Categorized | Business, Energy

HEI reports second quarter 2011 earnings


Hawaiian Electric Industries, Inc. has reported consolidated net income for common stock for the second quarter of 2011 was $27.1 million, or $0.28 diluted EPS, compared to $29.3 million, or $0.31 diluted EPS for the second quarter of 2010.

“Earnings were lower in the second quarter as our utilities invested in their clean energy and reliability strategies which required additional capital investments and higher operating expenses. Now that rate relief has recently been approved for our largest utility, earnings should improve in the second half of the year,” said Constance H. Lau, HEI president and chief executive officer.

“At our bank, we had another solid quarter with continued improvement in credit quality and loan growth for the third consecutive quarter. Performance continued to exceed peer banks with a return on assets of 1.24%, net interest margin of 4.07% and efficiency ratio of 57%,” Lau said.


Electric utility net income for the second quarter of 2011 was $17.0 million compared to $17.6 million in the second quarter of 2010. The $0.6 million net income decline resulted primarily from (on an after-tax basis):

* $3 million higher planned operations and maintenance (O&M) expenses(1);
* $2 million of unusual items that are unlikely to recur including a 2011 billing adjustment and 2010 fuel cost recovery of previously recognized biofuels costs;
* $1 million lower fuel efficiency savings attributable to the implementation of the heat rate deadband which became effective with decoupling; and
* $1 million lower allowance for funds used during construction as a result of projects put into service in 2010.

The quarter benefitted from several key developments, including:

* $2 million of rate relief granted in late 2010 and early 2011 for our Maui County and Hawaii Island utilities, respectively;
* $2 million lower depreciation expense from the change in depreciation rates and methods for our Hawaii Island and Maui County utilities; and
* $1 million write-down of our investment in the combined heat and power system in 2010.

Our Oahu utility implemented sales decoupling earlier this year, and its second quarter decoupling revenues were essentially flat with sales revenues in the second quarter of 2010.

For our Hawaii Island and Maui County utilities that are awaiting decoupling implementation, their combined kilowatt hour sales were flat compared with the same quarter last year.

As planned, O&M expenses increased 6% over the same quarter last year to safely and responsibly operate our systems, invest in our clean energy strategies and serve our customers. This is in line with our previous guidance of a full year increase of 7% over the prior year.

The second quarter increase was primarily due to higher transmission and distribution operations, vegetation, substation maintenance and administrative and general expenses. We are now targeting O&M to be flat with 2010. Oahu expenses in 2011 are expected to be higher than in 2010, but consistent with the levels included in our recent rate decision. Hawaii Island and Maui County expenses in 2011 are expected to be slightly lower than in 2010.

Effective July 26, 2011, the Public Utilities Commission granted HECO a net interim increase of $38.2 million in annual revenues, or 2.2% increase, net of revenues previously being recovered through the decoupling Revenue Adjustment Mechanism.

(1) Excludes demand-side management (DSM) program costs. DSM program costs were $1 million in the second quarter of 2011 compared to nil in the second quarter of 2010. DSM program costs are recovered through a surcharge.


Bank net income for the second quarter of 2011 was $15.2 million, compared to $13.9 million in the first, or linked, quarter of 2011. Loans and total assets increased $31 million and $32 million, respectively, over the same period, representing the third consecutive quarter of loan growth and second consecutive quarter of asset growth.

The $1.3 million increase in second quarter 2011 net income compared to the linked quarter was primarily due to (on an after-tax basis):

* $1 million lower provision for loan losses from continued improvement in credit quality and portfolio mix; and
* $1 million higher noninterest income from a non-recurring insurance gain and higher fee income.

These were partially offset by $1 million higher noninterest expense.

Compared to the same quarter of 2010, net income decreased by $0.9 million as a $2 million after-tax reduction in noninterest expense was more than offset by (on an after-tax basis):

* $1 million reduction in noninterest income due to lower overdraft fees of $2 million as a result of regulatory changes which became effective in the third quarter of 2010, partially offset by the non-recurring insurance gain and higher fees for other products and services;
* $1 million reduction in net interest income principally due to the year-over-year runoff in the residential loan portfolio; and
* $1 million higher provision for loan losses (as the current quarter had no comparable significant reserve reversal as was realized in the second quarter of 2010).

Net interest margin was 4.07% in the second quarter of 2011, down from 4.16% in the linked quarter and 4.22% in the second quarter of 2010. The decline in net interest margin from the linked quarter was attributable primarily to lower deferred loan fees associated with lower loan prepayments, as well as lower yields on newly originated assets.

Provision for loan losses (pretax) was $2.6 million in the second quarter of 2011 compared to $1.0 million in the second quarter of 2010 and $4.6 million in the linked quarter. The provision in the second quarter 2010 was lower due to $2.4 million of loan loss reserves that were released attributable to two specific loans. The company continues to expect loan loss provision expense to be in the range of $15 to $20 million for the full year of 2011.

The second quarter 2011 net charge-off ratio remains low and declined further to 0.45%, from 0.49% reported in the linked quarter and from the 0.57% in the second quarter last year.

Noninterest expense (pretax) for the second quarter 2011 of $36.2 million was down from $39.6 million in the second quarter of 2010 and up $1.1 million compared to the linked quarter. This is in line with our annual noninterest expense target of $145 million for 2011.

The bank remains well-capitalized with a Tier 1 leverage ratio of 9.1% and total risk-based capital ratio of 13.3% as of the end of the second quarter of 2011.


The holding and other companies’ net losses were $5.1 million in the second quarter of 2011 compared to $4.5 million in the second quarter of 2010.


On Aug. 2, 2011, the board of directors of HEI maintained the regular quarterly cash dividend of 31 cents per share, payable Sept. 13, 2011, to shareholders of record at the close of business August 15, 2011 (ex-dividend date is Aug. 11, 2011). The dividend is equivalent to an annual rate of $1.24 per share.

Dividends have been paid continuously since 1901. At the indicated annual dividend rate and the closing share price Aug. 2, 2011 of $23.11, HEI’s yield is 5.4%.

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