TECO Energy Management Discusses Q3 2012 Results - Earnings Call Transcript

| About: TECO Energy, (TE)


Q3 2012 Earnings Call

November 01, 2012 9:00 am ET


Mark M. Kane - Director of Investor Relations

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

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


Andrew Bischof - Morningstar Inc., Research Division

Dan Eggers - Crédit Suisse AG, Research Division

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


Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to TECO Energy's Third Quarter Results and Preliminary 2013 Business Matters Conference Call. [Operator Instructions] After the speaker's remarks, there will be question-and-answer session. [Operator Instructions]

I will now turn the conference over to Director of Investor Relations, Mr. Mark Kane.

Mark M. Kane

Thank you, Christie. And good morning, everyone, and thank you for joining us for TECO Energy's Third Quarter Results Conference Call and Webcast. Our earnings release and unaudited financial statements were released and filed with the SEC earlier this morning.

This presentation is being webcast, and our earnings release, financial statements and the slides for this presentation are available on our website at tecoenergy.com. The presentation will be available for replay through the website approximately 2 hours after the end of the presentation and will be available for 30 days.

In the course of our remarks today, we'll be making forward-looking statements regarding our financial outlook for the remainder of 2012 and factors expected to influence 2013. There are a number of factors that could cause our actual results to differ materially from those that we'll discuss as our outlook and expectations today. For a more complete discussion of these factors, we refer you to the discussion of risk factors in our Annual Report on Form 10-K for the period ended December 31, 2011.

Today, Sandy Callahan, TECO Energy's Chief Financial Officer, will cover our results, the state and local economies, factors expected to influence 2013 and provide some thoughts on utility capital spending going forward. Also with us today to participate in answering your questions is John Ramil, our Chief Executive Officer.

Now let me turn it over to Sandy.

Sandra W. Callahan

Thank you, Mark. Good morning, everyone, and thank you for joining us today. I expect your priorities have been elsewhere the last few days and hope you escaped any damage from Hurricane Sandy. As you probably know, across the electric utility industry, there is an all-out effort to get as many resources as possible to the affected areas for power restoration.

Crews from Tampa Electric arrived to New Jersey on Tuesday, and all of us here wish you the very best as you recover from the storm's effects. Mark identified what we'll cover today, and I'll start my report with a look at the quarter. In the third quarter, net income from continuing operations was $90.2 million or $0.42 a share compared with $86.1 million or $0.40 in 2011. Discontinued operations, which includes the effect of the TECO Guatemala sales transaction in 2012, showed a loss of $46.2 million. And I'll detail the elements of discontinued operations in a later slide.

On a year-to-date basis, net income from continuing operations in 2012 was $200 million or $0.93 per share compared with $203 million or $0.95 last year. The most significant factors impacting the year-over-year comparisons was the effect of weather on electric sales, partially offset by better margins at TECO Coal.

Here are the details on the discontinued Guatemalan operations. It includes strong results from the power operations, as well as the effects of the sales transaction for both the quarter and year-to-date period. The full impact of the sale, including the component that hasn't closed yet, is captured as of September 30. And both the loss on sale and the charge associated with foreign tax credits that we won't be able to use in the future are slightly better than what we estimated when we announced the transaction.

Tampa Electric reported lower net income in the 2012 quarter despite having the strongest customer growth we've seen since late 2007. Since customer growth began to recover at the end of 2009, it has been on a solid trend up and for the third quarter this year, reached 1.4%, close to what we expect to be the new normal for customer growth.

Retail net energy for load in the third quarter was 1.6% lower than last year. Total degree days were 7% below last year, primarily due to wet summer weather patterns. The summer of 2012 was the second wettest summer on record for the Tampa area and included Tropical Storm Debby and Hurricane Isaac the last week of August. We experienced several periods of persistent daily rain in the third quarter, and patterns like that can reduce daily energy sales to residential customers by 10% off normal level. Tampa Electric had lower interest expense, higher depreciation expense due to normal additions to facilities and higher operations and maintenance expense.

Peoples Gas reported higher results than last year and customer growth that reached 1.3% in the third quarter. Weather isn't a factor in third quarter gas consumption, and we saw some sales increase in every retail segment: residential, commercial and industrial as the Florida economy continued to improve. Peoples also benefited from lower O&M in the quarter compared with 2011, in part from the recovery of legal fees related to a previous environmental claim settlement. This graph showing Tampa Electric's cumulative customer addition is a good illustration of the slowdown we saw in 2008 and 2009 when customer growth stagnated and how we've been adding customers at a very steady pace since then.

TECO Coal achieved higher results this quarter from better margins on lower sales volumes than last year. The average selling price for the quarter rose to $96 per ton due to met coal prices locked in when the market was stronger and higher average steam coal prices following the expiration of a below-market contract at the end of last year. The all-in cost of production in the quarter was $84 per ton, which is below the middle of our cost guidance range, and that's after experiencing higher first quarter costs due to costs associated with idling some facilities. This is indicative of TECO Coal's aggressive action to manage cost and offset the effects of spreading fixed costs over fewer tons.

We are reaffirming our 2012 earnings per share guidance range of $1.10 to $1.20, which reflects the reclassification of TECO Guatemala to discontinued operations and excludes any non-GAAP charges or gains that might occur. The underlying factors in the guidance remained essentially unchanged from those discussed on our call in August and identified again on this slide.

The graph from the next few slides illustrate the trends we're seeing in the local and state economies. Locally, we're seeing both workforce and employment growth. And the point in showing this is to illustrate that improvement in the unemployment rate is a result of the increasing employment and not a shrinking of the workforce. In the past 12 months, the workforce has brought about 1%, and the number employed has increased 3%.

In Hillsborough County, Tampa Electric's primary service area, the unemployment rate declined to 8.6% and is now below the state's 8.7% rate. As a point of reference, the Hillsborough County rate was 10.6% at this time last year. Over the last 12 months, Florida has added more than 63,000 new jobs in areas including private education and health service, transportation and utilities and the hospitality sector.

Even construction employment has picked up over the last several months. While still down from September of 2011, it is up more than 8,000 jobs from the low point experienced this spring. Of the 63,000 jobs added in Florida over the past 12 months, almost 19,000 of these were on the Tampa metropolitan area, making it one of the best job growth areas in the state.

As you can see from the nice upward trends in building permit, the single-family home construction market is showing some strengthening. Typically, it's about 6 months from the time that a building permit is issued until we see that as a new customer on the system. Metrostudy, a firm that tracks new home construction trends, expects new home starts in the Tampa area to be 5% to 15% higher by the end of 2012 than it was last year, and the actual year-to-date data supports those projections. Statewide, Metrostudy is reporting increased residential construction activity in virtually every major market, with a few of them up as much as 35%. Even the once overbuilt south Florida condo market is rebounding, with little of the peak inventory remaining unfold and now actually some new condo towers being proposed.

All of this level of new construction across the state has the potential to eventually be reflected in growth at Peoples Gas. The new single-family construction trends have been helped by the shrinking inventory of existing homes. Growth in existing home resales has continued to show a strong upward trend, and the inventory of homes actively on the market in the greater Tampa area with below 4 months in September. In the first quarter, it was 6 months, which is a level considered to be a healthy market, and remember, at the worst of the downturn, it was 25 months.

The final picture on the economy shows taxable sales in Hillsborough County, where the city of Tampa is located, and it illustrates that with the economy slowly improving, consumers are spending more as well. Taking the seasonal spikes out, the trends have been steadily upward since sales bottomed in late 2009, early 2010. We continue to be encouraged by the trends we're seeing in our state and local economies and housing markets, and our expectations going forward are for continued growth.

All of our operating companies are currently in the annual cycle of developing the details of their respective 2013 business plans. And today, I'll discuss some of the high-level factors that we expect to influence 2013. At Tampa Electric and Peoples Gas, we expect customer growth to reflect the trends that we've experienced this year.

Consistent with the longer-term forecast we have described before, we anticipate that weather-normalized retail electric sales growth will be about 0.5% below the expected customer growth. In the residential and commercial customer classes, that reflects the impact of new lighting efficiency standards and increased appliance efficiencies. For residential customers, it also reflects smaller and more energy-efficient houses and more multifamily units. Sales to phosphate customers were strong in 2012, reflecting outages on some of their self-generating units. So we expect reduced sales to this sector in 2013 as their self-generation comes back.

And at Peoples Gas, we expect to continue to see the benefit of more compressed natural gas vehicle conversions and industrial customers converting from petroleum or propane to natural gas. At TECO Coal, although the current steam market is weak, we have 2.5 million tons of steam coal already contracted for 2013 at prices ranging from $75 to $82 per ton, and these are profitable levels for us.

The contracting period for 2013 met coal is underway, but proceeding slowly. The markets are very competitive, and expectations are that met coal prices in 2013 will be well off 2012 levels. Until the met coal contracting has completed, it isn't possible for us to determine what our total volume or average overall selling price will be.

And TECO Coal's mining plan and therefore, its production cost, will also be influenced by those outcomes. What we can tell you is that TECO Coal will mine to meet market conditions. We'll only produce what they can sell at profitable level, and we'll continue to focus on cost control.

Now let me turn to the long-term growth prospects for Tampa Electric and Peoples Gas. At Tampa Electric, annual maintenance capital spending is about $350 million. That supports normal customer growth, system reliability, investments in information technology and small investments in smart grid applications.

Tampa Electric completed its major investment in environmental controls in 2010, and so all of its baseload coal units have state-of-the-art environmental controls and are expected to meet all of the proposed EPA regulations with only minor additional investment. We are currently earning on all of those investments, either through base rates or the environmental cost recovery clause. Maintenance capital spending at this level is about $100 million above depreciation annually, and that represents about 2% annual rate base growth.

Peoples Gas increased its level of capital spending to about $100 million annually in 2012. In addition to customer growth and maintenance capital, this level of spending supports system expansions to serve large commercial or industrial customers desiring to switch to natural gas based on the favorable gas economics. Capital spending at this level is about twice Peoples annual depreciation and adds about 8% to rate base. Peoples will also replace about 150 miles of cast iron and bare steel pipe over the next 10 years. This approximately $10 million annual investment is recovered through a commission-approved cost recovery clause.

In September, we announced that the lowest cost option for Tampa Electric customers was a conversion of 4 simple-cycle CTs to combined cycle at the Polk Power Station and that we would file with the commission for the determination of need for that project. It is a $700 million project, including approximately $100 million of AFUDC and $150 million for transmission system improvement. The project has an expected early 2017 service date to support modest customer growth, system reliability and most significantly, to replace expiring purchase power agreements.

Tampa Electric's 345-megawatt power purchase agreement with the Hardy Power Station expires at the end of this year and will be replaced by several smaller contracts through the end of 2016. The Polk conversion project will, in part, replace that expiring contracted capacity. Tampa Electric filed for the need determination on September 12. The hearings on the matter are scheduled for December, with final decision expected in January of 2013.

This slide shows graphically the rate base growth that we expect through 2017, including the Polk project. The base level of maintenance capital spending, plus the investment in the Polk project, represent about a 6% growth rate over that 5-year period in rate base.

I'll close with our upcoming investor communication. We expect to file our 10-Q tomorrow. We will, of course, be at EEI in about 10 days, and hope to see many of you there, and we will be at the BMO conference in New York the first week of December.

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

Question-and-Answer Session


[Operator Instructions] Your first question comes from the line of Ali Agha -- I apologize. Your first question comes from the line of Andy Bischof of Morningstar Financial.

Andrew Bischof - Morningstar Inc., Research Division

I have more so just kind of a strategic question. Looking at the ramp in natural gas prices a little bit in the last few months, can you, first, comment how that has impacted your generation and also on the level of interest of your system expansion from the large and commercial and industrial customers?

John B. Ramil

Yes, Andy, this is John Ramil. Natural gas price is lower earlier in the year. Natural gas generation competed with our coal generation a little bit more, but not to a huge extent. I think our natural gas generation is something like 4% or 5% higher than we might normally expect it to be, as prices have come up a little bit. Our coal units are dispatching a little bit more strongly versus them, as we'd expect. And remember our coal units are really southern-Illinois-type coal that are convenient [ph] with the natural gas prices. So we've seen a little bit of change, but not a whole lot. With respect to the second part of your question, was customer switching on the natural gas side of the business? We're still seeing strong interest from customers in replacing natural gas Btus, replacing their petroleum-based Btus with natural gas Btus. Even though there has been an increase in price, the belief is the differential will still be there long term, and the additional benefits they see from using natural gas on the environmental side and just the comfort side and the ease side are still drivers for customers.

Sandra W. Callahan

And that accounted for the additional investment in 2012 that drove Peoples capital spending up to that $100 million level, and we anticipate the same thing in 2013.

Andrew Bischof - Morningstar Inc., Research Division

Okay. And then one question, you've done a good job managing cost at your coal unit this year. Can you kind of expand opportunities you have to control cost in 2013?

John B. Ramil

We'll continue to keep focusing on costs, and our folks have really done an outstanding job at all of our businesses controlling cost. If you look at our utility business, we're effectively on pace this year to operate at 2007 cost levels, so they're doing great work. A lot of challenges from things that we don't control, pension cost, other benefits cost. It's getting tougher and tougher to offset those, but we're committed to continue to do everything we can to keep cost down. On the coal company side, if you look, our cost per ton in the third quarter were actually on the lower side of our guidance range for the year and year-to-date are right in the middle of the guidance range. And that's in spite of the lower volumes, which we think would add about $3 to $4 a ton of fixed cost at the lower volumes we're at. So our folks have found ways to completely offset that, and we'll continue to take every effort to do that in the future.


Your next question comes from the line of Dan Eggers of Credit Suisse.

Dan Eggers - Crédit Suisse AG, Research Division

In the wake of the Guatemala sales, is that going to cause you to rethink your balance sheet at all as far as leverage or payout ratios or anything like that, kind of as you focus more domestic and more utility mix within the overall business?

Sandra W. Callahan

Dan, we don't really anticipate that, that will be the case. We had said when we announced the Guatemala sale that we would anticipate -- if we applied those funds to the balance sheet, it would be in a balanced sort of a way, which implies a continuation of kind of where we are. And as you know, we look at the payout ratio, in part, with respect to how much of that the utility is providing anyway.

Dan Eggers - Crédit Suisse AG, Research Division

Okay. And I guess just on -- kind of thinking about 2013 guidance. When do you think you're going to be comfortable to kind of give the full outlook for next year and be comfortable with the coal business, both in volumes and pricing and that sort of thing?

Sandra W. Callahan

Fourth quarter earnings call.

Dan Eggers - Crédit Suisse AG, Research Division

So fourth quarter call, you guys will have all the contracting done and all visibility to the pieces?

Sandra W. Callahan

We hope so.

John B. Ramil

If you remember, Dan, last year we were only 90% contracted at the time of that call, so there may be some open tons at that time. We'll have to wait and see how the market develops.

Dan Eggers - Crédit Suisse AG, Research Division

Okay. And Sandy, is there anybody you're -- maybe John can give a little more color to help us think about the scaling of the O&M cost for coal depending on where volumes come out from -- relative to what you guys have, reasonably in hand today, if you were to scale volumes up, what the volumetric sensitivity would be.

John B. Ramil

Well, I think, we -- Dan, we do have a significantly scaled-down volume this year. The good news for next year is from a volume of sales standpoint, the softest part of our business is the steam side. And we have the good fortune of being in good shape, with the 2.5 million that we have contracted on the steam side there. On the met side, right now, we're optimistic about volume. The price is the biggest concern and the softness of those markets. So I don't know where the volume will be, I don't know if it will be hugely different than this year, but we'll continue to do the job that we've been doing on controlling our costs.


Your next question comes from the line of Paul Ridzon of KeyBanc.

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

Unlike prior releases, you don't talk about earning within your authorized ROE band. Is that changed?

Sandra W. Callahan

It really has not changed from what we last reported, where Tampa Electric does expect to be down at the bottom this year.

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

And Peoples?

Sandra W. Callahan

And Peoples, we've reported before that they were actually earning slightly above their midpoint, and we would expect that to be the case for this year.


[Operator Instructions] There are no further questions at this time.

John B. Ramil

Okay. Thank you very much, everyone, for joining us for this call this morning. We know there's a lot going on, and there's a lot of distractions, so thank you for joining us.


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

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