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Rating Action:

Moody's affirms NextEra Energy (Baa1 stable) on Oncor acquisition announcement

29 Jul 2016

Over $23 billion of debt affected

New York, July 29, 2016 -- Moody's Investors Service ("Moody's") affirmed the ratings and stable outlooks of NextEra Energy, Inc. (NEE Baa1) and its subsidiaries Florida Power & Light Company (FPL A1) and NextEra Capital Holdings, Inc. (NEECH Baa1). These rating actions follow NEE's announcement that it had agreed to purchase the majority equity stake in Oncor Electric Delivery Company LLC (Oncor) for $9.5 billion plus debt at Oncor's 80% owner Energy Future Intermediate Holding (EFIH) and its parent Energy Future Holdings Corp. (EFH), which is in bankruptcy.

RATINGS RATIONALE

"An Oncor acquisition is credit-positive for NextEra by diversifying its regulated businesses," said Moody's Senior Vice President Mihoko Manabe. "But the substantial amount of associated debt could exhaust the company's debt capacity."

The largest electric utility in Texas, Oncor is an attractive, low-risk asset. It fits NEE's strategy of increasing its mix of regulated businesses. Oncor is a transmission and distribution (T&D) utility, without the operational risks related to electric generation. It is located in a service area with above-average organic growth. The acquisition also diversifies NEE's regulatory jurisdiction in Texas, where regulators have been supportive of T&D credit quality. NEE's familiarity with the Texas market comes from its ownership of transmission and independent power projects there.

NEE's regulated business mix already stands at roughly 60% by various measures. As NEE's business mix has shifted toward regulated businesses, the assessment of qualitative aspects of regulation and cost recovery factors have become more important, making the regulated utilities methodology more relevant to the rating. Consequently, Moody's designates the Regulated Electric and Gas Utilities Rating Methodology as the principal methodology for NEE although it still employs the unregulated power methodology in assessing NEE's wholesale merchant power business.

The enterprise value of Oncor is estimated at about $18 billion (including the equity purchase price plus $9 billion of existing debt at EFH and EFIH and $5 billion for its 80% share of debt at Oncor). A substantial amount of EFH and EFIH debt comprises the enterprise value, which is over 9 times Oncor's EBITDA and 1.8 times its rate base.

The acquisition-related debt, without a material amount of deleveraging, would exhaust NEE's debt capacity at its current rating and make the company more vulnerable to unforeseen events or margin shortfalls. Although the financing plan will not be finalized until around the acquisition closing, the company plans to use a balanced mix of financings and asset sale proceeds.

NEE's existing businesses have improved organically over the past few years from reinvestment and risk reduction efforts, particularly at NEECH, so that NEE can support a limited decline in its credit metrics. NEECH is also in midst of a construction wave of new power plants, which will add a meaningful amount of incremental cash flow over the next couple of years. Moody's notes NEE's solid record of project execution that supports the likelihood of a steady recovery in its credit metrics over the 2017-18 period.

This acquisition of a sizable regulated asset further stabilizes NEE and allows the flexibility for slightly lower financial thresholds. Moody's stable outlooks are based on the expectation that NEE will manage its balance sheet and increase cash flow from non-utility businesses sufficiently to keep CFO pre-wc / Debt above 18%.

To finance a portion of this transaction, NEE announced that it will issue $1.5 billion in equity units, which would have a minimal de-leveraging effect, since Moody's attributes only a 25% equity component to these hybrid securities.

As of the last twelve months ended June 2016, NEE's cash flow before working capital changes to debt (CFO pre-wc / Debt) was approximately 20.5%, on the low end of the range assumed in its rating. As of 30 June 2016, holding company level debt was 36% of NEE's consolidated debt (34% with the hybrid adjustment), below the 40% maximum threshold Moody's currently assumes.

NEE's acquisition of Oncor is subject to approvals by the bankruptcy court and the Public Utility Commission of Texas. Another key hurdle will be the Internal Revenue Service's private letter ruling on whether the transaction would constitute a tax-free spin-off. It is possible that a competing bid emerges and delays or prevents the consummation of this deal, which NEE expects in the first quarter of 2017.

NEE and NEECH's ratings currently assume consolidated CFO pre-wc / Debt sustained above 20%. If NEE consummates the Oncor acquisition, the lower business risk would provide limited additional debt capacity, for example, CFO pre-wc / Debt above 18%. FPL's rating assumes a constructive outcome of its ongoing rate case and NEE's ratings at no lower than Baa1.

This sizable pending acquisition and the likely incremental debt make an upgrade unlikely in the foreseeable near future for NEE, NEECH, and FPL. A downgrade could result for NEE and NEECH if NEE's consolidated CFO pre-wc / Debt is sustained below 20% (18% if the Oncor acquisition is consummated) from inadequate debt reduction and organic increase in cash flow expected from new power plants under NEECH. Downgrades could also result if the holding company-level debt is sustained above 40%. A downgrade of NEE and NEECH could also result in a downgrade of FPL, due to its affiliation with a weaker parent.

Outlook Actions:

..Issuer: Florida Power & Light Company

....Outlook, Remains Stable

..Issuer: FPL Group Capital Trust I

....Outlook, Remains Stable

..Issuer: NextEra Energy Capital Holdings, Inc.

....Outlook, Remains Stable

..Issuer: NextEra Energy, Inc.

....Outlook, Remains Stable

Affirmations:

..Issuer: Broward (County of) FL

....Senior Unsecured Revenue Bonds, Affirmed A1

....Senior Unsecured Revenue Bonds, Affirmed P-1

..Issuer: Dade County Industrial Development Auth., FL

....Senior Secured Revenue Bonds, Affirmed Aa2

....Senior Secured Revenue Bonds, Affirmed VMIG 1

..Issuer: Florida Power & Light Company

.... Commercial Paper, Affirmed P-1

.... Issuer Rating, Affirmed A1

....Senior Unsecured Shelf, Affirmed (P)A1

....Senior Secured Shelf, Affirmed (P)Aa2

....Senior Secured First Mortgage Bonds, Affirmed Aa2

..Issuer: FPL Group Capital Trust I

....Pref. Stock Preferred Stock, Affirmed Baa2

..Issuer: Jacksonville (City of) FL

....Backed Senior Secured Revenue Bonds, Affirmed Aa2

....Backed Senior Secured Revenue Bonds, Affirmed VMIG 1

....Senior Secured Revenue Bonds, Affirmed Aa2

....Senior Secured Revenue Bonds, Affirmed VMIG 1

..Issuer: MANATEE (COUNTY OF) FL

....Senior Secured Revenue Bonds, Affirmed Aa2

....Senior Secured Revenue Bonds, Affirmed VMIG 1

..Issuer: Martin (County of) FL

....Senior Unsecured Revenue Bonds, Affirmed Aa2

....Senior Unsecured Revenue Bonds, Affirmed VMIG 1

..Issuer: Miami-Dade County Industrial Dev. Auth., FL

....Senior Secured Revenue Bonds, Affirmed Aa2

....Senior Secured Revenue Bonds, Affirmed VMIG 1

..Issuer: NextEra Energy Capital Holdings, Inc.

.... Commercial Paper, Affirmed P-2

....Backed Junior Subordinated Regular Bond/Debenture, Affirmed Baa2

....Backed Junior Subordinate Shelf, Affirmed (P)Baa2

....Backed Preferred Shelf, Affirmed (P)Baa3

....Backed Senior Unsecured Shelf, Affirmed (P)Baa1

....Senior Unsecured Commercial Paper, Affirmed P-2

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

..Issuer: NextEra Energy, Inc.

.... Issuer Rating, Affirmed Baa1

....Junior Subordinate Shelf, Affirmed (P)Baa2

....Preferred Shelf, Affirmed (P)Baa3

....Senior Unsecured Shelf, Affirmed (P)Baa1

..Issuer: Putnam County Development Authority, FL

....Senior Secured Revenue Bonds, Affirmed Aa2

....Senior Secured Revenue Bonds, Affirmed VMIG 1

..Issuer: St. Lucie (County of) FL

....Senior Secured Revenue Bonds, Affirmed Aa2

....Senior Secured Revenue Bonds, Affirmed VMIG 1

The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in December 2013. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Mihoko Manabe
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

James Hempstead
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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