TECO Energy Earnings Call Nuggets: Tax Rate Outlook and Regulatory Mechanism

TECO Energy (NYSE:TE) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Tax Rate Outlook

Julien Dumoulin-Smith – UBS: I wanted to ask here about the tax rate in the quarter here on coal. Just to what extent do you expect that to continue in other quarters or is it strictly limited to the first quarter here on your tons?

Sandra W. Callahan – SVP-Finance and Accounting and CFO: Well, it will change every quarter and as you know percentage depletion is calculated on a bi-mine basis. So I think the effective tax rate for the full year, which we had originally estimated would be 25% will be less than 25% overall, because of the zero tax rate in the first quarter, but it’s hard to tell at this what the second, third and fourth quarters will be.

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Julien Dumoulin-Smith – UBS: But there seems like there could be some tax benefit.

Sandra W. Callahan – SVP-Finance and Accounting and CFO: There could be.

Julien Dumoulin-Smith – UBS: Then in terms of the coal business overall, how do you feel today looking beyond I suppose the ’13 parameters to ’14 and beyond, keeping at net income or free cash flow positive if you will.

John B. Ramil – President and CEO: Julien, this John Ramil. Right now we’re looking at ’14, maybe being about like ’13, maybe a little bit better. We still have a lot of unknowns. We do have about 1.2 million of steam coal already contracted at high-70s to low 80s pricing. So, that’s a pretty good start on the year, but we remain feeling good that we’ll be able to stay earnings positive and cash flow positive ’14.

Julien Dumoulin-Smith – UBS: And if you were to piece apart the revision in the Tampa Electric ROE comment on the guidance, what drives it far and away, just to be very clear about this?

Sandra W. Callahan – SVP-Finance and Accounting and CFO: When you’re talking about revision, you’re talking about our expectation that Tampa Electric’s ROE will be below 9% for…?

Julien Dumoulin-Smith – UBS: Right, versus your 4Q commentary.

Sandra W. Callahan – SVP-Finance and Accounting and CFO: Right.

Julien Dumoulin-Smith – UBS: Just the magnitude of each of those pieces.

Sandra W. Callahan – SVP-Finance and Accounting and CFO: Yeah, I think what’s driving it is really the continued investment in rate base that we’ve been making which drives the capital structure it drives deprecation. It drives ad valorem taxes, and then on top of that, we are continuing to see some pressure on O&M, which we have kept the lid on for a long time, but some of that’s been deferral.

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Mark Kane – Director of IR: Just to be clear we said on our fourth quarter call that we expected the ROE to be below the bottom of the range, and we’ve developed all the detail around the rate case filing. In the filing, we do have an ROE less than 9%.

 

Regulatory Mechanism

Kevin Cole – Credit Suisse: This is actually Kevin Cole. I guess, on the regulatory mechanism side, I guess, now since you’re entering a new regulatory cycle, do you see any opportunity to address new rate mechanisms to help account for the impacts of energy efficiency that are weighing on your natural demand growth that you’d once realized and to help facilitate I guess utility directed energy efficiency?

John B. Ramil – President and CEO: Yes. Kevin, I think when we look at what we filed is kind of a pre-traditional rate case. We do have some things we have done in certain rate classes to address how their patterns have changed. But really it’s kind of catching up with some of what you just talked about, why we are going in now and we got out of our last rate case we envisioned that we had be able to stay out longer. But because of many factors that we have talked about, including those that you mentioned we are having to go in now. In addition that Sandy mentioned that are putting pressure on us from a cost side, recognize that the total revenues that our rates were based on in our test year rates when our rates were last set and what we are expecting in this year is about $72 million less than that. So we are going to catch up and make up for that in this filing…

Kevin Cole – Credit Suisse: So I guess in this filing will you be requesting like a loss fixed cost recovery or any mechanism – any non-traditional mechanism to help account for energy efficiency?

John B. Ramil – President and CEO: No. We are just laying out what our costs to serve are and setting the rates properly by customer class.

Kevin Cole – Credit Suisse: Then can you remind me what your medium term like 2014, ’15 customer growth targets are? Is that 50 basis point less load growth assumptions a part of that number as well?

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Sandra W. Callahan – SVP-Finance and Accounting and CFO: Actually the longer-term outlook is about 1.5% customer growth and the energy sales growth is expected to be about 0.3% below that. The 0.5% is really 2013, ’14, and that is a little higher than the longer-term outlook primarily because of the lighting efficiency standards coming into effect in that timeframe.

Kevin Cole – Credit Suisse: How much housing inventory I guess slack you have in the system today to support the demand growth? When will you start using the (home spill)?

John B. Ramil – President and CEO: We’re seeing the numbers on new single family home permits ramping up pretty quickly in our service territory. Our last number, I think Sandy had it in your numbers about 4,800 permits over the last 12 months. That’s almost double what it was a couple of years ago, if my memory serves me right and a little less than half of where it was at the peak. So it’s coming back pretty strongly. Sales have increased and the inventory’s been consumed.

Mark Kane – Director of IR: Existing home inventory is less than three months – existing home inventory for resale is less than three months, so that’s starting to impact new home demand, and to pick up on John’s thought I actually annualized fourth quarter building permits. Literally, first quarter is always a little heavier on building permits, but that would be approaching 5,500 new home building permits in 2013, if it holds at that annual rate.

Kevin Cole – Credit Suisse: Then last question, how vulnerable is I guess the (Pollock) CCGT to a year to delay if demand growth doesn’t quite come back as expected?

John B. Ramil – President and CEO: It’s mostly driven by the need to replace purchased power contracts that are expiring. So it’s pretty locked-in when we need it in 2017.