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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
| x | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 2003
OR
| ¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File No. | Exact name of each Registrant as | I.R.S. Employer Identification Number | ||
| 1-8180 | TECO ENERGY, INC. | 59-2052286 | ||
(a Florida corporation) TECO Plaza 702 N. Franklin Street Tampa, Florida 33602 (813) 228-4111 | ||||
| 1-5007 | TAMPA ELECTRIC COMPANY | 59-0475140 | ||
(a Florida corporation) TECO Plaza 702 N. Franklin Street Tampa, Florida 33602 (813) 228-4111 | ||||
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
| TECO Energy, Inc. | ||
| Common Stock, $1.00 par value | New York Stock Exchange | |
| Common Stock Purchase Rights | New York Stock Exchange | |
| Equity Security Units | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants’ knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. ¨
Indicate by check mark whether TECO Energy, Inc. is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES x NO ¨
Indicate by check mark whether Tampa Electric Company is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES ¨ NO x
The aggregate market value of TECO Energy, Inc.’s common stock held by nonaffiliates of the registrant as of June 30, 2003 was $2,117,879,345.
The aggregate market value of Tampa Electric Company’s common stock held by nonaffiliates of the registrant as of June 30, 2003 was zero.
The number of shares of TECO Energy, Inc.’s common stock outstanding as of February 29, 2004 was 188,175,926. As of February 29, 2004, there were 10 shares of Tampa Electric Company’s common stock issued and outstanding, all of which were held, beneficially and of record, by TECO Energy, Inc.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of TECO Energy, Inc.’s 2003 Annual Report are incorporated by reference into Parts II and IV.
Portions of the Definitive Proxy Statement relating to the 2004 Annual Meeting of Shareholders of TECO Energy, Inc. are incorporated by reference into Part III.
Tampa Electric Company meets the conditions set forth in General Instruction (I) (1) (a) and (b) of Form 10-K and is therefore filing this form with the reduced disclosure format.
This combined Form 10-K represents separate filings by TECO Energy, Inc. and Tampa Electric Company. Information contained herein relating to an individual registrant is filed by that registrant on its own behalf. Tampa Electric Company makes no representations as to the information relating to TECO Energy, Inc.’s other operations.
Page 1 of 40
Index to Exhibits on Page 40
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TABLE OF CONTENTS
| Page No. | ||||
| EXPLANATORY NOTE | 3 | |||
| PART II - | Item 8. Financial Statements and Supplementary Data TECO Energy, Inc. | 4-5 | ||
| Tampa Electric Company | 6-31 | |||
| PART IV - | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K | 32-38 | ||
| SIGNATURES | 39 | |||
| INDEX TO EXHIBITS | 40 | |||
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EXPLANATORY NOTE
This Amendment No. 1 of the Combined Annual Report on Form 10-K of TECO Energy, Inc. and Tampa Electric Company (Form 10-K/A) for the year ended Dec. 31, 2003 is being filed to correct typographical mistakes which were inadvertently included in the Combined Annual Report of TECO Energy, Inc. and Tampa Electric Company (Form 10-K) for the year ended Dec. 31, 2003, as originally filed. The typographical mistakes are summarized below and were contained in the (a) TECO Energy, Inc. Consolidated Financial Statements included in the TECO Energy 2003 Annual Report to Shareholders which was included as Exhibit 13 of Item 15(a)(1) of the Form 10-K (and incorporated by reference into Items 6, 7, 7A and 8 of the Form 10-K) and (b) the Tampa Electric Company Consolidated Financial Statements included in Item 8 of the Form 10-K.
Summary of Corrections
| 1. | Item 8. Tampa Electric Company Note 13 - Segment Information on page 28 in the Tampa Electric CompanyNotes to the Consolidated Financial Statements: 2002 Net income for Peoples Gas was corrected to “$24.2” from “$100.4”. The “$24.2” was properly reflected in Tampa Electric Company’s Form 10-K for the year ended Dec. 31, 2002 and was properly reflected in TECO Energy, Inc.’s Form 10-K for the year ended Dec. 31, 2003. |
| 2. | Exhibit 13. Note 19 - Segment Information on page 61 in the TECO Energy, Inc.Notes to Consolidated Financial Statements: |
| a. | Amounts with respect to (Benefit) provision for taxes have been corrected for TWG Merchant, Other Unregulated and Eliminations and Other for all years. Amounts with respect to benefit or provision for taxes have been corrected for TECO Coal in 2002 and 2001. |
| b. | Amounts with respect to Interest charges have been corrected for TWG Merchant and Other Unregulated in 2003. |
| c. | Footnote 6 has been corrected to remove the reference to the asset impairment charge related to turbines, which is a component of the charges disclosed in Footnote 7. |
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PART II
| Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. |
Information responding to Item 8 for TECO Energy, Inc., appears in the2003 Annual Report under the following headings:Consolidated Financial Statements — Consolidated Balance Sheets, Consolidated Financial Statements — Consolidated Statements Of Income, Consolidated Financial Statements — Consolidated Statements of Comprehensive Income, Consolidated Financial Statements — Consolidated Statements of Cash Flows, Consolidated Financial Statements — Consolidated Statements of Common Equity, Notes to the Consolidated Financial Statements, andReport of Independent Certified Public Accountants, which information is hereby incorporated by reference and filed as part ofExhibit 13 to this report.
| Page No. | ||
Report of Independent Certified Public Accountants on Financial Statement Schedules | 5 | |
Financial Statement Schedule I — Condensed Parent Company Financial Statements | 33-36 | |
Financial Statement Schedule II — Valuation and Qualifying Accounts and Reserves for the years ended Dec. 31, 2003, 2002 and 2001 | 37 | |
| 39 | ||
All other financial statement schedules have been omitted since they are not required, are inapplicable or the required information is presented in the financial statements or notes thereto.
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Report of Independent Certified Public Accountants on Financial Statement Schedules
To the Board of Directors of TECO Energy, Inc.:
Our audits of the consolidated financial statements referred to in our report dated March 2, 2004 appearing in the 2003 Annual Report to Shareholders of TECO Energy, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K/A) also included an audit of the financial statement schedules listed in Item 15(a)(2) of this Form 10-K/A. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Tampa, Florida
March 2, 2004
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TAMPA ELECTRIC COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
All other financial statement schedules have been omitted since they are not required, are inapplicable or the required information is presented in the financial statements or notes thereto.
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Tampa Electric Company:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Tampa Electric Company and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a) (2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Tampa, Florida
March 2, 2004
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TAMPA ELECTRIC COMPANY
Assets (millions) Dec. 31, | 2003 | 2002 | ||||||
Property, plant and equipment | ||||||||
Utility plant in service | ||||||||
Electric | $ | 4,693.5 | $ | 4,310.8 | ||||
Gas | 778.2 | 746.7 | ||||||
Construction work in progress | 470.0 | 768.5 | ||||||
Property, plant and equipment, at original costs | 5,941.7 | 5,826.0 | ||||||
Accumulated depreciation | (1,808.2 | ) | (1,720.4 | ) | ||||
| 4,133.5 | 4,105.6 | |||||||
Other property | 3.7 | 7.9 | ||||||
Total property, plant and equipment | 4,137.2 | 4,113.5 | ||||||
Current assets | ||||||||
Cash and cash equivalents | 33.6 | 6.9 | ||||||
Receivables, less allowance for uncollectibles of $1.1 million and $1.1 million at Dec. 31, 2003 and 2002, respectively | 186.0 | 186.5 | ||||||
Inventories | ||||||||
Fuel, at average cost | 71.2 | 79.1 | ||||||
Materials and supplies | 43.8 | 48.1 | ||||||
Prepayments and other | 22.8 | 18.4 | ||||||
Total current assets | 357.4 | 339.0 | ||||||
Deferred debits | ||||||||
Deferred income taxes | 133.5 | 133.3 | ||||||
Unamortized debt expense | 23.2 | 23.7 | ||||||
Regulatory assets | 188.3 | 163.2 | ||||||
Other | 0.1 | 5.6 | ||||||
Total deferred debits | 345.1 | 325.8 | ||||||
Total assets | $ | 4,839.7 | $ | 4,778.3 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
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TAMPA ELECTRIC COMPANY
CONSOLIDATED BALANCE SHEETS (continued)
Liabilities and capital (millions) Dec. 31, | 2003 | 2002 | ||||
Capital | ||||||
Common stock | $ | 1,376.8 | $ | 1,535.1 | ||
Retained earnings | 274.9 | 302.9 | ||||
Total capital | 1,651.7 | 1,838.0 | ||||
Long-term debt, less amount due within one year | 1,590.9 | 1,345.6 | ||||
Total capitalization | 3,242.6 | 3,183.6 | ||||
Current liabilities | ||||||
Long-term debt due within one year | 6.1 | 81.0 | ||||
Notes payable | — | 10.5 | ||||
Accounts payable | 167.9 | 178.8 | ||||
Customer deposits | 101.4 | 94.6 | ||||
Interest accrued | 26.7 | 18.3 | ||||
Taxes accrued | 82.9 | 46.9 | ||||
Total current liabilities | 385.0 | 430.1 | ||||
Deferred credits | ||||||
Deferred income taxes | 474.5 | 483.1 | ||||
Investment tax credits | 22.6 | 27.1 | ||||
Regulatory liabilities | 560.2 | 538.7 | ||||
Other | 154.8 | 115.7 | ||||
Total deferred credits | 1,212.1 | 1,164.6 | ||||
Total liabilities and capital | $ | 4,839.7 | $ | 4,778.3 | ||
The accompanying notes are an integral part of the consolidated financial statements.
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TAMPA ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF INCOME
The accompanying notes are an integral part of the consolidated financial statements.
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TAMPA ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions) For the years ended Dec. 31, | 2003 | 2002 | 2001 | |||||||||
Cash flows from operating activities | ||||||||||||
Net income | $ | 123.4 | $ | 196.0 | $ | 177.1 | ||||||
Adjustments to reconcile net income to net cash from operating activities: | ||||||||||||
Depreciation | 243.0 | 220.1 | 201.3 | |||||||||
Deferred income taxes | (23.9 | ) | 23.6 | (2.0 | ) | |||||||
Investment tax credits, net | (4.6 | ) | (4.4 | ) | (4.5 | ) | ||||||
Allowance for funds used during construction | (27.4 | ) | (34.5 | ) | (9.2 | ) | ||||||
Loss on sales of assets, pre-tax | 0.8 | — | — | |||||||||
Asset impairment, pre-tax | 79.6 | — | — | |||||||||
Deferred recovery clause | (27.3 | ) | 72.2 | (19.0 | ) | |||||||
Refunded to customers | — | (6.4 | ) | — | ||||||||
Receivables, less allowance for uncollectibles | 0.5 | (19.8 | ) | 19.1 | ||||||||
Inventories | 12.2 | (7.2 | ) | (10.8 | ) | |||||||
Prepayments and other deposits | (3.1 | ) | (2.4 | ) | (9.2 | ) | ||||||
Taxes accrued | 36.0 | (10.4 | ) | (14.3 | ) | |||||||
Interest accrued | 8.4 | 2.3 | (18.1 | ) | ||||||||
Accounts payable | (10.8 | ) | 43.1 | (52.4 | ) | |||||||
Other | 70.4 | 2.5 | 35.2 | |||||||||
Cash flows from operating activities | 477.2 | 474.7 | 293.2 | |||||||||
Cash flows from investing activities | ||||||||||||
Capital expenditures | (331.7 | ) | (685.7 | ) | (499.3 | ) | ||||||
Allowance for funds used during construction | 27.4 | 34.5 | 9.2 | |||||||||
Net proceeds from sales of assets | 4.3 | — | — | |||||||||
Cash flows from investing activities | (300.0 | ) | (651.2 | ) | (490.1 | ) | ||||||
Cash flows from financing activities | ||||||||||||
Proceeds from contributed capital from parent | — | 217.0 | 170.0 | |||||||||
Return of contributed capital to parent | (158.3 | ) | — | — | ||||||||
Proceeds from long-term debt | 250.0 | 689.3 | 250.0 | |||||||||
Repayment of long-term debt | (80.3 | ) | (302.4 | ) | (54.4 | ) | ||||||
Net (decrease) increase in short-term debt | (10.5 | ) | (238.5 | ) | 17.8 | |||||||
Payment of dividends | (151.4 | ) | (197.4 | ) | (171.8 | ) | ||||||
Cash flows from financing activities | (150.5 | ) | 168.0 | 211.6 | ||||||||
Net (decrease) increase in cash and cash equivalents | 26.7 | (8.5 | ) | 14.7 | ||||||||
Cash and cash equivalents at beginning of year | 6.9 | 15.4 | 0.7 | |||||||||
Cash and cash equivalents at end of year | $ | 33.6 | $ | 6.9 | $ | 15.4 | ||||||
Supplemental disclosure of cash flow information | ||||||||||||
Cash paid during the year for: | ||||||||||||
Interest | $ | 109.4 | $ | 74.0 | $ | 85.3 | ||||||
Income taxes | $ | 61.9 | $ | 143.9 | $ | 119.9 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
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TAMPA ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(millions) For the years ended Dec. 31, | 2003 | 2002 | 2001 | ||||||
Balance, beginning of year | $ | 302.9 | $ | 304.3 | $ | 299.0 | |||
Add: Net income | 123.4 | 196.0 | 177.1 | ||||||
| 426.3 | 500.3 | 476.1 | |||||||
Deduct: Cash dividends on capital stock Common | 151.4 | 197.4 | 171.8 | ||||||
| 151.4 | 197.4 | 171.8 | |||||||
Balance, end of year | $ | 274.9 | $ | 302.9 | $ | 304.3 | |||
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(millions, except share amounts) | Current Redemption Price | Capital Stock Dec. 31, | Cash dividends paid(1) | |||||||||
| Shares | Amount | Per Share | Amount | |||||||||
Common stock — without par value | ||||||||||||
25 million shares authorized | ||||||||||||
2003 | N/A | 10 | $ | 1,376.8 | N/A | $ | 151.4 | |||||
2002 | N/A | 10 | $ | 1,535.1 | N/A | $ | 197.4 | |||||
Preferred stock — $100 par value | ||||||||||||
1.5 million shares authorized, none outstanding | ||||||||||||
Preferred stock – no par | ||||||||||||
2.5 million shares authorized, none outstanding | ||||||||||||
Preference stock – no par | ||||||||||||
2.5 million shares authorized, none outstanding | ||||||||||||
| (1) | Quarterly dividends paid on Feb. 15, May 15, Aug. 15 and Nov. 15. |
The accompanying notes are an integral part of the consolidated financial statements.
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TAMPA ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION (continued)
Long-Term Debt (millions) Dec. 31, | Due | 2003 | 2002 | |||||||
Tampa Electric | ||||||||||
First mortgage bonds (issuable in series): | ||||||||||
7.75% (effective rate of 7.96%) | 2022 | $ | 75.0 | $ | 75.0 | |||||
6.125% (effective rate of 6.61%) | 2003 | — | 75.0 | |||||||
Installment contracts payable(1): | ||||||||||
6.25% Refunding bonds (effective rate of 6.81%)(2) | 2034 | 86.0 | 86.0 | |||||||
5.85% Refunding bonds (effective rate of 5.88%) | 2030 | 75.0 | 75.0 | |||||||
5.1% Refunding bonds (effective rate of 5.77%)(3) | 2013 | 60.7 | 60.7 | |||||||
5.5% Refunding bonds (effective rate of 6.34%)(3) | 2023 | 86.4 | 86.4 | |||||||
4% (effective rate of 4.22%)(4) | 2025 | 51.6 | 51.6 | |||||||
4% (effective rate of 4.17%)(4) | 2018 | 54.2 | 54.2 | |||||||
4.25% (effective rate of 4.44%)(4) | 2020 | 20.0 | 20.0 | |||||||
Notes: 6.875% (effective rate of 6.98%)(5) | 2012 | 210.0 | 210.0 | |||||||
6.375% (effective rate of 7.35%)(5) | 2012 | 330.0 | 330.0 | |||||||
5.375% (effective rate of 5.59%)(5) | 2007 | 125.0 | 125.0 | |||||||
6.25% (effective rate of 6.31%)(5) | 2016 | 250.0 | — | |||||||
| 1,423.9 | 1,248.9 | |||||||||
Peoples Gas System | ||||||||||
Senior Notes: (6) 10.35% | 2007 | 3.4 | 4.2 | |||||||
10.33% | 2008 | 4.8 | 5.6 | |||||||
10.3% | 2009 | 6.4 | 7.2 | |||||||
9.93% | 2010 | 6.6 | 7.4 | |||||||
8.0% | 2012 | 23.3 | 25.4 | |||||||
Notes: 6.875% (effective rate of 6.98%)(5) | 2012 | 40.0 | 40.0 | |||||||
6.375% (effective rate of 7.34%)(5) | 2012 | 70.0 | 70.0 | |||||||
5.375% (effective rate of 5.58%)(5) | 2007 | 25.0 | 25.0 | |||||||
| 179.5 | 184.8 | |||||||||
| 1,603.4 | 1,433.7 | |||||||||
Unamortized debt premium (discount), net | (6.4 | ) | (7.1 | ) | ||||||
| 1,597.0 | 1,426.6 | |||||||||
Less amount due within one year(7) | 6.1 | 81.0 | ||||||||
Total long-term debt | $ | 1,590.9 | $ | 1,345.6 | ||||||
| (1) | Tax exempt securities. |
| (2) | Proceeds of these bonds were used to refund bonds with an interest rate of 9.9% in February 1995. For accounting purposes, interest expense has been recorded using a blended rate of 6.52% on the original and refunding bonds, consistent with regulatory treatment. |
| (3) | Proceeds on these bonds were used to refund bonds with interest rates of 5.75% to 8%. |
| (4) | The interest rate on these bonds was fixed for a five-year term on Aug. 5, 2002. |
| (5) | These notes are subject to redemption in whole or in part, at any time, at the option of the company. |
| (6) | These long-term debt agreements contain various restrictive covenants, including provisions related to interest coverage, maximum levels of debt-to-total capitalization and limitations on dividends. |
| (7) | Of the amount due in 2004, $0.8 million may be satisfied by the substitution of property in lieu of cash payments. |
A substantial part of the tangible assets of Tampa Electric is pledged as collateral to secure its first mortgage bonds, and certain pollution control equipment is pledged to secure installment contracts payable. Maturities and annual sinking fund requirements of long-term debt for the years 2005, 2006, 2007 and 2008 are $5.5 million, $5.9 million, $156.1 million and $5.7 million, respectively.
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TAMPA ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION (continued)
At Dec. 31, 2003, total long-term debt had a carrying amount of $1,590.9 million and an estimated fair market value of $1,697.4 million. The estimated fair market value of long-term debt was based on quoted market prices for the same or similar issues, on the current rates offered for debt of the same remaining maturities, or for long-term debt issues with variable rates that approximate market rates, at carrying amounts. The carrying amount of long-term debt due within one year approximated fair market value because of the short maturity of these instruments.
In April 2003, Tampa Electric issued $250 million of 6.25% Senior Notes due in 2016, in a private placement. Net proceeds of approximately $250 million were used to repay short-term indebtedness and for general corporate purposes. The 6.25% Senior Notes contain covenants that (1) require Tampa Electric Company to maintain, as of the last day of each fiscal quarter, a debt-to-capital ratio, as defined in the agreement, that does not exceed 60%, and (2) prohibit the creation of any liens on any of its property in excess of $787 million in the aggregate, with certain exceptions, as defined, without equally and ratably securing the 6.25% Senior Notes.
The accompanying notes are an integral part of the consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
The significant accounting policies are as follows:
Principles of Consolidation
Tampa Electric Company is a wholly-owned subsidiary of TECO Energy, Inc, and is comprised of the Electric division, generally referred to as Tampa Electric, and the Natural Gas division, generally referred to as Peoples Gas System (PGS).
All significant intercompany balances and intercompany transactions have been eliminated in consolidation.
The use of estimates is inherent in the preparation of financial statements in accordance with generally accepted accounting principles (GAAP). Actual results could differ from these estimates.
Planned Major Maintenance
Tampa Electric and PGS expense major maintenance costs as incurred. Concurrent with a planned major maintenance outage, the cost of adding or replacing retirement units-of-property is capitalized in conformity with Florida Public Service Commission (FPSC) and Federal Energy Regulatory Commission (FERC) regulations.
Allowance for Funds Used During Construction (AFUDC)
AFUDC is a non-cash credit to income with a corresponding charge to utility plant which represents the cost of borrowed funds and a reasonable return on other funds used for construction. The rate used to calculate AFUDC is revised periodically to reflect significant changes in Tampa Electric’s cost of capital. The rate was 7.79% for 2003, 2002 and 2001. Total AFUDC for 2003, 2002 and 2001 was $27.4 million, $34.5 million, and $9.2 million, respectively. The base on which AFUDC is calculated excludes construction work-in-progress which has been included in rate base.
Deferred Income Taxes
TECO Energy utilizes the liability method in the measurement of deferred income taxes. Under the liability method, the temporary differences between the financial statement and tax bases of assets and liabilities are reported as deferred taxes measured at current tax rates. Tampa Electric and PGS are regulated, and their books and records reflect approved regulatory treatment, including certain adjustments to accumulated deferred income taxes and the establishment of a corresponding regulatory tax liability reflecting the amount payable to customers through future rates.
Investment Tax Credits
Investment tax credits have been recorded as deferred credits and are being amortized to income tax expense over the service lives of the related property.
Revenue Recognition
Tampa Electric Company recognizes revenues consistent with the Securities and Exchange Commission’s Staff Accounting Bulleting (SAB) 104,Revenue Recognition in Financial Statements. The interpretive criteria outlined in SAB 104 are that 1) there is persuasive evidence that an arrangement exists; 2) delivery has occurred or services have been rendered; 3) the fee is fixed and determinable; and 4) collectibility is reasonably assured. Except as discussed below, Tampa Electric Company recognizes revenues on a gross basis when earned for the physical delivery of products or services and the risks and rewards of ownership have transferred to the buyer.
The regulated utilities’ (Tampa Electric and Peoples Gas System) retail businesses and the prices charged to customers are regulated by the FPSC. Tampa Electric’s wholesale business is regulated by FERC. SeeNote 3 for a discussion of significant regulatory matters and the applicability of Financial Accounting Standard No. (FAS) 71,Accounting for the Effects of Certain Types of Regulation, to the company.
Revenues and Fuel Costs
Revenues include amounts resulting from cost recovery clauses which provide for monthly billing charges to reflect increases or decreases in fuel, purchase power, conservation and environmental costs for Tampa Electric and purchase gas, interstate pipeline capacity and conservation costs for PGS. These adjustment factors are based on costs incurred and projected for a specific recovery period. Any over-recovery or under-recovery of costs plus an interest factor are taken into account in the process of setting adjustment factors for subsequent recovery periods. Over-recoveries of costs are recorded as deferred credits, and under-recoveries of costs are recorded as deferred charges.
Certain other costs incurred by the regulated utilities are allowed to be recovered from customers through prices approved in the regulatory process. These costs are recognized as the associated revenues are billed. The regulated utilities accrue base revenues for services rendered but unbilled to provide a closer matching of revenues and expenses. SeeNote 3.
As of Dec. 31, 2003 and 2002, unbilled revenues of $45.7 million and $41.3 million, respectively, are included in the “receivables” line item on the balance sheet.
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Purchased Power
Tampa Electric purchases power on a regular basis primarily to meet the needs of its retail customers. As a result of the sale of Hardee Power Partners, Ltd. (HPP) in October 2003 (seeNotes 14 and21to theTECO Energy Consolidated Financial Statementsin the 2003 Annual Report), subsequent power purchases from HPP are reflected as non-affiliate purchases by Tampa Electric. Tampa Electric’s long-term power purchase agreement from HPP was not affected by TPS’ sale of HPP. Under the existing agreement, which has been approved by the FERC and FPSC, Tampa Electric has the right to purchase, on average, approximately 52% of the total output of the Hardee power station. Tampa Electric purchased power from non-TECO Energy affiliates, including HPP, at a cost of $234.9 million, $253.7 million, and $209.7 million, respectively, for the years ended Dec. 31, 2003, 2002 and 2001. These purchased power costs are recoverable through an FPSC-approved cost recovery clause.
Depreciation
Tampa Electric provides for depreciation primarily by the straight-line method at annual rates that amortize the original cost, less net salvage value, of depreciable property over its estimated service life. The provision for utility plant in service, expressed as a percentage of the original cost of depreciable property was 4.6% for 2003 and 4.2% for 2002 and 2001. For the year ended Dec. 31, 2003, Tampa Electric recognized depreciation expense of $36.6 million related to accelerated depreciation of certain Gannon power station coal-fired assets, in accordance with a regulatory order issued by the FPSC. Construction work-in-progress is not depreciated until the asset is completed or placed in service.
The implementation of FAS 143,Accounting for Asset Retirement Obligationsin 2003 resulted in an increase in the carrying amount of long-lived assets and the reclassification of the accumulated reserve for cost of removal from accumulated depreciation to “Regulatory liabilities,” for all periods presented. The adjusted capitalized amount is depreciated over the remaining useful life of the asset (seeNote 4).
Accounting for Excise Taxes, Franchise Fees and Gross Receipts
Tampa Electric Company is allowed to recover certain costs incurred from customers through prices approved by the regulatory process. The amounts included in customers’ bills for franchise fees and gross receipt taxes are included as revenues on the Consolidated Statements of Income. These amounts totaled $77.7 million, $73.8 million and $71.7 million, for the years ended Dec. 31, 2003, 2002 and 2001, respectively. Franchise fees and gross receipt taxes payable by the regulated utilities are included as an expense on the Consolidated Statements of Income in “Taxes, other than income”. For the years ended Dec. 31, 2003, 2002 and 2001, these totaled $77.5 million, $73.7 million and $71.0 million, respectively.
Excise taxes paid by the regulated utilities are not material and are expenses when incurred.
Asset Impairments
Effective Jan. 1, 2002, Tampa Electric Company adopted FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes FAS 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of. FAS 144 addresses accounting and reporting for the impairment or disposal of long-lived assets, including the disposal of a segment of a business.
In accordance with FAS 144, the company assesses whether there has been impairment of its long-lived assets and certain intangibles held and used by the company when such impairment indicators exist. Indicators of impairment existed for certain long-term turbine purchase contracts, triggering a requirement to ascertain the recoverability of these assets using undiscounted cash flows before interest expense. SeeNote 7 for specific details regarding the results of these assessments.
Restrictions on Dividend Payments and Transfer of Assets
Tampa Electric’s first mortgage bond indenture and certain long-term debt at PGS contain restrictions that limit the payment of dividends and distributions on the common stock of Tampa Electric Company. Tampa Electric’s first mortgage bond indenture does not limit loans or advances. As of Dec. 31, 2003 and 2002, the balances restricted as to transfers from Tampa Electric to TECO Energy under the first mortgage bonds were 3% and 20%, respectively, of consolidated common equity. Tampa Electric’s new credit facilities include a covenant limiting cumulative distributions and outstanding affiliate loans.
SeeNotes 5and 14 for a more detailed description of significant financial covenants.
2. Derivatives and Hedging
From time to time, Tampa Electric Company enters into futures, forwards, swaps and option contracts to limit the exposure to price fluctuations for physical purchases and sales of natural gas in the course of normal operations.
The company uses derivatives only to reduce normal operating and market risks, not for speculative purposes. The company’s primary objective is to reduce the impact of market price volatility on ratepayers, and uses derivative instruments primarily to optimize the value of physical assets, including generation capacity, natural gas production and natural gas delivery.
The risk management policies adopted by the company provide a framework through which management monitors various risk exposures. Daily and periodic reporting of positions and other relevant metrics are performed by a centralized risk management group which is independent of all operating companies.
Effective Jan. 1, 2001, the company adopted FAS 133,Accounting for Derivative Instruments and Hedging Activities. The new standard requires companies to recognize derivatives as either assets or liabilities in the financial statements, to measure those
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instruments at fair value, and to reflect the changes in the fair value of those instruments as either components of other comprehensive income (OCI) or in net income, depending on the designation of those instruments. The changes in fair value that are recorded in OCI are not immediately recognized in current net income. As the underlying hedged transaction matures or the physical commodity is delivered, the deferred gain or the loss on the related hedging instrument must be reclassified from OCI to earnings based on its value at the time of its reclassification. For effective hedge transactions, the amount reclassified from OCI to earnings is offset in net income by the amount paid or received on the underlying physical transaction. Additionally, amounts deferred in OCI related to an effective designated cash flow hedge must be reclassified to current earnings if the anticipated hedged transaction is no longer probable of occurring.
At Dec. 31, 2003 and 2002, respectively, the company had derivatives assets of $4.8 million and $3.5 million. The amounts recorded in accumulated other comprehensive income (OCI), as of Dec. 31, 2003 and 2002, are fully offset by regulatory assets or liabilities to reflect the impact of the fuel recovery clause on the results of hedging activities.
For the years ended Dec. 31, 2003, 2002 and 2001, Tampa Electric Company reclassified from OCI to earnings, pre-tax gains (losses) of $3.2 million, $0.2 million and $(0.7) million, respectively. Amounts reclassified were primarily related to cash flow hedges of physical purchases of natural gas. For these types of hedge relationships, the gain or loss on the derivative, reclassified from OCI to earnings, is offset by a regulatory asset or liability, reflecting the fact that all fuel hedging activity is subject to the fuel recovery clause (seeNote 3).
Based on the fair values of derivatives at Dec. 31, 2003, pre-tax gains of $4.8 million are expected to be reversed from OCI to the Consolidated Statements of Income within the next twelve months. However, these gains and other future reclassifications from OCI will fluctuate with movements in the underlying market price of the derivative instruments. The company does not currently have any cash flow hedges for transactions forecasted to take place in periods subsequent to 2004.
3. Regulatory
As discussed inNote 1, Tampa Electric’s and PGS’ retail business are regulated by the FPSC.
Base Rate – Tampa Electric
Since the expiration, in 1999, of agreements entered into in 1996 with Florida’s Office of Public Counsel (OPC) and the Florida Industrial Power Users Group (FIPUG), which were approved by the FPSC, Tampa Electric is not under a new stipulation to stabilize prices while securing fair earnings opportunities. Tampa Electric’s rates and allowed return on equity (ROE) range of 10.75 percent to 12.75 percent with a midpoint of 11.75 percent are in effect until such time as changes are occasioned by an agreement approved by the FPSC or other PFSC actions as a result of rate other proceedings initiated by Tampa Electric, FPSC staff or other interest parties. Tampa Electric expects to continue earnings within its allowed ROE range.
Tampa Electric has not sought a base rate increase to recover the investment in the Bayside Power Station, of which phase one entered service in April 2003.
Cost Recovery – Tampa Electric
2003 Proceedings
In February 2003, Tampa Electric filed a request for an additional fuel cost adjustment of almost $61 million due to continued increases in the cost of natural gas and oil and the plan to phase out Gannon Units 1 through 4 in 2003. In March 2003, the FPSC approved Tampa Electric’s new fuel rates as well as new fuel rates for the other peninsular Florida investor-owned utilities.
In September 2003, Tampa Electric filed with the FPSC for approval of fuel and purchased power, capacity, environmental and conservation cost recovery rates for the period January through December 2004. In November, the FPSC approved Tampa Electric’s requested changes except for the lower coal transportation rate as a results of a new contract with TECO Transport described below. The resulting rates include the impacts of increased use of natural gas at the Bayside Power Station and the collection of $91 million for under recovery of fuel expense for 2002 and 2003. The filing also included estimated waterborne transportation rates for coal transportation services (seeNote 12). The FPSC did not allow the recovery of $8.4 million it characterized as savings from shutting down the Gannon Station earlier than originally planned which the FPSC deemed generated operations and maintenance savings. The rates include projected costs associated with environmental projects required under the Florida Department of Environmental Protection (FDEP) Consent Final Judgment (seeNote 14 for additional details regarding these environmental matters). The costs associated with this disallowance were recognized in 2003.
Tampa Electric filed its objection to the disallowance of the recovery of the $8.4 million and a motion asking FPSC to reconsider its decision because all facts and law were not taken into account. The motion was filed on Jan. 6, 2004, and a decision on this matter is expected in the first quarter of 2004. SeeRegulation – Cost Recovery Clauses section ofMD&A.
As part of the regulatory process, it is reasonably likely that third parties may intervene on this or similar matters in the future. The company is unable to predict the timing, nature or impact of such future actions.
Base Rate – Peoples Gas
On June 27, 2002, PGS filed a petition with the FPSC to increase its service rates. The requested rates would have resulted in a $22.6 million annual base revenue increase, reflecting a ROE mid-point of 11.75 percent.
On the date of the FPSC hearing, PGS agreed to a settlement with all parties involved, and a final FPSC order was granted on Dec. 17, 2002. PGS received authorization to increase annual base revenues by $12.05 million. The new rates allow for an ROE range of 10.25 to 12.25 percent with an 11.25 percent midpoint ROE and a capital structure with 57.43 percent equity. The increase went into effect on Jan. 16, 2003.
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Cost Recovery – Peoples Gas
In November 2003, the FPSC approved rates under Peoples’ Gas Purchased Gas Adjustment (PGA) cap factor for the period January 2004 through December 2004. The PGA is a factor that can vary monthly due to changes in actual fuel costs but is not anticipated to exceed the annual cap.
Other Items
Coal Transportation Contract
Tampa Electric’s contract for coal transportation and storage services with TECO Transport expired on Dec. 31, 2003. In June 2003, Tampa Electric issued a Request For Proposal (RFP) to potential providers requesting services for the next five years. The result of the RFP process was the execution of a new contract between Tampa Electric and TECO Transport with market rates supported by the results of the RFP and an independent expert in maritime transportation matters. The prudence of the RFP process and final contract is expected to be reviewed by the FPSC in May 2004, with a decision expected in July 2004.
Regional Transmission Organization (RTO)
In October 2002, the RTO process involving the proposed formation of GridFlorida, LLC, as initiated in response to the Federal Regulatory Commission’s (FERC’s) continuing effort to affect open access to transmission facilities in large regional markets, was delayed when the OPC filed an appeal with the Florida Supreme Court asserting that the FPSC could not relinquish its jurisdictional responsibility to regulate the IOUs and the approval of GridFlorida would result in such a relinquishment. Oral arguments occurred in May 2003, and the Florida Supreme Court dismissed the OPC appeal citing that it was premature because certain portions of the FPSC GridFlorida order are not final.
In September 2003, a joint meeting of the FERC and FPSC took place to discuss wholesale market and RTO issues related to GridFlorida and in particular federal/state interactions. The FPSC has scheduled a series of collaborative meetings with all interested parties upon their conclusion, will set items for hearing and a hearing schedule. This is expected to occur throughout 2004.
Regulatory Assets and Liabilities
Tampa Electric and PGS maintain their accounts in accordance with recognized policies of the FPSC. In addition, Tampa Electric maintains its accounts in accordance with recognized policies prescribed or permitted by the FERC. These policies conform with generally accepted accounting principles in all material respects.
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Tampa Electric and PGS apply the accounting treatment permitted by FAS 71,Accounting for the Effects of Certain Types of Regulation. Areas of applicability include deferral of revenues under approved regulatory agreements; revenue recognition resulting from cost recovery clauses that provide for monthly billing charges to reflect increases or decreases in fuel; purchased power, conservation and environmental costs; and deferral of costs as regulatory assets when cost recovery is ordered over a period longer than a fiscal year, to the period that the regulatory agency recognizes them. Details of the regulatory assets and liabilities as of Dec. 31, 2003 and 2002 are presented in the following table:
Regulatory Assets and Liabilities(millions)
Dec. 31, | 2003 | 2002 | ||||
Regulatory assets: | ||||||
Regulatory tax asset(1) | $ | 63.3 | $ | 54.9 | ||
Other: | ||||||
Cost recovery clauses | 59.7 | 34.7 | ||||
Coal contract buy-out(2) | 2.7 | 5.4 | ||||
Deferred bond refinancing costs(3) | 32.2 | 35.9 | ||||
Environmental remediation | 20.7 | 20.3 | ||||
Competitive rate adjustment | 5.3 | 7.4 | ||||
Other | 4.4 | 4.6 | ||||
| 125.0 | 108.3 | |||||
Total regulatory assets | $ | 188.3 | $ | 163.2 | ||
Regulatory liabilities: | ||||||
Regulatory tax liability(1) | $ | 29.9 | $ | 36.6 | ||
Other: | ||||||
Deferred allowance auction credits | 1.9 | 2.1 | ||||
Recovery clause related | — | 2.2 | ||||
Environmental remediation | 20.7 | 20.3 | ||||
Transmission and distribution storm reserve | 40.0 | 36.0 | ||||
Deferred gain on property sales(4) | 1.9 | 0.9 | ||||
Accumulated reserve – cost of removal | 462.2 | 440.6 | ||||
Other | 3.6 | — | ||||
| 530.3 | 502.1 | |||||
Total regulatory liabilities | $ | 560.2 | $ | 538.7 | ||
| (1) | Related primarily to plant life. Includes excess deferred taxes of $17.0 million and $20.9 million as of Dec. 31, 2003 and 2002, respectively. |
| (2) | Amortized over a 10-year period ending December 2004. |
| (3) | Unamortized refinancing costs: |
Related to debt transactions as follows (millions): | Amortized until: | |
$ 50.0 | 2004 | |
$ 51.6 | 2005 | |
$ 22.1 | 2007 | |
$ 25.0 | 2011 | |
$ 50.0 | 2011 | |
$150.0 | 2012 | |
$150.0 | 2012 | |
$ 85.9 | 2014 | |
$ 25.0 | 2021 | |
$100.0 | 2022 |
| (4) | Amortized over a 5-year period with various ending dates. |
4. Asset Retirement Obligations
On Jan. 1, 2003, Tampa Electric Company adopted FAS 143,Accounting for Asset Retirement Obligations. The company recognized liabilities for retirement obligations associated with certain long-lived assets, in accordance with the relevant accounting guidance. An asset retirement obligation for a long-lived asset is recognized at fair value at inception of the obligation if there is a legal obligation under an existing or enacted law or statute, a written or oral contract, or by legal construction under the doctrine of promissory estoppel. Retirement obligations are recognized only if the legal obligation exists in connection with or as a result of the permanent retirement, abandonment or sale of a long-lived asset.
When the liability is initially recorded, the carrying amount of the related long-lived asset is correspondingly increased. Over time, the liability is accreted to its future value. The corresponding amount capitalized at inception is depreciated over the remaining useful life of the asset. The liability must be revalued each period based on current market prices.
As a result of the adoption of FAS 143, Tampa Electric Company recorded an increase to net property, plant and equipment of $0.1 million (net of accumulated depreciation), an increase in regulatory assets of $0.2 million, and an increase to asset retirement obligations of $0.3 million. The after-tax charge recorded as a change in accounting principle was not material.
For year ended Dec. 31, 2003, accretion expense associated with asset retirement obligations for Tampa Electric Company was not material. During this period, no new retirement obligations were incurred and no significant revisions to estimated cash flows used in determining the recognized asset retirement obligations were necessary. FAS 143 was not effective for years ended Dec. 31, 2002 and 2001.
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As regulated utilities, Tampa Electric and PGS must file depreciation and dismantlement studies periodically and receive approval from the FPSC before implementing new depreciation rates. Included in approved depreciation rates is either an implicit net salvage factor or a cost of removal factor, expressed as a percentage. The net salvage factor is principally comprised of two components – a salvage factor and a cost of removal or dismantlement factor. The company uses current cost of removal or dismantlement factors as part of the estimation method to approximate the amount of cost of removal in accumulated depreciation.
Upon adoption of FAS 143 at Jan. 1, 2003, the estimated accumulated cost of removal and dismantlement included in net accumulated depreciation at Dec. 31, 2003 and 2002 of $462.2 million and $440.6 million, respectively, was reclassified to a regulatory liability for all periods presented (see alsoNote 3). For Tampa Electric and PGS, the original cost of utility plant retired or otherwise disposed of and the cost of removal, or dismantlement, less salvage value are charged to accumulated depreciation and the accumulated cost of removal reserve reported as a regulatory liability, respectively.
5. Short-Term Debt
At Dec. 31, 2003 and 2002, the following credit facilities and related borrowings existed:
| Credit Facilities | Dec. 31, 2003 | Dec. 31, 2002 | ||||||||||||||||
(millions) | Credit Facilities | Borrowings Outstanding | Letters of Credit Outstanding | Credit Facilities | Borrowings Outstanding | Letters of Credit Outstanding | ||||||||||||
Recourse: | ||||||||||||||||||
Tampa Electric: | �� | |||||||||||||||||
1-year facility | $ | 125.0 | $ | — | $ | — | $ | 300.0 | $ | — | $ | — | ||||||
3-year facility | 125.0 | — | — | — | — | — | ||||||||||||
Total | $ | 250.0 | $ | — | $ | — | $ | 300.0 | $ | — | $ | — | ||||||
The credit facility requires commitment fees of 20 basis points, and drawn amounts are charged interest at LIBOR 105-117.5 basis points, depending upon the amount of the draw, at current ratings. Notes payable at Dec. 31, 2002 consisted of $10.5 million of commercial paper with a weighted average interest rate of 1.86%. There were no notes payable at Dec. 31, 2003.
On Nov. 7, 2003, Tampa Electric replaced its maturing $300 million credit facility with a $125 million one-year credit facility and a $125 million three-year credit facility, maturing in November 2004 and November 2006, respectively. In addition to the financial covenants described below and inNotes 1 and14, the two new facilities include a covenant limiting cumulative distributions after Oct. 31, 2003 and outstanding loans to its parent to an amount representing an accumulation of net income after May 31, 2003 and capital contributions from the parent after Oct. 31, 2003, plus $450 million.
6. Common Stock
Tampa Electric Company is a wholly-owned subsidiary of TECO Energy, Inc.
| Common Stock | Issue Expense | |||||||||||||
(millions, except per share amounts) | Shares | Amount | Total | |||||||||||
Balance Dec. 31, 2000 | 10 | $ | 1,148.8 | $ | (0.7 | ) | $ | 1,148.1 | ||||||
Contributed capital from parent | — | 170.0 | — | 170.0 | ||||||||||
Balance Dec. 31, 2001 | 10 | 1,318.8 | (0.7 | ) | 1,318.1 | |||||||||
Contributed capital from parent | — | 217.0 | — | 217.0 | ||||||||||
Balance Dec. 31, 2002 | 10 | 1,535.8 | (0.7 | ) | 1,535.1 | |||||||||
Contributed capital returned to parent | — | (158.3 | ) | — | (158.3 | ) | ||||||||
Balance Dec. 31, 2003 | 10 | $ | 1,377.5 | $ | (0.7 | ) | $ | 1,376.8 | ||||||
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7. Asset Impairments
In 2003, Tampa Electric Company recorded a $48.9 million after-tax charge ($79.6 million pre-tax) to reflect the impact of the cancellation of turbine purchase commitments. As reported previously and inNote 12, certain turbine rights had been transferred from Other Unregulated operations of TECO Energy to Tampa Electric in 2002 for use in Tampa Electric’s generation expansion activities. These cancellations, made in April 2003, fully terminate all turbine purchase obligations.
8. Restructuring Costs
In September and October of 2003, TECO Energy announced a corporate reorganization to restructure the company along functional lines, consistent with its objectives to grow the core utility operation, maintain liquidity, generate cash and maximize the value in the existing assets. As a result of these actions, TECO Energy is now aligned to provide for centralized oversight along functional lines for power plant operations, energy delivery, energy management, and human resources and technology/support services. The 2003 actions included the involuntary termination or retirement of 232 employees at Tampa Electric Company, including officers and other personnel from operations and support services.
In 2002, TECO Energy initiated a restructuring program that impacted approximately 182 employees at Tampa Electric. This program included retirements, the elimination of positions and other cost control measures. The total costs associated with this program included severance, salary continuation and other termination and retirement benefits.
Tampa Electric recognized a pre-tax expense of $14.0 million and $16.6 million for accrued benefits and other termination and retirement benefits for the years ended Dec. 31, 2003 and 2002, respectively. Tampa Electric Company completed these restructuring activities as of Dec. 31, 2003. As of Dec. 31, 2003 and 2002, respectively, no adjustments were made to the benefits initially accrued for and $8.4 million and $16.6 million, respectively, of the accrued benefits were paid or otherwise settled.
9. Income Tax Expense
Tampa Electric Company is included in the filing of a consolidated federal income tax return with TECO Energy and its affiliates. Tampa Electric Company’s income tax expense is based upon a separate return computation. Income tax expense consists of the following components:
Income Tax Expense
(millions) | Federal | State | Total | |||||||||
2003 | ||||||||||||
Currently payable | $ | 74.9 | $ | 17.6 | $ | 92.5 | ||||||
Deferred | (16.0 | ) | (7.9 | ) | (23.9 | ) | ||||||
Amortization of investment tax credits | (4.6 | ) | — | (4.6 | ) | |||||||
Total income tax expense | $ | 54.3 | $ | 9.7 | 64.0 | |||||||
Included in other income, net | (30.0 | ) | ||||||||||
Included in operating expenses | $ | 94.0 | ||||||||||
2002 | ||||||||||||
Currently payable | $ | 66.7 | $ | 14.9 | $ | 81.6 | ||||||
Deferred | 23.2 | 0.4 | 23.6 | |||||||||
Amortization of investment tax credits | (4.4 | ) | — | (4.4 | ) | |||||||
Total income tax expense | $ | 85.5 | $ | 15.3 | 100.8 | |||||||
Included in other income, net | 0.5 | |||||||||||
Included in operating expenses | $ | 100.3 | ||||||||||
2001 | ||||||||||||
Currently payable | $ | 88.6 | $ | 15.7 | $ | 104.3 | ||||||
Deferred | (1.3 | ) | (0.7 | ) | (2.0 | ) | ||||||
Amortization of investment tax credits | (4.4 | ) | — | (4.4 | ) | |||||||
Total income tax expense | $ | 82.8 | $ | 15.0 | 97.9 | |||||||
Included in other income, net | 0.2 | |||||||||||
Included in operating expenses | $ | 97.7 | ||||||||||
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Deferred taxes result from temporary differences in the recognition of certain liabilities or assets for tax and financial reporting purposes. The principal components of the company’s deferred tax assets and liabilities recognized in the balance sheet are as follows:
Deferred Income Tax Assets and Liabilities
(millions) Dec. 31, | 2003 | 2002 | ||||||
Deferred tax assets(1) | ||||||||
Property related | $ | 93.6 | $ | 90.3 | ||||
Leases | 3.1 | 3.5 | ||||||
Insurance reserves | 20.5 | 17.7 | ||||||
Early capacity payments | 3.5 | 6.0 | ||||||
Other | 12.8 | 15.8 | ||||||
Total deferred income tax assets | 133.5 | 133.3 | ||||||
Deferred income tax liabilities(1) | ||||||||
Property related | (500.0 | ) | (502.8 | ) | ||||
Other | 25.5 | 19.7 | ||||||
Total deferred income tax liabilities | (474.5 | ) | (483.1 | ) | ||||
Accumulated deferred income taxes | $ | (341.0 | ) | $ | (349.8 | ) | ||
| (1) | Certain property related assets and liabilities have been netted. |
The total income tax provisions differ from amounts computed by applying the federal statutory tax rate to income before income taxes for the following reasons:
Effective Income Tax Rate
(millions) | 2003 | 2002 | 2001 | |||||||||
Net income(1) | $ | 123.4 | $ | 196.0 | $ | 177.1 | ||||||
Total income tax provision(1) | 64.0 | 100.8 | 97.9 | |||||||||
Income before income taxes(1) | $ | 187.4 | $ | 296.8 | $ | 275.0 | ||||||
Income taxes on above at federal statutory rate of 35% | $ | 65.6 | $ | 103.8 | $ | 96.2 | ||||||
Increase (decrease) due to | ||||||||||||
State income tax, net of federal income tax | 6.3 | 10.0 | 9.8 | |||||||||
Amortization of investment tax credits | (4.6 | ) | (4.4 | ) | (4.5 | ) | ||||||
Equity portion of AFUDC | (7.0 | ) | (8.7 | ) | (2.3 | ) | ||||||
Other | 3.7 | 0.1 | (1.3 | ) | ||||||||
Total income tax provision | $ | 64.0 | $ | 100.8 | $ | 97.9 | ||||||
Provision for income taxes as a percent of income before income taxes | 34.2 | % | 34.0 | % | 35.6 | % | ||||||
| (1) | Includes $48.9 million after-tax ($79.6 million pre-tax) charges associated with cancellation of turbine purchase commitments noted above. |
10. Other Comprehensive Income
Tampa Electric Company reported the following comprehensive income (loss) for the years ended Dec. 31, 2003, 2002 and 2001 related to changes in the fair value of cash flow hedges:
Comprehensive income (loss) (millions) | Gross | Tax | Net | |||||||||
2003 | ||||||||||||
Unrealized gain on cash flow hedges | $ | 3.2 | $ | 1.2 | $ | 2.0 | ||||||
Less: Gain reclassified to net income | (3.2 | ) | (1.2 | ) | (2.0 | ) | ||||||
Total other comprehensive income (loss) | $ | — | $ | — | $ | — | ||||||
2002 | ||||||||||||
Unrealized gain on cash flow hedges | $ | 0.3 | $ | 0.1 | $ | 0.2 | ||||||
Less: Gain reclassified to net income | (0.2 | ) | (0.1 | ) | (0.1 | ) | ||||||
Total other comprehensive income (loss) | $ | 0.1 | $ | — | $ | 0.1 | ||||||
2001 | ||||||||||||
Unrealized (loss) on cash flow hedges | $ | (0.8 | ) | $ | (0.3 | ) | $ | (0.5 | ) | |||
Less: Loss reclassified to net income | 0.7 | 0.3 | 0.4 | |||||||||
Total other comprehensive income (loss) | $ | (0.1 | ) | $ | — | $ | (0.1 | ) | ||||
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11. Employee Postretirement Benefits
Pension Benefits
Tampa Electric Company is a participant in the comprehensive retirement plans of TECO Energy (multi-employer plans), including a non-contributory defined benefit retirement plan which covers substantially all employees. Where appropriate and reasonably determinable, the portion of expenses, income, gains or losses allocable to Tampa Electric Company are presented. Otherwise, such amounts presented reflect the amount allocable to all participants of the TECO Energy retirement plans. Benefits are based on employees’ age, years of service and final average earnings. On Apr. 1, 2000, the plan was amended to provide for benefits to be earned and payable substantially on a lump sum basis through an age and service credit schedule for eligible participants leaving the company on or after July 1, 2001. Other significant provisions of the plan, such as eligibility, definitions of credited service, final average earnings, etc., were largely unchanged. This amendment resulted in decreased pension expense at TECO Energy of approximately $0.8 million in 2001 and a reduction of benefit obligation of $6.2 million at Sept. 30, 2001.
TECO Energy’s policy is to fund the plan within the guidelines set by ERISA for the minimum annual contribution and the maximum allowable as a tax deduction by the IRS. In 2004, TECO Energy expects to make a contribution of about $14.2 million, of which Tampa Electric Company’s portion is expected to be about $9.1 million.
Amounts disclosed for pension benefits also include the unfunded obligations for the supplemental executive retirement plan, non-qualified, non-contributory defined benefit retirement plans available to certain senior management. In 2004, TECO Energy expects to make a contribution of about $1.7 million to these plans. TECO Energy reported other comprehensive loss of $43.9 million and $4.4 million in 2003 and 2002, respectively and other comprehensive income of $0.3 million in 2001 related to adjustments to the minimum pension liability associated with the supplemental executive retirement plan.
The asset allocation for the company’s pension plan as of Sept. 30, 2003 and 2002, and the target allocation for 2004, by asset category, follows:
Asset Allocation
Target Allocation of 2004 | Percentage of Plan Assets at Sept. 30, | |||||||
Asset category | 2003 | 2002 | ||||||
Equities | 55% – 60% | 57 | % | 53 | % | |||
Fixed income | 40% – 45% | 43 | % | 47 | % | |||
Real Estate | — | — | — | |||||
Other | — | — | — | |||||
Total | — | 100 | % | 100 | % | |||
TECO Energy’s investment objective is to obtain above average returns while minimizing volatility of expected returns over the long term. The target equities/fixed income mix is designed to meet investment objectives. TECO Energy’s strategy is to hire proven managers and allocate assets to reflect a mix of investment styles, emphasize preservation of principal to minimize the impact of declining markets, and stay fully invested except for cash to meet benefit payment obligations and plan expense.
The assumptions for the expected return on plan assets were developed based on an analysis of historical market returns, the plan’s past experience and current market conditions. Estimates of future market returns are lower than actual long-term historical returns of the plan but were factored into the expected return on asset assumptions to generate a conservative forecast.
In 2001, TECO Energy elected to change the measurement date for pension obligations and plan assets from Dec. 31 to Sep. 30. The effect of this accounting change was not material.
Components of net pension expense, reconciliation of the funded status and the accrued pension liability are presented below for TECO Energy consolidated.
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Pension Benefit Expense
(millions) | 2003 | 2002 | 2001 | |||||||||
Components of net periodic benefit expense | ||||||||||||
Service cost (benefits earned during the period) | $ | 14.3 | $ | 11.8 | $ | 11.2 | ||||||
Interest cost on projected benefit obligations | 30.8 | 28.7 | 27.9 | |||||||||
Expected return on assets | (42.1 | ) | (42.9 | ) | (42.0 | ) | ||||||
Amortization of: | ||||||||||||
Transition obligation (asset) | (1.1 | ) | (1.1 | ) | (1.1 | ) | ||||||
Prior service cost (benefit) | (0.5 | ) | (0.5 | ) | (0.5 | ) | ||||||
Actuarial (gain) loss | 1.4 | (3.7 | ) | (4.4 | ) | |||||||
Pension expense (benefit) | 2.8 | (7.7 | ) | (8.9 | ) | |||||||
Special termination benefit charge | — | 2.7 | — | |||||||||
Additional amounts recognized | — | — | — | |||||||||
Net pension expense (benefit) recognized in the | ||||||||||||
TECO Energy Consolidated Statements of Income(1) | $ | 2.8 | $ | (5.0 | ) | $ | (8.9 | ) | ||||
Assumptions used to determine net costs | ||||||||||||
Discount rate | 6.75 | % | 7.50 | % | 7.50 | % | ||||||
Rate of compensation increase | 4.82 | % | 4.66 | % | 4.69 | % | ||||||
Expected return on plan assets | 9.00 | % | �� | 9.00 | % | 9.00 | % | |||||
| (1) | Tampa Electric Company’s portion was $(1.9) million, ($7.8) million and ($10.4) million for 2003, 2002 and 2001, respectively. |
The following table shows the funded status of the qualified and non-qualified pension plans for which the projected obligation exceeds the fair value to the plan assets:
Pension Plans – Projected Obligation Exceeds Plan Assets
(millions) Dec. 31, | 2003 | 2002 | ||||
Projected benefit obligation | $ | 554.5 | $ | 455.1 | ||
Fair value of plan assets | 391.8 | 371.9 | ||||
Projected obligation in excess of plan assets | $ | 162.7 | $ | 83.2 | ||
Accumulated benefit obligation | $ | 480.0 | $ | 400.8 | ||
As of Dec. 31, 2003, for the qualified and non-qualified pension plans, the accumulated obligation exceeded the fair value of the plan assets. As of Dec. 31, 2002, the accumulated obligation exceeded the fair value of the plan assets for only the non-qualified pension plan. The table below shows the funded status at the end of 2003 and 2002 for the respective plans:
Pension Plans – Accumulated Obligation Exceeds Plan Assets
(millions) Dec. 31, | 2003 | 2002(1) | ||||
Projected benefit obligation | $ | 480.0 | $ | 32.8 | ||
Fair value of plan assets | 391.8 | — | ||||
Accumulated obligation in excess of plan assets | $ | 88.2 | $ | 32.8 | ||
Accumulated benefit obligation | $ | 554.5 | $ | 41.3 | ||
| (1) | In 2002 only the non-qualified plan is presented due to the fact that the fair value of plan assets exceeded the accumulated obligation for the qualified plan. |
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Reconciliation of the funded status of the retirement plan and the accrued pension prepayment/(liability)
(millions) | 2003 | 2002 | ||||||
Change in benefit obligation | ||||||||
Net benefit obligation at prior measurement date | $ | 455.1 | $ | 382.3 | ||||
Service cost | 14.3 | 11.8 | ||||||
Interest cost | 30.8 | 28.7 | ||||||
Actuarial loss | 89.7 | 58.3 | ||||||
Plan amendments | — | 1.1 | ||||||
Special termination benefits | — | 2.7 | ||||||
Curtailment | (1.9 | ) | — | |||||
Gross benefits paid | (33.5 | ) | (29.8 | ) | ||||
Net benefit obligation at measurement date | $ | 554.5 | $ | 455.1 | ||||
Change in plan assets | ||||||||
Fair value of plan assets at prior measurement date | $ | 371.9 | $ | 428.0 | ||||
Actual return on plan assets | 51.7 | (24.9 | ) | |||||
Employer contributions | 1.7 | 1.7 | ||||||
Gross benefits paid (including expenses) | (33.5 | ) | (32.9 | ) | ||||
Fair value of plan assets at measurement date | $ | 391.8 | $ | 371.9 | ||||
Funded status | ||||||||
Fair value of plan assets | $ | 391.8 | $ | 371.9 | ||||
Benefit obligation | 554.5 | 455.1 | ||||||
Funded status at measurement date | (162.7 | ) | (83.2 | ) | ||||
Net contributions after measurement date | 6.7 | 0.4 | ||||||
Unrecognized net actuarial loss | 165.6 | 88.9 | ||||||
Unrecognized prior service cost (benefit) | (6.9 | ) | (7.4 | ) | ||||
Unrecognized net transition obligation (asset) | (1.4 | ) | (2.5 | ) | ||||
Accrued liability at end of year | $ | 1.3 | $ | (3.8 | ) | |||
Amounts recognized in the statement of financial position | ||||||||
Prepaid benefit cost | $ | 16.9 | $ | 14.8 | ||||
Accrued benefit cost | (15.7 | ) | (18.5 | ) | ||||
Additional minimum liability | (82.7 | ) | (13.8 | ) | ||||
Intangible asset | 1.3 | 1.5 | ||||||
Accumulated other comprehensive income | 81.5 | 12.2 | ||||||
Net amount recognized at end of year | $ | 1.3 | $ | (3.8 | ) | |||
Assumptions used in determining actuarial valuations | ||||||||
Discount rate to determine projected benefit obligation | 6.00 | % | 6.75 | % | ||||
Rate of increase in compensation levels | 4.25 | % | 9.0 | % | ||||
Other Postretirement Benefits
Tampa Electric provides certain postretirement health care and life insurance benefits for substantially all employees retiring after age 50 meeting certain service requirements. The company contribution toward health care coverage for most employees who retired after the age of 55 between Jan. 1, 1990 and June 30, 2001 is limited to a defined dollar benefit based on years of service. On April 1, 2000, the company adopted changes to this program for participants retiring from the company on or after July 1, 2001. The company contribution toward pre-65 and post-65 health care coverage for most employees retiring on or after July 1, 2001 is limited to a defined dollar benefit based on an age and service schedule. The impact of this amendment, including a change in the company’s commitment for future retirees combined with a grandfathering provision for current retired participants, resulted in a reduction in the benefit obligation of $1.4 million in 2001. In 2004, TECO Energy expects to make a contribution of about $9.5 million to this program. Postretirement benefit levels are substantially unrelated to salary. The company reserves the right to terminate or modify the plans in whole or in part at any time.
On Dec. 8, 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act). Beginning in 2006, the new law adds prescription drug coverage to Medicare, with a 28% tax-free subsidy to encourage employers to retain their prescription drug programs for retirees, along with other key provisions. TECO Energy’s current retiree medical program for those eligible for Medicare (generally over age 65) includes coverage for prescription drugs. The company is continuing to analyze the potential impact the Act may have on the company’s FAS 106,Employers’ Accounting for Postretirement Benefits Other Than Pensions, expense and what, if any, plan design changes should be made with respect to the company’s retiree medical program in response to the Act.
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The following charts summarize the income statement and balance sheet impact, as well as the benefit obligations, assets, funded status and rate assumptions associated with other postretirement benefits.
Other Postretirement Benefit Expense
(millions) | 2003 | 2002 | 2001 | |||||||
Components of net periodic benefit expense | ||||||||||
Service cost (benefits earned during the period) | $ | 2.6 | $ | 2.4 | $ | 2.3 | ||||
Interest cost on projected benefit obligations | 9.3 | 8.6 | 8.4 | |||||||
Amortization of: | ||||||||||
Transition obligation (straight line over 20 years) | 2.1 | 2.1 | 2.1 | |||||||
Prior service cost | 1.7 | 1.7 | 1.7 | |||||||
Actuarial loss | 1.0 | 0.1 | 0.3 | |||||||
Pension expense | 16.7 | 14.9 | 14.8 | |||||||
Special termination benefits | — | 0.6 | — | |||||||
Additional amounts recognized | 0.1 | (0.1 | ) | — | ||||||
Net periodic postretirement benefit expense | $ | 16.8 | $ | 15.4 | $ | 14.8 | ||||
The accumulated postretirement benefit obligation exceeds plan assets for the postretirement health and welfare benefits plan.
Reconciliation of the funded status of the postretirement benefit plan and the accrued liability
(millions) | 2003 | 2002 | ||||||
Change in benefit obligation | ||||||||
Net benefit obligation at prior measurement date | $ | 138.8 | $ | 114.8 | ||||
Service cost | 2.6 | 2.4 | ||||||
Interest cost | 9.3 | 8.6 | ||||||
Plan participants’ contributions | 1.0 | 0.8 | ||||||
Actuarial loss | 3.1 | 17.3 | ||||||
Special termination benefits | — | 0.6 | ||||||
Gross benefits paid | (8.0 | ) | (5.7 | ) | ||||
Net benefit obligation at measurement date | $ | 146.8 | $ | 138.8 | ||||
Change in plan assets | ||||||||
Fair value of plan assets at prior measurement date | — | — | ||||||
Employer contributions | 7.0 | 4.9 | ||||||
Plan participants contributions | 1.0 | 0.8 | ||||||
Gross benefits paid (including expenses) | (8.0 | ) | (5.7 | ) | ||||
Fair value of plan assets at measurement date | $ | — | $ | — | ||||
Funded status | ||||||||
Funded status at measurement date | $ | (146.8 | ) | $ | (138.8 | ) | ||
Net contributions after measurement date | 1.8 | 1.5 | ||||||
Unrecognized net actuarial loss | 31.5 | 29.5 | ||||||
Unrecognized prior service cost | 18.7 | 20.3 | ||||||
Unrecognized net transition obligation | 19.0 | 21.1 | ||||||
Accrued liability at end of year | $ | (75.8 | ) | $ | (66.4 | ) | ||
Assumptions Used in Determining Actuarial Valuations | ||||||||
Discount rate to determine projected benefit obligation | 6.00 | % | 6.75 | % | ||||
Employer contributions and benefits paid in the above tables include both those amounts contributed directly to, and paid directly from both plan assets and directly to plan participants. The assumed health care cost trend rate for medical costs was 11.5% in 2003 and decreases to 5.0% in 2013 and thereafter.
A 100 basis point increase in the medical trend rates would produce a 3 percent ($0.4 million) increase in the aggregate service and interest cost for 2003, and a 4 percent ($5.4 million) increase in the accumulated postretirement benefit obligation as of Sept. 30, 2003.
A 100 basis point decrease in the medical trend rates would produce a 2 percent ($0.3 million) decrease in the aggregate service and interest cost for 2003 and a 2 percent ($3.5 million) decrease in the accumulated postretirement benefit obligation as of Sept. 30, 2003.
12. Related Party Transactions
In February 2002, Tampa Electric and TECO-Panda Generating Company (TPGC) II, an affiliate of TECO Wholesale Generation, entered into an assignment and assumption agreement under which Tampa Electric obtained TPGC II’s rights and interests to four combustion turbines being purchased from General Electric, and assumed the corresponding liabilities and obligations for such equipment. In accordance with the terms of the assignment and assumption agreement, Tampa Electric paid $62.5 million to TPGC II as reimbursement
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for amounts already paid to General Electric by TPGC II for such equipment. No gain or loss was incurred on the transfer. In the first quarter of 2003, Tampa Electric recorded a $48.9 million after-tax charge related to the cancellation of these turbine purchase commitments (seeNote 7).
In the second and third quarters of 2003, Tampa Electric returned approximately $158 million of capital to TECO Energy. TECO Energy had previously contributed capital to Tampa Electric in support of Tampa Electric’s construction program in the wholesale business, which was subsequently scaled back.
In October 2003, Tampa Electric signed a five-year contract renewal with a TECO Energy affiliate company, TECO Transport Corporation, for integrated waterborne fuel transportation services effective Jan. 1, 2004. The contract calls for inland river and ocean transportation along with river terminal storage and blending services for up to 5.5 million tons of coal annually through 2008. SeeNote 3 for additional details.
A summary of activities between Tampa Electric Company and its affiliates follows:
Net transactions with affiliates:
(millions) | 2003 | 2002 | 2001 | ||||||
Fuel and interchange related, net | $ | 152.4 | $ | 144.9 | $ | 162.0 | |||
Administrative and general, net | $ | 13.7 | $ | 10.7 | $ | 22.1 | |||
Amounts due from or to affiliates of the company at Dec. 31, | |||||||||
(millions) | 2003 | 2002 | |||||||
Accounts receivable (1) | $ | 4.5 | $ | 6.6 | |||||
Accounts payable (1) | $ | 13.3 | $ | 23.6 | |||||
| (1) | Accounts receivable and accounts payable were incurred in the ordinary course of business and do not bear interest |
13. Segment Information
Tampa Electric Company is a public utility operating within the state of Florida. Through its Tampa Electric division, it is engaged in the generation, purchase, transmission, distribution and sale of electric energy to more than 612,000 customers in West Central Florida. Its Peoples Gas System division is engaged in the purchase, distribution and marketing of natural gas for more than 299,000 residential, commercial, industrial and electric power generation customers in the state of Florida.
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Segment Information
(millions) | Tampa Electric | Peoples Gas | Other & Eliminations | Tampa Electric Company | |||||||||||
2003 | |||||||||||||||
Revenues – outsiders | $ | 1,582.7 | $ | 408.4 | $ | — | $ | 1,991.1 | |||||||
Sales to affiliates | 3.4 | — | (0.7 | ) | 2.7 | ||||||||||
Total revenues | $ | 1,586.1 | $ | 408.4 | $ | (0.7 | ) | $ | 1,993.8 | ||||||
Depreciation | 210.3 | 32.7 | — | 243.0 | |||||||||||
Restructuring costs(1) | 9.9 | 4.1 | — | 14.0 | |||||||||||
Interest charge | 85.0 | 15.6 | — | 100.6 | |||||||||||
Provision for taxes | 48.1 | (2) | 15.2 | — | 63.3 | (2) | |||||||||
Net income | $ | 98.9 | $ | 24.5 | $ | — | $ | 123.4 | |||||||
Total assets | 4,191.3 | 651.5 | (7.1 | ) | 4,835.7 | ||||||||||
Capital expenditures | $ | 289.1 | $ | 42.6 | $ | — | $ | 331.7 | |||||||
2002 | |||||||||||||||
Revenues – outsiders | $ | 1,548.9 | $ | 318.1 | $ | — | $ | 1,867.0 | |||||||
Sales to affiliates | 34.3 | — | (0.7 | ) | 33.6 | ||||||||||
Total revenues | $ | 1,583.2 | $ | 318.1 | $ | (0.7 | ) | $ | 1,900.6 | ||||||
Depreciation | 189.8 | 30.5 | (0.2 | ) | 220.1 | ||||||||||
Restructuring costs(2) | 16.6 | — | — | 16.6 | |||||||||||
Interest charge | 51.5 | 14.8 | — | 66.3 | |||||||||||
Provision for taxes | 85.7 | 14.7 | — | 100.4 | |||||||||||
Net income | $ | 171.8 | $ | 24.2 | $ | — | $ | 196.0 | |||||||
Total assets | 4,135.0 | 650.2 | (6.9 | ) | 4,778.3 | ||||||||||
Capital expenditures | $ | 632.2 | $ | 53.4 | $ | — | $ | 685.6 | |||||||
2001 | |||||||||||||||
Revenues – outsiders | $ | 1,380.1 | $ | 352.9 | $ | — | $ | 1,733.0 | |||||||
Sales to affiliates | 32.6 | — | (0.9 | ) | 31.7 | ||||||||||
Total revenues | $ | 1,412.7 | $ | 352.9 | $ | (0.9 | ) | $ | 1,764.7 | ||||||
Depreciation | 173.4 | 27.9 | — | 201.3 | |||||||||||
Restructuring costs | — | — | — | — | |||||||||||
Interest charge | 60.8 | 14.3 | — | 75.1 | |||||||||||
Provision for taxes | 83.5 | 14.2 | — | 97.7 | |||||||||||
Net income | $ | 154.0 | $ | 23.1 | $ | — | $ | 177.1 | |||||||
Total assets | 3,693.0 | 605.0 | (6.0 | ) | 4,292.0 | ||||||||||
Capital expenditures | $ | 426.3 | $ | 73.0 | $ | — | $ | 499.3 | |||||||
| (1) | SeeNote 8 for a discussion of restructuring charges in 2003 and 2002. |
| (2) | Net income for 2003 includes a $48.9 million after-tax charge (79.6 million pre-tax) asset impairment charge related to the turbine purchase cancellations (seeNote 7). |
14. Commitments and Contingencies
Capital Investments
For 2004, Tampa Electric expects to spend $182.9 million, consisting of $9.4 million (committed as of Dec. 31, 2003) for the completion of the repowering project at the Gannon Station, $18.2 million for environmental expenditures and $155.3 million to support system growth and generation reliability. Tampa Electric’s estimated capital expenditures over the 2005-2008 period are projected to be $1,006.4 million, including $323.8 million for environmental expenditures.
Capital expenditures for PGS are expected to be about $40 million in 2004 and $160 million during the 2005-2008 period. Included in these amounts are approximately $25 million annually for projects associated with customer growth and system expansion. The remainder represents capital expenditures for ongoing maintenance and system safety.
Legal Contingencies
Three lawsuits have been filed in the Circuit Court in Hillsborough County against Tampa Electric, in connection with the location of transmission structures in certain residential areas, by residents in the areas surrounding the structures. The high-voltage power lines are needed by Tampa Electric to move electricity to the northwest part of its service territory where population growth has been experienced. The residents are seeking to remove the poles or to receive monetary damages. Tampa Electric is working with the community to determine the feasibility of alternate routes or structures or some combination.
From time to time Tampa Electric Company is involved in various other legal, tax and regulatory proceedings before various courts, regulatory commissions, and governmental agencies in the ordinary course of its business. Where appropriate, accruals are made in accordance with FAS 5,Accounting for Contingencies, to provide for matters that are reasonably likely to result in an estimable, material loss. While the outcome of such proceedings is uncertain, management does not believe that the ultimate resolution of pending matters will have a material adverse effect on the company’s results of operations or financial condition.
Superfund and Former Manufactured Gas Plant Sites
Tampa Electric Company, through its Tampa Electric and Peoples Gas divisions, is a potentially responsible party for certain superfund sites and, through its Peoples Gas division, for certain former manufactured gas plant sites. While the joint and several liability associated with these sites presents the potential for significant response costs, as of Dec. 31, 2003, Tampa Electric Company has estimated its ultimate financial liability to be $20 million, and this amount has been accrued in the company’s financial statements. The environmental remediation costs associated with these sites, which are expected to be paid over many years, are not expected to have a significant impact on customer prices.
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The estimated amounts represent only the estimated portion of the cleanup costs attributable to Tampa Electric Company. The estimates to perform the work are based on actual estimates obtained from contractors, or Tampa Electric Company’s experience with similar work adjusted for site specific conditions and agreements with the respective governmental agencies. The estimates are made in current dollars, are not discounted and do not assume any insurance recoveries.
Allocation of the responsibility for remediation costs among Tampa Electric and other potentially responsible parties (PRPs) is based on each party’s relative ownership interest in or usage of a site. Accordingly, Tampa Electric’s share of remediation costs varies with each site. In virtually all instances where other PRPs are involved, those PRPs are considered creditworthy.
Factors that could impact these estimates include the ability of other PRPs to pay their pro rata portion of the cleanup costs, additional testing and investigation which could expand the scope of the cleanup activities, additional liability that might arise from the cleanup activities themselves or changes in laws or regulations that could require additional remediation. These costs are recoverable through customer rates established in subsequent base rate proceedings.
Long Term Commitments
Tampa Electric Company has commitments under long-term operating leases, primarily for building space, office equipment and heavy equipment. Total rental expense included in the Consolidated Statements of Income for the years ended Dec. 31, 2003, 2002 and 2001 was $6.2 million, $6.1 million and $6.1 million, respectively. The following table is a schedule of future minimum lease payments at Dec. 31, 2003 for all operating leases with noncancelable lease terms in excess of one year:
Future Minimum Lease Payments for Operating Leases
Year ended Dec. 31: | Amount (millions) | ||
2004 | $ | 4.6 | |
2005 | 4.6 | ||
2006 | 4.1 | ||
2007 | 2.5 | ||
2008 | 0.3 | ||
Later Years | 0.2 | ||
Total minimum lease payments | $ | 16.3 | |
In 1994, Tampa Electric bought out a long-term coal supply contract which would have expired in 2004 for a lump sum payment of $25.5 million. In February 1995, the FPSC authorized the recovery of this buy-out amount plus carrying costs through the Fuel and Purchase Power Cost Recovery Clause over the 10-year period beginning Apr. 1, 1995. In each of the years 2003, 2002 and 2001, $2.7 million of buy-out costs were amortized to expense.
Guarantees and Letters of Credit
On Jan. 1, 2003, Tampa Electric Company adopted the prospective initial measurement provisions for certain types of guarantees, in accordance with FASB Interpretation No. (FIN) 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34). Upon issuance or modification of a guarantee after Jan. 1, 2003, the company must determine if the obligation is subject to either or both of the following:
| • | Initial recognition and initial measurement of a liability; and/or |
| • | Disclosure of specific details of the guarantee. |
Generally, guarantees of the performance of a third party or guarantees that are based on an underlying (where such a guarantee is not a derivative subject to FAS 133) are likely to be subject to the recognition and measurement, as well as the disclosure provisions, of FIN 45. Such guarantees must initially be recorded at fair value, as determined in accordance with the interpretation.
Alternatively, guarantees between and on behalf of entities under common control or that are similar to product warranties are subject only to the disclosure provisions of the interpretation. The company must disclose information as to the term of the guarantee and the maximum potential amount of future gross payments (undiscounted) under the guarantee, even if the likelihood of a claim is remote.
As of Dec. 31, 2003, Tampa Electric Company had outstanding letters of credit of $0.9 million, which guarantee performance to third parties related to debt service.
Tampa Electric Company also enters into commercial agreements in the normal course of business that typically contain standard indemnification clauses. Tampa Electric Company may sometimes agree to make payments to compensate or indemnify the counterparty for legal fees, environmental remediation costs and other similar costs arising from possible future events or changes in laws or regulations. These agreements cover a variety of goods and services, and have varying triggering events dependent on actions by third parties.
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Tampa Electric Company is unable to estimate the maximum potential future exposure under these clauses because the events that would obligate Tampa Electric Company have not occurred, or if such event has occurred, Tampa Electric Company has not been notified of any occurrence. As claims are made or changes in laws or regulations indicate, an amount related to the indemnification is reflected in the financial statements.
Financial Covenants
A summary of Tampa Electric’s significant financial covenants is as follows:
Tampa Electric Significant Financial Covenants
(millions) Instrument | Financial Covenant(1) | Requirement/ Restriction | Calculation at Dec. 31, 2003 | |||
Tampa Electric | ||||||
Mortgage bond indenture | Dividend restriction | Cumulative distributions cannot exceed cumulative net income plus $4 | $5 unrestricted(2) | |||
PGS senior notes | EBIT/interest(3) Restricted payments Funded debt/capital Sale of assets | Minimum of 2.0 times Shareholder equity at least $500 Cannot exceed 65% Less than 20% of total assets | 3.5 times $1,652 50.5% —% | |||
Credit facility | Debt/capital EBITDA/interest (3) Restriction on distributions | Cannot exceed 60% Minimum of 2.5 times Limit on cumulative distributions and outstanding affiliate loans(4) | 49.2% 5.8 times $483 unrestricted | |||
6.25% senior notes | Debt/capital Limit on liens | Cannot exceed 60% Cannot exceed $787 | 49.2% $362 | |||
| (1) | As defined in applicable instrument. |
| (2) | Reflects the determination as of Dec. 31, 2003, after giving effect to $158 million distributed to TECO Energy as a return of capital during 2003. There were $75 million of callable bonds outstanding under the indenture at Dec. 31, 2003. |
| (3) | EBIT generally represents earnings before interest and taxes. EBITDA generally represents EBIT before depreciation and amortization. However, in each circumstance, the term is subject to the definition prescribed under the relevant legal agreements. |
| (4) | Limits cumulative distributions after Oct. 31, 2003 and outstanding affiliate loans to an amount representing an accumulation of net income after May 31, 2003 and capital contributions from the parent after Oct. 31, 2003, plus $450 million. |
15. New Accounting Pronouncements
Amendment to Derivatives Accounting
In April 2003, the FASB issued FAS 149,Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which clarifies the definition of a derivative and modifies, as necessary, FAS 133 to reflect certain decisions made by the FASB as part of the Derivatives Implementation Group (DIG) process. The majority of the guidance was already effective and previously applied by the company in the course of the adoption of FAS 133.
In particular, FAS 149 incorporates the conclusions previously reached in 2001 under DIG Issue C10,“Can Option Contracts and Forward Contracts with Optionality Features Qualify for the Normal Purchases and Normal Sales Exception”, and DIG Issue C15,“Normal Purchases and Normal Sales Exception for Certain Option-Type Contracts and Forward Contracts in Electricity”. In limited circumstances, when the criteria are met and documented, Tampa Electric Company designates option-type and forward contracts in electricity as a normal purchase or normal sale (NPNS) exception to FAS 133. A contract designated and documented as qualifying for the NPNS exception is not subject to the measurement and recognition requirements of FAS 133. The incorporation of the conclusions reached under DIG Issues C10 and C15 into the standard will not have a material impact on the consolidated financial statements of Tampa Electric Company.
FAS 149 establishes multiple effective dates based on the source of the guidance. For all DIG Issues previously cleared by the FASB and not modified under FAS 149, the effective date of the issue remains the same. For all other aspects of the standard, the guidance is effective for all contracts entered into or modified after June 30, 2003. The company does not anticipate that the adoption of the additional guidance in FAS 149 will have a material impact on the consolidated financial statements.
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Financial Instruments with Characteristics of both Liabilities and Equity
In May 2003, the FASB issued FAS 150,Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which requires that an issuer classify certain financial instruments as a liability or an asset. Previously, many financial instruments with characteristics of both liabilities and equity were classified as equity. Financial instruments subject to FAS 150 include financial instruments with any of the following features:
| • | An unconditional redemption obligation at a specified or determinable date, or upon an event that is certain to occur; |
| • | An obligation to repurchase shares, or indexed to such an obligation, and may require physical share or net cash settlement; |
| • | An unconditional, or for new issuances conditional, obligation that may be settled by issuing a variable number of equity shares if either (a) a fixed monetary amount is known at inception, (b) the variability is indexed to something other than the fair value of the issuer’s equity shares, or (c) the variability moves inversely to changes in the fair value of the issuer’s shares. |
The standard requires that all such instruments be classified as a liability, or an asset in certain circumstances, and initially measured at fair value. Forward contracts that require a fixed physical share settlement and mandatorily redeemable financial instruments must be subsequently re-measured at fair value on each reporting date.
This standard is effective for all financial instruments entered into or modified after May 31, 2003, and for all other financial instruments at the beginning of the first interim period beginning after June 15, 2003. The adoption of FAS 150 has had no material impact on the consolidated financial statements.
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PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
| (a) | Certain Documents Filed as Part of this Form 10-K/A |
| 1. | Financial Statements |
TECO Energy, Inc. Financial Statements – Filed as part of the amended Exhibit 13 of this report, and is hereby incorporated by reference.
Tampa Electric Company Financial Statements – See index on page 4.
| 2. | Financial Statement Schedules |
Condensed Parent Company Financial Statements Schedule I – pages 33-36
TECO Energy, Inc. Schedule II – page 37
Tampa Electric Company Schedule II – page 38
| 3. | Exhibits – See index on page40 |
| (c) | The exhibits filed as part of this Form 10-K/A and listed on the Exhibit Index immediately preceding such Exhibits. The Exhibit Index is incorporated herein by reference. |
All other schedules and exhibits not indicated above are contained in the Combined Annual Report of TECO Energy, Inc. and Tampa Electric Company (Form 10-K) for the year ended Dec. 31, 2003, as originally filed.
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SCHEDULE I – CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
TECO ENERGY, INC.
PARENT COMPANY ONLY
Condensed Balance Sheets
| (millions) | ||||||||
Dec. 31, | 2003 | 2002 | ||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 28.0 | $ | 370.9 | ||||
Restricted cash | 6.9 | — | ||||||
Advances to affiliates | 3,078.4 | 2,380.1 | ||||||
Accounts receivable from affiliates | 3.4 | — | ||||||
Other current assets | 11.4 | 13.0 | ||||||
Total current assets | 3,128.1 | 2,764.0 | ||||||
Other assets | ||||||||
Investment in subsidiaries | 1,381.5 | 2,646.2 | ||||||
Deferred income taxes | 293.5 | 220.7 | ||||||
Other assets | 46.7 | 46.3 | ||||||
Total other assets | 1,721.7 | 2,913.2 | ||||||
Total assets | $ | 4,849.8 | $ | 5,677.2 | ||||
Liabilities and capital | ||||||||
Current liabilities | ||||||||
Notes payable | $ | 37.5 | $ | 350.0 | ||||
Accounts payable to affiliates | 0.3 | 19.1 | ||||||
Accounts payable | 21.9 | 32.3 | ||||||
Interest payable | 19.2 | 21.4 | ||||||
Other current liabilities | 9.1 | 4.5 | ||||||
Total current liabilities | 88.0 | 427.3 | ||||||
Other liabilities | ||||||||
Advances from affiliates | 233.9 | 221.0 | ||||||
Deferred income taxes | 117.4 | — | ||||||
Long-term debt | ||||||||
Junior subordinated | 669.3 | 669.3 | ||||||
Others | 1,958.8 | 1,656.5 | ||||||
Other liabilities | 104.7 | 91.4 | ||||||
Total other liabilities | 3,084.1 | 2,638.2 | ||||||
Capital | ||||||||
Common equity | 187.8 | 175.8 | ||||||
Additional paid in capital | 1,220.8 | 1,094.5 | ||||||
Retained earnings | 339.5 | 1,413.7 | ||||||
Accumulated other comprehensive income | (55.8 | ) | (41.2 | ) | ||||
Common equity | 1,692.3 | 2,642.8 | ||||||
Unearned compensation | (14.6 | ) | (31.1 | ) | ||||
Total capital | 1,677.7 | 2,611.7 | ||||||
Total liabilities and capital | $ | 4,849.8 | $ | 5,677.2 | ||||
The accompanying notes are an integral part of the condensed financial statements.
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SCHEDULE I – CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
TECO ENERGY, INC.
PARENT COMPANY ONLY
Condensed Statements of Income
(millions) For the years ended Dec. 31, | 2003 | 2002 | 2001 | |||||||||
Revenues | $ | 4.4 | $ | 6.7 | $ | 2.0 | ||||||
Expenses | ||||||||||||
Administrative and general expenses | 7.2 | 8.6 | 6.8 | |||||||||
Restructuring charges | 2.6 | — | — | |||||||||
Total expenses | 9.8 | 8.6 | 6.8 | |||||||||
Income from operations | (5.4 | ) | (1.9 | ) | (4.8 | ) | ||||||
Loss on debt extinguishment | — | (34.1 | ) | — | ||||||||
(Losses) earnings from investments in subsidiaries | (873.2 | ) | 363.8 | 308.7 | ||||||||
Interest income (expense) | ||||||||||||
Interest income | ||||||||||||
Affiliates | 139.3 | 120.0 | 72.9 | |||||||||
Interest expense | ||||||||||||
Affiliates | (43.0 | ) | (40.1 | ) | (17.5 | ) | ||||||
Others | (171.9 | ) | (103.4 | ) | (56.6 | ) | ||||||
Total interest expense | (75.6 | ) | (23.5 | ) | (1.2 | ) | ||||||
(Loss) income before income taxes | (954.2 | ) | 304.3 | 302.7 | ||||||||
(Benefit) for income taxes | (48.0 | ) | (25.8 | ) | (1.0 | ) | ||||||
Net (loss) income from operations | (906.2 | ) | 330.1 | 303.7 | ||||||||
Cumulative effect of change in accounting principle, net of tax | (3.2 | ) | — | — | ||||||||
Net (loss) income | $ | (909.4 | ) | $ | 330.1 | $ | 303.7 | |||||
The accompanying notes are an integral part of the condensed financial statements.
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SCHEDULE I – CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
TECO ENERGY, INC.
PARENT COMPANY ONLY
Condensed Statements of Cash Flows
(millions) For the years ended Dec. 31, | 2003 | 2002 | 2001 | |||||||||
Cash flows from operating activities | $ | 10.2 | $ | (82.4 | ) | $ | (128.0 | ) | ||||
Cash flows from investing activities | ||||||||||||
Investment in subsidiaries | 156.7 | (232.4 | ) | (408.2 | ) | |||||||
Dividends from subsidiaries | 296.0 | 316.1 | 307.6 | |||||||||
Net change in affiliate advances | (741.2 | ) | (1,230.8 | ) | (841.3 | ) | ||||||
Cash flows from investing activities | (288.5 | ) | (1,147.1 | ) | (941.9 | ) | ||||||
Cash flows from financing activities | ||||||||||||
Dividends to shareholders | (165.2 | ) | (215.8 | ) | (184.2 | ) | ||||||
Common stock | 136.6 | 572.6 | 348.4 | |||||||||
Proceeds from long-term debt – others | 296.8 | 1,510.9 | 1,012.2 | |||||||||
Repayment of long-term debt – others | — | (600.0 | ) | (153.2 | ) | |||||||
Net increase (decrease) in short-term debt | (312.5 | ) | 350.0 | — | ||||||||
Equity contract adjustment payments | (20.3 | ) | (15.3 | ) | — | |||||||
Cash flows from financing activities | (64.6 | ) | 1,602.4 | 1,023.2 | ||||||||
Net (decrease) increase in cash and cash equivalents | (342.9 | ) | 372.9 | (46.7 | ) | |||||||
Cash and cash equivalents at beginning of period | 370.9 | (2.0 | ) | 44.7 | ||||||||
Cash and cash equivalents at end of period | $ | 28.0 | $ | 370.9 | $ | (2.0 | ) | |||||
The accompanying notes are an integral part of the condensed financial statements.
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SCHEDULE I – CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
TECO ENERGY, INC.
PARENT COMPANY ONLY
NOTES TO CONDENSED FINANCIAL STATEMENTS
| 1. | Basis of Presentation |
TECO Energy, Inc., on a stand alone basis, (the parent company) has accounted for majority-owned subsidiaries using the equity basis of accounting. These financial statements are presented on a condensed basis. Additional disclosures relating to the parent company financial statements are included under the headingNotes to Consolidated Financial Statements in the2003 Annual Report, which information is hereby incorporated by reference and filed as part ofExhibit 13.
The use of estimates is inherent in the preparation of financial statements in accordance with generally accepted accounting principles. Actual results could differ from those estimates.
| 2. | Long-term Obligations |
SeeNote 7to the TECO EnergyConsolidated Financial Statements for a description and details of long-term debt obligations of the parent company. The preferred securities on TECO Energy’s consolidated balance sheet are reflected as junior subordinated debt, as discussed inNote 7 to the TECO EnergyConsolidated Financial Statements, of $669.3 million on the parent company’s financial statements.
| 3. | Commitments and Contingencies |
SeeNote 20to the TECO EnergyConsolidated Financial Statements for a description of all material contingencies and guarantees outstanding of the parent company.
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SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
TECO ENERGY, INC
For the Years Ended Dec. 31, 2003, 2002 and 2001
(millions)
Balance at Beginning of Period | Additions | Deductions(1) | Balance at End of Period | |||||||||||||
Charged to Income | Other Charges | |||||||||||||||
Allowance for Uncollectible Accounts: | ||||||||||||||||
2003 | $ | 6.6 | $ | 7.0 | $ | (1.8 | )(2) | $ | 7.3 | $ | 4.5 | |||||
2002 | $ | 7.1 | $ | 9.4 | $ | 0.3 | $ | 10.2 | $ | 6.6 | ||||||
2001 | $ | 8.7 | $ | 8.1 | $ | (0.3 | ) | $ | 9.4 | $ | 7.1 | |||||
(1) Write-off of individual bad debt accounts
(2) Includes $1.1 of bad debt reserves for Prior Energy and BGA that were moved to assets held for sale | ||||||||||||||||
Restructuring Cost Reserve Accounts: | ||||||||||||||||
2003 | $ | 6.0 | $ | 24.6 | $ | — | $ | 19.9 | $ | 10.7 | ||||||
2002 | $ | 0.2 | $ | 17.8 | $ | — | $ | 12.0 | $ | 6.0 | ||||||
2001 | $ | 2.3 | $ | 0.1 | $ | — | $ | 2.2 | $ | 0.2 | ||||||
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SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
TAMPA ELECTRIC COMPANY
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended Dec. 31, 2003, 2002 and 2001
(millions)
| Balance at Beginning of Period | Additions | Deductions(1) | Balance at End of Period | ||||||||||||
| Charged to Income | Other Charges | ||||||||||||||
Allowance for Uncollectible Accounts: | |||||||||||||||
2003 | $ | 1.1 | $ | 4.4 | $ | — | $ | 4.4 | $ | 1.1 | |||||
2002 | $ | 1.6 | $ | 7.7 | $ | — | $ | 8.2 | $ | 1.1 | |||||
2001 | $ | 2.0 | $ | 7.2 | $ | — | $ | 7.6 | $ | 1.6 | |||||
(1) Write-off of individual bad debt accounts | |||||||||||||||
Restructuring Cost Reserve Accounts: | |||||||||||||||
2003 | $ | 5.1 | $ | 14.0 | $ | — | $ | 13.4 | $ | 5.7 | |||||
2002 | $ | 0.2 | $ | 16.6 | $ | — | $ | 11.7 | $ | 5.1 | |||||
2001 | $ | 2.3 | $ | 0.1 | $ | — | $ | 2.2 | $ | 0.2 | |||||
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 12thday of May.
TECO ENERGY, INC. | ||
By: | /s/ G. L. GILLETTE | |
G. L. GILLETTE, | ||
Senior Vice President-Finance and Chief Financial Officer | ||
TAMPA ELECTRIC COMPANY | ||
By: | /s/ G. L. GILLETTE | |
G. L. GILLETTE, | ||
Senior Vice President-Finance and Chief Financial Officer | ||
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INDEX TO EXHIBITS
| Exhibit No. | Description | Page No. | |||
| 13. | TECO Energy 2003 Annual Report to Shareholders, as amended | [ | ] | ||
| 23.1 | Consent of Independent Certified Public Accountants – TECO Energy, Inc. | [ | ] | ||
| 23.2 | Consent of Independent Certified Public Accountants – Tampa Electric Company | [ | ] | ||
| 31.1 | Certification of the Chief Executive Officer of TECO Energy, Inc. pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | [ | ] | ||
| 31.2 | Certification of the Chief Financial Officer of TECO Energy, Inc. pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | [ | ] | ||
| 31.3 | Certification of the Chief Executive Officer of Tampa Electric Company pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | [ | ] | ||
| 31.4 | Certification of the Chief Financial Officer of Tampa Electric Company pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | [ | ] | ||
| 32.1 | Certification of the Chief Executive Officer and Chief Financial Officer of TECO Energy, Inc. pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1) | [ | ] | ||
| 32.2 | Certification of the Chief Executive Officer and Chief Financial Officer of Tampa Electric Company pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1) | [ | ] | ||
| (1) | This certification accompanies the Annual Report on Form 10-K and is not filed as part of it. |
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