NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the Issuer Default Rating (IDR) of TECO Energy, Inc. (TE) and its fully guaranteed finance subsidiary, TECO Finance at 'BBB'. Fitch has also affirmed the IDR of Tampa Electric Company, Inc. (TEC) at 'BBB+'. Fitch has withdrawn TE's 'BBB' senior unsecured debt rating following the retirement of its 6.75% senior unsecured notes in 2012. The Rating Outlook is Stable. A full list of ratings is included at the end of this release. Approximately $2.97 billion of long-term debt is affected by today's rating actions.
KEY RATING DRIVERS
Cash Flow Predictability
TE' ratings affirmation reflects the stable and predictable cash flows generated by its low-risk regulated utility subsidiary TEC. TEC contributed more than 90% of TE's operating cash flows and close to 90% of consolidated EBITDA as of Dec. 31, 2012.
Balanced Regulatory Compact
Fitch views the regulatory environment in Florida as balanced. TEC benefits from rate design mechanisms that allow timely recovery of fuel and purchased power expenses, purchased gas costs, customer conservation related expenses, and environmental expenses. The Florida Public Service Commission (FPSC) accepts forward-looking test years in rate determinations that reduce regulatory lag and provide an opportunity to earn authorized returns on equity (ROE).
Authorized ROEs granted by the FPSC tend to be above the industry average of about 10.15% in 2012, as reflected in rate orders of other Florida utilities in 2012. TEC's current authorized ROE is 11.25%, the mid-point of a 10.25% - 12.25% range.
Rate Case Filing
TEC is filing in April 2013 for an electric rate increase of approximately $135 million based on an equity ratio and ROE that are identical to TEC's current rate structure. TEC's last rate case was filed in 2008. Rate base additions, increasing operating costs, higher depreciation expense and pension expense, and slower than anticipated economic recovery, are the main drivers behind the rate request. Management has stated it will likely not earn its authorized ROE in 2013 due to these factors.
Fitch expects TEC to receive a balanced rate order, consistent with other recent rate decisions in Florida. The new base rates are to be effective Jan. 1, 2014.
Solid Consolidated Credit Metrics
TE's credit metrics are solid for the 'BBB' rating category. Fitch projects FFO-to-interest to range between 4.4x and 5.5x over 2013 - 2016, and FFO/debt, to range between 20% and 25% over the same time period. Fitch expects a decline in credit metrics in 2013, reflecting the impact of TEC's rising operating costs and, to a lesser extent, the depressed margins experienced at TE's unregulated coal business.
Fitch expects credit protection measures to improve in 2014, driven by rate relief and additions to rate base. Additionally, Fitch recognizes that TE has been able to significantly reduce parent-only debt over the recent years, and the resulting lower interest expense strengthens forecasted interest coverage measures.
Forecasted credit metrics are predicated on the utility achieving a supportive rate outcome in its pending rate case, and that TE is able to successfully execute its relatively large consolidated capex program, estimated by management to amount to a total of $2.98 billion over 2013 - 2017, approximately $300 million higher than the previous five years.
Modest Improvement in Florida's Economy
Fitch views the Florida economy as gradually improving, despite performing significantly below pre-recession levels. Housing permits are trending up relative to the last two years, and Florida's unemployment rate of 7.6% was below the national average of 7.8% at the end of 2012. Fitch expects the gradual economic recovery to provide some modest upside to TEC's margins.
Fitch projects electric load growth to hover around 1% over the forecast period, somewhat similar to management expectations. TEC anticipates customer growth in its service territory in 2013 to continue at a pace similar to 2012, when the average number of customers increased by 1.2%.
Adequate Liquidity Profile
Fitch considers consolidated liquidity to be adequate for working capital purposes and other short-term funding needs. TE and TEC have separate multi-year bank credit agreements that were renewed in 2011 and mature in October 2016. TE has access to a total of $200 million under its credit facility. There were no borrowings outstanding as of Dec. 31, 2012.
TEC has access to a total of $325 million under its credit facility. $1.5 million of letters of credit were outstanding as of Dec. 31, 2012TEC's one-year $150 million accounts receivable credit facility was renewed in Feb. 2013 and now expires Feb. 14, 2014. There were no borrowings outstanding under the credit facility. The bank credit agreements include a financial covenant that the debt/capitalization ratio should be no greater than 65%. TE and TEC were in compliance as of Dec. 31, 2012.
TE and TEC have adequate access to capital markets, in Fitch's view. Fitch expects TEC to continue to have unrestricted access to capital markets in order to finance a portion of its capex program and be able to refinance near-term debt maturities. Consolidated debt maturities are considered manageable with $83.3 million due in 2014, $274.5 million due in 2015 which includes $191.2 million of TECO Finance debt, and $333.4 million due in 2016, which includes $250 million of TECO Finance debt).
Polk Conversion Project
The project consists of the conversion of Polk units 2 - 5 from peaking service to combined cycle with a January 2017 in-service date. The FPSC approved the project in December 2012. Management estimates capital spending to amount to $605 million, including $150 million for transmission and distribution, over 2013-2017. The peak capital spending is forecast at $490 million over 2014-2015.
Fitch expects TEC to fund its capex-related funding needs with a combination of internally generated funds, and an equity contribution from TE, estimated to total between $50 million and $70 million in 2013, and $180 million to $200 million in 2014. TE plans on using net proceeds of $194 million related to the recent divestiture of its Guatemalan business to support the equity infusion.
Fitch considers the parent equity infusion to be supportive of TEC's credit quality as it significantly mitigates the need for incremental leverage during the heavy construction phase. Fitch believes a successful execution of the project and receiving an adequate return of and on TEC's capital investments will be essential to maintaining TE and TEC's ratings at current levels.
Parent Cash Flow Generation
Cash flows are bolstered by NOLs that effectively shelter net income from taxes for the next five years. NOLs total approximately $465 million at year-end 2012. The extension of bonus depreciation rules have effectively extended the life of the NOLs. Consequently, Fitch expects TE to be cash flow positive over the forecast period, and TE's cash flows should support a portion of TEC's large growth capex.
Conservative Management of the Unregulated Business
Following the divestiture of TECO Guatemala in 2012, TECO Coal is the only remaining unregulated entity. Management strategy is to focus exclusively on its regulated utility, and essentially views TECO Coal as a non-core business.
The coal business has been a positive source of cash flows to TE over recent years, and it contributed approximately $50 million of operating cash to TE in both 2011 and 2012. Due to the depressed coal markets, management expects TECO Coal's contribution to decline to approximately $12 million of net income in 2013. Fitch estimates that, on average over 2013-2016, the coal business will provide less than 10% of parent operating cash flows.
Fitch projections assume a modest improvement in coal sales volumes and pricing, starting in 2014, but Fitch does not believe the improvement is likely to have a significant impact on consolidated earnings and cash flows. Fitch expects TE to follow a conservative approach to running the coal business to maintain positive margins in a very challenging environment.
Notching
Fitch considers TEC's credit profile to carry less business and financial risk than that of TE, which exhibits a capital structure that continues to reflect a substantial amount of leverage. Consequently, Fitch deems the one-notch differential between TE and TEC to be appropriate.
RATING SENSITIVITIES
Factors that could lead to positive rating actions are:
--A constructive rate order at TEC and accelerated retirement of TECO Finance debt
--Stronger than forecasted consolidated credit metrics with FFO-to-interest near 5x and FFO/debt between 22% to 25% on a sustained basis
Factors that could lead to negative rating actions are:
--An unfavorable rate order in TEC's rate case
--A revised financing plan that leads TE to issue a significant amount of incremental debt to support TEC's capex program
--TEC's inability to recover construction costs on a timely basis could impact the ratings.
Fitch affirms the following ratings:
TECO Energy
-Long-term IDR at 'BBB';
--Short-term IDR at 'F2'.
TECO Finance
--Long-term IDR at 'BBB';
--Short-term IDR at 'F2';
--Senior unsecured debt at 'BBB'.
Tampa Electric Company
--Long-term IDR at 'BBB+';
--Short-term IDR at 'F2';
--Commercial Paper at 'F2';
--Senior unsecured debt at 'A-';
--Hillsborough County Industrial Development Authority (Tampa Electric Company Project) pollution control revenue refunding bonds at 'A-';
--Polk County Industrial Development Authority (Tampa Electric Company Project) solid waste disposal facility revenue refunding bonds at 'A-' /'F2'.
Fitch withdraws the following rating:
TECO Energy
--Senior unsecured debt
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria for Utilities' (May 3, 2012);
--'Rating North American Utilities, Power, Gas, and Water Companies' (May 16, 2012).
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012)
Applicable Criteria and Related Research
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Recovery Ratings and Notching Criteria for Utilities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693750
Rating North American Utilities, Power, Gas, and Water Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=625129
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