may have totest the goodwill of the capital markets over the next year to help it fill apossible $4 billion cash flow hole in its balance sheet, courtesy of itsaggressive renewable energy development plans, Moody's analysts said.
NextEra'splans to develop as much as 5,400 MW of renewable capacity through 2018 havegiven Moody's analysts reason to believe the company will ultimately need tocover a record $4 billion in negative free cash flow tied to the financing ofits development pipeline.
WhileMoody's indicated that it is confident NextEra will be able to keep its Baa1stable rating by securing the funds, it did highlight the likelihood thatNextEra will be unable to take on additional debt to help balance its capitalexpenditure spending with relatively lower cash flows from operations, withoutcompromising its credit ratings.
"Asof 31 March 2016, NextEra's consolidated CFO-to-debt ratio was 19.8%, justbelow the 20% minimum threshold we assume in our Baa1 rating, so the companyhas limited leeway to sustain additional debt without a marked increase in cashflow," Moody's analysts wrote in a July 21 report.
Instead,the company may have to look to issue new equity, pursue non-recourseproject-level debt, or "recycle capital" by selling merchant assetsat a time when the market appears to be saturated with similar, potentiallycheaper assets via the SunEdisonInc. bankruptcy.
"They'vebeen very selective, but they are not under the gun to sell," Moody'sSenior Vice President and author of the report Mihoko Manabe said during aninterview. "The bulk of their portfolio is renewable assets, and thoseassets are particularly attractive to yieldcos looking for something with longterm future cash flows."
Thatcould mean potential drop-downs for its yieldco affiliate, , internally orin the market.
"Ithink they are looking for growth at NEP, and that will come from new assets atNEP through drop-downs," Manabe said. "It is possible they couldacquire assets from third parties as well."
NextEra,together with its affiliates, raised $9.2 billion of capital in 2015, of whichsome $1.25 billion in hybrid securities were issued by , thoughthat may be a more costly option compared to straight equity raises, according toMoody's.
Theresult could drive the company to make "at the market" equityissuances, when stock prices are high enough such that small issuances canavoid dilutions, both at the parent and yieldco level, combined for about $224million, plus as much as $400 million in additional debt capacity at the NEP holdco level, based on March 31 data provided by NextEra in June.
Butfor NextEra, equity price appears paramount. The company's of ,which it attempted to do entirely in equity, could help free up cash for apotential bid for Oncor ElectricDelivery Co. LLC, the transmission arm of bankrupt
Creditorshave estimated Oncor's value at about$19 billion.
Ifsuch a deal was to go through, it could give NextEra some extra debt capacity,via its regulated cash flows, to create a window for some incremental leverageon the renewables side.
"Conceptually,if they do grow their regulated business, it would give them more debtcapacity," Manabe said.