HEI profit rises on utility rates

The company's power subsidiary increased Oahu rates 3.3 percent

Hawaiian Electric Industries Inc. increased its net income by more than a third and topped analysts' average estimate by 3 cents in the final full quarter of Robert Clarke's 15 years as the company's top executive.

Clarke will retire at today's annual shareholders meeting and be replaced as president and chief executive officer by Constance Lau, who will retain those same positions in her current role at HEI subsidiary American Savings Bank.

The shareholders meeting will be at 9:30 a.m. at the American Savings Bank Tower in Honolulu.

Net income was $32.3 million, or 40 cents a share, compared with $24.1 million, or 30 cents a share, a year earlier, HEI reported yesterday. Analysts had expected an average of 37 cents a share, according to a survey by Thomson Financial.

Net income for utility subsidiary Hawaiian Electric Co., bolstered by an interim 3.3 percent rate increase on Oahu and a 1.8 percent gain in kilowatt-hour sales, was up 69.5 percent. But American Savings Bank's net income fell 5.3 percent despite growth in loans and deposits. The bank's results included a $3.1 million reversal of an allowance for loan losses in the first quarter of 2005 that did not recur last quarter.

Overall, revenue for the company rose 21.7 percent to $575 million from $472.6 million.

"The earnings were a little short of our expectations, but when you're up 34 percent, that's not a bad quarter," said analyst Dave Parker of Tampa, Fla.-based Robert W. Baird & Co. "Of course, a lot of (the earnings increase) had to do with interim rate relief that was given last October," added Parker, whose 42-cent earnings-per-share estimate was at the top of the analysts' range. "Now we're getting utility margins back within the ballpark of normal, but we're still a little ways from what we see in the utility space. Rising costs for most utilities are putting pressure on utilities, and Hawaiian Electric hasn't been a special case."

Clarke said even though first-quarter results gained from the same period a year ago, they were only slightly above 2004's first-quarter earnings of $30.9 million. Hawaiian Electric Co.'s earnings also were about level with two years ago. The utility had net income of $21 million last quarter compared with $12.4 million in the first quarter of 2005 and $20 million in the same period in 2004.

Higher kilowatt-hour sales contributed an additional $11 million to revenue last quarter over the year-earlier period because of more customers and new construction loads. The interim rate increase granted in late September for Oahu by the state Public Utilities Commission added $9 million to revenue.

"Although operations and maintenance expenses (for the utility) were relatively flat quarter over quarter, we expect the overall trend of higher expense levels to continue due to load growth and increased retirement benefits expenses," Clarke said.

Parker said Hawaii's economic expansion has strained HEI's capabilities.

"The economic expansion in Hawaii over the last five or six years has put a lot of pressure on infrastructure and is driving costs up," Parker said. "Interim rate relief is a step in the right direction, but more probably will be needed as Hawaiian Electric continues to add infrastructure to keep up with expanding needs."

American Savings, the third-largest bank in the state in terms of assets behind First Hawaiian Bank and Bank of Hawaii, saw its net income fall to $16.8 million from $17.8 million.

Despite the lower earnings, Clarke said the company was pleased with the performance of the bank's core businesses "in an interest rate environment that was more challenging than it was the same time last year."

"Good organic growth continued, with average loan and deposit balances higher by $306 million and $230 million, respectively, than the same period last year," he added.

American Savings' net interest margin, which reflects the difference between what it pays depositors and what it takes in from loans, slipped to 3.29 percent from 3.36 percent a year earlier primarily due to lower interest income on mortgage-related securities. Net interest income fell 1.7 percent to $52.7 million from $53.6 million.

Noninterest income rose 6.7 percent to $14.8 million from $13.8 million a year ago because of higher fee income on debit cards and merchant services, HEI said.

"The bank continues to be under pressure with the very difficult yield environment they find themselves in," Parker said. "But things are moving in the right direction (for the company) after four or five quarters of dismal earnings."

As part of today's executive changeover, Jeffrey Watanabe, a senior partner of his law firm, Watanabe Ing & Komeiji, will take over for Clarke as chairman of the board. Watanabe has been a director with HEI since 1987. He also is a director of Oahu Publications Inc., publisher of the Honolulu Star-Bulletin and MidWeek.