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By BuildMWell
May 17, 2004

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Over on the BMW Method Board we have been discussing TECO as an investment. I thought it might be good to bring the discussion over here to see if it stirs up some interest.

I understand that TECO is in a little trouble...that is why the stock is priced so low. That is what the BMW Method points us toward. The E/P is about 1% because the earnings are in trouble due to the recent bad decisions concerning natural gas fired power plants. Those plants looked really attractive when Natural Gas was projected to be selling for under $3.00/MMCF. At $8.00/MMCF they are a sure loser.

I was a seller of any utility that I saw falling for this obvious ploy back in 1999. Today I am a buyer of any utility that has come to their senses and are correcting the problem. TECO management has admitted their mistakes and they are going to sell the combined cycle units to local utilities for "peaking units." They are writing off their losses and moving on.

Here is the good news on TECO. They own their own coal mines and, thus, have some control over their fuel costs...that is much more than many other utilities can say for themselves. Fuel cost is everything to any utility. That is why the move to natural gas was so stupid in the first place. Utilities trusted their future to the gas companies and to the continued low cost of natural gas. Meanwhile, no one happened to ask the question, "What will happen to natural gas prices if utilities suddenly build combined cycle natural gas units and suck up all of the surplus?" We are in huge gas crisis now because no one bothered to ask the right question.

Anyway, that is history. Today, we can clearly see that relying on gas was a mistake...so we move on and do what is needed. TECO is doing just that and I see then coming out of this mess way ahead of many other utilities. They are located in a fast growing area of America...lots of new customers are coming to them to use electricity. Thus, they should return to the old growth patterns that they experienced for the past 50+ years. They will not be chasing the merchant power business where Enron created a huge false demand. However, I think that I can see what is ahead by using the BMW Method. I could be completely wrong, but here is what I saw a year ago when I bought lots of TECO at $9.84/share.

TECO had a long history of growing between 6% and 10% per year. That matched nicely with the growth in the customer base. They were not an exciting business, but they grew very consistently and even though they had some ups and downs, the stock price stayed in a very nice band outlined by the 30 year CAGRs.

Starting in 1999, the business tried to expand into the very speculative merchant power business. They, along with many, many other utilities fell for the big lie. That lie was based on a very important report that said that natural gas was in plentiful supply and, thus, the price was going to remain steady at about the present price levels for the foreseeable future.

If you do the math, $3/MMCF natural gas shows a fuel cost of about 2 cents per kilowatt output...which is competitive with coal and nuclear fuels. PLUS...the cost of building a combined cycle plant is about a third that of a nuclear plant and under half that of a coal plant without the expensive pollution control devices added in. In other words, it was a no-brainer to build natural gas fired plants. Only an idiot would not do it...especially when California was going to pay $.17 to $.19/kilowatt for their power based on the futures market.

But, like I said, no one asked the right questions. So, America has wasted $100 Billion in building the wrong technology for all of the right reasons. The problem is, the "right" reasons were all wrong. There was not as much natural gas a promised and the price went up along with all of the new "unforeseen" demand.

OK, there is the history for you. It is a sad story but true. We have to deal with the future. I am buying TECO because I understand the past. They are a money making machine. If they cut the dividend, so what? They are going to return to profitability because they have a great business. They have a great customer base and they are growing. They sell a product that no one can do without...especially in Florida. Air Conditioning is the last thing anyone will stop using in Florida.

As I say over and over again, this is not rocket science. I have made my money by being practical. TECO is a $25 to $30 stock in my estimation. If I can buy it at $12/share, I will double my money. The only question is, "How long will it take?"

Two months ago, my investment had jumped by over 50% in under a year. Today, it has dropped back to a 21% gain, but it has paid a 7% dividend along the way. But, why has it dropped so far so fast? Does any one know?

I think that I do. It was almost exactly a year ago that the stock hit the 30 year low CAGR. I was not the only person sucking up shares at under $10/share. The folks who bought a year ago want to take advantage of the 15% Capital Gains Tax rate...so they wait a year before selling...it makes complete sense. I have no desire to sell because I am in this for the long haul. I want $30/share for my TECO. My greed keeps me in the stock while other's greed makes them sell. Both of us are correct. I am just more patient. I could have taken a 50% gain and been happy...but the BMW Method tells me that time is on my side. I could be wrong, but I expect TECO's stock price to start back up soon. This might be a good time to get some more shares...and I might. The problem is, I am over-weighted in TECO already at $9.84/share. Look at the chart...the BMW Method told me to back up the truck last March and I did.

To me, this is a lesson is "group think." No one thinks for himself any longer...they all are like a herd of sheep. The gas gurus looked at the "present" demand for gas and saw no reason for a price increase. They said so.

Utilities, in trying to be competitive, looked at the energy gurus' report and thought there was a golden opportunity to get rich quick buying natural gas for 2 cents and selling it for 19 cents after building generating facilities for 5 cents/kilowatt, converting it into electricity for 2.5 cents/KW and delivering it to customers for another 1.7 cents. They could take 2-cent fuel and make a sweet 60% profit.

However, at 6 or 7 cents per kilowatt in fuel cost, their sweet profit of 60% was zero or a net loss when the price in California dropped to 15 cents per kilowatt...still almost twice what it should be. Meanwhile, the futures on natural gas were over $10/MMCF due to the "perceived" demand due to the utilities!

What we had is a bunch of idiots getting educated by reality. And, that is very good! At least they learned to ask the right questions.

People learn by screwing up. TECO screwed up...but they know it. They have admitted it and I like that. They are going back to what made them great...efficient, low cost power generation in a growing market where they have a monopoly on production. You cannot beat that in my book. And, that is the only reason that I own TECO. Well, that and the fact that it is way below its 30 year low CAGR.

Will TECO go back to $10/share or will it turn around and move above $16/share? I surely have no clue...but I know what I think I know from my study of the situation. I like my position in TECO and I am not selling. I may buy some more but right now I am very happy with what I own. I do not recommend TECO to anyone else. You have to buy what is right for you. I hope this information about TECO and the energy market in general is of interest to you. Please do not buy TECO based on anything I have said. But, check it out for yourself.


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