Income taxes

12 Months Ended

Dec. 31, 2011

Income taxes

Income taxes

11 · Income taxes

The components of income taxes attributable to net income for common stock were as follows:

Years ended December 31	2011		2010		2009
(in thousands)
Federal
Current	$ (7,638	)	$(25,446	)	$25,691
Deferred	73,494		85,268		14,161
Deferred tax credits, net	—		(901	)	(593	)
	65,856		58,921		39,259
State
Current	2,437		(7,392	)	6,930
Deferred	5,949		13,425		(783	)
Deferred tax credits, net	1,690		2,868		(1,483	)
	10,076		8,901		4,664
Total	$ 75,932		$ 67,822		$43,923

A reconciliation of the amount of income taxes computed at the federal statutory rate of 35% to the amount provided in the Company’s consolidated statements of income was as follows:

Years ended December 31	2011		2010		2009
(in thousands)
Amount at the federal statutory income tax rate	$75,618		$64,136		$45,088
Increase (decrease) resulting from:
State income taxes, net of federal income tax benefit	6,550		5,786		3,033
Other, net	(6,236	)	(2,100	)	(4,198	)
Total	$75,932		$67,822		$43,923
Effective income tax rate	35.1	%	37.0	%	34.1%

The effective tax rate decreased from 2010 to 2011 due primarily to additional low income housing credits and tax-free income from municipal bonds and bank-owned life insurance at ASB, and a favorable Internal Revenue Service (IRS) appeals settlement related to foreign losses at HEI in 2011. The lower effective tax rate for 2009 was due primarily to the greater relative impact of tax credit amortization to net income, which was reduced by ASB’s losses from sales of mortgage-related securities and other-than-temporary impairments.

The tax effects of book and tax basis differences that give rise to deferred tax assets and liabilities were as follows:

December 31	2011	2010
(in thousands)
Deferred tax assets
Allowance for loan losses	$  14,076	$  16,461
Retirement benefits	6,175	–
Other	33,217	35,878
	53,468	52,339
Deferred tax liabilities
Property, plant and equipment related	255,488	188,490
Retirement benefits	–	2,479
Goodwill	22,028	20,130
Regulatory assets, excluding amounts attributable to property, plant and equipment	32,343	32,074
FHLB stock dividend	20,552	20,552
Change in accounting method related to repairs	48,566	46,702
Other	28,542	20,870
	407,519	331,297
Net deferred income tax liability	$354,051	$278,958

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. Based upon historical taxable income and projections for future taxable income, management believes it is more likely than not the Company will realize substantially all of the benefits of the deferred tax assets. In 2011, the net deferred income tax liability continued to increase primarily as a result of accelerated tax deductions taken for bonus depreciation (resulting from the 2010 Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act).

In 2010, interest income on income tax refunds was reflected in “Revenues—Electric utility” in the amount of $9.7 million, which resulted from the settlement with the IRS of appealed issues for the tax years 1996 to 2006 and was due in large part to a change in the method of allocating overhead costs to self-constructed assets. In 2011, 2010 and 2009, interest expense/(credit adjustments to interest expense) on income taxes was reflected in “Interest expense – other than on deposit liabilities and other bank borrowings” in the amount of $(1.2) million, $(0.9) million and $0.7 million, respectively. The credit adjustments to interest expense were primarily due to the resolution of tax issues with the IRS.  As of December 31, 2011 and 2010, the total amount of accrued interest related to uncertain tax positions andrecognized on the balance sheet in “Interest and dividends payable” was $1.5 million and $2.7 million, respectively.

As of December 31, 2011, the total amount of liability for uncertain tax positions was $5.7 million and, of this amount, $0.9 million, if recognized, would affect the Company’s effective tax rate. The Company’s unrecognized tax benefits are primarily the result of temporary differences relating to the deductibility of costs incurred to repair generation property. The Company believes that it is reasonably possible that the IRS may issue guidance on the deductibility of these repair costs and this guidance will eliminate much of the uncertainty in 2012.  Management has concluded that it is reasonably possible that the liability for uncertain tax positions may decrease by $5 million within the next 12 months.

The changes in total unrecognized tax benefits were as follows:

(in millions)	2011		2010		2009
Unrecognized tax benefits, January 1	$ 15.4		$ 26.5		$ 27.9
Additions based on tax positions taken during the year	–		11.0		–
Reductions based on tax positions taken during the year	(0.6	)	–		–
Additions for tax positions of prior years	0.1		2.2		0.4
Reductions for tax positions of prior years	(8.1	)	(18.2	)	(1.8	)
Settlements	–		(6.1	)	–
Lapses of statute of limitations	(1.1	)	–		–
Unrecognized tax benefits, December 31	$  5.7		$ 15.4		$ 26.5

The 2011 reduction in unrecognized tax benefits was primarily due to the IRS’s issuance of guidance on the deductibility of costs of repairs to utility transmission and distribution (T&D) property (Revenue Procedure 2011-43, issued in August 2011), including a “safe harbor” method under which taxpayers could transition and minimize the uncertainty of the repairs expense deduction for T&D property. The Company intends to elect the “safe harbor” method in its 2011 tax return, which resulted in the reduction of associated unrecognized tax benefits for 2011.

Tax years 2007 to 2010 currently remain subject to examination by the IRS. Tax years 2005 to 2010 remain subject to examination by the Department of Taxation of the State of Hawaii. HEI Investments, Inc., which owned leveraged lease investments in other states prior to its dissolution in 2008, is also subject to examination by those state tax authorities for tax years 2005 to 2007.

As of December 31, 2011, the disclosures above present the Company’s accrual for potential tax liabilities and related interest. Based on information currently available, the Company believes this accrual has adequately provided for potential income tax issues with federal and state tax authorities and related interest, and that the ultimate resolution of tax issues for all open tax periods will not have a material adverse effect on its results of operations, financial condition or liquidity.