One Big, Bullish Energy Merger
#1 Nat Gas Joins with #1 Data Centers
Editor’s note: Thanks for reading Dividends Roundtable! Sometimes, things happen that are too good to wait for the regular weekly issue!—RC
Over the past 125 years, America’s electric utility industry has consolidated from literally thousands of operating companies to several dozen majors.
This week has brought the industry’s most audacious deal. And this is one case where the biggest is definitely the best yet.
NextEra Energy (NYSE: NEE) has agreed to buy Dominion Energy (NYSE: D), with every D share exchanged for 0.8138 NEE.
The all-stock deal will create a regulated electric utility serving 10 million customers in four of the five fastest growing US states. The new company will serve the world’s largest concentration of data centers. It will operate 110 gigawatts of electric generating capacity with a 130 GW development pipeline. And it will be the largest producer of renewable energy/storage and natural gas generated electricity, as well as number two in US nuclear power.
The partners expect the deal to be immediately accretive to earnings after the close, which is expected to take 12 to 18 months. And management is guiding to 9% plus annual earnings growth through at least 2032, fueled by 11% annual growth in regulatory capital employed.
The combined company will enjoy enhanced access to capital, with BBB+ (S&P) Dominion getting an immediate boost from A- rated NextEra. Revenue reliability will be firmly anchored in 80% regulated cash flow and the balance fully contracted generation, electric transmission and natural gas pipelines. And it will benefit from some of the most favorable utility regulation in the US—Florida, the Carolinas and Virginia.
Both utilities have long track records of successfully executing energy infrastructure construction. That includes the biggest ongoing project between the two companies—the now 75% plus completed, 2.6 GW Coastal Virginia Offshore Wind facility. And it will have by far the biggest inventory of future data center business, with 51 GW in Virginia alone.
As this deal is all-stock, the offer value for Dominion will fluctuate until the close. And predictably, shares of the acquirer NextEra have sold off a bit on the news. But even at a price of $85 for NEE, the offer is still worth almost 15% more than D’s close Friday. At $90, it’s 20% higher. And long-term, the linkage to high growth NEE’s shares will be worth much bigger gains.
The exchange ratio implies a post-deal dividend of 50.7 cents for Dominion. That’s based on NextEra’s current rate of 62.3 cents times the exchange ratio of 0.8138. That’s a reduction of -24% from the current rate of 66.7 cents.
But Dominion shareholders will also receive a special dividend of $360 million at the close. By the time the deal is done, NextEra will have raised its dividend at least one more time to a rate of at least 66 cents per share based on guidance for 6% annual growth. And within 2-3 years of the close, the regular payout should be higher than what Dominion shareholders now receive.
Regulatory Approvals Highly Likely
Under Florida law, regulators do not need to approve utility mergers, though it’s a fair bet that officials were consulted first. That leaves state regulators in Virginia and the Carolinas, the Federal Energy Regulatory Commission, the Department of Justice (anti-trust) and the Nuclear Regulatory Commission as the key hurdles.
Earlier this year, the Trump Administration forced Dominion to stop work on CVOW. And it’s possible the Interior Department will require the utility to relinquish licenses it holds for additional offshore wind capacity as a condition for merger approval.
NextEra on the other hand has proven adept navigating Trump energy policies, winning a 10 GW contract to develop natural gas generation funded jointly by the US and Japanese governments. Federal regulators have also expeditiously approved extending licenses of its nuclear power plants, the restart of the Duane Arnold nuclear facility and expansion of the Mountain Valley Pipeline (30% owned). And there’s been little or no interference in its expansion of solar, wind and energy storage operations, which pulled in a quarterly record 4 GW of new orders in Q1.
Bottom line: NextEra and Dominion should be able to win fairly speedy federal regulatory approvals for this merger, and with acceptable if not minimal conditions.
I also expect both Carolinas to approve within a year if not sooner. Dominion’s ability to carve together an all-parties rate settlement in its ongoing South Carolina is a clear testament to how much the environment has approved since the 2019 SCANA merger. And the company’s North Carolina presence is small.
That leaves Virginia as the critical path for this deal.
The key issues are almost certain to be affordability and data centers. The northern part of the state is the epicenter of America’s data center boom. Data centers are already 30% of Dominion’s commercial load. And with 51 GW of prospective new demand in various stages of development, they were the primary driver of the company’s 4.3% boost in weather normalized demand for Q1.
Data centers are a key driver of Virginia’s economy. But providing the needed electricity to run them without burdening Dominion’s ratepayers and the state’s environment has become a critical concern for the public, and by extension politicians.
That said, Virginia Governor Spanberger and the Democrat-controlled legislature have laid out ambitious goals for renewable energy expansion. And joining Dominion to NextEra would certainly accelerate that, given the acquirer’s unmatched supply chain for rapid development and deployment of solar, wind and battery storage.
The companies have pledged to keep Dominion’s headquarters in Richmond as an effective regional hub. And CEO Robert Blue would become boss of the combined regulated utilities, as management is combined.
One fundamental difference between utility mergers and M&A in other industries is businesses are so similar they can be easily scaled. And with some $200 billion in investment opportunities, the focus for the new company is expansion and growth, rather than shrinking and cost cutting. The new company will guarantee “18 months of job protection and 24 months of compensation and benefits protection” for Dominion employees after the close.
The companies have also promised $2.25 billion in rate credits for Dominion’s utility customers, over the two years following the close. My view is that figure is likely just an opener and will likely be raised in a final settlement. But it’s also a clear indication of the efficiencies and growth this deal offers all parties.
So what am I recommending now?
