Tucson Electric Power Co.

Overview Key strengths Key risks Our rating on the company is tied to our rating on its parent, Fortis Inc., which provides one notch of uplift. The company must effectively manage its energy transition risk, similar to its peers with legacy coal-fired generation assets. Relatively low-risk, vertically integrated electric utility operations regulated by the Arizona Corp. Commission (ACC) and the Federal Energy Regulatory Commission (FERC). The company lacks geographic and regulatory diversity, which renders it mostly dependent on the ACC to sustain its credit quality. Limited commodity exposure with ability to pass on costs to its ratepayers. Our base-case scenario assumes negative discretionary cash flow over the next few years, which indicates a need for external funding. Our base-case scenario

...We expect Tucson Electric Power Co. (TEP) to maintain its financial performance through our two-year outlook period. Our base- case scenario assumes modest sales growth, the implementation of the utility's most recent rate-case outcomes, annual capital spending averaging about $580 million over the forecast period, and dividend payments of about $80 million per year. Overall, we forecast that TEP will maintain funds from operations (FFO) to debt of about 19%-22% through the 2023-2025 outlook period. Recently, TEP filed a request to recover certain investments including the cost of new wind and solar generation, grid improvements, technology and security upgrades, and other investments made since 2018. The rate case request includes a nonfuel revenue increase of about $123 million at 9.75% return on equity. The company needs a successful rate case outcome to maintain its overall credit quality. We continue to monitor the progress on this rate case proceedings. TEP is a lower-risk, regulated,...

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