Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2001, 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, an unregulated independent power producer. The filing includes unaudited condensed consolidated financial statements for both the three and six months ended June 30, 2001, compared to the same periods in 2000.
Key Financial Metrics
Revenue and Profitability (FPL Group Consolidated):
- Operating Revenues (6 months): $4,107 million (2001) vs. $3,138 million (2000).
- Net Income (6 months): $329 million (2001) vs. $325 million (2000).
- Earnings Per Share (6 months): $1.95 (2001) vs. $1.91 (2000).
- Operating Income (6 months): $620 million (2001) vs. $583 million (2000).
Cash Flow (6 months ended June 30, 2001):
- Net Cash Provided by Operating Activities: $849 million.
- Net Cash Used in Investing Activities: ($1,549) million, driven by $595 million in FPL capital expenditures and $899 million in independent power investments.
- Net Cash Provided by Financing Activities: $643 million, primarily from the issuance of long-term debt ($493 million) and commercial paper ($404 million).
- Cash and Cash Equivalents: Decreased from $129 million to $72 million.
Balance Sheet Highlights (June 30, 2001):
- Total Assets: $16,559 million.
- Total Capitalization: $10,449 million (Common Equity: $5,749 million; Long-term Debt: $4,474 million).
- Current Liabilities: $3,311 million, including $1,562 million in debt due within one year.
Material Changes vs. Prior Period
Revenue Growth: Operating revenues increased significantly year-over-year, driven by higher fuel charges passed through to customers and increased energy sales. FPL's retail base revenues rose due to a 2.3% increase in customer accounts and a 1.4% increase in usage per customer (partially offset by milder weather in Q2).
Expense Increases: Fuel, purchased power, and interchange expenses rose to $2,005 million for the six months ended June 30, 2001, compared to $1,146 million in 2000. This reflects higher commodity costs. Other operations and maintenance expenses also increased due to fossil plant outage costs and higher employee-related costs.
Profitability Drivers: Despite higher expenses, net income improved due to lower depreciation expense (reflecting lower special depreciation under a rate reduction agreement) and strong performance from FPL Energy's expanded portfolio (approx. 1,200 MW additional capacity). However, results were partially offset by $19 million in after-tax merger-related expenses.
Accounting Changes: The adoption of FAS 133 (Accounting for Derivative Instruments) in January 2001 positively affected earnings by $5 million for the period. The company also recorded a $2 million loss as the cumulative effect of the change in accounting principle.
Guidance, Outlook, Risks, and Contingencies
Regulatory and Rate Matters: The Florida Public Service Commission (FPSC) ordered FPL to file minimum filing requirements for a base rate proceeding by October 15, 2001. Any rate changes would take effect after April 14, 2002. FPL is also participating in FERC-mediated discussions regarding a regional transmission organization (RTO) for the Southeast.
California Energy Crisis Exposure: FPL Energy faces significant uncertainty regarding receivables from California utilities (PG&E and SCE) due to the state's energy crisis and utility bankruptcies. Approximately $15 million in past due receivables were outstanding at June 30, 2001. Agreements have been reached with both PG&E and SCE to establish fixed payment structures, but these are subject to bankruptcy court approval and legislative action. FPL Energy's net investment in California projects is approximately $290 million.
Legal Proceedings: The EPA has sued Georgia Power (in which FPL owns a 76% interest) regarding alleged Clean Air Act violations at the Scherer Unit No. 4 plant. The EPA seeks injunctive relief and civil penalties. The case is currently stayed pending consolidation with other Clean Air Act cases.
Capital Commitments: FPL has estimated capital expenditures of approximately $3.3 billion for 2001 through 2003. FPL Energy has committed approximately $860 million to independent power projects, with an additional $440 million committed in July 2001.
Future Accounting Standards: The company is evaluating the impact of FAS 142 (Goodwill and Other Intangible Assets), which will eliminate goodwill amortization starting in 2002. FPL Group currently holds approximately $380 million in goodwill.
Investor Verification Checklist
- California Receivables: Verify the status of the agreements with PG&E and SCE and the likelihood of collecting the $15 million in past due receivables and future payments.
- Rate Case Outcome: Monitor the FPSC base rate proceeding filing in October 2001 and the potential impact on future revenue and margins post-April 2002.
- Environmental Litigation: Track the resolution of the EPA lawsuit regarding Scherer Unit No. 4 and potential penalties or required capital expenditures for control technology.
- Capital Expenditure Execution: Assess the company's ability to fund the $3.3 billion capital plan (2001-2003) given the heavy cash outflow from investing activities ($1.5 billion in H1 2001).
- Derivative Accounting: Review the impact of FAS 133 on future earnings volatility, particularly regarding the fair value recording of power purchase and sales contracts.