ITEM 1. BUSINESS.
TECO Capital Trust II (the “Trust”) is a statutory business trust that TECO Funding Company II, LLC (the “LLC”), a subsidiary of TECO Energy, Inc. (“TECO Energy”), formed under Delaware law on November 20, 2000 pursuant to a certificate of trust filed with the Delaware Secretary of State. The Trust is governed by an Amended and Restated Trust Agreement dated as of January 15, 2002 by and among the LLC as depositor, The Bank of New York as property trustee, and The Bank of New York (Delaware) as Delaware trustee (the “Trust Agreement”). The Trust Agreement is qualified as an indenture under the Trust Indenture Act of 1939. TECO Energy and the Trust issued to the public 17,965,000 mandatorily convertible adjustable conversion-rate equity security units with an annual distribution rate of 9.50%, with an aggregate liquidation amount of $449.1 million on January 15, 2002 for the purpose of acquiring related company preferred securities from the LLC, which in turn purchased a corresponding amount of subordinated notes from TECO Energy. Each equity security unit initially consisted of a contract to purchase shares of common stock of TECO Energy and a trust preferred security of the trust, which was pledged to secure the obligation to purchase the common stock of TECO Energy under the related purchase contracts.
Each trust preferred security has a stated liquidation amount of $25, on which distributions are payable at the rate of 5.11% per year on a quarterly basis, in arrears, through October 15, 2004. In order to provide holders of equity security units comprised of trust preferred security and a purchase contract (each a “normal unit”) with the necessary collateral to be applied in the settlement of their purchase contracts, a remarketing agent will sell the trust preferred securities of the holders of normal units, other than those electing not to participate in the remarketing, and the remarketing agent will use the proceeds to purchase treasury securities, which the participating normal unitholders will pledge to secure their obligations under the related purchase contracts. Holders of trust preferred securities who have substituted collateral for the trust preferred securities that were part of the normal units and hold the trust preferred securities separately may also elect to participate in the remarketing. In order to facilitate the remarketing of the trust preferred securities, the remarketing agent will reset the rate of distribution on the trust preferred securities, and on the company preferred securities, for the quarterly payments payable on and after January 15, 2005.
The trust preferred securities represent a corresponding amount of company preferred securities of the LLC. The LLC sold company preferred securities to the Trust and company common securities to TECO Energy. The LLC used the proceeds from the sale of the company preferred securities and the company common securities to buy from TECO Energy a series of 5.11% junior subordinated notes due January 15, 2007, with the same financial terms as the company preferred securities. TECO Energy has guaranteed payments to be made on the company preferred securities pursuant to a guarantee agreement. TECO Energy has indirectly guaranteed payments to be made to the holders of the trust preferred securities as a result of their beneficial interest in the company preferred securities.
The cumulative cash distributions are subject to certain deferral provisions. TECO Energy can defer interest payments on the underlying subordinated notes for up to five years, but not beyond the maturity date on the subordinated notes of January 15, 2007. If TECO Energy defers interest payments on the subordinated notes, the Trust will defer distributions on the trust preferred securities. During any deferral period, distributions on the trust preferred securities will continue to accumulate quarterly at the initial annual rate of 5.11% of the stated liquidation amount through October 15, 2004 and at the reset rate thereafter through January 15, 2007.
The Trust has minimal assets other than the company preferred securities. The Trust Agreement does not permit the Trust to engage in any activities other than holding the company preferred securities, issuing the trust preferred securities, and engaging in other related activities. The equity security units (of which the trust preferred securities are a component) began trading on the New York Stock Exchange on January 16, 2002 under the symbol “TE PRU.”
As long as the trust preferred securities remain outstanding, TECO Energy is required to maintain a 100 percent direct or indirect ownership in the company common securities issued by the LLC. TECO Energy was in compliance with this covenant at December 31, 2003.
The fiscal year of the Trust is the calendar year. The LLC pays all fees and expenses related to the Trust.
ITEM 2.
ITEM 2. PROPERTIES.
The Trust has no physical property. Its primary assets are the company preferred securities issued by the LLC.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Trust is not a party to any legal proceedings.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the quarter ended December 31, 2003.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Trust has not issued common equity securities.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
(1) The Trust was established on November 20, 2000 and commenced operations on January 15, 2002.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION FOR THE YEAR ENDED DECEMBER 31, 2003.
TECO Capital Trust II was formed on November 20, 2000 and issued to the public 17,965,000 of its trust preferred securities as components of equity security units issued by TECO Energy, Inc. and the Trust for an aggregate purchase price of $449,125,000 on January 15, 2002. The proceeds from the issuance were remitted to the LLC in exchange for 17,965,000 company preferred securities for an aggregate purchase price of $449,125,000. TECO Energy, Inc. purchased all of the company common securities of the LLC for an aggregate purchase price of $13,975,000. The LLC remitted the proceeds from the issuance of both its company common securities and company preferred securities to TECO Energy, Inc. in exchange for $463,100,000 aggregate principal amount of 5.11% Junior Subordinated Notes Due 2007 of TECO Energy, Inc., dated January 15, 2002, and bearing interest and maturing on the dates and in the amounts set forth in the Indenture, dated as of August 17, 1998, by and between the Company and The Bank of New York, as Trustee, as supplemented by the Sixth Supplemental Indenture, dated as of January 15, 2002.
The trust preferred securities represent undivided beneficial interests in the assets of the Trust, which consist of a corresponding amount of the company preferred securities. Distributions on the company preferred securities are passed on to the holders of the trust preferred securities. The Trust is required to make distributions on the trust preferred securities concurrently with, and in the same amount as, the distributions on the company preferred securities. Distributions on the company preferred securities are cumulative and accumulate from the date they are first issued at the annual rate of 5.11% of the $25 per company preferred security liquidation preference. Distributions are payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year. Distributions accrued on the company preferred securities at December 31, 2002 and 2003, together with the amounts accrued during the periods January 1 through January 15 of 2003 and 2004, respectively, were subsequently distributed by the Trust to the holders of the trust preferred securities.
The equity security units (of which the trust preferred securities are a component) began trading on the New York Stock Exchange on January 16, 2002 under the symbol “TE PRU.”
TECO Energy, Inc. owns all of the company common securities of the LLC, which, unless an event of default has occurred and is continuing with respect to the junior subordinated notes, represent 100 percent of the voting rights in the LLC. The LLC is managed by a board of directors who are designated as “managers” of the LLC within the meaning of Delaware law. The directors will serve until their successors are duly elected and qualified. The directors may appoint officers of the limited liability company from time to time to manage the day-to-day affairs of the limited liability company. All voting rights in the LLC are vested in TECO Energy, Inc. as the sole holder of the company common securities, including the right to elect the board of directors.
Because the Trust is a special purpose financing entity with no separate business operations and minimal assets other than the company preferred securities, the Trust’s ability to pay distributions on the trust preferred securities depends on the ability of the LLC to pay distributions on the common preferred securities, which in turn depends on the LLC’s receipt of payments from TECO Energy, Inc. Accordingly, an evaluation of TECO Energy, Inc.’s financial condition is relevant to an evaluation of the financial condition of the Trust and its ability to pay distributions on the trust preferred securities, and the Trust refers you to the information about TECO Energy, Inc., including financial statements and other financial information, included in TECO Energy, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2003, its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2003, June 30, 2003 and September 30, 2003, and its Current Reports on Form 8-K as filed with the Securities and Exchange Commission, copies of which may be obtained from the Director of Investor Relations at TECO Energy, Inc., 702 North Franklin Street, Tampa, Florida 33602 or from its website at www.tecoenergy.com.
Contractual obligations of the Trust consist only of repayment of the principal amount of trust preferred securities due on January 15, 2007.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
On January 15, 2002, the Trust purchased 17,965,000 company preferred securities of the LLC with an annual distribution rate of 5.11% for an aggregate purchase price of $449,125,000. TECO Energy has guaranteed all payments to be made on the company preferred securities. There is no public market for these company preferred securities.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
All financial statement schedules have been omitted since they are not required, are inapplicable or the required information is presented in the financial statements or notes thereto.
Report of Independent Certified Public Accountants
To the Trustees of the TECO Capital Trust II:
In our opinion, the financial statements listed in the accompanying index present fairly, in all material respects, the net assets available for trust activities of the TECO Capital Trust II (the “Trust”) at December 31, 2003 and 2002, and the changes in net assets available for trust activities for the year ended December 31, 2003 and for the period from January 15, 2002 (date of formation) through December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Trust’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Tampa, Florida
March 26, 2004
TECO CAPITAL TRUST II
STATEMENT OF NET ASSETS AVAILABLE FOR TRUST ACTIVITIES
The accompanying notes are an integral part of the financial statements
TECO CAPITAL TRUST II
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR TRUST ACTIVITIES
The accompanying notes are an integral part of the financial statements
NOTES TO FINANCIAL STATEMENTS
A. OVERVIEW
TECO Capital Trust II (the “Trust”) is a statutory business trust that TECO Funding Company II, LLC (the “LLC”), a subsidiary of TECO Energy, Inc. (“TECO Energy”), formed under Delaware law on November 20, 2000 pursuant to a certificate of trust filed with the Delaware Secretary of State. The Trust is governed by an Amended and Restated Trust Agreement dated as of January 15, 2002 by and among the LLC as depositor, The Bank of New York as property trustee, and The Bank of New York (Delaware) as Delaware trustee (the “Trust Agreement”). The Trust Agreement is qualified as an indenture under the Trust Indenture Act of 1939. TECO Energy and the Trust issued to the public 17,965,000 mandatorily convertible adjustable conversion-rate equity security units with an annual distribution rate of 9.50%, with an aggregate liquidation amount of $449.1 million on January 15, 2002 for the purpose of acquiring related company preferred securities from the LLC, which in turn purchased a corresponding amount of subordinated notes from TECO Energy. Each equity security unit initially consisted of a contract to purchase shares of common stock of TECO Energy and a trust preferred security of the trust, which was pledged to secure the obligation to purchase the common stock of TECO Energy under the related purchase contracts. At December 31, 2003, the trust preferred securities had a carrying amount of $449,125,000 and an estimated fair market value of $298,219,000. The estimated fair market value was based on quoted market prices.
Each trust preferred security has a stated liquidation amount of $25, on which distributions are payable at the rate of 5.11% per year on a quarterly basis, in arrears, through October 15, 2004. In order to provide holders of equity security units comprised of trust preferred security and a purchase contract (each a “normal unit”) with the necessary collateral to be applied in the settlement of their purchase contracts, a remarketing agent will sell the trust preferred securities of the holders of normal units, other than those electing not to participate in the remarketing, and the remarketing agent will use the proceeds to purchase treasury securities, which the participating normal unitholders will pledge to secure their obligations under the related purchase contracts. Holders of trust preferred securities who have substituted collateral for the trust preferred securities that were part of the normal units and hold the trust preferred securities separately may also elect to participate in the remarketing. In order to facilitate the remarketing of the trust preferred securities, the remarketing agent will reset the rate of distribution on the trust preferred securities, and on the company preferred securities, for the quarterly payments payable on and after January 15, 2005.
The trust preferred securities represent a corresponding amount of company preferred securities of the LLC. The LLC sold company preferred securities to the Trust and company common securities to TECO Energy. The LLC used the proceeds from the sale of the company preferred securities and the company common securities to buy from TECO Energy a series of 5.11% junior subordinated notes due January 15, 2007, with the same financial terms as the company preferred securities. TECO Energy has guaranteed payments to be made on the company preferred securities pursuant to a guarantee agreement. TECO Energy has indirectly guaranteed payments to be made to the holders of the trust preferred securities as a result of their beneficial interest in the company preferred securities.
The cumulative cash distributions are subject to certain deferral provisions. TECO Energy can defer interest payments on the underlying subordinated notes for up to five years, but not beyond the maturity date on the subordinated notes of January 15, 2007. If TECO Energy defers interest payments on the subordinated notes, the Trust will defer distributions on the trust preferred securities. During any deferral period, distributions on the trust preferred securities will continue to accumulate quarterly at the initial annual rate of 5.11% of the stated liquidation amount through October 15, 2004 and at the reset rate thereafter through January 15, 2007.
The Trust has minimal assets other than the company preferred securities. The Trust Agreement does not permit the Trust to engage in any activities other than holding the company preferred securities, issuing the trust preferred securities, and engaging in other related activities. The equity security units (of which the trust preferred securities are a component) began trading on the New York Stock Exchange on January 16, 2002 under the symbol “TE PRU.”
As long as the trust preferred securities remain outstanding, TECO Energy is required to maintain a 100 percent direct or indirect ownership in the company common securities issued by the LLC. TECO Energy was in compliance with this covenant at December 31, 2003.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Additions to net assets, including dividend income, and deductions from net assets, including dividend distributions, are recognized on an accrual basis. Dividend distributions accumulated from the date the Trust issued the trust preferred securities and are payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year, beginning April 15, 2002.
INCOME TAXES
The Trust is characterized for United States federal income tax purposes as a grantor trust and will not be taxed as a corporation. For income tax purposes, any income or losses from the Trust are passed through to the holders of the trust preferred securities. Therefore, no provision for income taxes has been included in the Trust’s financial statements.
C. RELATED PARTIES
During the years ended December 31, 2003 and 2002, the Trust recognized dividend income on the company preferred securities from the LLC of $22,950,288 and $21,994,026, respectively. The Trust also received dividend payments from the LLC of $22,950,288 and $17,212,716 in 2003 and 2002, respectively.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures. TECO Energy, Inc. (the Company) is designated to make compliance filings on behalf of the Trust. The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Trust’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this quarterly report (the “Evaluation Date”). Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, the Trust’s disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Trust required to be included in the Trust’s reports filed or submitted under the Exchange Act.
(b) Changes in Internal Controls. There have not been any changes in the Trust’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, such controls during the period covered by this report.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Bank of New York (Delaware), a Delaware banking corporation, acts as the Delaware Trustee, pursuant to the certificate of trust that formed the Trust in November 2000. The Trust has no executive officers or directors.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
Not applicable.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT.
Not applicable.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The LLC pays all fees and expenses related to the Trust including audit fees. The following table presents fees for professional audit services rendered by PricewaterhouseCoopers LLC for the audit of the Trust’s annual financial statements for the years ended December 31, 2003 and December 31, 2002.
Audit fees consist of professional services for the audit of the Trust’s annual financial statements and review of financial statements included in the Trust’s 10-Q filings.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS
The financial statements are listed under Item 8 of this report.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of 2003.
(c) EXHIBITS
The exhibits filed as part of this Form 10-K are listed on the Exhibit Index immediately preceding such Exhibits. The Exhibit Index is incorporated herein by reference.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TECO CAPITAL TRUST II
By: TECO Energy, Inc., as designated signatory
Date: March 30, 2004
By:
/s/ Gordon L. Gillette
Name:
Gordon L. Gillette
Title:
Principal Financial Officer
EXHIBIT INDEX
(1) Incorporated by reference to the identically titled exhibit to the Current Report on Form 8-K (File No. 1-08180) filed by TECO Energy, Inc. on January 15, 2002.
(2) Incorporated by reference to Exhibit 4 to TECO Energy, Inc.’s Amendment No. 1 to Registration Statement on Form S-3 (No. 333-60819) filed with the Commission on August 24, 1998.