Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2008, for FPL Group, Inc. and its primary subsidiary, Florida Power & Light Company (FPL). FPL Group operates through two main reportable segments: FPL, a rate-regulated electric utility serving Florida, and FPL Energy, a competitive energy business focused on wind, nuclear, and gas generation. The filing includes unaudited condensed consolidated financial statements and management's discussion and analysis.
Key Financial Metrics (Six Months Ended June 30, 2008)
| Metric | FPL Group (Consolidated) | FPL (Utility) |
|---|---|---|
| Operating Revenues | $7,020 million | $5,406 million |
| Net Income | $458 million | $325 million |
| Earnings Per Share (Diluted) | $1.14 | N/A |
| Operating Cash Flow | $2,068 million | $1,680 million |
| Capital Expenditures | $2,474 million (Total Investing) | $1,161 million (FPL CapEx) |
| Total Assets | $43,753 million | $25,882 million |
| Long-Term Debt | $12,057 million | $5,328 million |
| Cash and Equivalents | $424 million | $287 million |
Material Changes vs. Prior Period
- Consolidated Net Income: Decreased by $97 million (17.5%) to $458 million compared to $555 million in the prior year period. The decline was driven primarily by FPL Energy's results.
- FPL Energy Segment: Net income plummeted by $81 million to $167 million. This was caused by $209 million in net unrealized mark-to-market after-tax losses on non-qualifying hedges (compared to $68 million in losses in 2007) and increased "other than temporary impairment" (OTTI) losses on securities in nuclear decommissioning funds.
- FPL Utility Segment: Net income decreased slightly by $12 million to $325 million. This was due to higher operations and maintenance (O&M), depreciation, and interest expenses, partially offset by higher retail customer usage and a base rate increase from the Turkey Point Unit No. 5.
- Revenues: Consolidated operating revenues remained relatively flat at $7,020 million versus $7,004 million in 2007. FPL revenues increased slightly due to customer growth and usage, while FPL Energy revenues dropped significantly due to derivative mark-to-market losses.
- Debt and Liquidity: FPL Group issued approximately $1.75 billion in new debt during the period. Total available net liquidity stood at approximately $6.7 billion as of June 30, 2008.
Guidance, Outlook, and Risks
- Regulatory Actions: In July 2008, the Florida Public Service Commission (FPSC) approved a mid-course increase in FPL's retail fuel clause recovery factor to collect approximately $746 million of anticipated underrecovered fuel costs. The FPSC also approved FPL's need petition for two new nuclear units at Turkey Point (projected in-service 2018-2020) and cost recovery for proposed solar generation facilities.
- Capital Projects: FPL is constructing two natural gas units at West County Energy Center (expected mid/late 2009) and seeking approval for a third unit. FPL Energy plans to add 7,000-9,000 MW of wind generation between 2008 and 2012, contingent on the extension of Production Tax Credits (PTCs).
- Market Risk: FPL Energy faces significant volatility from commodity price changes. The company recorded substantial unrealized losses on non-qualifying hedges due to changes in forward power and natural gas prices. Management notes that these accounting losses are often offset by gains in physical asset positions not marked to market.
- Legal and Operational Risks:
- Substation Fault: A February 2008 substation fault caused a 3,400 MW loss affecting 596,000 customers. Investigations by the FERC and FRCC are ongoing.
- Litigation: Ongoing proceedings include an EPA action regarding Clean Air Act violations at Scherer Unit No. 4 (76% owned by FPL) and a bankruptcy court complaint from Adelphia Communications regarding a 1999 stock repurchase.
- Insurance: FPL does not have insurance for a substantial portion of its transmission and distribution property; storm restoration costs exceeding reserves may require rate adjustments or securitization.
Investor Verification Checklist
- Derivative Exposure: Verify the magnitude of unrealized mark-to-market losses in FPL Energy and their impact on reported earnings versus cash flow.
- Fuel Cost Recovery: Monitor the implementation of the FPSC-approved fuel clause increase and its effect on FPL's cash flows and customer rates.
- Regulatory Approvals: Track the status of the FPSC decision on the third West County Energy Center unit and the modernization of Cape Canaveral and Riviera plants.
- PTC Extension: Assess the risk to FPL Energy's growth strategy if federal Production Tax Credits for wind projects are not extended beyond 2008.
- Legal Outcomes: Review developments in the EPA/Scherer Unit litigation and the Adelphia bankruptcy claim for potential material liabilities.