Aquila to reflect the increased importance of its energy trading activities. During 2002, how-
ever, all energy traders came under close scrutiny as a result of the Enron bankruptcy and the
deceptive trading practices that were revealed. Flat energy demand and tougher credit
requirements imposed by the market kept prices low, and increased the cost of the capital that
traders needed to back their portfolios. As a result the overall energy trading business con-
tracted significantly. In August, after suffering reduced earnings and liquidity, and facing a
credit-rating downgrade, Aquila decided to abandon the energy trading business, reduce its
risk profile and return to its roots as a traditional utility. Aquila became the first of the lead-
ing US energy traders to exit the business. Panda–TECO plans to replace Aquila with a new
power manager, possibly a large utility whose trading activities are an adjunct to its underly-
ing power business.
Dividend increase
In April 2002 TECO Energy announced an increase in its quarterly common dividend from
34.5 cents to 35.5 cents per share. This was TECO’s 43rd straight annual dividend increase,
a record matched by only one other power company, WPS Resources. Despite growing cash
flow problems TECO Energy’s management maintained the dividend at 35.5 cents in
September. Dividends had always been an important matter for such a classic example of a
stable ‘widows and orphans’ utility share, but starting in 1989, when it founded TECO Power
Services, TECO Energy had diversified from its base of regulated utility businesses in an
effort to increase its earnings growth. Some of the pressure to diversify came from seeing
what was happening to competitors: in 1999, for example, Florida Progress, another utility
based across Tampa Bay in St Petersburg, had been acquired by Carolina Power & Light after
giving up efforts to remain independent. TECO Energy’s strategy to survive on its own was
to invest in wholesale power businesses outside its home market. The company was encour-
aged by a strong economy pushing up electricity demand and the growth of the energy trad-
ing business, with Enron as its most prominent pioneer.^3
Changing power sales outlook
During 2002 the power sales outlook became more uncertain for both plants. Overbuilding
and limited transmission capacity were becoming increasingly apparent in both markets. The
justification for building the Gila River plant and other merchant plants in Arizona had been
not only that there was an attractive local market, but that there was an opportunity to export
electricity to California. Now the Arizona market was heading toward overcapacity and trans-
mission constraints were limiting generators’ access to local markets as well as exports.
The Entergy subregion of the SERC, the Union Power plant’s immediate target market, was
already overbuilt and capacity was still being added. Entergy was reportedly tending to use
its own plants, even when they were less efficient, rather than buy power from the new plants
in the area with heat rates above 7,000 Btu/kWh. Further, the prospects for wholesale power
sales were dimming because of delayed deregulation in Arkansas.
Another rating downgrade
In September 2002 analysts at several brokerage firms placed ‘sell’ recommendations on
POWER PLANT