Hawaiian Electric Industries, Inc. has reported consolidated net income for common stock for the first quarter of 2011 was $28.5 million, or $0.30 diluted EPS, compared to $27.1 million, or $0.29 diluted EPS for the first quarter of 2010.
“This was a solid quarter for HEI. We achieved another significant milestone in the implementation of our new regulatory model at our largest utility, advanced several clean energy projects, and delivered continued strong performance at the bank,” said Constance H. Lau, HEI president and chief executive officer.
“At the utility, although earnings and returns on equity remain depressed pending the outcome of the Oahu 2011 rate case and other regulatory proceedings, we are pleased that we were able to implement sales decoupling for HECO Oahu to further align our financial business model with our state’s public policy to promote energy efficiency and conservation. At the bank, we are pleased to report another quarter of solid performance with a return on assets of 1.15 percent, net interest margin of 4.16 percent, lower credit costs, and loan growth for the second consecutive quarter,” Lau said.
UTILITY NET INCOME SLIGHTLY HIGHER ON WEATHER
Electric utility net income for the first quarter of 2011 was $19.2 million compared to $18.1 million in the first quarter of 2010. The $1.1 million net income improvement resulted primarily from (on an after-tax basis):
Approximately $4 million of higher kilowatthour sales, largely due to warmer and more humid weather; and
$3 million of rate relief granted in our 2010 Hawaii Island and Maui County rate cases and the 2009 Oahu rate case.
These were partially offset by:
$4 million higher operations and maintenance (O&M) expenses(1); and
$1 million lower allowance for funds used during construction as a result of projects put into service in 2010.
Our Hawaii Island and Maui County utilities will continue to be impacted by changes in sales levels as they await decoupling implementation. Kilowatthour sales were up 0.4 percent and 2.0 percent for our Hawaii Island and Maui County utilities, respectively, in the first quarter.
For our Oahu utility, kilowatthour sales for the first two months of 2011 were 3.2 percent higher than the same period last year. Subsequently, sales decoupling became effective on March 1, 2011 and starting from that date, actual kilowatthour sales are no longer a net income driver.
O&M expenses(1) (pretax) were up 8 percent over the same quarter last year. This increase resulted primarily from higher emission fees (fees were waived in 2010), and higher vegetation and substation maintenance expenses. This level of increase is consistent with our guidance for a 7 percent annual increase in 2011.
(1) Excludes demand-side management (DSM) program costs. DSM program costs were $2 million in the first quarter of 2011 compared to $1 million in the first quarter of 2010. DSM program costs are recovered through a surcharge.
BANK MAINTAINS PROFITABILITY AND LOWER COST STRUCTURE AND RESULTS REFLECT LOWER CREDIT COSTS
Bank net income for the first quarter of 2011 was $13.9 million compared to $13.7 million for the same quarter last year and $13.3 million in the fourth quarter of 2010.
The bank was able to hold first quarter 2011 net income essentially flat with the same quarter last year as lower expenses offset lower revenues. The major variances over the same quarter last year were (on an after-tax basis):
$2 million reduction in noninterest expense derived from the completion of the performance improvement project; offset by
$1 million reduction in noninterest income due to lower fees as a result of regulatory changes related to overdraft fees which became effective in the third quarter of 2010; and
$1 million reduction in net interest income due to lower yields and lower earning asset balances largely in the residential loan portfolio.
The $0.6 million increase in first quarter 2011 net income compared to the fourth quarter of 2010 was primarily due to (on an after-tax basis): $2 million lower provision for loan losses partially offset by $1 million lower noninterest income.
Net interest margin was 4.16 percent in the first quarter of 2011, down slightly from 4.18 percent in the first quarter of 2010 and 4.21 percent in the fourth quarter 2010. The decline in net interest margin from the fourth quarter 2010 to the first quarter 2011 was predominantly attributable to lower deferred loan fees recognized in the first quarter 2011 because of declining mortgage prepayments. However, earning assets increased by approximately $60 million in the quarter and reflected the second consecutive quarter of loan growth.
Provision for loan losses (pretax) improved to $4.6 million in the first quarter of 2011 compared to $5.4 million in the first quarter of 2010 and $8.6 million in the fourth quarter of 2010. The decline in the provision from fourth quarter 2010 was primarily due to the fourth quarter’s provision including a $1.2 million charge-off of one commercial loan and a $1.4 million one-time adjustment to enhance our reserve methodology for the declining portfolio of residential lot loans.
The majority of the provision in the first quarter 2011 reflected net charge-offs in the following loan categories: the neighbor island and mainland residential loans and vacant lot loans. We continue to expect provision to be in the range of $15 to $20 million for the year.
The first quarter 2011 net charge-off ratio remains low and declined further to 0.49 percent, from the 0.62 percent in the first quarter last year and from 0.72 percent reported last quarter.
Noninterest expense (pretax) for the first quarter 2011 of $35.1 million was down from the $38.0 million in the first quarter of 2010 and flat compared to the fourth quarter of 2010 as the bank continued to maintain the savings and efficiencies it achieved from the performance improvement project.
The bank remains strongly capitalized with a Tier 1 leverage ratio of 9.1 percent and total risk-based capital ratio of 13.5 percent as of the end of the first quarter of 2011.
HOLDING AND OTHER COMPANIES
The holding and other companies’ net losses were $4.6 million in the first quarter of 2011, which was relatively flat compared to $4.7 million in the first quarter of 2010.
BOARD DECLARES QUARTERLY DIVIDEND
On May 9, 2011, the board of directors of HEI maintained the regular quarterly cash dividend of 31 cents per share, payable on June 14, 2011, to shareholders of record at the close of business on May 20, 2011 (ex-dividend date is May 18, 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 on May 6, 2011 of $26.00, HEI’s yield is 4.8 percent.
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