NEW YORK--()--Fitch Ratings has assigned ratings of 'BBB' to NextEra Energy Capital Holdings Inc.'s (Capital Holdings) issue of up to $488.75 million 5.00% series J junior subordinated debentures due Jan. 15, 2073. The debentures will be unconditionally and irrevocably guaranteed by NextEra Energy, Inc. (NEE). The net proceeds from this issue along with other general funds will be used to repay a portion of Capital Holdings' outstanding commercial paper obligations (which stood at $1.6 billion as of Jan. 14, 2013) and for general corporate purposes. The Issuer Default Rating (IDR) of NEE and Capital Holdings is 'A-', and the Rating Outlook for both is Stable.
The debentures are junior and subordinated in right of payment and upon liquidation to all of Capital Holdings' senior indebtedness. The junior subordinated guarantee from NEE is unsecured, will rank junior, and will be subordinated in right of payment and upon liquidation to all of NEE's senior indebtedness. So long as there is no event of default under the subordinated indenture, Capital Holdings may defer interest payments on the debentures on one or more occasions for up to 10 consecutive years per deferral period.
The securities are eligible for 50% equity credit under Fitch's applicable criteria 'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' dated Dec. 13, 2012. Features supporting the equity categorization of these debentures include their junior subordinate priority, the option to defer interest payments on a cumulative basis for up to 10 years on each occasion and a 60-year maturity.
NEE's ratings are supported by sound liquidity and satisfactory cash flow from two businesses: its utility subsidiary Florida Power & Light (FPL) and Capital Holdings' non-regulated energy subsidiary, NextEra Energy Resources (Energy Resources). NEE's ratings reflect a shifting business mix through 2015 towards regulated and highly contracted cash flows driven by significant rate base growth opportunities at FPL, completion of the regulated Lone Star transmission line in 2013, weak wholesale prices that reduces the contribution of non-contracted generation assets, and rising contribution from solar and Canadian wind investments that partially offset the decline in U.S. wind investments.
Over 2013 - 2015, NEE's cash flows from stable utility-type sources are expected to grow. FPL was able to achieve a constructive outcome in its recently concluded rate case. The utility was allowed a $350 million rate increase effective Jan. 2, 2013 based on a mid-point Return on Equity (ROE) of 10.50% with a band of +/- 100 basis points and nearly 60% equity ratio. Importantly, the order provided for a four-year generation base rate adjustment (GBRA) mechanism, which allows FPL to raise rates when its three modernization projects, Cape Canaveral, Riviera Beach and Port Everglades achieve commercial operations in 2013, 2014 and 2016, respectively, without having to file a rate case proceeding. This not only provides timely recovery on major capital expenditures but significantly reduces regulatory risk of frequent rate filings.
At Capital Holdings, completion of new Texas electric transmission assets will result in predictable tariff revenues. Fitch forecasts that regulated businesses will contribute more than 55% of NEE's EBITDA for the next several years. Within Energy Resources, the contribution of long-term contracted generation assets will increase. Fitch expects contractual sources to drive another 25% - 30% of NEE's consolidated EBITDA over the next few years.
NEE's credit metrics, as reported, show more leverage than 'A-' peers. However, Fitch considers several factors that mitigate debt leverage. First, sales at Energy Resources are supported by off-take contracts for a longer term than most other peers (approximately 90% hedged over 2013 - 2014). This provides NEE with greater insulation to commodity price movements as compared to other hybrid peers. Second, NEE's non-utility generation is concentrated in renewable and nuclear resources with favorable environmental characteristics. Finally, about $6.5 billion of consolidated debt (as of Sept. 30, 2012) is made up of project finance loans that have limited or no corporate recourse.
Fitch's adjusted consolidated credit metrics for NEE incorporates 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.
What Could Trigger a Rating Action
Deterioration in Florida Regulation: Any change in current regulatory policies at the Florida Public Service Commission (FPSC) that adversely affect the timely recovery of utility capital investments, fuel and purchased power costs, and storm-related costs would adversely affect NEE's and FPL's ratings.
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.
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 be adverse to NEE's cash flow credit measures.
Positive Rating Actions Unlikely: Positive rating actions for NEE and Capital Holdings appear unlikely at this time.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis'
(Dec. 13, 2012);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' (Nov. 13, 2012);
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage