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 June 30, 2003. FPL Group operates as a holding company with 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 financial statements and management discussion regarding operations, liquidity, and significant regulatory and legal developments.
Key Financial Metrics
Consolidated Results (FPL Group) for the Six Months Ended June 30, 2003:
- Operating Revenues: $4,632 million (up from $3,899 million in 2002).
- Net Income: $414 million (up from $194 million in 2002, which included a $222 million goodwill impairment charge).
- Earnings Per Share (Diluted): $2.33 (up from $1.14 in 2002).
- Operating Cash Flow: $1,032 million (down from $1,427 million in 2002, impacted by fuel cost underrecoveries).
- Total Assets: $23,421 million (up from $19,790 million at year-end 2002).
- Long-Term Debt: $6,765 million (up from $5,790 million at year-end 2002).
- Cash and Cash Equivalents: $281 million.
Segment Performance (Six Months Ended June 30, 2003):
- FPL (Regulated Utility): Net income of $334 million; Operating revenues of $3,810 million.
- FPL Energy (Competitive Generation): Net income of $93 million; Operating revenues of $772 million.
Material Changes Versus Prior Period
- Revenue Growth: Consolidated operating revenues increased 18.8% year-over-year, driven by higher retail base operations at FPL and significant project additions at FPL Energy (including the Seabrook nuclear acquisition).
- Profitability: Net income improved significantly compared to the prior year, which was depressed by a one-time $222 million after-tax goodwill impairment charge related to the adoption of FAS 142. Excluding this charge and other non-recurring items, adjusted net income increased from $384 million to $413 million.
- Cost Pressures: Fuel, purchased power, and interchange expenses rose to $2,204 million (from $1,701 million) due to higher oil and natural gas prices. This resulted in an underrecovery of fuel costs, negatively impacting operating cash flows.
- Balance Sheet Expansion: Total assets increased by approximately $3.6 billion, largely due to the adoption of FAS 143 (Asset Retirement Obligations), which capitalized $231 million in asset retirement costs and recorded a $1.8 billion liability, alongside continued capital expenditures.
Guidance, Outlook, Risks, and Unusual Items
Accounting Changes:
- FAS 143 (Asset Retirement Obligations): Adopted January 1, 2003. Recorded a $1.8 billion liability for nuclear decommissioning and capitalized associated costs. Accretion expense for the six months was approximately $50 million.
- FIN 46 (Variable Interest Entities): Effective July 1, 2003, FPL Group will consolidate certain VIEs, expected to increase assets by $366 million and liabilities by $379 million, with a negligible impact on net income.
Outlook and Capital Projects:
- Capital Expenditures: Estimated at $5.67 billion for FPL and $1.035 billion for FPL Energy through 2007. FPL Energy expects to add 1,421 MW of gas-fired and 812 MW of wind generation in the second half of 2003.
- Rate Adjustments: The Florida Public Service Commission (FPSC) approved fuel adjustment increases totaling $347 million effective April 1, 2003, and an additional $214 million effective July 1, 2003, to recover higher fuel costs.
Risks and Contingencies:
- Regulatory/Litigation: Pending appeals regarding FPL's 2002-2005 rate agreement and the GridFlorida transmission project. EPA litigation regarding Scherer Unit No. 4 remains stayed but involves potential penalties.
- Nuclear Operations: Cracks found in control rod drive mechanism tubes at St. Lucie Unit No. 2 were repaired. Steam generator replacement is anticipated in 2007 at an estimated cost of $224 million.
- Market Risk: FPL Energy faces volatility in wholesale energy markets. As of June 30, 2003, 77% of FPL Energy's capacity was under contract for the remainder of 2003, dropping to 65% for 2004.
- Contingent Liabilities: A $127 million note receivable from Olympus Communications (Adelphia subsidiary) is in default; management believes it is not impaired based on recent evaluations but collectibility is not assured.
Investor Verification Checklist
- Fuel Cost Recovery: Verify the timing and sufficiency of the FPSC-approved fuel rate increases ($347M + $214M) to cover the reported underrecovery and its impact on future cash flows.
- Capital Expenditure Execution: Monitor the progress of the $224 million steam generator replacement at St. Lucie Unit No. 2 and the $685 million wind project commitments at FPL Energy.
- Regulatory Appeals: Track the outcome of the South Florida Hospital and Healthcare Association's appeal of the 2002-2005 rate agreement, scheduled for oral argument in November 2003.
- Debt Structure: Review the impact of the new $780 million debt financing for FPL Energy projects and the associated interest rate swaps on future interest expense.
- Accounting Adjustments: Confirm the impact of the July 1, 2003 consolidation of Variable Interest Entities (VIEs) on the balance sheet and equity.