Additional financing
In October 2002 TECO Energy issued US$200 million in common equity. Despite this bal-
ance-sheet strengthening, in early November the company was unable to persuade banks to
renew a US$350 million line of credit, and that line was converted to a one-year term loan.
To preserve medium-term liquidity and stave off a credit-rating downgrade, the company
made preparations for a US$240 million bond issue to refinance an existing issue of long-
term debt. A rating downgrade was a particular issue at this point, because TECO Energy had
the lowest investment-grade ratings, and a downgrade just one notch to a speculative level
would have required the company to post a letter of credit equal to the equity bridge loan for
the Union Power and Gila River projects. The amount of the equity bridge loan had recently
been reduced from US$500 million to US$375 million. During a conference call arranged to
market the US$240 million bond issue, the company heard calls from prospective bond
investors to strengthen its balance sheet by cutting its dividend or launching still another com-
mon share offering. During November TECO Energy’s shares hit 15-year lows after UBS
Warburg downgraded its stock, citing concerns about the company’s ability to sell electricity
from Gila River and Union Power after they went online.^5
On 13 November Moody’s confirmed its ‘Baa2’ rating for TECO Energy’s senior unse-
cured debt, but changed the rating outlook from stable to negative. The agency said that the
conversion of the credit line to a term loan did not have an immediate affect on TECO
Energy’s liquidity, but it did indicate that the company could have difficulty replacing the
term loan a year from then. Moody’s viewed the issuance of US$240 million senior unsecured
notes, rated ‘Baa2’, along with an associated release of cash collateral, as important steps
towards maintaining the company’s liquidity in the short term. TECO Energy’s financial flex-
ibility would be further enhanced when the company repaid its US$375 million equity bridge
loan in 2003 and freed itself from any rating triggers. On the same day Standard & Poor’s
made a statement that TECO Energy had sufficient liquidity, including cash on hand and
US$700 million in credit facility capacity. The agency said that TECO Energy’s maturities
were minimal, with US$130 million in debt coming due in 2003 and US$30 million per year
up to 2006.
TECO Energy’s 10.5 per cent notes due in 2007, originally estimated to be US$240 mil-
lion, were issued on 15 November. Market acceptance allowed the company to increase its
offering to US$380 million. In addition to refinancing US$200 million of redeemable securi-
ties due in 2015, TECO Energy intended to use the proceeds to pay down short-term debt
drawn against its credit facility and for general corporate purposes. Credit Suisse First Boston
purchased all of the notes on 15 November, and registered them with the US Securities and
Exchange Commission on 6 January 2003 in order to become able to sell them to individual
as well as institutional investors. The notes contained some stiff provisions. TECO Energy
promised to deliver a US$50 million letter of credit if its ratings from either Moody’s or
Standard & Poor’s fell below investment grade, if it failed to maintain a 65 per cent debt-to-
capital ratio, or if it failed to maintain earnings before interest, taxes, depreciation and amorti-
sation (EBITDA) at a level at least 2.5 times interest payments on outstanding debt. This is in
addition to the US$375 million letter of credit related to the equity bridge loan required while
that rating trigger remained in effect, until the Gila River and Union plants were expected to
begin operation, and the equity bridge loan would be repaid. A TECO Energy spokesman said
that the company was working quickly to boost its liquidity in the short term, having recently
sold assets and raised new financing, but the real test would come in the long term. Power
POWER PLANT