TECO Energy last Thursday said that it has decided to drop out of the 2,145 MW Gila River power station in Arizona and the 2,200 MW Union Power Station in Arkansas and will cease funding the plants. As a result, the company will record an after-tax impairment charge of up to $780 million.

TECO’s announcement came on the same day that a standstill agreement reached with lending banks was set to expire. Under that agreement, the banks had agreed not to exercise remedies, including asking for payment of over $1 billion in debt, related to the two power plants.

TECO Energy, as the equity investor, and its subsidiaries that own the two large plants have reached an understanding on a letter of intent with the lending bank group that provided the non-recourse project financing for these projects that contemplates negotiation of an agreement for the purchase and sale or other agreement to transfer ownership of the plants to these banks.

As part of the contemplated transaction, the outstanding non-recourse project debt owed by the project companies would be satisfied. However, the decision to end the ownership of the plants and cease further funding is not dependent on reaching final agreement with the lenders for a consensual transfer. Even without such an agreement, the project companies, which are currently indirect subsidiaries of TECO Energy, could pursue other disposition alternatives that would ultimately end TECO Energy’s ownership of the plants.

“This is the most significant step in our back-to-basics strategy, refocusing on our regulated Florida utilities,” said TECO Energy CEO Robert Fagan. “This decision formalizes our intent to exit these merchant projects and to make no additional investment in them.” He said that the plants “are state-of-the-art combined-cycle plants providing energy that is cleaner and more efficiently produced than many of the older plants currently operating in the markets that they serve. I believe that over the long term these plants will provide good value to their ultimate owners. Unfortunately, in the interim, we cannot continue to support these plants.”

Fagan went on to say, “Our decision to invest in these plants was made more than three years ago based on the outlook for vibrant, competitive energy markets. Since then, for a variety of reasons, policy makers have retreated from mandating wholesale competition, supplies currently exceed demand, and economic growth has been less robust. In short, the market conditions we anticipated at the time we made our sizeable investments in merchant power have not materialized.”

Fagan last year said that the company was considering reinforcing its liquidity position with the sale of its merchant energy unit including the Gila River and Union power plants (see NGI, Nov. 3, 2003).

The steering committee of banks, representing the larger bank group for the Union and Gila River projects, has approved a non-binding letter of intent containing a binding settlement agreement and is recommending adoption by the bank group.

Under the agreement, TECO Energy and the project companies will work toward a definitive agreement with the lending banks for a purchase and sale or other agreement to transfer of the ownership of the projects to the lending banks in exchange for a release of all obligations under the project loan agreements. The letter of intent specifies target dates for a definitive agreement by June 30 and for closing by Sept. 30.

The settlement agreement provides for the treatment of the $66 million of letters of credit posted by TECO Energy, with $35 million to be drawn for the benefit of the project companies and the remaining $31 million of letters of credit to be cancelled and returned to TECO Energy. Under the letter of intent, all parties have specified a target completion of due diligence for final acceptance under the construction and undertaking contracts for both projects within 45 days. However, TECO Energy and the project companies will remain responsible to address certain permit issues at the Gila River project.

TECO Energy will make no new investment in the projects. Since the projects have achieved commercial operation on all facilities at Union and Gila River, TECO Energy believes it has met all but limited warranty and final acceptance responsibilities to the project companies. TECO Energy and various of its subsidiaries plan to continue to provide services and continue to provide expertise and operating support to help the project companies operate the facilities consistent with past practices at least through the completion of the transfer of ownership. The lending banks and TECO Energy and its affiliates have reserved their rights to assert certain claims they may have against one another until a definitive agreement is reached.

Based on TECO Energy’s short-term view of these projects and its efforts to dispose of them, the utility’s consolidated financial results will include, as of Dec. 31, 2003, an asset impairment of up to $780 million, after tax, for previous investments to reflect adjustments to the value of the subsidiaries that own the interests in the two plants.

©Copyright 2004 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.