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TECO Energy (NYSE:TE)

Q4 2011 Earnings Call

February 02, 2012 9:00 am ET

Executives

Mark M. Kane - Director of Investor Relations

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

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

Analysts

Dan Eggers - Crédit Suisse AG, Research Division

Paul Patterson - Glenrock Associates LLC

Unknown Analyst

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

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

Andrew Levi - Caris & Company, Inc., Research Division

Andrew Bischof - Morningstar Inc., Research Division

Greg Gordon - ISI Group Inc., Research Division

Operator

Good morning, my name is Marcy, and I will be your conference operator today. At this time, I would like to welcome everyone to the TECO Energy Fourth Quarter Results and 2012 Outlook Conference Call. [Operator Instructions] Thank you, Mr. Kane, you may begin your conference.

Mark M. Kane

Thank you, Marcy, and good morning, everyone. I'd like 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. The presentation will be available for replay through the website for approximately 2 hours after the end of the presentation this morning 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 2012. 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 the risk factors in our annual report on Form 10-K for the period ended December 31, 2010, 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 along with other helpful information contained in the appendix to today's presentation.

On our call this morning, Sandy Callahan, our Chief Financial Officer, who will cover the fourth quarter and full-year 2011 results and discuss our dividend increase announced this morning and our guidance for 2012. Also with us today to participate in answering your questions is John Ramil, our CEO. Now let me turn it over to Sandy.

Sandra W. Callahan

Thank you, Mark. Good morning, everyone and thank you for joining us. Mark gave you an overview of what I'll cover and I will assure you that I'll allow plenty of time for Q&A at the end.

In the fourth quarter, GAAP net income was $53.2 million or $0.25 a share compared to $56.7 million or $0.27 in 2010. There were no charges or gains in the fourth quarter of 2011, while results in 2010 included a net gain of $7.8 million, which captured the gain on the sale of our ownership interest in DECA II and a charge for the early retirement of TECO Energy debt. So the non-GAAP comparison for 2010 is $48.9 million or $0.23 a share, which excludes those charges and gains.

On a full-year basis, GAAP net income in 2011 was $272.6 million or $1.27 per share compared to $239 million or $1.12 in 2010. The 2010 non-GAAP results were $275.5 million or $1.29 per share. Excluding net charges of $36.5 million related to debt retirement premiums, taxes on the undistributed earnings of DECA II and the gain on the sale of DECA II.

The results drivers for the quarter and year-to-date period were covered extensively in the earnings release and I'll cover a few highlights. The real driver for Tampa Electric was mild weather compared to 2010 when we had a fourth quarter with extremely cold weather.

As measured by heating degree-days, December of 2011 was the mildest December we've experienced since 1992. Around the holidays, the Tampa area was tying records for high temperatures, but it wasn't hot enough to generate cooling load. Also in the fourth quarter, this time measured by cooling degree-days, we saw the mildest October we've experienced, again, since 1992. For the year, the weather worked against us 3 out of the 4 quarters. We had a mild late winter in the first quarter, a wet summer and then the fourth quarter with its Chamber of Commerce start to the 2011, 2012 winter.

Tampa Electric reported $31 million lower base revenues this year. But remember, in 2010, revenue was reduced by $24 million under our regulatory settlement. So the change in revenue from 2010 with favorable weather to a year with really unfavorable weather was actually $55 million. The very positive news was customer growth and improvements in the economy. The fourth quarter customer growth was 0.8%, representing about 5,000 additional customers and the full-year customer growth was 0.7%.

The stronger economy is evident in commercial sales, which held up well for the full year despite the weather, and in non-phosphate industrial sales, which increased throughout the year. A significant factor in mitigating some of the weather impact in 2011 was successful management of costs by all of the operating companies, all of the operating areas at Tampa Electric as outlined in our earnings release.

Peoples Gas had an interesting mix of sales results for the quarter and the year. Residential therm sales were lower in both periods due to the milder weather in 2011 compared to the prior year. While industrial and commercial sales volumes were higher reflecting the improvements we're seeing in the economy. Volumes there were higher for consumer related customers, such as food processing and packaging, and several asphalt and chemical plants had higher consumption as well. All system sales were lower due to the new capacity on the FGT pipeline that went in service about midyear. The power generators used more natural gas because of the lower gas prices.

Like Tampa Electric, Peoples Gas experienced stronger customer growth in the fourth quarter at 1.1% and saw 0.8% growth for the year. In the fourth quarter, TECO Coal's average selling price rose to $92 per ton and the full year selling price was on guidance at $88. That reflects a sales mix of 46% specialty coals and 54% steam. The all-in cost of production rose this quarter to more than $82 per ton with cost drivers similar to those discussed in previous quarters.

The per ton cost for the full year was just under $80. The net effect of year-over-year price and cost changes was a pretax margin expansion of $1 a ton. Fourth quarter sales volumes were slightly below last year at 1.9 million tons and the full year was 700,000 tons lower at 8.1 million tons. If you exclude the 4.1 million of benefits related to state and federal tax settlements included in 2010 net income, 2011 results reflect a year-over-year increase of about 5%.

And to complete the summary of results, the San José Power Station operated well and enjoyed higher spot sales at better prices. Full-year results at TECO Guatemala reflect the lower capacity payments of the Alborada Power Station and the absence of earnings from DECA II, which was sold in October of 2010. The impact of that sale was largely offset by the lower interest expense at TECO Energy parent because of the debt we retired with the sale proceeds.

I want to wrap up the report on 2011 with a look back at this table that we showed at the end of 2010, which was intended to provide a baseline for 2011. It captured items that affected 2010 that weren't expected to reoccur, like the extraordinarily cold weather, Tampa Electric's regulatory stipulation and some large tax items. And it captured the projected effect on 2011 of actions taken in 2010, like the Alborada contract expansion, sale of DECA II and retirement of parent debt.

This baseline effectively put Tampa Electric at a revenue level representative of normal weather before growth, which we have estimated here would be pretax base revenues about $35 million lower than 2010, while in fact, base revenues were $55 million lower, which is indicative of just how mild the weather was this year.

Now turning to what we're seeing in the Tampa and state economy. There are a number of graphs in the appendix that present some economic trend information that we've routinely shared with you. And you'll see, in all of the metrics that we track, the continuation of the positive trends we've been reporting all year.

The unemployment rates in both the state and local areas are continuing to improve. At the end of the year, Florida's unemployment rates had declined to 9.7% and the local rate declined even more to 9.5%. A dramatic improvement from the 12% and 11.6%, respectively, that we saw at the end of 2010. Year-to-date, Florida has added a net 114,000 new jobs, an increase of 1.6%, outpacing the 1.3% national increase. And that employment growth has been in the sectors that are shown here on the slide.

In the same period, the Tampa metropolitan area added 28,000 new jobs, again in the sectors shown. And the expectation is for continued modest improvement in 2012. The housing market also continued to improve in 2011. Historically, new home construction was a major driver of growth in Tampa and in the state. Metrostudy, a firm that monitors the new home construction industry, reports that new housing starts and closings increased in the fourth quarter of 2011 compared to the fourth quarter of 2010, and an increase in new home construction activity is also expected in 2012.

Existing home resales in 2011 were 11% higher than in 2010, which is particularly noticeable when you consider that 2010 included the homebuyer tax credit program. And prices of existing home resales, as measured by the Greater Tampa Association of Realtors, after bottoming out in January 2011, have been higher each month throughout the year. The inventory of existing homes on the market has consistently been around 6 months this year, compared to 8 at the end of 2010 and 25 at the deepest point of the downturn.

That inventory only includes homes actively on the market and doesn't include foreclosed properties not on the market. RealtyTrac data shows that foreclosure activity trended down in Tampa Electric service area in the fourth quarter compared to earlier in 2011. The data shows that at the end of 2011, there were 9,000 homes in various stages of foreclosure in the local area, which is down from 16,000 in March.

We've been very cautious that the foreclosure backlog had the potential to reverse some of the improvements we've seen in the housing market. But the fact that prices have been trending up all year and inventory levels have held at a healthy 6 months all year, at the same time that these foreclosures were being absorbed into the market, is a very good sign. Consistent with our announcement last February, our board changed the timing of its annual review of our dividend to the first quarter.

Earlier this morning, we announced an increase in our quarterly dividend, which represents a 3.5% increase on an annual basis to $0.88 per share in 2012. The new dividend represents a 65% payout at the middle of our guidance range, consistent with the target payout ratio of 60% to 70% announced last year. Turning to our 2012 guidance, we expect earnings per share to be in the range between $1.30 and $1.40 per share in 2012. This range allows for variations and factors such as weather at the utilities and production costs and sales volumes at TECO Coal.

In 2012, we expect both utilities to continue to earn within their respective ROE ranges. We expect customer growth to be in line with the trends we saw in 2011, with growth nearing the 1% level, and we assume normal weather. While we'll have to meet the challenge of higher depreciation from normal capital additions to serve customers, and pressure on pension and benefits costs before discount rates, the utilities will get the benefit of lower interest expense with the opportunity to refinance about $460 million of 2012 maturities in a low interest rate environment.

On the regulatory front, we will undertake the determination of need process for Tampa Electric's next increment of generation expansion, the Polk combined-cycle conversion that I described last quarter. In connection with this, we will begin the initial engineering work this year for the plant and transmission system upgrades to support the generation expansion. Peoples Gas capital spending this year will include several project to expand the system to supply commercial -- to supply economical and clean natural gas to large customers currently using petroleum or propane.

As described in our release last month, TECO Coal expects sales to be between 7.1 million and 7.3 million tons in 2012, at an average price of about $96 per ton, with about 50% of those sales going to the met, PCI and stoker coal markets. On the cost side, the fully loaded average production cost is expected to be in a range between $83 and $87 per ton. This takes into account the impact of higher selling prices, as well as spreading fixed costs over fewer tons. The $8 per ton increase in the average selling price this year adds almost $1 per ton to costs from royalties and severance taxes and spreading the same fixed costs over 1 million fewer tons affects costs by about $3 per ton. Our 2012 capital spending will include about $5 million for permitting an initial surface development related to the new met coal reserves that we told you about last November, to keep that activity moving forward while we continue to evaluate the specific market and mining plans.

The outlook for TECO Guatemala assumes normal operations at both power plants except for a scheduled turbine overhaul outage at the San José power plant, which we expect to reduce net income by about $4 million in 2012. I show you this next slide to illustrate the point that results in the coal business are driven by margins and not by volume. From 2008 to 2011, TECO Coal’s net income has almost tripled while volumes actually decreased by more than 1 million tons over the same timeframe.

Much of the margin expansion driving the slope of the net income line has come from a greater proportion of specialty coal in the sales mix. While that is also true in 2012, keep in mind that more than $3 a ton of the improvement in 2012 is attributable to the replacement of that significantly below market, 600,000-ton steam coal contracts You'll recall that we re-contracted those tons for 2012 in the second quarter of 2011 in a stronger steam coal market than we're seeing today. You can see here that coal sales are already pretty well contracted for 2012.

We are effectively sold-out on our steam coal and substantially all of our met coal is contracted as well. The unsold tons are primarily PCI tons. I'll close with our investor communication plans over the next several months. We expect to file our 10-K at the end of February and we'll be at the UBS conference in Dallas later that same week. In March, we'll be busy with the European Non-Deal Roadshow [ph] and we'll participate in the EEI Europe conference in London. We'll also be at the Morgan Stanley conference in New York that week.

And now, I'll turn it over to the operator to open the line for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from Daniel Eggers with Credit Suisse.

Dan Eggers - Crédit Suisse AG, Research Division

Talk a little bit more about weather versus normal this year or in 2011, and kind of how we should think about 2012. Just to kind of maybe recalibrate our volume baseline.

Sandra W. Callahan

The weather impact in Tampa Electric, for the year, compared to normal is probably in a $20 million magnitude because that $55 million delta in year-over-year base revenues is kind of that baseline. So it doesn't have the impact of normal customer growth in there. And so there's probably $20 million of hurt from being below normal in weather and $10 million of help from customer growth.

Dan Eggers - Crédit Suisse AG, Research Division

Okay and I guess, you guys did a good job managing costs relative to expectations for '11. Was a chunk of that borrowing, kind of, or pushing out spending to '12 for volumes to get back to normal? Are there some structural changes we should be paying attention to with the utilities?

Sandra W. Callahan

It really was not pushing cost out into 2012, and it reflected improvement. Some of them a while in the making, some of them the result of looking hard at processes and approaches to things. But I'll give you an example. The costs associated with our long-term disability plan, which you record those costs under FAS 112, was substantially lower this year and that is driven completely by fewer people who are out on long-term disability. And that is a result of a very dedicated focus on safety, that's been in place for a long time and we're really beginning to see some of the benefits of that materialize, same thing on the workers comp side. So just good management of operations. Another small example is bad debt expense where, as you know, we have not seen the kinds of impacts from that, that some other companies in other parts of the country have. But that's now starting to trend down a little bit because we've managed that very effectively over the last couple of years. So it's a little bit here and a little bit there and it really added up just some excellent O&M performance by all of the areas of the company this year.

John Ramil

This is John Ramil, I'll just add to what Sandy said. Across all of the TECO Energy companies, we had a record safety year and there's a lot of focus on that on all businesses. Coal company was well below their goal. Electric and gas company as well, and that's the key to keeping those costs down as well as managing the cases that Sandy noted. And we are aggressively dealing with everything including the bad debt, which once in a while I get a letter regarding that and we deal with it, but our folks are handling it very aggressively.

Dan Eggers - Crédit Suisse AG, Research Division

And I guess, on the San José maintenance for '12. Can you just remind me how often that occurs and regional expectation for '13 for that to revert back to kind of normal trend the last couple of years?

John Ramil

Yes, Dan, that's a once in a -- this is 12 years that, that unit has been in operation. So it's kind of a one-time thing. On the back end, there's some upside to it. We will get a little bit more capacity out of the machine once the change is made and we'll get a little bit more efficiency out of the machine once the changes are made. And that'll help us get a little bit more sales and margin on our opportunity sales from that unit. Just a little bit to characterize the $4 million, a little bit more than 1/2 of that is from equipment that we're retiring, we'll have to write-off, that's a non-cash. And then the balance of it is lost opportunity on sales.

Dan Eggers - Crédit Suisse AG, Research Division

Okay, and I guess just on the dividend. We should kind of as we plot out going forward, continue to target that 65% payout ratio?

John Ramil

No, we set up a dividend policy last year, a range of 60% to 70%. And where the board declared the dividend yesterday, is right in the middle of that.

Operator

And your next question comes from Paul Patterson with Glenrock Associates.

Paul Patterson - Glenrock Associates LLC

Just wanted to touch base with you on Slide 17. When we look at these volumes, with the forward curve, how should we think about the margins. We've had some volatility with gas and obviously with coal. I'm just trying to get a sense as to how should we think about the open position in 2013 and how that looks vis-à-vis your cost structure?

John Ramil

Well, a piece of it, Paul, the uncontracted is all met and PCI which is typically done on an annual basis. And we expect that to be about 50% of sales going forward until we get the new reserves into production. And the steam that we've done was done earlier in the year at better prices so it's a relatively small piece that -- of steam exposure for 2012 or '13, excuse me.

Paul Patterson - Glenrock Associates LLC

Okay, so when we look at met coal though, I mean I know imports have sort of -- there have been some issues in recent weeks. How do we think about that? I mean, how does that look or, I mean, can you give us a picture on that? And also, just what's the volume I guess for 2013?

John Ramil

That will be dictated by the market, and if anybody can tell you met coal prices for 2013, he needs to be picking lottery tickets.

Paul Patterson - Glenrock Associates LLC

Okay, so when we're looking at this I guess we should think about -- I mean, when we're looking at this, do we have any sense as to what the sort of -- when you talk about, I don't know, about 60% unhedged. Is that sort of a similar volume that we've been seeing in 2012?

John Ramil

That's a pretty normal level for this time of year.

Mark M. Kane

Yes, Paul, I think the chart we've shown you for '13 is probably pretty typical for this point in the year.

Paul Patterson - Glenrock Associates LLC

Okay. But I guess all I'm asking is it assumes pretty much the same production that you have in 2012. Is that the right way to think about it? Because I mean, there has to be some volume associated with it, right?

John Ramil

We haven't refined it that much. We don't have a production target yet for 2013. But I guess, one way you can look at is if you look at it -- if we did produce the same volume or near the same volume as 2012, that's about where we are. I can just give a little bit more color on the open position on 2012, as Mark and Sandy said, it's PCI and a little bit of met. And as we look at -- that's still to be sold and priced. But as we look at the rest of our portfolio for 2012, we contracted for met in about the same market situation for '12 as we did in '11. And the market, at the time we contracted, it was out there publicly, high vol A was up in the 170 range and high vol B was in the 130, 140 range. And that's where we contracted last year and for 2012. PCI softened a little bit I think, as everybody knows, and that's probably the more risky part of the open position that we have.

Paul Patterson - Glenrock Associates LLC

Okay. And then with respect to the sort -- the expansion thoughts that you guys had about 2017 and what have you. Is that pretty much the -- do you guys still have the same thought process you had on that before or has any of that changed?

John Ramil

You're talking about the expansion at the electric company?

Unknown Analyst

No, I meant with the reserves, I guess.

John Ramil

Okay, we certified the reserves and we have money in our plans, for this year, to get the permitting completed and to do detailed engineering and mine planning to let us more refine that project moving ahead.

Paul Patterson - Glenrock Associates LLC

Okay. And then, just finally, on the weather-adjusted numbers for 2012, could you give us a little -- this is back to the utility. The kilowatt hour sales, weather adjusted for 2012, just sort of a sense as to what kind of growth you're sort of seeing there in terms of -- I mean, you gave the dollar volume I think to Dan, but I'm just trying to get a sense as to what you're seeing, economically, in your service territory, not economically, as much as customer usage outside of people, non-occupied homes. Just are you seeing any sort of conservation efforts or sort of change in elasticity or behavior on your customers?

Mark M. Kane

Well, this is Mark. Yes, we're seeing some of that effect. If you go back a couple of years, and I know this was during the housing boom and the construction of McMansions, we used to see energy sales growth about 1/2 of a percent above customer growth. What we're seeing now is energy sales growth slightly below customer sales growth. So if our trend is 0.8% at the end of this year, energy sales growth would probably be 0.5%, maybe a little bit less. So we're still seeing some impact of the higher unemployment rate and we are seeing some voluntary conservation especially in the shoulder months.

John Ramil

Paul, I think that's exactly right, but also recognize that in 2010 and 2011 we had some extreme weather years on both ends. Mild and helpful to sales. So it's hard to calibrate that per science, given that -- those wild weather variances we've seen.

Operator

Your next question comes from Paul Ridzon with KeyBanc.

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

You talk about, it looks like, Mark, you're paying about 12.5% royalties. Is that fairly fixed across the mix?

Sandra W. Callahan

Royalties range from 6% to 10%. Severance taxes are 4% and so when we estimate that dollar a ton on $8 of price increase, it's the combined effect of an average royalty rate and a severance tax rate. 12% is on the high-end of, no -- yes, 12% is on the high end of the oil

Mark M. Kane

12% is about the middle of the range.

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

So 10 to 14 is the range?

Sandra W. Callahan

It's 4% for severance tax, that's across-the-board. Royalties range from 6% to 10%. So we kind of use the average of that and the 4% and that's where the 12% comes from.

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

Got it. Can you talk about your discount, your actuarial assumptions for your pension this year and kind of the impact that you expect that to have?

Sandra W. Callahan

We've got some disclosures in the 10-K that talk about the sensitivity and I think a 100-basis point change in the discount rate was $3 million or $4 million. Discount rates are actually about 50 basis points below where they were in 2010, for purposes of driving benefit expense. So it's actually less than if you look at just a 10-year treasury, the decrease that's happened in that same timeframe. So there's potentially a couple of million dollars associated with discount rate and then the asset base was impacted by lower equity returns as well but that kind of, that finds its way into expense over a couple of years, through that levelizing process that the accounting standard affords you.

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

And can you just give an update on kind of how you're looking about your regulatory strategy over the next couple of years?

John Ramil

We have the normal regulatory activities, the fuel adjustment and those types of things. Our major upcoming regulatory activity this year will be -- our plans are now to file for our certification of need, for the expansion of combined-cycle capacity in our full Power Station. That'll be in August for that project to go into service in 2017.

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

Anything on that GIC front? Any rate cases planned?

John Ramil

No, we don't have any rate cases planned. As we came out of our last rate case, we told you, looking ahead, our ability to control costs and improvement in the economy would dictate what our next timing would be. Our folks have done a super job in controlling costs and that's gone as we thought it would and maybe even a little better than we thought it would. And the economy has improved, but we'd sure like to see it do better. So we're watching the others, and what's going on in Tallahassee, closely. But we have no plans for timing of another case right now.

Operator

Your next question comes from Ali Agha with SunTrust.

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

John, when you look at the coal business, today, given your hedge position, your look into the market, and you were giving us some sense of how you're seeing pricing. I mean, just conceptually, should we think of the coal business, given market conditions in '13, to be higher than '12, flat, down? How should we sort of conceptualize that segment?

John Ramil

Ali, I think it's really tough to tell at this point. If you look at what we've been able to do over time, moving more and more of our production -- 5 years ago, about 1/3 of our production was the specialty coals going into the metallurgical market, in 2012, it'll be 50%. And that's helped us expand the net income in that business, as Sandy described earlier in the graph. Should demand and prices stay similar to where they were in '10 and '11, or better, it could increase. Should the economy worldwide, and the U.S. worsen, then it could be down. It's kind of early to tell at this point for 2013.

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

Okay. And then on the utility front, what are the actual earned ROEs for Peoples and Tampa Electric in '11?

Sandra W. Callahan

Yes, I don't have -- we haven't filed the actual final earned ROEs. I know that Peoples was slightly above its midpoint and Tampa Electric slightly below its midpoint because of the weather impacts of them.

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

And Sandy, you said you're managing or you're assuming in your guidance that you'll stay within the range. But just conceptually, assuming normalized weather, would you expect those ROEs to be higher in '12 versus '11, even though you would still remain in the range?

Sandra W. Callahan

In general, our expectation is probably a pattern kind of similar to what I think we're seeing in 2011, prior to actually filing that detail. We probably are going to have some opportunity to put some equity into Tampa Electric in 2012, because they have some debt refinancing that they need to do and we haven't been able to do that. Although, as you know, we have wanted to support the stronger capital structure in that business, that was supported in their regulatory proceeding. But the benefits associated with bonus depreciation have meant that the utilities have had plenty of cash and haven't needed that up to this point, so that may affect it a little bit as well.

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

And given the CapEx budgets that you have, I think, next couple of years at Tampa and Peoples. Can you remind us, what's the implied rate base growth that would imply?

Sandra W. Callahan

Well, the normal capital spending at Tampa Electric produces about $100 million a year of rate base growth, because it's about $100 million more than their depreciation. The combined cycle conversion at Polk is about a $700 million project before AFUDC and including required transmission upgrades. So that would be growth in addition to that normal annual growth.

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

And Peoples?

Sandra W. Callahan

Peoples have been spending about $60 million a year, which is pretty close to their depreciation. In 2012, as you saw on that slide, we expect Peoples to ramp up that spending and so that implies an incremental rate base of about $40 million in 2012.

Operator

Your next question comes from Andy Levi with Caris.

Andrew Levi - Caris & Company, Inc., Research Division

Just 2 very quick questions, and the first one you may not be able to answer. But I guess, there was a story in the fourth quarter about you guys possibly looking at, I think it was a municipal system. Davenport is maybe kicking the tires a little bit, thinking of buy in. Is there anything that you can tell us on that?

John Ramil

Sure, Andy. And you're right there was media coverage, Lakeland Electric was going to a rate proceeding. And in doing that, the decision-makers in the city and customers were looking at what are all the options and should they look at selling that utility. And through that process, we were asked if we had an interest in purchasing the utility and we indicated that we did. We believe that, that's a valuable asset, it fits right in with our service territory. When you look at where Tampa Electric's rates are, amongst the lowest in the state. Good, high-quality reliable service. We think we could serve our neighbors in Lakeland very well should they choose to sell the system.

Andrew Levi - Caris & Company, Inc., Research Division

And can you give us kind of any idea on just time frame on how this plays or doesn't play out?

John Ramil

No, it's not our decision. They did kind of defer the rate increase for a couple of years. But they'll be dealing with that again before too long. And I can't tell you what the timeframe would be. But they have to -- have to look at it, go through their process of what it takes, make sure that it's good for the city and the customers of Lakeland, which we very much agree with, and then decide what to do.

Andrew Levi - Caris & Company, Inc., Research Division

And then just two other quick questions. On your range of $1.30 to $1.40, what gets you to the low range and what gets you to the high range?

John Ramil

Good and bad weather, as we've seen from the last 2 years and a little bit better margins, I hope.

Andrew Levi - Caris & Company, Inc., Research Division

Okay. So it's the combination of coal and weather that either get you higher or lower.

John Ramil

That is a large drive.

Andrew Levi - Caris & Company, Inc., Research Division

And then, I know you haven't given guidance for 2013, and you just gave us 2012. But just on 2013, and I think maybe Paul Patterson and a couple of other guys tried to touch on this. But just on coal volumes, in a more normal kind of weather pattern, I guess, is one of the things that hurt you for 2012. And also, who knows what natural gas prices are going to be, none us can predict. But as we try to kind of come up with a normal coal volume for 2013, should we kind of think back to kind of the guidance, the preliminary guidance you gave after the third quarter call, for volumes for '13. I mean, I obviously can't hold you to it because there's a lot of variables, but is that kind of the level that you would hope to be at, in the more normal world?

John Ramil

It, again, depends on what I said earlier on the economy. We have some -- the gas prices and the weather have affected steam coal prices and volumes, but we have contracted pretty well for this year and next year on steam coal. Probably the biggest variable will be PCI and what the market is for that and we'll be making our decisions, just like we did this year. What kind of margin can we drive with the PCI business, and if it's not enough to encourage us to produce it, we'll just leave it in the ground and maybe we'll get a little bit better march the next year.

Andrew Levi - Caris & Company, Inc., Research Division

Let me ask you then in maybe a different way. The reduction in production for 2012 versus what you were maybe thinking against a couple of months ago, 3 months ago. Can you give us a breakdown of where the production kind of was reduced and why?

John Ramil

[indiscernible] PCI coal.

Mark M. Kane

Yes. We said in the release, at the time that we announced that cutback, was we were going to do slightly more met coal in '12 than '11. And with steam contracted at the time of our third quarter call, that leaves PCI as the victim.

Operator

Your next question comes from Andy Bischof with MorningStar.

Andrew Bischof - Morningstar Inc., Research Division

Just a few quick questions for you. Can you kind of explain or expand on your expected interest expense benefits and the timing in 2012.

Sandra W. Callahan

Yes, I can give you some of the data points here. Tampa Electric has about $460 million of debt maturing in 2012, and it's various pieces at various rates. But if you look at the weighted average effective rate on that, it's about 7%. If you look at the weighted average period outstanding during 2012, it's about 6 months. So whatever you want to assume for a current interest rate you can do some math on that.

Andrew Bischof - Morningstar Inc., Research Division

Okay. And just my other question is, you've mentioned that you are continuing to see strength in your commercial sales. Are you continuing to see that demand through January?

Sandra W. Callahan

We really don't have January data yet.

John Ramil

I mean talk -- talk to Dora [ph], so kind of [indiscernible] only. We haven't heard anything different, best we can tell you.

Operator

Your next question comes from Greg Gordon with ISI Group.

Greg Gordon - ISI Group Inc., Research Division

Hey, Sandy. Can I ask you, do you know what the approximate operating cash flow for fiscal year '11 was relative to CapEx?

Sandra W. Callahan

We have a cash flow statement...

Mark M. Kane

If you've seen the cash flow statement that went out with the package, yes.

Greg Gordon - ISI Group Inc., Research Division

Sorry, I -- okay, but to cut to the chase, the difference...

Mark M. Kane

Cash flow from ops, Greg, in 2011 was $754 million. Capital expenditures were $454 million.

Greg Gordon - ISI Group Inc., Research Division

All right, okay. So, I mean, I guess my -- to cut to the chase of my question. I know that you guys aspire to infuse more equity capital into utility and we know that you've got some volatility in the cash flow profile, pretty much every year, as it pertains to the coal business. But with one of the better free cash flow yields in the utility group, I wonder why you're not targeting the higher end of your dividend payout ratio aspiration when the difference between being at a 70% payout and $0.95 a share versus a 65% payout and $0.88 share is $15 million a year. It would seem to me that, in an environment where investors clearly are craving income, that with such a small impact on your cash flow flexibility that you ought to be at the high end of the range, can you comment on that?

John Ramil

Greg, I would just say that when you look at where we are on dividend payout, 60% to 70% range, it's kind of where the industry generally is and that's what we think investors are expecting. If we were in a more stable economic environment, in all of our businesses, you might think about us being a little bit more aggressive. But we think we're right where we should be right now.

Operator

Your next question comes from Ashar Khan [ph] with Visium Asset Management.

Unknown Analyst

If I can just follow-up, you said, Sandy, that weather helped us -- hurt us by about $20 million, right? Pretax, so that's about like $0.06 or so versus normal?

Sandra W. Callahan

$20 million will be about $0.06, right.

Unknown Analyst

Okay, okay. And then, I'm just trying to build -- and then if I'm right, the slides that you show us for coals earnings, am I right? You gave us a net income on that Slide 16. Is it fair to assume the way I can do my coordinates that it kind of implies a $60 million net income number in '12?

Mark M. Kane

Yes, if you take all of the elements of our guidance, it gets you almost dead on that number, Ashar.

Unknown Analyst

Okay, okay. So then I'm just trying to get to the mid -- getting to normal weather, picking up about like $0.03 from the coal business gets us to the midpoint of the guidance, right? Just looking at the math.

Sandra W. Callahan

That sounds right.

Unknown Analyst

And then you said that there should be savings from debt reductions. You mentioned 400, but can you -- I don't have the maturity chart in front of me. Can you tell us, do they happen like half the year or how should we look at it towards those savings?

Sandra W. Callahan

Ashar, that was a question that was just asked and the metrics that you can use on that is about, on average, 6 months outstanding. So half-year [indiscernible], and carrying a weighted average coupon across all the issues, about 7%.

Unknown Analyst

Okay. So what I'm driving at is, Sandy, is that just going to normal weather, including that all those things and a little bit of growth should get us to the higher end of the range.

Sandra W. Callahan

But remember, Ashar, I did mention that we do have some normal expense increases like depreciation because we are adding capital to those customers every year. And also, we're going to have some pressure on pension expense because of the lower discount rate and adds upward...

John Ramil

And, Ashar, we have the once-in-a-while major turbine activity at Guatemala, that's about $0.02 downward pressure.

Unknown Analyst

Okay, and can you just tell us what the pension expense delta would be?

Sandra W. Callahan

I really can't. I did provide a little bit of insight on that by saying that discount rates are down about 50 basis points from where they were in 2011 to 2012. And I think there's some sensitivity numbers in the 10-K and that's $3 million or $4 million for 100 basis points. So that's probably gives you some sense for discount rate impact or the half of that.

Operator

Your next question comes from Ted Hank [ph] with PointState Capital.

Unknown Analyst

I apologize if this has already been asked, but I wanted to see if you guys could break out or give any sense of the cost structure on the coal business, related specifically to your steam tons, relative to your met and your crossover tons. Is there a way that we can think about that? It looks like you've -- I think, a couple of years ago, you were pretty aggressive in locking in steam at higher rates. But I guess, my concern is that when those hedges come off, is your steam business still economic under this current environment when gas is at $2.50, $3.00?

Mark M. Kane

Ted, met coal is always a little more expensive because one, all of it has to go through the wash plant and the prep plant. Met coal is an underground product rather than a surface product, and those seams tend to be a little bit thinner. So just by its nature, met coal is a more expensive product. Steam coal is -- a lot of, not a lot, but some of our steam coal, the surface mine, we've cited the cost of diesel on surface mine operations, longer hauling distances, raising the cost. But beyond that, we haven't been really specific on cost differentials amongst the products.

Unknown Analyst

Okay, but we should assume that the steam coal should be at somewhat of a discount. The cost structure of steam coal should be somewhat of a discount to the kind of 85-ish kind of all-in number that includes the met.

John Ramil

Everything else being equal, yes.

Unknown Analyst

Okay, but you can't give us any guidance on whether that's $10 or $20 or $30 a ton lower?

John Ramil

It varies.

Operator

[Operator Instructions] You have a follow-up question from Andy Levi with Caris.

Andrew Levi - Caris & Company, Inc., Research Division

I apologize for asking this because I know you mentioned it before. But your guidance, for both Peoples and Tampa, does that assume normal weather or have you adjusted anything? I know you mentioned it, I just missed it.

Sandra W. Callahan

It always assumes normal weather and the range that we include in our guidance range gives us some wiggle room around normal weather but it typically doesn't contemplate really abnormal years.

Operator

And there are no further questions at this time. Sir, do you have any closing remarks?

Mark M. Kane

Just like to thank everybody for participating in the call this morning and we look forward to seeing you at various Investor Relations events over the next quarter. Thank you very much.

Operator

And this concludes today's conference call. You may now disconnect.

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