NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A-' rating to Tampa Electric Company's (Tampa Electric) new 4.35% $300 million issuance of senior unsecured notes due May 15, 2044. The Rating Outlook is Stable. The new notes will rank pari passu with Tampa Electric's existing senior unsecured obligations. Net proceeds will be used to repay short-term debt and for general corporate purposes.
On May 30, 2013, Fitch had placed the ratings of Tampa Electric and its parent holding company, TECO Energy Inc. (TECO), on Rating Watch Negative following TECO's announcement that it had entered into a definitive purchase agreement to acquire New Mexico Gas Intermediate, Inc. and its subsidiary New Mexico Gas Company (NMGC) from Continental Energy Systems LLC for $950 million.
On Oct. 9, 2013, Fitch removed Tampa Electric from Rating Watch Negative and affirmed its 'BBB+' Issuer Default Rating (IDR) and individual debt ratings. TECO's ratings remain on Rating Watch Negative.
KEY RATING DRIVERS
Solid Credit Metrics: Tampa Electric's ratings affirmation is based on Fitch's expectation that the utility can sustain credit metrics consistent with its current rating category even in a scenario of diminished financial support from TECO. TECO's pro forma financing plan includes a potentially sizeable equity issuance to finance NMGC's acquisition, as well as significant cash infusions to Tampa Electric over 2014-2015 to support the utility's capex program. TECO's financing plan bears some level of execution risk and the company may be challenged to raise funds for the acquisition while also infusing equity into the utility.
In its analysis, Fitch has considered a scenario in 2014 where Tampa Electric does not receive TECO's planned cash infusion and instead has to access the debt capital markets for an equivalent amount. In this scenario, Tampa Electric's credit metrics remain consistent with its current ratings with funds from operations (FFO) lease adjusted leverage and debt/EBITDAR approximating 3.8x and 3.2x, respectively. The forecasted credit metrics also reflect the tariff increase resulting from the utility's recently settled rate case. Fitch's rating affirmation assumes that Tampa Electric receives the planned equity infusion in 2015 from TECO.
For the latest 12 month (LTM) period ended March 31, 2014, FFO fixed charge coverage and FFO lease adjusted leverage were 6.7x and 2.6x, respectively. Like many of its utility peers, Tampa Electric has benefited from the low interest rate environment to refinance long-term debt at attractive terms, and bonus depreciation and other tax credits continue to support robust cash flows. Fitch expects FFO-based measures to reflect a more normalized level in 2015 as bonus depreciation subsides.
Potential Downgrade of TECO's IDR: Fitch expects to resolve the Rating Watch Negative at TECO once transaction financing is permanently established and regulatory approvals are obtained. In the event of a ratings downgrade, a one-notch downgrade is likely. A one-notch downgrade at TECO would result in a two-notch differential between the IDRs of TECO and Tampa Electric. While a one-notch differential is a more typical notching between parent holding company and utility subsidiary, the two-notch differential as it applies to Tampa Electric would be appropriate, in Fitch's view. Although there are no explicit ring-fencing provisions that would support the wider notching, the utility's strong credit metrics provide headroom within the current rating category in the unlikely event that TECO is unable to infuse equity as currently planned.
More importantly, Fitch believes TECO's commitment to keep Tampa Electric financially healthy remains its long-term core business strategy, and the company would likely consider, in the event that it needed to, alternative options to finance the acquisition of NMGC, rather than curtailing Tampa Electric's equity infusions, which could in the long-term affect the utility's credit profile. In Fitch's opinion, alternative options could include, among others, monetizing TECO's unregulated coal business whose margins have suffered from the sustained weakness in thermal and met coal markets.
Balanced Rate Order: On Sept. 11, 2013, the Florida Public Service Commission (FPSC) approved a rate settlement authorizing Tampa Electric an electric base rate increase of $70 million, consisting of $57.5 million effective Nov. 1, 2013, and additional step increases of $7.5 million and $5 million, effective Nov. 1, 2014 and Nov. 1, 2015, respectively. The order stipulates an authorized return on equity (ROE) of 10.25% based on a 54% common equity ratio. The 10.25% allowed ROE would increase to 10.5% if the yield on the 30-year treasury bond increases 75 basis points for six months.
Fitch views the rate outcome as balanced and supportive of earnings and cash flow predictability over the forecast period. The FPSC also authorized a separate $110 million rate increase that is to be effective when the Polk Power station project is completed. The Polk Power conversion project is a large component of future capital spending, and the additional relief provides more certainty related to recovery of construction costs. Management expects the project to be completed in January 2017.
Elevated Capex: Tampa Electric plans on spending a total of approximately $2.7 billion over 2014-2018, driven primarily by investments to upgrade base infrastructure and by new generation and transmission associated with the Polk power plant 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. As of Dec. 31, 2013, management estimated the total cost of the project to amount to $595 million, with peak spending of $445 million over 2014-2015. Fitch expects Tampa Electric to fund capex with a combination of internally generated funds, parent equity infusions, and incremental debt as needed.
Adequate Access to Liquidity: At March 31, 2014, Tampa Electric had $16.9 million of cash and cash equivalents. The utility has access to a total of $325 million under a five-year credit facility that expires in December 2018. At March 31, 2014, there were $0.7 million of letters of credit outstanding under the credit facility. Tampa Electric also has access to a $150 million one-year accounts receivable (AR) facility that expires in February 2015. There were $29 million of borrowings outstanding under the AR facility. Both facilities have a financial covenant that debt/capital ratio should be no greater than 65%. Tampa Electric was in compliance at March 31, 2014. Fitch considers long-term debt maturities to be manageable with $83.3 million due in each of 2014, 2015, and 2016.
Stable Outlook: The Stable Outlook assumes Tampa Electric is able to fund capex in a manner that is consistent with its authorized capital structure. The Stable Outlook is further supported by a Florida economy that continues to show gradual if modest improvement from the depressed levels experienced during the recession.
Future developments that may, individually or collectively, lead to a positive rating action:
No positive rating action is anticipated given Tampa Electric's elevated capex program and uncertainty related to TECO's pending acquisition of NMGC.
Future developments that may, individually or collectively, lead to a negative rating action:
Inability to control operating costs in a period of heavy capex, including any cost overruns related to the Polk conversion project could pressure the ratings.
A slowdown in Florida's economic recovery could lead to weaker sales and stress Tampa Electric's credit metrics in the absence of additional rate relief. Under the terms of the rate order, Tampa Electric cannot adjust its base rates until at least 2018. However, Fitch notes that, in the event Tampa Electric's earned ROE falls below 9.25%, the utility would be allowed to request a tariff adjustment before the FPSC prior to 2018.
While not currently anticipated by Fitch, any material weakness to Tampa Electric's credit ratios due to higher than expected leverage or upstream dividend distributions could lead Fitch to tighten the notching between the IDRs of Tampa Electric and TECO.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (Aug. 5, 2013);
--'Rating U.S. Utilities, Power and Gas Companies' (March 11, 2014);
--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 19, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)
Recovery Ratings and Notching Criteria for Utilities