Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2006, for FPL Group, Inc. and its principal subsidiary, Florida Power & Light Company (FPL). FPL Group operates as a holding company with two primary reportable segments: FPL, a rate-regulated utility serving over 8.5 million people in Florida, and FPL Energy, a competitive energy business focused on wind, nuclear, and fossil fuel generation. The company employed approximately 13,300 people at year-end. A proposed merger with Constellation Energy was mutually terminated in October 2006.
Key Financial Metrics
| Metric (in millions) | 2006 | 2005 |
|---|---|---|
| Operating Revenues | $15,710 | $11,846 |
| Net Income | $1,281 | $901 |
| Earnings Per Share (Diluted) | $3.23 | $2.34 |
| Operating Cash Flow | $2,498 | $1,547 |
| Capital Expenditures | $3,739 | $2,546 |
| Total Assets | $35,991 | $32,990 |
| Long-Term Debt | $9,591 | $8,039 |
Segment Performance: FPL reported net income of $802 million, while FPL Energy reported $610 million. Corporate and Other incurred a net loss of $131 million, primarily due to a $98 million impairment charge at FPL FiberNet.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 33% to $15.7 billion, driven by higher fuel cost recovery revenues ($6.6 billion vs. $4.3 billion) due to increased fuel prices and a higher fuel clause recovery factor.
- Profitability: Net income increased 42% to $1.28 billion. FPL Energy's results were significantly boosted by a $97 million pretax gain from a court judgment related to an Indonesian project (Karaha Bodas Company).
- Impairments: FPL FiberNet recorded a $98 million impairment charge related to its metro market assets due to changes in the business climate. FPL Energy recorded an $8 million impairment charge for a California coal plant.
- Storm Costs: FPL expensed approximately $27 million (after-tax) of disallowed 2005 storm costs due to a change in the regulatory standard applied by the Florida Public Service Commission (FPSC).
- Depreciation: Depreciation and amortization expense decreased $100 million to $1.185 billion, benefiting from lower depreciation rates and the suspension of the nuclear decommissioning accrual under the 2005 rate agreement.
Guidance, Outlook, and Risks
- Capital Plan: FPL projects capital expenditures of approximately $10.7 billion for 2007-2011, including the "Storm Secure Plan" to harden the grid against hurricanes. FPL Energy plans to add at least 1,500 MW of new wind generation in 2007-2008.
- Acquisitions: FPL Energy entered an agreement to purchase the Point Beach nuclear power plant (1,033 MW) for approximately $998 million, expected to close in Q3 2007.
- Regulatory Environment: FPL operates under a 2005 rate agreement effective through 2009. The agreement includes a revenue-sharing mechanism; if revenues exceed thresholds, amounts are refunded to customers. FPL is evaluating the construction of new nuclear and coal units.
- Key Risks:
- Environmental Compliance: Potential costs associated with the Clean Air Interstate Rule (CAIR), mercury emissions, and Clean Water Act Section 316(b) regarding cooling water intakes.
- Weather: Exposure to hurricanes affecting the Florida service territory and weather-dependent generation (wind/hydro).
- Commodity Prices: Volatility in natural gas and electricity prices, managed through hedging and cost recovery clauses.
- Legal Proceedings: Ongoing litigation regarding the Indonesian project judgment, EPA Clean Air Act violations at Scherer Unit No. 4, and transmission rate disputes with FMPA.
Investor Verification Checklist
- Storm Reserve Deficiency: Verify the status of the $868 million storm reserve deficiency and the issuance of up to $708 million in bonds for recovery.
- Indonesian Project Gain: Confirm the finality of the $97 million gain from Karaha Bodas Company and the status of the fraud claim filed by PT Pertamina seeking $145 million of FPL Energy's share.
- Point Beach Acquisition: Monitor regulatory approvals and closing conditions for the $998 million Point Beach nuclear plant acquisition.
- FPL FiberNet Impairment: Assess the long-term viability of the fiber-optic business following the $98 million impairment charge.
- Environmental Compliance Costs: Track potential capital expenditures required for CAIR, mercury, and Clean Water Act compliance, which could be material.
- Dividend Policy: Note the increase in the quarterly dividend to $0.41 per share announced in February 2007.