Teco Totters Along Writedown Trail

The Florida power company has been hit by charges before and may soon be again.
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Power-related charges continue to zap




The Florida-based utility weathered a steep second-quarter loss after taking big charges for terminated power projects and goodwill impairments on domestic generation assets. Together, these charges -- totaling $156 million -- pushed Teco to a second-quarter loss of $102 million, or 58 cents a share. The company earned $85.7 million, or 58 cents a share, in the year-ago period.

Investors shrugged off the results, leaving Teco shares unchanged at $12.15 in midday trading.

Excluding special charges, Teco reported a second-quarter profit of 31 cents a share that was sharply lower than last year's 56-cent profit but topped the consensus Wall Street estimate by 2 cents. Teco CEO Robert Fagan described the quarter as a strong one despite the massive charges.

"While our operating results are masked by accounting charges, Teco Energy made good progress in refocusing on the core utility operations," Fagan said. "We completed major activities on many fronts this quarter,

and we took steps to improve our financial condition."

Such improvements are paramount to Teco's future. Less than two weeks ago, Standard & Poor's indicated that it may join Moody's in cutting Teco's credit to junk if the company cannot "halt the erosion of

its weakened financial profile." S&P raised specific concerns about the potential loss of tax credits that, in the recent quarter, boosted results by $15.4 million and enabled Teco to beat the Street.

The tax credits, awarded for using synthetic fuel, have added more than $250 million to Teco's bottom line in the past three years alone. But the credits are vulnerable to future cancellation due to a government proposal aimed at ending abuses of the lucrative tax breaks.

Teco has arranged crucial asset sales that depend on the credits continuing. And S&P has warned that Teco's credit -- just one notch above junk -- hinges on a favorable outcome.

"The sale of these interests is expected to contribute about $70 million in cash flow in 2003 and $90 million to cash flow annually in 2004 through 2007," S&P wrote earlier this month. "An unfavorable outcome, which either halts or significantly delays the sales or ultimately affects cash flow, could lead to lower credit ratings."

Teco immediately downplayed the risks to its tax credits. The company insisted that it had not abused the system, saying that its "synthetic fuel product does undergo a significant chemical change," and expressed confidence that the tax credits would remain in place.

"Like the rest of the synthetic fuel industry, we are working diligently to achieve a successful resolution of the Section 29 issues quickly, which should remove the concerns raised today by S&P," Teco CFO Gordon Gilette said in response to S&P's new negative outlook for the company's credit rating.

But just days later, a Teco-backed bill to block the tax credit cancellations died on a tie vote in the House Appropriations Committee. So the quick -- and favorable -- resolution Teco had banked on did not materialize. Indeed,

The Wall Street Journal

described the committee meeting as "only the first skirmish in what promises to be months of intense lobbying."

Meanwhile, Teco faces plenty of other risks. Although the company's second-quarter charges were somewhat expected -- as part of a $350 million writedown announced in April -- some critics have warned that Teco's situation will only get uglier. Indeed, one industry expert has predicted that Teco will ultimately take fresh writedowns that are twice as big as those already announced. And S&P has already pointed out that Teco's power plant projects -- considered highly overvalued by some -- "are being severely affected by a weak power price environment."

Some experts believe that Teco must cut its dividend or issue new equity to bolster its financial condition. In the meantime, most analysts who follow the stock recommend selling the shares.