Fitch Affirms TECO Energy Following Acquisition Regulatory Approval; Outlook Stable
NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed TECO Energy Inc.'s (TE) 'BBB' long-term Issuer Default Rating (IDR) following the New Mexico Public Regulation Commission's (PRC) approval of its pending acquisition of New Mexico Gas Intermediate Inc. (NMGI) and wholly owned subsidiary, New Mexico Gas Company (NMGC). Concurrently, Fitch has affirmed the 'BBB' IDR and individual debt instruments of TE's guaranteed finance subsidiary, TECO Finance, Inc. (TECO Finance). Fitch has removed the ratings of TE and TECO Finance from Rating Watch Negative where they were placed May 30, 2013, following TE's announcement of the proposed acquisition of NMGI. The Rating Outlook for TE and TECO Finance is Stable.
The ratings of Tampa Electric Company (Tampa Electric; 'BBB+' IDR), TE's regulated utility subsidiary, are not affected by today's rating actions.
The PRC did not modify the settlement agreement reached in May 2014 between TE and the New Mexico State Attorney General and the New Mexico Industrial Energy Consumers. The terms are consistent with the 'net customer benefit' standard applied in New Mexico for merger transactions and include, among other elements, a base rate freeze through 2017 and ratepayer bill credits of $2 million in the first year after closing and $4 million on an annual basis thereafter, until NMGC's next rate case. NMGC's last rate increase of $22.4 million went into effect Feb. 1, 2012. Fitch expects NMGC to contribute approximately 10% of TE's parent cash flows over 2015-2018.
Management expects the transaction to close approximately within a month's time, unless one of the parties requests a rehearing.
KEY RATING DRIVERS
Successful Execution of Financing Plan: The ratings affirmation reflects TE's successful execution of its acquisition financing plan, which results in a financial profile that is consistent with current rating levels. To fund part of the $950 million transaction, TE issued approximately $292 million in common equity, and has secured private placement debt of $270 million, including $200 million at NMGI and $70 million at NMGC, to be funded upon closing. Proceeds from the NMGC debt will be used towards repayment of existing debt at closing while proceeds from the NMGI issuance are to be primarily used towards repayment of existing debt and to fund the transaction, costs and expenses. The remaining portion of the transaction is expected to be funded with cash on hand and short-term borrowings.
Even though the equity issuance to fund the acquisition fell below management's prior guidance of $350 million to $400 million and TE is likely to fund the deficit with short-term debt, Fitch is encouraged by TE's efforts to monetize its coal business. Per the latest 10Q filing, TE is in active discussions with potential buyers, but no agreement has been reached to date. The cash proceeds resulting from a sale would further support TE's financial profile, in Fitch's view. TECO Coal's margins have suffered over recent years from the sustained weakness in thermal and met coal markets. Fitch projects TECO Coal's contribution to parent cash flows to be insignificant over the next five years.
Credit Metrics: Fitch forecasts adjusted debt/EBITDAR to be between 4.3x and 4.0x over 2014-2016, and funds from operations (FFO) adjusted leverage between 4.2x and 3.9x, over the same time period. These ratios are consistent with what Fitch had projected in its last credit review and support existing ratings. Fitch's projections do not reflect a potential divestiture of TE's coal business. Consolidated credit metrics significantly improve by 2017, driven primarily by the incremental rate increase at Tampa Electric associated with the completion of the Polk conversion project. Forecasted cash flow measures also reflect the positive effect of net operating losses (NOLs), and Fitch expects TE's operating cash flows to return to more normalized levels overtime as those NOLs wind down. For the latest 12 months ended June 30, 2014, adjusted debt/EBITDAR and FFO adjusted leverage were 3.8x and 3.9x, respectively. FFO fixed charge coverage and EBITDAR/interest expense were 4.6x and 4.7x, respectively.
Strong Utility Financial Performance: TE's credit quality reflects Tampa Electric's solid financial profile with projected credit metrics that are strong for the current rating category. Fitch projects debt/EBITDAR to remain below 3x and FFO-adjusted leverage to range between 3x and 3.3x over the next five years. Tampa Electric's robust earnings and cash flows are supported by: a constructive outcome in its most recent rate case that provides regulatory predictability through 2017, a gradual recovery in the Florida economy, efficient cost control, and tax benefits stemming from bonus depreciation. Fitch estimates Tampa Electric to contribute approximately 90% of parent cash flows over the forecast period.
Parent Cash Flow Generation: Cash flows are bolstered by NOLs that effectively shelter net income from taxes through 2018. The tax value of NOLs totaled approximately $475 million at year end 2013. The extension of bonus depreciation rules has effectively extended the life of the NOLs. Parent cash flows also benefit from a large balance of cash on hand, stemming from TE's previous divestiture of its Guatemalan assets. At June 30, 2014, TE had $167 million of consolidated cash and cash equivalents. TE plans on using part of available cash towards funding of the NMGI acquisition.
Acquisition of a low-risk utility business: 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 90% of pro-forma EBITDA, further reducing TE's cash flow exposure to its volatile coal business.
Adequate Liquidity: At June 30, 2014, TE/TECO Finance had full availability under a $200 million credit facility that matures in December 2018. TECO Finance is the borrower with TE as guarantor of the credit facility. Fitch considers parent debt maturities (TECO Finance) to be manageable with $191 million due in 2015, $250 million due in 2016, and $300 million due in 2017. Fitch expects TECO Finance to refinance existing long-term debt at maturity.
Factors that could lead to a positive rating action:
--Given limited headroom in credit metrics for the existing rating level, a positive rating action is unlikely in the near term.
Factors that could lead to a negative rating action:
--Further acquisitions that result in greater leverage than currently projected by Fitch;
--Unexpected deterioration of the Florida regulatory compact that leads to a weaker financial profile at Tampa Electric; and
--A decline in FFO-adjusted leverage to a range of 4.3x to 4.5x on a sustained basis.
Fitch affirms the following ratings with a Stable Outlook:
--Long-term Issuer Default Rating (IDR) at 'BBB';
--Short-term IDR at 'F2'.
--Long-term IDR at 'BBB';
--Short-term IDR at 'F2';
--Senior unsecured debt at 'BBB'.
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