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Pima County Industrial Devel. Auth., AZ -- Moody's affirms UNS Energy and all subsidiary ratings; outlooks stable

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Rating Action: Moody's affirms UNS Energy and all subsidiary ratings; outlooks stableGlobal Credit Research - 29 Mar 2021Approximately $2.5 billion of debt securities affectedToronto, March 29, 2021 -- Moody's Investors Service, ("Moody's") today affirmed the ratings of UNS Energy Corporation (UNS Energy, Baa1 senior unsecured) and subsidiaries Tucson Electric Power Company (TEP, A3 senior unsecured and Issuer rating), UNS Gas, Inc. (UNSG, A3 senior unsecured) and UNS Electric, Inc (UNSE, A3 senior unsecured). The rating outlooks for all four entities are stable. For a full list of rating actions see the bottom of this press release.RATINGS RATIONALE"The affirmation of UNS Energy and its three utility subsidiary ratings reflects Arizona's generally supportive regulatory environment, with various cost recovery mechanisms in place, and our expectation that the credit profiles of the UNS companies will remain relatively stable over the next 2-3 years" stated VP-Senior Credit Officer, Gavin MacFarlane.The affirmation is based on our expectation that financial metrics will remain predictable, albeit with limited headroom above the metric thresholds we have established for a possible downgrade. The combination of lower cash flows related to federal tax reform, significant capital spending and regulatory lag in capital investment cost recovery have caused metrics throughout the UNS family to decline from historical levels. We expect the financial metrics of UNS Energy, TEP and UNSE to remain relatively stable going forward but at the lower end of the ranges appropriate for their current ratings.LDC subsidiary UNSG's financial metrics will be under additional pressure due to incremental gas costs as a result of the extreme cold weather event in the region in February 2021, but we expect that UNSG will be able to recover these costs through existing trackers and will receive support from its parent company if needed.TEP, UNS Energy's primary subsidiary, continues to experience regulatory lag associated with the recovery of capital investments. TEP's recent rate case decision [1] was delayed due to the coronavirus outbreak and wasn't issued until 21 months after the date the utility's application was originally filed. In the December 2020 order, the Arizona Corporation Commission (ACC) approved a $57.9 million rate increase based on an authorized ROE of 9.15%, a 53% equity ratio and a historical test year ending December 31, 2018. New rates went into effect on January 1, 2021.The rate case application had been filed to recover the addition of approximately $700 million of rate base since its previous 2017 rate order and originally included a request for a $114.9 million non-fuel revenue increase based on an allowed ROE of 10.35% on a 53% equity layer. TEP later revised its revenue request to approximately $99 million, ($61 million net of the change in base fuel revenues) based on a 10% ROE. The ACC also approved a 6 month post-test year plant period (PTYP) and the inclusion of the Gila Unit 2 gas-fired generation plant, reciprocating engine units and Irvington facilities improvements in rate base which partially mitigates the recovery lag on its investments.For the 2021-2025 period, TEP expects to spend around $2.4 billion on capital investments in distribution and transmission infrastructure as well as continuing the transition of its generation portfolio. We expect TEP to fund capex prudently with internally generated funds and a balanced mix of debt and equity and to recover the majority of its capital program through general rate cases filings.Parent UNS Energy's Baa1 rating reflects structural subordination of its debt relative to its three A3 senior unsecured rated operating utility subsidiaries, TEP, UNSG, and UNSE.From an environmental perspective, TEP has elevated carbon transition risk within the regulated electric and gas utility sector. Its relatively high coal generation ownership results in a higher risk than other utilities with about 43% of TEP's generation currently from coal (net of purchased power), albeit down from around 69% in 2017. TEP is planning to completely eliminate coal by the end of 2032 and is on track to remove around 600 MW of coal generation by June 2022. TEP expects to add 449 MW to its portfolio of renewables by the end of 2021 and increase its share of utility scale renewable resources in its retail energy mix to 35% by 2025.From a governance perspective, we believe it is unlikely that UNS Energy's ultimate parent company Fortis Inc. would increase leverage at any of its operating utilities above the levels established by the regulator. Fortis has a long track record of growth through M&A and further debt financed acquisitions remain a risk. However, we think the risk has diminished with management's public statements that it is no longer considering growth through acquisitions.Rating outlookThe stable rating outlook for UNS Energy and its subsidiaries reflects our view that the Arizona regulatory environment will remain generally credit supportive, allowing each subsidiary to produce predictable financial metrics. The stable outlook also incorporates our view that its ultimate parent Fortis will employ consistently credit supportive fiscal policies that offset the impact of high Fortis parent company leverage. We expect UNS Energy's CFO pre-W/C to debt ratio to remain in the low 20% range.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSWhat could lead to an upgradeUNS Energy's rating could be upgraded if regulatory lag is reduced and there are credit supportive rate case outcomes that contribute to stronger cash flow generation at its utilities. UNS Energy's rating could also be upgraded if its principal subsidiary, TEP, were to be upgraded. The rating could also be upgraded if there is a strengthening of financial metrics such that CFO pre-W/C to debt is sustained above 24%.UNS Energy's utility subsidiaries' ratings could be upgraded if regulatory lag is reduced, there are continued credit supportive rate case outcomes and financial and cash flow metrics strengthen including a CFO pre-W/C to debt ratio sustained above 24% for TEP, 27% for UNSE, and 25% for UNSG.What could lead to a downgradeUNS Energy's and its subsidiaries' ratings could be downgraded if a more contentious regulatory environment emerges in Arizona or there is a deterioration in the credit supportiveness of the regulatory framework including greater regulatory lag, litigated regulatory proceedings or higher uncertainty about the recovery of investments. A rating downgrade may also be considered if parent Fortis financial policies become less credit supportive.A downgrade of UNS Energy's rating could also be considered if financial metrics deteriorated such that CFO pre-W/C to debt were to decline to below 20% on a sustained basis. UNS Energy's rating could be downgraded if TEP's rating is downgraded.UNS Energy's utility subsidiaries' ratings could be downgraded if financial metrics deteriorated such that CFO pre-W/C to debt were to decline to below 20% for TEP, 22% for UNSE, and 18% for UNSG on a sustained basis.Affirmations:..Issuer: UNS Energy Corporation....Senior Unsecured Bank Credit Facility, Affirmed Baa1..Issuer: Tucson Electric Power Company.... Issuer Rating, Affirmed A3....Senior Unsecured Bank Credit Facility, Affirmed A3....Senior Unsecured Regular Bond/Debenture, Affirmed A3..Issuer: Apache (County of) AZ, I.D.A.....Senior Unsecured Revenue Bonds, Affirmed A3..Issuer: Pima County Industrial Devel. Auth., AZ....Senior Unsecured Revenue Bonds, Affirmed A3..Issuer: UNS Gas, Inc.....Senior Unsecured Regular Bond/Debenture, Affirmed A3....Gtd Senior Unsecured Regular Bond/Debenture, Affirmed A3..Issuer: UNS Electric, Inc.....Senior Unsecured Bank Credit Facility, Affirmed A3....Senior Unsecured Regular Bond/Debenture, Affirmed A3Outlook Actions:..Issuer: UNS Energy Corporation....Outlook, Remains Stable..Issuer: Tucson Electric Power Company ....Outlook, Remains Stable ..Issuer: UNS Gas, Inc. ....Outlook, Remains Stable ..Issuer: UNS Electric, Inc. ....Outlook, Remains Stable The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1072530. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.REFERENCES/CITATIONS[1] Arizona Corporation Commission: Docket E-01933A-19-0028 31-Dec-2020Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. 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