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Executives

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

Mark Kane - Director, IR

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

Analysts

Emily Christy - RBC Capital Markets, LLC

Timothy Yee - KeyBanc Capital Markets

Ali Agha - SunTrust Robinson Humphrey, Inc.

Chris Shelton -

Alex Kania - Merrill Lynch

James von Riesemann - UBS Investment Bank

TECO Energy (TE) Q4 2010 Earnings Call February 4, 2011 9:00 AM ET

Operator

Good morning. My name is Janet, 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 2011 Outlook Conference Call. [Operator Instructions] Mr. Mark Kane, Director of Investor Relations, you may begin the conference.

Mark Kane

Thank you, Janet. Good morning, everyone, and thank you for joining us for TECO Energy's Fourth Quarter Results Conference Call and Webcast. 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 the slides for this presentation are available on our website at tecoenergy.com. 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'll be making forward-looking statements regarding our financial outlook and plans for 2011. There are a number of factors that could cause our actual results to differ materially from those that we'll discuss as our outlook and expectations today. For a more complete discussion of these factors, we refer you to the discussion of risk factors in our annual report on Form 10-K for the period ended December 31, 2009, and as updated in subsequent SEC filings.

Also, today we'll be using non-GAAP measures in the course of the presentation. There are reconciliations to the nearest GAAP measure contained in the appendix to today's presentation. On the call today, John Ramil, TECO Energy's President and CEO, will make opening remarks and then Sandy Callahan, our Chief Financial Officer, will cover the fourth quarter results and drivers and discuss our outlook for 2011 and our guidance. Now I'll turn it over to John.

John Ramil

Thank you, Mark. Good morning, everyone, and thank you for joining us today. Today, I'm going to open our call with some brief remarks outlining the commitments we've made to investors, our achievements on meeting those commitments.

I'm extremely proud of our team's 2010 results and the delivery of over 59% total shareholder return of the last two calendar years. Several years we've told investors that our primary focus is on our two Florida utilities and that focus remains unchanged. We are still seeking in finding ways to more efficiently integrate our electric and gas operations. And it's this focus that help allow us to deliver almost 20% higher non-GAAP results in 2010, and we've established a nice pattern of EPS growth that Sandy will talk more about in a few minutes.

In 2010, Tampa Electric achieved an 11.75% regulatory ROE, and Peoples Gas achieved a regulatory ROE right about the top of their range of 11.74%. Combined, the electric and gas companies delivered 26% higher net income as a result of good cost management, modest customer growth in a slowly recovering economy and favorable weather. We delivered on our commitment to earn our allowed returns and that commitment will continue.

Our non-regulated companies delivered very strong value to investors as well. TECO Coal grew net income almost 43% in 2010 compared to prices in the much stronger specialty coal markets, and we look forward to further improvements in TECO Coal's results. Our Coal team is continually reassessing mine plants and reserves to best seize their market opportunities and minimize risk, and we're now only months away from the end of a several thousand ton way below market contract, and we're really looking forward to that.

At TECO Guatemala, we sold our interest in DECA II last year and got very value for those assets. We reached agreement on the Alborada contract extension at rates below the previous contracts but above the rates paid for peaking capacity in the United States. Our two power plants are performing well, and we look forward to continued steady earnings contributions from those operations. Like we demonstrated in 2010, we will continue to approach our non-regulated businesses with discipline.

We improved our balance sheet with a net retirement of almost $200 million of TECO Energy debt and extended the maturity to refinance about $550 million at rates about 100 basis points less. This significantly lowers our costs and gives us greater flexibility going forward. And we plan to retire an additional $60-plus million of TECO Energy debt once it matures this spring. Our good cash flows will continue.

In summary, we remain committed to these four principles and expect to continue delivering strong total returns to shareholders through our attractive dividend and through earnings growth overtime. Now it's my pleasure to turn it over to Sandy Callahan, our CFO and new Senior Vice President at TECO. Sandy will cover details on the fourth quarter full year and our guidance. Sandy?

Sandra Callahan

Thank you, John, and good morning to everyone on the call. I will get right into it starting with our fourth quarter results. Our GAAP net income was $56.7 million or $0.27 a share compared to $53.5 million or $0.25 a share in 2009. Net income this quarter included $7.8 million of net gain including a $21 million net gain on the sale of DECA II, partially offset by $13.2 million of early debt retirement charges.

In the fourth quarter of 2009, net income included a small restructuring charge. Excluding charges in gain, non-GAAP results were $48.9 million or $0.23 a share this quarter compared to $53.9 million or $0.25 in 2009. I'll briefly highlight the quarter's drivers that were covered in our earnings release.

Tampa Electric results reflect the coldest December since they started keeping records in 1890, but it followed very mild October/November weather. Tampa Electric enjoyed continued customer growth for the fifth consecutive quarter. Fourth quarter results were also affected by the higher base rates related to the step increase effective January 1 of this year, and higher non-fuel operations and maintenance expense. We estimate that weather added $5 million to $7 million to base revenues in the fourth quarter and that the new base rates effective January 1 added $7 million to $9 million.

Retail sales, measured on a calendar basis rather than on the billing cycle basis, increased 2.8% in the quarter. This reflects total degree days 18% above normal and 11% above 2009's fourth quarter. Cooling degree days were below normal due to the mild weather in October and November, but heating degree days were significantly above normal due to the cold weather in December. The heating degree days in December did not translate one-for-one into higher load though, due to the timing and duration of the early December cold weather. Typically, it takes three consecutive days with cold temperatures for the heating load to build. And in the first half of December, although there were heating degree days, it wasn't cold enough long enough to generate significant heating load. The cold weather late in the month, however, did generate significant heating load.

Peoples Gas reported lower results for the quarter because they had a benefit of a $4 million tax adjustment in the 2009 fourth quarter. Sales fundamentals were positive though, including customer growth of 0.5% this quarter compared to last year. We also saw higher term sales to residential customers due to weather and higher sales to commercial and industrial customers driven by the return to service of some customers idled in to 2009 and higher usage by others.

The higher base revenues were offset by higher O&M related to pipeline integrity and pipeline awareness programs, which are safety-related. As discussed on our second and third quarter call, due to the abnormally cold winter weather earlier in the year, Peoples Gas expected to earn above the top of its allowed ROE range in 2010. As a result, we recorded a $9.2 million pretax provision related to these potential earnings above the top of the range. This occurred primarily in the second and third quarters though and did not impact Peoples fourth quarter result.

On January 25, the Florida Public Service Commission approved the stipulation agreement between public counsel and People related to these over earnings that will result in a $3 million onetime reduction in customer bill, with the remainder applied to an accumulated depreciation reserve deficit.

For the unregulated companies, TECO Coal's results for the quarter reflected higher selling prices across all products, the higher production costs as well. Sales volumes were slightly higher at 2 million tons compared to 1.9 million tons in the fourth quarter of 2009. The average selling price for the quarter rose to $76 per ton due to higher prices for met coal compared to $73 last year. The all-in cost of production was almost $71 per ton. This higher cost was driven by the timing of surface mine reclamation work and increased safety inspections, which impacted production.

Fourth quarter GAAP net income at TECO Guatemala reflected the gain on the October sale of DECA II. Excluding that gain, results were lower than last year reflecting the absence of earnings from DECA II after its sale and the first quarter of the lower capacity payments for the Alborada Power Station. The San José Power Station performed well and its capacity revenues were back to normal levels compared to last year when they were reduced as a result of the extended outages in 2009.

Our full year 2010 net income was $239 million or $1.12 per share compared to $213.8 million or $1 per share last year. Net income included net charges of $36.5 million. Early extinguishment of debt accounted for $33.5 million of this amount, and the after-tax loss on the sale of DECA II was $3.9 million. 2009 net income included net charges of $16.1 million primarily for restructuring. Excluding these charges, full year non-GAAP result in 2010 were $275.5 million or $1.29 on a per share basis compared to $230 million or $1.8 in 2009.

Obviously, we are very pleased with our financial results in 2009. I do want to wrap up the look at 2010 with a few additional items of note, however. Last May, we increased our dividend 2.4%, the third increase in the past four years. And total shareholder return in 2010 was 15.4%. In addition to retiring parent debt in December, we took advantage of much-improved financial market conditions with our first quarter tender and new issue to extend the maturity profile of parent debt at favorable rates. As a result, we ended the year with a consolidated debt-to-total-capital ratio below 60% for the first time since 2002. We've lowered the effective rate on outstanding debt and we have no significant parent maturities until 2015.

And while others are facing large environmental spending programs, we completed the last phase of our $1.2 billion environmental compliance program this year. In the course of this 11-year program, we repowered our oldest coal fired station to natural gas combined cycle and added state-of-the-art SO2 and NOx control on all of our conventional coal-fired units. We are earning on these investments either through base rates as a result of our recent base rate case or through the environmental cost recovery clause.

And now turning to what we're seeing in the local and state economy and the prospects for recovery. In the first half of the year, we saw improvement in the local housing market. Existing home resales were strong and new home-building permits rose. In the fourth quarter, local housing market trends were similar to national trends for both resales and new construction permits. As expected, the housing markets were softer due to the expiration of the Homebuyer Tax Credit program that had boosted demand in the first half of the year. But the market is making progress. The inventory of existing homes on the market now is down to eight months from a 25-month supply in early 2008. But the key to really improving the housing market will be improvements in the job market.

Unemployment in the state and local areas does remain higher than the national level. Florida was one of the leaders in the housing boom and the contraction hit the construction industry hard, accounting for 1/3 of the job losses in the state. The good news is that Florida is adding jobs but like the national economy, slowly. In 2010, Florida added 43,000 jobs primarily in health and education services and in tourism-related businesses.

Although economists remain mixed in their assessments of the timing of a recovery in Florida, the forecasts indicates that unemployment should come down slowly in 2011. We are encouraged by some of the positive signs, including what is now five-consecutive quarters of year-over-year customer growth and higher energy sales by both the electric and gas companies to commercial and industrial customers in selected industry for the rebounding.

On this slide, we show existing home resales specific to the Tampa area and new single-family building permits issued in the areas served by Tampa Electric. Despite the falloff in activity, after the expiration of Homebuyer Tax Credit in the middle of last year, the existing home resales graph shows a definite positive trend line. There are still a significant number of foreclosed properties in the market which are affecting home prices. As reported by the Case-Shiller Index, home prices continue to decline in the Tampa Metro area due to the number of foreclosed properties being sold, which tends to pull down the average selling price.

At the height of the housing bubble, Florida housing had become unaffordable for many citizens. So if there's a good side to the price decline, it does make affordability less of an issue and opens the market to more potential buyers. New single-family building permits climbed significantly in the first quarter but fell sharply in the second in anticipation of the expiration of the tax credit. And although the gains are small, the trend since the trough in the fall of 2008 is positive. So again, some positive trends that are giving us cause for some optimism for continued growth in 2011.

Now turning to the coal market. The metallurgical coal market continues to be strong driven by international conditions. The floods in Australia have reduced production and the ability to ship coal due to damage to the rail system there. The near-term impact has been a spike in spot prices from met coal as Asian demand remains strong. In the U.S., the steel industry continues to operate at about 70% capacity utilization. As pointed out by U.S. Steel on their earnings call last week, included in that 70% are facilities operating near full capacity and facilities that aren't operating at all. Unfortunately, our met coal customers are in the operating category.

The domestic steam coal market still lags the robust met coal market. Coal continues to compete with low natural gas prices, which has reduced coal burns at some utilities. Fortunately, it has been a cold winter and electricity demand has been strong which has resulted in declines in utility inventories. The cold weather in Europe has opened the door for export to steam coal by some coal companies, but transportation, infrastructure, rail, barges and ports are booked with met coal shipments so the opportunities for exporting steam coal may be pretty limited industry-wide.

Before I get into 2011 guidance, I want to set the starting point on 2010 at the right level. We have some items unique to 2010, both positive and negative, that we didn't treat as non-GAAP items that really need to be considered when you start to compare 2010 to 2011. In addition, some actions in 2010, like the DECA II sale and using those proceeds for debt retirement will affect 2011. These are all in the company's discussions on our earnings release and this table just pulls them together.

First of all, we had the extraordinary weather at Tampa Electric, which we can't necessarily expect to recur. We also had the regulatory stipulation at Tampa Electric that resulted in a $14.7 million, onetime reduction to earnings in 2010. We had some significant tax charges at parent and a large tax benefit at TECO Coal that also were unique to 2010. We sold DECA II in October, so the earnings from that business are out of the 2011 picture. But we used the proceeds to accelerate debt retirement, so we'll have lower interest expense in 2011. And we will have a full year in 2011 of a lower-capacity payments at the Alborada Power Station that affected only fourth quarter results in 2010. So when you consider all of these items, we think that an appropriate starting point to develop a 2011 comparison is to an adjusted 2010 actual of a $1.25.

For this year, we expect earnings per share to be in a range between $1.25 and $1.40. This excludes any charges or gains that might occur in the year, which we don't plan for. We expect the Florida utilities to earn their allowed returns. The midpoint on which rates were set is 11.25% at Tampa Electric and 10.75% at Peoples Gas with a band of 1% on either side of that midpoint. We assume normal weather for 2011. And just a reminder, weather is going to create a tough comparison in the first quarter this year since in 2010, we had large weather benefits in the first quarter but the stipulation at Tampa Electric and the provision at Peoples Gas didn't affect results until later quarters.

Both utilities are sensitive to continued economic recovery for customer growth. We experienced stronger growth in 2010 than we initially expected. And at Tampa Electric, we expect a similar growth trend in 2011 with customer growth at about that same 0.6% level. We expect lower customer growth at Peoples Gas though, due to some of the areas of Florida that they serve being more severely impacted by high foreclosure rates.

With the slow improvement in the unemployment situation, customer growth should strengthen in 2012 to a more normal long-term trend of about 1.5%. And on the regulatory front, we have no major regulatory activities planned in Florida for 2011 other than the normal recovery clause filing.

TECO Coal expect sales to be in the range between 8.5 million and 9 million tons this year, with a mix of about 40% specialty coal, and that includes high ball A and B met coal, PCI coal and a small amount of stoker coal and the other 60% utility steam coal. Currently, we are about 92% contracted and that includes all of our high-quality met coal.

The uncontracted tons are primarily steam or coal that can be sold as C-grade met. Our average selling price for the contracted tons is almost $87 per ton, which is up from our October update. As you recall, in October, we had 90% contracted or agreed to. In the process of finalizing some of the agreed to tons, the pricing improved and the incremental tons were sold at stronger prices. All of our met coal contracts were done with domestic customers for 2011, which is not our normal pattern. And if our European customers want tons, we will look for ways to try to meet their needs.

On the cost side, total cost is now expected to be in a range between $74 and $78 per ton, which is also higher than our October number. The cost is being driven by higher contract miner cost; the resulting impact on productivity of more safety inspections; higher royalties and severance taxes, which are a function of the selling price; and higher surface mining costs due to delays in obtaining permits. What that means is that we have to haul overburn and coal further as we mine areas to make up for production that was planned from a mine that is waiting for a permit.

While 92% of 2011 sales are contracted, in 2012, we are only a little over 20% contracted in price, and those are steam tons. As John mentioned, we have a $600,000 ton utility steam coal contract that is priced significantly below market that rolls off at the end of 2011. If we repriced that coal just to the NYMEX stock price, it would add about $35 to $40 per ton, an increase of $21 million to $24 million in revenues.

The contracted but unpriced tons that show on this bar for 2012, represent committed volumes that were priced at the current market when we set those prices. If the met market stays strong and if steam market improves as most are forecasting for later this year, we could have significant upside in 2012.

At TECO Guatemala, we expect the San José Power Station to operate normally in 2011. The station should experience higher spot sales, which were reduced in the second half of 2010 due to heavy rains that made lower-cost hydropower plentiful. And as the comparability table showed, the Alborada Power Station result in 2011 will reflect an incremental 3/4 of the lower capacity price in the extended power sales contract that became effective September 14 of last year.

The last two items here were also included in the comparability table. No DECA II earnings in 2011 and lower interest expense at TECO Energy parent as a result of our December debt retirement. And there will be some other drivers that will influence parent-interest expense in a positive direction as well including the retirement of the $64 million of remaining outstanding debt at its maturity in May. This chart illustrates the earnings growth that we've achieved over the past several years and project at the middle of our 2011 guidance range. Since 2008, and assuming the middle of the range for 2011, the compound annual earnings growth here would be 15%.

I'll close with our investor communication plans over the next two months. Mark is going to keep us busy and provide numerous opportunities to meet with investors after we get our 10-K filed, which we expect to happen on February 25. We will be at the UBS Conference in Dallas in early March and the Morgan Stanley Conference in New York the following week. We'll be participating in the EEI conference in London for the first time to familiarize potential European investors with TECO Energy. And we'll be at the Soleil Conference in New York the first week of April.

That concludes my remarks and I will now 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 James von Riesemann of UBS.

James von Riesemann - UBS Investment Bank

Question on the Coal business, when you talk about maximizing the value of your non-regulated businesses, can you tell me what your strategic options are? Are you thinking about anything such as the joint venture with other coal producers to lower your fixed costs or have some fixed cost absorption there? And how do you think about an outright sale of that business given some of the recent activity that's been going on?

John Ramil

Jim, this is John Ramil. Our base case is that we like these businesses, we think we do a good job with them and we will continue to operate them how we have been. But we'll also look for alternatives to that, that can improve the value. And we got to be sure that we're getting a long-term value for it. I think a good example of that is what we did with DECA II. We are running that business and we had the opportunity, and we sold that something like 13x net income for that business. We thought that was a better value than hanging on to it. And that's how we'll approach all these businesses.

James von Riesemann - UBS Investment Bank

So are you saying to me through your answer that you expect coal pricing transactions to go even higher in the future?

John Ramil

I don't know if it would necessarily go higher, but we think that our performance as the coal company will improve. If you look at the guidance we gave for this year, it should be strongly improved over 2010. If you look at the performance of 2010, we delivered $52 million net income versus the high-30s in 2009. And then we look ahead to 2012 and we see the 600,000 ton contract going away priced in the 30s, replacing that with the price in the 70s. So we see value building in our business.

Operator

[Operator Instructions] Your next question comes from Ali Agha from SunTrust Robinson Humphreys.

Ali Agha - SunTrust Robinson Humphrey, Inc.

With regards to the outlook for coal, is your sense -- where would you say we are currently in the cycle? Looking out forward, do you expect prices to continue to go up in the forward markets over the next several years or are we reaching the peak? But can you give us a sense of how you're looking at the coal markets over, say, a three-, five-year period?

Sandra Callahan

With respect specifically to 2011 guidance, we're 92% contracted. So our pricing is pretty locked-in at that point. When you look into 2012, not clear where the market will be. We have some very substantial upside in 2012, as John just mentioned, because of the below-market contract rolling off. And if you just look at NYMEX spot prices right now, that has the potential, if it repriced at that level, to add $21 million to $24 million to total revenues or $35 to $40 a ton in there. I think generally the outlook is strong, particularly in the met area. A little less clear on the steam side.

John Ramil

I agree. I think we have to remember that it is a commodity business so there's potential for cycles. But we think that the met market is going to remain strong. And all indications are that the steam market is probably on the down part of the cycle and heading up later this year.

Ali Agha - SunTrust Robinson Humphrey, Inc.

So you think the steam market may have peaked out?

John Ramil

We think that -- we see the steam market heading up later this year.

Ali Agha - SunTrust Robinson Humphrey, Inc.

And John, just a second related question to you. When you talked about the options and looking at the Coal business, et cetera. Given where you are in the cycle right now and your expectation for that cycle in the next couple of years, I'm assuming any plans to think about monetizing that business will be related to your view of the market and where you think that's headed. So looking beyond '12, are you thinking that this is a five-year sort of bull run that you should thinking about?

John Ramil

It's hard to tell that part out in time. I think the reasonable range where we can see is after 2012, and we think that through that period of time, we will continue to build value in this business.

Operator

Your next question comes from Emily Christy with RBC Capital Markets.

Emily Christy - RBC Capital Markets, LLC

Just a couple more questions on coal. In terms of the contracting environment, forwards, ticked up in the fourth quarter for 2011 and 2012. Did you see tons moving at those levels? Does it look like you were able to lock in a few more tons during the quarter? Could you just give me some color in the environment you're seeing?

Sandra Callahan

Well, we did priced those tons when we lock those contracts in at stronger prices than what we were anticipating when we first provided some guidance on this in October. So we were seeing that improvement in the market and we're able to take advantage of it.

Emily Christy - RBC Capital Markets, LLC

And are utilities coming to the table or is it you that wants to wait until pricing improves? What is the dynamic there now?

John Ramil

We have a good bit of our steam sold for 2010. So we're watching what's going on. We think utilities are kind of tested in the market a little bit, as seen what's out there. But when you look at -- we had high inventories back a year and a half, almost two years ago. Since that time, there's been significant weather both cold and hot. And those inventories have been coming down, and just the natural supply and demand is going to have an effect on that market. And I think your observations earlier that Sandra responded to are right. I think back in October, we reported about 90% contracted at $85. And we're now saying 92% with $87, so you see a 2% request. It's a very, very strong pricing.

Emily Christy - RBC Capital Markets, LLC

And for 2012 as well or is it just a little bit too far out?

John Ramil

2012 is still far out. We don't have specific guidance on the pricing there. You saw the chart that was up there, we do not have a lot of that contracted for. The best part of that year is that we don't have contracted for that legacy contract.

Sandra Callahan

And the typical met coal pricing cycle is a one-year cycle. So we won't have met priced until late 2011 for 2012. And that's just a normal cycle.

Emily Christy - RBC Capital Markets, LLC

And then just one thing on 2011 in terms of the product mix, should we expect that to be kind of back-weighted with the met coal or is the product mix going to be relatively steady throughout the year?

Sandra Callahan

Typically, we plan on it being relatively steady. That's the way the deliveries are scheduled. But sometimes transportation changes the timing of that just a little bit. But it's roughly, evenly weighted.

Operator

[Operator Instructions] The next question comes from Alex Kania with Bank of America.

Alex Kania - Merrill Lynch

I guess, a question about the utility, to change the pace of the conversation, could you just give us an update on kind of the recent activity at the Public Service Commission with the Governor's action to kind of withdraw, I guess, the kind of foreclosed appointments? Any thoughts on how kind of that process could go?

John Ramil

I guess, it's kind of a breaking news. Yesterday, I believe, Governor Scott has somewhere around 200 appointments made by former Governor Crist to step down including the last four commissioners that Governor Crist appointed. I don't think that's terribly surprising given the pattern of governors recently. They want to make their own mark on who they appoint. There were some issues around some of the appointments that Governor Crist made, no doubt about that. The Governor, as we understand the process, will have to make his reappointments from the original list that the nominating committee set to former Governor Crist. So he may appoint some of the same commissioners that just went off or he may appoint others on that list. The way we view it, if you will recall several months ago when Governor Crist was in this process, we thought that a lot of discipline has been added to the process and the nominating committee had sent the Governor list of very well-qualified people from the PSC. And we still feel that way. So whatever new appointments the Governor makes, we think they're going to be quality appointments.

Mark Kane

One thing to remember, Alex, those four commissioners will continue to serve in the interim. It's not like they'll go away. They will continue to serve.

Alex Kania - Merrill Lynch

Until Scott appoints someone else, they're still going to be there for whenever. I know that when you're in the process it usually happens, the list is sent to the Governor and he has a certain period of time to make a selection. It's when he withdraw these people is there actually kind of a requirement to the S2 to make kind of appointments within the 30-, 60-day window or something like that or is it kind of fully open then?

John Ramil

I think he has a period of 30 days to do that. And there are a couple of heads nodding around the table here, so I think I'm right on that. But he could reappoint all or some of these and obviously some on the list as well.

Operator

Your next question comes from Igor Gitelman [ph] with FBR Capital Markets.

Unidentified Analyst

So particular to coal again, on the selling price guidance for 2011 went up about by $2 per ton, but the midpoint for oil and cost went up about $3 per ton. So while the coal margin has been high, how should we think about the impact of pricing pressure and cash margin beyond 2011? Do you expect cost escalation to largely offset the benefit of higher contract pricing going forward?

Sandra Callahan

That's difficult to estimate. One of the drivers on the cost side has been the impact on productivity of the increased inspections that are going on in deep mines, in particularly, now a little bit more at surface mine. Not clear whether all that is currently absorbed, but there's an awful lot of inspection activity going on. And we have, like everyone else, experienced the productivity impact of that. So I would not expect the incremental effect of that going forward to be as significant as certainly it had been in this year and last year. Contract miner cost, however, as you probably know, tend to follow the market. And so to the extent that you got a contract miner there, there will probably be some price pressure associated with increases in selling prices. But I think that's probably the component that would be most subject to that. And about 1/3 of our mines have contract miners in them.

Unidentified Analyst

The productivity for TECO coal came down in 2009 after 2008 and how was productivity in 2010? It seems like your saying that it went down again?

Sandra Callahan

Well, I don't have a specific measure on productivity. But my point is, that what happens when the inspectors are in the mine and stopping a continuous miner so that they can inspect it and other inspection activities that tend to stop progress, the same amount of cost is being incurred but fewer tons are being produced as a result of that. And that's really the productivity impact associated with inspection that's being experienced across the industry.

John Ramil

Two additional observations, Igor [ph]. We think total productions can be about in line with what we had 2010. Two big effects are, as Sandy said, the inspections. And I was talking with the TECO Coal team the other day and they were showing me some numbers, and 80% of the time that we were operating within coal, we've had inspectors on site. So that's the kind of volume. So that affects productivity and your cost to produce the same amount of tons, as well as the permitting issue. We are able to keep up that volume. But if we had some of the permits that we have in hand already, we've got a more efficient mining.

Unidentified Analyst

In terms of production, when do you expect service mining permitting issue to impact your production? Is it an '11 or '12 event and by how much?

Sandra Callahan

So to 2011, we expect to have production and sales in the 8.5 million to 9.5 million ton area, and so we don't expect an impact on numbers in 2011. It is driving our cost because, as John mentioned, we're having to kind of work around not having a permit on the mine we otherwise would like to have mined from. And in 2012, we have to think about this again. And whether we can work around that or whether we have an impact on tons in 2012, it's still a fairly nominal amount, I think, a couple of hundred thousand tons.

John Ramil

Worst case.

Sandra Callahan

And keep in mind, the surface mines are steam.

John Ramil

I would just add, we recognize the steam issues and we're talking about how they specifically affect us, but we also are pushing the increments without making huge changes and huge investments to produce more of the higher market demand coals. Our expectation for 2011 is about 40% of our production will be the met PCI-type quality coals.

Sandra Callahan

And it used to be 1/3 of our production, roughly.

Unidentified Analyst

Is there more opportunity for contracting? Or assuming in a higher percentage from crossover tons, or is that less of an opportunity since you're more contracted for steam at this point?

John Ramil

Potentially, the little bit of opportunity we have, we could move those up market a little bit. And that remains a little bit of upside for us. Thus, the range that we've given you.

Unidentified Analyst

And how was employee turnover at TECO Coal? Is it different than it has been in the past?

John Ramil

We haven't seen any changes, and our employee retention is strong. We pay a lot of attention to that. We do a lot of training and we believe -- and our numbers indicate it. We tend to a preferred employer.

Operator

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

Chris Shelton -

Another utility question to follow up on Alex's. I wanted to double check, what are the rate base numbers, I guess, at Tampa Electric that you're assuming the middle of your ROE range?

Mark Kane

Chris, the last time we file a surveillance report, I believe Tampa Electric was just north of $3.6 billion maybe close to $3.7 billion. And Peoples was just north of the $500 million number.

Chris Shelton -

And as far as bonus depreciation and the effects of that, what are you guys seeing on that front?

Sandra Callahan

First of all, out-of-the-box, keep in mind that because TECO Energy consolidated is in an NOL carryforward position, the net cash effect of bonus depreciation doesn't show up currently, but it does extend the period of time is that we will benefit from our NOL position and not pay any taxes. So with that said, bonus depreciation -- the incremental going from 50% to 100% in late 2010 and 2011 is about $125 million. But to put it in a broader perspective, from the time bonus depreciation first became effective in 2008 through the period that it will run 2012, that will result in additional tax deductions. Has resulted and will result in additional tax deduction for bonus of just under $600 million, primarily at the utilities for that time period. And so that translates into a tax benefit roughly in the neighborhood of $200 million. So what that has had the effect of doing is extending the period over which we will benefit from not paying taxes on a consolidated basis because we have NOL carryforward position with us. And it means more cash remains down at the utility.

Chris Shelton -

What's the NOL position as of the end of 2010, if you have it?

Sandra Callahan

It's about $400 million.

Mark Kane

We'll have the detail when we file the case, Chris.

Operator

Your next question comes from the line of Jim von Riesemann with UBS.

James von Riesemann - UBS Investment Bank

Could you just go over some of the CapEx spending plans for 2011 and '12 by subsidiary? And then, John, would you talk to us again about your dividend policy?

John Ramil

We're in process of reviewing all of our CapEx for 10-K for the general. Regular run rate for our utilities is about $300 million for the electric company, which is about $100 million more than depreciation so that gave us a sense of how the rate base is growing. And then plus or minus $60 million for the gas company. That would exclude any new initiatives whether new generating plants and anything we think might be required to do in a way of renewables on those tax effect.

James von Riesemann - UBS Investment Bank

And then the dividend?

John Ramil

The dividend, the board addresses the dividend policy in our proprietary annual meeting every year in May, and they will be doing that again in May of this year. You may recall when dividend growth was reinstated, the stated policy was we wanted to start to grow it again. We felt good about growing it every year continuously. And I think that continues to be the policy up to this point. But the management team will be putting their heads together in the next couple of months to make their recommendation to the board on the dividend policy and they'll consider it in May.

Operator

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

Timothy Yee - KeyBanc Capital Markets

Another question on coal. Could you elaborate a little bit more on your comment that you could look to meet your European customers needs if they want more tons? Is that something that could potentially impact your production forecast?

Sandra Callahan

It could potentially. It gives us a little upside.

John Ramil

The European customers have been kind of slow to go to market this year. And we essentially have built out all of our met production with the U.S. customers, but those have been long-term customers of ours. If there's some need that could be met and the market remains strong, we'll look at any incremental production we can find anywhere or perhaps go to market and buy coal to try to meet their needs. We view it as potential upside to the guidance we've given you.

Timothy Yee - KeyBanc Capital Markets

And I guess, just given some of the M&A activity in the region, John, do you care to comment on your thought?

John Ramil

Sure. We kind of live my whole career in the land of the giants here in the southeast with the utilities around us, and it looks like that's going to continue to be the case. Our focus, our plans as we've talked before is to run our business and deliver value to our shareholders, and we think that's a good value proposition for them. As I looked at how our operating stats compared to those around us, we're in very good shape. We tend to have rates among the lowest in the state for both of our utilities, and our financial performance is very, very sound. We look at strength of our balance sheet and our projected ability to raise capital with the investments we have to make, including the kind of generating capacity that we think is smart to invest in the foreseeable future, and we feel good about where we are.

Operator

You have a follow-up question from Chris Shelton with Millennium Partners.

Chris Shelton -

I saw Governor Scott had a report out in support of the solar industry and possibilities of investment in solar. Is that something you guys are participating in and interested in and have opportunity for?

John Ramil

Yes. Governor Scott is very, very focused on employment in Florida. And he ran on a platform of wanting to bring 700,000 jobs in the states at least. He's looking at every place where that could happen. And as you could imagine, everybody involved in the solar industry is talking to him about that. So that is indeed his focus on jobs and everybody that makes proposals on jobs, he's going listen to. You may recall that over the last two years, the Florida legislature has talked about the renewables and the state have a standards and have decided and have not passed anything. We think that, that discussion will continue in the legislature this session. We think what we see in the board of legislature is a disciplined discussion and if they're worried about how much impact that might have on consumers' rates, then you ought to go slow and steady. And we are supportive of that philosophy and we're supportive of their philosophy should they require or encourage renewable emissions that it will be done with a good mechanism, so they still have regulatory lag and the recovery of your cost perhaps through a clause like we have for environmental investments.

Chris Shelton -

Are there specific opportunities that you guys have or is this something on the near horizon or is this more distant, I guess, for TECO Tampa Electric?

John Ramil

Well, I think its specific opportunities that we have on the road to the near horizon both sub-central Solar plant installation, which does not have a huge lead time. As well as potentially some solar rooftop applications on maybe some of our larger commercial customers.

Chris Shelton -

And any sense on the magnitude of the spend at all yet or too early?

John Ramil

The things that the legislature has talked about is maybe a small megawatt target for [ph] utilities or no more impact than maybe 2%, 3% year on rates. I think that would probably drive, for us, investments in the $50 million to $100 million range, the maximum if that's where it hits.

Chris Shelton -

So that's $50 million to $100 million a year?

John Ramil

And that's just -- there's no refinement to that number.

Sandra Callahan

No specific plan behind it.

Chris Shelton -

Just a follow-up on my previous question, Mark, was that rate base number you gave the 3.6 to 3.7, is that the 13-month average or the ending?

Mark Kane

If my memory is correct, that's 13-month average, Chris.

Operator

There are no further questions at this time. Do you have any closing remarks Mr. Kane.

Mark Kane

Janet, thank you very much. Thank you everyone for participating in the call. If there are any follow up or detail, you can talk to me offline. And thank you everyone. This concludes TECO Energy's call.

Operator

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

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