Fitch Rates NextEra Energy Capital Holdings' Debentures 'A-'
NEW YORK -- September 23, 2013
Fitch Ratings has assigned an 'A-' rating to NextEra Energy Capital Holdings'
(Capital Holdings) $500 million series G senior unsecured debentures due Sept.
1, 2018. The current Issuer Default Rating (IDR) for Capital Holdings and for
its parent, NextEra Energy, Inc. (NEE), is 'A-', and the Rating Outlook for
both entities is Stable. NEE provides full guarantee of Capital Holdings' debt
NEE is issuing 10 million equity units with an initial stated amount of $50
per unit. Each equity unit comprises a forward equity purchase contract issued
by NEE and a beneficial ownership interest in series G senior unsecured
debentures of Capital Holdings. The debentures issued in connection with the
equity units serve to collateralize the investor's forward stock purchase
The series G debentures are absolutely, irrevocably and unconditionally
guaranteed by NEE. The guarantee is an unsecured obligation of NEE and will
rank equally and ratably with all other unsecured and unsubordinated
obligations of NEE. NEE has the right to defer contract adjustment payments
with respect to the equity units at any time through the conversion date, but
has no option to defer interest on the debentures. Consistent with Fitch's
hybrid rating criteria, all of the units' value will be allocated to debt in
Fitch's review of the corporate capital structure, due to the senior ranking
of the debentures used as collateral for the transaction.
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
NEE's regulated utility subsidiary, Florida Power & Light (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
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 billion capex at Capital Holdings
over 2013-16, which is at the higher end of management's target range of $5.9
billion-$9 billion. Fitch's forecasts incorporate approximately $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 will gain.
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 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
$7.9 billion of consolidated debt (as of June 30, 2013) 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 $8.6 billion, excluding
limited recourse or non-recourse project financing arrangements. Debt
maturities are manageable.
Positive or negative rating actions for NEE and Capital Holdings 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.
--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.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013);
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Analysis' (Dec. 13, 2012);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers'
(Nov. 13, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
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Fitch Ratings, Inc.
Shalini Mahajan, CFA, +1-212-908-0351
One State Street Plaza
New York, NY 10004
Glen Grabelsky, +1-212-908-0577
Philip Smyth, +1-212-908-0531
Brian Bertsch, New York
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