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

NEW YORK--(BUSINESS WIRE)-- Fitch rates NextEra Energy Capital Holdings' (Capital Holdings) $600 million 1.586% senior unsecured series E debentures due June 1, 2017 'A-'. 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.

The issuance constitutes remarketing of debentures that were originally issued in May 2012 by Capital Holdings as components of equity units sold by Nextera. The 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.

KEY RATING DRIVERS

Changing Business Mix To More Regulated/Contracted: Nextera'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 such factors as significant rate base increases at Nextera's regulated utility subsidiary, Florida Power & Light (FPL), a recovering Florida economy, planned investments in regulated electric and natural gas transmission projects, the rising contribution from contracted solar and wind investments, and proposed acquisition of Hawaiian Electric Industries, Inc. (HEI). 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.

Regulated businesses comprised approximately 60% of total adjusted EBITDA for Nextera in 2014 and Fitch expects this proportion to sustain for the next several years. Within the non-regulated businesses, management's emphasis remains on long-term contracted renewable generation, specifically solar and wind. The adjusted EBITDA contribution from both regulated and contracted businesses at Nextera was approximately 84% in 2014 and Fitch expects this to modestly increase to 85% over the next few years.

High Capex: The capex at FPL over 2015-2018 is expected to range between $13.9 billion-$15.6 billion and is being driven by the ongoing plant modernizations at Port Everglades, generation upgrades of its peaking units, utility scale solar investments, investments in natural gas supplies and other infrastructure improvements such as storm hardening and reliability investments. Regulated electric transmission and natural gas pipeline investments are expected to drive additional $2.5 billion of capex over the four-year period. Aided by yet another extension in Production Tax Credits (PTCs), Nextera's renewable portfolio continues to grow under Capital Holdings' wholly owned subsidiary, NextEra Energy Resources (Energy Resources). Management expects to develop 4,600-5000 MWs of new contracted wind and solar projects over 2015-2018, of which 2,616 MW have been committed and have long-term signed power purchase agreements (PPAs). As a result, the capex at Energy Resources is expected to range between $13.4 billion-$15.0 billion over 2015-2018.

As a result of continued investments at both Capital Holdings and FPL, capex at Nextera will continue to be elevated throughout Fitch's four-year forecast period (average of $8 billion-$9 billion p.a.). 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 Nextera to expand its renewable portfolio.

HEI Acquisition: Fitch views the HEI acquisition as moderately positive for Nextera driven by a modest increase in earnings from regulated businesses, predominant use of equity to finance the acquisition, and attractive regulated investment opportunities at HEI's utility. That said, Fitch's view is somewhat tempered by structural issues with the Hawaii service territory with its excessive reliance on oil for power generation, high retail prices, increasing penetration of residential roof-top solar and need for significant capital investment to transition to cleaner fuel sources. This could put pressure on retail prices in the short- to medium-term. Management expects the transaction to be completed by the end of the year, subject to HEI shareholder and various regulatory approvals.

Demonstrated Commitment to Balance Sheet: Given the elevated levels of forecasted capex, management's emphasis on strengthening credit metrics is warranted to maintain the current levels of ratings. Through a series of equity issuances, management has consistently improved the balance sheet, which had become stressed in 2012. Dropdown of assets to Nextera Energy Partners, LP (NEP), provides an alternative source of cash proceeds to Nextera. Fitch expects Nextera to use a portion of the dropdown proceeds for holding company debt reduction. Management in its public comments has reinforced its commitment to credit ratings and Fitch expects Nextera to meet the targeted credit metrics on a consistent basis. As NEP grows larger and if Nextera'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.

Treatment of Non-recourse Debt: Nextera's credit metrics, as reported, have historically shown 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 Nextera. In Fitch's view, a better way to analyze Nextera's metrics is to deconsolidate a majority of the project-financed entities and only include the upstream distribution from these entities in Nextera'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.

Strengthening Credit Measures: On a fully consolidated basis, Fitch expects Nextera's funds from operations (FFO) fixed-charge coverage to be approximately 5.0x-5.5x over the forecast period of 2015-2018. Fitch expects adjusted debt to EBITDA and FFO adjusted leverage to approximate 3.5x by 2018. 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 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 looks at an alternative rating scenario for Nextera which incorporates off-credit treatment to a large portion of limited recourse debt and proportionately consolidates NEP. Fitch accordingly excludes the debt, interest expense, EBITDA contribution and tax attributes from the limited recourse projects and includes only the distributable cash flow. Nextera's credit metrics look stronger in the alternative rating case. FFO fixed-charge cover remains above 7.5x over the forecast period and FFO adjusted leverage is forecasted to improve to 3.0x by 2018 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 $9.7 billion, excluding limited recourse or non-recourse project financing arrangements. Debt maturities are manageable.

KEY ASSUMPTIONS

--Annual retail sales growth of 1.0% at 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 ROE of 10.5%.

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

--Capex at FPL and Capital Holdings toward the higher end of capex range.

--Limited commodity exposure based on existing hedge position.

--Completion of HEI acquisition by the end of 2015.

RATING SENSITIVITIES

Positive rating actions for Nextera and Capital Holdings appear unlikely at this time. Downward rating pressure could result from the following scenarios:

--Inability to Reach Targeted Credit Metrics: A failure to achieve adjusted FFO leverage of 3.5x-3.75x by 2018 on a consolidated basis could lead to negative rating action for Nextera;

--Deterioration in Florida Regulation: Any change in current regulatory policies at Florida Public Service Commission would adversely affect Nextera'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. This in turn could result in lower ratings for Nextera. 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 Nextera and NEP, or predominantly shareholder-focused use of sell-down proceeds will have negative implications for Nextera's credit;

--Change in Tax Laws or Regulations: 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 would have an adverse effect on Nextera's cash flow credit measures.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014);

--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' (Nov. 25, 2014);

--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 18, 2014).

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Fitch Ratings
Primary Analyst
Shalini Mahajan, CFA
Managing Director
+1 212-908-0351
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Maude Tremblay
Director
+1 312-368-3203
or
Committee Chairperson
Philip Smyth
Senior Director
+1 212-908-0531
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
[email protected]
or
Elizabeth Fogerty, +1 212-908-0526
[email protected]

Source: Fitch Ratings

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