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TECO Energy, Inc. (NYSE:TE)

Q3 FY08 Earnings Call

October 30, 2008, 10:00 AM ET

Executives

Mark M. Kane - Director, IR

Gordon L. Gillette - EVP and CFO and President TECO Guatemala

John B. Ramil - President and COO

Sandra W. "Sandy" Callahan - VP Treasury and Risk Management

Analysts

Daniel Eggers - Credit Suisse

Greg Gordon - Citigroup

Lasan Johong - RBC Capital Markets

Maurice May - Power Insights/Soleil

Operator

Good morning. My name is Darlene, and I will be your conference operator today. At this time, I would like to welcome everyone to the TECO Energy 2008 Third Quarter Results Conference Call. All lines have been placed on-mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you.

I would now like to turn the call over to Mr. Mark Kane Director of Investor Relations. You may begin your conference.

Mark M. Kane - Director, Investor Relations

Thank you, Darlene. Good morning, everyone, and thank you for joining us for TECO Energy's third quarter results conference call and webcast. Our earnings along with un-audited financial statements were released and filed with the SEC earlier this morning.

This presentation is being webcast and our earnings release, financial statements and the slides for this presentation are available on our website at tecoenergy.com. The presentation will be available for replay through the website approximately two hours after the end of the presentation and will be available for 30 days.

In the course of our remarks today, we will be making forward-looking statements regarding our financial outlook and plans for 2008 and 2009. There are a number of factors that could cause our actual results to differ materially from those that will discuss our outlook and expectations today.

For a more complete discussion of these factors, we refer you to the discussion of the risk factors in our annual report on Form 10-K for the period ended December 31, 2007, and as updated with our subsequent filings with the SEC.

Also today, we'll be using non-GAAP measures in the course of the presentation. There are reconciliations to the nearest GAAP measure contained in the appendix to today's presentation. On the call today, Gordon Gillette, our Chief Financial Officer will cover the third quarter and year-to-date results, the outlook for the remainder of 2008 and provide a preliminary 2009 outlook.

Also with us today to participate and answering your questions are Sherrill Hudson, TECO Energy's Chief Executive Officer, John Ramil, our Chief Operating Officer, and Sandy Callahan, our Treasurer.

Now, I'll turn it over to Gordon.

Gordon L. Gillette - Executive Vice President and Chief Financial Officer and President TECO Guatemala

Thanks, Mark and good morning. Thank you for joining us for our third quarter earnings conference call and what I know it's a very busy day for utility companies reporting earnings ahead of VEI [ph] next month. We plan to be very brief. We'll focus on the quarter and the impact that our year-to-date results have on our outlook for the rest of the year.

Also given our performance today then our expectations for the rest of this year, we will discuss our 2008 guidance and provide a preliminary look at the factors that we see driving 2009. We will provide an update on our coal operations and contracting status to assist you and valuing this segment of our operations for next year as well. As we said previously, for us the real value of TECO Coal will be apparent in 2009 not in 2008.

For the quarter, GAAP net income was $58.2 million compared to $92.8 million in 2007, which included synfuel in TECO Transport. Third quarter non-GAAP results excluding charges, gains in synfuel were the same at $58.2 million in 2008, compared to $79.1 million in 2007.

Our non-GAAP results excluding synfuel in 2007, included $7.4 million of non-GAAP results from TECO Transport, which was sold last December. On a per share basis, our non GAAP results excluding the items I just mentioned were $0.28 per share this quarter, compared to per share results of $0.38 in 2007. There are tables in the appendix of this presentation that provide a reconciliation between GAAP net income and earnings per share and the non-GAAP measures that we just discussed.

Our year-to-date GAAP net income was $140.4 million compared to $293.3 million in 2007, which included synfuel in TECO Transport. Year-to-date non-GAAP results excluding charges, gains and synfuel, were $141 million, compared to $176 million in 2007. In 2007, the year-to-date non-GAAP contribution from TECO Transport was $19.8 million. On a per share basis, our non-GAAP results, excluding the items I just mentioned were $0.67 per share in the year-to-date period compared to per share results of $0.78 in 2007.

Charges and gains in 2008 included $600,000 after-tax adjustments of previously estimated cost associated with the sale of TECO Transport last year. The drivers for the quarter and year-to-date periods were covered extensively in our earnings release. So I'll only cover the highlights now.

For the first time and as long as we can remember, we had no net customer growth in Tampa Electric in the third quarter. This continued the downward trend for 2008 and were significantly lower than last year's third quarter customer growth of 1.8%. On a gross basis, Tampa Electric actually added 1.1% of new customers in the quarter, but the number of residences being disconnected due to foreclosures or vacancies exceeded the number of new customers yielding us quietly negative net customer growth.

Unfortunately, mild and wet weather drove retail energy sales to be 6.7% below 2007 levels in the quarter. Cooling degree days was 7% below normal and 11% below last year. We have lower sales to industrial customers that supply the housing market and the phosphate customers due to maintenance outages in their facilities. As we have indicated to you previously, Tampa Electric is spending more on non-fuel operations and maintenance activity this year and this has impacted our year-over-year earnings comparisons with Tampa Electric as well. The higher O&M cost of Tampa Electric were related to maintenance at power generating facilities and bad debt expense, which is another indicator of the housing market and economic slowdown in our area.

As indicated, Peoples Gas results were lower than last year due to much lower customer growth and higher operating expenses. Like Tampa Electric, Peoples Gas has fewer residential customers due to foreclosures and vacancies. Peoples had higher sales volumes for residential and commercial customers in the quarter driven by an increase in the number of commercial customers and higher usage by residential customers for believe it or not, cool heaters in this summer time due to the rainy summer weather.

Operations and maintenance expense cost of Peoples Gas where slightly higher than last year. Production at TECO Coal was lower in the third quarter compared to last year's third quarter and lower than we expected due to a second instance of difficult mining conditions and an underground mine later in the quarter with a roof fall, which temporarily halted production in the mine.

Although, the mine is now back in full production, these two occurrences of adverse geology, one in the second quarter and one in the third, and a shortage of qualified labor contributing to a lower production forecast for 2008, which we'll talk about more in just a minute.

TECO Coal had slightly higher sales level on a year-to-date basis, compared to last year. However, because of the contract timing, we won't see the benefits of the higher prices until 2009 and 2010. Most of our sales for this year were under contracts that were signed in 2006 and 2007 before the coal markets dramatically improved.

Another important factor influencing our current results at TECO Coal is much higher production costs. Although the average selling price for the quarter was 10% higher than last year, production cost increased almost 16%. While this was down from the second quarter, the benefits of lower diesel prices were not realized until late in the quarter and higher labor costs are continuing to drive up our production cost. Lower production volume in the quarter also cost per unit production cost to be higher as fixed cost were spread over few returns.

At TECO Guatemala, we had improved results for the quarter despite two months of the much lower value-added distribution tariff or VAD or EEGSA the distribution utility that was effective of August 1st. The new VAD reduced net income by about $0.5 million for the quarter. On the other hand, at EEGSA we had higher energy sales from customer growth and the affiliated companies had increased earnings as well.

The coal-fired San Jose Power Station had improved results driven by the fact that the prices for the spot energy sales that we make after fulfilling our obligations under the power purchase agreements have been much stronger this year driven by higher fuel oil prices, given that oil fire generation is on the margin in Guatemala. We also have lower interest expense on the non-recourse debt associated with both power plants. In apparent and other line for TECO Energy, our debt redemption activities are paying off this year through lower interest expense.

Turning, now to our cash and liquidity status at the end of the quarter, we ended the quarter in a very strong cash and liquidity position with almost $750 million of cash and credit facilities available. Our liquidity position reflects Tampa Electric's current $110 million under recovery under its fuel adjustment clause due to the higher natural gas and coal prices.

Tampa Electric expects its fuel under recovery amount to grow to about $133 million by the end of the year, driven by the higher prices it's paying for both natural gas and coal in the current market compared with filings in late 2007.

However this amount is down from projections that we were making this summer due to the lower natural gas and oil prices and improved operations from our coal units. Tampa electric has filed to recover the under recoveries that we project for 2008 fuel cost to the normal throughout mechanism in its fuel adjustments cost filing for 2009. The hearings on a fuel adjustment clause are scheduled for next week with the decision expected at that time.

We will now turn to our outlook and guidance for 2008 and our thoughts on 2009. We are maintaining our 2008 guidance for earnings to be in a range between $0.80 and $0.90 per share including charges or gains. This forecast is based on a year-to-date factors that we have experienced in our expectations for the reminder of the year.

Weather for the year has been below normal with a mild winter and a rainy month of July which reduced energy sales level down to almost summer levels. Before the economy and housing market remains weak and the tighter credit and lending standards for home mortgages are keeping customer growth significantly below our earlier expectation.

At TECO Coal, we are now forecasting sales of 9.5 million tons for 2008 which is down from prior forecast due to a lack of qualified underground miners, difficult mining conditions, increased safety inspection and low equipment lead times all of which has delayed our ability to increase production as planned.

Even though TECO Coal was benefiting from some of the improvement in selling prices higher cost of production at more and more than offsetting this. At TECO Guatemala, the five months impact of the bad decision at exit... at the end of this year will be offset by strong overall performance in the power plants and the affiliated decade two companies later this year in its royalty year.

Now we will address the current economic situation in Florida and the prospects for growth in our utility companies. You saw in our release that Tampa Electrics had essentially no customer growth in the third quarter which was below the second quarter's 0.2% customer growth and our first quarter customer growth of 0.6%.

Overall, the year-to-date customer growth has been 0.3%, which is below our first quarter expectation for customer growth of more than 0.6% for the year. A recent reexamination of our customer growth forecast which is supported be the general economic outlooks being provided by other company in many different business sectors nationwide is that the credit market crisis than its resulting economic impact with delaying economic recovery until well into 2010.

As, we reported earlier this year the statewide economic situation is also driving lower electric and natural gas sales to commercial and industrial customers that supply the housing industry and consumer discretionary purchases. We believe we are experiencing some voluntary conservation by our electric customers due to consumers paying more for basics, such as food and consumer's general concerns regarding the economy.

Florida and the Tampa region have higher unemployment rates in a national level that we are initially driven by a drastic slowdown in the construction industry but increasingly other industries are now a factor in the high unemployment levels due to the overall economic slowdown.

This is the opposite of prior economic slowdowns in which Florida and the Tampa area has outperformed the nation. This graph reinforces at this point, you can spikes in customer growth factor in the dot com boom days in 2000 and 2001, followed by the economic slowdown that occurred following September 11.

You can also see the largest spike in new customers in 2005 and 2006 as the height of the housing boom. What we've learned and are now factoring into our forecast is that a significant number of the new meters being installed in 2005 to early 2007 during the boom, while residences that are still vacant. As I discussed in the results for the quarter, actual new customer additions of 1% are being offset by meters being disconnected due to foreclosures and vacancies.

You can also see on the slide that the year-to-date September actual growth is much lower than the full year projection for customer growth that we provided back in April. A recent positive development is that like many other areas of the country, Tampa experienced a 38% increase in existing home sales in September. Our belief is that housing prices have perhaps been driven down to a level that bargain hunters are now finding good values in homes that are now buying.

Even with this one month improvement, we still have a significant inventory of existing homes to be absorbed. The next few slides cover the Tampa Electric and Peoples Gas filings with the Florida Public Service Commission for increases in their base rates. Both companies filed their cases in early August in the process of discovery and audits by the Florida Public Service Commission staff are now underway. The formal hearings on the case for Tampa Electric are scheduled in January of 2009 with a final commission decision expected in April of 2009.

Peoples Gas requested interim rates to bring them back to the bottom if they are allowed return on equity range, while Tampa Electric is not seeking interim rates. The commission approved $2.4 million of annual interim rates for Peoples Gas that becomes effective at November 1. The Peoples Gas rate case schedule is slightly behind the Tampa Electric's schedule under an agreement with the commission's staff to accommodate two simultaneous cases.

Using the 2009 test year, Tampa Electric has requested $228 million in a base rate increase based on a 12% return on equity and a 55% equity ratio on a $3.66 billion rate base. Tampa electric is seeking a new inverted rate design, which is similar to the rate structure used by other four investor on utilities. Under this proposed rate design, the more customer uses the higher rate the customer will pay. This type of rate design encourages wise and efficient use of energy, which also supports Florida's desires to eliminate greenhouse gas emissions.

The public hearings still allow customers to comment, request were held in Tampa and for Paul County last week where comments from interveners and customers. As you would expect, the requested level of return on equity due comments from the office of Public Council and the fact that we're asking for a base rate increase at the same time that we're retesting a significant increase in our fuel adjustment charge in a tough economy during a number of comments as well.

It's been 16 years since Tampa Electric last filed for a base rate increase in 1992, and a lot changed over that time. We made significant investments in facilities and infrastructure, and we have added 200,000 new customers, which is a 42% increase. To serve these customers and maintain the required reserve margin, we've added almost 1700 megawatts of generating capacity.

This included our HOPW1 IDCC unit 480 megawatt peaking unit and a re-powering of the bay side [ph] power station. We've also added 100 miles of high voltage transmission lines, 17 new distribution substations, and invested in hardening, both our transmission and distribution systems as required following the 2004 and 2005 hurricane season.

At the same time, we faced norm in cost pressures. Labor costs are up 77% and concrete and steel are more than 70% since 1992. Much of the materials cost increases have occurred over the past four years.

This graph illustrates our need for a base rate increase at Tampa Electric. You can see that using 1992 as the base line, during the period from 1992 to 2003 our growth in base revenues have resulted from continued customer growth exceeded our additions to rate base. Reversing this trend, starting in 2004 and 2005 with the investment in the re-powering of base side power station and the accelerating cost for the raw materials that we use on a daily basis for new construction. Base revenue growth was no longer keeping pace with additions to rate base, thus putting pressure on our ability to earn within our allowed return on equity range.

The addition of new generation to meet our generating reserve requirements, capital spending on the T&D system to support new customers, storm hardening and cent spending to improve our distribution system reliability caused a relationship to get even more severe and ultimately caused that they had no choice but they file for base rate release.

At, Peoples Gas using a 2009 test year we requested a $26.5 million base rate increase with a 11.5%return on equity and a 55%equity ratio on an almost $600 million rate base. Peoples Gas is requesting a new tracker to support its expanding of natural gas distribution systems to new developments that are not near existing pipelines to support the use of natural gas and help for to achieve its goal for the reduction of greenhouse gas submissions.

This tariff would allow more timely recovery of certain costs to serve new customers with natural gas. All the rate case information for both Tampa Electric and Peoples Gas is available on TECO Energies website or through the links to the Florida of the Public Service Commission's website at TECO energies Investor Relations page.

Turning to 2009, our overall outlook is strong. We have a positive outlook at TECO Coal given the strong coal price environment, we expect base rate relief at our Florida utilities by mid year next year at Tampa Electric, we also have the exploration of the water borne fuel transfer station just allowing at the end of this year.

We conducted a completely transparent or RFP process with the participation and support of the Florida Public Commission Staff to avoid the issues that resulted in the disallowance five years ago. The new cost at fuel transportation has included in our annual fuel adjustment filing that we expect to be approved next week.

The disallowance that's going away has reduced Tampa Electric net income by about $10 million annually since 2004. So this will represent an upside for Tampa Electric in 2009. We reviewed our forecast and we now expect customer growth as the utilities to be below our previously forecasted level of 1.2% for 2009.

As, obviously still significant uncertainty in the economy, which is making it difficult to have a high degree of certainty and our future rate of customer growth when it will return to more normal levels. At TECO Guatemala, our results for next year will be impacted by a major outage that is scheduled for the Centre Base power station and the outcome of our efforts to have the value added distribution recalculated at a more reasonable level at EGGSA.

We are currently working with EGGSA and our partners and our efforts to the legal diplomatic and political channels to have the bad recalculated. Now, just a few more specifics on our expectations for TECO Coal for 2009, we are positive on the prospects for our coal operations. Contract prices for physical coal deliveries have remained strong despite the weakening of the coal financial futures markets over the summer.

Next year we expect sales of 10.5 million tons from new mines and additional sections that are being added to existing mines. We made significant progress in contracting new met coal sales since July. Currently, 88% of our expected sales are of our expected sales are contracted for next year at an average price of $77 per ton.

This includes all of our steam coal and portions of our met/PCI coal production. We're in discussions to finalize our sales of the remaining met/PCI coal and making progress to finalize those deals. The on priced tons are 60% met and 40% PCI, which means that if we're successful in completing our contracts at the recent market prices for those products, TECO Coal should have a very strong year in 2009.

On the cost front, we're seeing that the only in cost to productions including $5 per ton for depletion, depreciation and amortization and allocated interest expense could be in the range of between 65 and $75 per ton next year driven primarily by higher labor in and contract minor cost.

This means that we expect our cash cost to production to be between $60 and $70 per ton. The industry continues to offer qualified minors higher pay and we have to compete to retain our miners. In addition, competition per contract miners is driving cost higher as well. We are getting some help from lower commodity prices for materials such as explosives, steel and petroleum related products, we've also hedged our diesel cost for the tons that are under contract either to swap certain contract terms which will help to protect our margins at TECO Coal for 2009.

You can see on this slide then an addition to having most of our 2009 tons committed in price we have made progress on contracting our 2010 tons in the current market. We now have a little more than 50% of our expected 2010 sales contracted and priced at level similar to those that are already contacted for in 2009.

In 2011, we have approximately 30% of our expected sales under contracts and all of this is steam coal. Included in to the sales for 2009, 10 and 11 our two relatively small steam coal contracts that we've discussed previously that are well under market. Together they totaled less than 7% of production but they negatively affect our average selling prices.

In closing, 2008 has turned out to be weaker than we originally projected at the utility companies due to the weak Florida economy and weather. At TECO Coal production cost have been a struggle due to the commodity input cost in the first nine months of the year and labor cost escalation.

We are looking forward to 2009 and expect improved results from stronger prices and higher production at TECO Coal and additional earnings from base rate relief that we expect to be in place by May at Tampa Electric and June at Peoples Gas. The major issue we're still facing at the utilities there is continued weakness in the economy that now is spreading beyond the housing sector.

We will now open up the phone lines to answer your questions. Operator?

Question And Answer

Operator

[Operator Instructions]. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Dan Eggers with Credit Suisse.

Daniel Eggers - Credit Suisse

Good morning. Just looking at the slowdown in Tampa, how are you guys thinking that's going to effect kind of some of the longer run CapEx plans by way of new generation additions in as that kind of push out CCGT construction and that sort of thing.

John B. Ramil - President and Chief Operating Officer

Yeah Dan this is John Ramil. Its is Dan we typical been seen 2.5% to 3% kind of long-term growth we think it back to normal its going to more than 2% range, so between the slowdown now and a slower growth in the future that going to push the future generation out. So the CT that we have beyond 2010 and the next natural gas combine cycle unit will move up. Although we do have to replace some purchase power contracts no matter what the load growth is we're going to have to do some of that but its going to have the effect of moving things out.

Daniel Eggers - Credit Suisse

But John, on the CCGT should we be thinking that you have decided a year or two, I know that was part of the goal that was to replace some of the purchase power contracts. Is that enough need just for those contract replacements to keep the CCGT ...?

John B. Ramil - President and Chief Operating Officer

That it pass by quickly comes back Dan, but I think at least a year is probably the best guess, right now.

Daniel Eggers - Credit Suisse

Okay. Given the challenges with kind of a volume production out of the coal side, can you help to get some more comfort around the ability to hit the 10.5 million tons next year and it's kind of a visibility in making sure you have a labor pool to do that?

John B. Ramil - President and Chief Operating Officer

Yes Dan that's a really good question. We are going to continue to fight with contract minors and labor and we are prepared to do that. We have done some things and part of the mining challenges we face this year have been in opening new mines and getting through the initial path that we have to get through this mine and we've done that we've taken that pain and we are prepared to produce very strongly from those new mines. We're also, on a very well reasoned in employee training basis, are moving more to our own mine than depending on others, and we're moving from, historically, our own mining in the mid upper 50% of our production, more towards two-thirds of our production.

Daniel Eggers - Credit Suisse

John remind me that just given the hedging structure, if you guys you're not hedging out all of your exposure for `09 and then the volumes come in lower, how does that... are you obligated to make people whole, or is it as delivered kind of hedging structure?

John B. Ramil - President and Chief Operating Officer

Well, we now have its kind of... we're hedging as we contract for tons. So, we tied our commitments either in passing through the cost of fuel or as we've contracted for tons so we should have the production and the hedging of our diesel fuel to coal company lined up really well.

Daniel Eggers - Credit Suisse

And then just one last question, on the rate case you given the fact that you have the cost of capital has appreciably gone up even since you guys filed, is there any opportunity for you guys to make any adjustments to your rate case as filed at this point in time to reflect the realities of the world or we're going to be stuck with the original cases files.

John B. Ramil - President and Chief Operating Officer

Well I think the hearings and discovery are forward options for people to address what's going up and down. We clearly expect that our request on our ROE was strongly supported when we filed it is even more supported now and remember we still have some upside in the range that we are allowed on our return on hourly.

Daniel Eggers - Credit Suisse

Great, thank you.

Operator

Your next question comes from the line of Dan Eggers with Credit Suisse.

Daniel Eggers - Credit Suisse

That's what you had.

John B. Ramil - President and Chief Operating Officer

I was saying. We are just heading him.

Operator

Thank you. Your next question comes from the line of Greg Gordon with Citigroup.

Greg Gordon - Citigroup

Thanks, good morning guys.

John B. Ramil - President and Chief Operating Officer

Good morning.

Greg Gordon - Citigroup

The outage in Guatemala, the power plant outage, do you know the approximate, what quarter, or quarters that will be in and can you give us an estimate of what the earnings impact on that might be?

John B. Ramil - President and Chief Operating Officer

The outages that we have planned are primarily in the summer in the fall and we've typically taken about 20 days. We'll probably take closer to 30 or 40 days. It's just a major preventive maintenance outage. And, in terms of what that would do to earnings, we're assuming that we will probably generate a little bit less next year and that will mean a little less revenue in the form of our non-fuel energy charge.

Greg Gordon - Citigroup

Okay. But you don't have a real form as to how much that generally costs you during an outage cycle?

John B. Ramil - President and Chief Operating Officer

Well, the non-fuel energy charge under the PPA is about $20 a megawatt hour.

Greg Gordon - Citigroup

Okay. And, so we just need to figure out how many megawatt hours your work will go during that 20 day outage.

John B. Ramil - President and Chief Operating Officer

Yeah. And I frankly haven't done that calculation myself.

Greg Gordon - Citigroup

Okay. I will go of call to Mark on that. The second question is, is then the rate case be trued up, they can do account changes in both, pension funding needs and casually $0.07 of an expense given the conditions we've seen in the financial markets? And can you give us an estimate of what you expect the impact of market conditions to be on both, your cash funding needs and summary expense on '09?

Sandra W. "Sandy" Callahan - Vice President Treasury and Risk Management

Yes, this is Sandy. we are about... we've been about typically 60% equities, 40% fixed income and obviously like everybody else the equities have been hit pretty hard. The way that the expense components will interact, there will be a hurt on the earnings on the assets side to the extent that assets are lower at year end which is the measurement date. And your earnings rate earnings rates supply to that.

But mitigating that is the fact that the discount rate is likely to be substantially higher. Right now if we look at the discount rates versus what we used last year it's probably a 150 basis points higher and so that serves to offset that. I would say in general, any effect of pension expense is likely to be less than a penny of share. From a funding perspective, we were funded 100% as of the beginning of the year from a risk [ph] perspective and as you know if PPA stays in place and I guess there is some debate about that right now. Any funding shortfall at the measurement date is caught up over seven years. So whatever that might be divided by seven and I have no idea what that might be.

Greg Gordon - Citigroup

Did you fund this year?

Sandra W. "Sandy" Callahan - Vice President Treasury and Risk Management

We did fund this year. Well, we're going to fund this year and that kind of a normal funding amount.

Greg Gordon - Citigroup

And the cash we've tentatively set for next years is about $12 million, but we could defer that to 2010 if we want it to.

Greg Gordon - Citigroup

Yes. But, see it, that's being a meaningful negation liquidity driver on the market...

Sandra W. "Sandy" Callahan - Vice President Treasury and Risk Management

I really don't think so because of the way that all worked and because, we make some larger funding contributions in 2006 and 2007. And so that gave us some cushion to fall back on a little bit and I think that will give us the opportunity to kind of moderate the funding requirement. So will it be somewhat larger next year, it might be, but actually it would be 2010, but I think it's going to be material.

Greg Gordon - Citigroup

Okay. So, Sandy, amortizing '07 expense, just to... over what period do you use versus the link in terms of when you look at the advertising actuarial loss that of the reduction in the PVO from the higher discount rate, what period do you use to amortize that shortfall?

Sandra W. "Sandy" Callahan - Vice President Treasury and Risk Management

I think that's over the average remaining wise of the population or kind of that I guess duration of the liability.

Greg Gordon - Citigroup

Sorry. Like 10 or 12 years or something like that?

Sandra W. "Sandy" Callahan - Vice President Treasury and Risk Management

Yes probably 12 or something, I don't know exactly but...

Greg Gordon - Citigroup

So, that's why the impact have been not been that large there, is because less duration of the amortization coupled with a higher discount rate.

Sandra W. "Sandy" Callahan - Vice President Treasury and Risk Management

But there is back, and then there is also the fact that you've got a lower asset based earn on and that's offset by the discount rate, too.

Greg Gordon - Citigroup

Okay. But any change versus what you had filed in the plan would not be trued up in the plan; you just have to manage that?

John B. Ramil - President and Chief Operating Officer

You mean in the rate case, Greg?

Greg Gordon - Citigroup

In the rate case.

John B. Ramil - President and Chief Operating Officer

We don't have the chance to true up what we file. Now, when you get to the hearings and you answer questions on the stand and you get to talk about what has changed, what has gone up, you might engage in some lively debate with the interveners about what goes up and down. So, there's always a chance to put that into the record, Greg, and have it considered in the rate mix.

Greg Gordon - Citigroup

Okay, Thank you guys.

Operator

Your next question comes from the line of Lasan Johong with RBC Capital Markets.

Lasan Johong - RBC Capital Markets

Good morning. Just a couple of questions. First on coal, the labor market continues to be tight, and we hearing this from pretty much all over the place in terms of secure labor, is there some optimism that this might kind of ease as we see unemployment hover at a higher rates and increase overtime. Are you expecting labor cost to come down in '09?

John B. Ramil - President and Chief Operating Officer

Lasan, this is a unique labor market and we expect the coal markets to remain pretty strong. So we don't have a whole lot of thoughts throughout labor market availability will help whole lot. In the guidance we're giving you on cost, if you think about it that way, the lower into that guidance assumes that we have cost pressure increases similar to what we had from '08... from '07 to '08, the upper end of course assumes more than that.

You factor in some moderation of the other commodities that effect our price of steel, petroleum and natural gas, those look a little bit better. We hedge ourselves on diesel, that's helpful, but we left ourselves some room and I am thinking, I know I am, because of this big labor and I don't hold out a whole lot of hope, it's going to get a lot better we are hopeful it doesn't get any worse.

Gordon L. Gillette - Executive Vice President and Chief Financial Officer and President TECO Guatemala

It's still a very tight labor market.

Lasan Johong - RBC Capital Markets

Then could the opposite become reality where the miners maybe potentially strike because they know they have pricing power?

John B. Ramil - President and Chief Operating Officer

We're non union and I think it's a matter of the economics made we have been very conservative and then our best to capture with the significant range of those economics in our cost estimate.

Lasan Johong - RBC Capital Markets

Okay. On the second question, let me see if I can kind of ask Dan's question a little differently. If there was a shortage of ton for whatever reasons your mining, technical mining issues continue and or you find something new that weren't expecting that reduces your coal tonnage. Is there a situation in which coal is not being produced yet you have make good on your hedging?

Mark M. Kane - Director, Investor Relations

This is Mark. A lot our contracts have a number of different structures in them, some of them, we have to make up at the end of the contract period, that we actually have some contracts, that's it as available where we don't have to make-up the coal. And there are a few contracts, for the next year, we have to make it up. So there is a variety of structures in our contracts.

Lasan Johong - RBC Capital Markets

So what you're saying that even if there were a situation where that could happen, that there are way to make it up, without taking up this?

Mark M. Kane - Director, Investor Relations

That's correct.

Lasan Johong - RBC Capital Markets

Okay. That's good.

John B. Ramil - President and Chief Operating Officer

And we have a pretty steady customer base, and we work closely with our customers over the years, do issues like this and in the past we've been able to work almost everything out very satisfactory to both us and to our customers.

Lasan Johong - RBC Capital Markets

Understood. One last question, have you had any preliminary discussions with regulators on the ROE and the equity percentage for both, Tampa Electric and Peoples Gas? I understand that cost of capital is going up, but I think we all ... as I hope we all assume that this is going to be temporary in which case 12% ROE versus 1% hedged funds rate on a 55% equity base seems potentially excessive?

Gordon L. Gillette - Executive Vice President and Chief Financial Officer and President TECO Guatemala

We don't see it that way. Obviously as our file testimony, which show as we look at and rate this business across the nation and right here in Florida. Given the integrated nature of our utility and the risks associated with generation transmission and distribution, we think our request for 12% return on equity is very fair.

Lasan Johong - RBC Capital Markets

Okay, great. Thank you very much.

Operator

Your next question comes from the line of Ashar Khan with FAC [ph].

Unidentified Analyst

Hi, good morning. I was trying to get a sense looking on '09 based on the assumptions that you mentioned in the presentation. What kind of margins per ton should we be expecting out of the coal business?

Gordon L. Gillette - Executive Vice President and Chief Financial Officer and President TECO Guatemala

I think Ashar, John and I has probably shared this one a little bit, but as we did in July we hopefully have provided you and other investors within building blocks that do some estimates on margins. And I think we've been obviously rather definitive as it's relates to the 88% of tons that are already sold at this point. We've given you a potential cost range and we've also given you our expected realization.

With regard to the 12% of coal, that is not yet contracted and priced. We've given mix of what we expect that to be we said that 60% met 40% PCI and has given kind of a range for what it seems the current market to be there. And so I think we've provided the building blocks for margin calculation. But, the reason we kind of do it that way is that we know the analyst community and institutional investors alike have their own views and thoughts on what met and PCI tons will get so forth.

Unidentified Analyst

Okay. But I guess going to... will do... I guess another way to ask it, will this, you had mentioned like $10 a ton last time in the beginning of the year, is that still doable right now?

Gordon L. Gillette - Executive Vice President and Chief Financial Officer and President TECO Guatemala

Yes Ashar, just to be clear, are you talking '08 or '09, because my remarks are focused on '09.

Unidentified Analyst

I'm talking about '09 because I am trying if I understand you're saying, the costs are between 65 to 75 for '08 am I right?

Gordon L. Gillette - Executive Vice President and Chief Financial Officer and President TECO Guatemala

That's right.

Unidentified Analyst

And the prices like 78, if I heard am I right?

Gordon L. Gillette - Executive Vice President and Chief Financial Officer and President TECO Guatemala

$77 on the 88%.

Unidentified Analyst

So now the range on the cost I pretty right which I don't understand its like I don't know if you can elaborate on that, I don't know which number to take out of that to do the net margin for the hedged portion. Can you just talk about why the cost range is so wide 65 to 75?

Unidentified Company Representative

Well, Ashar, if you look at year-over-year with everything, moving in the wrong direction, we've seen pretty significant double digit increase in our cost year-over-year. And those things may happen again. We talked about the labor issues earlier. So we try to conservatively cover that cost range that we might see. As Gordon mentioned there are a lot people will use their own assumptions on what the pricing for PCI and met tonnage will be, but if you look at Gordon's chart on page 16, you have roughly 88% of our production priced at $77. If you just take that $200 assumption in price that will be 12% of our production on 10.5 million tons you can calculate what the revenue would be. And then look at the range of cost and figure out what the operating income would be and then the tax effect.

Unidentified Analyst

Okay. And if I can end up on 2010, could you just mention out of the contracted and price portion if you can just tell us how much is steam versus met in PCI?

Unidentified Company Representative

That factor in price is just about steam.

Unidentified Analyst

It's all steam?

Unidentified Company Representative

Just about. Have a little bit of that in here.

Unidentified Analyst

Okay, so all of it is at steam, okay. Thank you very much.

Operator

Your next question comes from the line of Andy Smith [ph] with J.P Morgan.

Unidentified Analyst

Good morning guys.

Unidentified Company Representative

Good morning.

Unidentified Analyst

I wanted to talk a little bit about the demand side response you're seeing from residential in Florida. I mean that is a common thing we've heard across the industry but, want to get a little more sense from you guys, how comfortable do you feel given the weather patterns in the third quarter, sort of teasing out what as you mentioned some sort of voluntary demand, response versus it is easy to do that when it is not that hot, and should we think about that as being sticky as a sort of a step function change and then we'll just move... sort of muddle falling from that, if you little give color around how you see that evolving would be helpful?

Unidentified Company Representative

Let me try. It's hardest because of all the factors and when you look at it statistically, you don't have that longer period of time to analyze. But, we know we have a factor that Gordon talked about earlier, and that's an empty house factor. A lot of the customer additions in '05, '07 early part of '06 were really empty houses and we saw minimum use maybe 300 kilowatt hours a month on those houses and so that is factor in the customer usage and it's really become a factor in the net customer additions because what happen is those homes gone into foreclosure or people sand I can't afford a $50 a month just to keep the electricity on, they're turning it off.

So, that the customer going to waste, so you have the empty house factor. Then you have on top of that a very, very mild weather that we had and that has affected the usage per customer. And from experience we know that extreme weather some conservation if that maybe a lot of conversation goes up in winters and we haven't seen any of that all this year either winter or summer.

And then we have we know that people are more tuned on what they're spending, and we hear that from customers. So, we know that they're more aware of their consumption patterns everywhere, probably electricity is no different. So that's a factor as well. We can't, at this point, break it down for you how much is happening on each of those.

John B. Ramil - President and Chief Operating Officer

And another component in it, Andy, is the whole greenhouse gas emissions. We know that kids are coming home from school, and have become the turn off the light police, and that people are replacing bulbs with the compact fluorescents, and that's a fairly new phenomenon and that's reducing some of the residential consumption as well.

Unidentified Analyst

On a couple of questions to expand on that a little bit, to in terms of the CFL swap out, you're describing a scenario to me where it sounds like people are worried about paying next month's bill. So, to go out and spend five bucks a light bulb on a CFL, which lighting is 15%, 20% to household usage. Do you guys take you have seen that sort of structural shift or is that a smaller component of this broader issue with the empty house and a lot of gain of it?

John B. Ramil - President and Chief Operating Officer

It's a smaller shift its probably I think long term we have to be think there is or will be more and more that building up particularly as a price of those products comes down, but I think light now its a small thing.

Unidentified Analyst

Okay. And a one last question on this and that will cover it for me, has there been any shaping of customer bill this year that would lead us to believe that might exacerbate that customer response with the shift in natural gas we have seen as the years going on or is it fairly smooth?

John B. Ramil - President and Chief Operating Officer

I'm not sure I understand what you're asking?

Unidentified Analyst

The question being is depending on how fuel pass through and things like that timing like that works, your customer build those way out because the input commodity price fuel goes up right and then when that moderate you shock the customers for a month or two with a high deal if they turn the lights off or cut the air-conditioning back, and then a couple of months later, that moderates just as commodity price has moved it for, it becomes much less significant in the eyes of the customer?

John B. Ramil - President and Chief Operating Officer

No, we haven't seen that, and that's not going to happen here because the adjustments are done on annual basis.

Unidentified Analyst

Right, okay.

John B. Ramil - President and Chief Operating Officer

It is not seasonal or month by month.

Unidentified Analyst

Okay. I just want to just understand there wasn't something like that where we would see this sort of shortage on impacts. Okay. Great, thanks guys I appreciate it.

Operator

Your next question comes from the line of Jeff [ph] with Zimmer Lucas.

Unidentified Analyst

Hi, good morning.

Unidentified Company Representative

Good morning Jeff.

Unidentified Company Representative

Good morning.

Unidentified Analyst

Just wondering to get your sense as to on the rate case process, how your new outlook on customer growth is going to work into that and whether you're going to be able to get the benefit of the reduced customer demand outlook when you're having rates reset.

John B. Ramil - President and Chief Operating Officer

We, this is John Ramil, we did in our rate case file a... sales forecast it was more reflective of the economic conditions that we have. Its still probably over state to sales a little bit. Right now we are thinking on the order about 1% or so. It's not compared to the same kind of comparison moving from '07 to '08 same that you have seen this year.

Again I don't like the discussions we had earlier as we have the opportunity to file more exhibits simplified testimony in the hearings and in depositions. We will have the opportunity to talk about the things that move around and we will argue those things that moved around that we need to use to support and really enhance our revenue climate, requested and sales in expense and all other pressures will be included in those arguments.

Unidentified Analyst

Great, thank you.

Operator

Your next question comes from the line of Edward Haynes [ph] with Capital Management.

Unidentified Analyst

Good morning.

Unidentified Company Representative

Good morning

Unidentified Analyst

Had a few quick questions on coal, I guess first half just look comparing the percentage hedge in your average revenues versus the second quarter call, its looks like in the third quarter you mainly sold PCI Coal and at probably a range of like a $185 to $190 a ton is that kind of is in the right ballpark?

John B. Ramil - President and Chief Operating Officer

You'recorrect and that was mostly PCI Ed, but we are not going to get into the pricing.

Unidentified Analyst

Okay. And I guess it is just on the average $200 can you given these sense of where your, math kind of vision the market versus where the PCI is?

John B. Ramil - President and Chief Operating Officer

The reports for our quality and percent now will matter, physical properties at similar ours, the met that I am seeing Ted is anywhere 225 to 245 probably top end, PCI is probably the report time reading ours in the 175 area to a better a couple of reports higher than that but I don't know the quality specs on those sales.

Unidentified Analyst

Got you, that's helpful. And, then just a little color on the timing of, I know you said your kind of in discussions but when should we expect to hear kind of where you're... the remaining open position is settled out is that something that's eminent or is it of a couple of months down the line?

John B. Ramil - President and Chief Operating Officer

We had discussions right now and it will be wrapped up in pieces over the next one to two months as our sense is.

Unidentified Analyst

Okay, great. And, then just one last question on, I know you said your hedged a fair amount of diesel cost for 2009. Is there a chance that some of those diesel hedges given the short drop off in the pricing there or actually above market and you might actually see some pricing relief moving into 2010?

John B. Ramil - President and Chief Operating Officer

We have been kind of hedging as we have been contracting such the summer here.

Unidentified Analyst

Okay.

John B. Ramil - President and Chief Operating Officer

So, you are right, if you look at what's happened with diesel prices some of those hedges are at higher price levels than the current future's market. But other of those hedges are pretty close to where diesel is right now.

Unidentified Analyst

Okay, fair enough. Thank you very much.

Operator

Your next question comes from Maurice May with Power Insights.

Maurice May - Power Insights/Soleil

Yes. Good morning folks. Not to be at a dead horse but I want to get back to coal production cost because as I read your indications this morning, it looks like a 30% increase in these oil and production costs versus an earlier estimate of 20% increase for this year, is that correct?

John B. Ramil - President and Chief Operating Officer

That sounds to be awfully high Maurice.

Maurice May - Power Insights/Soleil

Okay. Because, before you were talking about a 20%, 22% increase.

John B. Ramil - President and Chief Operating Officer

We said in the second quarter we said we are estimating at 20%. I mean if you took the very upper end of the range, I don't know it gets all the way to 30 I think that's closer, it's a in high 20s but it's not a full 30.

Maurice May - Power Insights/Soleil

Okay. So high 20s, and then going forward...

John B. Ramil - President and Chief Operating Officer

At that range.

Maurice May - Power Insights/Soleil

Yes, Okay. And going forward is this sense to these new recent higher estimates has any implications, for next year and 2010?

John B. Ramil - President and Chief Operating Officer

Maurice, you predict what steel, diesel, natural gas and labor cost are going to be. Those are the factors we're trying to capture here, and it's hard enough to do that at one year ahead, than two to three years ahead. I think, if the commodities are going to be what they're going to be and we put out ways to manage that risk and we're doing that, and we're probably going to as long as coal markets strong, we're going to continue to have labor issues, and it's a positive and a negative.

Maurice May - Power Insights/Soleil

Yes well yes, I know yeah I know I understand.

John B. Ramil - President and Chief Operating Officer

Trying to stay strong when the market stay strong but you have the challenges on the labor side.

Maurice May - Power Insights/Soleil

Yes.

Unidentified Company Representative

We have work to get there, we are going to get work to get the cost out of the 65 or less but as John just pointed out, there is so many factors that as market driven and we have got, we saw the pain of that this year. But we got a great management team up at coal and I tell you, they focus every single day on controlling cost.

Maurice May - Power Insights/Soleil

Okay, good. Thank you very much folks.

Operator

Your final question comes from the line of Alex Henry with Ursula [ph] Capital.

Unidentified Analyst

Hi, good morning. Following up on the ROE, question given what's going on in the capital markets, does it strengthen your ROE argument in the rate case? I think you have corporate bonds, the company does yielding as high as 11% right now. So in that context, I want to argue 12% is pretty low?

John B. Ramil - President and Chief Operating Officer

No, I really think it does, if you look at some the recent bond deals that have been done for good credits in the markets and we have seen bond pricings upwards at 10%. So to your point there are be an equity risk premium and are significantly above that. So I think it does strengthen the arguments for 12 or better.

Unidentified Analyst

Thanks.

Operator

And, there are no questions at this time.

Mark M. Kane - Director, Investor Relations

Okay, operator I think we're just about out of time as well. So I'd like to thank everybody for participating in our call today. Thank you very much. This concludes the call.

Operator

This concludes today's conference call. You may now disconnect. .

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Source: TECO Energy Inc. Q3 2008 Earnings Conference Call Transcript
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