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Executives

Sandy Callahan – CFO

Sherrill Hudson – CEO

John Ramil – President & newly named CEO

Mark Kane - Director of IR

Analysts

Lasan Johong – RBC Capital

Ali Agha - SunTrust Robinson Humphrey

Mark De Croisset – FBR

Jeff Gildersleeve – Millenium Partners

Maurice May – Power Insight

Jack DeAngelo – Catapult

Timothy Yee – KeyBanc Capital Markets

TECO Energy, Inc. (TE) Q2 2010 Earnings Call August 5, 2010 9:00 AM ET

Operator

Good morning. My name is Janiqua, and I will be your conference operator today. At this time, I would like to welcome everyone to the TECO Energy Second Quarter Result and Remainder 2010 Outlook Conference Call. (Operator Instructions)

I would now like to turn the call over to Mark Kane, Director of Investor Relations. You may begin.

Mark Kane

Thank you, Janiqua. Good morning, everyone. And thank you for joining us on TECO Energy’s Second Quarter Results Conference Call and Webcast.

Our Earnings Release, along with unaudited financial statements were released and were also filed with the SEC earlier this morning.

The presentation is being webcasted and our Earnings Release, Financial Statements, and the slides for this presentation are available on our website at TECOEnergy.com.

The presentation will be available for replay through the website approximately two hours after the end of the presentation and will be available for 30 days.

In the course of our remarks, today, we will be making forward-looking statements regarding our financial outlook and plans for 2010 and beyond.

There are a number of factors that could cause our actual results to differ materially from those that we’ll discussion as our outlook and expectations today.

For a more complete discussion of these factors, we refer you to the discussion of the risk factors in our annual report on Form 10K for the period ended December 31, 2009 and as they’ve been updated in subsequent filings with the SEC.

Also today, we’ll be using non-GAAP measures in the course of the presentation. There are reconciliations to the nearest GAAP measure contained in the appendix to today’s presentation.

On our call today, Sherrill Hudson and John Ramil will make some opening remarks regarding our management change announced yesterday afternoon. Then Sandy Callahan, our Chief Financial Officer will cover the second quarter results, discuss what we’re seeing in the local and Florida economies, and update the drivers for our guidance for 2010.

Now, let me turn it over to Sherrill Hudson.

Sherrill Hudson

Thank you, Mark. And I want to thank all of you for joining us this morning.

Yesterday we announce that our Board had named John Ramil as TECO Energy’s President and Chief Executive Officer. That was an important day for John, for the company, and for me.

Shortly after I became TECO Energy’s CEO, in an interview in the Miami Herald, I stated that my number one priority was to develop a successor. John has been an outstanding leader at TECO Energy for many years in a variety of key roles.

I’m confident that with his extensive experience, that he’s the perfect person to lead TECO Energy in the environment of change and opportunity we see today.

I look forward to working with John and his team. John, again, congratulations. I appreciate everything you’ve done and are going to do in the future.

John Ramil

Thanks, Sherrill. And thanks all of you for joining us this morning.

I’m, indeed, excited to assume this new leadership role at TECO Energy, and I’m especially pleased to be following Sherrill as our CEO.

Over the past six years, under Sherrill’s guidance and steady hand at the company we made significant progress on improving our financial health. We added generate facilities and state-of-the-art environmental controls. We retired over 900 million of debt. We’ve grown our dividends three of the last four years, and we are on a nice trend of meaningful earnings growth.

We focused on our regulated for the utilities and positioned them well. We’ve served our customers and our communities for more than 110 years and we look forward to serving you for another 110.

And most importantly, I think we’ve met our commitments. We’ve done what we said we would do. And I can assure you that’s something that won’t change as we move forward.

I’ve gotten to know most of you over the past several years and I look forward to continue to work with you as we move ahead.

And most of you know Sandy, and Gordon Gillette has joined us on the conference call this morning as smart, competent, dedicated and achievement-oriented executives.

I can assume you that the rest of our leadership team possesses those very same skills and we’re committed to continue success.

And with that, I’ll turn things over to Sandy.

Sandy Callahan

Thank you, John. Good morning, everyone. And thank you for joining us on what we know is a very busy day for utility earnings reports.

I’ll cover our first quarter and year-to-date results and business drivers, and then I’ll update our outlook for the remainder of this year, what we’re seeing in the Florida and local economies. And finally, update you on some of our investor communication plans.

In the first quarter, our GAAP net income was 75 ½ million compared to 60.9 million in 2009. Earnings per share were $0.35 in the first quarter compared to $0.29 last year.

Net Income included a $4.1 million charge for early debt retirement completed in April. There were no charges or gains in the 2009 quarter.

Excluding charges, non-GAAP results were 79.6 million, or $0.37 a share this quarter compared to 60.9 million, or $0.29 a share last year.

Year-to-date Net Income was 131.3 million, or $0.61 a share compared to 95.6 million, or $0.45 per share last year.

Net Income in 2010 included 20.3 million of early debt retirement charges and the final 900,000 of restructuring charges.

In 2009, Net Income included a gain of 8.7 million on the sale of our interest in the Guatemalan Telecommunications provider, Navaga, and a $3.6 million loss on auction securities held at TECO Energy.

Excluding charges and gains, non-GAAP results were 152.5 million, or $0.72 on a per-share basis compared to 90.5 million, or $0.43 in 2009.

I’ll briefly highlight the quarter’s drivers that were covered in our earnings release.

Tampa Electric reported second quarter results above last year driven by favorable weather. We didn’t really have a spring in Tampa, we went straight from winter into summer.

Tampa Electric also had higher base rates approved in 2009, some unexpected customer growth, and higher non-fuel operations and maintenance expense.

We estimate that weather-driven sales added 3 to 5 million to base revenues in the second quarter. New base rates effective last year, and on January 1st of this year added 13 to 17 million to base revenues in the quarter.

Retail Sales increased 2% in the quarter. And this reflects warmer than normal weather with total degree days 12% above normal and 6% above 2009 second quarter.

We also saw 7/10th of a percent customer growth, which was stronger than we expected.

Non-fuel operations and maintenance expense increased 2.4 million over 2009, driven by the accrual of performance-based incentive compensation reflecting our strong year-to-date financial results.

Peoples Gas also reported higher results for the quarter, driven by the new base rates effective in June of last year. We estimate that the new rates added approximately 4 million to pre-tax base revenue this quarter.

The rates approved in 2009 have a higher fixed component, but a lower volume-related charge, which makes Peoples Gas less volume sensitive in the lower-usage months.

The average number of gas customers increased ½% this quarter compared to last year, which we didn’t expect due to the soft Florida housing market.

We also saw higher therm sales to commercial and industrial customers, driven by the return to service of some customers idled in 2009, and higher usage by others.

Due to the abnormally cold winter weather, Peoples Gas expects to earn above the top it’s allowed ROE range this year. As a result, in the second quarter, Peoples recorded a provision related to these potential earnings above the top of the range. The final disposition of any earnings above the range would be determined by the Florida Public Service Commission after the end of the year.

For the unregulated companies, TECO Coal’s results for the quarter were more than double last year, reflecting higher selling prices across all products. Sales volumes were slightly higher at 2.4 million tons compared to 2.2 million tons in the second quarter of ’09.

The average selling price for the quarter rose almost 9% over last year to almost $77 a ton, due to higher prices for MET Coal and the higher percentage of MET in the mix compared to 2009.

The all-in cost of production was almost $67 a ton, which is within the guidance range that we provided in February.

TECO Coal also had the benefit in the second quarter of a $2 million settlement of prior years State Income Tax issues.

Second quarter net income at TECO Guatemala was significantly higher than their non-GAAP results last year. The biggest driver for the improved results was the San Jose Power Station, which operated throughout this quarter, compared to last year when it was out of service for most of the quarter due to expended-unplanned outages.

The capacity payments for San Jose are calculated on a rolling 12-month availability factor and they’re reduced if that factor falls below 85%.

In the second quarter, the capacity payment was at levels similar to the second quarter 2009 as outage days were replaced by operating days in the calculation of the 12-month rolling-average availability.

Normal rainfall resumed in the second quarter, which increased the availability of low-cost hydroelectric power in the country. This reduced spot sales from San Jose to more normal levels.

Results for DECA II companies, which includes the regulated distribution company, EEGSA, and its unregulated affiliates, reflect the benefits of customer and energy sales growth and cost control measure at the utility as well as higher earnings from the affiliates.

In the second quarter, each year we record an adjustment to previously-estimated year-end equity balances. That adjustment was $800,000 this year, a positive $800,000 compared to a $2 ½ million benefit in 2009.

We’ve tightened our 2010 earnings per share guidance to a range between $1.25 and $1.35 per share, excluding charges in gain.

This range includes the $24 million one-time reduction in Tampa Electric’s customer bills under the regulatory stipulation that is before the FPSC for approval.

Our guidance includes sales at TECO Coal at 9 million tons this year, and it assumes normal weather for the remainder of the year.

Now, turning to what we’re seeing the local and state economies and prospects for recover. We’ve seen signs of improvement in the local housing market. Existing home resales continued strong in the quarter and based on the Case-Shiller Index, home prices in the Tampa Metro Area improved in both April and May, but were still lower than 2009.

We believe a significant portion of the housing market improvement was driven by the Homebuyer Tax Credit Program that effectively ended April 30th.

The closing deadline was extended to September 30th, so it may have a positive effect on customer growth in the third quarter as home sales under contract at April 30th close.

While we’re cautiously optimistic, there remains a degree of uncertainty about the sustainability of the improvement we’ve seen without the benefit of the Federal Tax Credit Program.

Economists are mixed in their assessments of the timing of a recovery in Florida. Lower unemployment is key to a recovery and most forecasts are for unemployment to improve in 2010, but they disagree as to the timing and magnitude of that improvement.

Despite the uptick in growth we’ve seen in the past few quarters, we’re maintaining a conservative outlook for weather-normalized residential sales for the rest of the year. And assuming slightly lower weather-normalized sales for the full year to the commercial and non-phosphate industrial customers due to the slow economic recovery.

There have been pockets of improvement in some commercial and industrial sales, apparently driven by some of the Federal Stimulus dollars including the Homebuyer Tax Credit Program. But it hasn’t been widespread.

At Peoples Gas, we’re seeing increased usage by some steel processing, chemical, and glass manufacturing facilities.

At Tampa Electric, the largest increase in industrial usage has been the phosphate industry, followed by retail and healthcare providers.

As commercial energy sales growth historically lags residential, until we see a consistent upward trend in the residential housing market, we think it may be premature to forecast an improvement in commercial and industrial sales.

In short, we’re encouraged by some of the positive signs, including having seen now three consecutive quarters of year-over-year customer growth, but we remain cautious in our outlook.

The next couple of slides are graphics that demonstrate some of the positive signs and some of the mixed indicators that we’re seeing. The first is the unemployment trends that we’ve seen over the past 18 months.

Earlier this year, Tampa Area unemployment declined, but in June it picked pack up to 12% compared to 11.4% for the state and 9.5% for the nation as a whole.

The most significant loss of jobs in June was in the Government Sector, and that’s a summer pattern that we’ve seen for many years, which we believe is related to schools closing for the summer. This year we also have the temporary sensus worker effect.

The bulk of the job losses contributing to Florida’s unemployment rate has been in the construction industry and housing-related fields.

Since the housing peak in the summer of 2006, Florida and the Tampa Area lost about 320,000 and 40,000 construction jobs respectively.

This slide shows our electric company customer additions in a couple of different ways. On the left is the monthly sequential customer adds.

Starting last fall, the additions were consistently positive after repeated dips into negative territory over the past three years. The dip in April and May of this year, which you can see here is the pattern that repeats every year, is a normal seasonal migration of winter Floridians back to their summer homes.

The good news is that the dip was shallower than the last several years, and the return to positive sequential growth has been quicker this year.

The graph on the right is our cumulative customer additions, which continues to show an upturn since last fall. The important note on this slide actually is the footnote where we’ve now recovered more customers than we disconnected since the start of the housing crisis.

On this slide, we show existing-home resales, and new single-family building permits issued in the areas served by Tampa Electric. The existing-home resales graph continues to show a very positive trend. Resales have rebounded strongly from a low point in early 2008.

A lot of these resales had been vacant homes with an inactive meter. So this rebound in resales combined with fewer disconnects has translated into real customer growth in the last three quarters.

There are still a significant number of foreclosed properties in the market, but RealtyTrac reports the number declining from about 16,500 in the Tampa Area at the ended of the first quarter to about 14,500 currently.

This absorption of foreclosed properties is probably attributable to the demand created by the Homebuyer Tax Credit Program.

New single-family building permits climbed significantly in the first quarter, but they feel sharply in the second. This appears to be Homebuyer Tax Credit driven as well, but it did put construction workers back on the job for the first has of the year.

As I’ve said, these are positive trends that are giving us cause for optimism, but there is a degree of uncertainty about the strength of the Tampa Area housing market after the expiration of that credit program.

Now, turning to our unregulated operations, at TECO Coal, we expect improved results in 2010 from better margins. We know expect sales to be 9 million tons, which is above the previously provided range of 8.3 to 8.7 million tons.

All of these sales are contracted at an average price of almost $77 a ton. We’ve been able to sell additional tons, much of it out of inventory that built up into 2009, into the PCI market. This will shift our sales mix closer to 40% specialty coals this year and the remainder steam.

We’ve been able to sell some coal in the MET market that we would ordinarily sell into the steam coal market at better margins this year.

Traditionally, we sell very little coal into this so-called crossover market. So we’re not necessarily counting on selling into that market next year.

On the cost side, total costs in the second quarter was in line with our guidance, and we’re projecting that for the year, we’ll be towards the high end of the $65 to $69 per ton cost range.

This is a result of increased safety inspections which reduced productivity and higher contract miner costs.

What we don’t know yet is the potential longer-term cost impact of the Upper Big Branch mine tragedy. Beyond this year, there will probably be some new safety regulations that may add cost and impact productivity, but it’s too early to tell at this point.

Despite reports that the MET coal market is weakened, we are still experiencing good demand for our High-Vol A and High-Vol B products and our customers continue to take their contracted volumes.

We had one customer idol a blast furnace, but we were able to sell those tons elsewhere, actually at better prices.

The operating rate for the domestic steel industry is currently at about 71%, down slightly from 74% earlier in the year, and a vast improvement from the 40% operating rate that it had experienced for much of the first half of 2008.

Asian demand for MET coal is apparently moderated somewhat, but both India and China continue to import significant tonnage.

Some forecasts show Chinese demands slowing in the second half of the year, but still at a level that’s driving very strong prices compared to 2009.

As strong as the MET market is, the Central App Steam Coal market continues to lag it, although the cold winter and hot summer weather have reduced utility inventories.

Natural gas prices are a level that is encouraged fuel switching from coal to natural gas, but the summer heat is keeping the base-load coal-fired units operating.

There have been a number of utility steam-poll RSPs in the market over the past few months, with most buyers looking for tons for deliver in 2011 and beyond.

We’re encouraged that buyers are looking for coal but don’t foresee a significant improvement in the steam market before the end of the year at the earliest.

This is the bar graph of contracted and price tons that we routinely provide. You can see that there really hasn’t bee much of a change for 2011 or 2012. The graph shows that the contracted and priced tons for 2011 are primarily steam coal, where 75% of those tons are currently priced.

You can also see that the majority of our MET and PCI coal remains unsold for 2011.

The real steam-coal opportunity is in 2012 when a below-market steam coal contract representing 600,000 tons rolls off. Based on our signed contract prices, product mix, and current market conditions, we would expect our average price per ton across all products to be above $78 per ton in 2011.

On the MET coal side, typically North American MET coal customers don’t contract for the next year until late in the third quarter or early in the fourth. And European customers typically contract in the fourth quarter or the first quarter of next year, depending on market conditions.

At TECO Guatemala, we expect the San Jose Power Station to operate more normally in 2010 following the unplanned outages we experienced last year.

As a result of those outages, capacity payments were lower in the first half of 2010, until the outage days rolled out of the 12-month rolling average availability factor that has penalized those payment.

In 2009, the lower capacity payments reduced net income about 4 million in the second half of the year.

The capacity payments are now back to the normal contract levels for the remainder of 2010.

First quarter spot sales from San Jose were stronger than expected, primarily due to high resid fuel-oil prices, which is a fuel that sets the market clearing price, and lower-than-normal output from hydroelectric sources due to a poor rainy season last year.

Normal rainfall resumed in the second quarter so we expect that spot sales will be at more normal levels for the remainder of the year.

At the Alborada Power Station, we have expended the power sales contract for five years at a lower capacity charge. The lower pricing was driven by changes in the Guatemalan power market.

When we first built the plant in 1996, the country badly needed new capacity. And Alborada operated far more than you would expect a peaking plant to operate.

The electricity market in Guatemala has developed significantly in the last 15 years, and the Alborada Plant now operates like a typical peaking unit. And the revised capacity charge is reflective of that.

The contract extension is effective September 14th and the lower capacity payments will reduce net income about 7 million over a full 12-month period and our guidance for the year includes the 3 ½-month impact of the lower pricing in 2010.

At DECA II, which is the entity that holds our interest in EEGSA, our issue with the way the value-added distribution rate, or VAD was set in 2008 remains unresolved with no definitive timeframe for resolution despite some efforts to resolve it amicably.

We do have the option to file under the Dominican Republic Central American Free Trade Agreement, CAFTA, but as you would expect, this is not a quick solution. In the meantime, the management at EEGSA has taken steps to reduce costs to partially mitigate the effects of the lower VAD and EEGSA continues to experience good customer and energy sales growth.

In addition, the small-unregulated companies at DECA II continue to contribute good earnings.

Let me close with our plan to meet with and communicate with investors over the next two months. We will file our Second Quarter 10Q tomorrow. And we’ll be at the Wellington Shields Conference next week, and ringing the closing bell at the New York Stock Exchange at the end of the month in honor of our 45th year of being listed on the Exchange.

In September, we’ll be meeting with investors in North America and Europe. And end the month at the Banc of America Merrill Lynch Conference in New York.

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 come from the line of Lasan Johong of RBC Capital.

Lasan Johong – RBC Capital

Thank you. Great quarter. I’m a little confused about some of the things. It sounds like what you’re suggesting is that even though residential and housing issues have started to turn the corner, you’re hesitant to raise guidance because you don’t know if it’s due to Federal subsidies or not. And even though employment is, again, kind of flattening and picking back up, and third quarter probably got off to a very good start, you think the housing could weigh down your results for the next six months by that much? That doesn’t seem kine of, you know, that doesn’t seem logical. It seems like you should be raising guidance.

Sandy Callahan

Well, I think effectively, we tightened our guidance range. And so I think we are giving a positive signal in that regard.

We’re clearly encouraged by the fact that we’ve seen customer growth for the last three quarters, but there is some element of the – we think there’s some element of the new Homebuyer Tax Credit in that. And so we’re simply being cautious about how much growth we should or should not be anticipating over the remainder of the year as a result of that.

Sherrill Hudson

And additionally, Lasan, we had forecasted at the beginning of the year that commercial and non-phosphate industrial on a weather-normalized basis would be down for the year. And we are indeed seeing that pattern for the first two quarters. So those two sectors are also contributing to some reluctance to raise guidance based on their lower energy sales this year.

Lasan Johong – RBC Capital

But you’re getting compensation from other areas, including it sounds like other manufacturers and also better normalized sales from Peoples Gas as well.

Sherrill Hudson

The Peoples Gas sales are, as Sandy pointed out, are a few selected industries that were idled that have come back. At Peoples Gas, those large industrial customers are transportation only and they’re very low-margin customers.

Sandy Callahan

And remember, Lasan, our guidance does include the roughly $15 million net income impact associated with the $24 million credit to customer’s bills that will result from the regulatory stipulation if approved by the Public Service Commission.

Lasan Johong – RBC Capital

Okay. How much coal-to-gas switching do you think is out there? And therefore, how much do you think it will reverse in ’11?

Sandy Callahan

Are you talking about coal?

Lasan Johong – RBC Capital

Which we also are seeing. How much do you think that is actually in terms of tons of coal and how much therefore do you think it will reverse next year?

John Ramil

Lasan, this is John Ramil. I don’t think anybody can tell you how much is going to switch. You know, there has been, depending on gas prices dip down a little bit. Our expectation is we’re going to be able to sell our full production of steam coal next year.

Operator

Your next questions comes from the line of Ali Agha of Sun Trust Robinson.

Ali Agha – Sun Trust Robinson Humphrey

Thank you. Good morning. Sandy, if I heard you correctly, you alluded to the fact that you did take a provision in the quarter at Peoples Gas because of the ROE being higher. Could you let us know? How big was that provision?

Sandy Callahan

Actually, that – what we did is evaluate at this point in time where we might expect people to be for the full year, and recorded a provision such that we would be reflecting Peoples Gas results not above the top of their range. That provision, Ali, will probably change from period to period as we move towards the end of the year.

And so I’m reluctant to talk about its magnitude because it’s not really indicative. I think the meaningful element of this is to think about Peoples Gas as earning at the top of its range because we will provide for anything above that.

Ali Agha – Sun Trust Robinson Humphrey

Okay. All right. A question, John, for you. You know, in the past you folks have stated clearly that the coal business is not considered a quote operation for TECO. I don’t know if that view has changed, and if it has not, should we expect that you will be more proactive in monetizing or looking to monetize coal, or would you wait for the market opportunity to come to you? How do you see the coal business down the road?

John Ramil

We see the coal business the way we’ve seen it and been describing it for a while now, Ali. And that’s the number one first and foremost, our business is the utility business, the electric and gas business. The coal business is a valuable business to us. It produces nice earnings and cash, as you’ve seen from the results this year. And you know, we are content to continue to operate it and think it will continue to produce good earnings and cash for us.

If someone comes to us and can provide us more value up front that what we see over the long term in that business, we have to consider that, and being more valuable to our shareholders and we will.

But we are actively operating the business, not looking to sell.

Ali Agha – Sun Trust Robinson Humphrey

Sure. Final question with gubernatorial elections coming up in Florida, a couple of commissioners retiring, or being replaced, etcetera, what’s your sense looking into 2011 of how you see the regulatory environment in the state being any different than what we’ve seen this year?

John Ramil

Ali, I think, you know, our experience at Tampa Electric and Peoples Gas long term has been a very constructive regulatory environment. I think we continue to see that through our regulatory activities over the last couple years. And we think that what is happening with the commission, we’re going to continue to have a constructive regulatory environment in Florida. And you know, that’s what our company has enjoyed.

We think that’s very, very good for everybody involved, all constituents. You know, we’re capital intensive, we have more things to do on the expansion of the utility side, and we need to go out and raise capital. We need that constructive regulatory environment to do that and expect that to happen.

Ali Agha – Sun Trust Robinson Humphrey

Thank you.

Operator

Your next question comes from the line of Mark De Croisset of FBR Capital.

Mark De Croisset – FBR Capital

Hi. Good morning, everyone. A couple questions. First I wanted just to confirm something. I think I heard in the script, did I hear correctly that the realized price for 2011 for TECO coal is $78.00 per ton? Was that correct?

Sandy Callahan

Yes.

Mark De Croisset – FBR Capital

And the cost of production for 2009 is towards the high end of 65 to 69? Was that correct as well?

Sandy Callahan

Yes.

John Ramil

2010 Mark.

Mark De Croisset – FBR Capital

2010. Thank you. And a longer-term question here. How do you guys view the long-term strategy for the electric utility, the rate-based growth trajectory for the utility? What do you see there as something that’s sustainable?

John Ramil

Mark, this is John Ramil. Let me just say on the coal question, we have not put together our business plans yet, but what Sandy reported to you is kind of where we see everything coming together next year. And our thinking is, you know, steam sales would start kind of with a 7, PCI in the mid 90s and our type of MET coal north of 120. And that’s kind of the thinking behind that $78 number, plus what we’ve contracted that we have out there.

At the utility, I think what we’ve been saying for a while is the old normal at about 2 1/2% growth is not what we’re expecting and planning to run our business at. We think the more normal growth might be 1 ½ to maybe 2%. And that’s how we’re planning to run the business, and that’s how we organized ourselves to run the business.

The good news on the upside is to get from where we were to that new normal, we thought this year would be flat on customer growth, and next year might be ½%. We’re already seeing that ½% for next year in the first six months of this year. So that’s a positive thing.

And that’s the way we’re looking at the business. We think that’s a conservative way to run the business and if it’s more than that, it’s easier to adjust to the upside. And that’s our longer-term view.

Mark De Croisset – FBR Capital

So that’s primarily a usage number. The 1 ½ - 2% is primarily a usage number?

John Ramil

That’s a customer growth number, but we also think the usage is probably going to match that. We used to have usage maybe a little bit higher, but when we start to look at new appliance efficiencies and other factors, we think growth and usage are going to pretty much come in line with each other.

Mark De Croisset – FBR Capital

So it sounds like rate-based growth is relatively slow, and that growth for the business as a whole is sustained by that customer growth and that usage growth of 1 ½ to 2%. Is that fair characterization?

John Ramil

Well, I think I would just add to that, if you look at this year that we’re not adding anything significant in terms of new generating capacity, our CapEx at the electric company is about 100 million more than our depreciation. That translates to roughly about 3% growth in rate base. And then as we move forward, as you layer on additional growth over time, new generating capacity.

And then the other policy things we’re going to have, whether it’s more environmental investment, renewables, SmartGrid technologies to meet customer demands. There’s where you get upside beyond that 3%.

Operator

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

Jeff Gildersleeve – Millenium Partners

Hi. It’s actually Jeff Gildersleeve. Good morning. Congratulations, John. And Sherrill, great job. Thanks a lot.

Just over on TECO Coal, I just wanted your comments regarding the crossover tons this year and that opportunity, roughly what are we talking as far as volumes that you were able to bring over from the steam into the MET market?

Sandy Callahan

That’s about 250,000 tons. And if you think about, Jeff, the guidance that we previously provided, that’s about the difference between the top of that range and where we’re ending up at the end of this year.

Jeff Gildersleeve – Millenium Partners

Right. So you’re at 9 million tons for the year now. Do you feel that’s a pretty good run rate that we should be thinking of going forward in production?

Sandy Callahan

That depends on your take on the market. We had some opportunities this year. We really had no deferrals of any magnitude. And we did have 250,000 tons that went over in the crossover market and we’re not sure that we’ll be able to do that again next year. So that’s probably the upper end.

Jeff Gildersleeve – Millenium Partners

Okay. And then just any update? I know – I think you had three permits pending with the Army Corp and others, but actually some positive activity. I think Arch received a permit from the Corp. Any updates on your permits?

John Ramil

Jeff, no, we don’t have any. We’re kind of still at the same point where we described the last couple calls. You know, there has been some signs that things might be happening, but we’re also concerned about what the conditions of those permits might be. And you know, can you really use them.

Jeff Gildersleeve – Millenium Partners

Right.

John Ramil

So we’ll continue to watch it very closely.

Sherrill Hudson

Some of the permits that have been granted have come out with those new water conductivity standards in them. Whether or not, as John just said, they can ever be met is to be determined.

Jeff Gildersleeve – Millenium Partners

Understood. Thanks very much.

John Ramil

And Jeff, there’s going to be a lot more activity on that and I think we’ll see some court activity with the, I think the Mine Association just filed a suit a couple of days ago. So there’s more to come.

Jeff Gildersleeve – Millenium Partners

Okay. Thanks a lot. Bye, bye.

Operator

Your next question comes from the line of Maurice May of Power Insight.

Maurice May – Power Insight

Yes, good morning, folks. And congratulations, John.

John Ramil

Thanks, Maury.

Maurice May – Power Insight

A couple questions on coal, staring with 2010. Your realized price on second quarter, $77, is that what you expected realized prices to be for the full year?

Sandy Callahan

We did, yes.

Maurice May – Power Insight

Okay. And then tax rate this year, 23%?

Sandy Callahan

Yeah, kind of at the normal rate.

Maurice May – Power Insight

Okay.

Sandy Callahan

23 to 25%.

Maurice May – Power Insight

23 to 25, okay. And then moving to 2011, I’m trying to get projection on production. You just turned 9 million tons, the upper end of the range, 250,000 tons on certain of crossover sales. So maybe a new range is in the 8.7 to 9 million ton range?

John Ramil

I think, Maury, you know, we’re still working our business plans, but I’m thinking that coal as 9 plus or minus a little bit.

Maurice May – Power Insight

Okay. So 9 plus or minus? Okay. And then cross production this year, 65 to 69, do you have a projection for next year? Well actually, you’re estimating at the upper end of that range this year, like you know, between 68 and 69. Do you have any projection for next year?

John Ramil

No yet. But everything else being equal, the exceptions and regulatory oversight, our expectation of that is that pressure is going to continue to increase and affect productivity for the entire industry.

Maurice May – Power Insight

Okay. And then the tax rate again next year, 23 to 25%?

Sandy Callahan

Yeah. That’s kind of the normal run rate for taxes. Every once in a while it will bounce around a substantial amount on you depending on what mines the production is coming out of. But all in, that’s about where it ought to end up being.

Maurice May – Power Insight

Okay. Moving to Guatemala, the $7 million loss or reduced capacity payment on Alborada, I was thinking of TECO Guatemala as earning 40 million, then it booked down to like 25 to 30, and now it’s heading back up, 30 to 35 on an annualized basis. But this is – and heading back up towards maybe 35 to $40 million a year. But the loss of 7 million after tax and capacity payments does kind of halt that rising expectation doesn’t it?

Sandy Callahan

It puts it more in the low 30s.

Maurice May – Power Insight

Low 30s. Okay. And final question has to do with industrial sales. Your non-phosphate sales in Florida, down 4%. Can you give us some color on that?

John Ramil

Maury, we’re just saying, you know in general, both electric and gas side, the commercial and the non-phosphate industrial just continue to be weak. And it’s hard to tell when that’s going to turn around.

Maurice May – Power Insight

What is non-phosphate? What is non-phosphate industrial in your service territory?

John Ramil

Lots of little things.

Mark Kane

It can be a wall-board plant, there’s some aluminum extrusion manufacturers, there’s roofing shingle manufacturers as well as a lot of other smaller industries.

John Ramil

And unfortunately, you know, just what Mark described, a lot of them are tied to the construction industry.

Maurice May – Power Insight

I get it. Okay.

John Ramil

So that revolves around the whole economy issue.

Mark Kane

And one important point to remember, Maury, is our total industrial sales is a relatively small percentage of our total sales.

Maurice May – Power Insight

Yes.

John Ramil

And in spite of that, you know, we’re still seeing growth from the residential.

Maurice May – Power Insight

Yeah. Okay. That’s good. Well, anyhow, congratulations on a very good quarter overall.

John Ramil

Thank you.

Operator

The next question comes from the line of Jack DeAngelo of Catapult.

Jack DeAngelo – Catapult

Hi, guys. Could you just reiterate what your expectations are, that $78 expected realized price. I’m sorry, I missed the components of that for steam PCI and MET.

John Ramil

Yeah, Jack. And recognize I’ll qualify it with, you know, we have not built our business plans for next year. But that based upon our current reads from the market, we have RPs out talking to customers and various things.

Steam prices start with a seven. PCI in the mid-90s and our quality of MET north of 120. And that would be layered upon the contracts that we have in place already. We’ve got about 50, a little bit more than 50% contracted for next year, and that’s an average price of about $74ish.

Jack DeAngelo of Catapult

So the MET contracts you currently have in place are at 74ish?

John Ramil

No, no.

Sandy Callahan

That’s a blended number.

John Ramil

That’s a blend of what we have under contract for next year. The vast majority of which is steam. Just a very, very small amount of MET.

Jack DeAngelo of Catapult

Okay. Thanks, guys.

Operator

(Operator Instructions) Your next question comes from the line of Lasan Johong of RBC Capital Markets

Lasan Johong – RBC Capital Markets

Yes, thank you. When do you expect to start negotiations on those open contracts that you said were rolling off in 2012?

Sandy Callahan

We would probably just look to replace those sales with another purchaser. We’re not necessarily going to renegotiate that contract. That just gives us open coal volumes to sell.

John Ramil

That’s exactly right. We’re talking to the entire market right now responding to RFPs across the entire market right now.

Sandy Callahan

But that is a very old contract that is very underwater. And –

Lasan Johong – RBC Capital Markets

Like how much underwater?

Sandy Callahan

That’s one of those contracts that’s got a price starting with a three.

Lasan Johong – RBC Capital Markets

Ouch. Okay.

John Ramil

You know, we’ll see what we’re successful in doing, but you know, if you move it from a number that starts with a three to a number that starts with a seven, that’s a pretty big gain.

Lasan Johong – RBC Capital Markets

Great. Thank you. And congratulations, John.

John Ramil

Thanks, Lasan.

Operator

Your next question comes from the line of Timothy Yee of KeyBanc Capital Markets.

Timothy Yee – KeyBanc Capital Markets

Hi. Just one quick question. Could you talk about briefly what the possibility of the outcomes are with the Peoples Gas Provision with the Commission? Is there any chance that you could actually like keep the earnings?

John Ramil

I think what we’re planning for with Peoples Gas is right now earning at the top of the range. And I think that’s a reasonable expectation for all of us to have.

Timothy Yee – KeyBanc Capital Markets

Has there been any – has historically has the Commission like – has this happened before in the past? Is there any history or precedence around this?

John Ramil

Earning at the top of the range?

Timothy Yee – KeyBanc Capital Markets

Yeah. Or above the range.

John Ramil

Not that I can recall with Peoples Gas.

Timothy Yee – KeyBanc Capital Markets

Okay. All right, great. Thank you.

Operator

And at this time, there are no further questions. Are there any closing remarks? Mr. Kane?

Mark Kane

With no further questions, we know it’s a busy day for folks, thank you for participating in our call. We look forward to speaking to you in future meetings.

Thank you, everyone.

Operator

This concludes today’s conference call. You may not disconnect.

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Source: TECO Energy, Inc. Q2 2010 Earnings Call Transcript
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