TECO Energy reports third quarter results
TAMPA, October 22, 2004
Net income from continuing operations – $53.1 million
TECO Energy, Inc. (NYSE:TE) today reported third quarter net income of $41.3 million, compared with a loss of $19.5 million for the same period in 2003. Earnings per share were $0.21, compared with a loss of $0.11 per share in the 2003 period. The number of common shares outstanding was 8 percent higher in the 2004 quarter than for the same period in 2003. Net income from continuing operations was $53.1 million, or $0.27 per share, compared with net income of $4.6 million, or $0.03 per share, for the same period in 2003.
The year-to-date loss was $64.4 million, compared with a loss of $118.7 million for the same period in 2003. Results in 2004 were driven by write-offs associated with the company’s efforts to reduce its exposure to merchant power through the sale of merchant power assets. The loss on a per-share basis was $0.34 for the 2004 period and $0.67 for the 2003 period. Shares outstanding for the nine months of 2004 were 7 percent higher than for the same period in 2003. The year-to-date loss from continuing operations was $0.7 million, or break even per share, compared with a loss of $10.7 million, or $0.06 per share, for the same period in 2003.
TECO Energy Chairman and CEO Sherrill Hudson said, “Despite the effects of Florida’s active hurricane season, our utility-focused strategy produced solid third-quarter results. We benefited from good customer growth in our utility operations and higher coal prices at the coal company, and we continued to make good progress on the transfer of the Union and Gila River power stations. The Union and Gila River transfer is a major component of our strategy to reduce our merchant exposure, which we believe will benefit investors in the future.”
Hudson added, “On the financial front, earlier this month we successfully completed the remarketing of the trust preferred debt associated with our equity security units; we participated in the remarketing through the bridge loan established for this transaction, and retired $122 million of the trust preferred debt. In addition, we are in the process of closing a new $150 million three-year Tampa Electric credit facility to replace the $125 million 364-day facility that was up for renewal next month.”
Hudson went on to say, “The men and women of TECO did a superb job of restoring service to our customers after three hurricanes in a six-week period, and I am proud of them.”
Third quarter non-GAAP results from continuing operations, excluding the effects of gains and charges identified below, were $52.3 million, compared with $34.7 million in 2003. Year-to-date non-GAAP results from continuing operations, excluding the effects of the gains and charges, were $116.7 million, compared with $138.9 million in 2003.
- 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 GAAP measure so calculated and presented.
- Benefit from mandatorily convertible equity unit early exchange
- San José debt extinguishment and benefit from mandatorily convertible equity unit early exchange
- Goodwill write-offs for Frontera and Commonwealth Chesapeake power stations
For a discussion regarding this presentation of non-GAAP results and management’s use of this information please see the Non-GAAP Presentation section starting on page 7.
Charges and Gains:
Third quarter results included after-tax charges and gains of $0.3 million for a true-up charge on the TIE valuation adjustment initially recorded in the second quarter; a $3.4 million charge related to management restructuring; a $4.3 million benefit from the settlement of the arbitration related to the TECO Wholesale Generation subsidiary, TMDP, at a cost less than previously accrued; and a $0.2 favorable adjustment, net of fees, related to the accounting for the early exchange for TECO Energy’s mandatorily convertible equity units. Results in 2003 included after-tax charges and gains of $6.8 million for corporate restructuring costs, a $25.9 million reserve related to the TMDP arbitration and $2.6 million of net income from the operations of the Hardee Power Station which was sold.
In addition to the third quarter charges and gains, year-to-date results included $118.2 million of charges and gains described in the reconciling table above, compared to $121.2 million of charges and gains and the cumulative effect of accounting changes in the 2003 period.
Ended Sept. 30
Ended Sept. 30
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Net Income (loss) Summary
Peoples Gas System
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)
- Segment information is a GAAP presentation which includes the effects of all charges and gains.
Tampa Electric’s net income for the third quarter was $53.4 million, compared with $53.3 million for the same period in 2003. Results for the quarter include a $6.4 million after-tax adjustment to reflect the adverse impact for the first three quarters of 2004 of the Florida Public Service Commission (FPSC) decision to disallow the recovery of a portion of Tampa Electric’s waterborne transportation costs under its contract with TECO Transport. 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 $3.9 million for the same period in 2003, reflecting the commercial operation of Bayside Unit 2 in January 2004. Depreciation 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 $6 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.
Third quarter base revenues were reduced by an estimated $4.9 million pretax, due to lost revenues associated with the three hurricanes in the quarter, which by definition are not covered by the storm damage reserve. Although there was no significant financing associated with the storm damage during the third quarter, the storm damage and lost revenues will increase Tampa Electric’s borrowing needs associated with the restoration costs in future periods. Operations and maintenance expense and capital expenditures were not affected by hurricane restoration costs, as costs to date were charged to the $43 million unfunded storm damage reserve. Lower third quarter operations and maintenance expenses do, however, reflect the shift to hurricane restoration from normal activities. This effect is expected to reverse in the fourth quarter as the company works through the backlog of normal activities delayed by the storms.
Tampa Electric had previously reported that the expected restoration costs for Hurricanes Charley and Frances were in a range of $25 million to $30 million. More recent estimates put the restoration cost for those hurricanes at about $32 million, and the restoration cost for Hurricane Jeanne is estimated to be about $28 million. Total estimated hurricane restoration costs of $60 million will now exceed Tampa Electric’s $43 million storm damage reserve once all costs are recorded. Tampa Electric has filed with the FPSC for deferral of these costs until the company seeks alternative accounting treatment for the costs that exceed the reserve balance. An FPSC decision on this matter is expected in the fourth quarter.
Retail energy sales increased 1.7 percent in the quarter, as average customer growth of 2.4 percent was partially offset by wet summer weather and lost sales due to outages associated with the three hurricanes. Cooling degree days in the quarter, which also include the hurricane related weather, were almost 4 percent below normal and almost 2 percent below 2003, when cooling degree days were 2 percent below normal.
Tampa Electric’s year-to-date net income was $119.2 million, compared to $132.7 million excluding the $48.9 million charge related to turbine purchase cancellations in 2003. Equity AFUDC decreased to $0.7 million, from $15.6 million for the same period in 2003. Tampa Electric’s 2003 year-to-date net income, including the turbine purchase cancellation charge, was $83.8 million.
Year-to-date results also reflect average customer growth of 2.5 percent and retail energy sales that were 0.7 percent higher than last year. Total degree days for the year-to-date period were more than 3 percent below normal and more than 7 percent below 2003, when total degree days were significantly above normal.
Peoples Gas System reported net income of $3.0 million for the quarter, compared with $4.0 million, excluding the $1.1 million after-tax restructuring charge, in the same period in 2003. Quarterly results reflected customer growth of 5.4 percent, offset by increased operations and maintenance costs and lower volumes for the low-margin transportation service for electric power generators and industrial customers due to higher gas prices. Year-to-date net income was $21.7 million, compared with $20.7 million, excluding the $1.1 million after-tax restructuring charge, 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 recorded net income of $1.7 million in the third quarter, excluding $1.1 million of after-tax management restructuring costs, compared to net income of $2.6 million in the same period last year. Results for the quarter reflect the impact of four hurricanes in August and September which disrupted river and ocean movements and caused the terminal in Louisiana to halt operations. Estimated lost revenues and direct costs due to the hurricanes reduced TECO Transport’s third quarter pretax results by $3.8 million. Third-quarter results also reflect higher fuel costs, which were only partially offset by improved northbound river shipments and higher rates for river grain shipments.
Year-to-date net income was $5.5 million, excluding a $0.8 million first quarter valuation adjustment and the third quarter management restructuring costs, compared to $12.4 million, excluding a $0.8-million charge due to the adoption of FAS 143, for the same period in 2003. 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 results were driven by increased export coal volume at the river terminal, which was more than offset by the lower Tampa Electric volumes, higher fuel costs, unusual operating conditions due to hurricanes in the third quarter, higher than normal shipyard activity and a five day closing of the Mississippi River in the first quarter. Volumes transported for Tampa Electric declined more than one million tons in the first six months of 2004, as a result of the Bayside repowering, but volumes in the second half of 2004 are at levels comparable to the same period in 2003.
TECO Coal achieved third quarter net income of $12.5 million on total production of 2.4 million tons, compared to $18.4 million on total production of 2.3 million tons in the same period in 2003. Results in the third quarter of 2004 reflect effective third-party ownership interests in TECO Coal’s synthetic fuel production facilities of more than 90 percent, compared with 49 percent third party ownership in 2003. The third-party ownership structure of the synfuel facilities retains TECO Coal as the operator and decreases overall earnings per ton but increases cash generation per ton as a result of TECO Energy’s tax position. Synthetic fuel volumes were slightly higher in 2004. TECO Coal recorded no Section 29 tax credits in 2004 associated with its remaining synfuel ownership interest because of TECO Energy’s anticipated tax position in 2004, which is expected to be driven by the tax losses incurred upon the transfer of the Union and Gila River projects to the lending banks. Results for the quarter in 2003 included $21.1 million of Section 29 tax credits.
Year-to-date net income was $45.6 million, compared to $64.9 million, excluding a $0.3-million after-tax charge due to the adoption of FAS 143, in 2003. Total coal sales in both periods were 6.9 million tons. Year-to-date results in 2004 reflect the increased effective third-party ownership interest in TECO Coal’s synthetic fuel production facilities. Results also reflect lower volumes of conventional metallurgical and steam coals, 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 $57.3 million of Section 29 tax credits.
Other Unregulated Companies
TECO Energy’s other unregulated companies recorded net income of $13.9 million for the third quarter, compared to $4.6 million for the same period in 2003. Results for the quarter reflect higher energy sales and higher rates for the Guatemalan operations and a $5.6 million benefit from reducing previously deferred income taxes due to a change in Guatemalan tax law. In 2003, results included net income of $2.6 million from the Hardee Power Station, which was sold in October 2003.
Year-to-date net income was $33.4 million excluding the gains and charges described below, compared to $16.3 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.
Excluded from the year-to-date results discussed above were after-tax charges of $6.7 million associated with debt extinguishment for 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. Year-to-date results also exclude after-tax asset valuation adjustments at TECO Solutions of $4.9 million and $12.2 million of after-tax gains on the sale of its interest in the propane business. Results in 2003 exclude after-tax charges of $15.3 million for turbine cancellations and $3.0 million for corporate restructuring, and net income of $8.5 million from the Hardee Power Station which was sold in October 2003.
TWG Merchant’s loss for the third quarter was $10.7 million, excluding a $4.3 million after-tax benefit from the reversal of costs previously accrued for the TMDP arbitration which was settled in July at a lower cost, compared to a loss of $10.1 million, excluding the original $25.9 million after-tax charge for the TMDP arbitration, for the same period in 2003. Despite continued weak sales and margins, Commonwealth Chesapeake Station reported improved net income due to sales of spinning reserve services. Results for the Frontera Power Station reflect lower power prices in the Texas market primarily due to mild weather during the quarter.
TWG Merchant’s year-to-date loss, excluding the $99.0 million after-tax write-off of the investment in the TIE project, was $36.8 million, compared with a loss of $58.9 million, excluding the $61.2 million goodwill write-off associated with the Frontera and Commonwealth Chesapeake power stations, for the same period in 2003. Results in 2004 reflect weak power prices in Texas and Virginia primarily due to weather and outages at the Frontera Station partially offset by an insurance settlement on previously incurred repair costs.
The TWG Merchant segment results in 2004 include allocated TECO Energy interest expense of $7.9 million after-tax and $25.8 million after-tax for the quarter and year-to-date periods, respectively.
Parent / Other
Interest expense for the third quarter was lower than the 2003 period, primarily reflecting lower short-term borrowing and credit facility costs, adjustments associated with the early settlement of the trust preferred component of TECO Energy’s equity security units and the benefit from the settlement of the TMDP arbitration. Year-to-date interest expense increased reflecting no capitalized interest on the merchant power generation facilities. For the first nine months of 2003, capitalized interest on the debt of TECO Energy was $17.3 million. Capitalization of interest ended with commercial operation of the final phase of the Gila River Power Station in July 2003.
TECO Energy’s consolidated provision for income taxes from continuing operations for the 2004 third quarter was $23.7 million compared to a benefit of $10.0 million in the 2003 period. The provision for income taxes for the 2004 year-to-date period was $16.6 million, compared to a benefit of $69.5 million for the same period in 2003. Results in the third quarter of 2003 included the deferral of $18 million of Section 29 tax credits for the production of synthetic fuel.
The net loss from discontinued operations for the 2004 third quarter and year-to-date periods was $11.8 million and $63.7 million, respectively, compared to losses of $20.9 million and $103.7 million, respectively, for the same periods in 2003. Discontinued operations in 2004 reflect primarily the operating losses for the Union and Gila River power stations. Discontinued operations in 2003 include the results from Union and Gila River, results from Prior Energy, which was sold in January 2004, and the gain on the final installment of the sale of the coalbed methane gas production assets in January 2003.
Cash and Liquidity
TECO Energy’s consolidated cash and cash equivalents, excluding all restricted cash, totaled $102.5 million at September 30, 2004. Restricted cash of $57.2 million includes $50.1 million held in escrow related to the first sale of a 49 percent interest in the synthetic coal production facilities. Cash at September 30, 2004 excludes the San José and Alborada power stations’ unrestricted cash balances of $38.4 million, and restricted cash of $8.4 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 September 30, 2004 aggregate availability under bank credit facilities was $394.3 million, net of letters of credit of $30.7 million outstanding under these facilities and $25 million drawn on the Tampa Electric credit facility. At the end of the third quarter, total liquidity, cash plus credit facilities, was $535.2 million, including $237.2 million at Tampa Electric which consisted of $225 million of undrawn credit facilities and $12.2 million of cash.
The table presenting non-GAAP results on page 2 presents financial results after elimination of the effects of certain identified gains and charges. Management believes that the presentation of this financial performance provides investors a non-GAAP measure that reflects the Company’s operations under its utility focused business strategy. Management also believes that it is helpful to present a non-GAAP measure of performance that clearly reflects the ongoing operations of TECO Energy’s business and that allows investors to understand and evaluate the business as it is expected to operate in future periods.
The non-GAAP measure of financial performance used by the company is not a measure of performance under accounting principles generally accepted in the United States and should not be considered an alternative to net income or other GAAP figures as an indicator of the company’s financial performance or liquidity. TECO Energy’s non-GAAP presentation of net income may not be comparable to similarly titled measures used by other companies.
Management and the Board of Directors use this non-GAAP presentation as a yardstick for measuring the company’s performance, making decisions that are dependent upon the profitability of the company’s various operating units and in determining levels of incentive compensation.
While each of the particular excluded items is not expected to recur, management recognizes that similar types of items could occur in the next two years, specifically those relating to the company’s strategy of minimizing the risks from its merchant power investments. Even though similar types of charges may occur, management believes the non-GAAP measure is important in addition to GAAP net income for assessing its potential future performance because excluded items are limited to those that management believes are not indicative of future performance.
Additional financial information regarding TECO Energy is 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 the company’s ability to complete the transfer of the Union and Gila River projects as planned and Tampa Electric Company’s ability to close its new credit facility as planned. Additional information is contained under “Risk Factors” in the company’s Prospectus Supplement filed with the Securities and Exchange Commission on October 12, 2004.
Summary Information (as of September 30, 2004)
(millions except per share amounts)
Net income (loss)from continuing operations
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
Earnings (loss) per share from continuing operations – basic
Earnings per share from discontinued operations – basic
Earnings (loss) per share from cumulative effect of change in accounting principle – basic
Total earnings (loss) per share – basic
Earnings (loss) per share – basic
Earnings (loss) per share – diluted
Average common shares outstanding – basic
Average common shares outstanding – diluted