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Executives

Mark M. Kane - Director, IR

Gordon L. Gillette - EVP and CFO and President – TECO Guatemala

John B. Ramil - President and COO

Sherrill W. Hudson - Chairman of the Board and CEO

Analysts

Ashar Khan - SAC Capital

Daniel Eggers - Credit Suisse

Greg Gordon - Citigroup

Lasan Johong - RBC Capital Markets

Paul Patterson - Glenrock Associates

Jonathan Arnold - Merrill Lynch

TECO Energy, Inc. (TE) Q2 FY08 Earnings Call July 31, 2008 11:00 AM ET

Operator

Good morning. My name is Celina, and I will be your conference operator today. At this time, I would like to welcome everyone to the TECO Energy 2008 Second Quarter Results 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]. I will now turn the call over to Director of Investor Relations, Mr. Mark Kane. Thank you. Sir, you may begin.

Mark M. Kane - Director, Investor Relations

Thank you, Celina.

Good morning, everyone, and thank you for joining us for TECO Energy's second quarter results conference call and webcast. Our earnings release along with unaudited financial statements were released this morning and filed with the SEC. This presentation is being web cast and our earnings release, financial statements and the slides for this presentation are available on our website at tecoenergy.com. The presentation will be available for replay through the website approximately two hours after the end of the presentation and will be available for 30 days.

In the course of our remarks today, we will be making forward-looking statements regarding our financial outlook and plans for 2008 and beyond. 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, 2007, and as updated in our Form 10-Q for the period ended June 30, 2008.

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

On the call today, Gordon Gillette, our Chief Financial Officer will cover the second quarter and year to date results, the outlook for the remainder of 2008 and provide a preliminary 2009 outlook. Also with us today to participate in answering your questions are Sherrill Hudson, TECO Energy CEO, John Ramil, our Chief Operating Officer, and Sandy Callahan, our Treasurer.

Now, I'll turn it over to Gordon.

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

Thanks, Mark, and good morning. Thank you for joining us for our second quarter earnings call on this very busy day for a utility companies reporting earnings. We plan to be very brief today. We'll focus on the quarter and the impact that our year-to-date results will have at our outlook for the rest of the year. Also as Mark said, given our performance to date and our expectations for the rest of the year, we plan to update our 2008 guidance and provide some more perspective on 2009. We're also going to provide details on our coal operations to assist you in valuing the segment of our operations for next year. As we said previously, for us, the real value of TECO Coal will be apparent in 2009 and not so much in 2008.

For the quarter, GAAP net income was $51.4 million compared to $73.4 million in 2007, which included synfuel. Second quarter non-GAAP results excluding charges, gains in synfuel were the same at $51.4 million in 2008, compared to $53.1 million in 2007. Our non-GAAP results excluding synfuel in 2007, included $6 million of non-GAAP results from TECO Transport, which was sold last December. On a per share basis, our non-GAAP results excluding the items I just mentioned were $0.24 a share this quarter, compared to per share results of $0.25 in 2007. 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 just discussed.

Our year-to-date GAAP net income was $82.2 million compared to $146.5 million in 2007, which included synfuel.

Year to date non-GAAP results excluding charges, gains and synfuel, were $82.8 million, compared to $97 million in 2007. In 2007, the year-to-date non-GAAP contribution from TECO Transport was $12.4 million. On a per share basis, our non-GAAP results excluding the items I just mentioned were $0.39 per share this quarter compared to per share results of $0.46 in 2007. Charges and gains in 2008 included a $600,000 after-tax adjustment to previously estimated costs associated with the sale of TECO Transport last year.

The drivers for the quarter in year-to-date periods, were covered extensively in our earnings release, so we'll only cover the highlights now. Consumer growth of 0.2% at Tampa Electric for the quarter was significantly lower in the second quarter than last year's customer growth of 2.2%. The 0.2 % growth for the quarter results are lower than the 0.6% growth experienced in the first quarter of this year. Fortunately, we had hotter spring weather and retail energy sales increased 2.7% year-over-year for the second quarter. Total heating and cooling degree-days were 3% above normal and 8% above last year. We also had higher sales due to the operation of a large water desalinization plant which was idle for repairs last year. We have lower sales to industrial customers that supply the housing market, which partially offset these gains.

As we've indicated to you previously, Tampa Electric is spending more on non-fuel operations and maintenance activities this year, and this has impacted our year-over-year earnings comparisons for Tampa Electric as well. The higher O&M spending at Tampa Electric was related to scheduled generating unit outages and bad debt expense which is another indicator of the housing market and economic slowdown in our area. On the positive side, lower depreciation and property tax expenses essentially offset the higher O&M expenses in the quarter.

As indicated, Peoples Gas results were essentially unchanged from last year due to much lower customer growth and lower customer usage. Peoples is experiencing lower sales through consumer oriented commercial customers, notably restaurants due to that state wide economic slowdown. Operations and maintenance costs were higher than last year and depreciation expense increased from routine capital additions to our pipeline.

For the unregulated companies, production and sales at TECO Coal were higher in the second quarter compared to last year's second quarter. However, production was a little lower than we expected due to difficult mining conditions and a new underground mine in April and May. Although, we successfully worked through the tougher geology, these conditions and a shortage of qualified labor are contributing to lower production... to a lower production forecasts for 2008 which we'll talk more about in a moment.

TECO Coal's higher sales level this year compared to last year is in response to the much stronger coal prices and markets in the future, especially in 2009 and beyond. However, because of contract timing, we won't see the benefits of the higher prices until 2009 and 2010. In other words, an important factor influencing our current result is the timing of the contracts that TECO Coal has in place. Most of our contract sales so far this year were under contracts that were signed in 2006 and 2007 before the coal markets dramatically improved.

Another important factor influencing our current results at TECO Coal is much higher production costs. Although the average selling price for the quarter was 10% higher than last year, production cost increased almost 20%. This was driven by the higher prices for diesel fuel and materials that are affected by the petroleum prices.

At TECO Guatemala, we had strong results for the quarter despite a short scheduled maintenance outage at our coal fire San Jose Power Station. This was driven by the fact that prices for spot energy sales from San Jose have been much stronger this year given the higher diesel fuel cost as diesel was on the margin in Guatemala. We also have lower interest expense on the non-recourse debt associated with both power plants. We have higher energy sales and customer growth at EEGSA, the distribution utility, and the affiliated companies had increased earnings as well.

Finally, we had a benefit this quarter from a positive adjustment to previously estimated 2007 income and equity balances. In the parent and other line for TECO Energy, our debt redemption activities are paying off this year through lower interest expense.

Turning now to our cash and liquidity status at the end of the quarter, we entered the quarter in a very strong cash and liquidity position with almost $840 million of cash and credit facilities available. Our liquidity position reflects Tampa Electric's $93 million under recovery of... under the fuel adjustment clause due to the higher natural gas and coal prices, an increased use of higher cost, higher price natural gas for generation.

Tampa Electric expects its fuel under recovery amount to grow to about $209 million by the end of the year, driven by the higher prices it's paying for both natural gas and coal in the current market. Tampa Electric will file to recover the under recoveries that we're projecting for 2008 fuel-cost through the normal true-up mechanism in its fuel adjustment clause filing in 2009 that we will be making in September of this year. Peoples Gas has the ability to adjust its purchase gas clause on a monthly basis within an allowed band, so it's not currently under recovered for its natural gas purchases under its fuel clause.

Now turning to our outlook and revised guidance for 2008 and our thoughts on 2009. The original 2008 guidance that we provided in February was a range from $0.95 a share to $1.10 a share. We now expect our 2008 earnings to be in a range between $0.80 and $0.90 per share excluding any charges or gains. This new forecast is based on the year-to-date factors that we've experienced and our expectations for the remainder of the year.

Weather was better than normal in the second quarter but for the year was still slightly below normal and we've had a very rainy month of July which has reduced energy sales well below normal summer levels. The Florida housing market remains weak and the tight credit and other lending standards for home mortgage are keeping customer growth significantly below our expectations. At TECO Coal, we are benefiting from some slight improvement in selling prices. The higher cost of production are more than offsetting the higher selling prices this year.

Now we will be a bit more specific on how we see the near-term economic situation and the prospects for growth at our electric utility... at our utility companies. You saw in our earnings release that Tampa Electric had customer growth of 0.2% in the second quarter, which was well below the first quarter growth of 0.6%. The year-to-date customer growth at 0.4% is below our quarter expectation for customer growth of more than 0.6% for the year. An economic outlook recently published by the University of Central Florida forecasted that the housing market is expected to bottom in late 2008 and slowly start to recover in 2009. As we reported in the first quarter, the statewide economic situation is also driving lower electric and natural gas sales to commercial and industrial customers that supply the housing industry and consumer discretionary purchases.

Consumers are paying more for basics such as food and other forms of energy especially at the gas pump. We believe that this is triggering some voluntary conservation by our electric customers. In previous economic slowdowns, Florida and the Tampa region outperformed the national economy. Unfortunately, this isn't the case in this cycle. The local unemployment rate is above the national and state levels driven primarily by the drastic slowdown in the construction industry.

We also wanted to spend a few minutes today drilling down a bit on our economics at TECO Coal in light of the much higher cost of production that we are now experiencing. When we showed this slide in February, the expected average selling price was $58 per ton and the average cost of production was forecasted to be $48 per ton, which you see in the light gray numbers in the right hand column.

We're now forecasting the average selling price to be $59 per ton for the full year 2008 reflecting the contract renewals... our contract renewals in early 2008 when prices were starting to rise. But the average cost of production is now forecast to be $51 per ton assuming that prices for diesel and steel products stay high for the remainder of the year. At $4 per gallon level diesel fuel for our operations is about 12% of the total cost of production.

We're also reducing our sales forecast for the year to about 10 million tons compared to our previous forecast of 10.5 million tons as a result of the tough geology that we endured in the second quarter and an industry wide shortage of qualified miners and contract miners. One thing to remember is that TECO Coal typically had a tax rate of about 25% primarily due to depletion, but the rate will likely be a little lower this year.

We're going to break from tradition today and provide you a preliminary 2009 outlook earlier than we normally provide it, due to all the interests in the coal operations in 2009 and the weaker 2008 outlook. We have a very positive outlook for the coal markets and coal prices next year and for the next several years. The combination of domestic and international market demand and the tightness of supply both of which are not expected to ease significantly for some time is boosting our expectations for TECO Coal next year.

About the regulated utilities, we've taken the initial step in the regulatory process for base rate release in 2009. We expect to file our full base rate cases on or about August 11. If the process runs the full schedule without delays, we'd expect to have new rates in place by about May of 2009. At the utilities, as we said, there is uncertainty as to the pace of the recovery in the Florida housing market and the economy and we are watching this very closely. At TECO Guatemala, we expect continued strong operational results, but we know that the San Jose plant, has it scheduled major maintenance outage that will affect the results from that plant in 2009. Also, we should know more shortly on the resetting of the value added distribution rates for EEGSA, the distribution utility.

Turning now to the specifics of our outlook for TECO Coal in 2009, we're very positive on the long-term prospects for our coal company. It's a commodity business that has cycles, but we believe that we are in a very strong up cycle over the peers to be sustainable for several years. In March, we said that margins and net income from TECO Coal in 2009 could be double our projection for 2008. Since then, 2008 has weakened but 2009 has improved. Met coal prices have strengthened and we've been able to hedge a significant portion of our diesel price exposure over 2009 to manage our production costs. We've also been able to secure input commodity price protection from customers on some of our new steam coal contracts to protect our margins.

We currently have 80% of our expected productions for 2009 contracted and priced. This includes some of the met coal under a very good multi-year contract. The average price for the contracted price ton is $66 per ton which is significantly better than our 2008 average. All of our expected steam coal production is contacted and priced which leaves met and PCI tons which are committed on volume but subject to repricing and market prices.

If an agreement can't be striked on price, we'd expect to market these tons to other customers. For 2009,we expect our sales mix to return to our historical mix of about one third net which includes PCI and two-thirds steam coal. Of the currently on price tons for 2009, the sales mix is expected to be 35% high vol c-MET [ph] and 65% PCI tons.

We now expect our 2009 sales volumes to be in a range between 10.5 million tons and a 11 million tons, which is about 0.5 million tons lower than previously forecasted. The lower production expectation is due to the industry wide shortage of contract miners. We're hiring and training our own miners for some mines, so for safety reasons, we'll limit the number of new underground miners at any one time. This makes it a slow process to grow production. On the cost side of the equation, after experience this year with production costs and given the continued high diesel and fuel costs, the shortage of miners and expected higher cost to retain miners as well higher royalties that we'll pay on higher priced sales, we're assuming a 20% increase in the cost of production over 2008.

However as we said, we are taking steps to secure our margins next year by actively hedging our diesel fuel costs for those tons that we don't have commodity price protection built into the contracts for. With these elements in place, we expect net income for TECO Coal to grow significantly in 2009.

We've previously shown this graph for 2008, '09 and '10, but this is the first look that we're providing on our open position for 2011. You can see that both the 2010 contracted and priced positions have increased 8% and 10% with the signing of new contracts in met and steam coals since March. In 2011 we have about 25% of expected sales contracted. Included in the slides are two below market legacy contracts that make up about 7% of our production. The larger of the two contracts rolls off at the end of 2011. All of our met and PCI coal is unpriced for 2011 although there is some PCI in the contracted un-priced slides on the graph.

In summary, we are disappointed with the outlook for the remainder of 2008 due to Florida economy, the impact of the mild weather to July and the cost of production at TECO Coal. The good news is that we see good prospects for a strong recovery in 2009. Our results will reflect the higher coal prices that we expect to contract for and we're taking steps to lock in our margins. External forecasts are the Florida economy will start to recover next year, but it could be a slow process.

Finally, we expect to conclude our base rate proceedings next year and we expect that we'll receive appropriate base rate relief for closed utilities. I'll now turn it back to the operator to open the phones for your questions.

Question and Answer

Operator

[Operation Instructions]. Your first question comes from Ashar Khan from SAC Capital.

Ashar Khan - SAC Capital

Good morning. If I can go back to the revision in guidance, is it fair that $0.07 is from the coal and the rest is all from the utilities, am I doing my math right?

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

We are not going to be specific on how we got to...everything on a penny-for-penny basis, but I think it's fair to say that it is a combination of both the coal and the utility.

Ashar Khan - SAC Capital

Okay. And then just going back, could you mention at what prices the new contracts were signed this quarter?

John B. Ramil - President and Chief Operating Officer

Hi, Ashar. This is John Ramil. We are not disclosing the extract prices, but I can tell you the steam that we have contracted -- we have all of our steam contracted for -- some of it was done back in the time when you saw spot prices in the 50s and 60s and that a good bit of it was done back we installed spot prices in the 70s and 80s. And when you take all that along with those legacy contracts that we have from many years back, you get to that $66 a ton average.

Ashar Khan - SAC Capital

Not, but, what I was... Gordon had mentioned in his comments that you signed some new contracts since March. Could you give us a flavor of what those contracts were signed at, the 6% or 7% that you mentioned in 10 and 11?

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

Ashar, we do not give specific contract pricing.

Ashar Khan - SAC Capital

Okay. And if I can just end up, Gordon, if I'm right the previous guidance was that for '09, at least the pre-tax net income would double and it would imply a pre-tax margin in an excess of $10. If I am right from your comments today you're saying that, as you stand today, the pre-tax margin in '09 would be in excess of $10 better than what was previously forecasted. Is that fair?

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

Speaking to coal here, that's obviously dependent on what we contract. The remaining 20% that we have yet to contract of our projected production for 2009. I think today we've attempted to be pretty specific on the character of those tons that are yet to be contracted. And we gave you the expected mix of PCI and met coal tons that are yet to be contacted. And I think the other thing that we provided was the price for the 80% that we have contacted. So, I think with that, we provided some pretty good information for people to make their own estimates on what they expect will be able to contract the met coal and the PCI coal and can come up with an idea of what the margin will be for the next year.

Operator

And your next question comes from Dan Eggers from Credit Suisse.

Daniel Eggers - Credit Suisse

Good morning. How do you get comfortable and how do you think you get your arms fully around what the cost pressures are on the coal business? I understand that diesel has limited exposure, just seemed like it might be moderating if there was a pullback, but when we think about labor and the unavailability to get people on site, how much cost increase are we going to see sustained on that basis or what are you having to do to get bodies on site right now.

John B. Ramil - President and Chief Operating Officer

Dan, as you know everything is heading in a direction where it all lines up with upward pressure and that makes it really tough. We are, as Gordon mentioned, as we look ahead, we're trying to be very conservative in our estimates and so we're kind of right now looking at a 20% year-over-year increase from '08 to '09 which is about what we're seeing from '07 to '08, and that's kind of our comfort level right now. Now having said that, we've gotten a little bit window of relief here on oil prices and we're doing some hedging on our diesel costs to lock in as much of that as we can.

Sherrill W. Hudson - Chairman of the Board and Chief Executive Officer

One other thing to add, Dan, on your labor shortage... your labor availability question, the folks at TECO Coal have an outstanding safety record. They have a very good training program, and in some of the regions they operate, they're going to become the preferred employer out there. And they have been able to attract folks but as Gordon said for safety purposes, it's a slow process to keep feeding new people into the process to grow production.

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

And we are moving more towards our own miners, contract miners. Not a huge amount but less and less dependency on the contract plans.

Daniel Eggers - Credit Suisse

Thank you.

Sherrill W. Hudson - Chairman of the Board and Chief Executive Officer

We have a terrific management team up there and they're doing everything I think that possible to control cost and to expand production. And but they'd like to go faster but we're trying to give you the number we realistically think we might end up next year.

Daniel Eggers - Credit Suisse

I know it's a long way away and who knows where oil prices are going to be, but if you were to think about kind of the 10 cost inflation of '09. I know you mentioned about labor contracts and some of the non-commodity pieces, do you anticipate further inflation as we look even further on to the horizon?

John B. Ramil - President and Chief Operating Officer

One more non-union there, so there is no labor contracts.

Daniel Eggers - Credit Suisse

Okay. So, just market rates will determine whether there is further --

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

[inaudible] we talked, Dan, in addition to labor, the three key drivers are diesel, which we talked about, steel prices and cost of explosives which is highly driven by the price of natural gas. So as those go, so do our cost.

Daniel Eggers - Credit Suisse

Okay, all right. And reverting back to the utility, given the fact that when you guys are going to file, are you at the right time to file to how a good baseline for volumes and costs or are you comfortable [inaudible] make some adjustments in the rate proceeding to kind of true up for what you are seeing at these [inaudible]?

John B. Ramil - President and Chief Operating Officer

Dan, this is John. We filed our test year [ph] letter and given the timing that puts us 10 or 12 days away from the first window when we can file our full K. So we're right there right now. We baked it on our best view as of right now. What we know from the process is you have a case, but it tends to get a little bit dynamic as you move over the next eight months in the process. And we and the interveners will be trying to adjust lines and there will be some adjustments both up and down as we move ahead as more data becomes available, as we head towards a hearing in January. After kind of the record gets set, the hearings, so that's probably kind of last point-in-time where data might be adjusted one way or the other.

Daniel Eggers - Credit Suisse

Okay. And then I guess just kind of on a resource planning perspective, are you guys at this point in time having to change any of the CapEx plans, particularly on new generation or is this the view this is going to be shore gated [ph] enough, there is not going to be any subsequent of adjustments.

John B. Ramil - President and Chief Operating Officer

I mean, very, very short term, what we're seeing right now, and the peakers that we have covered in the service next year, that's not going to change. A little bit slower growth will move things out a little further. We still kind of see the same needs out there but they may move back a year or two with a little bit slower growth. One of the things especially with the additional peakers that we're seeing is while we're seeing less energy and really weather this year, especially July, which has been pretty incredible month, we're still... energy is off, but peaks are still there, which we still have to meet. So we have to watch that very, very closely.

Daniel Eggers - Credit Suisse

Okay. When are you going to make a decision on the updated CapEx plan or the updated generation additions?

John B. Ramil - President and Chief Operating Officer

It will be probably in our process as we go through and update things for you in the fall between EEI and when we talk about where we are after the first of the year, we'll be doing that. We're also looking at... we have [inaudible] for future capacity for the 2012, 2013 needs as we sharpen our pencil on that, that will help clarify that as well.

Mark M. Kane - Director, Investor Relations

One thing to remember and that's 2013 combined cycle there, we have a power purchase agreement that rolls off at the end of 2012 with the Hardee Power Station and Seminole has first called to buy that station. So that's something that we have to consider in our planning for that combined cycle unit.

Daniel Eggers - Credit Suisse

Okay, thank you, Mark.

Operator

Your next question comes from Greg Gordon with Citi.

Greg Gordon - Citigroup

Good afternoon, guys.

Sherrill W. Hudson - Chairman of the Board and Chief Executive Officer

Good afternoon, Greg.

Greg Gordon - Citigroup

So just to review the information that you've disclosed on the core business, you see your 80% hedged at 66, so just doing the math, you've hit your 11-ton target that's 8.8 million tons, that's $66 right? And the remaining 2.2 million tons that's open is two-thirds... was it two-thirds in that, one-third's PCI?

Sherrill W. Hudson - Chairman of the Board and Chief Executive Officer

Two-thirds PCI.

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

Two third, PCI --

Greg Gordon - Citigroup

Two-thirds PCI and one-third met. Can you tell us where you're seeing... where you've seen anecdotal evidence of pricing on those products for 09?

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

Well I think that you've probably read all the reports that we've read on the type of Jim Walter sells $300, $400 it can't pick your latest number. The stuff we sell sells at discount to that. We see quotes in the 200 to 200 plus for that out there. That's probably the closest anecdotal stuff we see. We also know that our PCI trades at a discounts to that. So, as we negotiate, we set it up so that you can pick your number. Pick your number, what you think that the prices might be as we finished negotiating the contracts for next year, and you can make estimates, but your numbers are right on.

Greg Gordon - Citigroup

Okay, and then you're looking at $61 a ton operating costs?

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

Cash operating costs at $61 a ton, that's right. You've got all the pieces to make your assumptions on those two prices and get to the bottom line.

Sherrill W. Hudson - Chairman of the Board and Chief Executive Officer

We noted they were comfortable with those, but obviously if there is... something goes crazy in the market for natural gas, we would have a little bit of an impact on those. We're trying to take advantage of some hedging on diesel that take that piece of the equation out. We're also trying on new contracts that factor in commodity price adjustment factor and we have been successful in doing that in some cases.

Greg Gordon - Citigroup

Okay. Thanks guys.

Operator

Thanks. Your next question comes from Lasan Johong from RBC Capital.

Lasan Johong - RBC Capital Markets

Good afternoon. Can you talk about the impact of conservation, kind of what...how much it contributed to the lower than last years comparative increase in sales of volume ?

John B. Ramil - President and Chief Operating Officer

It's hard to tell because we have so many moving parts but we'll see it some. We have seen it, we... our last two conference call, I think we've talked a lot about the average use for customer going down a little bit. We know the biggest part of that is really we have customers that are really in the homes out there, that are just using a minimal amount of refrigerator running, maybe a few light bulbs, and that's probably 300 to 350 kilo watt hours a month. So that looks like conservation, if you just look at the numbers, but it's really just an empty house.

We know just from interactions with our customers that they are more aware of their wallet and their spending when they go to the pump and every place else, so they're watching things a little bit more, and we know that's having a conservation effect on everything, including both our gas and electricity sale. We're unable to define just how much. The other factor is particularly in July, we have such a mild July, a really rainy July. It's much easier for people to conserve when the weather is an extreme. So we're not getting to real feel of that. And we know that that happens and we have real evidence of that because as we've seen from time to time sales moderate, we still see the high peaks. So we know when it's very cold and very hot, the conservation will just happen.

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

Lasan, just to set the record straight, second quarter of '08 compared to the second quarter of '07, we have 2.7% of higher retail energy sales due to the weather.

Lasan Johong - RBC Capital Markets

Right. I was talking about customer usage. Can you also kind of quickly go over the housing situation, you did mention there was a lot of empty houses. Is that and you said that by the end of the year you expect a kind of turn around in the hosing situation. Currently what do you see in terms… Can you also kind of quickly go over the harden situation you did mentioned there was an empty houses. Is that and then by the end of the year you expect they have a turn around in the harden situation. kindly what do you see in terms turnover in housing in the Tampa area, are you seeing a pickup in sales or decreasing sales? Home starting is it... housing situation starts going up, coming down, kind of comment overall, if you would?

John B. Ramil - President and Chief Operating Officer

This remained very slow and I think when we first started talking about this and now it's probably gone a little bit deeper and a little bit longer when we thought as a good thing. Gordon referenced the Central Florida University, Central Florida study in his remarks. We also just... just saw where Moody's Economy.com has looked at Florida and the Tampa area in particular. Their expectation is that things will bottom out in '08, which we like to see, because that's started get to the point where we can see the end of that. And they... they think the fundamentals are strong and their conclusion is that the Tampa area in particular will be above average performer over their forecast time here.

Lasan Johong - RBC Capital Markets

So, as the recovery happens, you expect housing to contribute to that at an accelerated pace?

John B. Ramil - President and Chief Operating Officer

Yes. In addition to that and kind of related to the previous question, we also expect to see our energy consumption probably increased before that as that inventory gets consumed into an increase in the housing.

Lasan Johong - RBC Capital Markets

Great. One last question, how much of your diesel exposure is still uncontracted?

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

We at this point hedged roughly half of 2009 and --

Lasan Johong - RBC Capital Markets

Great.

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

And in the current market where diesel is much lower than it has been in prior month, we are looking to do some more.

Lasan Johong - RBC Capital Markets

Great, thank you very much.

Operator

Your next question comes from [inaudible].

Unidentified Analyst

Yes, my question has been answered, thank you very much.

Operator

Your next question comes from Paul Patterson with Glenrock Associates.

Paul Patterson - Glenrock Associates

Good morning guys.

Sherrill W. Hudson - Chairman of the Board and Chief Executive Officer

How are you?

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

Hi Paul.

Paul Patterson - Glenrock Associates

I'm sorry if I missed this. What is the last 12 months ROE for Tampa Electric now, with the last quarter?

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

We haven't disclosed that Paul.

John B. Ramil - President and Chief Operating Officer

Over the end of the year... end of the year '07 was 11.4 but that some third quarter benefit of lower depreciation and lower property taxes and some weather in it.

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

Our expectation is that it will be well below our allowed... the bottom of our allowed range of 10.75 by the end of this year.

Paul Patterson - Glenrock Associates

Okay. In the past, the Florida Public Service commission has been sort of settlement friendly. I think of it is being that way at least. But it has been time some time when we got a new Commission. Any sense of the possibility of having a settlement or do you think you'd have to go through these litigation process? Or is it too early to say?

John B. Ramil - President and Chief Operating Officer

It's something that is hard to predict. As you might guess, we are making our full preparations to go to the entire process and the full hearings, full litigation. But while we repair it, we've had a history with selling with the entrepreneurs and that's been a pattern in the past, but you can't count on that happening and you can't complain on that happening. You have to be prepared to go the entire way.

Paul Patterson - Glenrock Associates

Okay. And then it would be like... I think, yes, I missed it but what was... would the rate be effected when it is fully litigated?

John B. Ramil - President and Chief Operating Officer

Right now the schedule we are on, in May of next year.

Paul Patterson - Glenrock Associates

Okay, May of '09. And then the geology that you guys mentioned, the difficult geology that happened in the first part of the quarter, what was that and how does that show up... what --

John B. Ramil - President and Chief Operating Officer

In opening some new mines which we think are going to be great mining areas for the long-term, we did encounter as expected some sandstorm conditions which we had to get through. It turned out to be a little tougher and a little longer than you generally thought but we got through that, towards the end of May, early June and we're in very, very good mining area there.

Sherrill W. Hudson - Chairman of the Board and Chief Executive Officer

We'll reduce the production [inaudible] .

Paul Patterson - Glenrock Associates

Okay, but you saw those are the unusual debt and you still likely get that showing up again or any thing like that, is that something that's a risk, or is it --

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

You never know when you're mining and it wasn't a total surprise because you do [inaudible] when you know it is there. What you don't know for sure is how long it's going to last and how thick and hard it's going to be, and that was more than we thought. Right now, based on where we're mining and the drilling that we have made to help us project what the future geology is, it looks pretty good.

Paul Patterson - Glenrock Associates

Okay, great. Thanks a lot, guys.

Operator

The next question comes from Denise [ph] with Citigroup.

Unidentified Analyst

Hi. I have a question about your decision not to seek interim release for the fuel adjustment clause. I was wondering if you could give any more colors within the press release recently?

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

Yes, I think when you look at fuel under recovery in the state of Florida, you have to [inaudible] commission and you have the opportunity to go and ask for interim when you are 10% off of the forecast, either way up or down. And where we saw ourselves for June is we were on the order of $50 million or $60 million over recovered, and we weren't sure if we'll be over the 10% with very high natural gas prices towards the end of May and into June. The $50 million, $60 million under recovery that month, it was just that month went to about $90 million under recovery.

And if you look at those kind of gas prices continuing through the rest of the year, you'll then see us actually at 90 and look as the rest of the year maybe as much as $200 million, then clearly it was... we're going to be above 10%. Once we make... made our filing in the new numbers and all that, we're about to file our numbers for 2009, it's not likely you could get through the process and have a meaningful amount in the last two or three or four months in the year. So, we put the commission on notice as we're supposed to do, made notice to our customers and told them we would roll it all into 2009 fuel charges.

Unidentified Analyst

Thank you.

Operator

Your next question Chris Sheldon [ph] with Millennium Partners.

Unidentified Analyst

Good morning. It is actually Mark Cristo [ph], how are you?

Sherrill W. Hudson - Chairman of the Board and Chief Executive Officer

Fine, Mark.

Unidentified Analyst

I just had a quick... want to get some clarifications on the call. I think you guys had gone through with someone else. I just want to make sure and set it right. So, the $66 is your average contract price, am I right. That includes, whatever you got for [inaudible]?

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

$66 is what's already contracted of '09 which is mostly steam, but does include some Mat.

Unidentified Analyst

Okay, got you. And then I know that other persons asked about it earlier, I apologize I had to hop off, but as far as PCI just on the Consol Call, and they are indicating that some of their coal, they're actually selling into the PCI market in 2010 to 2020 and I'm curious s that sort of in line with what you guys are saying because I think I heard you earlier saying high-vol is around 200 where they are indicating high vol is around 300. So, just want to try [inaudible] to reconcile the two?

Sherrill W. Hudson - Chairman of the Board and Chief Executive Officer

I think we would love to sign contracts at those numbers, and we gave you the amounts of ton, so you can pick your number. Trust me, the management team we have at TECO Coal is going to get a fair price for our shareholders. So we will work very hard and we will love to get those prices, but we don't have them yet.

Unidentified Analyst

I guess those prices sort of out there in the market as an opportunity, is that sort of...on the table for where you guys are seeing your quality coal?

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

Now that's what Sherrill said, 220 for PCI would be a great price.

Unidentified Analyst

Okay, Got you. Thank you.

Operator

The next question comes from Jonathan Arnold with Merrill Lynch.

Jonathan Arnold - Merrill Lynch

Yes, my question was answered, thank you.

Operator

There are no further questions at this time. I'll turn the call back over to management for any closing remarks.

Mark M. Kane - Director, Investor Relations

Thank you everybody for spending the time with us today and the interests in TECO Energy. Sherrill you want to say anything?

Sherrill W. Hudson - Chairman of the Board and Chief Executive Officer

I appreciate your interest and hopefully, we've been very helpful to you in providing you some information which will enable you to look at 2009 in a better light. Thank you.

Mark M. Kane - Director, Investor Relations

Thank you operator, this concludes the call.

Operator

Thank you, and this concludes today's conference. You may now disconnect.

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Source: TECO Energy, Inc. Q2 2008 Earnings Call Transcript
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