NextEra Energy Inc. is likely to pull the plug on its proposed purchase of Hawaii’s largest electric utility if state regulators do not approve the sale by June, according to analysts.
Reports from New York-based Barclays Capital Inc., New York-based Macquarie Research and San Francisco-based Wells Fargo Securities LLC on Friday said NextEra’s purchase of HEI is unlikely to close because NextEra is willing to walk away if the merger is not complete by June 3. When NextEra announced its interest in purchasing HEI for $4.3 billion in December 2014, the two companies were bound to an 18-month contract preventing either from dropping out until the June deadline.
Rob Gould, spokesman for NextEra, shared the reports Monday.
“We expect NEE (the ticker symbol for NextEra) to walk if approval doesn’t happen by June,” said a Feb. 12 report from analysts at Macquarie Research.
“As most investors are aware, June 3, 2016, is the date at which either party may choose to walk away,” said a report Friday from Barclays. “We think NEE is likely to walk away if the merger is not completed by that date.”
Wells Fargo analysts said, “NEE has made it clear that they are willing to walk away if they view Hawaii’s terms to be unreasonable — and this philosophy could very possibly extend to delays beyond the June 3 date.”
According to the contract between HEI and NextEra, if HEI failed to get shareholder approval, it would have to pay a $90 million termination fee to NextEra. HEI shareholders approved the sale in June. If NextEra fails to get state regulator approval, NextEra has to pay HEI a $90 million termination fee.
Hawaii Public Utilities Commission Chairman Randy Iwase said despite the recent research he is still committed to reviewing the decision in a methodical way due to the gravity of the sale of the state’s largest electrical utility and is not concerned with a timetable.
“I don’t have a deadline,” Iwase said. “I plan to do it in a methodical way and do our best to make the right decision.”
After 20 days of hearings, Iwase called a third round, to be held Feb. 29 through March 4. The hearings were extended because of the large number of intervenors involved. Closing briefs are expected to be filed about 30 days after the hearings. Iwase said the PUC will take the entire application into review after the closing briefs are filed.
Wells Fargo said it is placing a 50 percent probability on the sale because of the strong opposition voiced by Gov. David Ige and “the tendency of Hawaiian residents to favor local ownership of businesses over ‘outsiders.’”
“We remain of the opinion that the deal could go either way,” Wells Fargo analysts said. “On one hand, we believe NextEra offers Hawaii an exceptional opportunity to achieve the state’s goals given the company’s strong financial position and proven track record on green projects. On the other hand, public and government opposition to the merger remains strong.”
HEI and NextEra submitted integration plans with the PUC last week under the prospect of the sale closing March 14.
In their reports, Barclays and Macquarie said another obstacle between NextEra and its proposed purchase of HEI is a bill moving through the state Legislature that requires the sale to have a “substantial net benefit” for it to earn PUC approval.
HB 2567 passed out of committee with a 9-1 vote Feb. 9.
“If the bill is enacted, it would likely be a death knell for the merger, since at the very least it would extend the PUC’s review beyond June 3,” Barclays analysts said.
Macquarie said the bill is ambiguous and a higher hurdle for NextEra.
State rep. Chris Lee (D, Kailua-Lanikai-Waimanalo), who introduced the bill, said the bill was meant to hold NextEra to the commitments it makes to the public.
“NextEra has a long history of making promises they don’t keep, and the only way to protect local residents is by requiring any takeover to guarantee substantial benefits to the public by law,” Lee said.
The reports were released following HEI’s fourth-quarter and annual earnings report Thursday. HEI’s net income rose 27.3 percent in the quarter to $42.3 million but fell 4.9 percent for the year to $168 million.
In the report, Wells Fargo lowered its 2016 earnings-per-share expectations for HEI to $1.69 from $1.75.
Barclays’ report gave HEI a potential downside of 10 percent with a price target of $26 a share. HEI closed the day of the report at $28.85.
Macquarie reiterated a neutral rating for HEI with a price point at $32 a share.
The day after NextEra announced on Dec. 3, 2014, its intent to purchase HEI for $4.3 billion, or roughly $34 a share, HEI’s share price — which had been trading around $28 — jumped 14 percent to close at $32.22. However, HEI has been trading at a discount since Ige came out in opposition to the sale in July.
