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TECO Energy, Inc. (NYSE:TE)

Q4 2008 Earnings Call Transcript

February 6, 2009 9:00 am ET

Executives

Mark Kane – Director, IR

Gordon Gillette – EVP and CFO, TECO Energy, and President, TECO Guatemala

John Ramil – President and COO

Sherrill Hudson – Chairman and CEO

Analysts

Greg Gordon – Citi Investments

Lasan Johong – RBC Capital Markets

Marc De Croisset – Macquarie Capital

Paul Patterson – Glenrock Associates

Paul Ridzon – KeyBanc

Danielle Seitz [ph] – Seitz Research [ph]

Yiktak Fung – Zimmer Lucas Partners

Scott Zimtek [ph] – Decade [ph]

Travis Miller – Morningstar

Chris Shelton – Millennium Partners

Operator

Good morning. My name is Sheila and I will be your conference operator today. At this time I would like to welcome everyone to the TECO Energy 2008 results and business drivers for 2009. 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 will now turn the call over to Mr. Mark Kane, Director of Investor Relations. Sir, you may begin.

Mark Kane

Thank you, Sheila. Good morning, everyone, and thank you for joining us for TECO Energy's fourth quarter 2008 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 2009. There are a number of factors that could cause our actual results to differ materially from those that will discuss as 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 in 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 this presentation.

On the call today, Gordon Gillette, our Chief Financial Officer, will cover the fourth quarter and full year results, and discuss the business drivers that we see for 2009. Also with us today to participate and answering your questions are Sherrill Hudson, TECO Energy's CEO; John Ramil, our Chief Operating Officer; and Sandy Callahan, our Treasurer.

Now, I'll turn it over to Gordon.

Gordon Gillette

Thanks, Mark, and good morning. Thank you for joining us on our fourth quarter earnings call. Today we will focus on our fourth quarter and full year results, provide an update on our base rate proceedings for both the utilities, and discuss the major business drivers for 2009.

As a bit of our preview, we see our 2009 results being primarily driver by our Florida utilities with TECO Coal and TECO Guatemala playing supporting roles in earnings and cash outlook. In addition to a discussion of the activities related to the ongoing rate hearings at Tampa Electric and Peoples Gas and the economy in the areas of Florida that the utilities serve, we will provide an update on our coal operations including a production cost outlook and an overview of our contracting status and the events at TECO Guatemala.

For the quarter, GAAP net income was $22 million compared to $173.9 million in 2007, which includes synfuel TECO Transport’s operating results through December 3rd of last year and a gain on the sale of TECO Transport. Fourth quarter non-GAAP results, excluding charges, gains and synfuel, were $42.3 million in 2008 compared to $47.7 million in 2007.

Our 2008 non-GAAP results excluded $20.3 million of charges and gains, which were primarily taxes on the repatriation of $71 million of cash and investments from Guatemala in December. On a per share basis, our non-GAAP results, excluding the items I just mentioned, were $0.20 per share this quarter compared to per share results of $0.23 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 full year GAAP net income was $162.4 million compared to $413.2 million in 2007, which included synfuel and a gain on the sale of TECO Transport and TECO Transport’s operating results. Full year non-GAAP results, excluding charges, gains and synfuel, were $183.3 million compared to $223.7 million in 2007. In 2007, the full year non-GAAP contribution from TECO Transport was $24.3 million.

On a per share basis, our non-GAAP results, excluding the items I just mentioned, were $0.87 per share in the year-to-date period compared to per share results of $1.07 in 2007. Charges and gains in 2008 included the fourth quarter items we discussed and a $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 in as long as we can remember, we had slightly negative net customer growth in Tampa Electric in the third quarter, and this continued in the fourth quarter of 2008. So there has been a downward trend for 2008 and our fourth quarter customer growth of minus 0.3% were significantly lower than last year’s fourth quarter customer growth of 1.3%. We had positive growth in the first half of the year.

Therefore, for all of 2008, actual customer growth was a positive 0.1%. The negative customer growth is reflected in a number of inactive meters on Tampa Electric’s system. The combination of low usage meters, which are defined as meters using less than 350 kilowatt hours per month, and a number of inactive meters, which are installed meters without an active account associated with it, is up almost 2% for the year, consistent with the trends experienced throughout the state.

As a result of all these housing market conditions, our bad debt expense increased in 2008. At the end of 2008, our level of bad debt expense was slightly more than 0.4% of total annual revenues compared to an average amount of about 0.25% over the preceding five years.

We had mild weather for electric sales in the Tampa Electric area in the quarter that drove retail energy sales to be 4% below 2007 levels. Total heating and cooling degree days were 12% below normal and 19% below last year. Finally, we had lower sales in industrial customers reflecting the general economic conditions. Tampa Electric’s non-fuel operations and maintenance expenses decreased in the fourth quarter and the full year due to lower employee-related expenses and lower distribution system operating expenses.

At Peoples Gas we actually had slightly positive but albeit much slower customer growth than last year for both the quarter and the year. With Peoples’ statewide footprint, the housing market in northeastern Florida held up better than some of the other areas in the state. Another benefit of Peoples’ statewide presence was the favorable impact of colder weather in the northern portion of Florida in December. The cold weather boosted therm sales to residential and commercial customers.

O&M expense at Peoples was lower in the quarter and was attributable to the lower employee related expenses compared to last year. Peoples also had a $1.5 million benefit from the recognition of insurance recoveries related to environmental remediation liabilities in the fourth quarter. Depreciation expense increased due to the addition for the distribution system, and interest expense increased due to higher levels of long-term debt outstanding.

Production at TECO Coal was lower in the fourth quarter compared to last year’s fourth quarter and lower than we expected primarily due to continued difficult mining conditions in an underground mine. This mine is the new mine that we’ve been bringing online throughout 2008. We’ve had to work our way through tougher geologic conditions than we anticipated at this mine.

TECO Coal had a slightly higher sales level in 2008 compared to last year. However, because of contract timing, we didn’t see the benefits of the higher prices that we expect for this year and next. Most o four sales for 2008 were under contracts that were signed in 2006 and 2007 when prices were weaker.

Another important factor influencing our current results of TECO Coal is higher production costs. Although the average selling price for the quarter was 7% higher than last year, production cost increased 13%. While this was down from earlier in the year, higher labor costs are continuing to drive up production costs. Lower production volume in the quarter also cost per unit production cost to be higher as the fixed costs were spread over fewer tons.

At TECO Guatemala we had lower results for the quarter primarily from the much lower value-added distribution tariff, or VAD, and EEGSA, the distribution utility that was effective August 1. The new VAD reduced net income about $3 million in the quarter. Offsetting this to some degree, we had higher energy sales from customer growth at EEGSA, and the affiliated companies besides EEGSA in the DECA II group had increased earnings as well.

The coal-fired San Jose Power Station had lower results driven by a scheduled maintenance outage and declining spot energy sales margins. On the parent 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 $600 million of cash and credit facilities available. Our liquidity position reflects Tampa Electric 2008 $128 million under recovery under its various adjustment clauses primarily due to higher natural gas, coal and purchase power prices earlier in 2008. Tampa Electric’s fuel adjustment was approved by the Florida Public Service Commission last November, and we are hopeful that will allow full recovery of the 2008 under recovery fuel cost.

We’ll now provide an update on our current thinking on the local and Florida economic situations. Since this time last year we have lowered the outlook for customer growth at Tampa Electric twice, and the actual results have been below even our latest forecast. At this time, it appears that the continued tight credit markets and general issues in the economy are going to delay a real recovery in the housing market until at least the end of this year and probably into next year.

Florida continues to suffer from the overall economic weakness, and both utilities are experiencing lower energy sales to industrial customers, especially those that are related to the housing industry. We are also seeing commercial and industrial customers trying to reduce their energy cost through lower usage. In the commercial sector, we are seeing lower sales to restaurants and we're seeing a slowing of the tourist industry.

Residential customers appear to be conserving more due to the weak economy, and they became accustomed to using less last year when the prices on all forms of energy spiked up. You can see the respective unemployment rates for the country, state, and Tampa area. The higher unemployment rate for Tampa is unlike prior economic slowdowns and is driven primarily by the virtual shutdown of the construction industry. Since the peak in June of 2006, construction employment is down almost 20% and 25% for the Tampa area and the State of Florida respectively.

The first chart on this graph is a good illustration of the loss of construction jobs. It’s the monthly 12-month moving average of residential building permits in Tampa Electric’s service area from April 2004 through last November. The good news on this graph is that the rate of decline has slowed. The second graph actually shows some positive news. The green line is the 2008 monthly residential home sales and the red line is the 2007 sales. The good news here is that starting last fall residential home sales picked up above the anemic levels of late 2007.

Our theory is that home prices and mortgage rates have dropped low enough to attract buyers back into the market. If this continues, we can expect to see the current low usage meters using more energy and the inactive meters turn back on over time. But it will likely be a slow process due to the inventory of vacant homes in the area.

This next graph is our annual average customer additions. You can see the large spike in new customers in 2005 and 2006 at 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 through the early part of 2007 during the boom were on residences that are still vacant. As we discussed in the results for the quarter, actual new customer additions are being offset by meters disconnected due to foreclosures and vacancies.

You can also see on the slide that the actual 2008 growth was much lower than the previous full year projections for customer growth. We're in uncharted territory for Tampa Electric, and the loss of customers and the uncertainty of timing of the housing market recovery is making it very difficult to accurately forecast customer growth.

The next several slides cover Tampa Electric’s and Peoples Gas base rate filings. These activities are shown in green. The activities that are shown in green are the activities that are already complete. As you are aware, both companies filed their cases in early August, and the processes for both companies are well underway. The formal hearings on Tampa Electric's case were held over five days in the last two weeks of January. The company and intervenor witnesses were questioned in detail on a variety of issues during the process. And in our biased opinion, we think we held our own very well.

The commission decision in Tampa Electric’s case on the revenue requirements is scheduled for March 17, and the final decision, including rate design issues, is scheduled for April 4. For Peoples Gas, the commission approved $2.4 million of annual interim rate that became effective November 1. The Peoples Gas case schedule is slightly behind Tampa Electric’s and they are hearing a schedule for the first week of March, and the commission decision on revenue requirement is scheduled for May 5.

To refresh your memory, this is a summary of Tampa Electric’s request. Using a 2009 test year, Tampa Electric has requested a $228 million base rate increase based on a 12% return on equity and a 55% equity ratio level on its $3.66 billion of rate base. Tampa Electric is seeking a new inverted residential rate design, which is similar to the rate structures used by the other Florida investor-owned utilities. Under this proposed rate design, both the base energy charge and the fuel charge are priced in two blocks. The first block, which is up to 1000 kilowatt hours is priced $0.02 per kilowatt hour lower than the energy consumption above that level.

This next slide is a summary of some of the major issues in the Tampa Electric’s rate care that were addressed in the hearings. The intervenors were focused on such items as the requested return on equity, the proportion of equity in the cap structure, our proposal to annualize the peaking combustion turbines and coal handling capacity additions that we’re making this year, a requested increase in our T&D system storm damage reserve, a number of selected O&M items, as well as our requested base rate adjustment mechanisms for new transmission projects.

Some of the points that Tampa Electric witnesses stress were the benefits of better access to capital markets during periods of financial stress if the company has stronger financial metrics, especially given the higher levels of capital expenditures and the expected need to make investments in federal and state energy policies such as renewables and other low carbon generating technologies.

We also focused on the fact that the recent financial market turmoil has actually raised across the capital for utilities even though the treasury rates are at historic low levels. And that the need to increase rates is at least somewhat driven by the existence of new state and federally mandated programs like storm hardening and NERC transmission guidelines.

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

All of the rate case information is available on TECO Energy’s website or through links to the Florida Public Service Commission’s website and TECO Energy’s Investor Relations home page.

Turning now to 2009, our overall outlook has improved – is for improved financial results. We expect our results this year to be driven by the performance of our utility company. As I said, we expect base rate release at both utilities in the April/May time period. At Tampa Electric, we also had the expiration of the waterborne fuel transportation disallowance at the end of 2008.

In order to accomplish this, we conducted a completely transparent RFP process with the participation and support of the Florida Public Service Commission staff to avoid the issues that resulted in the disallowance five years ago. The new cost of fuel transportation was approved in our annual fuel adjustment filing in November. The disallowance that’s now gone away has been reducing Tampa Electric’s net income by about $10 million annually since 2004. So this will represent an upside for Tampa Electric in 2009. The obvious downside for the utilities is the weak economy. We review our forecast, and as I said a few minutes ago, we now expect customer growth at the utilities to be below the previously forecasted level of 1.2% for 2009.

At TECO Guatemala, our results this year will be impacted by an early year forced outage caused by a steam turbine that is currently ongoing at the San Jose Power Station and our efforts to improve the economic dispatch of the plant relative to oil-fired capacity when it returns to service. We are fortunate that the PPA or power purchase agreement at San Jose has a 65% take-or-pay provision that will protect some of our non-fuel energy revenue. But we expect the level of operation – we expect the level of operations is much lower than we’ve been used to for 2009 at San Jose.

Another major factor that will affect results in 2009 relative to 2008 is the full year effect of the VAD and the outcome of our efforts to have the VAD we calculated at a more reasonable level at EEGSA. We are currently working with EEGSA and our partners through legal, diplomatic and political channels to have the VAD recalculated. We served the Guatemalan government notice that we plan to seek an international arbitration of the issue under CAFTA. Iberdrola has filed a similar notice under their bilateral trade agreement between Spain and Guatemala.

We also expect lower results from the DECA II operations due to the lower operator fee from EEGSA as part of the VAD decision and lower interest income and lower cash balances after having repatriated all of the offshore cash at DECA II in December of last year. Finally, we don’t expect to be adjusting our estimated 2008 year-end equity balances in 2009 as we did in 2008. In 2008 the adjustment to 2007 estimated balances was a $3.1 million benefit to earnings.

Turning now to the coal company, we’ve been able to add new sales to those completed earlier in 2008 to the point that we now have 9.6 million tons contracted for 2009 despite the rapid decline in the outlook for the coal markets over the past three months. The worldwide economic downturn has reduced worldwide net coal demand. According to the American Iron and Steel Institute, the utilization rate for the US steel industry for the first three weeks of 2009 was 43% compared to an average rate of 93% last year.

According to several of the major coal producers that have already announced earnings, cumulative net coal production from major producers is expected to be 20 million to 30 million tons lower in 2009 than last year out of a 230 million ton worldwide market. It’s also thought that a number of the smaller non-public producers are cutting back on production as well. Our sales forecast for 2009 is now in a range between 9.8 million and 10.3 million tons, which is reflective of the current market conditions.

Now we’ll cover with just a few – we'll continue with just a few more specifics on our expectations for TECO Coal in 2009. The average selling price for the 9.6 million tons of production that’s under contract is $73 per ton. This includes all of our steam coal and portions of our met and PCI production. With this slower met coal market, our production this year will be weighted a little heavier to the steam side than in the past few years at 70% steam with the remaining 30% being met and specialty (inaudible) market coal.

The 200,000 to 700,000 tons that are currently unpriced and unsold are expected to be two-thirds met and one-third PCI, both of which are expected to sell at prices above our current average selling price.

On the production cost front, we are seeing that the cost of production could be in the range between $63 and $66 per ton for this year, which is lower than our previous forecast. This lower estimate is being driven primarily by now having hedged some of our exposure to commodity prices and lower steel prices. We’ve hedged our diesel cost for the tons that we have under contract, either through swaps or through contract terms, and we’ve hedged the price of our explosives for surface mining operations, which would help protect our margins.

We are expecting less volatility in labor costs in 2009 than in 2008 at TECO Coal. This cost forecast reflects the wage increases granted last year to retain our workforce, and it also reflects continued increase, safety inspections and new safety requirements that will begin in 2009.

Except for 2009, this next slide is essentially unchanged from the outlook provided in October. We now have a little more than 50% of our expected 2010 sales contracted and priced at levels similar to those contracted for in 2009. Much of this contracted coal is steam coal. In 2011, we have approximately 30% of our expected sales under contract, and all of this is steam coal. Including our sales for 2009, ’10 and ’11 are the two relatively small steam coal contracts that we’ve discussed previously that are well below market. Together, they total less than 7% of production, but they negatively affect our average selling prices.

In closing, looking forward to the expected improved results in 2009 from the base rate relief that we expect to be in place by May at Tampa Electric and June at Peoples Gas. We are contracted at stronger prices and higher production at TECO Coal than in 2008, and we’ll be dealing with some more challenging conditions at TECO Guatemala this year that we will manage in the best way possible.

Now we’ll open the phone lines for your questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Greg Gordon of Citi Investments.

Greg Gordon – Citi Investments

Thanks. Good morning, gentlemen.

Gordon Gillette

Good morning.

Greg Gordon – Citi Investments

First question is, looking at the guidance – the last time you gave guidance on the percentage of your coal that was hedged and what the average price is versus the percentage of your coal now hedged and the average price. The math is a little bit confusing as the hedging went up, but the price went down a lot. Algebraically that seems to infer a pretty low price on the marginal tons hedged. Could you – is there a way that you can sort of walk me through how the hedging profile changed?

John Ramil

Yes. Greg, this is John Ramil. I think last time we talked we were about 88% contracted and about $77 a ton price on that. We picked up a little bit more, but we’ve also given the conditions have done a little bit of renegotiations with some of our tentative sales and swapped out a little bit of price for some better conditions for us on the other side.

Greg Gordon – Citi Investments

And so you contracted more volumes than agreed to lower the weighted average price of the contract?

John Ramil

In total, yes, that’s what’s happened.

Greg Gordon – Citi Investments

Great. Thank you. Second question is, in Guatemala you’ve given pretty good disclosure on what you are looking at here vis-à-vis the worst case scenario on lost earnings from the tariff issue. You have also given – there was I guess a non-recurring item that was worth about $3 million. You have disclosed that. And you have talked qualitatively about just opportunity costs associated with spot sales. Can you give us a sense of what sort of average net income or gross margin has been from spot sales in prior year so we can get a sense of sort of what the min/max is of what you might be at risk there at the coal plant?

Gordon Gillette

Sure. In the past, Greg – this is Gordon – we have been selling our 8 megawatts that we have the capacity to generate over and above our 120-megawatt PPA at about an 85% capacity factor. And we’ve seen spot prices in Guatemala that have raised as high as $140 per megawatt hour in Guatemala and averaged for 2008 in the $110 to $120 per megawatt hour range. This year, as we look to 2009, it’s going to be interesting to see the dynamics between coal on the margin and oil. There are a lot of bunker fire or residual oil fire diesel units with pretty good heat rates that now have fairly low oil prices. And so the level of spot sales that we are going to be able to make I think is questionable. And I think it’s even possible that we make very little of any spot sales this year. So that should give you some parameters to work with on.

Greg Gordon – Citi Investments

So 8 megawatts and an 85% capacity factor with an average revenue of 110 in ’08?

Gordon Gillette

Right.

Greg Gordon – Citi Investments

And then we need to sort of figure out a delta off that?

Gordon Gillette

That’s right. And with the understanding that the underlying coal price has been roughly half of that and so the margin has been the difference between that 120 and the coal price.

Greg Gordon – Citi Investments

Okay. So your dark spread average is, call it, $50 to $60 last year.

Gordon Gillette

Fair enough.

Greg Gordon – Citi Investments

Is that a good way to think about it?

Gordon Gillette

That is a good way to think about it.

Greg Gordon – Citi Investments

Thank you. Final question on parent and other, you’ve obviously seen an improvement. You discussed it on in the script the non-GAAP ongoing was 45.8 million for 2008?

Gordon Gillette

Yes.

Greg Gordon – Citi Investments

You gave pretty good visibility in a lot of the other business segments. Can you tell us, should we expect that drag to be meaningfully higher, lower, or about the same in ’09?

Gordon Gillette

I would think probably about the same given the fact that we are looking at debt retirements in the 2010, ’11 and ’12 time periods, but don’t have any planned right now for 2009.

Operator

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

Lasan Johong – RBC Capital Markets

Good morning. Thank you. Great quarter. Couple of things on the coal side. It sounded like you guys have resolved some of the labor issues that you are confronted with in ’08. Is that a correct characterization?

Gordon Gillette

Yes. Lasan, yes, we – the upside of a softer coal market is that the labor is not as big an issue.

Lasan Johong – RBC Capital Markets

Perfect. And on your coal contracts, are there any flexible delivery contracts? Meaning, is there ability for the buyer to say, you know what, I don’t want to take any more coal from you right now?

Gordon Gillette

There is some limited, but they are committed to take the coal within some reasonable periods of time.

Lasan Johong – RBC Capital Markets

Okay. So they can delay, but they can’t cancel it.

Gordon Gillette

Yes.

Lasan Johong – RBC Capital Markets

Okay, that’s good. Have there been any discussions about whether – it sounds like the intervenor is saying, look, this is a bad economy, why are you asking for a rate increase, more or less. Has there been any discussion with the commission about maybe doing something a little different, maybe doing some sort of decoupling mechanism just forgetting about this whole – going after the commission and doing rates and just doing everything off of an asset base or rate base?

Gordon Gillette

The intervenors’ arguments in every rate case turn to it’s never a good time to increase existing [ph] customers, no matter what he economy is. And in spite of the economy we still have to do the things we're required to do like provide reliable service and meet the environmental requirements and all those types of things, Lasan. The discussions that we did here and the questions that some of the commissioners asked for along the lines is as you add rail facilities to Big Ben, as you add some of these CTs, we’ve annualized that in our rate case maybe doing it in a step or two, which could mitigate some of that and still get the job accomplished from our standpoint from a revenue side.

Lasan Johong – RBC Capital Markets

So – in other words, instead of doing one big step you take it in smaller incremental steps of net present value being the same.

Gordon Gillette

That’s a possibility, and there are questions along those lines from the bench.

Lasan Johong – RBC Capital Markets

That’s good. I know you’re not giving spot guidance or range guidance, but generally speaking, I have to believe that unfortunately the market in Tampa is probably, on a general business environment sense, not as good as it was last year, at least – first half of last year was at least relatively decent. Is that a fair characterization?

Mark Kane

Yes, it is, Lasan. This is Mark.

Lasan Johong – RBC Capital Markets

So all else being equal, this is going to be a challenging year. No rate case increases and just apple-to-apples basis, it’s not going to be a good year other than weather.

Gordon Gillette

I think it’s pretty common knowledge where the economy is for all business and nobody is expecting a banner year anywhere in ’09. But one of the unique things I think about this rate case is that while you do have the economy backdrop and then you have the fact that we haven’t been in for 16 years for rate base help at the utility, is that the main intervenor – the public counsel has actually agreed in both utilities cases that we do need a rate increase. And that’s a rare occurrence. Obviously it’s not as much as we think we need, but there has been that significant acknowledgement.

Operator

Your next question comes from the line of Marc De Croisset of Macquarie Capital.

Marc De Croisset – Macquarie Capital

Thank you, and good morning. A quick question on the Tampa rate case. The assumptions going into the rate case such as customer count now appears somewhat optimistic in retrospect. So this is potentially a headwind in the outcome of this rate case. In the event this creates a large regulatory lag, are you prepared to file a second rate case?

Gordon Gillette

Yes. I mean, we’re prepared to do what we need to do to protect our revenue and our capital structure to provide reliable service to meet all the requirements as the utility. And you file these things back – in this case, back in June or July. So any time you do a rate case, things get dated. Right now, our forecast for sales would be lower than what we filed in the case. And that’s a fact given what’s actually happened. But other things have moved also. For instance, as we have reviewed employee salaries, the original thought of increases there is less than it was. So you have things moving in both ways as you normally do in this eight to nine-month process.

Marc De Croisset – Macquarie Capital

As a quick follow-up here, and I know this is a doomsday scenario, but – is there a – your dividend payout is about 100% today. Is there a risk that you might retrench on your dividends?

Sherrill Hudson

This is Sherrill. Our Board looks at that every quarter and it’s based on the facts that exist at that time.

Marc De Croisset – Macquarie Capital

Got you. Thank you.

Operator

Your next question comes from the line of Paul Patterson of Glenrock Associates.

Paul Patterson – Glenrock Associates

It’s Paul Patterson. Can you hear me?

Gordon Gillette

We know you, Paul.

Paul Patterson – Glenrock Associates

Okay. I look forward to touch base again on the question about the rate case and the change in assumption. I guess you mentioned that there is some things that would work in your favor and some things that will work against it. How should we think about that in the whole mix of things? I mean, does the decrease in salaries and what have you, or the salary increase expectations, how do we think about that in terms of just the dismal economy and sales growth?

Gordon Gillette

My suggestion would be you think about it the same way that we and our witnesses last week thought about it. The big picture of our rate case is we asked for $228 million of revenue requirements at Tampa Electric. Some things have moved in both directions, but our total request still stays right out that range at $228 million.

Paul Patterson – Glenrock Associates

So the offset is pretty much equal?

Gordon Gillette

Yes. I mean, we haven’t gone back through and redefined every single thing. But we’re still right in that range of revenue requirement.

Paul Patterson – Glenrock Associates

Okay, great. And then in terms of the coal mine, on slide 21, I didn’t see really much of a change in the contracting for 2010 although there was a significant change in 2011. I’m just wondering if you could elaborate a little bit about your coal contracting, and I’m talking about pretty much the one with prices connected with them. What’s happening there and sort of what’s your philosophy is, or what you can share with us in terms of why 2011 has increased, but 2010 hasn’t?

Mark Kane

Paul, this is Mark. The 2011 moved up just a couple percent. And I think your 2010, you’re right, it’s pretty close. It’s probably just shifting amongst bands. We did add some tons, but it’s just the way the bands are working on that graph, Paul.

Paul Patterson – Glenrock Associates

Okay. It looked like there was about a 10% increase from 20% to 30% for the contracted and prices in 2011.

Gordon Gillette

I thought the last time, by my memory, it looks like it moved 2% or 3%. But I can get back to you on that.

Paul Patterson – Glenrock Associates

Okay. That’s fine. But I guess it’s just sort of broader in terms of strategy, in terms of what you guys are seeing out there. What is the thought process with respect to contracting? Is it basically because prices are weak? Is it as simple as basically prices are weak right now so it doesn’t make a lot of sense to contract?

Gordon Gillette

Yes. I think that right now in the current coal market we are sold out for 2009 on the steam side especially. So we’re not going to be participating in the current spot market at the lower prices. We can wait and see where the market goes. We don’t have to be signing 2010 and 2000 contracts right now because, like I said, we’re sold out for 2009 for steam. You know, we’ve got time.

Operator

Your next question comes from the line of Paul Ridzon of KeyBanc.

Paul Ridzon – KeyBanc

You mentioned down in Guatemala 65% provision. Can you just give a little more detail on what that means exactly? I was a little confused by how that protects you.

Gordon Gillette

Our contract structure for the San Jose coal unit has a capacity payment. And then on the energy side, we’ve got two components, a fuel-related payment and fuel is ostensibly a pass-through. And then we also have another component, which is a non-fuel energy charge, which has both obviously a coverage of variable O&M cost and a capital recovery or profit component. And therefore as we look at the 65% capacity factor minimum, we can’t run any less than that. And so we’re assured of making the non-fuel revenue charge, which I said has a profit component on at least a 65% capacity factor.

Operator

Your next question comes from the line of Danielle Seitz [ph] of Seitz Research [ph].

Danielle Seitz – Seitz Research

Thank you. I was wondering if your CapEx is gradually going to remain roughly as you estimated in November or are you looking at some – possibly some reduction in future CapEx?

Gordon Gillette

Danielle, this is Gordon. We are going to be publishing our new five-year CapEx projections as part of our 10-K filing. We are working on those now. As we look at the near-term, the things that we had planned for the electric company in the form of new CTs and coal rail facilities, we’re still moving forward with that activity. In the out years, as on a generation expansion basis, we are updating our long range plans for new peaking and base load capacity as we speak. And hopefully we’ll have a good update at the time of the 10-K for that.

Operator

Your next question comes from the line of (inaudible).

Unidentified Analyst

Hi guys.

Gordon Gillette

Hi, good morning.

Unidentified Analyst

Can you hear me? Thanks. This question has been asked a couple times, but I just maybe ask you in a different way. On the rate case, John, I think you mentioned some things have gone the right way in terms of cost coming down, some things have gone the wrong way in terms of maybe sales being lower than what you filed. Can you in this process still get some of the stuff updated on both sides of that, or how does the –?

John Ramil

I mean, they will make their decision based upon the record. And the record effectively is closed at the hearing of that testimony. But like I mentioned earlier, some things have gone both ways. But we’re still right in that $228 million revenue request range that we need when you look at everything going in both directions. And let me just mention on the sales, ’08 was an incredibly unique year with the economy and all the things going on, and it really was a very mild weather year as well. You had energy prices in the middle of the year soaring, and people were paying attention to pocketbook issues, and we know that had a conservation effect that was probably magnified by the mild weather. So far in January we’re having the first real winter I think since 2003 where we’re seeing some loads and demands and that’s a positive sight to kind of get us back to where we thought we would be. In fact, January 22nd we set a new winter peak for demand. And yesterday morning and again this morning we almost eclipsed that peak. There is still a lot of customer usage out there when the weather is there.

Gordon Gillette

John, I would just add to that from a financial standpoint. The events that have occurred in the financial markets over the last three or four months, I think, have bolstered our arguments significantly on cost of capital and the need for strong equity ratios and financial integrity, and I think have been living proof of the importance of those issues in the case as well.

John Ramil

Gordon is exactly right. And the economy and everything going on, the statewide energy policy is still moving forward and the legislature is about to convene and will be addressing things like nuclear policy and renewables and the theme of needing to remain strong financially to be able to implement those policies is a key part of our case.

Operator

Your next question comes from the line of Yiktak Fung of Zimmer Lucas Partners.

Yiktak Fung – Zimmer Lucas Partners

Thank you. My question has already been answered.

Operator

Your next question comes from the line of Scott Zimtek [ph] of Decade [ph].

Scott Zimtek – Decade

Good morning.

Gordon Gillette

Good morning, Scott.

Scott Zimtek – Decade

Just you guys have said previously that your ‘10 hedges are around the similar level to your ‘09 hedges. I was just wondering if that still holds true or if those kind of stayed at the same level?

Gordon Gillette

Which hedge –?

Scott Zimtek – Decade

As far as price goes.

Sherrill Hudson

Pricing of sales.

Gordon Gillette

Yes, it’s about – it’s pretty close, Scott.

Scott Zimtek – Decade

To ’09 now?

Gordon Gillette

Yes, it should be that same ballpark.

Sherrill Hudson

And keep in mind that the ’10 sales are primarily steam coal.

Gordon Gillette

Yes.

Scott Zimtek – Decade

Got you. Got you. And then where do you guys kind of see the met coal pricing? I know it’s tough, but right now – and then where do you kind of see it longer term in your view?

Mark Kane

Scott, this is Mark. I don’t think anybody is willing to predict a met coal price currently. I mean, you can look at the various publications, and there is such a wide range of met coal prices. And I’ve seen prices in the same – in the same publication in the same week it ranged from $80 to $140 a metric ton on met coal prices. So that range is pure speculation at this time. I think the $80 a ton is what the buyers are hoping they can get it for. And $140 a ton is the price of the sellers who are hoping they can sell it for. So you’ve got a bid-ask spread that probably is kind of meaningless at this point.

Sherrill Hudson

Should get resolved in March/April.

Mark Kane

We'll know more. Typically the European customers will contract – their contract year starts April 1st. The Asian markets are April 1st contract years. So we should get some visibility on it by the April 1st time frame.

Sherrill Hudson

We’ve contracted in the fall and we’ve contracted on March 31st. So –

Operator

Your next question comes from the line of Travis Miller of Morningstar.

Travis Miller – Morningstar

Go back to this rate case one more time if you don’t mind, remind me again what the test year is for the sales figure?

Gordon Gillette

For both utilities that’s a projected 2009 test year.

Travis Miller – Morningstar

Okay. And that projection was set back in June – the couple months before?

Gordon Gillette

It was filed in July and actually put together in late spring, May-ish kind of time period.

Travis Miller – Morningstar

Okay. Can you give me on an absolute basis or a percentage basis what that difference is between what you guys forecasted at that time versus what you are forecasting now on a sales figure, like kilowatt hours or other metric?

Gordon Gillette

We have not updated that forecast, but if you look at what happened in ’08 and try to take out the weather, it was essentially a kind of a flat maybe slightly up year. And we normally would be looking at a 2.5% growth in sales.

Operator

Your next question comes from the line of Chris Shelton of Millennium Partners.

Chris Shelton – Millennium Partners

Good morning, guys. Can you hear me?

Gordon Gillette

Yes.

Chris Shelton – Millennium Partners

Quick question. Scott took most of them. But I wanted to double check on the contracted unpriced tons, is there kind of a floor or ceiling kind of assumed on those tons as far as the pricing?

Gordon Gillette

There are one or two contracts in there that have collars in them, Chris, that contracted unpriced, a lot of our met coal contracts are annual renewals. That’s a lot of the contracted unpriced. We’re assuming we will do repeat business with those met coal customers and those contracts are priced at the current – then current market price when they renew.

Chris Shelton – Millennium Partners

Okay. All right. And then the other thing, the 2010 I was trying to see, did you deal any of the met or PCI hedging for 2010 over the last quarter?

Gordon Gillette

There was some in there in October and that number moved slightly for ’10 – moved up slightly in ’10.

Operator

(Operator instructions) Your next question comes from the line of Paul Ridzon of KeyBanc.

Paul Ridzon – KeyBanc

Are you going to be collecting capacity payments at San Jose while the plant is down?

Gordon Gillette

Yes.

Paul Ridzon – KeyBanc

So that’s what you’re getting at with the 65%?

Gordon Gillette

Well, yes. We’re basically, with the turbine outage on a forced outage at this point, and the contract provides for us to collect capacity payments as long as we’ve maintained certain availability on the plant. And we think we’re going to have the plant back on line if we are going to be in that window where there will be no effect on the capacity payments. And as for the energy part of the payment, we won’t start to receive that until we start generating power again.

Paul Ridzon – KeyBanc

How much annually is the energy piece?

Gordon Gillette

The overall charge is about $19 per megawatt hour at an 85% capacity factor. In 2008 we collected roughly $18 million.

Operator

We do have a question from the line of Paul Patterson of Glenrock Associates.

Paul Patterson – Glenrock Associates

Hey guys, one really quick question. What was the ROE – the regulated ROE for utilities for 2008? Do you have that?

Gordon Gillette

The actual at September, Tampa Electric was about 8.66 and at the same time for Peoples Gas they were in the 9s.

Paul Patterson – Glenrock Associates

Okay. And you think it would probably – how do you think it would look – it wouldn't be probably much better I guess for the full year, right? Just ballparking it.

Gordon Gillette

That’s on a 13-month average basis, like it’s calculated for regulatory purposes. And basically the trend that we’ve seen is that Tampa Electric has been trending down on a 13-month average basis very significantly ever since the end of 2007. At the end of 2007, they were in the 11% range. And month-by-month, that 13-month average has come down very, very significantly. And we have forecast that without an increase in rates, that 2009 we could be as low as 4% ROE. So I think that’s very telling of the significant need that we have for rates, that even the intervenors have admitted to.

Mark Kane

Paul, the other thing to remember, as Gordon mentioned in his remarks, Peoples Gas did get $2.4 million of annual interim rates effective in November. So that probably helped stop the slide to bump Peoples up slightly by the end of the year.

Operator

(Operator instructions)

Mark Kane

If there is no further questions, operator, we’d like to thank everybody for participating in the call today and that concludes the call.

Operator

Thank you for participating in today's teleconference. You may now disconnect.

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Source: TECO Energy, Inc. Q4 2008 Earnings Call Transcript
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