NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB' rating to TECO Finance's new $250 million issuance of senior unsecured floating rate notes due in 2018. The Rating Outlook is Stable. The new notes will rank pari passu with TECO Finance's existing senior unsecured obligations. The notes are fully and unconditionally guaranteed by TECO Energy, Inc. (TE), TECO Finance's parent company. Net proceeds will be used to retire the $191 million 6.75% notes maturing May 2015 and for general corporate purposes.
KEY RATING DRIVERS
Regulated Business Model: TE's stable credit profile is supported by the ownership of low-risk regulated utility subsidiaries Tampa Electric Co. (Tampa Electric) and the recently acquired New Mexico Gas Co, New Mexico's largest gas LDC. Fitch estimates Tampa Electric will contribute between 85%-90% of parent operating cash flows over the next five years. Including New Mexico Gas, Fitch forecasts TE's regulated businesses to contribute slightly higher than 90% of consolidated EBITDA, further reducing TECO's cash flow exposure to its underperforming coal business, TECO Coal.
TE has a pending sale agreement with Cambrian Coal Corp. to divest the unregulated coal business for a total consideration of up to $140 million. On March 12, 2005, TE extended the closing date of the transaction to April 24th from March 13th, with a stipulation that TE can withdraw the deal on April 17th if closing conditions are not met. The initial sale target date was Dec. 31, 2014. A sale of TECO Coal would lower TE's business risk and be supportive of credit quality, in Fitch's view.
Favorable Florida Regulation: Tampa Electric operates under a favorable regulatory framework in Florida with the inclusion in rate design of riders that provide for timely recovery of all prudent costs related to fuel and purchased power expenses, purchased gas costs, and environmental expenditures. The utility exhibits robust earnings and cash flows that are supported by a constructive outcome in its most recent rate case that provides regulatory predictability through 2017.
Elevated Capex: Management plans on spending approximately $3.03 billion of consolidated capex over 2015-2019 compared with approximately $2.69 billion over prior five years. Tampa Electric contributes about 90%, or $2.73 billion (including gas division), of consolidated spending over the forecast period, with New Mexico Gas contributing the remainder.
Projected capex is earmarked towards investments to upgrade base infrastructure and new generation and transmission associated with the Polk Power plant 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. Management estimates total cost of the project to amount to approximately $685 million, with peak spending in 2015 and 2016.
Fitch believes TE's commitment to keep Tampa Electric financially healthy and maintain its regulatory capital structure remains its long-term core business strategy, illustrated by the planned equity infusions into the utility over the next three years.
Pressured Credit Metrics: Fitch expects consolidated leverage metrics to remain pressured over 2015-2016 during peak spending related to the Polk project. Fitch forecasts debt/EBITDAR to average 4.2x and funds from operations (FFO) adjusted leverage, 4x, over the next couple of years. These ratios are consistent with what Fitch had projected in its last credit review and support existing ratings. Consolidated credit metrics improve by 2017, as Tampa Electric starts recovering costs associated with the completion of the Polk conversion project in rates.
Fitch's projections do not reflect a sale of TECO Coal. The closing of the pending transaction could lead credit metrics to improve earlier than currently projected by Fitch, assuming TE applies cash proceeds towards repayment of parent debt, further strengthening the existing financial profile.
Forecasted cash flow measures also reflect the positive effect of net operating losses (NOLs) that effectively shelter net income from taxes through 2019. The tax value of NOLs totalled approximately $567 million at year-end 2014. Fitch expects TE's operating cash flows to return to more normalized levels overtime as those NOLs wind down.
Adequate Liquidity: At Dec. 31, 2014, TE/TECO Finance had $50 million of short-term borrowings outstanding under a $300 million credit facility that matures in December 2018. TECO Finance is the borrower with TE as guarantor of the facility. Parent-only available cash was $10 million. Fitch considers parent-only debt maturities to be manageable with $250 million due in 2016 and $300 million due in 2017.
--Annual retail sales growth of about 1% over 2015-2018;
--$110 million base rate increase at Tampa Electric in 2017 for recovery of Polk conversion costs;
--Modest cash tax payments due to availability of NOLs.
--Capex as projected by management.
Future developments that may, individually or collectively, lead to a positive rating action:
--No positive rating action is anticipated in the near term given Tampa Electric's elevated capex plan and limited headroom in credit metrics for the existing rating level.
Future developments that may, individually or collectively, lead to a negative rating action:
--Further acquisitions that result in greater leverage than currently projected by Fitch;
--Unexpected deterioration in Florida regulation that leads to a weaker financial profile at Tampa Electric;
--FFO-adjusted leverage weakening to a range of 4.75x to 5x on a sustained basis.
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:
Recovery Ratings and Notching Criteria for Utilities
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage