Big energy getting bigger

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0:31Pushkin.

0:34Robert Armstrong: The AI boom runs on two things, money and electricity. And as it turns out, electricity runs on money too. Today on the show, the huge NextEra Dominion deal, deal-making and AI, electricity and money, and everything else. I'm Rob Armstrong, and this is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I am joined on the show today by two fan favorites and show regulars, James Fontanella Khan and Oliver Bad News Barnes. Gentlemen, welcome back to the show. Now is the part of the show where I get your titles wrong. So Oliver, you are the U.S. deals impresario, I believe is our term.

1:28Robert Armstrong: Correct. Okay. And you are Grand High Priest, JFK. Of deals. Of all finance. Is that right? Yes. Actually, you should say your real titles. U.S. finance. I'm going to be serious.

1:45Oliver Barnes: U.S. finance editor. And I am the U.S. deals correspondent. The atmosphere in here is electric. Yeah.

1:54Robert Armstrong: Let's start by just there's been a big deal in utilities and it's always a bit of a big ask for a financial journalist to make the utility industry interesting. How dare you say that? Tell us about what this deal is and why it is interesting. I'll let you start, Oliver.

2:13Oliver Barnes: It's interesting first in its scale. It's the biggest deal of the year. It's an all stock acquisition, kind of framed as a combination or merger, but really it's an acquisition. It's NextEra, the world's largest listed utility group by market cap, buying Dominion. The deal is, it values Dominion about$67 billion equity value, around$120 billion enterprise value.

2:43Robert Armstrong: Okay. Place these for me geographically.

2:44Oliver Barnes: Where are these monsters located? Sure. So NextEra, their kind of home base is in Florida. They own a subsidiary called Florida Power and Light, and that serves around 10 million customers in Florida. And this is the grid, the power generation, or both? Both. Their home turf is Florida and Florida Power and Light. And then Dominion basically has a real foothold in Virginia and the Carolinas. But they don't touch.

3:15Robert Armstrong: In other words, the footprints, the geographic footprints don't touch. But they're nearby, but not overlapping.

3:21Oliver Barnes: But they don't overlap, but they will now be contiguous. So like now, if this deal closes, you know, Nextera will control half of the eastern seaboard of the US. I mean, if to frame it in a proper empire building way. But in essence, right, like there are two elements to these businesses, right? In their core, they're regulated utilities, providing power to, you know, everyday Americans, businesses up and down Florida, up and down the Carolinas and Virginia. But then there's another part to the business, which is the power generation element of it. So if you look what's grown next era so much, it's not just this core regulated utility part.

4:02Oliver Barnes: It's the fact that they operate in almost every U.S. state as a power generator. And they're a huge renewable energy generator. They benefited a lot from Biden's Inflation Reduction Act agenda and green push. And now, obviously, that's fallen by the wayside somewhat. They have to pivot towards this other huge opportunity outside regulated utilities, which is data centers.

4:25Robert Armstrong: Of course, we're going to focus a lot on the data centers here. I want to just make sure I have the kind of regulated, unregulated distinction correct. My understanding is the government allows you to have a monopoly supplying power in a certain area. And in return, your profits are limited to a certain amount. Correct. Right. Broadly speaking, whereas unregulated, you're just a company that makes energy and selling it to whoever's out there buying it. And there's also rules.

4:53Oliver Barnes: And don't get me too into specifics here. But there's also rules about how much of a company's revenue streams can come from regulated versus unregulated. So in a way, it can't get too lopsided. So part of actually the logic of this deal for NextEra is also they kind of rewrite that maths of like the balance of regulated versus unregulated.

5:15Robert Armstrong: James, we have to do something now to make Oliver stop talking, so let me ask you a question.

5:20Oliver Barnes: I love hearing Oliver's voice.

5:22Robert Armstrong: It's like every day for him, every hour. I think it's the whole office, really. What's the logic of this deal? It's scale. We're going through an AI revolution, particularly in America. And, by the way, particularly in Virginia. Absolutely. Right. You know what I mean? That's where a lot of these sheds are with the big computers in them. Absolutely. the data center alley, what's it called? Data center alley. Yeah, I think that's right. What is fascinating here is that they need a ton of power. Yes. And they'll do the companies, the data centers, the hyperskills will do whatever they can to get this power.

5:59Robert Armstrong: Yeah. And so a company like NextEra sees this as a hell of an opportunity to supply that power. And Dominion, who they're effectively buying, they're in data center alley. So that's where the demand is. It's got the location. Let's go there. Right. And obviously, when they announced the deal, which was, I should say, was we broke. Yes. Ollie and I broke before everybody else. Tiny little victory lap there. Yeah. Thank you very much. In the press release, I don't think they ever use the word data center. That's very interesting. Which is very interesting. And they, in fact, use another word, which is affordability a gazillion times, which is now one of Trump's favorite words as well.

6:40Yeah, and this touches on the kind of political aspect of this deal, which is pretty significant.

6:46Robert Armstrong: You know, how it's presented is extremely important. A hundred percent, because I think the logic is quite clear. You need scale to kind of help feed all this demand for power. So they're going to have to build a lot of stuff. And if they're a bigger company, they can build it for cheaper. CapEx is another kind of buzzword this year. So everybody needs to invest a ton of money. And in some way, it's great for America. It creates a lot of jobs in industries which were previously maybe less sexy. We always love writing about tech. Now it's all about industrials. It's all about power, utilities. Heavy asset, low obsolescence.

7:26Robert Armstrong: Exactly. Halo companies, they call them. So I think the logic, it basically is quite obvious to everybody. But so why then do they say affordability, affordability, affordability? Well, because in the past, it's never been that straightforward to get two large utility companies to combine. Just that's simple. To the point that we were making earlier about they generally run essentially regulated monopolies. And the way that you can increase usually prices on consumers has to be justified by that CapEx expenditure. Yes. The world is very different now. And so AI, and we can go back to why AI is so important to deal-making today, but for the US, winning the AI race versus China is of absolute importance from a geopolitical perspective.

8:18And you need to balance that interest, that geopolitical kind of battle with the question of affordability in an election year. We've got in November, we'll have midterms. And a lot of people, especially in parts of Virginia, are not very happy about data centers.

8:35Robert Armstrong: I want to focus on the controversial aspect of data center construction, which I kind of sympathize with. And maybe you could sum up like this. The pitch from the tech industry is we're building these machines that are going to take away your job. and by the way before they do that they're going to drive up your electricity bill i don't think

8:58Oliver Barnes: that's quite how they'd want to frame it but i there's there's a truth to it right and and why i think this deal is so interesting is because in a way it strikes at the heart of that kind of duality right next era is both a regulated utility that has to serve its everyday customers right but then at the same time it's seeing this huge potential opportunity in um you know regulated power exactly demand from data centers right the combined company alone has the potential of adding i think 130 gigawatts which is the equivalent of like 100 million homes worth of power right so that's why you you don't get the mention of data centers in the press release and you do get a lot of talk of affordability right because in order to sell this they have to do quite a delicate dance which is basically say on the one hand yes we're going to serve these data center providers But then the scale and profits that we get from that, we can give back to the consumer, at least in the short term.

9:56Oliver Barnes: Right. So they are also offering bill credits, subsidizing the bills of some of the customers where Dominion operates. Right. And the really tricky thing about all of these utility deals, and there have been big ones in the past, but this is by quite a large measure, the biggest. And NextEra knows this very well itself. NextEra has tried on several occasions to do larger deals, some of which came undone in the negotiations and some of which came undone when they went in front of regulators. And it's not so much the regulators in D.C. It's not the FTC that they're necessarily worried about or the DOJ.

10:32Oliver Barnes: It's the public services commissions in the states in which Dominion operates. because their primary concern is always going to be, how does this affect my electorate?

10:44Robert Armstrong: Yes.

10:45Oliver Barnes: So it's like an audience of one, in a way. It's whoever local official is presiding over those committees. And particularly in Virginia, there's quite a thorny history of utilities deals and the financial engineering within this industry getting past the Virginia Public Services Commission. And that's really Dominion's heartland, right? That's why they have to think so much about affordability. Then it plays into this much bigger debate that's unfolding in the U.S.

11:16Robert Armstrong: I want to turn to JFK on that. Can you kind of put this in the context of the national picture? Where is the Trump administration on this? Where is national politics on this? How does that stuff fit in? Well, there's two things going on. On the one hand, the US has been and Trump has been very clear about wanting America to be dominant in the AI space. This is a matter of national security. It's also a matter of like kind of succeeding. Yeah, economic. Economically. Yeah, yeah, yeah. And the rival, very clearly, is China. And so you see also the kind of people in the administration are kind of doing everything to support that.

11:57And so in that sense, this deal is helpful for that. On the other hand, politics is a retail business as well. Yes. And we have an election where the pressure on inflation is rising, despite Trump's promises of lowering it. and a lot of it is driven by electricity costs.

12:17Robert Armstrong: And there's another issue, which is that AI is not that popular. You know, you look how it's polling. Are you looking forward to the future of AI? Or, you know, when I talk to my kids, they're not excited about AI. They're terrified about their futures. It's one of those things that there's a lot of consensus, both on the right and on the left, that, like, we don't like AI. We didn't vote for AI. We didn't ask for AI.

12:41Oliver Barnes: Well, I think because it seems like a bit of a lose-lose, right? Doesn't it? It's like, on the one hand, AI isn't what it stacks up to be. And then we're in a huge bubble and the market comes crashing down. On the other hand, AI does stack up to what it's meant to be. And you're fired. And you are gone. Yeah, exactly. And none of us have a job left. And then meanwhile, like your beautiful pastoral view out your back window has turned into this like large whirring shed. Absolutely. A desktop computer. And it's funny because before we broke this deal, Like, I didn't even know about data center, Ali.

13:14Oliver Barnes: There's this town in Northern Virginia called Ashburn where there's like 150 data centers. Can you imagine? There's only 50 ,000 residents. I mean, there's something so like kind of Martian and soulless about the idea of living in a town full of data centers.

13:28Robert Armstrong: I mean, if you have to live in that town, you should just get a dividend. It should be like living in Alaska and you just get a cut of the oil money. That is kind of what the bill credit is, right? Yeah, yeah. You know what I mean? It is a dividend. It impacts, if I'm not mistaken, mostly Republican states. and that's again it's kind of it's one of those situations where well Virginia's purple famously right? It is but it's kind of the Carolinas aren't and there's a sense that people that have suffered the brunt of AI the most are not based in cities they're more in rural areas which again tend to be more Republican than Democrat and so there's an irony there and so Trump really finds himself in a position where it's not an easy thing to manage.

14:13Robert Armstrong: Do you think the deal is going through, Oliver? Yeah. Yeah. You think it's going to work? Yeah. I just think - It is kind of your baby. You broke it. So basically, if it doesn't go through, it's a commentary on you.

14:24Oliver Barnes: We're completely objective on it. But I think that there is a degree of empire building here from John Ketchum, who's the CEO of NextEra. And this is kind of quite an extraordinary pivot from a few years ago, where really they were just being subsidized so much by the Biden administration. And now they're pushing in to a whole new territory, right? The reason I think, the reason I'm confident that it will go through is that I think nowadays when people go about doing big deals, the first thought they have before they've even got together in the room and started negotiating is what is our Trump strategy?

14:59Oliver Barnes: What is the strategy with the administration, right? And it's no coincidence that a company like NextEra was among the companies that donated to Trump's ballroom, the beautiful ballroom. So that's just one little leg of I'm sure what is a much larger strategy to try and convince the Trump administration of the merits of that. And on this show before, we've discussed the railroad merger that happened. And that now is beginning to go through its regulatory process. And it's maybe not quite as smooth as everyone imagined it would be, right? And I'm sure this won't be easy, but they will have a very detailed, thought-out strategy of how to convince the Trump administration and also how to convince the local regulators.

15:37Robert Armstrong: I want to widen the discussion now to AI and dealmaking. It seems like as a markets columnist, all I get to write about now is AI. Everything that happens in markets is AI-driven, et cetera, et cetera. Is that true in dealmaking world, JFK? Is every time anybody calls you, anytime you talk to a source, is it AI all day long and twice on Sundays? Maybe not every conversation, but certainly a lot of the deals that we look at are driven by AI in one way or the other. We mentioned scale earlier. That's, again, you need to be bigger than ever to compete in this space. But it's also, what is interesting, a lot of industries which were slightly sleepier or like a little less sexy, frankly.

16:26Yes. Have suddenly become the center of the attention. They're being impacted by AI. So give me some examples of that. Well, I mean, in the power and utilities is one, but like in the energy sector, in kind of... Industrials. Industrials. We've seen a lot of action, yeah. Exactly. And the other thing is that the nature of deals has also changed because of AI. And that's, I think, the biggest change. From my perspective, I've been doing this now for over a decade. And it was just like kind of, it was journey pretty vanilla A buys B and, you know, you move on. Times to get blocked by a regulator, you've got to make some concessions.

17:04Now we're seeing, for example, the tech companies were left out of the kind of the mega merger mania that we saw in the last 10 years. And now they found ways of actually doing deals which are not traditional M &A. So starting even with like Microsoft not really owning OpenAI but being in the foundation or instead of you have Facebook, instead of acquiring a company, it now kind of buys out the 10 best employees for$15 billion. Yes. So that's – is that M &A? I mean, it kind of is, but it isn't. And that kind of why are they doing that? In the case of Facebook or Meta, it's probably because it makes it easier not to go through the whole antitrust regulatory process, right?

17:50It's an acqui-hire.

17:51Oliver Barnes: Yeah, rather than an outright deal. In the same way we've been talking a lot about scale throughout this conversation, in tech in a way the driving factor is speed, is that the technology is evolving at such a rapid pace. We went from kind of GPT-4 to GPT-5 and now people are like, we're going to get AGI at some point. Artificial general intelligence. Exactly. Our robot overlord. Let's not get into whether or not that's going to happen or not. But if you're a tech company and if you're one of the big players in AI, you have to think about, okay, if I'm buying something, if I had a regulatory process that takes 18 months, what I'm buying might be irrelevant by the time I actually get to buy it and own it.

18:33Oliver Barnes: Right. And that's what's driving a lot of these kind of acquires or new structures around deals. But the thing that's so striking, I think, that this deal made us think about, I think, for the first time is just how like. AI to to us as the average consumer, it's it's a digital phenomenon, right? You go on your phone, you go into chat, GBT or into Claude or whatever, you know, and you ask it, whatever, whatever, whatever breakfast this morning. but there's a huge physical infrastructure right in the background and in a way that i don't think we've ever really seen because like you think about the internet and telecommunications like yes we laid kind of subsea cables and the internet also needed data centers too but the level of demand for all this physical infrastructure is like it's it's reaching like constantly new heights and it's kind of fascinating how it like cascades from one industry to the next to the next it's like first you have the data centers themselves then there's the power companies serving the data centers so it has effects on the oil and gas companies then it has effects on industrials companies because they're the ones doing the picks and shovels story for the energy companies i like working on their pipelines and little like generators and so much of this this frothiness we're seeing in deal making at the moment when you when you trace a lot of it back it's kind of etymology.

19:58Oliver Barnes: It starts with AI.

20:00Robert Armstrong: Listeners, if the three of us are not replaced by AI in the next few minutes, we will be right back with Long and Short.

20:27Robert Armstrong: Our leading experts analyze key market themes each week. So whether you're managing a portfolio or leading a business, the Barclays Brief podcast can help you make smarter decisions today. Stay sharp, stay briefed. Find Barclays Brief wherever you get your podcasts.

20:47Robert Armstrong: Listeners, welcome back. This is long and short. The part of the show where we go long things we like and short things we don't like. jfk what are you long or short today i'm long on brazil winning the world cup who you think it's going to be brazil they've had a hard time the last couple given that i'm italian and there's no italian team i need to pick a derivative and you're not only do you think they're going to win that's the team you're rooting for absolutely and they're going to win okay very good oliver

21:16Oliver Barnes: i'm long the upcoming new york summer yeah it's going to be a good one i think after one of the most brutal winters ever. Yeah. And with a potential Knicks victory on the horizon, it's going to be special.

21:30Robert Armstrong: If Oliver has just jinxed the Knicks, I'm going to be so happy. JFK is going to be so mad. I am long the gating of private capital funds. Everybody, we have a headline here in the FTDA, Blackstone Caps Withdrawals from Flagship Private Credit Fund. I think the gating structure is totally fine. You saw when you went in, you may not be able to take your money out at will. Sometimes you can't take out your money at will. No problem. Prevents a bank run. Yeah, it prevents a bank run. I don't think there's anything wrong with gating. I don't think it's a problem when funds have to gate. I think this is, we're all grownups here.

22:09Robert Armstrong: We can have, if we're going to have private asset funds, we're going to have gates and gates are fine. JFK wants to say something, but I'm not going to let him say anything about this. Listeners, we will be back in your feed next Tuesday. And until then, stay cool out there. Unhedged is produced by Jake Harper and edited by Bryant Erstat. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Special thanks to Laura Clark, Greta Cohn, and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else.

22:47Robert Armstrong: Just go to ft.com slash unhedged offer. I'm Rob Armstrong. Thanks for listening.

23:13Thank you.