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Fair value measurements - HECO | 9 Months Ended
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Sep. 30, 2012
Fair value measurements |
9 · Fair value measurements Fair value estimates are based on the price that would be received to sell an asset, or paid upon the transfer of a liability, in an orderly transaction between market participants at the measurement date. The fair value estimates are generally determined based on assumptions that market participants would use in pricing the asset or liability and are based on market data obtained from independent sources. However, in certain cases, the Company uses its own assumptions about market participant assumptions based on the best information available in the circumstances. These valuations are estimates at a specific point in time, based on relevant market information, information about the financial instrument and judgments regarding future expected loss experience, economic conditions, risk characteristics of various financial instruments and other factors. These estimates do not reflect any premium or discount that could result if the Company were to sell its entire holdings of a particular financial instrument at one time. Because no active trading market exists for a portion of the Company’s financial instruments, fair value estimates cannot be determined with precision. Changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the estimates. In addition, the tax ramifications related to the realization of the unrealized gains and losses could have a significant effect on fair value estimates, but have not been considered in making such estimates. The Company groups its financial assets measured at fair value in three levels outlined as follows: Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available. Level 2: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by observable market data by correlation or other means. Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation. The Company used the following methods and assumptions to estimate the fair value of each applicable class of financial instruments for which it is practicable to estimate that value: Cash and cash equivalents and short term borrowings—other than bank. The carrying amount approximated fair value because of the short maturity of these instruments. Investment and mortgage-related securities. To determine the fair value of investment securities held in ASB’s available-for-sale portfolio, independent third-party vendor or broker pricing is used on an unadjusted basis. Under this methodology, valuation is based upon quoted prices for similar assets in active markets; quoted prices for identical or similar assets in markets that are not active; or use of valuation methodologies that use inputs that are derived principally from or can be corroborated by observable market data by correlation or other means. On a quarterly basis, fair value pricing levels obtained from ASB’s third-party vendor are reviewed by comparing its prices to a separate third party pricing service or to non-binding third-party broker quotes. ASB’s third-party vendor pricing is validated in the majority of cases for the determination of fair value. However, in cases where there are less active and orderly markets or less transparent information from ASB’s third-party vendor, fair value may be estimated by use of prices from the separate third party pricing service or from non-binding third-party broker quotes. Loans receivable. The estimated fair value of loans receivable is determined based on characteristics such as loan category, repricing features and remaining maturity, and includes prepayment estimates. For residential real estate loans, fair values were estimated by discounting estimated cash flows using discount rates based on current industry pricing for loans with similar contractual characteristics and remaining maturity. For other types of loans, fair values were estimated by discounting contractual cash flows using discount rates that reflect current industry pricing for loans with similar characteristics and remaining maturity. Where industry pricing is not available, discount rates are based on ASB’s current pricing for loans with similar characteristics and remaining maturity. The fair value of all loans was adjusted to reflect current assessments of loan collectability. Also see “Fair value measurements on a nonrecurring basis” below. Deposit liabilities. The fair value of savings, negotiable orders of withdrawal, demand and money market deposits was the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit was estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. Other bank borrowings and long-term debt. Fair value was estimated by discounting the future cash flows using the current rates available for borrowings with similar credit terms and remaining maturities. Off-balance sheet financial instruments. The fair value of loans serviced for others was calculated by discounting expected net income streams using discount rates that reflect industry pricing for similar assets. Expected net income streams were estimated based on industry assumptions regarding prepayment speeds and income and expenses associated with servicing residential mortgage loans for others. The fair value of commitments to originate loans was estimated based on the change in current primary market prices of new commitments. Since lines of credit can expire without being drawn and customers are under no obligation to utilize the lines, no fair value was assigned to unused lines of credit. The fair value of letters of credit was estimated based on the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements. The estimated fair values of certain of the Company’s financial instruments were as follows:
|  | September 30, 2012 |  | December 31, 2011 |
|  | Carrying or |  |  |  |  |  | Carrying or |  |  |
|  | notional |  | Estimated fair value |  | notional |  | Estimated |
(in thousands) |  | amount |  | Level 1 |  | Level 2 |  | Level 3 |  | Total |  | amount |  | fair value |
Financial assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents, excluding money market funds |  | $ | 168,502 |  | $ | — |  | $ | 168,502 |  | $ | — |  | $ | 168,502 |  | $ | 270,255 |  | $ | 270,255 |
Money market funds |  | 10 |  | — |  | 10 |  | — |  | 10 |  | 10 |  | 10 |
Available-for-sale investment and mortgage-related securities |  | 664,051 |  | — |  | 664,051 |  | — |  | 664,051 |  | 624,331 |  | 624,331 |
Investment in stock of Federal Home Loan Bank of Seattle |  | 96,893 |  | — |  | 96,893 |  | — |  | 96,893 |  | 97,764 |  | 97,764 |
Loans receivable, net |  | 3,722,243 |  | — |  | — |  | 3,948,690 |  | 3,948,690 |  | 3,652,419 |  | 3,886,253 |
Financial liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposit liabilities |  | 4,126,788 |  | — |  | 4,133,347 |  | — |  | 4,133,347 |  | 4,070,032 |  | 4,075,656 | (1)
Short-term borrowings—other than bank |  | 82,219 |  | — |  | 82,219 |  | — |  | 82,219 |  | 68,821 |  | 68,821 |
Other bank borrowings |  | 211,219 |  | — |  | 228,533 |  | — |  | 228,533 |  | 233,229 |  | 250,486 |
Long-term debt, net—other than bank |  | 1,429,869 |  | — |  | 1,491,860 |  | — |  | 1,491,860 |  | 1,340,070 |  | 1,400,241 |
(1) Revised (increased by $83.9 million) to correct an error in the estimated fair value disclosure at December 31, 2011. As of September 30, 2012 and December 31, 2011, loan commitments and unused lines and letters of credit issued by ASB had notional amounts of $1.5 billion and $1.3 billion, respectively, and their estimated fair value on such dates were $2.1 million and $0.3 million, respectively. As of September 30, 2012 and December 31, 2011, loans serviced by ASB for others had notional amounts of $1.2 billion and $993 million, respectively, and the estimated fair value of the servicing rights for such loans was $11.5 million and $9.8 million, respectively. Fair value measurements on a recurring basis. While securities held in ASB’s investment portfolio trade in active markets, they do not trade on listed exchanges nor do the specific holdings trade in quoted markets by dealers or brokers. All holdings are valued using market-based approaches that are based on exit prices that are taken from identical or similar market transactions, even in situations where trading volume may be low when compared with prior periods as has been the case during the recent market disruption. Inputs to these valuation techniques reflect the assumptions that consider credit and nonperformance risk that market participants would use in pricing the asset based on market data obtained from independent sources. Available-for-sale securities were comprised of federal agency obligations and mortgage-backed securities and municipal bonds. Assets measured at fair value on a recurring basis were as follows:
|  | Fair value measurements |
(in thousands) |  | Level 1 |  | Level 2 |  | Level 3 |
September 30, 2012 |  |  |  |  |  |  |
Money market funds (“other” segment) |  | $ | — |  | $ | 10 |  | $ | — |
Available-for-sale securities (bank segment) |  |  |  |  |  |  |
Mortgage-related securities-FNMA, FHLMC and GNMA |  | $ | — |  | $ | 364,620 |  | $ | — |
Federal agency obligations |  | — |  | 216,583 |  | — |
Municipal bonds |  | — |  | 82,848 |  | — |
|  | $ | — |  | $ | 664,051 |  | $ | — |
December 31, 2011 |  |  |  |  |  |  |
Money market funds (“other” segment) |  | $ | — |  | $ | 10 |  | $ | — |
Available-for-sale securities (bank segment) |  |  |  |  |  |  |
Mortgage-related securities-FNMA, FHLMC and GNMA |  | $ | — |  | $ | 344,865 |  | $ | — |
Federal agency obligations |  | — |  | 220,727 |  | — |
Municipal bonds |  | — |  | 58,739 |  | — |
|  | $ | — |  | $ | 624,331 |  | $ | — |
Fair value measurements on a nonrecurring basis. From time to time, the Company may be required to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the writedowns of individual assets. ASB does not record loans at fair value on a recurring basis. However, from time to time, ASB records nonrecurring fair value adjustments based on the current appraised value of the collateral securing the loans or unobservable market assumptions. Unobservable assumptions reflect ASB’s own estimate of the fair value of collateral used in valuing the loan. ASB may also be required to measure goodwill at fair value on a nonrecurring basis. During the first nine months of 2012, it was not required that a measurement of the fair value of goodwill be calculated and goodwill was not measured at fair value. Assets measured at fair value on a nonrecurring basis were as follows:
|  |  |  | Fair value measurements |
(in millions) |  | Balance |  | Level 1 |  | Level 2 |  | Level 3 |
Loans |  |  |  |  |  |  |  |  |
September 30, 2012 |  | $ | 24 |  | $ | — |  | $ | — |  | $ | 24 |
December 31, 2011 |  | 34 |  | — |  | — |  | 34 |
For the first nine months of 2012 and 2011, there were no adjustments to fair value for ASB’s loans held for sale. Residential loans. The fair value of ASB’s residential loans that were written down due to impairment was determined based on third party appraisals for similar residential property sales in an active market, and therefore, is classified as a Level 3 measurement. Home equity lines of credit. The fair value of ASB’s home equity lines of credit that were written down due to impairment was determined based on third party appraisals for similar residential property sales in an active market, and therefore, is classified as a Level 3 measurement. Commercial loans. The fair value of ASB’s commercial loans that were written down due to impairment was determined based on third party appraisals for the specific properties, the value placed on the assets of the business and cash flows generated by the business entity, and therefore, is classified as a Level 3 measurement. For loans classified as Level 3 as of September 30, 2012, the significant unobservable inputs used in the fair value measurement were as follows:
($ in thousands) |  | Fair value at September 30, 2012 |  | Valuation technique |  | Significant unobservable input |  | Significant unobservable input value
Residential loans |  | $ | 20,088 |  | Third party appraisal |  | Property sales |  | 64%
Home equity lines of credit |  | 649 |  | Third party appraisal |  | Property sales |  | 42%
Commercial loan |  | 14 |  | Third party appraisal |  | U.S. government agency guarantee |  | 85%
Commercial loans |  | 738 |  | Third party appraisal |  | Fair value of business assets |  | 45%
Commercial loan |  | 1,998 |  | Present value of cash flows |  | Present value of expected future cash flows based on anticipated debt restructuring Discount rate |  | Paydown of loan — 62% 4.5%
Commercial loan |  | 227 |  | Third party appraisal |  | Insurance proceeds |  | 60%
Significant increases (decreases) in any of those inputs in isolation would result in significantly higher (lower) fair value measurement.
Hawaiian Electric Company, Inc. and Subsidiaries |
Fair value measurements |
7 · Fair value measurements Fair value estimates are based on the price that would be received to sell an asset, or paid upon the transfer of a liability, in an orderly transaction between market participants at the measurement date. The fair value estimates are generally determined based on assumptions that market participants would use in pricing the asset or liability and are based on market data obtained from independent sources. However, in certain cases, the electric utilities use their own assumptions about market participant assumptions based on the best information available in the circumstances. These valuations are estimates at a specific point in time, based on relevant market information, information about the financial instrument and judgments regarding future expected loss experience, economic conditions, risk characteristics of various financial instruments and other factors. These estimates do not reflect any premium or discount that could result if the electric utilities were to sell their entire holdings of a particular financial instrument at one time. Because no active trading market exists for a portion of the electric utilities’ financial instruments, fair value estimates cannot be determined with precision. Changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the estimates. In addition, the tax ramifications related to the realization of the unrealized gains and losses could have a significant effect on fair value estimates, but have not been considered in making such estimates. The Company groups its financial assets measured at fair value in three levels outlined as follows: Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available. Level 2: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by observable market data by correlation or other means. Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation. The electric utilities used the following methods and assumptions to estimate the fair value of each applicable class of financial instruments for which it is practicable to estimate that value: Cash and cash equivalents and short-term borrowings. The carrying amount approximated fair value because of the short maturity of these instruments. Long-term debt. Fair value was estimated by discounting the future cash flows using the current rates available for borrowings with similar credit terms and remaining maturities. The estimated fair values of certain of the electric utilities’ financial instruments (with the level of the fair value hierarchy in which the fair value measurements are categorized noted in parentheses) were as follows:
|  | September 30, 2012 |  | December 31, 2011 |
(in thousands) |  | Carrying amount |  | Estimated fair value |  | Carrying amount |  | Estimated fair value |
Financial assets |  |  |  |  |  |  |  |  |
Cash and cash equivalents (Level 2) |  | $ | 15,722 |  | $ | 15,722 |  | $ | 48,806 |  | $ | 48,806 |
Financial liabilities |  |  |  |  |  |  |  |  |
Short-term borrowings - nonaffiliates (Level 2) |  | 44,719 |  | 44,719 |  | — |  | — |
Long-term debt, net, including amounts due within one year (Level 2) |  | 1,147,869 |  | 1,178,889 |  | 1,058,070 |  | 1,095,133 |
Fair value measurements on a nonrecurring basis. From time to time, the utilities may be required to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower-of-cost-or-market accounting or writedowns of individual assets. As of September 30, 2012, there were no adjustments to fair value for assets measured at fair value on a nonrecurring basis in accordance with GAAP. From time to time, the utilities may be required to measure certain liabilities at fair value on a nonrecurring basis in accordance with GAAP. The fair value of the utilities ARO (Level 3) was determined by discounting the expected future cash flows using market-observable risk-free rates as adjusted by HECO’s credit spread. The expected future cash flows to retire the assets are significant unobservable inputs used to measure fair value. HECO estimates these cash flows based on the cost of past asset retirements and contractor cost estimates. As of September 30, 2012, the undiscounted future cash outflows used were $33 million. Also, see Note 5.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=7491637&loc=d3e13504-108611 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15C, 15D -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 44A, 44B -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15A -Subparagraph a-d -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 3, 10, 14, 15 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=7491637&loc=d3e13433-108611 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 159 -Paragraph 17-22, 27, 28 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=7491637&loc=d3e13537-108611 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15B -Subparagraph a, b -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 157 -Paragraph 32, 33, 34 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=7578670&loc=d3e19207-110258 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 + Details
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