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

[June 04, 2013]

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

NEW YORK --(Business Wire)--

Fitch Ratings has assigned an 'A-' rating to NextEra Energy Capital Holdings' (Capital Holdings) $250 million 3.625% senior unsecured debentures due June 15, 2023. 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. The debentures being issued are unconditionally guaranteed by NEE.

The net proceeds from this offering are expected to be used to repay at maturity Capital Holdings' $250 million principal amount of 5.35% debentures due June 15, 2013. Pending such use, Capital Holdings expects to deploy the net proceeds to repay a portion of Capital Holdings' outstanding commercial paper obligations and for general corporate purposes. As of May 31, 2013, Capital Holdings had $122 million of commercial paper outstanding.

NEE's ratings reflect weak but recovering credit metrics, declining capex after hitting peak levels in 2012, and a continued shift in the business mix through 2016 towards regulated and highly contracted assets. 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) as a result of the 2012 rate order, completion of the regulated Lone Star transmission line in 2013, the rising contribution from contracted solar and wind investments, and weak wholesale prices that limit the contribution of non-contracted generation assets.

Significant capex growth over the last few years, with $9.2 billion spent in 2012 alone, has weakened NEE's credit metrics considerably relative to its rating category and in comparison with historical levels. Future capex levels will continue to remain high both at FPL and Capital Holdings. Fitch's financial forecasts reflect approximate $9 billion capex at Capital Holdings over 2013-16, which is at the higher end of management's target range of $5.9 billion-$9 billion. Fitch's forecasts incorporate approximately $12.5 billion in capex at FPL over 2013-16.

It is conceivable that certain investment opportunities for both FPL and Capital Holdings may not materialize as these are still in the development stage. In the current environment of low power prices and less political appetite for tax subsidies for renewables, Fitch sees lower potential for Capital Holdings to grow its renewable portfolio at the same pace as it has in recent years. To the extent that the capex levels fall short of Fitch's expectations, there could be upside to NEE's credit metrics given the enhanced financial flexibility that the company will gain.

Given the pressures on credit metrics today and elevated levels of forecasted capex, management's renewed emphasis on strengthening the balance sheet is warranted to maintain the current levels of ratings. In this regard, the company's recent announcement to issue up to $1.5 billion in equity in 2014 depending upon the level of capex spend, in addition to maturing equity units, is positive for NEE's credit. It is also Fitch's expectation that Capital Holdings is able to reduce recourse debt over the forecast period.

NEE's continued shift away from merchant businesses toward regulated investments and contracted non-regulated renewable assets is also supportive of its credit profile. Over 2013-16, NEE's cash flows from stable utility-type sources are expected to grow. At FPL, recovering retail sales and recently secured base rate increase will produce revenue uplift. At Capital Holdings, the new Texas electric transmission assets will result in predictable tariff revenues. Fitch forecasts that regulated businesses will contribute close to 55% 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 contractual sources to drive another 30% of NEE's consolidated EBITDA over the next few years. For future growth investments, management is focusing on Federal Energy Regulated Commission (FERC) regulated gas pipelines and electricity transmission opportunities, which will further skew the business mix towards predictable cash flow sources.

On a consolidated basis, Fitch projects NEE to start generating significant free cash flow from 2016 as capex spending declines. NEE's cash flow has been buoyed by significant tax incentives (production and investment tax credits and accelerated depreciation and bonus depreciation benefits). NEE has accumulated tax icentives that Fitch assumes the company can continue to monetize against taxable income or via tax-oriented partnerships. Fitch forecasts NEE to start paying cash taxes beginning 2016 assuming no extension of bonus depreciation benefits, no incremental tax subsidies for U.S. wind projects, and no incremental renewable investments beyond the projects in the current pipeline.

NEE's credit metrics, as reported, show more leverage than 'A-' peers. However, Fitch considers several factors that mitigate debt leverage. First, within the non-regulated operations of NextEra Energy Resources (Energy Resources), Capital Holdings' wholly owned subsidiary, sales are supported by off-take contracts for a longer term than most other peers (more than 86% hedged over 2013-16 for existing assets). This provides NEE with greater insulation to commodity price movements as compared to other diversified peers. Second, NEE's non-utility generation is concentrated in renewable and nuclear resources with favorable environmental characteristics. Finally, about $6.4 billion of consolidated debt (as of March 31, 2013) is made up of project finance loans that have limited or no corporate recourse. Fitch's adjusted consolidated credit metrics for NEE incorporate off-credit treatment to limited recourse debt at Energy Resources. This 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. Fitch accordingly excludes the debt, interest expense, EBITDA contribution and tax attributes from such projects and includes only the distributable cash flow.

Fitch expects NEE's EBITDA coverage ratio to be in a 6.0x-6.5x range and debt-to-EBITDA to be approximately 3.5x toward the end of the forecast period. Fitch forecasts NEE's FFO-to-debt to be close to 25% and FFO-to-interest coverage to approximate 6.3x toward the end of the forecast period, which is in-line with Fitch's guidelines for an 'A-' rated issuer.

NEE's ratings also reflect the company's strong access to the capital markets, commercial paper 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 $8.4 billion, excluding limited recourse or non-recourse project financing arrangements. Debt maturities are manageable.

RATING SENSITIVITIES

Positive or negative rating actions for NEE and Capital Holdings look unlikely at this time. However, downward rating pressure could result from:

--Change in Florida Regulation: Unfavorable changes in current Florida regulatory policies for timely recovery of utility capital investments, fuel and purchased power costs, and storm-related costs would adversely affect ratings of FPL and NEE.

--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 for NEE.

--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 work against NEE's cash flow credit measures.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 8, 2012);

--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 13, 2012);

--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012);

--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' (Dec. 13, 2012);

--'Rating North American Utilities, Power, Gas and Water Companies' (May 16, 2011).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Recovery Ratings and Notching Criteria for Utilities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693750

Parent and Subsidiary Rating Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552

Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696670

Rating North American Utilities, Power, Gas, and Water Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=625129

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=792845

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.


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