NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded the Issuer Default Rating of TECO Energy, Inc. (TECO) to 'BBB' from 'BBB-', and that of its main regulated utility operating subsidiary, Tampa Electric Company (Tampa Electric) to 'BBB+' from 'BBB'. The Rating Outlook is Stable. A complete list of affected ratings is included at the end of this release. The rating action reflects the significant parent level debt reduction and the improving outlook at Tampa Electric due to recent rate increases and modest customer growth.
Rating and Outlook Rationale:
TECO's financial results have improved steadily in recent years with significant debt reduction and greater cash flow generation at the utilities due to higher base rates that went into effect in 2009 and 2010. Consolidated leverage, as measured by debt to operating EBITDA, improved to 3.4 times (x) through year-end 2010, and Fitch projects this to continue to improve over the next several years as free cash flow is used for debt reduction. For 2011 Fitch anticipates leverage of just over 3.2 times (x). At the same time, interest coverage continues to show improvement due to both the debt reduction and strategic refinancing efforts over the past 12 months.
The key rating drivers include:
--The underlying strength of Tampa Electric from which TECO derives stable and consistent cash flows. Tampa Electric continues to post strong results, with operating EBITDA-to-interest of 5.5x, funds from operations (FFO) coverage of 5.2x, and debt-to-operating EBITDA of 2.7x for the year ended Dec. 31, 2010.
--Results at Tampa Electric are expected to continue to strengthen as a result of the higher base rates as well as continuing control of O&M costs. Fitch expects the utility to earn at or near its authorized return on equity (ROE) for the next several years and no new base rate case is likely. In addition, annual rate adjustments for fuel and environmental compliance costs provide further stability.
--Fitch's primary concerns remain related to the slow pace of economic recovery in Tampa Electric's service territory and its impact on load trends. While economic recovery has been slow, signs of stabilization in the real estate market and employment in the Tampa area have begun to emerge. Over the next several years developments on this front and the impact on load growth could result in higher capital expenses for peak generating capacity previously deferred.
--In 2009-2010, uncertainty at the Florida Public Service Commission (FPSC) was an area of concern regarding two of Tampa Electric's peers, but in Fitch's view, the state political environment and FPSC have stabilized.
--Cash distributions from TECO's coal mining and the remaining Guatemalan businesses provide some limited additional dividend support to the parent company. Fitch expects TECO Coal to generate stable cash flows as a result of higher priced contracts, stable production levels, and improved margins.
Recent Developments:
Fitch placed TECO and Tampa Electric on Rating Watch Positive following the announcement of the sale its Guatemalan distribution assets on the expectation that proceeds would be used for debt reduction in the near term. TECO announced the sale of DECA II to Empresas Publicas de Medellin E.S.P. (EPM) in October 2010 from which it received cash proceeds of approximately $181.5 million plus $25 million of repatriated cash. Proceeds from the sale were in fact used to redeem $236.3 million of 2012 maturities at TECO and its fully guaranteed financing subsidiary TECO Finance in December.
TECO had owned 30% of DECA II whose primary asset is an 80.9% interest in Empresa Electrica de Guatemala, the largest Guatemalan distribution utility. It is worth noting that due to a tax deferral strategy at DECA II TECO had not been receiving regular ongoing dividends from this portion of the Guatemalan business.
Liquidity and Capital Resources:
Fitch considers TECO and Tampa Electric's liquidity position to be strong relative to its business risk profile and working capital needs. Credit facilities include a $325 million five-year facility and a $150 million one year receivables facility at Tampa Electric and a $200 million five-year facility at TECO Finance (guaranteed by TECO), all of which expire in 2012. Going forward, Fitch expects the company to be free cash flow positive thus allowing for continuing parent level debt reduction. Capital expenditures are expected to remain at manageable levels and to be focused on core utility operations.
Fitch has taken the following rating actions:
TECO Energy
--IDR upgraded to 'BBB' from 'BBB-';
--Senior unsecured upgraded to 'BBB' from 'BBB-';
--Short-term IDR assigned 'F2'.
TECO Finance
--IDR upgraded to 'BBB' from 'BBB-';
--Senior unsecured upgraded to 'BBB' from 'BBB-';
--Short-term IDR assigned 'F2'.
Tampa Electric Company
--IDR upgraded to 'BBB+' from 'BBB';
--Senior unsecured and pollution control revenue bonds upgraded to 'A-' from 'BBB+';
--Hillsborough County Industrial Development Authority (Tampa Electric Company Project) pollution control revenue refunding bonds series 2002, 2006, 2007A, 2007B, and 2007C upgraded to 'A-' from 'BBB+';
--Polk County Industrial Development Authority (Tampa Electric Company Project) pollution control revenue refunding bonds series 2010 upgraded to 'A-' from 'BBB+';
--Short-term IDR and commercial paper affirmed at 'F2'.
The Rating Outlook for all ratings is Stable.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 16, 2010;
--'Credit Rating Guidelines for Regulated Utility Companies' July 31, 2007;
--'U.S. Power and Gas Comparative Operating Risk (COR) Evaluation and Financial Guidelines' Aug. 22, 2007;
--'Utilities Sector Notching and Recovery Ratings', March 16, 2010.
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
Credit Rating Guidelines for Regulated Utility Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=334652
U.S. Power and Gas Comparative Operating Risk (COR) Evaluation and Financial Guidelines
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=338030
Utilities Sector Notching and Recovery Ratings
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=504546
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