NextEra merger may be too attractive for Duke, regulators to ignore, analysts say

 

Duke Energy’s reported rebuff of NextEra’s merger advances is just another setback in a long line of setbacks over the last 20 years as NextEra has sought to acquire a major utility.

NextEra is a major player in the development of Oklahoma’s wind farms. While some analysts do not see much potential for a deal, others say the advantages of a combination are compelling, particularly in clean energy, and could serve to overcome the significant obstacles to a transaction.

A merger would create the nation’s largest utility with a regulated rate base of more than 15 million customers and revenues approaching $45 billion. Based on recent stock market prices, the combined company would be worth more than $200 billion reported Utility Dive.

NextEra’s stock fell on news of the Duke overture, but Duke shares surged and have remained higher, suggesting that investors like the idea of a tie up and think that Duke’s rebuff may not be the last word on a possible deal.

The fall in NextEra stock was tiny compared to the stock price advances that have come as NextEra has grown its renewables portfolio. NextEra is now more valuable than Exxon, which for many years had been energy’s, and America’s, market capitalization king.

“NextEra and Exxon have passed each other on escalators going in opposite directions,” said Jonathan Arnold, principal at independent research firm Vertical Research Partners in Connecticut, pointing out that as the environment has emerged as a principal concern of the electorate, hydrocarbons have been devalued by investors and premium values have been placed on clean energy.

Over the past 20 years NextEra shares are up over 950%, while the Dow Jones Utility Average index is up a little more than 200%.

NextEra is a top renewables player at a time when demand for clean energy and the expertise to produce it are skyrocketing. The company produces more renewable power than any other player on earth, with wind farms, solar farms and rising storage capability all over the United States.

Next Energy Resources, NextEra’s unregulated merchant power unit that is mostly focused on renewable energy, added more than 1.7 GW to its 14.4 GW renewables pipeline in the first half of 2020 alone. And reflecting strong demand from utilities and customers who are being pressured to move the needle on emissions, Next Energy Resources’ renewables capacity is all spoken for under long term contracts.

“We believe that [Next Energy Resources’] renewables development opportunities have never been stronger,” said Rebecca Kujawa, NextEra executive vice president and chief financial officer, at a utility conference last month, pointing out that Next Energy Resources’ backlog of renewables projects is greater than the renewables operating capacity of all but two utilities in the world.

Renewables are at the heart of why the logic of a NextEra/Duke tie up is strong, according to Arnold. Over 98% of Duke’s revenue comes from regulated sources in six states, including Florida — where all of NextEra’s regulated business is located — Indiana and North Carolina.

“In North Carolina, for example, Duke has various scenarios laid out for achieving cleaner emissions. NextEra can argue that its access to cheap capital, expertise in renewables and strong financial stability can help Duke hit the high end of emission reduction expectations,” said Arnold, adding such an argument could be very appealing politically to regulators and politicians.

But Arnold also points out that Duke, the nation’s largest utility by the number of customers, certainly has the wherewithal to reach emissions targets on its own, and that jumping over as many regulatory hurdles as exist in the many states in which Duke is present will be daunting.

A NextEra/Duke merger would require approval from six state utility regulators in North Carolina, South Carolina, Indiana, Kentucky, Ohio and Tennessee.

Source: Utility Dive