TEXT-Fitch rates NextEra Energy Capital Holdings
Sept 7 - Fitch Ratings has assigned 'A-' ratings to NextEra Energy Capital Holdings' (Capital Holdings) $650 million series F senior unsecured debentures due Sept. 1, 2017. 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. NEE provides full guarantee of Capital Holdings' debt and hybrids. NEE is issuing 13 million equity units with an initial stated amount of $50 per unit. Each equity unit comprises a forward equity purchase contract issued by NEE and a beneficial ownership interest in series F senior unsecured debentures of Capital Holdings. The debentures issued in connection with the equity units serve to collateralize the investor's forward stock purchase obligation. The series F debentures are unconditionally guaranteed by NEE. NEE has the right to defer contract adjustment payments with respect to the equity units at any time through the conversion date, but has no option to defer interest on the debentures. Consistent with Fitch's hybrid rating criteria, all of the units' value will be allocated to debt in Fitch's review of the corporate capital structure, due to the senior ranking of the debentures used as collateral for the transaction. 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 due to the 2012 expiration of tax subsidies. Fitch expects NEE's cash flows from stable utility-type sources to grow during 2012 to 2015. At FPL, recovering retail sales and potential future rate increases to incorporate new rate base investments will produce revenue uplift. 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 its '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 (over 90% hedged over 2012-13). 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 $5.7 billion of consolidated debt (as of Dec. 31, 2011) 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. Positive rating actions on NEE and Capital Holdings appear unlikely at this time. Downward rating pressure could result from: Deterioration in Florida Regulation: Any change in current FPSC regulatory policies or adverse FPSC decision in the pending rate case at FPL 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.