FPL sees profit, worry: FPL Group reported a $774 million quarterly profit, but the company's stock continued to drop.

Oct 28, 2008 (The Miami Herald - McClatchy-Tribune Information Services via COMTEX) -- FPL | Quote | Chart | News | PowerRating -- FPL Group reported on Monday a huge increase in profits for its third quarter, thanks to financial hedging of energy commodities, but the economic downturn caused a decline in the usage of electricity in Florida and the company is working on a multibillion-dollar scale-back on expenses.

Overall, the parent of Florida Power & Light reported profits of $774 million, or $1.92 a share, assisted by a $285 million hedge-fund gain. Operating revenue climbed to $5.4 billion, up from $4.6 billion.

Still, the company's stock has been hard hit in recent weeks, falling from $68 in July to close at $40.68 on Monday, down $2.52 for the day. The company's quarterly performance, eliminating the one-time hedging profit, was below analysts' expectations. Analysts say investors are also concerned about FPL Group's unregulated wing, which they fear might be hammered by recession.

Acknowledging recent "unprecedented events" in the American economy, FPL Group Chief Executive Lew Hay said Monday during a conference call, "We will be feeling the tremors for some time to come, but less at FPL Group than elsewhere."

The utility's performance in Florida is a clear indication of what has been happening economically in the state. For years, FPL has seen steadily rising profits because of customer growth. Between 2002 and 2007, the utility saw quarterly customer growth of 79,000 to 116,000. In the third quarter of 2008, a mere 1,000 customers were added.

MORE LATE BILLS

Customer accounts more than 60 days past due increased 17 percent, or $4 million, compared to the third quarter last year. Inactive customers, indicators of empty houses, went from 222,000 at the start of 2007 to about 290,000 on Sept. 30.

Overall, 4.5 million existing customers used 4.3 percent less electricity than they did a year ago.

The company attributed 1.5 percent of that to cooler weather, meaning people used their air conditioners less, but 2.8 percent of that was people simply using less power, partly because they're cutting back because of economic fears and partly because growing numbers are buying energy-efficient appliances.

For the third quarter, the utility saw its profit decline from $326 million last year to $314 million this year.

On the unregulated side, FPL Energy suffered because of renewable energy problems. There was significantly less wind in the West than usual, the company reported, although hydro power in Maine was better than usual. These two factors caused an earnings reduction of 7 cents a share.

During the conference call, Chief Financial Officer Armando Pimentel said the company is making contingency plans for an "economic slowdown that will last through at least the later parts of 2009."

Because of that, FPL Group plans to reduce its capital expenditures by $1.7 billion next year, much of that in planned construction of wind farms in the West and Plains states. In Florida, the utility is slashing capital expenditures by $475 million in 2008 and during the third quarter reduced operation and maintenance by $22 million.

Company executives insisted Monday that the company is on firm footing. Its $17 billion in total debt is highly rated by listing agencies. Even during this liquidity crisis the company has been able to use markets for short-term commercial paper, although at somewhat higher rates.

On its unregulated side, the executives said much of the power that it sells utilities is under long-term contract and will not be subject to market pressures.

Still, it's on this last point that investors are worried. Debra Bromberg, an analyst with Jefferies & Co., said FPL and other utilities have been hit partly because of the "overall weak market" and partly because "they have merchant power that has been underperforming due to weakness in [natural] gas prices," which is causing wholesale electric prices to fall.

Bromberg, which has a hold rating on the stock, said that while some of FPL Energy's production was under long-term contract, some of it is not. Jefferies & Co. research shows regulated utilities' stock prices have dropped 18 percent in the past two months, while the stock of utilities with unregulated generation has fallen 32 percent, about the same as the Standard & Poors 500.

'OUT OF WHACK'

Considerably more upbeat is David E. Parker of Robert W. Baird & Co., who has an outperform rating on FPL Group and sees a target price of $75.

"Traveling around the world, I see most investors believe Florida has gone out of business," Parker said, because of the real-estate collapse. "It's kind of a knee-jerk reaction. I think something's out of whack."

Parker said FPL Group looks sound financially and Florida will bounce back. He noted one big fear of Florida economists had been that high housing prices would keep many baby boomers from retiring here. "But that's no longer an issue."

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