OREANDA-NEWS. October 13, 2015. Fitch Ratings has affirmed the 'BBB' Issuer Default Rating (IDR) of TECO Energy, Inc. (TE) and the 'BBB+' IDR of its regulated utility subsidiary Tampa Electric Company (Tampa Electric). The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.

The ratings and Stable Outlook of TE and Tampa Electric assume no financial contagion from the proposed acquisition by 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. In addition, the ratings are driven by manageable albeit elevated capex through 2016, as Tampa Electric executes on its Polk conversion project. 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.


No Change to Capital Allocation Policy: The ratings affirmation and Stable Outlook assume TE can continue to maintain its existing capital structure and current dividend policy with no financial contagion from the Emera acquisition. Fitch 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 TE. Emera's adoption of a more aggressive financial strategy to support the incremental leverage, reflected in the form of higher upstream dividends from TE than currently projected by Fitch, would be a credit concern and could lead to a revision of TE's Outlook to Negative.

Business Profile Mostly Unchanged: The acquisition of TE 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 NMGC. Importantly, Fitch believes TE 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. For the LTM June 2015, Tampa Electric represented 95% of consolidated EBITDA.
The recent sale of TE's 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.

Limited Regulatory Risk: Tampa Electric enjoys rate predictability through 2017, as reflected in a multiyear 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 project. The Polk-related rate increase mitigates regulatory risk by providing more certainty related to the recovery of construction costs.

Favorable Regulation: Florida regulatory framework is supportive of credit quality in Fitch Ratings' view. Authorized returns on equity (ROEs) of Florida utilities have been above the median nationwide authorized ROEs in recent years. Tampa Electric operates under an authorized midpoint ROE of 10.25% (+/- 100 bps), based on a 54% common equity ratio. The utility has several rate riders that provide timely recovery of all prudent costs related to fuel, purchased power, environmental expenditures and conservation costs.

Manageable Capex: 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 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.

Modest Pressure on Credit Metrics: Fitch expects consolidated leverage metrics to be pressured over the next two years but nonetheless remain consistent with existing rating levels. Fitch forecasts EBITDAR and FFO leverage metrics to approximate 4.4x through 2016 and average 3.6x post 2016. For the LTM June 2015, EBITDAR and FFO leverage metrics stood at 4.6x and 4.2x, respectively. Forecasted cash flow measures also reflect the positive effect of net operating losses (NOLs) that effectively shelter net income from taxes through 2019. The tax value of NOLs amounted to approximately \\$567 million at year-end 2014. Fitch expects TE's operating cash flows to return to more normalized levels overtime as those NOLs wind down.

Tampa Electric's credit metrics are forecasted to be robust for the current rating category despite a modest weakening in the near term due to rising capex. Fitch models EBITDAR and FFO leverage metrics to average 2.7x and 3.1x, respectively. On an LTM basis, EBITDAR and FFO leverage were 2.8x and 3.0x, respectively. Strong credit metrics are supported by step-up retail rate increases, cost reductions, and an improving Florida economy, with several economic trends, such as the unemployment rate and housing data, recovering from a prolonged decline.

Ratings Linkage: The one-notch rating differential between Tampa Electric and TE is supported by several factors including: an authorized regulatory capital structure provision; maximum debt-to-capitalization ratios included in debt indentures; local operating board; and access to own financing. Fitch recognizes Tampa Electric's projected strong financial performance is consistent with an 'A' rated utility profile that would suggest the ratings could be widened two notches. However, Fitch believes the uncertainty regarding the post-acquisition capital structure and treatment of TE's high parent-level debt by Emera, an entity that Fitch views to be of a weaker credit profile than TE, is a mitigant to Tampa Electric's financial strength and therefore justifies maintaining a one-notch gap only.


Fitch's key assumptions within the rating case for TE include:

--Annual retail sales growth of about 1% over 2015-2019;
--\\$110 million base rate increase at Tampa Electric in 2017;
--Modest cash tax payments due to availability of NOLs;
-Capex totaling \\$3.03 billion over 2015-2019;
--TE parent-level debt is refinanced when due and gradually winds down beyond 2017.

Fitch's key assumptions within the rating case for Tampa Electric include:

--Annual retail sales growth of about 1% over 2015 - 2019;
--\\$110 million base rate increase at Tampa Electric in 2017;
-Capex totaling \\$2.73 billion over 2015-2019;
-Parent cash infusion of \\$175 million in 2015;
-Cash flows normalized post 2015 with expiration of bonus depreciation.



Future developments that may, individually or collectively, lead to a positive rating action:

No positive rating action is anticipated in the near term given the pending acquisition and limited headroom in credit metrics for the existing rating level. However, parent-level debt reduction that is greater than currently anticipated by Fitch coupled with adjusted debt/EBITDAR at 3.5x or below on a sustained basis could lead to positive rating actions.

Future developments that may, individually or collectively, lead to a negative rating action:

--A more aggressive financial strategy under new ownership to support Emera's growing capex and dividends that leads to incremental leverage. Emera targets dividend growth of 8% through 2019 and beyond. TE's dividend payout ratio has been running above industry average over the last two years;
--Unexpected deterioration in Florida regulation that leads to a weaker financial profile at Tampa Electric;
--FFO adjusted leverage weakening to greater than 5.0x on a sustained basis or adjusted debt/EBITDAR greater than 4.5x on a sustained basis.

Tampa Electric

Future developments that may, individually or collectively, lead to a positive rating action:
--Accelerated debt reduction at TE coupled with adjusted debt/EBITDAR sustained below 3x;
--An upgrade of TE.

Future developments that may, individually or collectively, lead to a negative rating action:

--While not currently anticipated by Fitch, any material weakness to credit ratios due to higher than forecasted leverage or upstream dividend distributions could have an adverse effect on ratings. Adjusted debt/EBITDAR weakening to 3.75x or higher on a sustained basis could also lead to negative rating actions;
--An unexpected deterioration in Florida regulation or a slowdown in economic recovery of service area;
--A downgrade of TE.


Fitch affirms the following ratings:

-Long-term IDR at 'BBB';
--Short-term IDR at 'F2'.

Tampa Electric
--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.