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TECO Energy 10-Q 2010 Documents found in this filing:Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended June 30, 2010 OR
For the transition period from to
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. YES x NO ¨ Indicate by check mark whether the registrants have submitted electronically and posted on their corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrants were required to submit and post such files). YES x NO ¨ Indicate by check mark whether TECO Energy, Inc. is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether Tampa Electric Company is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether TECO Energy, Inc. is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x Indicate by check mark whether Tampa Electric Company is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x The number of shares of TECO Energy, Inc.’s common stock outstanding as of Jul. 29, 2010 was 214,589,531. As of Jul. 29, 2010, there were 10 shares of Tampa Electric Company’s common stock issued and outstanding, all of which were held, beneficially and of record, by TECO Energy, Inc. Tampa Electric Company meets the conditions set forth in General Instruction (H) (1) (a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format. This combined Form 10-Q represents separate filings by TECO Energy, Inc. and Tampa Electric Company. Information contained herein relating to an individual registrant is filed by that registrant on its own behalf. Each registrant makes representations only as to information relating to itself and its subsidiaries. Page 1 of 58 Index to Exhibits appears on page 58.
Table of ContentsPART I. FINANCIAL INFORMATION Item 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS TECO ENERGY, INC. In the opinion of management, the unaudited consolidated condensed financial statements include all adjustments that are of a recurring nature and necessary to state fairly the financial position of TECO Energy, Inc. and subsidiaries as of Jun. 30, 2010 and Dec. 31, 2009, and the results of their operations and cash flows for the periods ended Jun. 30, 2010 and 2009. The financial statements for the periods ended Jun. 30, 2010 include the financial position, results of operations and cash flows for two power generation projects in Guatemala, previously reflected as unconsolidated affiliates, that were reconsolidated effective Jan. 1, 2010 in accordance with new accounting guidance. The results of operations for the three month and six month periods ended Jun. 30, 2010 are not necessarily indicative of the results that can be expected for the entire fiscal year ending Dec. 31, 2010. References should be made to the explanatory notes affecting the consolidated financial statements contained in TECO Energy, Inc.’s Annual Report on Form 10-K for the year ended Dec. 31, 2009 and to the notes on pages 9 through 29 of this report. INDEX TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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Table of ContentsConsolidated Condensed Balance Sheets Unaudited
The accompanying notes are an integral part of the consolidated condensed financial statements.
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Table of ContentsTECO ENERGY, INC. Consolidated Condensed Balance Sheets – continued Unaudited
The accompanying notes are an integral part of the consolidated condensed financial statements.
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Table of ContentsConsolidated Condensed Statements of Income Unaudited
The accompanying notes are an integral part of the consolidated condensed financial statements.
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Table of ContentsTECO ENERGY, INC. Consolidated Condensed Statements of Income Unaudited
The accompanying notes are an integral part of the consolidated condensed financial statements.
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Table of ContentsConsolidated Condensed Statements of Comprehensive Income Unaudited
The accompanying notes are an integral part of the consolidated condensed financial statements.
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Table of ContentsConsolidated Condensed Statements of Cash Flows Unaudited
The accompanying notes are an integral part of the consolidated condensed financial statements.
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Table of ContentsNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS UNAUDITED 1. Summary of Significant Accounting Policies The significant accounting policies for both utility and diversified operations include: Principles of Consolidation and Basis of Presentation The consolidated condensed financial statements include the accounts of TECO Energy, Inc., its majority-owned and controlled subsidiaries, and the accounts of variable interest entities (VIEs) for which it is the primary beneficiary (TECO Energy or the company). TECO Energy is considered to be the primary beneficiary of VIEs if it has both 1) the power to direct the activities of a VIE that most significantly impact the entity's economic performance and 2) the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. Effective Jan. 1, 2010, amended accounting standards on consolidation resulted in the reconsolidation of two projects in Guatemala. Prior periods presented in this quarterly report were not restated. (See Note 16.) All significant intercompany balances and intercompany transactions have been eliminated in consolidation. Generally, the equity method of accounting is used to account for investments in partnerships or other arrangements in which TECO Energy is not the primary beneficiary but is able to exert significant influence. In the opinion of management, the unaudited consolidated condensed financial statements include all adjustments that are of a recurring nature and necessary to state fairly the financial position of TECO Energy, Inc. and subsidiaries as of Jun. 30, 2010 and Dec. 31, 2009, and the results of operations and cash flows for the periods ended Jun. 30, 2010 and 2009. The results of operations for the three and six month periods ended Jun. 30, 2010 are not necessarily indicative of the results that can be expected for the entire fiscal year ending Dec. 31, 2010. The use of estimates is inherent in the preparation of financial statements in accordance with generally accepted accounting principles (GAAP). Actual results could differ from these estimates. The year-end condensed balance sheet data was derived from audited financial statements, however this quarterly report on Form 10-Q does not include all year-end disclosures required for an annual report on Form 10-K by GAAP in the United States of America. Revenues As of Jun. 30, 2010 and Dec. 31, 2009, unbilled revenues of $65.6 million and $51.6 million, respectively, are included in the “Receivables” line item on the Consolidated Condensed Balance Sheets. Accounting for Franchise Fees and Gross Receipts The regulated utilities (Tampa Electric and Peoples Gas System (PGS)) are allowed to recover from customers certain costs incurred through rates approved by the Florida Public Service Commission (FPSC). The amounts included in customers’ bills for franchise fees and gross receipt taxes are included as revenues on the Consolidated Condensed Statements of Income. These amounts totaled $28.1 million and $59.0 million, respectively, for the three and six months ended Jun. 30, 2010, compared to $28.2 million and $58.3 million, respectively, for the three and six months ended Jun. 30, 2009. Franchise fees and gross receipt taxes payable by the regulated utilities are included as an expense on the Consolidated Condensed Statements of Income in “Taxes, other than income”. These totaled $28.0 million and $58.8 million, respectively, for the three and six months ended Jun. 30, 2010, compared to $28.2 million and $58.2 million, respectively, for the three and six months ended Jun. 30, 2009. Purchased Power Tampa Electric purchases power on a regular basis to meet the needs of its customers. Tampa Electric purchased power from entities not affiliated with TECO Energy at a cost of $49.1 million and $106.3 million, respectively, for the three and six months ended Jun. 30, 2010, compared to $56.1 million and $98.3 million, respectively, for the three and six months ended Jun. 30, 2009. Prudently incurred purchased power costs at Tampa Electric have historically been recoverable through FPSC-approved cost recovery clauses. Cash Flows Related to Derivatives and Hedging Activities The company classifies cash inflows and outflows related to derivative and hedging instruments in the appropriate cash flow sections associated with the item being hedged. In the case of heating oil swaps which are used to mitigate the fluctuations in the price of diesel fuel, primarily at TECO Coal, the cash inflows and outflows are included in the operating section. For natural gas, primarily at Tampa Electric and PGS, and ongoing interest rate swaps, the cash inflows and outflows are included in the operating section. For interest rate swaps that settle coincident with the debt issuance, the cash inflows and outflows are treated as premiums or discounts and included in the financing section of the Consolidated Condensed Statements of Cash Flows.
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Table of Contents2. New Accounting Pronouncements Subsequent Events In February 2010, the Financial Accounting Standards Board (FASB) issued additional guidance related to subsequent event disclosure. The guidance was effective upon issuance and has no effect on the company’s results of operations, statement of position or cash flows. Fair Value Measures and Disclosures In January 2010, the FASB issued guidance that requires entities to disclose more information regarding the movements between Levels 1 and 2 of the fair value hierarchy. The guidance was effective for fiscal years that begin after Dec. 15, 2010, and for interim periods within that year. This guidance will not have any effect on the company’s results of operations, statement of position or cash flows. 3. Regulatory Tampa Electric’s and PGS’s retail businesses are regulated by the FPSC. Tampa Electric also is subject to regulation by the Federal Energy Regulatory Commission (FERC) under the Public Utility Holding Company Act of 2005 (PUHCA 2005). However, pursuant to a waiver granted in accordance with the FERC’s regulations, TECO Energy is not subject to certain accounting, record-keeping and reporting requirements prescribed by the FERC’s regulations under PUHCA 2005. The operations of PGS are regulated by the FPSC separately from the regulation of Tampa Electric. The FPSC has jurisdiction over rates, service, issuance of securities, safety, accounting and depreciation practices and other matters. In general, the FPSC sets rates at a level that allows utilities such as Tampa Electric and PGS to collect total revenues (revenue requirements) equal to their cost of providing service, plus a reasonable return on invested capital. Stipulation with Intervenors – Tampa Electric As previously reported in the company’s Annual Report on Form 10-K for the period ended Dec. 31, 2009, the FPSC, in connection with Tampa Electric’s 2008 base rate request, approved a $25.7 million increase in base rates effective Jan. 1, 2010 (step increase), subject to refund, for certain capital additions placed in service in 2009. In connection with the base rate request, the FPSC had rejected the intervenors’ arguments that the approved 2010 increase violated the intervenors’ due process rights, Florida Statutes or FPSC rules. The intervenors filed an appeal with the Florida Supreme Court in September 2009 and Tampa Electric opposed this appeal. In July 2010, Tampa Electric entered into a stipulation with intervenors to resolve all issues related to the 2008 base rate case including the 2010 step increase, as well as the intervenors’ appeal to the Florida Supreme Court. Under the terms of the stipulation, the $25.7 million step increase remains in effect for 2010, and Tampa Electric will make a one-time reduction of $24.0 million to customer’s bills in 2010. Effective Jan. 1, 2011, and for subsequent years, rates of $24.4 million (a $1.3 million reduction from the $25.7 million in effect for 2010) related to the step increase will be in effect. The stipulation is subject to final approval by the FPSC, and a vote on this matter is expected in August 2010. Wholesale and Transmission Rate Cases In July 2010, Tampa Electric filed wholesale and transmission rate cases with the FERC. Tampa Electric’s last wholesale requirements rate case was in 1991 and the associated service agreements were approved by the FERC in the mid-1990s. The transmission rates charged by Tampa Electric were last updated in 2003. The proposed rates, as filed with the FERC, could become effective, subject to refund, later this year or in the first quarter of 2011, and are not expected to have a material impact on Tampa Electric’s results. Storm Damage Cost Recovery Tampa Electric accrues $8.0 million annually effective May 2009, an increase of $4.0 million from the prior year, to a FERC-authorized and FPSC-approved self-insured storm damage reserve. This reserve was created after Florida’s investor owned utilities (IOUs) were unable to obtain transmission and distribution insurance coverage due to destructive acts of nature. Tampa Electric’s storm reserve was $33.4 million and $29.3 million as of Jun. 30, 2010 and Dec. 31, 2009, respectively. Regulatory Assets and Liabilities Tampa Electric and PGS maintain their accounts in accordance with recognized policies of the FPSC. In addition, Tampa Electric maintains its accounts in accordance with recognized policies prescribed or permitted by the FERC. Tampa Electric and PGS apply the accounting standards for regulated operations. Areas of applicability include: deferral of revenues under approved regulatory agreements; revenue recognition resulting from cost recovery clauses that provide for monthly billing charges to reflect increases or decreases in fuel, purchased power, conservation and environmental costs; and the deferral of costs as regulatory assets to the period that the regulatory agency recognizes them when cost recovery is ordered over a period longer than a fiscal year.
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Table of ContentsDetails of the regulatory assets and liabilities as of Jun. 30, 2010 and Dec. 31, 2009 are presented in the following table: Regulatory Assets and Liabilities
All regulatory assets are being recovered through the regulatory process. The following table further details the regulatory assets and the related recovery periods: Regulatory assets
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Table of Contents4. Income Taxes The company’s U.S. subsidiaries join in the filing of a U.S. federal consolidated income tax return. The Internal Revenue Service (IRS) concluded its examination of the company’s 2008 consolidated federal income tax return during 2009. There is one open issue for the 2008 tax return for which an Appeals Conference took place in June 2010. The company expects to receive a proposed settlement amount during the third quarter of 2010. The U.S. federal statute of limitations remains open for the year 2006 and onward. Years 2009 and 2010 are currently under examination by the IRS under the Compliance Assurance Program, a program in which the company is a participant. The company does not expect the settlement of current IRS examinations to significantly change the total amount of unrecognized tax benefits by the end of 2010. Foreign and U.S. state jurisdictions have statutes of limitations generally ranging from three to five years from the filing of an income tax return. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. Years still open to examination by tax authorities in major state and foreign jurisdictions include 2004 and forward. During the second quarter of 2010, the company finalized the settlements of certain state items that were under appeal. As a result, the company recorded a $1.6 million after-tax benefit, excluding interest. During the six months ending Jun. 30, 2010, the company recorded a $4.0 million after-tax benefit, excluding interest, for these state items. The company recognizes interest and penalties associated with uncertain tax positions in the Consolidated Condensed Statements of Income in accordance with standards for accounting for uncertainty in income taxes. During the six month periods ended Jun. 30, 2010 and 2009, the company recorded ($1.3) million and $0.5 million, respectively, of pre-tax (income) charges for interest only. During the second quarter of 2010, as a result of finalizing the settlement of certain state items, the company recorded pre-tax interest income of $0.6 million for a total of $2.0 million pre-tax interest income for the six months ended Jun. 30, 2010. No amounts have been recorded for penalties for the six month periods ended Jun. 30, 2010 or 2009. The effective tax rate increased to 34.84% for the six months ended Jun. 30, 2010 from 32.06% for the same period in 2009, primarily due to an additional $5.9 million valuation allowance related to our updated, anticipated ability to use foreign tax credits. 5. Employee Postretirement Benefits Included in the table below is the periodic expense for pension and other postretirement benefits offered by the company.
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Table of ContentsPension Expense
For the fiscal 2010 plan year, TECO Energy assumed an expected long-term return on plan assets of 8.25% and a discount rate of 5.75% for pension benefits under its qualified pension plan, and a discount rate of 5.60% for its other postretirement benefits as of their Jan. 1, 2010 measurement dates. Additionally, TECO Energy assumed a discount rate of 5.75% for its Supplemental Executive Retirement Plan (SERP) benefits as of its Mar. 1 and Jan. 1, 2010 measurement dates. Effective Dec. 31, 2006, in accordance with the accounting standard for defined benefit plans and other postretirement benefits, TECO Energy adjusted its postretirement benefit obligations and recorded other comprehensive income (loss) to reflect the unamortized transition obligation, prior service cost, and actuarial gains and losses of its postretirement benefit plans. The adjustment to other comprehensive income was net of amounts that, for purposes prescribed by accounting standards for regulated operations, were recorded as regulatory assets for Tampa Electric Company. For the three months and six months ended Jun. 30, 2010, TECO Energy and its subsidiaries reclassed $0.6 million and $1.2 million, respectively, of unamortized transition obligation, prior service cost and actuarial gains and losses from accumulated other comprehensive income to net income as part of periodic benefit expense. In addition, during the three months and six months ended Jun. 30, 2010, Tampa Electric Company reclassed $3.3 million and $6.4 million, respectively, of unamortized transition obligation, prior service cost and actuarial losses from regulatory assets to net income as part of periodic benefit expense. In connection with the restructuring events that occurred in the third quarter of 2009 that changed the senior management structure, TECO Energy recognized settlement charges of $0.1 million and $1.6 million, respectively, for the three months and six months ended Jun. 30, 2010 for pay-outs from its SERP. In 2010, TECO Energy expects to make a contribution to its qualified pension plan of approximately $34.6 million. In March 2010, the Patient Protection and Affordable Care Act and a companion bill, The Health Care and Education Reconciliation Act (the Acts) were signed into law. Among other things, the Acts reduce the tax benefits available to an employer that receives the Medicare Part D subsidy, resulting in a write-off of any associated deferred tax asset. As a result, TECO Energy reduced its deferred tax asset by $6.4 million and recorded a corresponding charge of $1.1 million and a regulatory tax asset of $5.3 million. TECO Energy is reviewing certain other aspects of the Acts that could impact the cost of medical benefits provided to retirees and active employees. These impacts are not expected to be material to the company’s future results of operations, statement of position or cash flows.
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Table of Contents6. Short-Term Debt At Jun. 30, 2010 and Dec. 31, 2009, the following credit facilities and related borrowings existed: Credit Facilities
These credit facilities require commitment fees ranging from 7.0 to 60.0 basis points. The weighted-average interest rate on outstanding amounts payable under the credit facilities at Jun. 30, 2010 and Dec. 31, 2009 was 0.74% and 0.66%, respectively. Tampa Electric Company Accounts Receivable Facility On Feb. 19, 2010, Tampa Electric Company and TEC Receivables Corp. (TRC), a wholly-owned subsidiary of Tampa Electric Company, amended their $150 million accounts receivable collateralized borrowing facility, entering into Amendment No. 8 to the Loan and Servicing Agreement with certain lenders named therein and Citicorp North America, Inc. as Program Agent. The amendment (i) extends the maturity date to Feb. 18, 2011, (ii) provides that TRC will pay program and liquidity fees, which, pursuant to the amendment, will total 100 basis points, (iii) provides that the interest rates on the borrowings will be based on prevailing asset-backed commercial paper rates, unless such rates are not available from conduit lenders, in which case the rates will be at an interest rate equal to, at Tampa Electric Company’s option, either Citibank’s prime rate (or the federal funds rate plus 50 basis points, if higher) or a rate based on the London interbank offer rate (if available) plus a margin and (iv) makes other technical changes. 7. Long-Term Debt Issuance of TECO Finance, Inc. 4.00% Notes due 2016 and 5.15% Notes due 2020 On Mar. 15, 2010, TECO Finance, Inc. issued $250 million aggregate principal amount of 4.00% Notes due Mar. 15, 2016 and $300 million aggregate principal amount of 5.15% Notes due Mar. 15, 2020. The 2016 Notes were priced at 99.594% of the principal amount to yield 4.077% to maturity, and the 2020 Notes were priced at 99.552% of the principal amount to yield 5.208% to maturity. TECO Finance is a wholly-owned subsidiary of TECO Energy whose business activities consist solely of providing funds to TECO Energy for its diversified activities. The TECO Finance notes are fully and unconditionally guaranteed by TECO Energy. The offering resulted in net proceeds to TECO Finance (after deducting underwriting discounts and commissions and estimated offering expenses) of approximately $543.5 million. TECO Finance used a portion of these net proceeds to fund the cash purchase of the TECO Energy and TECO Finance notes tendered in March 2010 (see “TECO Energy, Inc. and TECO Finance, Inc. Tender Offers” below) and to fund the redemptions of the TECO Energy Floating Rate Notes due 2010 and 7.20% Notes due 2011 in April 2010. TECO Finance may redeem some or all of the notes at its option at any time and from time to time at a redemption price equal to the greater of (i) 100% of the principal amount of Notes to be redeemed or (ii) the sum of the present value of the remaining payments of principal and interest on the Notes to be redeemed, discounted at an applicable treasury rate (as defined in the Indenture), plus 25 basis points; in either case, the redemption price would include accrued and unpaid interest to the redemption date.
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Table of ContentsTECO Energy, Inc. and TECO Finance, Inc. Tender Offers On Mar. 22, 2010, TECO Energy and TECO Finance completed debt tender offers which resulted in the purchase of approximately $70 million principal amount of TECO Energy notes for cash and approximately $230 million principal amount of TECO Finance notes for cash. The tender offers resulted in the purchase and retirement of approximately:
In connection with these debt tender transactions, $25.5 million of premiums and fees were expensed, and are included in “Loss on debt extinguishment” on the Consolidated Condensed Statements of Income and as part of the “Cash flows from operating activities” in the Consolidated Condensed Statements of Cash Flows for the six months ended Jun. 30, 2010. “Loss on debt extinguishment” also includes remaining unamortized debt issue costs of $0.9 million. Redemption of TECO Energy, Inc. Floating Rate Notes due 2010 On Apr. 14, 2010, TECO Energy redeemed all of the outstanding $100 million aggregate principal amount of its Floating Rate Notes due 2010. The redemption price was equal to 100% of the principal amount of notes redeemed, plus accrued and unpaid interest on the redeemed notes up to the redemption date. Redemption of TECO Energy, Inc. 7.2% Notes due 2011 On Apr. 22, 2010, TECO Energy redeemed $100 million aggregate principal amount of its 7.2% Notes due 2011. The redemption price was equal to $1,066.38 per $1,000 principal amount of notes redeemed, plus accrued and unpaid interest on the redeemed notes up to the redemption date. In connection with this transaction, $6.6 million of premiums and fees were expensed, and are included in “Loss on debt extinguishment” on the Consolidated Condensed Statements of Income and as part of the “Cash flows from operating activities” in the Consolidated Condensed Statements of Cash Flows for the six months ended Jun. 30, 2010. Reconsolidation of TCAE and CGESJ Effective Jan. 1, 2010, new accounting standards for consolidations amended the determination of the primary beneficiaries for variable interest entities. As a result of adopting these standards, TECO Guatemala, Inc., a wholly-owned subsidiary of TECO Energy, was determined to be the primary beneficiary of, and therefore required to consolidate, both the Tampa Centro Americana de Electricidad (TCAE) and Central Generadora Eléctrica San José (CGESJ) projects in Guatemala. (See Note 16.) The consolidation resulted in a net $44.4 million increase of non-recourse debt.
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Table of Contents8. Other Comprehensive Income TECO Energy reported the following other comprehensive income (OCI) for the three months and six months ended Jun. 30, 2010 and 2009, related to changes in the fair value of cash flow hedges, amortization of unrecognized benefit costs associated with the company’s pension plans and unrecognized gains and losses on available-for-sale securities: Other Comprehensive Income
Accumulated Other Comprehensive Loss
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Table of Contents9. Earnings Per Share Earnings Per Share
10. Commitments and Contingencies Legal Contingencies From time to time, TECO Energy and its subsidiaries are involved in various legal, tax and regulatory proceedings before various courts, regulatory commissions and governmental agencies in the ordinary course of its business. Where appropriate, accruals are made in accordance with accounting standards for contingencies to provide for matters that are probable of resulting in an estimable, material loss. While the outcome of such proceedings is uncertain, management does not believe that their ultimate resolution will have a material adverse effect on the company’s results of operations or financial condition. Superfund and Former Manufactured Gas Plant Sites Tampa Electric Company, through Tampa Electric and PGS, is a potentially responsible party (PRP) for certain superfund sites and, through PGS, for certain former manufactured gas plant sites. While the joint and several liability associated with these sites presents the potential for significant response costs, as of Jun. 30, 2010, Tampa Electric Company has estimated its ultimate financial liability to be approximately $19.9 million, primarily at PGS, and this amount has been accrued in the company’s financial statements. The environmental remediation costs associated with these sites, which are expected to be paid over many years, are not expected to have a significant impact on customer prices. The estimated amounts represent only the estimated portion of the cleanup costs attributable to Tampa Electric Company. The estimates to perform the work are based on Tampa Electric Company’s experience with similar work adjusted for site specific conditions and agreements with the respective governmental agencies. The estimates are made in current dollars, are not discounted and do not assume any insurance recoveries.
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Table of ContentsAllocation of the responsibility for remediation costs among Tampa Electric Company and other PRPs is based on each party’s relative ownership interest in or usage of a site. Accordingly, Tampa Electric Company’s share of remediation costs varies with each site. In virtually all instances where other PRPs are involved, those PRPs are considered creditworthy. Factors that could impact these estimates include the ability of other PRPs to pay their pro-rata portion of the cleanup costs, additional testing and investigation which could expand the scope of the cleanup activities, additional liability that might arise from the cleanup activities themselves or changes in laws or regulations that could require additional remediation. These costs are recoverable through customer rates established in subsequent base rate proceedings. Guarantees and Letters of Credit A summary of the face amount or maximum theoretical obligation under TECO Energy’s and Tampa Electric Company’s letters of credit and guarantees as of Jun. 30, 2010 is as follows: Letters of Credit and Guarantees-TECO Energy
Financial Covenants In order to utilize their respective bank facilities, TECO Energy, TECO Finance and Tampa Electric Company must meet certain financial tests as defined in the applicable agreements. In addition, TECO Energy, TECO Finance, Tampa Electric Company and other operating companies have certain restrictive covenants in specific agreements and debt instruments. At Jun. 30, 2010, TECO Energy, TECO Finance, Tampa Electric Company and the other operating companies were in compliance with all applicable financial covenants.
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Table of Contents11. Segment Information TECO Energy is an electric and gas utility holding company with significant diversified activities. Segments are determined based on how management evaluates, measures and makes decisions with respect to the operations of the entity. The management of TECO Energy reports segments based on each subsidiary’s contribution of revenues, net income and total assets, as required by the accounting guidance for disclosures about segments of an enterprise and related information. All significant intercompany transactions are eliminated in the Consolidated Condensed Financial Statements of TECO Energy, but are included in determining reportable segments.
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Table of ContentsSegment Information (1)
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Table of Contents
12. Accounting for Derivative Instruments and Hedging Activities From time to time, TECO Energy and its affiliates enter into futures, forwards, swaps and option contracts for the following purposes:
TECO Energy and its affiliates use derivatives only to reduce normal operating and market risks, not for speculative purposes. The company’s primary objective in using derivative instruments for regulated operations is to reduce the impact of market price volatility on ratepayers. The risk management policies adopted by TECO Energy provide a framework through which management monitors various risk exposures. Daily and periodic reporting of positions and other relevant metrics are performed by a centralized risk management group which is independent of all operating companies. The company applies the accounting standards for derivative instruments and hedging activities. These standards require companies to recognize derivatives as either assets or liabilities in the financial statements, to measure those instruments at fair value, and to reflect the changes in the fair value of those instruments as either components of OCI or in net income, depending on the designation of those instruments. The changes in fair value that are recorded in OCI are not immediately recognized in current net income. As the underlying hedged transaction matures or the physical commodity is delivered, the deferred gain or loss on the related hedging instrument must be reclassified from OCI to earnings based on its value at the time of the instrument’s settlement. For effective hedge transactions, the amount reclassified from OCI to earnings is offset in net income by the market change of the amount paid or received on the underlying physical transaction. New accounting standards for disclosures became effective for financial statements issued for fiscal years and interim periods beginning after Nov. 15, 2008. This new standard requires enhanced disclosures about a company’s derivative activities and how the related hedged items affect a company’s financial position, financial performance and cash flows. The new requirements include quantitative disclosures about the company’s fair value amounts of gains and losses associated with derivative instruments, as well as disclosures about credit-risk-related contingent features in derivative agreements. The company adopted this new standard effective Jan. 1, 2009. The company applies the accounting standards for regulated operations to financial instruments used to hedge the purchase of natural gas for its regulated companies. These standards, in accordance with the FPSC, permit the changes in fair value of natural gas derivatives to be recorded as regulatory assets or liabilities to reflect the impact of hedging activities on the fuel recovery clause. As a result, these changes are not recorded in OCI (see Note 3). A company’s physical contracts qualify for the normal purchase/normal sale (NPNS) exception to derivative accounting rules, provided they meet certain criteria. Generally, NPNS applies if the company deems the counterparty creditworthy, if the counterparty owns or controls resources within the proximity to allow for physical delivery of the commodity, if the company intends to receive physical delivery and if the transaction is reasonable in relation to the company’s business needs. As of Jun. 30, 2010, all of the company’s physical contracts qualify for the NPNS exception.
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Table of ContentsThe following table presents the derivatives that are designated as cash flow hedges at Jun. 30, 2010 and Dec. 31, 2009: Total Derivatives(1)
The following table presents the derivative hedges of heating oil contracts at Jun. 30, 2010 and Dec. 31, 2009 to limit the exposure to changes in the market price for diesel fuel used in the production of coal: Heating Oil Derivatives
The following table presents the derivative hedges of natural gas contracts at Jun. 30, 2010 and Dec. 31, 2009 to limit the exposure to changes in market price for natural gas used to produce energy and natural gas purchased for resale to customers: Natural Gas Derivatives
The ending balance in accumulated other comprehensive income (AOCI) related to the cash flow hedges and previously settled interest rate swaps at Jun. 30, 2010 is a net loss of $6.1 million after tax and accumulated amortization. This compares to a net loss of $7.3 million in AOCI after tax and accumulated amortization at Dec. 31, 2009.
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Table of ContentsThe following table presents the derivative hedges of interest rate swaps at Jun. 30, 2010 and Dec. 31, 2009 to limit the exposure to market changes in interest rates on outstanding debt: Interest Rate Swaps
The following table presents the fair values and locations of derivative instruments recorded on the balance sheet at Jun. 30, 2010: Derivatives Designated As Hedging Instruments
The following table presents the effect of energy related derivatives on the fuel recovery clause mechanism in the Consolidated Condensed Balance Sheet as of Jun. 30, 2010: Energy Related Derivatives
Based on the fair value of the instruments at Jun. 30, 2010, net pretax losses of $35.7 million are expected to be reclassified from regulatory assets or liabilities to the Consolidated Condensed Statements of Income within the next twelve months.
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Table of ContentsThe following tables present the effect of hedging instruments on OCI and income for the three months and six months ended Jun. 30:
For derivative instruments that meet cash flow hedge criteria, the effective portion of the gain or loss on the derivative is reported as a component of OCI and reclassified into earnings in the same period or period during which the hedged transaction affects earnings. Gains and losses on the derivatives representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. For the three months and six months ended Jun. 30, 2010 and 2009, all hedges were effective.
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Table of ContentsThe following table presents the derivative activity for instruments classified as qualifying cash flow hedges for the six months ended Jun. 30:
The maximum length of time over which the company is hedging its exposure to the variability in future cash flows extends to Dec. 31, 2012 for both financial natural gas and financial heating oil fuel contracts. The following table presents by commodity type the company’s derivative volumes that, as of Jun. 30, 2010, are expected to settle during the 2010, 2011 and 2012 fiscal years:
The company is exposed to credit risk primarily through entering into derivative instruments with counterparties to limit its exposure to the commodity price fluctuations associated with diesel fuel and natural gas. Credit risk is the potential loss resulting from a counterparty’s nonperformance under an agreement. The company manages credit risk with policies and procedures for, among other things, counterparty analysis, exposure measurement, and exposure monitoring and mitigation. It is possible that volatility in commodity prices could cause the company to have material credit risk exposures with one or more counterparties. If such counterparties fail to perform their obligations under one or more agreements, the company could suffer a material financial loss. However, as of Jun. 30, 2010, substantially all of the counterparties with transaction amounts outstanding in the company’s energy portfolio are rated investment grade by the major rating agencies. The company assesses credit risk internally for counterparties that are not rated. The company has entered into commodity master arrangements with its counterparties to mitigate credit exposure to those counterparties. The company generally enters into the following master arrangements: (1) Edison Electric Institute agreements (EEI) - standardized power sales contracts in the electric industry; (2) International Swaps and Derivatives Association agreements (ISDA) - standardized financial gas and electric contracts; and (3) North American Energy Standards Board agreements (NAESB) - standardized physical gas contracts. The company believes that entering into such agreements reduces the risk from default by creating contractual rights relating to creditworthiness, collateral and termination. The company has implemented procedures to monitor the creditworthiness of our counterparties and to consider nonperformance in valuing counterparty positions. The company monitors counterparties’ credit standing, including those that are experiencing financial problems, have significant swings in credit default swap rates, have credit rating changes by external rating agencies or have changes in ownership. Net liability positions are generally not adjusted as the company uses derivative transactions as hedges and has the ability and intent to perform under each of these contracts. In the instance of net asset positions, the company considers general market conditions and the observable financial health and outlook of specific counterparties, forward looking data such as credit default swaps, when available, and historical default probabilities from credit rating agencies in evaluating the potential impact of nonperformance risk to derivative positions. As of Jun. 30, 2010, substantially all positions with counterparties are net liabilities. Certain TECO Energy derivative instruments contain provisions that require the company’s debt, or in the case of derivative instruments where Tampa Electric Company is the counterparty, Tampa Electric Company’s debt, to maintain an investment grade credit rating from any or all of the major credit rating agencies. If debt ratings, including Tampa Electric
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Table of ContentsCompany’s, were to fall below investment grade, it could trigger these provisions, and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing full overnight collateralization on derivative instruments in net liability positions. The company has no other contingent risk features associated with any derivative instruments. The table below presents the fair value of the overall contractual contingent liability positions for the company’s derivative activity at Jun. 30, 2010: Contingent Features
13. Fair Value Measurements Items Measured at Fair Value on a Recurring Basis The following tables set forth by level within the fair value hierarchy the company's financial assets and liabilities that were accounted for at fair value on a recurring basis as of Jun. 30, 2010 and Dec. 31, 2009. As required by accounting standards for fair value measurements, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The company's assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. For natural gas, interest rate and heating oil swaps, the market approach was used in determining fair value. Recurring Fair Value Measures
Natural gas and heating oil swaps are over-the-counter swap instruments. The primary pricing inputs in determining the fair value of these swaps are the New York Mercantile Exchange (NYMEX) quoted closing prices of exchange-traded instruments. These prices are applied to the notional amounts of active positions to determine the reported fair value.
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Table of ContentsThe primary pricing inputs in determining the fair value of interest rate swaps are LIBOR swap rates as reported by Bloomberg. For each instrument, the projected forward swap rate is used to determine the stream of cash flows over the life of the contract. The cash flows are then discounted using a spot discount rate to determine the fair value. Fair Value of Debt Outstanding At Jun. 30, 2010, total long-term debt had a carrying amount of $3,396.0 million and an estimated fair market value of $3,674.9 million. At Dec. 31, 2009, total long-term debt had a carrying amount of $3,309.7 million and an estimated fair market value of $3,500.3 million. 14. Asset Dispositions Sale of Navega On Mar. 13, 2009, TECO Guatemala sold its 16.5% interest in the Central American fiber optic telecommunications provider, Navega. The sale resulted in a pretax gain of $18.3 million and total proceeds of $29.0 million. 15. Restructuring Charges On Jul. 30, 2009, TECO Energy, Inc. announced organizational changes and a new senior management structure as part of its response to industry changes, economic uncertainties and its commitment to maintain a lean and efficient organization. As a second step in response to these factors, on Aug. 31, 2009, the company decided on a total reduction in force of 229 jobs. The reduction in force was substantially completed by Dec. 31, 2009. In connection with this reduction in force, the company incurred total costs of $26.6 million related to severance and other benefits. For the three months ended Mar. 31, 2010, the remaining $1.5 million of these costs were recognized on the Consolidated Condensed Statements of Income under “Restructuring Charges”. The company’s wholly-owned subsidiary, Tampa Electric Company, incurred $23.1 million of such costs, all of which were recognized in the year ended Dec. 31, 2009. The total cash payments related to these actions were $28.4 million; including $4.9 million for the settlement of pension obligations. As of Mar. 31, 2010, all restructuring charges were paid or settled. Restructuring Charges Incurred
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Table of Contents16. Variable Interest Entities The company formed TCAE to own and construct the Alborada Power Station and the company formed CGESJ to own and construct the San José Power Station. Both power stations are located in Guatemala and both projects obtained long-term power purchase agreements (PPAs) with Empresa Eléctrica de Guatemala, S.A. (EEGSA), a distribution utility in Guatemala. The terms of the two separate PPAs include EEGSA’s right to the full capacity of the plants for 15 years, U.S. dollar based capacity payments, certain terms for providing fuel, and certain other terms including the right to extend the Alborada and San José contracts. Under prior accounting standards for consolidation, management believed that EEGSA was the primary beneficiary of the variable interests in TCAE and CGESJ due to the terms of the PPAs. Accordingly, both entities were deconsolidated as of Jan. 1, 2004. The TCAE deconsolidation resulted in the initial removal of $25.0 million of debt and $15.1 million of net assets from TECO Energy’s Consolidated Balance Sheet. The CGESJ deconsolidation resulted in the initial removal of $65.5 million of debt and $106.6 million of net assets from TECO Energy’s Consolidated Balance Sheet. The results of operations for the two projects were classified as “Income from equity investments” on TECO Energy’s Consolidated Statements of Income since the date of deconsolidation through Dec. 31, 2009. Effective Jan. 1, 2010, the accounting standards for consolidation of VIEs were amended. The most significant amendment was the determination of a VIE’s primary beneficiary. Under the amended standard, the primary beneficiary is the enterprise that has both 1) the power to direct the activities of a VIE that most significantly impact the entity's economic performance and 2) the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. As a result of adopting this amendment, the company reconsolidated both TCAE and CGESJ. The following table summarizes combined income statement information for the TCAE and CGESJ projects for the three months and six months ended Jun. 30, 2010, which were consolidated, and Jun. 30, 2009, which were not consolidated: Summary Results for TCAE and CGESJ
The following table summarizes combined balance sheet information for the TCAE and CGESJ projects for the periods ended Jun. 30, 2010, which is now consolidated, and Dec. 31, 2009, which were not consolidated: Summary Results for TCAE and CGESJ
Tampa Electric Company has entered into multiple PPAs with wholesale energy providers in Florida to ensure the ability to meet customer energy demand and to provide lower cost options in the meeting of this demand. These agreements range in size from 121 MW to 370 MW of available capacity, are with similar entities and contain similar provisions. Because some of these provisions provide for the transfer or sharing of a number of risks inherent in the generation of energy, these agreements meet the definition of being variable interest entities. These risks include: operating and maintenance; regulatory; credit; commodity/fuel; and energy market risk. Tampa Electric Company has reviewed these risks and has determined that the owners of these entities have retained the majority of these risks over the expected life of the underlying generating assets, have the power to direct the most significant activities, the obligation or right to absorb losses or benefits and hence remain the primary beneficiaries. As a result, Tampa Electric Company is not required to consolidate any of these entities. Tampa Electric Company purchased $49.1 million and $56.1 million, and $106.3 million and $98.3 million, under these PPAs for the three months and six months ended Jun. 30, 2010 and 2009, respectively. In one instance Tampa Electric Company’s agreement with the entity for 370 MW of capacity was entered into prior to Dec. 31, 2003, the effective date of these standards. Under the standards, the company is required to make an exhaustive effort to
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Table of Contentsobtain sufficient information to determine if this entity is a VIE and which holder of the variable interests is the primary beneficiary. The owners of this entity are not willing to provide the information necessary to make these determinations, have no obligation to do so and the information is not available publicly. As a result, the company is unable to determine if this entity is a VIE and if so, which variable interest holder, if any, is the primary beneficiary. The company has no obligation to this entity beyond the purchase of capacity; therefore, the maximum exposure for the company is the obligation to pay for such capacity under terms of the PPA at rates that could be unfavorable to the wholesale market. The company purchased $17.6 million and $11.2 million, and $30.3 million and $17.4 million under this PPA for the three months and six months ended Jun. 30, 2010 and 2009, respectively. The company does not provide any material financial or other support to any of the VIEs it is involved with, nor is the company under any obligation to absorb losses associated with these VIEs. Other than the Guatemalan projects previously mentioned, in the normal course of business, our involvement with the remaining VIEs does not affect our Consolidated Condensed Balance Sheets, Statements of Income or Cash Flows. 17. Subsequent Events Stipulation with Intervenors – Tampa Electric In July 2010, Tampa Electric entered into a stipulation with intervenors to resolve all issues related to the 2008 base rate proceedings including the 2010 step increase, as well as the intervenors’ appeal to the Florida Supreme Court. The stipulation is subject to final approval by the FPSC, and a vote on this matter is expected in August 2010. If approved, Tampa Electric Company will make a one-time reduction of $24.0 million to customer bills in 2010. See Note 3 for further discussion. Alborada Power Purchase Agreement Extension In July 2010, TCAE, the owner of the Alborada power station and a subsidiary of TECO Guatemala, executed a document confirming the 5-year extension of a power purchase agreement that was scheduled to expire on Sep. 14, 2010. As a result, the capacity payment for the extension period will be reduced. The company does not anticipate that this capacity payment change will have a significant impact on the recorded goodwill associated with this generation project.
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Table of ContentsTAMPA ELECTRIC COMPANY In the opinion of management, the unaudited consolidated condensed financial statements include all adjustments that are of a recurring nature and necessary to state fairly the financial position of Tampa Electric Company as of Jun. 30, 2010 and Dec. 31, 2009, and the results of operations and cash flows for the periods ended Jun. 30, 2010 and 2009. The results of operations for the three months and six months ended Jun. 30, 2010 are not necessarily indicative of the results that can be expected for the entire fiscal year ending Dec. 31, 2010. References should be made to the explanatory notes affecting the consolidated financial statements contained in Tampa Electric Company’s Annual Report on Form 10-K for the year ended Dec. 31, 2009 and to the notes on pages 36 through 46 of this report. INDEX TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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Table of ContentsConsolidated Condensed Balance Sheets Unaudited
The accompanying notes are an integral part of the consolidated condensed financial statements.
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Table of ContentsTAMPA ELECTRIC COMPANY Consolidated Balance Sheets -continued Unaudited
The accompanying notes are an integral part of the consolidated condensed financial statements.
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Table of ContentsConsolidated Condensed Statements of Income and Comprehensive Income Unaudited
The accompanying notes are an integral part of the consolidated condensed financial statements.
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Table of ContentsTAMPA ELECTRIC COMPANY Consolidated Condensed Statements of Income and Comprehensive Income Unaudited
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