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TECO Energy (NYSE:TE)

Q1 2014 Earnings Conference Call

April 29, 2014 5:00 p.m. ET

Executives

Mark Kane – Director, IR

Sandra Callahan – CFO

John Ramil – CEO

Analysts

Andrew Levi – Avon Capital

Andrew Weisel – Macquarie Research

Andy Bischof – Morningstar Inc.

Paul Ridzon

James von Riesemann – CRT Capital Group LLC

Operator

Good morning. My name is Sara, and I will be your conference operator today. At this time, I would like to welcome everyone to the TECO Energy's First Quarter Results and 2014 Outlook Conference call. [Operator Instructions] Thank you. And now, Mr. Mark Cain you may begin your conference.

Mark Kane

Thank you, Shara. Good afternoon and welcome to TECO energy first quarter 2014 results conference call. Our earnings along with unaudited financial statements, were released after the market closed today and filed with the SEC just a little bit while ago. 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 annual report on Form 10-K for the period ended December 31, 2013. 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 Callahan

Thank you Mark. Good afternoon everyone and thank you for joining us so late in the day. We deviate this time of year from our normal morning call schedule so that we can release earnings prior to our shareholding meeting which is tomorrow morning. Appreciating that it’s late, I will be brief and leave time for questions.

Today I will cover first quarter results and provide update from local economy, our 2014 outlook and our progress in the New Mexico Gas Company acquisition. In the course of my remarks I will be using non-GAAP results and as a reconciliation to the nearest GAAP measure in the appendix. There are also some graphs on the Florida economy contained in the appendix.

In the first quarter net income was $50.1 million or $0.23 a share compared with $41.2 million or $0.19 in 2013. Those results include in continuing operation $2.1 million of charges related to the acquisition of New Mexico gas and in discontinued operation a $3.1 million benefit related to the resolution of a tax matter associated with TECO Guatemala.

Excluding these items non-GAAP results from continuing operations were $0.23 per share compared with $0.19 last year. Tampa Electric reported higher net income in the quarter, reflecting the rate settlement that became effective November first of last year. This added about $14 million to pre-tax based revenue in the quarter.

The settlement also extended the amortization life for software which reduced the depreciation and amortization expense on those assets, thus offsetting some of the depreciation associated with normal addition to facilities. The settlement discontinued the storm damage reserve accrual which was $2 million per quarter as well as lower pension expense to offset higher generation and delivery cost to leave O&M essentially unchanged year over year.

The number of customers was up 1.8% this quarter which is higher than our full year estimates and energy sales were higher reflecting the colder weather in January and February partially offset by some of the mildest March weather on record. All that resulted in retail net energy per load in the first quarter 2.4 % higher than last year with total degree days 2% above normal and 7% above last year.

Sales to residential customers increased reflecting the strong customer growth as well as the January and February heating load. A lower return on investment recovered through environmental cost recovery clause which impacted net income almost a million dollars in the quarter reflects Florida commission rule effected last year that requires annual revision of the return rate just like the actual capital structure and actual capital cost for sources other than equity. And of course the return on equity now embedded in this rate is 10.25% authorized in Tampa Electric rate case settlement.

Peoples [ph] gas experienced customer growth of 1.6% in the first quarter which like Tampa Electric was higher than our full year estimate. Sales to residential, commercial and industrial customers were all higher reflecting the cold winter weather, the strength of the economy and the attractiveness of natural gas as an industrial fuel.

On the expense side both O&M and depreciation increased slightly in 2014.TECO coal recorded the first quarter loss of $1.6 million compared to net income of $3 million last year. This results reflect the $6 per ton reduction in cost which partially mitigated the negative impact from disruption s to rail service from the severe winter weather in the first quarter.

The average selling price for the quarter of more than $79 per ton was almost $11 below last year and the all in cost of sales was $82 per ton. While margins were significantly below last year due to weak global coal market, tax benefits as expected offset some of the margin impact. Tax benefits of 2.2 million included 700,000 associated with tax percentage depletion.

The Florida economy continues to be a good story. State-wide unemployment in the first quarter was 6.3%, an improvement of 1.4% from a year ago. At the same time the state has added more that 225,000 new jobs over the past year. With the largest growth occurring in business service followed by trade transport and utilities.

On a percentage gain basis construction which was the hardest hit sector in the downturn was the biggest gainer with an increase of more than 10%. Hillsborough County, Tampa Electric's primary service territory also continues to do well with the unemployment there at 6.3%, down almost 4% from a year ago and less than a half of where it stood at 12.8% peak in January of 2010.

Over the past year the Tampa St. Petersburg Metropolitan area added more than 30,000 jobs which makes it one of the best metro areas in the state for job addition. Contributing to this has been the success of the Hillsborough county economic development cooperation’s aggressive pursuit of economic development for our local area, its actions has resulted in creating 6300 new jobs and will result in almost half a billion dollar of investment in new facilities.

The housing market also continues to look good with a 9% increase in new single family building permits in Tampa Electric service territory for the last 12-months and continued strong pace of home resale. Despite an uptake in interest rate and higher selling prices sales of existing homes remained strong up more 7% for the 12 months ended in March. And although the inventory of existing homes has picked up as potential sellers respond to higher prices and strong demand at just more than 4 months it remains at a very healthy level.

And the March case [ph] report shows that selling prices in the Tampa market increased almost 15% year over year which was better than the national average. Another strong indicator of the resilience of the Florida economy is taxable sale which year over year were up almost 7% through January which is the last month that data is available.

At the local level, Hillsborough county taxable sales were up 6% for the same period. We are encouraged by the consistency of the economic trends and we expect those to continue in 2014.

We are maintaining our 2014 guidance for our Florida operations net of parent cost in a range between $1 and $1.05 per share. We expect that the combined earnings growth of our Florida utilities will exceed 13% in 2014 driven by higher electric base revenues as a result of the 2013 case settlement, gas and electric customer growth and higher AFPDC [ph] earnings.

All things considered we expect Tampa Electric to earn us about 10.25% midpoint return and People Gas to earn the 10.75% midpoint return.

We still anticipate that the net cost in parent and other in 2014 should be fairly consistent with the 2013 non-GAAP cost. This segment includes TECO finance interest income, the net income of lower operations and notably TECO pipeline and some tax consolidation impacts that are recognized at parent.

Consolidated guidance of $0.95 to a $1.05 per share has some 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 have reflected that risk in the consolidated guidance.

TECO coal expects the sale volumes at the high end of the previously forecast range of 5.5 million to 6million tons with a specialty coal, met PCI and stocker [ph] representing almost 70% of those sales. We have 90% of the volume contracted in price and there is an additional 10% of the volume that is committed to a broker selling primarily to Asia but those tons to unpriced and subject to quarterly price adjustment.

Prices currently being paid for all products yields an average price of about $80 per ton but the Asian benchmark price is currently below the early 2014 level when current prices were set. TECO coal continues to manage costs and expects the all in cost to sale which includes A&G, depreciation to be in a range of between $79 and $83 per ton. The average cash cost which takes out depreciation and allocated interest is about $7 per ton below that fully loaded all in cost.

TECO coal results this year could be impacted by a fire that started on a rail tunnel on April 26 on a rail line that serves our premier coal [ph] facility. Right now we are not in a position to speculate on the impact until we know the potential duration of the rail disruption and [indiscernible] around that.

A final note on guidance. Our guidance does not include the new impact of New Mexico gas acquisition or associated financing activities and it excludes any charges or gains. The acquisition impact is very dependent upon the timing of closing and will revise our confirmed guidance once we close.

We continue to anticipate that the New Mexico gas acquisition will close in the third quarter following the required regulatory approval. We completed a major milestone activity earlier this month with the conclusion of a hearing before a hearing examiner in New Mexico. Hearing briefs are due this week with replied brief due in two weeks on May 15th. After that the examiner will make her recommendation and the parties will have an opportunity to comment on the recommendation.

The recommendation will then go to the New Mexico commission for a final decision. Dates have not been established but assuming that these activities run their full course closing is expected mid to late third quarter. We think we've made a lot of progress towards getting this transaction approved. This slide lists some of the key benefits that we committed to testimony and at the hearing. To provide the commission with the assurance that the system will be safely and reliably operated and the customers will receive high quality service and lower cost.

I am not going to read this slide but you can see that we have made it clear that customers will benefit under our ownership of NMGC. We look forward to the successful conclusion of this process with the New Mexico commission final decision and the integration of New Mexico gas into the TECO family of companies.

Now I want to wrap up the financial discussion with a recap of our longer term outlook for earnings growth. Through 2017 Tampa Electric compound annual average growth in a rate base is about 6%, this is driven by about almost 700,000 million generation expansion project [indiscernible] conversion to combined cycle operation.

Between now and 2017 the project will generate significant and growing AFEDC [ph] earnings as spend ramps up. The project is expected to be in service in January 2017 and our rate case settlement from last year provides $110 million of higher based revenues when that project goes into service. Because that eliminates the need for a new rate case associated with this generation expansion the regulatory risk typically associated with earnings driven by rate base growth just is a factor here.

We are investing about $100 dollars a year in Peoples Gas and about 70% of that is revenue producing capital investment. Including about 8 million to 10 million a year associated with the replacement of cast iron and bare steel pipes. And finally following the conclusion of the regulatory in New Mexico we can start the integration process with those operations and bring to New Mexico gas the economy development and marketing efforts that have been so successful for the growth of Peoples Gas in Florida.

I will close with our upcoming investor communication schedule. After missing a couple of opportunities to meet with you in March due to inclement weather and cancelled airline flights we will be active in the second quarter. We will be at both the ISI and ADA conferences in May, at WCG conference in June and we will be hosting investor meetings [indiscernible] in June. 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 Andrew Levi – Avon Capital

Andrew Levi – Avon Capital

I guess I might be the only question too. Seems like the utilities humming along, so really nothing to ask there. Just on the fire at the Premier Elkhorn, any idea when we may get an update on that?

Sandra Callahan

No Andy. The fire is on the rail tunnel on the rail line that serves Premier Elkhorn, we don’t have any indication from CFX at that time on the extent of the damage or how long this tunnel might be disrupted. The other is that will enable us to look at what other transportational alternatives are, what other sourcing alternatives are and to consider all the elements of this and at that point in time we will provide a better update.

Andrew Levi – Avon Capital

Okay, and just in general, I don't know how your contracts are written but if you're unable for a period of time to deliver, this would be metallurgical coal, or this would be -- right? Is that correct, or cap coal?

John Ramil

Well, our coal is cap, Andy, this is a mix of steam, primarily steam and PCI coal.

Andrew Levi – Avon Capital

So I just don't know, is there like kind of a force majeure, where if you can't deliver the coal, you just lose the sales, you don’t have to go out and source it.

John Ramil

Andy, that’s correct. Yeah, to Sandy’s point, Andy, we don’t want to lose any sales. We’re going to look at every option to find other transportation methods perhaps other load-outs in the area and/or potentially sourcing coal from other facilities.

Andrew Levi

Okay.

John Ramil

Yeah. We’re looking for every way to capture the economics from our deals, but there is no penalties to us if we can’t.

Andrew Levi

Perfect. Okay. Great. Thank you very much.

Operator

Your next question comes from the line of Andy – I’m sorry Andrew Weisel.

Andrew Weisel – Macquarie Research

Hi. Good afternoon, guys.

John Ramil

Good afternoon.

Andrew Weisel – Macquarie Research

It’s first question following up on that rail disruption, I completely understand it’s too early to say in detail, but on the last call you talked about sort of a $0.5 contingency in the guidance. Is there any way to know if this would be in that ballpark above or below?

Sandra Callahan

That really is untested at this point. We’ll provide better information when we have it.

Andrew Weisel – Macquarie Research

Okay. Understood. Then looking forward in May you don’t give multiyear guidance kind of coal outlook, what sort of directionally based on what you’re seeing from your customers and in the forward markets and benchmarks any sense as to what mix you might look like relative to this year just better or worse?

John Ramil

Andrew, it’s way too early. I mean we know what the second quarter benchmark is and it’s not very pretty, but it’s very early in the year for us to be thinking about what contracted net prices will be next year.

Andrew Weisel – Macquarie Research

Okay. Then last one on coal, I mentioned I think it’s similar answer of the first couple but clearly your name has come up a bit more in the trade about M&A speculation of the coal business. Can you kind of tell us your latest thoughts on the potential for sale of that business?

John Ramil

Sure, Andrew. We’re very similar to what I said during the last few earnings calls. It’s a soft market but there have been people that are interested. We still see that in the market. We have not yet seen anybody step up and want to sign on to a deal at this point that’s good for them and good for us, but we continue to see interest but it’s reflective of the soft market.

Andrew Weisel – Macquarie Research

Okay. Great. Then changing gears, just quick ones on the New Mexico Gas deal, but first we list the potential benefits to customers. It’s pretty clear you have sweetened the offer a little bit in terms of the offer, for example, free keeping the base rates at from [ph] one additional year and the rate credits. First of all, how confident you feel in the goal for accretion one full year after it closes? And second of all, how confident you feel that this is – I don’t want to say a final offer but that you won’t need to add additional concessions to get the deal done?

John Ramil

You know like we don’t have the hearing officers recommended over the commissioner’s decision. I can tell you that we believe we put on a good case. We believe in reading the questions and the actions of the hearing examiner. We believe in hearing the questions and comments of the commissioners that participate in the hearing that the deal will be approved and there I think are offers of you that’s very positive and it will really close in what we’ve offered where within the framework of the guidance we’d given that the deal would be accretive after the first year.

Andrew Weisel – Macquarie Research

Alright. Thank you very much.

Operator

Your next question comes from the line of Andy Bischof.

Andy Bischof – Morningstar Inc.

Hi. Good afternoon. It looks like cost at the coal somewhat increased a little bit to 82. Can you reconcile with the –[indiscernible]?

John Ramil

Our costs are actually down almost $6 a ton from last year.

Andy Bischof – Morningstar Inc.

I’m looking at fourth quarter, sorry.

John Ramil

If you compare quarter to quarter with similar weather conditions, they are down pretty significantly and it’s driven by the things we’ve always done to control cost plus as we mentioned last year the move to more highwall mining, which is much more effective in controlling cost somewhat we were.

Andy Bischof – Morningstar Inc.

And you’ve begun hedged out your coal production on in 2015?

John Ramil

No.

Andy Bischof – Morningstar Inc.

And I guess lastly if you could stick [ph] a little bit of your efforts to manage O&M across both the coal business and the rail area operations and it’s anchoring around potential savings when you incorporate New Mexico Gas?

John Ramil

Yes. We across all the businesses have on [indiscernible] activities to operate more and more efficient each and every day. We’ve seen how that’s worked for that’s to be enabled to have more detail. This is for significant period of times we enable to stay out of rate cases at Peoples Gas. Those efforts plus growth have allowed us to continue to earn at the upper half of our range. We continue to have good cost control of the electric company and with help from the rate case we see the results already starting strongly this year and we need to continue doing that for next several years in plan-2 [ph]. We did see synergies from the addition of New Mexico Gas to the portfolio not only in New Mexico where we’ve identified about 99 jobs, about 13% of that workforce that we think will be phased out over three years, but we also see other synergies across the entire company from spreading our fixed cost associated with HR, with IT, with procurement of all of those central service areas with the TECO Vitol [ph] which is in sales right now.

Andy Bischof – Morningstar Inc.

Great. Thank you.

Operator

Your next question comes from the line of Paul Ridzon.

Paul Ridzon

I’m sorry. My question had been answered.

Operator

Your next question comes from the line of James von Riesemann.

James von Riesemann – CRT Capital Group LLC

Hi John. Hi Sandy. Good afternoon.

John Ramil

Hi James.

Sandy Callahan

Good afternoon.

James von Riesemann – CRT Capital Group LLC

Can you just talk briefly about New Mexico and what’s your thought process is today and maybe what it might be after hearing examiner in terms of getting a settlement out of there out of the stay?

John Ramil

Well. We’ve kept a note in line of communication for settlement from the very beginning and it is not happened. We’ve been to the hearings and where we find ourselves is we still have that opened lot of communications and that could happen anywhere between now and before the hearing officer issues a recommended order, which would follow sometime after May 15th which is the date that I believe all the crossed response free [indiscernible] in the docket.

James von Riesemann – CRT Capital Group LLC

Okay. So, that to me that sounds like you’re willing to do so, but you’re not actively engaged in settlement discussions at this point in time.

John Ramil

We are open and as we have from the prior beginnings have had conversions with various of the innovators.

James von Riesemann – CRT Capital Group LLC

Okay. And then a second question, totally different topic. This one is for Sandy. Can you just talk a little bit about capital allocation thought process going forward expected cash flow generation maybe from deferred taxes and now that we don’t have any bonus depreciation, which are expected, cash tax rate might be over the next several years?

Sandy Callahan

Our cash tax rates are still going to be zero so that we can follow that way because we have – well no, it’s actually about 2% of the ECO. You can only reduce taxable income by 9% with then well, but at the NOL carry forwards are doing that. In terms of capital, I think you may be asking what the source of capital is to fund the utilities. And ECO Energy at the parent level from NOL carryforwards and the like has $100 million to $150 million of cash a year that’s available really to invest in those businesses and so we don’t really need any external capital to support that.

James von Riesemann – CRT Capital Group LLC

Okay.

Sandy Callahan

And then Tampa Electric of course will be raising from debt itself to balance their capital structure at the roughly 54% equity, 46% deft that was supported in the K.

James von Riesemann – CRT Capital Group LLC

Okay. Sounds good. Appreciate the answers. Thank you.

John Ramil

You bet.

Operator

And at this time there are no further questions.

Mark Kane

Thank you for joining us, everyone late in the afternoon. This concludes the TECO Energy first quarter earnings call. Thank you. Good bye.

Operator

Thank you for joining today’s conference call. You may now disconnect your line.

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