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TECO Energy (NYSE:TE)

Q4 2013 Earnings Call

January 30, 2014 10:00 am ET

Executives

Mark M. Kane - Director of Investor Relations

Sandra W. Callahan - Chief Financial Officer, Chief Accounting Officer and Senior Vice President of Finance & Accounting

John B. Ramil - Chief Executive Officer, President, Director and Member of Finance Committee

Analysts

Jonathan P. Arnold - Deutsche Bank AG, Research Division

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Ashar Khan

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Steven I. Fleishman - Wolfe Research, LLC

Andrew Bischof - Morningstar Inc., Research Division

James D. von Riesemann - CRT Capital Group LLC, Research Division

Maurice E. May - Wellington Shields & Co., LLC, Research Division

Andrew Levi

Andrew M. Weisel - Macquarie Research

Operator

Good morning. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the TECO Energy's Fourth Quarter Results and 2014 Guidance Conference call. [Operator Instructions] Thank you. And now, I'll turn the call over to Mark Kane, Director of Investor Relations, you may begin your conference.

Mark M. Kane

Thank you, Lisa. Good morning, everyone, and welcome to the TECO Energy fourth quarter 2013 results and 2014 guidance conference call. Our earnings, along with unaudited financial statements, were released and filed with the SEC earlier this morning. This presentation is being webcast and our earnings release, financial statements and slides for this presentation are available on our website at tecoenergy.com. This presentation will be available for replay through the website approximately 2 hours after the conclusion of our presentation, and will be available for 30 days.

In the course of our remarks today, we will be making forward-looking statements about our expectations for 2014 and our New Mexico Gas Company acquisition. There are number of factors that could cause actual results to differ materially from those that we'll discuss today. For a more complete discussion of these factors, we refer you to the risk factor discussion on our -- from our annual report on Form 10-K for the period ended December 31, 2012, and as updated in subsequent SEC filings. In the course of today's presentation we will be using non-GAAP results. There is a reconciliation between these non-GAAP measures and the closest GAAP measure in the Appendix to today's presentation. The host for our call today is Sandy Callahan, TECO Energy's Chief Financial Officer. Also with us today is John Ramil, TECO Energy's CEO, to assist in answering your questions. Now, I'll turn it over to Sandy.

Sandra W. Callahan

Thank you, Mark. Good morning, everyone. Thank you for joining us. Today I'll cover fourth quarter results, provide an update on the local economy, discuss our 2014 guidance and update our progress in the New Mexico Gas Company acquisition. In the course of my remarks today, I will be using non-GAAP results and there is a reconciliation to the nearest GAAP measure in the Appendix, and there are also some graphs on the Florida economy contained in the Appendix.

In the fourth quarter, net income was $42 million or $0.20 a share, compared with $45.1 million or $0.21 in 2012. Non-GAAP results in 2013, which excludes $2.3 million of charges related to the acquisition of New Mexico Gas and some minor costs associated with TECO Guatemala discontinued operations, were $0.21 per share, unchanged from last year.

Full year net income was $197.7 million or $0.92 per share compared with $212.7 million or $0.99 in 2012, which included the discontinued operations and sale of TECO Guatemala. Non-GAAP results in 2013, which exclude charges related to the New Mexico Gas acquisition were $0.95 per share compared to $1.14 in 2012. The most significant factor impacting the year-over-year comparison was the effect of the coal price environment on margins at TECO Coal.

Tampa Electric reported higher net income in the quarter, primarily due to the benefits from its rate settlement, which added about $10 million to pretax based revenue in the quarter. The settlement extended the amortization life for software, retroactive to the first of the year and this, net of the depreciation impact of planned addition, reduced depreciation and amortization expense $2.2 million in the quarter.

O&M increased, primarily, due to the accrual all in the fourth quarter of performance-based incentive compensation. The number of customers was up 1.8% this quarter and 1.5% for the full-year, and energy sales were higher reflecting the warm winter weather that resulted in air conditioning load in December.

Retail net energy per load in the fourth quarter was 3.7% higher than last year, with total degree days 2% above normal and 18% above last year. Sales to residential customers increased, reflecting customer growth and running those air conditioners in December. A lower return on investments recovered through the Environmental Cost Recovery Clause, which impacted net income about a $1 million in the quarter, reflects the commission rule affected the first of the year that requires annual revision of the return rate to reflect the actual capital structure and actual capital cost for sources other than equity.

In Tampa Electric's case, this included the lower cost per debt and customer deposits and a higher proportion of deferred taxes due to bonus depreciation. Peoples Gas experienced customer growth of 1.2% in the fourth quarter, but therm sales to residential customers were lower due to the same warm weather that helped Tampa Electric. Compared to 2012, Peoples had lower O&M in the quarter, and depreciation and amortization expense decreased due to the same change in the amortization life for software.

TECO Coal recorded net income of $6.7 million for the quarter compared to $10.8 million last year. While margins were significantly below last year due to the weak global coal market, tax benefits offset some of the margin effect. The average selling price for the quarter of almost $82 per ton was $13 below last year and was below the $85 full year price as fourth quarter net coal prices were lower than earlier quarters.

The fourth quarter all-in cost of sales was $79 per ton, which was below the full year cost guidance range. The cost of production has declined steadily each quarter, as cost control actions taken earlier in the year have fully taken hold, and this positions TECO Coal well going into 2014. Tax benefits in the fourth quarter included $1.9 million from the reversal of previously accrued state income taxes and $1.3 million associated with tax percentage depletion.

The Florida economy continues to post strong gains. Statewide, unemployment in the fourth quarter fell to 6.2%, an improvement of 1.7% from a year ago. At the same time, the state has added about 193,000 new jobs, with the largest growth occurring in trade, transport and utilities, followed by business services. Even construction, which was the hardest hit sector in the downturn, added new jobs.

Hillsborough County, Tampa Electric's primary service territory, fared even better, with the unemployment rate dropping to 5.7%, less than half of where it stood at 12.8% peak in January of 2010. So we're definitely back to the pre-recession relationship with Florida unemployment better than the national level and the Tampa area better than the state.

Over the past year, the Tampa St. Petersburg Metropolitan area added more than 35,000 jobs, the most of any Metro area in the state. Contributing to this, has been the success of the Hillsborough County economic development corporation's aggressive pursuit of economic development for our local area. Over the past 15 months, its actions have resulted in creating 6,300 new jobs and will result in almost a $0.5 billion of capital investment in new facilities.

You can see on this Slide, some of the major employers either coming to our market or expanding existing operations. Most notable are Amazon's new 1 million square foot distribution facility and USAA's almost doubling of its current workforce and development of a second new campus.

The housing market also continues to look good. For the 12 months ended in December, more than 5,100 new single-family building permits were issued in territories served by Tampa Electric, representing an 18% increase over the prior year. That's a positive indicator for future customer growth as typically about 6 months after a building permit is issued, it becomes a new customer.

Despite an uptick in interest rates, sales of existing homes have remained strong, up more than 11% for the 12 months ended December 2013. And although the inventory of existing homes has picked up as potential sellers respond to higher prices and strong demand, at 4 months, it remains at a very healthy level.

In the January Case-Shiller report shows that selling prices in the Tampa market increased 15.7% year-over-year.

Another strong indicator of the resilience of the local economy is taxable sale, which were up 5.4% for the 12 months ending in October, the last month the data is available. We're encouraged by the consistency of the economic trends over the last few years and we expect that to continue into 2014.

We're establishing 2014 guidance for our Florida operations net of parent in a range between $1 and $1.05. We expect that the combined earnings growth of our Florida utilities will exceed 13% in 2014. The major driver for Tampa Electric is the expected $50 million of hire-based revenues as a result of the 2013 rate settlement. We expect that O&M in 2014 will be lower than 2013 and that continued growth in the local economy will yield 1.5% annual customer growth similar to 2013. And as construction at the Polk Power Station increases, Tampa Electric will see higher AFUDC earnings as well.

All things considered, we expect Tampa Electric to earn at or above its allowed 10.25% midpoint return. Peoples Gas has allowed ROE range of 9.75% to 11.75%, and we anticipate that the gas company will earn above its midpoint with continued customer growth as well as volume growth, driven in part by interest in converting vehicle fleets to compressed natural gas.

The last item here is the Parent/other segment. By far, the largest component of this segment is the TECO finance interest expense less interest allocated primarily to TECO Coal. It also includes the net income of smaller operations, notably TECO's pipeline and some tax consolidation impacts that are recognized at parent. We don't foresee any major changes here and expect that 2014 should be fairly consistent with the 2013 non-GAAP cost of about $37 million.

Consolidated guidance of $0.95 to $1.05 has downside allowance in it for TECO Coal results. Although we expect TECO Coal results to be about breakeven in 2014, the weak market presents an element of risk to that, and we've reflected that risk in the consolidated guidance.

TECO Coal expects sales volume at levels similar to 2013 in a range between 5.5 million and 6 million tons, with the specialty coal (met, PCI and stoker) representing almost 70% of those sales. We expect the average selling price to be about $80 per ton, and 80% of the volume is already contracted and priced. There is an additional 15% of the volume that is committed to a broker selling primarily to Asia, but those tons are unpriced and are subject to quarterly price adjustments.

TECO Coal continues to trend costs and expects the all-in cost of sales, which includes ANG depreciation and interest to be in the range between $79 and $83 a ton. Cost will benefit from lower royalty and severance tax payments as a result of the lower selling price, the full year benefit of actions taken in 2013 and plans to convert additional traditional surface mining operation to lower-cost highwall mining as was done in 2013. The average cash cost, which takes out depreciation and allocated interest, is expected to be about $7 per ton below the fully loaded all-in cost. And, as was the case in 2013, the coal company should benefit from tax percentage depletion.

A final note on guidance. Our guidance does not include the impact of the New Mexico Gas acquisition or associated financing activity, and it excludes charges or gains. The acquisition impact is very dependent on the timing of closing and we'll revise or confirm guidance once we close.

Here's a quick refresher on Tampa Electric's rate case settlement approved last September. As you know, Tampa Electric filed for new rates in April, driven primarily by rate-based growth since 2009. At that time, we also expected that we would need to file again in 2016 for rates to support the Polk expansion project in 2017. The settlement resolved all of the issues in the 2013 case, and also included the rate requirements associated with the Polk in-service in 2017, thus eliminating the need for a case in '16. The settlement included an authorized ROE midpoint of 10.25% with the typical 100 basis point range. The indicated ROE would be used for clauses and for surveillance purposes and can increase for these purposes to 10.5% if the 30-year treasury bond yield rises 75 basis points for 6 months.

The settlement provides Tampa Electric with a $180 million of higher base rates over the life of the agreement including the $57.5 million that started last November, an additional $7.5 million in November of '14, and then $5 million in November '15. On January 1, 2017, or when the Polk project is in service, whichever is later, Tampa Electric will receive an additional $110 million of base revenue. We agreed to extend the amortization life for software to 15 years from the previous 10, retroactive to January 1 last year, which resulted in a $6 million pretax benefit in 2013, and we agreed to end the $8 million pretax storm damage accrual beginning November 1 of last year, which will reduce O&M in 2014 by an additional $6.7 million.

Tampa Electric's $700 million generation expansion project, the Polk unit's 2-5 conversion to combined-cycle was approved by the governor and cabinet last November. The project is expected to be in service in January of 2017, which will trigger the $110 million of hire-based revenues becoming effective. We have all of the required permits in place and construction started earlier this month.

This is an update on the timing of regulatory activities to seek approval for our acquisition of New Mexico Gas Company, including the revised schedule that was issued earlier this month. The key schedule points are that staff and intervenor testimony is due at the end of February and hearings in front of the hearing examiner are scheduled to begin in late March. At this point in time, we are assuming that we will proceed to hearing. Following the hearing, there is a process of filing briefs, hearing examiner recommendation, commission decision and potential appeal that are not on a defined schedule. Assuming that these activities run their full course, closing would be expected in the third quarter of this year.

This slide summarizes some of the elements we've laid out for the parties in our testimony including benefits that we expect the acquisition to bring to customers in New Mexico. I'm not going to read the slide, but you can see that we've made it clear that customers will benefit under our ownership of NMGC. Many of these items are similar to the elements in the settlement that Continental Energy agreed to when they acquired NMGC.

I'll close with our upcoming investor communications schedule. We expect to file our 10-K at the end of February, and will then kick-off our investor meetings for the year at the Morgan Stanley conference in New York the first week of March and the UBS conference in Boston the next day. And now, I will turn it over to the operator to open the lines for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Jonathan Arnold with Deutsche Bank.

Jonathan P. Arnold - Deutsche Bank AG, Research Division

2 questions, 1 on this presentation of the guidance where you're sort of looking at it excluding coal, but on that sort of otherwise consolidated basis, is that an indication of where you stand in terms of strategic commitment to that business? Can you update us on -- just general thoughts regarding interest and perhaps exiting at some point?

John B. Ramil

Jonathan, this is John Ramil. Our main purpose for doing that is to provide strong, clear transparency to our core business, the Electric and Gas utility and to show how earnings growth is strengthening that business, and we expect that to continue as we build out the Polk Power Station. With respect to coal, I think consistent with what we've been saying for the last 2 or 3 years, that is not a core business, it's a value business to us. If it is more valuable to somebody else than to us, we see that a transaction could happen. But, we have not reached that point.

Jonathan P. Arnold - Deutsche Bank AG, Research Division

Do you feel closer to that point than you might have been? Or anything that can...

John B. Ramil

No, if you recall, the last probably 2 or 3 earnings calls, the last several months anyway, we've indicated that even in the soft market there have been expressions of interest in the business. We have set up and maintained refreshed and current data available to anybody who is interested in that business, and we've entertained several visits of folks looking at the business but have not gotten to a transaction yet.

Jonathan P. Arnold - Deutsche Bank AG, Research Division

And just as similar vein, can you just comment at all on your -- obviously NMGC, you're getting well into the process. Is -- are the opportunities like that, something that you'd sort of -- to be kind of part of the business plan going forward? Or are you sort of comfortable with the portfolio, those comments on coal aside that you will have come late this year?

John B. Ramil

We, first and foremost, want to organically grow our existing portfolio of utility businesses. And given the right opportunity, we would look to expand that portfolio with other utility business, both electric and gas. We really like the gas LDC business, those gas infrastructure businesses that -- like Sea Coast that carry nice utility-type business risk and returns without commodity risk, and would look in areas which we refer to as the Sunbelt. Those are areas where there tend to be growth, look at companies that are well run and don't have a lot of environmental issues like we found in New Mexico.

Operator

Comes from the line of Julien Dumoulin-Smith from UBS.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

So perhaps just to follow-up a little bit on Jonathan's question there, could you talk a little bit more about potential partial sales of coal? I noticed in the release here, there was talk of selling idled facilities. Any ability if not to transact on the entire business, just kind of piecemeal, could you talk about that, if you will?

John B. Ramil

Yes, Julien, I probably shouldn't read in anything strongly into that. Once in a while, you'll have a prep plant or a loading facility or something like that, that because of where you move your operations, is no longer of use to you and might be to somebody else, particularly, some of the smaller operators and that's the opportunity we had. Our objective would be in exiting that business, to fully exit that business and simplify our story in our core business strategy for investors.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Is there an ambition here to exit that business in time to mitigate the equity needs? Is that a conscious thought process of yours?

John B. Ramil

It's a consideration. It's not a driver. We -- as we said in the past, we'll look at the value, and that value includes what we will sell the business for and how we modify [ph] the process.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Great, and then talking about the core business here, you talked about lower O&M year-on-year. Could you talk a little bit more definitively as to the key drivers there? I know you already alluded to some of them, but what are they, just more concretely, if you will?

John B. Ramil

Just very quickly, 30,000 feet [ph] and then I'll let Sandy fill in if we need to. We expect, moving forward, a little bit of upward pressure on pure kind of operating O&M that still could be well managed as our folks have been doing but then lower cost, particularly in the benefits area for employees, and of course, we do not have the storm accrual any longer at Tampa Electric. Sandy, you want to add to that?

Sandra W. Callahan

Yes, the drivers for next year, we're getting help on a couple of front. Storm accrual will have 10 months difference in that between '13 and '14. Getting some help on the pension expense front, because of lower discount rates, and we had incentive accruals in 2013, some of which are provided for in our 2014 estimate, but some of what appears in '13 is really achieving above a certain level and so would kind of take care of itself in '14. And then there are some O&M elements that are going the other way. For example, just the extent and nature of planned outages in '14 is greater than '13, and so that carry some additional expense. And so net-net, O&M will be lower in '14 than it was in '13.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

What's the core level of inflation you're seeing, if you could talk to that? Because it seems as if a lot of elements you're seeing here in '14 are somewhat transitionary, right? Obviously, with the accruals and sort of a one-time benefit or a one-time carried forward benefit on pension, but at the core, what is that metric looking like right now?

Sandra W. Callahan

I think, every year there are discrete elements that one way or another tend to keep O&M from trending out at a certain core rate. I mean, you always have some increase in salary cost for example, but there are always specific unique increments of activity based on the actions that we're taking that have tended over time to moderate some of those things.

John B. Ramil

Julien, having to run the Tampa Electric's budget process many years ago, and they still do it today pretty much as they did then, essentially it's bottoms up, 0 based budget process. And except for some trends like Sandy explained, such as payroll, they start from scratch every year and look at the activities that they need to bake in and build the base budget.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Great. Excellent, well I -- actually, quick question, if you will, on the gas acquisition front. You alluded to the potential impact in '14 depending on the timing. But obviously, the earnings contribution for that business probably weighted towards the winter months, presumably forth and first quarter. How do you think about that? If you do close on it, say, later this third quarter, what that impact would be from an accretion dilution perspective?

John B. Ramil

Well, I mean, it depends on when, but typically the spring and the summer months are low income and even negative income months. And the income from that business, like most gas utilities in the country, is loaded January, February and then November, December. So the longer it takes, you drop some of those months that are aren't as positive, and you stay with the higher income months.

Unknown Executive

The other factor is the number of shares that we'll issue, and the timing of shares.

John B. Ramil

Lisa, our next question?

Operator

Next question comes from Ashar Khan from Visium.

Ashar Khan

Could you just give us -- utility, I guess, is the way to now look at the company going forward, and you have a pretty definite rate case agreement which goes out for quite a few years. John, can you just tell us what kind of growth we can expect in utility earnings based on the rate agreement that we have for the next 2 or 3 years? Is it like a 5% grower?[ph]

John B. Ramil

If you -- what, we didn't have it here, but we showed the DEI [ph] maybe and in before that at some calls, we showed a chart of rate-base growth at the electric company. When you look at our base CapEx and then you layer the Polk expansion on top of that, if you look from '13 to '17, it was somewhere between a 6% and a 7% average annual growth rate. Now it is a little bit lumpy, because of the size of the timing of the construction spending. And our goal with the rate held [ph] at Tampa Electric is to take that rate-base growth to the bottom line during that period of time. Now, we have a strong year moving from 2013 to 2014 because we had a good increase in revenue for the rate case results going from '13 and '14. And we have another really strong increase in revenue in '17 as well, when Polk comes into service. In the middle, the increases are a little more moderate and we'll need it [ph] to be more focused and look at what our revenue growth is and how we're managing O&M. On the gas side, as we look at normal CapEx and then we look at customer growth, then we look at the opportunities we've been seeing, either in pipeline expense, extensions to commercial customers to replace other sources of BTus for the work we've been doing with customers on compressed natural gas vehicles, roughly a $100 million of CapEx a year in that business with about 60% to 70% going for new revenue-increasing activities, we see the growth of rate base in that business at about 6% a year. And our objective would be to take that to the bottom line as well.

Ashar Khan

Okay. So can we just say then, I guess it's a little bit lumpy, that at least 5% till '17 and then it gets little bit higher, because '17 is kind of back-end loaded, is that a goal that you can espouse towards?

John B. Ramil

Our goal is, we have that full rate base in at '17 to earn our allowed return on that. And it would reflect roughly a 6%, 6% to 7% year growth in earnings over that period of time.

Operator

Next question comes from the line of Paul Ridzon from KeyBanc.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

Could you give just a little more detail on what was your expectation on the close in New Mexico from its first to third quarters?

John B. Ramil

Sure, Paul. Things have moved a little more slowly than we would've expected. There's a lot going on in the regulatory world in New Mexico right now, and that's on top of unfortunately an undersized staff because they -- for various reasons, they have several openings at the commission staff. So they had been managing their first projected test year utility rate case, along with their [indiscernible] of activities and along with our case. So while we've been pushing our business needs, we've also been very, very much empathizing with the staff over what they are facing, so it's moved more slowly. The good news is that we did, back a few days ago, have a hearing with the hearing examiner and the schedule was set, as Sandy laid it out earlier. And we'll move forward on that schedule. Beyond that schedule, when we talk about right now, that goes it's whole route, we're looking for probably a third quarter closing. Beyond the schedule, there are a lot of things that have to happen: orders are issued, time periods are passed. And those aren't specifically defined, but if you use traditional estimates of what those time frames would be, that's how we come up with that third quarter closing.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

Have any of these attempts made you more or less optimistic about the eventual closing of the deal?

John B. Ramil

No. We still feel that the deal makes sense for everybody. It will close as the staff, I think, has time and the intervenors have time to focus more on our testimony and the depositions of our witnesses over the next few weeks. And I'm confident it will become clear that what they see there in terms of current operations, that will all stay intact. We have a strong record of utility operations and a strong commitment to reliability and customer service and safety, and we've been recognized for that by AGA. We've been recognized by J.D. Power. And that with the utility holding infrastructure and the ability to centralize and run efficiently the back-office operations, like HR and IT, that will be more efficient and effective and yield results to customers over the long run.

Operator

Your next question comes from the line of Ali Agha from SunTrust.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

First, Sandy or John, just wanted to be clear on the '14 guidance. So when you said you exclude the New Mexico acquisition, obviously it hasn't closed. All the cost that you're incurring right now, those are excluded as well, just like you have been doing that in 2013, is that right?

Sandra W. Callahan

That's correct. The costs associated with the transaction, we've characterized as non-GAAP charges in '13, and we would do the same in '14.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Got it. And then John, the transaction with New Mexico, you're saying third quarter closing. What is currently the possibility of still getting a settlement done to try to expedite this? Is that still a realistic possibility? And if so, what would the timing of that? Would that be linked to the hearing schedule? How should we think about settlement here?

John B. Ramil

No, it still is a possibility. Probably the most likely time for that would be the 2 or 3 weeks preceding the hearing. That is the time between staff and intervenor testimony and when the hearings starts. And if we look back at the last acquisition, that's when a settlement was made.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

And then separately, on the coal business, the jump in fourth quarter net income, you talked about some diversion of taxes and couple of other things. But was there something else that drove the number to be so much higher in the fourth quarter versus how you were trending through the first 3 quarters of the year?

John B. Ramil

Yes. That's a great question, Ali, and I get to do a little shout out to our people on this one. If you notice on Sandy's Slide #6, the all-in cost of $79 a ton reflects just incredible work that people have done both in looking at every detail of cost as well as shifting our operations, largely driven by what we've done with our highwall mining operations to get to that low of cost, which has indeed expanded the margin in the fourth quarter.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

So that's not something that sustainable, so you don't think you can continue?

John B. Ramil

No, we think that's sustainable. We have all those things in place, and in fact if you look at our guidance range, it's $79 to $83 a ton. So we expect to stay in that ballpark.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

And assuming you still own this business next couple of years, how are you are seeing the outlook for '15, '16 right now where you stand? I mean, should we think it's fairly similar to '14?

John B. Ramil

Hard to tell. This business will have a turnaround in the net market and that's where our opportunities really lie. We -- at some point, Australia is going to stop taking losses with oversupply in the market, which will be helpful. Any pick up in China will be helpful. And of course, pick up in the European economies would be a great, great help.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Last question, I don’t know if you guys look at these statistics, but on a weather-normalized basis, what was your electric and gas sales in '13> And how do you budget for that in your outlook next couple of years?

Sandra W. Callahan

Our -- we don't look back and say here's what we were on weather-normalized basis. But in terms of forecasting, our estimate of customer growth long-term is 1.5% a year. And we expect that, that customer usage will actually decline somewhat and our estimate is about 0.03% per year. So that gives us net growth of about 1.2% in our long-term forecasting.

Operator

Your next question comes from the line of Steven Fleishman with Wolfe Research.

Steven I. Fleishman - Wolfe Research, LLC

John, last year you had talked about -- I think around this time last year about seeing the earning recovery in '14 and looking at resuming dividend growth in '14. Could you just update us on whether that's viable, given that the payout ratio is high?

John B. Ramil

Sure. Yes, the -- I don't know if you saw it, but we did have a dividend release this morning.

Steven I. Fleishman - Wolfe Research, LLC

Yes.

John B. Ramil

And we've decided to keep it at $0.88 and our -- looking at that decision, obviously looking at our cash situation and looking at the payout ratio and cash is not an issue, given our earnings and our NOL position. But the dividend payout ratio is better than last year, but still higher than we'd like to see it. So we thought another year of being conservative on the dividend and being disciplined would better position us to grow earnings and improve that gap and start to drop our payout ratio.

Steven I. Fleishman - Wolfe Research, LLC

Okay.

John B. Ramil

Ideally, we're comfortable with a high payout ratio while we're in this NOL position because we're generating cash relative to our net income at a higher -- at a rate of somebody earning much higher earnings per share. But as we look ahead, 2017, 2018 when we're out of the NOL position, we want to be growing the dividend and growing earnings, so we're back in that 60%, 70% payout ratio.

Steven I. Fleishman - Wolfe Research, LLC

Okay. And we should view the dividend as secure?

John B. Ramil

Absolutely.

Steven I. Fleishman - Wolfe Research, LLC

Okay, and then on -- question on coal and kind of allocations, parent allocations, now that the coal business is really making no money, are you still allocating costs against it at a kind of consolidated level? Could you just give us kind of update on how much parent cost is allocated or consolidated cost allocated to coal?

Sandra W. Callahan

We are. We disclose the amount of interest that we allocate to coal, which is about $6 million, $7 million. And that's in the segment information. We also allocate parent, some parent cost to TECO Coal and that is a couple of million dollars a year.

Steven I. Fleishman - Wolfe Research, LLC

Okay, and so that -- these would be the rough range for -- in the '14 forecast for what's allocated?

Sandra W. Callahan

And those numbers are included in TECO Coal cost range for the cost per ton. All that's in there.

Steven I. Fleishman - Wolfe Research, LLC

Okay.

John B. Ramil

Our cost -- Steve, our cost allocation includes multiple elements. It's not just net income, so that's why we're still allocating cost to them.

Operator

Line of Andy Bischof from MorningStar Financial Services.

Andrew Bischof - Morningstar Inc., Research Division

Is it fair to say that you're continuing to see the same level of interest in the coal business that you have had in prior quarters?

John B. Ramil

Could you repeat that? I am sorry, Andy.

Andrew Bischof - Morningstar Inc., Research Division

No, that's okay. Is it fair to say you're seeing the same level of interest in the coal business compared to prior quarters?

Unknown Executive

You mean the potential acquirers?

Andrew Bischof - Morningstar Inc., Research Division

Correct.

John B. Ramil

Okay, yes.

Andrew Bischof - Morningstar Inc., Research Division

Okay, and then just a clarifying question. You do expect the 1% customer growth beyond 2014?

Sandra W. Callahan

Correct.

John B. Ramil

Yes, that's our long-term expectation.

Operator

Your next question comes from the line of Jim von Riesemann from CRT capital.

James D. von Riesemann - CRT Capital Group LLC, Research Division

Couple of questions, first one is, have any of your financing plans for this pending New Mexico Gas transaction changed?

Sandra W. Callahan

They have not. The rough increments we talked about earlier are still our expectations.

James D. von Riesemann - CRT Capital Group LLC, Research Division

Okay, switching to CapEx, can you just give us an update on the CapEx? Or do we need to wait for the K, for that?

Sandra W. Callahan

We'll be putting all of that in the K, when it comes out at the end of February.

James D. von Riesemann - CRT Capital Group LLC, Research Division

It is safe to say there's not many material changes from what was out before?

Sandra W. Callahan

That's correct. There is not. And obviously, the biggest piece for Tampa Electric is their Polk generation expansion and that is definitely very close to what it was before, little bit less.

James D. von Riesemann - CRT Capital Group LLC, Research Division

Okay. And I just wanted to follow-up with one question that Steve had on the dividend. How do you think about it really on a cash basis ex all the NOLs, just policy perspective?

Sandra W. Callahan

Well, I -- from a policy perspective, our objective is to have a strong sustainable dividend for a long, long, long time, right? And so when we look out at the point in time when our NOLs expire, we want to be back inside that target range of 60% to 70%, as John talked about. And if you look at -- if you looked at earnings on a pretax basis, the dividend payout ratio right now is in the high 50s. But that's not really apples-to-apples and it wouldn't be apples-to-apples with that 60% to 70%. So you really do just look at it from a cash perspective during this NOL period as sustainable and supportable by the robust cash flows we have as a result of that tax position. But longer-term, we want to be back in at appropriate range by the time those NOLs expire. So we're not -- it's not that we're using a metric to evaluate that, we're taking a longer-term view of it.

James D. von Riesemann - CRT Capital Group LLC, Research Division

Okay. And then just one final question, because that tied into my financing issues on gas, on the New Mexico Gas. But when you say that you expect it to still be accretive in the first 12 months, can you define accretive to what?

John B. Ramil

Just for clarification, Jim, we said "to begin to be accretive at 12 months after closing."

James D. von Riesemann - CRT Capital Group LLC, Research Division

So the question remains, to be accretive to what? What's your earnings number would've been otherwise or what you guys have internally or what maybe Street consensus is? That's what I am trying to get at.

John B. Ramil

We made that statement early on and moved it with the schedule and to be accretive to what we otherwise would have earned.

Operator

Next question comes from the line of Maury May from Wellington Shields.

Maurice E. May - Wellington Shields & Co., LLC, Research Division

Again on the dividend, the scenario, the payout ratio scenario that you outlined, looks like they might not be a dividend increase for several years, is that correct, until Polk is completed?

John B. Ramil

No, that's not correct.

Maurice E. May - Wellington Shields & Co., LLC, Research Division

Okay, but not in '14 obviously, but there is a possibility for a boost in '15 or '16?

John B. Ramil

Yes.

Sandra W. Callahan

We're confident in the earnings power of our utilities and are confident that moderate dividend growth is consistent with the earnings growth that we see from those businesses in a pattern that would put us at a desired level once these NOLs expire.

Maurice E. May - Wellington Shields & Co., LLC, Research Division

Okay. And Sandy, my second question really directed to you. You have, in your oral presentation, said that you expected Tampa Electric to earn at or above the midpoint, which I guess is 10.25%, but all the published materials says in the middle of the range. So, I'm just wondering, what you're seeing that might drive the earnings above the midpoint of the ROE range?

John B. Ramil

Well, what you might be sensing is some of our smiling around here, Maury. The sales in January had been strong.

Maurice E. May - Wellington Shields & Co., LLC, Research Division

Well, yes. They've been strong everywhere, I think. I guest the polar vortex did reach Tampa, didn't it?

John B. Ramil

It did. We'd welcome some more of it, but it has.

Maurice E. May - Wellington Shields & Co., LLC, Research Division

Okay. So that was really a weather comment then?

John B. Ramil

Yes.

Maurice E. May - Wellington Shields & Co., LLC, Research Division

I guess, okay but conversely...

John B. Ramil

Yes, it's a weather comment, but it's on top of the good economic data that Sandy had in her presentation and in her charts. We'd been through such a rough ride on the economy, that you hate to get too optimistic about it. But things are feeling very positive.

Maurice E. May - Wellington Shields & Co., LLC, Research Division

Okay. And then, just a couple of quick questions on the coal business. I know we've beaten this to death, but in 2014, your guidance, your consolidated guidance of $0.95 to $1.05, what does that imply for coal at the high-end? And what does it imply for coal at the low-end?

Sandra W. Callahan

Well, the -- when you compare the consolidated guidance to the utility and parent guidance, you can see that there is basically $0.05 of downside in that consolidated guidance for TECO Coal. And the starting point for TECO Coal is that we expect that they will be breakeven in 2014. That $0.05 of downside is more than we actually need, actually, and we have a practice of providing guidance in $0.05 increments. So we did that for the TECO Coal downside. But if you put that in the perspective of what that means from a pretax margin view, it's that $3 of degradation in pretax margin across the whole number of tons that we anticipate selling next year. And so that means that we'd have to be above the top of our cost guidance range. And circumstances are not such in that business right now where we really have a lot of variability exposure on the cost front. From a price perspective, it -- remember we only 1.1 million to 1.2 million of the sales tons in 2014 that are not priced. And so, that would require a $15 decline in price per ton from today's prices to eat up that $0.05 and that's just not realistic from where current prices are. So that -- hopefully that gives you a little bit of perspective on that. It is overly conservative in terms of how much room it provides, but our expectation for TECO Coal is that they're breakeven.

Operator

Your next question comes from the line of Andy Levi from Avon Advisors.

Andrew Levi

It's Andy Levi So, just a couple other coal questions just to get out there. '15, how much are you hedged in '15?

John B. Ramil

We're not.

Andrew Levi

Okay. And if you ended up incurring in '15, you saw in '15 that the loss was going to be greater than let's say the negative $0.05 that probably doesn't happen this year, at what stage do you kind of cut the cord, if you cut the cord?

John B. Ramil

No, we don't -- we haven't defined that. We still -- even where we are at this year on a breakeven basis, the business still is net positive. Cash, as Sandy pointed out, we still are $7 a ton. Cash costs below are all-in. And that's a true all-in, everything in their costs. And we still have that cushion on a cash basis, pretty significant before we get to that point.

Andrew Levi

And how much cash does -- should the business generate this year?

Unknown Executive

EBITDA on a breakeven would be roughly $45 million, $50 million.

Andrew Levi

Okay, that's about what I had. Okay, got it. And then there's -- capital expenses are?

John B. Ramil

Will update that in the K.

Andrew Levi

Okay. And just -- I'm not that familiar with coal, I'm better with natural gas. But when prices come in like they do, and I don't know if you have coal on the books for a certain price, is there a possibility like there is on the gas side when they do like a ceiling test that you can take some type of impairment?

Sandra W. Callahan

I think it's a little less prescribed than it is on the gas side. But we test all of our long-life assets for potential impairment, at least on an annual basis.

Andrew Levi

And when that does typically happen?

Sandra W. Callahan

Well, it typically happens at the end of the year or it can happen at another time during the year if there is triggering event that causes you to do that.

Operator

Your next question comes from the of Andrew Weisel from Macquarie Capital.

Andrew M. Weisel - Macquarie Research

For coal, can you elaborate of what you were just saying by breakeven is conservative? I mean just the simple math of selling prices average $80 and the midpoint of the cost is above $80, what am I missing that makes breakeven conservative?

Sandra W. Callahan

No, I didn't say that breakeven was conservative. Breakeven is our reasonable expectation. What I said was conservative is the fact that in the guidance we baked in basically $0.05 of downside.

Andrew M. Weisel - Macquarie Research

Okay, that make sense. Okay, and then as far as coal pricing, can you tell us what you have in the numbers there for high-vol ANB and PCI?

John B. Ramil

No, we haven't broken that out.

Unknown Executive

For years, we've provided a blended cost across all products, Andrew.

Andrew M. Weisel - Macquarie Research

Okay, worth a try. My next question is you talked a little bit about potential for additional regulated M&A. Should we think of that as being on hold until New Mexico Gas closes? Or is there a potential for something to come before New Mexico is done?

John B. Ramil

Well, our #1 focus is getting New Mexico done.

Andrew M. Weisel - Macquarie Research

Okay. And then my last question, you're assuming 1.5% customer growth, give or take. My only question about that is, in Florida, as you pointed out, housing or building permits were up about 25% last year. We've already seen a little slowdown in the orders. How -- is there some kind of offset to that? I mean, 25%, I would say most would call unsustainable. How is it that you're expecting the customer growth to continue even though it looks like housing still remains strong by historical standards, but 25% can't last forever?

John B. Ramil

Andrew, if look on page 23 in the -- which is a graph in the Appendix, which is building permits, you'll see back at the peak, we were doing 14,000 building permits a year, which is truly unsustainable. We're at just over 5,100 building permits per year now. We're -- the sustainable level is probably above that level.

Operator

We have no further questions at this time. I now turn the call back over to the presenter.

Mark M. Kane

I would like to thank everybody. We're just about out of time for our call this morning. Thank you for joining us, and we look forward to meeting with you in future conferences this year. Thank you, very much, operator. This concludes the call.

Operator

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

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