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NextEra pays premium for Fla. expansion in deal for Southern assets

NextEra Energy Inc.'s $6.48 billion acquisition of Southern Co.'s Florida businesses and two gas plants allows Southern to address a multibillion-dollar equity need and NextEra to grow regulated earnings, their CEOs said May 21.

NextEra shares added 2.41% in average volume to close the day at $160.22, and Southern shares climbed 1.66% on brisk volume to close at $43.44.

NextEra said the regulated contribution will grow to 70% of its overall business mix when the service territories of Gulf Power Co. and Florida City Gas are combined with Florida Power & Light Co. NextEra will also add to its portfolio the Oleander and Stanton gas-fired plants from Southern Power Co. NextEra Chairman, President and CEO Jim Robo said the company has no plans to bring the two gas plants into FPL as regulated assets in the near term.

The deal terms include a $5.1 billion cash purchase price, which NextEra expects to finance through the issuance of new debt, and the assumption of $1.4 billion of Gulf Power debt. NextEra estimates the deal will increase EPS by 15 cents in 2020 and by 20 cents in 2021 and raised guidance accordingly.

NextEra still expects to maintain $5 billion to $7 billion of excess balance sheet capacity, which Robo said could go toward share buybacks, capital investments or future acquisitions.

When asked if NextEra has plans to acquire another utility, Robo said that notion is "getting the cart ahead of the horse," but declined to rule out further regulated acquisitions. NextEra has reportedly been pitching elected officials in South Carolina with unofficial deal terms to acquire Santee Cooper, legally known as the South Carolina Public Service Authority.

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"We're going to be, as we always are, on the hunt for attractive opportunities, whether they're incremental capital investments in both our core businesses or potential regulated asset opportunities that we see in areas that we find attractive," he said. "Having done this transaction, the strategy hasn't changed."

Robo added that while the Florida City Gas purchase compliments FPL's pipeline network, it does not necessarily serve as a launchpad for NextEra to move strategically into the local distribution company sector around the country.

'Value-enhancing' sale

For Southern, deal proceeds will go toward addressing the company's $7 billion equity need over the next five years as it works to mitigate the effects of federal tax reform.

On a separate conference call, Southern Executive Vice President, CFO and Chief Risk Officer Art Beattie said the company has a "clear objective" to improve its credit profile through debt reductions, primarily by increasing equity ratios at its regulated utilities.

Southern expects pretax proceeds of $5.75 billion for Gulf Power, $530 million for Florida City Gas and $195 million for Stanton and Oleander. The deal should help Southern avoid approximately $3 billion in new share issuances. The company is also contemplating pursuing third-party tax equity deals for Southern Power's wind fleet, which Beattie said could close in the fourth quarter and reduce debt by $1 billion, leaving a "modest" equity need of $3 billion.

"Our current five-year financing plan does not assume any discrete equity offerings or block sales as we expect that our internal equity plans, supplemented with other methods we have used in the past such as an at-the-market program, could easily fund our remaining equity needs," Beattie added.

Southern Chairman, President and CEO Tom Fanning suggested its deal with NextEra represents a safer option than relying on equity markets.

"Reducing the execution risk of our equity financing plans, particularly in times of potentially rising interest rates, market volatility and uncertainty, makes the value created even greater," Fanning said. "We all like to get bigger and stronger and all that, but boy oh boy, I think this announcement today demonstrates the other side of our thinking: that if we can improve shareholder prospects by value-enhancing sales, we will certainly consider it."

Southern sold two of its gas utilities in 2017 and sold a subsidiary of its gas business last month.

'Win-win for both parties'

CreditSights analyst Greg Jones wrote in a May 21 note that the transaction is credit positive for Southern, and CreditSights' view of NextEra remains unchanged.

Jones expects Southern to send equity proceeds to regulated utilities in Georgia and Mississippi, where generation projects have caused financial and regulatory headaches.

CreditSights analysts were "astounded by the sky-high" premium paid for Gulf Power, calculating a 29x price-to-earnings ratio and a 12.6x enterprise value-to-EBITDA multiple, after removing the value of the two gas plants. "On this basis, it looks like [Southern] made out like a bandit on this one," Jones wrote. "[NextEra] is clearly overpaying to get its [percentage of] regulated earnings well over 60%, maintain its $5 to $7 billion excess balance sheet capacity and own a utility based in its home state of Florida. Southern likely knew that [NextEra] would overpay given that [NextEra] has the home state regulatory advantage in [Florida]."

"We view the transaction as a win-win for both parties," Wells Fargo Securities analyst Neil Kalton wrote in a May 21 note, citing NextEra's enlarged Florida geography and Southern's reduced equity need. He reiterated the former's "outperform" rating and the latter's "market perform" rating.

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