Business Context and Reporting Period
This Form 10-Q is a combined quarterly report for FPL Group, Inc. and its primary subsidiary, Florida Power & Light Company (FPL), for the period ended September 30, 2003. FPL Group operates through two primary reportable segments: FPL, a rate-regulated electric utility serving Florida, and FPL Energy, a non-rate regulated subsidiary engaged in independent power generation and energy marketing. The filing includes unaudited condensed consolidated financial statements and management's discussion and analysis.
Key Financial Metrics (Nine Months Ended Sept 30, 2003)
| Metric | FPL Group (Consolidated) | FPL (Utility) | FPL Energy |
|---|---|---|---|
| Operating Revenues | $7,605 million | $6,193 million | $1,345 million |
| Net Income | $745 million | $611 million | $156 million |
| Earnings Per Share (Diluted) | $4.19 | N/A | N/A |
| Operating Cash Flow | $1,609 million | $1,278 million | N/A |
| Capital Expenditures | $2,089 million (Investing) | $946 million | $1,108 million (Investments) |
| Total Assets | $25,155 million | $15,840 million | $8,139 million |
| Long-Term Debt | $8,331 million | $2,994 million | Significant portion of FPL Group Capital debt |
| Cash and Equivalents | $935 million | $231 million | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated operating revenues increased 21.7% to $7,605 million from $6,251 million in the prior year. FPL revenues rose due to increased customer accounts and usage, partially offset by a 7% base rate reduction effective in 2002. FPL Energy revenues increased significantly due to new project additions (over 4,500 MW) and higher energy prices.
- Profitability: Net income surged to $745 million from $344 million in the prior year. This improvement is largely attributable to the absence of significant impairment and restructuring charges recorded in 2002 (specifically a $222 million goodwill impairment and $73 million restructuring charge at FPL Energy).
- Accounting Changes: The company adopted FAS 143 (Asset Retirement Obligations) and FIN 46 (Variable Interest Entities) in 2003. The adoption of FIN 46 resulted in the consolidation of certain entities, increasing assets by approximately $366 million and liabilities by $379 million, with a negligible impact on net income ($3 million loss).
- Cost Structure: Fuel and purchased power expenses increased to $3,736 million (from $2,783 million) driven by higher oil and natural gas prices. O&M expenses also rose due to increased plant maintenance and employee benefit costs.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: FPL Energy expects to add approximately 517 MW of gas-fired generation and 411 MW of wind generation for the remainder of 2003. The company targets having approximately 75% of its capacity under contract by year-end.
- Regulatory Environment: FPL is facing an appeal by the South Florida Hospital and Healthcare Association regarding its 2002-2005 rate agreement. The company believes the FPSC's approval will be upheld. FPL is also evaluating the impact of FERC's proposed rules on wholesale power markets.
- Unusual Items:
- 2002 Charges: The prior year included a $222 million goodwill impairment (FAS 142) and $207 million in restructuring/impairment charges, which are not present in the current period.
- Derivatives: FPL Energy recorded net unrealized gains of $9 million (nine months) from non-managed hedge activities.
- Risks:
- Commodity Prices: Significant exposure to volatility in natural gas and oil prices, which affect both fuel costs and wholesale power revenues.
- Legal Proceedings: Ongoing litigation includes EPA actions regarding Scherer Unit No. 4 (Clean Air Act), shareholder suits regarding Long Term Incentive Plan (LTIP) payments, and environmental suits alleging health impacts from plant emissions.
- Contingencies: A $127 million note receivable from Olympus Communications (Adelphia subsidiary) is in default; collectibility is uncertain.
Investor Verification Checklist
- Accounting Adoptions: Verify the impact of FAS 143 (Asset Retirement Obligations) on future depreciation and accretion expenses, noting the $1.8 billion ARO recorded for nuclear decommissioning.
- Debt Structure: Review the significant increase in long-term debt ($8.3 billion) and the reliance on FPL Group Capital for financing independent power projects.
- Regulatory Rate Case: Monitor the status of the appeal against the 2002-2005 rate agreement, as a reversal could impact future revenue recovery.
- Contingent Liabilities: Assess the potential exposure from the Olympus note receivable ($127 million) and the EPA litigation regarding Scherer Unit No. 4.
- Capital Commitments: Confirm the ability to fund projected capital expenditures of $5.75 billion for FPL and $565 million for FPL Energy through 2007.