NextEra Energy’s shares have declined about 9% since the company disclosed its plan last month to acquire Dominion Energy in a mostly-stock deal that would create a utility giant more than double the size of the next-largest U.S. electric company by market capitalization, The Wall Street Journal reported Wednesday.
The transaction, which NextEra expects to be immediately accretive to its earnings per share, would combine the nation’s largest utility’s two core assets: Florida Power & Light, a well-managed regulated utility, and NextEra Energy Resources, one of North America’s most prolific power-plant developers. Dominion brings exposure to Virginia, a data-center-rich territory where electricity demand is expected to grow 5% to 6% annually on a compound basis for the next decade, among the highest rates in the sector, according to Hugh Wynne, an equity analyst at SSR.
“You get to tie this rapid growth opportunity at Dominion with NextEra’s capital and expertise to realize it,” Wynne said in comments reported by the Journal.
The deal also boosts NextEra’s mix of lower-risk regulated utility earnings from about 70% to more than 80%, according to S&P Global Ratings. That shift gives NextEra’s fast-growing unregulated development arm more room to expand without triggering a credit downgrade, analysts said. The unregulated unit is NextEra’s primary vehicle for participating in electricity demand growth outside Florida, which has not been a data-center hot spot.
Regulatory approval remains a significant uncertainty. Utilities typically enter a “merger penalty box” when seeking deal approvals because regulators may extract ratepayer-friendly concessions, said Tim Winter, a portfolio manager at Gabelli who focuses on utility funds, as quoted by the Journal. NextEra has already offered $2.25 billion in bill credits for Dominion customers, but regulators in Virginia, South Carolina, and North Carolina are expected to scrutinize the deal closely with affordability as a top priority.
The approval process is expected to take 12 to 18 months. If the deal is blocked, NextEra must pay a $4.83 billion termination fee. However, the share-price decline has erased roughly $18 billion in market value — far exceeding that fee, the Journal noted.
Even as a standalone company, NextEra remains the nation’s biggest utility with targeted annual earnings-per-share growth of 8% or more, on the high end of its peer group. The company has estimated its unregulated arm can continue growing earnings at a 12% annual pace through 2032 while maintaining its credit rating.