Downturn dims outlook for utilities

The spreading financial meltdown is cutting ever deeper into the nation's power companies, traditionally among the most stable businesses.

Since Raleigh-based Progress Energy announced 300 job cuts this summer in Florida and said further layoffs could come, other electricity providers have warned they may have to delay building power plants and put off developing renewable energy such as solar and wind power.

James Rogers, CEO of Charlotte-based Duke Energy, recently remarked that “a few utilities have hit the pause button on some of their biggest projects.”

The power companies face stalled growth after years of booming home sales that were fueled by a speculative real-estate bubble. The spreading crisis is leading utilities' biggest customers to close factories, cut jobs and reduce electricity use. Meanwhile, the credit freeze on Wall Street is tightening the supply of money utilities depend on to operate.

Progress Energy, whose biggest service area is in economically battered Florida, will provide details of its financial health this morning when the company issues third-quarter earnings.

Officials are likely to discuss the worsening impact of the downturn in this state. Duke, which operates in five states, will release results next week. Analysts are expecting Duke to post earnings of 44 cents per share, the median figure of 12 analysts surveyed by Bloomberg. That would be a drop from 48 cents per share a year earlier.

Other utilities have seen slowdowns. Utility giants like Florida Power & Light and Southern Co. have not only seen customer growth stall, but electricity sales have also begun to slip this year.

North Carolina has been hit with thousands of layoffs in recent weeks across a broad spectrum of industries. A recession can wreak havoc with power companies, whose major industrial customers can run up electricity bills exceeding $1 million a month.

Despite the economic turmoil, the stock prices of Duke and Progress are faring better than others in their industry. Both companies' stock has declined nearly 15 percent this year, compared with a 29 percent drop in the S&P 500 Utilities Index.

The economic slump has struck at a time when Progress, Duke and other utilities are in the beginning phases of decade-long plans to build the nation's first nuclear power plants in decades. The multibillion-dollar nuclear plants are contingent on continued customer growth and an unabated appetite for energy.

Even though the optimistic growth projections are on hold, utility officials aren't scrapping their nuclear strategies yet, in part because construction wouldn't start for at least three or four years. A state law enacted last year requires utilities to tap renewable sources, limiting the companies' ability to postpone solar, biomass and other green projects.

If a recession drags on, however, officials could face tough choices on whether to remain committed to existing timetables or to hedge their risk and consider postponements.

“It's a question of how long it lasts,” said Marc de Croisset, a utility analyst in New York with Macquarie Research. “Everyone understands that as long as this situation continues, it'll be very hard to fund projects.”

Even though customers pay for power plants and other expansions through their monthly bills, utility companies finance capital projects by borrowing the money up-front and paying back the loans over decades.

Many still remain confident that the downturn is a temporary hiccup in a broader national trend of growth, particularly in the Southeast. As long as people depend on electricity, utilities will remain insulated from the worst effects of a recession, Rogers recently told National Journal magazine. If the recession lasts less than nine months, he said, utilities should be in the clear.

Rogers said the economic slowdown will likely delay plans to modernize power plants and upgrade power distribution systems, as well as require putting off investment in renewables, which are being promoted by North Carolina and other states in response to global warming.

To free up cash for the next 18 months, Duke recently took out $1 billion from a credit agreement that contractually obligates Wall Street financial institutions to lend.