Fitch Rates NextEra Energy Capital Holdings' Debentures 'A-'

  Fitch Rates NextEra Energy Capital Holdings' Debentures 'A-'  Business Wire  NEW YORK -- June 4, 2014  Fitch Ratings has assigned an 'A-' rating to NextEra Energy Capital Holdings' (Capital Holdings) $350 million 2.40% senior unsecured debentures due Sept. 15, 2019. 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 and hybrids.  The 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. The net proceeds from this offering will be added to Capital Holdings' general funds, which will be used to repay a portion of total outstanding commercial paper (CP) obligations and for other general corporate purposes. As of March 5, 2014, Capital Holdings had outstanding commercial paper obligations of $1.435 billion.  KEY RATING DRIVERS  Changing Business Mix To More Regulated/Contracted: NEE's continued shift away from merchant businesses toward regulated investments and contracted non-regulated renewable assets is supportive of its credit profile. 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), a recovering Florida economy, completion of the regulated Lone Star transmission line in 2013, the rising contribution from contracted solar and wind investments, and proposed investment in regulated natural gas transmission. In addition, absent a significant recovery in the commodity environment, which Fitch is not expecting, the contribution from non-contracted generation assets and other non-regulated businesses will remain contained, in Fitch's opinion. Fitch forecasts that regulated businesses will contribute between 60%-65% 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 the long-term contracted business to drive up to 63% of 2016 forecasted EBITDA for Energy Resources, which is higher than 56% contribution in 2013 and significantly above the 49% contribution in 2009. Fitch expects contractual sources to continue to drive another 20% of NEE's consolidated EBITDA over the next few years.  High Capex: Aided by yet another extension in Production Tax Credits (PTCs), NEE's renewable portfolio continues to grow under Capital Holdings' wholly owned subsidiary, NextEra Energy Resources (Energy Resources). Management expects to develop 2,000-2,500 megawatts (MW) of new wind projects over 2013-2015, of which 1,672 MW have been committed and have long-term signed power purchase agreements (PPAs). Management is also targeting approximately 1,100 MWs of solar projects over 2013-2016, all of which has been contracted. Capital Holdings is also increasing its regulated portfolio through investments in Federal Energy Regulatory Commission (FERC) regulated gas pipelines. Fitch has assumed all these projects come to fruition and have included them in its financial projections but have not included any incremental capex opportunities.  The capex at FPL over 2014-2016 is being driven by the recently completed plant modernization at Riviera Beach and the ongoing plant modernizations at Port Everglades and other infrastructure improvements such as storm hardening and reliability investments. The plant modernization projects have been approved by the Florida Public Service Commission and, once completed, will earn a return through the generation base-rate adjustment (GBRA) mechanism. As a result of continued investments at both Capital Holdings and FPL, capex at NEE will continue to be elevated throughout Fitch's forecast period of 2014-2016 (average of $6.6 billion), albeit lower than the $9.5 billion peak reached in 2012. It is highly likely that there is further upside to these capex estimates, particularly for Capital Holdings, since any legislative extension of tax benefits for wind and solar will be a further impetus for NEE to expand its renewable portfolio.  Demonstrated Equity Support: Given the pressures on credit metrics today and elevated levels of forecasted capex, management's emphasis on strengthening the balance sheet is warranted to maintain the current levels of ratings. In this regard, the company's equity issuance of $1.5 billion in 2013 in the form of $400 million of common equity issued in November 2013, $600 million of equity forward contract to be settled by the end of 2014, and $500 million of equity units issued in September 2013, is positive for NEE's credit.  Formation Of A Growth-Oriented Limited Partnership: NEE recently announced its decision to form Nextera Energy Partners, LP (NEP), which will be a publically listed, yield driven growth oriented vehicle. NEP will initially own a portfolio of 10 wind and solar assets with a generating capacity of 990 MW. 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. 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.  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. Management in its public comments 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. Please refer to Fitch's release "Fitch Views NEP Formation as Neutral to Nextera's Ratings" dated May 28, 2014, available at www.fitchratings.com, for additional commentary on NEP and its implication for NEE's credit profile.  Treatment Of Non-recourse Debt: NEE's credit metrics, as reported, show more leverage than a median 'A-' financial profile for a utility or parent holding company. A large portion of Energy Resources' generation portfolio is project financed with debt that has limited or no corporate recourse. These projects, however, tend to be highly leveraged (with typically a low investment grade profile), which weakens the consolidated leverage metrics for NEE. In Fitch's view, a better way to analyze NEE's metrics is to deconsolidate a majority of the project financed entities and only include the upstream distribution from these entities in NEE's credit analysis. The off-credit treatment to the limited recourse debt at Energy Resources 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. These projects typically comprise wind, solar as well as fossil assets. Non-recourse debt associated with entities such as Lone Star Transmission is not deconsolidated.  Weak But Strengthening Credit Measures: On a fully consolidated GAAP basis, Fitch expects NEE's funds from operations (FFO) fixed-charge coverage to be approximately 5.00x-5.25x over the forecast period of 2014-2016. FFO adjusted leverage and adjusted debt/EBITDAR are expected to improve to 3.7x by 2016 from year-end 2013 levels of 4.2x and 4.7x, respectively. NEE's FFO based metrics are robust reflecting the beneficial cash tax position of the company and aligned with an 'A-' rated financial profile for the sector. The biggest risk to Fitch forecasts is the extent of tax equity used by Energy Resources to build its renewable pipeline. Lower than expected tax equity proceeds for Energy Resources due to a limited tax equity appetite among market participants in the future will increase the reliance on project debt, thereby, putting pressure on the consolidated GAAP financials. Extension of PTCs is another wild card since it would spur a higher renewable development and likely lead to higher than anticipated debt financing.  Fitch also looked at an alternative rating scenario, which incorporates off-credit treatment to a large portion of limited recourse debt at Energy Resources. Fitch accordingly excludes the debt, interest expense, EBITDA contribution and tax attributes from such projects and includes only the distributable cash flow. Adjusting for non-recourse debt, NEE's credit metrics look stronger. FFO fixed-charge cover remains above 6.5x over the forecast period. FFO adjusted leverage and adjusted debt/EBITDAR are both expected to improve to 3.2x by 2016 under this scenario.  Strong Liquidity And Capital Access: NEE's ratings also reflect the company's strong access to the capital markets, CP 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 $8.8 billion, excluding limited recourse or non-recourse project financing arrangements. Debt maturities are manageable.  RATING SENSITIVITIES  Positive rating actions for NEE and Capital Holdings appear unlikely at this time. Downward rating pressure could result from:  Inability to Reach Targeted Credit Metrics: A failure to achieve adjusted FFO leverage between 3.75x - 4.0x by 2016 on a consolidated basis could lead to negative rating action for NEE.  Deterioration in Florida Regulation: Any change in current regulatory policies at Florida Public Service Commission would adversely affect NEE's and FPL's ratings. Any weakness in the current business climate in Florida will also be a cause for concern.  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. Fitch will continue to monitor management's strategy with respect to NEP 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.  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.  Additional information is available at 'www.fitchratings.com'.  Applicable Criteria and Related Research:  --'Corporate Rating Methodology' (May 28, 2014);  --'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. 19, 2013).  Applicable Criteria and Related Research:  Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers  http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=721836  Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis - Effective Dec. 13, 2012 to Dec. 23, 2013  http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696670  Parent and Subsidiary Rating Linkage  http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552  Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage  http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393  Additional Disclosure  Solicitation Status  http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=832979  ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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Contact:  Fitch Ratings Primary Analyst Shalini Mahajan, CFA Senior Director +1-212-908-0351 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 or Secondary Analyst Glen Grabelsky Managing Director +1-212-908-0577 or Committee Chairperson Philip Smyth Senior Director +1-212-908-0531 or Media Relations Brian Bertsch, New York, +1 212-908-0549 brian.bertsch@fitchratings.com  
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