Rate hikes fuel 49% jump in HEI profit

A sharp increase in earnings at its electric utility subsidiary drove Hawaiian Electric Industries’ profits up 49 percent in the third quarter compared with the same period a year earlier, the company reported Thursday.

HEI, the parent of Hawaiian Electric Co. and American Savings Bank, reported net income of $48.4 million, or 50 cents a share for the July-through-September period, up from $32.4 million, or 35 cents a share, a year earlier.

The biggest factor was a $16 million jump in net income at HECO, fueled largely by $6 million in rate increases across three counties and $5 million in revenue from the implementation of a "decoupling" mechanism on Oahu designed to encourage the development of renewable energy by eliminating the economic incentive for HECO to sell more electricity.

Other items contributing to the increase in HECO earnings included $2 million from increased fuel efficiency at its subsidiaries in Hawaii and Maui counties, and a $1 million gain from lower depreciation expenses, HEI said. The increases were partially offset by a $1 million decline in electricity sales.

A combination of rising fuel costs and increases in HECO’s base rate pushed Oahu residential electric bills to a record high in August. The record was broken again in October.

The new decoupling mechanism, implemented March 1, essentially guarantees HECO enough revenue to cover its fixed costs if electricity sales decline. Proponents say that by decoupling sales from earnings a utility is free to pursue alternative energy sources or increased efficiency without worrying about hurting its bottom line.

HECO’s earnings through the first nine months of the year were 25 percent higher than the same period last year. Earnings for all of 2010 were down 3.5 percent from 2009.

"While utility earnings are recovering from the depressed levels of 2010, returns will continue to fall short of those allowed by the Hawaii Public Utilities Commission," said Connie Lau, HEI president and chief executive officer.

The PUC in HECO’s 2011 rate case authorized the utility to earn a 10 percent return on equity. HECO’s return on equity has averaged 6.9 percent over the past 12 months, although it has set a target of 8.5 percent for 2012.

Net income from American Savings Bank was $15.5 million in the third quarter compared with $15.2 million for the same period in 2010.

The bank increased its loan portfolio by $40 million in the third quarter, as increases in home equity and commercial lending more than offset a decline in residential mortgage lending, HEI said.

American Savings’ net interest margin, the difference between what it generates from loans and what it pays on deposits, fell to 4.11 percent in the third-quarter from 4.31 percent for the same period a year earlier. However, it was up from the 4.07 percent recorded in the second quarter.

Provision for loan losses totaled $3.8 million in the third quarter compared with $6 million in the year-earlier period.

With year-to-date provision expenses of $10.9 million, the company said it expects the full-year total to be at the lower end of its guidance range of $15 million to $20 million.

HEI shares closed up 77 cents, or 3 percent, at $26.13 Thursday on the New York Stock Exchange. HEI reported its earnings before the market opened.