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Power company weathers stormy year

TPS president Richard Ludwig says the past year held "unexpected challenges."

By LOUIS HAU

© St. Petersburg Times
published June 2, 2002


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    Sixteen months ago, TECO Power Services Inc. was flying high.

    TPS, the wholesale power subsidiary of TECO Energy Co. and a sibling of Tampa Electric, had announced its latest acquisition, a 500-megawatt power plant in McAllen, Texas, which it was buying from American Electric Power for $265-million.

    It was TPS' seventh major power-plant purchase or investment in less than a year and was the latest indication of TECO's aggressive growth plans for TPS. Despite the power crisis in California, the outlook for the wholesale energy market looked good, with the demand for power still strong in deregulated electricity markets and financing for projects relatively easy to secure.

    photo
    [Special to the Times]
    As soon as the McAdams Power Station, above in Kosciusko, Miss., and three other plants under construction are fully operational, TPS will be able to offer wholesale power to 18 states.
    Then, in quick succession, came a slowdown in the U.S. economy, the further economic fallout of the Sept. 11 terrorist attacks and the accounting scandals that brought down energy-trading giant Enron Corp. TECO chairman and chief executive Robert Fagan would later say that all of that amounted to a "perfect storm of impact on the energy industry."

    The result? A drop in wholesale energy prices, uncertainty over future power demand and fresh questions about when or whether states such as Florida with regulated power markets would open to competition. The Enron debacle guaranteed heightened scrutiny, even suspicion, by Wall Street, ratings agencies and the media about the way energy companies did business and kept their books.

    TPS got its fingers burned in December when it learned that $300-million it had advanced for the construction of two massive power projects in Arizona and Arkansas had been swept away by the construction company's bankrupt parent, Enron.

    All of this has clouded the once-ambitious growth plans of TECO, a company that has staked its future on power plants far beyond its home territory in Hillsborough County. But things could have been worse.

    The company has a pipeline full of projects that are scheduled to come online in 2003, although TPS still is lining up financing for two of the four projects that are under construction. And a major Canadian construction company recently swooped in to take over responsibility for completing TPS' Enron-linked projects, resulting in higher projected cost overruns but greatly diminished risk.

    photoTPS president Richard Ludwig says the past year held "unexpected challenges."

    This leaves TPS president Richard Ludwig feeling sanguine about business.

    "They created some unexpected challenges," Ludwig said of the past year's events. "But those challenges were not insurmountable. I'm very pleased with how we reacted to them."

    TPS has at least a 50 percent ownership interest in 10 power plants or construction projects with total generating capacity of nearly 6,900 megawatts -- compared with the 4,000 megawatts churned out by all of Tampa Electric's local power plants -- as well as smaller investments in other facilities.

    The four largest are under construction: the 599-megawatt Dell Power Station in Dell, Ark., and the 599-megawatt McAdams Power Station in Kosciusko, Miss., both of which TPS fully owns; and the mammoth 2,145-megawatt Gila River Power Station in Gila Bend, Ariz., and the 2,205-megawatt Union Power Station in El Dorado, Ark., which are 50-50 joint ventures with Panda Energy International Inc. of Dallas.

    After mounting an aggressive expansion drive from the second half of 2000 until early 2001 that saw TPS' net ownership interest in generating capacity soar by 5,700 megawatts, the company decided to focus on completing the projects it had taken on.

    "These are all excellent projects in good areas of the country," said Ludwig, 57, who took charge of TPS in 1989, after seven years at other TECO companies and more than a decade with New York State Electric & Gas Corp. "Our concentration now is to get these done."

    Once the Dell, McAdams, Gila River and Union plants are fully operational, TPS will be able to offer wholesale power to 18 states, most of them southern and western.

    About 65 percent of the output at TPS plants currently in operation are sold through long-term contracts of three to five years with local utilities or other customers, with the remainder sold through shorter-term contracts and on the spot market. At the four new plants, about half the output will be sold through long-term pacts.

    While the company has slowed its expansion in the United States, it has all but dropped its international growth plans.

    The company owns two power plants in Guatemala and has interests in a plant in the Czech Republic and a wind-power farm in Costa Rica. But earlier frustrated efforts to do business in Mexico and Brazil persuaded the company to keep its focus on the United States, Ludwig said.

    TPS remains an important source of earnings growth for TECO. In 2001, the unit generated net income of $26.9-million, up 18 percent from $22.8-million a year earlier, which in turn was more than double the $9.3-million reported in 1999. During that time, TECO reported net income of $303.7-million in 2001, $250.9-million in 2000 and $186.1-million in 1999. TPS is expected to increase its net income by an average of about 25 percent a year through 2005, Ludwig said.

    While TPS focuses on completing the projects it has started, Ludwig won't rule out the possibility of more acquisitions this year.

    "Given the downturn in the business climate," he said, "there are now some fairly attractive opportunities."

    - Louis Hau can be reached at hau@sptimes.com or (813) 226-3404.

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