Tampa Electric's corporate parent says it will record an after-tax charge of up to $780-million to leave power plants in Arkansas and Arizona.
By LOUIS HAU
Published February 6, 2004
TAMPA - TECO Energy Inc. pulled the plug Thursday on its disastrous billion-dollar investment in two giant out-of-state power plants.
The corporate parent of Tampa Electric, which sunk just less than $1.2-billion into the plants, said it will record a massive after-tax charge of up to $780-million against its year-end 2003 earnings to walk away from the plants in Arkansas and Arizona.
It's a crucial step in the company's efforts to end its failed adventure as a player in the unregulated wholesale power market. The result was a corporate nightmare that has slashed the total value of the Tampa utility by hundreds of millions of dollars, left it mired in debt and forced it to cut its dividend - a treasured source of income for many shareholders - to barely half its former level.
TECO delayed Thursday's scheduled release of its year-end 2003 earnings until Monday to resolve all accounting issues related to the charge.
In an interview, TECO executive vice president and chief operating officer John Ramil said the move is a painful but necessary measure in the company's "back-to-basics" campaign to focus again on its regulated utilities, Tampa Electric Co. and Peoples Gas System.
"We're turning the corner," Ramil said. "Take the medicine, do the surgery ... and get that behind us so we can focus on our core utility business."
Ramil acknowledged that doing so could put TECO back where it started in the late 1990s before it aggressively expanded its wholesale power investments: a stable, boring, relatively small utility ripe for a takeover by a larger company.
But he said "our objective is to remain independent and generate value for our shareholders." Besides, he added, the wave of consolidation that had swept through the utility industry in recent years - which included Carolina Power & Light's takeover of Florida Progress Corp. in 2000 - has largely subsided.
As for running a stable and boring utility, Ramil said he will welcome the day investors use those words again to describe the company.
"The key is predictability and cash flow," he said. "At the end of the day, that's what our investors want."
TECO can walk away from the plants because the facilities themselves are the only collateral for loans from 38 banks, led by Citibank and Societe Generale.
Although the lenders consider TECO already in default, a takeover isn't expected to happen until the end of September. The two sides have signed a letter of intent on the transfer and plan to have a definitive agreement in place by the end of June. In the meantime, TECO said it won't sink any more money into either the Union or Gila River plants. That includes stopping further payments on the considerable interest accumulating on the projects.
Ramil said TECO has received periodic offers to buy the plants and "if someone else shows up to make it easier for us and make it easier for the banks, we'll take a look at that."
Ramil acknowledged that TECO needs to take steps to strengthen its balance sheet, which currently reflects a debt-to-total-capital ratio of 62 percent, unusually high for a utility company. But he said the company has no immediate plans to issue more stock, which would further dilute the value of its existing shares.
Ramil also rebuffed the arguments of some Wall Street analysts and fund managers who believe TECO should consider further reducing or eliminating its quarterly dividend payout to help pay off debt.
"Everything is always on the table," he said. "But we look at equity and we look at the dividend as the last places to go for cash."
Instead, Ramil said, TECO would consider reducing debt by buying back its corporate bonds and exploring the possible sale of its other wholesale power plants, including the Odessa, Guadalupe and Frontera power stations in Texas, the Commonwealth Chesapeake power station in Virginia and the mothballed, yet-to-be-completed Dell and McAdams power stations in Arkansas and Mississippi.
TECO's rapid expansion of its wholesale power business in the late 1990s came amid excitement in energy markets over the pending deregulation of electricity markets, booming growth in energy trading led by Enron Corp. and expectation that the Internet-fueled New Economy would accelerate growth in electricity demand.
To lead TECO's efforts, the company's board appointed Robert Fagan, a senior executive at PP&L Resources Inc. of Allentown, Pa., as chief executive in April 1999. Fagan had been known as a savvy dealmaker at PP&L, where he aggressively grew that company's wholesale power portfolio.
The Union and Gila River power projects were the starkest symbols of Fagan's ambitions. Each natural-gas plant boasts a total generating capacity of more than 2,000 megawatts, making them among the largest wholesale power plants ever built in the United States. The two plants combined can generate more electricity than all of Tampa Electric's power plants in the Tampa Bay area.
But the wholesale market quickly soured, thanks to events such as the California power crisis of 2000, revelations of rampant accounting and trading fraud at Enron in 2001 and the failure of some states, including Florida, to completely open their electricity markets to competition.
A glut of power generation capacity developed in markets where many of TECO's wholesale plants operated, including the Union and Gila River plants. That drove power prices down to levels that made it impossible to operate the plants profitably.
"There's a growing recognition that these power markets are going to be recovering after many years, rather than after the next several years," said Larry Makovich, a senior research director at Cambridge Energy Research Associates in Cambridge, Mass. "It's going to take quite some time to work through the overbuild and thus get prices to recover. And that's why you're seeing this phenomenon happening."
TECO's shares closed Thursday at $14.35, up 36 cents, or 2.6 percent, on heavy trading volume.
- Louis Hau can be reached at hau@sptimes.com or 813 226-3404.
