,105 shares)	$	102,880		$	102,880
Premium on capital stock	541,447			541,452
Retained earnings	990,784			948,624
Accumulated other comprehensive income, net of income taxes-retirement benefit plans	640			608
Common stock equity	1,635,751			1,593,564
Cumulative preferred stock — not subject to mandatory redemption	34,293			34,293
Long-term debt, net	1,206,546			1,206,545
Total capitalization	2,876,590			2,834,402
Commitments and contingencies (Note 3)
Current liabilities
Current portion of long-term debt	11,400			11,400
Short-term borrowings from non-affiliates	84,987			—
Accounts payable	151,978			189,559
Interest and preferred dividends payable	24,401			21,652
Taxes accrued	236,481			249,445
Regulatory liabilities	528			1,916
Other	62,400			63,881
Total current liabilities	572,175			537,853
Deferred credits and other liabilities
Deferred income taxes	565,499			507,161
Regulatory liabilities	356,562			347,383
Unamortized tax credits	79,268			73,539
Defined benefit pension and other postretirement benefit plans liability	248,338			262,162
Other	77,919			91,735
Total deferred credits and other liabilities	1,327,586			1,281,980
Contributions in aid of construction	448,811			432,894
Total capitalization and liabilities	$	5,225,162		$	5,087,129

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

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidated Statements of Changes in Common Stock Equity (unaudited)



	Common stock			Premium on capital			Retained			Accumulated other comprehensive
(in thousands)	Shares	Amount		stock			earnings			income (loss)			Total
Balance, December 31, 2013	15,429	$	102,880	$	541,452		$	948,624		$	608		$	1,593,564
Net income for common stock	—	—		—			108,529			—			108,529
Other comprehensive income, net of taxes	—	—		—			—			32			32
Common stock dividends	—	—		—			(66,369		)	—			(66,369		)
Common stock issuance expenses	—	—		(5		)	—			—			(5		)
Balance, September 30, 2014	15,429	$	102,880	$	541,447		$	990,784		$	640		$	1,635,751
Balance, December 31, 2012	14,665	$	97,788	$	468,045		$	907,273		$	(970	)	$	1,472,136
Net income for common stock	—	—		—			90,939			—			90,939
Other comprehensive income, net of taxes	—	—		—			—			52			52
Common stock dividends	—	—		—			(61,183		)	—			(61,183		)
Balance, September 30, 2013	14,665	$	97,788	$	468,045		$	937,029		$	(918	)	$	1,501,944

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

Hawaiian Electric Company, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)



Nine months ended September 30	2014			2013
(in thousands)
Cash flows from operating activities
Net income	$	110,025		$	92,435
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation of property, plant and equipment	124,790			115,865
Other amortization	4,662			2,470
Increase in deferred income taxes	67,392			48,014
Change in tax credits, net	5,816			4,510
Allowance for equity funds used during construction	(4,933		)	(4,030		)
Change in cash overdraft	(1,038		)	—
Changes in assets and liabilities
Decrease (increase) in accounts receivable	(19,731		)	42,077
Decrease (increase) in accrued unbilled revenues	971			(5,603		)
Decrease in fuel oil stock	15,784			24,332
Increase in materials and supplies	(1,595		)	(8,349		)
Increase in regulatory assets	(17,531		)	(53,314		)
Decrease in accounts payable	(77,893		)	(22,974		)
Change in prepaid and accrued income taxes and utility revenue taxes	(18,075		)	(15,416		)
Increase (decrease) in defined benefit pension and other postretirement benefit plans liability	(748		)	1,488
Change in other assets and liabilities	(41,629		)	(10,195		)
Net cash provided by operating activities	146,267			211,310
Cash flows from investing activities
Capital expenditures	(229,105		)	(237,869		)
Contributions in aid of construction	21,740			23,633
Other	—			427
Net cash used in investing activities	(207,365		)	(213,809		)
Cash flows from financing activities
Common stock dividends	(66,369		)	(61,183		)
Preferred stock dividends of Hawaiian Electric and subsidiaries	(1,496		)	(1,496		)
Net increase in short-term borrowings from non-affiliates and affiliate with original maturities of three months or less	84,987			73,246
Other	(462		)	(42		)
Net cash provided by financing activities	16,660			10,525
Net increase (decrease) in cash and cash equivalents	(44,438		)	8,026
Cash and cash equivalents, beginning of period	62,825			17,159
Cash and cash equivalents, end of period	$	18,387		$	25,185

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1 · Basis of presentation

The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) for interim financial information, 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 and Hawaiian Electric's Form 10-K for the year ended December 31, 2013.

In the opinion of HEI’s and Hawaiian Electric's management, the accompanying unaudited consolidated financial statements contain all material adjustments required by GAAP to fairly state the Company’s and Hawaiian Electric's financial position as of September 30, 2014 and December 31, 2013, the results of its operations for the three and nine months ended September 30, 2014 and 2013, and its cash flows for the nine months ended September 30, 2014 and 2013. 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.

Reclassifications and revisions. In the fourth quarter of 2013, Hawaiian Electric changed its consolidated statements of income for 2013 and prior comparative periods from a utility presentation to a commercial company presentation, under which all operating revenues and expenses (including non-regulated revenues and expenses) are included in the determination of operating income. Additionally, income tax expense, which was previously included partially in operating expenses and partially in other income (deductions), is now entirely presented directly above net income in income taxes and includes income taxes related to non-regulated revenues and expenses.

In making the change to a commercial company presentation, the Company discovered that interest on the Utilities’ uncollected revenue balancing accounts and the income tax gross-up adjustment for allowance for funds used during construction (AFUDC)-equity were incorrectly included in HEI consolidated revenues and is revising its previously filed quarterly Consolidated Statements of Income for 2013 to move the amounts to “Interest expense, net-other than on deposit liabilities and other bank borrowings” and income taxes, respectively. The Company and the Utilities have also revised their property, plant and equipment as of December 31, 2013 to correct for an error that excluded Hawaiian Electric consolidated non-utility property plant and equipment amounts.

The table below illustrates the effects of the revisions on the previously filed financial statements:



	As previously			As
(in thousands)	filed			revised			Difference
HEI consolidated
Consolidated Statements of Income
Three months ended September 30, 2013
Revenues	$	831,229		$	829,168		$	(2,061	)
Operating income	90,099			88,038			(2,061		)
Interest expense, net—other than on deposit liabilities and other bank borrowings	(20,304		)	(19,043		)	1,261
Income before income taxes	71,548			70,748			(800		)
Income taxes	22,841			22,041			(800		)
Nine months ended September 30, 2013
Revenues	2,412,023			2,405,967			(6,056		)
Operating income	243,126			237,070			(6,056		)
Interest expense, net—other than on deposit liabilities and other bank borrowings	(59,705		)	(56,216		)	3,489
Income before income taxes	189,077			186,510			(2,567		)
Income taxes	65,157			62,590			(2,567		)
Consolidated Balance Sheets
December 31, 2013
Property, plant and equipment, net of accumulated depreciation	3,858,947			3,865,514			6,567
Accumulated depreciation	(2,191,199		)	(2,192,422		)	(1,223		)
Other assets	519,194			512,627			(6,567		)
Hawaiian Electric consolidated
Consolidated Balance Sheets
December 31, 2013
Other assets	73,993			67,426			(6,567		)

The reclassifications and revisions made to prior periods’ financial statements for the three and nine months ended September 30, 2013 and as of December 31, 2013 to conform to the presentation for the three and nine months ended, and as of, September 30, 2014 did not affect previously reported net income and cash flows and were not considered material to previously filed financial statements.

Out-of period income tax benefit. In the third quarter of 2013, the Company recorded a $3.1 million (including $2.7 million related to the Utilities) out-of-period income tax benefit, resulting primarily from the reversal of deferred tax liabilities due to errors in the amount of book over tax basis differences in plant and equipment. Management concluded that this out-of-period adjustment was not material to either the current or any prior period financial statements.

2 · Segment financial information



(in thousands)	Electric utility		Bank		Other			Total
Three months ended September 30, 2014
Revenues from external customers	$	803,559	$	63,536	$	1		$	867,096
Intersegment revenues (eliminations)	6		—		(6		)	—
Revenues	803,565		63,536		(5		)	867,096
Income (loss) before income taxes	62,419		19,572		(7,382		)	74,609
Income taxes (benefit)	23,042		6,312		(3,031		)	26,323
Net income (loss)	39,377		13,260		(4,351		)	48,286
Preferred stock dividends of subsidiaries	498		—		(27		)	471
Net income (loss) for common stock	38,879		13,260		(4,324		)	47,815

Nine months ended September 30, 2014
Revenues from external customers	$	2,262,038	$	187,771	$	(307	)	$	2,449,502
Intersegment revenues (eliminations)	18		—		(18		)	—
Revenues	2,262,056		187,771		(325		)	2,449,502
Income (loss) before income taxes	174,711		58,244		(23,110		)	209,845
Income taxes (benefit)	64,686		18,769		(10,190		)	73,265
Net income (loss)	110,025		39,475		(12,920		)	136,580
Preferred stock dividends of subsidiaries	1,496		—		(79		)	1,417
Net income (loss) for common stock	108,529		39,475		(12,841		)	135,163
Assets (at September 30, 2014)	5,225,162		5,442,336		2,973			10,670,471

Three months ended September 30, 2013
Revenues from external customers	$	764,048	$	65,058	$	62		$	829,168
Intersegment revenues (eliminations)	6		—		(6		)	—
Revenues	764,054		65,058		56			829,168
Income (loss) before income taxes	56,573		22,808		(8,633		)	70,748
Income taxes (benefit)	18,258		7,532		(3,749		)	22,041
Net income (loss)	38,315		15,276		(4,884		)	48,707
Preferred stock dividends of subsidiaries	498		—		(27		)	471
Net income (loss) for common stock	37,817		15,276		(4,857		)	48,236

Nine months ended September 30, 2013
Revenues from external customers	$	2,210,002	$	195,841	$	124		$	2,405,967
Intersegment revenues (eliminations)	18		—		(18		)	—
Revenues	2,210,020		195,841		106			2,405,967
Income (loss) before income taxes	141,645		69,265		(24,400		)	186,510
Income taxes (benefit)	49,210		23,915		(10,535		)	62,590
Net income (loss)	92,435		45,350		(13,865		)	123,920
Preferred stock dividends of subsidiaries	1,496		—		(79		)	1,417
Net income (loss) for common stock	90,939		45,350		(13,786		)	122,503
Assets (at December 31, 2013)	5,087,129		5,243,824		9,091			10,340,044

Intercompany electricity sales of the 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 the Utilities, 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 Utilities 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 segment

Revenue taxes. The Utilities’ revenues include amounts for the recovery of various Hawaii state revenue taxes. Revenue taxes are generally recorded as an expense in the period the related revenues are recognized. However, the Utilities’ revenue tax payments to the taxing authorities in the period are based on the prior year’s billed revenues (in the case of public service company taxes and PUC fees) or on the current year’s cash collections from electric sales (in the case of franchise taxes). The Utilities included in the third quarters of 2014 and 2013 and the nine months ended September 30, 2014 and 2013 approximately $74 million, $69 million, $203 million and $198 million, respectively, of revenue taxes in "revenues" and in "taxes, other than income taxes" expense.

Recent tax developments. In September 2013, the Internal Revenue Service (IRS) issued final regulations addressing the acquisition, production and improvement of tangible property, which were effective January 1, 2014. Management does not expect the impact of these new regulations will be material to the Utilities' financial statements since specific guidance on network (i.e., transmission and distribution) assets and generation property had already been received. The IRS also recently issued guidance addressing the disposition of property and providing an election for retroactive disposition of certain property. The Company will be reviewing the impact of this guidance, but does not expect it to have a material effect on the financial statements.

The Utilities adopted the safe harbor guidelines with respect to network assets in 2011 and in June 2013, the IRS released a revenue procedure relating to deductions for repairs of generation property, which provides some guidance (that is elective) for taxpayers that own steam or electric generation property. This guidance defines the relevant components of generation property to be used in determining whether such component expenditures should be deducted as repairs or capitalized and depreciated by taxpayers. The revenue procedure also provides an extrapolation methodology that could be used by taxpayers in determining deductions for prior years’ repairs without going back to the specific documentation of those years. The guidance does not provide specific methods for determining the repairs amount. Management intends to adopt this guidance through an election in its 2014 tax return, which is expected to result in slightly improved cash flows.

In the second quarter of 2014, the Utilities received IRS approval for a change in the method of accounting for revenues recorded to the Utilities’ revenue balancing accounts (RBAs) (from an accrual basis to a billed basis) for income tax purposes, effective January 1, 2014. HEI has included the effects of this change in its estimated income tax payments for 2014. This change will result in improved cash flows by deferring the payment of income taxes on the RBA revenues recognized until the revenues are billed but will reduce the interest to be accrued on the RBA balance as proposed by the Consumer Advocate.

Unconsolidated variable interest entities.

HECO Capital Trust III. HECO Capital Trust III (Trust III) was created and exists for the exclusive purposes of (i) issuing in March 2004 2,000,000 6.50% Cumulative Quarterly Income Preferred Securities, Series 2004 (2004 Trust Preferred Securities) ($50 million aggregate liquidation preference) to the public and trust common securities ($1.5 million aggregate liquidation preference) to Hawaiian Electric, (ii) investing the proceeds of these trust securities in 2004 Debentures issued by Hawaiian Electric in the principal amount of $31.5 million and issued by Hawaii Electric Light and Maui Electric each in the principal amount of $10 million, (iii) making distributions on these trust securities and (iv) engaging in only those other activities necessary or incidental thereto. The 2004 Trust Preferred Securities are mandatorily redeemable at the maturity of the underlying debt on March 18, 2034, which maturity may be extended to no later than March 18, 2053; and are currently redeemable at the issuer’s option without premium. The 2004 Debentures, together with the obligations of the Utilities under an expense agreement and Hawaiian Electric’s obligations under its trust guarantee and its guarantee of the obligations of Hawaii Electric Light and Maui Electric under their respective debentures, are the sole assets of Trust III. Taken together, Hawaiian Electric’s obligations under the Hawaiian Electric debentures, the Hawaiian Electric indenture, the subsidiary guarantees, the trust agreement, the expense agreement and trust guarantee provide, in the aggregate, a full, irrevocable and unconditional guarantee of payments of amounts due on the Trust Preferred Securities. Trust III has at all times been an unconsolidated subsidiary of Hawaiian Electric. Since Hawaiian Electric, as the holder of 100% of the trust common securities, does not absorb the majority of the variability of Trust III, Hawaiian Electric is not the primary beneficiary and does not consolidate Trust III in accordance with accounting rules on the consolidation of VIEs. Trust III’s balance sheets as of September 30, 2014 and December 31, 2013 each consisted of $51.5 million of 2004 Debentures; $50.0 million of 2004 Trust Preferred Securities; and $1.5 million of trust common securities. Trust III’s income statements for the nine months ended September 30, 2014 and 2013 each consisted of $2.5 million of interest income received from the 2004 Debentures; $2.4 million of distributions to holders of the Trust Preferred Securities; and $0.1 million of common dividends on the trust common securities to Hawaiian Electric. As long as the 2004 Trust Preferred Securities are outstanding, Hawaiian Electric is not entitled to receive any funds from Trust III other than pro-rata distributions, subject to certain subordination provisions, on the trust common securities. In the event of a default by Hawaiian Electric in the performance of its obligations under the 2004 Debentures or under its Guarantees, or in the event any of the Utilities elect to defer payment of interest on any of their respective 2004 Debentures,

then Hawaiian Electric will be subject to a number of restrictions, including a prohibition on the payment of dividends on its common stock.

Power purchase agreements. As of September 30, 2014, the Utilities had six purchase power agreements (PPAs) for firm capacity and several other PPAs with variable generation independent power producers (IPPs) and Schedule Q providers (i.e., customers with cogeneration and/or small power production facilities with a capacity of 100 kilowatts (kWs) or less who buy power from or sell power to the Utilities), none of which are currently required to be consolidated as VIEs. The PPAs with AES Hawaii, Inc. (AES Hawaii), Kalaeloa Partners, L.P. (Kalaeloa), Hamakua Energy Partners, L.P. (HEP) and Hpower comprise approximately 90% of IPP contractual firm capacity available to the Utilities. Purchases from all IPPs were as follows:



	Three months ended September 30				Nine months ended September 30
(in millions)	2014		2013		2014		2013
AES Hawaii	$	38	$	38	$	107	$	98
Kalaeloa	73		80		214		223
HEP	16		15		36		36
Hpower	18		17		50		44
Other IPPs	48		45