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

NEW DELHI & SYDNEY & SINGAPORE--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'A-' rating to NextEra Energy Capital Holdings Inc.'s (Capital Holdings) $700 million series H senior unsecured debentures due Sept. 1, 2020. The current Issuer Default Rating (IDR) for Capital Holdings and for its parent, NextEra Energy, Inc. (Nextera), is 'A-', and the Rating Outlook for both entities is Stable. Nextera provides full guarantee of Capital Holdings' debt and hybrids.

Nextera is issuing 14 million equity units with an initial stated amount of $50 per unit. Each equity unit comprises a forward equity purchase contract issued by Nextera and a beneficial ownership interest in series H senior unsecured debentures of Capital Holdings. The debentures issued in connection with the equity units serve to collateralize the investor's forward stock purchase obligation. The net proceeds from the debenture issuance will be used for general corporate purposes including investments in energy and power projects at Capital Holdings as well as investments in NEP.

The series H debentures are absolutely, irrevocably and unconditionally guaranteed by Nextera. The guarantee is an unsecured obligation of Nextera and will rank equally and ratably with all other unsecured and unsubordinated obligations of Nextera. Nextera 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.

Fitch last affirmed the IDRs of Nextera and Capital Holdings on Aug. 6, 2015 following the acquisition announcement of NET Midstream by Nextera Energy Partners (NEP; not rated). Fitch viewed the addition of stable cash flows from long-term contracted pipeline assets and benefits of asset class diversification at NEP positive but also had concerns about the large equity component in the financing risk and pursuit of third-party acquisitions to grow NEP in a heightened M&A environment. Since then, NEP has modified its financing mix to reduce the external equity component from $1.2 billion to $200 million and replaced it with a $700 million share issuance to Nextera and debt.

KEY RATING DRIVERS

Asset Diversification at NEP: Fitch views the addition of long-term contracted pipeline assets via the NET Midstream acquisition as a positive addition to NEP's overall portfolio. Asset diversification has become more relevant in the recent context of weather-induced below-average performance of wind projects. NEP's current portfolio is heavily weighted towards wind. NET Midstream is the first pipeline acquisition for NEP and offers organic growth opportunities. This asset will also fit well with other pipeline investments that Nextera is pursuing, which includes Sabal Trail, Florida Southeast Connection, and Mountain Valley Pipeline. Fitch believes, once operational, these new pipeline investments could be dropped down into NEP.

Tilt Toward Third-Party Acquisitions: NEP has been pursuing an aggressive growth strategy and drop-downs from Nextera into NEP have occurred at an accelerated pace compared to Fitch's initial expectations. The pursuit of third-party acquisitions to drive growth at NEP, despite a large existing and a healthy development pipeline of assets available with Nextera for future drop-downs, is a concern for Fitch.

Risk of Subordination: Management plans to raise $600 million of new term loans at NEP to repay the $313 million of outstanding term loans and to partly fund the NEP acquisition. Permanent debt at NEP increases the level of subordination for Nextera's debtholders.

Strengthening Credit Metrics: On a fully consolidated basis, Fitch still expects Nextera's funds from operations (FFO) fixed-charge coverage to be in the 5.5x-6.0x range over the forecast period of 2015-2018. Fitch expects adjusted debt-to-EBITDA and FFO adjusted leverage to approximate 3.5x by 2018. There is no material change to these projected metrics after incorporating the NET Midstream acquisition and the inclusion of the newly issued debentures.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Nextera include:

--Annual retail sales growth of 1% at Florida Power & Light (FPL) over 2015-2018;

--Base rate increases at FPL in mid-2016 for Port Everglades. Additional rate increase in 2017 to allow FPL to earn close to its current authorized return on equity of 10.5%;

--O&M and other expenses growth at FPL of 1.5% from 2015 to 2018;

--Capex at FPL and Capital Holdings of approximately $30 billion over 2015-2018;

--Limited commodity exposure based on existing hedge position;

--Completion of Hawaiian Electric Industries, Inc. acquisition by the end of 2015.

RATING SENSITIVITIES

Positive: Positive rating actions for Nextera and Capital Holdings appear unlikely at this time.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--A failure to achieve adjusted FFO leverage of 3.5x-3.75x by 2017 on a consolidated basis;

--Any deterioration in credit measures that results from higher use of leverage or outsized return of capital to shareholders. Fitch will continue to monitor management's strategy with respect to NEP, and an aggressive acquisition or financial strategy, rising conflict of interest between Nextera and NEP, or predominantly shareholder-focused use of sell-down proceeds will have negative implications for Nextera's credit;

--A change in strategy to invest in non-contracted renewable/pipeline/electric transmission assets, more speculative assets, or a lower proportion of cash flow under long-term contracts;

--Any change in current regulatory policies at Florida Public Service Commission and/or any weakness in the current business climate in Florida;

--Changes in tax rules that reduce Nextera's ability to monetize its accumulated production tax credits, investment tax credits, and accumulated tax losses carried forward.

LIQUIDITY

Liquidity is robust with committed corporate credit facilities of the NEE group of companies aggregating approximately $9.7 billion, excluding limited recourse or non-recourse project financing arrangements. Debt maturities are manageable. Nextera's ratings reflect the company's strong access to the capital markets, CP market and to banks for both corporate credit and project finance.

Date of Relevant Rating Committee: August 5, 2015

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Recovery Ratings and Notching Criteria for Utilities (pub. 05 Mar 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863298

Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 25 Nov 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=821568

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990732

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20150911005901/en/

Fitch Ratings
Primary Analyst
Shalini Mahajan, +1-212-908-0351
Managing Director
Fitch Ratings Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Maude Tremblay, +1-312-368-3203
Director
or
Committee Chairperson
Peter Molica, +1-212-908-0288
Senior Director
or
Media Relations, New York
Alyssa Castelli, +1-212-908-0540
[email protected]

Source: Fitch Ratings

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