Earnings per share and shareholders’ equity

Earnings per share. Under the two-class method of computing earnings per share (EPS), EPS was comprised as follows for both participating securities and unrestricted common stock:



	Three months ended September 30					Nine months ended September 30
	2013			2012		2013				2012
	Basic		Diluted	Basic and diluted		Basic		Diluted		Basic and diluted
Distributed earnings	$	0.31	0.31	$	0.31	$	0.93	$	0.93	$	0.93
Undistributed earnings	0.18		0.17	0.18		0.31		0.30		0.36
	$	0.49	0.48	$	0.49	$	1.24	$	1.23	$	1.29

As of September 30, 2013, the antidilutive effects of SARs of 164,000 shares of HEI common stock for which the exercise prices were greater than the closing market price of HEI’s common stock were not included in the computation of dilutive EPS. As of September 30, 2012, there were no shares that were antidilutive.

Shareholders’ equity.

Equity forward transaction. On March 19, 2013, HEI entered into an equity forward transaction in connection with a public offering on that date of 6.1 million shares of HEI common stock at $26.75 per share. On March 19, 2013, HEI common stock closed at $27.01 per share. On March 20, 2013, the underwriters exercised their over-allotment option in full and HEI entered into an equity forward transaction in connection with the resulting additional 0.9 million shares of HEI common stock.

The use of an equity forward transaction substantially eliminates future equity market price risk by fixing a common equity offering sales price under the then existing market conditions, while mitigating immediate share dilution resulting from the offering by postponing the actual issuance of common stock until funds are needed in accordance with the Company’s capital investment plans. Pursuant to the terms of these transactions, a forward counterparty borrowed 7 million shares of HEI’s common stock from third parties and sold them to a group of underwriters for $26.75 per share, less an underwriting discount equal to $1.00312 per share. Under the terms of the equity forward transactions, to the extent that the transactions are physically settled, HEI would be required to issue and deliver shares of HEI common stock to the forward counterparty at the then applicable forward sale price. The forward sale price was initially determined to be $25.74688 per share at the time the equity forward transactions were entered into, and the amount of cash to be received by HEI upon physical settlement of the equity forward is subject to certain adjustments in accordance with the terms of the equity forward transactions. The equity forward transactions must be settled fully by March 25, 2015. Except in specified circumstances or events that would require physical settlement, HEI is able to elect to settle the equity forward transactions by means of physical, cash or net share settlement, in whole or in part, at any time on or prior to March 25, 2015.

The equity forward transactions had no initial fair value since they were entered into at the then market price of the common stock. HEI will not receive any proceeds from the sale of common stock until the equity forward transactions are settled, and at that time HEI will record the proceeds, if any, in equity. HEI concluded that the equity forward transactions were equity instruments based on the accounting guidance in ASC 480 and ASC 815 and that they qualified for an exception from derivative accounting under ASC 815 because the forward sale transactions were indexed to its own stock. HEI anticipates settling the equity forward transactions through physical settlement.

At September 30, 2013, the equity forward transactions could have been settled with physical delivery of the shares to the forward counterparty in exchange for cash of $175 million. At September 30, 2013, the equity forward transactions could also have been cash settled, with delivery of cash of approximately $6 million (which amount includes $7 million of underwriting discount) to the forward counterparty, or net share settled with delivery of approximately 212,000 shares of common stock to the forward counterparty.

Prior to their settlement, the equity forward transactions will be reflected in HEI’s diluted earnings per share calculations using the treasury stock method. Under this method, the number of shares of HEI’s common stock used in calculating diluted earnings per share for a reporting period would be increased by the number of shares, if any, that would be issued upon physical settlement of the equity forward transactions less the number of shares that could be purchased by HEI in the market (based on the average market price during that reporting period) using the proceeds receivable upon settlement of the equity forward transactions (based on the adjusted forward sale price at the end of that reporting period). The excess number of shares is weighted for the portion of the reporting period in which the equity forward transactions are outstanding.

Accordingly, before physical or net share settlement of the equity forward transactions, and subject to the occurrence of certain events, HEI anticipates that the forward sale agreement and additional forward sale agreement will have a dilutive effect on HEI’s earnings per share only during periods when the applicable average market price per share of HEI’s common stock is above the per share adjusted forward sale price, as described above. However, if HEI decides to physically or net share settle the forward sale agreement and additional forward sale agreement, any delivery by HEI of shares upon settlement could result in dilution to HEI’s earnings per share.

For the nine months ended September 30, 2013, the equity forward transactions did not have a material dilutive effect on HEI’s earnings per share.

Accumulated other comprehensive income. Reclassifications out of accumulated other comprehensive income/(loss) (AOCI) were as follows:



	Amount reclassified from AOCI
	Three months ended September 30						Nine months ended September 30
(in thousands)	2013			2012			2013			2012			Affected line item in the Statement of Income
Net realized gains on securities	$	—		$	—		$	(738	)	$	(81	)	Revenues-bank (net gains on sales of securities)
Derivatives qualified as cash flow hedges
Interest rate contracts (settled in 2011)	59			59			177			177			Interest expense
Retirement benefit plan items
Amortization of transition obligation, prior service credit and net losses recognized during the period in net periodic benefit cost	5,789			3,826			17,490			11,467			See Note 5 for additional details
Less: reclassification adjustment for impact of D&Os of the PUC included in regulatory assets	(5,156		)	(3,342		)	(15,468		)	(10,026		)	See Note 5 for additional details
Total reclassifications	$	692		$	543		$	1,461		$	1,537