NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the Issuer Default Ratings (IDR) for Nextera Energy, Inc. (NEE) and Nextera Energy Capital Holdings (Capital Holdings) at 'A-' and Florida Power & Light (FPL) at 'A'. The debt instrument ratings are also being affirmed and are listed at the end of this release. The Rating Outlook is Stable for all three entities. NEE provides a full guarantee of Capital Holdings' senior debt and hybrids, which is the basis for Fitch equalizing Capital Holdings' ratings and Outlook with those of NEE.
NEE's ratings and outlook reflect weak but recovering credit metrics, a step down in capex levels after hitting a peak 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, FPL, a recovering Florida economy, completion of the regulated Lone Star transmission line in 2013, the rising contribution from contracted solar and wind investments, and proposed investment in regulated natural gas transmission. 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.
FPL's ratings reflect the predictable nature of cash flows from regulated electric operations, a favorable 2012 rate order that provides for at least four years of regulatory certainty, recovering electric sales in its service territory after a prolonged trough, management focus on O&M cost containment that is expected to drive returns close to the authorized levels, and a strong balance sheet and liquidity profile. The ratings also reflect high-capex investments over 2014-2016 as the utility spends on new generation and other infrastructure improvements.
KEY RATING DRIVERS FOR NEE:
High Capex: Aided by yet another extension in Production Tax Credits (PTCs), NEE's renewable portfolio continues to grow under Capital Holdings' wholly owned subsidiary, NextEra Energy Resources (Energy Resources). Management expects to develop 2,000-2,500 MW of new wind projects over 2013-2015, of which 1,425 MWs have been committed and have long-term signed PPAs. Management is also targeting 1,100 MWs of solar projects over 2013-2016, all of which has been contracted. Capital Holdings is also increasing its regulated portfolio through investments in Federal Energy Regulatory Commission (FERC) regulated gas pipelines. Fitch has assumed all these projects come to fruition and have included them in its financial projections but have not included any incremental capex opportunities.
The capex at FPL over 2014-2016 is being driven by the recently completed plant modernization at Riviera Beach and the ongoing plant modernizations at Port Everglades and other infrastructure improvements such as storm hardening and reliability investments. The plant modernization projects have been approved by the Florida Public Service Commission and, once completed, will earn a return through the generation base rate adjustment (GBRA) mechanism. As a result of continued investments at both Capital Holdings and FPL, capex at NEE will continue to be elevated throughout Fitch's forecast period of 2014-2016 (average of $6.6 billion), albeit lower than the $9.5 billion peak reached in 2012. 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 NEE to expand its renewable portfolio.
Demonstrated Equity Support: Given the pressures on credit metrics today and elevated levels of forecasted capex, management's emphasis on strengthening the balance sheet is warranted to maintain the current levels of ratings. In this regard, the company's equity issuance of $1.5 billion in 2013 in the form of $400 million of common equity issued in November 2013, $600 million of equity forward contract to be settled by the end of 2014, and $500 million of equity units issued in September 2013, is positive for NEE's credit.
Changing Business Mix To More Regulated/Contracted: 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 2014-2016, NEE's cash flows from stable utility-type sources are expected to grow. This is being led by recovering retail sales and base rate increases through the GBRA mechanism at FPL. At Capital Holdings, the new Texas electric transmission assets will result in predictable tariff revenues. For future growth investments, management is focusing on FERC regulated natural gas pipelines and electricity transmission opportunities, which will further skew the business mix towards predictable cash flow sources. Fitch forecasts that regulated businesses will contribute between 60%-65% 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 the long-term contracted business to drive up to 63% of 2016 forecasted EBITDA for Energy Resources, which is higher than 56% contribution in 2013 and significantly above the 49% contribution in 2009. Fitch expects contractual sources to continue to drive another 20% of NEE's consolidated EBITDA over the next few years.
Potential Formation Of A Yieldco: Fitch recognizes that there is considerable shareholder interest for NEE to form a Yieldco. The highly contracted nature of NEE's renewable portfolio as well as its large size has sparked considerable interest among investors for a tax advantaged, high dividend yielding growth vehicle. Management has been studying the Yieldco structure and evaluating the option for the last several months and could be arriving at a decision soon (possibly by the end of the second quarter). The credit implications for NEE will be highly dependent upon the size of the Yieldco, nature of NEE's ownership, projected pace of asset sell downs, valuation of assets to be dropped down, and the use of sale proceeds, among other issues. In its public comments management has stressed its goal of structuring the Yieldco such that it does not negatively impact its credit position. If a majority of sell down proceeds is used to retire debt at Capital Holdings, Fitch believes, at least initially, the creation of a YieldCo vehicle could be neutral to NEE's credit profile.
Treatment Of Non-recourse Debt: NEE's credit metrics, as reported, show 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 NEE. In Fitch's view, a better way to analyze NEE's metrics is to deconsolidate a majority of the project financed entities and only include the upstream distribution from these entities in NEE'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.
Weak But Strengthening Credit Measures: On a fully consolidated GAAP basis, Fitch expects NEE's funds from operations (FFO) fixed charge coverage to be approximately 5.00x - 5.25x over the forecast period of 2014-2016. FFO adjusted leverage and adjusted debt/EBITDAR are expected to improve to 3.7x by 2016 from year-end 2013 levels of 4.2x and 4.7x, respectively. 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 GAAP 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 looked at an alternative rating scenario, which incorporates off-credit treatment to a large portion of limited recourse debt at Energy Resources. Fitch accordingly excludes the debt, interest expense, EBITDA contribution and tax attributes from such projects and includes only the distributable cash flow. Adjusting for non-recourse debt, NEE's credit metrics look stronger. FFO fixed charge cover remains above 6.5x over the forecast period. FFO adjusted leverage and adjusted debt/EBITDAR are both expected to improve to 3.2x by 2016 under this scenario.
Strong Liquidity And Capital Access: 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 $8.8 billion, excluding limited recourse or non-recourse project financing arrangements. Debt maturities are manageable.
KEY RATING DRIVERS FOR FPL:
Base Rate Increases: The outcome of FPL's 2012 base rate case filing was quite constructive, in Fitch's opinion. In addition to a $350 million base rate increase effective January 2013, FPL was granted a four-year GBRA mechanism that automatically adjusts base rates on commercial operations of its new generation plants in 2013, 2014 and 2016, and reflects an approximately $600 million of incremental base rate increase over 2013-2016. While the rate 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, in Fitch's opinion. A favorable turnaround in the regulatory climate in Florida and an extended period of regulatory certainty is a key credit positive for FPL.
Recovering FL Economy: 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 1.8% in 2012 and 1% in 2013. Fitch's financial forecasts for FPL are based on a 1% cumulative annual growth rate over 2014-2016; 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 over 2014-2016 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.
High Capex: Fitch expects FPL to spend over $9.7 billion in capex through 2016. This includes investment in the new generation projects, storm hardening, infrastructure, reliability improvements and maintenance expenditures. Fitch expects FPL to finance its capex needs using a mix of equity and debt so as to maintain its regulatory capital structure.
Robust Credit Metrics: FPL's forecasted FFO credit metrics are expected to weaken from their current robust levels as benefits from bonus depreciation subside. Fitch expects the FFO fixed charge coverage to be in the 7.0x - 9.0x range over the forecast period. The FFO adjusted leverage and adjusted debt/EBITDAR are expected to be 3.0x and 2.4x, respectively, by 2016. These metrics are quite robust compared to 'A' rated financial profile for a regulated utility.
NEE and Capital Holdings:
Positive rating actions for NEE and Capital Holdings appear unlikely at this time. Downward rating pressure could result from:
Inability to Reach Targeted Credit Metrics: A failure to achieve adjusted FFO leverage between 3.75x - 4.0x by 2016 on a consolidated basis could lead to negative rating action for NEE.
Deterioration in Florida Regulation: Any change in current regulatory policies at Florida Public Service Commission would adversely affect NEE'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 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 or negative rating actions for FPL 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 FPL's ratings.
Increasing Parent Risk Profile: 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.
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'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 13, 2013);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2013);
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis'
(Dec. 13, 2012);
--'Rating U.S. Utilities, Power and Gas Companies, (March 9, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Recovery Ratings and Notching Criteria for Utilities
Parent and Subsidiary Rating Linkage Fitch's Approach to Rating Entities within a Corporate Group Structure
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)