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TE > SEC Filings for TE > Form 10-Q on 1-Aug-2014All Recent SEC Filings

Show all filings for TECO ENERGY INC

Form 10-Q for TECO ENERGY INC


1-Aug-2014

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS

This Management's Discussion & Analysis of Financial Conditions 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 Management's Discussion & Analysis, except as may be required by law. Factors that could impact actual results include: regulatory actions by federal, state or local authorities, including the required approval by the New Mexico Public Regulation Commission for the acquisition of NMGC; the risk that the transaction to acquire NMGC may be delayed, may be consummated on less favorable terms than originally expected, or not be consummated at all; unexpected capital needs or unanticipated reductions in cash flow that affect liquidity; the ability to access the capital and credit markets when required; the ability to sell TECO Coal at an acceptable price; general economic conditions affecting energy sales at the utility companies; economic conditions, both national and international, affecting the Florida economy and demand for TECO Coal's production; costs for alternate fuels used for power generation affecting demand for TECO Coal's thermal coal production; operating costs and environmental or safety regulations affecting production levels and margins at TECO Coal; weak demand and market pricing conditions affecting the value of TECO Coal's facilities and coal reserves; weather variations and customer energy usage patterns affecting sales and operating costs at the utilities and the effect of weather conditions on energy consumption; the effect of extreme weather conditions or hurricanes; general operating conditions; input commodity prices affecting cost at all of the operating companies; natural gas demand at the utilities; and the ability of TECO Energy's subsidiaries to operate equipment without undue accidents, breakdowns or failures. Additional information is contained under Item IA "Risk Factors" in this Quarterly Report on Form 10-Q for the period ended June 30, 2014.

Earnings Summary - Unaudited
                                          Three months ended June 30,           Six months ended June 30,
(millions, except per share amounts)       2014                2013               2014               2013
Consolidated revenues                  $       726.3       $       735.9      $     1,410.4       $  1,397.0

Continuing operations                  $        58.4       $        51.6      $       105.4       $     92.8

Discontinued operations                           -                 (0.2 )              3.1              0.1

Net income                             $        58.4       $        51.4      $       108.5       $     92.9

Average common shares outstanding
Basic                                          215.4               215.0              215.3            214.8

Diluted                                        215.9               215.5              215.8            215.3

Earnings per share - Basic
Continuing operations                  $        0.27       $        0.24      $        0.49       $     0.43
Discontinued operations                           -                   -                0.01               -

Earnings per share - Basic             $        0.27       $        0.24      $        0.50       $     0.43

Earnings per share - Diluted
Continuing operations                  $        0.27       $        0.24      $        0.49       $     0.43
Discontinued operations                           -                   -                0.01               -

Earnings per share - Diluted           $        0.27       $        0.24      $        0.50       $     0.43

TECO Energy Strategy

TECO Energy's strategy is to transition into a growth plus sustainable yield company focused on its existing core businesses-electric and gas utilities-and to execute on accretive acquisitions of regulated utilities to grow its base. TECO Energy seeks to optimize its businesses by application of best practices in both gas and electric operations.

Our strategy, which is based on a long and successful history of owning and operating regulated electric and gas utilities, consistently delivering value to our shareholders over the long term, is to:

Invest in and grow our utilities, both in Florida and, upon consummation of the NMGC acquisition, in New Mexico with intentions to acquire additional utilities in areas of the country with favorable regulatory environments and above-average growth prospects;

Focus our gas utilities on CNG vehicle conversions and customer user-conversions from other forms of energy to natural gas;

Invest in proven and emerging technologies, such as smart grid applications, that benefit customers and shareholders;

Collaborate with customers to develop alternative solutions to meet their energy needs; and Utilize our expertise in intrastate pipelines and lateral development to support the growth of natural gas in Florida and in New Mexico.


Table of Contents

An important part of our strategy is that we expect our utilities to earn returns that are at or above the middle of their respective allowed ROE while maintaining their authorized capital structures and financial integrity. Tampa Electric's 2013 Florida rate case settlement, which included $70 million of base rate increases through 2015, plus an additional $110 million base rate increase in January 2017, or when the Polk Power Station units two through five conversion project enters service, provides regulatory certainty through 2017.

Florida, with its favorable growth characteristics, combined with its supportive regulatory environment, is one of the most attractive states to operate regulated utilities. We see similar growth characteristics in New Mexico, an attractive sunbelt state with a growing population. We expect opportunities to invest capital to support the growth and reliability opportunities at PGS and NMGC, the largest LDCs Florida and New Mexico, respectively. Additionally, we have opportunities to invest significant capital in Tampa Electric over the next several years for the Polk Power Station units two through five conversion, which we believe will allow us to continue providing safe, affordable and reliable service to customers and support our growth.

TECO Coal Update

As we have previously indicated, we do not consider TECO Coal to be a core holding. Consistent with this view, we have had discussions from time to time with interested parties regarding a possible sale of TECO Coal, and have been working with an investment banking firm to help us determine whether there would be interest in a sale transaction that we would find acceptable. We are in active discussions with potential buyers, but no agreement or understanding with respect to any sale has been reached. Furthermore, our board of directors has not made a determination regarding whether we would sell TECO Coal based on current indications of value. These indications suggest that a sale price above book value may be unlikely in the current market conditions. In the context of furthering our overall strategy, that is a factor which we would consider, among others, in deciding whether to sell TECO Coal. Accordingly, there can be no assurances that a sale of TECO Coal will be completed, and if a sale is completed, the price received is expected to reflect current market conditions.

Update on Regulatory Status of NMGC Acquisition

In May 2013, TECO Energy announced that it had signed an agreement to acquire NMGI, the parent company of New Mexico Gas Company from CES. This acquisition is subject to approval by the NMPRC. In July 2013, we filed a joint application with NMGC and CES with the NMPRC for approval of the acquisition. On May 14, 2014, we reached a settlement agreement with the New Mexico Industrial Energy Consumers, which represents large customers of NMGC, and the New Mexico Attorney General's office, which represents New Mexico residential and small business customers, with regards to the NMGC acquisition. Under the terms of the settlement, among other elements, NMGC will freeze customer rates until the end of 2017 and limit job reductions in the first three years after the NMGC acquisition. The NMPRC staff did not oppose the settlement, and on June 30, 2014, the NMPRC hearing examiner issued a certification of stipulation recommending that the NMPRC approve the transaction and related matters. The NMPRC still must decide whether the settlement is in the public interest and whether to approve the NMGC acquisition, which decision we expect in the third quarter of 2014. Under this schedule, however, closing of the NMGC acquisition will not occur within one year of our Hart-Scott-Rodino Premerger Notification and Report Form with the U.S. Department of Justice (HSR Form). Accordingly, on June 20, 2014, we filed a new HSR Form and the closing of the transaction will be subject to renewed clearance from anti-trust regulators and expiration of the new waiting period under the filing. As previously announced, we already reached a settlement agreement with the U.S. Department of Energy regarding the NMGC acquisition.

In July, we completed the permanent financing required to fund the closing of the NMGC acquisition.

Operating Results

Three Months Ended June 30, 2014

TECO Energy, Inc. reported second-quarter 2014 net income of $58.4 million, or $0.27 per share, compared with $51.4 million, or $0.24 per share, in the second quarter of 2013. Net income from continuing operations was also $58.4 million in the 2014 second quarter, compared with $51.6 million, or $0.24 per share, for the same period in 2013.

Six Months Ended June 30, 2014

Year-to-date net income was $108.5 million, or $0.50 per share, compared with net income of $92.9 million, or $0.43 per share in the 2013 period. Net income from continuing operations was $105.4 million or $0.49 per share, compared with $92.8 million or $0.43 per share in the 2013 period.

The 2014 benefit of $3.1 million reported in discontinued operations was related to the favorable resolution of an indemnification provision associated with the 2012 sale of TECO Guatemala.


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Operating Company Results

All amounts included in the operating company discussions below are after tax, unless otherwise noted.

Tampa Electric Company - Electric Division

Tampa Electric's net income for the second quarter of 2014 was $62.2 million, compared with $50.6 million for the same period in 2013. Results for the quarter reflected the benefits of the rate case settlement effective Nov. 1, 2013, a 1.7% higher average number of customers, higher energy sales primarily due to customer growth, and $0.8 million lower earnings on assets recovered through the Environmental Cost Recovery Clause (ECRC) due to a lower current weighted average cost of capital, which includes the lower return on equity (ROE) in the 2013 rate case settlement. Results reflected lower operations and maintenance expenses, partially offset by higher depreciation expense. Second-quarter net income in 2014 included $2.1 million of Allowance for Funds Used During Construction (AFUDC) equity, which represents allowed equity cost capitalized to construction costs, compared with $1.4 million in the 2013 quarter.

Total degree days in Tampa Electric's service area in the second quarter of 2014 were 4% below normal, and 6% below the 2013 period. Although the total degree day comparisons indicate milder than normal weather, the pattern of periods of warm and dry weather, especially later in the quarter, contributed to higher energy sales. Total net energy for load, which is a calendar measurement of retail energy sales rather than a billing-cycle measurement, increased 0.8% in the second quarter of 2014 compared with the same period in 2013. In the 2014 period, pretax base revenues were almost $17 million higher than in 2013, including approximately $15 million of higher revenue as a result of the 2013 rate case settlement. (The quarterly energy sales shown on the statistical summary that follows reflect the energy sales based on the timing of billing cycles, which can vary period to period.) Sales to residential customers increased primarily from customer growth. Sales to commercial and non-phosphate industrial customers increased due to the improving economy. Sales to lower-margin industrial-phosphate customers decreased as self-generation by those customers increased.

Operations and maintenance expense, excluding all Florida Public Service Commission (FPSC)-approved cost-recovery clauses, was $1.6 million lower than in the 2013 quarter, reflecting $1.7 million of higher cost to operate and maintain the generating system and higher employee-related costs more than offset by a $1.2 million benefit from the elimination of the storm damage accrual as a result of the 2013 rate case settlement, almost $1.0 million lower pension expense and lower self-insurance reserves. Depreciation and amortization expense increased $0.5 million in 2014, primarily as a result of normal additions to facilities to reliably serve customers, partially offset by approximately $1.0 million of lower amortization on software due to the change in expected useful life for software in the 2013 rate case settlement.

Year-to-date net income was $107.4 million, compared with $82.4 million in the 2013 period, driven primarily by the benefits from the 2013 rate case settlement, 1.7% higher average number of customers, higher energy sales from customer growth, more favorable weather and a stronger economy and lower operations and maintenance expenses, partially offset by higher depreciation expense, and $1.6 million lower earnings on assets recovered through the ECRC. Year-to-date net income in 2014 included $4.4 million of AFUDC equity, compared with $2.5 million in the 2013 period.

Year-to-date total degree days in Tampa Electric's service area were 3% below normal, and 2% below the prior year-to-date period. Pretax base revenue was almost $39 million higher than in 2013, including approximately $28 million of higher revenue as a result of the 2013 rate case settlement. In the 2014 year-to-date period, total net energy for load was 1.5% higher than the same period in 2013. Higher energy sales were driven by the same factors as the quarterly sales, and winter weather that was colder than in 2013.

Operations and maintenance expenses, excluding all FPSC-approved cost-recovery clauses, decreased $1.8 million in the 2014 year-to-date period reflecting the same factors as in the second quarter. Compared to the 2013 year-to-date period, depreciation and amortization expense increased $2.5 million, reflecting additions to facilities to serve customers, partially offset by approximately $2.0 million of lower amortization on software due to the change in expected useful life for software in the 2013 rate case settlement.


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A summary of Tampa Electric's regulated operating statistics for the three and six months ended June 30, 2014 and 2013 follows:

(millions, except average customers)                  Operating Revenues                       Kilowatt-hour sales
Three months ended June 30,                    2014        2013        % Change         2014          2013         % Change
By Customer Type
Residential                                   $ 243.5     $ 226.2            7.6        2,089.2       2,061.9            1.3
Commercial                                      150.2       143.5            4.7        1,529.2       1,501.0            1.9
Industrial - Phosphate                           16.5        18.9          (12.7 )        203.5         235.1          (13.4 )
Industrial - Other                               26.6        25.5            4.3          297.4         287.5            3.4
Other sales of electricity                       45.6        44.4            2.7          459.1         460.3           (0.3 )
Deferred and other revenues (1)                  15.2        26.0          (41.5 )

Total energy sales                            $ 497.6     $ 484.5            2.7        4,578.4       4,545.8            0.7
Sales for resale                                  1.2         3.5          (65.7 )         26.3          88.5          (70.3 )
Other operating revenue                          14.0        14.9           (6.0 )

Total revenues                                $ 512.8     $ 502.9            2.0        4,604.7       4,634.3           (0.6 )

Average customers (thousands)                   705.3       693.8            1.7
Retail net energy for load (kilowatt hours)                                             5,068.8       5,029.0            0.8


Six months ended June 30,
By Customer Type
Residential                                   $ 457.0     $ 415.8            9.9        3,912.1       3,787.1            3.3
Commercial                                      285.0       274.2            3.9        2,880.1       2,854.3            0.9
Industrial - Phosphate                           33.3        36.7           (9.3 )        411.8         457.1           (9.9 )
Industrial - Other                               50.9        48.8            4.3          565.3         550.4            2.7
Other sales of electricity                       88.1        85.7            2.8          880.9         880.8            0.0
Deferred and other revenues (1)                  13.2        23.2          (43.1 )

Total energy sales                              927.5       884.4            4.9        8,650.2       8,529.7            1.4
Sales for resale                                  8.2         4.9           67.3          132.7         129.3            2.6
Other operating revenue                          30.2        31.6           (4.4 )

Total revenues                                $ 965.9     $ 920.9            4.9        8,782.9       8,659.0            1.4

Average customers (thousands)                   703.8       692.0            1.7
Retail output to line (kilowatt hours)                                                  9,254.0       9,116.9            1.5

(1) Primarily reflects the timing of environmental and fuel clause recoveries.

Tampa Electric Company - Natural Gas Division

PGS reported net income of $7.5 million for the second quarter, compared with $7.9 million in 2013. Average customer growth was 1.8% in the quarter, and therm sales to residential customers decreased as a result of mild spring weather. Second-quarter results in 2014 reflected slightly higher general non-fuel operations and maintenance expense driven by higher employee-related costs. Depreciation and amortization increased slightly due to normal additions to facilities to serve customers, partially offset by a change in software amortization similar to Tampa Electric's discussed above. Sales to power-generation customers and off-system sales decreased due to two power generators not operating and new participants in the off-system sales market.

PGS reported net income of $22.1 million for the year-to-date period, compared with $21.7 million in the same period in 2013. Results reflect a 1.7% higher average number of customers, and higher therm sales to residential and commercial customers due to more-normal winter weather and improving economic conditions. Sales to power generation customers and off-system sales decreased due to the same reasons as in the second quarter. Non-fuel operations and maintenance expense increased $0.6 million compared to the 2013 period, driven by the same factors as in the second quarter partially offset by a first quarter of 2014 recovery of $1.6 million of costs incurred in connection with a 2010 outage incident.


Table of Contents

A summary of PGS's regulated operating statistics for the three and six months ended June 30, 2014 and 2013 follows:

(millions, except average customers)                Operating Revenues                            Therms
Three months ended June 30,                  2014        2013        % Change        2014        2013        % Change
By Customer Type
Residential                                 $  30.7     $  29.6            3.7         15.3        16.3           (6.1 )
Commercial                                     33.4        33.0            1.2        110.9       107.3            3.4
Industrial                                      3.3         3.0           10.0         64.8        68.5           (5.4 )
Off system sales                                9.4        20.4          (53.9 )       18.5        46.6          (60.3 )
Power generation                                1.6         2.5          (36.0 )      148.7       180.4          (17.6 )
Other revenues                                 10.6        10.7           (0.9 )

Total                                       $  89.0     $  99.2          (10.3 )      358.2       419.1          (14.5 )

By Sales Type
System supply                               $  50.0     $  60.4          (17.2 )       40.6        70.5          (42.4 )
Transportation                                 28.4        28.2            0.7        317.6       348.6           (8.9 )
Other revenues                                 10.6        10.7           (0.9 )

Total                                       $  89.0     $  99.3          (10.4 )      358.2       419.1          (14.5 )

Average customers (thousands)                 353.9       347.8            1.8


Six months ended June 30,
By Customer Type
Residential                                 $  80.4     $  71.9           11.8         48.6        45.8            6.1
Commercial                                     74.3        72.2            2.9        241.9       232.1            4.2
Industrial                                      6.9         6.6            4.5        136.8       139.7           (2.1 )
Off system sales                               17.8        38.7          (54.0 )       33.9        97.1          (65.1 )
Power generation                                3.6         5.6          (35.7 )      304.3       385.4          (21.0 )
Other revenues                                 26.5        23.2           14.2

Total                                       $ 209.5     $ 218.2           (4.0 )      765.5       900.1          (15.0 )

By Sales Type
System supply                               $ 121.7     $ 134.4           (9.4 )       98.1       160.4          (38.8 )
Transportation                                 61.3        60.6            1.2        667.4       739.7           (9.8 )
Other revenues                                 26.5        23.2           14.2

Total                                       $ 209.5     $ 218.2           (4.0 )      765.5       900.1          (15.0 )

Average customers (thousands)                 352.9       347.1            1.7

TECO Coal

TECO Coal reported second quarter net income of $0.8 million on sales of 1.5 million tons, compared with net income of $0.7 million on similar sales volumes in the same period in 2013. In 2014, second-quarter results reflect an average net per ton selling price, excluding transportation allowances, of $80, more than $5 lower than in 2013. In the second quarter of 2014, the all-in total per-ton cost of sales was $80, compared with almost $86 in the 2013 period. Second quarter costs include an approximately $0.30 per ton negative impact of incremental transportation costs due to a tunnel fire on the railroad serving the Premier Elkhorn mining complex. These costs are expected to be recovered from the railroad in a future quarter. TECO Coal recorded a $0.7 million income tax benefit in the second quarter of 2014 that included a $0.8 million tax depletion benefit, compared with a $1.0 million tax benefit that included a $0.8 million tax depletion benefit, in the 2013 period.

TECO Coal recorded a 2014 year-to-date loss of $0.8 million on sales of 2.8 million tons, compared with net income of $3.7 million on similar sales volumes in the 2013 period. The 2014 year-to-date average net per-ton selling price was almost $80, compared with $87 in 2013. The all-in total per-ton cost of sales was $81, compared with almost $87 in 2013. TECO Coal recorded a $2.9 million income tax benefit in 2014, which included a $1.5 million tax depletion benefit, compared with a $1.0 million income tax benefit in the 2013 period.

Parent & other

The cost from continuing operations for Parent & other in the second quarter of 2014 was $12.1 million, compared with a cost of $7.6 million in the same period in 2013. Costs in 2014 included $2.7 million of costs associated with the pending acquisition of NMGC, compared with $1.8 million of NMGC related costs in 2013. Results in 2014 reflect lower results at the smaller unregulated companies reported in Parent & other and less favorable tax adjustments compared to 2013.

The 2014 year-to-date cost from continuing operations was $23.3 million, compared with $15.0 million in the 2013 period. The 2014 year-to-date cost included $4.8 million of NMGC acquisition-related costs, compared with $1.8 million of NMGC acquisition-related costs in 2013. Other cost drivers in the 2014 year-to-date period were the same as in the second quarter.


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2014 Guidance from Continuing Operations

TECO Energy expects the Florida regulated utility operations, net of Parent & other, to deliver earnings in a range between $1.00 and $1.05 in 2014, and expects consolidated 2014 earnings from continuing operations, excluding any non-GAAP charges or gains, in a range between $0.95 and $1.05. We now expect that the above 2014 guidance will be unchanged by the effects of the acquisition related financing activities and NMGC's expected seasonally positive financial results for the remainder of 2014, assuming that the NMGC acquisition closes later in the third quarter.

TECO Energy expects earnings in 2014 to be driven by the factors discussed below.

Tampa Electric expects to earn in the middle of its authorized allowed ROE range of 9.25% to 11.25%, driven by approximately $50 million of higher base revenues in 2014 as a result of its September 2013 rate case settlement agreement. Based on year-to-date experience, it now expects slightly higher average customer growth of 1.6% and total retail energy sales growth about 0.5% lower than customer growth due to lower average customer usage. Operations and maintenance expenses are expected to be lower than 2013 actual amounts due to lower employee-related costs, lower storm-damage expense accruals and lower pension expense driven by higher discount rate assumptions, partially offset by increased expenses to operate the system and reliably serve customers. Depreciation expense is expected to be higher due to normal additions to facilities to serve customers.

Peoples Gas expects to continue to earn above the middle of its allowed ROE range of 9.75% to 11.75% from moderate customer growth, in line with the trends experienced in 2013. It also expects to benefit from continued interest from customers utilizing petroleum and other fuel sources to convert to natural gas due to the attractive economics.

The expectations for both Tampa Electric and Peoples Gas assume normal weather for the remainder of 2014.

TECO Coal expects 2014 sales of about 6.0 million tons, reflecting almost 70% specialty coal. Almost 90% of the expected second half sales tons are committed and priced, with the remainder subject to quarterly met coal price adjustments . . .

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