Fitch Ratings has assigned an 'A-' rating to NextEra Energy Capital Holdings, Inc.'s (Capital Holdings) $900 million 3.00% Exchangeable Senior Notes due 2027.

Holders of the notes may exchange all or a portion of their notes and Capital Holdings may use cash, shares or a combination of cash and shares to exchange the notes.

In addition, Fitch has assigned a 'BBB' rating to Capital Holdings' $1.0 billion series Q junior subordinated debentures due Sept. 1, 2054. The debentures are eligible for 50% equity credit based on Fitch's 'Corporates Hybrids Treatment and Notching Criteria,' dated Nov. 12, 2020 and available at www.fitchratings.com.

Features supporting the equity categorization of these debentures include their junior subordinate priority, the option to defer interest payments on a cumulative basis for up to 10 years on each occasion and a 30-year maturity. The Issuer Default Ratings (IDRs) for Capital Holdings and its parent, NextEra Energy, Inc. are 'A-'. The Rating Outlook for both entities is Stable. NextEra provides a full guarantee of Capital Holdings' debt and hybrids.

Key Rating Drivers

Exposure to Regulated and Contracted Assets: NextEra's business mix, comprised of primarily regulated investments and long-term contracted non-regulated renewable assets, is supportive of its credit profile. Base rate increases at 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 are driving the favorable shift in cash flow mix.

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 non-regulated 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. The enhanced federal tax incentives provided by the Inflation Reduction Act (IRA) is expected 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 32.7GW-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.

Given its market leading position and scale in renewables, NextEra has successfully navigated through 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 $30 billion over 2024-2025, which is significantly higher than historical levels. Capex is split roughly 65% at non-regulated business and balance at regulated business; the large skew of capex toward non-regulated 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. It includes build-operate-transfer transactions, in lieu of asset drop-downs to NextEra Energy Partners L.P. (NEP, BB+/Stable). Fitch assumes NextEra's access to capital markets will remain strong, and that it will use bank debt and tax equity to finance its growth. NextEra has substantial interest rate hedges in place that provide near-term protection; however, higher interest expense 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 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 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 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 (BBB+/Stable) and Dominion Energy, Inc. (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.

All of NextEra's peers are facing material project execution risk due to the construction of large projects, which include the Vogtle Unit 4 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 $30 billion over 2024-2025 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 $12.2 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.

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 30.6 GW of net generating capacity as of YE 2023.

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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