S&P Moves Outlook on TECO Energy (TE) to 'Developing'

Standard & Poor's Ratings Services affirmed its ratings on TECO Energy (NYSE: TE) and its subsidiaries, Tampa Electric Co. and New Mexico Gas Co., including the 'BBB+' issuer credit ratings, and revised the outlook to developing from positive.

At the same time, we affirmed the'BBB' rating on TECO's senior unsecured debt and the 'BBB+' ratings on Tampa Electric Co. and New Mexico Gas Co. Inc.'s senior unsecured debt. The short-term rating on Tampa Electric Co. is unchanged at 'A-2'.

"The outlook revision on TECO and its subsidiaries to developing from positive reflects the potential for a rating change over the next 12 to 24 months related to TECO's announcement that it has retained a financial advisor in connection with exploring strategic alternatives," said Standard & Poor's credit analyst Obioma Ugboaja. It is too early to evaluate the potential credit implications on TECO and its subsidiaries given the preliminary nature of this announcement.

We would affirm, raise, or lower our issuer credit rating on TECO if the company is eventually acquired depending on the rating of the new owner, the regulatory response to the transaction, and any insulation measures that may be imposed as a result of the sale.

We base our rating on TECO on its "excellent" business risk profile and "significant" financial risk profile, according to our criteria.

TECO's "excellent" business risk profile reflects its low-risk regulated utility operations, which provide electric and gas utility service to about 1.6 million customers in Florida (80%) and to 23 of the 33 counties in New Mexico (20%). In addition, the company has about 4,700 megawatts of generating capacity and about 60% of its electricity is generated from coal. We believe the Florida regulatory jurisdiction supports the company's credit quality, reflecting the constructive regulatory mechanisms in place that reduce regulatory lag and the authorized return on equity (ROE) that we view as generally higher than average. In New Mexico, we view the company's ability to manage regulatory risk as about average compared with other utilities that operate in this jurisdiction.

For TECO, we use our medial volatility table, reflecting the company's low-risk vertically integrated regulated electric utility that is offset by our view of the company's higher operating risk of generation. Our assessment of the company's financial risk profile as "significant" reflects our base-case scenario of capital spending of about $725 million and consolidated customer growth of about 1.4%. Specifically, we expect funds from operations (FFO) to debt of about 18%, reflecting the middle of the range for the "significant" financial risk profile.

We assess the comparable ratings modifier as negative because of the ownership of its unregulated coal mining operations (TECO Coal), which we view as higher risk relative to its regulated utility operations. This in our view, constrains the company's consolidated business risk profile, and thus leads to a stand-alone credit profile (SACP) of 'bbb+'.

The developing outlook on TECO and its subsidiaries reflects the possible acquisition of TECO and the uncertainty surrounding any such transaction.

We could lower the rating if TECO is acquired by a lower-rated entity and TECO and subsidiaries are not legally or structurally insulated from the new owner.

We could also lower the rating if in our view TECO's credit profile weakens as a result of any strategic decision that leads to a deterioration of either the company's business or financial risk profiles.

We could raise the rating if TECO Energy is acquired by a higher-rated entity and is considered a core or highly strategic member of the new group. Higher ratings could also result from a transaction with a similarly rated or lower-rated entity that improves TECO's stand-alone credit profile and insulates it from the rest of the group.

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