By Mark Jaffe, EUCI energy writer
The $67-billion merger of NextEra Energy and Dominion Energy is expected to close, according to an S&P Global survey of analysts, but there was no consensus on whether the deal is a one-off or the start of a round of mergers.
Juno Beach, Florida-based NextEra announced plans May 18 to acquire Richmond, Virginia-based Dominion in an all-stock deal that would create the world’s largest regulated electric utility.
“The proposed merger comes as NextEra seeks to dilute its reliance on expiring clean energy tax credits by increasing its regulated business mix,” S&P Global said. “For Dominion, the deal follows a period of investor disappointment and a strategic business review.”
The market capitalization of the combined company will be more than $249 billion with a rate base of $138 billion, according to an investor presentation. The merged company would be the third-largest in the U.S. energy sector by market cap, behind Exxon Mobil Corp. and Chevron Corp.
“Our country is at an inflection point. Demand for electricity is increasing unlike anything we’ve seen in generations,” John Ketchum NextEra’s CEO, said on a call to discuss the merger. “The opportunity set is enormous. Meeting it requires us to enhance our customer value proposition. That starts with scale.”
The merger will increase NextEra’s share of regulated business to 80% from 70% – reducing its risk profile. Much of the regulated market is in the fast-growing states of Florida, North Carolina, South Carolina, and Virginia.
NextEra has been thwarted in deals with Hawaiian Electric Industries and Oncor Electric Delivery Co. Both ran into regulatory hurdles.
NextEra’s track record on mergers has made it “akin to a runaway bride,” Rob Rains, Washington Analysis director of policy research, wrote in a May 18 report.
The Dominion deal looks to be different particularly as the renewable energy tax credits that were a key part of NextEra’s project development are being sunset by the Trump administration.
Jefferies equity analyst Julien Dumoulin-Smith said in an interview with Platts, part of S&P Global Energy, there is a greater sense of urgency for NextEra.
“This transaction has everything to do with NextEra wanting to rebalance itself, and recognizing there’s an abundance of tax credits in their earnings profile that need to be diluted down because those aren’t sustainable,” Dumoulin-Smith told S&P Global.
Another element that points to the merger closing is the high breakup fees for not doing so.
“It’s a meaningful starting point,” Nicholas Campanella, senior equity research analyst at Barclays, said in an interview with S&P Global, adding, “There’s high confidence in the management teams of getting this done based on the break fees.”
If Dominion terminates the deal or fails to get shareholder approval, the company would have to pay NextEra a $2.24 billion termination fee. NextEra would face a $6.52 billion penalty if it fails to go through with the merger.
The question going forward is whether or not the NextEra is just the beginning of a round of power sector consolidation.
Analysts at Mizuho and Evercore told clients they expect more utility-sector merger and acquisition activity, S&P Global said.
“It’s a meaningful starting point,” Campanella, said in the interview with S&P Global. He said discussions about “other potential tie-ups” could be happening.
Andrew Bischof, a Morningstar analyst, was “more cautious” about further transactions. This merger, he said, presented a special case with NextEra’s large balance sheet and Dominion’s discounted trading multiples.
“I’m not quite sure I see that dynamic elsewhere in the market right now,” Bischof told S&P Global.
The deal, Jefferies Dumoulin-Smith said is “really a one-off.”
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