New York, January 23, 2002 — Moody’s Investors Service has changed the outlooks of the long-term ratings of TECO Energy and Tampa Electric Company to negative in response to increased financial pressure on the companies resulting from accelerated equity contributions and a higher degree of risk being undertaken by TECO Energy at its two major independent power projects: Union Power and Gila River.
These developments have increased the level of uncertainty throughout the organization. The company has responded proactively to this increased financial pressure by trimming its capital expenditure forecast and reevaluating overall growth and expansion plans.
Affected are Tampa Electric Company’s Aa3 senior secured, A1 issuer, senior unsecured and pollution control revenue bond debt; TECO Energy’s A3 senior unsecured and Baa1 junior subordinated debt; and the Baa1 rating of the trust preferred securities of TECO Capital Trust I and TECO Capital Trust II.
Moody’s action does not affect the P-1 commercial paper rating for Tampa Electric Company or the P-2 commercial paper rating of TECO Finance, Inc. TECO Energy has been engaged in an ambitious program to expand TECO Power Services (TPS), its unregulated power development business.
TPS has interests in a number of primarily gas fired combined cycle plants which are expected to operate in an increasingly uncertain merchant environment for 50% or more of their output.
At the same time, Tampa Electric is engaged in a large construction program of rate based generation to add capacity to meet growth requirements in Florida, increase its reserve margins, and meet environmental compliance mandates.
These substantial capital requirements have been and will continue to be a challenge for the company. Four of the projects under construction at TPS, including the large Union Power and Gila River power stations, utilize NEPCO, an Enron subsidiary, as construction contractor.
Although NEPCO has not filed for bankruptcy, and TECO Energy does not expect it to do so, Enron had guaranteed NEPCO’s obligations under the construction contracts.
Enron’s bankruptcy permitted the bank group financing the Union Power and Gila River projects to stop funding construction costs, although construction continued without interruption.
The banks have agreed to continue funding the two projects in exchange for TECO Energy replacing Enron as guarantor of NEPCO’s obligations, payment by TECO Energy of project cost overruns (estimated at $63 million, although this can be offset by any remaining contingency amounts), and an acceleration by TECO Energy of $200 million of project equity contributions to mid-2002 from 2003.
These developments have also delayed the financing of the smaller Dell and McAdams projects. In short, TECO Energy has had to undertake additional risk and obligations with respect to various TPS projects than had been contemplated at their outset.
In response, TECO Energy has announced measures to offset the impact of these developments, including a reduction in its 2002-2004 capital expenditure budget by approximately $700 million, for the most part by delaying other generation projects at TPS and Tampa Electric, including the recently announced repowering of its Bayside Units 3 and 4.
The company also recently issued $400 million of Mandatorily Convertible Securities to be used to fund capital expenditures and to repay short-term debt. Finally, the company has indicated that it intends to finance its growth requirements with a higher proportion of equity than debt and plans to issue equity in 2003 and 2004 (on top of the $325 million of common equity issued in 2001).
Moody’s believes these actions are positive and will be important to maintaining credit quality at both TECO Energy and Tampa Electric. TECO Energy is a diversified energy company headquartered in Tampa, Florida.