UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2019
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 specified in its charter, state of incorporation, address of principal executive offices, telephone number | | I.R.S. Employer Identification Number |
1-5007 | | TAMPA ELECTRIC COMPANY | | 59-0475140 |
| | (a Florida corporation) TECO Plaza 702 N. Franklin Street Tampa, Florida 33602 (813) 228-1111 | | |
Indicate by check mark whether the registrant (1) has 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) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ NO ☐
Indicate by check mark whether Tampa Electric Company is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | | ☐ | | Accelerated filer | | ☐ |
| | | |
Non-accelerated filer | | ☒ | | Smaller reporting company | | ☐ |
| | | | | | |
| | | | Emerging growth company | | ☐ |
If an emerging growth company, indicate by check mark whether Tampa Electric Company has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether Tampa Electric Company is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
As of May 7, 2019, 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.
Securities registered or to be registered pursuant to Section 12(b) of the Act:
| | | | |
Title of each class | | Trading symbol(s) | | Name of each exchange on which registered |
None. | | | | |
Tampa Electric Company meets the conditions set forth in General Instruction (H)(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format specified in General Instruction H(2) of Form 10-Q.
ACRONYMS
Acronyms used in this and other filings with the U.S. Securities and Exchange Commission in 2018 and 2019 include the following:
Term | | Meaning |
AFUDC | | allowance for funds used during construction |
AFUDC-debt | | debt component of allowance for funds used during construction |
AFUDC-equity | | equity component of allowance for funds used during construction |
AMI | | Advanced Metering Infrastructure |
APBO | | accumulated postretirement benefit obligation |
ARO | | asset retirement obligation |
ASC | | Accounting Standards Codification |
BACT | | Best Available Control Technology |
CAD | | Canadian dollars |
CAIR | | Clean Air Interstate Rule |
CCRs | | coal combustion residuals |
CMO | | collateralized mortgage obligation |
CNG | | compressed natural gas |
CPI | | consumer price index |
CSAPR | | Cross State Air Pollution Rule |
CO2 | | carbon dioxide |
CT | | combustion turbine |
ECRC | | environmental cost recovery clause |
Emera | | Emera Inc., a geographically diverse energy and services company headquartered in Nova Scotia, Canada |
EPA | | U.S. Environmental Protection Agency |
ERISA | | Employee Retirement Income Security Act |
EROA | | expected return on plan assets |
EUSHI | | Emera US Holdings Inc., a wholly owned subsidiary of Emera, which is the sole shareholder of TECO Energy’s common stock |
FASB | | Financial Accounting Standards Board |
FDEP | | Florida Department of Environmental Protection |
FERC | | Federal Energy Regulatory Commission |
FPSC | | Florida Public Service Commission |
GHG | | greenhouse gas(es) |
IGCC | | integrated gasification combined-cycle |
IOU | | investor owned utility |
IRS | | Internal Revenue Service |
ITCs | | investment tax credits |
KW | | kilowatt(s) |
kWac | | kilowatt on an alternating current basis |
LNG | | liquefied natural gas |
MBS | | mortgage-backed securities |
MD&A | | the section of this report entitled Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Merger | | Merger of Merger Sub Company with and into TECO Energy, with TECO Energy as the surviving corporation |
MGP | | manufactured gas plant |
Merger Agreement | | Agreement and Plan of Merger dated September 4, 2015, by and among TECO Energy, Emera and Merger Sub Company |
Merger Sub Company | | Emera US Inc., a Florida corporation |
MMBTU | | one million British Thermal Units |
MRV | | market-related value |
MW | | megawatt(s) |
MWH | | megawatt-hour(s) |
NAV | | net asset value |
Note | | Note to consolidated financial statements |
NOx | | nitrogen oxide |
NPNS | | normal purchase normal sale |
NYMEX | | New York Mercantile Exchange |
O&M expenses | | operations and maintenance expenses |
OCI | | other comprehensive income |
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Term | | Meaning |
OPC | | Office of Public Counsel |
OPEB | | other postemployment benefits |
Parent | | TECO Energy, Inc., the direct parent company of Tampa Electric Company |
PBGC | | Pension Benefit Guarantee Corporation |
PBO | | projected benefit obligation |
PGA | | purchased gas adjustment |
PGS | | Peoples Gas System, the gas division of Tampa Electric Company |
PPA | | power purchase agreement |
PRP | | potentially responsible party |
R&D | | research and development |
REIT | | real estate investment trust |
RFP | | request for proposal |
Regulatory ROE | | return on common equity as determined for regulatory purposes |
ROE | | return on common equity |
ROU | | right-of-use |
S&P | | Standard and Poor’s |
SCR | | selective catalytic reduction |
SEC | | U.S. Securities and Exchange Commission |
SO2 | | sulfur dioxide |
SoBRAs | | solar base rate adjustments |
SERP | | Supplemental Executive Retirement Plan |
STIF | | short-term investment fund |
Tampa Electric | | Tampa Electric, the electric division of Tampa Electric Company |
TEC | | Tampa Electric Company |
TECO Energy | | TECO Energy, Inc., the direct parent company of Tampa Electric Company |
TSI | | TECO Services, Inc. |
U.S. GAAP | | generally accepted accounting principles in the United States |
VIE | | variable interest entity |
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TAMPA ELECTRIC COMPANY
Consolidated Condensed Balance Sheets
Unaudited
Assets | March 31, | | | December 31, | |
(millions) | 2019 | | | 2018 | |
Property, plant and equipment | | | | | | | |
Utility plant | | | | | | | |
Electric | $ | 9,835 | | | $ | 9,645 | |
Gas | | 1,839 | | | | 1,793 | |
Utility plant, at original costs | | 11,674 | | | | 11,438 | |
Accumulated depreciation | | (3,279 | ) | | | (3,214 | ) |
Utility plant, net | | 8,395 | | | | 8,224 | |
Other property | | 12 | | | | 12 | |
Total property, plant and equipment, net | | 8,407 | | | | 8,236 | |
| | | | | | | |
Current assets | | | | | | | |
Cash and cash equivalents | | 11 | | | | 15 | |
Receivables, less allowance for uncollectibles of $2 at March 31, 2019 and December 31, 2018 | | 209 | | | | 258 | |
Due from affiliates | | 9 | | | | 4 | |
Inventories, at average cost | | | | | | | |
Fuel | | 41 | | | | 46 | |
Materials and supplies | | 100 | | | | 100 | |
Regulatory assets | | 85 | | | | 88 | |
Prepayments and other current assets | | 17 | | | | 6 | |
Total current assets | | 472 | | | | 517 | |
| | | | | | | |
Deferred debits | | | | | | | |
Regulatory assets | | 399 | | | | 370 | |
Other | | 45 | | | | 32 | |
Total deferred debits | | 444 | | | | 402 | |
Total assets | $ | 9,323 | | | $ | 9,155 | |
The accompanying notes are an integral part of the consolidated condensed financial statements.
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TAMPA ELECTRIC COMPANY
Consolidated Condensed Balance Sheets - continued
Unaudited
Liabilities and Capitalization | March 31, | | | December 31, | |
(millions) | 2019 | | | 2018 | |
Capitalization | | | | | | | |
Common stock | $ | 3,100 | | | $ | 2,990 | |
Accumulated other comprehensive loss | | (1 | ) | | | (1 | ) |
Retained earnings | | 302 | | | | 314 | |
Total capital | | 3,401 | | | | 3,303 | |
Long-term debt | | 2,575 | | | | 2,575 | |
Total capitalization | | 5,976 | | | | 5,878 | |
| | | | | | | |
Current liabilities | | | | | | | |
Notes payable | | 312 | | | | 221 | |
Accounts payable | | 186 | | | | 251 | |
Due to affiliates | | 19 | | | | 24 | |
Customer deposits | | 132 | | | | 132 | |
Regulatory liabilities | | 82 | | | | 44 | |
Accrued interest | | 44 | | | | 16 | |
Accrued taxes | | 29 | | | | 13 | |
Other | | 40 | | | | 84 | |
Total current liabilities | | 844 | | | | 785 | |
| | | | | | | |
Long-term liabilities | | | | | | | |
Deferred income taxes | | 739 | | | | 799 | |
Regulatory liabilities | | 1,242 | | | | 1,266 | |
Investment tax credits | | 156 | | | | 74 | |
Deferred credits and other liabilities | | 366 | | | | 353 | |
Total long-term liabilities | | 2,503 | | | | 2,492 | |
| | | | | | | |
Commitments and Contingencies (see Note 8) | | | | | | | |
| | | | | | | |
Total liabilities and capitalization | $ | 9,323 | | | $ | 9,155 | |
The accompanying notes are an integral part of the consolidated condensed financial statements.
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TAMPA ELECTRIC COMPANY
Consolidated Condensed Statements of Income and Comprehensive Income
Unaudited
| Three months ended March 31, | |
(millions) | 2019 | | | 2018 | |
Revenues | | | | | | | |
Electric | $ | 411 | | | $ | 461 | |
Gas | | 128 | | | | 136 | |
Total revenues | | 539 | | | | 597 | |
Expenses | | | | | | | |
Fuel | | 107 | | | | 122 | |
Purchased power | | 4 | | | | 13 | |
Cost of natural gas sold | | 47 | | | | 55 | |
Operations and maintenance | | 130 | | | | 157 | |
Depreciation and amortization | | 92 | | | | 93 | |
Taxes, other than income | | 50 | | | | 52 | |
Total expenses | | 430 | | | | 492 | |
Income from operations | | 109 | | | | 105 | |
Other income | | | | | | | |
Allowance for equity funds used during construction | | 2 | | | | 0 | |
Other income, net | | 2 | | | | 2 | |
Total other income | | 4 | | | | 2 | |
Interest charges | | | | | | | |
Interest expense | | 34 | | | | 30 | |
Allowance for borrowed funds used during construction | | (1 | ) | | | 0 | |
Total interest charges | | 33 | | | | 30 | |
Income before provision for income taxes | | 80 | | | | 77 | |
Provision for income taxes | | 16 | | | | 14 | |
Net income | $ | 64 | | | $ | 63 | |
Comprehensive income | $ | 64 | | | $ | 63 | |
The accompanying notes are an integral part of the consolidated condensed financial statements.
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TAMPA ELECTRIC COMPANY
Consolidated Condensed Statements of Cash Flows
Unaudited
| Three months ended March 31, | |
(millions) | 2019 | | | 2018 | |
Cash flows from operating activities | | | | | | | |
Net income | $ | 64 | | | $ | 63 | |
Adjustments to reconcile net income to cash from operating activities: | | | | | | | |
Depreciation and amortization | | 92 | | | | 93 | |
Deferred income taxes and investment tax credits | | 23 | | | | 8 | |
Deferred recovery clauses | | (9 | ) | | | (7 | ) |
Receivables, less allowance for uncollectibles | | 47 | | | | 32 | |
Inventories | | 5 | | | | 2 | |
Taxes accrued | | 9 | | | | 23 | |
Interest accrued | | 28 | | | | 23 | |
Accounts payable | | (74 | ) | | | (68 | ) |
Regulatory assets and liabilities | | (4 | ) | | | 20 | |
Other | | (36 | ) | | | (32 | ) |
Cash flows from operating activities | | 145 | | | | 157 | |
Cash flows used in investing activities | | | | | | | |
Capital expenditures | | (274 | ) | | | (162 | ) |
Cash flows used in investing activities | | (274 | ) | | | (162 | ) |
Cash flows from financing activities | | | | | | | |
Equity contributions from Parent | | 110 | | | | 110 | |
Net increase (decrease) in short-term debt | | 91 | | | | (5 | ) |
Dividends to Parent | | (76 | ) | | | (97 | ) |
Cash flows from financing activities | | 125 | | | | 8 | |
Net increase (decrease) in cash and cash equivalents | | (4 | ) | | | 3 | |
Cash and cash equivalents at beginning of period | | 15 | | | | 13 | |
Cash and cash equivalents at end of period | $ | 11 | | | $ | 16 | |
Supplemental disclosure of non-cash activities | | | | | | | |
Change in accrued capital expenditures | $ | (4 | ) | | $ | 0 | |
The accompanying notes are an integral part of the consolidated condensed financial statements.
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TAMPA ELECTRIC COMPANY
Consolidated Condensed Statements of Capital
Unaudited
| | | | | | | | | | | | | | Accumulated | | | | | |
| | | | | | | | | | | | | | Other | | | | | |
| | | | | | Common | | | Retained | | | Comprehensive | | | Total | |
(millions, except share amounts) | | Shares | | | Stock | | | Earnings | | | Loss | | | Capital | |
Balance, December 31, 2018 | | | 10 | | | | 2,990 | | | $ | 314 | | | $ | (1 | ) | | $ | 3,303 | |
Net income | | | | | | | | | | | 64 | | | | | | | | 64 | |
Equity contributions from Parent | | | | | | 110 | | | | | | | | | | | | 110 | |
Dividends to Parent | | | | | | | | | | | (76 | ) | | | | | | | (76 | ) |
Balance, March 31, 2019 | | | 10 | | | $ | 3,100 | | | $ | 302 | | | $ | (1 | ) | | $ | 3,401 | |
The accompanying notes are an integral part of the consolidated condensed financial statements.
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TAMPA ELECTRIC COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
UNAUDITED
1. Summary of Significant Accounting Policies
See TEC’s Annual Report on Form 10-K for the year ended December 31, 2018 for a complete discussion of accounting policies. The significant accounting policies for TEC include:
Principles of Consolidation and Basis of Presentation
TEC is a wholly owned subsidiary of TECO Energy, which is an indirect, wholly owned subsidiary of Emera. TEC is comprised of the electric division, referred to as Tampa Electric, and the natural gas division, referred to as PGS.
Intercompany balances and transactions within the divisions have been eliminated in consolidation. In the opinion of management, the unaudited consolidated condensed financial statements include all adjustments that are of a recurring nature and necessary to state fairly the financial position of TEC as of March 31, 2019 and December 31, 2018, and the results of operations and cash flows for the periods ended March 31, 2019 and March 31, 2018. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results that can be expected for the entire fiscal year ending December 31, 2019.
The use of estimates is inherent in the preparation of financial statements in accordance with U.S. GAAP. Actual results could differ from these estimates. The year-end consolidated condensed balance sheet was derived from audited financial statements; however, this quarterly report on Form 10-Q does not include all year-end disclosures required for an annual report on Form 10-K by U.S. GAAP.
Receivables and Allowance for Uncollectible Accounts
Receivables from contracts with customers, which consist of services to residential, commercial, industrial and other customers, were $208 million and $226 million as of March 31, 2019 and December 31, 2018, respectively. An allowance for uncollectible accounts is established based on TEC’s collection experience. Circumstances that could affect Tampa Electric’s and PGS’s estimates of uncollectible receivables include, but are not limited to, customer credit issues, the level of fuel prices, customer deposits and general economic conditions. Accounts are written off once they are deemed to be uncollectible.
As of March 31, 2019 and December 31, 2018, unbilled revenues of $58 million and $67 million, respectively, are included in the “Receivables” line item on the Consolidated Condensed Balance Sheets.
Accounting for Franchise Fees and Gross Receipts
Tampa Electric and PGS are allowed to recover certain costs from customers on a dollar-per-dollar basis through rates approved by the FPSC. The amounts included in customers’ bills for franchise fees and gross receipt taxes are included as revenues on the Consolidated Condensed Statements of Income. Franchise fees and gross receipt taxes payable by Tampa Electric and PGS are included as an expense on the Consolidated Condensed Statements of Income in “Taxes, other than income”. These amounts totaled $27 million and $29 million for the three months ended March 31, 2019 and 2018, respectively.
2. New Accounting Pronouncements
Change in Accounting Policy
The new U.S. GAAP accounting policies that are applicable to and adopted by TEC in 2019 are described as follows:
Leases
On January 1, 2019, TEC adopted Accounting Standard Updates (ASU) 2016-02, Leases (Topic 842), including all related amendments, using the modified retrospective approach. The standard requires lessees to recognize leases on the balance sheet for all leases with a term of longer than twelve months and disclose key information about leasing arrangements.
As permitted by the optional transition method, TEC did not restate comparative financial information in its consolidated financial statements, did not reassess whether any expired or existing contracts contained leases and carried forward existing lease classifications. Additionally, TEC elected to not evaluate existing land easements under the new standard if the land easements were not previously accounted for under the leasing guidance within ASC Topic 840. TEC elected to use hindsight to determine the lease term for existing leases and elected to not separate lease components from non-lease components for all lessee and lessor arrangements.
TEC has implemented additional processes and controls to facilitate the identification, tracking and reporting of potential leases based on the requirements of the standard. There were no updates to information technology systems as a result of implementation.
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TEC’s adoption of this new standard resulted in right-of-use (ROU) assets and lease liabilities of $20 million as of January 1, 2019. The ROU assets and lease liabilities were measured at the present value of remaining lease payments using TEC’s incremental borrowing rate.
There was no impact to opening retained earnings as of January 1, 2019 or TEC’s net income or cash flows for the three months ended March 31, 2019 as a result of the adoption of the standard. There were no significant impacts to TEC’s accounting for lessor arrangements. Refer to Note 11 for further detail.
Targeted Improvements to Accounting for Hedging Activities
On January 1, 2019, TEC adopted ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, which amends the hedge accounting recognition and presentation requirements in ASC Topic 815. This standard improves the transparency and understandability of information about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities and simplifies the application of hedge accounting. The standard will make more financial and nonfinancial hedging strategies eligible for hedge accounting, amends the presentation and disclosure requirements for hedging activities and changes how entities assess hedge effectiveness. There was no impact on the condensed consolidated financial statements as a result of the adoption of this standard.
Cloud Computing
In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The standard allows entities who are customers in hosting arrangements that are service contracts to apply the existing internal-use software guidance to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The guidance specifies classification for capitalizing implementation costs and related amortization expense within the financial statements and requires additional disclosures. The guidance is effective for annual reporting periods, including interim reporting within those periods, beginning after December 15, 2019. Early adoption is permitted and can be applied either retrospectively or prospectively. TEC early adopted the standard effective January 1, 2019 and elected to apply the guidance prospectively. There was no material impact on the condensed consolidated financial statements as a result of the adoption of this standard.
Future Accounting Pronouncements
TEC considers the applicability and impact of all ASUs issued by the FASB. The ASUs that have been issued, but that are not yet effective, are consistent with those disclosed in TEC’s Annual Report on Form 10-K for the year ended December 31, 2018.
3. Regulatory
Tampa Electric Base Rates
On September 27, 2017, Tampa Electric filed with the FPSC an amended and restated settlement agreement that replaced the existing 2013 base rate settlement agreement and extended it another four years through December 31, 2021. The FPSC approved the agreement on November 6, 2017.
The amended agreement provides for SoBRAs for TEC’s investments in solar generation. Tampa Electric plans to invest approximately $850 million during 2017 through 2021 related to 600 MW of solar projects recoverable under the SoBRAs.
On December 12, 2017, TEC filed its first petition regarding the SoBRAs along with supporting tariffs demonstrating the cost-effectiveness of the September 1, 2018 tranche representing 145 MW and $24 million annually in estimated revenue requirements. The FPSC approved the tariffs on the first SoBRA filing on May 8, 2018 and TEC began receiving these revenues in September 2018. On June 29, 2018, TEC filed its second SoBRA petition along with supporting tariffs demonstrating the cost-effectiveness of the January 1, 2019 tranche representing 260 MW and $46 million annually in estimated revenue requirements. The FPSC approved the tariffs on the second SoBRA filing on October 29, 2018 and TEC began receiving these revenues in January 2019.
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Tampa Electric Storm Restoration Cost Recovery and Tax Reform
As a result of Tampa Electric’s 2013 rate case settlement, in the event of a named storm that results in damage to its system, Tampa Electric can petition the FPSC to seek recovery of those costs over a 12-month period or longer as determined by the FPSC, as well as replenish its reserve to $56 million, the level of the reserve as of October 31, 2013. In the third quarter of 2017, Tampa Electric was impacted by Hurricane Irma and incurred storm restoration costs of approximately $102 million. Tampa Electric petitioned the FPSC on December 28, 2017 for recovery of estimated storm costs and to replenish the balance in the reserve to the level that existed as of October 31, 2013.
On March 1, 2018, the FPSC approved a settlement agreement filed by Tampa Electric that addressed both the recovery of storm costs and the return of tax reform benefits to customers (see Note 4) while keeping customer rates stable in 2018. Beginning on April 1, 2018, the agreement authorized Tampa Electric to net the estimated amount of storm cost recovery against Tampa Electric’s estimated 2018 tax reform benefits of $103 million. As a result, during 2018, Tampa Electric recorded O&M expense and a reduction of the storm reserve regulatory asset of $47 million and recorded O&M expense for the increase in the storm reserve regulatory liability of $56 million to reflect effective recovery of the storm costs due to the allowed netting of storm cost recovery with tax reform benefits. On August 20, 2018, the FPSC approved lowering base rates by $103 million annually beginning on January 1, 2019 as a result of lower tax expense.
On April 9, 2019, Tampa Electric reached a proposed settlement agreement with consumer parties regarding eligible storm costs. If the settlement is approved by the FPSC, Tampa Electric will refund $12 million to customers in January 2020, resulting in minimal impact to the Consolidated Condensed Statements of Income. The FPSC is expected to reach a decision in the second quarter of 2019.
PGS Base Rates
PGS’s base rates were established in May 2009. In 2017, the FPSC approved an updated PGS settlement agreement that did not contain a provision for tax reform. In 2018, the FPSC approved a settlement agreement authorizing PGS to accelerate $11 million of amortization of its regulatory asset associated with the MGP environmental liability in 2018 to net it against the estimated 2018 tax reform benefits.
In accordance with the 2018 settlement agreement, PGS reduced its base rates by $12 million for the impact of tax reform and reduced depreciation rates by $10 million beginning in January 2019. PGS is permitted to initiate a general base rate proceeding during 2020 regardless of its earned ROE at the time provided the new rates do not become effective before January 1, 2021.
Regulatory Assets and Liabilities
Tampa Electric and PGS apply the FASB’s accounting standards for regulated operations. Regulatory assets generally represent incurred costs that have been deferred, as their future recovery in customer rates is probable. Regulatory liabilities generally represent obligations to make refunds to customers from previous collections for costs that are not likely to be incurred or the advance recovery of expenditures for approved costs.
Details of the regulatory assets and liabilities are presented in the following table:
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Regulatory Assets and Liabilities | | | | | | | |
(millions) | March 31, 2019 | | | December 31, 2018 | |
Regulatory assets: | | | | | | | |
Regulatory tax asset (1) | $ | 70 | | | $ | 56 | |
Cost-recovery clauses (2) | | 65 | | | | 55 | |
Environmental remediation (3) | | 24 | | | | 23 | |
Postretirement benefits (4) | | 291 | | | | 295 | |
Storm reserve (5) | | 3 | | | | 3 | |
Other | | 31 | | | | 26 | |
Total regulatory assets | | 484 | | | | 458 | |
Less: Current portion | | 85 | | | | 88 | |
Long-term regulatory assets | $ | 399 | | | $ | 370 | |
Regulatory liabilities: | | | | | | | |
Regulatory tax liability (6) | $ | 729 | | | $ | 715 | |
Cost-recovery clauses (2) | | 18 | | | | 17 | |
Accumulated reserve - cost of removal (7) | | 513 | | | | 513 | |
Storm reserve (8) | | 56 | | | | 56 | |
Other | | 8 | | | | 9 | |
Total regulatory liabilities | | 1,324 | | | | 1,310 | |
Less: Current portion | | 82 | | | | 44 | |
Long-term regulatory liabilities | $ | 1,242 | | | $ | 1,266 | |
(1) | The regulatory tax asset is primarily associated with the depreciation and recovery of AFUDC-equity. This asset does not earn a return but rather is included in the capital structure, which is used in the calculation of the weighted cost of capital used to determine revenue requirements. It will be recovered over the expected life of the related assets. The regulatory tax asset balance reflects the impact of the federal tax rate reduction. |
(2) | These assets and liabilities are related to FPSC clauses and riders. They are recovered or refunded through cost-recovery mechanisms approved by the FPSC on a dollar-for-dollar basis in the next year. |
(3) | This asset is related to costs associated with environmental remediation primarily at MGP sites. The balance is included in rate base, partially offsetting the related liability, and earns a rate of return as permitted by the FPSC. The timing of recovery is based on a settlement agreement approved by the FPSC. |
(4) | This asset is related to the deferred costs of postretirement benefits and it is amortized over the remaining service life of plan participants. Deferred costs of postretirement benefits that are included in expense are recognized as cost of service for rate-making purposes as permitted by the FPSC. |
(5) | In October 2018, Hurricane Michael impacted PGS’s Panama City division and the cost of restoration exceeded PGS’s storm reserve balance. This regulatory asset reflects PGS’s storm reserve costs expected to be recovered. In April 2019, PGS filed a petition to the FPSC for recovery of these deferred costs from customers on a dollar-for-dollar basis in 2019. |
(6) | The regulatory tax liability is primarily related to the revaluation of TEC’s deferred income tax balances recorded on December 31, 2017 at the lower income tax rate. The liability related to the revaluation of the deferred income tax balances is amortized and returned to customers through rate reductions or other revenue offsets based on IRS regulations and the settlement agreement for tax reform benefits approved by the FPSC. See Note 4 to the TEC Consolidated Financial Statements for further information. |
(7) | This item represents the non-ARO cost of removal in the accumulated reserve for depreciation. AROs are costs for legally required removal of property, plant and equipment. Non-ARO cost of removal represents estimated funds received from customers through depreciation rates to cover future non-legally required cost of removal of property, plant and equipment, net of salvage value upon retirement, which reduces rate base for ratemaking purposes. This liability is reduced as costs of removal are incurred. |
(8) | See “Tampa Electric Storm Restoration Cost Recovery and Tax Reform” discussion above for information regarding this reserve. |
4. Income Taxes
U.S. Tax Reform
On December 22, 2017, the U.S. Tax Cuts and Jobs Act of 2017 (the Act) was signed into legislation. The Act includes a broad range of tax reform changes affecting businesses, effective January 1, 2018 which provide a corporate federal tax rate reduction from 35% to 21%, 100% asset expensing, limitation of interest deduction, the repeal of section 199 domestic production deduction and the
12
preservation of the existing normalization rules. The Act also provides that regulated electric and gas companies are exempt from the 100% asset expensing and interest expense deduction limitation. In accordance with U.S. GAAP, TEC was required to revalue its deferred income tax assets and liabilities based on the new 21% federal tax rate at the date of enactment. Additionally, under FPSC rules TEC was required to adjust deferred income tax assets and liabilities for changes in tax rates with a corresponding regulatory liability for the excess deferred taxes generated by the tax rate differential. See Note 3.
Income Tax Expense
TEC is included in a consolidated U.S. federal income tax return with EUSHI and its subsidiaries. TEC’s income tax expense is based upon a separate return method, modified for the benefits-for-loss allocation in accordance with respective tax sharing agreements with TECO Energy and EUSHI. To the extent that TEC’s cash tax positions are settled differently than the amount reported as realized under the tax sharing agreement, the difference is accounted for as either a capital contribution or a distribution.
TEC’s effective tax rates for the three months ended March 31, 2019 and 2018 were 20.0% and 18.2%, respectively. The March 31, 2019 effective tax rate is an estimate of the annual effective income tax rate. TEC’s effective tax rate for the three months ended March 31, 2019 differed from the statutory rate principally due to the amortization of the regulatory tax liability resulting from tax reform. See Note 3 for further information regarding the regulatory tax liability.
Unrecognized Tax Benefits
As of March 31, 2019 and December 31, 2018, the amount of unrecognized tax benefits was $8 million, all of which was recorded as a reduction of deferred income tax assets for tax credit carryforwards. TEC believes that the total unrecognized tax benefits will decrease and be recognized within the next twelve months due to the ongoing audit examination of TECO Energy’s consolidated federal income tax return for the short tax year ending June 30, 2016. TEC had $8 million of unrecognized tax benefits at March 31, 2019 and December 31, 2018, that, if recognized, would reduce TEC’s effective tax rate.
5. Employee Postretirement Benefits
TEC is a participant in the comprehensive retirement plans of TECO Energy. The following table presents detail related to TECO Energy’s periodic benefit cost for pension and other postretirement benefits. Amounts disclosed for TECO Energy’s pension benefits include the amounts related to its qualified pension plan and non-qualified, non-contributory SERP and Restoration Plan.
TECO Energy Benefit Cost | | | | | | | | | | | | | | | |
(millions) | Pension Benefits | | | Other Postretirement Benefits | |
Three months ended March 31, | 2019 | | | 2018 | | | 2019 | | | 2018 | |
Components of net periodic benefit cost | | | | | | | | | | | | | | | |
Service cost | $ | 5 | | | $ | 5 | | | $ | 0 | | | $ | 1 | |
Interest cost | | 8 | | | | 7 | | | | 2 | | | | 2 | |
Expected return on assets | | (12 | ) | | | (12 | ) | | | 0 | | | | 0 | |
Amortization of: | | | | | | | | | | | | | | | |
Prior service (benefit) cost | | 0 | | | | 0 | | | | 0 | | | | (1 | ) |
Actuarial loss | | 3 | | | | 5 | | | | 0 | | | | 0 | |
Settlement cost | | 1 | | (1) | | 0 | | | | 0 | | | | 0 | |
Net periodic benefit cost | $ | 5 | | | $ | 5 | | | $ | 2 | | | $ | 2 | |
(1)Represents TECO Energy’s SERP and Restoration Plan settlement charges as a result of the prior retirements of certain executives.
TEC’s portion of the net periodic benefit cost for the three months ended March 31, 2019 and 2018, respectively, was $4 million and $3 million for pension benefits, and $2 million and $2 million for other postretirement benefits.
TECO Energy assumed a long-term EROA of 7.15% and a discount rate of 4.34% for pension benefits under its qualified pension plan for 2019. For TECO Energy’s other postretirement benefits, TECO Energy used a discount rate of 4.38% for 2019.
TECO Energy made contributions of $0 and $10 million to its qualified pension plan in the three months ended March 31, 2019 and 2018, respectively. TEC’s portion of these contributions was $0 and $8 million, respectively. TECO Energy expects to make contributions to the pension plan of $20 million for the remainder of 2019. TEC estimates its portion of the 2019 contribution to be $15 million.
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Included in the benefit cost discussed above, for the three months ended March 31, 2019 and 2018, TEC reclassified $3 million and $4 million, respectively, of unamortized prior service benefits and costs and actuarial gains and losses from regulatory assets to the Consolidated Condensed Statement of Income.
6. Short-Term Debt
Details of the credit facilities and related borrowings are presented in the following table:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2019 | | | December 31, 2018 | |
| | | | | | | | | Letters | | | | | | | | | | | Letters | |
| Credit | | | Borrowings | | | of Credit | | | Credit | | | Borrowings | | | of Credit | |
(millions) | Facilities | | | Outstanding (1) | | | Outstanding | | | Facilities | | | Outstanding (1) | | | Outstanding | |
Tampa Electric Company: | | | | | | | | | | | | | | | | | | | | | | | |
5-year facility (2) | $ | 325 | | | $ | 192 | | | $ | 1 | | | $ | 325 | | | $ | 131 | | | $ | 1 | |
3-year accounts receivable facility (3) | | 150 | | | | 120 | | | | 0 | | | | 150 | | | | 90 | | | | 0 | |
Total | $ | 475 | | | $ | 312 | | | $ | 1 | | | $ | 475 | | | $ | 221 | | | $ | 1 | |
(1) | Borrowings outstanding are reported as notes payable. |
(2) | This 5-year facility matures March 22, 2022. |
(3) | This 3-year facility matures March 22, 2021. |
At March 31, 2019, these credit facilities required commitment fees ranging from 12.5 to 35.0 basis points. The weighted-average interest rate on outstanding amounts payable under the credit facilities at March 31, 2019 and December 31, 2018 was 3.31% and 3.14%, respectively.
7. Long-Term Debt
Fair Value of Long-Term Debt
At March 31, 2019, TEC’s long-term debt had a carrying amount of $2,575 million and an estimated fair market value of $2,749 million. At December 31, 2018, TEC’s total long-term debt had a carrying amount of $2,575 million and an estimated fair market value of $2,686 million. The fair value of the debt securities is determined using Level 2 measurements (see Note 13 for information regarding the fair value hierarchy).
8. Commitments and Contingencies
Legal Contingencies
From time to time, TEC and its subsidiaries are involved in various legal, tax and regulatory proceedings before various courts, regulatory commissions and governmental agencies in the ordinary course of business. Where appropriate, accruals are made in accordance with accounting standards for contingencies to provide for matters that are probable of resulting in an estimable loss.
Superfund and Former Manufactured Gas Plant Sites
TEC, through its Tampa Electric and PGS divisions, is a PRP for certain superfund sites and, through its PGS division, for certain former MGP sites. While the joint and several liability associated with these sites presents the potential for significant response costs, as of March 31, 2019, TEC has estimated its ultimate financial liability to be $28 million, primarily at PGS. This amount has been accrued and is primarily reflected in the long-term liability section under “Deferred credits and other liabilities” on the Consolidated Condensed Balance Sheets. The environmental remediation costs associated with these sites are expected to be paid over many years.
The estimated amounts represent only the portion of the cleanup costs attributable to TEC. The estimates to perform the work are based on TEC’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.
In instances where other PRPs are involved, most of those PRPs are creditworthy and are likely to continue to be creditworthy for the duration of the remediation work. However, in those instances that they are not, TEC could be liable for more than TEC’s currently assessed percentage of the remediation costs.
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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. Under current regulations, these costs are recoverable through customer rates established in subsequent base rate proceedings.
Long-Term Commitments
TEC has commitments for purchased power, long-term leases, other purchase obligations, long-term service agreements and capital projects. In addition, TEC has payment obligations under contractual agreements for fuel, fuel transportation and power purchases that are recovered from customers under regulatory clauses. The following is a schedule of future payments under PPAs, minimum lease payments with non-cancelable lease terms in excess of one year, and other net purchase obligations/commitments at March 31, 2019:
| | | | | | | | | | | | | | | | | | Long-term | | | | | | | | Demand | | | | | |
| | Purchased | | | | | | | Capital | | | Fuel and | | | Service | | | | Operating | | | Side | | | | | |
(millions) | | Power | | | Transportation | | | Projects | | | Gas Supply | | | Agreements | | | | Leases | | | Management | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2019 | | $ | 33 | | | $ | 145 | | | $ | 238 | | | $ | 193 | | | $ | 5 | | | | $ | 2 | | | $ | 3 | | | $ | 619 | |
2020 | | | 0 | | | | 175 | | | | 85 | | | | 32 | | | | 6 | | | | | 2 | | | | 1 | | | | 301 | |
2021 | | | 0 | | | | 141 | | | | 35 | | | | 3 | | | | 7 | | | | | 2 | | | | 0 | | | | 188 | |
2022 | | | 0 | | | | 133 | | | | 7 | | | | 3 | | | | 7 | | | | | 2 | | | | 0 | | | | 152 | |
2023 | | | 0 | | | | 109 | | | | 2 | | | | 1 | | | | 11 | | | | | 2 | | | | 0 | | | | 125 | |
Thereafter | | | 0 | | | | 1,014 | | | | 6 | | | | 0 | | | | 78 | | | | | 37 | | | | 0 | | | | 1,135 | |
Total future minimum payments | | $ | 33 | | | $ | 1,717 | | | $ | 373 | | | $ | 232 | | | $ | 114 | | | | $ | 47 | | | $ | 4 | | | $ | 2,520 | |
Financial Covenants
TEC must meet certain financial tests, including a debt to capital ratio, as defined in the applicable debt agreements and has certain restrictive covenants in specific agreements and debt instruments. At March 31, 2019, TEC was in compliance with all required financial covenants.
9. Segment Information
(millions) | Tampa | | | | | | | | | | | Tampa Electric | |
Three months ended March 31, | Electric | | | PGS | | | Eliminations | | | Company | |
2019 | | | | | | | | | | | | | | | |
Revenues - external | $ | 411 | | | $ | 128 | | | $ | 0 | | | $ | 539 | |
Intracompany sales | | 1 | | | | 5 | | | | (6 | ) | | | 0 | |
Total revenues | | 412 | | | | 133 | | | | (6 | ) | | | 539 | |
Total interest charges | | 29 | | | | 4 | | | | 0 | | | | 33 | |
Net income | $ | 46 | | | $ | 18 | | | $ | 0 | | | $ | 64 | |
2018 | | | | | | | | | | | | | | | |
Revenues - external | $ | 461 | | | $ | 136 | | | $ | 0 | | | $ | 597 | |
Intracompany sales | | 0 | | | | 6 | | | | (6 | ) | | | 0 | |
Total revenues | | 461 | | | | 142 | | | | (6 | ) | | | 597 | |
Total interest charges | | 26 | | | | 4 | | | | 0 | | | | 30 | |
Net income | $ | 48 | | | $ | 15 | | | $ | 0 | | | $ | 63 | |
Total assets at March 31, 2019 | $ | 8,451 | | | $ | 1,443 | | | $ | (571 | ) | (1) | $ | 9,323 | |
Total assets at December 31, 2018 | $ | 8,235 | | | $ | 1,407 | | | $ | (487 | ) | (1) | $ | 9,155 | |
(1) | Amounts relate to consolidated deferred tax reclassifications. Deferred tax assets are reclassified and netted with deferred tax liabilities upon consolidation. |
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10. Revenue
The following disaggregates TEC’s revenue by major source:
(millions) | Tampa | | | | | | | | | | | Tampa Electric | |
Three months ended March 31, 2019 | Electric | | | PGS | | | Eliminations | | | Company | |
Electric revenue | | | | | | | | | | | | | | | |
Residential | $ | 206 | | | $ | 0 | | | $ | 0 | | | $ | 206 | |
Commercial | | 120 | | | | 0 | | | | 0 | | | | 120 | |
Industrial | | 34 | | | | 0 | | | | 0 | | | | 34 | |
Regulatory deferrals and unbilled revenue | | (7 | ) | | | 0 | | | | 0 | | | | (7 | ) |
Other (1) | | 59 | | | | 0 | | | | (1 | ) | | | 58 | |
Total electric revenue | | 412 | | | | 0 | | | | (1 | ) | | | 411 | |
Gas revenue | | | | | | | | | | | | | | | |
Residential | | 0 | | | | 50 | | | | 0 | | | | 50 | |
Commercial | | 0 | | | | 42 | | | | 0 | | | | 42 | |
Industrial (2) | | 0 | | | | 5 | | | | 0 | | | | 5 | |
Other (3) | | 0 | | | | 36 | | | | (5 | ) | | | 31 | |
Total gas revenue | | 0 | | | | 133 | | | | (5 | ) | | | 128 | |
Total revenue | $ | 412 | | | $ | 133 | | | $ | (6 | ) | | $ | 539 | |
Three months ended March 31, 2018 | | | | | | | | | | | | | | | |
Electric revenue | | | | | | | | | | | | | | | |
Residential | $ | 230 | | | $ | 0 | | | $ | 0 | | | $ | 230 | |
Commercial | | 132 | | | | 0 | | | | 0 | | | | 132 | |
Industrial | | 38 | | | | 0 | | | | 0 | | | | 38 | |
Regulatory deferrals and unbilled revenue | | (1 | ) | | | 0 | | | | 0 | | | | (1 | ) |
Other (1) | | 62 | | | | 0 | | | | 0 | | | | 62 | |
Total electric revenue | | 461 | | | | 0 | | | | 0 | | | | 461 | |
Gas revenue | | | | | | | | | | | | | | | |
Residential | | 0 | | | | 56 | | | | 0 | | | | 56 | |
Commercial | | 0 | | | | 44 | | | | 0 | | | | 44 | |
Industrial (2) | | 0 | | | | 5 | | | | 0 | | | | 5 | |
Other (3) | | 0 | | | | 37 | | | | (6 | ) | | | 31 | |
Total gas revenue | | 0 | | | | 142 | | | | (6 | ) | | | 136 | |
Total revenue | $ | 461 | | | $ | 142 | | | $ | (6 | ) | | $ | 597 | |
| (1) Other includes sales to public authorities, off-system sales to other utilities and various other items. |
| (2) Industrial includes sales to power generation customers. |
| (3) Other includes off-system sales to other utilities and various other items. |
Remaining Performance Obligations
Remaining performance obligations primarily represent lighting contracts and gas transportation contracts with fixed contract terms. As of March 31, 2019 and December 31, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $135 million. As allowed under ASC 606, this amount excludes contracts with an original expected length of one year or less and variable amounts for which TEC recognizes revenue at the amount to which it has the right to invoice for services performed. TEC expects to recognize revenue for the remaining performance obligations through 2033.
11. Leases
TEC determines whether a contract contains a lease at inception by evaluating if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
Operating lease ROU assets and operating lease liabilities are recognized on the Condensed Consolidated Balance Sheets based on the present value of the future minimum lease payments over the lease term at commencement date. As most of TEC’s leases do
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not provide an implicit rate, the incremental borrowing rate at commencement of the lease is used in determining the present value of future lease payments. Lease expense is recognized on a straight-line basis over the lease term and is recorded as “Operations and maintenance expenses” on the Consolidated Condensed Statements of Income.
Where TEC is the lessor, a lease is a sales-type lease if certain criteria is met and the arrangement transfers control of the underlying asset to the lessee. For arrangements where the criteria are met due to the presence of a third-party residual value guarantee, the lease is a direct financing lease.
For direct finance leases, a net investment in the lease is recorded that consists of the sum of the minimum lease payments and residual value (net of estimated executory costs and unearned income). The difference between the gross investment and the cost of the leased item is recorded as unearned income at the inception of the lease. Unearned income is recognized in income over the life of the lease using a constant rate of interest equal to the internal rate of return on the lease.
TEC has certain contractual agreements that include lease and non-lease components, which management has elected to account for as a single lease component for all leases.
Lessee
TEC has operating leases for buildings, land, telecommunication services and rail cars. TEC’s leases have remaining lease terms of 2 years to 67 years, some of which include options to extend the leases for up to an additional 65 years. These options are included as part of the lease term when it is considered reasonably certain that they will be exercised.
(millions) | | Classification | | March 31, 2019 | |
Right-of-use asset | | Other deferred debits | | $ | 19 | |
Lease liabilities | | | | | | |
Current | | Other current liabilities | | $ | 2 | |
Long-term | | Deferred credits and other liabilities | | | 17 | |
Total lease liabilities | | | | $ | 19 | |
TEC has recorded operating lease expense for the three months ended March 31, 2019 of $1 million.
Future minimum lease payments under non-cancellable operating leases for each of the next five years and in aggregate thereafter consisted of the following at March 31, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(millions) | | 2019 | | | 2020 | | | 2021 | | | 2022 | | | 2023 | | | Thereafter | | | Total | |
Minimum lease payments | | $ | 2 | | | $ | 2 | | | $ | 2 | | | $ | 2 | | | $ | 2 | | | $ | 37 | | | $ | 47 | |
Less imputed interest | | | | | | | | | | | | | | | | | | | | | | | | | | | (28 | ) |
Total future minimum payments | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 19 | |
Additional information related to TEC’s leases is as follows:
(millions) | | | | |
Three months ended March 31, | | 2019 | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | |
Operating cash flows for operating leases | | $ | 1 | |
Weighted average remaining lease term | | | 49 | |
Weighted average discount rate - operating leases | | | 4.3 | % |
Lessor
TEC leases CNG stations to other companies, which are classified as direct finance leases.
The net investment in direct finance leases consists of the following:
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(millions) | | March 31, 2019 | | |
Total minimum lease payments to be received | | $ | 35 | | |
Less amounts representing estimated executory costs | | | (13 | ) | |
Minimum lease payments receivable | | $ | 22 | | |
Less unearned finance lease income | | | (11 | ) | |
Net investment in direct finance leases | | $ | 11 | | |
Principal due within one year (included in "Receivables") | | | (2 | ) | |
Net investment in direct finance leases - long-term (included in "Other deferred debits") | | $ | 9 | | |
The unearned income related to these direct finance leases is recognized in income over the life of the lease using a constant rate of interest equal to the internal rate of return on the lease and is recorded as “Gas revenues” on the Consolidated Condensed Statements of Income. Customers have the option to purchase the assets related to the CNG stations at any time after 2021 by paying a make-whole payment at the date of the purchase based on a targeted internal rate of return. Alternatively, the customer may take possession of the CNG station asset at the end of the lease term for no cost.
As of March 31, 2019, future minimum direct finance lease payments to be received for each of the next five years and in aggregate thereafter consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(millions) | | 2019 | | | 2020 | | | 2021 | | | 2022 | | | 2023 | | | Thereafter | | | Total | |
Minimum lease payments to be received | | $ | 2 | | | $ | 2 | | | $ | 2 | | | $ | 2 | | | $ | 2 | | | $ | 25 | | | $ | 35 | |
Less executory costs | | | | | | | | | | | | | | | | | | | | | | | | | | | (13 | ) |
Total minimum lease payments receivable | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 22 | |
12. Accounting for Derivative Instruments and Hedging Activities
From time to time, TEC enters into futures, forwards, swaps and option contracts for the following purposes:
| • | To limit the exposure to price fluctuations for physical purchases and sales of natural gas in the course of normal operations, and |
| • | To optimize the utilization of Tampa Electric’s physical natural gas storage capacity and PGS’s firm transportation capacity on interstate pipelines. |
TEC uses derivatives only to reduce normal operating and market risks, not for speculative purposes. TEC’s primary objective in using derivative instruments for regulated operations is to reduce the impact of market price volatility on customers and to optimize the utilization of its physical natural gas storage capacity and firm transportation capacity on interstate pipelines.
The risk management policies adopted by TEC 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.
On November 6, 2017, the FPSC approved an amended and restated settlement agreement filed by Tampa Electric, which replaces the existing 2013 base rate settlement agreement and includes a provision for a five-year moratorium on hedging of natural gas purchases ending on December 31, 2022 (see Note 3). TEC was hedging its exposure to the variability in future cash flows until November 30, 2018 for financial natural gas contracts. TEC had zero derivative assets and liabilities as of March 31, 2019 and December 31, 2018.
TEC applies the accounting standards for derivative instruments and hedging activities. These standards require companies to recognize derivatives as either assets or liabilities in the financial statements and to measure those instruments at fair value. TEC also applies the accounting standards for regulated operations to financial instruments used to hedge the purchase of natural gas and optimize natural gas storage capacity for its regulated companies. These standards, in accordance with the FPSC, permit the changes in fair value of natural gas derivatives to be recorded as regulatory assets or liabilities reflecting the impact of these activities on the fuel recovery clause. As a result, these changes are not recorded in OCI or net income.
TEC’s physical contracts qualify for the NPNS exception to derivative accounting rules, provided they meet certain criteria. Generally, NPNS applies if TEC deems the counterparty creditworthy, if the counterparty owns or controls resources within the proximity to allow for physical delivery of the commodity, if TEC intends to receive physical delivery and if the transaction is reasonable in relation to TEC’s business needs. As of March 31, 2019, all of TEC’s physical contracts qualify for the NPNS exception, which has been elected.
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TEC is exposed to credit risk by entering into derivative instruments with counterparties to limit its exposure to the commodity price fluctuations associated with natural gas and to optimize the value of natural gas storage capacity. Credit risk is the potential loss resulting from a counterparty’s nonperformance under an agreement. TEC manages credit risk with policies and procedures for, among other things, counterparty analysis, exposure measurement and exposure monitoring and mitigation.
It is possible that volatility in commodity prices could cause TEC to have material credit risk exposures with one or more counterparties. If such counterparties fail to perform their obligations under one or more agreements, TEC could suffer a material financial loss. However, as of March 31, 2019, substantially all of the counterparties with transaction amounts outstanding in TEC’s energy portfolio were rated investment grade by the major rating agencies. TEC assesses credit risk internally for counterparties that are not rated.
TEC has entered into commodity master arrangements with its counterparties to mitigate credit exposure to those counterparties. TEC generally enters into standardized master arrangements in the electric and gas industry. TEC believes that entering into such agreements reduces the risk from default by creating contractual rights relating to creditworthiness, collateral and termination.
TEC has implemented procedures to monitor the creditworthiness of its counterparties and to consider nonperformance risk in determining the fair value of counterparty positions. Net liability positions generally do not require a nonperformance risk adjustment as TEC uses derivative transactions as hedges and has the ability and intent to perform under each of these contracts. In the instance of net asset positions, TEC considers general market conditions and the observable financial health and outlook of specific counterparties in evaluating the potential impact of nonperformance risk to derivative positions.
Certain TEC derivative instruments contain provisions that require TEC’s debt to maintain an investment grade credit rating from any or all of the major credit rating agencies. If debt ratings were to fall below investment grade, it could trigger these provisions, and the counterparties to the derivative instruments could demand immediate and ongoing full overnight collateralization on derivative instruments in net liability positions. TEC has no other contingent risk features associated with any derivative instruments.
13. Fair Value Measurements
Items Measured at Fair Value on a Recurring Basis
Accounting guidance governing fair value measurements and disclosures provides that fair value represents the amount that would be received in selling an asset or the amount that would be paid in transferring a liability in an orderly transaction between market participants. As a basis for considering assumptions that market participants would use in pricing an asset or liability, accounting guidance also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
| |
Level 1: | Observable inputs, such as quoted prices in active markets; |
Level 2: | Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and |
Level 3: | Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions. |
There were no Level 3 assets or liabilities for the periods presented.
As of March 31, 2019 and December 31, 2018, the carrying value of TEC’s short-term debt was not materially different from the fair value due to the short-term nature of the instruments and because the stated rates approximate market rates. The fair value of TEC’s short-term debt is determined using Level 2 measurements. See Note 7 for information regarding the fair value of long-term debt.
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Item 2. | MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS |
This Management’s Discussion & Analysis contains forward-looking statements, which are subject to the inherent uncertainties in predicting future results and conditions. Actual results may differ materially from those forecasted. The forecasted results are based on TEC's current expectations and assumptions, and TEC does not undertake to update that information or any other information contained in this Management’s Discussion & Analysis, except as may be required by law. Factors that could impact actual results include: regulatory actions or legislation by federal, state or local authorities; unexpected capital needs or unanticipated reductions in cash flow that affect liquidity; the ability to access the capital and credit markets when required; general economic conditions affecting customer growth and energy sales; economic conditions affecting the Florida economy; weather variations and customer energy usage patterns affecting sales and operating costs and the effect of weather conditions on energy consumption; the effect of extreme weather conditions or hurricanes; general operating conditions; input commodity prices affecting cost; natural gas demand; and the ability of TEC to operate equipment without undue accidents, breakdowns or failures. Additional information is contained under "Risk Factors" in TEC’s Annual Report on Form 10-K for the year ended December 31, 2018.
Earnings Summary - Unaudited
| | | | Three months ended March 31, | | |
(millions) | | | | 2019 | | | 2018 | | |
Revenues | | | | | | | | | |
| | Tampa Electric | | $ | 412 | | | $ | 461 | | |
| | PGS | | | 133 | | | | 142 | | |
| | Eliminations | | | (6 | ) | | | (6 | ) | |
| | TEC | | $ | 539 | | | $ | 597 | | |
| | | | | | | | | | | |
Net income | | | | | | | | | |
| | Tampa Electric | | $ | 46 | | | $ | 48 | | |
| | PGS | | | 18 | | | | 15 | | |
| | TEC | | $ | 64 | | | $ | 63 | | |
Operating Results
Three Months Ended March 31, 2019
First quarter 2019 net income was $64 million, compared to $63 million in the first quarter of 2018. In 2018, as permitted by the FPSC, TEC offset the impact of estimated 2018 tax reform benefits with a $22 million charge to O&M expense in the first quarter of 2018, comprised of $19 million at Tampa Electric and $3 million at PGS (see Note 3 to the TEC Consolidated Condensed Financial Statements). Beginning on January 1, 2019, as approved by the FPSC, base rates were lowered due to the impact of tax reform by $103 million annually ($22 million in the first quarter of 2019) at Tampa Electric and $12 million annually ($3 million in the first quarter of 2019) at PGS. Therefore, the decrease in revenue due to lower base rates from tax reform in 2019 was largely offset by lower O&M expense from the absence of the offsetting of tax reform benefits in 2018, resulting in minimal impact to the Consolidated Condensed Statements of Income. Excluding the impact of tax reform, first quarter 2019 results were impacted by higher base rates related to the in-service of solar generation projects and lower O&M primarily due to the timing of generation outages, partially offset by lower revenues due to weather. See below for further detail.
Operating Company Results
Amounts included in the operating company discussions below are pre-tax, except net income and income taxes.
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Tampa Electric Company – Electric Division
Tampa Electric’s net income for the first quarter of 2019 was $46 million, compared with $48 million for the same period in 2018. Results reflected lower base revenues, lower clause-related revenues and higher depreciation expense partially offset by higher AFUDC earnings and lower O&M expense. Base revenues are energy sales excluding revenues from clauses, gross receipts taxes and franchise fees. Clauses, gross receipts taxes and franchise fees do not have a material effect on net income as these revenues substantially represent a dollar-for-dollar recovery of clauses and other pass-through costs.
Excluding the impact of tax reform as disclosed above, revenues were $27 million lower than in the same period in 2018, driven by lower clause revenue and milder weather, partially offset by higher revenues related to the in-service of solar generation projects and customer growth. Total degree days (a measure of heating and cooling demand) in Tampa Electric's service area in the first quarter of 2019 were 1% below normal and 16% below the 2018 period. Total retail net energy for load, which is a calendar measurement of energy output, decreased 3.5% in the first quarter of 2019 compared with the same period in 2018 due to milder weather. Results also reflect a 2.3% increase in number of customers at March 31, 2019 compared to March 31, 2018.
O&M expense, excluding all FPSC-approved cost-recovery clauses and the impact of the FPSC-approved settlement agreement regarding tax reform, was $5 million lower than in the 2018 quarter, primarily reflecting the timing of generation outages. See Note 3 to the TEC Consolidated Condensed Financial Statements for further information regarding Tampa Electric’s tax reform and storm settlement agreement. Depreciation and amortization expense increased $5 million in the first quarter of 2019 from normal additions to facilities to reliably serve customers and the in-service of solar generation projects.
Tampa Electric’s regulated operating statistics for the three months ended March 31, 2019 and 2018 are as follows:
(millions, except customers and total degree days) | | Operating Revenues | | | Kilowatt-Hours Billed | |
Three months ended March 31, | | 2019 | | | 2018 | | | % Change | | | 2019 | | | 2018 | | | % Change | |
By Customer Type | | | | | | | | | | | | | | | | | | | | | | | | |
Residential (1) | | $ | 206 | | | $ | 230 | | | | (10 | ) | | | 1,939 | | | | 2,021 | | | | (4 | ) |
Commercial (1) | | | 120 | | | | 132 | | | | (9 | ) | | | 1,370 | | | | 1,404 | | | | (2 | ) |
Industrial (1) | | | 34 | | | | 38 | | | | (11 | ) | | | 462 | | | | 473 | | | | (2 | ) |
Other (1) | | | 41 | | | | 44 | | | | (7 | ) | | | 446 | | | | 448 | | | | (0 | ) |
Regulatory deferrals and unbilled revenue (2) | | | (7 | ) | | | (1 | ) | | | 600 | | | | | | | | | | | | | |
Total retail sales of electricity | | | 394 | | | | 443 | | | | (11 | ) | | | 4,217 | | | | 4,346 | | | | (3 | ) |
Off system sales of electricity | | | 1 | | | | 4 | | | | (75 | ) | | | 15 | | | | 92 | | | | (84 | ) |
Other operating revenue | | | 17 | | | | 14 | | | | 21 | | | | | | | | | | | | | |
Total revenues | | $ | 412 | | | $ | 461 | | | | (11 | ) | | | 4,232 | | | | 4,438 | | | | (5 | ) |
Customers at March 31, (thousands) | | | 769 | | | | 751 | | | | 2 | | | | | | | | | | | | | |
Retail net energy for load (kilowatt-hours) | | | 4,321 | | | | 4,480 | | | | (4 | ) | | | | | | | | | | | | |
Total degree days | | | 586 | | | | 700 | | | | (16 | ) | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
(1) | Reflects a billing cycle measurement. |
(2) | Primarily reflects unbilled revenue, which incorporates a calendar measurement, and postings for clause recovery deferrals. |
Tampa Electric Company – Natural Gas Division
PGS reported net income of $18 million for the first quarter, compared with $15 million in the first quarter of 2018. Results reflect a 3.1% higher number of customers in the first quarter of 2019 compared to the first quarter of 2018. Excluding the impact of tax reform as disclosed above, revenues were $6 million lower than the prior year quarter due to lower clause-related revenue and lower off-system sales. Excluding the impact of tax reform as disclosed above, base revenues were $1 million higher than in 2018 primarily due to customer growth, partially offset by cooler weather in 2018.
Operations and maintenance expense, excluding all FPSC-approved cost-recovery clauses and the impact of deferring tax reform benefits in 2018, was $1 million higher than in the 2018 quarter primarily due to higher employee benefit and self-insurance costs. Depreciation and amortization decreased $6 million due to accelerated amortization of the regulatory asset associated with MGP environmental remediation costs in the prior year and reduced depreciation rates in 2019 related to the settlement agreement, which were partially offset by normal asset growth. Return on investment in cast iron and bare steel replacement rider was $1 million higher in the 2019 period.
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PGS’s regulated operating statistics for the three months ended March 31, 2019 and 2018 are as follows:
(millions, except customers) | | Operating Revenues | | | Therms | |
Three months ended March 31, | | 2019 | | | 2018 | | | % Change | | | 2019 | | | 2018 | | | % Change | |
By Customer Type | | | | | | | | | | | | | | | | | | | | | | | | |
Residential | | $ | 50 | | | $ | 56 | | | | (11 | ) | | | 33 | | | | 35 | | | | (6 | ) |
Commercial | | | 42 | | | | 44 | | | | (5 | ) | | | 146 | | | | 144 | | | | 1 | |
Industrial | | | 4 | | | | 4 | | | | 0 | | | | 105 | | | | 90 | | | | 17 | |
Power generation | | | 1 | | | | 1 | | | | 0 | | | | 188 | | | | 191 | | | | (2 | ) |
Off system sales | | | 13 | | | | 15 | | | | (13 | ) | | | 37 | | | | 36 | | | | 3 | |
Other operating revenues | | | 20 | | | | 19 | | | | 5 | | | | | | | | | | | | | |
Total | | $ | 130 | | | $ | 139 | | | | (6 | ) | | | 509 | | | | 496 | | | | 3 | |
By Sales Type | | | | | | | | | | | | | | | | | | | | | | | | |
System supply | | $ | 74 | | | $ | 83 | | | | (11 | ) | | | 76 | | | | 78 | | | | (3 | ) |
Transportation | | | 36 | | | | 37 | | | | (3 | ) | | | 433 | | | | 418 | | | | 4 | |
Other operating revenues | | | 20 | | | | 19 | | | | 5 | | | | | | | | | | | | | |
Total | | $ | 130 | | | $ | 139 | | | | (6 | ) | | | 509 | | | | 496 | | | | 3 | |
Customers at March 31, (thousands) | | | 395 | | | | 383 | | | | 3 | | | | | | | | | | | | | |
Other Income
For the first quarter of 2019 and 2018, TEC’s other income was $4 million and $2 million, respectively, and included AFUDC-equity of $2 million and zero, respectively. The increase in AFUDC-equity is due to Tampa Electric’s construction of solar generation, the AMI system and the Big Bend modernization as disclosed in Capital Investments below.
Income Taxes
The provisions for income taxes for the first quarters of 2019 and 2018 were $16 million and $14 million, respectively. The provision for income taxes for the 2019 quarter increased mainly due to higher pre-tax income and the estimated annual effective income tax rate.
Liquidity and Capital Resources
The table below sets forth the March 31, 2019 liquidity, cash balances and amounts available under the TEC credit facilities.
| | | | | |
(millions) | | | | | |
Credit facilities | | $ | 475 | | |
Drawn amounts/letters of credit | | | 313 | | |
Available credit facilities | | | 162 | | |
Cash and short-term investments | | | 11 | | |
Total liquidity | | $ | 173 | | |
Cash Impacts Related to Operating Activities
Cash flows from operating activities for the three months ended March 31, 2019 were $145 million, a decrease of $12 million compared to the same period in 2018. The decrease is primarily due to the timing of prepaid expenses and accounts payable spending.
Cash Impacts Related to Financing Activities
Cash flows from financing activities for the three months ended March 31, 2019 resulted in net cash inflows of $125 million. TEC received $110 million of equity contributions from Parent and $91 million of net proceeds from borrowings under credit agreements (see Note 6 to the TEC Consolidated Condensed Financial Statements for further information regarding TEC’s credit agreements). These increases in cash flows were partially offset by dividend payments to Parent of $76 million.
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Covenants in Financing Agreements
In order to utilize its bank credit facilities, TEC must meet certain financial tests as defined in the applicable agreements. In addition, TEC has certain restrictive covenants in specific agreements and debt instruments. At March 31, 2019, TEC was in compliance with all applicable financial covenants. The table that follows lists the significant financial covenants and the performance relative to them at March 31, 2019. Reference is made to the specific agreements and instruments for more details.
Significant Financial Covenants
| | | | | | Calculation at | |
Instrument (1) | | Financial Covenant (2) | | Requirement/Restriction | | March 31, 2019 | |
Credit facility - $325 million | | Debt/capital | | Cannot exceed 65% | | 45.9% | |
Accounts receivable credit facility - $150 million | | Debt/capital | | Cannot exceed 65% | | 45.9% | |
(1) | See Note 6 to the TEC Consolidated Condensed Financial Statements for details of the credit facilities. |
(2) | As defined in each applicable instrument. |
Credit Ratings of Senior Unsecured Debt at March 31, 2019
| | S&P | | Moody’s |
Credit ratings of senior unsecured debt | | BBB+ | | A3 |
Credit ratings outlook | | Negative | | Stable |
Certain of TEC’s derivative instruments contain provisions that require TEC’s debt to maintain investment grade credit ratings (see Note 12 to the TEC Consolidated Condensed Financial Statements).
Commitments and Contingencies
See Note 8 to the TEC Consolidated Condensed Financial Statements for information regarding TEC’s commitments and contingencies as of March 31, 2019.
Capital Investments
In 2019, TEC expects to invest approximately $1,255 million in capital projects, excluding AFUDC-debt and equity. This represents an increase of approximately $45 million from the 2019 forecasted capital investments amount disclosed in TEC’s Annual Report on Form 10-K for the year ended December 31, 2018. The increase is primarily due to timing of solar construction.
Tampa Electric expects to spend approximately $850 million during 2017 through 2021 related to the 600 MW solar project recoverable under the SoBRAs as discussed in Note 3 to the TEC Consolidated Condensed Financial Statements, approximately $850 million during 2018 through 2023 to modernize the Big Bend Power Station and approximately $235 million during 2018 through 2022 for an AMI project, including the installation of smart meters. TEC intends to fund those capital expenditures with available cash on hand, cash generated from operating activities, and cash from equity contributions and debt issuances so that Tampa Electric and PGS maintain their capital structures consistent with existing regulatory arrangements. Actual capital expenditures could vary materially due to changes in schedule, costs for materials or labor or changes in plans.
Fair Value Measurements
The valuation methods used to determine fair value are described in Notes 7 and 13 to the TEC Consolidated Condensed Financial Statements. In addition, TEC considered the impact of nonperformance risk in determining the fair value of derivatives. TEC considered the net position with each counterparty, past performance of both parties and the intent of the parties, indications of credit deterioration and whether the markets in which TEC transacts have experienced dislocation. At March 31, 2019, the fair value of derivatives was not materially affected by nonperformance risk.
Critical Accounting Policies and Estimates
Critical accounting policies and estimates have not materially changed in 2019. For further discussion of critical accounting policies and estimates, see TEC’s Annual Report on Form 10-K for the year ended December 31, 2018.
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Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Information required by Item 3 is omitted pursuant to General Instruction H(2) of Form 10-Q.
Item 4. | CONTROLS AND PROCEDURES |
(a) | Evaluation of Disclosure Controls and Procedures. TEC’s management, with the participation of its principal executive officer and principal financial officer, has evaluated the effectiveness of TEC’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2019. Based on such evaluation, TEC’s principal financial officer and principal executive officer have concluded that, as of March 31, 2019, TEC’s disclosure controls and procedures are effective. |
(b) | Changes in Internal Controls. There was no change in TEC’s internal controls over financial reporting (as defined in Rules 13a–15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation of TEC’s internal control over financial reporting that occurred during TEC’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, such controls. |
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PART II. OTHER INFORMATION
From time to time, TEC is involved in various legal, tax and regulatory proceedings before various courts, regulatory commissions and governmental agencies in the ordinary course of business. Where appropriate, accruals are made in accordance with accounting standards for contingencies to provide for matters that are probable of resulting in an estimable loss. For a discussion of legal proceedings and environmental matters, see Note 8 of the TEC Consolidated Condensed Financial Statements.
(1) | This certification accompanies the Quarterly Report on Form 10-Q and is not filed as part of it. |
* | Indicates exhibit previously filed with the Securities and Exchange Commission and incorporated herein by reference. Exhibits filed with periodic reports of TECO Energy, Inc. and TEC were filed under Commission File Nos. 1-8180 and 1-5007, respectively. |
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SIGNATURES
Pursuant to the requirements 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.
| | TAMPA ELECTRIC COMPANY |
| | (Registrant) |
| | |
Date: May 9, 2019 | | By: | | /s/ Gregory W. Blunden |
| | | | Gregory W. Blunden |
| | | | Senior Vice President-Finance and Accounting, Treasurer and Chief Financial Officer (Chief Accounting Officer) |
| | | | (Principal Financial and Accounting Officer) |
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