Fitch Affirms IDRs of NextEra Energy, Inc. and its Subsidiaries; Outlook
NEW YORK -- April 26, 2013
Fitch Ratings has affirmed the Issuer Default Ratings (IDR) of NextEra Energy,
Inc. (NEE) and NextEra Energy Capital Holdings (Capital Holdings) at 'A-'.
Fitch has also affirmed the IDR of Florida Power & Light (FPL) at 'A'. The
Rating Outlook is Stable. A list of debt instruments affected is provided at
the end of this release.
RATING DRIVERS FOR FPL
FPL's ratings reflect the predictable nature of cash flows from regulated
electric operations, a favorable outcome to the recently concluded base rate
case that provides for at least four years of regulatory certainty, recovering
electric sales in its service territory after a prolonged trough, and a strong
balance sheet and liquidity profile. The ratings also reflect high-capex
investments over 2013-16 as the utility spends on new generation and other
The outcome of FPL's 2012 base rate case filing was quite constructive, in
Fitch's opinion, and resulted in a $350 million base rate increase effective
January 2013 and allows the utility to earn a return on equity (ROE) of up to
a 100-basis point band around 10.5%. FPL was also granted a four-year
generation base rate adjustment (GBRA) mechanism that automatically adjusts
base rates on commercial operations of its new generation plants in 2013, 2014
and 2016, and reflects an approximately $3.5 billion addition to the rate
base. While the order spans a four-year term (till December 2016), FPL could
potentially delay filing a rate case for a longer period by proactively
managing its costs. A favorable turnaround in the regulatory climate in
Florida and an extended period of regulatory certainty for FPL is a key credit
positive for the company and an important driver for Fitch's affirmation of
the 'A' IDR.
A recovering Florida economy could drive FPL's electric sales growth rates
above national averages over Fitch's forecast period. Adjusted for weather,
FPL's retail kWH sales grew 1.7% in 2011 and 1.8% in 2012. Fitch's financial
forecasts for FPL are based on a conservative 1.0% cumulative annual growth
rate over 2013-16; any upside in sales growth would be positive for FPL's
credit metrics. Conversely, a flat or declining growth environment could put
pressure on FPL's financial performance. That said, FPL's credit metrics are
expected to be quite robust in 2013 on the heels of a favorable rate decision
and there exists adequate headroom to withstand a long period of
flat-to-negative growth, which is what Fitch has assumed in its stress case.
This is also a key factor in the stability of FPL's ratings, since the utility
cannot implement a base rate increase outside the GBRA mechanism before
FPL plans to spend over $9.2 billion in baseline capex through 2016. Of this
amount, approximately $2.0 billion will be spent on modernizing its aging gas
fleet at Cape Canaveral, Riviera Beach and Port Everglades, with the new
gas-fired plants expected to be in service by 2013, 2014 and 2016,
respectively. All these projects have been approved by the Florida Public
Service Commission (FPSC). Recovery of these expenditures will be via the GBRA
mechanism and is expected to result in only modest price increases for
consumers due to the anticipated fuel cost savings. Infrastructure
improvements and maintenance capex make up the bulk of the remaining capex
In addition, FPL has identified another $4 billion-$5 billion of incremental
investment opportunities in areas such as storm hardening, generation
upgrades, solar investment, natural gas pipeline and other
infrastructure/reliability improvements. The visibility around the incremental
capex is low at present; Fitch has assumed that FPL spends between $3
billion-$3.5 billion in incremental capex over the forecast period. Fitch
expects FPL to finance its capex needs using a mix of equity and debt so as to
maintain its regulatory capital structure. Reflecting the additional capex in
financial assumptions does pressure FPL's forecasted credit metrics, since
there will likely be a regulatory lag associated with some of these
Fitch anticipates FPL's credit metrics to strengthen in 2013 and beyond as a
result of the $350 million base rate increase effective 2013, stepped-up GBRA
increases, and rate increases associated with the ongoing nuclear uprates.
Fitch expects EBITDA coverage ratio to be 8.0-8.5x and Debt-to-EBITDA ratio to
be in the 2.4x-2.6x range towards the end of the forecast period. The funds
flow from operations (FFO)-based credit measures remain robust over 2013-14
due to bonus depreciation benefits, and decline to more normalized levels
thereafter. Fitch forecasts FFO-to-Debt to be in the 25%-27% range and
FFO-to-interest coverage to approximate 7.0x toward the end of the forecast
RATING DRIVERS FOR NEE AND CAPITAL HOLDINGS
NEE provides a full guarantee of Capital Holdings' debt and hybrids. Thus,
Capital Holdings' ratings and Rating Outlook are identical to those of NEE.
NEE's ratings reflect weak but recovering credit metrics, declining capex
after hitting peak levels in 2012, and a continued shift in the business mix
through 2016 towards regulated and highly contracted assets. Driving the
favorable shift in cash flow mix are factors such as base rate increases at
FPL as a result of the 2012 rate order, completion of the regulated Lone Star
transmission line in 2013, the rising contribution from contracted solar and
wind investments, and weak wholesale prices that limit the contribution of
non-contracted generation assets.
Significant capex growth over the last few years, with $9.2 billion spent in
2012 alone, has weakened NEE's credit metrics considerably relative to its
rating category and in comparison with historical levels. Future capex levels
will continue to remain high both at FPL and Capital Holdings. Fitch's
financial forecasts reflect approximate $9.0 billion capex at Capital Holdings
over 2013-16, which is at the higher end of management's target range of $5.9
billion-$9.0 billion. As highlighted previously, Fitch has assumed $12.5
billion in capex at FPL over 2013-16. It is conceivable that certain
investment opportunities for both FPL and Capital Holdings may not materialize
as these are still in the development stage. In the current environment of low
power prices and less political appetite for tax subsidies for renewables,
Fitch sees lower potential for Capital Holdings to grow its renewable
portfolio at the same pace as it has in recent years. To the extent that the
capex levels fall short of Fitch's expectations, there could be upside to
NEE's credit metrics given the enhanced financial flexibility that the company
Given the pressures on credit metrics today and elevated levels of forecasted
capex, management's renewed emphasis on strengthening the balance sheet is
warranted to maintain the current levels of ratings. In this regard, the
company's recent announcement to issue up to $1.5 billion in equity in 2014
depending upon the level of capex spend, in addition to maturing equity units,
is positive for NEE's credit. It is also Fitch's expectation that Capital
Holdings is able to reduce recourse debt over the forecast period.
NEE's continued shift away from merchant businesses toward regulated
investments and contracted non-regulated renewable assets is also supportive
of its credit profile. Over 2013-16, NEE's cash flows from stable utility-type
sources are expected to grow. At FPL, recovering retail sales and recently
secured base rate increase will produce revenue uplift. At Capital Holdings,
the new Texas electric transmission assets will result in predictable tariff
revenues. Fitch forecasts that regulated businesses will contribute close to
55% of NEE's EBITDA for the next several years. Within the non-regulated
businesses, management's emphasis remains on long-term contracted renewable
generation, specifically solar and wind. Fitch expects contractual sources to
drive another 30% of NEE's consolidated EBITDA over the next few years. For
future growth investments, management is focusing on Federal Energy Regulated
Commission (FERC) regulated gas pipelines and electricity transmission
opportunities, which will further skew the business mix towards predictable
cash flow sources.
On a consolidated basis, Fitch projects NEE to start generating significant
free cash flow from 2016 as capex spending declines. NEE's cash flow has been
buoyed by significant tax incentives (production and investment tax credits
and accelerated depreciation and bonus depreciation benefits). NEE has
accumulated tax incentives that Fitch assumes the company can continue to
monetize against taxable income or via tax-oriented partnerships. Fitch
forecasts NEE to start paying cash taxes beginning 2016 assuming no extension
of bonus depreciation benefits, no incremental tax subsidies for U.S. wind
projects, and no incremental renewable investments beyond the projects in the
NEE's credit metrics, as reported, show more leverage than 'A-' peers.
However, Fitch considers several factors that mitigate debt leverage. First,
within the non-regulated operations of NextEra Energy Resources (Energy
Resources), Capital Holdings' wholly owned subsidiary, sales are supported by
off-take contracts for a longer term than most other peers (more than 86%
hedged over 2013-16 for existing assets). This provides NEE with greater
insulation to commodity price movements as compared to other diversified
peers. Second, NEE's non-utility generation is concentrated in renewable and
nuclear resources with favorable environmental characteristics. Finally, about
$6.3 billion of consolidated debt (as of Dec. 31, 2012) is made up of project
finance loans that have limited or no corporate recourse. Fitch's adjusted
consolidated credit metrics for NEE incorporate 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.
Fitch expects NEE's EBITDA coverage ratio to be in a 6.0x-6.5x range and
debt-to-EBITDA to be approximately 3.5x toward the end of the forecast period.
Fitch forecasts NEE's FFO-to-debt to be close to 25% and FFO-to-interest
coverage to approximate 6.3x toward the end of the forecast period, which is
in-line with Fitch's guidelines for an 'A-' rated issuer.
NEE's ratings also reflect the company's strong access to the capital markets,
commercial paper market and to banks for both corporate credit and project
finance. Liquidity is robust with committed corporate credit facilities of the
NEE group of companies aggregating approximately $8.4 billion, excluding
limited recourse or non-recourse project financing arrangements. Debt
maturities are manageable.
Positive or negative rating actions for FPL and NEE look unlikely at this
time. However, downward rating pressure could result from:
--Change in Florida Regulation: Unfavorable changes in current Florida
regulatory policies for timely recovery of utility capital investments, fuel
and purchased power costs, and storm-related costs would adversely affect
ratings of FPL and NEE.
--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 risk.
--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 for NEE. If parent NEE
increases its debt leverage or changes its corporate strategy such that NEE's
risk profile materially worsens, it could adversely affect FPL's ratings in
line with Fitch's Parent and Subsidiary Rating Linkage Criteria.
--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 work against NEE's
cash flow credit measures.
Fitch has affirmed the following with Stable Outlook:
NextEra Energy, Inc.
--IDR at 'A-'.
NextEra Energy Capital Holdings, Inc.
--IDR at 'A-';
--Senior unsecured debentures at 'A-';
--Equity Units at 'A-';
--Jr. Subordinate hybrids at 'BBB';
--Short-term IDR and commercial paper at 'F1'.
FPL Group Capital Trust I
--Trust preferred stock at 'BBB'.
Florida Power & Light Company
--IDR at 'A';
--First mortgage bonds at 'AA-';
--Unsecured pollution control revenue bonds at 'A+';
--Short-term IDR and commercial paper at 'F1'.
Consistent with its credit policy, Fitch rates only the underlying senior
unsecured debentures associated with equity units and is, therefore,
withdrawing the 'A-' rating on NEE's equity units.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 13, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012);
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
(Dec. 13, 2012);
--'Rating North American Utilities, Power, Gas and Water Companies' (May 16,
Applicable Criteria and Related Research
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Parent and Subsidiary Rating Linkage
Recovery Ratings and Notching Criteria for Utilities
Corporate Rating Methodology
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Shalini Mahajan, CFA
One State Street Plaza
New York, NY 10004
Brian Bertsch, +1-212-908-0549 (New York)
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