News Column

Fitch Maintains TECO Energy on Rating Watch Negative Pending Acquisition Closing

May 29, 2014

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings maintains the 'BBB' Issuer Default Ratings (IDRs) of TECO Energy Inc. (TE) and its guaranteed finance subsidiary TECO Finance, Inc. on Rating Watch Negative, pending the completion of TE's proposed acquisition of New Mexico Gas Intermediate, Inc. (NMGI), and NMGI's subsidiary New Mexico Gas Company (NMGC). Fitch expects to resolve the Rating Watch Negative upon final regulatory approval and execution of TE's permanent financing plan.

The ratings of Tampa Electric Company (Tampa Electric; 'BBB+' IDR), TE's regulated utility subsidiary, were reviewed independently of TE on Oct. 9, 2013 and are not affected by today's rating actions.

On May 14, 2014, TE announced that it reached a settlement on the pending acquisition with the New Mexico State Attorney General and the New Mexico Industrial Energy Consumers. The staff of the New Mexico Public Regulation Commission (PRC) does not oppose the settlement. The terms of the settlement are consistent with either the 'net customer benefit' or the 'net no harm' standards applied in merger transactions and include 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 base rate increase of $21.5 million went into effect Feb. 1, 2012. Fitch estimates NMGC to contribute less than 10% of TE's parent cash flows over the next few years. The settlement is subject to final approval by the PRC, and management expects the transaction to close in Q3 2014.

KEY RATING DRIVERS

Financing Plan: Fitch expects TE's financial profile to moderately weaken as a result of the additional leverage associated with the NMGC acquisition. TE's current financing plan for the $950 million acquisition incorporates the issuance of approximately $250 million of long-term debt at NMGI and NMGC, in addition to $200 million of assumed debt at NMGC. The financing plan also includes a sizeable common equity issuance at TE in the $350 million to $400 million range. Fitch believes the proposed financing plan bears some level of execution risk, given the substantial equity dilution. Fitch recognizes that a potential monetization of TE's unregulated coal business would provide an additional funding source that management would likely consider. TECO Coal's margins have suffered from the sustained weakness in the thermal and met coal markets. Fitch models TECO Coal's contribution to parent cash flows to be insignificant over the forecast period.

Pressure on Credit Metrics: Fitch forecasts adjusted debt/EBITDAR to be between 4.3x and 4x over 2014-2016, and FFO adjusted leverage between 4.2x and 3.9x, over the same time period. Credit metrics remain in line with TE's current rating category, and therefore may support a rationale for affirming the ratings upon resolution of the Watch Negative. TE's credit metrics significantly improve by 2017, driven primarily by the incremental rate increase at Tampa Electric following completion of the Polk conversion project. For the latest 12 months ended March 31, 2014, adjusted debt/EBITDAR and FFO adjusted leverage were 3.6x and 3.7x, respectively.

Resolving the Rating Watch Negative: Fitch would consider affirming TE's existing ratings if the company can successfully execute the proposed financing plan and support credit metrics as currently projected by Fitch. Conversely, a greater use of leverage to fund the transaction would likely lead to a one-notch downgrade. TE's 'F2' short-term rating would also be lowered to 'F3' concurrent with the one-notch downgrade of TE's 'BBB' IDR.

Strong Utility Performance: TE's credit quality reflects Tampa Electric's solid financial profile with projected credit metrics that are strong for the current rating category. Tampa Electric's robust earnings and cash flows are supported by: a constructive outcome in its most recent rate case settlement that provides regulatory predictability through 2017, a recovering Florida economy, and tax benefits stemming from bonus depreciation. Fitch estimates Tampa Electric to contribute near 90% of parent cash flows over the forecast period.

Fitch issued a separate press release discussing Tampa Electric's ratings. Please refer to Fitch's press release titled 'Fitch Removes Tampa Electric from Rating Watch Negative; Affirms Ratings' dated Oct. 9, 2013.

Parent Cash Flow Generation: Cash flows are bolstered by NOLs that effectively shelter net income from taxes through 2018. NOLs total approximately $480 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 Dec. 31, 2013, TE had $185.2 million of cash and cash equivalents. TE plans on using part of available cash towards funding of the acquisition. Fitch projects TE to be cash flow positive over the forecast period, and expects parent cash flows to be sufficient to support planned equity infusions at the utilities.

Acquisition of a Low-Risk 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 near 90% of pro forma EBITDA, further reducing TE's cash flow exposure to its volatile coal business.

RATING SENSITIVITIES

Factors that could lead to a positive rating action:

--Successful execution of TE's financing plan that reflect leverage metrics that are consistent with Fitch's projections could lead to affirmation of TE's ratings upon resolution of the Rating Watch Negative.

Factors that could lead to a negative rating action:

--Greater than projected debt levels to fund the transaction, leading to leverage metrics that are weaker than currently forecasted by Fitch, would likely result in a one-notch downgrade;

--Unexpected deterioration in Tampa Electric's financial profile would likely lead to a one-notch downgrade at TE.

Fitch maintains the following ratings on Rating Watch Negative:

TE

--IDR 'BBB';

--Short-term IDR 'F2'.

TECO Finance

--Long-term IDR 'BBB';

--Short-term IDR 'F2';

--Senior unsecured debt '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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735155

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=832168

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Philippe Beard

Director

+1-212-908-0242

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Shalini Mahajan

Senior Director

+1-212-908-0351

or

Committee Chairperson

Glen Grabelsky

Managing Director

+1-212-908-0577

or

Media Relations

Brian Bertsch, +1-212-908-0549

brian.bertsch@fitchratings.com


Source: Fitch Ratings


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