NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of NextEra Energy, Inc. (NextEra) at 'A-' with a Stable Rating Outlook following the company's announcement to acquire 100% of the equity of reorganized Energy Future Holdings Corp. (EFH), which indirectly owns an 80% equity interest in Oncor Electric Delivery Company LLC (Oncor). Fitch has also affirmed the Long-Term IDR of NextEra Energy Capital Holdings, Inc. (Capital Holdings) at 'A-'. The IDR of NextEra is equalized with that of Capital Holdings due to the full, unconditional guarantee from NextEra. Fitch has also affirmed the IDR of Florida Power & Light (FPL) at 'A'. The Rating Outlook remains Stable for Capital Holdings and FPL.
NextEra plans to fund the $9.5 billion acquisition of EFH through a combination of $1.5 billion of equity units, cash on hand and debt. NextEra is a frequent issuer of equity units, which have a three-year conversion period. Fitch typically does not assign any equity credit to these units until they convert. In the past, Fitch had established an adjusted FFO leverage threshold on a consolidated basis of 3.5x - 3.8x for NextEra to maintain its 'A-' IDR. The acquisition of Oncor does improve the qualitative profile of the company and Fitch has widened the upper bound of the adjusted FFO leverage range to 4.0x. There exists possibility of additional bids for Oncor. It is Fitch's expectation that NextEra's funding mix for EFH's acquisition and other capital commitments would be such so as to achieve the 4.0x FFO adjusted leverage ratio by 2019.
The transaction is subject to receiving approval from the bankruptcy court of the EFH's amended plan of reorganization, the change of control approval from the Public Utility Commission of Texas (PUCT) and the Private Letter Ruling from the IRS confirming the tax free nature of the transaction. Approvals are also needed from the Federal Energy Regulatory Commission and under Hart-Scott-Rodino Act. NextEra plans to apply for PUCT's approval in the next few days. The PUCT has statutorily 180 days to decide, which places the closing of the transaction toward the end of the first quarter of 2017.
KEY RATING DRIVERS
Improving Regulated Mix: The acquisition of Oncor improves the business profile for NextEra by driving up the proportion of regulated utilities mix to 66% in 2017 from 59% in 2015. This proportion, however, will decline somewhat as the contracted renewable business grows. The addition of Oncor diversifies the regulated earnings for NextEra across two strong state jurisdictions of Florida and Texas, both of which are growing above national average. Oncor is a transmission and distribution (T&D) utility, with supportive regulatory mechanisms, which Fitch views as lower risk compared to integrated utilities. The regulation in Texas is quite supportive in particular for the transmission business, where the majority of Oncor's capex is focused. NextEra has sufficient experience in Texas from its ownership of generation plants, a retail electric supply business and a regulated transmission line.
PUCT Approval is Key: Fitch currently does not anticipate any significant customer concessions as part of the merger approval process; the ring fencing provisions and the governance structure at both Oncor and its direct parent, Oncor Electric Delivery Holdings Company LLC (Oncor Holdings), would likely occupy greater attention in the merger proceedings. Fitch believes Oncor's credit ratings will benefit from the ownership by a higher rated parent even if the current ring fencing provisions are diluted to reflect traditional utility ring-fencing protections. The EFH acquisition by NextEra when completed will finally resolve the long drawn bankruptcy proceedings for Oncor's indirect parent holding companies as well as eliminate the significant amount of debt above Oncor. Fitch has been constraining Oncor's IDR by one-notch compared to its peer electric T&D utilities in Texas. The notching of the senior secured debt at Oncor has been further constrained to reflect ownership by a distressed parent. Fitch sees lifting of these constraints under the ownership of NextEra.
Weakened Pro-forma Credit Metrics: On a fully consolidated basis, Fitch expects NextEra's leverage ratios to weaken after the close of EFH acquisition. Fitch expects adjusted FFO leverage ratio to peak at 4.4x in 2017 and then improve to approximate 4.0x by 2019, with the conversion of the equity units. Fitch expects the FFO fixed charge coverage to be in the 5.0x - 5.5x range over 2017 - 2019. Fitch also analyses NextEra's metrics on a deconsolidated basis. Fitch deconsolidates the non-recourse debt that is associated with the wind and solar projects as well as the EBITDA associated with these projects and only includes the cash distribution from these projects. The FFO based credit metrics for NextEra look stronger on a deconsolidated basis.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for NextEra include:
--80% equity ownership in Oncor;
--No material customer concession to get PUCT approval;
--Annual retail sales growth of 1.0% at FPL over 2016 - 2018;
--Base 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 billion over 2016-2018; and
--Limited commodity exposure based on existing hedge position.
RATING SENSITIVITIES
NextEra and Capital Holdings:
Positive: Positive rating actions for NextEra and Capital Holdings appear unlikely at this time.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Inability to achieve FFO adjusted leverage of 4.0x by 2019;
--Any deterioration in credit measures that result from higher use of leverage or outsized return of capital to shareholders. Fitch will continue to monitor management's strategy with respect to NEP, and an aggressive acquisition or financial strategy, rising conflict of interest between NextEra and NEP, or predominantly shareholder focused use of sell down proceeds will have negative implications for NextEra's credit;
--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.
FPL
Positive Rating Action: Given the strong rating linkage with its parent company, future positive rating actions appear unlikely.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--Unfavorable changes in current Florida regulatory policies for timely recovery of utility capital investments, fuel and purchased power costs, and storm-related costs;
--Increasing parent risk profile from higher debt leverage or aggressive corporate strategy.
LIQUIDITY
Liquidity is robust, with $628 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.
FULL LIST OF RATING ACTIONS
Fitch affirms the following ratings with a Stable Outlook:
NextEra Energy, Inc.
--Long-Term IDR at 'A-'.
NextEra Energy Capital Holdings, Inc.
--Long-Term IDR at 'A-';
--Senior unsecured debentures at 'A-';
--Junior subordinate hybrids at 'BBB';
--Short-Term IDR and Commercial Paper at 'F1'.
Florida Power & Light Company
--Long-Term IDR at 'A';
--First mortgage bonds at 'AA-';
--Unsecured pollution control revenue bonds at 'A+'/F1;
--Short-Term IDR at 'F1'.
FPL Group Capital Trust I
--Trust preferred stock at 'BBB'.
Date of Relevant Rating Committee: July 29, 2016
There were no financial statement adjustments made that were material to the rating rationale outlined above.
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
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