TECO Energy reports fourth quarter results
TAMPA, February 9, 2004
Results Driven by Exit From Merchant Plants and Related Impairment Charges
TECO Energy, Inc. (NYSE:TE) today reported a fourth-quarter loss of $825.2 million, compared with net income of $50.1 million in the fourth quarter of 2002. The loss on a per-share basis was $4.39, compared with earnings per share of $0.29 for the same period in 2002. The fourth-quarter loss from continuing operations was $38.6 million, compared with net income from continuing operations of $26.1 million for the same period in 2002. On a per-share basis, the loss from continuing operations was $0.20 for the quarter, compared with earnings-per-share of $0.15 in the 2002 period. Discontinued operations in the quarter reflect the results from the Union and Gila power stations, including valuation adjustments which resulted in a write-off of the full equity investment in the plants taken in the fourth quarter, as well as results from TECO Gas Services, the business of which was sold, and Prior Energy, which is in the process of being sold. The number of common shares outstanding was 10 percent higher for the quarter than for the same period in 2002.
Results for the quarter were driven by a $762.0-million after-tax valuation adjustment for previous investments in the Union and Gila River power stations which includes the adjustment to the asset values, the expensing of a major portion of the project companies’ interest rate hedge and a valuation allowance for certain state tax benefits. The results for the Union and Gila River projects are now reported as discontinued operations. The company’s decision to exit ownership of these two power projects was discussed in a release issued on Feb. 5, 2003.
TECO Energy Chairman and CEO Robert Fagan said, “Last Thursday we announced a dramatic step to reduce risk and uncertainty, and our financial results reflect that step. While the write-offs and the financial performance of the Union and Gila River plants resulted in large losses for both the quarter and the year, our decision to exit these two plants will make our results more predictable as we move forward, focused on our core Florida utility operations.”
Fagan went on to say, “We are making progress on our plan to transfer the ownership of these plants to the lending bank group. This is not a simple process, but successful completion of this transaction will be a major focus for us in 2004.”
Financial results for the quarter also included:
- A $22.2-million after-tax write-off of steam turbines and project development costs for cancelled independent power projects;
- Recognition of $21.5 million of the previously deferred $28.5 million Section 29 tax credits related to the production of synthetic fuel which resulted in a $7.0 million charge for tax credits at TECO Coal that could not be recognized due to taxable income limitations;
- A $20.7-million after-tax adjustment at TECO Solutions for goodwill impairments under Financial Accounting Standard (FAS) 142 Goodwill and Other Intangible Assets and project development cost write-offs at the energy services companies;
- An $8.3-million after-tax restructuring charge for the corporate realignment to focus on the core utility operations;
- A $2.7-million negative valuation adjustment to certain foreign tax credits; and
- A $3.2-million after-tax charge associated with the accounting treatment of the Hamakua Power Station required under FIN 46 and $0.8 million of additional costs associated with the TMDP arbitration reserve for the Commonwealth Chesapeake Power Station.
The year-to-date loss was $909.4 million, compared with net income of $330.1 million in 2002. The loss on a per-share basis was $5.05, compared to earnings of $2.15 per share in 2002. The year-to-date loss from continuing operations was $58.3 million compared with net income from continuing operations of $268.1 million in 2002. The loss on a per-share basis was $0.32, compared to earnings-per-share of $1.75 in 2002. Discontinued operations which include the Union and Gila River power stations, TECO Coalbed Methane, Hardee Power Partners, Prior Energy and TECO Gas Services, resulted in a loss for the year of $846.8 million, or a loss of $4.71 on a per-share basis, compared to net income of $62.0 million or $0.40 on a per-share basis in 2002. Average shares outstanding for the year were 17 percent higher than for the same period in 2002.
In addition to the fourth-quarter factors outlined above, year-to-date results also include:
- An after-tax charge of $6.9 million from the corporate restructuring announced September 2;
- A $25.9-million after-tax charge associated with the recognition of a reserve for an arbitration award against a TECO Wholesale Generation (formerly TECO Power Services) subsidiary, TMDP, related to its indirect ownership interest of the Commonwealth Chesapeake Power Station;
- A $4.3-million after-tax charge for the cumulative effect of accounting changes to reflect the implementation of FAS 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, and the adoption of FAS 143, Accounting for Asset Retirement Obligations;
- After-tax charges of $94.7-million for accounting charges related to the Panda partnership termination and resulting consolidation of Panda Energy’s interest in the Union and Gila River power stations in the second quarter which is now included in discontinued operations;
- After-tax charges of $61.2-million for goodwill impairments required under FAS 142, for the Frontera and Commonwealth Chesapeake power stations in the second quarter;
- A $64.2-million after-tax write-off in the first quarter related to turbine purchase cancellations;
- A $34.6-million after-tax gain on the sale of the Hardee Power Station; and
- A $23.1-million after-tax gain from discontinued operations, primarily from the completion of the sale of TECO Coalbed Methane in the first quarter.
Fourth-quarter net income from continuing operations, excluding the charges identified in the following table, was $26.3 million, compared to $59.8 million for the 2002 period. In 2003, net income from continuing operations, excluding charges, was $164.8 million, compared with $305.7 million for 2002.
The table below reconciles quarterly and year-to-date net income after elimination of the charges referred to above. Management believes that this non-GAAP presentation provides useful supplemental information by providing a measure that is more closely related to the company’s ongoing operations.
Net Income Reconciliation:
Three months ended
Twelve months ended
GAAP net income (loss)
Add change in accounting
Exclude discontinued operations
GAAP net income (loss) from continuing operations
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Add unutilized tax credits
Add TWG cancelled project write-offs
Add TECO Solutions valuation
Add corporate restructuring costs
Add TMDP arbitration reserve
Add 2002 debt extinguishment costs
Add Hamakua FIN 46 accounting
Add 2002 ECKG valuation adjustment
Add FAS 142 adjustments
Add turbine write-offs
Non-GAAP net income from continuing operations (1)( 2)
(1) Excludes adoption of FAS 143, FAS 142 adjustments and items noted in table above.
(2) A non-GAAP financial measure is a numerical measure of historical or future financial performance, financial position or cash flow that includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure GAAP so calculated and presented.
Discontinued operations for the year include the operational losses and charges for the Union and Gila River power stations; a partial year of operations and the sale of Hardee Power Partners and TECO Gas Services, the gain on the final installment for the sale of the coalbed methane gas production assets in the first quarter, and a full year of operations at Prior Energy.
The fourth-quarter loss from discontinued operations was $786.6 million, reflecting the $762.0-million in after-tax impairment charges for the Union and Gila River power stations and their operating losses partially offset by the operating results at Prior Energy. The year-to-date loss from discontinued operations of $846.8 million reflects the results from the Union and Gila River power plants, partially offset by the $34.6-million after-tax gain on the Hardee Power Partners sale, net income of $5.0 million from Prior Energy and TECO Gas Services and a $23.5-million after-tax gain on the final installment of the TECO Coalbed Methane sale received in January 2003.
As part of its renewed focus on its utility operations, TECO Energy has revised its internal reporting for management and decision-making purposes. It is now focused on the results and performance of its unregulated power investments as two separate components—merchant and non-merchant. These investments were formerly reported together with the TECO Power Services (TPS) segment. Going forward the TPS segment will be replaced by TECO Wholesale Generation (TWG) which will include the results of operations for the remaining merchant facilities including Frontera, Commonwealth Chesapeake, Dell and McAdams, as well as the equity investment in the Odessa and Guadelupe power plants or TIE plants, and TECO EnergySource (TES), the energy marketing operation for the merchant plants. The non-merchant component of the former TPS segment is comprised of the interests in the Hamakua Power Station in Hawaii and the Guatemalan operations which includes the San José and Alborada power stations and the company’s minority interest in the Guatemalan distribution utility EEGSA. The non-merchant results are now included with Other Unregulated Companies.
Results for each unregulated business segment include internally allocated interest expenses. Interest is not, however, allocated to discontinued operations but remains at the TECO Energy parent level.
Ended Dec. 31
Ended Dec. 31
Net Income (loss) Summary
Peoples Gas System
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TECO Wholesale Generation
Other Unregulated Companies
Net income from continuing operations before cumulative effect of an accounting change
Cumulative effect of an accounting change
Total net income (loss)
1) Includes the effects of charges related to turbine purchase cancellations in the first quarter.
2) Excludes charges related to the adoption of FAS 143.
3) Includes the effects of the deferred tax credit recognition.
4) Interest expense that was previously internally allocated to the Union and Gila River power stations is now reflected as a TECO Energy parent company expense. This is $7.8 million and $25.5 million for the quarter and year-to-date periods, respectively.
Tampa Electric’s net income for the fourth quarter was $15.1 million, compared with $27.3 million for the same period in 2002, due primarily to a $5.1 million after-tax charge to reflect operations and maintenance expenses related to the Gannon Station shutdown that were disallowed by the Florida Public Service Commission in the November 2003 fuel adjustment hearings; lower wholesale power sales due to the expiration of the contract with Hardee Power Partners on Dec. 31, 2002; lower earnings from the equity component of AFUDC (which represents allowed equity cost capitalized to construction costs); higher depreciation and interest expense; and lower operations and maintenance expenses. The lower AFUDC equity earnings were driven primarily by the Gannon/Bayside repowering project, for which AFUDC equity earnings decreased to $4.1 million for the quarter, down from $8.0 million for the same period in 2002, reflecting the commercial operation of Bayside Unit 1 in April 2003. Depreciation expense increased reflecting accelerated depreciation on the Gannon coal assets which ceased operation in 2003; the April in-service of Bayside Unit 1; and normal electric plant additions to support customer growth, partially offset by the retirement of the Hookers Point and Dinner Lake power stations. Lower operations and maintenance expenses for the quarter reflected lower generating unit expenses. Tampa Electric recorded a $4.7-million after-tax charge in the fourth quarter for costs associated with the corporate restructuring announced on Sept. 2, 2003.
Retail energy sales were unchanged from last year, as average customer growth of 2.5 percent was more than offset by decreased sales to industrial phosphate customers. Total degree-days in the quarter were slightly above 2002 levels and 3.1 percent above normal.
Tampa Electric’s year-to-date net income, excluding the $48.9-million charge recorded in the first quarter related to turbine purchase cancellations, was $147.8 million, compared to $171.8 million in 2002. The equity component of AFUDC decreased to $19.8 million, down from $25.0 million for the same period in 2002, reflecting the commercial operation of Bayside Unit 1 in April 2003. Depreciation expense for the year increased by $20.7 million, and non-fuel operations and maintenance expense decreased by $27.3 million due to lower expenditures on generating units. Results for the year include a $6.1 million in after-tax restructuring charges, compared to a $10.3 million after-tax charge related to staffing reduction programs in 2002, and a $5.1 million after-tax disallowance of Gannon Station operations and maintenance expenses in the fourth quarter. Interest expense increased $31 million, reflecting higher debt balances associated with the completion of Tampa Electric’s major construction program. Tampa Electric’s year-to-date net income, including the turbine purchase cancellation charge, was $98.9 million.
These results also reflect average customer growth of 2.5 percent and 1.8 percent higher retail energy sales. Total heating and cooling degree-days were 4.4 percent above normal due to colder-than-normal winter weather, but 1.8 percent lower than 2002, due to mild summer weather in 2003.
Peoples Gas System reported net income of $4.9 million for the quarter, compared with $6.9 million in the same period in 2002. Quarterly results reflected customer growth of 5.2 percent, offset by a $1.5-million after-tax restructuring charge. Higher gas prices resulted in decreased sales of low-margin transportation service for interruptible customers and electric power generators. These customers are sensitive to the commodity price of gas, and many have the ability to switch to alternative fuels or to simply alter consumption patterns.
Year-to-date net income was $24.5 million, compared with $24.2 million for the same period in 2002. Customer growth of 5.2 percent, favorable winter weather in the first quarter and a base rate increase effective in January 2003 contributed to these results. Volumes were lower for the lower-margin transportation service for interruptible customers and electric power generators, primarily due to higher gas prices.
TECO Wholesale Generation (formerly TECO Power Services)
TECO Wholesale Generation’s (TWG) portfolio has been redefined for segment reporting purposes as discussed previously.
TWG recorded a fourth-quarter loss of $27.5 million, compared with a loss of $8.2 million for the same period in 2002. The lower results reflect losses at the Frontera Station, which no longer has a reliability-must-run contract as it did in the fourth quarter of 2002, and the end of interest income from the loans to Panda related to the TIE projects. Fourth quarter results in 2002 included a $5.8-million after-tax charge related to a valuation adjustment for the Czech Republic assets, which were sold in early 2003. Interest expense also increased due to the cessation of capitalized interest on the suspended Dell and McAdams power stations.
TWG recorded a year-to-date loss of $147.6 million, compared with a loss of $7.9 million for the same period in 2002. The loss reflects the factors previously discussed for the quarter as well as a $25.9-million after-tax charge associated with the recognition of a reserve for an arbitration award against TMDP, the indirect owner of the Commonwealth Chesapeake Power Station; and a $61.2-million after-tax charge for goodwill impairments required under FAS 142, Goodwill and Other Intangible Assets, for the Frontera and Commonwealth Chesapeake power stations.
TECO Transport recorded net income of $2.9 million in the fourth quarter, compared with $5.2 million for the same period last year. These results reflect lower Tampa Electric volumes as a result of the Bayside repowering, as well as higher labor and repair costs, a $1.0-million after-tax restructuring charge at TECO Bulk Terminal and a $1.5-million after-tax gain on the disposition of scrap river barges and oceangoing equipment no longer in service.
Year-to-date net income was $15.3 million, excluding a $0.8-million after-tax charge due to the adoption of FAS 143, compared to $21.0 million for the same period in 2002. Year-to-date results were driven by the same factors as in the fourth quarter, weak pricing and lower northbound river shipments. Year-to-date results include an after-tax gain of $3.5 million on the disposition of equipment.
TECO Coal achieved fourth-quarter net income of $12.2 million, compared to $17.6 million reported in the same period in 2002. Results for the quarter were driven primarily by the write-off of $7.0 million of Section 29 tax credits and lower volumes for conventional metallurgical and steam coals, which were partially offset by the production and sales of higher volumes of synthetic fuel. The write-off of tax credits is due to production of synfuel that was in excess of the company’s level of taxable income, given the rules that require a taxpayer have sufficient taxable income to use the credits. These results also reflect the effect of the sale of the 49 percent interest in the synfuel facilities to a third party.
Year-to-date net income was $77.1 million, excluding a $0.3-million after-tax charge due to the adoption of FAS 143, compared with $76.4 million reported in 2002. Results were driven primarily by lower volumes and prices for conventional coals and higher mining costs due to the use of marginal coals for the production of synfuel, which were more than offset by higher volumes of synthetic fuel and the sale of a 49 percent interest in the synfuel production facilities.
Other Unregulated Companies
TECO Energy’s other unregulated companies, which now include the Guatemalan and Hamakua non-merchant power investments of TWG, recorded a loss of $46.5 million for the fourth quarter, primarily due to valuation adjustments and goodwill write-offs at the energy services companies, compared to a net loss of $2.3 million for the same period in 2002. The year-to-date loss was $49.0 million, compared with net income of $18.8 million for the same period in 2002.
The non-merchant portfolio recorded a fourth quarter net loss of $23.9 million, compared to a net loss of $4.6 million for the same period in 2002. The non-merchant results included continued strong earnings at the Guatemalan distribution operations, more than offset by the effects of $28.6 million of charges primarily for the end of project development at TWG, a planned outage at the San José Station and an accounting adjustment at the Hamakua Plant. The year-to-date loss was $21.6 million, compared to net income of $16.2 million for the same period in 2002. The non-merchant results included continued strong earnings at the Guatemalan operations, more than offset by the effects of $46.3 million of charges for items such as restructuring, project cancellation charges and turbine purchase cancellations, previously discussed. The non-merchant operations net income was $4.7 million and $24.7 million for 2003’s fourth quarter and year-to-date periods, respectively, excluding all charges. Non-merchant results include internally allocated interest which was $2.3 million and $8.2 million for 2003’s fourth quarter and year-to-date periods, respectively.
Non-operating Items Affecting Net Income
Results for the quarter and year-to-date periods include the non-operating items and charges detailed above. The reversal of $21.5 million of previously deferred Section 29 tax credits is reported at the parent company for segment reporting purposes.
Interest expense increased due to decreased interest expense credit for AFUDC borrowed funds at Tampa Electric; cessation of capitalizing interest on the Dell and McAdams power stations where construction was suspended at the end of 2002; and higher overall levels of debt in support of TECO Energy’s capital investment program. Interest expense was reduced in the fourth quarter in 2002 by a refund and a reversal of interest expense related to prior-year tax deficiencies previously recorded at Tampa Electric and TECO Energy based on an Internal Revenue Service tax settlement.
TECO Energy consolidated cash and cash equivalents, excluding all restricted cash, totaled $108.2 million at Dec. 31, 2003. Restricted cash of $51.4 million includes $15.4 million held in escrow related to the sale of the 49 percent interest in the synthetic coal production facilities due to TECO Energy’s current credit rating and cash held in escrow pending completion of certain conditions on the Hardee Power Partners sale. The final $29 million of proceeds from the sale of Hardee Power Partners is expected to be released from escrow in February.
In addition, at Dec. 31, 2003, availability under bank credit facilities totaled $590.1 million, net of letters of credit of $109.9 million outstanding under these facilities. Therefore, total liquidity, cash plus credit facilities, totaled $698.3 million, including $280.6 million at Tampa Electric, at the end of the fourth quarter.
TECO Energy is a diversified energy-related holding company headquartered in Tampa. Its principal businesses are Tampa Electric, Peoples Gas System, TECO Wholesale Generation, TECO Transport, TECO Coal and TECO Solutions.
Note: This press release may be deemed to contain forward-looking statements, which are subject to the inherent uncertainties in predicting future results and conditions. Certain factors that could impact actual results include the company’s ability to successfully transfer its ownership in the Union and Gila River power stations. Additional information is contained under “Investment Considerations” in the company’s Annual Report on Form 10-K for the period ended December 31, 2002 and under “Risk Factors” in the company’s prospectus supplement filed with the Securities and Exchange Commission on September 11, 2003.
(millions except per share amounts)
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Net income (loss) from discontinued operations
Total net income (loss) before cumulative effect of change in accounting principle
Cumulative effect of change in accounting principle
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Earnings (loss) per share from cumulative effect of change in accounting principle – basic
Earnings (loss) per share – basic
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Total earnings (loss) per share – basic
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