FPL Group last week raised its full-year 2002 earnings forecast by about 5 cents a share, and now expects earnings through next year will be on the rise as well. As it had expected, the third quarter was hit with charges in its unregulated power group and mark-to-market accounting, which pushed earnings down 55% over the same period of 2001. Minus the charges, FPL surpassed Wall Street estimates.

The utility holding company earned $150 million, or 85 cents/share for the quarter, compared with $334 million, or $1.98 for the third quarter of 2001. FPL also recorded $167 million in charges for the quarter. Late last month the company expected to report charges against third quarter earnings, and also said it was restructuring its wholesale energy and telecommunications businesses in response to the current marketplace (see NGI, Sept. 30).

Excluding the charges, net income was $315 million, or $1.79 a share, close to Wall Street estimates of between $1.70 and $1.78. FPL raised its full-year 2002 earnings forecast about 5 cents a share, anticipating it will garner $4.75-80 per share, up from a previous estimate of $4.70-75. In 2003, the utility group expects earnings to total $4.80-$5.00 per share.

“As we had indicated earlier, we expected our third quarter earnings to be down slightly from the prior year, and fourth quarter earnings to be up,” said CEO Lew Hay. “Despite some rather challenging conditions in the energy sector, we expect to exceed our earlier earnings forecast for the full year 2002 and are revising our guidance upward.” The new forecast, said Hay, “assumes that in the fourth quarter Florida Power & Light will see customer growth consistent with the first three quarters of the year, and normal weather and FPL Energy will experience forward market prices at current levels.”

Based on current market conditions and anticipated normal weather in Florida, Hay said the 2003 forecast “reflects our confidence in continued customer growth at Florida Power & Light, and the fact that we already have nearly three-fourths of the output of FPL Energy power plants and more than 85% of the subsidiary’s anticipated gross margin under contract for next year.” The contracted output includes the Seabrook Nuclear Station, which FPL anticipates will be added to its portfolio in November.

Broken down by entities, FPL’s principal subsidiary Florida Power & Light’s third-quarter net income was down 2% to $284 million, or $1.61 a share, compared with earnings of $1.72 for the same period of 2001. A 5.8% increase in retail kilowatt-hour sales partially offset a $250 million annual rate reduction that became effective mid-April. However, the utility, which serves 4 million customers in the state, also experienced higher taxes and operations and maintenance expenses, offsetting lower depreciation and increased sales. Since the third quarter of 2001, the subsidiary has added 86,000 new customers, a 2.2% increase, and usage per customer was up 3.6%.

The other major subsidiary, FPL Energy, reported a sharp loss compared with the third quarter of 2001, losing $34 million, or 19 cents a share, which included the mark-to-market effect of non-managed hedges and non-recurring charges. Excluding the charges, FPL Energy was still down in earnings, with third-quarter net income of $37 million compared with $46 million a year earlier. Earnings per share were 21 cents for the quarter, down from last year’s quarterly earnings of 27 cents.

Operationally, FPL Energy’s results also were down slightly from last year. Power plant additions, totaling more than 1,100 MW since the prior-year quarter, and improved operating results at several existing assets, including wind-driven electricity generating facilities, together added $9 million to net income. Offsets included lower prices, blamed in part on milder weather in Texas, which reduced the subsidiary’s earnings by $6 million, as well as a $7 million reduction from the company’s Maine assets, which reflected the impact of new, more efficient generation displacing older fossil fuel plants in that state.

Despite the quarterly losses in FPL Energy, Hay was optimistic that the unit would grow dramatically in the coming year. He said the company expects the subsidiary to report strong earnings in the fourth quarter, and “are optimistic we can achieve earnings growth of 30-to-50% in 2003.”

Following the earnings conference call with investors last week, CreditSights analysts noted that FPL had discussed its acquisition strategy, and noted that “the urge to grow” by the company “is one of the things that makes us a bit nervous abut FPL. That will probably work for the short to intermediate term, but there remains a risk that the itch to buy could result in some pricey purchases down the road.”

Analysts also are concerned about FPL’s risk profile. “FPL’s nonutility adventures have been in telecom and power. There is no balance of pipelines, distribution or other less-risky income, like Duke Capital has in its portfolio. On the positive side, however, FP&L is a cash cow with a superb service territory and a monopoly for the foreseeable future. Also a positive versus Duke is the relatively restrained trading strategy, which seems to be dedicated to hedging the portfolio, not speculative trading. We saw the failed merger with Entergy as more of a negative for FPL than Entergy, as we like Entergy’s management a lot. Entergy’s discipline applied to FPL would have made us a lot happier.”

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