TECO Energy is turning a corner. With a major regulatory win and new natural gas investments, let's take a look at whether this dividend stock is ready to pull profits for your portfolio.
Like many utilities, TECO operates in two parts: unregulated electricity generation and regulated utilities. Until recently, both of TECO's divisions have been stuck between a rock and a hard place.
On the regulated side, heavyweight Tampa Electric is responsible for two-thirds of TECO's total sales , creating an ideal scenario for steady, sustainable earnings. Unfortunately, the utility's regulated return on equity (ROE) has lagged competitors for years. While TECO expects its 2013 ROE to clock in at just 9%, NextEra Energy's Florida Power & Light enjoys 11% ROE .
But all that changed when Tampa Electric's rate request got the go-ahead, clearing the company for ROE between 9.25% and 11.25 %. Over the next four years, Tampa will add on $180 million to its total base rate, freeing up cash to continue to upgrade its coal-fired Polk power plant to combined cycle operations. The upgrade should improve its energy efficiency, while doubling capacity to 1,420 MW.
Most other utilities haven't held out for coal upgrades. FirstEnergy announced in July that it would shutter two coal plants totaling 2,080 MW, around 10% of the utility's total capacity . Although environmental spending was listed as an issue, FirstEnergy has also been working hard to decrease debt .
Natural gas notions
With regulations looking up, TECO is taking its earnings up a notch with natural gas. The company spent $950 million in May to acquire New Mexico Gas Company, a move that TECO President and CEO John Ramil believes to hold significant opportunity. "We are adding 50% to our customer base in a single transaction, and we expect it to provide opportunities for future growth in an attractive Sunbelt location," said Ramil. "It will increase the percentage of earnings from regulated operations and reduce earnings volatility ."
With just $100 million in annual costs and an expected 6% annual rate base growth for the next four years , TECO can immediately sit back and enjoy 10% ROE, a far cry from its Tampa Electric troubles . While coastal companies are examining export opportunities , TECO is keeping a close eye on the future of compressed natural gas as a transportation fuel.
At $2.24 per comparable gallon, natural gas provides an enviably low pump price, and Peoples Gas already has 14 fueling stations across the state . Companies like Westport Innovations and Clean Energy Fuel are building their entire corporations on the back of natural gas as a transport fuel. While Westport is partnering with automotive giants to stick its natural gas engines in the next generation of heavy-haul vehicles, Clean Energy owns around 150 stations across the nation, and supplies or operates around 120 more.
TECO's New Mexico Gas may seem like a small player, but in a market with major growth potential and necessary infrastructure build-out, TECO's subsidiary could see sales soar alongside other companies.
Growth Times Ahead?
With new regulated earnings and a fresh foray into natural gas, TECO is turning a corner on its coal-centric days of yesteryear. It's not a new company and its unregulated earnings are still worrisome, but its current valuation doesn't take into account the potential for major profit in the years to come. With a history of dividend increases and a current 5.2% yield to boot, this stock is making a return to my investment radar.
The Root of All Revenue
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The article From Coal to Natural Gas: This Dividend Stock's Turnaround Story originally appeared on Fool.com.Fool contributor Justin Loiseau has no position in any stocks mentioned, but he does use electricity. You can follow him on Twitter, @TMFJLo, and on Motley Fool CAPS, @TMFJLo. The Motley Fool recommends Clean Energy Fuels and Westport Innovations. The Motley Fool owns shares of Westport Innovations. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.