HEI profit falls 57% in fourth quarter

The firm suffered setbacks throughout its operations

Hawaiian Electric Industries Inc., stung by setbacks in its utility, bank and investments, stumbled in the fourth quarter of 2006 as net income fell 57 percent and badly missed analysts' earnings forecasts.

"(It) was a tough quarter all around," said Connie Lau, HEI's president and chief executive.

The company, which is seeking a 7 percent rate increase in its utility operations on top of a interim 3.3 percent increase granted in 2005, had net income of $16.1 million, or 20 cents a share, compared with $37.5 million, or 46 cents a share, a year earlier.

Analysts surveyed by Thomson Financial had forecast 38 cents a share.

Revenue fell 2.8 percent to $607.1 million from $624.8 million.

Analyst James Bellessa of Great Falls, Mont.-based D.A. Davidson & Co. was surprised by the magnitude of the decline.

"The overall operations sucked big in the quarter," Bellessa said. "It's a very disappointing quarter, well below expectations. Even though they had given us an indication that their bank (American Savings Bank) was going to have difficulties, nobody thought they would have this much of a decline in bank results."

The bank's net income in the fourth quarter fell 47.5 percent to $9.3 million from $17.7 million. Part of the decline was due to a $4.8 million increase in noninterest expenses that included legal fees associated with two lawsuits against the bank involving an embezzlement case and a whistleblower case. The bank announced an undisclosed settlement in the embezzlement case in September; the whistleblower case is still pending.

HEI spokeswoman Suzy Hollinger declined to disclose the amount of the legal fees.

American Savings Bank's net interest income, which reflects the difference between what it pays depositors and what it takes in from loans, declined 11.6 percent to $47.9 million from $54.2 million and its net interest margin narrowed to 3.05 percent from 3.41 percent.

"They had a big jump in their cost of deposits," Bellessa said. "Evidently, to hold onto business, they had to raise deposit income. At the same time, they were not able to generate much increase in their investments."

Noninterest income, which includes service charges and fees, fell 3.2 percent to $14.9 million from $15.4 million.

The bank also took a $1.4 million provision for loan losses, which it did not do in the year-earlier quarter.

"The $7.7 million difference in the net interest income after the provision from a year ago was tough to overcome, but the higher ($4.8 million) noninterest expense of the quarter, plus the loan-loss provision, was impossible to overcome," Bellessa said.

For the year, HEI had net income of $108 million, or $1.33 a share, compared with $126.7 million, or $1.57 a share, a year earlier. Revenue rose 11.1 percent to $2.5 billion from $2.2 billion.

HEI's utility unit, which supplies power to more than 400,000 customers, or 95 percent of the state, saw its net income fall 28.5 percent in the fourth quarter to $13 million from $18.2 million.

Hollinger said the financial impact of the Oct. 15 earthquakes in Hawaii were "not significant."

The utility subsidiary's revenue slipped 0.9 percent to $504.9 million from $509.3 million. Kilowatt-hour sales rose 1.4 percent from a year earlier due partly to an increase in customers and to warmer, more humid weather.

"The impacts of higher kilowatt-hour sales for the fourth quarter were more than offset by higher other operation, maintenance, and depreciation expenses," Lau said.

The holding and other companies' earnings in the fourth quarter swung to a net loss of $6.2 million from net income of $1.7 million a year ago.

That primarily was due to investment losses of $900,000 last quarter compared with investment gains of $7.7 million in the fourth quarter of 2005.

The year-earlier quarter included the sale of a leveraged lease investment in a Georgia power plant.