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Downgrades send TECO's shares reeling
By LOUIS HAU, Times Staff Writer Two more brokerage firms Tuesday downgraded TECO Energy Inc.'s stock to "sell," sending the company's shares plunging to their lowest level in more than 11 years. The sell ratings from Credit Suisse First Boston and Jefferies & Co. come on the heels of a sell recommendation last month from A.G. Edwards & Sons Inc. All three firms say they are concerned about the Tampa utility's plans for a sharp expansion of generating capacity at its wholesale power subsidiary, TECO Power Services Inc. They note that the expansion comes amid a projected glut in TECO's core wholesale markets over the next several years. Furthermore, Credit Suisse analyst Neil Stein said in his downgrade report that he sees more downside in the stock and believes that TECO's dividend yield could be at risk. TECO's shares closed Tuesday at $16.18, down $3.57, or 18.1 percent. Earlier in the day, the stock sank to an intraday low of $16.01, down a dizzying 45 percent from its 52-week high of $29.35 set on Sept. 6, 2001, and its lowest intraday level since it touched a low of $15.94 on March 13, 1991. TECO spokeswoman Laura Plumb said the company takes issue with the argument that its wholesale power operations pose a threat to its dividend, which she noted has risen every year for 43 consecutive years. "We've consistently said that the next several years will be transitional," Plumb said. "We're moving into new markets ... (but) our regulated utilities make up more than half of our business and they will continue (to do so)." Plumb also noted that TECO has raised all the capital it needs to complete construction of TECO Power Services' new power plants and the conversion of Tampa Electric Co.'s two coal-burning generators at its Gannon power plant in Tampa to natural gas use. Sell ratings are rarely issued by stock analysts, but Credit Suisse's downgrade was particularly unusual because it went straight to a sell from a "buy," skipping the customary "hold" rating that usually precedes a recommendation to exit a stock. In addition, Credit Suisse was a joint lead manager of TECO's offering in June of 15.5-million common shares. Negative stock recommendations are typically even scarcer among brokerage firms that have a close investment-banking relationship with a publicly traded company. Robert W. Baird & Co., which was also an underwriter of TECO's June stock offering, reaffirmed Tuesday its strong buy rating on TECO. Stein noted in his report that while not every wholesale electricity market in the country faces a glut of supply, his analysis suggests that TECO Power Services' core regions in Louisiana, Arkansas, Mississippi and Texas "are among the most overbuilt in the country." TECO Power Services is constructing two 599-megawatt power stations in Dell, Ark., and Kosciusko, Miss., as well as the massive 2,145-megawatt Gila River Power Station in Gila Bend, Ariz. and the 2,205-megawatt Union Power Station in El Dorado, Ark. The latter two are 50-50 joint ventures with Panda Energy International Inc. of Dallas. All four are due to go online by the end of 2003 but TECO Power Services has yet to conclude any power sale contracts for the four plants. "As this merchant capacity begins operation, the company's earnings stream will become increasingly sensitive to power price fluctuations over the next 18 months," Stein said in his report. Stein is maintaining his 2002 net income projection of $2.35 a share but is slashing his earnings forecast for next year to $1.50 from his previous estimate of $2.18. TECO reported net income of $2.26 a share in 2001. Stein also said that TECO could come under pressure to reduce its annual dividend yield of 7.2 percent under a "worst case scenario" of no improvement in power market conditions and a deterioration in access to financing. Stein sees further downside in TECO's stock. Based on its Aug. 30 closing price of $19.75, the stock was valued at a 29 percent premium to its peers based on Stein's earnings projections for next year. As a result, Stein cut his 52-week price target to $14 from a previous target range of $21 to $22. Jefferies analyst Paul Fremont is slightly more optimistic, reducing his 52-week price target to $18 from $21.50. He is sticking by his 2002 earnings projection of $2.35 a share, but is slicing his 2003 estimate to $1.80 from $2.25. The sharp decline in TECO's market capitalization could revive speculation about a possible takeover of the utility. But Fremont said that the added debt and business risk associated with TECO's wholesale power business complicates a potential buyout, especially given Wall Street's recent renewed focus on sound credit ratings and balance sheets. He also notes that sharp drops in the shares of other energy concerns such as Calpine Corp., AES Corp., Reliant Energy Inc. and Mirant Corp. haven't yet resulted in an acquisition of those companies. The environment for a potential takeover could improve if wholesale electricity price expectations increase, Fremont said. But for now, there is a strong belief in the market "that you're looking at a fundamental near-term glut in supply," he said. Meanwhile, Baird analyst Dave Parker acknowledges in his report that TECO's stock is under pressure from investor skepticism about merchant power markets, "obviously for valid reasons." But while TECO's exposure to nonregulated merchant power is expanding, its regulated operations in Florida will still contribute about 60 percent of the company's net income this year and next year, Parker said. He describes TECO's earnings growth during the first six months of 2002 as "stellar," noting that net income grew 14 percent and earnings per share rose 7 percent from the year-earlier period. -- Louis Hau can be reached at hau@sptimes.com or (813) 226-3404.
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From the Times Business report Robert Trigaux
From the AP
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