NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB' rating to NextEra Energy Capital Holdings Inc.'s (Capital Holdings) $500 million 5.25% series K junior subordinated debentures due June 1, 2076.
NextEra plans to use the issuance to repay a portion of outstanding commercial paper obligations and for general corporate purposes. The current Issuer Default Rating (IDR) for Capital Holdings and for its parent, NextEra Energy, Inc. (NextEra), is 'A-', and the Rating Outlook for both entities is Stable. NextEra provides full guarantee of Capital Holdings' debt and hybrids.
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 Feb. 29, 2016. 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.
KEY RATING DRIVERS
Growing Regulated and Contracted Assets: The ratings for NextEra reflect a continued shift in business mix toward regulated and highly contracted assets that comprise approximately 85% of adjusted EBITDA. Base rate increases at Florida Power and Light Co. (FPL), rising contributions from contracted renewable projects, and investments in regulated natural gas transmission are driving this favorable shift.
Focus on Rate Case: On March 15, 2016 FPL filed with the Florida Public Service Commission for a roughly $1.3 billion rate base increase over 2017-19 based upon an 11.5% return on equity (ROE). New rates would take effect Jan. 1, 2017. Fitch views the Florida regulatory environment as constructive and has incorporated a satisfactory outcome to the rate increase request in its basecase scenario.
Recovering Florida Economy: Florida's economy is recovering well with most key indicators such as housing starts, employment statistics and consumer sentiment on an upward trend. However, customer usage has been volatile and below historical levels reflecting energy efficiency trends and demand side management initiatives. Adjusted for weather, FPL's retail kilowatt hour sales grew 1.2% in 2015 and 1.8% in first-quarter 2016 driven by positive customer growth offset by about 0.4% drop in underlying usage. Fitch's financial forecasts for FPL are based on a 1% cumulative annual growth rate in retail sales over 2016-2018, primarily driven by customer growth; any upside in sales growth would be positive for FPL's credit metrics.
Elevated Capex: NextEra had been projecting approximately $17.6 billion in capex over 2016-2018, divided 60%/40% between FPL and Capital Holdings, but a significant increase in the renewables pipeline for 2017-2018, announced in April 2016, is likely to result in higher investment levels over that horizon. Fitch expects a balanced funding mix at FPL and reliance on project debt and tax equity at Capital Holdings.
Challenging Outlook for Yieldcos: Capital market access for yieldcos is gradually opening for select issuers and NextEra Energy Partners, L.P. (NEP) was able to issue approximately $250 million of equity in February 2016. Nevertheless, Fitch believes access to external capital when needed is by no means assured and market valuations could constrain NextEra's ability to grow NEP and recycle its capital into new renewable projects.
Recovering Credit Metrics: On a fully consolidated basis, Fitch expects NextEra's FFO fixed charge coverage to be in the 5.5x-6.0x range over the forecast period of 2016-2018. Fitch expects both adjusted debt to EBITDAR and adjusted FFO leverage to approximate 3.5x by 2018.
Fitch's key assumptions within the rating case for NextEra include:
--Annual retail sales growth of 1.0% at FPL over 2016-2018;
--Base rate increases at FPL in mid-2016 for Port Everglades. Additional rate increase in 2017 to allow FPL to earn close to its current authorized ROE of 10.5%;
--O&M and other expenses growth at FPL of 1.5% from 2016 to 2018;
--Capex at FPL and Capital Holdings of approximately $18.5 billion over 2016-2018;
--Limited commodity exposure based on existing hedge position.
Positive Rating Action: Positive rating actions for NextEra appear unlikely at this time.
Negative Rating Action: Future developments that may, individually or collectively, lead to a negative rating action include:
--Failure to achieve adjusted FFO leverage of 3.50x-3.75x by 2017 on a consolidated basis;
--Deterioration in credit measures that result from higher use of leverage or outsized return of capital to shareholders;
--An aggressive acquisitive or financial strategy at NEP or predominantly shareholder-focused use of sell down proceeds;
--Change in strategy to invest in non-contracted renewable/pipeline/electric transmission assets, more speculative assets, or a lower proportion of cash flow under long-term contracts.
Liquidity is robust, with $624 million in cash and approximately $5.3 billion available under committed corporate credit facilities for the NextEra group of companies as of March 31, 2016, excluding limited recourse or nonrecourse project financing arrangements. NextEra's ratings reflect the company's strong access to the capital markets, commercial paper market and to banks for both corporate credit and project finance.
Date of Last Rating Committee: Aug. 5, 2015
Additional information is available on www.fitchratings.com
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 29 Feb 2016)