Michael Giberson
Seeking Alpha has begun publishing transcripts of quarterly corporate earnings calls. Typically these calls are discussions presented by the CEO and other corporate officers followed by Q&A with financial analysts. The calls offer a more “inside look” at company operations than you get from reading newspaper or magazine stories or even trade press. What’s more, the calls provide insight into the markets that the company participates in. The FPL Group Inc. 3Q 2009 call provides several insights into the electric business in Texas, where FPL participates in both the wholesale and retail markets.
FPL, through its NextEra Energy Resources subsidiary, owns both fossil-fueled and wind power plants in Texas and several other places. Currently the company is the second-largest operator of wind power plants in the world behind Iberdrola. FPL owns Gexa Energy, a energy retailer in Texas serving about 172,000 customers (according to Wikipedia).
The earnings call spanned the range of FPL Group activities and interests. There is much here of interest in Texas: FPL has recently completed a 200-mile self-funded transmission line linking four of its wind power plants in ERCOT’s west region directly to the higher-priced ERCOT south region, they’ve added both wind power and natural gas generation in Texas, and they are constantly trying to balance their risk exposures for their wholesale and retail obligations in the state.
I thought the call was particularly interesting for what it implied about retail market profit margins during the current low-wholesale power prices in Texas (and most other places). Earnings from their merchant generator fleet are down:
Although we were pleased with the $0.11 year-over-year improvement in NextEra Energy Resources’ quarterly earnings per share contributions, the financial performance did not meet our internal expectations. Two factors primarily drive this: the Texas merchant gas fleet and the wind resource. Let me explain a bit further.
On the former, contributions from the Texas gas fleet were approximately $24 million or $0.06 per share below our quarterly expectations. Both spark spreads and ancillary revenues were much lower than we expected.
As for the latter, as I mentioned a moment ago, the wind resource in the third quarter was well below normal or roughly $0.06 per share below our expectations. … For the year, the poor wind resource has reduced per share results by nearly $0.13.
Elsewhere in the call:
Meanwhile, our retail business in Texas … added about $0.04 per share incrementally given favorable margins. The remaining contributions from the existing merchant fleet amounted to negative $0.02 per share, but there is nothing notable in any one category worth calling out.
Later in the call:
Just one last comment: As I’ve said before, we’re certainly not happy that ancillary revenue is down at our gas plants in Texas, but one of the reasons that [inaudible] retail business is up $0.04 quarter-over-quarter is because they didn’t have to pay the ancillary cost to our gas assets and other gas assets.
A couple of comments:
First, the ownership of both wholesale and retail assets in the Texas competitive market provides a sort of natural hedge against fuel price movements. When wholesale power revenue or ancillary service revenues are low, as currently, the wholesale business suffers but the retail side benefits. (See related discussion on wholesale-retail combination in Texas, and earlier here.)
Second, while retail prices have fallen in Texas, they haven’t fallen as far and as fast as wholesale prices, so retail margins are higher for FPL. The call doesn’t fully clarify the reasons here. The most straightforward explanation is that FPL likely has many customers on one- or two-year fixed price contracts, with prices that relatively high now (but presumably competitive one or two years ago.) Also, as noted in the call, costs for ancillary services were unexpectedly low, which reduced expenses for the retail side.
But margins may be higher, too, if retail prices are slow to adjust to dropping wholesale prices. I wonder whether there is an asymmetric price adjustment phenomenon in competitive retail electricity? Do consumers shop around more and switch companies more when prices are going up as compared to when prices are falling? Probably, and that should be enough of a force to produce a “rockets and feathers” effect on prices.
Finally, and I don’t think the call made this connection, but I wonder whether there is a link between the lower-than-expected wind resource and the low revenues/costs associated with ancillary services. To some degree, variable wind power output increases the demand for energy balancing and other ancillary services required by the transmission system for reliable operations. Possibly with less wind power coming on the system, fewer ancillary services were required. Of course low natural gas prices and on-average slightly lower electric power demand would also reduce the cost of ancillary services, so the explanation may not be wind-output related.
NOTE: FPL’s 200-mile self-funded transmission line, dubbed the “Texas Clean Energy Express,” raises a host of interesting issues worthy of examination. One of these days…
ALSO: Of course FPL Group Inc. isn’t the only company with an interest in the Texas electric power market. Search “Texas AND electric” at Seeking Alpha’s Transcript Center for much much more. If you find anything interesting, let me know.