Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2002, for FPL Group, Inc. and its primary subsidiary, Florida Power & Light Company (FPL). FPL Group operates as a holding company with two main reportable segments: FPL, a rate-regulated electric utility serving Florida, and FPL Energy, a non-regulated energy generation subsidiary. The filing includes a combined report for both entities.
Key Financial Metrics
| Metric (in millions) | FPL Group (Q1 2002) | FPL Group (Q1 2001) | FPL (Q1 2002) | FPL (Q1 2001) |
|---|---|---|---|---|
| Operating Revenues | $1,843 | $1,941 | $1,538 | $1,647 |
| Operating Income | $256 | $240 | $164 | $156 |
| Net Income (Loss) | $(56) | $110 | $122 | $101 |
| Adjusted Net Income (Excl. FAS 142 & non-recurring) |
$135 | $130 | N/A | N/A |
| Operating Cash Flow | $690 | $533 | $710 | $502 |
| Capital Expenditures | $(269) | $(333) | $(269) | $(333) |
| Long-Term Debt | $5,333 | $4,858 | $2,479 | $2,579 |
| Cash & Equivalents | $117 | $109 | $81 | $12 |
Earnings Per Share (FPL Group): Reported loss of $(0.33) per share. Adjusted earnings per share (excluding the cumulative effect of FAS 142) were $0.98.
Material Changes vs. Prior Period
- Accounting Change (FAS 142): The primary driver of the reported net loss was a one-time, non-cash impairment charge of $222 million (after-tax) recorded by FPL Energy upon the adoption of FAS 142, "Goodwill and Other Intangible Assets." This eliminated all previously recorded goodwill.
- Revenue Decline: Consolidated operating revenues decreased 5% to $1,843 million. FPL revenues declined due to lower fuel prices (reducing pass-through clause revenues) and milder weather reducing usage per customer, partially offset by a 1.9% increase in customer accounts.
- Operating Income Growth: Despite lower revenues, FPL Group operating income increased to $256 million (from $240 million) due to significantly lower fuel and purchased power costs ($804 million vs. $951 million) and the absence of merger-related expenses ($31 million in 2001).
- Segment Performance: FPL Energy reported a net loss of $(198) million primarily due to the FAS 142 charge. Excluding this charge, FPL Energy earnings grew due to new project additions and favorable trading activities, though offset by drought impacts on hydro assets.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
- Adjusted Earnings: Management highlights adjusted earnings of $135 million, a 4% increase over the prior year, driven by lower fuel costs and asset optimization.
- Capital Expenditures: FPL expects 2002 capital expenditures of approximately $1.2 billion. FPL Energy expects 2002 capital expenditures of approximately $2.4 billion.
- Acquisitions: FPL Energy agreed to acquire an 88.23% interest in the Seabrook Nuclear Generating Station for $837 million, expected to close by year-end 2002.
- Rate Case: The Florida Public Service Commission (FPSC) approved a new retail base rate settlement on April 11, 2002. However, an administrative appeal was filed on April 26, 2002, by the South Florida Hospital & Healthcare Association. FPL intends to contest this appeal.
Risks and Contingencies
- Legal Proceedings:
- Mercury Litigation: A suit filed in April 2002 alleges mercury poisoning from FPL plant emissions; no damages specified.
- Executive Compensation: Shareholder suits (Oorbeek and Klein) allege corporate waste regarding Long Term Incentive Plan payments made after the failed Entergy merger. A special committee is investigating.
- Environmental: Ongoing EPA action regarding Clean Air Act violations at Scherer Unit No. 4 (in which FPL holds a 76% interest).
- Market Risk: A hypothetical 40% decrease in natural gas/electricity prices and 25% decrease in oil prices would result in a negative fair value change of $18 million for FPL Group's derivative instruments.
- Off-Balance Sheet Arrangements: FPL Energy has significant commitments related to Special Purpose Entities (SPEs) for power plant construction, including residual value guarantees.
Investor Verification Checklist
- FAS 142 Impact: Verify the sustainability of earnings by excluding the $222 million goodwill impairment charge, which is a non-recurring accounting adjustment.
- Rate Case Appeal: Monitor the outcome of the administrative appeal filed against the FPSC's rate settlement, as this could impact future revenue recovery.
- Seabrook Acquisition: Confirm the closing of the $837 million Seabrook acquisition and the associated financing plans (short-term borrowings vs. equity issuance).
- Executive Compensation Litigation: Track the special committee's investigation into the shareholder suits regarding LTIP payments to determine potential financial or reputational impact.
- Capital Commitments: Review the $6.1 billion in total commitments (including $3.6 billion for FPL capital expenditures) to assess future liquidity requirements.