Fitch Affirms TECO Energy and Tampa Electric's Ratings; Outlook Stable
NEW YORK -- March 22, 2013
Fitch Ratings has affirmed the Issuer Default Rating (IDR) of TECO Energy,
Inc. (TE) and its fully guaranteed finance subsidiary, TECO Finance at 'BBB'.
Fitch has also affirmed the IDR of Tampa Electric Company, Inc. (TEC) at
'BBB+'. Fitch has withdrawn TE's 'BBB' senior unsecured debt rating following
the retirement of its 6.75% senior unsecured notes in 2012. The Rating Outlook
is Stable. A full list of ratings is included at the end of this release.
Approximately $2.97 billion of long-term debt is affected by today's rating
KEY RATING DRIVERS
Cash Flow Predictability
TE' ratings affirmation reflects the stable and predictable cash flows
generated by its low-risk regulated utility subsidiary TEC. TEC contributed
more than 90% of TE's operating cash flows and close to 90% of consolidated
EBITDA as of Dec. 31, 2012.
Balanced Regulatory Compact
Fitch views the regulatory environment in Florida as balanced. TEC benefits
from rate design mechanisms that allow timely recovery of fuel and purchased
power expenses, purchased gas costs, customer conservation related expenses,
and environmental expenses. The Florida Public Service Commission (FPSC)
accepts forward-looking test years in rate determinations that reduce
regulatory lag and provide an opportunity to earn authorized returns on equity
Authorized ROEs granted by the FPSC tend to be above the industry average of
about 10.15% in 2012, as reflected in rate orders of other Florida utilities
in 2012. TEC's current authorized ROE is 11.25%, the mid-point of a 10.25% -
Rate Case Filing
TEC is filing in April 2013 for an electric rate increase of approximately
$135 million based on an equity ratio and ROE that are identical to TEC's
current rate structure. TEC's last rate case was filed in 2008. Rate base
additions, increasing operating costs, higher depreciation expense and pension
expense, and slower than anticipated economic recovery, are the main drivers
behind the rate request. Management has stated it will likely not earn its
authorized ROE in 2013 due to these factors.
Fitch expects TEC to receive a balanced rate order, consistent with other
recent rate decisions in Florida. The new base rates are to be effective Jan.
Solid Consolidated Credit Metrics
TE's credit metrics are solid for the 'BBB' rating category. Fitch projects
FFO-to-interest to range between 4.4x and 5.5x over 2013 - 2016, and FFO/debt,
to range between 20% and 25% over the same time period. Fitch expects a
decline in credit metrics in 2013, reflecting the impact of TEC's rising
operating costs and, to a lesser extent, the depressed margins experienced at
TE's unregulated coal business.
Fitch expects credit protection measures to improve in 2014, driven by rate
relief and additions to rate base. Additionally, Fitch recognizes that TE has
been able to significantly reduce parent-only debt over the recent years, and
the resulting lower interest expense strengthens forecasted interest coverage
Forecasted credit metrics are predicated on the utility achieving a supportive
rate outcome in its pending rate case, and that TE is able to successfully
execute its relatively large consolidated capex program, estimated by
management to amount to a total of $2.98 billion over 2013 - 2017,
approximately $300 million higher than the previous five years.
Modest Improvement in Florida's Economy
Fitch views the Florida economy as gradually improving, despite performing
significantly below pre-recession levels. Housing permits are trending up
relative to the last two years, and Florida's unemployment rate of 7.6% was
below the national average of 7.8% at the end of 2012. Fitch expects the
gradual economic recovery to provide some modest upside to TEC's margins.
Fitch projects electric load growth to hover around 1% over the forecast
period, somewhat similar to management expectations. TEC anticipates customer
growth in its service territory in 2013 to continue at a pace similar to 2012,
when the average number of customers increased by 1.2%.
Adequate Liquidity Profile
Fitch considers consolidated liquidity to be adequate for working capital
purposes and other short-term funding needs. TE and TEC have separate
multi-year bank credit agreements that were renewed in 2011 and mature in
October 2016. TE has access to a total of $200 million under its credit
facility. There were no borrowings outstanding as of Dec. 31, 2012.
TEC has access to a total of $325 million under its credit facility. $1.5
million of letters of credit were outstanding as of Dec. 31, 2012TEC's
one-year $150 million accounts receivable credit facility was renewed in Feb.
2013 and now expires Feb. 14, 2014. There were no borrowings outstanding under
the credit facility. The bank credit agreements include a financial covenant
that the debt/capitalization ratio should be no greater than 65%. TE and TEC
were in compliance as of Dec. 31, 2012.
TE and TEC have adequate access to capital markets, in Fitch's view. Fitch
expects TEC to continue to have unrestricted access to capital markets in
order to finance a portion of its capex program and be able to refinance
near-term debt maturities. Consolidated debt maturities are considered
manageable with $83.3 million due in 2014, $274.5 million due in 2015 which
includes $191.2 million of TECO Finance debt, and $333.4 million due in 2016,
which includes $250 million of TECO Finance debt).
Polk 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. The FPSC
approved the project in December 2012. Management estimates capital spending
to amount to $605 million, including $150 million for transmission and
distribution, over 2013-2017. The peak capital spending is forecast at $490
million over 2014-2015.
Fitch expects TEC to fund its capex-related funding needs with a combination
of internally generated funds, and an equity contribution from TE, estimated
to total between $50 million and $70 million in 2013, and $180 million to $200
million in 2014. TE plans on using net proceeds of $194 million related to the
recent divestiture of its Guatemalan business to support the equity infusion.
Fitch considers the parent equity infusion to be supportive of TEC's credit
quality as it significantly mitigates the need for incremental leverage during
the heavy construction phase. Fitch believes a successful execution of the
project and receiving an adequate return of and on TEC's capital investments
will be essential to maintaining TE and TEC's ratings at current levels.
Parent Cash Flow Generation
Cash flows are bolstered by NOLs that effectively shelter net income from
taxes for the next five years. NOLs total approximately $465 million at
year-end 2012. The extension of bonus depreciation rules have effectively
extended the life of the NOLs. Consequently, Fitch expects TE to be cash flow
positive over the forecast period, and TE's cash flows should support a
portion of TEC's large growth capex.
Conservative Management of the Unregulated Business
Following the divestiture of TECO Guatemala in 2012, TECO Coal is the only
remaining unregulated entity. Management strategy is to focus exclusively on
its regulated utility, and essentially views TECO Coal as a non-core business.
The coal business has been a positive source of cash flows to TE over recent
years, and it contributed approximately $50 million of operating cash to TE in
both 2011 and 2012. Due to the depressed coal markets, management expects TECO
Coal's contribution to decline to approximately $12 million of net income in
2013. Fitch estimates that, on average over 2013-2016, the coal business will
provide less than 10% of parent operating cash flows.
Fitch projections assume a modest improvement in coal sales volumes and
pricing, starting in 2014, but Fitch does not believe the improvement is
likely to have a significant impact on consolidated earnings and cash flows.
Fitch expects TE to follow a conservative approach to running the coal
business to maintain positive margins in a very challenging environment.
Fitch considers TEC's credit profile to carry less business and financial risk
than that of TE, which exhibits a capital structure that continues to reflect
a substantial amount of leverage. Consequently, Fitch deems the one-notch
differential between TE and TEC to be appropriate.
Factors that could lead to positive rating actions are:
--A constructive rate order at TEC and accelerated retirement of TECO Finance
--Stronger than forecasted consolidated credit metrics with FFO-to-interest
near 5x and FFO/debt between 22% to 25% on a sustained basis
Factors that could lead to negative rating actions are:
--An unfavorable rate order in TEC's rate case
--A revised financing plan that leads TE to issue a significant amount of
incremental debt to support TEC's capex program
--TEC's inability to recover construction costs on a timely basis could impact
Fitch affirms the following ratings:
-Long-term IDR at 'BBB';
--Short-term IDR at 'F2'.
--Long-term IDR at 'BBB';
--Short-term IDR at 'F2';
--Senior unsecured debt at 'BBB'.
Tampa Electric Company
--Long-term IDR at 'BBB+';
--Short-term IDR at 'F2';
--Commercial Paper at 'F2';
--Senior unsecured debt at 'A-';
--Hillsborough County Industrial Development Authority (Tampa Electric Company
Project) pollution control revenue refunding bonds at 'A-';
--Polk County Industrial Development Authority (Tampa Electric Company
Project) solid waste disposal facility revenue refunding bonds at 'A-' /'F2'.
Fitch withdraws the following rating:
--Senior unsecured debt
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria for Utilities' (May 3, 2012);
--'Rating North American Utilities, Power, Gas, and Water Companies' (May 16,
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012)
Applicable Criteria and Related Research
Parent and Subsidiary Rating Linkage
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Utilities
Rating North American Utilities, Power, Gas, and Water Companies
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