(TE) TECO Energy Still Neutral

Despite TECO Energy Inc. (TE) missing our expectation for both the top and bottom lines in the most recent quarter, we reiterate our Neutral recommendation for TECO shares as we believe the long-term fundamentals of the company remain sound helped by a reviving Florida economy.

TECO’s strong fundamentals reflect stable regulated utility operations, rising metallurgical coal prices, solid utility cost management and a high dividend yield. We expect the company to achieve higher earnings and dividend growth over the next few years. Also, TECO’s balance sheet has improved considerably due to regular debt repayments.

Over the years, TECO has made good progress in improving its financial position, focusing continually on debt retirement and balance sheet improvement. As of March 31, 2011, consolidated liquidity was $757.1 million, consisting of $89.5 million in cash and short term investments and available credit facilities of $667.6 million. The company’s long-term debt as of March 31, 2011 was reduced to $3,070.3 million versus $3,148.1 million as of December 31, 2010.

Additionally, income-seeking investors may find TECO shares attractive given the increased annual dividend rate of $0.85 per share, which yields a competitive 4.6% at the current price, above the utility industry average.

Nevertheless, volatility in fuel prices, uncertainty on regulatory decisions and environmental legislations may partially offset the more bullish factors, in our view.

TECO’s largest subsidiary, Tampa Electric, uses fossil fuels like coal, natural gas or oil to generate all of its electricity making it vulnerable to the swings in fossil fuel prices and carbon emissions regulation. Recently, the company’s operating costs have increased significantly with the rise in coal prices.

Also, TECO’s core utility operations are subject to various federal, state and local regulations, which make it difficult to adjust retail prices based on swings in the cost of fuel as regulators must approve changes in electricity rates.

Over the long-term, however, we continue to view rather favorably TECO’s restructured business profile and solid cost management, along with the improving regulatory scenario in Florida. Furthermore, over the near-term, we believe that the stock’s above-industry-average dividend yield may provide some downside share price protection, which we believe is sustainable and secure if the company successfully delivers modest earnings growth.

Tampa, Florida-based TECO Energy currently retains a Zacks #3 Rank (short term Hold rating). TECO Energy competes head to head with NextEra Energy Inc. (NEE) and Progress Energy Inc. (PGN).

NEXTERA ENERGY (NEE): Free Stock Analysis Report

PROGRESS ENERGY (PGN): Free Stock Analysis Report

TECO ENERGY (TE): Free Stock Analysis Report

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