NextEra Energy

On Aug. 6, Virginia Gov. Abigail Spanberger announced that she will formally intervene in the regulatory review of the proposed combination between Dominion Energy and NextEra Energy.

Why it matters: Gov. Spanberger's request to intervene in the State Corporation Commission's regulatory review of the case is the first time that a Virginia governor has formally intervened in a regulatory review. Regulators ultimately have the authority to review and approve the merger, but the governor's intervention allows her to have her position heard formally during the regulatory proceedings. Spanberger noted three “nonnegotiable priorities” for her support for the transaction: customer affordability, protection of jobs, and continued support for renewable energy. NextEra Energy previously announced $2.25 billion in customer bill credits as well as protections for Dominion employees. With NextEra being the largest renewable energy developer in the US, we think NextEra will support Dominion's renewable energy goals.

The bottom line: We are reaffirming our $88 fair value estimate for NextEra Energy and $73 fair value estimate for Dominion Energy. We think the transaction is in the best interest of Dominion shareholders. We previously increased our fair value estimate by $14 per share when the transaction was announced.

Long view: NextEra has filed for key state and federal regulatory approvals and plans to close in the second half of next year. We viewed Virginia as the most difficult regulatory approval to obtain. Today's announcement supports that view. We think there is increased risk that NextEra will need to offer more bill credits to Virginia customers than the current $2.25 billion proposal to obtain regulatory approval. Given the size of the transaction, we don't expect any additional customer benefits will materially alter our fair value estimate.

Our fair value estimate is $88 per share, reflecting recent regulatory and financial updates.

For the proposed acquisition of Dominion Energy, Dominion Energy shareholders will receive 0.8138 shares of NextEra Energy, plus a one-time $360 million payment upon the deal closing. Dominion Energy shareholders will own approximately 25.5% of the combined company. We lowered our fair value $2 per share as a result of the transaction. Most of the premium paid by NextEra Energy is offset by issuing shares above our fair value and operational synergies of the combined entity.

Our near-term profit outlook accounts for forecast rate increases and capital investments at FP&L through 2030, additional wind and solar generation investments at NEER, normal weather, and continued strong energy demand and economic growth in Florida. We expect the company to achieve management's goal for more than 8% annual earnings growth through our forecast.

At FP&L, we assume Florida regulators continue to set customer rates based on a 10.95% midpoint long-term allowed return on equity with the potential for the company to earn an additional 100 basis points. We assume 11.5% in our forecast based on management's track record of achieving returns greater than the midpoint of its allowed ROE range.

We estimate NextEra will invest more than $35 billion annually through 2030. We expect its regulated utilities will focus on new generation, existing generation maintenance, and transmission and distribution investments.

We anticipate that NextEra will continue to pivot toward solar development after aggressively building out its wind portfolio the past two decades. We forecast NextEra will achieve the midpoint of its 2026-29 development program of 44 GW-61 GW. We forecast NextEra will build 2 GW of natural gas generation to serve data centers by 2030.

We use a 5.8% cost of capital.

Considering NextEra Energy’s full suite of businesses, we assign the company a narrow moat.

We don't expect the proposed transaction to acquire Dominion Energy to have no effect on our narrow moat rating. Narrow-moat Dominion operates competitively advantaged regulated utilities in constructive regulatory environments. Additionally, the transaction will increase NextEra's total business from regulated utilities to 80% of earnings, up from the current 70%, further strengthening NextEra's moat.

Service territory monopolies and efficient scale advantages are the primary sources of an economic moat for regulated utilities such as NextEra Energy’s regulated Florida utility, FP&L. State and federal regulators typically grant regulated utilities exclusive rights to charge customers rates that allow the utilities to earn a fair return on and return of the capital they invests to build, operate, and maintain their distribution networks. In exchange for regulated utilities’ service territory monopolies, state and federal regulators set returns at levels that aim to minimize customer costs while offering fair returns for capital providers.

This is particularly true for FP&L. The company’s below-average retail rates have garnered comparatively favorable treatment in the already-constructive Florida regulatory jurisdiction. FP&L enjoys above-average returns on equity, forward-looking rate adjustments, and automatic general base-rate adjustments for investments upon completion.

We also believe NextEra's renewable energy business has a durable competitive advantage. This segment has secured some of the country's most desirable wind and solar generation sites, locking in 20-year-plus purchase power agreements with escalator clauses protecting returns. Moreover, a large, diversified generation fleet gives this segment scale, cost, and flexibility advantages over smaller competitors.

NEER will look to develop natural gas generation beginning in 2030, where we believe it has less of a competitive advantage.

FP&L operates in one of the most constructive regulatory environments with numerous capital investment opportunities.

NEER has benefited from renewable energy federal tax credits, but state renewable portfolio standards, corporate purchases, and attractive economics are also supporting renewable energy investments.

Management's long runway of capital investment opportunities support our expectation that annual earnings growth can achieve management's expectations of more than 8% annual earnings growth through 2035.

Federal renewable energy policy uncertainty under the current administration could lessen the competitiveness of NextEra's wind and solar portfolio.

NextEra's aggressive investment plan increases regulatory, execution, and inflationary risk.

Rising interest rates will raise financing costs and could make development of NEER's renewable energy backlog more difficult to achieve.