TECO Energy reports first-quarter results
TAMPA, May 1, 2007
TECO Energy, Inc. (NYSE:TE) today reported first-quarter net income of $72.8 million, or $0.35 per share, compared to $55.2 million, or $0.27 per share, in the first quarter of 2006.
TECO Energy Chairman and CEO Sherrill Hudson said, “Despite the mild winter weather patterns, which reduced energy sales at our Florida utilities and weaker coal market conditions this year, our operating companies continue to make good progress in building shareholder value and meeting customers’ needs. We’ve also made good headway on our debt reduction plans in 2007 with the retirement of $357 million of parent level debt.”
First-quarter 2007 non-GAAP results from continuing operations including synthetic fuel (Non-GAAP Results With Synthetic Fuel), which exclude charges, were $74.6 million, compared to $57.9 million in the 2006 period. First- quarter 2007 non-GAAP results from continuing operations excluding synthetic fuel (Non-GAAP Results Excluding Synthetic Fuel), which exclude charges and gains and also exclude the benefits associated with the production of synthetic fuel, were $43.9 million, compared to $47.9 million in the 2006 period (see the Results Reconciliation table later in this release).
In 2007, first-quarter net income included a $30.7 million, or $0.15 per share, net benefit to earnings from the production of synthetic fuel and the sale of the ownership interests in the synthetic fuel production facilities, compared to a $10.0 million, or $0.05 per share, in the 2006 period. (See the TECO Coal section later in this release.) First-quarter 2007 results also included a $1.8 million after-tax charge for transaction-related costs associated with the proposed sale of TECO Transport. First quarter 2006 results included $2.7 million of after-tax costs for hurricane-related repairs at TECO Transport (see the Results Reconciliation table later in this release).
TECO Energy Executive Vice President and Chief Financial Officer Gordon Gillette said, “Our $30.7 million of earnings from the production of synthetic fuel at TECO Coal this quarter reflect the impact of a significant increase in the value of the oil price hedges we have in place to protect our projected synthetic fuel benefits. This is temporary, however, as we continue to expect full-year 2007 benefits from the production of synthetic fuel to be $65 million of net income and $100 million of cash, either from our third-party investors or from the settlement of our hedges. We expect our quarterly earnings associated with the production of synthetic fuel to vary this year as we make required quarterly adjustments to the value of the hedges. Based on this, we believe we’ve realized a significant portion of this year’s earnings from synthetic fuel production in the first quarter, and that subsequent quarters will reflect lower synthetic fuel earnings.”
The table below compares the TECO Energy GAAP net income to the non-GAAP measures used in this release, which exclude certain charges and gains. Non-GAAP Results Excluding Synthetic Fuel exclude those charges and gains and also exclude the earnings benefits associated with the production of synthetic fuel. For a reconciliation to GAAP results and a discussion regarding this presentation of non-GAAP results and management’s use of this information, please see the Non-GAAP Presentation section and Results Reconciliation table later in this release.
Ended Mar. 31
Ended Mar. 31
Net income from continuing operations
Non-GAAP Results With Synthetic Fuel
Non-GAAP Results Excluding Synthetic Fuel
The table below includes TECO Energy segment information on a GAAP basis, which includes all charges and gains and synthetic fuel-related benefits for the periods shown.
Ended Mar. 31
Ended Mar. 31
Net Income (loss)
Peoples Gas System
TWG Merchant (1)
Net income from
Total net income
(1) As of Jan. 1, 2006, only historical data is presented for TWG Merchant, as all merchant assets have been divested or impaired.
Operating Company Results:
Net income for the first quarter was $21.8 million, compared with $22.5 million for the same period in 2006. Results for the quarter reflect 2.5% average customer growth and higher retail energy sales. Sales to other utilities were lower in 2007 compared to 2006, when certain customers purchased energy in excess of contract amounts. Net income included $1.7 million of Allowance for Funds Used During Construction – Equity (which represents allowed equity cost capitalized to construction costs) related to the construction of the peaking generation units and the installation of nitrogen oxide (NO x ) pollution control equipment, compared to $0.2 million included in the 2006 period.
Operations and maintenance expense, excluding all Florida Public Service Commission (FPSC)-approved cost recovery clauses, increased $2.6 million after-tax, as expected, driven by planned outage requirements on power generating equipment, expenditures related to storm hardening and higher property insurance.
In the first quarter of 2006, Tampa Electric sold approximately $41 million of excess sulfur dioxide (SO2) emissions credits. While these sales primarily benefited retail customers through a reduced Environmental Cost Recovery Clause (ECRC) recovery charge, Tampa Electric recognized a $1.4 million after-tax benefit from the wholesale component of the sale of these credits in the 2006 period. There were no sales of excess SO2 emissions credits in the first quarter of 2007. Interest expense increased due to higher levels of long-term debt outstanding, and interest income decreased due to lower interest income on lower under-recovered fuel balances.
Retail energy sales increased 4.4%, driven by higher sales to commercial customers and lower-margin phosphate customers. Year-over-year commercial sales growth was driven by new commercial development, which lags residential development, and lower-than-normal sales in 2006 when degree days were below normal. Sales to weather-sensitive residential customers grew only 1%, despite strong residential customer growth in the first quarter, as mild weather patterns limited customer energy usage. Total degree days in Tampa Electric’s service area were normal, but 17% above the first quarter 2006 period. Although the number of degree days in the first quarter of this year indicated normal weather, with above normal cooling degree days offsetting below normal heating degree days, weather patterns in the first quarter of 2007 included relatively few sustained periods of extreme temperatures and thus did not generate significant energy sales.
Peoples Gas reported net income of $11.0 million for the first quarter, compared to $12.5 million in the same period in 2006. Quarterly results reflect average customer growth of 2.1%, lower sales to residential and commercial customers primarily due to one of the warmest Januarys on record, which limited the number of heating degree days, and lower gas transported for power generation customers due to mild weather and the use of other fuels for power generation. Non-fuel operations and maintenance expense was higher and depreciation expense increased, as expected, due to a routine depreciation study approved by the FPSC in January.
TECO Coal achieved first-quarter net income of $42.4 million, compared to $24.7 million in the same period in 2006. TECO Coal’s Non-GAAP Results Excluding Synthetic Fuel were $11.7 million in 2007, compared to $14.7 million in 2006. These results exclude the $30.7 million of net benefits related to synthetic fuel production in 2007, compared to $10.0 million of net benefits in 2006. (See the Results Reconciliation table.)
Total sales were 2.1 million tons in the 2007 first quarter, including 1 .3 million tons of synthetic fuel, compared to 2.5 million tons, including 1.5 million tons of synthetic fuel, in the 2006 period. Sales volumes, as planned, were lower in 2007 in response to the softer market conditions. Average net selling prices in 2007, which exclude transportation allowances, were comparable to average net selling prices in the first quarter of 2006 on the same basis. In 2007, the cash cost of production per ton was essentially unchanged from the first quarter of 2006 but more than 3% below the average cost of production experienced in the full year 2006, as a result of equipment relocations and other actions taken in 2006 to stabilize production costs. First quarter results also include a $1.6 million after-tax benefit reflecting the final adjustment to the 2006 inflation factor applied to the tax credit available on the production of synthetic fuel. In 2006, first quarter results included a $2.7 million after-tax benefit for the final 2005 inflation adjustment to the tax credit.
The $30.7 million of benefits from the production of synthetic fuel reflect a $4.3 million or $0.02 per share reduction in earnings benefits due to an estimated 14% phase out caused by actual and futures markets oil prices for 2007 at the end of the quarter. This compares to a 40% phase out and $14.0 million or $0.07 per share reduction in the 2006 period. The estimated 14% reduction in revenues from third-party synthetic fuel investors reflects an estimated average annual oil price of $65/Bbl at Mar. 31. The results for synthetic fuel production this quarter also reflect a $12.3 million after-tax benefit from adjusting to market the valuation of the oil price hedges placed to protect the 2007 synthetic fuel benefits against high oil prices. In 2006, first quarter results included a $1.5 million after-tax benefit from mark-to-market adjustments. Because the oil price hedges in place should provide approximately a dollar-for-dollar recovery of lost synthetic fuel revenues in the event of a phase out, TECO Coal expects full-year benefits from the production of synthetic fuel to be approximately $100 million of net cash and $65 million of net income, regardless of oil price levels. Oil price volatility and mark-to-market accounting may introduce significant variation into quarterly results from synthetic fuel production, as demonstrated by the disproportionately high first quarter synthetic fuel results. Actual and forecasted net income from synthetic fuel production reflects the expected 35% tax rate applied to synthetic fuel related earnings, rather than TECO Coal’s lower overall effective tax rate, which includes depletion, as was previously applied.
TECO Coal has in place oil price hedge instruments that protect against the risk of high oil prices reducing the value of the tax credits related to the production of synthetic fuel in 2007. The hedges protect the full gross cash benefits, approximately $195 million, expected from the third-party investors for the production of synthetic fuel over the full expected average annual oil price range. The total cost of the hedges was approximately $37 million.
The phase-out range will be based on oil prices represented by the annual average of Producer First Purchase Prices reported by the U.S. Department of Energy. Based on the historical relationship of these prices to NYMEX prices, TECO Coal estimates the initial phase-out level for 2007 to begin at $63/Bbl on a NYMEX basis, and that the tax credits would be fully phased out at $79/Bbl on a NYMEX basis.
The federal tax credit program for the production of synthetic fuel will expire on Dec. 31, 2007. The program is not expected to be extended or renewed in its current form, and no change in the current legislation is expected. Based on the assumption that the program expires as scheduled, both GAAP net income and cash flow at TECO Coal are expected to decline in 2008, due to the loss of the benefits from the sale of the third-party ownership interests.
TECO Transport recorded first-quarter 2007 net income of $6.4 million, compared to $5.2 million in the same period in 2006. TECO Transport’s first-quarter 2006 non-GAAP results of $7.9 million exclude $2.7 million of after-tax costs associated with repairs of Hurricane Katrina damage at TECO Transport. (See the Results Reconciliation table.) In 2007, first-quarter results reflect higher labor and labor-related costs, lower volumes for Tampa Electric and higher repair expenses due to scheduled shipyard periods partially offset by higher cross-Gulf phosphate and river towing movements. Results also include a $0.8 million after-tax benefit related to the sale of scrap river barges and equipment no longer used at TECO Barge Line.
TECO Guatemala reported first-quarter net income of $10.3 million in 2007, compared to $8.6 million in the 2006 period. The 2007 results reflect lower operating expense; increased generation by the San José Power Station; increased capacity payments at the Alborada Power Station; higher interest income on higher cash balances; and lower wheeling revenues and higher fuel costs at EEGSA, the distribution utility.
The cost for Parent/Other in the first quarter was $19.1 million, which included $1.8 million of after-tax transaction-related costs associated with the proposed sale of TECO Transport, compared to a cost of $18.3 million in the same period in 2006. In 2007, the non-GAAP cost for Parent/Other in the first quarter was $17.3 million, compared to $18.3 million in the 2006 period. (See the Results Reconciliation table.)
These non-GAAP results were driven by pretax parent interest expense that was $2.9 million lower in the 2007 period, due to debt redemption and refinancing actions. This was partially offset by higher unallocated employee-related expenses and certain state tax items.
Cash and Liquidity
The table below sets forth the Mar. 31, 2007 consolidated liquidity and cash balances, the cash balances at the operating companies and TECO Energy parent, and amounts available under the TECO Energy and Tampa Electric credit facilities.
Balances as of Mar. 31, 2007
Drawn amounts / LCs
Available credit facilities
Cash and short-term investments
Consolidated restricted cash (not included above)
Consolidated restricted cash of $37.3 million includes $30.0 million held in escrow until the end of 2007 related to the sale of an interest in the synthetic coal production facilities. Consolidated other cash and short-term investments includes $14.1 million of cash at the unregulated operating companies for normal operations and $18.2 million of consolidated short-term investments at TECO Guatemala held offshore due to the tax deferral strategy associated with EEGSA. In addition to consolidated cash, as of Mar. 31, 2007 , unconsolidated affiliates owned by TECO Guatemala, CGESJ ( San José ) and TCAE (Alborada), had unrestricted cash balances of $10.9 million and restricted cash of $8.9 million, which are not included in the table above.
2007 Earnings Outlook
TECO Energy is maintaining its outlook for 2007 earnings per share from continuing operations within a range of $0.97 and $1.07, excluding benefits from the production of synthetic fuel , but including TECO Transport for the full year . In 2007, reported GAAP net income will include the benefits of synthetic fuel production. For comparability to 2006 and expected 2008 results, TECO Energy will continue to also provide Non-GAAP Results Excluding Synthetic Fuel, and is providing its 2007 results guidance on this basis.
TECO Energy’s results for the year are still expected to be driven by the same factors as outlined in February. Tampa Electric expects customer and weather-normalized energy sales growth, higher AFUDC, and Environmental Cost Recovery Clause-related earnings on its first NOx control project. Peoples Gas expects customer growth and therm sales growth to be more than offset by the effects of higher operation and maintenance expense and higher depreciation expense. TECO Coal expects lower total sales volumes due to soft market conditions and per-ton average margins similar to 2006 levels. TECO Transport expects higher rates and improved operating efficiencies, and TECO Guatemala expects 2007 results consistent with 2006 levels. Costs at the TECO Energy parent level are expected to decline due to debt retirement actions partially offset by lower investment income due to lower cash balances.
Effective March 31, 2007 the assets and liabilities associated with TECO Transport were reclassified for balance sheet purposes as assets and liabilities held for sale. In accordance with the provisions of SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144), effective April 1, depreciation will no longer be recorded for the TECO Transport assets. Also in accordance with the provisions of FAS 144, as a result of its significant continuing involvement with Tampa Electric related to the waterborne transportation of solid fuel, the results of TECO Transport will continue to be reflected in continuing operations.
The “Results Reconciliation” table below presents non-GAAP financial results after elimination of the effects of certain identified gains and charges and earnings from the production of synthetic fuel in the 2007 and 2006 quarterly and 12-months ended periods. The company provides both measures to allow comparison of results both with and without synthetic fuel. This provides investors additional information to assess the company’s results and future earnings potential without the production of synthetic fuel.
Management believes it is helpful to present a non-GAAP measure of performance that clearly reflects the ongoing operations of TECO Energy’s businesses and which allows investors to better understand and evaluate the business as it is expected to operate in future periods.
Management and the Board of Directors use non-GAAP measures as a yardstick for measuring the company’s performance, in making decisions that are dependent upon the profitability of the company’s various operating units, and in determining levels of incentive compensation.
The non-GAAP measures of financial performance used by the company are not measures 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.
3 Months Ended
12 Months Ended
GAAP net income
Exclude discontinued operations (1)
GAAP net income from continuing operations
Add TECO Transport transaction related costs
Add TECO Transport hurricane costs
Exclude TECO Transport hurricane insurance recovery
Add parent debt extinguishment (2)
Exclude Dell & McAdams valuation adjustment and gain on sale, net
Exclude sale of unused steam turbines
Total charges and gains
Non-GAAP results from continuing operations (3)
Exclude synthetic fuel benefit
Non-GAAP results excluding synthetic fuel
(1) Discontinued operations for the 12 months ended 2006 included the losses associated with operations of the Union, Gila River, Commonwealth Chesapeake and Frontera power stations, as well as the energy services companies, and the gain on the final transfer of the Union and Gila River power stations in May 2005. Discontinued operations in the 12 months ended 2007 period reflect primarily recovery of amounts that had been previously written off and tax adjustments at the small energy services companies.
(2) Debt extinguishment costs included the second-quarter 2005 redemption premium and unamortized debt issuance costs associated with the June 2005 redemption of the 10.5% notes due in 2007 and the fourth-quarter 2005 write-off of unamortized debt issuance costs associated with the December 2005 redemption of $100 million of 8.5% trust preferred securities.
(3) A non-GAAP financial measure is a numerical measure 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.
As previously announced, TECO Energy will host a Webcast with the investment community on its first-quarter results on Tuesday, May 1, 2007 at 5:00 pm Eastern time. The Webcast will be accessible through the link on TECO Energy’s Web site: www.tecoenergy.com. The Webcast and accompanying slides will be available for replay on the Web site for 30 days, beginning approximately two hours after the conclusion of the live event.
TECO Energy, Inc. (NYSE: TE) is an integrated energy-related holding company with regulated utility businesses, 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 electric generation and distribution in Guatemala .
Note: This press release contains forward-looking statements, which are subject to the inherent uncertainties in predicting future results and conditions. Actual results may differ materially from those forecasted. The forecasted results are based on the company’s current expectations and assumptions, and the company does not undertake to update that information or any other information contained in this press release. Factors that could impact actual results include: unforeseen regulatory actions by federal, state or local authorities that could impact operations; uncertainty related to any sale of TECO Transport; additional debt extinguishment costs or premiums associated with the early retirement of TECO Energy debt; unexpected capital needs or unanticipated reductions in cash flow that affect liquidity; the availability of adequate rail transportation capacity for the shipment of TECO Coal’s production; general economic conditions in Tampa Electric’s service area affecting energy sales; economic conditions, both national and international, affecting the demand for TECO Transport’s waterborne transportation services; weather variations and changes in customer energy usage pattern affecting sales and operating costs at Tampa Electric and Peoples Gas and the effect of hurricanes or other extreme weather conditions; commodity price and operating cost changes affecting the production levels and margins at TECO Coal and margins at TECO Transport, fuel cost recoveries and cash at Tampa Electric or natural gas demand at Peoples Gas; the ability of TECO Energy’s subsidiaries to operate equipment without undue accidents, breakdowns or failures; changes in electric tariffs or contract terms affecting TECO Guatemala’s operations; changes in the oil price relationship between the Department of Energy’s Producer First Purchase Price and oil futures prices as reported on NYMEX, which affects the synthetic fuel tax credit phase-out range; the actual change in inflation in 2007, which affects the final value of the synthetic fuel related tax credits; TECO Coal’s ability to successfully operate its synthetic fuel production facilities in a manner qualifying for the federal income tax credits; and TECO Coal’s exposure to changes in law, regulation or administration that would retroactively impact the federal income tax credits from the production of synthetic fuel that have been recognized to date. Additional information is contained under “Risk Factors” in TECO Energy, Inc.’s Annual Report on Form 10-K for the period ended Dec. 31, 2006 .
SUMMARY INFORMATION AS OF MAR. 31, 2007
(millions except per share amounts)
Net income (loss) from continuing operations
Net income (loss) from discontinued operations
|Net income (loss)|
Earnings (loss) per share from continuing operations – basic
Earnings (loss) per share from discontinued operations – basic
Earnings (loss) per share – basic
Earnings (loss) per share – diluted
Average common shares outstanding – basic
Average common shares outstanding – diluted