We have downgraded our recommendation on
TECO Energy Inc.
) to Underperform from Neutral, due to its over-reliance on weather
patterns, unstable commodity prices, strict federal regulations
related to underground mining operations and waste management, and
unsold tons of coal at TECO Coal.
As we know that performance of the utility providers, to a great
extent, depends on weather patterns and TECO is no exception.
Demand for energy is sensitive to unpredictable variations in
weather conditions. Periods of volatile weather conditions not only
dampen the demand, but severe weather can cause interruptions in
coal production or transportation, thereby increasing cost of
operations of the company.
Secondly, TECO's businesses are commodity price sensitive. Changes
in coal, gas, oil and other commodity prices could impact the
company's financial performance, including operating costs and
margins. For example, the company's unit Tampa Electric's fuel
costs for electricity generation might be negatively affected if
cost of coal and natural gas rise in the future. The company
normally recovers incurred costs of fuel through retail customers'
bills. Sometimes, rise in customer bills damage Tampa Electric's
competitive advantage in comparison to its peers in terms of
As far as positive factors are concerned, we expect these negatives
to some extent get diminished by gradual revival of Florida's
economy, strong customer growth in TECO's operating territory as
well as strong thermal coal contracts pipeline.
Currently, TECO is also skeptical about a possibility of removal of
the provision for depletion tax deduction on coal mines and other
hard minerals. In the FY13 Federal Budget, the government is
planning to eliminate the provision for depletion tax deduction for
coal mines and other hard minerals and fossil fuels. If such a
thing happens, then the effective tax rate will rise to 37% from 20
- 25%. This would have an adverse effect on TECO Coal's financial
performance in the near future.
Tampa, Florida-based TECO Energy Inc. is involved in the
generation, purchase, transmission, distribution, and sale of
electric energy in Florida. One of the peers of the company is
GenOn Energy Inc.
). TECO Energy Inc. currently has a short-term Zacks #5 Rank
(Strong Sell rating).
GENON ENERGY (GEN): Free Stock Analysis Report
TECO ENERGY (TE): Free Stock Analysis Report
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