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. 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.

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-driven merger logic

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.

"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," said Roger Conrad, editor of Energy and Income Advisor at Capitalist Times, an investment advisory firm.

On Friday, at its inaugural ESG Day, Duke laid out a new 10-year renewables target, announcing plans to triple renewable capacity from the current 8 GW by 2030, while reaffirming its plan to double capacity by 2025.

"Our confidence in these new commitments is grounded in Duke Energy’s strong record of results," said Duke CEO Lynn Good speaking at the virtual ESG event.  

The fact that Duke has so much of its revenue on the regulated side is appealing to NextEra, not least because the company needs to expand its regulated footprint to balance its growth in renewables on the merchant power side, something NextEra is required to do to maintain its S&P A- credit rating, Conrad said.

20-year quest

NextEra has for the last 20 years been trying to get a major utility merger deal done, with no success. The company struck out on a transaction in 2001 to merge with Entergy in Louisiana and five years later could not reach a deal for Constellation Electric in Baltimore.

In 2017, the Texas Public Utilities Commission rejected NextEra's attempt to buy Oncor Electric Delivery Co., and in 2016 NextEra ended its bid to buy Hawaiian Electric amid strong local opposition.

Speaking to the recent Wolfe Research Virtual Utilities Conference, NextEra CEO James Robo expressed his frustration at the lack of deal success: "You just need to look at our track record over the last 20 years in M&A to know it's hard."

Last year, NextEra was able to get a relatively small deal done, acquiring Gulf Power, a utility with about 550,000 customers in the Florida Panhandle near NextEra regulated unit Florida Power & Light’s South Florida regulated ratepayer zone.

And late last month NextEra paid $660 million for Gridliance, an Irving, Texas-based transmission company, after purchasing Trans Bay Cable, a California transmission company, several years ago.

Duke experienced a recent setback with the cancellation of the $8 billion Atlantic Coast Pipeline, which the company abandoned along with its partner, Virginia’s Dominion Energy.

What will be very appealing to Duke shareholders is the aforementioned NextEra stock valuation, which gives NextEra a very valuable currency to dangle before Duke investors, Conrad said.

"NextEra will be able to do what Dominion Resources did when they acquired SCANA Corp," he said, referring to the Virginia utility’s 2019 acquisition of South Carolina’s SCANA, which was drowning in debt and stranded nuclear assets. "Dominion was able to offer their more valuable shares in exchange for SCANA’s, which was attractive to SCANA shareholders.

NextEra stock is up 26% this year, while Duke stock was down about 9% when news of NextEra’s advance hit on Sept 29. Since then, Duke shares are up about 2.5% on the year, suggesting that investors like the idea of a NextEra/Duke tie up and are speculating that Duke’s rebuff may not be the last word on a potential deal.

Conrad said that if Duke opens up to a NextEra deal, a big threat may come from Duke’s Atlantic Coast Pipeline partner Dominion Energy.

"The greatest risk to a Duke/NextEra union is a third-party offer, he said. "Like Duke, Dominion Energy is ramping up wind and solar energy adoption, responding to demand from its commercial customers and regulatory support. Combining with Duke’s efforts in their shared Mid-Atlantic region would provide incremental resources to accelerate that investment."

Duke and NextEra declined to comment for this story beyond what their executives have said in public.