In this article, we revise our original
pricing model for TECO Energy (NYSE: TE) estimated in November 2012, when
we predicted a period of no change. Here we demonstrate that there was no significant
change in TE price since 2012 and our prediction was correct.

TE is one of many energy
related companies in the S&P 500 list but its model reveals very specific
features. Our approach to pricing modeling is based on the link between stocks and
consumer price indices. The intuition is
simple and clear, the evolution of a share price is inherently related some
goods and services (at least to goods and services the company provides) and
thus the evolution of their relative prices. For example, it is not easy to ignore the
intuition that there exists a statistically reliable link between oil price and
share prices of oil companies. We have reported that such a link exists for ConocoPhillips
and formulated an empirical model. On the other hand, the oil price is not the
only changing price and other goods and services should obviously affect share
prices of oil companies. Thus one needs also some reference price, which best
expresses the overall price evolution.

We are testing various
pairs of different CPI components from a large number of pre-selected ones. The
best fit pair has to minimize the difference between observed (monthly closing
price adjusted for dividends and splits) and predicted prices for the period
between July 2003 and February 2014. For TE, we use 92 individual consumer
price indices to select the best two (defining) CPIs (i.e. two-component model)
in order to describe the evolution of the share price. Our two-component model
also includes a free term (constant), which compensates the difference in initial
values of the defining CPIs, and a linear
time term, which compensates well know linear (time) trends between various CPI
components. We allow the modeled share price to lead and lag behind one or both
defining CPIs. When the price is lagged, the model is deterministic one and
foresees at the horizon of the smallest lag. When the price leads both CPIs,
one cannot predict the future of the price but get some information on the future
CPIs.

In November 2012, both defining
CPIs were contemporary to the share price and the best-fit model was as
follows:

*TE(t)= -1.43R(t-0) + 0.05E(t-0) + 1.49(t-2000) + 150.92, October 2012*(1)

where

*R(t)*in the index recreation at time*t*,*E*is the index of energy also contemporary to the price, (*t-2000)*is the elapsed time. In February 2014, the model was practically identical:*TE(t)= -1.31(t-0) + 0.047E(t-0) + 1.35 (t-2000) + 137.81, February 2014*(2)

Moreover, the same model is defining for each month between December 2011 and February 2014: the
model is valid 27 months in a row.

Figure 1 depicts the evolution of
both CPIs. The index of recreation
evolves slowly and the energy index has been actually driving the TE price
since 2003. Figure 2 depicts the observed and predicted (monthly closing) prices
together with the monthly high/low prices, which are natural limits of the
intermonth price uncertainty. Our model correctly predicted the price since
2003. The model residual error is shown
in Figure 3. It has standard deviation of $0.78 for the period between July
2003 and February 2014.

The energy coefficient in (2) is
small but one can see that the evolution of TE is almost fully related to this
price index. Our
model of oil price evolution implies a significant fall by 2016. This may
induce a fall in energy prices in the long run and the TE price will be on a
down ward trend as well. On this long term trend, there should be periods of
high fluctuations associated with elevated market volatility. When the actual price
is far below the predicted price (October 2011), one may consider a profitable
(in the short run) share purchase. When the actual price is far above the
predicted price (e.g. April 2013), it is the best time to sell. Currently, the
predicted and observed prices are almost equal. No action is needed.

Figure 1. The evolution of defining CPIs.

Figure 2. Observed and predicted TE
share prices.

Figure 3. The model standard error is $0.78.

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