We reiterate our Neutral recommendation on
TECO Energy, Inc.
). Several factors prompt us to retain our recommendation.
The utility businesses primarily depend on weather patterns and
TECO Energy is no exception. The demand for energy and gas is
sensitive to unpredictable variations in weather conditions.
Periods of volatile weather conditions not only dampen demand, but
can cause interruptions in coal production or rail transportation,
consequently leading to an increase cost of production.
We believe TECO Energy is an important utility provider in
Florida along with its subsidiary Tampa Electric Company, which has
a strong presence in retail electricity in its areas of operations.
We expect the company to benefit from the recovery in Florida's
economy along with a decline in unemployment rates, favorable real
estate construction trends and higher home resale numbers. The
company expects customer growth of 1% and 0.9% year over year in
Tampa Electric and Peoples Gas, respectively.
On top of it, TECO Coal's sales prospects for 2012 look
encouraging. As much as 90% of TECO Coal's total expected fiscal
2012 sales, in the range of 7 - 7.3 million tons, have already been
priced with higher selling price per ton.
The first quarter 2012 earnings of the company were 24 cents per
share, flat year over year. The quarterly earnings also fell short
of the Zacks Consensus Estimate of 25 cents. During the earnings
announcement, the company increased the lower end of its 2012
earnings estimates, from $1.25-$1.40 per share to $1.30-$1.40 per
share. The Zacks Consensus Estimates for second quarter and full
year 2012 earnings are pegged at 37 cents and $1.34 per share,
TECO Coal primarily operates underground mines which generally
involves higher operating costs and greater regulatory clearance.
At present, the company is planning to operate a new surface mine
to increase its production volume, for which it needs to procure
permits from the U.S. Army Corp of Engineers ("USACE"). The
issuance of permits has been challenged in court by several
environmental groups, which has resulted in a backlog. Only a few
permits have been issued by the U.S. Environmental Protection
Agency ("EPA") to date.
In Florida, regulators are keen on implementing new Green House
Gas ("GHG") emissions rules. Tampa Electric's conventional
coal-fired Big Bend units do not have the required technology,
which can remove carbon dioxide. The utility companies are planning
to use natural gas as fuel. In the near term, the companies have to
invest more to initiate less GHG emission technologies including
natural gas-fired generation units and pipelines. Tampa Electric
can expect to recover these costs through a base-rate hike, but
only after the Florida Public Service Commission ("FPSC") approves
of the same.
TECO Energy also needs to cope up with unpredictable variations
in weather conditions, and chances of elimination of the provision
for depletion tax deduction for coal and other hard mineral mines.
All these factors make us retain our neutral stance on the
TECO Energy Inc. currently retains a Zacks #3 Rank (short-term
Hold rating). The company competes with
Wisconsin Energy Corporation
Based in Tampa, Florida TECO Energy Inc. is involved in
regulated utility operations. Through its subsidiaries, it
generates, transmits, distributes, purchases and sells electric
energy in Florida and Guatemala.
TECO ENERGY (TE): Free Stock Analysis Report
WISC ENERGY CP (WEC): Free Stock Analysis
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