NEW YORK--(BUSINESS WIRE)--Fitch Ratings has placed the 'BBB' Issuer Default Rating (IDR) of TECO Energy Inc. (TE) on Rating Watch Negative following TE's announcement of a definitive purchase agreement to acquire New Mexico Gas Intermediate, Inc. and its subsidiary New Mexico Gas Company (NMGC) (not rated by Fitch) from Continental Energy Systems LLC for $950 million, including the assumption of $200 million of NMGC's debt. Fitch has also placed the 'BBB+' IDR of subsidiary Tampa Electric Company (TEC) and the 'BBB' IDR of TE's fully guaranteed finance subsidiary, TECO Finance, Inc., on Rating Watch Negative.
TE has obtained a $1.075 billion fully committed bridge loan facility from Morgan Stanley to support financing for the transaction. However, Fitch expects that the permanent financing, expected to be completed in 2014, will consist of cash on hand, long-term debt at NMGC, and parent common equity. The transaction does not require shareholder approval. Management expects the transaction to close in the first quarter of 2014.
Fitch expects to resolve the Rating Watch Negative at TE once transaction financing is permanently established and regulatory approvals are obtained. Fitch expects to resolve the Rating Watch Negative at TEC independently of TE's, after reviewing pro-forma corporate and capital structure, including any financial impact on TEC, which will be dependent on equity support from TE in a period of high capital expenditures.
KEY RATING DRIVERS
The Rating Watch Negative at TE is driven by the incremental debt projected to be incurred as a result of the acquisition and its impact on TE's consolidated credit metrics, in Fitch's view. Fitch forecasts pro forma debt/EBITDA ratio to be above 4.0x by 2014, including the issuance of additional common equity. Projected metrics are below what Fitch had previously modeled. Fitch expects leverage metrics to gradually improve to close to 3.6x by 2016, but remain relatively weak for the current rating category.
In the event of a ratings downgrade upon resolution of the Rating Watch Negative, a one-notch downgrade is likely. TE's 'F2' short-term rating would also be lowered to 'F3' to reflect Fitch's traditional linkage between long-term and short-term ratings.
The Negative Rating Watch at TEC is driven by Fitch's parent and subsidiary linkage criteria. Fitch generally maintains a one-notch differential between parent holding company and utility subsidiaries. Notching can be widened in instances where some form of ring-fencing provisions exists and/or the parent holding company can demonstrate its commitment or ability to support utility's credit metrics.
In TEC's case, in its review of TE's pro forma financing strategy and capital structure, Fitch will be seeking to evaluate TE's equity infusions to support TEC's heavy capex program, and TEC's ability to maintain a capital structure in line with Fitch's expectations for the current rating category.
At present, Fitch's concerns relate to TE's ability to provide cash support to TEC, in a period of heavy capex, at levels similar to what Fitch had previously modeled. TE may be challenged to meet the funding requirements to complete the transaction and support the NMGC business, as well as expected equity infusions.
NMGC is the largest regulated natural gas local distribution company (LDC) in New Mexico, serving approximately 509,000, primarily residential, customers. The transaction effectively adds 50% to TE's current customer base, and TE will serve a total of approximately 855,400 gas customers, and more than 1.5 million total gas and electric customers upon closing. With this transaction, management expects its regulated businesses to contribute approximately 89% of pro forma EBITDA, further reducing TE's earnings and cash flow exposure to its more volatile coal business. As of Jan. 31, 2013, TE reports NMGC's EBITDA to be $86 million.
NMGC is regulated by the New Mexico Public Regulation Commission (NMPRC). The NMPRC applies a 'net customer benefit' standard in the context of approving mergers, and potential rate payer concessions imposed by the NMPRC could stress earnings and cash flows. The traditional use of historical test years to establish rates creates regulatory lag and limit the ability to earn authorized returns on equity (ROE).
NMGC's last base rate increase of $21.5 million went into effect Feb. 1, 2012. NMGC's authorized ROE and equity ratio are 10% and 52%, respectively. A purchased gas adjustment clause (PGAC) allows NMGC to recover cost of purchased gas on a timely basis.
RATING SENSITIVITIES
No positive rating action is anticipated in the near term.
Incremental leverage with debt/EBITDA above 4.0x on a sustained basis would likely lead to a one-notch downgrade.
Merger-related rate payer concessions imposed by the NMPRC could pressure credit metrics and ratings.
An outcome in TEC's pending rate proceeding that limits timely and adequate return on invested capital could negatively affect ratings.
Fitch places the following ratings on Rating Watch Negative:
TE
--Long-term Issuer Default Rating (IDR) 'BBB';
--Short-term IDR 'F2'.
TEC
--Long-term IDR 'BBB+';
--Senior unsecured debt 'A-';
--Hillsborough County Industrial Development Authority (Tampa Electric Company Project) pollution control revenue refunding bonds 'A-';
--Polk County Industrial Development Authority (Tampa Electric Company Project) solid waste disposal facility revenue refunding bonds long-term IDR 'A-'.
TECO Finance
--Long-term IDR 'BBB';
--Short-term IDR 'F2';
--Senior unsecured debt 'BBB'.
Fitch affirms the following ratings:
TEC
--Short-term IDR at 'F2';
--Commercial paper at 'F2';
--Polk County Industrial Development Authority (Tampa Electric Company Project)solid waste disposal facility revenue refunding bonds short-term IDR at 'F2'.
Additional information is available at 'www.fitchratings.com'.
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, 2011);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012);
--'Short-Term Ratings Criteria for Non-Financial Corporates (Aug. 9, 2012).
Applicable Criteria and Related Research:
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
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552
Short-Term Ratings Criteria for Non-Financial Corporates
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685553
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=792510
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