Fitch Ratings has assigned an 'A-' rating to NextEra Energy Capital Holdings, Inc.'s (Capital Holdings) $1 billion 4.95% debentures due Jan. 29, 2026, $900 million 4.9% debentures due March 15, 2029, $1.1 billion 5.25% debentures due March 15, 2034, $800 million 5.55% debentures due March 15, 2054 and $600 million of floating rate debentures due Jan. 29, 2026.

These debentures are pari passu with Capital Holdings' existing senior unsecured debt. Capital Holdings plans to use the net proceeds from these issuances to fund capex and for other general corporate purposes, including repayment of a portion of outstanding CP and prefunding certain 2024 debt maturities.

The Issuer Default Ratings for Capital Holdings and for its parent, NextEra Energy, Inc. (NextEra), are 'A-'. NextEra provides a full guarantee of Capital Holdings' debt and hybrids. The Rating Outlook for both entities is Stable.

Key Rating Drivers

Exposure to Regulated and Contracted Assets: NextEra's business mix, which is primarily comprised of regulated investments and long-term contracted nonregulated renewable assets, is supportive of its credit profile. The favorable shift in the cash flow mix is driven by base rate increases at Florida Power & Light (FPL) following a constructive 2021 rate order, planned investments in regulated solar generation projects, focus on Federal Energy Regulatory Commission-regulated transmission investments, and continued growth in contracted, nonregulated renewable investments.

Fitch calculates the proportion of regulated EBITDA in the overall business mix to be approximately 75% in 2022 and expects it to decline to 70% by 2025. 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 to be approximately 90%-95% over the next few years.

Leading Position in Renewables: Fitch believes NextEra is strongly positioned to take advantage of the energy transition underway in the U.S. Fitch expects the enhanced federal tax incentives provided by the Inflation Reduction Act (IRA) to drive significant growth in clean technologies that NextEra is pursuing (namely wind, solar, battery storage, hydrogen and renewable natural gas). The company's unregulated business has a robust pipeline of projects in various stages of development and plans to develop 32.7-41.8GW of renewable and battery storage projects over 2023-2026, thereby maintaining its leadership in the industry. Toward this goal, NextEra has originated approximately 20GW in its backlog of signed contracts (as of Jan. 25, 2024).

Given its market leading position and scale in renewables, NextEra has successfully navigated industry headwinds created by supply chain disruptions, import tariffs and interconnection issues without material disruptions. Despite recent increases in capital, operating and financing costs, contracted renewables remain competitive given the increase in power prices. Management has a strong track record of lowering O&M costs, and its scale gives it significant advantage over competition.

Elevated Capex: Fitch expects consolidated capex to be approximately $68 billion during 2023-2025, which is significantly higher than historical levels. Capex is split roughly 65%/35% between nonregulated and regulated business; the large skew of capex toward nonregulated businesses is a credit concern.

Management's updated funding plan relies on tax transferability provisions of the IRA and renewable asset sales to third parties, including build-operate-transfer transactions, in lieu of asset drop-downs to NextEra Energy Partners L.P. (NEP, BB+/Stable). Fitch assumes NextEra will also continue to have strong access to capital markets, bank debt and tax equity to finance its growth. The company has substantial interest rate hedges in place that provide near-term protection; however, higher interest expenses will be problematic if interest rates continue to rise.

Near-Term Weakening of Credit Metrics: On a fully consolidated basis (including nonrecourse project debt), Fitch expects NextEra's FFO leverage to remain elevated in 2023-2024 to reflect significantly higher capex at Capital Holdings. Fitch expects FFO leverage to moderate to 4.5x in 2025, benefiting from the conversion of $2.0 billion equity units issued in 2022, to which Fitch does not allocate any equity credit.

Adjustment for Non-Recourse Debt: NextEra's credit metrics, as reported, have historically shown more leverage than a median 'A-' financial profile for a utility or parent holding company. A portion of the renewable generation portfolio is financed with project debt that has limited or no corporate recourse. However, these projects tend to be highly leveraged (with typically a low investment-grade profile), which weakens the consolidated leverage metrics for NextEra.

Fitch believes a better way to analyze NextEra's metrics is to deconsolidate a majority of the project-financed entities and only include the upstream distribution from these entities in NextEra's credit analysis. The off-credit treatment to the limited recourse debt reflects Fitch's assumption is that NextEra would walk away from these projects in the event of financial deterioration, including those projects where a differential membership interest has been sold. NextEra's commitment to not buy the remaining ownership interest in its subsidiary, NextEra Energy Partners, LP (NEP), is supportive of this deconsolidated approach. Non-recourse debt associated with entities such as Lone Star Transmission is not deconsolidated.

Deconsolidating project debt typically results in 60bps-80bps lower leverage compared with consolidated leverage. As such, adjusting for non-recourse debt, Fitch expects FFO leverage for NextEra to be approximately 4.5x in 2023, which is 20bps above our 4.3x adjusted FFO leverage negative sensitivity. Fitch expects adjusted FFO leverage to decline to 3.6x in 2025 given Fitch's expectation that NextEra will rely more on project debt to finance its renewable investments than it has in the recent past.

Derivation Summary

NextEra compares favorably with peer parent holding companies The Southern Company (BBB+/Stable), Sempra Energy (BBB+/Stable) and Dominion Energy, Inc. (BBB+/Stable). NextEra's ownership of a strong regulated utility in Florida, dominant position in contracted renewable business and superior credit metrics are offset by a smaller proportion of regulated utility operations in the overall business mix.

All of NextEra's peers are facing material project execution risk due to the construction of large projects, which include the Vogtle Unit 4 nuclear project at Southern, a large offshore wind project at Dominion and potential LNG projects at Sempra's midstream subsidiary. The corporate debt at NextEra, Sempra and Dominion is structurally subordinated to non-recourse debt at their project subsidiaries. NextEra's ownership interest in NEP adds organizational structure complexity its peers do not have.

NextEra's proportion of consolidated EBITDA generated from regulated utility subsidiaries is approximately 70%75%, which is less favorable compared with Southern (80%), Sempra (80%) and Dominion (85%-90%). NextEra's projected consolidated FFO leverage of 4.5x by 2025 is stronger than projected metrics for Southern (4.7x by 2024) and Dominion (5.4x), and comparable to that for Sempra (mid to high 4.0x).

Key Assumptions

Annual retail sales growth of 0.5% at FPL over 2024-2025;

Rate increases for FPL as per 2021 rate order;

O&M and other expenses growth at FPL relatively flat from 2024 to 2025;

Capex at regulated and non-regulated businesses of approximately $68 billion over 2023-2025 split approximately 65/35 between the two businesses;

Renewable projects growth toward the top end of management's forecasts;

Balanced funding mix at FPL and reliance on tax equity, project debt and hybrid debt at Capital Holdings;

Limited commodity exposure and near-term interest rate exposure based on existing hedge position.

RATING SENSITIVITIES

Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Positive rating actions for NextEra appear unlikely at this time.

Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Consolidated FFO leverage above 4.5x on a sustainable basis;

After adjusting for non-recourse debt, FFO leverage above 4.3x on a sustainable basis as long as distribution derived from such non-recourse subsidiaries is less than 20% of the consolidated FFO;

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 from the sale of assets to NEP;

A change in strategy to invest in noncontracted 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.

Liquidity and Debt Structure

Strong Liquidity: On a consolidated basis, NextEra had $14 billion of net available liquidity as of Dec. 31, 2023, 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.

Committed corporate credit facilities for NextEra and FPL aggregated to approximately $14.4 billion as of Dec. 31, 2023. Included in that total is $3.8 billion in unsecured facilities available to FPL as loans, including $650 million available to issue LOCs.

Issuer Profile

NextEra owns FPL, which is the largest electric utility in the state of Florida. NextEra is also the world's largest operator of wind and solar projects. Its non-regulated arm owns approximately 27.3 GW of net generating capacity as of YE 2022.

Summary of Financial Adjustments

Fitch allocates 50% equity credit to Capital Holdings' junior subordinated debentures. Fitch has excluded the fuel under-recovery of $2.1 billion and deferred storm costs of $1.3 billion from its calculation of 2022 FFO. Accordingly, the recovery of these costs in 2023 and 2024 are also excluded from FFO calculation. Finally, as of Dec. 31, 2022, Fitch has excluded $8.7 billion of non-recourse project debt and approximately $1.1 billion related EBITDA, while including approximately $600 million of related cash distribution from NextEra's consolidated metrics to calculate adjusted FFO leverage.

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