A Strong Utility at a Bargain Price

03/24/2010 11:19 am EST

Focus: STOCKS

Richard Young

Editor, Young's Intelligence Report

Richard C. Young, editor of Intelligence Report, says FPL Group sold off on an unfavorable rate decision, but it’s an attractive play on Florida’s recovery.

FPL Group (NYSE: FPL) shares sold off in January on news of an adverse rate case ruling.

The ruling was unexpected by the market and was a short-sighted decision by the regulator. FPL had not filed a base rate case in Florida in 25 years.

FPL requested a base rate increase of $1 billion in 2010 and $250 million in 2011, based on an allowed return on equity of 12.5%. The regulator issued a verbal ruling that granted FPL the right to increase base rates by $75 million with an allowed ROE of 10%. Florida's regulators were hesitant to raise base rates in the midst of an economic downturn.

The decision appears to be politically motivated. FPL has the lowest rates of Florida's 54 utilities, reliability that is 47% better than the national average, and a power generation fleet that is among the nation's cleanest and most efficient. Yet the ROE granted by the state regulator was the lowest among Florida investor-owned utilities in 2009.

FPL shares are down 10% [so far this year,] with most of the selling taking place after the rate case decision. The outcome of the rate case is of course a negative for the company, but FPL will eventually get approvals for the rates it seeks. The company is likely to either appeal the ruling or file another rate case once Florida's economy fully recovers. In a different economic environment, the regulators may be more open to FPL's request.

FPL is one of the most attractive publicly traded utilities. The company owns both Florida Power and Light and NextEra Energy Resources. Florida Power and Light is the Florida utility discussed above. [It] serves 4.5 million customers, of which 56% are residential [and] 41% commercial. Power and Light generates 56% of its power from natural gas, 21% from nuclear plants, only 10% from coal and oil, and the remaining 13% primarily from wind.

NextEra Energy Resources is an independent wholesale energy company [and] the largest generator of wind and solar power in North America. NextEra's wind assets have the capacity to generate approximately 7,540 megawatts of electricity, enough to power approximately two million homes.

Florida is a top destination for the leading edge of the 76 million baby boomers who are now retiring. Until the recession hit, population growth in Florida was twice the national average. The credit crisis, economic downturn, and housing recession have slowed population growth, but a full-blown economic recovery is likely to reignite strong population growth in the state.

At my family-owned investment company, we took advantage of the recent share price weakness to build a position in FPL. The shares yield an attractive 4.2% today—a value rarely available over the last 15 years. If you do not yet own shares, initiate a position today. (The stock closed just below $48 Tuesday—Editor.)

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