|[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
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
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-'
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.
Positive or negative rating actions for NEE and Capital Holdings look
unlikely at this time. However, downward rating pressure could result
--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
Applicable Criteria and Related Research:
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Utilities
Parent and Subsidiary Rating Linkage
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT
Rating North American Utilities, Power, Gas, and Water Companies
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