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Much riding on TECO Transport

The energy company's shipping affiliate is just a blip on its bottom line, but it looms in these troubled financial times.

TALLAHASSEE - Among TECO Energy Inc.'s diversified operations, its barge and shipping unit, TECO Transport, casts a relatively small shadow.

The transport subsidiary posted net income last year of $14.5-million, a figure that barely registers against TECO Energy's bottom line, which in the same year suffered a $909.4-million loss.

But the deep financial troubles of its parent lend greater importance to the condition of TECO Transport than the raw numbers might suggest. That extends to the most controversial aspect of its business: its longstanding coal shipping contract with fellow TECO subsidiary Tampa Electric Co.

As TECO Energy tries to convince Wall Street that it can execute a back-to-basics recovery from a disastrous foray into unregulated electricity markets, analysts say the utility needs to hold onto all the sources of earnings and cash flow that it can.

That may explain why a recent challenge to the transport contract has prompted TECO to mount an unusually aggressive defense.

TECO Transport "is not the biggest part of (TECO Energy's) earnings, that's for sure," said Barry Abramson, senior utilities analyst for Gabelli Asset Management Inc. in Rye, N.Y. "But nevertheless, it's still an important business because earnings have been trending downward. They can't afford to see further earnings deterioration at the company."

The Florida Public Service Commission concluded a third and final day of hearings last week on the latest transport contract, which took effect Jan. 1.

Tampa Electric touts the agreement as giving the utility's customers a competitive rate for coal transport services, one of many costs included in their monthly electric bills.

But an array of critics - including the PSC staff, the state Office of Public Counsel, consumer groups and other transport companies - counter that Tampa Electric rigged its bid process last year to favor its fellow subsidiary and failed to get the lowest rates for coal transport services.

The PSC staff is expected to issue a formal recommendation on the matter by Aug. 19. The commission is scheduled to vote on the recommendation Aug. 31. The commission is expected to decide whether to allow Tampa Electric to continue passing on to rate payers the costs of the TECO Transport deal.

If the PSC rules against Tampa Electric, the contract itself probably wouldn't be affected. But the commission could rule that the utility can charge customers for only a portion of the contract cost.

The remaining costs would have to be absorbed by Tampa Electric, directly affecting the company's earnings and cash flow.

In addition, a decision against Tampa Electric probably would limit the value of TECO Transport as an asset for potential sale. Prospective bidders for the shipping subsidiary would likely assume that its decades-old relationship with Tampa Electric would soon be ending, or continuing at a lower rate. Last year, TECO Transport generated 38 percent of its revenues from Tampa Electric.

Although TECO has no immediate plans to sell its transport subsidiary, Wall Street hasn't ruled it out, due to concerns that the company may have to write off more out-of-state wholesale power investments. The staggering size of the company's net loss last year stemmed from the write off of its investments in its two largest wholesale plants.

Tampa Electric can ill afford a loss at the PSC that cuts into earnings and lessens the value of a profitable subsidiary. TECO's turnaround strategy consists primarily of cutting debt and maintaining its dividend while steering its focus back to regulated utility operations.

Highlighting the uncertainty of this strategy is the fact that TECO, like other utilities with large wholesale power businesses, still declines to release earnings forecasts. Amid concerns about the company's prospects, TECO's stock has been trading recently around its 52-week low. The company's shares closed Tuesday at $11.50, up 12 cents.

In light of these stakes, TECO is taking no chances in the PSC case. In April, the utility took the rare step of requesting a formal deposition from a PSC staff member who had been critical of the deal. The company later successfully lobbied to have that staff member, public utilities supervisor William McNulty, removed from the case.

TECO attorneys also submitted a lengthy filing against prominent Tallahassee consumer attorney Mike Twomey, asking that the PSC require Twomey to identify the contributors to a consumer group that paid part of Twomey's legal fees to represent nine Tampa Electric customers in the case. The consumer group acknowledged soliciting funds from other transport companies. The PSC rejected TECO's request.

But Tampa Electric wouldn't be using TECO Transport's services if it didn't offer the lowest price available, said Richard Lehfeldt, senior vice president of external relations for TECO Energy. He said Tampa Electric used to buy all its coal from another TECO affiliate but stopped doing so as market conditions changed.

Lehfeldt also said the resources TECO Energy has devoted to the defense of the transport contract weren't out of line with the unusual nature of the transport case. Originally part of the PSC's routine review of electric utility fuel costs, the commission decided to hold separate deliberations on the transport contract in response to consumer advocates who challenged it.

"It is a reality that affiliate deals are subject to a higher order of scrutiny than a garden-variety deal," Lehfeldt said, adding, however, that that was no reason to avoid dealing with an affiliate if that company offered the best possible deal.

"In the grand scheme of things, Tampa Electric needs transportation for its coal," he said. "Because of what it does for a living, it needs to get it at the best price available. I think that's what we've been all about. . . . If the market showed and Tampa Electric saw a better deal for its ratepayers than what TECO Transport brings to the table, we'd have gone elsewhere."

- Louis Hau can be reached at 813 226-3404 or hau@sptimes.com

In each of the past five years, a Tallahassee law firm has billed TECO more than $1-million in legal fees while Tampa Electric Co. and TECO Transport have battled over a contract.