netrashetty
Netra Shetty
TECO Energy, Inc. operates regulated electric and gas utilities in Florida and competes in the coal mining industry in Central Appalachia. Tampa Electric Company, its largest subsidiary, is a regulated Florida utility that supplies electricity to 668,000 customers and delivers natural gas to 334,000 customers in West Central Florida. [1] TECO Coal, its second largest subsidiary, mines and processes coal in Eastern Kentucky, Tennessee, and Virginia. The company owns mineral rights to 277.1 million tons of proved reserves. [2]
As a regulated utility, Tampa Electric has a monopoly in retail electricity but must ask regulators for authorization to recoup higher operating costs. Due to higher fuel prices, Tampa Electric projects a return on equity below its legally allowed limit in 2008, and is filing for a 2009 rate increase with the Florida Public Service Commission. [3]
As a whole, TECO Energy is vulnerable to swings in fossil fuel prices, though the company is less exposed to price changes because it is both a buyer and seller of coal. 100% of Tampa Electric’s generating capacity comes from coal, natural gas, or oil. In 2007, the gain in fuel prices, lead by a 42.5% increase in spot coal prices between March and December,[4] cost Tampa Electric $209 million.[5]
TECO Energy settled with government authorities in 2000 for alleged violations of the Clean Air Act and is still installing environmentally friendly technologies to fulfill its obligations under the settlement. [6] While Florida has not currently adopted Renewable Portfolio Standards, any level of stronger climate change regulation would hurt TECO Energy’s outlook. [7]
Contents
1 Business Overview
1.1 Business Segments
2 Trends and Forces
2.1 Tampa Electric’s Sole Reliance on Fossil Fuels Makes It Vulnerable to Carbon Emissions Regulation
2.2 Rising Cost of Coal Hurts TECO as a Whole
2.3 Natural Monopoly Over Retail Electricity Promotes Stable Revenue Outlook
3 Competition
3.1 Tampa Electric
3.2 People's Gas System
3.3 TECO Coal
4 References
Business Overview
2007 2006 2005 2004 2003
Revenue ($M) 3536.1 3448.1 3010.1 2639.4 2562.9
Net income ($M) [8] [9] 413.2 246.3 274.5 -552.0 -909.4
TECO Energy has completed a series of divestments as part of its business strategy to focus on its electric and gas utilities rather than its merchant wholesale power services. [10] From 2005 to 2007, the company sold its TWG Merchant, TECO Thermal, and TECO Transport units, as well as its stakes in power plants in Arkansas and Virginia. [10]
Business Segments
Tampa Electric Company (78.8% of revenue [10], 44% of net income [11]): Tampa Electric Company is a Florida-based regulated electric and gas utility. Its Tampa Electric division supplies electricity to more than 668,000 retail customers in West Central Florida. TE has a peak net generating capacity of 4,602 megawatts. The company is permitted to have a return on equity from 10.75-12.75%, and in 2007 earned a return of 11.4%. [3] Due to a lower sales forecast, higher operational expenses, and ongoing capital expenditures, TE expects its return on equity to be below its allowed range in 2008. [3] The company is filing for a 22.8% increase in residential rates to start in January 2009. [12] In 2007, Tampa Electric burned approximately 4.7 million tons of coal, generating 59% of its electricity. The company obtains its coal through an average portfolio of 60% long-term contracts and 40% spot contracts, none of which originate from TECO Coal. [2] [13]
People’s Gas System (PGS) is the gas division of TE and delivers natural gas to 334,000 residential, commercial, and industrial customers. PGS delivered 1.4 billion therms of natural gas to its customers in 2007. [1] The principal communities served are Tampa, Winter Haven, Plant City, and Dade City. [14] In 2007, due to higher operating costs and depreciation expenses, PGS’s return on equity was below the floor of its allowed range. PGS is pursuing authorization to increase its base rates. [15]
Tampa Electric fuel sources 2007 [13]
Tampa Electric operating revenue 2007 [14]
TECO Coal (14.5% of revenue [10], 22.8% of net income [11]): TECO Coal Corporation is a coal mining and processing company with 13 subsidiaries located in Eastern Kentucky, Tennessee, and Virginia. [10] This business unit produces, processes, and sells mostly bituminous, low-sulfur-content coal . [2]In 2007, TECO Coal sold 9.2 million tons of coal and had approximately 277.1 million tons of proved reserves. [2] No coal was sold to Tampa Electric, maximizing margins for the company. [2] Due to transportation costs and the regulatory cap on Tampa Electric's margins, TECO Coal can get higher margins from selling its coal wholesale.
TECO Guatemala (0.2% of revenue [10], 11.2% of net income [11]) [10]: TECO Guatemala, Inc. invests in energy projects in Guatemala. [10] The company owns 100% of Central Generadora Electrica San Jose, the first coal power plant in Central America. [16] TECO Guatemala also has a 30% ownership interest in the consortium that owns Empresa Electrica de Guatemala, S.A., the largest private electricity utility in Central America. [17]
TECO Transport (8.2% of revenue [10], 8.5% of net income [11]) [10]: TECO Transport Corporation provides transportation services in moving coal and other bulk commodities for Tampa Electric and third-party customers. In 2007, 32% of TECO Transport’s revenues were from Tampa Electric and 68% were from third-party customers. [17] TECO Transport was sold on December 4, 2007 for $405 million for an after-tax gain of $149.4 million. [10] [17] The sale allowed TECO Energy to raise money for capital investments and focus more on its utility business. [18]
Trends and Forces
Tampa Electric’s Sole Reliance on Fossil Fuels Makes It Vulnerable to Carbon Emissions Regulation
All of Tampa Electric’s electricity is generated from coal, natural gas, or oil. The company’s reliance on fossil fuels makes it vulnerable to carbon emissions regulation. As of 2008, twenty-six states had adopted binding Renewable Portfolio Standards, policies that require electricity providers to obtain a minimum percentage of their power from renewable energy sources. Florida has not yet adopted such a requirement. [7] Since Tampa Electric generates 100% of its electricity from fossil fuels, the implementation of Renewable Portfolio Standards in Florida would hurt the company’s operating outlook. [13]
In February 2000, Tampa Electric settled all allegations of Clean Air Act violations in a settlement with the EPA, the US Department of Justice, and the FDEP. It agreed to install desulfurization scrubbers and other technologies to reduce emissions. The company converted its coal-powered Gannon Station to natural gas in 2004. Its installation of environmental technologies are ongoing through 2010. Since 1998, the company has reduced sulfur, nitrogen, and particulate matter emissions by 208,000 tons, a reduction of 93%, 60%, and 77%, respectively. [6] The company has also voluntarily reduced its carbon emissions by 20% since 1998, bringing its emissions close to 1990 levels. Tampa Electric participates in the Department of Energy’s Power Partners program and the cap-and-trade system of the Chicago Climate Exchange (CCX). The company has committed to an additional 2% reduction in greenhouse gas emissions by 2010. [19] In 2007, Tampa Electric spent $105.8 million on environmental projects. [20]
Rising Cost of Coal Hurts TECO as a Whole
Tampa Electric’s operating costs have increased significantly with the rise in coal prices. In 2007, 59% of Tampa Electric's generating capacity was based on coal,[13] making the company vulnerable to swings in coal prices and carbon emissions legislation. Tampa Electric estimates that by the end of 2008, it will be under-recovered $209 million in fuel costs. The company intends to recover the cost with a 22.8% increase in 2009 electric rates, pending approval from the Florida Public Service Commission. [21]
Increases in coal prices are partially offset by increased revenue from TECO Coal, which engages in the mining and processing of coal. The spot price for Central Appalachian coal has increased 140.1% from $58.30 per ton in January 2008 to $140 per ton in October 2008. [22] In particular, continued strong demand for coal in China and India, bottlenecks in ports in Australia, and the temporary closures of several major coal mines worldwide caused coal prices to increase. [23] Spot prices for domestic steam coal have increased 48% from October 2007 to February 2008. [23] However, in 2008, the positive effects of the increase in coal prices will be mitigated by the coal delivery contracts that TECO Coal signed before the price increases in late 2007. [23]
Natural Monopoly Over Retail Electricity Promotes Stable Revenue Outlook
Tampa Electric has a monopoly over retail electricity in its areas of service in Florida because of the barriers to entry to the industry due to the high cost of building infrastructure. This brings stability to the company’s operating outlook by guaranteeing a customer base. As a legally regulated utility, the company is allowed to generate a return on equity from 10.75-12.75%. [3] If returns exceed this level, the extra revenue must be passed back to ratepayers in the form of savings.
On the other hand, Tampa Electric’s regulated status also makes it more difficult for the company to adjust retail prices based on swings in the cost of fuel since regulators must approve changes in electricity rates. If costs increase faster than regulators authorize retail rate increases, the company’s bottom line is negatively affected. In 2007, the Florida Public Service Commission (FPSC) approved the return of $18 million in fuel adjustment costs for 2006. [24] If the FPSC denies Tampa Electric’s request to recover $209 million in 2007 fuel costs through a 22.8% increase in 2009 rates, the company’s 2009 net income will suffer. [21]
Competition
Tampa Electric
Tampa Electric has a natural monopoly over retail electricity in its areas of operation since the high cost of infrastructure acts as a barrier to entry for other firms. However, customers have the ability to employ self-generating sources of energy, such as installing their own solar panels. Tampa Electric also competes with other power suppliers in the wholesale power market in surrounding areas where it does not have a statutory monopoly. [25]
Tampa Electric Comparison to Competitors
TE GXP EIX AEP DUK Entergy Exelon PSEG
Revenue (FY 2007, USD Billions) 3.5 [26] 3.3 [27] 13.1[28] 13.4[29] 12.7[30] 11.5 [31] 18.9 [32] 12.9 [33]
Generation Capacity (Megawatts) 4,602[34] 4,000[35] 14,500[36] 38,000[37] 40,000 (include int'l)[38] 30,000 33,000 17,000
Customers (Millions) 0.668[39] 0.506[40] 4.8 (SCE)[41] 5[42] 3.9[43] 2.4 6.1 21
% Nuclear Power 0[13] 24[44] 16.9 (SCE)[45] 6.1[46] 35[47] 31 66 23
After Tax Profit Margins (%) 8.96[48] 4.93[49] 9.97[50] 8.53[51] 11.98[52] 10.10 [53] 14.41 [54] 10.26 [55]
People's Gas System
PGS is not in direct competition with any other natural gas distributor in its service areas. Competition for natural gas is most prevalent in the large commercial and industrial markets, a market that companies offering alternative fuels have been aggressively targeting. [15]
TECO Coal
TECO Coal competes with other coal suppliers located in Central Appalachia. The company maintains its competitive edge by producing high-quality steam and specialty coals while keeping operating costs to a minimum. [56]
TECO Coal Comparison to Competitors
2007 Coal Industry Production Data TECO Coal[57] [23] Peabody[58] Arch Coal[59] Massey[60] CONSOL[61]
Tons of Coal Sold (Millions) 9.8 237.8 135.0 39.9 65.5
Revenue/Price per Ton - - $17.88 $51.55 $40.60
Operating Profit per Ton $4 $2.39 $2.15 - -
Net Company Profit (Millions) $90.9 $264.3 $174.7 $94.1 $267.8
As a regulated utility, Tampa Electric has a monopoly in retail electricity but must ask regulators for authorization to recoup higher operating costs. Due to higher fuel prices, Tampa Electric projects a return on equity below its legally allowed limit in 2008, and is filing for a 2009 rate increase with the Florida Public Service Commission. [3]
As a whole, TECO Energy is vulnerable to swings in fossil fuel prices, though the company is less exposed to price changes because it is both a buyer and seller of coal. 100% of Tampa Electric’s generating capacity comes from coal, natural gas, or oil. In 2007, the gain in fuel prices, lead by a 42.5% increase in spot coal prices between March and December,[4] cost Tampa Electric $209 million.[5]
TECO Energy settled with government authorities in 2000 for alleged violations of the Clean Air Act and is still installing environmentally friendly technologies to fulfill its obligations under the settlement. [6] While Florida has not currently adopted Renewable Portfolio Standards, any level of stronger climate change regulation would hurt TECO Energy’s outlook. [7]
Contents
1 Business Overview
1.1 Business Segments
2 Trends and Forces
2.1 Tampa Electric’s Sole Reliance on Fossil Fuels Makes It Vulnerable to Carbon Emissions Regulation
2.2 Rising Cost of Coal Hurts TECO as a Whole
2.3 Natural Monopoly Over Retail Electricity Promotes Stable Revenue Outlook
3 Competition
3.1 Tampa Electric
3.2 People's Gas System
3.3 TECO Coal
4 References
Business Overview
2007 2006 2005 2004 2003
Revenue ($M) 3536.1 3448.1 3010.1 2639.4 2562.9
Net income ($M) [8] [9] 413.2 246.3 274.5 -552.0 -909.4
TECO Energy has completed a series of divestments as part of its business strategy to focus on its electric and gas utilities rather than its merchant wholesale power services. [10] From 2005 to 2007, the company sold its TWG Merchant, TECO Thermal, and TECO Transport units, as well as its stakes in power plants in Arkansas and Virginia. [10]
Business Segments
Tampa Electric Company (78.8% of revenue [10], 44% of net income [11]): Tampa Electric Company is a Florida-based regulated electric and gas utility. Its Tampa Electric division supplies electricity to more than 668,000 retail customers in West Central Florida. TE has a peak net generating capacity of 4,602 megawatts. The company is permitted to have a return on equity from 10.75-12.75%, and in 2007 earned a return of 11.4%. [3] Due to a lower sales forecast, higher operational expenses, and ongoing capital expenditures, TE expects its return on equity to be below its allowed range in 2008. [3] The company is filing for a 22.8% increase in residential rates to start in January 2009. [12] In 2007, Tampa Electric burned approximately 4.7 million tons of coal, generating 59% of its electricity. The company obtains its coal through an average portfolio of 60% long-term contracts and 40% spot contracts, none of which originate from TECO Coal. [2] [13]
People’s Gas System (PGS) is the gas division of TE and delivers natural gas to 334,000 residential, commercial, and industrial customers. PGS delivered 1.4 billion therms of natural gas to its customers in 2007. [1] The principal communities served are Tampa, Winter Haven, Plant City, and Dade City. [14] In 2007, due to higher operating costs and depreciation expenses, PGS’s return on equity was below the floor of its allowed range. PGS is pursuing authorization to increase its base rates. [15]
Tampa Electric fuel sources 2007 [13]
Tampa Electric operating revenue 2007 [14]
TECO Coal (14.5% of revenue [10], 22.8% of net income [11]): TECO Coal Corporation is a coal mining and processing company with 13 subsidiaries located in Eastern Kentucky, Tennessee, and Virginia. [10] This business unit produces, processes, and sells mostly bituminous, low-sulfur-content coal . [2]In 2007, TECO Coal sold 9.2 million tons of coal and had approximately 277.1 million tons of proved reserves. [2] No coal was sold to Tampa Electric, maximizing margins for the company. [2] Due to transportation costs and the regulatory cap on Tampa Electric's margins, TECO Coal can get higher margins from selling its coal wholesale.
TECO Guatemala (0.2% of revenue [10], 11.2% of net income [11]) [10]: TECO Guatemala, Inc. invests in energy projects in Guatemala. [10] The company owns 100% of Central Generadora Electrica San Jose, the first coal power plant in Central America. [16] TECO Guatemala also has a 30% ownership interest in the consortium that owns Empresa Electrica de Guatemala, S.A., the largest private electricity utility in Central America. [17]
TECO Transport (8.2% of revenue [10], 8.5% of net income [11]) [10]: TECO Transport Corporation provides transportation services in moving coal and other bulk commodities for Tampa Electric and third-party customers. In 2007, 32% of TECO Transport’s revenues were from Tampa Electric and 68% were from third-party customers. [17] TECO Transport was sold on December 4, 2007 for $405 million for an after-tax gain of $149.4 million. [10] [17] The sale allowed TECO Energy to raise money for capital investments and focus more on its utility business. [18]
Trends and Forces
Tampa Electric’s Sole Reliance on Fossil Fuels Makes It Vulnerable to Carbon Emissions Regulation
All of Tampa Electric’s electricity is generated from coal, natural gas, or oil. The company’s reliance on fossil fuels makes it vulnerable to carbon emissions regulation. As of 2008, twenty-six states had adopted binding Renewable Portfolio Standards, policies that require electricity providers to obtain a minimum percentage of their power from renewable energy sources. Florida has not yet adopted such a requirement. [7] Since Tampa Electric generates 100% of its electricity from fossil fuels, the implementation of Renewable Portfolio Standards in Florida would hurt the company’s operating outlook. [13]
In February 2000, Tampa Electric settled all allegations of Clean Air Act violations in a settlement with the EPA, the US Department of Justice, and the FDEP. It agreed to install desulfurization scrubbers and other technologies to reduce emissions. The company converted its coal-powered Gannon Station to natural gas in 2004. Its installation of environmental technologies are ongoing through 2010. Since 1998, the company has reduced sulfur, nitrogen, and particulate matter emissions by 208,000 tons, a reduction of 93%, 60%, and 77%, respectively. [6] The company has also voluntarily reduced its carbon emissions by 20% since 1998, bringing its emissions close to 1990 levels. Tampa Electric participates in the Department of Energy’s Power Partners program and the cap-and-trade system of the Chicago Climate Exchange (CCX). The company has committed to an additional 2% reduction in greenhouse gas emissions by 2010. [19] In 2007, Tampa Electric spent $105.8 million on environmental projects. [20]
Rising Cost of Coal Hurts TECO as a Whole
Tampa Electric’s operating costs have increased significantly with the rise in coal prices. In 2007, 59% of Tampa Electric's generating capacity was based on coal,[13] making the company vulnerable to swings in coal prices and carbon emissions legislation. Tampa Electric estimates that by the end of 2008, it will be under-recovered $209 million in fuel costs. The company intends to recover the cost with a 22.8% increase in 2009 electric rates, pending approval from the Florida Public Service Commission. [21]
Increases in coal prices are partially offset by increased revenue from TECO Coal, which engages in the mining and processing of coal. The spot price for Central Appalachian coal has increased 140.1% from $58.30 per ton in January 2008 to $140 per ton in October 2008. [22] In particular, continued strong demand for coal in China and India, bottlenecks in ports in Australia, and the temporary closures of several major coal mines worldwide caused coal prices to increase. [23] Spot prices for domestic steam coal have increased 48% from October 2007 to February 2008. [23] However, in 2008, the positive effects of the increase in coal prices will be mitigated by the coal delivery contracts that TECO Coal signed before the price increases in late 2007. [23]
Natural Monopoly Over Retail Electricity Promotes Stable Revenue Outlook
Tampa Electric has a monopoly over retail electricity in its areas of service in Florida because of the barriers to entry to the industry due to the high cost of building infrastructure. This brings stability to the company’s operating outlook by guaranteeing a customer base. As a legally regulated utility, the company is allowed to generate a return on equity from 10.75-12.75%. [3] If returns exceed this level, the extra revenue must be passed back to ratepayers in the form of savings.
On the other hand, Tampa Electric’s regulated status also makes it more difficult for the company to adjust retail prices based on swings in the cost of fuel since regulators must approve changes in electricity rates. If costs increase faster than regulators authorize retail rate increases, the company’s bottom line is negatively affected. In 2007, the Florida Public Service Commission (FPSC) approved the return of $18 million in fuel adjustment costs for 2006. [24] If the FPSC denies Tampa Electric’s request to recover $209 million in 2007 fuel costs through a 22.8% increase in 2009 rates, the company’s 2009 net income will suffer. [21]
Competition
Tampa Electric
Tampa Electric has a natural monopoly over retail electricity in its areas of operation since the high cost of infrastructure acts as a barrier to entry for other firms. However, customers have the ability to employ self-generating sources of energy, such as installing their own solar panels. Tampa Electric also competes with other power suppliers in the wholesale power market in surrounding areas where it does not have a statutory monopoly. [25]
Tampa Electric Comparison to Competitors
TE GXP EIX AEP DUK Entergy Exelon PSEG
Revenue (FY 2007, USD Billions) 3.5 [26] 3.3 [27] 13.1[28] 13.4[29] 12.7[30] 11.5 [31] 18.9 [32] 12.9 [33]
Generation Capacity (Megawatts) 4,602[34] 4,000[35] 14,500[36] 38,000[37] 40,000 (include int'l)[38] 30,000 33,000 17,000
Customers (Millions) 0.668[39] 0.506[40] 4.8 (SCE)[41] 5[42] 3.9[43] 2.4 6.1 21
% Nuclear Power 0[13] 24[44] 16.9 (SCE)[45] 6.1[46] 35[47] 31 66 23
After Tax Profit Margins (%) 8.96[48] 4.93[49] 9.97[50] 8.53[51] 11.98[52] 10.10 [53] 14.41 [54] 10.26 [55]
People's Gas System
PGS is not in direct competition with any other natural gas distributor in its service areas. Competition for natural gas is most prevalent in the large commercial and industrial markets, a market that companies offering alternative fuels have been aggressively targeting. [15]
TECO Coal
TECO Coal competes with other coal suppliers located in Central Appalachia. The company maintains its competitive edge by producing high-quality steam and specialty coals while keeping operating costs to a minimum. [56]
TECO Coal Comparison to Competitors
2007 Coal Industry Production Data TECO Coal[57] [23] Peabody[58] Arch Coal[59] Massey[60] CONSOL[61]
Tons of Coal Sold (Millions) 9.8 237.8 135.0 39.9 65.5
Revenue/Price per Ton - - $17.88 $51.55 $40.60
Operating Profit per Ton $4 $2.39 $2.15 - -
Net Company Profit (Millions) $90.9 $264.3 $174.7 $94.1 $267.8