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TECO Energy in Neutral Lane

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We reiterate our Neutral recommendation on TECO Energy, Inc. . The company’s second-quarter 2012 results missed the Zacks Consensus Estimate and the year-ago quarterly earnings. The disappointing result resulted from a decline in the company's regulated electric and gas sales, as well as its unregulated segment’s revenue.

We know that utility business, to a great extent, depends on weather patterns of the region and TECO Energy is no exception. Volatile weather conditions not only lower the demand, but also interrupt coal production or transportation, thereby hiking the company’s operational costs.

On the positive side, TECO’s subsidiary Tampa Electric Company has a monopoly over retail electricity division in its areas of operations and hence acts as a major revenue churner for the company. The company also expects steady year-over-year customer growth from its Tampa Electric and Peoples Gas divisions due to gradual improvement of economy at the state of Florida. This will eventually improve the company’s financial performance.

In addition, we believe that housing market recovery, decline in unemployment rate and creation of higher number of new jobs in Florida will influence the consumers to spend more and pay the utility bills on time. These factors will boost TECO Energy’s near-term performance.

TECO’s second-quarter 2012 earnings came in at 34 cents per share, missing the Zacks Consensus Estimate of 37 cents and year-ago earnings of 36 cents per share. During the company’s earnings call, TECO Energy lowered its earnings expectation to $1.20–$1.30 per share from its prior forecast of $1.30–$1.40 per share. This downward anticipation was due to the negative effect of mild weather in the month of July.  

On the flip side, TECO Coal primarily operates underground mines, which generally involve higher operating costs and greater regulatory clearance. Currently, 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. The issuance of permits has been challenged in court by several environmental groups, resulting in a bottleneck.

In 2013 Federal Budget, the U.S. government is planning to eliminate the provision for depletion tax deduction for coal mines and other hard minerals and fossil fuels. If it happens, then the effective tax rate will rise to 37% from 20–25%, thereby adversely affecting TECO Coal’s financial performance from 2012 onwards.

TECO Energy Inc. currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. The company competes with Wisconsin Energy Corporation (WEC - Free Report) .

Tampa, Florida-based 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.

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