Weather, recession hold down utility earnings

Stung by declining demand for electrical power caused by the cool weather and the recession, the owner of Pennsylvania's second-biggest utility yesterday declared a quarterly loss that prompted Wall Street to dump its stock.

PPL Corp., the Allentown parent company of PPL Electric Utilities that supplies power to much of eastern Pennsylvania, posted a $7 million loss yesterday, surprising analysts. Its shares on the New York Stock Exchange declined $4.48 to close down 13 percent at $29.50 - a one-day whack to market value of nearly $1.7 billion.

PPL's earnings were among the more remarkable examples of the economy's effect on American utilities, which have suffered a drop in sales this year, primarily driven by lower industrial demand. Retail sales are down, and so are profit margins for electricity generators, which are selling power on the wholesale market at half the price commanded a year ago.

PPL's loss was driven mainly by a special charge associated with a hedging strategy undermined by depressed prices. To protect itself from last year's high prices, the company committed to buying power this year at prices above current market rates.

The quarterly loss amounted to 2 cents per share, compared with earnings a year ago of $190 million, or 50 cents a share. Excluding onetime items, earnings from ongoing operations were 32 cents a share, about 8 cents less than analysts expected.

PPL officials restated its 2010 earnings forecast to a range between $3.10 and $3.50 per share, down from its previous forecast of $3.60 to $4.20 per share.

The company was not the only utility reporting bad news. Duke Energy Corp., Entergy, Progress Energy Inc., Consolidated Edison Inc., and Allegheny Energy Inc. also reported profit declines.

"I think everybody in the industry is having their own little headaches - not little, actually," said Daniele Seitz, an analyst for Dudack Research Group in New York.

Last month, Exelon Corp., the parent company of Philadelphia's Peco Energy Co., reported a 12 percent drop in profits.

Public Service Enterprise Group, the parent company of New Jersey utility PSE&G, on Friday reported a slight increase in operating earnings that Ralph Izzo, the chief executive, said was not achieved easily.

"To say that the business environment we face is challenging is an understatement, but we're meeting those challenges," Izzo told analysts.

PPL said retail sales were off 5.5 percent in the second quarter. After adjusting for abnormal weather, sales fell 4 percent, almost all attributable to reduced industrial demand, said William H. Spence, executive vice president and chief operating officer.

But Spence and executives at other utilities said the worst appears to be over.

"The decline has leveled off in the second quarter, and industrial sales are expected to remain at this level for the rest of the year," Spence told analysts.