Fitch has relatively minor worries about Emera takeover of TECO Energy

Fitch Ratings said Oct. 9 that it has affirmed the ‘BBB’ Issuer Default Rating (IDR) of TECO Energy (NYSE: TE) and the ‘BBB+’ IDR of its regulated utility subsidiary Tampa Electric.

The Rating Outlook is Stable. The ratings and Stable Outlook assume no “financial contagion” from the proposed acquisition by Canada-based Emera Inc. and also reflect Tampa Electric’s strong credit profile, supported by a favorable Florida regulatory regime with long-term rate visibility provided by the existing multi-year retail rate agreement and a strengthening local economy, Fitch noted.

In addition, the ratings are driven by manageable albeit elevated capex through 2016, as Tampa Electric executes on its Polk conversion project, involving the addition of combined-cycle capability to a simple-cycle plant. Fitch projects consolidated credit metrics to temporarily weaken through the capex build-up and subsequently recover to levels that are consistent with the current ‘BBB’ rating category. Tampa Electric’s credit metrics are projected to remain strong for existing rating levels, benefiting from low leverage and parent financial support during the construction period.

Fitch said it recognizes the sizeable amount of incremental leverage that Emera will be taking on to finance the transaction. Although Emera is not rated by Fitch, the pro forma financial profile would suggest a credit profile that is likely weaker than TECO Energy. Emera’s adoption of a more aggressive financial strategy to support the incremental leverage, reflected in the form of higher upstream dividends from TECO Energy than currently projected by Fitch, would be a credit concern and could lead to a revision of TE’s Outlook to Negative, Fitch noted.

The acquisition of TECO Energy by Emera is credit neutral and has no material impact on the former’s business risk, in Fitch’s view. Under Emera’s ownership, TE will continue to follow a conservative fully regulated business model with consolidated operating cash flows derived exclusively by Tampa Electric and New Mexico Gas. Importantly, Fitch believes TECO Energy will remain committed to maintaining the financial health of Tampa Electric through downstream equity support during the high capex period, in accordance with the utility’s existing regulatory capital structure that includes a 54% common equity ratio. Fitch views parental support as constructive to Tampa Electric’s ratings. 

The recent sale of TECO Energy’s Central Appalachia coal business has modestly enhanced the consolidated business profile but has no material impact on the credit profile as the coal segment produced insignificant earnings in recent years and is already recognized in the existing ratings.

Tampa Electric enjoys rate predictability through 2017, as reflected in a multi-year rate settlement that provides rate increases totaling $70 million over 2013-2015. As part of the settlement, the utility will receive additional rate relief of $110 million to be effective upon completion of the Polk conversion. The Polk-related rate increase mitigates regulatory risk by providing more certainty related to the recovery of construction costs.

Management plans on spending approximately $3.03 billion over 2015-2019, compared with $2.70 billion over the previous five years. Tampa Electric is expected to contribute 90% of the consolidated amount with $2.73 billion, including $505 million in its gas division. Capital spending is projected to peak in 2015 and subsequently decline as the Polk conversion project nears completion, with a target date of January 2017. Projected capex also is earmarked toward investments to upgrade base infrastructure, including for transmission and distribution system expansion, reliability and storm hardening, and oil-to-gas conversions.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.