It's Got Gas

The coal business and the pipeline development business are what have really piqued my interest in this stock. In 2008, TECO formed SeaCoast Gas Transmission LLC, a subsidiary that plans to develop and own an intrastate natural gas pipeline in Florida.

Not only would this help grow the distribution side of TECO's natural gas utility, People's Gas System, it would also position the company as a potential wholesale transporter of the fuel in the region. As the nation increasingly switches toward natural gas as a viable energy source, this is a great advantage to have.

TECO's electric utility fuel breakdown is currently 62% coal and 38% natural gas. So if the company transitions toward more natural gas, then a cheap and efficient delivery system will already be in place. I like this kind of forward thinking.

Recently, TECO shares have been under pressure for two main reasons: Investors are shifting away from richly valued utility stocks, and the coal business is seeing lower margins due to higher production costs.

This year, TECO is expected to sell roughly 7 million tons of coal. Production costs are projected to increase to between $83 and $87 per ton, which is up from $80 per ton last year. The positive offset is that the 2012 average selling price is expected to come in at $96 per ton compared with last year's $88 per ton.

To see how this stock still has a good chance to grow, let's do some simple math. Last year's margin was right at about 10%. Let's get in the middle of TECO's expected production cost for coal this year, and call it $85 per ton. Based on a selling price of $96, that's about a 13% margin, and this could actually increase if the company is able to tighten production costs.

Risks to consider: Although aggressively marketed as "clean," coal is truly the environmental whipping boy. More than two thirds of TECO's power generation is coal-fired, so having a coal-mining business that generates about 24% of the company's revenue causes some obvious concerns. That said, it appears the company is correctly and intelligently poised to take advantage of the natural gas boom. Also, while the broader investor coolness toward utility names is without merit, it takes a while for the herd to come back around (which is why you should buy and sell before they do).

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