SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Amendment No. 1
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-8180
TECO ENERGY, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-2052286
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
702 North Franklin Street, Tampa, Florida 33602
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (813) 228-4111
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Number of shares outstanding of each of the issuer's classes of common stock,
as of the latest practicable date (October 31, 1999):
Common Stock, $1 Par Value 129,448,057
FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
In the opinion of management, the unaudited condensed consolidated
financial statements include all adjustments necessary to present fairly the
results for the three- and nine-month periods ended Sept. 30, 1999 and 1998.
Reference should be made to the explanatory notes affecting the income and
balance sheet accounts contained in TECO Energy, Inc.'s Annual Report on Form
10-K for the year ended Dec. 31, 1998 and to the notes on pages 7 through 17
of this report.
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FORM 10-Q
CONSOLIDATED BALANCE SHEETS
(in millions)
Sept. 30, Dec. 31,
1999 1998
unaudited audited
Assets
Current assets
Cash and cash equivalents $ 9.9 $ 16.9
Receivables, less allowance
for uncollectibles 266.7 224.6
Inventories, at average cost
Fuel 77.7 93.2
Materials and supplies 68.2 64.1
Prepayments 15.8 15.1
438.3 413.9
Property, plant and equipment,
at original cost
Utility plant in service
Electric 4,032.4 3,991.3
Gas 571.4 518.5
Construction work in progress 160.3 101.1
Other property 1,027.2 989.6
5,791.3 5,600.5
Accumulated depreciation (2,402.0) (2,292.9)
3,389.3 3,307.6
Other assets
Other investments 101.6 77.0
Investment in unconsolidated affiliates 164.0 141.2
Deferred income taxes 104.7 99.1
Deferred charges and other assets 155.7 140.5
526.0 457.8
$ 4,353.6 $ 4,179.3
Liabilities and Capital
Current liabilities
Long-term debt due within one year $ 35.1 $ 36.0
Notes payable 469.3 319.0
Accounts payable 166.7 208.1
Customer deposits 79.7 78.3
Interest accrued 27.0 14.2
Taxes accrued 89.9 5.1
867.7 660.7
Deferred income taxes 482.0 499.9
Investment tax credits 43.0 46.7
Regulatory liability-tax related 32.8 34.0
Other deferred credits 140.1 150.6
Long-term debt, less amount due
within one year 1,268.8 1,279.6
Common equity
Common equity - 400 million shares
authorized, $1 par value - outstanding
131,463,457 in 1999(after deducting
619,100 shares in Treasury, at a cost of
$13.4 million) and 131,955,939 in 1998 1,576.4 1,569.2
Unearned compensation (57.2) (61.4)
$ 4,353.6 $ 4,179.3
The accompanying notes are an integral part of the consolidated financial
statements.
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FORM 10-Q
CONSOLIDATED STATEMENTS OF INCOME
unaudited
(in millions)
For the three months ended Sept. 30, 1999 1998
Revenues $555.9 $525.3
Expenses
Operation 292.3 270.8
Maintenance 30.5 29.3
Depreciation 56.9 58.1
Taxes, other than income 37.4 38.2
417.1 396.4
Income from operations 138.8 128.9
Other income (expense)
Other income (expense), net (13.7) 0.4
Income before interest and income taxes 125.1 129.3
Interest expense 37.4 25.8
Income before provision for income taxes 87.7 103.5
Provision for income taxes 31.8 32.3
Net income from continuing operations 55.9 71.2
Net Loss from discontinued operations, net
of income tax benefit of $.4 million
for 1999 and $.3 million for 1998 (.8) (.4)
Gain (loss) on disposal of discontinued
operations, net of income tax benefit
of $7.8 million for 1999 (12.9) --
Net income $ 42.2 $ 70.8
Average common shares outstanding - basic 131.9 131.8
Average common shares outstanding - diluted 132.0 132.2
Earnings per average common share outstanding:
Basic and diluted-
From continuing operations $ 0.42 $ .54
Net income $ 0.32 $ .54
Dividend per common share outstanding $0.325 $ 0.31
The accompanying notes are an integral part of the consolidated financial
statements.
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FORM 10-Q
CONSOLIDATED STATEMENTS OF INCOME
unaudited
(in millions)
For the nine months ended Sept. 30, 1999 1998
Revenues $1,493.0 $1,481.8
Expenses
Operation 784.5 771.8
Maintenance 90.8 89.3
Non-recurring charges -- 23.2
Depreciation 169.2 172.4
Taxes, other than income 112.7 113.1
1,157.2 1,169.8
Income from operations 335.8 312.0
Other income (expense)
Other income (expense), net (11.4) (2.8)
Income before interest and income taxes 324.4 309.2
Interest expense 91.1 77.7
Income before provision for income taxes 233.3 231.5
Provision for income taxes 75.1 69.7
Net income from continuing operations 158.2 161.8
Net loss from discontinued operations, net
of income tax benefit of $1.4 million
for 1999 and $1.5 million for 1998 (2.5) (2.3)
Gain (loss) on disposal of discontinued
operations, net of income tax benefit of
$7.5 million for 1999 and net of income
tax expense of $12.9 million for 1998 (12.3) 22.2
Net income $ 143.4 $ 181.7
Average common shares outstanding - basic 132.0 131.7
Average common shares outstanding - diluted 132.2 132.2
Earnings per average common share outstanding:
Basic -
From continuing operations $1.20 $1.23
Net income $1.09 $1.38
Diluted -
From continuing operations $1.19 $1.22
Net income $1.08 $1.37
Dividend per common share outstanding $0.96 $0.915
The accompanying notes are an integral part of the consolidated financial
statements.
5
FORM 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS
unaudited
(in millions)
For the nine months ended Sept. 30, 1999 1998
Cash flows from operating activities
Net income $143.4 $181.7
Adjustments to reconcile net income
to net cash:
Depreciation 169.2 172.4
Deferred income taxes (24.5) 7.1
Investment tax credits, net (3.7) (3.7)
Amortization of unearned compensation 6.6 5.4
(Gain) loss on disposal of discontinued
operations, pretax 19.8 (37.5)
Deferred revenue 9.0 (31.7)
Deferred recovery clause (29.7) 13.4
Non-recurring charges, pretax 17.6 25.9
Receivables, less allowance
for uncollectibles (41.0) (16.9)
Inventories 10.3 3.4
Taxes accrued 84.8 44.1
Interest accrued 3.9 10.9
Accounts payable (55.8) (16.6)
Other (12.8) 14.5
297.1 372.4
Cash flows from investing activities
Capital expenditures (252.6) (174.5)
Net proceeds from sale of assets -- 39.2
Investment in unconsolidated affiliates (19.8) (111.5)
Other non-current investments (30.4) (1.2)
(302.8) 248.0)
Cash flows from financing activities
Common stock .1 3.5
Purchase of Treasury Stock (13.4) --
Proceeds from long-term debt -- 201.2
Repayment of long-term debt (11.6) (13.3)
Net borrowings under credit lines -- 60.0
Net increase (decrease) in short-term debt 150.3 (244.4)
Dividends (126.7) (120.5)
(1.3) (113.5)
Net increase (decrease) in cash and
cash equivalents (7.0) 10.9
Cash and cash equivalents
at beginning of period 16.9 10.6
Cash and cash equivalents at end of period $ 9.9 $ 21.5
The accompanying notes are an integral part of the consolidated financial
statements.
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FORM 10-Q
NOTES TO FINANCIAL STATEMENTS
A. Certain prior year amounts have been reclassified to conform to
the current year presentation.
B. On Nov. 4, 1999, TECO Energy completed the sale of the assets of
TeCom for $1.0 million in cash to Invensys Intelligent Building
Systems, a division of The Barber-Coleman Company. The company
decided to exit the automated energy management systems business
because it lacked the distribution channels necessary to effectively
reach the markets for its products. The total reported loss on the
disposal of discontinued operations, net of taxes for the three-
month period ended Sept. 30, 1999 was $12.9 million, or 10 cents per
share including an estimate of activities at TeCom after the Sept. 1,
1999 measurement date. TeCom's operating results for the quarter up
until the measurement date are now reported in net income (loss) from
discontinued operations.
A summary of the net assets of TeCom is as follows:
Sept. 30, Dec. 31,
(millions) 1999 1998
Inventories, at average cost $ .2 $ 1.3
Other current assets .7 .6
Net property, plant and equipment .2 1.1
Capitalized development costs -- 14.6
Other assets -- .4
Total liabilities (2.7) (6.5)
Net Assets $ (1.6) $ 11.5
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FORM 10-Q
Total revenues from discontinued operations were $.3 million and
$1.2 million, respectively, for the three- and nine-month periods
ended Sept. 30, 1999, and $.2 million and $2.0 million, respectively,
for the three- and nine-month periods ended Sept. 30, 1998. After-
tax losses from discontinued operations were $.8 million and $2.5
million, respectively, for the three- and nine-months ended Sept. 30,
1999 and $.4 million and $2.3 million, respectively, for the three-
and nine-months ended Sept. 30, 1998.
C. As reported in the company's Annual Report on Form 10-K for the
year ended Dec. 31, 1998, TECO Oil & Gas, Inc., the company's
conventional oil and gas subsidiary, sold its offshore assets to
American Resources Offshore, Inc. (ARO) in March 1998 for $57.7
million, consisting of $39.2 million in cash and a subordinated note
(the "ARO Note") in the principal amount of $18.5 million. TECO
Energy reported a net after-tax gain of $22.2 million from the
disposal of discontinued operations in the first quarter of 1998.
At Dec. 31, 1998, TECO Energy wrote off the recorded value of
all assets associated with the discontinued oil and gas operation,
including the $18.5-million ARO Note and associated accrued interest
income and the remaining on-shore assets. The net after-tax gain
reported from disposal of discontinued operations, including this
write-off, for full-year 1998 was $6.1 million.
In March 1999, TECO Oil & Gas sold the ARO Note to a third party
for $500,000 in cash and in a separate transaction ARO agreed to
assume disputed joint billing payments of approximately $425,000. A
$.6 million after-tax gain from these transactions was recognized in
the first quarter of 1999 as a gain on disposal of discontinued
operations.
There were no revenues from the discontinued oil and gas
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FORM 10-Q
operations for the three- and nine-month periods ended Sept. 30, 1999
and 1998.
D. TECO Energy and its subsidiaries have made certain commitments
in connection with their continuing capital expenditure program and
estimate that capital expenditures for continuing operations during
1999 will be as follows:
millions
Tampa Electric Company
Electric division $228
Peoples Gas System 75
TECO Transport Corporation 29
TECO Coal Corporation 18
TECO Power Services 47
Other diversified businesses 9
$406
TECO Power Services - investment
in unconsolidated affiliates $ 51
E. Revenues reflected the reversals of $2.8 million of revenues
previously deferred for future refund to customers for the three-
month period ended Sept. 30, 1999, and the deferral for refund to
customers of $1.1 million in the nine-month period ended Sept. 30,
1999 at Tampa Electric under its current regulatory agreement.
Revenues for the three- and nine- month periods ended Sept. 30, 1998
i n c l u d ed recognition of $11.8 million and $31.7 million,
respectively, of previously deferred revenues, which were partially
offset by a stipulated temporary base rate reduction totaling $6.1
million and $15.6 million, in the same three- and nine-month periods
ended in 1998. In accordance with the agreement, the temporary base
rate reduction and recognition of previously deferred revenues ended
in December 1998.
F. The reconciliation of TECO Energy's basic and diluted earnings
per share is shown below:
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FORM 10-Q
Three Months Ended Sept. 30, 1999 1998
(millions, except per share amounts)
Numerator (Basic and Diluted)
Net income from continuing operations $55.9 $71.2
Net income $42.2 $70.8
Denominator
Average number of shares outstanding-basic 131.9 131.8
Plus: incremental shares for assumed
conversions: Stock options at end
of period 1.2 3.1
Less: Treasury shares which could
be purchased (1.1) (2.7)
Average number of shares outstanding-diluted 132.0 132.2
Earnings per share from continuing operations
Basic and diluted $ .42 $ .54
Earnings per share
Basic and diluted $ .32 $ .54
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FORM 10-Q
Nine Months Ended Sept. 30, 1999 1998
(millions, except per share amounts)
Numerator (Basic and Diluted)
Net income from continuing operations $158.2 $161.8
Net income $143.4 $181.7
Denominator
Average number of shares outstanding-basic 132.0 131.7
Plus: incremental shares for assumed
conversions: Stock options at end
of period 2.3 3.2
Less: Treasury shares which could
be purchased (2.1) (2.7)
Average number of shares outstanding-diluted 132.2 132.2
Earnings per share from continuing operations
Basic $ 1.20 $ 1.23
Diluted $ 1.19 $ 1.22
Earnings per share
Basic $ 1.09 $ 1.38
Diluted $ 1.08 $ 1.37
G. In the third quarter of 1999, the company recognized certain
one-time charges totaling $16.1 million, after tax, or $.12 per
share.
A one-time charge of $6.4 million after-tax, or $.05 per share,
was recorded at Tampa Electric based on Florida Public Service
Commission (FPSC) audits of Tampa Electric's 1997 and 1998 earnings,
which among other things, limited its equity ratio to 58.7 percent, a
decrease of 91 basis points and 224 basis points from 1997's and
1998's ratios, respectively. The Florida Industrial Power Users Group
(FIPUG) has filed a petition with the FPSC protesting the decisions
for both 1997 and 1998. Tampa Electric responded to FIPUG's protest
by filing its own protest of the FPSC's equity ratio decision. The
company expects the FPSC staff to provide a schedule for hearing
dates for the protests soon.
After-tax charges totaling $6.1 million, or $.04 per share, were
a l so recognized this quarter reflecting corporate income tax
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FORM 10-Q
provisions and settlements related to prior years' tax returns. These
adjustments were recorded at Tampa Electric ($3.8 million), TECO
Investments ($4.3 million) and at the TECO Energy corporate level
($2.0 million benefit).
A charge of $3.6 million after-tax, or $.03 per share, was also
recorded in the third quarter of 1999 to adjust the carrying value of
certain investments in leveraged aircraft leases to reflect lower
anticipated residual values.
H. As discussed in its Annual Report on Form 10-K for the year
ended Dec. 31, 1998, in the first quarter of 1998, the company
recognized one-time charges at TECO Coal and Tampa Electric Company
totaling $15.2 million, after tax, or $.11 per share.
The one-time charges in 1998 reflected asset value adjustments
at TECO Coal's Gatliff mining facilities relating to the expiration
of the coal supply contract with Tampa Electric in 1999 ($8.9 million
after tax) and a $5.9-million after-tax charge at Tampa Electric
associated with ongoing actions to mitigate the effects of a 1997
FPSC ruling.
I. In late September 1999, TECO Energy announced a program to
repurchase up to $150 million of its outstanding common stock.
Shares acquired will constitute treasury shares. In the third
quarter, the company acquired 619,100 shares of its outstanding
common stock at a cost of $13.4 million; the average per share price
was $21.68. Earnings per share results were not affected due to the
timing of the purchases.
J. The management of TECO Energy determined its reportable segments
based on each subsidiaries' contribution of revenues, operating
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FORM 10-Q
income and net income. All significant intercompany transactions are
eliminated in the consolidated financial statements of TECO Energy
but are included in determining reportable segments.
Contributions by business segment (millions)
Operating Net
Revenues(1) Income(1) Income(1)
Three Months Ended Sept. 30, 1999
Tampa Electric Company
Electric division(2)(3)(8) $ 358.6 $ 96.7 $ 53.0
Peoples Gas System 57.2 6.4 2.5
415.8 103.1 55.5
TECO Transport(4) 65.1 12.2 6.8
TECO Coal(5) 60.5 5.5 4.2
TECO Power Services(6)(7) 32.2 3.7 3.7
Other diversified businesses(6) 28.1 8.5 6.9
601.7 133.0 77.1
Other and eliminations(8) (53.7) (2.1) (5.1)
548.0 130.9 72.0
One-time charges(8)(9) 7.9 7.9 (16.1)
TECO Energy consolidated $ 555.9 $ 138.8 $ 55.9
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FORM 10-Q
Operating Net
Revenues(1) Income(1) Income(1)
Three Months Ended Sept. 30, 1998
Tampa Electric Company
Electric division(2)(3) $ 353.7 $ 94.6 $ 51.4
Peoples Gas System 49.6 3.2 .5
403.3 97.8 51.9
TECO Transport(4) 61.0 11.9 6.5
TECO Coal(5)(8) 62.5 8.3 6.1
TECO Power Services(6)(7) 29.2 2.6 2.6
Other diversified
businesses(6)(8) 28.9 9.8 7.7
584.9 130.4 74.8
Other and eliminations (59.6) (1.5) (3.6)
TECO Energy consolidated $ 525.3 $ 128.9 $ 71.2
Nine Months Ended Sept. 30, 1999
Tampa Electric Company
Electric division(2)(3)(8) $ 923.8 $ 220.0 $ 115.1
Peoples Gas System 185.1 29.7 13.3
1,108.9 249.7 128.4
TECO Transport(4) 183.5 35.4 19.9
TECO Coal(5) 172.9 15.7 11.7
TECO Power Services (6)(7) 84.9 12.1 10.4
Other diversified
businesses(6) 74.6 21.7 18.5
1,624.8 334.6 188.9
Other and eliminations (6)(8) (139.7) (6.7) (14.6)
1,485.1 327.9 174.3
One-time charges(8)(9) 7.9 7.9 (16.1)
TECO Energy consolidated $1,493.0 $ 335.8 $ 158.2
Nine Months Ended Sept. 30, 1998
Tampa Electric Company
Electric division(2)(3)(8) $ 948.0 $ 231.0 $ 118.5
Peoples Gas System 188.2 23.3 9.4
1,136.2 254.3 127.9
TECO Transport(4) 171.4 30.5 16.8
TECO Coal(5)(8) 173.6 17.7 13.0
TECO Power Services(6)(7) 73.1 9.2 6.8
Other diversified
businesses(6)(8) 84.2 28.7 23.1
1,638.5 340.4 187.6
Other and eliminations (156.7) (5.2) (10.6)
1,481.8 335.2 177.0
One-time charges(8) -- (23.2) (15.2)
TECO Energy consolidated $1,481.8 $ 312.0 $ 161.8
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FORM 10-Q
(1) From continuing operations.
(2) The electric division revenues reflect the reversal of $2.8 million
of previous deferrals for refund to customers for the three- month
period ended Sept. 30, 1999. It deferred $1.1 million for the nine-
months ended Sept. 30, 1999. The electric division recognized
revenues previously deferred of $11.8 million and $31.7 million,
respectively, for the three- and nine-months ended Sept. 30, 1998.
See Note E on pages 9 and 10.
(3) Revenues from sales to affiliates were $8.3 million and $19.5 million
respectively, for the three- and nine-months ended Sept. 30, 1999,
and $7.8 million and $18.5 million respectively, for the three- and
nine-months ended Sept. 30, 1998.
(4) Revenues from sales to affiliates were $26.5 million and $73.2
million, respectively, for the three- and nine-months ended Sept. 30,
1999, and $26.7 million and $84.5 million, respectively, for the
three- and nine-months ended Sept. 30, 1998.
(5) Revenues from sales to affiliates were $6.2 million and $16.7
million, respectively, for the three- and nine-months ended Sept. 30,
1999, and $12.1 million and $28.4 million, respectively, for the
three- and nine-months ended Sept. 30, 1998 .
(6) O p e r a ting income includes items that are reclassified for
consolidated financial statement purposes. The principal items are
the non-conventional fuels tax credit related to coalbed methane
production ($4.4 million and $12.9 million, respectively, for the
three- and nine-months ended Sept. 30, 1999, and $4.6 million and
$14.1 million, respectively, for the three- and nine-months ended
Sept. 30, 1998) and interest expense on the limited-recourse debt
related to independent power operations ($2.7 million and $7.9
million, respectively, for the three- and nine-months ended Sept. 30,
1999, and $3.3 million and $10.2 million, respectively, for the
three- and nine-months ended Sept. 30, 1998), both of which are
included in operating income for the segments. In the Consolidated
Statements of Income, the tax credit is part of the provision for
income taxes and the interest is part of interest expense.
(7) Revenues from sales to affiliates were $12.6 million and $29.8
million, respectively, for the three- and nine-months ended Sept. 30,
1999, and $13.1 million and $24.9 million, respectively, for the
three- and nine-months ended Sept. 30, 1998.
(8) Revenues, operating income and net income exclude impacts of the one-
time charges discussed in Notes G and H on pages 11 and 12.
(9) The one-time charge for income tax settlements and provisions
recognized at Tampa Electric included a $7.9 million benefit to
revenues.
K. A s previously reported, the United States Environmental
Protection Agency (EPA) has been conducting an investigation under
the Clean Air Act of coal-fired electric power generators to
determine compliance with environmental permitting requirements
associated with repairs, maintenance, modifications and changes in
operation made to facilities that were in commercial operation prior
to 1977 and were "grandfathered" with respect to such requirements.
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FORM 10-Q
The investigation has focused on whether new source review and
performance standards should be applied to the modifications and
changes and whether the best available control technology was or
should have been used. On November 3, 1999, the EPA issued a notice
of violation to Tampa Electric Company and several other electric
utilities around the country and caused a civil action to be filed
against each of these utilities in federal court. The notice of
violation and the complaint in the civil action both allege that
Tampa Electric made modifications to its Big Bend and Gannon
generating plants without obtaining permits and installing the best
available pollution control equipment as required by the Prevention
of Significant Deterioration provisions of the Clean Air Act. The
complaint seeks (i) to require Tampa Electric to install additional
c o ntrol technology at the Big Bend and Gannon plants, (ii)
reimbursement of legal fees and (iii) penalties of up to $27,500 per
day for each alleged violation. The installation of such control
technology would involve significant capital expenditures.
Notwithstanding the EPA's allegations, Tampa Electric continues
to believe that it has repaired, maintained, modified and operated
its facilities in compliance with all applicable environmental
requirements. Tampa Electric has been in discussions with the EPA
for several months and expects to continue these discussions in an
effort to resolve the matter. The outcome of the civil and
administrative actions and the discussions with the EPA and the
approach to addressing the issues raised by the EPA are uncertain at
this time.
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FORM 10-Q
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking
statements which are subject to the inherent uncertainties in
predicting future results and conditions. Certain factors that could
cause actual results to differ materially from those projected in
these forward-looking statements include the following: general
economic conditions, particularly those in Tampa Electric's service
area affecting energy sales; weather variations affecting energy sales
and operating costs; potential competitive changes in the electric and
gas industries, particularly in the area of retail competition;
regulatory actions affecting Tampa Electric and Peoples Gas System;
commodity price changes affecting the competitive positions of Tampa
Electric, Peoples Gas System and the Peoples Gas Company as well as
margins at TECO Coalbed Methane and TECO Coal; business growth
opportunities as they may relate to the company's ability to achieve
its previously announced long-term growth strategy; international
risks as they may relate to TECO Power Services' ability to continue
to operate and invest successfully in its international projects; and
changes in and compliance with environmental regulations that may
impose additional costs or curtail some activities, including possible
mitigation actions relating to pending EPA proceedings. These factors
a r e discussed more fully under "Investment Considerations" in
registrant's Annual Report on Form 10-K for the year ended Dec. 31,
1998, and reference is made thereto.
Results of Operations
Three months ended Sept. 30, 1999:
Net income from continuing operations for the quarter ended Sept.
30, 1999 was $55.9 million or $.42 per share compared with $71.2
million or $.54 per share for the same period last year. Excluding
one-time charges of $16.1 million recorded in 1999's third quarter,
earnings from continuing operations were $72.0 million, or $.54 per
share, level with last year. One-time charges are discussed in Note G
on pages 11 and 12. These per share results were not affected by the
company's stock repurchase program that began in late September (See
Note I on pages 12 and 13).
Consolidated operating income from continuing operations was
$138.8 million, or $130.9 million, prior to the impact of one-time
charges, compared with last year's operating income of $130.4 million.
Net income of $72.0 million, excluding one-time charges, decreased 3.7
percent from third quarter 1998 primarily due to lower results at TECO
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FORM 10-Q
Coal and TECO Properties that were not offset by improved results at
Tampa Electric, Peoples Gas and TECO Power Services.
Tampa Electric Company - Electric division
T a mpa Electric's operating income for the third quarter,
excluding the impact of one-time charges, was $96.7 million on
revenues of $358.6 million, compared with $94.6 million on revenues of
$353.7 million for the same period last year. In addition, as
discussed in Note E on pages 9 and 10, quarterly revenue comparisons
reflect recognition of $11.8 million of previously deferred revenues
in 1998 (partially offset by a temporary base rate reduction of $6.1
million) that were not available in 1999 under the current regulatory
agreement. The company showed improved results due to revenue growth
and effective cost control. Customer growth remained strong at 2.4
percent for the quarter, which helped drive revenues higher than last
year's despite the recognition of deferred revenues in 1998.
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FORM 10-Q
Peoples Gas System
Peoples Gas System reported operating income of $6.4 million and
revenues of $57.2 million for the quarter compared with operating
income of $3.2 million and revenues of $49.6 million last year.
Quarterly results reflect increased sales volumes and strong customer
growth of 3.9 percent. Operations and maintenance expenses were lower
in 1999 due to cost reductions from last year's restructuring.
Diversified Companies-Operating Results
TECO Transport reported operating income of $12.2 million and
revenues of $65.1 million in the third quarter, compared with
operating income of $11.9 million and revenues of $61.0 million last
year. Results at TECO Transport reflected a strong increase in grain
shipments and higher northbound volumes, partially offset by lower
movements to Tampa Electric in response to lower coal usage during the
first half of the year. In 1998, delays and temporary tow
r e s trictions associated with flooding along the river system
unfavorably affected earnings. Weakness in the export coal and
petroleum coke markets has continued through the third quarter of
1999.
TECO Coal achieved third quarter operating income of $5.5
million, down from $8.3 million last year, with revenues of $60.5
million compared with $62.5 million last year. Higher third-party coal
sales and continued improvements in unit production costs partially
offset the lower revenues from the expected reductions in Tampa
Electric volumes.
19
FORM 10-Q
TECO Power Services' (TPS) operating income for the quarter was
$3.7 million, compared with $2.6 million last year, and revenues were
$32.2 million compared with last year's $29.2 million. Improvements
for the quarter reflected contributions from the company's recent
g r o wth initiatives and the capitalization of interest during
construction on the company's equity investment in the San Jose Power
Station.
TECO Energy's other diversified companies recorded operating
income of $8.5 million for the third quarter on revenues of $28.1
million. This compares with operating income of $9.8 million and
revenues of $28.9 million for the same period last year. These
amounts have been restated to exclude the results of TeCom. TECO
Properties' operating income was $2.1 million lower in 1999's third
quarter due to the sale of a real estate investment in 1998; no sales
were recognized in 1999's third quarter. Results at TECO Coalbed
Methane were even with last year for the quarter; improved gas prices
along with lower operating expenses offset lower volumes.
Other
In the third quarter of 1999, Tampa Electric recorded a $10.0
million pretax one-time charge in Other Income (Expense) related to
FPSC audits of years 1997 and 1998 which, among other things, limited
its equity ratio to 58.7 percent (see Note G on pages 11 and 12). The
FIPUG and Tampa Electric have each filed protests with the FPSC, and
are waiting for a schedule for hearing dates. TECO Energy also
recorded a $6.1 million pretax one-time charge in Other Income
(Expense) to adjust the carrying value of the leveraged lease
portfolio. (see Note G on pages 11 and 12).
One-time tax adjustments and settlements, as discussed in Note G
on pages 11 and 12, resulted in a third quarter pretax charge to
20
FORM 10-Q
interest expense of $9.0 million.
The effective income tax rate on net income from continuing
operations for the three-month period ended Sept. 30, 1999 was 36.3
percent compared to 31.1 percent last year. This increase was
primarily due to the corporate income tax provisions and settlements
recognized this quarter.
On Nov. 4, 1999, TECO Energy completed the sale of the assets of
TeCom to Invensys Intelligent Building Systems for $1.0 million in
cash. Total reported loss for the disposal of discontinued operations
for the three-months ended Sept. 30, 1999, net of taxes was $12.9
million. (See Note B on pages 7 and 8.)
Nine months ended Sept. 30, 1999:
Year-to-date net income from continuing operations was $158.2
million, compared with $161.8 million last year. Excluding the after-
tax one-time charges previously discussed of $16.1 million in 1999 and
$15.2 million in 1998, year-to-date income from continuing operations
was $174.3 million, compared with last year's $177.0 million. One-
time charges are discussed in Notes G and H on pages 11 and 12.
Including the loss for the discontinued TeCom operations, 1999 year-
to-date net income was $143.4 million, compared with $181.7 million
last year which included a net gain on the sale of offshore oil & gas
assets. Discontinued operations are discussed in Notes B and C on
pages 7 and 8.
For the first nine months of 1999, net income from continuing
operations of $174.3 million, excluding one-time charges, was 2
percent lower than last year's $177.0 million. Improvements at TECO
Transport, TECO Power Services and Peoples Gas System were offset by
the lack of deferred revenues available for recognition in 1999 under
the current regulatory agreement and lower off-system sales at Tampa
21
FORM 10-Q
Electric, by lower prices and volumes at TECO Coalbed Methane and by
higher financing costs associated with higher debt levels. Results
have been restated to include TeCom in discontinued operations.
C o n s olidated operating income from continuing operations
excluding non-recurring charges was $327.9 million, down 2 percent
from 1998's first nine months operating income of $335.2 million.
Tampa Electric Company - Electric division
Tampa Electric's year-to-date operating income, excluding the
one-time charges discussed in Note G on pages 11 and 12, was $220.0
million, compared with $231.0 million in 1998. Revenues were $923.8
million, compared with $948.0 million last year; 1998 revenues
included recognition of previously deferred revenues of $31.7 million,
partially offset by a temporary base rate reduction of $15.6 million.
Off-system sales were lower this year, primarily the result of warmer
winter weather in the first quarter compared to 1998.
On April 8, 1999, an explosion at Tampa Electric's Gannon Station
Unit Six, a 375-megawatt generator that was off line for scheduled
spring maintenance, resulted in damage to Unit Six, the shut down of
the other five units at the Station and injuries to 45 employees and
contractors, including three fatalities. The units at Gannon Station
that were affected by the accident have returned to service. The
estimated $5 million cost of replacement fuel and purchased power are
expected to be recovered through Tampa Electric's fuel and purchased
power clause, with little impact on customer rates. Although the
financial impact to Tampa Electric has not been fully determined, the
costs resulting from the accident are expected to be substantially
covered by insurance. The impact on current year operation and
maintenance expenses is estimated to be $1-2 million. The U.S.
O c c upational Safety and Health Administration (OSHA) recently
22
FORM 10-Q
concluded its safety investigation at the Gannon Station. OSHA found
no willful violations, and Tampa Electric agreed not to contest OSHA's
citations. Tampa Electric paid $30,075 in fines to OSHA largely
related to the explosion at the Gannon plant. This amount included a
reduction of 10 percent due to the company's excellent safety history.
Peoples Gas System
Year-to-date results at Peoples Gas System were 28 percent higher
with operating income of $29.7 million compared with $23.3 million
last year. Year-to-date customer growth of 3.2 percent partially
offset the effects of mild winter weather for the year, with revenues
totaling $185.1 million this year, compared with $188.2 million in
1998. Operating expense savings from last year's restructuring also
favorably impacted current year results.
Diversified Companies-Operating Results
TECO Transport recorded year-to-date operating income of $35.4
million and revenues of $183.5 million, compared with $30.5 million
and $171.4 million in 1998. Results at TECO Transport reflected a
strong increase in grain shipments and higher northbound volumes,
partially offset by lower movements to Tampa Electric in response to
lower coal usage and the corresponding adjustment in inventory. In
1998, delays and temporary tow restrictions associated with flooding
along the river system unfavorably affected earnings. Weakness in the
export coal and petroleum coke markets has continued.
TECO Coal's year-to-date operating income was $15.7 million on
revenues of $172.9 million compared with operating income of $17.7
million on revenues of $173.6 million in 1998. Operating income for
1998 excluded a one-time pretax charge of $13.6 million for asset
valuation adjustments. Operating income in 1999 reflected higher
third-party coal sales and continued improvements in unit production
23
FORM 10-Q
costs, offset by lower revenues from the expected reductions in Tampa
Electric volumes.
TECO Power Services' year-to-date operating income was $12.1
million, up 24 percent from last year's $9.2 million, with revenues of
$84.9 million compared to $73.1 million for 1998. Improvements
reflected contributions from the company's recent investments and the
capitalization of interest during construction on the company's equity
investment in the San Jose Power Station.
TECO Energy's other diversified companies recorded operating
income and revenues of $21.7 million and $74.6 million, compared with
$28.7 million and $84.2 million last year. TECO Coalbed Methane's
operating income was down for the nine-month period by $4.9 million,
as a result of a 6.5 percent decline in production and average gas
prices that were almost 12 percent below last year. Operating income
at TECO Properties was $2.7 million lower than in the prior year,
primarily because of the sale of real estate investments in 1998.
Other
During 1999, Tampa Electric recorded a $10.0 million pretax one-
time charge in Other Income (Expense) related to FPSC audits of years
1997 and 1998, as previously discussed in the third quarter results.
The parent company also recorded a $6.1 million pretax one-time charge
in Other Income (Expense) to adjust the carrying value of the
leveraged lease portfolio. (see Note G on pages 11 and 12).
One-time tax adjustments and settlements, as discussed in Note G
on pages 11 and 12, resulted in a pretax charge to interest expense of
$9.0 million.
Discontinued Operations
On Nov. 4, 1999, TECO Energy completed the sale of the assets of
TeCom to Invensys Intelligent Building Systems for $1.0 million in
24
FORM 10-Q
cash. Total reported loss on the disposal of discontinued operations,
net of taxes was $12.9 million, for the nine-months ended Sept. 30,
1999. (See Note B on pages 7 and 8.)
In March 1999, TECO Oil & Gas sold its subordinated note from ARO
to a third party for $500,000 in cash. In a separate transaction, ARO
agreed to assume disputed joint billing payments of approximately
$425,000. The net gain of $.6 million recorded as discontinued
operations in 1999's first quarter related to these two transactions
(See Note C on page 8).
Liquidity, Capital Resources and Changes in Financial Condition
In September 1999, TECO Energy announced a program for the
repurchase of up to $150 million of its outstanding common stock.
During the nine-month period ended Sept. 30, 1999, the company
acquired 619,100 shares of its outstanding common stock at a cost of
$13.4 million. (See Note I on pages 12 and 13.)
TECO Power Services loaned $25 million to Energia Global
International, Inc. (EGI) as described in TECO Energy's report on Form
10-Q for the quarter ended March 31, 1999. This loan is reflected in
Other Investments on the Balance Sheet.
In November 1999, TM Power Ventures L.L.C., a joint venture
between TECO Power Services Corporation and Mosbacher Power Partners
L.P., executed an agreement with NCP of Virginia, L.L.C. to build, own
and operate a 312-megawatt electric generating facility on the
Delmarva Peninsula in Virginia. The generating facility is scheduled
to be on-line in two phases; 135 megawatts in service by June 2000 and
the remaining capacity by June 2001. TPS anticipates an equity
investment in this project of $60-$70 million. The remainder of the
estimated $175 million project cost is expected to be financed with
equity from the other partners and non-recourse debt.
25
FORM 10-Q
Recent Developments
A s p reviously reported, the United States Environmental
Protection Agency (EPA) has been conducting an investigation under the
Clean Air Act of coal-fired electric power generators to determine
compliance with environmental permitting requirements associated with
repairs, maintenance, modifications and changes in operation made to
facilities that were in commercial operation prior to 1977 and were
"grandfathered" with respect to such requirements. The investigation
has focused on whether new source review and performance standards
should be applied to the modifications and changes and whether the
best available control technology was or should have been used. On
November 3, 1999, the EPA issued a notice of violation to Tampa
Electric Company and several other electric utilities around the
country and caused a civil action to be filed against each of these
utilities in federal court. The notice of violation and the complaint
in the civil action both allege that Tampa Electric made modifications
to its Big Bend and Gannon generating plants without obtaining permits
and installing the best available pollution control equipment as
required by the Prevention of Significant Deterioration provisions of
the Clean Air Act. The complaint seeks (i) to require Tampa Electric
to install additional control technology at the Big Bend and Gannon
plants, (ii) reimbursement of legal fees and (iii) penalties of up to
$27,500 per day for each alleged violation. The installation of such
control technology would involve significant capital expenditures.
26
FORM 10-Q
Notwithstanding the EPA's allegations, Tampa Electric continues
to believe that it has repaired, maintained, modified and operated its
facilities in compliance with all applicable environmental
requirements. Tampa Electric has been in discussions with the EPA for
several months and expects to continue these discussions in an effort
to resolve the matter. The outcome of the civil and administrative
actions and the discussions with the EPA and the approach to
addressing the issues raised by the EPA are uncertain at this time.
Year 2000 Computer Systems Readiness:
Background
There is a global awareness that many computer programs use only
two digits to refer to a year and, therefore, may not correctly
recognize and process date information beyond the year 1999. This is
referred to as the "Year 2000" issue.
The Year 2000 issue relates to two primary areas of TECO Energy's
operations: the critical business systems (such as the financial
reporting, procurement, payroll and customer information and billing
systems) and the control systems (such as those used in the operation
of electric generation and transmission facilities, gas and electric
distribution facilities and coal mining facilities).
TECO Energy began work on Year 2000 readiness in August 1995. The
project has been segmented into the following phases: awareness,
inventory, assessment, renovation, testing and contingency planning.
The project addresses readiness at Tampa Electric, Peoples Gas System
and the diversified companies.
Readiness
TECO Energy has completed its assessment of all hardware,
software and embedded systems and has substantially completed its
27
FORM 10-Q
renovation, testing and contingency planning efforts. TECO Energy's
critical systems (those required for reliable operations) are now
believed to be ready for the Year 2000, i.e. renovated and tested to
the extent necessary. Set forth below is a description of readiness
by functional area.
Critical Business Systems
Critical business systems, including mainframe hardware which was
replaced in 1998, have been renovated and tested and are believed to
be ready for the Year 2000. To assist in assuring readiness, the
renovation work and the integrated system testing were handled by
separate outside consulting firms.
Control Systems
Tampa Electric believes that its electric generation,
transmission and distribution systems, including energy management and
control and related embedded systems, are now ready for the Year 2000.
Tampa Electric retained industry specialty firms to assist in
identifying areas where renovations were needed in the embedded
systems associated with generator unit controls and with making these
renovations. A number of tests have been successfully completed on
these systems, including future date scenarios. Critical systems in
the other parts of TECO Energy, including Peoples Gas System, have
also been renovated and tested and are believed to be ready for
reliable operation into the Year 2000.
Coordination with Others
TECO Energy has surveyed its largest suppliers and customers with
respect to their Year 2000 readiness, including all providers of
technology supplies and services. As part of its Year 2000 project,
28
FORM 10-Q
the company is coordinating with its suppliers and customers based on
their responses to these surveys. At the request of the U. S.
Department of Energy (DOE), the North American Electric Reliability
Council (NERC) coordinated monthly readiness monitoring and reporting,
information sharing and contingency planning for the industry. The
final quarterly report was published in early August 1999. The NERC
activity addresses all aspects of the interconnected electric grid.
The aggregated results are being reported to the DOE and other
regulatory bodies in the U.S., Canada and Mexico. The Natural Gas
Council, through the American Gas Association, coordinated similar
processes within the gas industry, reporting to the Federal Energy
Regulatory Commission (FERC). Tampa Electric and Peoples Gas System
are active participants in these industry groups.
Costs
The total cost of Year 2000 remediation is expected to remain
under $10 million, which includes contracted resources, purchases and
internal labor. An estimated breakdown of project costs is as follows:
Tampa Electric - $6.5 million, Peoples Gas System - $2.5 million, and
the diversified companies - $.5 million. Approximately 40 percent of
these costs are attributable to testing expenses, and the remainder
consists primarily of renovation or replacement costs. Through Sept.
30, 1999, approximately $8.9 million had been spent.
Risks
TECO Energy believes the most reasonably likely worst case
scenario would be the occurrence of isolated outages of limited
duration for utility customers, similar to those occurring during the
utilities' storm season. The utilities have assessed the risk of this
scenario, and believe that their contingency efforts, primarily the
29
FORM 10-Q
ability to bypass automated controls, would mitigate the effect of
such a scenario.
Contingency Plans
T E C O Energy has prepared contingency plans for critical
functions. The Tampa Electric and Peoples Gas System plans have been
filed with the FPSC and are being coordinated with local emergency
planning organizations. The plans provide for an incident management
center; designated on-site and on-call response teams for critical
systems and customer communication functions; appropriate inventory of
critical materials and supplies; verification of computer-generated
utility service orders; adjusted maintenance schedules; and alternate
means of communications, both internally and with other industry
participants.
On Sept. 9, 1999, NERC facilitated a nationwide contingency plan
drill which Tampa Electric participated in as part of the Florida
Reliability Coordinating Council. The drill provided an opportunity
to test the company's ability to plan, equip and deploy personnel to
critical locations; test various means of communication and establish
manual data gathering and analysis procedures. No significant
problems were encountered. TECO Energy will continue to test less
critical systems and refine contingency plans throughout the remainder
of this year.
Forward-Looking Statements
The status of TECO Energy's Year 2000 efforts are based upon
management's best estimates. There can be no assurance that these
estimates will prove to be accurate, and actual results could differ
materially from those currently projected. Specific factors that could
cause such differences include, but are not limited to, the failure to
30
FORM 10-Q
identify, assess, remediate and test all relevant computer codes and
embedded technology and similar uncertainties.
Accounting Standards
Accounting for Derivative Instruments and Hedging
In 1998, the Financial Accounting Standards Board (FASB) issued
Financial Accounting Standard (FAS) 133, Accounting for Derivative
Instruments and Hedging. This standard was initially to be effective
for fiscal years beginning after June 15, 1999. In July 1999, the FASB
delayed the effective date of this pronouncement until fiscal years
beginning after June 15, 2000. TECO Energy does not use derivatives or
other financial products for speculative purposes. The company is in
t h e process of identifying derivative instruments and hedging
activities within its businesses, as defined by the Standard, to
d e termined to what extent FAS 133 will impact its financial
statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
TECO Energy is exposed to changes in interest rates primarily as
a result of its borrowing activities. A hypothetical increase in
interest rates of 10 percent of TECO Energy's weighted average
interest rate on its variable rate debt would not have a significant
impact on TECO Energy's pretax earnings over the next fiscal year.
A hypothetical 10-percent decrease in interest rates would not
have a significant impact on the estimated fair value of TECO Energy's
long-term debt at Sept. 30, 1999.
From time to time, TECO Energy enters into futures, swaps and
option contracts to moderate its exposure to interest rate changes.
The benefits of these arrangements are at risk only in the event of
31
FORM 10-Q
non-performance by the other party to the agreement, which the company
does not anticipate. TECO Energy does not use derivatives or other
financial products for speculative purposes.
32
FORM 10-Q
Commodity Price Risk
Currently, at Tampa Electric and Peoples Gas, commodity price
increases due to changes in market conditions for fuel, purchased
power and natural gas are recovered through cost recovery mechanisms,
with no effect on earnings.
TECO Coalbed Methane is exposed to commodity price risk through
the sale of natural gas. A 10-percent change in the market price of
natural gas would not have a significant impact on TECO Energy's
earnings.
TECO Coal is exposed to commodity price risk through coal sales.
A 10-percent change in the market price of coal would not have a
significant impact on TECO Energy's earnings.
From time to time, TECO Energy enters into futures, swaps and
options contracts to hedge the selling price for its physical
production at TECO Coalbed Methane, to limit exposure to gas price
increases at both the regulated natural gas utility and unregulated
propane business, and to limit exposure to fuel price increases at
TECO Transport. The benefits of these financial arrangements are at
risk only in the event of non-performance by the other party to the
agreement, which the company does not anticipate. TECO Energy does not
use derivatives or other financial products for speculative purposes.
33
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On November 3, 1999, a civil action was filed on behalf of the
United States Environmental Protection Agency against Tampa Electric
Company in the United States District Court for the Middle District of
Florida. The suit alleges that Tampa Electric made modifications to
its Big Bend and Gannon generating plants without obtaining permits
and installing the best available pollution control equipment as
required by the Prevention of Significant Deterioration provisions of
the Clean Air Act. See the discussion under Liquidity, Capital
Resources and Changes in Financial Condition - Recent Developments
above.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
12 Ratio of earnings to fixed charges
27 Financial data schedule - nine months ended
September 30, 1999. (EDGAR filing only)
(b) Reports on Form 8-K
The registrant filed a Current Report on Form 8-K dated September
16, 1999 reporting under "Item 5. Other Events" the announcement
of a stock repurchase program and the providing of guidance on
financial results.
34
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
TECO ENERGY, INC.
(Registrant)
Date: November 15, 1999 By: /s/G. L. Gillette
G. L. Gillette
Vice President - Finance and
Chief Financial Officer
(Principal Financial Officer)
36
FORM 10-Q
INDEX TO EXHIBITS
Exhibit No. Description of Exhibits Page No.
12 Ratio of earnings to fixed charges 39
27 Financial data schedule - nine months ended --
September 30, 1999. (EDGAR filing only)
37
Exhibit 12
TECO Energy, Inc.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the company's ratio of earnings to fixed
charges for the periods indicated.
Nine Months Twelve Months
Ended Ended Year Ended Dec. 31,
Sept 30, 1999 Sept 30, 1999 1998 1997 1996 1995 1994
3.49x(1) 3.38x(2) 3.67x(3) 3.77x(4) 3.72x 3.50x 3.06x(5)
For the purposes of calculating these ratios, earnings consist of
income from continuing operations before income taxes and fixed charges.
Fixed charges consist of interest on indebtedness, amortization of debt
premium, the interest component of rentals and preferred stock dividend
requirements.
(1) Includes the effect of one-time pretax charges totaling $17.6 million
recorded at Tampa Electric, TECO Investments and TECO Energy. The
effect of these charges was to reduce the ratio of earning to fixed
charges. Had these charges been excluded from the calculation, the
ratio of earnings to fixed charges would have been 3.97x for the nine-
month period ended Sept. 30, 1999.
(2) Includes the effect of one-time pretax charges totaling $17.6 million
in 1999 as discussed above, and $7.3 million associated with a write-
off at Tampa Electric in 1998. The effect of these charges was to
reduce the ratio of earnings to fixed charges. Had these charges been
excluded from the calculation, the ratio of earnings to fixed charges
would have been 3.80x for the twelve-month period ended Sept. 30,
1999.
(3) Includes the effect of one-time pretax charges totaling $30.5 million
associated with write-offs at TECO Coal and Tampa Electric, and $.6
million pretax of merger-related costs. Had these charges been
excluded from the calculation, the ratio of earnings to fixed charges
would have been 3.95x for the year ended Dec. 31, 1998.
(4) Includes a $2.6-million pretax charge for all transactions associated
with the mergers completed in June 1997. The effect of this charge was
to reduce the ratio of earnings to fixed charges. Had this charge been
excluded from the calculation, the ratio of earnings to fixed charges
would have been 3.79x for the year ended Dec. 31, 1997.
(5) Includes the effect of a $25-million pretax restructuring charge. The
effect of this charge was to reduce the ratio of earnings to fixed
charges. Had this one-time charge been excluded from the calculation,
the ratio of earnings to fixed charges would have been 3.30x for the
year ended Dec. 31, 1994.
39
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