New York, Feb. 10, 2004 — Moody’s Investors Service downgraded TECO Energy, Inc.’s senior unsecured debt rating to Ba2 from Ba1. Moody’s downgraded Tampa Electric Company’s senior secured debt rating to Baa1 from A3; and downgraded its senior unsecured debt, Issuer Rating, and long-term pollution control revenue bonds to Baa2 from Baa1.
Tampa Electric’s Prime-2 commercial paper rating is affirmed. Moody’s also downgraded the rating on the trust preferred securities of TECO Capital Trust I and TECO Capital Trust II to Ba3 from Ba2. The rating outlook is negative for TECO, Tampa Electric, TECO Capital Trust I, and TECO Capital Trust II.
The downgrade of TECO’s ratings reflects its high leverage, minimal anticipated free cash flow generation for the next several years, and likely continued reliance upon asset sales and/or equity issuance to limit further balance sheet deterioration.
The rating action also reflects Moody’s view that the overall cash generating prospects of the consolidated TECO enterprise have weakened considerably over the last several years as TECO has had to divest a number of once key cash generating assets, such as the Hardee Power plant and its coalbed methane business, and that TECO’s remaining merchant plant investments will continue to negatively affect the company’s financial performance until either market conditions improve or TECO disposes of these assets.
The downgrade also considers the larger than anticipated $826 million of write-downs, charges, and other adjustments taken in the fourth quarter, most of which were related to the company’s long expected decision to exit its investments in the poorly performing Union and Gila River merchant power projects. The write-down was larger than Moody’s anticipated, due partly to the expensing of an interest rate hedge at the projects and because of a series of smaller adjustments taken in the quarter.
As a result, TECO has only limited room under the 65% debt to capital covenant in its bank revolving credit facility. Absent a permanent amendment of this covenant or a waiver for a sustained period, this covenant may limit the company’s flexibility to address its other merchant plant investments in ways that would trigger an additional write-down.
As a means to maintain sufficient liquidity in the event its bank revolving credit can not be drawn upon, TECO has established a $200 million standby credit facility secured by the capital stock of TECO Transport. The security granted under this facility falls just below the 5% limitation on liens embodied in TECO’s most recent $300 million notes issuance.
Moody’s is also concerned that TECO will not completely exit from the Union and Gila River projects until at least September 30, 2004; and as a result will incur losses associated with these projects throughout most of fiscal year 2004. The company has recorded substantially negative free cash flow for the last several years which may continue given the company’s other merchant plant investments. While capital spending will be substantially lower going forward, cash flow generation is weak relative to the company’s high debt burden and high dividend pay-out ratio. This may result in a continued reliance upon asset sales or equity issuances to reduce debt and improve the balance sheet.
Moody’s also notes that TECO has taken no action to exit its other merchant plant investments, including the mothballed Dell and McAdams plants. Moody’s believes that the prospects for these plants, which are located in Arkansas and Mississippi, respectively, remain particularly bleak for at least the next several years.
TECO has publicly represented in the past that it thought it would be able to write off its entire merchant energy portfolio if necessary without breaking its debt to capital covenant. After the larger than expected write-off in the fourth quarter, Moody’s believes that this is no longer the case. In addition, in Moody’s opinion, TECO has likely failed to meet its 3.0x EBITDA to Interest coverage covenant in the Construction Contract Undertaking agreements associated with the Union and Gila River projects for the last two quarters.
The downgrade of Tampa Electric’s rating reflects Moody’s view that the regulated utility continues to be negatively affected by the weakened financial condition of the parent company. Although TECO has recently articulated a back to basics strategy focusing on its core Florida utility operations, Moody’s believes that TECO’s management will continue to be preoccupied with exiting the Union and Gila plant investments, and resolving issues surrounding its other merchant plant investments through 2004, and perhaps into 2005 as well.
Moody’s believes there may be greater pressure on Tampa Electric for dividends to the parent for a number of years, which may be accomplished by deferring certain expenses or capital expenditures.
The negative outlook reflects the continued challenges facing both TECO Energy and Tampa Electric going forward, including finalizing its exit from Union and Gila, strengthening the balance sheet, determining the ultimate disposition of its other merchant energy investments, executing additional asset sales, and renegotiating and extending its bank revolving credit facility. In the event that TECO makes significant progress in addressing these issues during 2004, the rating outlook could be revised.
Ratings lowered include:
TECO Energy’s senior unsecured debt rating, to Ba2 from Ba1; and the trust preferred securities rating of TECO Capital Trust I and TECO Capital Trust II, to Ba3 from Ba2.
Tampa Electric’s senior secured debt rating, to Baa1 from A3; senior unsecured and Issuer Rating, to Baa2 from Baa1; and pollution control revenue bonds to Baa2 from Baa1.
Tampa Electric’s Prime-2 commercial paper rating is affirmed.
TECO Energy, Inc. is a diversified energy company headquartered in Tampa Florida, and the parent company of Tampa Electric Company.