NEW YORK--(BUSINESS WIRE)--The sale of its volatile coal business lowers TECO Energy Inc.'s (TE) business risk and is supportive of credit quality, according to Fitch Ratings. The transaction is credit positive from a bondholder's perspective; however, it has no impact on the ratings of TE (BBB/Stable) or its regulated utility subsidiary Tampa Electric Co. (Tampa Electric [BBB+/Stable]).
In our rating affirmation of TE's ratings on Oct. 9, 2014, we previously recognized management's active efforts to sell the coal business and the added support a sale would provide to TE's business profile, irrespective of the sales price.
On Oct. 20, 2014, TE announced that signed an agreement to sell TECO Coal to Cambrian Coal Corporation, a member of the Booth Energy Group. The total transaction value of $170 million includes future contingent consideration of $50 million if certain coal benchmark prices reach pre-determined levels over the next five years. The sale is expected to close by year end and TE expects to use the sale proceeds, which is roughly in line with Fitch's expectation, to repay debt and for general corporate purposes. TE will record a non-cash valuation adjustment of approximately $65 million, after-tax, to the carrying value of TECO Coal to reflect the sales price.
TECO Coal's contribution to parent cash flows was projected by Fitch to be insignificant over the next five years. TECO Coal's margins have suffered over recent years from the sustained weakness in thermal and metallurgical coal markets due to both domestic and international factors.
Fitch expects TE to apply part of the cash proceeds towards repayment of short-term debt that was incurred to finance the $950 million acquisition of New Mexico Gas Co. (NMGC). TE closed the acquisition of NMGC in September 2014. Fitch believes it is likely TE will also apply some of the proceeds towards the repayment of TECO Finance's $191 million debt obligation that is due in 2015. TECO Finance's debt is fully guaranteed by TE.
Fitch expects the consolidated financial profile to weaken over the next three years, primarily driven by the significant capital spending projected at Tampa Electric. Fitch forecasts consolidated debt/EBITDAR to be between 4.3x and 4.0x over 2014-2016, and funds from operations adjusted leverage between 4.2x and 3.9x, over the same time period. Credit metrics improve by 2017 once Tampa Electric begins to recover in rates costs associated with the Polk conversion project.
While the sale of coal business may provide a modest boost to these projected metrics, Fitch expects the revised credit measures to continue to support the current rating levels.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.