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TECO Energy Inc. (NYSE:TE)

Q1 2009 Earnings Call

May 1, 2009; 9:00 am ET

Executives

Sherrill Hudson - Chief Executive Officer

Gordon Gillette - Chief Financial Officer

John Ramil - Chief Operating Officer

Sandy Callahan - Treasurer

Mark Kane - Director of Investor Relations

Analysts

Marc De Croisset - Macquarie Capital

Daniel Eggers - Credit Suisse

Lasan Johong - RBC Capital Markets

Chris Shelton - Millennium

Timothy Yee - KeyBanc

Jesse Laudon - Zimmer Lucas

Marc De Croisset - Macquarie Capital

Operator

Good morning. My name is Bobby-Jo and I will be you conference operator today. At this time, I would like to welcome everyone to the TECO Energy first quarter results and 2009 outlook 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 Mr. Kane, you may begin your conference.

Mark Kane

Thank you, Bobby-Jo. Good morning everyone and thank you for joining TECO Energy’s first quarter results conference call and webcast. We know that there are a number of other calls concurrent with our call this morning; I guess that says so much for coordinating calls through the EEI website.

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 the presentation are available on our website at www.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 and beyond. There are a number of factors that could cause our actual results to differ materially from those that we’ll 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 and our Annual Report on Form 10-K for the period ended December 31, 2008. 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 first quarter results, our guidance for 2009 and the business driver’s outlook for 2010. Also with us today to participate in 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 this busy day for earnings releases ahead of the American GAAP association financial conference. We plan to be very brief in our discussion of the results for the quarter and focus on our guidance for the year.

In February, we said that we were delaying providing 2009 guidance until there was more clarity on the outcome of the two utility based rate cases that were ongoing since last summer. With Tampa Electrics final decision last month and the staff recommendation in the Peoples Gas case last week, we are now in a better position to provide guidance for 2009.

For the quarter, GAAP net income was $34.7 million, compared to $30.8 million since 2008. First quarter non-GAAP results excluding charges and gains were $29.6 million, compared to $31.4 million in 2008. On a per share basis, our non-GAAP results were $0.14 per share this quarter, compared to per share results of $0.15 in 2008.

Charges and gains in the quarter included a $3.7 million valuation adjustment to student loan securities that we’re holding, and an $8.7 million net gain on the sale of our interest in the Guatemalan telecommunications provider in Navega, which was completed in March. There are tables in the appendix to this presentation that provide a reconciliation between GAAP net income and earnings per share and the non-GAAP measures we just discussed.

The drivers for the quarter were covered extensively in our earnings release. So, we will only cover the highlights at this time. Tampa Electric has slightly higher retail energy sales primarily due to colder winter weather. Total heating and cooling degree days were 3% above normal and 14% above 2008. Last year was one of the mildest winters on record.

Economic conditions are reducing sales to our commercial and non-phosphate industrial customers, which partially offset the higher sales to weather sensitive residential customers. We actually added almost 1600 new customers in the quarter, even though the average number of customers was 0.2% below last year.

The negative year-over-year comparison is being driven by the number of customers disconnected in the second half of last year. The number of disconnects appears to have leveled off and some houses that were vacant are now being occupied and taking electric service; however, foreclosures pick backup at some predict and we could see disconnects increased again.

A benefit that we’re seeing for the first time in this quarter is the elimination of the waterborne transportation disallowance, which has reduced Tampa Electrics net income by about $10 million annually for the past five years. Tampa Electric had higher non-fuel operations and maintenance expenses in the quarter, primarily due to the high levels of generating unit maintenance in the quarter, slightly higher bad debt expense and some higher employee related costs.

The increase in bad debt expense has been limited by Tampa Electric’s policies to secure accounts. Bad debt expense held a steady 0.3% of revenues since the beginning of the economic slowdown, compared to 0.2% in better times. Depreciation expense also increased for Tampa Electric in the quarter from normal additions to the facilities to serve customers.

As indicated, Peoples Gas results benefited from colder winter weather and interim base rates granted by the Florida Public Service Commission late last year. For the first time since our merger in 1997, Peoples Gas had a lower average number of customers on a year-over-year basis in the quarter driven by the Florida economic slowdown. Operations and maintenance expense increased primarily from higher pipeline integrity costs and depreciation expense increased on routine capital additions to our pipeline system.

For the unregulated companies, sales at TECO Coal were slightly lower at 2.3 million tons compared to 2.4 million tons in the first quarter of 2008, as a result of slower coal markets. In addition, results reflect a higher percentage of steam coal in the mix and several met coal shipments slip from the end of the first quarter into the second quarter.

The average selling price for the quarter increased 22% to almost $70 per ton, but not yet up to the guidance level of an average $73 per ton for 2009, due to carryover tons from 2008. We expect the average selling price will rise during the rest of the year now that we’ve shipped the majority of the carryover tons.

Production cost increased as expected. The higher costs are being driven by higher prices for our hedge diesel fuel, compared to the first quarter of last year before diesel prices spiked up. You recall that we hedged much of our 2009 diesel in the third quarter of last year, while prices were relatively high compared to where they are now.

Higher contract mining and labor costs are a result of increases made at various times last year to retain our workforce and are also driving the higher production costs. These increases were anticipated in the production cost guidance that we gave in February, of $63 to $66 per ton for the all-in cost of production in 2009.

TECO Coal also had a lower effective income tax rate for the quarter due to the effects of the percentage depletion calculations for income tax purposes. At TECO Guatemala, the San José Power Station was out of service for much of the quarter due to extended unplanned outages.

Results for the DECA II companies, which including EEGSA, and the unregulated companies were lower due to the Guatemalan regulator value-added distribution rate decision last year. This was partially offset by customer and energy sales growth and cost control efforts to mitigate the lower revenues.

We also completed the sale of our minority interest in the fiber optic telecommunications provider Navega last month. This company contributed $3 million of net income last year. The sale netted us $29 million in cash, which were repatriated. The original cash investment in Navega was $500,000.

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 $565 million of cash and credit facilities available, which excludes an additional $29 million of cash at the deconsolidated Guatemalan operations. Contributing to the strong position was the $29 million of cash repatriated to TECO Energy from TECO Guatemala, as a result of the sale of Navega.

As you know in March, the Florida commission reached its final decision on Tampa Electric’s request for a base rate increase. The final decision was for a two-step increase, a $104 million on an annual basis effective next week and a second step of $34 million effective January 2010. The allowed equity in the capital structure on a GAAP basis is 53.9%.

The midpoint of the allowed return on equity range is 11.25% and the range is plus or minus a 100 basis points around the midpoint. The average rate base for 2009 is expected to be $3.4 billion, which steps up by an additional $175 million when the 5CT’s in the rail unloading facilities at the Big Bend are added during the year.

On the Peoples Gas base rate increase, the commission staff made its recommendations last week and they are shown on this slide. The staff is recommending a 19.1% base rate increase and an equity ratio of 54.7%. The recommended midpoint of the allowed return on equity range is 10.75% and like Tampa Electric, the allowed range is plus or minus a 100 basis points. The commission is scheduled to make its final decision in this case next Tuesday.

Turning now to our guidance for 2009, we expect our earnings per share to be in a range between $1 and $1.15 this year, excluding any charges or gain. With the conclusion of Tampa Electric’s rate case and with the staff recommendation for Peoples Gas, we expect that our earnings will be increasingly driven by the utilities and less sensitive to the earnings dynamics of the coal business.

You saw our dividend announcement on Wednesday, which maintained our dividend at $0.80 per share annually. Assuming the middle of our guidance range, we expect our dividend payout to decrease to 74% this year, which is closer to the utility industry average. Our plans are to resume growing the dividend when the economy begins to recover.

Now, we’ll provide an update on how we see the current Florida economic situation affecting the prospects for longer term growth of the utility. Florida continues to rank among the top states in the nation for housing market weakness, but we’re starting to see signs that are bottom, maybe here or approaching. Energy sales growth is expected to be slightly higher, primarily due to the very mild weather that we had last year. All of our sales forecasts assume normal weather for the remaining months of the year.

Sales to commercial and industrial customers continue to decline due to the overall economic weakness. There’s an increasing amount of commercial space that’s vacant due to bankruptcies, such as Circuit City, Bennigan’s restaurant chain and others and we see industrial customers operating at lower levels, which is reducing demand. Establishments such as hotels, restaurants and tourist attractions are operating at lower levels as well, due to less business and recreational travel as well.

We are hoping and expecting that the housing market and the economy start to recover in Florida in late 2009. Based on this, we expect customer growth to be about 0.5% in 2010 and longer term customer growth to average just more than 1.5%. This level is lower than the roughly 2.5% that we’ve experienced for many years.

This graph actually shows some good news for the housing market in the Tampa area. You can see that in 2008 we disconnected more customers due to foreclosures and vacancies than we added. That trend is slowing and we are actually starting to experience positive net customer growth again, even though the year-over-year comparisons are still negative.

In the first three months of this year, we actually added almost 1500 net new incremental customers, net of normal customer turnover. With this trend continuing, we now expect to have positive average annual customer growth of 0.1% this year. The drivers for our guidance for the regulated utilities are as follows. We are assuming anticipating that an economic recovery will start in late 2009.

In the current economy, with the lower customer and energy sales growth projections, and the final rate decision that was below the amount requested, Tampa Electric is reviewing its levels of planned O&M and capital spending for reductions to enable it to earn within its new allowed ROE range.

As we said, in 2009 Tampa Electric will not be impacted by the waterborne transportation disallowance that’s been ongoing for five years, following the approval of its fuel adjustment clause late last year. This allowance had reduced net income by about $10 million annually over the last five years. Tampa Electric will benefit from increased earnings through the environmental cost recovery clause, with an additional NOx control project coming online this month.

As for Peoples Gas, with it’s stabilize footprint in which it is providing service to some areas of state that have been most severely impacted by the housing slowdown, a resumption of customer growth that Peoples Gas is expected to lag Tampa Electric by several months. Based on last week’s commission staff recommendation, it appears Peoples Gas will benefit from higher base rates starting in June of this year.

For TECO coal in 2009, we indicated in February that sales were expected to be in a range between 9.8 million and 10.3 million tons. The current expectation is now towards the bottom of the range, at 9.9 million tons. We have 9.5 million tons under contract for 2009, which includes a 100% of our expected steam coal sales. The expected sales under existing contracts are down 100,000 tons from prior projections due to reductions in carry over tons that’s allowed under certain of our of our contracts.

We are maintaining our estimates for the cost of production to be in a range of $63 to $66 per ton. To be sure there’s no confusion regarding this number, this is an all-in cost, including the cost of mining, preparation plan expenses, G&A, DD&A and taxes other than income. Our projected average selling price, minus the cost of production is our pretax margin.

TECO coal is working to reduce the cost pressures that built last year. They’ve announced that two mines could be closed as early as late June if efforts to reduce costs are unsuccessful. These mines produced about 400,000 tons last year, but that quantity could be made up from other mines or from purchased coal.

As you know, the coal markets remain weak. The US steel industry is operating at 43% utilization rate so far this year. Major coal companies are announcing reductions in output and that’s what’s driving our latest 9.9 million tons sales projection for 2009. We’ve had some customers request deferral of shipments; but most of our sales contracts have minimum purchase levels.

At TECO Guatemala, the San José Power Station was taken down in January and returned to service in late February due to a steam turbine problem. Unfortunately, contrary to its outstanding availability levels over the last several years in late March, the generator went out on an unplanned outage, which required a complete rewind of the generator rotor. The unit is expected to return to service in July.

In the meantime, we expect to continue to receive the capacity charge, but our non-fuel energy revenues will be impacted. We expect that some of the loss in sales will be made up later this year by the 65% capacity factor, take or pay provision in the contract. We announced the sale of the Navega in March, our share of the Navega’s net income in 2008, was about $3 million.

We continue to work to review the impact of the lower value-added distribution rate for our minority interest in EEGSA, the distribution utility, impost last August by the Guatemalan regulators. In parallel with Iberdrola’s action under the Spanish Guatemala’s trade agreement, we’re planning to file for an international arbitration under the Dominican Republic Central American free trade agreement. We filed our notice of intent to file this arbitration filing in January.

Now, we’ll discuss our outlook for 2010 and a few other factors that we see driving earnings longer term. In 2010, we expect to have a full year of higher base rates at both utilities and the second step increase granted by the commission to Tampa Electric effective in January.

We expect the economy to improve in 2010 with modest customer and energy sales growth. The coal markets for 2010 are very uncertain right now. We currently have 5.2 million tons of primarily steam coal contracted for 2010, at prices similar to 2009. When the economy starts to improve, we hope the coal prices for the unsold tons, especially met coal will firm up.

At TECO Guatemala, we planned to have the operational issues result at the San José Power Station this year and therefore we’re expecting normal availability at the plant next year. At TECO Energy parent, interest expenses is expected to decline again next year, when we retire the $100 million of floating rate notes that mature in early May of 2010.

Finally, we’ll be very active on the investor communications front over the next six weeks. You can see that in addition to the today’s call, we’ll have a number of opportunities to meet with you.

I’ll now turn it back to the operator to open the phones for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Marc De Croisset - Macquarie Capital.

Marc De Croisset - Macquarie Capital

Does the outcome of the Tampa rate case give you greater comfort that the company can support the current dividend of $0.80? I know I’m pressing my luck, but I thought I’d ask?

Gordon Gillette

Our answer is, yes. As we said, based on the earnings guidance we would expect at the midpoint that the payout ratio would be 74%, which is getting back closer to the utility industry average.

Marc De Croisset - Macquarie Capital

If I were to look at the Tampa and Peoples Gas earnings, would they cover the dividend for ‘09 and ’10; is that a fair statement?

Gordon Gillette

At this point in time, we’re not giving specifics on our earnings guidance on a company-by-company basis, but I think it’s fair to say even looking at the past before the rate increases, Tampa Electric and Peoples were a very important part of our overall earnings that we’re reporting.

Marc De Croisset - Macquarie Capital

Let me ask it another way; do you expect to earn at the lower end of the ROE band at Tampa?

Gordon Gillette

As we look at 2009 at this point, I think it’s important to remember that we’re effectively going to have about a half year or a little more than a half year of the rates for this year. So obviously, we’ll benefit in the second half compared to the first half of the year and the first quarter results at Tampa Electric and Peoples.

As we said, as we look to the 2010 guidance, a very important factor driving earnings beyond 2009, where our guidance is $1 to $1.15 will be a full year of base rates for both utilities and I think obviously that will point towards higher earnings from the utilities in 2010, than 2009.

John Ramil

Mark, this is John Ramil. I would just add to what Gordon said, that next year we’ll see the full year effect of the rate increase and the challenge we have to our team is, last time we were 16 years without going in for a rate case. So, our challenge would be to earn well above the minimum of the range, so that we keep the trend like that going again, as much as we can.

Marc De Croisset - Macquarie Capital

Will that require significant capital reductions and significant O&M reduction?

John Ramil

We’re looking at it in every efficiency we can and we’ve seen a slowdown, so maybe looking maybe a little bit less on the future generation side. It’s looking to us like after the next couple of years the state of Florida maybe a little bit long on generation, so we positioned ourselves more as a buyer than a builder for a while. So I think those opportunities are there.

Gordon Gillette

Mark, one other thing on the earnings front, and that is keep in mind, in addition to the half year of base rates; on the initial step, which was $104 million annually, there’s an anticipated $34 million step increase in January of 2010.

Marc De Croisset - Macquarie Capital

That’s fair, but aren’t you recording AFUDC for that currently or am I mistaken?

Sherrill Hudson

We’re earning AFUDC on the peakers that we’re building in some transmission projects.

Marc De Croisset - Macquarie Capital

So, is that step-up in revenue entirely accretive to your earnings in the first quarter, in January of 2010; is that true?

Gordon Gillette

Yes, I would say it’s all obviously; that is important, but with the understanding that we are going to have a new investment in service, as we reported, we expect that average rate base next year will be approximately $175 million higher than this year as a result of the additions of the CTs and the rail facilities.

Operator

Your next question comes from Daniel Eggers - Credit Suisse.

Daniel Eggers - Credit Suisse

On the utility on the customer level residential way, if you continue to carry what you saw in the first quarter into April and that sort of thing, you’re still seeing positive trends in customer additions?

Sherrill Hudson

Yes Dan, we did see as Gordon mentioned positive 1600 in the first quarter. It is a nice data point, we’d like to see that be a trend moving ahead, but it is positive and we like seeing that. Also remember too, as we’ve talked about in previous calls, we would expect sales to increase at a more rapid rate than customers because of the fill-in of some of the lower usage empty homes that we have, that we still record as online customers.

Daniel Eggers - Credit Suisse

Are you seeing that John, or is that still too early to dissect?

John Ramil

We’re seeing that low usage creep up on us a little bit, which is a positive thing.

Daniel Eggers - Credit Suisse

That’s good. On the coal side, just so I understand. The higher costs, the 66 at the high end of the operating costs for the first quarter, is there a timing of hedges that would allow the rest of the year on a unit basis to comedown or is it just going to be to get rid of the 400,000 tons a year out of the expensive mines, would that help to bring down the number from 66?

Gordon Gillette

Dan, we expect overall cost reductions from everything that we’re doing. Our team there is focused on doing things to move us more towards the lower end of that range that we gave you.

One thing is for certain, in most businesses and it seems to be especially true in the coal business; costs jump up rather quickly and then they comedown lagging and slowly and we’re seeing some of that, but the focus on cost is more than just diesel. We’re looking at our contract miner cost and shifting from our own production to purchases and even more contractors, when we find it cheaper and we’re in the process of doing that.

Daniel Eggers - Credit Suisse

I know the spot market is cheap for coal, how much do you think you can reasonably backfill as far as buying versus producing in the current market, before everybody figures out what you’re doing?

Gordon Gillette

Right now we’ve taken actions on about 400,000 of our own production and we think that we can cover that.

Sherrill Hudson

To your specific question on the hedges, those hedges are in place for the full year, that average is a full year. It’s not going to be a roll off at a certain time that’s going to change that diesel average.

Daniel Eggers - Credit Suisse

So you guys are recognizing an average price for the year.

Sherrill Hudson

That’s correct.

Daniel Eggers - Credit Suisse

I guess just one last question; what are the terms around minimum deliveries as far as how much of a contract generally is allowed to be deferred to a future period? I know you can’t give me a specific contract, but just general terms?

Gordon Gillette

It varies by contract, Dan. There is no one rule, but there is also judgment involve. It depends on the customer if they’re having a particular problem. No matter what the contract says, we might be more flexible in exchange for longer terms or some production and price trading it at a different point in time. So, it really is case-by-case.

Daniel Eggers - Credit Suisse

I guess one last question, the $29 million that was repatriated, was that a pretax number or an after tax number?

Gordon Gillette

That’s a cash.

Operator

Your next question comes from Lasan Johong - RBC Capital Markets.

Lasan Johong - RBC Capital Markets

Do you expect to start pricing the balance of your coal exposure in 2010 and I’m assuming by the end of this year you’ll have almost all of that contracted; is that correct?

John Ramil

Well, we have what we stated contracted. We are watching the markets very carefully. The markets are very soft now and it’s not a good time to contract. We are looking forward to the market improvement as the year goes by and then we’ll contract accordingly.

Lasan Johong - RBC Capital Markets

So you are going to try to time the market?

Sherrill Hudson

It would be in response to the market Lasan. As John just said, the market right now is not very attractive for 2010 pricing.

John Ramil

We do have 5.2 million tons, mainly steam that is contracted. We’ll get most of our steam contracted by year end.

Gordon Gillette

And traditionally the met coals are late in the year or early the following year.

Lasan Johong - RBC Capital Markets

I thought it was always the following year because of the second quarter pricing from Japan or March pricing in Japan.

John Ramil

Our met coal typically happens in the latter part of the year or even early in the next year.

Sherrill Hudson

The March met coal pricing for Japan sets our European customers, Lasan. We sell probably, maybe a little more than 50% of our met coal in North America, which is on a calendar year contract year.

Lasan Johong - RBC Capital Markets

When do you expect to price out the rest of your met coal for this year then?

John Ramil

It’s going to be based on customer demand. It’s only a couple of hundred thousand tons. As we said, we’ve got about $9.5 million under contract, out of expected total sales of 9.9.

Lasan Johong - RBC Capital Markets

Yes. I know it’s a small quantity, I was just curious.

John Ramil

One last thing Lasan, on the 2010 we’ve got the 5.2 million tons contracted. Normally, we have that contracted by late in the year, but as I said earlier, we are going to wait on the market. We are not going to get a contract for the sake of contracting.

Lasan Johong - RBC Capital Markets

Now, I understand that. I’m just wondering if that’s a good strategy or bad strategy, given where we think natural gas prices are going. I mean we’ll see the bottom line. Thank you.

Operator

Your next question comes from Chris Shelton - Millennium.

Chris Shelton - Millennium

I actually had a quick question. I wanted to reconcile the 2010 cost kind of guidance you get for coal. You said it was going to be stable and then also said that the diesel costs were hedged at a price below 2009. Is the right way to think about stable, is that flattish from ‘09 to ‘10 for coal?

John Ramil

On the ‘10 costs with what we know right now, we’re assuming the labor and the contract miners is flattish Chris. We’re hopeful it’s going to come down, especially on the contract miners in light of the where the current market is going. I mean I think it was Peabody that commented that they are seeing contract miner costs come down and we’re hoping, we are going to experience the same thing.

Now, Peabody is not in central App, so we would hope to have the same effect, but we are not willing to commit to that yet and as far as the diesel, we hedged the 2010 diesel at a later point and if we were to get sales, we’d hedge additional sales, the diesel to cover additional sales in the current market or whatever the market is and hopefully those prices would be much lower. Where we have hedged later in 2008, those prices are lower than what we hedge for 2009.

Chris Shelton - Millennium

But it sounds like the balance of your kind of open costs are on the labor side for ‘10?

John Ramil

Labor is a bigger percentage of our cost of production than diesel and that’s where we probably have the biggest impact.

Operator

(Operator Instructions) Your next question comes from Timothy Yee - KeyBanc.

Timothy Yee - KeyBanc

You didn’t put the coal hedging slide in this time and I just want to make sure that those amounts are essentially the same given the contract amounts you state for ’09 and ‘10?

Gordon Gillette

If you were to compare the numbers on this, the last time we did the graph to the absolute numbers we gave out today, they pretty well match up, except for the 100,000 ton reduction in ‘09 that Gordon addressed.

Operator

(Operator Instructions) Your next question comes from Jesse Laudon - Zimmer Lucas.

Jesse Laudon - Zimmer Lucas

Just one more question clarifying the comments on the coal hedging. You talked about the hedging for 2010 being at similar levels to 2009. Does that mean we should assume that the 5 million tons of steam is hedged at $73 a ton or is hedged at whatever price of that $73 a ton is steam?

Gordon Gillette

Well, the 73 average that we had given you for 2009 includes net prices in it. So what we have hedged for 2010 is mostly steam, but at a higher overall price. So, I think thinking around low 70s is a good number to be thinking about, from where we are right now.

Jesse Laudon - Zimmer Lucas

And then in terms of the balance of the year, you assume normal weather at the utilities; what was the weather for the last three quarters of last year? Is that sort of a year-over-year improvement and in turn, how many kilowatt hour sales?

Gordon Gillette

Last year was a mild year for weather throughout the entire year. We had both a mild winter and a mild summer. In fact, July when you look at the sales in July, it looked more like a spring or fall month, than a summer month because of all the rain we had. Our forecast for the electric company for 2009 assumed more normal weather patterns.

Jesse Laudon - Zimmer Lucas

Okay. So just to return to normal is probably going to give you 1% or 2% usage.

Gordon Gillette

It will definitely help, yes, compared to last year.

Operator

Your next question comes from Marc De Croisset – Macquarie Capital

Marc De Croisset – Macquarie Capital

I think the effective tax rate at TECO coal was 14% in the quarter and you said in the press release that the effective tax rate will be 25% for the year or it should be 25% of normalized basis. Does this mean that the average for this year should be about 21% or so?

John Ramil

It should normally run in that 20% to 25% range Mark, and that’s all tied up in depletion accounting, which can vary from quarter-to-quarter significantly. Our expectation on a normal basis, it’s going to be 20% to 25%.

Operator

Your final question comes from Lasan Johong - RPC Capital Markets.

Lasan Johong – RBC Capital Markets

John, next year, would it be fair to assume that labor costs and material contract costs will continue to come down?

John Ramil

We think it’s going to be flat to coming down and that would be our expectation right now.

Lasan Johong – RBC Capital Markets

Even without employment climbing you think it’s going to come down because of skilled labor or it’ll stay flat because of demand for skilled labor?

John Ramil

The prices, the costs were driven up because of some huge, huge, huge drivers that we saw in 2008 and while were looking for things to improve, we don’t think they’ll improve to the point where we’ll see the same extreme pressures we had before.

Gordon Gillette

Lasan, you’re correct in your comment about the skilled labor. There are certain, especially in the underground mines, certain positions that there are still, there’s adequate, but not over abundant supplies of labor.

Operator

There are no further questions at this time, sir.

Mark Kane

Thank you very much Bobby-Jo. If there is no further questions, we’d like to thank everybody for joining us this morning. We know there’s a lot of other calls going on and we look forward to seeing you at various events over the next several weeks. This will conclude our call.

Operator

This does conclude today’s conference call. You may now disconnect.

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