There are relationships you don’t just throw away.
Talk about a fruitful and enduring relationship: Hawaii and its electric utility have been together since 1891 when the Hawaiian Electric Co. started up with assets worth $17,000.
Most of the 124 years since then have seen the people of Hawaii consume ever-growing quantities of electricity to power businesses, streets and homes. For that, Hawaiian Electric enjoyed handsome rewards totaling billions upon billions of dollars.
Despite some more recent challenges, Hawaiian Electric remains a dominant presence in the islands thanks to its ownership of power grids that serve 95 percent of the state’s population.
From a corporate perspective, it has all added up to terrific business.
So why would the owners of Hawaiian Electric sell out to NextEra Energy, which is part of a massive Florida-based energy company?
Chuckling at the ridiculous simplicity of the answer, University of Hawaii economist Sumner La Croix, explained, “Hawaiian Electric is selling because it is a good time to sell.”
The ideal for investors is, almost invariably, to try to buy low and sell high. When it comes to shareholders in electric companies, they also want to enjoy the generally reliable dividends in between. Still, shrewd investors keep an eye on what’s coming.
Hawaiian Electric has faced destabilization in the industry in the last decade, and industry experts and economists believe there is even greater uncertainty ahead.
After all, the company faces growing competition from an array of increasingly affordable energy producers and questions about which game-changing technologies will transform the electricity industry — and in which direction. There’s also the issue of emboldened regulators.
Such industry tumult isn’t just a Hawaii phenomenon.
Transformative change is washing over the energy sector nationally. Electric utilities that long counted on their 20th century business models to produce reliable and substantial revenues are wrestling with a host of new and destabilizing factors.
Some must integrate, or compete with, a huge influx of relatively affordable natural gas, gyrations in the cost of oil and rapid decreases in the price of rooftop solar installation, among other challenges.
In places like Hawaii, where energy executives say the situation may be further along than anywhere else in the country, it is all enough to raise questions about the utility’s role and future prospects.
And yet, when asked in a recent interview why the moment was right to cash out, Hawaiian Electric Co. CEO and President Alan Oshima insisted Hawaiian Electric Industries — the mother company — was merely reacting to NextEra’s offer as part of a legal responsibility to shareholders.
“We were not for sale. NextEra approached us,” he said.
The merger deal was announced in Dec. 3, 2014, but the wheels were rolling at the start of the year.
In a 162-page collection of merger-related documents recently filed with regulators, top figures at NextEra Energy and Hawaiian Electric Industries shared some details about how the deal came about.
NextEra Energy President and CEO Jim Robo first broached the topic with Hawaiian Electric Industries CEO Connie Lau in February 2014 when he asked whether her company might be open to an offer.
On June 9 of that same year, Robo and Lau sat down for an informal lunch at The Henry, a restaurant in The Cosmopolitan hotel in Las Vegas on the sidelines of the Edison Electric Institute’s annual convention. They talked about their families, as well as business trends, and Robo handed Lau a brief overview of NextEra’s purchase offer. Lau promised to bring it up with her company’s board of directors.
Even as Hawaiian Electric Industries considered the offer, it appointed Oshima — a lawyer whose resume suggests plenty of experience with mergers and acquisitions — to head the electric utility in October. About two months later, the deal was announced.
Oshima said in the recent interview that as Hawaiian Electric looked into the offer, the company began to see that it made sense not only from a business perspective but also for employees and customers.
And he has repeatedly refuted suggestions that Hawaiian Electric somehow needed to get out while the getting is good, most recently in a discussion Thursday on the future of the electric utility on PBS Insights.
Asked by host Daryl Huff why the company felt compelled to sell, Oshima replied: “It was not necessary to sell.”
Hawaiian Electric began to modernize and change its internal culture prior to receiving NextEra’s offer, Oshima told Civil Beat, and it will continue regardless of whether regulators allow the deal to go through. But by becoming a part of NextEra, he argued, Hawaiian Electric can do it faster.
In both the interview with Civil Beat and the televised discussion, Oshima effectively avoided the issue of the rewards for shareholders and Hawaiian Electric executives.
“It was not necessary to sell.” — Hawaiian Electric CEO and President Alan Oshima
NextEra is willing to pony up $4.3 billion for Hawaiian Electric, with $1.7 billion of that going to cover the local utility’s debts. It amounted to an offer that Hawaiian Electric Industries and its shareholders couldn’t refuse.
If the deal goes through, it could work out very well for some of the company’s executives. A number of them will likely walk away with millions of dollars each.
The company’s top figure, Connie Lau, could receive around $10 million within two years of the merger’s completion, depending on various evolving factors, as part of a change-in-control agreement filed with the U.S. Securities and Exchange Commission.
But beyond the financial rewards, Hawaiian Electric and NextEra executives have argued relentlessly that the deal makes great business sense for the company and especially for customers. Their key arguments: Hawaiian Electric, bolstered by NextEra, will enjoy a far better credit rating, improved purchasing power and access to more efficient technology.
All three factors should translate, they say, into lowering the utility’s costs, making it likely that prices will come down — unless the price of oil, which is still used to produce most of the state’s electricity, goes back up, absorbing such savings.
Regardless of the volatility of oil, cheaper credit would almost undoubtedly be helpful to the utility. In August, Moody’s Investor Services downgraded Hawaiian Electric Industry’s credit rating from stable to negative; NextEra has sparkling appeal to lenders, so it can borrow money more cheaply if, for example, it wants to pay for new technology and infrastructure upgrades. But the inherent risk in the deal was troubling.
Similarly, NextEra is worth about 10 times what it is offering for Hawaiian Electric. So the scale of the energy giant’s purchases, Oshima noted, effectively give it a bulk discount that Hawaiian Electric, by itself, could never access.
NextEra Energy operates in 26 states, as well as in Canada and Spain so it has far broader experience, particularly with newer technologies including renewables than Hawaiian Electric, which operates in a state with just 1.42 million people.
“They have access to technology — and I’ve seen some of it when I visited them — that we could use without coming up with things on our own,” Oshima said. “All of those things will help us run more efficiently, cheaper and benefit our customers.”
Ultimately, Oshima said, “Because of Nextera’s culture and size, it helps us. It really helps us.”
There are many ways for a suitor-corporation to find additional value in a company it is thinking of buying, according to Kyle Datta, general partner at Ulupono Initiative, a social change investment firm. Ulupono is one of 26 remaining intervenors in the NextEra-HECO merger docket,
The suitor might perceive valuable opportunities that are unavailable to a company’s current owner, or it could see ways to decrease costs to boost profits. It can also boost investment that leads to more profits, greater efficiency, or both. Or it can do a lot of other things.
NextEra executives have repeatedly said they look forward to overseeing big investments in Hawaii, making Hawaiian Electric more efficient and developing a holistic renewable energy-driven framework. For a multifaceted energy behemoth like NextEra, that means the company can take lessons it learns and frameworks that it develops in one market, and apply them in others.
So a company that sees the islands as a small part of its overall investment pie will often see opportunities very differently from a company like Hawaiian Electric for whom Hawaii has long been the whole pie.
This is especially true since Hawaiian Electric’s pie has, in some ways, been shrinking.
Residential consumption of Hawaiian Electric’s electricity peaked nearly a decade ago. And — unless Hawaii shifts a large amount of its transportation needs from oil to electricity via electric cars and buses, and rail — that decline is likely to continue as an increasing number of residents satisfy more of their power needs directly from the solar panels going up on their roofs.
About 15 percent of residential rooftops in the state have solar power. Hawaiian Electric has predicted that 45 percent of homes will have such panels by 2030, although recently announced regulatory changes could slow solar energy’s momentum.
And, while Hawaiian Electric is involved in a growing number of renewable energy projects, it faces increasing competition from companies and individuals generating power from solar, wind, biomass, geothermal, liquefied natural gas and other sources. This suggests there is little certainty that Hawaiian Electric will continue to earn the sort of profits it has in the past from electricity generation.
For economist Paul Brewbaker, the real question is whether the price that NextEra is offering is more than Hawaiian Electric believes it will earn given its heavily regulated future revenue streams, high costs and the “ever-changing regulatory” and political environments in the islands.
“There are ways to bring electricity rates down, increase dividends for shareholders, invest in the right modernization and for Hawaii to become more renewable. The issue is more about whether this utility could pull it off.” — Kyle Datta, Ulupono Initiative
The former chief economist at Bank of Hawaii argued that the last factor may be perceived as the “least predictable” for a company like Hawaiian Electric, and therefore the most risky.
According to Ulupono’s Datta, Hawaiian Electric is not predestined for a future of decline.
“There are ways to bring electricity rates down, increase dividends for shareholders, invest in the right modernization and for Hawaii to become more renewable,” Datta said. “The issue is more about whether this utility could pull it off.”
So, with an offer on the table, he said, “You ask your shareholders, can our management team make this happen?”
Two key factors in finding an answer, he said, involve whether Hawaiian Electric’s leadership has the “internal will to make that kind of a shift” and whether the company has the right relationships — in this case with regulators — to do so.
“I think it is fair to say the relationship between the utility and the commission is not good,” Datta said.
While regulators have recently taken a more vigorous approach to their job, this also has implications for de facto energy generating competitors of Hawaiian Electric. (A recent decision that reduces certain advantages for solar led an industry lobbying group to sue the Public Utilities Commission.)
Speaking generally, Datta added that when a utility’s relationship with regulators is too troubled, some companies conclude that under a more deft owner, things will improve to their benefit.
Such factors weigh on the balance when a company like NextEra puts a $4.3 billion offer on the table.
Some critics argue that Hawaiian Electric has done little more than play defense in recent years. Such voices argue that the company — along with many other electric utilities — can’t escape its identity as a slow-to-change 20th century utility that is capable of the flexibility Hawaii needs to achieve its 2045 renewable energy goals.
“The old system,” according to Mina Morita, the former chair of the Public Utilities Commission, involved the power company always matching their own energy supply to the demand for electricity. “We are going though a sort of paradigm shift where we need to shift supply to when demand is greatest.”
She noted that energy generation is just one part of the entire electric system. “What is becoming more important is information on where the cheapest electrons are being generated, where the demand is and how to match that.”
To her, Hawaiian Electric must make profound organizational and cultural changes in order to respond to Hawaii’s new needs. “You really need to look at whether HECO has the capacity to move in that direction.”
“If the deal were not approved I am concerned about how the investment community will look at us as an investment opportunity.” — HECO CEO Alan Oshima
“It is a real important cultural change to use analytics in its operation. When you look at a company like NextEra, they already have that organizational culture and the culture of continuous improvement, which is going to be very important in moving forward,” said Morita.
“While we get caught up in issues of ownership, it really doesn’t matter who owns the utility. You want a well-managed and well-operated utility going forward. Ownership has nothing to do with it,” she said. “Leadership does.”
Hawaiian Electric — Oshima insisted — is making strides in modernizing by breaking down silos within the company and reducing the backlog of rooftop solar applications over the last year.
“We are transforming as a culture, as a company,” he said. “We will continue on that road.”
That said, he noted Hawaiian Electric wants to continue to broaden its vision. He went on to suggest that people with an isolationist mindset in the islands should do the same.
“We do have to change the way we look at things in Hawaii,” he said. “Despite our location as the most isolated landmass in the world, we tend to think of ourselves in the world. But when it comes to other things, we really want to be separate. On economic and technology kinds of issues, I think we have to be connected. We need those economies of scale. We need to move faster.”
While he expressed confidence that Hawaiian Electric is advancing in the right direction, and that it didn’t have to sell, he expressed worry about what might happen if regulators reject the deal. The repercussions could, he suggested, have an effect on the utility’s costs — and prices.
“If the deal were not approved,” Oshima said, “I am concerned about how the investment community will look at us as an investment opportunity.”
Read our ongoing report on Hawaii’s high cost of living and the search for what can be done about it here.
And you can continue the broader conversation and discuss practical and political solutions by joining Civil Beat’s Facebook group on the cost of living in Hawaii.
Disclosure: The Ulupono Initiative was founded by Pierre and Pam Omidyar. Pierre Omidyar is the CEO and publisher of Civil Beat.