Fitch Rates NextEra Energy Capital Holdings' Debentures 'A-'
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
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
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
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.
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
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
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Analysis - Effective Dec. 13, 2012 to Dec. 23, 2013
Parent and Subsidiary Rating Linkage
Corporate Rating Methodology - Including Short-Term Ratings and Parent and
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Shalini Mahajan, CFA
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Brian Bertsch, New York, +1 212-908-0549
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