Fitch Views NEP Formation as Neutral to Nextera's Ratings
NEW YORK -- May 28, 2014
Nextera Energy Inc.'s (NEE) decision to form a growth oriented limited
partnership, Nextera Energy Partners, LP (NEP), has no impact on NEE's ratings
in the near term, according to Fitch Ratings. Fitch currently rates NEE 'A-'
with a Stable Rating Outlook.
NEE's decision to pursue a publicly listed, yield driven and growth oriented
vehicle is not unexpected given considerable investor interest following the
successful performance of NRG Yield (not rated). Besides providing an obvious
cost of capital advantage to NEE, the formation of NEP provides the company
with an alternate source of capital to recycle its investments in Nextera
Energy Resources (Energy Resources). Energy Resources is NEE's indirect,
wholly owned subsidiary that owns predominantly contracted, non-regulated
power generation assets. In Fitch's view, the formation of NEP also provides
greater visibility to investors in monitoring the residual cash distributions
generated by a portion of the Energy Resources portfolio that help service
holding company debt.
The formation of NEP also raises several credit concerns with the primary one
relating to the potential conflict of interest that may arise between NEE's
investors and NEP's unitholders and how will management handle it. During the
first three years, NEP is targeting a 12% - 15% growth rate in cash available
for distributions, which will require a steady pace of sell-downs from Energy
Resources' portfolio that raises questions regarding the valuation of those
assets and the quality of assets left behind at Energy Resources. A conflict
committee composed of three independent directors (currently two are
nominated) will help partially mitigate this concern.
Another concern relates to any potential changes to NEE's growth strategy.
NEE's current portfolio of long-term contracted assets combined with its
development pipeline of new wind and solar projects creates a transparent
pipeline of additional sell downs to NEP without the need to chase
acquisitions. As NEP gets larger, managing a high growth in cash distributions
will get harder and potentially require a more aggressive and/or acquisitive
management stance in expanding the asset portfolio. Furthermore, NEE will
receive an Incentive Distribution Fee if NEP is able to achieve certain
targeted quarterly distribution to its unit holders (these levels will be
determined as part of the IPO), which creates further incentive for management
to pursue higher growth to hit those targets. There is expected to be no debt
at NEP initially except for a $250 million revolving credit facility. Future
debt issuances at NEP would result in further subordination of cash flows to
At present, Fitch views the formation of NEP as neutral to NEE's credit. The
small size of NEP and contemplated pace of sell downs does not alter the
business mix of Energy Resources or NEE in any meaningful way. Fitch expects
NEE to use a portion of the sale proceeds for holding company debt reduction.
In its public comments, management has reinforced its commitment to credit
ratings, and Fitch expects NEE to meet the targeted credit metrics on a pro
forma basis. As NEP grows larger and if NEE's ownership is progressively
reduced, Fitch could take a more conservative view of evaluating the cash
distributions from NEP relative to other sources of funds to service holding
company debt. Fitch will continue to monitor management's strategy and an
aggressive acquisition or financial strategy, rising conflict of interest
between NEE and NEP, or predominantly shareholder focused use of sell down
proceeds will have negative implications for NEE's credit.
NEP will initially own a portfolio of 10 wind and solar assets with a
generating capacity of 990 MW. One of the projects is still under construction
(59.9 MW) while the rest achieved commercial operation between 2009 - 1Q2014.
All of the projects have long-term contracts with creditworthy counterparty
with an average contract life of 21 years. NEE intends to sell-down a portion
of its ownership in NEP to public through an IPO and will own a general
partner interest in NEP through an affiliate. NEE has committed to provide a
right of first offer (ROFO) to NEP over a six-year period for additional 1,549
MW of wind and solar assets. These assets are also either in development or
newly constructed and have long-term contracts.
Additional information is available at 'www.fitchratings.com'.
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Shalini Mahajan, CFA, +1-212-908-0351
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Glen Grabelsky, +1-212-908-0577
Brian Bertsch, New York, +1-212-908-0549
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