Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

TECO Energy (NYSE:TE)

Q4 FY07 Earnings Call

February 05, 2008, 9:00 AM ET

Executives

Mark Kane - Director of IR

Gordon L. Gillette - EVP and CFO

John B. Ramil - President and COO

Analysts

Andrew Smith - J.P. Morgan

Lasan Johong - RBC Capital Markets

Greg Gordon - Citigroup

Ashar Khan - SAC Capital

Paul Ridzon - KeyBanc

Fadi Shadid - Friedman, Billings, Ramsey Group, Inc.

Ted Hine - Catapult Capital

Mark Finn - T. Rowe Price

Operator

Good morning. My name is Janice, and I will be your conference operator today. At this time, I would like to welcome everyone to the TECO Energy's 2007 Results and outlook for 2008 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]

And now I would like to turn the conference over to Mark Kane, Director of Investor Relations. Please go ahead.

Mark Kane - Director of Investor Relations

Thank you Janice. Good morning and thank you for joining us on TECO Energy's fourth quarter conference call. I am Mark Kane, the Director of Investor Relations, TECO Energy. Today, we will cover our fourth quarter and full year 2007 earnings and our 2008 outlook. Our earnings release and accompanying unaudited financial statements and statistical summary data were released and filed with the SEC this morning. The information and the slides for this call are available on our website at tecoenergy.com. The conference call will be available for replay through the website approximately two hours after the call and will be available for 30 days following today's call.

In the course of our remarks today, we will be making forward-looking statements regarding our financial outlook and plans for 2008. 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 31st, 2006 and is updated in our quarterly reports on Form 10-Q for the June and September 2007 quarters. Also today, we will be using non-GAAP measures in the course of the presentation. There are reconciliations to the nearest GAAP measures contained in the appendix to today's presentation as well as some other useful backup information. On our call today, Gordon Gillette, our Chief Financial Officer, will cover our 2007 results and our 2008 outlook. Also with us today to participate in answering your questions are Sherrill Hudson, TECO Energy's CEO, and John Ramil, our Chief Operating Officer.

On today's call, we will briefly review our 2007 fourth quarter and full year financial results. The earnings release provides details on the business drivers. So, in the interest of time, we will only briefly touch on them on this call. We will then provide our 2008 guidance and the business drivers that we expect to influence our results this year.

Now I'll turn it over to Gordon Gillette.

Gordon L. Gillette - Executive Vice President and Chief Financial Officer

Thanks Mark. Good morning and thanks to all you for joining us on this call. For the fourth quarter, GAAP net income was $173.9 million compared to $48.9 million for the same period 2006. These GAAP results include the $146.1 million net gain on the sale of TECO Transport. In addition, due to the December 3rd closing of our sale, our results reflect contributions from TECO Transport only through that date.

Fourth quarter non-GAAP results excluding synfuel and charges and gains were $47.7 million compared to fourth quarter 2006 non-GAAP results of $37 million. On a per share basis, our non-GAAP results excluding the items I just mentioned were $0.23 per share for this quarter compared to $0.18 per share in 2006. Our GAAP results for the quarter reflect a $2.2 million after-tax loss on a synfuel production or $0.01 per share, which is driven by the extremely high oil prices, which we hedge for 2007. I'll talk more about this in a minute.

Charges and gains in the quarter included $146.1 million gain on the sale of TECO Transport, which was net of $3.3 million of after-tax costs associated with the sale. The gain on the sale is in our GAAP results, but it is excluded from our non-GAAP results for the quarter.

By the same token, our GAAP results reflect a $2.5 million positive benefit of non-recording depreciation of the TECO Transport due to TECO Transport being in a Health Assets Held for Sale status. But our non-GAAP results for TECO Transport show the company as it would normally be shown including the $2.5 million of depreciation. This quarter we've recorded a $20.2 million charge for premiums and fees associated with a debt extinguishment and exchange completed in December, which is in our GAAP results, but also are excluded from our non-GAAP results. There are tables in the appendix to this presentation that provide a reconciliation between GAAP net income and earnings per share and the non-GAAP measures that we have just discussed.

2007 GAAP net income for the full year including the gain on the sale of TECO Transport, was $413.2 million. Our non-GAAP results from continuing operations excluding all charges and gains taking out the previously discussed TECO Transport gain and debt extinguishment cost as well as synfuel earnings were $223.7 million compared to $201.5 million in 2006 on the same basis. On a per share basis, our non-GAAP results excluding the items I just mentioned, were $1.07 per share for the year compared to $0.97 per share in 2006. Our GAAP results reflect a $52.6 million after-tax benefit from synfuel production or $0.25 per share compared to $32.1 million or $0.16 per share in 2006. Again, charges and gains included those I just discussed for the quarter plus an additional $13 million of after-tax costs associated with sale of TECO Transport and an additional $7.2 million positive benefit of not recording depreciation at TECO Transport on the full-year results.

In 2007, we had a number of significant financial accomplishments. Most importantly, we achieved actual results at the top of our original guidance range of $0.97 to $1.07 per share despite unfavorable weather through the first half of the year. In addition, synfuel provided us significant cash in 2007 that we put to good use. As we discussed we completed the sale of TECO Transport for $405 million of gross cash, which we used to accelerate our debt retirement plans and we are reporting a $149 million book gain, which contributed to strengthening our balance sheet.

Also on the balance sheet improvement front, we executed our accelerated liability management plan in which we retired a total of $765 million of parent guaranteed debt, exchange notes and extended the maturity of other notes. We took an associated $20.2 million charge in the course of the early retirement and exchange transaction. For the execution of our liability management plan, our debt-to-total capital ratio improved from 69% as of December 31, 2006 to 61% at the end of 2007. Based on these achievements, TECO Energy achieved two upgrades to invest to the investment grade category from the rating agencies later in the year.

We also made a planned $82 million equity contribution to Tampa Electric to support its capital investment. So, we are keeping with our strategy of improving the balance sheet and investing in our utility businesses. The tax credit program for the production of synfuel ended at the end of 2007. While the program was controversial at times and was sensitive to higher oil prices for the past two years, it generated significant cash and earnings for us over its life. In 2007 we realized $80 million of net cash and almost $53 million of net income from the production of synfuel and our related oil price hedges. We produced 6 million tons of synfuel last year compared to 5... in 2007 compared to 5.3 million tons in 2006 when we idled production for about six weeks due to higher oil prices. Oil prices were even higher in 2007 with the average annual price at $72 per barrel on a NYMEX basis. This oil price resulted in a 67% tax credit phase-out in 2007, compared to a 35% phase-out in 2006. In 2007, we had oil price hedges in place for 100% of our production. At this time last year, we were forecasting that we generate $100 million of net cash and $65 million of earnings from synfuel in 2007 either from the production of synfuel or from the oil price hedges, if oil prices rose. The actual results were lower than that due to a change in the relationship between the Producer First Purchase Price and NYMEX oil prices. Our hedges were structured on historical difference between these two prices, but in 2007 as oil prices rose, the relationship changed. So, our hedges were not completely effective due to basis differences.

Now turning to 2008. Our guidance for 2008 is for earnings to be in the range between $0.95 and $1.10 per share. As usual this forecast is for earnings from continuing operations before any charges and gains that might occur. In 2008 we expect both utilities to produce results that are essentially unchanged from their 2007 result. I will discuss each company's business drivers in just a minute. We expect somewhat higher results from TECO Coal this year. We expect lower results at TECO Guatemala in 2008 after a very strong 2007. In 2008 we expect that the loss of earnings from TECO Transport will be partially offset by lower parent interest expense following the $300 million debt retirement that we accomplished with the proceeds from the sale of TECO Transport. In addition, we expect lower interest expense from the other $300 million of TECO Energy notes that we retired last May. In all, we are expecting $30 million lower TECO Energy parent finance interest expense in 2008 compared to 2007 as a result of our aggressive liability management actions. The lower interest will be partially offset by lower investment income as a result of lower cash balances in 2008. Early in 2007 we had significant cash on the balance sheet in anticipation of debt maturing in May.

Now we will provide some 2008 expected business drivers for each of the companies, starting with Tampa Electric. We expect customer growth of about 2% to drive [inaudible] 2%. This is based on our expectation of a continued weak housing market in Florida and normal weather. Our estimates, however, did not include the impact of further economic downturn or a recession. I'll talk more about this in a minute.

O&M costs are expected to grow significantly in 2008 after a good year of controlling cost increases of Tampa Electric in 2007. Tampa Electric, like all of our companies, is paying more for vehicle fuel, and the cost of copper, steel and concrete have gone up. In addition, we are paying more for subcontractors that we use both on the energy supply and energy delivery size of our business. Finally, our estimate for O&M costs includes ongoing expenditures, of about $15 million per year for T&D systems storm hardening.

On the positive side, we will have earnings on the second SCR that we expect to go into service in May that was approved for recovery through the environmental cost recovery clause by the Florida Public Service Commission last November. Tampa Electric expects to have higher AFUDC earnings in 2008 due to having the final two SCR projects of Big Bend Station under construction. The company will also be starting construction on the new peaking units this year as well.

With this, Tampa Electric's capital spending will increase to $535 million in 2008 compared to $410 million in 2007. Base line capital spending to support the expected customer growth and systems safety and reliability is expected to be about $270 million. In 2008, Tampa Electric expects to spend about $120 million on its new peaking unit expansion to meet the reserve requirements in Florida and meet the new NERC Black Start requirements. Spending for SCR projects for nitrogen oxide control and other required environmental spending is expected to be $95 million.

Ongoing capital expenditures for T&D storm hardening requirements are expected to be at $20 million. After ramping up in 2006, this is the level of capital expenditures for storm hardening that we'd expect annually. Tampa Electric's portion of the required improvement to the central Florida transmission system is planned to be about $30 million this year. So, these are the overall drivers of Tampa Electric's increased capital spending for 2008.

To support this level of capital investment, TECO Energy expects to make $190 million of equity contributions to Tampa Electric this year. After dropping to the bottom of its allowed return on equity range earlier in the year, at the end of 2007, Tampa Electric's 13-month average regulatory ROE was 11.4% as a result of the positive impact of some good weather, lower depreciation and lower property taxes in the third and fourth quarters of 2007. However, based on our current lower forecast for energy sales growth, the expected higher O&M cost and ongoing higher levels of capital investment, we expect Tampa Electric's ROE to go well below the bottom of the range on a forecasted basis for the full-year 2008. This is expected to cause a need for base rate relief for Tampa Electric in 2009.

Tampa Electric experienced slower customer energy sales growth in 2007 than it has in many years and we expect that trend to continue in 2008. Weather normalized per customer energy usage declined again in 2007 due to a continuation of trends that we started to see in 2006. More efficient appliances and other electric devices are replacing older, less efficient ones, which is one of the factors leading to lower per customer sales.

In 2006 we experienced the higher percentage of multi-family home construction than traditional detached single-family homes and that continued in 2007. Multi-family residences tend to be smaller and more energy efficient than detached single-family homes. So, higher prices in general and for all forms of energy combined with appliance efficiency and higher percentage of multi-family residences are causing customers to use somewhat less on an average monthly basis in the Tampa Electric service area.

Florida's housing market has been the subject of national headlines and Tampa is suffering from the same slowdown, albeit not as badly as some of the other areas of the state. There has been a significant increase in the number of occupied homes and higher builder inventories due to the sub-prime mortgage situation and rising foreclosures. The number of unoccupied homes is also a factor in the lower per customer usage trends that we are seeing.

As I said a moment ago, Tampa Electric's 2008 forecast takes the weak housing market into account. But we are still in the process of figuring out exactly how we need to adjust our forecast to account for some of these new elements that are in the equation. For example, Tampa Electric set a new summer peak load in 2007. So, it appears that when it is hot enough or cold enough for a long enough period of time, customers use higher amounts of power. At the same time, the spring and fall shoulder months seem to be the most affected by the downturn in power usage. On the positive side, Florida continues to experience relatively good growth. According to the most recent Census Bureau data, Florida added 194,000 new residents in 2007. And while this is the first time this decade that the growth in new residents was less than 200,000, this still represents very substantial growth.

Now turning to Peoples Gas, customer growth is expected to be only 1% in 2008 of Peoples Gas. This much low expectation for customer growth at Peoples Gas is driven primarily by much lower levels of new residential construction. With the build up in housing inventories, new construction has slowed significantly and isn't expected to recover until sometime in 2009. In the Tampa area, building permits are 50% below last year and almost 65% below the more than 14,000 single-family residents building permits that were issued in 2005.

The Peoples Gas 2008 forecast assumes normal weather compared to 2007 when very mild winter weather reduced firm sales. O&M costs, excluding those costs recovered to the various clauses in Florida are expected to increase at a rate slightly above our projected 3% rate of inflation in 2008, driven primarily by employee related cost. Peoples is now earning below the bottom of the line of return on equity range due to higher depreciation as approved by the Florida Public Service Commission in 2007 and some of the same types of cost pressures Tampa Electric is experiencing.

Peoples expects to file for base rate release in 2008, with final rates expected to be in place in early 2009. In 2008, TECO Coal expects sales to be in a range between 9.5 and 10 million tons and of course we won't be producing synfuel. So, all of TECO Coals sales will be conventional steam and met coal in 2008. This higher projected level of sales in 2008 compared to sales of 9.2 million tons in 2007 reflects market conditions that started to improve in the second half of 2007.

Virtually all of the currently planned production is contracted at price at slightly higher average selling prices than in 2007. As we are benefiting in 2007 from our actions in 2006 and early 2007 to move out of higher cost production areas and optimize mining plans, the cost to production is expected to rise in 2008. Diesel fuel, tires, chemicals, and other petroleum related products and new safety requirements are expected to drive cost increases.

In all at TECO Coal, we expect a average cash margin of about $10 per ton in 2008, which are down from about $11 per ton in 2007. Considering taxes, depreciation, depletion and amortization, we expect average after-tax margins to be at about $4 per ton for this year. TECO Coal of effective tax rate will be lower in 2008, reflective of a tax rate for a Coal company producing conventional coal only given the end of synfuel production in the higher tax rate applied to basic synfuel earnings. The coal markets recovered dramatically in the second half of 2007 due to increased international demand for US metallurgical and steam coal and high international ocean shipping costs. Also driving the coal market recovery are expectations that that steam coal inventories at utilities will return to more normal levels and the expectations that overall production in Central Appalachia will decline overtime.

Spot prices quoted in trade publications for the second quarter of 2008 for rail delivery in Central Appalachian steam coal have risen from $48 per ton last July to $68 per ton last week. However, as most of you know, we don't sell much of our coal on the spot market, and our average pricing reflects the fact that the majority of our coal sales are contracted. TECO coals, steam coal contracts in 2007 were a blend of contracts signed in the robust coal market of late 2004 and 2005 and only a few contracts signed in the tougher 2006 market. Most of the steam coal expected to be sold in 2008 was contracted in 2006 and 2007 before the prices started to increase significantly. If you recall at EEI last November, we had virtually 100% of our steam coal sold for 2008. We signed our 2008 met and PCI coal contracts early in the fourth quarter of 2007 what we thought were very attractive prices compared to those signed in March of 2007. However, it turns out that met coal prices have improved even further since that time. The challenge for TECO coal is the optimized production to take advantage of higher stock market prices when possible and to sign some longer-term contracts at the current very attractive prices.

For TECO Guatemala, we expect continued strong operations for the power plants and growing energy sales at the distribution utility EEGSA. However, we expect lower net income than in 2007. As part of 2007 second quarter results for TECO Guatemala, we recorded a $1.9 million after tax equity adjustment that we don't expect to recur in 2008. The Alborada Power Station is expected to have performance similar to 2007, but it will be difficult to match the exceptional performance turned in by the San Jose power station in 2007. In 2007, San Jose performed at a capacity factor of 92.2% and had an overall equivalent availability factor of 94.9%, great performance by any standard. In fact that level of availability puts us at the top… in the top 1% of US coal units of the same size.

The maintenance scheduled for San Jose calls for less availability in 2008, which will reduce the opportunity for spot market sales of uncontracted capacity and will cause higher maintenance expenses in 2008. Our operations in Guatemala include the operations of DECA II which includes EEGSA, the distribution utility and the affiliated energy related companies, which provide among other things, electricity transmission services, wholesale power sales for large electric customers, engineering services and telecommunication services. For EEGSA, we expect continued customer and energy sales growth.

2008 is the year for the normal review of the retail distribution rates that occurs every year, every five years for EEGSA. The final decision in this rate case type review is expected to be in mid summer, and at this point we can't predict the outcome of the process. However, we and Iberdrola, the managing partner of DECA II are actively participating in the regulatory process. In 2007, the energy related companies had strong growth and we expect that to continue in 2008.

Due to the accounting rules FIN 48, most of the TECO Guatemala operations are deconsolidated and difficult to appreciate from the face of our financial statements. To provide you a deeper perspective on our operations in Guatemala, we will be providing some consolidated information in our upcoming 10-K filing. And we will share with you today the 2007 earnings contributions from the three major segments of our operations. 20% of our gross earnings before parent costs came from the San Jose power station. 15% came from the Alborada Power Station and 35% from DECA II. Within DECA II, setting aside EEGSA, the distribution utility the affiliated energy related companies and our earnings on our existing offshore cash contributed 55% of DECA II’s overall earnings. We are providing you this breakdown to give you a sense that EEGSA, although important doesn't impact our results as much as you might have thought.

Shifting gears, we are working on our future growth opportunity that we see in Guatemala. There is an RFP for a 200 megawatt coal fired power station that has been issued by Guatemala's other major distribution utility UNION FENOSA. The bids are due in April was a long-term power sales contract expected to be awarded later this year. Like our other projects in Guatemala, we would expect it to finance this project with non-recourse project financing.

We expect to fund our equity investment if we are successful on the bid with our growing offshore cash at Guatemala. Even after the significant debt retirements accomplished in 2007, our cash priorities remain the same in 2008. They are to focus on utilizing parent cash to support Tampa Electric and Peoples Gas capital investment needs, and to retire additional parent debt.

In 2008, we plan to use all of our expected $290 million of parent free cash flow after paying dividend to make a $190 million equity contribution to Tampa Electric and to execute an early retirement of the 2010 $100 million of parent floating rate notes.

Our consolidated cash flow expectations for this year or the cash from operations will be very similar to the $554 million generated in 2007. And cash from operations from 2008, the operating cost for the production of synfuel are gone, but so is the operating cash from TECO transport. Also in cash from operations as a result of our 2007 debt retirement actions, our cash interest payments will be significantly lower in 2008.

Finally, in cash from operations due to significant natural gas price volatility in 2004 and 2005, Tampa Electric had significant fuel expense under recoveries, that when we covered in 2007 provided a benefit to cash from operations. Natural gas price stability in 2007 in contrast enabled Tampa Electric to finish the year with a much smaller under recovery to be collected in 2008.

This will tend to lower cash from operations in 2008. Again in all, we expect consolidated cash from operations to be flat from 2007 to 2008. The investing section of the cash flow statement will reflect the expected capital expenditures for all of the operating companies, $620 million in 2008.

It will also reflect $80 million of net oil price hedge proceeds, that we received in January of this year as the close out of our 2007 oil price hedges related to the now completed synfuel program. The financing session will reflect the repayment of common stock... will reflect the payment of common stock dividend, incremental financing needs of $175 million for the utilities made up of both short-term and long-term borrowings and a retirement of $100 million of parent floating rate notes.

This next slide is a preview of our planned first quarter Investor Communications activity. We expect to file our 10-K in late February. We are planning to be at the UBS conference in Austin, Texas on March 6. And on March 27, we will host a breakfast meeting in New York where we will provide an update on our longer-term outlook. We will be sending out invitations for this meeting in a few weeks.

In summary, we had a strong 2007 in which we increased our non-GAAP results by 10%. We ended the year with a balance sheet that was significantly stronger than at the end of 2006 through debt retirement and the gain on the sale of TECO Transport. In 2008, we will deal with the challenges of declining ROEs and tougher markets that are utility companies in Florida. TECO Coal is working to find ways to take advantage of much improved coal markets that have developed over the last six months. Longer-term, Tampa Electric expects to make significant investments in the coming years and generating assets in its T&D infrastructure, which with appropriate regulatory treatment should lead to future earnings growth. At TECO Guatemala, there is significant potential for long-range growth, if we are successful in winning the bid for the new power project.

Now, I will turn it back over to the operator and we will be happy to take your questions.

Question and Answer

Operator

[Operator Instructions] Your first question is from Andy Smith with J.P. Morgan.

Andrew Smith - J.P. Morgan

Hi.

Gordon L. Gillette - Executive Vice President and Chief Financial Officer

Yes.

Andrew Smith - J.P. Morgan

Hi Gordon. You touched a little bit on this in your prepared remarks about potential recession and impact of weakness in Florida, didn't know if it is too early for you to first maybe give us a feel for let's say we have a 12-month economic slow down, do you see that as $0.01 or $0.02 or do you see that as like $0.07 to $0.10, order of magnitude will be helpful there. If you can't even speak to that, I will also be curious to know how you think about that in context of going through the rate making process? How do you see that going through the regulatory rate making with what you project volumes to be going forward?

Gordon L. Gillette - Executive Vice President and Chief Financial Officer

Sure. With regard to the first question on recession and weakness in Florida, as we said in our guidance for this year that we provided year-to-date, we factored in a weak economy in Florida with slower housing starts and some of the things that we talked about. We didn't include, however, the impact of a full recession, and obviously that's hard to estimate. And with regard to the rate making process, as we've said we are looking at a need for rate relief at Tampa Electric and Peoples in the 2009 time period. And we will be factoring into our forecast for the... forecast of revenues and rate base and all other things that typically go in to the rate making process. You might have noticed we provided a little wider range of earnings this year and the reason for that is our expectation of some obvious volatility and revenues at the utilities, given the fact that we are experiencing a weaker economy and the normal volatility at TECO coal, which as you know the coal markets are up and down.

Mark Kane - Director of Investor Relations

This is Mark Kane, let me add one thing. Our employment... unemployment rate in Tampa is below Florida. Florida is below the US average. So, even though it is weaker, it's still pretty robust compared to national averages and in the past economic downturn, Florida and the Tampa area in particular were slower to go into a recession and sooner to come out. So, we have had some… well it will impact us, as it typically has not been in the past as severe on a national level.

Andrew Smith - J.P. Morgan

Okay. And that is very helpful. And just one last question on that. Do you guys have... can you tell us in the... in your range, obviously you do have a range out there, but should we think about the slowdown in housing, which you've included. Can you quantify how much of that is a component of your earnings swing?

Gordon L. Gillette - Executive Vice President and Chief Financial Officer

Not as component of the earnings swing. But as we said, we are looking at more than 50% of reduction from prior years in the housing starts.

Andrew Smith - J.P. Morgan

Got it. Okay. Thanks guys.

Operator

Your next question is from Lasan Johong of RBC Capital Markets.

Lasan Johong - RBC Capital Markets

Good morning. I'm going to ask you about kind of two things. The coal business if it is indeed… and we see evidence that it is doing much better. Is this an opportunity for you to monetize that for the long haul and reinvest that capital somewhere else? And second, outside of the Guatemala project, which looks pretty good, what are your... some of your long-term growth plans for Tampa Electric and Peoples Gas?

Gordon L. Gillette - Executive Vice President and Chief Financial Officer

I'll take the… this is Gordon, I'll take the coal business one and John Ramil, our Chief Operating Officer may want to talk a little bit about some of the long-term plans for Tampa Electric. With regard to the coal business, let me just start with a little bit of history here with… with TECO Transport, with the sale of TECO Transport, we have as we have said earlier this morning, done a lot of strengthening in the balance sheet. So, that put ourselves in a position to fund the needs of the utility companies and continue our parent debt pay down without the need to sell any of the other unregulated companies. And therefore it is our base case that we would keep TECO Coal. Having said that, it is an attractive market and if there are offers, we would obviously consider that. John, you want to talk about Tampa Electric?

John B. Ramil - President and Chief Operating Officer

Yes. I would just add Lasan in your comments on TECO Coal and what Gordon said. The markets have improved a little bit in our one-to-three-year contracted strategy, I think this worked well. We may miss a little bit on the high upside, but we haven’t seen a real low side, we have got a nice path. When we look at other growth in addition to what Gordon said about Guatemala, the opportunity there, as we look at the utility there is still strong opportunity for growth. Even though it is slower, there are other places we'd rather be in the utility business in Florida. As we look at Tampa Electric, when you look at just growth, I think you look at many of the regulatory requirements that we have ranging from storm hardening to hurricane mandated transmission improvements to making sure we can fly with the required 20% reserve margins. We're looking at $400 million or so a year investment opportunity as an electric company moving ahead. As a gas company, we have opportunity for growth there as well. That is going to be somewhat related to how we're treated in the regulatory arena. We do have some catchup to do with respect to our rates and the investments we've made there. But as we think about Governor Crist's vision for a smaller carbon footprint for Florida, there is a real opportunity for the natural gas business there, because when you look at... if you look at the carbon footprint as a home that is using both natural gas and electricity, the carbon footprint is much smaller. So, if we can get some help in investing in new pipelines to reach a lot of new communities that we wouldn't able to otherwise, we could help with that initiative as well.

Lasan Johong - RBC Capital Markets

Are you at all concerned about potential CO2 restrictions on the new Guatemala RFP?

Gordon L. Gillette - Executive Vice President and Chief Financial Officer

We are required in Guatemala and all our existing plans meet World Bank environmental standards, and at this point all of the requirements for CO2 and oxygen and SO2 are basically in meeting an ambient condition standard. And we're pretty comfortable, we can meet those ambient standards with a new coal plant in Guatemala.

Lasan Johong - RBC Capital Markets

Okay. Thank you.

Operator

Your next question is from Greg Gordon of Citi.

Greg Gordon - Citigroup

How much cash is trapped offshore right now?

Gordon L. Gillette - Executive Vice President and Chief Financial Officer

Up $50 million at year-end 2007.

Greg Gordon - Citigroup

And what kind of rate do you want on that cash?

Gordon L. Gillette - Executive Vice President and Chief Financial Officer

4% to 5%.

Greg Gordon - Citigroup

And what's the sort of rate of growth? Are they current expected profitability of those assets?

Gordon L. Gillette - Executive Vice President and Chief Financial Officer

Well, as we look at TECO Guatemala overall, we've produced $37.6 million of net income in 2006 and then in 2007 as we said, had a very good year, reporting $44.7 million, and so good year-over-year growth 2007 over 2006. As we said, we're expecting low earnings at TECO Guatemala this year, because we had such a bad year in 2007. But long-term setting aside the bid that's outstanding for the new coal plant as we look at the existing assets in Guatemala, the drivers for growth will be normal growth and energy sales and electricity distribution at the distribution utility EEGSA and continued pay down of the non-recourse debt which is on a house payment type amortization for both the power plants that we had in Guatemala. The capacity payments at the Guatemalan power plants are essentially fixed under the long-term power purchase agreements.

Greg Gordon - Citigroup

Okay. So, that $50 million basically is the... you said the potential equity investment in a project that you're going to bid?

Gordon L. Gillette - Executive Vice President and Chief Financial Officer

Yes.

Greg Gordon - Citigroup

So, it wouldn't be any expectations of further some net investment down [inaudible]?

Gordon L. Gillette - Executive Vice President and Chief Financial Officer

Depending on the ultimate estimate for the capital cost and level of non-recourse leverage that we have on the project, there may be needs for additional equity. At the same time, we've got local partners that we're talking about... talking to about joining us in our bid on the project to what contributes some of the equity. And so, our final equity number isn't firm yet, but I think, Greg your statement is correct that we would expect the lion’s share of the cash that's needed if we're successful in the bid that we've provided from that offshore cash.

Greg Gordon - Citigroup

And, is [inaudible] sort of a of classically sort of rate of return times rate base regulated company, is it regulated on tariffs. And can you give us sort of what the current structure of your rate deal is and…

Gordon L. Gillette - Executive Vice President and Chief Financial Officer

Sure.

Greg Gordon - Citigroup

Whether there is an ALJ position or something comparable we can think about and sort of understanding the upside versus downside there?

Gordon L. Gillette - Executive Vice President and Chief Financial Officer

Sure. Greg, It's more of the latter; it's not return on equity type regulation like we're used to from most of the US utilities. In Central and South America, typically experts are brought in to look at the value-added distribution chargers or the distribution rates and how they compete kind of country-to-country. And so most of the… most of the data that will go into the rate setting process is to ensure that Guatemala’s charges for distribution are competitive with other Central and South American countries. And based on Iberdrola, the managing partner of [inaudible] has a strong record and managing the distribution utility and given our current rate, we expect that we'll be successful in sustaining rates that are in the neighborhood of where we are right now. But as we've said we don't know and won't know until that happens, the exact results of the process.

Operator

Your next question is from Ashar Khan of SAC capital.

Ashar Khan - SAC capital

Good morning. Gordon, I just want to go where you gave some prices. So, if there were no contracts for '08 and if you were to contact everything based on current prices, what would be the average price per ton that you could garner? If I am right, you're saying right now, it’s $58 a ton right on the appendix chart?

Gordon L. Gillette - Executive Vice President and Chief Financial Officer

Right.

Ashar Khan - SAC capital

So, what would that be based on prices as they stand today?

Gordon L. Gillette - Executive Vice President and Chief Financial Officer

Ashar this is Gordon. And Mark and John may want to help me with this. But the bottom line at this point is, we contracted when we contracted for coal, and as we said it was earlier in the year for steam and kind of early part of fourth quarter for met, and that's what's resulting in our expectations for the year of roughly $58 per ton on an average revenue basis. As we've said, spot prices are up at this point, but we are... as we said mostly in the contract market and we are not out seeking a lot of contracts at this point since we are already contacted for 2008. I think it's fair to say that it would probably be higher in the improved markets over the last couple of months, but how much higher it's hard to say.

Mark Kane - Director of Investor Relations

Ashar that $68 as NYMEX spec that's published in S&L and other newsletters. I mean our products are not all NYMEX spec, so you would have a wide range of prices depending on various qualities and products. We sell everything from stoker to high vol sea met. So, it would be a wide range of prices.

John B. Ramil - President and Chief Operating Officer

I would just add that I think the takeaway from the current spot market prices is the opportunity for that 60% contract open position that we have for 2009 and to capture some better prices for next year. And we typically don’t, we will be sitting here looking at poor performance that we performed in '06 and '07 [inaudible] spot market, and I think the takeaway is the upside we're for '09.

Ashar Khan - SAC capital

Okay. That's what I was trying to calculate, whether the upside is $4 to $5 of realized higher revenues. Okay, and when can I just go to... sorry I had some bad connection, what are we saying about a rate case at Tampa Electric, we are going to file one, this year or next year?

Gordon L. Gillette - Executive Vice President and Chief Financial Officer

As we look at where we are Ashar at this point, basically what we said was that our 13-month average... on a historical basis at year-end 2007 was about 11.4%. We said that on a forecast basis, we are expecting much lower ROEs this year with growth in expenses and growth in rate base, and based on that, we think we are going to need rate relief in 2009 for Tampa Electric, but we haven't been specific and really can't be at this point on exactly when we would file.

Operator

Your next question is from Paul Ridzon with KeyBanc.

Paul Ridzon - KeyBanc

From what I understand, it is you kind of have to play your 13-month average by year-end and trying to time your electric rate case, is that kind of the thinking?

Gordon L. Gillette - Executive Vice President and Chief Financial Officer

Yeah, I think so... but at the same time as part of the regulatory process, in Florida you file on a kind of full year... full calendar year budgeted test here and

based on where we are now, we are already into 2008, with an ROE that's still pretty strong, but expected to drop. It looks like the earliest test year would be 2009 on a budgeted basis.

Paul Ridzon - KeyBanc

Historical or forward?

Gordon L. Gillette - Executive Vice President and Chief Financial Officer

Forward potentially.

Paul Ridzon - KeyBanc

Okay. Thanks for the color on where you expect to come in. What are your permitted ROE ranges at Peoples and Tampa?

Gordon L. Gillette - Executive Vice President and Chief Financial Officer

Tampa is 10.75 to 12.75 and Peoples is 10.25 to 12.25.

Paul Ridzon - KeyBanc

And do you have year-end equity at the utilities?

Gordon L. Gillette - Executive Vice President and Chief Financial Officer

When you say year-end equity, in terms of where we are on cash structure?

Paul Ridzon - KeyBanc

For absolute dollars.

Gordon L. Gillette - Executive Vice President and Chief Financial Officer

I don't have the absolute dollars in front of me, but we are roughly $3 billion of rate base and about 50-50 cash structure at the electric company, and at the gas company, about $500 million of rate base and about 55% equity there.

Paul Ridzon - KeyBanc

So, when you kind of are giving your ROE projections, that's the denominator, like 150 for Tampa?

Gordon L. Gillette - Executive Vice President and Chief Financial Officer

Yeah, although that's going to vary a bit this year. As we said, we are planning to put equity into Tampa Electric. We put an equity last year, and really the contribution that we made last year and this year has just about maintained the equity ratio at that 50-50 kind of level.

Paul Ridzon - KeyBanc

Okay, thank you.

Gordon L. Gillette - Executive Vice President and Chief Financial Officer

You are welcome.

Operator

Your next question is from [inaudible].

Unidentified Analyst

All of my questions were answered. I just was wondering, do you have any sense of the potential price of the coal plant in Guatemala, and I am assuming it will be cheaper than in the US. Do you have a sense of the price per kilowatt? I mean just a range, obviously you cannot tell it.

Gordon L. Gillette - Executive Vice President and Chief Financial Officer

Obviously, since it is a competitive bid that we are going to do in April, we've got to be very careful with that. But bottom line is we would expect to be very competitive in that 200 megawatt size range. There is probably a little tradeoff obviously as you think about it, because some of the dollar per KW figures that you're used to looking at in the US are for large-scale coal units.

Unidentified Analyst

Right.

Gordon L. Gillette - Executive Vice President and Chief Financial Officer

These are smaller units. So, there would be some diseconomies of scale. On the other hand, the environmental requirements are different. So, there are probably some puts and takes there.

Unidentified Analyst

And is there a mechanism by which you can recover during the construction, because I'm assuming that still is taking roughly the same amount of time?

Gordon L. Gillette - Executive Vice President and Chief Financial Officer

Basically the structure of the project, if we are successful on the bid will be like a lot of other long-term contracts, non-recourse finance type power projects in the independent power market and will be responsible along with our bank group for construction financing of the project up until it is in service state, and we'll look to recover those costs of financing during construction as part of the charge that we propose to charge the distribution utility for the long-term after the plant comes into service.

Unidentified Analyst

So, it should be contracted before hand?

Gordon L. Gillette - Executive Vice President and Chief Financial Officer

That's correct. Actually what we're hearing from Union Fenosa is that they intend to select a bidder and sign a long-term power sales contract sometime the middle of this year after the bids come in, in April and that would obviously be the basis… that contract would obviously be the basis for our securing construction financing.

Unidentified Analyst

Great. On the [indiscernible], you mentioned that you may be considering building a pipeline on the gas side. Is this just in terms of, yes, it would be useful, or is it something that you're already really considering?

John B. Ramil - President and Chief Operating Officer

My reference earlier was to do further build out at Peoples Gas and reach some new development of subdivisions that it might otherwise not be cost effective and lose the opportunity to provide [inaudible] natural gas. We will be looking for more of those opportunities where the economics makes sense.

Gordon L. Gillette - Executive Vice President and Chief Financial Officer

It's extension of existing infrastructure, not a major new pipeline.

Operator

Your next question is from Fadi Shadid of the FBR Capital Markets.

Fadi Shadid - Friedman, Billings, Ramsey Group, Inc.

Hi, back to the coal segment maybe in terms of production, what needs to happen for you to reach maybe that upper end of the guidance in '08, 10 million tons versus 9.2 in '07? What kind of things are you doing like operationally on a mine level?

John B. Ramil - President and Chief Operating Officer

Yes, well we are in good shape. You may recall the end of '06 early '07, we did a lot of changing in our mining plants to get into better periods and to the extent that we keep mining in areas, where the geology remains pretty positive. We have a good opportunity to hit the top of the range, keep our productivity levels up at where we think they have been and where we think we can get them to. We had that opportunity and then I think the market is going to be there. So, that's probably not going to be a problem. Another key thing is having good performance from the railroads, making sure that they accommodate our ship... kind of the routine things that we have to always do, nothing out of the ordinary.

Fadi Shadid - Friedman, Billings, Ramsey Group, Inc.

Okay. And on pricing, you do tend to realize more than your peers. Could you remind us of the contract strategy, and if that's going to remain the same going forward given the market now?

John B. Ramil - President and Chief Operating Officer

Sure. We have a couple of legacy longer term contracts that are there kind of in base for sale. But then the bulk of it, steam one-to-three-year contracts and then met one year ahead, and we think that strategy has serviced us well. Our customers seemed to like that as well and we plan to continue doing that. But always looking to take advantage of when the prices are better as they appear to be now.

Gordon L. Gillette - Executive Vice President and Chief Financial Officer

As Fadi, as you know, we've got a pretty good percentage met approaching 40% met in our mix which is helpful to the average price as well.

Fadi Shadid - Friedman, Billings, Ramsey Group, Inc.

Okay. Okay. And how much CapEx will you spend on the coal segment next year?

Gordon L. Gillette - Executive Vice President and Chief Financial Officer

It's less than $30 million.

Fadi Shadid - Friedman, Billings, Ramsey Group, Inc.

Okay. And maybe what's the open position for 2010?

Gordon L. Gillette - Executive Vice President and Chief Financial Officer

It's probably 70... 65%, 70% open.

Fadi Shadid - Friedman, Billings, Ramsey Group, Inc.

Okay. Very well, thanks.

Gordon L. Gillette - Executive Vice President and Chief Financial Officer

Thank you.

Operator

Your next question is from Ted Hine of Catapult Capital.

Ted Hine – Catapult Capital

Just a few quick questions... a follow-up on the hedging. The 2009 hedging that you gave in the back of your presentation, I think it's around like 35% that you've hedged? Can you give us a sense of what… I would assume that's the steam coal that's being hedged and kind of when… was that hedged at the same time that you did hedging for this year, or is there a potential upside and when you entered into those contracts?

John B. Ramil - President and Chief Operating Officer

Yes. It's about 40% and the large majority of that is steamed and at prices comparable to what we're going to see in 2008.

Ted Hine – Catapult Capital

Okay. But obviously the 60% is the upside and you have opened that position on the remaining steam position.

John B. Ramil - President and Chief Operating Officer

That's correct Ted.

Ted Hine – Catapult Capital

Okay. And then just to go back to the [inaudible] the $58 realized price, but what was the realized price in 2007?

Gordon L. Gillette - Executive Vice President and Chief Financial Officer

It was a little bit less than that in the $57 range.

Ted Hine – Catapult Capital

$57. And so you guys are benefiting this year from a change in mix of selling more high-priced met and PCI versus steam in your output, correct?

John B. Ramil - President and Chief Operating Officer

We moved from about a third to about 40%.

Ted Hine – Catapult Capital

Okay. So, is it right to say that shift is essentially creating the small uptick and that on an actual unit basis that your hedging price hasn't really gone up even in the face of this higher price market?

John B. Ramil - President and Chief Operating Officer

That has helped, but what we are saying is most of what we contracted for this year was not contracted for in this market.

Ted Hine – Catapult Capital

Okay. And then I'm not sure, I may have missed this. Did you guys give any indication of where your met and PCI products are kind of selling in the market right now? I know you said that the NYMEX for central App was like $68 a ton, but do you have any... can you give us any idea or kind of sense of... you see a lot of numbers thrown around on that call, but they are not necessarily already comparable. Could you give us an idea about your products?

John B. Ramil - President and Chief Operating Officer

Ted, as always we don't provide individual product pricing for our products. We give you that average and that's what we give you.

Ted Hine – Catapult Capital

Okay. And then just...

John B. Ramil - President and Chief Operating Officer

Ted, I would add, be careful what you see on the met side and things going overseas, because you have the mixture of metric tons, the short tons. So, you are off about 10% and then a lot of the met prices you see will have either partial or all the transportation ends. So, you have got to be careful.

Ted Hine – Catapult Capital

Yes. But even with those adjustments, the market for the high vol stuff that you sell is still pretty robust.

John B. Ramil - President and Chief Operating Officer

Market is good.

Ted Hine – Catapult Capital

Okay. And then just to follow up. I got a little confused on the talk about the timing at Tampa Electric. I know you can't say exactly when you are looking to file. But is it right to say that you're hoping for relief in 2009 and that you could potentially file soon with a forward-looking 2009 test year, is that right? Or did I misunderstand that?

John B. Ramil - President and Chief Operating Officer

I think the part you said about kind of 2009 needing the release given the trend that we see in our projected return on equity is right on target. In terms of whether we take action to file in 2008 and when exactly that would be in 2008, we haven't decided ourselves.

Mark Kane - Director of Investor Relations

Janice, we'll take one last question. We are about out of time.

Operator

Okay. And your last question comes from Mark Finn of T. Rowe Price.

Mark Finn – T. Rowe Price

Hi, guys. John, congratulations on your addition to the Board.

John B. Ramil - President and Chief Operating Officer

Thanks Mark.

Mark Finn – T. Rowe Price

I had a couple of follow-up questions on coal. When I look at your 2009 open position, it's on the high end of... even my... a lot of my coal companies that I follow and I'm curious how aggressive you can be in pricing that into this market and whether or not you guys believe that your contracting actions that you undertake in '08 would have an impact on whether or not the coal company might receive a bid from an external party, and I guess where I'm going with that is, I'm trying to get a sense on whether or not your contracting has any impact on the potential sort of strategic value of the coal company?

John B. Ramil - President and Chief Operating Officer

Sure, sure. Mark, our open position is about where it's typically is this time of year. There is no difference there, and we are not doing anything and running anything different than to try to maximize the value that we can for that business each and every year. The market is more favorable now. We are being very aggressive to develop the contracts for next year as we always are this time of year. But it will happen when we and the customers agree to it.

Gordon L. Gillette - Executive Vice President and Chief Financial Officer

Mark, we can do some long-term contracts in this environment at attractive prices. We would certainly look to do that. I think as John said, we run all of our businesses as best we can every day and maximize the value. So, as far as I think John said earlier is that we are focused on running these businesses, but if an offer comes along, we'd certainly have to... we'll have a fiduciary responsibility to look at it. But we are just right down focused on maximizing the profits for the future.

Mark Finn – T. Rowe Price

Right, yes. The reason I was asking it, because you find yourself in a pretty nice position with the relatively large open position and I'm sure that is skewed to the met side, given that there is a one-year contracting.

John B. Ramil - President and Chief Operating Officer

That's correct.

Mark Finn – T. Rowe Price

And the overseas prices right now for met coal are... they have kind of gone parabolic, and you kind of... you guys have rightly pointed out that you can't really expect that to continue. I mean eventually Australia will come back on, and South Africa will address some of their issues, and the snow will melt in China, but the point I guess I am making is, is that when you have a fairly large open position to the extent you can kind of step it up a little bit, sometimes you are able to grab some pricing that may be a little fleeting, that's all.

Gordon L. Gillette - Executive Vice President and Chief Financial Officer

Mark, I talk to the sales people at TECO Coal, they are actively looking at opportunities and buyers, they are working their normal process of bidding on opportunities.

Mark Finn – T. Rowe Price

Right. Okay. Well thanks a lot guys.

John B. Ramil - President and Chief Operating Officer

Thanks Mark.

Mark Kane - Director of Investor Relations

Janice, that will... we are done. I would like to thank everybody for participating in the call. I know Duke has probably already started their call, so thank you for joining us this morning.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: TECO Energy, Inc. Q4 2007 Earnings Call Transcript
This Transcript
All Transcripts