Duke/NextEra And Another Wave Of Utility M&A
Not even rock-solid business resilience to Covid-19 fallout has been enough to swing US electric utilities from laggards to leaders this year. But another wave of mergers and acquisitions just might do the trick.
Joining NextEra Energy (NEE) with Duke Energy (DUK) would create the US’s biggest electric utility, combining a regulated franchise serving 15 million customers with the world’s largest portfolio of wind and solar generating facilities.
Now that Duke management has apparently rebuffed the initial offer, there are three questions for investors to answer:
Does a deal between these companies make sense?
Could a merger pass regulatory muster if a suitable bargain can be struck?
What’s the likelihood of more utility M&A this year?
The best way to think about a NextEra/Duke tie-up is it would boost the pair’s earnings by accelerating America’s long-term transition to renewable energy resources.
NextEra’s unregulated Energy Resources unit is getting much bigger, very fast. Combined wind, solar and battery storage project backlog is now 14.4 GW, after the addition of another 1.73 GW in the first half of 2020 alone. And all that output is basically sold under long-term sales contracts to regulated utilities.
Merging with Duke would add another 8 GW to NextEra’s fleet, an amount the Carolinas-based company has committed to doubling by 2025. That’s currently sold mostly under long-term contracts with commercial customers, including a 101 MW deal with Duke University announced in late September. But it will increasingly be in regulated rate base earning a guaranteed return of 9 to 10 percent a year, as the utility executes a $56 billion, five-year capital budget.