Fitch Ratings has affirmed GridLiance West, LLC's (GLW) Long-Term Issuer Default Rating (IDR) at 'A-'.

The Rating Outlook is Stable.

GLW's rating continues to reflect its low business risk profile as a regulated electric transmission utility operating in a constructive regulatory regime under Federal Energy Regulatory Commission (FERC). Additionally, counterparty risk lies with its regional transmission organization (RTO), California Independent System Operator (CAISO; A+/Stable).

FFO leverage is expected to remain elevated as GLW undertakes sizable capital projects but return within the rating thresholds in 2027, the expected in service date of the projects. GLW is an indirect, wholly owned subsidiary of NextEra Energy, Inc. (NEE; A-/Stable), which is expected to provide indirect equity support for the planned capex.

Key Rating Drivers

Significant Capex Plans: GLW has been awarded two projects by CAISO, core upgrades and Beatty upgrades. These two projects are focused on rebuilding and expansion of GLW's transmission infrastructure to strengthen Southern Nevada's electrical transmission grid and to enable incremental renewable generation onto the CAISO grid. As such, GLW's current capex plan over 2024-2027 is sizable and significantly larger than the previous four-year plan of $368 million for 2023-2026. Successful completion of these projects is expected to provide a multi-fold growth in GLW's rate base.

GLW is currently undertaking procurement of land and various permits. The upgrade projects will largely use GLW's existing rights of way. Procurement and engineering are expected to begin post the internal board approvals in February of 2024. Construction for the core upgrades is expected to begin in 3Q25 and in 4Q26 for the Beatty project with in-service dates in 2027. These projects are expected to be supported by GLW's existing rate-making under FERC, predicated on a 10.6% ROE (including adders) and 60% equity capitalization, which is also applicable during the construction phase with allowance for funds under construction and the additional incentive for asset abandonment.

Elevated Credit Metrics: Incremental debt for GLW's sizable capex plans is expected to keep credit metrics pressurized with FFO leverage peaking at 8.2x in 2025. However, placement of these projects into service starting early 2027 is expected to provide meaningful growth in cash flows. As a result, FFO leverage is expected to strengthen to 4.2x in 2027, which is within GLW's current thresholds. Low business and regulatory risks and a strong ultimate parent partially mitigate the risks of higher leverage during the project execution phase, in Fitch's view. That said, Fitch notes that material cost and time overruns in the planned projects or any negative regulatory actions could delay the expected deleveraging at GLW and may result in negative rating actions.

Constructive Regulatory Framework: The regulatory framework for GLW continues to be constructive under the FERC approved tariff structure that provides cash flow stability with automatic annual updates to forward-looking rates, subject to an annual true-up; allowance for funds used during construction and recovery for start-up regulatory assets. The approved tariff provides for a 10.6% ROE inclusive of 100bps of adders (50bps RTO and 50bps transmission incentives) predicated on a healthy 60% equity capitalization ratio. While lower transmission ROEs are possible under FERC's ongoing ROE review, Fitch believes the risk is manageable within GLW's current credit profile.

Beneficial Ownership by the Ultimate Parent, NEE: Fitch continues to view the ownership of GLW by the ultimate parent, NEE, as beneficial. NEE is one of the largest energy companies in the U.S. NEE's robust credit profile, strong financial measures and leading market position as the largest renewable developer in the U.S. underpins GLW's credit quality and enhances its competitive position.

NEE's strong financial position will help GLW as it seeks to gain scale and focuses on growth in transmission related to renewables, growth and system reliability. Fitch also expects that GLW would receive equity support for its capex plans from NEE, through its subsidiary NextEra Energy Capital Holdings, Inc. (NEECH, A-/Stable).

Additional Long-Term Growth Opportunities: GLW is expected to continue to pursue growth opportunities with more projects recently provided to CAISO for approval. The projects would support California's greenhouse gas reduction goals tied to renewable development on GLW's system, and also open the California and Nevada border to new renewable development. Given their alignment with California and Nevada's clean energy mandates and proximity to populous cities, Fitch expects the proposed projects to be supported by healthy demand for renewables and limited near-term policy risk. Fitch believes continuance of supportive FERC rate-making would be key for maintenance of GLW's credit metrics as it pursues these growth opportunities.

Low Business Risk Profile: GLW's ratings reflect the company's low business risk profile as a regulated electric transmission utility with no material volumetric, commodity or customer concentration risks. The company operates exclusively within CAISO and is regulated by FERC, which Fitch views as favorable compared with state regulations. Under FERC-approved rates, GLW recovers its cost of service, including a return on investment from all RTO transmission customers in CAISO. Moreover, the revenues are billed and collected by the CAISO and remitted to the company monthly, minimizing any payment delays and counter party risks.

Parent and Subsidiary Linkage: GLW remains an indirect, wholly owned subsidiary of NEE, However, in 2022, the NextEra group raised $1.1 billion of long-term debt at an intermediate holding company, NETH. As such, Fitch has determined a parent subsidiary linkage between GLW and NETH.

Fitch determines NETH's Standalone Credit Profile (SCP) based upon consolidated metrics. Fitch considers GLW to have a stronger SCP than NETH. As such, Fitch has followed the stronger subsidiary/weaker parent path. Emphasis is placed on GLW's status as a FERC-regulated transmission company. Legal ring fencing is considered porous given the general protections afforded by economic regulation including an authorized regulatory capital structure. Access and control are evaluated as porous.

NETH (via NEE) is the sole source of equity; however, GLW issues its own debt. Due to the aforementioned linkage considerations, the ratings of GLW could be constrained by a deterioration in the credit quality of NETH, although this is not a constraint now.

Derivation Summary

GLW's IDR reflects its low business risk profile as a regulated electric transmission utility with no exposure to commodity prices or volumetric risk, and also considers ownership by a strong ultimate parent, NEE (A-/Stable). In Fitch's coverage universe, GLW's closest peers are AEP Transmission Company, LLC (AEPT; A-/Stable) and Mid-Atlantic Interstate Transmission LLC (MAIT; BBB/Stable). GLW, like its peers, is regulated by FERC, which Fitch views as favorable compared with state regulation.

Fitch estimates FFO leverage will remain 4.0x or below at MAIT through 2025, while AEPT's leverage is projected to remain well below its 4.8x downgrade threshold through the same period. Smaller than its peers, GLW's significant capex plans are expected to pressurize its credit metrics in the near term as compared with those of AEPT and MAIT. FFO leverage is projected to peak at 8.2x in 2025 albeit improving to 4.2x in 2027, in line with its peers.

Notably, AEPT's rating is constrained by the IDR of its parent American Electric Power Company, Inc. (BBB/Stable), while MAIT's rating is constrained by the IDR of its parent, FirstEnergy Transmission, LLC (BBB-/Stable).

Key Assumptions

A constructive regulatory environment at the FERC;

Continued ROE of 10.6% for rate-making;

Distributions and/or member contributions managed to maintain regulatory capital structure at 60% equity;

Capex in line with management estimates over 2024-2027, funded in line with the authorized capital structure with an equity commitment from NEECH for the 60% equity layer;

The Beatty and core upgrades projects are in service by 2027 and are included in rates in 2027 and 2028, respectively;

Continuance of existing authorized ROE and capital structure for the new projects;

Interest rates remain elevated in 2024.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

A positive rating action is unlikely in the near term given the elevated leverage expected during the project execution phase.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Any major time or cost overrun at GLW's projects such that FFO leverage does not return to below 4.8x in 2027 and beyond;

A meaningful deterioration in the regulatory environment at the FERC;

Deterioration of the credit quality of NETH.

Liquidity and Debt Structure

Fitch views GLW's liquidity position as sufficient. The company's liquidity is backstopped by a $105 million secured credit facility of which around $36 million was available as of Sept. 30, 2023. The capacity is available to meet working capital and capex needs. The credit facility matures in August of 2024 but is expected to be extended prior to maturity.

GLW has already secured a FERC approval to increase the aforementioned credit facility to $500 million, which would be used to fund the planned capex. GLW plans to replace the credit facility with long-term debt post completion of the capex in 2027. Additional long-term debt is also expected to be issued for the capex execution. GLW has no other long-term debt outstanding as of end 2023. Likely equity support from NEE would provide further support to GLW's liquidity during the capex execution phase.

Financial covenants for GLW include a maximum debt to total capitalization covenant of 65% and minimum interest coverage of 2.5x and Fitch expects continued compliance with the aforementioned.

Issuer Profile

GridLiance West LLC is a small but growing transmission company and an operating subsidiary of the ultimate parent NextEra Energy, Inc. (A-/Stable). GLW operates exclusively in the CAISO region with assets in southwest Nevada.

Sources of Information

The principal sources of information used in the analysis are described in the Applicable Criteria.

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.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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