XNYS:TE TECO Energy Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

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

1-8180   

TECO ENERGY, INC.

(a Florida corporation)

TECO Plaza

702 N. Franklin Street

Tampa, Florida 33602

(813) 228-1111

   59-2052286
1-5007   

TAMPA ELECTRIC COMPANY

(a Florida corporation)

TECO Plaza

702 N. Franklin Street

Tampa, Florida 33602

(813) 228-1111

   59-0475140

 

 

Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrants have submitted electronically and posted on their corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrants were required to submit and post such files).    YES  x    NO  ¨

Indicate by check mark whether TECO Energy, Inc. is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether Tampa Electric Company is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x    Smaller reporting company   ¨

Indicate by check mark whether TECO Energy, Inc. is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

Indicate by check mark whether Tampa Electric Company is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

The number of shares of TECO Energy, Inc.’s common stock outstanding as of July 27, 2012 was 216,583,178. As of July 27, 2012, 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.

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.

This combined Form 10-Q represents separate filings by TECO Energy, Inc. and Tampa Electric Company. Information contained herein relating to an individual registrant is filed by that registrant on its own behalf. Each registrant makes representations only as to information relating to itself and its subsidiaries.

 

 

 

Page 1 of 56

Index to Exhibits appears on page 56.


Table of Contents

DEFINITIONS

Acronyms and defined terms used in this and other filings with the U.S. Securities and Exchange Commission include the following:

 

Term

  

Meaning

ABS    asset-backed security
ADR    American depository receipt
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
AOCI    accumulated other comprehensive income
APBO    accumulated postretirement benefit obligation
ARO    asset retirement obligation
capacity clause    capacity cost-recovery clause, as established by the FPSC
CERCLA    Comprehensive Environmental Response, Compensation and Liability Act of 1980
CGESJ    Central Generadora Eléctrica San José, Limitada, owner of the San José Power Station in Guatemala
CMO    collateralized mortgage obligation
CO2    carbon dioxide
CT    combustion turbine
DECA II    Distribución Eléctrica Centro Americana, II, S.A.
DOE    U.S. Department of Energy
EEGSA    Empresa Eléctrica de Guatemala, S.A., the largest private distribution company in Central America
EEI    Edison Electric Institute
EPA    U.S. Environmental Protection Agency
EPS    earnings per share
ERISA    Employee Retirement Income Security Act
EROA    expected return on plan assets
ERP    enterprise resource planning
FASB    Financial Accounting Standards Board
FDEP    Florida Department of Environmental Protection
FERC    Federal Energy Regulatory Commission
FGT    Florida Gas Transmission Company
FPSC    Florida Public Service Commission
fuel clause    fuel and purchased power cost-recovery clause, as established by the FPSC
GAAP    generally accepted accounting principles
GHG    greenhouse gas(es)
HCIDA    Hillsborough County Industrial Development Authority
HPP    Hardee Power Partners
IFRS    International Financial Reporting Standards
IGCC    integrated gasification combined-cycle
IOU    investor owned utility
IRS    Internal Revenue Service
ISDA    International Swaps and Derivatives Association
ISO    independent system operator
ITCs    investment tax credits
kW    kilowatt
kWh    kilowatt-hour(s)
LIBOR    London Interbank Offered Rate
MARN    Ministry of Environment, Guatemala
MBS    mortgage-backed securities
MD&A    Management’s Discussion and Analysis
MMA    The Medicare Prescription Drug, Improvement and Modernization Act of 2003
MM&A    Marshall Miller & Associates

 

2


Table of Contents
MMBTU    one million British Thermal Units
MRV    market-related value
MSHA    Mine Safety and Health Administration
MW    megawatt(s)
MWH    megawatt-hour(s)
NAESB    North American Energy Standards Board
NAV    net asset value
NERC    North American Electric Reliability Corporation
NOL    net operating loss
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
OATT    open access transmission tariff
OCI    other comprehensive income
OTC    over-the-counter
OTTI    other than temporary impairment
PBGC    Pension Benefit Guarantee Corporation
PBO    postretirement benefit obligation
PCI    pulverized coal injection
PCIDA    Polk County Industrial Development Authority
PGA    purchased gas adjustment
PGS    Peoples Gas System, the gas division of Tampa Electric Company
PPA    power purchase agreement
PPSA    Power Plant Siting Act
PRP    potentially responsible party
PUHCA 2005    Public Utility Holding Company Act of 2005
REIT    real estate investment trust
REMIC    real estate mortgage investment conduit
RFP    request for proposal
ROE    return on common equity
Regulatory ROE    return on common equity as determined for regulatory purposes
RPS    renewable portfolio standards
RTO    regional transmission organization
SEC    U.S. Securities and Exchange Commission
SO2    sulfur dioxide
SERP    Supplemental Executive Retirement Plan
SPA    stock purchase agreement
STIF    short-term investment fund
TCAE    Tampa Centro Americana de Electridad, Limitada, majority owner of the Alborada Power Station
Tampa Electric    Tampa Electric, the electric division of Tampa Electric Company
TEC    Tampa Electric Company, the principal subsidiary of TECO Energy, Inc.
TECO Diversified    TECO Diversified, Inc., a subsidiary of TECO Energy, Inc. and parent of TECO Coal Corporation
TECO Coal    TECO Coal Corporation, a coal producing subsidiary of TECO Diversified
TECO Finance    TECO Finance, Inc., a financing subsidiary for the unregulated businesses of TECO Energy, Inc.
TEMSA    Tecnología Marítima, S.A., a provider of dry bulk and coal unloading services located in Guatemala
TRC    TEC Receivables Company
VIE    variable interest entity
WRERA    The Worker, Retiree and Employer Recovery Act of 2008

 

3


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

TECO ENERGY, INC.

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 TECO Energy, Inc. and subsidiaries as of June 30, 2012 and Dec. 31, 2011, and the results of their operations and cash flows for the periods ended June 30, 2012 and 2011. The results of operations for the three month and six month periods ended June 30, 2012 are not necessarily indicative of the results that can be expected for the entire fiscal year ending Dec. 31, 2012. References should be made to the explanatory notes affecting the consolidated financial statements contained in TECO Energy, Inc.’s Annual Report on Form 10-K for the year ended Dec. 31, 2011 and to the notes on pages 10 through 29 of this report.

INDEX TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

     Page
No.
 

Consolidated Condensed Balance Sheets, June 30, 2012 and Dec. 31, 2011

     5-6   

Consolidated Condensed Statements of Income for the three month and six month periods ended June  30, 2012 and 2011

     7-8   

Consolidated Condensed Statements of Comprehensive Income for the three month and six month periods ended June 30, 2012 and 2011

     9   

Consolidated Condensed Statements of Cash Flows for the six month periods ended June 30, 2012 and 2011

     10   

Notes to Consolidated Condensed Financial Statements

     11-27   

All other financial statement schedules have been omitted since they are not required, are inapplicable or the required information is presented in the financial statements or notes thereto.

 

4


Table of Contents

TECO ENERGY, INC.

Consolidated Condensed Balance Sheets

Unaudited

 

Assets

(millions)

   June 30
2012
    Dec. 31,
2011
 

Current assets

    

Cash and cash equivalents

   $ 117.4      $ 44.0   

Restricted cash

     14.2        8.7   

Receivables, less allowance for uncollectables of $2.6 at June 30, 2012 and Dec. 31, 2011

     330.5        327.7   

Inventories, at average cost

    

Fuel

     166.1        136.8   

Materials and supplies

     88.8        87.3   

Derivative assets

     0.7        0.9   

Regulatory assets

     83.2        87.3   

Deferred income taxes

     43.1        72.7   

Prepayments and other current assets

     43.5        31.9   

Income tax receivables

     0.1        0.6   
  

 

 

   

 

 

 

Total current assets

     887.6        797.9   
  

 

 

   

 

 

 

Property, plant and equipment

    

Utility plant in service

    

Electric

     6,821.3        6,731.7   

Gas

     1,197.2        1,169.9   

Construction work in progress

     284.0        247.4   

Other property

     438.4        432.3   
  

 

 

   

 

 

 

Property, plant and equipment, at original costs

     8,740.9        8,581.3   

Accumulated depreciation

     (2,718.3     (2,613.5
  

 

 

   

 

 

 

Total property, plant and equipment, net

     6,022.6        5,967.8   
  

 

 

   

 

 

 

Other assets

    

Regulatory assets

     351.1        364.5   

Derivative assets

     0.1        0.0   

Goodwill

     55.4        55.4   

Deferred charges and other assets

     133.8        136.6   
  

 

 

   

 

 

 

Total other assets

     540.4        556.5   
  

 

 

   

 

 

 

Total assets

   $ 7,450.6      $ 7,322.2   
  

 

 

   

 

 

 

The accompanying notes are an integral part of the consolidated condensed financial statements.

 

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Table of Contents

TECO ENERGY, INC.

Consolidated Condensed Balance Sheets – continued

Unaudited

 

Liabilities and Capital

(millions)

   June 30,
2012
    Dec. 31,
2011
 

Current liabilities

    

Long-term debt due within one year

    

Recourse

   $ 256.4      $ 374.9   

Non-recourse

     11.2        11.2   

Notes payable

     20.0        0.0   

Accounts payable

     207.2        252.3   

Customer deposits

     161.4        159.5   

Regulatory liabilities

     83.4        86.2   

Derivative liabilities

     40.5        58.4   

Interest accrued

     42.8        39.3   

Taxes accrued

     51.5        20.7   

Other current liabilities

     17.2        17.2   
  

 

 

   

 

 

 

Total current liabilities

     891.6        1,019.7   
  

 

 

   

 

 

 

Other liabilities

    

Deferred income taxes

     178.9        150.8   

Investment tax credits

     9.9        10.0   

Regulatory liabilities

     654.1        647.8   

Derivative liabilities

     3.9        8.6   

Deferred credits and other liabilities

     522.4        530.8   

Long-term debt, less amount due within one year

    

Recourse

     2,878.4        2,665.0   

Non-recourse

     16.7        22.3   
  

 

 

   

 

 

 

Total other liabilities

     4,264.3        4,035.3   
  

 

 

   

 

 

 

Commitments and Contingencies (see Note 10)

    

Capital

    

Common equity (400.0 million shares authorized par value $1; 216.6 million shares and 215.8 million shares outstanding at June 30, 2012 and Dec. 31, 2011, respectively)

     216.6        215.8   

Additional paid in capital

     1,557.1        1,553.4   

Retained earnings

     547.9        519.4   

Accumulated other comprehensive loss

     (27.3     (22.0
  

 

 

   

 

 

 

TECO Energy capital

     2,294.3        2,266.6   

Noncontrolling interest

     0.4        0.6   
  

 

 

   

 

 

 

Total capital

     2,294.7        2,267.2   
  

 

 

   

 

 

 

Total liabilities and capital

   $ 7,450.6      $ 7,322.2   
  

 

 

   

 

 

 

The accompanying notes are an integral part of the consolidated condensed financial statements.

 

6


Table of Contents

TECO ENERGY, INC.

Consolidated Condensed Statements of Income

Unaudited

 

     Three months ended June 30,  

(millions, except per share amounts)

   2012     2011  

Revenues

    

Regulated electric and gas (includes franchise fees and gross receipts taxes of $28.3 in 2012 and $27.1 in 2011)

   $ 600.3      $ 656.5   

Unregulated

     188.1        229.2   
  

 

 

   

 

 

 

Total revenues

     788.4        885.7   
  

 

 

   

 

 

 

Expenses

    

Regulated operations

    

Fuel

     167.9        194.2   

Purchased power

     31.2        43.9   

Cost of natural gas sold

     36.4        54.1   

Other

     85.6        82.1   

Operation other expense

    

Mining related costs

     99.1        130.7   

Guatemalan power generation

     20.4        22.7   

Other

     1.1        1.7   

Maintenance

     43.8        48.5   

Depreciation and amortization

     84.2        81.2   

Taxes, other than income

     57.1        55.5   
  

 

 

   

 

 

 

Total expenses

     626.8        714.6   
  

 

 

   

 

 

 

Income from operations

     161.6        171.1   
  

 

 

   

 

 

 

Allowance for other funds used during construction

     0.5        0.3   

Other income

     1.9        1.5   
  

 

 

   

 

 

 

Total other income

     2.4        1.8   
  

 

 

   

 

 

 

Interest charges

    

Interest expense

     50.3        51.3   

Allowance for borrowed funds used during construction

     (0.3     (0.1
  

 

 

   

 

 

 

Total interest charges

     50.0        51.2   
  

 

 

   

 

 

 

Income before provision for income taxes

     114.0        121.7   

Provision for income taxes

     40.9        44.1   
  

 

 

   

 

 

 

Net income

   $ 73.1      $ 77.6   

Less: Net income attributable to noncontrolling interest

     0.0        (0.1
  

 

 

   

 

 

 

Net income attributable to TECO Energy

   $ 73.1      $ 77.5   
  

 

 

   

 

 

 

Average common shares outstanding – Basic

     214.3        213.6   

                                                                 – Diluted

     215.2        215.2   
  

 

 

   

 

 

 

Earnings per share attributable to TECO Energy – Basic

   $ 0.34      $ 0.36   

                                                                                       – Diluted

   $ 0.34      $ 0.36   
  

 

 

   

 

 

 

Dividends paid per common share outstanding

   $ 0.220      $ 0.215   

The accompanying notes are an integral part of the consolidated condensed financial statements.

 

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Table of Contents

TECO ENERGY, INC.

Consolidated Condensed Statements of Income

Unaudited

 

     Six months ended June 30,  

(millions, except per share amounts)

   2012     2011  

Revenues

    

Regulated electric and gas (includes franchise fees and gross receipts taxes of $54.4 in 2012 and $55.5 in 2011)

   $ 1,156.6      $ 1,243.6   

Unregulated

     361.8        438.2   
  

 

 

   

 

 

 

Total revenues

     1,518.4        1,681.8   
  

 

 

   

 

 

 

Expenses

    

Regulated operations

    

Fuel

     325.4        339.1   

Purchased power

     59.4        71.1   

Cost of natural gas sold

     78.0        136.1   

Other

     168.9        160.4   

Operation other expense

    

Mining related costs

     188.5        254.7   

Guatemalan power generation

     39.6        42.8   

Other

     3.7        3.1   

Maintenance

     87.8        97.3   

Depreciation and amortization

     167.2        161.0   

Taxes, other than income

     113.1        114.2   
  

 

 

   

 

 

 

Total expenses

     1,231.6        1,379.8   
  

 

 

   

 

 

 

Income from operations

     286.8        302.0   
  

 

 

   

 

 

 

Other income

    

Allowance for other funds used during construction

     0.9        0.6   

Other income

     3.9        3.0   
  

 

 

   

 

 

 

Total other income

     4.8        3.6   
  

 

 

   

 

 

 

Interest charges

    

Interest expense

     100.9        104.1   

Allowance for borrowed funds used during construction

     (0.5     (0.3
  

 

 

   

 

 

 

Total interest charges

     100.4        103.8   
  

 

 

   

 

 

 

Income before provision for income taxes

     191.2        201.8   

Provision for income taxes

     67.5        72.5   
  

 

 

   

 

 

 

Net income

   $ 123.7      $ 129.3   

Less: Net income attributable to noncontrolling interest

     (0.1     (0.1
  

 

 

   

 

 

 

Net income attributable to TECO Energy

   $ 123.6      $ 129.2   
  

 

 

   

 

 

 

Average common shares outstanding – Basic

     214.1        213.3   

                                                                 – Diluted

     215.3        215.1   
  

 

 

   

 

 

 

Earnings per share attributable to TECO Energy – Basic

   $ 0.58      $ 0.60   

                                                                                       – Diluted

   $ 0.57      $ 0.60   
  

 

 

   

 

 

 

Dividends paid per common share outstanding

   $ 0.440      $ 0.420   

The accompanying notes are an integral part of the consolidated condensed financial statements.

 

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Table of Contents

TECO ENERGY, INC.

Consolidated Condensed Statements of Comprehensive Income

Unaudited

 

     Three months ended June 30,     Six months ended June 30,  

(millions)

   2012     2011     2012     2011  

Net income

   $ 73.1      $ 77.6      $ 123.7      $ 129.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

        

Net unrealized (losses) gains on cash flow hedges

     (7.4     (1.4     (5.9     0.9   

Amortization of unrecognized benefit costs and other

     0.5        0.4        0.6        0.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income, net of tax

     (6.9     (1.0     (5.3     1.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     66.2        76.6        118.4        131.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to noncontrolling interest

     0.0        (0.1     (0.1     (0.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to TECO Energy, Inc.

   $ 66.2      $ 76.5      $ 118.3      $ 130.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of the consolidated condensed financial statements.

 

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Table of Contents

TECO ENERGY, INC.

Consolidated Condensed Statements of Cash Flows

Unaudited

 

     Six months ended June 30,  

(millions)

   2012     2011  

Cash flows from operating activities

    

Net income

   $ 123.7      $ 129.3   

Adjustments to reconcile net income to net cash from operating activities:

    

Depreciation and amortization

     167.2        161.0   

Deferred income taxes

     63.4        69.0   

Investment tax credits

     (0.1     (0.2

Allowance for funds used during construction

     (0.9     (0.6

Non-cash stock compensation

     5.3        4.2   

Deferred recovery clauses

     (12.9     6.3   

Receivables, less allowance for uncollectibles

     (2.8     (2.0

Inventories

     (30.8     13.8   

Prepayments and other current assets

     (11.6     (3.5

Taxes accrued

     31.3        22.3   

Interest accrued

     3.5        4.6   

Accounts payable

     (26.9     (34.6

Other

     (3.0     17.2   
  

 

 

   

 

 

 

Cash flows from operating activities

     305.4        386.8   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Capital expenditures

     (240.9     (200.2

Allowance for funds used during construction

     0.9        0.6   

Other investing activities

     0.0        17.3   
  

 

 

   

 

 

 

Cash flows used in investing activities

     (240.0     (182.3
  

 

 

   

 

 

 

Cash flows from financing activities

    

Dividends

     (95.1     (90.4

Proceeds from the sale of common stock

     3.2        5.4   

Proceeds from long-term debt issuance

     290.3        0.0   

Repayment of long-term debt/Purchase in lieu of redemption

     (210.1     (144.6

Dividend to noncontrolling interest

     (0.3     (0.6

Net increase in short-term debt

     20.0        20.0   
  

 

 

   

 

 

 

Cash flows from (used in) financing activities

     8.0        (210.2
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     73.4        (5.7

Cash and cash equivalents at beginning of period

     44.0        67.5   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 117.4      $ 61.8   
  

 

 

   

 

 

 

The accompanying notes are an integral part of the consolidated condensed financial statements.

 

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Table of Contents

TECO ENERGY, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

UNAUDITED

1. Summary of Significant Accounting Policies

See the company’s 2011 Annual Report on Form 10-K for a complete detailed discussion of accounting policies. The significant accounting policies for both utility and diversified operations include:

Principles of Consolidation and Basis of Presentation

The consolidated condensed financial statements include the accounts of TECO Energy, Inc., its majority-owned and controlled subsidiaries and the accounts of VIEs for which it is the primary beneficiary (TECO Energy or the company). TECO Energy is considered to be the primary beneficiary of VIEs if it has both 1) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and 2) the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. For the periods presented, no VIEs have been consolidated (see Note 14).

All significant intercompany balances and intercompany transactions have been eliminated in consolidation. Generally, the equity method of accounting is used to account for investments in partnerships or other arrangements in which TECO Energy is not the primary beneficiary, but is able to exert significant influence. 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 TECO Energy, Inc. and its subsidiaries as of June 30, 2012 and Dec. 31, 2011, and the results of operations and cash flows for the periods ended June 30, 2012 and 2011. The results of operations for the three and six month periods ended June 30, 2012 are not necessarily indicative of the results that can be expected for the entire fiscal year ending Dec. 31, 2012.

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 data 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.

Revenues

As of June 30, 2012 and Dec. 31, 2011, unbilled revenues of $54.1 million and $50.2 million, respectively, are included in the “Receivables” line item on the Consolidated Condensed Balance Sheets.

Accounting for Excise Taxes, Franchise Fees and Gross Receipts

TECO Coal incurs most of TECO Energy’s total excise taxes, which are accrued as an expense and reconciled to the actual cash payment of excise taxes. As general expenses, they are not specifically recovered through revenues. Excise taxes paid by the regulated utilities are not material and are expensed when incurred.

The regulated utilities are allowed to recover certain costs on a dollar-per-dollar basis incurred from customers through prices 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 the regulated utilities are included as an expense on the Consolidated Condensed Statements of Income in “Taxes, other than income”. These amounts totaled $28.3 million and $54.4 million, respectively, for the three and six months ended June 30, 2012, compared to $27.1 million and $55.5 million, respectively, for the three and six months ended June 30, 2011.

Cash Flows Related to Derivatives and Hedging Activities

The company classifies cash inflows and outflows related to derivative and hedging instruments in the appropriate cash flow sections associated with the item being hedged. In the case of diesel fuel swaps, which are used to mitigate the fluctuations in the price of diesel fuel, the cash inflows and outflows are included in the operating section. For natural gas and ongoing interest rate swaps, the cash inflows and outflows are included in the operating section. For interest rate swaps that settle coincident with the debt issuance, the cash inflows and outflows are treated as premiums or discounts and included in the financing section of the Consolidated Condensed Statements of Cash Flows.

2. New Accounting Pronouncements

Offsetting Assets and Liabilities

In December 2011, the FASB issued guidance enhancing disclosures of financial instruments and derivative instruments that are offset in the statement of financial position or subject to enforceable master netting agreements. The guidance is effective for interim and annual reporting periods beginning on or after Jan. 1, 2013. The company will adopt this guidance as required. It will have no effect on the company’s results of operations, financial position or cash flows.

3. Regulatory

Tampa Electric’s and PGS’s retail businesses are regulated by the FPSC. Tampa Electric also is subject to regulation by the FERC under the PUHCA 2005. However, pursuant to a waiver granted in accordance with the FERC’s regulations, TECO Energy is not subject to certain accounting, record-keeping and reporting requirements prescribed by the FERC’s regulations

 

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under the PUHCA 2005. The operations of PGS are regulated by the FPSC separately from the operations of Tampa Electric. The FPSC has jurisdiction over rates, service, issuance of securities, safety, accounting and depreciation practices and other matters. In general, the FPSC sets rates at a level that allows utilities such as Tampa Electric and PGS to collect total revenues (revenue requirements) equal to their cost of providing service, plus a reasonable return on invested capital.

Storm Damage Cost Recovery

Tampa Electric accrues $8.0 million annually to a FERC-authorized and FPSC-approved self-insured storm damage reserve. This reserve was created after Florida’s IOUs were unable to obtain transmission and distribution insurance coverage due to destructive acts of nature. Tampa Electric’s storm reserve was $47.6 million and $43.6 million as of June 30, 2012 and Dec. 31, 2011, respectively.

Wholesale and Transmission Rate Cases

In July 2012, the FERC approved the uncontested settlement that Tampa Electric filed with its customers in its wholesale requirements rate case earlier this year. The approved settlement will take effect in August and Tampa Electric will refund its wholesale requirements’ customers the appropriate amounts given the terms of the settlement. Tampa Electric awaits FERC approval for its uncontested transmission rate case settlement, which was filed with FERC also earlier this year. The wholesale requirements and transmission rate case settlements’ rates will not have a material impact on Tampa Electric’s results.

Regulatory Assets and Liabilities

Tampa Electric and PGS maintain their accounts in accordance with recognized policies of the FPSC. In addition, Tampa Electric maintains its accounts in accordance with recognized policies prescribed or permitted by the FERC.

Tampa Electric and PGS apply the accounting standards for regulated operations. Areas of applicability include: deferral of revenues under approved regulatory agreements; revenue recognition resulting from cost-recovery clauses that provide for monthly billing charges to reflect increases or decreases in fuel, purchased power, conservation and environmental costs; and the deferral of costs as regulatory assets to the period that the regulatory agency recognizes them when cost recovery is ordered over a period longer than a fiscal year.

Details of the regulatory assets and liabilities as of June 30, 2012 and Dec. 31, 2011 are presented in the following table:

 

Regulatory Assets and Liabilities

             

(millions)

   June 30,
2012
     Dec. 31,
2011
 

Regulatory assets:

     

Regulatory tax asset (1)

   $ 62.5       $ 63.6   
  

 

 

    

 

 

 

Other:

     

Cost-recovery clauses

     58.6         73.3   

Postretirement benefit asset

     245.2         252.4   

Deferred bond refinancing costs (2)

     9.1         11.1   

Environmental remediation

     37.7         30.5   

Competitive rate adjustment

     3.5         3.5   

Other

     17.7         17.4   
  

 

 

    

 

 

 

Total other regulatory assets

     371.8         388.2   
  

 

 

    

 

 

 

Total regulatory assets

     434.3         451.8   

Less: Current portion

     83.2         87.3   
  

 

 

    

 

 

 

Long-term regulatory assets

   $ 351.1       $ 364.5   
  

 

 

    

 

 

 

Regulatory liabilities:

     

Regulatory tax liability (1)

   $ 15.3       $ 16.0   
  

 

 

    

 

 

 

Other:

     

Cost-recovery clauses

     58.7         61.4   

Environmental remediation

     28.4         28.4   

Transmission and delivery storm reserve

     47.6         43.6   

Deferred gain on property sales (3)

     4.1         5.0   

Provision for stipulation and other

     1.0         0.8   

Accumulated reserve - cost of removal

     582.4         578.8   
  

 

 

    

 

 

 

Total other regulatory liabilities

     722.2         718.0   
  

 

 

    

 

 

 

Total regulatory liabilities

     737.5         734.0   

Less: Current portion

     83.4         86.2   
  

 

 

    

 

 

 

Long-term regulatory liabilities

   $ 654.1       $ 647.8   
  

 

 

    

 

 

 

 

(1) Primarily related to plant life and derivative positions.

 

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(2) Amortized over the term of the related debt instruments.
(3) Amortized over a 4- or 5-year period with various ending dates.

All regulatory assets are being recovered through the regulatory process. The following table further details the regulatory assets and the related recovery periods:

 

Regulatory Assets

             

(millions)

   June 30,
2012
     Dec 31,
2011
 

Clause recoverable (1)

   $ 62.1       $ 76.8   

Components of rate base (2)

     258.5         264.9   

Regulatory tax assets (3)

     62.5         63.6   

Capital structure and other (3)

     51.2         46.5   
  

 

 

    

 

 

 

Total

   $ 434.3       $ 451.8   
  

 

 

    

 

 

 

 

(1) To be recovered through cost-recovery clauses approved by the FPSC on a dollar-for-dollar basis in the next year.
(2) Primarily reflects allowed working capital, which is included in rate base and earns a rate of return as permitted by the FPSC.
(3) “Regulatory tax assets” and “Capital structure and other” regulatory assets have a recoverable period longer than a fiscal year and are recognized over the period authorized by the regulatory agency. Also included are unamortized loan costs, which are amortized over the life of the related debt instruments. See footnotes 1 and 2 in the prior table for additional information.

4. Income Taxes

The company’s U.S. subsidiaries join in the filing of a U.S. federal consolidated income tax return. The IRS concluded its examination of the company’s 2010 consolidated federal income tax return during 2011. The U.S. federal statute of limitations remains open for years 2008 and forward. Years 2011 and 2012 are currently under examination by the IRS under their Compliance Assurance Program. TECO Energy does not expect the settlement of current IRS examinations to significantly change the total amount of unrecognized tax benefits by the end of 2012. Foreign and U.S. state jurisdictions have statutes of limitations generally ranging from three to five years from the filing of an income tax return. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. Years still open to examination by tax authorities in major state and foreign jurisdictions include 2006 and forward.

The company recognizes interest and penalties associated with uncertain tax positions in “Operation other expense-Other” on the Consolidated Condensed Statements of Income in accordance with standards for accounting for uncertainty in income taxes. For the six months ended June 30, 2012, the company recorded $0.1 million of pretax charges for interest only and an immaterial amount for penalties.

The effective tax rate decreased to 35.29% for the six months ended June 30, 2012 from 35.92% for the same period in 2011. The decrease is principally due to state income taxes.

 

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5. Employee Postretirement Benefits

Included in the table below is the periodic expense for pension and other postretirement benefits offered by the company.

 

Pension Expense

                         
(millions)    Pension Benefits     Other Postretirement Benefits  

Three months ended June 30,

   2012     2011     2012      2011  

Components of net periodic benefit expense

         

Service cost

   $ 4.1      $ 3.8      $ 0.5       $ 0.5   

Interest cost on projected benefit obligations

     7.6        7.7        2.6         2.7   

Expected return on assets

     (8.9     (9.5     0.0         0.0   

Amortization of:

         

Transition obligation

     0.0        0.0        0.5         0.6   

Prior service (benefit) cost

     (0.1     (0.1     0.2         0.2   

Actuarial loss (gain)

     3.9        2.8        0.0         (0.1
  

 

 

   

 

 

   

 

 

    

 

 

 

Net pension expense recognized in the TECO Energy Consolidated Condensed Statements of Income

   $ 6.6      $ 4.7      $ 3.8       $ 3.9   
  

 

 

   

 

 

   

 

 

    

 

 

 

Six months ended June 30,

                         

Components of net periodic benefit expense

         

Service cost

   $ 8.5      $ 8.0      $ 1.2       $ 1.1   

Interest cost on projected benefit obligations

     15.0        15.5        5.1         5.5   

Expected return on assets

     (18.5     (19.2     0.0         0.0   

Amortization of:

         

Transition obligation

     0.0        0.0        0.9         1.2   

Prior service (benefit) cost

     (0.2     (0.2     0.4         0.4   

Actuarial loss

     7.6        5.6        0.0         0.0   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net pension expense recognized in the TECO Energy Consolidated Condensed Statements of Income

   $ 12.4      $ 9.7      $ 7.6       $ 8.2   
  

 

 

   

 

 

   

 

 

    

 

 

 

For the fiscal 2012 plan year, TECO Energy assumed a long-term EROA of 7.50% and a discount rate of 4.797% for pension benefits under its qualified pension plan, and a discount rate of 4.744% for its other postretirement benefits as of their Jan. 1, 2012 measurement dates. Additionally, TECO Energy made contributions of $20.1 million to its pension plan for the six months ended June 30, 2012.

For the three and six months ended June 30, 2012, TECO Energy and its subsidiaries reclassed $0.8 million and $1.5 million, respectively, of unamortized transition obligation, prior service cost and actuarial losses from AOCI to net income as part of periodic benefit expense. In addition, during the three and six months ended June 30, 2012, TEC reclassed $3.8 million and $7.3 million, respectively, of unamortized transition obligation, prior service cost and actuarial losses from regulatory assets to net income as part of periodic benefit expense.

In July 2012, the President signed into law the Moving Ahead for Progress in the 21st Century Act (MAP-21). MAP-21 provides funding relief for pension plan sponsors by stabilizing discount rates used in calculating the required minimum pension contributions and increasing PBGC premium rates to be paid by plan sponsors. The company is currently evaluating the impact MAP-21 will have on its pension contributions and on future PBGC premiums, and expects the required minimum pension contributions to be lower than the levels previously projected.

 

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6. Short-Term Debt

At June 30, 2012 and Dec. 31, 2011, the following credit facilities and related borrowings existed:

 

Credit Facilities

                                         
     June 30, 2012      Dec. 31, 2011  

(millions)

   Credit
Facilities
     Borrowings
Outstanding  (1)
     Letters
of Credit
Outstanding
     Credit
Facilities
     Borrowings
Outstanding  (1)
     Letters
of Credit
Outstanding
 

Tampa Electric Company:

                 

5-year facility (2)

   $ 325.0       $ 0.0       $ 0.7       $ 325.0       $ 0.0       $ 0.7   

1-year accounts receivable facility

     150.0         0.0         0.0         150.0         0.0         0.0   

TECO Energy/TECO Finance:

                 

5-year facility (2)(3)

     200.0         20.0         0.0         200.0         0.0         0.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 675.0       $ 20.0       $ 0.7       $ 675.0       $ 0.0       $ 0.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Borrowings outstanding are reported as notes payable.
(2) This 5-year facility matures Oct. 25, 2016.
(3) TECO Finance is the borrower and TECO Energy is the guarantor of this facility.

At June 30, 2012, these credit facilities require commitment fees ranging from 12.5 to 30.0 basis points. The weighted-average interest rate on outstanding amounts payable under the credit facilities at June 30, 2012 was 1.080%. There were no outstanding borrowings at Dec. 31, 2011.

Tampa Electric Company Accounts Receivable Facility

On Feb. 17, 2012, TEC and TRC amended their $150 million accounts receivable collateralized borrowing facility, entering into Amendment No. 10 to the Loan and Servicing Agreement with certain lenders named therein and Citibank, N.A. as Program Agent. The amendment (i) extends the maturity date to Feb. 15, 2013, (ii) provides that TRC will pay program and liquidity fees, which will total 60 basis points, (iii) continues to provide that the interest rates on the borrowings will be based on prevailing asset-backed commercial paper rates, unless such rates are not available from conduit lenders, in which case the rates will be at an interest rate equal to, at TEC’s option, either Citibank’s prime rate (or the federal funds rate plus 50 basis points, if higher) or a rate based on the LIBOR (if available) plus a margin and (iv) makes other technical changes.

7. Long-Term Debt

Issuance of Tampa Electric Company 4.10% Notes due 2042

On June 5, 2012, TEC completed an offering of $300 million aggregate principal amount of 4.10% Notes due 2042 (the Notes). The Notes were sold at 99.724% of par. The offering resulted in net proceeds to TEC (after deducting underwriting discounts, commissions, and estimated offering expenses and before settlement of interest rate swaps) of approximately $296.2 million. Net proceeds were used to repay maturing long-term debt, to repay short-term debt and for general corporate purposes. At any time prior to Dec. 15, 2041, TEC may redeem all or any part of the Notes at its option and from time to time at a redemption price equal to the greater of (i) 100% of the principal amount of Notes to be redeemed or (ii) the sum of the present value of the remaining payments of principal and interest on the Notes to be redeemed, discounted at an applicable treasury rate (as defined in the indenture), plus 25 basis points; in either case, the redemption price would include accrued and unpaid interest to the redemption date. At any time on or after Dec. 15, 2041, TEC may at its option redeem the Notes, in whole or in part, at 100% of the principal amount of the Notes being redeemed plus accrued and unpaid interest thereon to but excluding the date of redemption.

Purchase in Lieu of Redemption of Hillsborough County Industrial Development Authority Pollution Control Revenue Refunding Bonds (Tampa Electric Company Project), Series 2006 (Non-AMT) and Polk County Industrial Development Authority Solid Waste Disposal Facility Revenue Refunding Bonds (Tampa Electric Company Project), Series 2010

On March 15, 2012, TEC purchased in lieu of redemption $86.0 million HCIDA Pollution Control Revenue Refunding Bonds (Tampa Electric Company Project), Series 2006 (Non-AMT) (the HCIDA Bonds). On March 19, 2008, the HCIDA remarketed the HCIDA Bonds in a term-rate mode pursuant to the terms of the Loan and Trust Agreement governing those bonds. The HCIDA Bonds bore interest at a term rate of 5.00% per annum from March 19, 2008 to March 15, 2012. TEC is responsible for payment of the interest and principal associated with the HCIDA Bonds. Regularly scheduled principal and interest when due are insured by Ambac Assurance Corporation.

 

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On March 1, 2011, TEC purchased in lieu of redemption $75.0 million PCIDA Solid Waste Disposal Facility Revenue Refunding Bonds (Tampa Electric Company Project), Series 2010 (the PCIDA Bonds). On Nov. 23, 2010, the PCIDA issued the PCIDA Bonds in a term-rate mode pursuant to the terms of the Loan and Trust Agreement governing those bonds. Proceeds of the PCIDA Bonds were used to redeem $75.0 million PCIDA Solid Waste Disposal Facility Revenue Refunding Bonds (Tampa Electric Company Project), Series 2007, which previously were in auction rate mode and were held by TEC since March 26, 2008. The PCIDA Bonds bore interest at the initial term rate of 1.50% per annum from Nov. 23, 2010 to March 1, 2011.

On March 26, 2008, TEC purchased in lieu of redemption $20.0 million HCIDA Pollution Control Revenue Refunding Bonds (Tampa Electric Company Project), Series 2007C. $181.0 million in bonds purchased in lieu of redemption were held by the trustee at the direction of TEC as of June 30, 2012 (the “Held Bonds”) to provide an opportunity to evaluate refinancing alternatives. The Held Bonds effectively offset the outstanding debt balances and are presented net on the balance sheet.

Fair Value of Long-Term Debt

At June 30, 2012, total long-term debt had a carrying amount of $3,165.7 million and an estimated fair market value of $3,631.5 million. At Dec. 31, 2011, total long-term debt had a carrying amount of $3,075.8 million and an estimated fair market value of $3,435.3 million. The company uses the market approach in determining fair value. The majority of the outstanding debt is valued using real-time financial market data obtained from Bloomberg Professional Service. The remaining securities are valued using prices obtained from the Municipal Securities Rulemaking Board and by applying estimated credit spreads obtained from a third party to the par value of the security. All debt securities are level 2 instruments.

8. Other Comprehensive Income

TECO Energy reported the following OCI for the three and six months ended June 30, 2012 and 2011, related to changes in the fair value of cash flow hedges and amortization of unrecognized benefit costs associated with the company’s postretirement plans:

 

Other Comprehensive Income

                                    
     Three months ended June 30,     Six months ended June 30,  

(millions)

   Gross     Tax     Net     Gross     Tax     Net  

2012

            

Unrealized (loss) gain on cash flow hedges

   ($ 12.3   $ 4.7      ($ 7.6   ($ 9.7   $ 3.6      ($ 6.1

Reclassification from AOCI to net income

     0.4        (0.2     0.2        0.3        (0.1     0.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) Gain on cash flow hedges

     (11.9     4.5        (7.4     (9.4     3.5        (5.9

Amortization of unrecognized benefit costs and other

     0.8        (0.3     0.5        1.5        (0.9     0.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive (loss) income

   ($ 11.1   $ 4.2      ($ 6.9   ($ 7.9   $ 2.6      ($ 5.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

2011

            

Unrealized (loss) gain on cash flow hedges

   ($ 1.3   $ 0.5      ($ 0.8   $ 2.9      ($ 1.1   $ 1.8   

Reclassification from AOCI to net income

     (0.9     0.3        (0.6     (1.4     0.5        (0.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) Gain on cash flow hedges

     (2.2     0.8        (1.4     1.5        (0.6     0.9   

Amortization of unrecognized benefit costs and other

     0.7        (0.3     0.4        1.3        (0.5     0.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive (loss) income

   ($ 1.5   $ 0.5      ($ 1.0   $ 2.8      ($ 1.1   $ 1.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Accumulated Other Comprehensive Loss

            

(millions)

   June 30, 2012     Dec. 31, 2011  

Unrecognized pension losses and prior service credits (1)

   ($ 30.6   ($ 31.2

Unrecognized other benefit gains, prior service costs and transition obligations (2)

     14.2        14.2   

Net unrealized losses from cash flow hedges (3)

     (10.9     (5.0
  

 

 

   

 

 

 

Total accumulated other comprehensive loss

   ($ 27.3   ($ 22.0
  

 

 

   

 

 

 

 

(1) Net of tax benefit of $18.8 million and $19.6 million as of June 30, 2012 and Dec. 31, 2011, respectively.
(2) Net of tax expense of $6.2 million and $6.2 million as of June 30, 2012 and Dec. 31, 2011, respectively.
(3) Net of tax benefit of $6.8 million and $3.2 million as of June 30, 2012 and Dec. 31, 2011, respectively.

 

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9. Earnings Per Share

 

Earnings Per Share

                        
     Three months ended June 30,     Six months ended June 30,  

(millions, except per share amounts)

   2012     2011     2012     2011  

Basic earnings per share

        

Net income

   $ 73.1      $ 77.6      $ 123.7      $ 129.3   

Less: Income attributable to noncontrolling interest

     0.0        (0.1     (0.1     (0.1

Less: Amount allocated to nonvested participating shareholders

     (0.3     (0.4     (0.5     (0.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to TECO Energy available to common shareholders - Basic

   $ 72.8      $ 77.1      $ 123.1      $ 128.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Average common shares outstanding - Basic

     214.3        213.6        214.1        213.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share attributable to TECO Energy available to common shareholders - Basic

   $ 0.34      $ 0.36      $ 0.58      $ 0.60   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

        

Net income

   $ 73.1      $ 77.6      $ 123.7      $ 129.3   

Less: Income attributable to noncontrolling interest

     0.0        (0.1     (0.1     (0.1

Less: Amount allocated to nonvested participating shareholders

     (0.3     (0.4     (0.5     (0.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to TECO Energy available to common shareholders - Diluted

   $ 72.8      $ 77.1      $ 123.1      $ 128.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Average common shares outstanding - Diluted

     214.3        213.6        214.1        213.3   

Assumed conversions of stock options, unvested restricted stock and contingent performance shares, net

     0.9        1.6        1.2        1.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Average shares outstanding common - Diluted

     215.2        215.2        215.3        215.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share attributable to TECO Energy available to common shareholders - Diluted

   $ 0.34      $ 0.36      $ 0.57      $ 0.60   
  

 

 

   

 

 

   

 

 

   

 

 

 

Anti-dilutive shares

     0.3        1.6        0.8        2.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

10. Commitments and Contingencies

Legal Contingencies

From time to time, TECO Energy 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 its 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. While the outcome of such proceedings is uncertain, management does not believe that their ultimate resolution will have a material adverse effect on the company’s results of operations, financial condition or cash flows.

Merco Group at Aventura Landings v. Peoples Gas System

In 2004, Merco Group at Aventura Landings I, II and III (Merco) filed suit against PGS in Dade County Circuit Court alleging that coal tar from a certain former PGS manufactured gas plant site had been deposited in the early 1960s onto property now owned by Merco. Merco was seeking damages for costs associated with the removal of such coal tar and from out-of-pocket development expenses and lost profits due to the delay in its condominium development project allegedly caused by the presence of the coal tar. PGS denied liability on the grounds that the coal tar did not originate from its manufactured gas plant site and filed a third-party complaint against Continental Holdings, Inc., which Merco also added as a defendant in its suit, as the owner at the relevant time of the site that PGS believes was the source of the coal tar on Merco’s property. In addition, PGS filed a counterclaim against Merco which claimed that, because Merco purchased the property with actual knowledge of the presence of coal tar on the property, Merco should contribute toward any damages resulting from the presence of coal tar. The bench trial in this matter was concluded in February 2012 and, in June 2012, prior to receiving a ruling by the Judge, PGS and Merco settled the case, and PGS and Continental Holdings, Inc. agreed to a release for their claims against each other in the case. Both agreements have been approved by the court. The settlement is reflected as a regulatory asset at June 30, 2012 and is expected to be recovered through the regulatory process. The settlement did not impact the results of operations for the periods ended June 30, 2012 and is not material to the financial position of TEC or TECO Energy as of June 30, 2012.

 

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Superfund and Former Manufactured Gas Plant Sites

TEC, through its Tampa Electric and Peoples Gas divisions, is a PRP for certain superfund sites and, through its Peoples Gas division, for certain former manufactured gas plant sites. While the joint and several liability associated with these sites presents the potential for significant response costs, as of June 30, 2012, TEC has estimated its ultimate financial liability to be $28.4 million, primarily at PGS. This amount has been accrued and is primarily reflected in long-term “Regulatory liabilities” on the Consolidated Condensed Balance Sheets. The environmental remediation costs associated with these sites, which are expected to be paid over many years, are not expected to have a significant impact on customer prices.

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, many 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 actual percentage of the remediation costs.

Factors that could impact these estimates include the ability of other PRPs to pay their pro-rata portion of the cleanup costs, additional testing and investigation which could expand the scope of the cleanup activities, additional liability that might arise from the cleanup activities themselves or changes in laws or regulations that could require additional remediation. These costs are recoverable through customer rates established in subsequent base rate proceedings.

Potentially Responsible Party Notification

In October 2010, the EPA notified TEC that it is a PRP under the CERCLA for the proposed conduct of a contaminated soil removal action, if necessary, at a property owned by TEC in Tampa, Florida. The property owned by TEC is undeveloped except for the location of transmission lines and poles, and is adjacent to an industrial site, not owned by TEC, which the EPA has studied since 1992 or earlier. The EPA has asserted this potential liability due to TEC’s ownership of the property described above but, to the knowledge of TEC, this assertion is not based upon any release of hazardous substances by TEC. TEC has been in contact with the EPA to resolve this matter, and on July 10, 2012, TEC received an Enforcement Action Memorandum from the EPA, outlining the remediation actions the EPA is requiring at the site. The estimated costs to remediate the site are not expected to be material to the financial results or financial position of TEC or TECO Energy. TEC expects the remediation to be substantially completed in the third quarter of 2012.

Environmental Protection Agency Administrative Order

In December 2010, Clintwood Elkhorn Mining Company, a subsidiary of TECO Coal, received an Administrative Order from the EPA relating to the discharge of wastewater associated with inactive mining operations in Pike County, Kentucky. TECO Coal responded to the EPA in February 2011, and has been in contact with the EPA to resolve this matter. The company is unable to estimate the possible loss or range of loss with respect to this matter due to the uncertainty regarding the scope and extent of TECO Coal’s potential liability, if any, and the costs of any required investigation and remediation related to these inactive mining operations.

 

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Table of Contents

Guarantees and Letters of Credit

A summary of the face amount or maximum theoretical obligation under TECO Energy’s and TEC’s letters of credit and guarantees as of June 30, 2012 is as follows:

 

Guarantees - TECO Energy

                                  
(millions)                  After (1)             Liabilities Recognized  

Guarantees for the Benefit of:

   2012      2013-2016      2016      Total      at June 30, 2012  

TECO Coal

              

Fuel purchase related (2)

   $ 0.0       $ 0.0       $ 5.4       $ 5.4       $ 1.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other subsidiaries

              

Fuel purchase/energy management (2)

     0.0         10.0         95.3         105.3         2.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 0.0       $ 10.0       $ 100.7       $ 110.7       $ 4.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Letters of Credit - Tampa Electric Company

                                  
(millions)                  After (1)             Liabilities Recognized  

Letters of Credit for the Benefit of:

   2012      2013-2016      2016      Total      at June 30, 2012  

Tampa Electric (2)

   $ 0.0       $ 0.0       $ 0.7       $ 0.7       $ 0.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) These letters of credit and guarantees renew annually and are shown on the basis that they will continue to renew beyond 2016.
(2) The amounts shown are the maximum theoretical amounts guaranteed under current agreements. Liabilities recognized represent the associated obligation of TECO Energy under these agreements at June 30, 2012. The obligations under these letters of credit and guarantees include net accounts payable and net derivative liabilities.

Financial Covenants

In order to utilize their respective bank facilities, TECO Energy and its subsidiaries must meet certain financial tests as defined in the applicable agreements. In addition, TECO Energy, TECO Finance, TEC and the other operating companies have certain restrictive covenants in specific agreements and debt instruments. At June 30, 2012, TECO Energy, TECO Finance, TEC and the other operating companies were in compliance with all applicable financial covenants.

11. Segment Information

TECO Energy is an electric and gas utility holding company with significant diversified activities. Segments are determined based on how management evaluates, measures and makes decisions with respect to the operations of the entity. The management of TECO Energy reports segments based on each subsidiary’s contribution of revenues, net income and total assets as required by the accounting guidance for disclosures about segments of an enterprise and related information. All significant intercompany transactions are eliminated in the Consolidated Condensed Financial Statements of TECO Energy, but are included in determining reportable segments.

 

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Table of Contents

Segment Information (1)

                                        

(millions)

Three months ended June 30,

   Tampa
Electric
     Peoples
Gas
     TECO
Coal
     TECO
Guatemala
     Other &
Eliminations
    TECO
Energy
 

2012

                

Revenues - external

   $ 506.6       $ 93.7       $ 149.7       $ 36.0       $ 2.4      $ 788.4   

Sales to affiliates

     0.2         1.1         0.0         0.0         (1.3     0.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

     506.8         94.8         149.7         36.0         1.1        788.4   

Depreciation and amortization

     59.6         12.4         10.0         1.9         0.3        84.2   

Total interest charges (1)

     29.5         4.5         1.8         2.1         12.1        50.0   

Internally allocated interest (1)

     0.0         0.0         1.8         1.8         (3.6     0.0   

Provision (benefit) for income taxes

     31.9         5.7         4.1         3.4         (4.2     40.9   

Net income (loss) attributable to TECO Energy

   $ 52.0       $ 9.0       $ 12.2       $ 7.4       ($ 7.5   $ 73.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

2011

                

Revenues - external

   $ 546.1       $ 110.4       $ 191.3       $ 36.1       $ 1.8      $ 885.7   

Sales to affiliates

     0.4         0.8         0.0         0.0         (1.2     0.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

     546.5         111.2         191.3         36.1         0.6        885.7   

Equity earnings of unconsolidated affiliates

     0.0         0.0         0.0         0.0         0.0        0.0   

Depreciation and amortization

     55.3         12.0         11.7         1.9         0.3        81.2   

Total interest charges (1)

     30.4         4.4         1.7         1.9         12.8        51.2   

Internally allocated interest (1)

     0.0         0.0         1.7         1.6         (3.3     0.0   

Provision (benefit) for income taxes

     36.9         3.7         5.0         3.3         (4.8     44.1   

Net income (loss) attributable to TECO Energy

   $ 58.4       $ 5.9       $ 15.8       $ 5.6       ($ 8.2   $ 77.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
(millions)                                         

Six months ended June 30,

                                        

2012

                

Revenues - external

   $ 952.9       $ 203.7       $ 288.1       $ 68.9       $ 4.8      $ 1,518.4   

Sales to affiliates

     0.5         1.3         0.0         0.0         (1.8     0.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

     953.4         205.0         288.1         68.9         3.0        1,518.4   

Depreciation and amortization

     117.0         25.0         20.8         3.7         0.7        167.2   

Total interest charges (1)

     59.5         8.9         3.6         4.2         24.2        100.4   

Internally allocated interest (1)

     0.0         0.0         3.5         3.6         (7.1     0.0   

Provision (benefit) for income taxes

     50.8         12.6         7.2         6.1         (9.2     67.5   

Net income (loss) attributable to TECO Energy

   $ 83.4       $ 20.0       $ 22.0       $ 14.0       ($ 15.8   $ 123.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

2011

                

Revenues - external

   $ 979.0       $ 264.6       $ 365.0       $ 69.7       $ 3.5      $ 1,681.8   

Sales to affiliates

     0.7         2.7         0.0         0.0         (3.4     0.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

     979.7         267.3         365.0         69.7         0.1        1,681.8   

Depreciation and amortization

     110.2         23.8         22.6         3.7         0.7        161.0   

Total interest charges (1)

     61.3         8.9         3.4         3.8         26.4        103.8   

Internally allocated interest (1)

     0.0         0.0         3.3         3.1         (6.4     0.0   

Provision (benefit) for income taxes

     56.9         13.0         6.6         6.1         (10.1     72.5   

Net income (loss) attributable to TECO Energy

   $ 90.0       $ 20.6       $ 24.0       $ 11.9       ($ 17.3   $ 129.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

(millions)

   Tampa
Electric
     Peoples
Gas
     TECO
Coal
     TECO
Guatemala
     Other &
Eliminations
    TECO
Energy
 

At June 30, 2012

                

Goodwill

   $ 0.0       $ 0.0       $ 0.0       $ 55.4       $ 0.0      $ 55.4   

Total assets

   $ 6,030.9       $ 963.6       $ 376.9       $ 310.3       ($ 231.1   $ 7,450.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

At Dec. 31, 2011

                

Goodwill

   $ 0.0       $ 0.0       $ 0.0       $ 55.4       $ 0.0      $ 55.4   

Total assets

   $ 5,940.9       $ 932.0       $ 385.2       $ 304.1       ($ 240.0   $ 7,322.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) Segment net income is reported on a basis that includes internally allocated financing costs. Total interest charges include internally allocated interest costs that for January 2012 through June 2012 were at a pretax rate of 6.00% and for 2011 were at a pretax rate of 6.25% based on an average of each subsidiary’s equity and indebtedness to TECO Energy assuming a 50/50 debt/equity capital structure.

12. Accounting for Derivative Instruments and Hedging Activities

From time to time, TECO Energy and its affiliates enter 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 at Tampa Electric and PGS,

 

   

to limit the exposure to interest rate fluctuations on debt securities at TECO Energy and its affiliates, and

 

   

to limit the exposure to price fluctuations for physical purchases of fuel at TECO Coal.

TECO Energy and its affiliates use derivatives only to reduce normal operating and market risks, not for speculative purposes. The company’s primary objective in using derivative instruments for regulated operations is to reduce the impact of market price volatility on ratepayers.

The risk management policies adopted by TECO Energy 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.

The company 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, to measure those instruments at fair value and to reflect the changes in the fair value of those instruments as either components of OCI or in net income, depending on the designation of those instruments. The changes in fair value that are recorded in OCI are not immediately recognized in current net income. As the underlying hedged transaction matures or the physical commodity is delivered, the deferred gain or loss on the related hedging instrument must be reclassified from OCI to earnings based on its value at the time of the instrument’s settlement. For effective hedge transactions, the amount reclassified from OCI to earnings is offset in net income by the market change of the amount paid or received on the underlying physical transaction.

The company applies the accounting standards for regulated operations to financial instruments used to hedge the purchase of natural gas 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 hedging activities on the fuel recovery clause. As a result, these changes are not recorded in OCI (see Note 3).

A company’s physical contracts qualify for the NPNS exception to derivative accounting rules, provided they meet certain criteria. Generally, NPNS applies if the company deems the counterparty creditworthy, if the counterparty owns or controls resources within the proximity to allow for physical delivery of the commodity, if the company intends to receive physical delivery and if the transaction is reasonable in relation to the company’s business needs. As of June 30, 2012, all of the company’s physical contracts qualify for the NPNS exception.

The following table presents the derivatives that are designated as cash flow hedges at June 30, 2012 and Dec. 31, 2011:

 

Total Derivatives (1)

             

(millions)

   June 30,
2012
     Dec. 31,
2011
 

Current assets

   $ 0.7       $ 0.9   

Long-term assets

     0.1         0.0   
  

 

 

    

 

 

 

Total assets

   $ 0.8       $ 0.9   
  

 

 

    

 

 

 

Current liabilities

   $ 40.5       $ 58.4   

Long-term liabilities

     3.9         8.6   
  

 

 

    

 

 

 

Total liabilities

   $ 44.4       $ 67.0   
  

 

 

    

 

 

 

 

(1) Amounts presented above are on a gross basis, with asset and liability positions netted by counterparty in accordance with accounting standards for derivatives and hedging.

 

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Table of Contents

The following table presents the derivative hedges of diesel fuel contracts at June 30, 2012 and Dec. 31, 2011 to limit the exposure to changes in the market price for diesel fuel used in the production of coal:

 

Diesel Fuel Derivatives

             

(millions)

   June 30,
2012
     Dec. 31,
2011
 

Current assets

   $ 0.3       $ 0.9   

Long-term assets

     0.0         0.0   
  

 

 

    

 

 

 

Total assets

   $ 0.3       $ 0.9   
  

 

 

    

 

 

 

Current liabilities

   $ 1.6       $ 0.0   

Long-term liabilities

     1.3         1.2   
  

 

 

    

 

 

 

Total liabilities

   $ 2.9       $ 1.2   
  

 

 

    

 

 

 

The following table presents the derivative hedges of natural gas contracts at June 30, 2012 and Dec. 31, 2011 to limit the exposure to changes in market price for natural gas used to produce energy and natural gas purchased for resale to customers:

 

Natural Gas Derivatives

             

(millions)

   June 30,
2012
     Dec. 31,
2011
 

Current assets

   $ 0.4       $ 0.0   

Long-term assets

     0.1         0.0   
  

 

 

    

 

 

 

Total assets

   $ 0.5       $ 0.0   
  

 

 

    

 

 

 

Current liabilities

   $ 38.9       $ 58.4   

Long-term liabilities

     2.6         7.4   
  

 

 

    

 

 

 

Total liabilities

   $ 41.5       $ 65.8   
  

 

 

    

 

 

 

The ending balance in AOCI related to the cash flow hedges and previously settled interest rate swaps at June 30, 2012 is a net loss of $10.9 million after tax and accumulated amortization. This compares to a net loss of $5.0 million in AOCI after tax and accumulated amortization at Dec. 31, 2011. The balance at June 30, 2012 is primarily comprised of interest rate swaps settled coincident with debt issued in June of 2008 and 2012 (see Note 7). These amounts will be amortized into earnings over the life of the related debt.

The following table presents the fair values and locations of derivative instruments recorded on the balance sheet at June 30, 2012:

 

Derivatives Designated As Hedging Instruments

 
    

Asset Derivatives

    

Liability Derivatives

 

(millions)

at June 30, 2012

  

Balance Sheet

Location

   Fair
Value
    

Balance Sheet

Location

   Fair
Value
 

Commodity Contracts:

           

Diesel fuel derivatives:

           

Current

   Derivative assets    $ 0.3       Derivative liabilities    $ 1.6   

Long-term

   Derivative assets      0.0       Derivative liabilities      1.3   

Natural gas derivatives:

           

Current

   Derivative assets      0.4       Derivative liabilities      38.9   

Long-term

   Derivative assets      0.1       Derivative liabilities      2.6   
     

 

 

       

 

 

 

Total derivatives designated as hedging instruments

   $ 0.8          $ 44.4   
     

 

 

       

 

 

 

 

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Table of Contents

The following table presents the effect of energy related derivatives on the fuel recovery clause mechanism in the Consolidated Condensed Balance Sheets as of June 30, 2012:

 

Energy Related Derivatives

 
    

Asset Derivatives

    

Liability Derivatives

 

(millions)

at June 30, 2012

  

Balance Sheet

Location (1)

   Fair
Value
    

Balance Sheet

Location (1)

   Fair
Value
 

Commodity Contracts:

           

Natural gas derivatives:

           

Current

   Regulatory liabilities    $ 0.4       Regulatory assets    $ 38.9   

Long-term

   Regulatory liabilities      0.1       Regulatory assets      2.6   
     

 

 

       

 

 

 

Total

      $ 0.5          $ 41.5   
     

 

 

       

 

 

 

 

(1) Natural gas derivatives are deferred in accordance with accounting standards for regulated operations and all increases and decreases in the cost of natural gas supply are passed on to customers with the fuel recovery clause mechanism. As gains and losses are realized in future periods, they will be recorded as fuel costs in the Consolidated Condensed Statements of Income.

Based on the fair value of the instruments at June 30, 2012, net pretax losses of $38.5 million are expected to be reclassified from regulatory assets or liabilities to the Consolidated Condensed Statements of Income within the next 12 months.

The following tables present the effect of hedging instruments on OCI and income for the three and six months ended June 30:

 

For the three months ended June 30:

(millions)

   Amount of
Gain/(Loss) on
Derivatives
Recognized in

OCI
   

Location of Gain/(Loss)
Reclassified From AOCI

Into Income

   Amount of
Gain/(Loss)
Reclassified

From AOCI
Into Income
 

Derivatives in Cash Flow Hedging
Relationships

   Effective Portion  (1)          Effective Portion  (1)  

2012

       

Interest rate contracts

   ($ 4.9   Interest expense    ($ 0.2

Commodity contracts:

       

Diesel fuel derivatives

     (2.7   Mining related costs      0.0   
  

 

 

      

 

 

 

Total

   ($ 7.6      ($ 0.2
  

 

 

      

 

 

 

2011

       

Interest rate contracts

   $ 0.0      Interest expense    ($ 0.2

Commodity contracts:

       

Diesel fuel derivatives

     (0.8   Mining related costs      0.8   
  

 

 

      

 

 

 

Total

   ($ 0.8      $ 0.6   
  

 

 

      

 

 

 

 

(1) Changes in OCI and AOCI are reported in after-tax dollars.

 

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Table of Contents

For the six months ended June 30:

(millions)

   Amount of
Gain/(Loss) on
Derivatives
Recognized in

OCI
   

Location of Gain/(Loss)

Reclassified From AOCI

Into Income

   Amount of
Gain/(Loss)
Reclassified

From AOCI
Into Income
 

Derivatives in Cash Flow Hedging
Relationships

   Effective Portion  (1)          Effective Portion  (1)  

2012

       

Interest rate contracts

   ($ 4.9   Interest expense    ($ 0.4

Commodity contracts:

       

Diesel fuel derivatives

     (1.2   Mining related costs      0.2   
  

 

 

      

 

 

 

Total

   ($ 6.1      ($ 0.2
  

 

 

      

 

 

 

2011

       

Interest rate contracts

   $ 0.0      Interest expense    ($ 0.3

Commodity contracts:

       

Diesel fuel derivatives

     1.8      Mining related costs      1.2   
  

 

 

      

 

 

 

Total

   $ 1.8         $ 0.9   
  

 

 

      

 

 

 

 

(1) Changes in OCI and AOCI are reported in after-tax dollars.

For derivative instruments that meet cash flow hedge criteria, the effective portion of the gain or loss on the derivative is reported as a component of OCI and reclassified into earnings in the same period or period during which the hedged transaction affects earnings. Gains and losses on the derivatives representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. For the six months ended June 30, 2012 and 2011, all hedges were effective.

The following table presents the derivative activity for instruments classified as qualifying cash flow hedges and their effect on OCI and AOCI for the six months ended June 30:

 

For the six months ended June 30:

(millions)

   Fair Value
Asset/(Liability)
    Amount of
Gain/(Loss)
Recognized
in OCI (1)
    Amount of
Gain/(Loss)
Reclassified From
AOCI Into Income
 

2012

      

Interest rate swaps

   $ 0.0      ($ 4.9   ($ 0.4

Diesel fuel derivatives

     (2.6     (1.2     0.2   
  

 

 

   

 

 

   

 

 

 

Total

   ($ 2.6   ($ 6.1   ($ 0.2
  

 

 

   

 

 

   

 

 

 

2011

      

Interest rate swaps

   $ 0.0      $ 0.0      ($ 0.3

Diesel fuel derivatives

     3.1        1.8        1.2   
  

 

 

   

 

 

   

 

 

 

Total

   $ 3.1      $ 1.8      $ 0.9   
  

 

 

   

 

 

   

 

 

 

 

(1) Changes in OCI and AOCI are reported in after-tax dollars.

 

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Table of Contents

The maximum length of time over which the company is hedging its exposure to the variability in future cash flows extends to Dec. 31, 2014 for both financial natural gas and financial diesel fuel contracts. The following table presents by commodity type the company’s derivative volumes that, as of June 30, 2012, are expected to settle during the 2012, 2013 and 2014 fiscal years:

 

     Diesel Fuel Contracts      Natural Gas Contracts  

(millions)

   (Gallons)      (MMBTUs)  

Year

   Physical      Financial      Physical      Financial  

2012

     0.0         4.9         0.0         20.1   

2013

     0.0         2.7         0.0         13.4   

2014

     0.0         1.5         0.0         2.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     0.0         9.1         0.0         35.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

The company is exposed to credit risk primarily through entering into derivative instruments with counterparties to limit its exposure to the commodity price fluctuations associated with diesel fuel and natural gas. Credit risk is the potential loss resulting from a counterparty’s nonperformance under an agreement. The company 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 the company to have material credit risk exposures with one or more counterparties. If such counterparties fail to perform their obligations under one or more agreements, the company could suffer a material financial loss. However, as of June 30, 2012, substantially all of the counterparties with transaction amounts outstanding in the company’s energy portfolio are rated investment grade by the major rating agencies. The company assesses credit risk internally for counterparties that are not rated.

The company has entered into commodity master arrangements with its counterparties to mitigate credit exposure to those counterparties. The company generally enters into the following master arrangements: (1) EEI agreements - standardized power sales contracts in the electric industry; (2) ISDA agreements - standardized financial gas and electric contracts; and (3) NAESB agreements - standardized physical gas contracts. The company believes that entering into such agreements reduces the risk from default by creating contractual rights relating to creditworthiness, collateral and termination.

The company has implemented procedures to monitor the creditworthiness of its counterparties and to consider nonperformance in valuing counterparty positions. The company monitors counterparties’ credit standings, including those that are experiencing financial problems, have significant swings in credit default swap rates, have credit rating changes by external rating agencies or have changes in ownership. Net liability positions are generally not adjusted as the company 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, the company considers general market conditions and the observable financial health and outlook of specific counterparties, forward-looking data such as credit default swaps, when available, and historical default probabilities from credit rating agencies in evaluating the potential impact of nonperformance risk to derivative positions. As of June 30, 2012, all positions with counterparties are net liabilities.

Certain TECO Energy derivative instruments contain provisions that require the company’s debt, or in the case of derivative instruments where TEC is the counterparty, TEC’s debt, to maintain an investment grade credit rating from any or all of the major credit rating agencies. If debt ratings, including TEC’s, were to fall below investment grade, it could trigger these provisions, and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing full overnight collateralization on derivative instruments in net liability positions. The company has no other contingent risk features associated with any derivative instruments.

The table below presents the fair value of the overall contractual contingent liability positions for the company’s derivative activity at June 30, 2012:

 

Contingent Features

 

(millions)

At June 30, 2012

   Fair Value
Asset/
(Liability)
    Derivative
Exposure
Asset/
(Liability)
    Posted
Collateral
 

Credit Rating

   ($ 44.0   ($ 44.0   $ 0.0   

13. Fair Value Measurements

Items Measured at Fair Value on a Recurring Basis

The following tables set forth by level within the fair value hierarchy the company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2012 and Dec. 31, 2011. As required by accounting standards for fair value measurements, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. For natural gas and diesel fuel swaps, the market approach was used in determining fair value. There were no reclassifications between levels for the quarter.

 

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Recurring Fair Value Measures

                           
     At fair value as of June 30, 2012  

(millions)

   Level 1      Level 2      Level 3      Total  

Assets

           

Natural gas swaps

   $ 0.0       $ 0.5       $ 0.0       $ 0.5   

Diesel fuel swaps

     0.0         0.3         0.0         0.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 0.0       $ 0.8       $ 0.0       $ 0.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Natural gas swaps

   $ 0.0       $ 41.5       $ 0.0       $ 41.5   

Diesel fuel swaps

     0.0         2.9         0.0         2.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 0.0       $ 44.4       $ 0.0       $ 44.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     At fair value as of Dec. 31, 2011  

(millions)

   Level 1      Level 2      Level 3      Total  

Assets

           

Natural gas swaps

   $ 0.0       $ 0.0       $ 0.0       $ 0.0   

Diesel fuel swaps

     0.0         0.9         0.0         0.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 0.0       $ 0.9       $ 0.0       $ 0.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Natural gas swaps

   $ 0.0       $ 65.8       $ 0.0       $ 65.8   

Diesel fuel swaps

     0.0         1.2         0.0         1.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 0.0       $ 67.0       $ 0.0       $ 67.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Natural gas and diesel fuel swaps are over-the-counter swap instruments. The primary pricing inputs in determining the fair value of these swaps are the NYMEX quoted closing prices of exchange-traded instruments. These prices are applied to the notional amounts of active positions to determine the reported fair value (see Note 12).

The company considered the impact of nonperformance risk in determining the fair value of derivatives. The company considered the net position with each counterparty, past performance of both parties, the intent of the parties, indications of credit deterioration and whether the markets in which the company transacts have experienced dislocation. At June 30, 2012, the fair value of derivatives was not materially affected by nonperformance risk. The company’s net positions with substantially all counterparties were liability positions.

 

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14. Variable Interest Entities

The determination of a VIE’s primary beneficiary is the enterprise that has both 1) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and 2) the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE.

TEC has entered into multiple PPAs with wholesale energy providers in Florida to ensure the ability to meet customer energy demand and to provide lower cost options in the meeting of this demand. These agreements range in size from 117 MW to 370 MW of available capacity, are with similar entities and contain similar provisions. Because some of these provisions provide for the transfer or sharing of a number of risks inherent in the generation of energy, these agreements meet the definition of being VIEs. These risks include: operating and maintenance, regulatory, credit, commodity/fuel and energy market risk. TEC has reviewed these risks and has determined that the owners of these entities have retained the majority of these risks over the expected life of the underlying generating assets, have the power to direct the most significant activities, the obligation or right to absorb losses or benefits and hence remain the primary beneficiaries. As a result, TEC is not required to consolidate any of these entities. TEC purchased $20.8 million and $43.3 million pursuant to PPAs for the three and six months ended June 30, 2012, respectively, and $26.2 million and $42.0 million for the three and six months ended June 30, 2011, respectively.

In one instance, TEC’s agreement with an entity for 370 MW of capacity was entered into prior to Dec. 31, 2003, the effective date of these standards. Under these standards, TEC is required to make an exhaustive effort to obtain sufficient information to determine if this entity is a VIE and which holder of the variable interests is the primary beneficiary. The owners of this entity are not willing to provide the information necessary to make these determinations, have no obligation to do so and the information is not available publicly. As a result, TEC is unable to determine if this entity is a VIE and, if so, which variable interest holder, if any, is the primary beneficiary. TEC has no obligation to this entity beyond the purchase of capacity; therefore, the maximum exposure for TEC is the obligation to pay for such capacity under terms of the PPA at rates that could be unfavorable to the wholesale market. TEC purchased $10.5 million and $25.2 million for the three and six months ended June 30, 2012, respectively, and $5.9 million and $13.0 million for the three and six months ended June 30, 2011, respectively, under this PPA.

The company does not provide any material financial or other support to any of the VIEs it is involved with, nor is the company under any obligation to absorb losses associated with these VIEs. In the normal course of business, the company’s involvement with these VIEs does not affect its Consolidated Condensed Balance Sheets, Statements of Income or Cash Flows.

15. Subsequent Events

Potentially Responsible Party Notification

In July 2012, TEC received an Enforcement Action Memorandum from the EPA in reference to the previously reported October 2010 EPA PRP notification. This memorandum outlines the remediation actions the EPA is requiring at the aforementioned site. The estimated costs to remediate the site are not expected to be material to the financial results or financial position of TEC or TECO Energy. TEC expects the remediation to be substantially completed in the third quarter of 2012. See Note 10 for more information.

Wholesale and Transmission Rate Cases

In July 2012, the FERC approved the uncontested settlement that Tampa Electric filed with its customers in its wholesale requirements rate case earlier this year. The approved settlement will take effect in August and Tampa Electric will refund its wholesale requirements’ customers the appropriate amounts given the terms of the settlement. See Note 3 for more information.

 

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Table of Contents

TAMPA ELECTRIC COMPANY

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 June 30, 2012 and Dec. 31, 2011, and the results of operations and cash flows for the periods ended June 30, 2012 and 2011. The results of operations for the three month and six month periods ended June 30, 2012 are not necessarily indicative of the results that can be expected for the entire fiscal year ending Dec. 31, 2012. References should be made to the explanatory notes affecting the consolidated financial statements contained in TEC’s Annual Report on Form 10-K for the year ended Dec. 31, 2011 and to the notes on pages 36 through 48 of this report.

INDEX TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

     Page
No.
 

Consolidated Condensed Balance Sheets, June 30, 2012 and Dec. 31, 2011

     29-30   

Consolidated Condensed Statements of Income and Comprehensive Income for the three month and six month periods ended June 30, 2012 and 2011

     31-32   

Consolidated Condensed Statements of Cash Flows for the six month periods ended June  30, 2012 and 2011

     33   

Notes to Consolidated Condensed Financial Statements

     34-45   

All other financial statement schedules have been omitted since they are not required, are inapplicable or the required information is presented in the financial statements or notes thereto.

 

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Table of Contents

TAMPA ELECTRIC COMPANY

Consolidated Condensed Balance Sheets

Unaudited

 

Assets

(millions)

   June 30,
2012
    Dec. 31,
2011
 

Property, plant and equipment

    

Utility plant in service

    

Electric

   $ 6,603.8      $ 6,516.0   

Gas

     1,140.8        1,113.5   

Construction work in progress

     271.9        239.2   
  

 

 

   

 

 

 

Utility plant in service, at original costs

     8,016.5        7,868.7   

Accumulated depreciation

     (2,318.8     (2,230.3
  

 

 

   

 

 

 
     5,697.7        5,638.4   

Other property, net

     6.5        6.5   
  

 

 

   

 

 

 

Total property, plant and equipment, net

     5,704.2        5,644.9   
  

 

 

   

 

 

 

Current assets

    

Cash and cash equivalents

     84.4        13.9   

Receivables, less allowance for uncollectibles of $1.2 and $1.3 at June 30, 2012 and Dec. 31, 2011, respectively

     241.9        216.8   

Inventories, at average cost

    

Fuel

     106.3        97.9   

Materials and supplies

     68.9        67.7   

Regulatory assets

     83.2        87.3   

Derivative assets

     0.4        0.0   

Taxes receivable

     0.0        14.6   

Deferred income taxes

     29.6        30.4   

Prepayments and other current assets

     18.7        10.5   
  

 

 

   

 

 

 

Total current assets

     633.4        539.1   
  

 

 

   

 

 

 

Deferred debits

    

Unamortized debt expense

     15.3        14.1   

Regulatory assets

     351.1        364.5   

Derivative assets

     0.1        0.0   

Other

     2.1        8.8   
  

 

 

   

 

 

 

Total deferred debits

     368.6        387.4   
  

 

 

   

 

 

 

Total assets

   $ 6,706.2      $ 6,571.4   
  

 

 

   

 

 

 

The accompanying notes are an integral part of the consolidated condensed financial statements.

 

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Table of Contents

TAMPA ELECTRIC COMPANY

Consolidated Condensed Balance Sheets - continued

Unaudited

 

Liabilities and Capital    June 30,     Dec. 31,  

(millions)

   2012     2011  

Capital

    

Common stock

   $ 1,852.4      $ 1,852.4   

Accumulated other comprehensive loss

     (9.1     (4.6

Retained earnings

     314.9        305.7   
  

 

 

   

 

 

 

Total capital

     2,158.2        2,153.5   

Long-term debt, less amount due within one year

     1,829.6        1,616.3   
  

 

 

   

 

 

 

Total capital

     3,987.8        3,769.8   
  

 

 

   

 

 

 

Current liabilities

    

Long-term debt due within one year

     256.4        374.9   

Accounts payable

     154.7        191.3   

Customer deposits

     161.4        159.5   

Regulatory liabilities

     83.4        86.2   

Derivative liabilities

     38.9        58.4   

Interest accrued

     29.1        25.6   

Taxes accrued

     46.4        11.9   

Other

     11.6        11.6   
  

 

 

   

 

 

 

Total current liabilities

     781.9        919.4   
  

 

 

   

 

 

 

Deferred credits

    

Deferred income taxes

     894.3        833.0   

Investment tax credits

     9.9        10.0   

Derivative liabilities

     2.6        7.4   

Regulatory liabilities

     654.1        647.8   

Other

     375.6        384.0   
  

 

 

   

 

 

 

Total deferred credits

     1,936.5        1,882.2   
  

 

 

   

 

 

 

Commitments and Contingencies (see Note 8)

    

Total liabilities and capital

   $ 6,706.2      $ 6,571.4   
  

 

 

   

 

 

 

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 June 30,  

(millions)

   2012     2011  

Revenues

    

Electric (includes franchise fees and gross receipts taxes of $23.4 in 2012 and $21.3 in 2011)

   $ 506.6      $ 546.4   

Gas (includes franchise fees and gross receipts taxes of $4.9 in 2012 and $5.8 in 2011)

     93.8        110.4   
  

 

 

   

 

 

 

Total revenues

     600.4        656.8   
  

 

 

   

 

 

 

Expenses

    

Operations

    

Fuel

     167.9        194.2   

Purchased power

     31.2        43.9   

Cost of natural gas sold

     36.5        54.2   

Other

     85.6        82.0   

Maintenance

     28.6        31.6   

Depreciation and amortization

     72.0        67.3   

Taxes, federal and state

     37.5        40.4   

Taxes, other than income

     46.9        44.9   
  

 

 

   

 

 

 

Total expenses

     506.2        558.5   
  

 

 

   

 

 

 

Income from operations

     94.2        98.3   
  

 

 

   

 

 

 

Other income

    

Allowance for other funds used during construction

     0.5        0.3   

Taxes, non-utility federal and state

     (0.1     (0.2

Other income, net

     0.4        0.7   
  

 

 

   

 

 

 

Total other income

     0.8        0.8   
  

 

 

   

 

 

 

Interest charges

    

Interest on long-term debt

     31.3        32.1   

Other interest

     3.0        2.8   

Allowance for borrowed funds used during construction

     (0.3     (0.1
  

 

 

   

 

 

 

Total interest charges

     34.0        34.8   
  

 

 

   

 

 

 

Net income

     61.0        64.3   
  

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

    

Net unrealized (loss) gain on cash flow hedges

     (4.7     0.2   
  

 

 

   

 

 

 

Total other comprehensive (loss) income, net of tax

     (4.7     0.2   
  

 

 

   

 

 

 

Comprehensive income

   $ 56.3      $ 64.5   
  

 

 

   

 

 

 

 

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TAMPA ELECTRIC COMPANY

Consolidated Condensed Statements of Income and Comprehensive Income

Unaudited

 

     Six months ended June 30,  

(millions)

   2012     2011  

Revenues

    

Electric (includes franchise fees and gross receipts taxes of $43.3 in 2012 and $40.6 in 2011)

   $ 953.2      $ 979.4   

Gas (includes franchise fees and gross receipts taxes of $11.1 in 2012 and $14.9 in 2011)

     203.7        264.7   
  

 

 

   

 

 

 

Total revenues

     1,156.9        1,244.1   
  

 

 

   

 

 

 

Expenses

    

Operations

    

Fuel

     325.4        339.1   

Purchased power

     59.4        71.1   

Cost of natural gas sold

     78.1        136.2   

Other

     168.7        160.2   

Maintenance

     57.6        63.1   

Depreciation and amortization

     142.0        134.0   

Taxes, federal and state

     63.1        69.5   

Taxes, other than income

     92.3        91.5   
  

 

 

   

 

 

 

Total expenses

     986.6        1,064.7   
  

 

 

   

 

 

 

Income from operations

     170.3        179.4   
  

 

 

   

 

 

 

Other income

    

Allowance for other funds used during construction

     0.9        0.6   

Taxes, non-utility federal and state

     (0.3     (0.4

Other income, net

     0.9        1.2   
  

 

 

   

 

 

 

Total other income

     1.5        1.4   
  

 

 

   

 

 

 

Interest charges

    

Interest on long-term debt

     63.0        64.8   

Other interest

     5.9        5.7   

Allowance for borrowed funds used during construction

     (0.5     (0.3
  

 

 

   

 

 

 

Total interest charges

     68.4        70.2   
  

 

 

   

 

 

 

Net income

     103.4        110.6   
  

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

    

Net unrealized (loss) gain on cash flow hedges

     (4.5     0.3   
  

 

 

   

 

 

 

Total other comprehensive (loss) income, net of tax

     (4.5     0.3   
  

 

 

   

 

 

 

Comprehensive income

   $ 98.9      $ 110.9   
  

 

 

   

 

 

 

 

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Table of Contents

TAMPA ELECTRIC COMPANY

Consolidated Condensed Statements of Cash Flows

Unaudited

 

     Six months ended June 30,  

(millions)

   2012     2011  

Cash flows from operating activities

    

Net income

   $ 103.4      $ 110.6   

Adjustments to reconcile net income to net cash from operating activities:

    

Depreciation and amortization

     142.0        134.0   

Deferred income taxes

     65.3        57.5   

Investment tax credits, net

     (0.1     (0.2

Allowance for funds used during construction

     (0.9     (0.6

Deferred recovery clauses

     (12.9     6.3   

Receivables, less allowance for uncollectibles

     (26.5     16.0   

Inventories

     (9.6     13.9   

Prepayments

     (8.2     (2.4

Taxes accrued

     49.1        39.3   

Interest accrued

     3.5        5.2   

Accounts payable

     (17.3     (38.3

Gain on sale of assets, pretax

     (0.2     (0.1

Other

     5.7        15.2   
  

 

 

   

 

 

 

Cash flows from operating activities

     293.3        356.4   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Capital expenditures

     (215.6     (166.3

Allowance for funds used during construction

     0.9        0.6   

Net proceeds from sale of assets

     0.3        2.6   
  

 

 

   

 

 

 

Cash flows used in investing activities

     (214.4     (163.1
  

 

 

   

 

 

 

Cash flows from financing activities

    

Proceeds from long-term debt issuance

     290.3        0.0   

Repayment of long-term debt/Purchase in lieu of redemption

     (204.5     (75.3

Net (decrease) increase in short-term debt

     0.0        (5.0

Dividends

     (94.2     (105.8
  

 

 

   

 

 

 

Cash flows used in financing activities

     (8.4     (186.1
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     70.5        7.2   

Cash and cash equivalents at beginning of period

     13.9        3.7   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 84.4      $ 10.9   
  

 

 

   

 

 

 

 

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TAMPA ELECTRIC COMPANY

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

UNAUDITED

1. Summary of Significant Accounting Policies

See TEC’s 2011 Annual Report on Form 10-K for a complete detailed 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, Inc. For the purposes of its consolidated financial reporting, TEC is comprised of the electric division, generally referred to as Tampa Electric, the natural gas division, generally referred to as PGS, and potentially the accounts of VIEs for which it is the primary beneficiary. TEC is considered to be the primary beneficiary of VIEs if it has both 1) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and 2) the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. For the periods presented, no VIEs have been consolidated (see Note 13).

All significant intercompany balances and intercompany transactions 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 June 30, 2012 and Dec. 31, 2011, and the results of operations and cash flows for the periods ended June 30, 2012 and 2011. The results of operations for the three and six month periods ended June 30, 2012 are not necessarily indicative of the results that can be expected for the entire fiscal year ending Dec. 31, 2012.

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 data 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.

Revenues

As of June 30, 2012 and Dec. 31, 2011, unbilled revenues of $54.1 million and $50.2 million, respectively, are included in the “Receivables” line item on the Consolidated Condensed Balance Sheets.

Accounting for Franchise Fees and Gross Receipts

The regulated utilities are allowed to recover certain costs on a dollar-per-dollar basis incurred from customers through prices 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 the regulated utilities are included as an expense on the Consolidated Condensed Statements of Income in “Taxes, other than income”. These amounts totaled $28.3 million and $54.4 million, respectively, for the three and six months ended June 30, 2012, compared to $27.1 million and $55.5 million, respectively, for the three and six months ended June 30, 2011.

Cash Flows Related to Derivatives and Hedging Activities

TEC classifies cash inflows and outflows related to derivative and hedging instruments in the appropriate cash flow sections associated with the item being hedged. For natural gas and ongoing interest rate swaps, the cash inflows and outflows are included in the operating section. For interest rate swaps that settle coincident with the debt issuance, the cash inflows and outflows are treated as premiums or discounts and included in the financing section of the Consolidated Condensed Statements of Cash Flows.

2. New Accounting Pronouncements

Offsetting Assets and Liabilities

In December 2011, the FASB issued guidance enhancing disclosures of financial instruments and derivative instruments that are offset in the statement of financial position or subject to enforceable master netting agreements. The guidance is effective for interim and annual reporting periods beginning on or after Jan. 1, 2013. TEC will adopt this guidance as required. It will have no effect on TEC’s results of operations, financial position or cash flows.

3. Regulatory

Tampa Electric’s and PGS’s retail businesses are regulated by the FPSC. Tampa Electric is also subject to regulation by the FERC under the PUHCA 2005. However, pursuant to a waiver granted in accordance with the FERC’s regulations, TECO Energy is not subject to certain accounting, record-keeping and reporting requirements prescribed by the FERC’s regulations under the PUHCA 2005. The operations of PGS are regulated by the FPSC separately from the operations of Tampa Electric. The FPSC has jurisdiction over rates, service, issuance of securities, safety, accounting and depreciation practices and other matters. In general, the FPSC sets rates at a level that allows utilities such as Tampa Electric and PGS to collect total revenues (revenue requirements) equal to their cost of providing service, plus a reasonable return on invested capital.

 

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Storm Damage Cost Recovery

Tampa Electric accrues $8.0 million annually to a FERC-authorized and FPSC-approved self-insured storm damage reserve. This reserve was created after Florida’s IOUs were unable to obtain transmission and distribution insurance coverage due to destructive acts of nature. Tampa Electric’s storm reserve was $47.6 million and $43.6 million as of June 30, 2012 and Dec. 31, 2011, respectively.

Wholesale and Transmission Rate Cases

In July 2012, the FERC approved the uncontested settlement that Tampa Electric filed with its customers in its wholesale requirements rate case earlier this year. The approved settlement will take effect in August and Tampa Electric will refund its wholesale requirements’ customers the appropriate amounts given the terms of the settlement. Tampa Electric awaits FERC approval for its uncontested transmission rate case settlement, which was filed with FERC also earlier this year. The wholesale requirements and transmission rate case settlements’ rates will not have a material impact on Tampa Electric’s results.

Regulatory Assets and Liabilities

Tampa Electric and PGS maintain their accounts in accordance with recognized policies of the FPSC. In addition, Tampa Electric maintains its accounts in accordance with recognized policies prescribed or permitted by the FERC.

Tampa Electric and PGS apply the accounting standards for regulated operations. Areas of applicability include: deferral of revenues under approved regulatory agreements; revenue recognition resulting from cost-recovery clauses that provide for monthly billing charges to reflect increases or decreases in fuel, purchased power, conservation and environmental costs; and the deferral of costs as regulatory assets to the period that the regulatory agency recognizes them when cost recovery is ordered over a period longer than a fiscal year.

Details of the regulatory assets and liabilities as of June 30, 2012 and Dec. 31, 2011 are presented in the following table:

 

Regulatory Assets and Liabilities

             

(millions)

   June 30,
2012
     Dec. 31,
2011
 

Regulatory assets:

     

Regulatory tax asset (1)

   $ 62.5       $ 63.6   
  

 

 

    

 

 

 

Other:

     

Cost-recovery clauses

     58.6         73.3   

Postretirement benefit asset

     245.2         252.4   

Deferred bond refinancing costs (2)

     9.1         11.1   

Environmental remediation

     37.7         30.5   

Competitive rate adjustment

     3.5         3.5   

Other

     17.7         17.4   
  

 

 

    

 

 

 

Total other regulatory assets

     371.8         388.2   
  

 

 

    

 

 

 

Total regulatory assets

     434.3         451.8   

Less: Current portion

     83.2         87.3   
  

 

 

    

 

 

 

Long-term regulatory assets

   $ 351.1       $ 364.5   
  

 

 

    

 

 

 

Regulatory liabilities:

     

Regulatory tax liability (1)

   $ 15.3       $ 16.0   
  

 

 

    

 

 

 

Other:

     

Cost-recovery clauses

     58.7         61.4   

Environmental remediation

     28.4         28.4   

Transmission and delivery storm reserve

     47.6         43.6   

Deferred gain on property sales (3)

     4.1         5.0   

Provision for stipulation and other

     1.0         0.8   

Accumulated reserve - cost of removal

     582.4         578.8   
  

 

 

    

 

 

 

Total other regulatory liabilities

     722.2         718.0   
  

 

 

    

 

 

 

Total regulatory liabilities

     737.5         734.0   

Less: Current portion

     83.4         86.2   
  

 

 

    

 

 

 

Long-term regulatory liabilities

   $ 654.1       $ 647.8   
  

 

 

    

 

 

 

 

(1) Primarily related to plant life and derivative positions.
(2) Amortized over the term of the related debt instruments.
(3) Amortized over a 4- or 5-year period with various ending dates.

 

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All regulatory assets are being recovered through the regulatory process. The following table further details the regulatory assets and the related recovery periods:

 

Regulatory Assets

             

(millions)

   June 30,
2012
     Dec 31,
2011
 

Clause recoverable (1)

   $ 62.1       $ 76.8   

Components of rate base (2)

     258.5         264.9   

Regulatory tax assets (3)

     62.5         63.6   

Capital structure and other (3)

     51.2         46.5   
  

 

 

    

 

 

 

Total

   $ 434.3       $ 451.8   
  

 

 

    

 

 

 

 

(1) To be recovered through cost-recovery clauses approved by the FPSC on a dollar-for-dollar basis in the next year.
(2) Primarily reflects allowed working capital, which is included in rate base and earns a rate of return as permitted by the FPSC.
(3) “Regulatory tax assets” and “Capital structure and other” regulatory assets have a recoverable period longer than a fiscal year and are recognized over the period authorized by the regulatory agency. Also included are unamortized loan costs, which are amortized over the life of the related debt instruments. See footnotes 1 and 2 in the prior table for additional information.

4. Income Taxes

TEC is included in the filing of a consolidated federal income tax return with TECO Energy and its affiliates. TEC’s income tax expense is based upon a separate return computation. TEC’s effective tax rates for the three and six months ended June 30, 2012 and 2011 differ from the statutory rate principally due to state income taxes, the domestic activity production deduction and the AFUDC-equity.

The IRS concluded its examination of the company’s 2010 consolidated federal income tax return during 2011. The U.S. federal statute of limitations remains open for the year 2008 and forward. Years 2011 and 2012 are currently under examination by the IRS under the Compliance Assurance Program. TECO Energy does not expect the settlement of current IRS examinations to significantly change the total amount of unrecognized tax benefits by the end of 2012. Florida’s statute of limitations is three years from the filing of an income tax return. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. Years still open to examination by Florida’s tax authorities include 2008 and forward.

5. Employee Postretirement Benefits

TEC is a participant in the comprehensive retirement plans of TECO Energy. Amounts allocable to all participants of the TECO Energy retirement plans are found in Note 5, Employee Postretirement Benefits, in the TECO Energy, Inc. Notes to Consolidated Condensed Financial Statements. TEC’s portion of the net pension expense for the three months ended June 30, 2012 and 2011, respectively, was $5.0 million and $3.1 million for pension benefits, and $3.1 million and $3.2 million for other postretirement benefits. TEC’s portion of the net pension expense for the six months ended June 30, 2012 and 2011, respectively, was $9.2 million and $6.7 million for pension benefits, and $6.2 million and $6.7 million for other postretirement benefits.

For the fiscal 2012 plan year, TECO Energy assumed a long-term EROA of 7.50% and a discount rate of 4.797% for pension benefits under its qualified pension plan, and a discount rate of 4.744% for its other postretirement benefits as of their Jan. 1, 2012 measurement dates. Additionally, TECO Energy made contributions of $20.1 million to its pension plan in the six months ended June 30, 2012. TEC’s portion of the contributions was $15.7 million.

Included in the benefit expenses discussed above, for the three and six months ended June 30, 2012, TEC reclassed $3.8 million and $7.3 million, respectively, of unamortized transition obligation, prior service cost and actuarial losses from regulatory assets to net income.

In July 2012, the President signed into law the Moving Ahead for Progress in the 21st Century Act (MAP-21). MAP-21 provides funding relief for pension plan sponsors by stabilizing discount rates used in calculating the required minimum pension contributions and increasing PBGC premium rates to be paid by plan sponsors. TEC is currently evaluating the impact MAP-21 will have on its pension contributions and on future PBGC premiums, and expects the required minimum pension contributions to be lower than the levels previously projected.

 

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6. Short-Term Debt

At June 30, 2012 and Dec. 31, 2011, the following credit facilities and related borrowings existed:

 

Credit Facilities

                                         
     June 30, 2012      Dec. 31, 2011  

(millions)

   Credit
Facilities
     Borrowings
Outstanding  (1)
     Letters
of Credit
Outstanding
     Credit
Facilities
     Borrowings
Outstanding  (1)
     Letters
of Credit
Outstanding
 

Tampa Electric Company:

                 

5-year facility (2)

   $ 325.0       $ 0.0       $ 0.7       $ 325.0       $ 0.0       $ 0.7   

1-year accounts receivable facility

     150.0         0.0         0.0         150.0         0.0         0.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 475.0       $ 0.0       $ 0.7