Moody's Says NextEra's (NEE) Move to Acquire OED Assets is Credit-Positive Development
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Moody's Investors Service said that NextEra Energy, Inc.'s (NYSE: NEE)(Baa1 stable) ratings and outlook are unaffected by its agreement to acquire Oncor Electric Delivery Company LLC's (A3 review for upgrade) 20% minority interest for $2.4 billion.
"Acquiring the minority interest is credit positive, because NextEra will obtain full ownership of Oncor and simplify governance and financial control of this major investment," says Moody's Senior Vice President Mihoko Manabe.
Moody's assessment follows a series of announcements this week from NextEra. Following the news of this acquisition, NextEra filed with the Public Utility Commission of Texas to approve its acquisition of 100% of Oncor, starting an approval process that will extend into the second quarter of 2017. Moody's believes the Commission will ultimately approve the merger.
NextEra also announced a forward sale of approximately $1.5 billion of common stock to raise proceeds for the minority interest acquisition. Separately, the company agreed to sell its fiber-optics business FiberNet in the first half of 2017 for $1.5 billion. The divestiture of FiberNet, which Moody's views as non-core, is credit positive because it will raise additional funds, eliminate about $370 million of related project debt, and help to de-risk NextEra from an unregulated business.
Moody's expects that these transactions, in combination with the earlier announced acquisition of 80% of Oncor, will nevertheless stretch some of NextEra's credit metrics in 2017 to slightly outside the long-term ranges that are incorporated in its ratings. Moody's maintains the stable outlook, assuming that this weakness will be temporary and that the company has the capability and intention to fully restore its credit metrics to expected thresholds by year-end 2018. Moody's anticipates NextEra's unfettered access to various sources of capital, a large asset base for recycling capital, and a solid record of project execution will support its ability to achieve the expected thresholds over the 12 to 18 months following the acquisition.
In 2017, Moody's estimates that the ratio of cash flow from operations pre-working capital changes to debt (CFO pre-WC / Debt) could fall to the mid-17% range, normalized for the partial year of Oncor's cash flow and one-time items related to the Oncor acquisition and asset sales. This temporary shortfall is due in large part to the renewable power plants under construction which will add a meaningful amount of incremental cash flow over the next couple of years and help meet its thresholds. NextEra will also incur roughly $10 billion of debt in acquiring the debt of Oncor's bankrupt parent Energy Future Holdings Corp. and could raise the percentage of debt at the holding company level a few percentage points above the 40% Moody's assumes longer term, but equity unit conversions in 2018 and 2019 will help to reduce that metric.
If NextEra consummates the Oncor acquisition as planned, the lower business risk would provide limited additional debt capacity and allows some adjustments to the range of credit metrics that Moody's incorporates in its ratings, for example, CFO pre-WC / Debt sustained in the 18%-20% range (down from the 21%-23% range currently) and CFO pre-WC - Dividends / Debt in the 12.5-14% (from 16%-17% range currently). The ratings would continue to incorporate the longer term expectation of dividends divided by Net Profit After-tax Before Unusual Items being sustained below 70% and the percentage of holding company debt, below 40%.
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