Dive Brief:

• NextEra Energy's internal evaluations of a potential acquisition of Evergy are in their preliminary stages, according to a report from Reorg M&A. Other utilities, including Ameren and American Electric Power (AEP), are also interested in acquiring the Kansas-based utility, according to previous reports.

• Evergy is under pressure from activist investor Elliott Management to consider options for a sale. The utility declined to comment on bids or recent interest, but Elliott’s letter in January highlighted the opportunities of a "premium stock-for-stock merger" as a potential combination.​ 

• NextEra hired Citi to advise on the potential transaction, according to Reorg.

Dive Insight:

NextEra has consistently shown interest in purchasing electric utilities, having submitted an offer for JEA before the municipal utility’s board unanimously rejected a series of bids. But while utilities are highly sought after in the sector, the COVID-19 pandemic is causing an economic downturn and analysts have seen increased volatility in utility stocks.

"With the risk-adjusted rate of return, we’ve seen tremendous amounts of volatility" in the last three to four weeks, Paul Patterson, analyst at Glenrock Associates, told Utility Dive.

"This volatility is something that any potential deal would have to be taking into account," he said, adding that he was surprised to see headlines of NextEra’s interest "in the middle of" COVID-19.

NextEra did not respond to requests for comment. On Jan. 21, Guggenheim Securities reported NextEra and Ameren were clear candidates for a merger with Evergy, with Exelon as a "potentially dark horse."

Ameren, NextEra and others "could make the math work under the 'Combination' path pitched by activists," Guggenheim analyst Shahrir Pourreza wrote in the note, according to S&P Global.

Pourreza did not respond to requests for comment regarding current appetite for M&As.

Ameren, based in St. Louis, has experience working with regulators in Missouri, who also have jurisdiction over Evergy. In addition, Evergy has recently contracted for renewable energy from the generation arms of AEP and NextEra.
 

When Westar Energy and Kansas City Power & Light, a subsidiary of Great Plains Energy, were working on their $12.8 billion merger for what would become Evergy in 2019, Kansas regulators delayed the process for two years when they deemed the utilities did not provide adequate safeguards to protect consumers.

"Utility acquisitions… often involve a large amount of regulatory scrutiny and what have you," Patterson said, adding that as the Westar merger drew out, a future deal could also extend long after the pandemic is over.

Besides JEA’s rejection, NextEra also hit dead ends with Hawaii and Texas regulators when trying to purchase utilities in those states, before finally acquiring Gulf Power. NextEra CEO Jim Robo presented to state legislative committees in South Carolina regarding a potential bid on the publicly-owned Santee Cooper utility.

Any bid for Evergy would have to withstand the state’s merger standards, David Nickel, consumer counsel for the Kansas Citizens’ Utility Ratepayer Board (CURB), told Utility Dive. 

CURB had opposed the merger that produced Evergy, but would not be taking any position on potential partnerships until bids for the utility were officially posted, Nickel said.

"We primarily look to see what it’s going to do to the credit rating of the merged company, what type of savings there would be for ratepayers by virtue of the merger."