NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A-' rating to Tampa Electric Company's (Tampa Electric) new 4.20% $250 million issuance of senior unsecured notes due May 15, 2045. 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.
KEY RATING DRIVERS
Multi-Year Rate Settlement: Tampa Electric operates under a multi-year rate settlement that consists of a $70 million electric base rate increase that became effective on Nov. 1, 2013, with additional step increases of $7.5 million and $5 million, effective Nov. 1, 2014, and Nov. 1, 2015, respectively. The order stipulates an authorized mid-point return on equity (ROE) of 10.25% (+/- 100 basis points [bps]) based on a 54% common equity ratio. The 10.25% allowed ROE would increase to 10.50% if the yield on the 30-year treasury rate increases 75bps for six months.
The rate outcome was constructive and supportive of earnings and cash flow predictability over the forecast period, in Fitch's view. Importantly, the Florida Public Service Commission (FPSC) authorized, via its Generation Base Rate Adjustment (GBRA) mechanism, additional rate relief of $110 million, to be effective upon completion of the Polk conversion project. In Fitch's opinion, the GBRA adjustment is constructive as it provides more certainty related to recovery of construction costs, hence mitigating regulatory risk.
Robust Credit Metrics: Fitch projects credit metrics to remain strong for the current rating category, albeit trending downwards during the peak of capex over 2015-2016. Fitch models funds from operations (FFO)-adjusted leverage and adjusted debt/EBITDAR to average 3.1x and 2.7x, respectively, over 2015-2018. FFO-fixed charge coverage and EBITDAR coverage ratios are projected to average 6x and 6.9x, respectively, over the same forecast period.
For the latest 12 months (LTM) period ended March 30, 2015, FFO-fixed charge coverage and FFO-adjusted leverage were 6.2x and 2.9x, 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 have contributed to robust cash flows.
Adequate Liquidity: Tampa Electric has a $325 million five-year committed credit facility that expires in December 2018. Tampa Electric had access to $319.4 million under the facility at March 30, 2015. The utility also has access to a $150 million one-year accounts receivable (AR) facility that expires in March 2018. There were $42 million of borrowings outstanding under the AR facility at March, 30 2015. Both facilities have a financial covenant that debt/capital ratio should be no greater than 65%. Tampa Electric was in compliance with those covenants.
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 an improving Florida economy with several economic trends such as unemployment rate and housing data recovering from a prolonged decline.
--Annual retail sales growth of 1% over 2015-2018;
--Rate increases per settlement.
Future developments that may, individually or collectively, lead to a positive rating action:
No positive rating action is anticipated at this time given the projected elevated capex and associated decline in credit metrics in the near term.
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.
A slowdown in Florida's economic recovery could lead to weaker sales and stress the financial profile in the absence of additional base rate relief. Under the terms of the 2013 rate settlement, the utility 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 credit ratios due to higher than forecasted leverage or upstream dividend distribution to TE;
FFO-adjusted leverage weakening to a range of 4.25x to 4.35x or adjusted debt/EBITDAR to a range of 3.75x to 4.0x on a sustained basis.
Date of relevant rating committee: April 21, 2015.
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