OREANDA-NEWS. Fitch Ratings has assigned an 'A-' rating to NextEra Energy Capital Holdings Inc.'s (Capital Holdings) $1.50 billion series I senior unsecured debentures due Sept. 1, 2021. The current Issuer Default Rating (IDR) for Capital Holdings and its parent, NextEra Energy, Inc. (NextEra), is 'A-'. The Rating Outlook for both entities is Stable. NextEra provides full guarantee of Capital Holdings' debt and hybrids.

NextEra is issuing 30 million equity units with an initial stated amount of $50 per unit. Each equity unit comprises a forward equity purchase contract issued by NextEra and a 5% beneficial ownership interest in series I senior unsecured debentures of Capital Holdings. The debentures issued in connection with the equity units serve to collateralize the investor's forward stock purchase obligation.

The series I debentures are absolutely, irrevocably and unconditionally guaranteed by NextEra. The guarantee is an unsecured obligation of NextEra and will rank equally and ratably with all other unsecured and unsubordinated obligations of NextEra. NextEra has the right to defer contract adjustment payments with respect to the equity units at any time through the conversion date, but has no option to defer interest on the debentures. Consistent with Fitch's hybrid rating criteria, all of the units' value will be allocated to debt in Fitch's review of the corporate capital structure, due to the senior ranking of the debentures used as collateral for the transaction.

Fitch last affirmed the IDRs of NextEra and Capital Holdings on Aug. 1, 2016 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). NextEra plans to fund the $9.5 billion acquisition of EFH through a combination of equity units, cash on hand and debt. The issuance of the $1.5 billion equity units is a component of the financing plan.

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. 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.

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 $21 billion over 2016 - 2018; and

--Limited commodity exposure based on existing hedge position.

RATING SENSITIVITIES

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.

LIQUIDITY

Liquidity is robust, with $6.5 billion of net available liquidity as of June 30, 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.