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News Release

TECO Energy reports second quarter results

TAMPA, July 29, 2004

Results include $99 million after-tax non-cash write-off on sale of TIE interest

TECO Energy, Inc. (NYSE:TE) today reported a second quarter loss of $108.2 million, compared with a loss of $101.9 million for the same period in 2003. The loss on a per-share basis was $0.57, compared with a loss of $0.58 per share in the 2003 period. The number of common shares outstanding was 7 percent higher in the 2004 quarter than for the same period in 2003. The year-to-date loss was $105.7 million, compared with a loss of $99.2 million for the same period in 2003. The loss on a per-share basis was $0.56 for both the 2004 and 2003 periods. Shares outstanding for the first six months of 2004 were 7 percent higher than for the same period in 2003.

 

TECO Energy Chairman and CEO Sherrill Hudson said, “Although the charges related to the announced sale of our interest in the Texas Independent Energy (TIE) project hurt our earnings for the quarter, we believe that our strategy to reduce our merchant exposure will benefit investors over the longer term. The positive news in the quarter includes the continued strong Florida energy market and the good customer growth in our utility operations, and our coal company is benefiting from higher coal prices in its metallurgical coal contracts.

“We have also been active on the financial front. In early July, we completed the early replacement of our TECO Energy bank credit facility, which is sized to meet our anticipated needs over the next three years, and launched the early exchange offer for our equity units,” Hudson noted.

 

Charges and Gains:

 

Second quarter results were driven primarily by a $98.7 million after-tax write-off of the investment in the TIE project due to the previously announced agreement to sell TECO Energy’s indirect ownership interest; a $6.7 million after-tax charge associated with the extinguishment of debt following the refinancing of the San José Power Station in Guatemala; and a $19.3 million book accrual for income taxes related to the repatriation of cash from Guatemala. Results in 2003 included $61.2 million of goodwill impairments required under FAS 142, Goodwill and Other Intangible Assets , associated with the Frontera Power Station in Texas and the Commonwealth Chesapeake Power Station in Virginia, and $94.7 million of after-tax accounting charges related to the partnership termination and resulting consolidation of the Union and Gila River power stations.

 

In addition to the second quarter charges and gains, year-to-date results also include first-quarter charges and gains for after-tax valuation adjustments of $3.4 million at TECO Solutions and $0.8 million at TECO Transport, and the $10.6 million after-tax gain from the sale of TECO Energy’s interest in its propane business. Results in 2003 included the second quarter charges, as well as first-quarter after-tax charges of $48.9 million for turbine purchase cancellations at Tampa Electric, $15.3 million for non-merchant turbine purchase cancellations (which were reflected in the Other Unregulated Companies segment), the $22.7 million after-tax gain on the sale of the coalbed methane gas production assets and $1.1 million for the cumulative effect of an accounting change to reflect the adoption of FAS 143, Accounting for Asset Retirement Obligations .

 

Non-GAAP Earnings

Second-quarter non-GAAP net income from continuing operations, excluding the effects of gains and charges, was $42.1 million, compared with $63.2 million in 2003. Year-to-date non-GAAP net income from continuing operations, excluding the effects of gains and charges, was $64.4 million, compared with $104.3 million in 2003.

The table below reconciles net income after elimination of the effects of gains and charges. 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:

($ millions)

3-months ended

June 30

6-months ended

June 30

12-months ended

June 30


2004

2003

2004

2003

2004

2003

GAAP net income (loss)

($108.2)

($101.9)

($105.7)

($99.2)

($915.9)

$69.8

Add change in accounting

--

--

--

1.1

3.2

1.1

Exclude discontinued operations

(25.7)

(106.9)

(51.9)

(82.8)

(859.4)

(48.9)

GAAP net income (loss) from continuing operations

($82.5)

$5.0

($53.8)

($15.3)

($53.3)

$119.8

Add debt extinguishment cost

6.7(2)

--

6.7(2)

--

6.7(2)

20.9

Add TIE equity write-off

98.7

--

98.7

--

98.7

--

Add offshore cash repatriation taxes

19.3

--

19.3

--

19.3

2.8

Add Solutions valuation adjustments

1.5

--

4.9

--

12.8

--

Add Transport valuation adjustment

--

--

0.8

--

0.8

--

Add corporate restructuring costs

--

--

--

--

15.2

10.9

Add TMDP arbitration reserve

--

--

--

--

26.7

--

Add goodwill write-offs

--

61.2(3)

--

61.2(3)

16.0(4)

61.2(3)

Add turbine purchase cancellations

--

--

--

64.2

13.2

64.2

Add TWG cancelled project write-offs

--

--

--

--

9.0

--

Add unutilized tax credits

--

--

--

--

9.7

--

Add ECKG valuation adjustment

--

--

--

--

--

5.8

Subtract Hardee gain on sale

--

--

--

--

(34.6)

--

Subtract Hardee operating results

--

(3.0)

--

(5.8)

(3.0)

(10.8)

Subtract gain on propane business sale

(1.6)

--

(12.2)

--

(12.2)

--

Non-GAAP net income from continuing operations (1)

$42.1

$63.2

$64.4

$104.3

$125.0

$274.8

(1) 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 so calculated and presented.

 

(2) San José debt extinguishment

 

(3) Goodwill write-offs for Frontera and Commonwealth Chesapeake power stations

 

(4) Goodwill write-off for TECO Solutions

 

Operating Results:

Segment Information(1)

 

Three Months

 

Ended Jun. 30

Six Months

 

Ended Jun. 30

 

Twelve Months

 

Ended Jun. 30

 

(in millions)

 

Net Income (loss) Summary

 

2004

 

2003

 

2004

 

2003

 

2004

 

2003

 

Tampa Electric

 

$41.9

$39.5

$65.8

$30.5

$134.2

$120.9

Peoples Gas System

 

5.9

4.8

18.7

16.7

26.5

26.7

Total regulated

47.8

44.3

84.5

47.2

160.7

147.6

TWG Merchant

 

(110.7)

 

(72.3)

(129.4)

 

(84.1)

(192.9)

 

(82.3)

TECO Transport

 

1.9

5.2

3.0

9.8

8.6

19.6

TECO Coal

 

17.7

20.8

33.1

46.5

63.7

85.9

Other Unregulated Companies

 

(17.9)

 

4.1

0.8

 

1.9

(6.7)

10.5

Parent/other

 

(21.3)

2.9

 

(45.8)

 

(36.6)

 

(86.7)

 

(61.5)

 

Total unregulated

 

(130.3)

 

(39.3)

(138.3)

 

(62.5)

(214.0)

 

(27.8)

Net income from continuing operations before cumulative effect of an accounting change

 

(82.5)

 

5.0

(53.8)

 

(15.3)

(53.3)

119.8

Discontinued Operations

 

(25.7)

(106.9)

(51.9)

(82.8)

(859.4)

(48.9)

Cumulative effect of an accounting change

 

--

 

--

 

--

 

(1.1)

(3.2)

 

(1.1)

Total net income (loss)

($108.2)

 

($101.9)

 

($105.7)

 

($99.2)

($915.9)

$69.8

1) Segment information includes the effects of all charges and gains.

 

Tampa Electric

 

Tampa Electric’s net income for the second quarter was $41.9 million, compared with $39.5 million for the same period in 2003. There was no equity Allowance for Funds Used During Construction income (AFUDC, which represents allowed equity cost capitalized to construction costs) recorded in the quarter, compared to $4.1 million for the same period in 2003, reflecting the commercial operation of Bayside Unit 2 in January 2004. D epreciation expense decreased in the 2004 period, reflecting the end of accelerated depreciation on the Gannon coal assets; results in the same period in 2003 included $13 million pretax of accelerated depreciation expense. Interest expense decreased due to lower long-term debt balances after the first quarter repayment of $75 million of first mortgage bonds. Operations and maintenance expense, excluding fuel and purchased power, was essentially unchanged in the quarter compared to 2003. Savings from the retirement of the coal-fired Gannon Station were offset by higher pension, benefits and insurance-related costs.

 

R etail energy sales decreased 0.7 percent in the quarter, as a verage c ustomer growth of 2.5 percent was offset by milder weather early in the quarter. Cooling degree days in the quarter were 2 percent below normal and 14 percent below 2003, when cooling degree days were significantly above normal due to unusually hot weather in April of 2003.

Tampa Electric’s year-to-date net income was $65.8 million, compared to $79.4 million, excluding the $48.9 million charge related to turbine purchase cancellations in 2003. Equity AFUDC decreased to $0.7 million, from $11.7 million for the same period in 2003. Tampa Electric’s 2003 year-to-date net income, including the turbine purchase cancellation charge, was $30.5 million.

 

Year-to-date results also reflect average customer growth of 2.6 percent and retail energy sales that were 0.2 percent higher than last year. Total degree days for the year-to-date period were more than 3 percent below normal and almost 13 percent below 2003, when total degree days were significantly above normal.

Peoples Gas

 

Peoples Gas System reported net income of $5.9 million for the quarter, compared with $4.8 million in the same period in 2003. Quarterly results reflected favorable late spring weather and customer growth of 5.6 percent, partially offset by increased operations and maintenance costs and lower volumes for the low-margin transportation service for electric power generators due to higher gas prices. Year-to-date net income was $18.7 million, compared with $16.7 million for the same period in 2003. Customer growth of 5.3 percent and favorable winter weather in the first quarter contributed to these results.

 

TECO Transport

 

TECO Transport recorded net income of $1.9 million in the second quarter, compared with $5.2 million in the same period last year. Results for the quarter and year-to-date periods reflect the impact of lower Tampa Electric volumes, as a result of the Bayside repowering, and higher operating costs, which were only partially offset by improved northbound river shipments and increased export coal volume at the river terminal. Results in 2003 included a $1.5 million after-tax gain on the disposition of ocean-going equipment no longer used by TECO Ocean Shipping.

Year-to-date net income was $3.8 million, excluding a $0.8 million first-quarter valuation adjustment, compared to $9.8 million, excluding a $0.8 million charge due to the adoption of FAS 143, for the same period in 2003. Year-to-date results were driven by the lower Tampa Electric volumes, higher operating expenses, higher fuel costs and unusual operating conditions in the first quarter due to highe- than-normal shipyard activity and a five-day closing of the Mississippi River.

Volumes transported for Tampa Electric declined more than one million tons in the first six months of 2004 but are expected to be at levels comparable to 2003 in the second half of 2004. The impact of higher fuel prices is expected to be partially offset by fuel adjustment factors, which are contained in many of TECO Transport’s agreements, although the fuel adjustments lag actual fuel cost expenses.

 

TECO Coal

 

TECO Coal achieved second-quarter net income of $17.7 million, compared to $20.8 million in the same period in 2003. Results in the second quarter of both 2004 and 2003 reflect effective third-party ownership interests in TECO Coal’s synthetic fuel production facilities of more than 90 percent; however, synthetic fuel volumes were slightly lower in 2004 due to unavailability of rail transportation. TECO Coal’s results in 2004 reflect no Section 29 tax credits due to the third-party ownership and TECO Energy’s expected tax position in 2004, which is expected to be driven by the tax losses expected from the transfer of the Union and Gila River projects to the lending banks.

Year-to-date net income was $33.1 million, compared to $46.5 million excluding a $0.3 million after-tax charge due to the adoption of FAS 143, in 2003. Year-to-date results in 2004 reflect an effective third-party ownership interest in TECO Coal’s synthetic fuel production facilities of more than 90 percent, compared to 49 percent in 2003. Results also reflect lower volumes of conventional metallurgical and steam coals in the first quarter, higher mining costs and costs associated with the use of marginal coals for the production of synfuel, partially offset by higher volumes of synthetic fuel and higher coal prices. Year-to-date results in 2003 included $36.2 million of Section 29 tax credits.

 

Other Unregulated Companies

 

TECO Energy’s other unregulated companies recorded a loss of $17.9 million for the second quarter, compared to net income of $4.1 million for the same period in 2003. Results for the quarter were driven by the $6.7 million after-tax charge associated with the debt extinguishment related to the refinancing of the debt associated with the San José Power Station in Guatemala and the $19.3 million provision for income taxes due to the repatriation of cash from Guatemala following the financing. Results also include a $1.5 million after-tax asset valuation adjustment at TECO Solutions related to a district cooling plant in Tampa, which was essentially offset by a $1.6 million after-tax gain on the sale of the remaining interest in the propane business , the majority of which was sold in the first quarter. Results in 2003 include net income from the Hardee Power Station of $3.0 million, which was sold in October 2003.

The $19.3 million tax provision is related to the termination of a US income tax deferral strategy and $51.2 million of cash repatriated during the quarter. With these tax provisions, the company has completely accrued for U.S. income taxes on all GAAP earnings from this project to date. For segment reporting purposes, the $19.3 million includes $27.3 million of income tax expense recorded in the Other Unregulated Companies and $8 million of benefit to the provision for income taxes recorded at TECO Energy.

Year-to-date net income for the other unregulated companies was $0.8 million, compared to $1.9 million for the same period in 2003. In addition to the second-quarter effects, the year-to-date results also include a $3.4 million valuation adjustment at TECO Solutions for its minority interest in a fiber optics business in bankruptcy and a $10.6 million after-tax gain on the sale of the propane business in the first quarter. Results in 2003 include net income of $5.8 million from the Hardee Power Station, which was sold in October 2003.

Excluding the $6.7 million after-tax charge related to the San José debt refinancing and the associated $19.3 million in tax provisions, the non-merchant unregulated power operations recorded second-quarter net income of $9.7 million, compared to $4.0 million for the same period in 2003. These results were driven by continued good operating performance at the Guatemalan generating facilities and higher energy sales and prices at EEGSA, the Guatemalan distribution utility. Year-to-date net income, excluding the second-quarter charges, was $20.8 million, compared to $13.6 million, excluding $15.3 million after-tax turbine cancellation charges, for the six-month period in 2003. The results were driven by the same factors as the quarter.

 

TWG Merchant

TWG Merchant’s loss for the second quarter, excluding the $98.7 million after-tax write-off of the investment in the TIE project, was $12.0 million, compared with a loss, excluding the $61.2 million goodwill write-off, of $11.1 million for the same period in 2003. The second-quarter loss, including the charges, was $110.7 million, compared to a loss of $72.3 million including charges in 2003. Although TECO Energy announced the sale of its indirect ownership interest in the TIE project, because TIE is an unconsolidated equity investment, TIE results and the write-off are reflected in continuing operations. Despite lower sales and margins, Commonwealth Chesapeake Station reported improved net income due to lower overhead expense. Weak power prices in the Texas market due to mild weather and adequate capacity were partially offset by the recovery of previously incurred maintenance expenses through an insurance settlement at the Frontera Power Station. In 2003, a nuclear plant outage and unseasonably hot weather contributed to higher margins in Texas.

TWG Merchant’s year-to-date loss, excluding the TIE write-off, was $30.7 million, compared to a loss, excluding the $61.2 million goodwill impairments, of $22.9 million for the same period in 2003. The year-to-date loss, including the charges, was $129.4 million, compared to $84.1 million including charges for the same period in 2003. These results reflect improved results at the Commonwealth Chesapeake station in the first quarter due to favorable winter weather, which were more than offset by the operating losses on the TIE projects, lower net income from Frontera due to a major maintenance outage in the first quarter and the cost associated with the incomplete Dell and McAdams power stations, as well as the factors affecting the second quarter.

The TWG Merchant segment results include allocated TECO Energy interest expense of $9.9 million after-tax and $17.9 million after-tax for the quarter and year-to-date periods, respectively.

 

Parent / Other

Interest expense increased with the completion of construction of the Union and Gila River projects and the resulting discontinuance of capitalized interest, as well as higher overall levels of debt. In the second quarter of 2003, $7.0 million of interest on debt at the TECO Energy level related to investment in the Union and Gila River projects was capitalized. For the first six months of 2003, capitalized interest on the debt of TECO Energy was $17 million. Capitalization of interest ended with commercial operation of all phases in July 2003.

The provision for income taxes from continuing operations for the 2004 second quarter and year-to-date periods was a benefit of $15.8 million and $7.1 million, respectively, compared to benefits of $20.1 million and $59.6 million, respectively, for the same periods in 2003. The 2004 benefit is due primarily to the write-off associated with the TIE projects partially offset by the provision for taxes on repatriated cash from Guatemala. The 2003 benefit is due primarily to goodwill write-offs and turbine purchase cancellation charges. Second quarter results in 2003 included the reversal of $15.4 million of previously deferred Section 29 tax credits for the production of synthetic fuel.

Discontinued Operations

 

The net loss from discontinued operations for the 2004 second quarter and year-to-date periods was $25.7 million and $51.9 million, respectively, compared to losses of $106.9 million and $82.8 million, respectively, for the same periods in 2003. Discontinued operations in 2004 include the operating losses for the Union and Gila River power stations. Discontinued operations in 2003 include the results from Union and Gila River, which entered service over the first six months of 2003; results from Prior Energy, which was sold in January; and the gain on the final installment of the sale of the coalbed methane gas production assets.

 


Cash and Liquidity

TECO Energy’s consolidated cash and cash equivalents, excluding all restricted cash, totaled $85.6 million at June 30, 2004. Restricted cash of $49.5 million includes $41.9 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 non-investment grade credit rating. Cash at June 30 excludes the San José and Alborada power stations’ unrestricted cash balances of $27.4 million and restricted cash of $8.3 million, as these companies were deconsolidated due to the adoption of FIN 46R, Consolidation of Variable Interest Entities, effective Jan. 1, 2004.

 

In addition, at June 30, aggregate availability under bank credit facilities was $537.5 million, net of letters of credit of $32.5 million outstanding under these facilities and $30 million drawn on the Tampa Electric credit facility. Therefore, total liquidity, cash plus credit facilities, totaled $650.5 million, including $229.5 million at Tampa Electric, at the end of the second quarter. On July 7, 2004, TECO Energy replaced its $350 million credit facility with a new $200 million three-year facility.

 

Additional financial information related to the company's results through June 30, 2004, including unaudited financial statements, segment information, and electric and gas volumes, is also available at the Investor Relations section of TECO Energy's web site at www.tecoenergy.com.

TECO Energy, Inc. (NYSE: TE) is an integrated energy-related holding company with core businesses in the utility sector, complemented by a family of unregulated businesses. Its principal subsidiary, Tampa Electric Company, is a regulated utility with both electric and gas divisions (Tampa Electric and Peoples Gas System). Other subsidiaries are engaged in waterborne transportation, coal and synthetic fuel production and independent power.

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. Important factors that could impact actual results include unexpected capital needs or unanticipated reductions in cash flow that affect liquidity; declines in the anticipated waterborne fuel volumes transported by TECO Transport for Tampa Electric; general economic conditions in Tampa Electric’s service area affecting energy sales; economic conditions both national and international, that affect the demand for TECO Transport’s waterborne transportation services; weather variations affecting energy sales and operating costs at Tampa Electric and TWG; commodity price changes affecting the margins at TWG and TECO Coal; the ability of TECO Energy’s subsidiaries to operate equipment without undue accidents, breakdowns or failures; and energy prices in the markets served by TWG facilities. Additional information is contained under “Risk Factors” in the company’s registration Statement on Form S-4 filed with the Securities and Exchange Commission on July 28, 2004.

 


Summary Information (as of June 30, 2003)


Three Months

 

Ended

 

Six Months

 

Ended

 

Twelve Months

 

Ended

 


(millions except per share amounts)

 








2004

 

2003

 

2004

 

2003

 

2004

 

2003

 

Revenues

 

$713.0

$695.3

 

$1,355.3

$1,347.1

 

$2,748.0

$2,739.6

 

Net income (loss)from continuing operations

 

(82.5)

 

5.0

 

(53.8)

 

(15.3)

 

(53.3)

119.8

 

Net income (loss) from discontinued operations

 

(25.7)

(106.9)

 

(51.9)

(82.8)

 

(859.4)

(48.9)

 

Total net income (loss) before cumulative effect of change in accounting principle

 

(108.2)

 

(101.9)

 

(105.7)

 

(98.1)

 

(912.7)

 

70.9

 

Cumulative effect of change in accounting principle

 

--

--

--

 

(1.1)

 

(3.2)

 

(1.1)

Net income

 

($108.2)

 

($101.9)

 

($105.7)

 

($99.2)

 

($915.9)

$69.8

 








Earnings (loss) per share from continuing operations – basic

 

($0.44)

 

$0.03

 

($0.29)

 

($0.09)

 

($0.29)

$0.71

 

Earnings per share from discontinued operations – basic

 

(0.13)

(0.61)

 

(0.27)

 

(0.47)

 

(4.63)

(0.29)

 

Earnings (loss) per share from cumulative effect of change in accounting principle – basic

 

--

--

--

--

(0.02)

(0.01)

Total earnings (loss) per share – basic

 

($0.57)

 

($0.58)

 

($0.56)

 

($0.56)

 

($4.94)

$0.41

 








Total earnings (loss) per share – basic

 

($0.57)

 

($0.58)

 

($0.56)

 

($0.56)

 

($4.94)

$0.41

 

Total earnings (loss) per share – diluted

($0.57)

 

($0.58)

 

($0.56)

 

($0.56)

 

($4.94)

$0.41

 

Average common shares outstanding – basic

 

188.3

 

176.4

 

188.2

 

176.2

 

188.5

170.0

 

Average common shares outstanding – diluted

 

188.3

 

176.6

 

188.2

 

176.2

 

188.5

170.7

 

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