Fitch Rates NextEra Energy Capital Holdings' Hybrids 'BBB'
NEW YORK -- January 17, 2013
Fitch Ratings has assigned ratings of 'BBB' to NextEra Energy Capital Holdings
Inc.'s (Capital Holdings) issue of up to $488.75 million 5.00% series J junior
subordinated debentures due Jan. 15, 2073. The debentures will be
unconditionally and irrevocably guaranteed by NextEra Energy, Inc. (NEE). The
net proceeds from this issue along with other general funds will be used to
repay a portion of Capital Holdings' outstanding commercial paper obligations
(which stood at $1.6 billion as of Jan. 14, 2013) and for general corporate
purposes. The Issuer Default Rating (IDR) of NEE and Capital Holdings is 'A-',
and the Rating Outlook for both is Stable.
The debentures are junior and subordinated in right of payment and upon
liquidation to all of Capital Holdings' senior indebtedness. The junior
subordinated guarantee from NEE is unsecured, will rank junior, and will be
subordinated in right of payment and upon liquidation to all of NEE's senior
indebtedness. So long as there is no event of default under the subordinated
indenture, Capital Holdings may defer interest payments on the debentures on
one or more occasions for up to 10 consecutive years per deferral period.
The securities are eligible for 50% equity credit under Fitch's applicable
criteria 'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT
Credit Analysis' dated Dec. 13, 2012. Features supporting the equity
categorization of these debentures include their junior subordinate priority,
the option to defer interest payments on a cumulative basis for up to 10 years
on each occasion and a 60-year maturity.
NEE's ratings are supported by sound liquidity and satisfactory cash flow from
two businesses: its utility subsidiary Florida Power & Light (FPL) and Capital
Holdings' non-regulated energy subsidiary, NextEra Energy Resources (Energy
Resources). NEE's ratings reflect a shifting business mix through 2015 towards
regulated and highly contracted cash flows driven by significant rate base
growth opportunities at FPL, completion of the regulated Lone Star
transmission line in 2013, weak wholesale prices that reduces the contribution
of non-contracted generation assets, and rising contribution from solar and
Canadian wind investments that partially offset the decline in U.S. wind
Over 2013 - 2015, NEE's cash flows from stable utility-type sources are
expected to grow. FPL was able to achieve a constructive outcome in its
recently concluded rate case. The utility was allowed a $350 million rate
increase effective Jan. 2, 2013 based on a mid-point Return on Equity (ROE) of
10.50% with a band of +/- 100 basis points and nearly 60% equity ratio.
Importantly, the order provided for a four-year generation base rate
adjustment (GBRA) mechanism, which allows FPL to raise rates when its three
modernization projects, Cape Canaveral, Riviera Beach and Port Everglades
achieve commercial operations in 2013, 2014 and 2016, respectively, without
having to file a rate case proceeding. This not only provides timely recovery
on major capital expenditures but significantly reduces regulatory risk of
frequent rate filings.
At Capital Holdings, completion of new Texas electric transmission assets will
result in predictable tariff revenues. Fitch forecasts that regulated
businesses will contribute more than 55% of NEE's EBITDA for the next several
years. Within Energy Resources, the contribution of long-term contracted
generation assets will increase. Fitch expects contractual sources to drive
another 25% - 30% of NEE's consolidated EBITDA over the next few years.
NEE's credit metrics, as reported, show more leverage than 'A-' peers.
However, Fitch considers several factors that mitigate debt leverage. First,
sales at Energy Resources are supported by off-take contracts for a longer
term than most other peers (approximately 90% hedged over 2013 - 2014). This
provides NEE with greater insulation to commodity price movements as compared
to other hybrid peers. Second, NEE's non-utility generation is concentrated in
renewable and nuclear resources with favorable environmental characteristics.
Finally, about $6.5 billion of consolidated debt (as of Sept. 30, 2012) is
made up of project finance loans that have limited or no corporate recourse.
Fitch's adjusted consolidated credit metrics for NEE incorporates off-credit
treatment to limited recourse debt at Energy Resources. This reflects Fitch's
assumption that NEE would walk away from these projects in the event of
financial deterioration, including those projects where a differential
membership interest has been sold. Fitch accordingly excludes the debt,
interest expense, EBITDA contribution and tax attributes from such projects
and includes only the distributable cash flow.
What Could Trigger a Rating Action
Deterioration in Florida Regulation: Any change in current regulatory policies
at the Florida Public Service Commission (FPSC) that adversely affect the
timely recovery of utility capital investments, fuel and purchased power
costs, and storm-related costs would adversely affect NEE's and FPL's ratings.
Increase in Business Risk Profile: A change in strategy to invest in more
speculative assets, non-contracted renewable assets or a lower proportion of
cash flow under long-term contracts would increase business risk and could
result in lower ratings for NEE. The high level of capital expenditures at
both FPL and Capital Holdings creates completion risks, as well as funding
Aggressive Financial Strategy: Any deterioration in credit measures that
result from higher use of leverage or outsized return of capital to
shareholders could lead to negative rating actions.
Change in Tax Laws or Regulations: Changes in tax rules that reduce NEE's
ability to monetize its accumulated production tax credits, investment tax
credits, and accumulated tax losses carried forward would be adverse to NEE's
cash flow credit measures.
Positive Rating Actions Unlikely: Positive rating actions for NEE and Capital
Holdings appear unlikely at this time.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
(Dec. 13, 2012);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers'
(Nov. 13, 2012);
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL,
COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM
THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
Shalini Mahajan, CFA, +1-212-908-0351
One State Street Plaza
New York, NY 10004
Julie Jiang, +1-212-908-0708
Glen Grabelsky, +1-212-908-0577
Brian Bertsch, +1-212-908-0549 (New York)
Press spacebar to pause and continue. Press esc to stop.