Florida Power & Light Compan (fpl) Case Study

Executive Summary

FPL Group's major subsidiary Florida Power & Light Company (FP&L) is the largest electric power utility in Florida and one of the largest in the country. The company has so far enjoyed a growth trend higher than national industry standards while experiencing increasing turbulence in its business environment since the 1970's. These include the commissioning of a faulty nuclear power plant, losses in major non-utility subsidiaries and of late, competitive challenges due to potential deregulation in all segments of the industry. In addition, FPL now also finds itself in the unenviable position of its prized investment grade credit rating being downgraded. An influential industry analyst has reported that FPL may not continue its long established practice of annual dividend increases from the coming financial year. This news has been greeted by an immediate drop in the share price. This report analyses FPL's situation and what its response might be in terms of its dividend policy.

Current Scenario and the Risk

Deregulation in power and utility sector in several states has increased competition and brought in major changes in the business. Competitive demands need to address efficiency of service at a market determined price. Consequently, several of the players have suffered major losses, possibly due to slow adaptation to the new challenges. FPL, sooner or later, will face the same challenge in Florida due to the possibility of coming deregulations. The deregulation in power and transmission have their own challenges, despite deregulation, there is still some control and governance by the Government agencies. This change in business landscape poses a major risk to FPL and it needs to prepare itself to mitigate this risk. FPL needs to do a balancing act to safeguard the interests of all including the competitiveness of the company, the shareholders and the creditors. Any decision that does not factor in these interests can jeopardise the future of all.

The Leadership and the Agency Problem

The change in leadership has brought about a refocus on core operations and competencies with a roll back on the diversification policies. This has resulted in selling off some of the underperforming units, investing in infrastructure, expansion in core business and the realization that a high dividend payout ratio may not be sustainable. Some of these changes have brought several positive outlooks to the company including improved efficiency which is better than other industry standards and lowered the operating and maintenance expenses. The investment in expansion program has put FPL on top of the chart in Florida and fourth largest in the country. The new Standard and Poor's rating based on changed competitive landscape, still place the FPL's position above