TECO Energy expects solid EPS growth and double-digit net income growth for 2002, provides 2003 outlook
TAMPA, September 23, 2002
TECO Energy’s top management today said the company expects 2002 earnings-per-share to increase over 2001, and that net income is expected to grow by more than 10 percent. TECO Energy’s business outlook for 2003 focuses on continued growth in its Florida operations, optimizing its independent power investments and minimizing potential earnings volatility and external financing needs while maximizing cash flow to support the company’s capital obligations.
Chairman and CEO Robert D. Fagan said, “ TECO Energy is having another good year in 2002 – our third straight year of solid earnings per share growth – despite the general economic downturn and low prices in the energy sector. We told investors two weeks ago that we would accelerate our planning process and provide them with information on our 2003 outlook earlier than usual. Today, we are doing that.”
“We have long described 2003 as ‘transitional’ as our major utility and non-utility generating projects begin commercial operation. The plan we are announcing today eliminates the need for additional financing and virtually removes our cash exposure to merchant power prices for next year,” said Fagan.
“TECO Energy is different from many others in the industry. We have a strong underpinning of proven, earnings-producing assets, including our utilities, transportation and mining operations,” added Fagan.
Key elements in the 2003 plan being presented to TECO Energy’s Board of Directors are: (1) deferral of its Dell and McAdams independent power plants, and other actions to reduce capital expenditures; (2) monetization of certain Section 29 tax credits related to the production of synthetic fuel at TECO Coal and the coal gasification unit at Tampa Electric’s Polk Power Station; (3) sale of its TECO Coalbed Methane gas assets in Alabama, which have 150 billion cubic feet of long-lived, proven reserves; and (4) $250 million of cash from repatriation of cash and non-recourse refinancings on generating facilities in Guatemala and other financial transactions or asset sales.
The combination of the sale and monetization actions is expected to generate more than $400 million, which more than offsets the proceeds previously expected from a non-recourse financing for the Dell, McAdams and Frontera facilities.
“We are monetizing quality non-core assets that have greater value to others than they do to us. For example, synfuel production levels can exceed our ability to utilize the related tax credits, and thus monetizing a portion of these assets enables us to realize additional value for our shareholders,” said Fagan.
Senior Vice President-Finance and CFO Gordon Gillette said, “Our plan for the rest of 2002 and 2003 is focused on maximizing cash flow. Although we have a $200-million debt maturity refinancing that we will undertake this year, our plans call for no incremental new debt in 2003. While we expect the rating agencies to cut our debt ratings, we want to improve our ratings, and rapid execution of this plan would be the first step in this direction. The debt rating agencies have been fully briefed on this plan and view our commitment to it as being very important. Depending on the rating agencies’ actions we may need to do some renegotiations of our existing bank agreements.”
TPS President Richard E. Ludwig said, “Deferring the Dell and McAdams facilities is the best economic choice in the current market conditions. We have had upward pressure on our capital spending plans due to the potential cost overruns that resulted from the Enron bankruptcy and the replacement of NEPCO with SNC Lavalin. This deferral will allow us to complete construction whenever power prices increase to a level commensurate with our investment. When the market is ready for us, we will be ready for the market.”
The company has reduced its projected capital expenditures by $250 million based on the deferrals of Dell and McAdams and other reductions made at the other companies.
“When we review our individual businesses, there are many positives in 2003. We expect continued growth in our Florida operations; we expect that TECO Transport will experience growth as the U.S. economy strengthens; and we expect that higher production levels and monetization of synthetic fuel will improve TECO Coal’s results. Excluding TECO Power Services, we expect net income from TECO Energy’s operating companies to be more than $310 million in 2003,” said Gillette.
“As has historically been the case at TECO Energy, our management and employees are demonstrating remarkable flexibility in response to challenging market conditions,” said Fagan.
2002 SECOND HALF OUTLOOK
- Net income for the second half of 2002 is expected to be 10 to 15 percent higher than 2001. This will offset the effects of the higher number of shares on earnings-per-share from the June equity issuance, bringing expected earning per share results for the second half in line with our growth targets. Overall for 2002, net income growth is expected to push earnings-per-share growth to within a few cents of the original 5 percent growth target.
- These results are expected to be driven by customer growth and normal weather at Tampa Electric and Peoples Gas and increased allowance for funds used during construction (AFUDC) associated with the Gannon to Bayside repowering at Tampa Electric.
- TECO Transport expects improved results in the second half from an improvement in the U.S. economy and some higher northbound river shipments and better prices in the U.S. government grain program. Overall, 2002 results are expected to be below 2001.
- TECO Coal expects to benefit from increased synfuel production and higher steam coal prices than in 2001; the results will reflect lower prices for metallurgical coal in the second half.
- TECO Power Services expects higher results from the sale of ancillary services and power sales to Mexico at the Frontera Power Station in Texas, continued good performance from its other operating plants and increased earnings from construction-related and loan agreements with Panda Energy.
- Cash flow in the second half of 2002 will benefit from the $550-million notes offering completed at Tampa Electric, proceeds expected from the sale of TECO Coalbed Methane and the higher level of cash from operations that normally occurs in the third quarter.
- Capital expenditures in the second half are expected to be $860 million, or $400 million higher than was previously forecast, due to elimination of the previously expected non-recourse financing at TECO Power Services. These capital expenditures include the first $125-million payment on the equity bridge loan for the Union and Gila River power stations and the remaining $265 million required to complete TECO Energy’s equity commitment for these power stations.
- Based on projected net income of $270 to $305 million, earnings-per-share are expected to be between $1.75 to $2.00 per share.
- The low end of the range is based on the company-by-company assumptions outlined below with power margins based on the current forward curves, while the high end of the range assumes moderate improvement in wholesale power prices due to economic dispatch, which means the most efficient units, regardless of ownership, are dispatched first.
- Projections include capital expenditures of $700 million, which includes $250 million at the Florida operations; $400 million for TPS, including $375 million to repay the equity bridge loan and $40 million for all other operating companies combined; and dividend payments of $227 million.
- Cash from operations at the lower end of the earnings-per-share guidance range is expected to be about $575 million, including the effects of higher synfuel production and monetization at TECO Coal. Total cash flow from operations, including cash from the monetization transactions described above and $250 million from other activities, which include the repatriation of cash and non-recourse refinancings on generating facilities in Guatemala, is projected to be more than $1.1 billion.
- No external debt financing needs are projected for 2003.
- The 2003 plan has virtually eliminated any exposure to negative cash variability due to merchant power risk. Next year, most of total cash flow is expected to come from utility operations and non-TPS operations. This is based on the fact that TECO Power Services’ operating projects (Hardee, Hamakua, Alborada and San Jose) all have long-term contracts and Frontera expects to have a significant portion contracted. In addition, our long-standing bank agreements are expected to trap the cumulative positive cash we expect to generate at the Gila River and Union power stations in 2003.
COMPANY OUTLOOK: UTILITIES, TRANSPORTATION AND MINING
- In 2003, Tampa Electric expects that retail energy sales will continue to grow at about 2.5 percent and that allowance for funds used during construction (AFUDC) will continue at about the same level.
- Bayside Units 1 and 2 are expected to enter service in May 2003 and in 2004, respectively. The addition to rate base when this plant enters service is expected to give the company the opportunity to increase earnings without exceeding its allowed return on equity.
- Significant operations and maintenance cost reductions are expected from the reduction in the number of coal-fired units at Gannon Station, the completion of Bayside Unit 1 and other initiatives.
- Excluding the effects of monetizing the gasifier, net income is expected to increase 4 percent.
- The effect of monetizing the gasifier will reduce Tampa Electric’s net income $10 million but will be neutral to TECO Energy’s earnings. Importantly, the gasifier transaction will make Tampa Electric self-funding in 2003, meaning it will eliminate the need for an equity infusion from TECO Energy.
- In 2003, Peoples Gas expects to continue to add customers at a 4 to 5 percent rate.
- In June 2002, Peoples Gas filed for a $22.6 million permanent base rate increase, which if approved would be effective in March 2003. Given this rate increase, Peoples Gas net income could grow by as much as 35 percent in 2003.
- Based on a modest economic recovery in 2003, TECO Transport expects growth of about 2 percent. These results are affected by increased allocated interest expense.
- Operating results are expected to be driven by increased volumes through TECO Bulk Terminal in Louisiana and northbound volume on TECO Barge Line, and continued strength in the government grain programs and new cargo opportunities at TECO Ocean Shipping.
- In 2003, results are expected to be driven by increased synthetic fuel production. The company expects to produce more than 5 million tons of synthetic fuel next year and anticipates monetizing a material amount of that production, which will provide significant positive cash flow.
- TECO Coal also expects to produce about 4 million tons of conventional steam and metallurgical coal in 2003.
- Based on current market estimates, the 2003 plan assumes coal prices that are lower than those achieved in 2002.
- The increased synfuel production is expected to more than offset the impact of lower coal prices and net income is expected to rise more than 15 percent in 2003.
COMPANY OUTLOOK: INDEPENDENT POWER
In 2003, TECO Power Services results will be driven by the phased commercial operation of the Union and Gila River facilities. The company expects to continue putting contracts in place for portions of the output of its Arizona, Texas and the Entergy region projects, which would reduce potential volatility in earnings and cash flow for these projects in 2003, with the goal of having at least 40 percent of its combined merchant output (Union, Gila River and Frontera power stations) hedged by the end of 2002. The portion of output that has been sold forward for 2003 has been at pre-tax cash flow-positive prices at the projects.
The Gila River Power Station plans to compete to serve the load, which will include transmission capacity, that will be put up for bid in March 2003 under Arizona’s competitive bidding process. In addition, TPS has or has applied for firm transmission service for more than 1,800 megawatts of capacity, which will ensure power can move to customers.
Union Power Station expects to secure short-term transmission capacity, as is customary, for sales within the Entergy region, and it is currently pursuing firm transmission options for sales outside of the region.
Operating Projects – TPS’ Hardee Power Station in Florida, Hamakua Power Station in Hawaii and the Alborada and San Jose facilities in Guatemala are selling power under long-term contracts. Commonwealth Chesapeake Power Station, a peaking facility in Virginia, has sold capacity on a forward basis and is expected to receive capacity credit payments in addition to energy payments, as it has in the past; these payments are a function of the Pennsylvania-New Jersey-Maryland market. The contracted portion of the TPS portfolio is expected to deliver the performance that it has for the past several years. Discussions are underway for a 2003 contract on the Frontera Power Station in Texas. These facilities represent 30 percent of its total portfolio that is under contract for 2003, thereby significantly reducing the company’s merchant exposure.
Other Holdings – TPS’ position in the Odessa and Guadalupe power stations in Texas is currently in the form of a loan to Panda Energy International through the end of 2002, at which time Panda Energy will either repay the loans or the loans will convert to an equity ownership in these facilities. TPS is evaluating various options regarding its position in these projects going forward.
Assumptions for 2003 -- The 2003 plan includes an after-tax loss of about $30 million at TPS. Assumptions include a relatively low capacity factor, supported by the forward curve, and a premium for physical dispatchability and ancillary services for the uncontracted portion of the Frontera Power Station and the Union and Gila River facilities. The plan also assumes the current 5 or 6 by 16 forward curve, which indicates spark spreads of approximately $9 per megawatt hour in Arizona; less than $4 per megawatt hour in Texas; and less than $1 per megawatt hour in Entergy.
Based on our current estimates of the dispatch profile for each facility, the effective spark spread embedded in the earnings guidance is less than $14 per megawatt hour at the Gila River Power Station, less than $4 per megawatt hour at the Frontera Power Station and more than $4 per megawatt at the Union Power Station
With the higher power prices that would result from economic dispatch results from TPS results would be a less than a $10 million after-tax loss.
Note: This press release contains forward-looking statements, which are subject to the inherent uncertainties in predicting future results and conditions. These forward-looking statements include references to our anticipated results of operations, growth rates, capital investments, financing requirements, project completion dates, future transactions and other plans. Certain factors that could cause actual results to differ materially from those projected in these forward-looking statements include the following: energy price changes affecting TPS’ merchant plants; TPS’ ability to sell the output of the merchant plants operating or under construction at a premium to the forward curve prices and to obtain power contracts to reduce earnings volatility; TPS’ ability to successfully resolve its dispute and enter into a service contract with ERCOT; any unanticipated need for additional equity capital that might results from lower than expected cash flow or higher than projected capital requirements; TECO Energy’s ability to successfully complete the monetization of its synthetic fuel and gasification facilities, the sale of gas properties and other financial transactions in its new business plan; and TECO Energy’s ability to maintain credit ratings sufficient to avoid posting letters of credit relating to its construction loans and to avoid providing additional assurances to counterparties. Others factors include: general economic conditions, particularly those in Tampa Electric’s service area affecting energy sales; weather variations affecting energy sales and operating costs; potential competitive changes in the electric and gas industries, particularly in the area of retail competition; regulatory actions affecting Tampa Electric, Peoples Gas System or TECO Power Services; commodity price changes affecting the competitive positions of Tampa Electric and Peoples Gas System, as well as the margins at TECO Coalbed Methane and TECO Coal; changes in and compliance with environmental regulations that may impose additional costs or curtail some activities; TPS’ ability to successfully construct, finance and operate its projects on schedule and within budget; the ability of TECO Energy’s subsidiaries to operate equipment without undue accidents, breakdowns or failures; interest rates, credit ratings and other factors that could impact TECO Energy’s ability to obtain access to sufficient capital on satisfactory terms; and TECO Coal’s ability to successfully operate its synthetic fuel production facilities in a manner qualifying for Section 29 federal income tax credits, which could be impacted by changes in law, regulation or administration. Some of these factors and others are discussed more fully under “Investment Considerations” in the company’s Annual Report on Form 10-K for the year ended December 31, 2001, and in the company’s Registration Statement on Form S-3 (Registration No. 333-83958).