NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the Issuer Default Ratings (IDR) of NextEra Energy, Inc. (NEE) and NextEra Energy Capital Holdings (Capital Holdings) at 'A-'. Fitch has also affirmed the IDR of Florida Power & Light (FPL) at 'A'. The Rating Outlook is Stable. A list of debt instruments affected is provided at the end of this release.
RATING DRIVERS FOR FPL
FPL's ratings reflect the predictable nature of cash flows from regulated electric operations, a favorable outcome to the recently concluded base rate case that provides for at least four years of regulatory certainty, recovering electric sales in its service territory after a prolonged trough, and a strong balance sheet and liquidity profile. The ratings also reflect high-capex investments over 2013-16 as the utility spends on new generation and other infrastructure improvements.
The outcome of FPL's 2012 base rate case filing was quite constructive, in Fitch's opinion, and resulted in a $350 million base rate increase effective January 2013 and allows the utility to earn a return on equity (ROE) of up to a 100-basis point band around 10.5%. FPL was also granted a four-year generation base rate adjustment (GBRA) mechanism that automatically adjusts base rates on commercial operations of its new generation plants in 2013, 2014 and 2016, and reflects an approximately $3.5 billion addition to the rate base. While the order spans a four-year term (till December 2016), FPL could potentially delay filing a rate case for a longer period by proactively managing its costs. A favorable turnaround in the regulatory climate in Florida and an extended period of regulatory certainty for FPL is a key credit positive for the company and an important driver for Fitch's affirmation of the 'A' IDR.
A recovering Florida economy could drive FPL's electric sales growth rates above national averages over Fitch's forecast period. Adjusted for weather, FPL's retail kWH sales grew 1.7% in 2011 and 1.8% in 2012. Fitch's financial forecasts for FPL are based on a conservative 1.0% cumulative annual growth rate over 2013-16; any upside in sales growth would be positive for FPL's credit metrics. Conversely, a flat or declining growth environment could put pressure on FPL's financial performance. That said, FPL's credit metrics are expected to be quite robust in 2013 on the heels of a favorable rate decision and there exists adequate headroom to withstand a long period of flat-to-negative growth, which is what Fitch has assumed in its stress case. This is also a key factor in the stability of FPL's ratings, since the utility cannot implement a base rate increase outside the GBRA mechanism before December 2016.
FPL plans to spend over $9.2 billion in baseline capex through 2016. Of this amount, approximately $2.0 billion will be spent on modernizing its aging gas fleet at Cape Canaveral, Riviera Beach and Port Everglades, with the new gas-fired plants expected to be in service by 2013, 2014 and 2016, respectively. All these projects have been approved by the Florida Public Service Commission (FPSC). Recovery of these expenditures will be via the GBRA mechanism and is expected to result in only modest price increases for consumers due to the anticipated fuel cost savings. Infrastructure improvements and maintenance capex make up the bulk of the remaining capex budget.
In addition, FPL has identified another $4 billion-$5 billion of incremental investment opportunities in areas such as storm hardening, generation upgrades, solar investment, natural gas pipeline and other infrastructure/reliability improvements. The visibility around the incremental capex is low at present; Fitch has assumed that FPL spends between $3 billion-$3.5 billion in incremental capex over the forecast period. Fitch expects FPL to finance its capex needs using a mix of equity and debt so as to maintain its regulatory capital structure. Reflecting the additional capex in financial assumptions does pressure FPL's forecasted credit metrics, since there will likely be a regulatory lag associated with some of these incremental investments.
Fitch anticipates FPL's credit metrics to strengthen in 2013 and beyond as a result of the $350 million base rate increase effective 2013, stepped-up GBRA increases, and rate increases associated with the ongoing nuclear uprates. Fitch expects EBITDA coverage ratio to be 8.0-8.5x and Debt-to-EBITDA ratio to be in the 2.4x-2.6x range towards the end of the forecast period. The funds flow from operations (FFO)-based credit measures remain robust over 2013-14 due to bonus depreciation benefits, and decline to more normalized levels thereafter. Fitch forecasts FFO-to-Debt to be in the 25%-27% range and FFO-to-interest coverage to approximate 7.0x toward the end of the forecast period.
RATING DRIVERS FOR NEE AND CAPITAL HOLDINGS
NEE provides a full guarantee of Capital Holdings' debt and hybrids. Thus, Capital Holdings' ratings and Rating Outlook are identical to those of NEE. 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 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 $9.0 billion capex at Capital Holdings over 2013-16, which is at the higher end of management's target range of $5.9 billion-$9.0 billion. As highlighted previously, Fitch has assumed $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 incentives 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 $6.3 billion of consolidated debt (as of Dec. 31, 2012) 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.
Positive or negative rating actions for FPL and NEE 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. If parent NEE increases its debt leverage or changes its corporate strategy such that NEE's risk profile materially worsens, it could adversely affect FPL's ratings in line with Fitch's Parent and Subsidiary Rating Linkage Criteria.
--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.
Fitch has affirmed the following with Stable Outlook:
NextEra Energy, Inc.
--IDR at 'A-'.
NextEra Energy Capital Holdings, Inc.
--IDR at 'A-';
--Senior unsecured debentures at 'A-';
--Equity Units at 'A-';
--Jr. Subordinate hybrids at 'BBB';
--Short-term IDR and commercial paper at 'F1'.
FPL Group Capital Trust I
--Trust preferred stock at 'BBB'.
Florida Power & Light Company
--IDR at 'A';
--First mortgage bonds at 'AA-';
--Unsecured pollution control revenue bonds at 'A+';
--Short-term IDR and commercial paper at 'F1'.
Consistent with its credit policy, Fitch rates only the underlying senior unsecured debentures associated with equity units and is, therefore, withdrawing the 'A-' rating on NEE's equity units.
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
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis
Parent and Subsidiary Rating Linkage
Recovery Ratings and Notching Criteria for Utilities
Corporate Rating Methodology