Geographically speaking, NextEra Energy's bid for Hawaiian Electric is the most far-flung merger in the history of American utilities. A commercial flight between the two headquarters spans five time zones, nearly 5,000 miles, and requires a stopover. Executives traveling from Juno Beach, Fla.-based NextEra could reach Moscow in less time than they can get to Honolulu.
For those reasons, analysts are giving mixed reviews to the proposed $4.3 billion deal, which was announced this week. Those looking at it through a traditional lens, valuing geographic proximity, are less sanguine than those who see a strategic value in understanding distributed generation in which electricity customers are generally independent of the grid. Hawaiian Electric has climbed that learning curve.
"You would think that neighboring transactions would drive more synergies," says William Kemp, founding partner for Enovation Partners in Des Plaines, Ill., outside Chicago. "But information technologies are not dependent on geography. [This deal] is more of a strategic transaction to develop a successful regulated business model in high distributed-generation regions, lessons from which could then be applied to other acquisitions on the mainland.”
The NextEra-Hawaiian Electric deal is just the tip of the iceberg. After a long economic downturn and recovery that has trimmed electric demand and tempered forecasts for growth, deep-pocketed utilities in the United States are seeking partners that give them a business edge. Unlike before the Great Recession, when they frowned on most mega utility mergers, regulators are now inclined to go along, given that corporate marriages mean new capital investments in modern power generation and smarter electric grids.
In the case of NextEra, the edge that Hawaiian Electric offers is a ready-made laboratory to study renewable, distributed energy. Renewable energy produced 18 percent of Hawaii’s electricity last year. Its residents, on average, use less energy than all but two other states. Various commercial and military installations in the state are beginning to install microgrids, which are onsite, small-scale power grids that deliver electricity to a defined area, like a neighborhood.
"Hawaii is a real-life beta test site," said Lorraine Akiba, a Hawaii public utilities commissioner, during an industry discussion in November before the NextEra-Hawaiian Electric deal was announced. [Editor's note: The quote has been corrected.]
NextEra, too, is a leader in renewables. It’s North America's largest generator of wind and solar power. But whereas the Florida-based utility invests in utility-scale installations outside of Florida, Hawaiian Electric, which supplies 95 percent of the state’s power, interacts – not always smoothly – with tens of thousands of decentralized rooftop solar systems.
The buyout of Hawaiian Electric must still go through a host of state and federal regulatory approvals, which are expected to take a full year. This time, regulators will certainly exact concessions from NextEra on electric rates, and jobs.
If NextEra is successful, it would likely pour more money into renewable energy in Hawaii, which would replace much of the utility’s current oil-fired steam electricity. For all its vaunted push for renewable energy, Hawaii in 2012 still relied on oil for 71percent of its electricity. (The national average is less than 1 percent.) That could potentially lower electric prices for customers, who currently pay three times the national average. It could also mean greater dividends for shareholders.
The utility proposes to pay about $33.50 for Hawaiian Electric’s shares, as well as $1.7 billion of its debt, after Hawaiian Electric’s banking division called American Savings Bank is spun off. NextEra's price represents roughly a 20 percent premium for the shares, which Mr. Kemp says “is a little rich” given that 15 percent has been the average in recent years.
Moody’s Investor Services says that the acquisition would not affect NextEra’s credit ratings.
Although it may take three to five years before they are fully realized, the operating synergies from utility mergers are often greater than expected, consultant Kemp adds. But in the current environment of fairly frequent base rate cases, such savings would be returned to customers, eventually trimming the profits of the merged entity. "Looking at the pattern, you typically get a bump in earnings and share price that starts one to two years after the transaction and continues for a few years, and then you return to the prior share price trajectory."
The deal is part of a broader trend within the utility sector: FirstEnergy Corp. purchased Allegheny Energy in 2010 for about $4.7 billion; Duke Energy linked up with Progress Energy in 2012 in a $25 billion deal; and NRG Energy bought out GenOn last year for $4.2 billion. Like other industrial sectors, utilities are emerging from hard times and trying to prepare for the future – gaining scale and achieving synergies.
NextEra's record on mergers is not stellar. In 2001, when it was known as FPL, it's attempts to buy New Orleans-based Entergy Corp. became a high-profile flop. In 2006, Maryland regulators nixed its planned merger with Constellation Energy. Most recently, it has pursued Oncor, a Dallas-based transmission operator of bankrupt power company, although it appears to have pulled back.
Before the Great Recession, state utility commissions had started to become skeptical of mega-utility deals, fearing that they would have too much market power. Now, they are more accommodating, insisting that the merger adopt modern technologies – something that is more feasible given that the combined entity has better access to capital markets.