Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2008, for FPL Group, Inc. (FPL Group) and its principal subsidiary, Florida Power & Light Company (FPL). FPL Group operates through two primary segments: FPL, a rate-regulated utility serving over 8.7 million people in Florida, and NextEra Energy Resources, a competitive energy subsidiary focused on wind, solar, and nuclear generation. The reporting period was characterized by a significant economic slowdown in Florida, impacting customer growth and usage, alongside a major regulatory initiative to increase base rates.
Key Financial Metrics
| Metric (in millions) | 2008 | 2007 |
|---|---|---|
| Operating Revenues | $16,410 | $15,263 |
| Net Income | $1,639 | $1,312 |
| Earnings Per Share (Diluted) | $4.07 | $3.27 |
| Total Assets | $44,821 | $40,123 |
| Long-term Debt (excl. current) | $13,833 | $11,280 |
| Operating Cash Flow | $3,403 | $3,593 |
| Capital Expenditures | $5,236 | $5,019 |
Segment Performance: FPL reported net income of $789 million (down $47 million from 2007), while NextEra Energy Resources reported net income of $915 million (up $375 million from 2007). The increase in NextEra Energy Resources' income was driven by new investments and favorable market conditions, partially offset by unrealized mark-to-market losses in 2007 which turned into gains in 2008.
Material Changes vs. Prior Period
- Customer Growth Slowdown: FPL experienced a slowdown in retail customer growth to 0.3% in 2008, with a decline of 0.2% in the fourth quarter. Non-weather related usage per customer also declined due to the economic downturn and housing market crisis in Florida.
- Rate Regulation: FPL notified the Florida Public Service Commission (FPSC) in November 2008 of its intent to initiate a base rate proceeding in March 2009, requesting an annual increase of $800 million to $950 million starting January 1, 2010.
- Derivative Valuation: Net income for 2008 included $170 million in after-tax unrealized gains from non-qualifying hedges, compared to $86 million in after-tax losses in 2007. This volatility is attributed to changes in forward power and natural gas prices.
- Capital Markets: The company faced unprecedented volatility in credit and capital markets. Despite this, FPL Group maintained access to commercial paper and long-term debt markets, issuing approximately $3.8 billion in long-term debt during 2008.
Guidance, Outlook, and Risks
Outlook and Capital Plan: FPL Group plans to add 7,000 to 9,000 MW of new wind generation between 2008 and 2012. FPL is constructing three natural gas-fired combined-cycle units at the West County Energy Center, with two expected in service in 2009. The company is evaluating the impact of the American Recovery and Reinvestment Act of 2009, which offers tax incentives and cash grants for renewable energy projects.
Key Risks and Contingencies:
- Regulatory Risk: FPL's earnings are subject to the FPSC's prudence review. The company faces uncertainty regarding the final outcome of its 2009 base rate proceeding and potential disallowance of costs.
- Environmental Compliance: Significant capital expenditures are required to comply with emerging environmental regulations, including the Clean Air Act (mercury, NOx, SO2) and potential greenhouse gas reduction mandates (RGGI, WCI, Florida RPS).
- Nuclear Waste: The Department of Energy (DOE) has failed to meet its statutory obligation to dispose of spent nuclear fuel. FPL and NextEra Energy Resources are involved in litigation seeking damages, but the timing of a permanent disposal facility remains uncertain.
- Market Risk: NextEra Energy Resources is exposed to commodity price volatility and counterparty credit risk in competitive wholesale markets. The company uses derivatives to hedge these risks, which introduces valuation volatility into earnings.
Important Facts for Investor Verification
- Rate Case Outcome: Verify the FPSC's final decision on FPL's requested $800-$950 million annual base rate increase, as this will directly impact future revenue and earnings.
- Customer Usage Trends: Monitor whether the decline in non-weather related usage and customer growth in Florida stabilizes or worsens, as this affects FPL's base revenue.
- Capital Market Access: Confirm the company's continued ability to access capital markets at reasonable rates given the volatility experienced in late 2008, which is critical for funding its aggressive expansion plans.
- Environmental Legislation: Track the finalization of Florida's Renewable Portfolio Standard (RPS) and federal climate change legislation, as these could materially increase compliance costs or alter the competitive landscape.
- Derivative Exposure: Review the company's exposure to unrealized mark-to-market gains/losses on energy derivatives, which caused significant earnings volatility between 2007 and 2008.