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Teco Energy Inc. (TE - Analyst Report) announced second quarter 2012 earnings of 34 cents per share, lower than the year-ago earnings of 36 cents per share.  The earnings in the current quarter were also below the Zacks Consensus Estimate of 37 cents.

The earnings underperformance was due to weather irregularities and the current downturn in coal markets, partially offset by favorable growth in the company’s Florida utilities owing to an increased customer base.

Total Revenue

Teco Energy posted total revenue of $788.4 million in the second quarter of 2012, down 11% from $885.7 million in the year-ago quarter. This was due to a combined decline in the company’s regulated electric and gas sales as well as in the unregulated division.

Reported revenue widely missed the Zacks Consensus Estimate of $893 million.

Segmental Analysis

Sales at Peoples Gas surged 26.1% to 513,231 therms from 406,961 therms in the year-ago quarter. This was driven by higher sales to residential consumers due to customer additions and greater volume sold to commercial and industrial users. However, aggregate revenue from this segment declined owing to the depressed natural gas prices in the US markets.

Teco Coal witnessed a decline in sales volume in the reported quarter to 1.6 million tons from 2.1 million tons in the year-ago period. This resulted in revenue to dip by 28% to $149.7 million from $191.3 million in the year ago quarter.

On the international front, Teco Guatemala experienced electric sales increase resulting from higher contract and spot energy sales at the San Jose Power station compounded by decrease in operating expenses.

Sales volume at Tampa Electric dipped by 0.5% year over year due to the impact of wet and soft weather in June, resulting in 7.3% decline in revenue from this segment.

Operational Highlights

Total operating expenses declined in the second quarter by 12.2% to $626.8 million from $714.6 million in the year-ago quarter. This was backed by a fall in fuel costs by 14% and a marked decline in the cost of natural gas sold by 33%.

Total operating income slipped to $161.6 million from $171.1 million in the prior-year quarter, reflecting a decrease of 6%. This was due to fall in revenue outweighing the positive effect of decline in operating costs.

Interest expenses declined marginally to $50.3 million from $51.3 million in the year-ago quarter.

Financial Screening

Cash and cash equivalents as of June 30, 2012 were $117.4 million versus $44.0 million as of December 31, 2011.

Cash flow from operating activities during the quarter was $81.5 million compared with $156.9 million in the prior-year quarter.

Long-term debt as of June 30, 2012 was $2,895.1 million versus $2,687.3 million as of December 31, 2011.

Guidance

Teco Energy lowered its earnings expectation to $1.20–$1.30 per share from the prior forecast of $1.30–$1.40 per share. This downward anticipation is due to the negative effect of mild weather in the month of July.

However, under the new base rate system, the company’s natural gas business wing expects to earn returns near the middle of its equity range as the new rates make People Gas less exposed to weather sensitivities.

Teco Coal forecasts depressed sales volume for 2012 and projects sales to be in the range of 6.0 million tons to 6.3 million tons with an average selling price of $96 per ton.

The company anticipates cost of production to be in the range of $83 per ton to $87 per ton.

Peer Update

Wisconsin Energy Inc. (WEC - Analyst Report), a competitor of Teco Energy posted second-quarter 2012 earnings per share of 51 cents, up 24.4% year over year from 41 cents per share. The reported quarter’s earnings also comfortably surpassed the Zacks Consensus Estimate of 44 cents per share.

Revenue in the second quarter of 2012 was $944.7 million, down 4.7% from $991.7 million in the year-ago quarter. Revenue also fell short of Zacks Consensus Estimate by $44.3 million.

Our View

Teco Energy’s lackluster financial performance in the second quarter 2012 is a result of the ongoing depression in steam coal markets. We believe this trend will rebound with the rise in demand for metallurgical coal from the Asian markets. The positive movement in the Florida economy will also attract strong customer growth which would propel the company’s development prospects.

However, the location of the state of Florida makes it prone to natural disasters and extreme weather conditions. This can pose a serious threat to the smooth functioning of Teco Energy’s operations.

Based in Tampa, Florida, the company is involved in regulated utility operations. Through its subsidiaries it generates, transmits, distributes, purchases and sells electric energy in Florida and Guatemala.

Teco Energy Inc. holds a Zacks #3 Rank which translates into a short-term Hold rating. We recommend a Neutral rating in the long run.

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