NextEra’s Mega-Utility Deal Will Shore Up Its Credit Profile

Article content

(Bloomberg) — NextEra Energy Inc.’s $67 billion bid for Dominion Energy Inc. won’t just create an energy giant stretching from Florida to Virginia, it’s also helping the power firm shore up its credit standing in the eyes of rating companies. 

Article content

Demand from artificial intelligence data centers accelerated growth at NextEra’s power generation business, making it more reliant on earnings from its unregulated unit, where prices are more volatile. That shift was putting its credit ratings ever closer to potential downgrade thresholds, according to Andy DeVries, a utility analyst for CreditSights, a debt research firm.  

Article content

Article content

Article content

“A lesser known aspect of the deal is the need for NextEra to do a regulated acquisition to appease the agencies,” DeVries said, referring to bond rating firms. 

Article content

Article content

Credit rating firms want to see owners of utilities getting the bulk of their earnings from their regulated power distribution businesses, which can provide more predictable cash flow and are less vulnerable to fluctuations that can happen in less regulated parts of the energy market. 

Article content

The three biggest US credit graders, Fitch Ratings, S&P Global Ratings and Moody’s Ratings, reaffirmed NextEra’s ratings Monday, citing the increase in cash flows from the regulated businesses.

Article content

NextEra is paying a takeover premium of 23% based on Friday’s closing stock prices. The deal valued Dominion  — which serves 4.1 million utility customers in Virginia, North Carolina and South Carolina — at about $116 billion including debt, according to data compiled by Bloomberg. 

Article content

For NextEra, it means regulated operations will account for about 80% of its business, compared with just above 70% currently, company executives said Monday during a call with investors. Ratings firms’ thresholds are based on regulated earnings making up about 70% to 75% of the total, CreditSights said. 

Article content

Article content

NextEra Chief Financial Officer Michael Dunne said during the investor call, the addition of Dominion will create long-term stability supporting the company’s growth. 

Article content

“You have a situation where our key rating agencies are really approving this transaction,” Dunne said. “They like what this is doing from a regulated mix.”

Article content

Fitch Ratings affirmed NextEra’s rating at A-, saying the merger with Dominion will be beneficial by adding greater scale, adding “the higher share of regulated cash flows is credit positive.”

Article content

S&P also affirmed its A- issuer credit rating while Moody’s affirmed its Baa1 rating on NextEra.

Article content

“The merger will not increase leverage for the combined company, as it is structured as an all stock transaction,” Toby Shea, vice president at Moody’s, wrote. “NextEra’s business profile will benefit from the addition of another source of high quality regulated cash flows coming from Dominion’s utilities.”

Article content

S&P said it had a stable outlook on NextEra due to the higher share of regulated utility business after the deal, should the transaction close as expected.