FPL GROUP INC. $48 (New York symbol FPL; Income Portfolio, Utilities sector; Shares outstanding: 414.7 million; Market cap: $19.9 billion; Price-to-sales ratio: 1.3; Dividend yield: 4.2%; WSSF Rating: Average) operates through two wholly owned subsidiaries. Florida Power and Light Company (which accounted for 73% of FPL Group’s 2009 revenue and 49% of its earnings) sells electricity to 4.5 million customers in eastern and southern Florida. This subsidiary’s power stations operate under some form of government regulation. That limits the prices Florida Power and Light can charge, but it also gives the company steady revenue streams. FPL Group also owns NextEra Energy Resources, which operates unregulated electrical-power projects in Canada and 26 U.S. states. NextEra mainly sells its power to other utilities, and is free to sell at the market price or under long-term contracts. In all, its projects generate 18,148 megawatts. In 2009, NextEra generated 41% of its electricity from wind, followed by natural gas (37%), nuclear (14%), oil (5%), hydro (2%) and other sources (1%). NextEra is the leading wind-power producer in the U.S., and controls 30% of the market. (Note: FPL Group will change its name to NextEra Energy Inc. in late June 2010. The names of its two main subsidiaries will stay the same. The company’s new trading symbol will be “NEE”.)
Hedges cut wind-power risk
Because wind speeds are variable, wind farms produce a less-reliable power stream than traditional power plants. NextEra cuts this risk with long-term contracts that lock in the selling prices for its wind power. It also protects itself from volatile prices for natural gas, oil and other fuels with swaps, options and other contracts that trade on futures exchanges. FPL Group’s revenue rose 32.6%, from $11.8 billion in 2005 to $15.7 billion in 2006. NextEra expanded its solar and wind-power operations in 2006. That was the main reason for the gain. In 2007, revenue fell 2.9%, to $15.3 billion, but rose 7.5%, to $16.4 billion, in 2008. Revenue fell 4.7%, to $15.6 billion, in 2009. That’s because the weak economy cut power demand, and lowered the prices that NextEra could charge for its power.
Earnings and cash flow on the rise
Despite the uneven revenue, FPL Group’s earnings rose 81.9%, from $901 million in 2005 to $1.64 billion in 2008. Earnings per share rose 75.4%, from $2.32 in 2005 to $4.07 in 2008, on more shares outstanding. FPL Group’s earnings fell 1.5% in 2009, to $1.62 billion, or $3.97 a share. Cash flow per share rose 41.6%, from $6.18 in 2005 to $8.75 in 2009. The stock suffered a setback in early 2010, after Florida power regulators rejected the company’s request to raise its rates. Florida Power and Light had asked for increases of $1 billion in 2010 and $250 million in 2011. However, regulators granted a 2010 increase of just $75.4 million, and no raise in 2011.
FPL resumes upgrades despite ruling
The ruling prompted FPL Group to suspend work on $10 billion of new power plants. However, the company later resumed work on these projects. It felt the lower operating costs following these upgrades will outweigh the negative impact of the rate ruling. FPL Group now expects to spend roughly $2.9 billion on new projects and upgrades this year. It will devote $2.0 billion to Florida Power and Light and $950 million to NextEra. The company planned to increase its wind-power capacity by 1,000 megawatts this year, but will likely scale back these plans because of the slow economy. Besides wind projects, Florida Power and Light and NextEra are building new solar-powered generating stations over the next few years. Florida Power and Light opened a 10-megawatt solar facility in April 2010. It will open a larger, 75-megawatt facility by the end of this year. NextEra plans to spend up to $4 billion over the next four years to add up to 600 megawatts of solar power to its portfolio.
High debt normal for FPL
The company can comfortably afford these investments. FPL Group holds cash of $1.2 billion, or $2.93 a share. Its $16.6 billion of long-term debt is a high 83% of its market cap. However, higher debt loads are normal for power utilities, which invest large sums in plants and maintenance, but receive steady, predictable revenue streams from those assets. The stock trades at just 11.1 times its forecast 2010 earnings of $4.34 a share. The company has raised its dividend each year since 1994. The current annual rate of $2.00 yields 4.2%. FPL Group is a buy.
