New York, Jan. 12, 2004 — Moody’s Investors Service has placed the debt ratings of TECO Energy, Inc. (TECO) and Tampa Electric Company under review for possible downgrade.
Ratings under review include TECO Energy’s Ba1 senior unsecured debt and Tampa Electric Company’s A3 senior secured; Baa1 Issuer Rating, Baa1 senior unsecured and pollution control revenue bond debt; and the Ba2 rating of the trust preferred securities of TECO Capital Trust I and TECO Capital Trust II. Tampa Electric’s Prime-2 commercial paper rating is affirmed.
The review of TECO’s rating reflects high leverage and limited financial flexibility at the holding company level; weaker than projected performance of TECO’s largest merchant power plants; the potential for increased liquidity pressure; the potential for a default on bank covenants; and continued poor market conditions for the sale of merchant generating plants.
The review incorporates Moody’s concerns regarding the financial and operating performance of TECO’s merchant power plants, especially the large Union and Gila projects, which are performing worse than anticipated as a result of poor merchant energy market conditions. As disclosed earlier by the company, there is a pending covenant default under the EBITDA/Interest coverage covenant in the Construction Contract Undertaking agreements associated with the Union and Gila projects.
The covenant would have been broken as of September 30, 2003, but a Suspension Agreement between TECO and the Union/Gila bank lending group has postponed calculation of the covenant until January 31, 2004. A default under the 3.0x EBITDA/Interest coverage covenant in the Construction Contract Undertaking agreement cross defaults with the nonrecourse bank project financing on the Union and Gila projects, which could force TECO to make a decision regarding the future of its investment in these projects.
Moody’s believes that it is likely that TECO will walk away from and write down its significant investments in these projects. TECO also has other merchant plant investments which could be written down. A writedown of TECO’s investment in the Union and Gila plants, combined with possible additional writedowns of investments in the Dell, McAdams, Guadalupe, Odessa and/or Frontera power plants, could result in a substantial reduction in TECO’s equity levels. A substantial writedown could cause a default under the 65% debt to capital covenant in TECO’s bank revolving credit agreements.
The review of subsidiary Tampa Electric’s ratings is prompted by Moody’s concern that TECO’s problems could have adverse ramifications for the subsidiary, including greater pressure for dividends to the parent for a number of years. Moody’s notes that Tampa Electric has not been completely insulated from the ongoing pressures facing the parent and other subsidiaries of the parent and we expect Tampa Electric to continue to be somewhat exposed to the weakened financial condition of TECO.
Moody’s review will focus on the ability of TECO to withstand significant writedowns related to its unregulated merchant generating plant portfolio while maintaining adequate liquidity, the company’s overall strategy going forward with regard to its wholesale generation business, and the ongoing cash generating capability of the consolidated TECO enterprise going forward. The review will also assess Tampa Electric’s financial performance and the degree to which the utility may be called upon to provide financial support to TECO.
TECO Energy is a diversified energy company headquartered in Tampa, Florida, and is the parent company of its regulated utility subsidiary Tampa Electric Company and unregulated power development subsidiary TECO Power Services.