SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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 Number 1-5007
TAMPA ELECTRIC COMPANY
(Exact name of registrant as specified in its charter)
FLORIDA 59-0475140
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
702 North Franklin Street, Tampa, Florida 33602
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (813) 228-4111
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 X No
Number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date (October 31, 1998):
Common Stock, Without Par Value 10
The registrant 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.
FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
In the opinion of management, the unaudited financial
statements include all adjustments necessary to present
fairly the results for the three- and nine-month
periods ended Sept. 30, 1998 and 1997. Reference should
be made to the explanatory notes affecting the income
and balance sheet accounts contained in Tampa Electric
Company's Annual Report on Form 10-K for the year ended
Dec. 31, 1997 and to the notes on pages 7 through 9 of
this report.
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FORM 10-Q
BALANCE SHEETS
(in millions)
Sept. 30, Dec. 31,
1998 1997
Assets
Property, plant and equipment,
at original cost
Utility plant in service
Electric $3,696.3 $3,632.0
Gas 505.0 471.1
Construction work in progress 53.5 40.6
4,254.8 4,143.7
Accumulated depreciation (1,692.6) (1,595.3)
2,562.2 2,548.4
Other property 8.1 6.5
2,570.3 2,554.9
Current assets
Cash and cash equivalents .9 2.8
Receivables, less allowance
for uncollectibles 169.1 161.4
Inventories, at average cost
Fuel 69.6 69.5
Materials and supplies 46.9 45.6
Prepayments 9.2 7.3
295.7 286.6
Deferred debits
Unamortized debt expense 16.5 17.5
Deferred income taxes 115.0 112.2
Regulatory asset - tax related 39.8 41.8
Other 67.8 85.9
239.1 257.4
$3,105.1 $3,098.9
Liabilities and Capital
Capital
Common stock $1,016.1 $ 972.1
Retained earnings 321.5 289.6
1,337.6 1,261.7
Long-term debt, less amount due
within one year 774.6 727.1
2,112.2 1,988.8
Current liabilities
Long-term debt due within one year 4.6 4.1
Notes payable 37.4 219.1
Accounts payable 120.7 118.4
Customer deposits 77.5 77.3
Interest accrued 27.5 18.7
Taxes accrued 54.1 8.5
321.8 446.1
Deferred credits
Deferred income taxes 438.4 415.6
Investment tax credits 46.2 49.7
Regulatory liability - tax related 73.9 77.0
Other 112.6 121.7
671.1 664.0
$3,105.1 $3,098.9
The accompanying notes are an integral part of the financial statements.
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FORM 10-Q
STATEMENTS OF INCOME
(in millions)
For the three months ended Sept. 30, 1998 1997
Operating revenues
Electric $353.7 $342.3
Gas 49.6 49.7
403.3 392.0
Operating expenses
Operation
Fuel - electric generation 100.7 98.3
Purchased power 29.5 29.1
Natural gas sold 21.9 22.2
Other 58.7 53.9
Maintenance 22.0 22.1
Depreciation 42.3 40.3
Taxes, federal and state income 31.1 30.7
Taxes, other than income 30.4 27.5
336.6 324.1
Operating income 66.7 67.9
Other income (expense)
Allowance for other funds used
during construction .1 --
Other income (expense), net .2 (.4)
.3 (.4)
Income before interest charges 67.0 67.5
Interest charges
Interest on long-term debt 12.7 12.5
Other interest 2.5 3.9
15.2 16.4
Net Income-balance applicable to
common stock $ 51.8 $ 51.1
The accompanying notes are an integral part of the financial statements.
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FORM 10-Q
STATEMENTS OF INCOME
(in millions)
For the nine months ended Sept. 30, 1998 1997
Operating revenues
Electric $ 948.0 $ 915.1
Gas 188.2 183.6
1,136.2 1,098.7
Operating expenses
Operation
Fuel - electric generation 284.5 277.7
Purchased power 63.8 55.7
Natural gas sold 86.2 87.2
Other 164.0 160.4
Maintenance 68.4 62.0
Non-recurring charge 9.6 --
Depreciation 125.3 120.3
Taxes, federal and state income 72.3 73.8
Taxes, other than income 89.7 85.4
963.8 922.5
Operating income 172.4 176.2
Other income (expense)
Allowance for other funds used
during construction .2 .1
Other income (expense), net (2.5) (1.7)
(2.3) (1.6)
Income before interest charges 170.1 174.6
Interest charges
Interest on long-term debt 37.4 38.1
Other interest 10.7 11.6
48.1 49.7
Net income 122.0 124.9
Preferred dividend requirements -- .5
Balance applicable to common stock $ 122.0 $ 124.4
The accompanying notes are an integral part of the financial statements.
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FORM 10-Q
STATEMENTS OF CASH FLOWS
(in millions)
For the nine months ended Sept. 30, 1998 1997
Cash flows from operating activities
Net income $ 122.0 $ 124.9
Adjustments to reconcile net income
to net cash:
Depreciation 125.3 120.3
Deferred income taxes 19.3 4.9
Investment tax credits, net (3.5) (3.5)
Allowance for funds used
during construction (.2) (.1)
Deferred recovery clause 13.4 2.2
Deferred revenue (31.7) (27.7)
Refund to customers -- (19.4)
Non-recurring charge 9.6 --
Receivables, less allowance
for uncollectibles (7.8) 11.6
Inventories (1.3) (13.6)
Taxes accrued 45.6 35.2
Accounts payable 2.3 (19.7)
Other 26.5 (4.0)
319.5 211.1
Cash flows from investing activities
Capital expenditures (141.6) (104.6)
Allowance for funds used
during construction .2 .1
(141.4) (104.5)
Cash flows from financing activities
Proceeds from contributed capital
from parent 44.0 5.0
Proceeds from long-term debt 51.2 --
Repayment of long-term debt (3.4) (16.7)
Net payments under credit lines -- (10.0)
Net increase (decrease) in short-term debt (181.7) 41.0
Redemption of preferred stock, including
premium -- (20.4)
Dividends (90.1) (93.2)
(180.0) (94.3)
Net increase (decrease) in cash
and cash equivalents (1.9) 12.3
Cash and cash equivalents at
beginning of period 2.8 3.5
Cash and cash equivalents at end of period $ .9 $ 15.8
The accompanying notes are an integral part of the financial statements.
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FORM 10-Q
NOTES TO FINANCIAL STATEMENTS
A. Tampa Electric Company is a wholly owned subsidiary of TECO
Energy, Inc.
B. The company has made certain commitments in connection with its
continuing construction program. Total construction expenditures
during 1998 are estimated to be $163 million for the electric division
and $55 million for Peoples Gas System.
In July 1998, the company announced that it has determined that
t h e most cost-effective method of compliance with the U.S.
Environmental Protection Agency's (EPA) Clean Air Act Amendments Phase
II sulfur dioxide (SO2) reduction requirements is to install a flue
gas desulfurization (FGD) system at Big Bend Station Units One and
Two, comparable to the system operated for Big Bend Units Three and
Four. The project's estimated cost is $88 million. Conceptual and
preliminary site engineering is underway, and the project is scheduled
to be completed by the middle of 2000. Carrying charges and other
costs associated with the system are planned to be recovered through
the Environmental Cost Recovery Clause. The electric division's 1998
estimated capital expenditures include $16.0 million related to this
FGD system.
C. The electric division recognized revenues that had been deferred
in 1995 and 1996 pursuant to regulatory agreements approved by the
Florida Public Service Commission (FPSC). For the three- and nine-
month periods ended Sept. 30, 1998, $11.8 million and $31.7 million,
respectively, of these revenues were recognized. Previously deferred
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FORM 10-Q
revenues of $10.6 million and $27.7 million were recognized for the
three- and nine-month periods ended Sept. 30, 1997, respectively.
Effective Oct. 1, 1997, the company's electric customers began
receiving a $25-million temporary base rate reduction over a 15-month
period pursuant to the same agreements.
D. I n 1997, the Financial Accounting Standards Board issued
Financial Accounting Standards (FAS) 130, Reporting Comprehensive
Income, effective for fiscal periods beginning after Dec. 15, 1997.
The new standard requires that comprehensive income, which includes
net income as well as certain changes in assets and liabilities
recorded in common equity, be reported in the financial statements.
For the three- and nine-month periods ended Sept. 30, 1998 and 1997,
there were no components of comprehensive income other than net
income.
E. As discussed in Tampa Electric Company's 1997 Annual Report on
Form 10-K, the FPSC in September 1997 ruled that under the regulatory
agreements effective through 1999 the costs associated with two Tampa
Electric long-term wholesale power sales contracts should be assigned
to the wholesale jurisdiction and that for retail rate making purposes
the costs transferred from retail to wholesale should reflect average
costs rather than the lower incremental costs on which the two
contracts are based. As a result of this decision and the related
reduction of the retail rate base upon which Tampa Electric is allowed
to earn a return, these contracts became uneconomic. One contract was
terminated in 1997. As to the other contract, which expires in 2001,
Tampa Electric has entered into firm power purchase contracts with
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FORM 10-Q
third parties to provide replacement power through 1999 and is no
longer separating the associated generation assets from the retail
jurisdiction. The cost of purchased power under these contracts
e x c eeds the revenues expected through 1999. To reflect this
difference, Tampa Electric recorded a $5.9-million after-tax charge in
the first quarter of 1998.
F. In the second quarter of 1998, the company filed a registration
statement on Form S-3 for the issuance of up to $200 million of
medium-term notes. On July 31, 1998, the company issued $50 million of
Remarketed Notes (the Notes) due 2038. The Notes are subject to
mandatory tender on July 15, 2001, at which time they will be
remarketed or redeemed. The coupon rate for the initial term is
5.94%. If the remarketing agent appointed by the company in
connection with the issue of the Notes exercises its right to purchase
the Notes on July 15, 2001, for the following ten years the Notes will
bear interest at an annual rate of 5.41% plus a premium based on the
company s then current credit spread above United States Treasury
Notes with ten years to maturity. Otherwise, the Notes may be
remarketed for periods selected by the company at fixed or floating
market rates of interest. Net proceeds to the company were 102.1
percent of the principal amount and included a premium paid to the
company by the remarketing agent for the right to purchase the Notes
in 2001. Proceeds from the Note issuance were used to repay short-term
debt.
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FORM 10-Q
Item 2. Management's Narrative Analysis of Results of Operations
Nine months ended Sept. 30, 1998:
Net income for the nine-month period ended Sept. 30, 1998,
including a non-recurring after-tax charge of $5.9 million, was $122.0
million, compared to $124.9 million for the same period last year.
In 1998's first quarter, the electric division recorded a $5.9-
million after-tax charge associated with actions to mitigate the
effects of the 1997 FPSC ruling that separated certain wholesale power
sales contracts from the retail jurisdiction. See the discussion in
Note E on pages 8 and 9.
Operating income for the 1998 year-to-date period of $178.3
million, excluding the charge discussed above, was up one percent from
1997's comparable period as the effect of increased electric energy
sales in the summer months and gas sales earlier in the year offset
the impact of $3.5-million of pretax restructuring charges at the gas
division primarily reflecting costs associated with discontinuing the
appliance sales and service business.
Contributions by operating division
Operating income
(millions) 1998 1997
Electric division (1) $161.1 $157.5
Peoples Gas System 17.2 18.7
178.3 176.2
Non-recurring charge, after tax (5.9) --
$172.4 $176.2
(1) Operating income for 1998 excludes the after-tax non-recurring
charge discussed above and in Note E on pages 8 and 9.
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FORM 10-Q
Electric division
The electric division's operating income for the current year
period, excluding the charge discussed above, was two percent higher
than in the prior year due to a four-percent increase in operating
revenues resulting from higher energy sales. Retail sales volumes were
up five percent, primarily due to warmer summer weather and customer
growth of over two percent.
N o n-fuel operating expenses for the current year period,
excluding the $5.9-million after-tax charge discussed in Note E on
pages 8 and 9, were two percent higher than in 1997 due to increased
g e nerating unit maintenance and increased depreciation expense
resulting from higher plant balances.
During the current year's nine-month period, Tampa Electric
recorded $1.1 million of after-tax charges relating to its 1996
earnings as a result of an FPSC audit of that year which involved
several adjustments, including the establishment for regulatory
purposes of an equity ratio cap of 58.7 percent for 1996 compared to
the actual ratio for the year of 59.5 percent. Because of the return
on equity thresholds in Tampa Electric s regulatory agreements
covering the years 1995 through 1999, which are described in the
company's Annual Report on Form 10-K for the year ended Dec. 31, 1997,
and the potential for customer refunds in 1999 and 2000, the company
expects continuing audit scrutiny by the FPSC and active involvement
of intervenors in any proceedings involving returns on equity and
potential refunds.
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FORM 10-Q
Peoples Gas System
At Peoples Gas System, operating income was lower than in 1997's
nine-month period primarily due to restructuring costs, which are
expected to be nearly recouped by the end of the year. Total revenues
were up three percent from 1997, reflecting an eight-percent increase
in residential and commercial natural gas sales (therms) due to
customer growth and increased usage which were partially offset by
l o wer gas prices. Higher expenses, including $3.5 million of
restructuring costs primarily associated with discontinuing the
appliance sales and service business, led to a reduction in operating
income.
Recent Developments
As discussed in Note F on page 9, on July 31, 1998, the company
issued $50 million of Remarketed Notes due 2038. The Notes are subject
to mandatory tender on July 15, 2001, at which time they will be
remarketed or redeemed. The coupon rate for the initial term is 5.94%.
Proceeds from the Note issuance were used to repay short-term debt.
As discussed in Note B on page 7, Tampa Electric announced that
it has determined that the most cost-effective method of compliance
with the U.S. Environmental Protection Agency's (EPA) Clean Air Act
Amendments Phase II sulfur dioxide (SO2) reduction requirements is to
install a flue gas desulfurization (FGD) system at Big Bend Station
units one and two. The project's estimated cost is $88 million.
Conceptual and preliminary site engineering is underway and the
project is scheduled to be completed by the middle of 2000. Carrying
charges and other costs associated with the system are planned to be
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FORM 10-Q
recovered through the Environmental Cost Recovery Clause, a matter
which is the subject of a proceeding before the FPSC.
The United States Environmental Protection Agency (EPA) has
commenced an investigation under the Clean Air Act of coal-fired
electric power generators to determine compliance with environmental
p e r m itting requirements associated with repairs, maintenance,
modifications and operations changes (collectively, the changes )
made to the facilities over the years. The EPA s focus is on whether
new source performance standards should be applied to the changes and,
accordingly, whether the best available control technology should be
used. Tampa Electric has been visited by EPA personnel and has
received a comprehensive request for information pursuant to Section
114 of EPA's Clean Air Act regulations. Tampa Electric is evaluating
the request from the EPA and will furnish appropriate information.
Tampa Electric believes that it has built, maintained and operated its
facilities in compliance with relevant environmental permitting
requirements. The timing of completion and the outcome of EPA s
investigation are uncertain at this time.
Year 2000
There is a global awareness that many computer programs use only
the last two digits to refer to a year and therefore may not correctly
recognize and process date information beyond the year 1999. This is
referred to as the Year 2000 issue.
The Year 2000 issue exists in two primary areas of Tampa Electric
Company's operations: the critical business systems (such as the
financial reporting, procurement, payroll and customer information and
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FORM 10-Q
billing systems) and the control systems (such as those used in the
operation of generation, transmission and distribution facilities).
The company began work on Year 2000 readiness in August 1995. The
project is segmented into the following phases: awareness, inventory,
assessment, renovation, testing and contingency planning.
The company has completed its assessment of all hardware,
software and embedded systems and is currently engaged in renovation,
testing and contingency planning.
The company's critical business systems are scheduled to be
renovated and functionally tested by the end of 1998, including
mainframe hardware which was replaced in July 1998. Mainframe
integrated system testing has begun and is scheduled to be completed
in March 1999.
Tampa Electric s transmission and distribution systems, including
energy management and control, are scheduled to be Year 2000 ready
(renovated, to the extent necessary, and tested) by the end of 1998.
A number of successful unit tests have been conducted for Tampa
Electric s generating units, and all required plant control system
renovations are scheduled to be complete by May 1999.
The company has surveyed its largest suppliers with respect to
their Year 2000 readiness, including all providers of technology
supplies and services, and plans to complete its customer survey
process in the first quarter of 1999. As part of its Year 2000
project, the company will be coordinating with its suppliers and
customers based on their responses to these surveys.
At the request of the U.S. Department of Energy (DOE), the North
American Electric Reliability Council (NERC) prepared a Year 2000
coordination plan and preliminary status report in September of 1998,
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FORM 10-Q
and has indicated it will provide a full status report by July of
1999. NERC is conducting monthly readiness assessment surveys and
coordinating information sharing and contingency planning activities
among the member firms. The NERC activity addresses all aspects of
the interconnected electric grid. The aggregated results are being
reported to the DOE and other regulatory bodies in the U.S., Canada
and Mexico. The Natural Gas Council, through the American Gas
A s sociation, is coordinating similar processes within the gas
industry, reporting to the Federal Energy Regulatory Commission. Tampa
Electric and Peoples Gas System are active participants in these
industry groups.
The company believes the most reasonably likely worst case
scenario would be the occurrence of isolated outages of limited
duration for its customers, similar to those occurring during storm
season.
The company has assessed the risk of this scenario, and believes
that its contingency efforts (namely, the ability to bypass automated
controls) would mitigate the effect of such a scenario.
Forward-Looking Statements
The dates on which the company believes it will complete its Year
2000 efforts are based upon management's best estimates, which were
derived using numerous assumptions regarding future events, including
t h e continued availability of certain resources, third-party
remediation plans and other factors. There can be no assurance that
these estimates will prove to be accurate and actual results could
differ materially from those currently projected. Specific factors
that could cause such differences include, but are not limited to, the
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FORM 10-Q
availability of personnel trained in Year 2000 issues, the ability to
identify, assess, remediate and test all relevant computer codes and
embedded technology and similar uncertainties.
A more detailed discussion of the Year 2000 issue and its impact
on TECO Energy and its subsidiaries, including Tampa Electric Company,
is part of TECO Energy's Form 10-Q for the quarter ended Sept. 30,
1998 (Commission File Number 1-8180).
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Tampa Electric Company is exposed to changes in interest rates
primarily as a result of its borrowing activities. A hypothetical
increase in interest rates of 10 percent of the company's weighted
average interest rate on its variable rate debt would not have a
significant impact on the company's pretax earnings over the next
fiscal year.
A hypothetical 10-percent decrease in interest rates would not
have a significant impact on the estimated fair value of the company's
long-term debt at Sept. 30, 1998.
From time to time, the company enters into futures, swaps and
option contracts to moderate its exposure to interest rate changes.
The benefits of these arrangements are at risk only in the event of
non-performance by the other party to the agreement, which the company
does not anticipate. The company does not use derivatives or other
financial products for speculative purposes.
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FORM 10-Q
Commodity Price Risk
Currently, at Tampa Electric's electric division and at Peoples
Gas System, the commodity price increases due to changes in market
conditions for fuel, purchased power and natural gas are recovered
through cost recovery clauses, with no effect on earnings.
From time to time, Peoples Gas System enters into futures, swaps
and options contracts to limit the effects of natural gas price
increases on the prices it charges customers. The benefits of these
financial arrangements are at risk only in the event of non-
performance by the other party to the agreement, which the company
does not anticipate.
Tampa Electric Company does not use derivatives or other
financial products for speculative purposes.
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FORM 10-Q
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Forms of Severance Agreements between TECO Energy, Inc. and
certain senior executives, as amended and restated as of July 15,
1998.
10.2 Form of Amendment to Restricted Stock Agreements, dated as of
July 15, 1998, between TECO Energy, Inc. and certain senior
executives under the TECO Energy, Inc. 1996 Equity Incentive
Plan.
10.3 Form of Amendment to Nonstatutory Stock Option, dated as of July
15, 1998, under the TECO Energy, Inc. 1996 Equity Incentive Plan.
12. Ratio of earnings to fixed charges.
27 Financial data schedule - nine months ended Sept. 30, 1998.
(EDGAR filing only)
(b) Reports on Form 8-K
The registrant filed a Current Report on Form 8-K dated July 20,
1998 reporting under "Item 5. Other Events" its plan to comply
with Phase II sulfur dioxide emission standards under the Clean
Air Act Amendments.
The registrant filed a Current Report on Form 8-K dated July 28,
1998 reporting under "Item 5. Other Events" that it had entered
into a purchase agreement with Citicorp Securities, Inc. and
M o r gan Stanley & Co. Incorporated for the sale to the
Underwriters of $50 million principal amount of Remarketed Notes
Due 2038 (the Notes). The Notes are a portion of the $200 million
principal amount of debt securities the registrant registered
under the Securities Act of 1933, as amended, on a registration
statement on Form S-3 in the second quarter of 1998.
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FORM 10-Q
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)
Dated: Nov. 13, 1998 By: /s/G. L. Gillette
G. L. Gillette
Vice President - Finance
and Chief Financial Officer
(Principal Financial Officer)
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FORM 10-Q
INDEX TO EXHIBITS
Exhibit No. Description of Exhibits Page No.
10.1 Forms of Severance Agreements between 21
TECO Energy, Inc. and certain senior executives,
as amended and restated as of July 15, 1998.
10.2 Form of Amendment to Restricted Stock Agreements, 68
dated as of July 15, 1998, between TECO Energy,
Inc. and certain senior executives under the
TECO Energy, Inc. 1996 Equity Incentive Plan.
10.3 Form of Amendment to Nonstatutory Stock Option, 70
dated as of July 15, 1998, under the TECO
Energy, Inc. 1996 Equity Incentive Plan
12. Ratio of earnings to fixed charges 73
27 Financial data schedule - nine months ended
Sept. 30, 1998 (EDGAR filing only) --
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