Fitch Rates NextEra Energy Capital Holdings' Fixed and Floating Rate Debentures 'A-'
Fitch Rates NextEra Energy Capital Holdings' Fixed and Floating Rate Debentures 'A-'
(The following statement was released by the rating agency)Fitch Ratings-New York-16 March 2021:
Fitch rates NextEra Energy Capital Holdings, Inc.'s (Capital Holdings) $2.0 billion 0.65% debentures, series due March 1, 2023 and $500 million floating rate debentures, series due March 1, 2023 'A-'. The Issuer Default Ratings (IDRs) for Capital Holdings and for its parent, NextEra Energy, Inc. (NextEra), are 'A-'. The Rating Outlook for both entities is Stable. NextEra provides a full guarantee of Capital Holdings' debt and hybrids. Capital Holdings plans to use the proceeds from this issuance to fund capex and for general corporate purposes, including to redeem a portion of its outstanding CP obligations.
NextEra's ratings and Stable Outlook reflect ownership of Florida Power & Light Co. (FPL; A/Stable), which benefits from the constructive regulatory environment in Florida, and its strong competitive position as the largest renewable generation company in the U.S. Fitch expects NextEra's consolidated FFO leverage, including nonrecourse debt, to be approximately 4.5x over 2021-2022.
Key Rating Drivers
No Material Impact from COVID: NextEra delivered strong financial and operating performance in 2020 and was not materially impacted from the coronavirus. Given its strong competitive position in renewables, NextEra enjoys significant clout with its supply chain vendors and tax equity investors, leading to minimal disruptions to its operations and large construction program. A vast majority of NextEra's wind and solar portfolio is under long-term power purchase agreements (PPAs) with minimal volumetric risk. NextEra's PPAs counterparties are typically highly creditworthy, consisting of regulated utilities and public power entities and only a small proportion is corporates. At its utility operations, growth in the higher margin residential segment due to work-from-home policies offset in part the impact from lower commercial sales. FPL derives approximately 60% of its MWh sales from residential customers, 38% from commercial and 2% from industrial.
Impact from Texas Cold Snap Unknown: The unprecedented winter weather conditions in Texas in mid-February forced a majority of renewable generators in Texas to severely curtail production both due to equipment and grid issues. NextEra owns approximately 3.3 GW of renewable generation in Texas, a vast majority of which is wind generation. The company also owns Gexa Energy, which provides retail electricity services to residential and commercial customers. While the financial impact of the unprecedented cold snap on NextEra's Texas operations is unclear at this time, these should be manageable given these operations form a small proportion of NextEra's overall portfolio.
Continued Pivot to Regulated and Contracted Assets: NextEra's continued shift from merchant businesses toward regulated investments and contracted nonregulated renewable assets is supportive of its credit profile. Driving the favorable shift in cash flow mix are base rate increases at FPL following a constructive 2016 rate order, acquisition of Gulf Power followed by its modernization plan, planned investments in regulated solar generation projects, and the continued growth in contracted, nonregulated solar and wind investments. Fitch expects the proportion of regulated EBITDA in the overall business mix to be approximately 70%. Within the nonregulated businesses, management's emphasis remains on long-term contracted renewable generation. Fitch expects the adjusted EBITDA contribution from both regulated and contracted businesses at NextEra to be approximately 90% over the next few years.
Leading Position in Renewables: Fitch considers NextEra to be strongly positioned to take advantage of the energy transition underway in the U.S., where technological developments and falling costs of wind, solar and battery storage have accelerated the shift in power generation mix away from fossil fuels. The company commissioned approximately 5.8 GW of wind, storage and solar projects in 2020 and added 7 GW to its backlog. NextEra currently has approximately 13.5 GW of renewables backlog and expects to develop between 22.7 GW - 30 GW of renewable and battery storage projects over 2021-2024. The recent extension of Production Tax Credits for wind projects that begin construction in 2020 at a rate of 60% is expected to support continued wind development until 2025. Accelerating trends in deployment of battery storage and pairing of batteries with intermittent renewables to offer a firm product open up additional growth opportunities.
Resilient Credit Metrics: On a fully consolidated basis (including nonrecourse project debt), Fitch expects NextEra's FFO leverage to approximate 4.5x and FFO fixed-charge coverage to approximate 6.0x over 2021-2022. Credit metrics in 2023 should benefit from conversion of $4.5 billion equity units that were issued in 2020. The investors in equity units are obligated to purchase stock at the end of three years. Fitch does not allocate any equity credit to the underlying debentures issued to collateralize the investor's forward stock purchase obligation.
NextEra compares favorably with its peer parent holding companies, Southern Company (BBB+/Stable), Sempra Energy (BBB+/Stable) and Dominion Energy (BBB+/Stable) given its ownership of a strong regulated utility in Florida, dominant position in contracted renewable business and superior credit metrics, offset by a smaller proportion of regulated utility operations in the overall business mix. NextEra's proportion of consolidated EBITDA generated from regulated utility subsidiaries is approximately 70%, which is less favorable compared with Southern (80%), Sempra (80% pro forma for Cameron completion) and Dominion (85%-90%). NextEra's projected FFO leverage at 4.5x is stronger than the projected metrics for Southern (5.0x ), Sempra (4.1x-4.6x) and Dominion (4.8x).
Some of NextEra's peers face project execution risk due to the construction of large projects, which include the Cameron LNG project at Sempra and Vogtle Units 3 and 4 nuclear units at Southern. NextEra is also facing headwinds to its Mountain Valley Pipeline project but this project is relatively less material for NextEra. NextEra's ownership interest in NextEra Energy Partners (NEP) adds to complexity in organizational structure that its peers do not have.
Fitch's Key Assumptions Within the Rating Case for NextEra Include:
Annual retail sales growth of 0.5% at FPL over 2021-2022;
Rate increases for FPL as per 2016 rate order and retention of tax savings;
Constructive outcome in the 2021 rate case at FPL that preserves ROE at the current authorized levels;
O&M and other expenses growth at FPL relatively flat from 2021 to 2022;
Capex at regulated utilities and Capital Holdings of approximately $25 billion over 2021-2022 split approximately 60/40 between the two businesses;
Renewable projects growth toward the middle of management's forecasts;
Balanced funding mix at FPL and reliance on project debt and tax equity at Capital Holdings;
Limited commodity exposure based on existing hedge position;
At Gulf Power, sales growth of 0.5% p.a., capex of $1.6 billion over 2021-2022 funded in a balanced manner, rate changes reflecting the last rate order and tax-reform settlement, and reduction in corporate overhead and O&M expenses.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
--Positive rating actions for NextEra and Capital Holdings appear unlikely at this time.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
--FFO leverage above 4.5x on a sustainable basis;
--Any deterioration in credit measures that result from higher use of leverage or outsized return of capital to shareholders;
--An aggressive acquisition or financial strategy at NEP, rising conflict of interest between NextEra and NEP, or predominantly shareholder focused use of proceeds as NextEra sells assets to NEP;
--A 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;
--Any change in current regulatory policies at Florida Public Service Commission and/or any weakness in the current business climate in Florida;
--Changes in tax rules that reduce NextEra's ability to monetize its accumulated production tax credits, investment tax credits and accumulated tax losses carried forward.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Robust Liquidity: On a consolidated basis, NextEra had $10.9 billion of net available liquidity as of Dec. 31, 2020, excluding limited recourse or nonrecourse project financing arrangements. The company continues to have strong access to the capital markets and banks for both corporate credit and project finance.
Summary of Financial Adjustments
Fitch provides equity credit to junior subordinated debt and preferred securities of Capital Holdings in accordance with Fitch's applicable criteria.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
Date of Relevant Committee 08 October 2020
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria.
NextEra Energy Capital Holdings, Inc. (formerly FPL Group Capital Inc.)
----senior unsecured; Long Term Rating; New Rating; A-
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Shalini Mahajan, CFA
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Philip Smyth, CFA
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