NEW YORK–(BUSINESS WIRE)–Fitch Ratings has assigned a ‘BBB-‘ rating to Tucson Electric Power Company’s (TEP; Issuer Default Rating [IDR] ‘BB+’) issuance of $150 million of 3.85% of unsecured bonds, due March 15, 2023.
Proceeds will be used, along with cash on hand, to substantially reduce revolver borrowings and for general corporate purposes.
The Rating Outlook for TEP is Positive.
The Positive Outlook incorporates gradual improvement in TEP’s credit risk profile with continued progress in improving the capital structure including lengthening debt maturities and reduced reliance on variable interest rate debt. For 2011, TEP’s variable rate debt comprised 15% of total long-term debt, as compared to 26% for the prior year, including capital lease debt.
2012 GRC Filed; Partial Decoupling Requested
On July 2, 2012, TEP filed its 2012 General Rate Case (GRC) with the Arizona Corporation Commission and requested a non-fuel base-rate increase of $128 million predicated on a 10.75% return on equity (ROE) for rates effective no later than Aug. 1, 2013. Notably, TEP’s filing includes a request for a Lost Fixed Cost Recovery (LFCR) mechanism and an Environmental Compliance Adjustor (ECA). The LFCR is a partial revenue decoupling mechanism which is designed to recover non-fuel costs associated with the implementation of energy efficiency or distributed generation programs. The ECA is a recovery mechanism designed to recover compliance costs associated with environmental regulations, primarily for pollution control upgrades on TEP’s coal-fired generation fleet. Fitch notes that the LFCR is not weather normalized and expects a decision on the pending 2012 GRC by August of next year.
Going forward, Fitch expects a constructive outcome in the utility’s pending 2012 GRC which should permit an adequate rate of return on investment and recovery of higher operating expenses incurred over the last few years. Currently, TEP is operating under a five-year non-fuel base-rate freeze following settlement of its 2007 GRC. The ratings also reflect TEP’s stable earnings and cash flows, competitive electric rates, and successful renegotiation of its bank agreement.
Rating concerns include high debt leverage, limited room under debt-to-capitalization leverage restrictions in TEP’s bank agreements, and frozen non-fuel base rates through 2012. Management of costs and ultimate recovery of such expenses will be key to maintaining credit metrics.
In November of last year, TEP amended its $200 million secured credit agreement and extended the maturity by two years to 2016.
What Could Trigger a Positive Rating Action
–Constructive outcome of pending 2012 GRC;
–A reduction in leverage.
What Could Trigger a Negative Rating Action
–A regulatory outcome that limits TEP’s ability to earn or recover an adequate return on invested capital.