We reiterate our Neutral recommendation on TECO Energy, Inc. (TE). 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, respectively.
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 company.
TECO Energy Inc. currently retains a Zacks #3 Rank (short-term Hold rating). The company competes with Wisconsin Energy Corporation (WEC).
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.Read the Full Research Report on TE
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