FPL: A "Green" Utility

03/18/2005 12:00 am EST

Focus:

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

"FPL Group is a growth-oriented success story with the wind riding at its backs," says Ian Wyatt, along with research analyst Pete Henig. Indeed, "wind" and other alternative sources of energy is a primary focus behind their bullishness in this environmentally friendly utility.

"I'm a sucker for alternative energy--not just because it's good for the environment and weans us off dependency on foreign oil, but because it remains a relatively untapped market with guaranteed demand, an industry where technology and innovation can solve a problem by doing good, and offers the potential for huge profits that need not flow outside our borders. FPL Group (FPL NYSE), one of the nation's largest providers of electricity-related services--with annual revenues of more than $9 billion--offers a case in point.

"Its principal subsidiary, Florida Power & Light, is one of the nation's largest electric utilities serving more than 4.2 million customers. The company also operates FPL Energy LLC, a leading wholesale generator utilizing clean fuels such as natural gas, wind, solar, hydroelectric, and nuclear to generate electricity. In fact, FPL Energy is the nation's leader in wind energy, with 43 wind facilities in operation in 15 states. As a result, the company owns, operates, and controls nearly 40% of wind-generated energy within the US.

"The parent firm reported a 30% rise in fourth-quarter earnings with Florida Power & Light, witnessing an increase in customer accounts during the quarter of 94,000, or 2.3%. Net income for the FPL Group rose to 94 cents a share, up from 81 cents a year earlier. Though such results were modestly below Wall Street's expectations, FPL said it still expects total 2005 earnings of $5.00 to $5.20 a share, in line with analysts' average forecasts of $5.14. (The company mentioned that the severe hurricane season had been the primary cause for the dent in profits.)

"Investors don't seem to mind. Not only do they remain unfazed by a bit of bad weather, they are treating FPL Group and many other utilities as if they represent a true growth end of the stock market. Shares of FPL are trading at the upper limits of their 52-week highs, having risen 25% over the past year from $60 per share to over $75. This parallels the performance of the average utility fund last year, funds that rose roughly 22% during 2004, more than double the S&P 500's gain.

"Recognizing its increasingly solid footing, Moody's recently changed its outlook on FPL Group Capital to stable from negative, citing factors that include less short-term debt. (FPL Group Capital provides funding for the unregulated activities of FPL Group, including its wind energy endeavors.) At the same time, Moody's assigned an ‘A2’ issuer rating (its sixth-highest rating) to FPL Group with a stable outlook, a very good sign for investors not only counting on FPL's dividend, but the potential for dividend expansion.

"Equally, FPL Group has the auspicious honor to have recently scored the highest ranking in the US, and second globally, in a World Wildlife Fund report analyzing 72 of the world's leading power companies. This report reviewed current use of available technologies to reduce C02 emissions as well as clear commitments made for future improvements. The report declared FPL a 'bright spot' in the US rankings and stated that its leadership in developing wind energy and a commitment to dramatically improving power plant efficiency placed it at the top of its industry.

"I find this admirable. To finally find a company offering leadership by example--that energy innovation, sound management principles, and clear strategic thinking can lead to expanding business results--is like a clean, clear breath of fresh air. That such results might come from a dividend-paying utility is even more refreshing. That such leadership might yet further emerge from its commitment to clean energy should be a buying signal for growth-oriented investors. In our view, the company's environmentally positive approach to business will be the next wave of opportunity in energy, and companies such as FPL Group will be leading that charge."

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