TECO Energy’s stock because they anticipated an oversupply of electricity in some of the
markets that the company’s new wholesale power plants were intended to serve. TECO
Energy’s share price fell to its lowest level since 1990. TECO Energy’s CEO, Robert Fagan,
argued that his company should not be judged in the same category as an independent power
producer without a base in regulated utilities, but it was a tough case to argue. By this time
TECO Energy had an ownership interest of 50 per cent or more in 10 independent power
plants with total generating capacity of 7,100 MW, compared to the 4,000 MW combined
capacity of Tampa Electric’s local power plants. About 5,700 MW of these plants’ generat-
ing capacity was scheduled to come on line in 2003.^4
On 6 September 2002 Moody’s announced that it was reviewing TECO Energy’s debt
ratings for a possible downgrade. On 23 September Fitch downgraded its rating for TECO
Energy’s senior unsecured debt from ‘A-’ to ‘BBB’ and for Tampa Electric’s senior secured
debt from ‘AA-’ to ‘A’, citing continued weakness in wholesale power markets, and the
expected negative impact on TECO Energy’s earnings and cash flow measures. On the same
day TECO Energy announced that it would postpone completion of two power plants, the
Dell Power Station in Dell, Arkansas, and the McAdams Power Station in Kosciusko,
Mississippi, and raise US$400 million from the repatriation of cash from the company’s
power plants in Guatemala, the sale of methane gas assets in Alabama and other asset sales.
On 24 September Moody’s reduced TECO Energy’s senior unsecured debt rating from
‘A3’ to ‘Baa2’, and also reduced several other TECO and Tampa Electric debt ratings, fol-
lowing a review that was prompted by concerns about low projected wholesale power prices,
excess capacity and deteriorating market conditions in the regions where TECO Power
Services (TPS) was completing an aggressive merchant-generation expansion programme.
The agency said that its downgrade reflected TECO Energy’s large and highly concentrated
exposure to merchant-generation markets, but also took into account the difficult measures
that management was taking to limit the adverse effects of that exposure. While TECO
Energy’s action plan would mitigate some of the long-term risks related to its merchant-gen-
eration portfolio, it might affect the company’s credit quality adversely in the short term. For
example, the indefinite delay of the Dell and McAdams projects would save the company
US$87 million, and reduce its merchant market exposure in 2003, but raised the possibility
that the company would have to write off the capital that it already had invested in those pro-
jects. TECO Energy said that it was exploring various options regarding the US$137 million
debt related to its Odessa and Guadeloupe power projects in Texas, thus introducing the pos-
sibility of writing off all or part of that investment as well.
In downgrading TECO Energy Moody’s said that it expected that fully half of the com-
pany’s cash flow going forward would come from businesses other than Tampa Electric and
Peoples Gas, its stable, regulated utility subsidiaries. The agency viewed the quality and
certainty of the cash flows coming from TECO Energy’s other businesses, including TPS,
TECO Coal and TECO Transport, to be lower than for its regulated utilities. Nonetheless,
Moody’s said that the stable outlook that it assigned to the rating indicated its view that man-
agement had taken action to limit the downside risk associated with its merchant generation
portfolio, and also reflected the expectation that stable earnings from Tampa Electric and
Peoples Gas would help mitigate the impact of the continued low-power-price environment
in the medium term. The agency noted, however, that the management’s plan still had to be
executed, and that the company would be challenged to generate cash and earnings from the
Gila River and Union Power projects, scheduled to come on stream in the first half of 2003.
PANDA ENERGY–TECO POWER JOINT VENTURE, UNITED STATES