NextEra's Hawaiian Electric Bid Rejected, Merger Called Off

NextEra Energy, Inc.’s (NYSE:NEE) proposed takeover of Hawaiian Electric Industries, Inc. (NYSE:HE) has been rejected by regulatory authorities, after nearly two years of its initial filing. The rejection has lead the parties to call off the merger.

Details of the Ruling

The Hawaiian Public Utilities Commission (HPUC) has rejected the $4.3 billion acquisition citing ambiguities related to NextEra Energy’s commitment to support Hawaiian Electric’s target of 100% green energy in the island chain.

We remind investors that Hawaiian Electric set an ambitious target of installing smart grids, smart meters and converting cars to run on electricity to benefit consumers as well as to conserve the environment.

NextEra Energy failed to outline a clear plan of action to benefit ratepayers as well as to help in the eventual conversion to renewable energy in the Hawaiian island. Instead, it was only focused on utilizing its technical expertise and economies of scale to transition into a bigger utility.

Further, the loss of local control of the island’s biggest utility and NextEra Energy’s complex corporate structure posed concerns, as NextEra Energy had offered no steps to mitigate the impact of its structure on ratepayers.

Merger Called off

After the receiving the HPUC ruling, NextEra Energy’s management has decided not to pursue the merger hereafter. As part of the deal termination, NextEra Energy is obligated to pay a breakup fee of $90 million and reimburse $5 million to Hawaiian Electric as expenses related to proceedings.

Exelon Managed to Reach Full Distance

Earlier this year, Exelon Corporation (NYSE:EXC) faced a similar situation when regulatory authorities rejected its proposed merger with Pepco Holdings, Inc. twice before giving the final nod.

The deal, which was originally filed in 2014, hit a roadblock twice in the form of a rejection by the Public Service Commission of the District of Columbia. The regulatory body had opined that it was not in the best interests of the District and that it would also convert Pepco into a second-tier company.

In the final filing, the companies proposed three approaches, any of which, if approved by the commission, would prevent a loss of more than $78 million in direct benefits for the District and Pepco customers.

Finally, on Mar 23, 2016, Exelon was able to close its $6.8 billion merger with Pepco Holdings Inc., having received the regulatory approval to create the largest power distributor in the U.S.

Utility Sector Overview

The utility sector has been going through a phase of numerous mergers and acquisitions. Deals worth over $52 billion were closed or were pending in the utility sector in the U.S last year.

This month, Canadian utility Emera Inc. closed the $10.4 billion acquisition of TECO Energy Inc (NYSE:TE)., expanding its market presence and increasing regulated earnings to constitute 85% of its net income.

With the sector gearing up for the upcoming earnings season, earnings in the second quarter of 2016 are expected to improve 20.6% in contrast to the S&P 500’s projected decline of 5.4%. The On the other hand, revenues are expected to improve 2.4% compared to the expected decline of 0.5% for the S&P 500.

Zacks Rank& key Picks in the Sector

NextEra Energy carries a Zacks Rank #3 (Hold).A couple of better-ranked stocks in the utility space are Alliant Energy Corporation (NYSE:LNT) and NiSource Inc. (NYSE:NI) , both carrying a Zacks Rank #2(Buy).