10-Q 1 ck0000096271-10q_20170630.htm 10-Q ck0000096271-10q_20170630.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended June 30, 2017

OR

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

For the transition period from                      to                     

 

 

Commission

File No

 

Exact name of each registrant as specified in its charter, state of

incorporation, address of principal executive offices, telephone number

 

I.R.S. Employer

Identification Number

1-5007

 

TAMPA ELECTRIC COMPANY

 

59-0475140

 

 

(a Florida corporation)

TECO Plaza

702 N. Franklin Street

Tampa, Florida 33602

(813) 228-1111

 

 

 

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

Indicate by check mark whether the registrant has submitted electronically 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      NO  

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

  

Emerging growth company

 

If an emerging growth company, indicate by check mark whether Tampa Electric Company has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

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

As of August 9, 2017, 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.

 

 

 

 

 

 


ACRONYMS

Acronyms 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 receipts

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

AMT

 

alternative minimum tax

AOCI

 

accumulated other comprehensive income

APBO

 

accumulated postretirement benefit obligation

ARO

 

asset retirement obligation

BACT

 

Best Available Control Technology

CAIR

 

Clean Air Interstate Rule

CCRs

 

coal combustion residuals

CMO

 

collateralized mortgage obligation

CNG

 

compressed natural gas

CPI

 

consumer price index

CSAPR

 

Cross State Air Pollution Rule

CO2

 

carbon dioxide

CT

 

combustion turbine

ECRC

 

environmental cost recovery clause

EEI

 

Edison Electric Institute

EGWP

 

Employee Group Waiver Plan

Emera

 

Emera Inc., a geographically diverse energy and services company headquartered in Nova Scotia, Canada

EPA

 

U.S. Environmental Protection Agency

ERISA

 

Employee Retirement Income Security Act

EROA

 

expected return on plan assets

EUSHI

 

Emera US Holdings Inc., a wholly owned subsidiary of Emera, which is the sole shareholder of TECO Energy’s common stock

FASB

 

Financial Accounting Standards Board

FDEP

 

Florida Department of Environmental Protection

FERC

 

Federal Energy Regulatory Commission

FPSC

 

Florida Public Service Commission

GHG

 

greenhouse gas(es)

HAFTA

 

Highway and Transportation Funding Act

HCIDA

 

Hillsborough County Industrial Development Authority

IGCC

 

integrated gasification combined-cycle

IOU

 

investor owned utility

IRS

 

Internal Revenue Service

ISDA

 

International Swaps and Derivatives Association

ITCs

 

investment tax credits

KW

 

kilowatt(s)

MAP-21

 

Moving Ahead for Progress in the 21st Century Act

MBS

 

mortgage-backed securities

MD&A

 

the section of this report entitled Management’s Discussion and Analysis of Financial Condition and Results of Operations

Merger

 

Merger of Merger Sub Company with and into TECO Energy, with TECO Energy as the surviving corporation

MGP

 

manufactured gas plant

Merger Agreement

 

Agreement and Plan of Merger dated September 4, 2015, by and among TECO Energy, Emera and Merger Sub Company

Merger Sub Company

 

Emera US Inc., a Florida corporation

MMA

 

The Medicare Prescription Drug, Improvement and Modernization Act of 2003

MMBTU

 

one million British Thermal Units

MRV

 

market-related value

MW

 

megawatt(s)

MWH

 

megawatt-hour(s)

2


Term

  

Meaning

NAESB

 

North American Energy Standards Board

NAV

 

net asset value

NMGC

 

New Mexico Gas Company, Inc.

Note

 

Note to consolidated financial statements

NOx

 

nitrogen oxide

NPNS

 

normal purchase normal sale

NYMEX

 

New York Mercantile Exchange

O&M expenses

 

operations and maintenance expenses

OCI

 

other comprehensive income

OPC

 

Office of Public Counsel

OPEB

 

other postretirement benefits

OTC

 

over-the-counter

PBGC

 

Pension Benefit Guarantee Corporation

PBO

 

postretirement benefit obligation

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

R&D

 

research and development

REIT

 

real estate investment trust

RFP

 

request for proposal

ROE

 

return on common equity

Regulatory ROE

 

return on common equity as determined for regulatory purposes

ROW

 

rights-of-way

S&P

 

Standard and Poor’s

SCR

 

selective catalytic reduction

SEC

 

U.S. Securities and Exchange Commission

SO2

 

sulfur dioxide

SERP

 

Supplemental Executive Retirement Plan

STIF

 

short-term investment fund

Tampa Electric

 

Tampa Electric, the electric division of Tampa Electric Company

TEC

 

Tampa Electric Company

TECO Energy

 

TECO Energy, Inc., the direct parent company of Tampa Electric Company

TSI

 

TECO Services, Inc.

U.S. GAAP

 

generally accepted accounting principles in the United States

VIE

 

variable interest entity

WRERA

 

The Worker, Retiree and Employer Recovery Act of 2008

 

 

 

 

 

 

3


 

TAMPA ELECTRIC COMPANY

Consolidated Condensed Balance Sheets

Unaudited

 

Assets

June 30,

 

 

December 31,

 

(millions)

2017

 

 

2016

 

Property, plant and equipment

 

 

 

 

 

 

 

Utility plant

 

 

 

 

 

 

 

Electric

$

8,374

 

 

$

7,624

 

Gas

 

1,547

 

 

 

1,503

 

Construction work in progress

 

250

 

 

 

892

 

Utility plant, at original costs

 

10,171

 

 

 

10,019

 

Accumulated depreciation

 

(2,891

)

 

 

(2,826

)

Utility plant, net

 

7,280

 

 

 

7,193

 

Other property

 

11

 

 

 

10

 

Total property, plant and equipment, net

 

7,291

 

 

 

7,203

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

15

 

 

 

10

 

Receivables, less allowance for uncollectibles of $1 at both June 30, 2017 and December 31, 2016

 

236

 

 

 

206

 

Due from affiliates

 

3

 

 

 

7

 

Inventories, at average cost

 

 

 

 

 

 

 

Fuel

 

84

 

 

 

77

 

Materials and supplies

 

95

 

 

 

86

 

Derivative assets

 

1

 

 

 

15

 

Regulatory assets

 

26

 

 

 

28

 

Prepayments and other current assets

 

26

 

 

 

21

 

Total current assets

 

486

 

 

 

450

 

 

 

 

 

 

 

 

 

Deferred debits

 

 

 

 

 

 

 

Regulatory assets

 

400

 

 

 

393

 

Other

 

37

 

 

 

37

 

Total deferred debits

 

437

 

 

 

430

 

Total assets

$

8,214

 

 

$

8,083

 

 

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

 

4


 

 TAMPA ELECTRIC COMPANY

Consolidated Condensed Balance Sheets - continued

Unaudited

 

Liabilities and Capitalization

June 30,

 

 

December 31,

 

(millions)

2017

 

 

2016

 

Capitalization

 

 

 

 

 

 

 

Common stock

$

2,513

 

 

$

2,456

 

Accumulated other comprehensive loss

 

(2

)

 

 

(3

)

Retained earnings

 

344

 

 

 

311

 

Total capital

 

2,855

 

 

 

2,764

 

Long-term debt

 

1,859

 

 

 

2,163

 

Total capitalization

 

4,714

 

 

 

4,927

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Long term debt due within one year

 

304

 

 

 

0

 

Notes payable

 

298

 

 

 

170

 

Accounts payable

 

158

 

 

 

262

 

Due to affiliates

 

11

 

 

 

25

 

Customer deposits

 

135

 

 

 

146

 

Regulatory liabilities

 

87

 

 

 

154

 

Accrued interest

 

18

 

 

 

16

 

Accrued taxes

 

49

 

 

 

12

 

Other

 

10

 

 

 

11

 

Total current liabilities

 

1,070

 

 

 

796

 

 

 

 

 

 

 

 

 

Deferred credits

 

 

 

 

 

 

 

Deferred income taxes

 

1,476

 

 

 

1,407

 

Investment tax credits

 

22

 

 

 

11

 

Regulatory liabilities

 

575

 

 

 

591

 

Deferred credits and other liabilities

 

357

 

 

 

351

 

Total deferred credits

 

2,430

 

 

 

2,360

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (see Note 8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and capitalization

$

8,214

 

 

$

8,083

 

 

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

 

5


 

TAMPA ELECTRIC COMPANY

Consolidated Condensed Statements of Income and Comprehensive Income

Unaudited

 

 

Three months ended June 30,

 

(millions)

2017

 

 

2016

 

Revenues

 

 

 

 

 

 

 

Electric

$

542

 

 

$

499

 

Gas

 

102

 

 

 

100

 

Total revenues

 

644

 

 

 

599

 

Expenses

 

 

 

 

 

 

 

Fuel

 

165

 

 

 

138

 

Purchased power

 

8

 

 

 

28

 

Cost of natural gas sold

 

35

 

 

 

36

 

Operations and maintenance

 

131

 

 

 

133

 

Depreciation and amortization

 

88

 

 

 

81

 

Taxes, other than income

 

49

 

 

 

47

 

Total expenses

 

476

 

 

 

463

 

Income from operations

 

168

 

 

 

136

 

Other income

 

 

 

 

 

 

 

Allowance for equity funds used during construction

 

0

 

 

 

6

 

Other income, net

 

2

 

 

 

1

 

Total other income

 

2

 

 

 

7

 

Interest charges

 

 

 

 

 

 

 

Interest on long-term debt

 

28

 

 

 

28

 

Other interest

 

2

 

 

 

1

 

Allowance for borrowed funds used during construction

 

0

 

 

 

(3

)

Total interest charges

 

30

 

 

 

26

 

Income before provision for income taxes

 

140

 

 

 

117

 

Provision for income taxes

 

54

 

 

 

41

 

Net income

$

86

 

 

$

76

 

Comprehensive income

$

86

 

 

$

76

 

 

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

6


 

TAMPA ELECTRIC COMPANY

Consolidated Condensed Statements of Income and Comprehensive Income

Unaudited

 

 

Six months ended June 30,

 

(millions)

2017

 

 

2016

 

Revenues

 

 

 

 

 

 

 

Electric

$

984

 

 

$

923

 

Gas

 

213

 

 

 

227

 

Total revenues

 

1,197

 

 

 

1,150

 

Expenses

 

 

 

 

 

 

 

Fuel

 

296

 

 

 

253

 

Purchased power

 

15

 

 

 

42

 

Cost of natural gas sold

 

71

 

 

 

86

 

Operations and maintenance

 

259

 

 

 

254

 

Depreciation and amortization

 

173

 

 

 

162

 

Taxes, other than income

 

98

 

 

 

96

 

Total expenses

 

912

 

 

 

893

 

Income from operations

 

285

 

 

 

257

 

Other income

 

 

 

 

 

 

 

Allowance for equity funds used during construction

 

1

 

 

 

12

 

Other income, net

 

4

 

 

 

2

 

Total other income

 

5

 

 

 

14

 

Interest charges

 

 

 

 

 

 

 

Interest on long-term debt

 

56

 

 

 

57

 

Interest expense

 

4

 

 

 

2

 

Allowance for borrowed funds used during construction

 

(1

)

 

 

(5

)

Total interest charges

 

59

 

 

 

54

 

Income before provision for income taxes

 

231

 

 

 

217

 

Provision for income taxes

 

89

 

 

 

78

 

Net income

$

142

 

 

$

139

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

Gain on cash flow hedges

 

1

 

 

 

0

 

Total other comprehensive income, net of tax

 

1

 

 

 

0

 

Comprehensive income

$

143

 

 

$

139

 

 

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

 

7


 

TAMPA ELECTRIC COMPANY

Consolidated Condensed Statements of Cash Flows

Unaudited

 

 

Six months ended June 30,

 

(millions)

2017

 

 

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income

$

142

 

 

$

139

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

173

 

 

 

162

 

Deferred income taxes and investment tax credits

 

87

 

 

 

37

 

Allowance for equity funds used during construction

 

(1

)

 

 

(12

)

Deferred recovery clauses

 

(52

)

 

 

41

 

Receivables, less allowance for uncollectibles

 

(23

)

 

 

(8

)

Inventories

 

(16

)

 

 

1

 

Taxes accrued

 

27

 

 

 

120

 

Accounts payable

 

(88

)

 

 

4

 

Other

 

(21

)

 

 

(21

)

Cash flows from operating activities

 

228

 

 

 

463

 

Cash flows from investing activities

 

 

 

 

 

 

 

Capital expenditures

 

(299

)

 

 

(354

)

Net proceeds from sale of assets

 

0

 

 

 

9

 

Cash flows used in investing activities

 

(299

)

 

 

(345

)

Cash flows from financing activities

 

 

 

 

 

 

 

Common stock

 

58

 

 

 

90

 

Repayment of long-term debt

 

0

 

 

 

(83

)

Net increase in short-term debt

 

128

 

 

 

62

 

Dividends

 

(109

)

 

 

(182

)

Other financing activities

 

(1

)

 

 

0

 

Cash flows from (used in) financing activities

 

76

 

 

 

(113

)

Net increase in cash and cash equivalents

 

5

 

 

 

5

 

Cash and cash equivalents at beginning of period

 

10

 

 

 

9

 

Cash and cash equivalents at end of period

$

15

 

 

$

14

 

Supplemental disclosure of non-cash activities

 

 

 

 

 

 

 

Change in accrued capital expenditures

$

(24

)

 

$

(14

)

 

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

 

 

8


 

TAMPA ELECTRIC COMPANY

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

UNAUDITED

 

1. Summary of Significant Accounting Policies

See TEC’s Annual Report on Form 10-K for the year ended December 31, 2016 for a complete discussion of accounting policies. The significant accounting policies for TEC include:

Principles of Consolidation and Basis of Presentation

For the purposes of its consolidated financial reporting, TEC is comprised of the electric division, referred to as Tampa Electric, and the natural gas division, referred to as PGS.

Intercompany balances and transactions within the divisions have been eliminated in consolidation. In the opinion of management, the unaudited consolidated condensed financial statements include all adjustments that are of a recurring nature and necessary to state fairly the financial position of TEC as of June 30, 2017 and December 31, 2016, and the results of operations and cash flows for the periods ended June 30, 2017 and 2016. The results of operations for the three and six months ended June 30, 2017 are not necessarily indicative of the results that can be expected for the entire fiscal year ending December 31, 2017.

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.

TEC is a wholly owned subsidiary of TECO Energy. On July 1, 2016, TECO Energy and Emera completed the Merger contemplated by the Merger Agreement entered into on September 4, 2015. Therefore, TEC continues to be a wholly owned subsidiary of TECO Energy and became an indirect wholly owned subsidiary of Emera as of July 1, 2016. The acquisition method of accounting was not pushed down to TECO Energy or its subsidiaries, including TEC.

Revenues

As of June 30, 2017 and December 31, 2016, unbilled revenues of $66 million and $54 million, respectively, are included in the “Receivables” line item on the Consolidated Condensed Balance Sheets.

Accounting for Franchise Fees and Gross Receipts

Tampa Electric and PGS are allowed to recover certain costs from customers on a dollar-per-dollar basis through rates approved by the FPSC. The amounts included in customers’ bills for franchise fees and gross receipt taxes are included as revenues on the Consolidated Condensed Statements of Income. Franchise fees and gross receipt taxes payable by Tampa Electric and PGS are included as an expense on the Consolidated Condensed Statements of Income in “Taxes, other than income”. These amounts totaled $29 million and $54 million for the three and six months ended June 30, 2017, respectively, and $29 million and $57 million for the three and six months ended June 30, 2016, respectively.

 

 

2. New Accounting Pronouncements

Future Accounting Pronouncements

TEC considers the applicability and impact of all Accounting Standard Updates (ASU) issued by the FASB.  The ASUs that have been issued, but that are not yet effective, are consistent with those disclosed in TEC’s Annual Report on Form 10-K for the year ended December 31, 2016, with the exception of the items noted below.

Revenue from Contracts with Customers

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which creates a new, principle-based revenue recognition framework, which has been codified as ASC Topic 606. The FASB issued amendments to ASC Topic 606 during 2016 to clarify certain implementation guidance and to reflect narrow scope improvements and practical expedients. The guidance will require additional disclosures regarding the nature, amount, timing and uncertainty of revenue and related cash flows arising from contracts with customers. This guidance will be effective for annual reporting periods, including interim reporting within those

9


 

periods, beginning after December 15, 2017 and will allow for either full retrospective adoption or modified retrospective adoption. TEC will adopt this guidance effective January 1, 2018. 

 

TEC implemented a revenue recognition project plan in 2016. In the first quarter of 2017, TEC concluded that the accounting for contributions in aid of construction will be out of the scope of the new standard. In the second quarter of 2017, TEC completed an analysis of material regulated revenue streams and collectibility risk and concluded that there will be no material changes on adoption of this standard. TEC will adopt the standard using the modified retrospective approach. TEC continues to evaluate the impact of this standard, including financial statement disclosure requirements. TEC continues to monitor the assessment of ASC Topic 606 by the AICPA Power and Utilities Revenue Recognition Task Force for developments.

 

Leases

In February 2016, the FASB issued ASU 2016-02, Leases. The standard, codified as ASC Topic 842, increases transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet for leases with terms of more than 12 months. Under the existing guidance, operating leases are not recorded as lease assets and lease liabilities on the balance sheet. The effect of leases on the Consolidated Statements of Income and the Consolidated Statements of Cash Flows is largely unchanged. The guidance will require additional disclosures regarding key information about leasing arrangements. This guidance is effective for annual reporting periods, including interim reporting within those periods, beginning after December 15, 2018. Early adoption is permitted, and is required to be applied using a modified retrospective approach. TEC is currently evaluating the impact of adoption of this standard on its consolidated financial statements.

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The guidance requires the service cost component of defined benefit pension or other postretirement benefit plans to be reported in the same line items as other compensation costs. The other components of net benefit cost are required to be presented in the Consolidated Statements of Income outside of income from operations. Only the service cost component will be eligible for capitalization under this guidance. This guidance will be effective for annual reporting periods, including interim reporting within those periods, beginning after December 15, 2017. The guidance is required to be applied retrospectively for presentation in the Consolidated Statements of Income and prospectively for the guidance limiting capitalization. TEC is currently evaluating the impact of the adoption of this standard on the consolidated financial statements, including the eligibility for capitalization of the other components of net benefit cost given the application of ASC 980 Regulated Operations. TEC will adopt this guidance effective January 1, 2018.

 

 

3. Regulatory

Base Rates-Tampa Electric

Tampa Electric’s results reflect a stipulation and settlement agreement entered into on September 6, 2013, between Tampa Electric and the intervenors in its Tampa Electric division base rate proceeding, which resolved all matters in Tampa Electric’s 2013 base rate proceeding. On September 11, 2013, the FPSC unanimously voted to approve the stipulation and settlement agreement.

This agreement provided for the following revenue increases: $58 million effective November 1, 2013, an additional $8 million effective November 1, 2014, an additional $5 million effective November 1, 2015, and an additional $110 million effective the date that the expansion of Tampa Electric’s Polk Power Station went into service, which was January 16, 2017. The agreement also provides for Tampa Electric’s allowed regulatory ROE to be a mid-point of 10.25% with a range of plus or minus 1%, with a potential increase to 10.50% if U.S. Treasury bond yields exceed a specified threshold. The agreement provides that Tampa Electric cannot file for additional base rate increases to be effective sooner than January 1, 2018, unless its earned ROE were to fall below 9.25% (or 9.5% if the allowed ROE were increased as described above) before that time. If its earned ROE were to rise above 11.25% (or 11.5% if the allowed ROE were increased as described above) any party to the agreement other than Tampa Electric could seek a review of its base rates. Under the agreement, the allowed equity in the capital structure is 54% from investor sources of capital and Tampa Electric began using a 15-year amortization period for all computer software beginning on January 1, 2013.

Storm Damage Cost Recovery-Tampa Electric

As a result of several named storms, including Tropical Storm Colin, Hurricane Hermine and Hurricane Matthew, Tampa Electric incurred $9 million of storm costs in 2016. In 2017, Tampa Electric petitioned the FPSC to seek full recovery of those costs, subsequently withdrew the petition, applied the storm costs to the transmission and delivery storm reserve, and concluded to seek recovery of storm costs once the reserve is fully depleted. See the Regulatory Assets and Liabilities table below.

10


 

Base Rates-PGS

On June 28, 2016, PGS filed its depreciation study with the FPSC seeking approval for new depreciation rates. After communications with the FPSC staff, on December 15, 2016, PGS and OPC filed a settlement with the FPSC agreeing to new depreciation rates that reduce annual depreciation expense by $16 million, accelerate the amortization of the regulatory asset associated with environmental remediation costs as described below, include obsolete plastic pipe replacements through the existing cast iron and bare steel replacement rider, and decrease the bottom of the ROE range from 9.75% to 9.25%. The new bottom of the ROE range will remain until the earlier of new base rates established in PGS’s next general base rate proceeding or December 31, 2020. The top of the ROE range will continue to be 11.75%, and the ROE of 10.75% will continue to be used for the calculation of return on investment for clauses and riders. On February 7, 2017, the FPSC approved the settlement agreement. No change in customer rates resulted from this agreement.

As part of the settlement, PGS and OPC agreed that at least $32 million of PGS’s regulatory asset associated with the environmental liability for current and future remediation costs related to former MGP sites, to the extent expenses are reasonably and prudently incurred, will be amortized over the period 2016 through 2020. At least $21 million will be amortized over a two-year recovery period beginning in 2016. In 2016, PGS recorded $16 million of this amortization expense. This additional amortization expense in 2016 was offset by the decrease in depreciation expense as discussed above with no impact to 2016 earnings. For the three and six months ended June 30, 2017, PGS recorded amortization expense of $2 million and $3 million, respectively.  

Regulatory Assets and Liabilities

Tampa Electric and PGS apply the accounting standards for regulated operations. Areas of applicability include: 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; the deferral of costs as regulatory assets to the period in which the regulatory agency recognizes them when cost recovery is ordered over a period longer than a fiscal year; and the advance recovery of expenditures for approved costs such as future storm damage or the future removal of property.

Details of the regulatory assets and liabilities are presented in the following table:

 

Regulatory Assets and Liabilities

 

 

 

 

 

 

 

(millions)

June 30, 2017

 

 

December 31, 2016

 

Regulatory assets:

 

 

 

 

 

 

 

Regulatory tax asset (1)

$

84

 

 

$

86

 

Cost-recovery clauses - deferred balances (2)

 

8

 

 

 

8

 

Environmental remediation (3)

 

34

 

 

 

37

 

Postretirement benefits (4)

 

279

 

 

 

272

 

Other

 

21

 

 

 

18

 

Total regulatory assets

 

426

 

 

 

421

 

Less: Current portion

 

26

 

 

 

28

 

Long-term regulatory assets

$

400

 

 

$

393

 

Regulatory liabilities:

 

 

 

 

 

 

 

Regulatory tax liability

$

12

 

 

$

6

 

Cost-recovery clauses - deferred balances (2)

 

59

 

 

 

112

 

Cost-recovery clauses - offsets to derivative assets (2)

 

1

 

 

 

17

 

Transmission and delivery storm reserve

 

47

 

 

 

56

 

Accumulated reserve - cost of removal (5)

 

536

 

 

 

547

 

Other

 

7

 

 

 

7

 

Total regulatory liabilities

 

662

 

 

 

745

 

Less: Current portion

 

87

 

 

 

154

 

Long-term regulatory liabilities

$

575

 

 

$

591

 

(1)

The regulatory tax asset is primarily associated with the depreciation and recovery of AFUDC-equity. This asset does not earn a return but rather is included in the capital structure, which is used in the calculation of the weighted cost of capital used to determine revenue requirements. It will be recovered over the expected life of the related assets.  

(2)

These assets and liabilities are related to FPSC clauses and riders. They are recovered or refunded through cost-recovery mechanisms approved by the FPSC on a dollar-for-dollar basis in the next year. In the case of the regulatory liability related to derivative assets, refund occurs in the year following the settlement of the derivative position.

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(3)

This asset is related to costs associated with environmental remediation primarily at MGP sites. The balance is included in rate base, partially offsetting the related liability, and earns a rate of return as permitted by the FPSC. The timing of recovery is based on a settlement agreement approved by the FPSC.

(4)

This asset is related to the deferred costs of postretirement benefits and it is amortized over the remaining service life of plan participants. Deferred costs of postretirement benefits that are included in expense are recognized as cost of service for rate-making purposes as permitted by the FPSC.

(5)

This item represents the non-ARO cost of removal in the accumulated reserve for depreciation. AROs are costs for legally required removal of property, plant and equipment. Non-ARO cost of removal represents estimated funds received from customers through depreciation rates to cover future non-legally required cost of removal of property, plant and equipment, net of salvage value upon retirement, which reduces rate base for ratemaking purposes. This liability is reduced as costs of removal are incurred.

 

 

4. Income Taxes

Effective July 1, 2016 and due to the Merger with Emera, TEC is included in a consolidated U.S. federal income tax return with EUSHI and its subsidiaries. Prior to the Merger, TEC was included in the filing of a consolidated federal income tax return with TECO Energy and its subsidiaries. TEC’s income tax expense is based upon a separate return method, modified for the benefits-for-loss allocation in accordance with respective tax sharing agreements of TECO Energy and EUSHI. To the extent that TEC’s cash tax positions are settled differently than the amount reported as realized under the tax sharing agreement, the difference is accounted for as either a capital contribution or a distribution.

The IRS concluded its examination of TECO Energy’s 2015 consolidated federal income tax return in March 2017 with no changes required. The U.S. federal statute of limitations remains open for the year 2013 and forward. The short tax year ending June 30, 2016 is currently under examination by the IRS under its Compliance Assurance Program (CAP). Due to the Merger with Emera, TECO Energy is only able to participate in the CAP through its short tax year ending June 30, 2016.

TEC’s effective tax rates for the six months ended June 30, 2017 and 2016 were 38.53% and 35.94%, respectively. The increase in the six-month effective tax rate in 2017 versus the same period in 2016 is primarily due to lower AFUDC-equity and production deduction tax benefits. TEC’s effective tax rate for the six months ended June 30, 2017 differs from the statutory rate principally due to state income taxes. TEC’s effective tax rate for the six months ended June 30, 2016 differs from the statutory rate principally due to state income taxes offset by tax benefits related to AFUDC-equity and production deduction.

As of June 30, 2017, the amount of unrecognized tax benefits was $7 million, all of which was recorded as a reduction of deferred income tax assets for tax credit carryforwards. TEC believes that the total unrecognized tax benefits will decrease within the next twelve months due to the expected audit examination of TECO Energy’s consolidated federal income tax return for the short tax year ending June 30, 2016. TEC had $7 million of unrecognized tax benefits at June 30, 2017, that, if recognized, would reduce TEC’s effective tax rate.

 

 

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5. Employee Postretirement Benefits

 

TEC is a participant in the comprehensive retirement plans of TECO Energy. The following table presents detail related to TECO Energy’s periodic benefit cost for pension and other postretirement benefits. Amounts disclosed for TECO Energy’s pension benefits include the amounts related to its qualified pension plan and non-qualified, non-contributory SERP.

 

TECO Energy Benefit Cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(millions)

Pension Benefits

 

 

Other Postretirement Benefits

 

Three months ended June 30,

2017

 

 

2016

 

 

2017

 

 

2016

 

Components of net periodic benefit cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

5

 

 

$

5

 

 

$

0

 

 

$

1

 

Interest cost

 

9

 

 

 

8

 

 

 

2

 

 

 

2

 

Expected return on assets

 

(12

)

 

 

(11

)

 

 

0

 

 

 

0

 

Amortization of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior service (benefit) cost

 

0

 

 

 

0

 

 

 

1

 

 

 

(1

)

Actuarial loss

 

4

 

 

 

3

 

 

 

(1

)

 

 

0

 

Curtailment cost

 

0

 

 

 

1

 

 

 

0

 

 

 

0

 

Settlement cost

 

0

 

(1)

 

1

 

 

 

0

 

 

 

0

 

Net periodic benefit cost

$

6

 

 

$

7

 

 

$

2

 

 

$

2

 

Six months ended June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Components of net periodic benefit cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

10

 

 

$

9

 

 

$

1

 

 

$

1

 

Interest cost

 

16

 

 

 

16

 

 

 

4

 

 

 

4

 

Expected return on assets

 

(24

)

 

 

(22

)

 

 

0

 

 

 

(1

)

Amortization of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior service (benefit) cost

 

0

 

 

 

0

 

 

 

0

 

 

 

(1

)

Actuarial loss

 

8

 

 

 

7

 

 

 

(1

)

 

 

0

 

Regulatory asset

 

0

 

 

 

0

 

 

 

0

 

 

 

1

 

Curtailment cost

 

0

 

 

 

1

 

 

 

0

 

 

 

0

 

Settlement cost

 

7

 

(1)

 

1

 

 

 

0

 

 

 

0

 

Net periodic benefit cost

$

17

 

 

$

12

 

 

$

4

 

 

$

4

 

 

(1)

Represents TECO Energy’s SERP settlement charge as a result of retirements that occurred subsequent to the Merger with Emera. The charge did not impact TEC’s financial statements.

TEC’s portion of the net periodic benefit cost for the three months ended June 30, 2017 and 2016, respectively, was $4 million and $3 million for pension benefits, and $2 million and $2 million for other postretirement benefits. TEC’s portion of the net periodic benefit cost for the six months ended June 30, 2017 and 2016, respectively, was $7 million and $6 million for pension benefits, and $3 million and $3 million for other postretirement benefits.  

For the 2017 plan year, TECO Energy assumed a long-term EROA of 7.00% and a discount rate of 4.16% for pension benefits under its qualified pension plan.  For the January 1, 2017 measurement of TECO Energy’s other postretirement benefits, TECO Energy used a discount rate of 4.28%.

TECO Energy made contributions of $25 million and $16 million to its qualified pension plan in the six months ended June 30, 2017 and 2016, respectively. TEC’s portion of these contributions was $20 million and $13 million, respectively.

Included in the benefit cost discussed above, for the three and six months ended June 30, 2017, TEC reclassified $3 million and $5 million, respectively, of unamortized prior service benefit and actuarial losses from regulatory assets to net income, compared with $3 million and $5 million for the three and six months ended June 30, 2016, respectively.

 

 

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6. Short-Term Debt

Details of the credit facilities and related borrowings are presented in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

Letters

 

 

 

 

 

 

 

 

 

 

Letters

 

 

Credit

 

 

Borrowings

 

 

of Credit

 

 

Credit

 

 

Borrowings

 

 

of Credit

 

(millions)

Facilities

 

 

Outstanding (1)

 

 

Outstanding

 

 

Facilities

 

 

Outstanding (1)

 

 

Outstanding

 

Tampa Electric Company:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5-year facility (2)

$

325

 

 

$

174

 

 

$

1

 

 

$

325

 

 

$

40

 

 

$

1

 

3-year accounts

   receivable facility (3)

 

150

 

 

 

124

 

 

 

0

 

 

 

150

 

 

 

130

 

 

 

0

 

Total

$

475

 

 

$

298

 

 

$

1

 

 

$

475

 

 

$

170

 

 

$

1

 

(1)

Borrowings outstanding are reported as notes payable.

(2)

This 5-year facility matures March 22, 2022.

(3)

This 3-year facility matures March 23, 2018.

At June 30, 2017, these credit facilities required 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, 2017 and December 31, 2016 was 1.89% and 1.49%, respectively.

 

Tampa Electric Company Credit Facility

 

On March 22, 2017, TEC amended its $325 million bank credit facility, entering into a Fifth Amended and Restated Credit Agreement. The amendment (i) extended the maturity date of the credit facility from December 17, 2018 to March 22, 2022 (subject to further extension with the consent of each lender); (ii) included a $50 million letter of credit facility; and (iii) made other technical changes.

 

 

 

 

7. Long-Term Debt

Fair Value of Long-Term Debt

At June 30, 2017, TEC’s total long-term debt had a carrying amount of $2,163 million and an estimated fair market value of $2,379 million. At December 31, 2016, TEC’s total long-term debt had a carrying amount of $2,163 million and an estimated fair market value of $2,345 million. TEC uses the market approach in determining fair value. The majority of the outstanding debt is valued using real-time financial market data. The remaining securities are valued using prices obtained from the Municipal Securities Rulemaking Board or by applying estimated credit spreads obtained from a third party to the par value of the security. The fair value of debt securities determined using Level 1 measurements was $57 million and $58 million at June 30, 2017 and December 31, 2016, respectively. The fair value of the remaining debt securities is determined using Level 2 measurements (see Note 11 for information regarding the fair value hierarchy).

 

 

8. Commitments and Contingencies

Legal Contingencies

From time to time, TEC and its subsidiaries are involved in various legal, tax and regulatory proceedings before various courts, regulatory commissions and governmental agencies in the ordinary course of 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. TEC believes the final disposition of these proceedings will not have a material effect on its results of operations, cash flows or financial position.

Superfund and Former Manufactured Gas Plant Sites

TEC, through its Tampa Electric and PGS divisions, is a PRP for certain superfund sites and, through its PGS division, for certain former MGP sites. While the joint and several liability associated with these sites presents the potential for significant response costs, as of June 30, 2017, TEC has estimated its ultimate financial liability to be $30 million, primarily at PGS. This amount has been accrued and is primarily reflected in the long-term liability section under “Deferred credits and other liabilities” on the Consolidated Condensed Balance Sheets. The environmental remediation costs associated with these sites are expected to be paid over many years.

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The estimated amounts represent only the portion of the cleanup costs attributable to TEC. The estimates to perform the work are based on TEC’s experience with similar work, adjusted for site-specific conditions and agreements with the respective governmental agencies. The estimates are made in current dollars, are not discounted and do not assume any insurance recoveries.

In instances where other PRPs are involved, most of those PRPs are creditworthy and are likely to continue to be creditworthy for the duration of the remediation work. However, in those instances that they are not, TEC could be liable for more than TEC’s currently assessed percentage of the remediation costs.

Factors that could impact these estimates include the ability of other PRPs to pay their pro-rata portion of the cleanup costs, additional testing and investigation which could expand the scope of the cleanup activities, additional liability that might arise from the cleanup activities themselves or changes in laws or regulations that could require additional remediation. Under current regulations, these costs are recoverable through customer rates established in subsequent base rate proceedings. See Note 3 for information regarding an agreement approved by the FPSC to accelerate the amortization of the regulated asset associated with this reserve.

Long-Term Commitments

TEC has commitments for purchased power and long-term leases, primarily for building space, vehicles, office equipment and heavy equipment. TEC also has other purchase obligations for long-term service agreements and capital projects.  In addition, TEC has payment obligations under contractual agreements for fuel, fuel transportation and power purchases that are recovered from customers under regulatory clauses. The following is a schedule of future payments under PPAs, minimum lease payments with non-cancelable lease terms in excess of one year, and other net purchase obligations/commitments at June 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

Long-term Service

 

 

 

 

 

 

 

 

 

 

 

Purchased

 

 

Operating

 

 

Agreements/Capital

 

 

Clause Recoverable

 

 

 

 

 

(millions)

 

Power

 

 

Leases

 

 

Projects

 

 

Commitments

 

 

Total

 

Year ended December 31:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

$

5

 

 

$

3

 

 

$

38

 

 

$

303

 

 

$

349

 

2018

 

 

10

 

 

 

4

 

 

 

11

 

 

 

257

 

 

 

282

 

2019

 

 

0

 

 

 

2

 

 

 

11

 

 

 

186

 

 

 

199

 

2020

 

 

0

 

 

 

2

 

 

 

6

 

 

 

163

 

 

 

171

 

2021

 

 

0

 

 

 

2

 

 

 

7

 

 

 

132

 

 

 

141

 

Thereafter

 

 

0

 

 

 

38

 

 

 

25

 

 

 

1,157

 

 

 

1,220

 

Total future minimum payments

 

$

15

 

 

$

51

 

 

$

98

 

 

$

2,198

 

 

$

2,362

 

 

Financial Covenants

TEC must meet certain financial tests, including a debt to capital ratio, as defined in the applicable banking agreements. TEC has certain restrictive covenants in specific agreements and debt instruments. At June 30, 2017, TEC was in compliance with all required financial covenants.

 

 

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9. Segment Information

 

(millions)

Tampa

 

 

 

 

 

 

 

 

 

 

Tampa Electric

 

Three months ended June 30,

Electric

 

 

PGS

 

 

Eliminations

 

 

Company

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues - external

$

542

 

 

$

102

 

 

$

0

 

 

$

644

 

Intracompany sales

 

0

 

 

 

2

 

 

 

(2

)

 

 

0

 

Total revenues

 

542