HOUSTON, Jan. 7 — Credit rating agency Fitch IBCA downgraded energy holding company Teco Energy Inc. and its Tampa Electric unit a notch Friday, citing TECO’s increased leverage and the business risk associated with independent power projects.
It also cited TECO’s exposure to Nepco, an indirect subsidiary of Enron Corp., and the engineering and procurement contractor on several of TECO’s merchant generation projects. Fitch said the long-term rating outlook remains negative pending resolution of the Nepco-related issues and strengthening of the balance sheet.
Enron’s Chapter 11 bankruptcy reorganization filing allowed the banks to stop funding the projects for which Nepco is serving as engineer and contractor, Fitch said. While Tampa, Fla.-based TECO is negotiating with the banks for a waiver, Fitch said a source of funding is still uncertain.
TECO is the most recent energy company to get caught up in the market’s distaste for leverage in the wake of Enron’s collapse. Companies have rushed to shore up their balance sheets to avoid a credit downgrade or in response to recent downgrades by the ratings agencies.
In TECO’s case, Fitch said a resolution with the banks is likely to result in amendments that will shift additional risk to the parent company. At the same time, it said additional equity is needed to maintain a capital structure consistent with the rating. Fitch expects TECO to issue additional equity before year-end to strengthen the balance sheet.
On the plus side, Fitch said TECO’s credit quality continues to be supported by solid unregulated coal, natural gas and transport businesses as well as its regulated utility subsidiary, Tampa Electric Co. The regulated gas and electric operations contributed the majority of earnings before interest and taxes in 2001.
The utility also benefits from a favorable customer mix, a fuel and purchased power cost recovery adjustment clause, and the slow pace of electric industry restructuring in Florida, Fitch said. Capital expenditures for new generating capacity, however, have increased as the utility prepares to serve anticipated demand growth and to increase the reserve margin.
Fitch lowered TECO Energy’s senior unsecured and medium-term notes to A- from A; ROARS to A- from A; trust preferred stock to BBB+ from A-; and commercial paper to F2 from F1. Tampa Electric’s first mortgage bonds were cut to AA- from AA and its senior unsecured to A+ from AA-.