NextEra Energy Inc. 'A-' Rating Affirmed On Strong Growth; Outlook Remains Stable
- Following NextEra Energy Inc.'s (NEE) recent investor conference, we believe that NEE's non-utility competitive contracted business will experience increasing growth related to demand from data centers and the onshoring of manufacturing. We also expect an improvement in the non-utility businesses' cash flow stability because of the company's increasing reliance on the transferability of tax credits. At the same time, the company's regulated utilities are experiencing high growth for renewable generation and as such we expect that the company will maintain its utility to non-utility balance at about 70% of consolidated EBITDA to about 30% of consolidated EBITDA.
- We affirmed all our ratings on NEE, including the 'A-' issuer credit rating and the 'BBB+' senior unsecured debt rating. The outlook remains stable.
- We affirmed all our ratings on Florida Power & Light Co., including the 'A' issuer credit rating and 'A-1' short-term rating.. The outlook remains stable.
- The stable outlook incorporates our view that NEE's regulated utility business will continue to account for about 70% of the company's consolidated EBITDA. Under our base case, we assume consolidated funds from operations (FFO) to debt of 19%-21% through 2026.
NEW YORK (S&P Global Ratings) June 25, 2024—S&P Global Ratings today took the above rating actions.
Our ratings on NEE reflect our assessment of its business risk profile as excellent. We continue to assess NEE as toward the middle of the business risk profile category range, primarily reflecting the company's lower-risk regulated utilities businesses (roughly 70% of EBITDA), which benefit from utility subsidiary Florida Power & Light Co.'s (FP&L) large, mostly residential and expanding customer base that provides cash flow stability. We assess Florida's regulatory construct as constructive because NEE benefits from forward-looking test years and various regulatory mechanisms that provide for the timely recovery of investments and fuel costs.
The company's higher-risk non-utility businesses, which account for roughly 30% of its consolidated EBITDA, increases business risk. They include contracted competitive energy, nuclear merchant generation, customer supply and trading, retail supply and wholesale full-requirement contracts, and natural gas exploration and production businesses. Some of these activities entail significant liquidity needs, low margins, and require diligent risk management and hedging against fluctuating commodity prices. Our assessment of these businesses incorporates the company's growing benefits from the 2022 Inflation Reduction Act that include longer-term certainty for tax credit benefits and the transferability opportunities as an efficient option to divest of tax credits that enhances longer-term cash flow predictability. Accordingly, the non-utility business' FFO will likely account for more than 30% of the company's consolidated FFO because of its growth opportunities and its increasing stable cash flows from the transferability of tax credits. While we believe tax credit transferability may be transitory in nature, credit quality is supported by a strong management track record and the company's competitive advantages, relative to peers. This includes the company being North America's largest developer and operator of renewable generation and its improving efficiencies, including remote operations of the company's generation assets.
We assess NEE's financial risk profile as significant. NEE's capital spending remains robust, averaging about $26 billion per year through 2026. We expect it will lead to annual discretionary cash flow deficits of about $17 billion. For 2023, we removed about $6.6 billion of the project finance debt at NextEra Energy Resources LLC associated with its stand-alone renewable generation projects. This reflects our view that NextEra Energy Resources has sufficient scale and diversity around its existing wind and solar investment and that no single project is critical to the company. Furthermore, management's public statement that it would not support a failing project and NEE's record of walking away from one project supports our assessment.
We expect NEE will fund its growing capital investments in a balanced manner, maintaining its credit quality. This could include use of equity issuances, hybrid securities, asset recycling, tax credits, and tax equity to support credit quality. Under our base case, we expect FFO to debt of 19%-21% through 2026. We evaluate the company's financial measures using our medial-volatility benchmarks, which primarily reflect its low-risk utility operations and effective management of regulatory risk.
The stable outlook on NEE incorporates our view that it will maintain its lower-risk regulated utility business at about 70% of consolidated EBITDA. We also forecast NEE's consolidated FFO to debt of 19%-21% through 2026.
We could lower our rating on NEE over the next 24 months if we believe its management of regulatory risk has weakened, its lower-risk regulated utility businesses account for materially less than 70% of its consolidated EBITDA, or if FFO to debt weakens to below 18%. This could occur if the company unexpectedly increases leverage to support a more aggressive growth strategy, higher-than-forecast shareholder rewards, or a large debt-financed acquisition.
We could raise our rating on NEE over the next 24 months if its financial measures improve and consistently reflect FFO to debt greater than 25%, without increasing business risk. This could occur if the company reduces its reliance on leverage, substantially reduces growth spending, or finances a large acquisition or capital project mostly with equity.
Related Criteria
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- General Criteria: Hybrid Capital: Methodology And Assumptions, March 2, 2022
- General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
- General Criteria: Group Rating Methodology, July 1, 2019
- Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
- Criteria | Corporates | General: Reflecting Subordination Risk In Corporate Issue Ratings, March 28, 2018
- General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
- Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
- General Criteria: Methodology: Industry Risk, Nov. 19, 2013
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- Criteria | Corporates | Utilities: Collateral Coverage And Issue Notching Rules For '1+' And '1' Recovery Ratings On Senior Bonds Secured By Utility Real Property, Feb. 14, 2013
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.spglobal.com/ratings for further information. Complete ratings information is available to RatingsDirect subscribers at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.spglobal.com/ratings.
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Global-scale credit rating(s) issued by S&P Global Ratings' affiliates based in the following jurisdictions [To read more, visit Endorsement of Credit Ratings] have been endorsed into the EU and/or the UK in accordance with the relevant CRA regulations. Note: Endorsements for U.S. Public Finance global-scale credit ratings are done per request. To review the endorsement status by credit rating, visit the spglobal.com/ratings website and search for the rated entity.
| Primary Credit Analyst: | Gerrit W Jepsen, CFA, New York + 1 (212) 438 2529; gerrit.jepsen@spglobal.com |
| Secondary Contact: | Daria Babitsch, New York 917-574-4573; daria.babitsch1@spglobal.com |
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