Fitch Rates Florida Power & Light Company's FMBs 'AA-'

Fitch Ratings has assigned a 'AA-' rating to Florida Power & Light Company's (FPL) $1.2 billion first mortgage bonds (FMB), 2.875% series due Dec. 4, 2051.

FPL plans to use the net proceeds from the issuance for general corporate purposes, including repayment of a portion of its outstanding CP obligations.

The Long-Term Issuer Default Rating for FPL is 'A' with a Stable Outlook. FPL's ratings reflect the predictable nature of cash flows from regulated electric operations; a favorable 2016 rate order that provides for four years of regulatory certainty; constructive outcome in the 2021 base rate case; customer growth that partially offsets weakness in usage; and a strong balance sheet and liquidity profile.

Key Rating Drivers

Constructive Agreement in Rate Case: On Oct. 26, the Florida Public Service Commission (PSC) unanimously approved FPL's four-year settlement agreement that was jointly developed with key intervenors in its 2021 combined rate filing with Gulf Power. The rate plan provides for $692 million base rate revenue increase in 2022 and $560 million rate increase in 2023. The rate plan also provides for a solar base rate adjustment for the recovery of up to approximately 900MW in new solar construction in each of 2024 and 2025 that would result in $140 million rate increase for each of those two years. The rate increases are based on a 10.6% ROE.

The agreement also provides for continuation of the reserve amortization mechanism as well as the storm cost recovery mechanism. The agreement will unify the rates and tariffs for FPL and Gulf Power using a transition rider/credit to address the current differences, which would decline to zero over a five-year period.

Economic Recovery Builds Momentum: Florida's economy is recovering well from the pandemic-driven slowdown. Most key indicators, such as housing starts, employment and consumer sentiment, are on an upward trend. The state continues to draw people from other parts of the country. Customer growth has varied between 0.6%-1.3% over 2017-2020, whereas customer usage has fluctuated from year to year. Fitch's financial forecasts for FPL are based on a 0.5% cumulative annual growth rate in retail sales over 2021-2023.

High Capex: FPL has outlined approximately $22 billion in potential capital investments over 2021-2023 for the combined FPL and Gulf entities. A significant portion will be spent to maintain and upgrade infrastructure, including investments for storm hardening and grid reliability. The balance is earmarked for new generation capacity, which includes utility scale solar generation and community solar investments as part of FPL's 30x30 plan to install 30 million solar panels in Florida by 2030.

Other investments include battery storage, the Dania Beach natural gas combined cycle plant and Gulf Clean Energy Center. Fitch expects FPL to finance its capex and dividend distributions in a balanced manner to maintain its regulatory capital structure.

Robust Credit Metrics: Fitch forecasts FPL's credit metrics to remain robust over 2021-2023. Fitch expects FFO leverage to be 2.6x-3.1x and FFO fixed-charge coverage to be 10.0x-11.0x over this period.

Derivation Summary

FPL is favorably positioned relative to other highly rated integrated utility peers including, Alabama Power Company (A/Stable) and Oklahoma Gas & Electric (OG&E; A-/Stable). FPL's credit metrics are superior to both Alabama Power and OG&E. FFO-adjusted leverage is expected to average between 2.9x to 3.1x for FPL versus 3.8x to 4.0x for Alabama Power and 4.0x for OG&E.

Fitch views the regulation in Florida and Alabama to be constructive and predictable for its utilities. Oklahoma regulation has been constructive for a long while, but has seen deterioration in recent years. FPL has negligible exposure to coal-fired generation, while this exposure is large for Alabama Power. FPL's ratings are constrained due to ownership by NextEra Energy Inc. (A-/Stable), which, unlike Alabama Power's weaker parent, derives approximately one-third of its earnings from non-regulated operations.

Key Assumptions

Fitch's key assumptions within the rating case for FPL include:

Annual retail sales growth of 0.5% over 2021-2023;

Rate increases for FPL as per 2016 rate order, retention of tax savings in 2021 and PSC approved agreement in the 2021 rate case;

O&M and other expenses stay relatively flat;

Capex of approximately $22 billion over 2021-2023;

Balanced funding mix.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Positive rating actions for FPL appear unlikely at this time.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Unfavorable changes in Florida regulatory policies for timely recovery of utility capital investments, fuel and purchased power costs, and storm-related costs;

Increasing risk profile of its parent company from higher debt leverage or aggressive corporate strategy;

Sustained FFO leverage above 4.0x.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

FPL's long-term debt financing vehicles are primarily taxable secured first mortgage bonds and tax-exempt revenue bonds. FPL has its own credit facilities, separate from NextEra and its other subsidiaries, to provide liquidity backup for CP funding and variable rate tax-exempt revenue notes, as well as for issuance of LOC.

Committed corporate credit facilities for NextEra, FPL and Gulf Power Company aggregated approximately $13.7 billion as of Sep. 30, 2021, excluding limited recourse or nonrecourse project financing arrangements. Included in that total is $3.8 billion in unsecured facilities available to FPL as loans including $650 million available to issue LOC.

FPL's bank revolving line of credit facilities are also available to support the purchase of $1,375 million of pollution control, solid waste disposal and industrial development revenue bonds, as well as repayment of approximately $882 million of floating rate notes in the event of early redemption. Of FPL's $3.8 billion credit facility, $3.1 billion matures in 2026. Other credit facilities available to FPL mature over 2022-2026. In Fitch's view, FPL's debt maturities are manageable.

Issuer Profile

FPL is the largest vertically integrated electric utility in the state of Florida serving 5.6 million customers.

Summary of Financial Adjustments

Fitch capitalizes operating lease expenses in accordance with Fitch's applicable criteria.

Date of Relevant Committee

30 September 2021

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.