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Mississippi Business Finance Corporation -- Moody's upgrades Gulf Power to A1 upon merger with Florida Power & Light

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Rating Action: Moody's upgrades Gulf Power to A1 upon merger with Florida Power & Light

Global Credit Research - 04 Jan 2021

Over $1.7 billion of rated debt securities affected

New York, January 04, 2021 -- Moody's Investors Service, (Moody's) upgraded Gulf Power Company's senior unsecured debt rating to A1 from A2. At the same time, Moody's affirmed Gulf Power's P-1 short-term rating for commercial paper rating and short term VMIG 1 rating. Gulf Power's A2 Issuer Rating is withdrawn. The rating actions reflect Gulf Power's 1 January 2021 merger with affiliate Florida Power & Light Company (FPL, A1 stable), at which time FPL assumed all of Gulf Power's outstanding debt obligations. Gulf Power's P-1 rating will be withdrawn by the end of January after the company's commercial paper borrowings mature and it will no longer be a commercial paper issuer. FPL will continue to issue commercial paper on its already existing commercial paper program. A complete list of rating actions follows:

Withdrawals:

..Issuer: Gulf Power Company

....Issuer Rating, Withdrawn, previously rated A2

Upgrades:

..Issuer: Gulf Power Company

....Senior Unsecured Regular Bond/Debenture, Upgraded to A1 from A2

..Issuer: BAY (COUNTY OF) FL

....Senior Unsecured Revenue Bonds, Upgraded to A1 from A2

..Issuer: Escambia (County of) FL

....Senior Unsecured Revenue Bonds, Upgraded to A1 from A2

..Issuer: Jackson (County of) FL

....Senior Unsecured Revenue Bonds, Upgraded to A1 from A2

..Issuer: Mississippi Business Finance Corporation

....Senior Unsecured Revenue Bonds, Upgraded to A1 from A2

..Issuer: Monroe County Development Authority, GA

....Senior Unsecured Revenue Bonds, Upgraded to A1 from A2

Affirmations:

..Issuer: Gulf Power Company

....Senior Unsecured Commercial Paper, Affirmed P-1

..Issuer: BAY (COUNTY OF) FL

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

..Issuer: Escambia (County of) FL

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

..Issuer: Jackson (County of) FL

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

..Issuer: Mississippi Business Finance Corporation

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

..Issuer: Monroe County Development Authority, GA

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

Outlook Actions:

..Issuer: Gulf Power Company

....Outlook, Changed To No Outlook From Stable

RATINGS RATIONALE

"Gulf Power's rating upgrade was driven by the utility's merger into FPL that took effect at the beginning of this year," said Jeff Cassella, VP-Senior Credit Officer. The combination of the two entities occurred after the Federal Energy Regulatory Commission (FERC) approved, on 15 October 2020[1], the merger application filed earlier in the year by NextEra Energy, Inc.'s (NEE, Baa1 stable) two Florida utility subsidiaries, FPL and Gulf Power. Upon the completed merger, Gulf Power no longer exists as a separate organization as FPL is continuing as the surviving entity. FPL assumed all of Gulf Power short and long-term debt obligations, liabilities and physical assets.

The A1 rating on Gulf Power former debt obligations now reflects the credit quality of FPL, including its strong financial profile as evidenced by a ratio of cash flow from operations pre-working capital (CFO pre-W/C) to debt of 34.1% for the 12- months ended 30 September 2020, while operating within a highly credit supportive Florida regulatory environment. FPL is the largest vertically integrated regulated utility in Florida; the combined entity will have approximately 31,000 megawatts (MW) of generating capacity, a rate base of about $45 billion and over 5.4 million customer accounts.

FPL is authorized to use timely cost recovery mechanisms that enable it to generate predictable and stable cash flows and consistently maintain strong financial metrics. Its large, mainly residential service territory benefits from solid economic expansion that leads to organic sales growth and a need for continued infrastructure investments. To meet these needs, FPL continues to make substantial capital investments in its rate base, which provides steady earnings and cash flow growth potential. FPL finances these investments in a manner that maintains the utility's targeted capital structure, including an approximate 60% equity ratio allowed by regulators. FPL's credit profile also considers its high geographic concentration risk, as it operates solely in one state that is exposed to extreme weather events such as hurricanes and tropical storms. At the same time, FPL's credit is constrained by high holding company debt at its parent, NEE, which drives the difference in credit quality between the two entities.

FPL plans to continue to provide service to customers in Gulf Power's service territory in the Florida panhandle under the existing Gulf Power brand during this year. Gulf Power will be an operating division of FPL with separate retail rates as well as books and records. Gulf Power and FPL have been in the process of constructing a 176-mile, 161-kilovolt transmission line that will directly interconnect the legacy Gulf Power service territory with rest of the FPL service territory. Once in operation, expected mid-2021, the transmission line will provide approximately 850 MW of bidirectional power transfer capability. FPL plans to file a combined retail rate case in the first quarter of this year for new retail customer rates effective in January 2022. Over the long term, we expect Gulf Power's customer rates will benefit from being a part of the much larger combined entity that has an enormous customer base, greater scale and from improved operational, regulatory and administrative efficiencies.

Environmental, social and governance considerations incorporated into our credit analysis for Gulf Power and FPL are primarily related to carbon regulations and social risks related to demographic and societal trends, as well as customer and regulatory relations. NEE is strongly positioned for carbon transition because of a business model that is not expected to be materially affected by the carbon transition and strategies and plans that substantially mitigate carbon transition exposure. This incorporates FPL's minimal exposure to coal, which is primarily at its Gulf Power operating division, but substantial ownership of highly efficient and modernized natural gas-fired generation. There are no renewable portfolio standards in Florida and the state's political and regulatory environment is not pushing for an increase in renewables to the same degree as in other states. However, the company has plans to materially increase its solar generation over the next decade. For example, FPL plans on adding about 10,000 MW of solar energy by 2029.

Social risks are primarily related to demographic trends, safety, customer and regulatory relations. FPL continues to work towards ensuring safe, reliable and affordable electricity service to its customers through grid hardening investments and improving its generation portfolio mix to lower cost natural gas and renewable energy sources. From a governance perspective, financial and risk management policies including a strong financial profile are important characteristics for managing environmental and social risks particularly amid its elevated capital expenditure program.

Rating Outlook

The stable outlook on FPL reflects our expectation that the Florida regulatory environment will continue to be highly credit supportive as evidenced by a credit supportive outcome of FPL and the former Gulf Power's joint rate case expected to be filed this year. The stable outlook reflects our expectation that FPL will have access to several timely cost and investment recovery mechanisms, which will enable the utility to maintain strong financial metrics including a ratio of CFO pre-W/C to debt in the low 30% range.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Factors that could lead to an upgrade

While FPL exhibits strong credit metrics, the rating is constrained by its geographic concentration in Florida, a state that is prone to event risk from storms and hurricanes, and its parent's high percentage of holding company debt, which is reflected in the difference between the two entities' credit quality. Over the longer term, FPL could be upgraded in conjunction with an upgrade of NEE, and if NEE's holding company debt declines to less than 25% of NEE's consolidated debt.

Factors that could lead to a downgrade

A downgrade of FPL could be considered if there are significant cost disallowances or other changes in the upcoming rate case that would weaken Florida's credit supportive regulatory and cost recovery framework; if the political environment were to become less supportive or contentious; or if there is a sustained decline in key credit metrics, such that its ratio of CFO pre-W/C to debt declines below 25% on a sustained basis. A downgrade of NEE could also result in a downgrade of FPL, due to the utility's affiliation with a weaker parent.

Headquartered in Juno Beach, FL, FPL is one of the largest regulated electric utilities in the US and the principal subsidiary of NEE, which is one of the largest power and utility holding companies in North America. For the 12-months ended 30 September, FPL generated about $12 billion of revenue, which accounted for about 60% of NextEra's consolidated revenues; and ended the period with about $60.5 billion of assets. On 1 January 2019, NEE, through a wholly owned subsidiary, acquired Gulf Power from Southern Company (The) (Southern, Baa2 stable), for approximately $5.75 billion, which included approximately $1.4 billion of Gulf Power debt.

The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1072530. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

REFERENCES/CITATIONS

[1] https://ferc.gov/sites/default/files/2020-10/10-2020-E-2.pdf 15-Oct-2020

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.

Jeffrey F. Cassella VP - Senior Credit Officer Infrastructure Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Michael G. Haggarty Associate Managing Director Infrastructure Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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