TECO Energy Inc. Q2 2009 Earnings Call Transcript

Jul.28.09 | About: TECO Energy, (TE)

TECO Energy Inc. (NYSE:TE)

Q2 2009 Earnings Call

July 28, 2009; 5:00 pm 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

Paul Ridzon - Keybanc

Greg Gordon - Morgan Stanley

Ashar Khan - Incremental Capital

Scot Sanchia - Decade Capital

Marc De Croisset - Macquarie Capital

Danielle Seitz - Dudack Research

Jesse Laudon - Zimmer Lucas

Operator

Good afternoon. My name is Mark, and I will be you conference operator today. At this time, I would like to welcome everyone to the TECO Energy’s second quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions)

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

Mark Kane

Thank you very much Mark. Good afternoon everyone and thank you for joining us for TECO Energy’s second quarter results conference call and webcast. Our earnings along with un-audited financial statements were released and filed with the SEC well about 45 minutes ago.

This presentation is being webcast, and our earnings release, financial statements and the slides for the presentation are available on our website at tecoenergy.com. This 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 our plans for the remainder of 2009. 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 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, as well as some detail on our recent rate case decisions.

On the call today Gordon Gillette, our Chief Financial Officer will cover the second quarter results, and update the drivers for our guidance for 2009. Also with us today to participate and answering your questions are John Ramil, our Chief Operating Officer; and Sandy Callahan, our Treasurer and we expect Sherrill Hudson to join us shortly.

Now, I’ll turn the call over to Gordon.

Gordon Gillette

Thanks Mark, and good morning. Thank you for joining us late in the day for our earnings call. We plan to be very brief in our discussion of the results for the quarter and focus on updating our guidance for the remainder of the year.

For the quarter, net income was $60.9 million, compared to $51.4 million in 2008. Earnings per share were $0.29 this quarter, compared to $0.24 in 2008 and there were no charges or gains in the quarter. For the year-to-date period GAAP net income was $95.6 million compared to $82.8 million in 2008. Non-GAAP results for the six months period excluding charges and gains were $90.5 million compared to $82.8 million in 2008.

On a per share basis, our year-to-date, non-GAAP results were $0.43 per share compared with per share results of $0.39 in 2008. Charges and gains for the year-to-date period include a first quarter $3.7 million valuation adjustment to student-loan securities that we held, 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 that we just discussed. The drivers for the quarter in the six month period were covered extensively in our earnings release. So we’ll only cover the highlights now.

New base rates, which were effective for Tampa Electric on May 7 added $15 million to the base revenues in the quarter. However, the benefit from the higher base rates was partially offset by lower retail electric sales in the quarter, primarily due to wet weather in May and the overall lower economic conditions in Florida.

Although, total degree days were 5% above normal and 3% above 2008 in the second quarter, 15 consecutive days of rain in May, the third wettest May on record reduced retail sales primarily to residential customers. Economic conditions continue to hold down sales to our commercial and industrial customers. The absolute average number of customers was 0.2% below last year.

Going in the other direction for Tampa Electric, a significant benefit in the quarter and year-to-date periods relative to last year has been the elimination of the waterborne transportation disallowance, which has reduced Tampa Electric’s net income by about $10 million annually for the past five years.

Tampa Electric has slightly higher non-fuel operations and maintenance expenses in this quarter, primarily due to the write-off of disallowed rate case expenses. As the economy is slowed bad-debt expenses increased, but the increase has been limited by Tampa Electric’s policies to secure accounts.

Bad-debt expense has held relatively steady at 0.3% of revenues since the beginning the economic slowdown, compared to 0.2% in better times. Depreciation expense increased for Tampa Electric in the quarter from normal additions to the facilities to serve customers.

As indicated, Peoples Gas results benefited from the higher base rates that were affected June 18, and the interim base rates granted by the Florida Public Service Commission late last year. Like Tampa Electric, Peoples Gas had a lower average number of customers this quarter compared to last year at this time, driven by the Florida economic slowdown.

Operations and maintenance expenses increased the Peoples, primarily from the write-off of disallowed rate case expenses and higher pipeline integrity costs. This was partially offset by lower employee related costs, depreciation expense increased from routine capital additions to our pipeline system.

Now for the unregulated companies; sales at TECO Coal were slightly lower at 2.2 million tons compared to 2.4 million tons in the second quarter of 2008, as a result of the slower coal markets. In addition, our results reflect a higher percentage of steam coal in the mix due to lower met coal sales levels.

The average selling price for the quarter increased 17% over the last year to more than $70 per ton, but it was not yet at our guidance level of an average of $73 per ton for 2009, due to the sales mix shift towards higher percentage of lower margin steam coal away from higher margin met coal.

Production cost increased as expected for TECO Coal. The higher costs are being driven primarily by higher labor costs, which are a result of pay increases made various times during last year to routine our workforce. The increases in production costs were anticipated in the production cost guidance that we gave of $63 to $66 per ton for the all-in cost of production in 2009.

On a positive side, TECO Coal had a lower effected income tax rate for the quarter due to the effects of percentage depletion and calculation 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. The repairs were completed and the unit was returned to service on July 2.

Results for the DECA II companies, which including EEGSA and the unregulated companies were lower due to the bad decision at EEGSA last year. This was partially offset by energy sales growth and cost control efforts to mitigate the lower revenues that EEGSA.

We completed the sale of the fiber optic telecommunications provider Navega in March. This company contributed $3 million of net income last year. The DECA II companies recorded $2.5 million benefit in the second quarter due an adjustment to previously estimated 2008 year end equity balances. The similar adjustment of $3.1 was included in last years second quarter results.

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 more than $500 million of cash and credit facilities available, which excludes an additional $19 million of cash at the deconsolidated Guatemalan operation.

While it isn’t reflected in our quarter end liquidity position, Tampa Electric had a very successful $100 million notes offering which was significantly oversubscribed and was completed in one day on July 1.

Now we’ll recap just a few of our recent accomplishment. As you aware, we completed the base rate proceedings to both Tampa Electric and Peoples Gas. You can see on a slide at Tampa Electric was awarded a $104 million annualized base rate increase for 2009 with an additional $34 million second step increase for 2010 to reflect additional combusted turbines and coal rail unloading facilities and we revised in service in 2009.

Just two weeks ago, the Florida Commission approved our Motion for Reconsideration to correct technical issues in the calculation of the capital structure that were result in an additional $9.8 million at base rate after the second step increase in 2010. The associated 2009 annualized amount of $9.3 million without the step change will become effective on August 13.

Peoples Gas was awarded $19.2 million base rate increase. The rate design that was approved in the case makes Peoples less sensitive to monthly sales volumes primarily for residential customers. In May, TECO Energy was upgraded to investment grade by S&P making us investment grade at all three rating agencies. This upgrade removed a number of financial coverage that we’re in the TECO Energy credit facility and notes.

Also, both Moody’s and S&P have recently upgraded Tampa Electric’s credit rating to Baa1 and BBB respectively. On the heels of this, the recent successful Tampa Electric $100 million notes offering that I mentioned earlier priced favorably at 5.67% and as previously mentioned TECO Guatemala the repairs to the generator at San Jose Power Station were completed and the unit was returned to service on July 2.

Now, we’ll provide an update on how we see the current Florida economic situation affecting the prospects for longer term growth of the utilities. Florida continues to rank among the top states in the nation for housing market weakness, but we are starting to see signs conditions maybe improving. I will show a few of the measures that are leading us to think this way in the next few slides.

However, sales to commercial and industrial customers continue to decline due to the overall economic weakness. We had several industrial customers close operations due to bankruptcy and there is an increasing amount of commercial space that’s vacant due to bankruptcy such as Circuit City, Bennigan’s restaurant chain and others.

We are seeing commercial and industrial customers looking to improve their efficiency in order to lower their total energy cost, which is reducing sales as well. Establishments such as hotels and restaurants and tourist attractions are operating at lower levels as well due to the fact that fewer people are traveling both for business and recreation.

We are hoping and expecting that the housing market and economy starts to recover in Florida in late 2009. Based on this, we expect customer growth to be at 0.1% for 2009, and energy sales growth is expected to be only slightly higher.

Again, even though the year-to-date comparisons are still negative, we think we are on track to achieve the slight amount of customer growth by the end of this year. This slide and the next one show some of the data we believe maybe indicating that the housing market in the Tampa area is starting to stabilize.

This slide shows both the monthly customer additions over the past 4.5 years and the cumulative customer additions over the same period. In May we reported that Tampa Electric had positive customer growth in three consecutive quarters. You can see on the graph on this trend reversed in the second quarter, but slower customer growth normally happens in the second quarter due to an increase in the number of inactive accounts as Florida’s winter resident goes north for the summer.

You can see this dip in the growth in each year since 2005. The good news for 2009 when compared to 2008 is that in 2008 the negative growth continued for more than six months. It looks like 2009 is going to have a more normal pattern with a more normal seasonal rebound as active accounts are active later in the year.

The graph on the right is the cumulative customer edition. You can see clearly the rapid customer growth during the housing boom in 2005 and 2006 and in the first half of 2007. Despite the slightly negative customer growth numbers in the past several quarters, our customer count has leveled off and remain fairly stable since the middle of 2007.

This slide shows two other graphics, to given indication that the housing markets may be ready to turn. The graph on the left is the number of single-family building permits issued monthly in our service area. After declining fairly steadily since the middle of 2007, the number of perms is slowly increasing every month since late last year with a noticeable improvement in June of this year.

The graph on the right shows monthly residential real estate sales. You can see the very deep trough in the second quarter or second half of 2007 when the sub-prime mortgage market was collapsing and a second trough off in the second half of 2008, when the credit markets temporarily closed.

The steadily increasing sale of existing homes over the first half of 2009, so that the various home buying incentive programs, the improving of the availability of credit and lower home prices are having the desired effects of bringing buyers back into the market.

The Tampa area still has eight months of inventory on the market at the current sales rate, but that significantly better than the 25 months of inventory that we were seeing at the depressed sales level of early 2008.

In May, we provided guidance that we expected our earnings per share to be in a range between $1 and $1.15 per share this year excluding charges or gain. This guidance included the Tampa Electric base rate increase that had been approved and included in assumption for the Peoples Gas rate increase that was essentially inline with the final decision.

We assume that for 2009, TECO Coal would sell 9.9 million tons of better margins than in 2008 and that earnings from TECO Guatemala would be lower than in 2008 due to the regulators decision to reduce the VAD, and the unplanned outages of San José Power Station.

In our guidance, we indicated that we expected to see utility earnings growing and becoming an increasing percentage of total earnings in 2009 and beyond. We also indicated in our conference call last quarter, that with our April decision to maintain our annual dividend at $0.80 per share, we expected our dividend payout ratio to be 74%, based on the middle of our guidance range.

Now updating our outlook for the remainder of the year, as in our May guidance the rate case decisions at Tampa Electric and Peoples Gas are important to our revenue expectations for the remainder of 2009. The arrowhead at the right of certain lines on the slide indicates that we had included that factor in our original May guidance.

So in addition to our prior guidance, because it doesn’t have an arrowhead we now are including the approval of the Motion for Reconsideration, which will add a prorated portion of $9.3 million of annualized revenues, effective August 13. During the calendar math, this should add about $3.5 million to revenues over the final four months of 2009.

We’re dealing with customer growth and energy sales significantly below the level that were forecasted in our rate cases. We told you in May, that the fact that we experienced virtually no growth in 2008 and expect to experience very little growth in 2009, drove an approximate $40 million revenue shortfall compared to our rate filing.

Due to this shortfall, subsequent to the rate case decisions, we had to review our planned levels of O&M and capital spending with a focus of making reductions that would give us the ability to earn within our new allowed ROE rates.

In other words, in spite of our new base rate at Tampa Electric and Peoples Gas, we’re facing much lower than previously anticipated customer growth and revenues at the utility companies. This has caused us to push out our plans for generation addition and look at reducing other capital in O&M spending.

Since May, we’ve been working on identifying ways to eliminate overlapping activity and define synergies among our businesses. Based on this, we expect that will benefit from lower spending later this year and beyond as we seek to make these savings to reality. In our May guidance, we incorporated savings of this type and we believe that we’re on track to deliver those cost savings at the utilities.

For instance, on the capital spending front, we’ve identified $120 million in lower expenditures at Tampa Electric for 2009 driven by lower load growth. The largest reduction at Tampa Electric is the deferral of certain upgraded to the Central Florida transmission system.

The latest studies by the Florida Reliability Coordinating Council, indicate that lower load growth statewide will allow us to defer our prorated portion of certain plant statewide transmission system upgrade at least a year, if not longer. Other savings will result from the lower commodity prices for items such as steel, concrete, copper and contract or labor in the current economy.

At Peoples Gas, we’ve identified $10 million in lower capital spending and another $10 million at the unregulated companies. We expect to keep capital spending at about $300 million annually after 2009 for Tampa Electric and $50 million annually for Peoples Gas over the next several years, absent the need for generation expansion expenditures suspending on renewable sources of energy.

The completion of the five Aero-Derivative Combustion Turbines this year is expected to satisfy our generation expansion needs for the next several years. We think Florida will have excess generating capacity and that we will be able to purchase rather than build to meet our next-generation expansion needs. However, if the capacity is not available at attractive terms, we’ll be positioned to build it ourselves if required.

The upper end of our guidance range that we provided in May, assumed that TECO Coal would be successful in selling the full projected 9.9 million tons including the 400,000 tons of metallurgical coal that was on contract at that time. Also in the May guidance, we assumed better margins with average selling prices of about $73 per ton and an all end fully loaded average cost of production in the range of between $63 and $66 per ton.

So far this year, the met coal market has remained weak and the steam coal market is deteriorated. The previously unsold met coal unfortunately remains unsold and delivery deferrals under existing contracts to spread throughout the industry as you utilities deal with high inventories and steel industry operates at low levels.

As you saw in our second quarter results, we’ve agreed to defer deliveries of steam coal to one customer and we’re working with other steam and metallurgical coal customers to manage their coal deliveries to meet their actual needs. In the case of any deferrals, our goal is then to maintain the Integrity of our contracts.

We may trade tons today for a better price in 2010 or ‘11. Or we may agree to deliver at higher price coal today in exchange for the deferral of 10 tons into the future, or we may agree to defer tons into the future year, but at current prices which were probably higher than the market will be in 2010. In all of these instances, we’re trying to accommodate our customers, but at the same time we’re working to keep our contracted business contracted at similar price levels.

The two graphs on the next slide are illustrative of the conditions of the met coal market. The graph on the left shows the one year forward benchmark met and PCI coal prices in prior years and where they are for the 2010 contract year. As most of you know, due to our contract timing and differing coal quality, we didn’t participate in the 2008 price spike to the $300 per ton levels. The open question is where prices will be later this year and early next year when we contract for our 2010 sales.

The graph on the right shows the U.S. steel industry capacity utilization for the past several years and this year. You can see that the industry was essentially shutdown in the fourth quarter of 2008 and remains at very low levels through July. There are reports in the steel industry that inventory levels at the steel service centers at hit bottom and there will be an increased in production in order to return inventories to more normal levels.

There are reports that by year end, the steel industry could be operating at about 65% capacity utilization rate, which is significantly better than the first six months of this year. We hope that this will be the case so that we can sell some of the unsold met coal tons.

For TECO Guatemala, our May guidance included the effects of the unplanned outages at the San Jose plant and the expectation with the plant would run at a 65% capacity factor for the remainder of the year after coming back online.

We also included the effects of the August, 2008 bad decision in our guidance. We remain on track with those assumptions, and with the assumptions that were in our earlier guidance. A positive event in the ongoing bad story was a favorable decision by a lower court judge in Guatemala in May, directing regulators to go back and implement the process for determining the bad as required by the Guatemala in Electricity Law.

This decision has been appealed by the Guatemala constitution, so that Guatemala constitutional board by the National Energy Commission. We don’t expect the decision on the matter in the near term, but the lower court Judge is ruling was nonetheless to positive event.

In conclusion, our expectation remains that we will earn in the guidance range that we provided in May of $1 to $1.15 for 2009 excluding charges or gain and it assumes all other factors that we just detailed for each of the operating companies.

Now I’ll turn it back to the operator so that we can take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Paul Ridzon - Keybanc.

Paul Ridzon - Keybanc

What are you thinking your earned ROE at Tampa Electric could be for the year? Could you break through the bottom end of the bracket?

John Ramil

Paul, this is John Ramil. We haven’t talked about what we expected to be this year because it’s kind of a split year with rates come in the middle of the year, but our focus for 2010 and beyond as we have a full year of those new revenues is to earn at our allowed ROE at both utility companies.

Paul Ridzon - Keybanc

What was, as far as the VAD in Guatemala if that were to go your way, what will the upside of that be, whenever it would happen?

Mark Kane

We said the VAD decision basically put the earnings from EEGSA, and only EEGSA at risk and historically that’s been about $10 million a year. So, if the regulators just restored the VAD back to the prior level, it would be about $10 million of net income on an annual basis.

Paul Ridzon - Keybanc

For the balance of the year, any potential pick up from the very slack labor markets for miners? Are you still living with prior contracts?

John Ramil

We have some prior contracts Paul, but we are looking at every single thing and every single place that we can reduce our costs. You may have read we did shut down a cup of our higher cost mines, we moved that production elsewhere and wherever we can buy the product and produce it ourselves we will take that option.

Operator

Your next question comes from Greg Gordon - Morgan Stanley.

Greg Gordon - Morgan Stanley

Looking at your guidance page, page 14 the guidance update. So the motion for consideration you now, you are saying you are assuming just over $3 million of fiscal year ‘09 impact and that will be in Q4?

John Ramil

Little in three, but mostly in four Greg

Greg Gordon - Morgan Stanley

So that’s basically a penny right?

Gordon Gillette

After tax, yes.

Greg Gordon - Morgan Stanley

It says that on page 15, general cost controls and reductions in cap spending. So part of the way that you guys are looking to get to earn your authorized ROE given that sales are lower is that the rate base will grow at a less rapid pace.

Is that fair to say, because of the CapEx cuts, it’s not junction a function of cuts and operating costs but also a less steep trajectory and rate base growth, but we should expect you to answer reasonable return on that rate base?

John Ramil

I think that’s fair. That’s a fair assessment now recognize because the rates didn’t start kicking in until May at the electric company where we are not likely to earn our allowed ROE this year. In fact, we don’t expect that to happen at all.

Greg Gordon - Morgan Stanley

I get it your goal is to on a full year basis, and try to get to your authorized return, correct?

John Ramil

That’s correct.

Greg Gordon - Morgan Stanley

Now when you talk about general cost control? Are we talking about reductions in O&M?

John Ramil

Yes. Everything is on the table, Greg and most the things that will affect our ability to earn our allowed return is O&M in the short term.

Greg Gordon - Morgan Stanley

So, to the extent I’m looking at, my model and think about how you guys endeavor to achieve the guidance range if I’m falling short because the top line growth trends just continue to be lackluster, I should think about how much flexibility you might or might not have on the O&M lines to make temporary cuts.

John Ramil

I think that’s fair and we’re looking as we have described to you kind of a new business model for the utility that is different than the past where we used to look at about 2.5% a year. So customer growth, we think the normal is going to be more or like 1.5% to 2% a year growth. So, we were looking to not only put things in place for now, but for that new expectation moving ahead.

Greg Gordon - Morgan Stanley

On the coal business, you’re basically telling us that the 9.9 million tons that you’d previously expected to sell, depending on how much potentially gets deferred could be as low as 9.2 million tons this year, and maybe even as low as 8.8 if you are unable to sell the un-contracted met?

Mark Kane

Yes, about 8.8 to 9.3 is probably the new expected range.

Greg Gordon - Morgan Stanley

You said that EEGSA was a $10 million annual net income hit to the extent, you don’t get a reversal. Is that happened 1/1/09, so is that a full impact in ‘09 versus ‘08, $10 million lower?

Mark Kane

No, that impact hit in August. It started in August of ‘08. The $10 million is an annualized number. So we had about five months of hit in ‘08 and you got an incremental seven months in ‘09 and that the expectation that there be no earnings from EEGSA were baked into the May guidance.

Greg Gordon - Morgan Stanley

Then what’s the impact of San José been year-to-date versus last year?

Mark Kane

We said in the quarter it was a $3.8 million negative impact on earnings, and it was out or part of the first quarter on a different unplanned outage, so …

Greg Gordon - Morgan Stanley

You can get back to me on the first quarter, but it is expected to earn inline with what it earned last year for the second half?

Mark Kane

Probably a little less because we expect it to run at about a 65% capacity factor than last year in the second half, it was running at about an 85%, Gordon?

Gordon Gillette

That’s right and the other factor for the second half is the pursuant to the power sales contract, we’ll have some reduction on the capacity charge fees as well. So, I think Mark’s characterization is right. We’ll be a bit lower than last year both due to sales and lower capacity charge revenue.

Operator

Your next question comes from Ashar Khan - Incremental Capital.

Ashar Khan - Incremental Capital

Gordon, I was just trying to get a sense, as you sit over here after two quarters are things better off or worse off after the May guidance?

Gordon Gillette

Well, I think we went kind of through some of the puts and takes and what was in the guidance and what wasn’t. I think the good news subsequent to the May guidance is that we had the positive decision on the Motion for Reconsideration.

The more challenging pieces are lower sales at the utility companies and a very shaky met coal markets for the rest of the year.

Ashar Khan - Incremental Capital

I know you went through them in a very detailed manner, but in the net is that par a negative, is that a way to get out of it, if you take all of the factors at the utilities and the coal or is it positive?

Gordon Gillette

Well, I think provided as much as we can in the way of some of the detail business drivers and we’ve also given a sense for our expectation that we will still earn within our guidance range, but in terms of slicing it any finer than that, I don’t think we’re in a position to do that at this point. Hopefully through some of your analytics you can quantify some of those piece parts.

Ashar Khan - Incremental Capital

What is the expected tax rate to be for the whole year at the coal as up?

Mark Kane

We said in the outlook section Ashar that based on the 14% year-to-date and the historical normal of about 25%, we are looking about 18% for the full year.

Ashar Khan - Incremental Capital

I’m assuming there is no update to hedging beyond there has been no hedging in the later years. Is that a fair thing to assume?

Gordon Gillette

You mean further coal sales, right?

Ashar Khan - Incremental Capital

Further coal sales right, in 2010, is that fair to assume?

Sherrill Hudson

Yes, I mean one of the things that make it a little bit difficult to tell you what’s been sold for ‘10, especially is how many tons may or may not carry over into ‘10. We said 200,000 to 700,000 tons might carry over if it’s 200,000 we have a bigger open position, if it’s 700,000 more of our production is committed. That remains a work in progress.

Operator

Your next question comes from [Scot Sanchia - Decade Capital].

Scot Sanchia - Decade Capital

I think you said in response to Ridzon question that you were able to purchase some of the coal in the spot market to fill some your contracts instead of sort of producing it. Just wondering if that could be big enough to impact the $63 to $64 per ton cost guidance, or are there any other offsets to that?

Sherrill Hudson

We have been able to purchase some coal, Scott. So far we’ve been able to purchase it at cost below our cost of production and we’ll continue to look for opportunities. The fact that we’re still maintaining our production cost guidance even on lower ton as that it is having some level of impact, plus all of the cost control measures at the folks at TECO coal are taking. There are several moving parts there and purchased coal is a component of it.

Scot Sanchia - Decade Capital

I guess in the past you say that, the ‘10 coal that you have hedged I guess should be around close to 2009. Any update on that and then also any color on current coal prices that you see for 2010 and contracts. What do you see there?

John Ramil

We’ve seen, you’re reading the same things we’re reading about the steam and the met markets steam remains a little bit weak. Met, there are signs of improvement as Gordon noted. Steel production, the use of the facilities which is about 42% a few months ago is up about 50% now.

A lot of folks are expecting to go to about the mid-60s by the end of the year. So that’s all moving in the right direction. Where we are for ‘10 is we’re about, or where we were before about the same pricing expectation as ‘09 at $73 a ton and Mark, about $5.6 million a ton. Is that about right?

Mark Kane

That’s what was contracted in price, yes, 5.2 and that could move around with a carry over.

John Ramil

That could move forward with the carry over.

Scot Sanchia - Decade Capital

Just one more question, I don’t know if you this number handy, but just the reserve margins in Florida. Do you happen to have that handy or what you seeing there?

John Ramil

I can’t tell you what they are. Ours are just a little north of 20% and I think probably the states a little stronger than that, because we’re looking at the state being in pretty good shape.

Gordon Gillette

There is a requirement in Florida that the utilities individually maintain at least 20% reserve.

Operator

Your next question comes from Marc De Croisset - Macquarie Capital.

Marc De Croisset - Macquarie Capital

You indicated that bad debt expense was basically flat year-on-year at Tampa. Can you give us a bit more color how you’re managing bad debt expense from an operational perspective?

John Ramil

It’s actually a little bit above where it’s been historically. It was about two tenth of a percent of revenue. It’s grown about three tenth of a percent of revenue, but it’s kind of held there. Two things; we really our folks two or three years ago really put into place some nice controls on deposits and various things, and the timing worked out well and that minimized our exposure to bad debt. We did see it, we saw it go up and we think that really helped minimize the exposure.

The other area is that, we think we’ve kind of seen a bottoming out of the downside of the market. We’re seeing fewer cutoffs for people wanting to get turned off. We’re seeing that in the stabilization of the customer numbers. So all the indications are that we’ve kind of seen the bottom and the largest impact on that and I think that one added to, one of the things Gordon mentioned earlier, about how we feel versus the time of our previous guidance versus now, I think on the utility side we were projecting and hoping for a recovery late this year.

I think as we’re little further into the year, what we’ve seen, was the building permits start to turn around. What Gordon showed you with the housing sales increasing, we are seeing data points that are indicating that recovery is happening, so that leans us more towards positive.

Marc De Croisset - Macquarie Capital

Another question, if I may on O&M. Just to clarify were O&M cuts incorporated into your ‘09 guidance or they incremental to ’09 guidance..

Gordon Gillette

We gave the ‘09 guidance back away, we were looking at O&M that would have been lower than our previous business plans. When we talk about O&M cuts we are talking relative to that. We are still looking at O&M being up year-over-year.

Operator

Your next question comes from Danielle Seitz - Dudack Research

Danielle Seitz - Dudack Research

I was wondering if you could, you mentioned that the last response that you are looking at somewhat of economy recovery in your region of Florida a little bit earlier than the rest of the state, you are looking at something earlier than the mid 2010, is that correct?

Sherrill Hudson

I think the best thing we can point you to.

Danielle Seitz - Dudack Research

I understand it’s hard to tell, but it just to get a color on that.

Sherrill Hudson

The best leading indicators we have for recovery is building permits and on page 12 of Gordons charts you can see that the building permits bottomed out kind of the end of ‘08, beginning of ’09 and on a strong recovery since then. That’s one of the best leading indicators we see when we look at the economic expansion of the area.

The other is we know we had a large inventory of homes. For the building permits to start to rise; you need that activity plus you need the inventory being depleted and that appears like that’s happening nicely when you look at what’s happened.

I think every month this year we seen an increase in home sales. So, both those things happening is a very positive side of things starting to turn.

Danielle Seitz - Dudack Research

What you are saying that, actually you anticipate to raise the customer growth around 1%, 1.5%. You are basically talking not about 2010, but in 2010?

Sherrill Hudson

We are talking about the new normal, and I think for putting a calendar on it. You might think about that being like 2011, and the latter part of ‘09 and 2010 on a recovery curve to that new normal.

Gordon Gillette

Danielle, we previously said that 2010 customer growth was probably going to be about a 0.5%, maybe a little bit North of that.

Operator

Your next question comes from Paul Ridzon - Keybanc.

Paul Ridzon - Keybanc

As far as the home sales, are you seeing People buy these investments and they sit empty or are they occupied at this point?

John Ramil

I don’t know that we can really tell, but everything that we see and hear is that there aren’t a lot of people loaning money for investment homers. It’s most likely its owner occupied.

Paul Ridzon - Keybanc

Any visible on whether the meters are spinning?

John Ramil

We talked about in previous calls like this. We looked at a lot of low usage meters and we think that has gone down quite a bit and we saw low usage meters turned into people asking us just to disconnect them completely and we seen that stop as well. Turning around to a more normal pattern where people aren’t asking us to cut them off and we don’t have that huge number of low usage meters.

Gordon Gillette

With the weather patterns we had in the quarter, it’s a little bit difficult to try to say exactly how much is do to weather and how much is still vacancy with for minimal use meters.

Paul Ridzon - Keybanc

Can you outline your rate case strategy for the next couple of years? Well you might want to think about going back in or…

John Ramil

Our strategy is we are going to do the things we have to do to match expenses to revenues, to earn at our allowed rate of return and in doing so we can stay out of Tallahassee and rate cases.

Operator

Your next question comes from Jesse Laudon - Zimmer Lucas.

Jesse Laudon - Zimmer Lucas

Just on the O&M a little more detail; what was the planned year-over-year change in O&M that you are sort of looking to reduce from?

Gordon Gillette

The rate case budget that was submitted to the Public Service Commission was about a 16% or 17% increase over ‘08. Now, some of that was disallowed in the course of the rate case, but that was what was filed in August of ‘08.

Jesse Laudon - Zimmer Lucas

I guess in terms of, when your original guidance, what kind of an O&M increase was that year-over-year?

Gordon Gillette

We didn’t specify at that time.

Jesse Laudon - Zimmer Lucas

In terms of the CapEx, now you’re looking to reduce some CapEx in ‘09, what’s the full year CapEx expected at Tampa Electric?

Gordon Gillette

The 10-K had $620 million and we’ve identified a $120 million reduction for Tampa Electric alone. The other companies are also contributing an additional $20 million reduction.

Jesse Laudon - Zimmer Lucas

You talked about some of that being I guess, deferral of some transmission investment, but then in terms of sort of the 10/11 or sort of annual CapEx run rate, those numbers also seem to be down. So I’m just trying to get an understanding in terms of is that just like a longer term deferral beyond the next couple of years, or is there just a big reduction in one of the other pieces like distribution or generation?

Gordon Gillette

Some of it you hit all right. We talked about it is transmission deferral. We’re going to follow what the state needs and do our share on that, looks like its moving back. The next biggest piece is new generation and that tends to get deferred, but at some point you have to build it and it will get deferred based on low growth and it will get deferred if we can buy more cheaply than build and we will do that first if we have that option.

The other thing and the smallest of the factors is commodity prices are down and that helps in all the cap expense.

John Ramil

Jesse, if you go back to our 10-K where we had the line, proposed new generation out in the 12, 13 timeframe. If you strip that out after we got passed the big slug of transmission projects, we are probably looking around 300 million a year in the future anyhow.

Jesse Laudon - Zimmer Lucas

Then in terms of some of the movement on the coal deferrals and some potential contract, should we expect that to be all steam or all met or split between the two?

John Ramil

It’s going to be a mix Jesse, because you’ve got the inventory issue at the utilities and we said in the earnings release, where we got paid to defer a steam coal contract and met at a -- year-to-date the steel industry been operating, I think at about a 44% to 45% rate. So, there is going to be some met coal tons deferred too, I would expect.

Jesse Laudon - Zimmer Lucas

Sort of a couple years out assuming that coal markets recover, would it be pretty easy for you guys to get back to kind of the high 9 million tons per year of production?

Gordon Gillette

Yes.

Operator

Your last question comes from Greg Gordon - Morgan Stanley.

Greg Gordon - Morgan Stanley

Do you think it’s a reasonable expectation to assume that in 2010 you can get to an earn return-on-equity that’s equivalent to what you’ve been authorized for the year or you think it’s going to take, when we get out to the end of next year on a run rate basis, you’ll be at a operating cost level on a revenue level that is equivalent to where you want to be.

How long do you think its going take given the business plan you put in place to trend up to that authorized return?

John Ramil

I think its reasonable assume will be in position to have earned our allowed ROE for the full calendar year 2010.

Operator

There are no further audio questions at this time. Do you have any closing comments?

Mark Kane

We’d like to thank everybody for joining us this afternoon, and we look forward to speaking to you in the future. Thank you very much Mark. This concludes our call.

Operator

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

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