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CAUTIONARY STATEMENTS AND RISK FACTORS THAT MAY AFFECT FUTURE RESULTS |
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In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (Reform Act), FPL Group, Inc. (FPL Group) and Florida Power & Light Company (FPL) are hereby filing cautionary statements identifying important factors that could cause FPL Group's or FPL's actual results to differ materially from those projected in forward-looking statements (as such term is defined in the Reform Act) made by or on behalf of FPL Group and FPL in this combined Form 10-Q, in presentations, in response to questions or otherwise. Any statements that express, or involve discussions as to expectations, beliefs, plans, objectives, assumptions or future events or performance (often, but not always, through the use of words or phrases such as will likely result, are expected to, will continue, is anticipated, believe, could, estimated, may, plan, potential, projection, target, outlook) are not statements of historical facts and may be forward-looking. Forward-looking statements involve estimat
es, assumptions and uncertainties. Accordingly, any such statements are qualified in their entirety by reference to, and are accompanied by, the following important factors (in addition to any assumptions and other factors referred to specifically in connection with such forward-looking statements) that could cause FPL Group's or FPL's actual results to differ materially from those contained in forward-looking statements made by or on behalf of FPL Group and FPL.
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Any forward-looking statement speaks only as of the date on which such statement is made, and FPL Group and FPL undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement.
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The following are some important factors that could have a significant impact on FPL Group's and FPL's operations and financial results, and could cause FPL Group's and FPL's actual results or outcomes to differ materially from those discussed in the forward-looking statements:
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·
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FPL Group and FPL are subject to changes in laws or regulations, including the Public Utility Regulatory Policies Act of 1978, as amended (PURPA), and the Public Utility Holding Company Act of 1935, as amended (Holding Company Act), changing governmental policies and regulatory actions, including those of the Federal Energy Regulatory Commission (FERC), the Florida Public Service Commission (FPSC) and the utility commissions of other states in which FPL Group has operations, and the U.S. Nuclear Regulatory Commission (NRC), with respect to, among other things, allowed rates of return, industry and rate structure, operation of nuclear power facilities, operation and construction of plant facilities, operation and construction of transmission facilities, acquisition, disposal, depreciation and amortization of assets and facilities, recovery of fuel and purchased power costs, decommissioning costs, return on common equity and equity ratio limits, and present or prospective wholesale and retail competition (incl
uding but not limited to retail wheeling and transmission costs). The FPSC has the authority to disallow recovery of costs that it considers excessive or imprudently incurred.
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·
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The regulatory process generally restricts FPL's ability to grow earnings and does not provide any assurance as to achievement of earnings levels.
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·
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FPL Group and FPL are subject to extensive federal, state and local environmental statutes, rules and regulations relating to air quality, water quality, waste management, natural resources and health and safety that could, among other things, restrict or limit the output of certain facilities or the use of certain fuels required for the production of electricity and/or increase costs. There are significant capital, operating and other costs associated with compliance with these environmental statutes, rules and regulations, and those costs could be even more significant in the future.
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·
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FPL Group and FPL operate in a changing market environment influenced by various legislative and regulatory initiatives regarding deregulation, regulation or restructuring of the energy industry, including deregulation of the production and sale of electricity. FPL Group and its subsidiaries will need to adapt to these changes and may face increasing competitive pressure.
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·
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The operation of power generation facilities involves many risks, including start up risks, breakdown or failure of equipment, transmission lines or pipelines, use of new technology, the dependence on a specific fuel source or the impact of unusual or adverse weather conditions (including natural disasters such as hurricanes), as well as the risk of performance below expected levels of output or efficiency. This could result in lost revenues and/or increased expenses. Insurance, warranties or performance guarantees may not cover any or all of the lost revenues or increased expenses, including the cost of replacement power. In addition to these risks, FPL Group's and FPL's nuclear units face certain risks that are unique to the nuclear industry including the ability to dispose of spent nuclear fuel, as well as additional regulatory actions up to and including shutdown of the units stemming from public safety concerns, whether at FPL Group's and FPL's plants, or at the plants of other nuclear operators. Bre
akdown or failure of an FPL Energy, LLC (FPL Energy) operating facility may prevent the facility from performing under applicable power sales agreements which, in certain situations, could result in termination of the agreement or incurring a liability for liquidated damages.
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·
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FPL Group's and FPL's ability to successfully and timely complete their power generation facilities currently under construction, those projects yet to begin construction or capital improvements to existing facilities is contingent upon many variables and subject to substantial risks. Should any such efforts be unsuccessful, FPL Group and FPL could be subject to additional costs, termination payments under committed contracts and/or the write-off of their investment in the project or improvement.
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·
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FPL Group and FPL use derivative instruments, such as swaps, options, futures and forwards to manage their commodity and financial market risks, and to a lesser extent, engage in limited trading activities. FPL Group could recognize financial losses as a result of volatility in the market values of these contracts, or if a counterparty fails to perform. In the absence of actively quoted market prices and pricing information from external sources, the valuation of these derivative instruments involves management's judgment or use of estimates. As a result, changes in the underlying assumptions or use of alternative valuation methods could affect the value of the reported fair value of these contracts. In addition, FPL's use of such instruments could be subject to prudency challenges by the FPSC and if found imprudent, cost disallowance.
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·
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There are other risks associated with FPL Group's non-rate regulated businesses, particularly FPL Energy. In addition to risks discussed elsewhere, risk factors specifically affecting FPL Energy's success in competitive wholesale markets include the ability to efficiently develop and operate generating assets, the successful and timely completion of project restructuring activities, the price and supply of fuel, transmission constraints, competition from new sources of generation, excess generation capacity and demand for power. There can be significant volatility in market prices for fuel and electricity, and there are other financial, counterparty and market risks that are beyond the control of FPL Energy. FPL Energy's inability or failure to effectively hedge its assets or positions against changes in commodity prices, interest rates, counterparty credit risk or other risk measures could significantly impair its future financial results. In keeping with industry trends, a portion of FPL Energy's power ge
neration facilities operate wholly or partially without long-term power purchase agreements. As a result, power from these facilities is sold on the spot market or on a short-term contractual basis, which may affect the volatility of FPL Group's financial results. In addition, FPL Energy's business depends upon transmission facilities owned and operated by others; if transmission is disrupted or capacity is inadequate or unavailable, FPL Energy's ability to sell and deliver its wholesale power may be limited.
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·
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FPL Group is likely to encounter significant competition for acquisition opportunities that may become available as a result of the consolidation of the power industry. In addition, FPL Group may be unable to identify attractive acquisition opportunities at favorable prices and to successfully and timely complete and integrate them.
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·
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FPL Group and FPL rely on access to capital markets as a significant source of liquidity for capital requirements not satisfied by operating cash flows. The inability of FPL Group and FPL to maintain their current credit ratings could affect their ability to raise capital on favorable terms, particularly during times of uncertainty in the capital markets which, in turn, could impact FPL Group's and FPL's ability to grow their businesses and would likely increase interest costs.
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·
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FPL Group's and FPL's results of operations can be affected by changes in the weather. Weather conditions directly influence the demand for electricity and natural gas and affect the price of energy commodities, and can affect the production of electricity at wind and hydro-powered facilities. In addition, severe weather can be destructive, causing outages and/or property damage, which could require additional costs to be incurred.
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·
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FPL Group and FPL are subject to costs and other effects of legal and administrative proceedings, settlements, investigations and claims; as well as the effect of new, or changes in, tax rates or policies, rates of inflation, accounting standards, securities laws or corporate governance requirements.
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·
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FPL Group and FPL are subject to direct and indirect effects of terrorist threats and activities. Generation and transmission facilities, in general, have been identified as potential targets. The effects of terrorist threats and activities include, among other things, terrorist actions or responses to such actions or threats, the inability to generate, purchase or transmit power, the risk of a significant slowdown in growth or a decline in the U.S. economy, delay in economic recovery in the U.S., and the increased cost and adequacy of security and insurance.
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·
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FPL Group's and FPL's ability to obtain insurance, and the cost of and coverage provided by such insurance, could be affected by national events as well as company-specific events.
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·
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FPL Group and FPL are subject to employee workforce factors, including loss or retirement of key executives, availability of qualified personnel, collective bargaining agreements with union employees or work stoppage.
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The issues and associated risks and uncertainties described above are not the only ones FPL Group and FPL may face. Additional issues may arise or become material as the energy industry evolves. The risks and uncertainties associated with these additional issues could impair FPL Group's and FPL's businesses in the future.
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FPL GROUP, INC. AND FLORIDA POWER & LIGHT COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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The accompanying condensed consolidated financial statements should be read in conjunction with the 2002 Form 10-K for FPL Group and FPL. In the opinion of FPL Group and FPL management, all adjustments (consisting of normal recurring accruals) considered necessary for fair financial statement presentation have been made. Certain amounts included in the prior year's consolidated financial statements have been reclassified to conform to the current year's presentation. The results of operations for an interim period may not give a true indication of results for the year. |
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1. Asset Retirement Obligations |
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Effective January 1, 2003, FPL Group and FPL adopted Statement of Financial Accounting Standards No. (FAS) 143, "Accounting for Asset Retirement Obligations." The statement requires that a liability for the fair value of an asset retirement obligation (ARO) be recognized in the period in which it is incurred with the offsetting associated asset retirement cost capitalized as part of the carrying amount of the long-lived asset. The asset retirement cost is subsequently allocated to expense using a systematic and rational method over its useful life. Changes in the ARO resulting from the passage of time are recognized as an increase in the carrying amount of the liability and as accretion expense, which is included in depreciation and amortization expense in the condensed consolidated statements of income. Prior to January 1, 2003, FPL accrued for decommissioning and dismantlement costs over the life of the related asset through depreciation expense. |
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Upon adoption of FAS 143, with respect to amounts for nuclear decommissioning, FPL recorded an ARO of approximately $1.8 billion, capitalized a net asset related to the ARO of approximately $231 million and reversed the approximately $1.6 billion it had previously recorded in accumulated depreciation. The difference, approximately $29 million, was deferred as a regulatory liability. FPL's AROs other than nuclear decommissioning were not significant. The adoption of FAS 143 results in timing differences in the recognition of legal asset retirement costs for financial reporting purposes and the method the FPSC allows FPL to recover in rates. Accordingly, any differences between the ongoing expense recognized under FAS 143 and the amount recoverable through rates have been deferred in accordance with FAS 71, "Accounting for the Effects of Certain Types of Regulation." At June 30, 2003, approximately $1.8 billion remained in accumulated depreciation for recorded asset retire
ment costs that do not meet the definition of an ARO under FAS 143, or are not estimable as discussed in the paragraph below, but are accrued based on FPSC rules and regulations. FPL recorded accretion expense of approximately $25 million and $50 million for the three and six months ended June 30, 2003, respectively. No other adjustments were made to FPL's ARO during the quarter ended June 30, 2003. Had FAS 143 been applied in 2002 and 2001, FPL would have recorded AROs of approximately $1.8 billion and $1.7 billion at December 31, 2002 and 2001, respectively. Pro forma net income and earnings per share have not been presented for FPL for the three and six months ended June 30, 2002 and for the years ended December 31, 2002, 2001 and 2000 because the pro forma application of FAS 143 to prior periods would result in the same pro forma net income and earnings per share amounts as the actual amounts reported for those periods due to the regulatory treatment mentioned above. |
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FPL Group and FPL have identified but not recognized ARO liabilities related to electric transmission and distribution (T&D) and telecommunications assets resulting from easements over property not owned by FPL Group or FPL. These easements are generally perpetual and only require retirement action upon abandonment or cessation of use of the property for the specified purpose. The ARO liability is not estimable for such easements as FPL Group and FPL intend to utilize these properties indefinitely. In the event FPL Group and FPL decide to abandon or cease the use of a particular easement, an ARO liability would be recorded at that time. |
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In addition to the amounts recorded by FPL, upon adoption of FAS 143, FPL Energy increased its ARO by approximately $6 million to a total ARO of approximately $164 million and increased its net property, plant and equipment by approximately $6 million. Approximately $152 million of FPL Energy's ARO related to the nuclear decommissioning obligation of the Seabrook Station (Seabrook), and the remainder primarily represented the current estimated fair value of obligations to dismantle its wind facilities located on leased property and certain hydro facilities. The cumulative effect on FPL Energy's net income of adopting FAS 143 was immaterial. FPL Energy recorded accretion expense of approximately $3 million and $6 million for the three and six months ended June 30, 2003, respectively, which caused FPL Energy's ARO to increase to approximately $170 million at June 30, 2003. FPL Energy made no other adjustments to its ARO during 2003. |
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Had FAS 143 been applied in 2002 and 2001, FPL Group would have recorded AROs of approximately $2.0 billion and $1.7 billion at December 31, 2002 and 2001, respectively. Additionally, had FPL Group applied FAS 143 in the three and six months ended June 30, 2002, FPL Group's net income and earnings per share would not have differed from the reported amounts. |
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2. Variable Interest Entities |
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In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. (FIN) 46, "Consolidation of Variable Interest Entities," which will replace the current accounting guidance for special purpose entities (SPEs). As a result, entities that are deemed to be variable interest entities (VIEs) in which FPL Group or FPL or one of their respective subsidiaries is considered to be the "primary beneficiary" will be consolidated. Variable interests are considered to be contractual, ownership or other monetary interests in an entity that fluctuate with changes in the entity's net asset value. An entity is considered to be a VIE when it has equity investors who lack the characteristics of having a controlling financial interest, or its capital is insufficient to permit it to finance its activities without additional subordinated financial support. Consolidation of a VIE by an investor is required when it is determined that the investor will absorb a majori
ty of the VIE's expected losses or residual returns. FPL Group and FPL believe that the VIEs discussed below will be required to be consolidated beginning in July 2003. |
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FPL - FPL leases nuclear fuel for all four of its nuclear units from an unrelated SPE. For ratemaking purposes, these leases are classified as operating leases. For financial reporting, the capital lease obligation is recorded at the amount due in the event of lease termination. FPL makes quarterly payments to the lessor for the lease commitments regardless of fuel utilization. In 1991, at the inception of the leases, the SPE entered into various debt agreements to finance the cost of the nuclear fuel. As of June 11, 2003, FPL is the guarantor of the debt agreements. The outstanding balances under the debt agreements were approximately $164 million at June 30, 2003 and $158 million at December 31, 2002. |
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FPL Energy - In 2000, an FPL Energy subsidiary entered into an operating lease agreement with an SPE lessor to lease a 550-mw combined-cycle power generation plant through 2007. At the inception of the lease, the lessor obtained the funding commitments required to complete the acquisition, development and construction of the plant through debt and equity contributions from investors who are not affiliated with FPL Group. At December 31, 2002, the commitment was capped at costs incurred of $380 million. The $380 million commitment includes $364 million of debt and $16 million of equity. The conditions to achieve project completion were satisfied as of December 27, 2002, at which time the base lease term began. The FPL Energy subsidiary began making quarterly lease payments on March 31, 2003. The amounts are intended to cover the lessor's debt service, which includes a stated yield to equity holders and certain other costs. The minimum annual lease payments are estimated to be approximately $11 million for the remainder of 2003, $23 million in 2004, $25 million in 2005, $18 million in 2006 and $209 million in 2007 (including a residual value guarantee of $192 million). The lease payments are based on a floating interest rate, tied to three month LIBOR, which adjusts quarterly. |
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The FPL Energy subsidiary has the option to purchase the plant at any time during the remaining lease term for 100% of the outstanding principal balance of the loans and equity contributions made to the SPE, all accrued and unpaid interest and yield, and all other fees, costs and amounts then due and owing pursuant to the provisions of the related financing documents. However, under certain limited events of default, the FPL Energy subsidiary can be required to purchase the plant for the same cost. If the FPL Energy subsidiary does not elect to purchase the plant at the end of the lease term, a residual value guarantee (included in the minimum lease payments above) must be paid, and the plant will be sold. Any proceeds received by the lessor in excess of the outstanding debt and equity will be given to the FPL Energy subsidiary. FPL Group Capital Inc (FPL Group Capital) has guaranteed certain obligations of the FPL Energy subsidiary under the lease agreement. The equity ho
lder controls the lessor. The lessor has represented that it has essentially no assets or obligations other than the plant and the related debt and that total assets, total liabilities and equity of the lessor at June 30, 2003 were approximately $383 million, $367 million and $16 million, respectively. |
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At June 30, 2003, FPL Group's and FPL's maximum exposure to loss as a result of their involvement with the two VIEs discussed above, in the event that the underlying asset would be economically worthless, was approximately $376 million and $164 million, respectively, which includes the residual value guarantee, letters of credit and debt service guarantees. As a result of the consolidation of the above mentioned VIEs beginning July 1, 2003, FPL Group's and FPL's assets will increase by approximately $366 million and $1 million, respectively, and their liabilities will increase by approximately $379 million and $1 million, respectively. In addition, FPL Group's equity will decrease by approximately $7 million related to accumulated other comprehensive losses recorded by FPL Energy's SPE lessor mentioned above. The cumulative effect on FPL Group's net income of implementing FIN 46 for the VIEs discussed above is approximately a $3 million loss (net of taxes of $2 million) an
d zero for FPL. FPL Group is continuing to evaluate its investments in partnerships and joint ventures to determine if any of those entities would be required to be consolidated under the provisions of FIN 46. |
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3. Earnings Per Share |
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The reconciliation of earnings per share and earnings per share - assuming dilution is shown below: |
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Three Months Ended
June 30, |
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Six Months Ended
June 30, |
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|
| |
2003 |
|
2002 |
|
2003 |
|
2002 ; |
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|
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| |
(millions, except per share amounts) |
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Numerator: |
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|
|
|
|
|
|
|
|
|
|
Net income |
$ |
239 |
|
$ |
250 |
|
$ |
414 |
|
$ |
194 |
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|
|
|
|
|
|
|
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Denominator: |
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Weighted-average number of common shares outstanding |
|
177.3 |
|
|
170.6 |
|
|
177.0 |
|
|
169.9 |
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Performance share and shareholder value awards, options and equity units (a) |
|
0.8 |
|
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0.5 |
|
|
0.6 |
|
|
0.3 |
|
|
|
|
|
|
|
|
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Weighted-average number of common shares outstanding - assuming dilution |
|
178.1 |
|
|
171.1 |
|
|
177.6 |
|
|
170.2 |
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|
|
|
|
|
|
|
|
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Earnings per share |
$ |
1.35 |
|
$ |
1.46 |
|
$ |
2.34 |
|
$ |
1.14 |
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Earnings per share - assuming dilution |
$ |
1.34 |
|
$ |
1.46 |
|
$ |
2.33 |
|
$ |
1.14 |
|
_____________________ |
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(a) |
Performance share and shareholder value awards are included in diluted weighted-average number of common shares outstanding based upon what would be issued if the end of the reporting period was the end of the term of the award. Options and equity units (known as Corporate Units) are included in diluted weighted-average number of common shares outstanding by applying the treasury stock method. |
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Unrealized mark-to-market gains (losses) on derivative transactions for both consolidated subsidiaries and equity method investees were as follows: |
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Three Months Ended
June 30, |
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Six Months Ended
June 30, |
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| |
2003 |
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2002 |
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2003 |
|
2002 |
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(millions) |
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|
|
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|
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Trading and managed hedges (a) |
$ |
- |
|
$ |
(6 |
) |
$ |
(4 |
) |
$ |
8 |
|
|
Non-managed hedges (b) |
$ |
(3 |
) |
$ |
2 |
|
$ |
3 |
|
$ |
3 |
|
|
_____________________ |
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(a) |
The unrealized gains (losses) from trading and managed hedge activities are reported net in operating revenues. |
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(b) |
The unrealized gains (losses) from non-managed hedge activities of consolidated entities are reported in other - net and activities of equity method investees are reported in equity in earnings of equity method investees in FPL Group's condensed consolidated statements of income. |
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In April 2003, the FASB issued FAS 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," which amends FAS 133 to formally incorporate certain conclusions reached by the Derivatives Implementation Group. For implementation issues that were modified in the amendment process, the new guidance will be applied prospectively for contracts entered into or modified after June 30, 2003. FPL Group and FPL are evaluating the effects, if any, the modifications would have on their financial statements in the future.
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Since the adoption of Derivatives Implementation Group Issue (Issue) C11 in July 2001, FPL Group has considered any contract with its total sales price indexed to the consumer price index (CPI) or any similar broad market index to be ineligible for the normal purchases and normal sales exception under FAS 133, since its price was not clearly and closely related to the asset being sold. However, electricity contracts with a price based on the fuel used to generate the electric power being sold have been considered to be eligible for the normal sales exception, even when that price also contained an additional payment for incremental operations and maintenance expenses that was indexed to CPI. FPL Group believed that the types of expenses incurred as incremental operations and maintenance expenses, such as materials and supplies, would be expected to fluctuate with CPI and as such believed the overall price in the contract was clearly and closely related to the electric power being sold. However, in March 200
3, FPL Group amended all such derivative contracts to remove the inflation indices.
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In June 2003, the FASB addressed this issue by providing guidance in Issue C20 regarding when a contract's price may be considered clearly and closely related to the asset being sold for purposes of qualifying for the normal purchases and normal sales exception in FAS 133. Based on the provisions of this guidance, the amended contracts would have continued to qualify for the normal exception even if they had not been amended. However, Issue C20 would have required a one time cumulative effect adjustment on the October 1, 2003 implementation date to mark these contracts to their fair value. Because these contracts were amended to remove the inflation indices, FPL Group believes a cumulative effect adjustment will not be required.
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6. Regulation |
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In April 2003, the FERC issued its White Paper on Wholesale Power Market Platform (White Paper), responding to comments on its proposed rule regarding standardized market design for electric markets in the United States. The White Paper indicates that the FERC intends to be more flexible on how and when the final rule will be implemented, defer to regional state committees to address significant regional transmission organizations (RTO)/independent system operator (ISO) features, require regulated utilities to join RTOs or ISOs and require RTOs to implement spot markets. FPL is evaluating the proposed rule and is currently unable to determine the effects, if any, on FPL's operations.
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In June 2003, the Florida Supreme Court dismissed the State of Florida Office of Public Counsel's (Public Counsel's) appeal of the FPSC's approval of GridFlorida LLC (GridFlorida) without prejudice. The FPSC has restored the GridFlorida docket to active status and will reestablish a schedule for proceeding after an FPSC and FERC technical conference on September 15, 2003.
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On November 6, 2003, the Florida Supreme Court will hear oral arguments in the South Florida Hospital and Healthcare Association's appeal of the FPSC's approval of FPL's 2002-2005 rate agreement. FPL intends to continue to vigorously contest this appeal and believes that the FPSC's decision approving the 2002-2005 rate agreement will be upheld.
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7. Stock-Based Compensation |
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FAS 123, "Accounting for Stock-Based Compensation," encourages a fair value based method of accounting for stock-based compensation. FPL Group, however, uses the intrinsic value based method of accounting as permitted by the statement. Stock-based compensation expense was approximately $7 million and $5 million for the three months ended June 30, 2003 and 2002, respectively, and $10 million and $11 million for the six months ended June 30, 2003 and 2002, respectively. Compensation expense for restricted stock and performance shares is the same under the fair value and the intrinsic value based methods. The following table illustrates the effect on net income and earnings per share if FPL Group's compensation expense relating to options had been determined using the fair value based method:
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In addition to estimated capital expenditures listed above, FPL and FPL Energy have long-term contracts related to purchased power and/or fuel (see Contracts below). As of June 30, 2003, FPL Energy had approximately $1.5 billion in firm commitments for a portion of its capital expenditures, natural gas transportation and storage and nuclear fuel contracts and minimum lease payments associated with an SPE (see Note 2). FPL Group has guaranteed certain payment obligations of FPL Group Capital, including most of those under FPL Group Capital's debt.
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FPL Group and FPL each account for payment guarantees and related contracts, for which it is the guarantor, under FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others," which requires that the fair value of guarantees provided to consolidated entities entered after December 31, 2002, be recorded on the balance sheet. At June 30, 2003, subsidiaries of FPL Group, other than FPL, have guaranteed a firm gas transportation agreement obligation with a letter of credit, purchase and sale of power and fuel agreement obligations and debt service payments relating to agreements that existed at December 31, 2002. The term of the guarantees is equal to the term of the related debt, firm transportation agreement, or purchase and sale of power and fuel agreement, which can be as short as 30 days or as long as 20 years. The maximum potential amount of future payments that could be required under these guarantees at June 30, 2003 is approx
imately $21 million, of which $2 million relates to a guarantee for the performance of an unrelated party. At June 30, 2003, FPL Group does not have any liabilities recorded for these guarantees. In certain instances, FPL Group can seek recourse from third parties for 50% of any amount paid under the guarantees.
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FPL Energy has guaranteed certain performance obligations of a power plant owned by a wholly-owned subsidiary as part of a power purchase agreement (PPA) that expires in 2027. Under the PPA, the subsidiary could incur market-based liquidated damages for failure to meet a stated mechanical availability and guaranteed average output. Based on past performance of similar projects and current forward prices, management believes that the exposure associated with this guarantee is not material.
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Contracts - FPL Energy has entered into several contracts for the supply of wind turbines and towers to support a portion of the wind generation under construction. In addition, FPL Energy has entered into various engineering, procurement and construction contracts with expiration dates through 2004 to support its development activities. All of these contracts are intended to support expansion, and the related commitments as of June 30, 2003 are included in Commitments above.
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FPL has entered into long-term purchased power and fuel contracts. FPL is obligated under take-or-pay purchased power contracts with JEA (formerly known as the Jacksonville Electric Authority) and with subsidiaries of The Southern Company (Southern Companies) to pay for approximately 1,300 mw of power through mid-2010 and 381 mw thereafter through 2021. FPL also has various firm pay-for-performance contracts to purchase approximately 900 mw from certain cogenerators and small power producers (qualifying facilities) with expiration dates ranging from 2005 through 2026. The purchased power contracts provide for capacity and energy payments. Energy payments are based on the actual power taken under these contracts, and the Southern Companies' contract is subject to minimum quantities. Capacity payments for the pay-for-performance contracts are subject to the qualifying facilities meeting certain contract conditions. FPL has various agreements with several electricity suppliers to purchase an aggregate of u
p to 1,100 mw of power with expiration dates ranging from 2003 through 2007. In general, the agreements require FPL to make capacity payments and supply the fuel consumed by the plants under the contracts. FPL has medium- to long-term contracts for the transportation and supply of natural gas, coal and oil with various expiration dates through 2028.
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FPL Energy has long-term contracts for the transportation, supply and storage of natural gas with expiration dates ranging from 2005 through 2033. FPL Energy also has several contracts for the supply, conversion, enrichment and fabrication of Seabrook's nuclear fuel with expiration dates ranging from 2003 to 2008.
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The remaining required capacity and minimum payments under these contracts as of June 30, 2003 are estimated to be as follows:
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|
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|
| |
2003 |
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
Thereafter |
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|
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FPL: |
(millions) |
|
|
Capacity payments: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JEA and Southern Companies |
$ |
90 |
|
$ |
180 |
|
$ |
180 |
|
$ |
190 |
|
$ |
190 |
|
$ |
1,100 |
|
|
Qualifying facilities |
$ |
170 |
|
$ |
350 |
|
$ |
350 |
|
$ |
300 |
|
$ |
300 |
|
$ |
4,300 |
|
|
Other electricity suppliers |
$ |
55 |
|
$ |
90 |
|
$ |
55 |
|
$ |
50 |
|
$ |
5 |
|
$ |
- |
|
|
Minimum payments, at projected prices: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southern Companies - energy |
$ |
30 |
|
$ |
60 |
|
$ |
70 |
|
$ |
70 |
|
$ |
70 |
|
$ |
180 |
|
|
Natural gas, including transportation |
$ |
935 |
|
$ |
1,180 |
|
$ |
615 |
|
$ |
275 |
|
$ |
275 |
|
$ |
3,175 |
|
|
Coal |
$ |
15 |
|
$ |
25 |
|
$ |
25 |
|
$ |
10 |
|
$ |
10 |
|
$ |
- |
|
|
Oil |
$ |
200 |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FPL Energy |
$ |
20 |
|
$ |
45 |
|
$ |
40 |
|
$ |
40 |
|
$ |
40 |
|
$ |
610 |
|
|
Insurance - Liability for accidents at nuclear power plants is governed by the Price-Anderson Act, which limits the liability of nuclear reactor owners to the amount of insurance available from both private sources and an industry retrospective payment plan. In accordance with this act, FPL Group maintains $300 million of private liability insurance per site, which is the maximum obtainable, and participates in a secondary financial protection system under which it is subject to retrospective assessments of up to $454 million ($363 million for FPL) per incident at any nuclear utility reactor in the United States, payable at a rate not to exceed $54 million ($43 million for FPL) per incident per year. FPL Group and FPL are contractually entitled to recover a proportionate share of such assessments from the owners of minority interests in Seabrook and St. Lucie Unit No. 2, which approximates $11 million and $14 million per incident, respectively. The Price-Anderson Act expired on Augus
t 1, 2002 but the liability limitations did not change for plants, including FPL's four nuclear units and Seabrook, with operating licenses issued by the NRC prior to August 1, 2002.
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FPL Group participates in nuclear insurance mutual companies that provide $2.75 billion of limited insurance coverage per occurrence per site for property damage, decontamination and premature decommissioning risks at its nuclear plants. The proceeds from such insurance, however, must first be used for reactor stabilization and site decontamination before they can be used for plant repair. FPL Group also participates in an insurance program that provides limited coverage for replacement power costs if a nuclear plant is out of service for an extended period of time because of an accident. In the event of an accident at one of FPL Group's or another participating insured's nuclear plants, FPL Group could be assessed up to $93 million ($70 million for FPL) in retrospective premiums. FPL Group and FPL are contractually entitled to recover a proportionate share of such assessments from the owners of minority interests in Seabrook and St. Lucie Unit No. 2, which approximates $3 million and $3 million, respecti
vely.
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In the event of a catastrophic loss at one of FPL Group's nuclear plants, the amount of insurance available might not be adequate to cover property damage and other expenses incurred. Uninsured losses, to the extent not recovered through rates in the case of FPL, would be borne by FPL Group and FPL and could have a material adverse effect on FPL Group's and FPL's financial condition and results of operations.
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FPL self-insures its T&D property due to the high cost and limited coverage available from third-party insurers. As approved by the FPSC, FPL maintains a storm and property insurance reserve for uninsured property storm damage or assessments under the nuclear insurance program. As of June 30, 2003, the storm and property insurance reserve (approximately $317 million) equals the amount in the storm fund (approximately $196 million) plus related deferred income taxes (approximately $121 million). The current annual accrual approved by the FPSC is $20.3 million. Recovery from customers of any losses in excess of the storm and property insurance reserve will require the approval of the FPSC. FPL's available lines of credit provide additional liquidity in the event of a T&D property loss. In addition, FPL Group is self-insured for FPL FiberNet's fiber-optic cable located throughout Florida.
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Litigation - In 1999, the Attorney General of the United States, on behalf of the U.S. Environmental Protection Agency (EPA), brought an action against Georgia Power Company and other subsidiaries of The Southern Company for certain alleged violations of the Clean Air Act. In May 2001, the EPA amended its complaint. The amended complaint alleges, among other things, that Georgia Power Company constructed and is continuing to operate Scherer Unit No. 4, in which FPL owns a 76% interest, without obtaining proper permitting, and without complying with performance and technology standards as required by the Clean Air Act. It also alleges that unspecified major modifications have been made at Scherer Unit No. 4 that require its compliance with the aforementioned Clean Air Act provisions. The EPA seeks injunctive relief requiring the installation of best available control technology and civil penalties of up to $25,000 per day for each violation from an unspecified date after June 1, 1975 through Januar
y 30, 1997, $27,500 per day for each violation thereafter through August 3, 2003 and, under a proposed EPA rule, $32,500 per day for each violation thereafter. Georgia Power Company has answered the amended complaint, asserting that it has complied with all requirements of the Clean Air Act, denying the plaintiff's allegations of liability, denying that the plaintiff is entitled to any of the relief that it seeks and raising various other defenses. In June 2001, a federal district court stayed discovery and administratively closed the case pending resolution of the EPA's motion for consolidation of discovery in several Clean Air Act cases that was filed with a Multi-District Litigation (MDL) panel. In August 2001, the MDL panel denied the motion for consolidation. In September 2001, the EPA moved that the federal district court reopen this case for purposes of discovery. Georgia Power Company opposed that motion asking that the case remain closed until the Eleventh Circuit Court of Appeals rules on the
Tennessee Valley Authority's (TVA) appeal of an EPA administrative compliance order relating to legal issues that are also central to this case. In August 2002, the federal district court denied without prejudice the EPA's motion to reopen. In June 2003, the Eleventh Circuit issued its order dismissing the TVA's appeal because it found the provision of the Clean Air Act allowing the EPA to issue binding administrative compliance orders was unconstitutional, and hence found that the TVA order was a non-final order that courts of appeal do not have jurisdiction to review. The EPA is reviewing its options for further review of the Eleventh Circuit decision. The EPA has not yet moved to reopen this case.
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In 2001, J. W. and Ernestine M. Thomas, Chester and Marie Jenkins, and Ray Norman and Jack Teague, as Co-Personal Representatives on behalf of the Estate of Robert L. Johns, filed suit against FPL Group, FPL, FPL FiberNet, FPL Group Capital and FPL Investments, Inc. in the Florida circuit court. This action is purportedly on behalf of all property owners in Florida (excluding railroad and public rights of way) whose property is encumbered by easements in favor of defendants, and on whose property defendants have installed or intend to install fiber-optic cable which defendants currently lease, license or convey or intend to lease, license or convey for non-electric transmission or distribution purposes. The lawsuit alleges that FPL's easements do not permit the installation and use of fiber-optic cable for general communication purposes. The plaintiffs have asserted claims for unlawful detainer, unjust enrichment and constructive trust and seek injunctive relief and compens
atory damages. In May 2002, plaintiffs filed an amended complaint, adding allegations regarding the installation of wireless communications equipment on some easements, and adding a claim for declaratory relief. Defendants have filed an answer and affirmative defenses to the amended complaint. The parties are pursuing discovery. |
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In August 2001, Florida Municipal Power Agency (FMPA) filed with the United States Court of Appeals for the District of Columbia (DC Circuit) a petition for review asking the DC Circuit to reverse and remand orders of the FERC denying FMPA's request for credits for transmission facilities owned by FMPA members. The transmission credits sought by FMPA would offset the transmission charges that FPL bills FMPA for network transmission service to FMPA's member cities. FMPA member cities have been taking network transmission service under FPL's open access transmission tariff (OATT) since the mid-1990s. In the orders appealed by FMPA, FERC ruled that FMPA would be entitled to credits for any FMPA facilities that were "integrated" with the FPL transmission system. Based on the evidence submitted, FERC concluded that none of the FMPA facilities met the integration test and, therefore, FMPA was not entitled to credits against FPL's charges for transmission service. On January 21
, 2003, the DC Circuit upheld FERC's order denying FMPA credits for its facilities, finding that substantial evidence supported FERC's conclusion that FMPA's facilities do not satisfy the integration test. On March 28, 2003, the DC Circuit denied FMPA's rehearing request of the DC Circuit's decision. FMPA has petitioned the U.S. Supreme Court for review of the DC Circuit's decision. FMPA also has requested that FERC decide the crediting issue again in a separate FERC proceeding. That proceeding dates back to a filing by FPL on March 19, 1993, as completed on July 26, 1993, of a comprehensive restructuring of its then-existing tariff structure. All issues in that case are settled except for three issues reserved by FMPA, one of which is the crediting issue. FPL has argued that, particularly in light of the DC Circuit's order, FERC should not issue another order addressing FMPA's request for credits. If FERC does decide the crediting issue in this separate proceeding, and reverses its previous finding t
hat FMPA is not entitled to transmission credits, FMPA is likely to seek refunds for amounts collected from FMPA member cities taking service under FPL's OATT. FPL estimates that through June 30, 2003 its maximum exposure to refunds, including interest, is approximately $50 million to $60 million. On March 5, 2003, FMPA petitioned the DC Circuit to order FERC to rule on the reserved issues. FERC's response to FMPA's petition stated that FMPA had not shown the extraordinary circumstances to warrant granting their petition. FERC has directed FPL and FMPA to file supplemental initial and reply briefs. |
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In January 2002, Roy Oorbeek and Richard Berman filed suit against FPL Group (as an individual and nominal defendant); all its current directors (except James L. Camaren, Michael H. Thaman and Frank G. Zarb); certain former directors; and certain current and former officers of FPL Group and FPL, including James L. Broadhead, Lewis Hay III, Dennis P. Coyle, Paul J. Evanson and Lawrence J. Kelleher. The lawsuit alleges that the proxy statements relating to shareholder approval of FPL Group's Long Term Incentive Plan (LTIP) and FPL Group's proposed, but unconsummated, merger with Entergy Corporation (Entergy) were false and misleading because they did not affirmatively state that payments made to certain officers under FPL Group's LTIP upon shareholder approval of the merger would be retained by the officers even if the merger with Entergy was not consummated and did not state that under some circumstances payments made pursuant to FPL Group's LTIP might not be deductible by FPL
Group for federal income tax purposes. It also alleges that FPL Group's LTIP required either consummation of the merger as a condition to the payments or the return of the payments if the transaction did not close, and that the actions of the director defendants in approving the proxy statements, causing the payments to be made, and failing to demand their return constitute corporate waste. The plaintiffs seek to have the shareholder votes approving FPL Group's LTIP and the merger declared null and void, the return to FPL Group of $62 million of payments received by the officers, compensatory damages of $92 million (including the $62 million of payments received by the officers) from all defendants (except FPL Group) and attorneys' fees. FPL Group's board of directors had previously established a special committee to investigate a demand by another shareholder that the board take action to obtain the return of the payments made to the officers and expanded that investigation to include the allegations in
the Oorbeek and Berman complaint. |
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In March 2002, William M. Klein, by Stephen S. Klein under power of attorney, on behalf of himself and all others similarly situated, filed suit against FPL Group (as nominal defendant); all its current directors (except James L. Camaren, Michael H. Thaman and Frank G. Zarb); certain former directors; and certain current and former officers of FPL Group and FPL, including James L. Broadhead, Paul J. Evanson, Lewis Hay III and Dennis P. Coyle. The lawsuit alleges that the payments made to certain officers under FPL Group's LTIP upon shareholder approval of the proposed merger with Entergy were improper and constituted breaches of fiduciary duties by the individual defendants because the LTIP required consummation of the merger as a condition to the payments. The plaintiff seeks the return to FPL Group of the payments received by the officers ($62 million); contribution, restitution and/or damages from the individual defendants; and attorneys' fees. These allegations also were referred to the special commit
tee of FPL Group's board of directors investigating the allegations in the Oorbeek and Berman lawsuit.
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In August 2002, the special committee filed under seal with the court its report of its investigation. The report concluded that pursuit of the claims identified by the plaintiffs in the Oorbeek and Berman and the Klein lawsuits is not in the best interest of FPL Group or its shareholders generally, and recommended that FPL Group seek dismissal of the lawsuits. After reviewing the special committee's report, FPL Group's board of directors (with only independent directors participating) concluded likewise. In September 2002, FPL Group, as nominal defendant, filed the special committee's report in the public docket and filed with the court a Statement of Position setting forth the special committee's and the board's conclusions and authorizing the filing of a motion to dismiss. The Statement of Position also reported that during the course of the special committee's investigation of the allegations in the lawsuits a separate question arose concerning the interpretation of the provisions of the LTIP pursuan
t to which the payments to eight senior officers were calculated. The board, the affected officers (three of whom have retired or resigned from FPL Group), and their respective legal counsel are discussing resolution of the issue. Any change from the original interpretation could result in a repayment to FPL Group of up to approximately $9 million.
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In February 2003, Donald E. and Judith B. Phillips filed suit against FPL Group (as nominal defendant); all its current directors (except James L. Camaren, Michael H. Thaman and Frank G. Zarb); certain former directors; and certain current and former officers of FPL Group and FPL, including James L. Broadhead, Paul J. Evanson, Lewis Hay III, Dennis P. Coyle and Lawrence J. Kelleher. The lawsuit alleges that the proxy statements relating to shareholder approval of FPL Group's LTIP and FPL Group's proposed, but unconsummated, merger with Entergy were false and misleading because they did not affirmatively state that payments made to certain officers under FPL Group's LTIP upon shareholder approval of the merger would be retained by the officers even if the merger with Entergy was not consummated and did not state that under some circumstances payments made pursuant to FPL Group's LTIP might not be deductible by FPL Group for federal income tax purposes. It also alleges that FPL Group's LTIP required either c
onsummation of the merger as a condition to the payments or the return of the payments if the transaction did not close, and that the actions of the director defendants in approving the proxy statements, causing the payments to be made, and failing to demand their return constitute corporate waste. The plaintiffs seek to have the shareholder votes approving FPL Group's LTIP and the merger declared null and void, the return to FPL Group of $62 million of payments received by the officers, compensatory damages of $92 million (including the $62 million of payments received by the officers) from all defendants (except FPL Group) and attorney's fees.
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The Oorbeek, Klein and Phillips lawsuits have been consolidated. FPL Group has filed motions to dismiss the Oorbeek, Klein and Phillips lawsuits for failure to make a proper demand, as required by Florida law, to obtain action by the board of directors and to dismiss the Oorbeek and Klein lawsuits because the independent directors (other than Messrs. Zarb, Camaren and Thaman) have determined that pursuit of the lawsuits is not in the best interests of FPL Group. Messrs. Zarb, Camaren and Thaman joined the board in August 2002, October 2002 and July 2003, respectively, and did not participate in the proceedings relating to this determination or the motions to dismiss.
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On May 2, 2003, the plaintiff's attorneys in the Klein lawsuit sent a new letter to FPL Group's board of directors (the May 2, 2003 Letter). This letter demands, among other things, that the board take action (i) to recover from the persons who approved such payments and/or otherwise breached their fiduciary duties, all of the above-described $92 million of LTIP payments made to officers and employees of FPL Group, allegedly on the grounds that the payments constituted a breach of fiduciary duty, bad faith, corporate waste and other unspecified wrongs, (ii) to investigate whether the proposed merger with Entergy was a plan by FPL Group's officers and directors to enrich themselves at the expense of the company, (iii) to seek the return of certain LTIP awards made in replacement of accelerated LTIP awards, (iv) to take immediate actions to secure the return of up to approximately $9 million in LTIP payments which is subject to an interpretation question under the LTIP, (v) to investigate and seek the re
turn of stock options and restricted stock paid to Mr. Broadhead in January 2002 in connection with a consulting agreement and his retirement from FPL Group in December 2001, and (vi) to investigate whether punitive damages may be sought. In July 2003, FPL Group's board of directors appointed a special committee, composed of James L. Camaren and Michael H. Thaman, to investigate the matters raised in the May 2, 2003 Letter and to make a determination as to how FPL Group should respond to the matters raised therein.
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In February 2003, Scott and Rebecca Finestone brought an action on behalf of themselves and their son Zachary Finestone in the U.S. District Court for the Southern District of Florida alleging that their son has developed cancer (neuroblastoma) as a result of the release and/or dissipation into the air, water, soil and underground areas of radioactive and non-radioactive hazardous materials, including strontium 90, and the release of other toxic materials from FPL's St. Lucie nuclear power plant. The complaint includes counts against FPL for strict liability for allegedly engaging in an ultra-hazardous activity and for alleged negligence in operating the plant in a manner that allowed emissions of the foregoing materials and failing to limit its release of nuclear fission products as prescribed by federal and state laws and regulations. The plaintiffs seek damages in excess of $1 million. FPL has moved to dismiss the complaint.
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In May 2003, Tish Blake and John Lowe, as personal representatives of the Estate of Ashton Lowe, on behalf of the estate and themselves, as surviving parents, brought an action in the U.S. District Court for the Southern District of Florida alleging that their son developed cancer (medulo-blastoma) as a result of the release and/or dissipation into the air, water, soil and underground areas of radioactive and non-radioactive hazardous materials, including strontium 90, and the release of other toxic materials from FPL's St. Lucie nuclear power plant. The allegations, counts and damages demanded in the complaint are virtually identical to those contained in the Finestone lawsuit described above. FPL will be moving to dismiss the complaint. |
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In March 2003, James J. and Lori Bradstreet brought an action on behalf of themselves and their son, Matthew Bradstreet, in the Circuit Court of the 18th Judicial Circuit in and for Brevard County, Florida, against Aventis Pasteur and a number of other named and unnamed drug manufacturing and distribution companies, the American Dental Association, the Florida Dental Association, FPL and the Orlando Utilities Commission (OUC), alleging that their son has suffered toxic neurological effects from mercury poisoning. An amended complaint was filed in May 2003. The sources of mercury exposure are alleged to be vaccines containing a preservative called thimerosal that were allegedly manufactured and distributed by the drug companies, mercury amalgam dental fillings, and emissions from FPL and OUC power plants in Florida, including Brevard County. The complaint includes counts against all defendants for civil battery and against FPL for alleged negligence in operating
the plants such that the son was exposed to mercury and other heavy metals emissions. The damages demanded from FPL are for injuries and losses allegedly suffered by the son as a result of his exposure to the plants' mercury emissions and the parents' alleged pain and suffering, medical expenses, loss of wages, and loss of their son's services and companionship. No amount of damages is specified. FPL has moved to dismiss the complaint. In July 2003, the Bradstreets brought an identical action in the same court on behalf of themselves and their daughter, Elizabeth Bradstreet. FPL will be moving to dismiss the complaint. |
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In June 2003, Monty and Kathryn Wooldridge brought an action on behalf of themselves and their son, Kevin Allen Wooldridge, in the Circuit Court of the 9th Judicial Circuit in and for Orange County, Florida, against Aventis Pasteur and a number of other named and unnamed drug manufacturing and distribution companies, the American Dental Association, the Florida Dental Association, FPL and the OUC, alleging that their son has suffered toxic neurological effects from mercury poisoning. The allegations, counts and damages demanded in the complaint are virtually identical to those contained in the Bradstreet lawsuits described above. FPL will be moving to dismiss the complaint. |
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In March 2003 and subsequently amended in April 2003, the New York Public Interest Research Group, the NY/NJ Baykeeper and the American Littoral Society brought an action against the New York State Department of Environmental Conservation (DEC), Jamaica Bay Peaking Facility, LLC (Jamaica Bay), FPL Energy and Long Island Power Authority (LIPA) in the New York State Supreme Court, Queens County. The action challenges the construction and operation by Jamaica Bay of a nominal 55 mw generating facility (Facility) currently operating in Far Rockaway, NY. The petition alleges, among other things, that LIPA did not conduct a proper environmental review of the Facility under the State Environmental Quality Review Act, and that the issuance of an air emissions permit for the Facility by the DEC was improper because the Facility should have been considered a major stationary source under the Clean Air Act. Petitioners have also filed a Motion for a Preliminary Injunction seeking to
stop the construction of the Facility pending a decision on their request that the court declare the DEC air permit null and void and requesting the court to order LIPA to prepare an environmental impact statement for the Facility. FPL Energy and Jamaica Bay have moved to dismiss the petition. In August 2003, the parties entered into a settlement agreement and expect that the case will be dismissed shortly. |
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FPL Group and FPL believe that they have meritorious defenses to the pending litigation discussed above and are vigorously defending the lawsuits. As noted above, FPL Group's Board of Directors has appointed a special committee of the Board to investigate the matters raised in the May 2, 2003 Letter and to make a determination with respect thereto. Management does not anticipate that the liabilities, if any, arising from the proceedings would have a material adverse effect on the financial statements. |
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In addition to those legal proceedings discussed herein, FPL Group and its subsidiaries, including FPL, are involved in a number of other legal proceedings and claims in the ordinary course of their businesses. While management is unable to predict with certainty the outcome of these other legal proceedings and claims, it is not expected that their ultimate resolution, individually or collectively, will have a material adverse effect on the financial statements. |
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Other Contingencies - In connection with the redemption in 1999 of its one-third ownership interest in Olympus Communications, L.P. (Olympus), an indirect subsidiary of FPL Group holds a note receivable from a limited partnership, of which Olympus is a general partner. The note receivable is secured by a pledge of the redeemed ownership interest. Olympus is an indirect subsidiary of Adelphia Communications Corp. (Adelphia). In June 2002, Adelphia and a number of its subsidiaries, including Olympus, filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code (Chapter 11). The note receivable plus accrued interest totaled approximately $127 million at June 30, 2003 and are included in other investments on FPL Group's condensed consolidated balance sheets. The note was due on July 1, 2002 and is currently in default. |
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Based on the most recent publicly available financial information set forth in Olympus' Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001, total assets of Olympus exceeded liabilities by approximately $3.6 billion and Olympus served 1,787,000 basic subscribers. Olympus has not filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2001 or any subsequent Quarterly Reports on Form 10-Q or Annual Reports on Form 10-K with the Securities and Exchange Commission (SEC), and consequently the September 30, 2001 financial information may not be indicative of Olympus' current financial position. Olympus has stated publicly that it expects to restate its financial statements for the years ended December 31, 2000 and 1999, and its interim financial statements for 2001 and possibly other periods. In addition, current management of Olympus believes that other public information provided by the Rigas family was unreliable. In July 2002, the SEC filed suit against Adelph
ia and certain of its officers alleging that Adelphia fraudulently excluded billions of dollars of debt from its financial statements, misstated its financial and operating results and concealed rampant self-dealing by the Rigas family, which controlled Adelphia. Pursuant to a bankruptcy court order, Olympus is required to file with the court updated financial information. After a number of motions to extend being granted by the court, updated financial information is now required to be filed by October 20, 2003.
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In August 2002, an affidavit was filed in the bankruptcy court proceedings by a director of Lazard Freres & Co. LLC stating that, based on his analysis, the market value of FPL Group's secured interest in Olympus exceeded the carrying value of the note receivable plus accrued interest. In February 2003, FPL Group obtained an evaluation of the Olympus assets from an independent third party. The results of the evaluation, which was based on the limited information available, indicated that there was no impairment. However, the ultimate collectibility of the note receivable cannot be assured. FPL Group will continue to monitor these developments. |
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FPL Energy owns a 50% interest in two wind projects that are qualifying facilities under the PURPA and sell 100% of their output to Southern California Edison (SCE). The projects' qualifying facility status is based on an application filed by FPL Energy's partner in the projects. FERC regulations preclude more than 50% of the equity in qualifying facilities being owned directly or indirectly by utilities or utility holding companies. However, the ownership restriction does not apply to utility holding companies that are exempt from the Holding Company Act under section 3(a)(3) or 3(a)(5). FPL Energy and its partner both are utility holding companies, but FPL Energy's partner currently has exemptions from the Holding Company Act under both section 3(a)(3) and 3(a)(5). Thus, FPL Energy and its partner currently satisfy the 50% ownership test of PURPA. SCE has filed a motion with the SEC requesting that the SEC revoke the Holding Company Act exemptions currently held by FP
L Energy's partner prospectively, as well as retroactively, on the basis that the Holding Company Act exemption applications filed by FPL Energy's partner were not filed in good faith. On February 6, 2003, an administrative law judge issued a decision revoking FPL Energy's partner's exemptions from the Holding Company Act. FPL Energy's partner has filed for an appeal of this decision with the SEC. On February 27, 2003, in response to the administrative law judge's decision, FPL Energy's partner transferred the ownership of its affiliates, which are partners in the partnership, to a trust with an independent non-utility trustee. The partnerships applied to the FERC for recertification of the facilities as qualifying facilities under the new ownership arrangements, which remains pending. In addition, on October 24, 2002, the FERC issued an Order Initiating Investigation and Hearing on the issue of whether three facilities, including the two wind projects described above and a third in which FPL Energy has
no interest, satisfied statutory and regulatory requirements for qualifying facility status following the 1997 transfer of ownership interests in the facilities from FPL Energy's partner to a third party. This investigation resulted in a settlement with SCE and the FERC Staff. As of July 25, 2003, the settlement received all required regulatory and court approvals and will become effective upon conclusion of the FERC rehearing process. The effectiveness of the settlement would result in the facilities no longer having to satisfy qualifying facility ownership requirements and would not materially affect FPL Energy's results of operations. It will also result in SCE withdrawing its motion at the SEC. If the SEC upholds the administrative law judge's decision, the FERC on rehearing reverses its initial decision and rejects the SCE settlement, and the FERC rejects the recertification application and/or FPL Energy or its partner did not take appropriate remedial steps, the projects could lose their qualifyin
g facility status and SCE could seek to terminate its long-term power sales agreements with the partnerships. If the long-term power sales agreements were terminated, the projects would have to sell their output into the marketplace. FPL Energy recorded a charge in the third quarter of 2002 associated with these regulatory issues of approximately $17 million ($10 million after tax). At June 30, 2003, FPL Energy's net investment in these two wind projects totaled approximately $13 million, which is included in other investments and other receivables on FPL Group's condensed consolidated balance sheets. |
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Subsidiaries of FPL Group, other than FPL, have investments in several leveraged leases, two of which are with MCI Telecommunications Corporation (MCI). In July 2002, MCI filed for bankruptcy protection under Chapter 11. Due to the uncertainty of collectibility associated with these leveraged leases, FPL Group recorded reserves totaling approximately $48 million ($30 million after tax) in the third quarter of 2002. At June 30, 2003, investments in leveraged leases with MCI totaled approximately $14 million and related deferred tax liabilities totaled approximately $10 million. On June 30, 2003, an agreement was reached with MCI for MCI's assumption of the leases as amended subject to the approval of the bankruptcy court and MCI's emergence from bankruptcy. The amended leases would result in the leases being classified as operating leases and are not expected to have a significant effect on FPL Group's financial statements. |
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FPL Group recorded charges totaling $207 million ($127 million after tax) in the third quarter of 2002 due to unfavorable market conditions in the wholesale energy and telecommunications markets. During the first six months of 2003, approximately $21 million was charged against the associated liability. As of June 30, 2003, a balance of approximately $6 million remains and is included in other current liabilities on FPL Group's condensed consolidated balance sheets. |
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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This discussion should be read in conjunction with the Notes contained herein and Management's Discussion and Analysis of Financial Condition and Results of Operations (Management's Discussion) appearing in the 2002 Form 10-K for FPL Group and FPL. The results of operations for an interim period generally will not give a true indication of results for the year. In the following discussion, all comparisons are with the corresponding items in the corresponding periods of the prior year.
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Results of Operations |
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FPL Group's net income for the second quarter of 2003 was $239 million compared to $250 million for the same period in 2002. Earnings growth at FPL Energy was more than offset by a decline in earnings at FPL and a loss for Corporate and Other. Unrealized losses from non-managed hedge activities decreased FPL Group's net income for the three months ended June 30, 2003 by $2 million while gains of $1 million increased net income for the same period in 2002. Excluding this item, net income would have been $241 million for the second quarter of 2003 compared to $249 million in the second quarter of 2002.
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FPL Group's year-to-date net income for 2003 was $414 million compared to $194 million for the same period in 2002 reflecting improved results at both FPL and FPL Energy. FPL Group's net income for the six months ended June 30, 2002 included a first quarter after-tax charge of $222 million related to the cumulative effect of an accounting change. Also during the first quarter of 2002, a $30 million gain from an income tax settlement was recorded. Unrealized gains from non-managed hedge activities increased FPL Group's net income for the six months ended June 30, 2003 by $1 million compared to gains of $2 million for the six months ended June 30, 2002. Excluding these items, net income would have been $413 million for the first six months of 2003 compared to $384 million during the same period in 2002. Management assesses the economic performance of its business segments excluding these charges, gains and the effects of non-managed hedges. Although such items are properly included in the determination of
net income in accordance with generally accepted accounting principles, both the size and nature of such items make period to period comparisons of operations difficult and potentially confusing.
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FPL Group's effective tax rate for the three and six months ended June 30, 2003 reflects increased tax credits for wind projects at FPL Energy. The effective tax rate for the six months ended June 30, 2002 was further reduced by the gain from an income tax settlement discussed above.
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In March 2003, the FASB added a project to its agenda to address whether compensation paid in the form of equity instruments should be recognized and how such compensation should be measured. In May 2003, FPL Group announced it would begin using the fair value based method of accounting for stock-based compensation beginning in 2004.
|
|
FPL - For the three months ended June 30, 2003, FPL's net income declined as higher operations and maintenance (O&M) and depreciation expenses more than offset higher revenues from retail base operations. Net income for the six months ended June 30, 2003 benefited from higher revenues from retail base operations partially offset by higher O&M expenses and depreciation expense.
|
|
FPL's operating revenues consisted of the following:
|
|
Three Months Ended
June 30, |
|
Six Months Ended
June 30, |
|
|
|
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
|
|
|
|
|
(millions) |
|
|
|
|
|
|
|
Retail base operations |
$ |
946 |
|
$ |
917 |
|
$ |
1,774 |
|
$ |
1,734 |
|
|
Revenue refund provision |
|
- |
|
|
(4 |
) |
|
- |
|
|
(23 |
) |
|
Cost recovery clauses and other pass-through costs |
|
1,093 |
|
|
1,005 |
|
|
2,006 |
|
|
1,742 |
|
|
Other |
|
14 |
|
|
3 |
|
|
30 |
|
|
7 |
|
|
|
|
|
|
|
|
|
|
Total |
$ |
2,053 |
|
$ |
1,921 |
|
$ |
3,810 |
|
$ |
3,460 |
|
|
|
|
|
|
|
|
|
|
The increase in retail base revenues for the three months ended June 30, 2003 was primarily due to an increase in customer accounts and an increase in usage per retail customer. A 2.4% increase in the number of retail customer accounts increased revenues by approximately $21 million, while the balance of the increase, or $8 million, was primarily due to a 0.5% increase in usage per retail customer. Usage growth associated with price elasticity and improved economic conditions was partially offset by a reduction in weather-driven usage, which was anticipated since revenues in the second quarter of the prior year benefited significantly from warmer weather.
|
|
The increase in retail base revenues for the six months ended June 30, 2003, resulting from an increase in customer accounts and an increase in usage per retail customer, was partially offset by the 7% reduction in retail rates pursuant to the 2002-2005 rate agreement that was effective in mid-April 2002. The 7% rate reduction equated to a $62 million reduction in retail base revenues for the six month period. A 2.4% increase in the number of retail customer accounts increased revenues by approximately $40 million, while the balance of the increase, or $62 million, was primarily due to a 3.4% increase in usage per retail customer. Almost 70% of the growth in usage was due to the effects of weather and price elasticity.
|
|
Revenues from cost recovery clauses and other pass-through costs such as franchise fees and revenue taxes do not significantly affect net income; however, differences between actual revenues and costs incurred can significantly affect FPL Group's and FPL's operating cash flows. Fluctuations in these revenues, as well as in fuel, purchased power and interchange expenses, are primarily driven by changes in energy sales, fuel prices and capacity charges. The increase in revenues from cost recovery clauses and other pass-through costs for the three and six months ended June 30, 2003, as well as an increase in related payables included in accounts payable on the condensed consolidated balance sheets, was primarily due to higher fuel costs. These higher than projected fuel costs resulted in an underrecovery which increased deferred clause expenses on FPL Group's and FPL's condensed consolidated balance sheets and negatively affected FPL Group's and FPL's cash flows from operations for the three and six months e
nded June 30, 2003. In March and July 2003, the FPSC approved fuel adjustment increases totaling $347 million effective April 1, 2003 and an additional $214 million effective July 1, 2003, respectively, due to higher than projected oil and natural gas prices.
|
|
FPL's O&M expenses increased for the three and six months ended June 30, 2003 primarily due to higher nuclear maintenance, employee benefit and various insurance costs. For the second quarter of 2003, nuclear maintenance costs increased $13 million primarily due to additional maintenance work performed during the scheduled outage at St. Lucie Unit No. 2; employee benefit costs increased $8 million due to higher employee health care costs; with the balance of the increase primarily due to higher property and liability insurance costs. For the six months ended June 30, 2003, nuclear maintenance costs increased $25 million; employee benefit costs increased $15 million; with the balance of the increase primarily due to higher property and liability insurance costs.
|
|
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. (FIN) 46, "Consolidation of Variable Interest Entities," which will replace the current accounting guidance for special purpose entities (SPEs). As a result, entities that are deemed to be variable interest entities (VIEs) in which FPL Group or FPL or one of their respective subsidiaries is considered to be the "primary beneficiary" will be consolidated. Variable interests are considered to be contractual, ownership or other monetary interests in an entity that fluctuate with changes in the entity's net asset value. An entity is considered to be a VIE when it has equity investors who lack the characteristics of having a controlling financial interest, or its capital is insufficient to permit it to finance its activities without additional subordinated financial support. Consolidation of a VIE by an investor is required when it is determined that the investor will absorb a majority of the VIE's expected losses o
r residual returns. FPL Group and FPL believe that the VIEs discussed below will be required to be consolidated beginning in July 2003.In late April and early May 2003, while volumetric inspections of the reactor vessel head at St. Lucie Unit No. 2 were being performed during a scheduled refueling outage, two small cracks were found in the control rod drive mechanism tubes. No leakage was observed and both cracks were repaired during the outage. The cost for the repairs is included in an accrual which is being recorded on a levelized basis over a five-year period beginning in 2002, as approved by the FPSC. Also during the St. Lucie Unit No. 2 scheduled refueling outage, the steam generators were inspected and more tubes had to be plugged than anticipated. The inspection results were evaluated and revised tube plugging projections developed. As a result of this evaluation, management anticipates replacing the steam generators at St. Lucie Unit No. 2 in 2007. The cost for the steam generators is estimated
to be approximately $224 million and is included in FPL's capital expenditures disclosed in Note 9 - Commitments. Depending upon the results of future inspections, the reactor vessel head replacement for St. Lucie Unit No. 2 may be delayed until 2007 to coincide with the steam generator replacement.
|
|
In anticipation of NRC regulatory requirements resulting from another nuclear company's recent experience, FPL and FPL Energy plan on performing visual inspections of Turkey Point Unit No. 3's, Turkey Point Unit No. 4's and Seabrook's bottom mounted instrumentation penetrations during their next scheduled refueling outages (fall of 2004 for Turkey Point Unit No. 3 and October 2003 for both Turkey Point Unit No. 4 and Seabrook). FPL performed a limited visual inspection of Turkey Point Unit No. 3 during its scheduled refueling outage in the spring of 2003 and found no evidence of leakage from these penetrations. St. Lucie Units No. 1 and 2 do not have bottom mounted instrumentation penetrations.
|
|
The variances in depreciation expense are affected by the amortization of a regulatory liability, as approved by the FPSC in FPL's 2002-2005 rate agreement, representing the pro rata portion of the $125 million annual depreciation credit provided for by the 2002-2005 rate agreement. In 2002, the $125 million depreciation credit was amortized over an eight and one half month period beginning April 15th versus a twelve month period in 2003. This timing issue resulted in a $6 million smaller depreciation credit in the second quarter 2003 and a larger depreciation credit of $26 million for first six months of 2003 compared with the same periods in 2002. Absent this credit, depreciation expense increased by $16 million and $30 million for the three and six months ended June 30, 2003, respectively, reflecting the Fort Myers and Sanford plant additions and general system growth.
|
|
On April 8, 2003, final approval of the Martin and Manatee plant expansion was granted by the Governor and Cabinet sitting as the Siting Board under the Florida Electrical Power Plant Siting Act. On April 9, 2003, CPV Gulfcoast, Ltd. filed its initial brief for its appeal to the Supreme Court of Florida challenging the FPSC's 2002 approval of the Martin and Manatee expansion. FPL has filed its answer brief, which included a request for dismissal.
|
|
In April 2003, the FERC issued its White Paper, responding to comments on its proposed rule regarding standardized market design for electric markets in the United States. The White Paper indicates that the FERC intends to be more flexible on how and when the final rule will be implemented, defer to regional state committees to address significant RTO/ISO features, require regulated utilities to join RTOs or ISOs and require RTOs to implement spot markets. FPL is evaluating the proposed rule and is currently unable to determine the effects, if any, on FPL's operations.
|
|
In June 2003, the Florida Supreme Court dismissed the Public Counsel's appeal of the FPSC's approval of GridFlorida without prejudice. The FPSC has restored the GridFlorida docket to active status and will reestablish a schedule for proceeding after an FPSC and FERC technical conference on September 15, 2003.
|
|
On November 6, 2003, the Florida Supreme Court will hear oral arguments in the South Florida Hospital and Healthcare Association's appeal of the FPSC's approval of FPL's 2002-2005 rate agreement. FPL intends to continue to vigorously contest this appeal and believes that the FPSC's decision approving the 2002-2005 rate agreement will be upheld.
|
|
FPL Energy - FPL Energy's net income for the quarters ended June 30, 2003 and 2002 was $49 million and $38 million, respectively. During the second quarter of 2003, FPL Energy recorded $2 million of after-tax net unrealized mark-to-market losses from non-managed hedges compared to gains of $1 million during the second quarter of 2002. For further discussion of the derivative instruments, see Note 5. Excluding these items, FPL Energy's after-tax earnings were $51 million and $37 million in the second quarter of 2003 and 2002, respectively.
|
|
FPL Energy's second quarter 2003 net income benefited from project additions, primarily the purchase of an 88.23% interest in Seabrook in November 2002, as well as wind and natural gas-fired assets that began operations during or after the second quarter of 2002. These project additions, totaling more than 3,700 mw, contributed $23 million to the second quarter 2003 net income. FPL Energy's operating revenues and operating expenses for the second quarter of 2003 increased $222 million and $179 million, respectively, primarily driven by project additions. The balance of the portfolio also experienced increased revenues primarily as a result of higher energy prices in the Electric Reliability Council of Texas (ERCOT) region and the Northeast due to rising fuel prices partially offset by lower generation on hydro assets due to weather conditions in the Northeast. The balance of the portfolio also experienced increases in operating expenses, primarily fuel-related, due to rising natural gas and oil prices.
|
|
Earnings from investments in partnerships and joint ventures for the second quarter of 2003, presented as equity in earnings of equity method investees, decreased $6 million from the prior year quarter primarily due to increased gas prices and lower earnings from a project in California. Also, FPL Energy's net income for the second quarter of 2002 included the positive effects of a $10 million insurance settlement.
|
|
FPL Energy's net income for the six months ended June 30, 2003 was $93 million compared to a net loss of $161 million for the comparable period in 2002. The net loss for 2002 was the result of FPL Energy recording a goodwill impairment charge totaling $222 million after tax representing the cumulative effect of adopting FAS 142, "Goodwill and Other Intangible Assets." During the first six months of 2003, FPL Energy recorded $1 million of after-tax net unrealized mark-to-market gains from non-managed hedges compared to gains of $2 million during the same period of 2002. Excluding these items, FPL Energy's after-tax earnings were $92 million and $59 million for the six months ended June 30, 2003 and 2002, respectively.
|
|
FPL Energy's net income for the six months ended June 30, 2003 benefited from project additions, primarily Seabrook, as well as wind and natural gas-fired assets that began operations subsequent to June 2002. These project additions, totaling more than 3,700 mw, contributed $51 million to net income for the first six months of 2003. FPL Energy's operating revenues and operating expenses for the first six months of 2003 increased $402 million and $339 million, respectively, primarily driven by project additions. The balance of the portfolio also experienced increased revenues primarily as a result of higher energy prices in the ERCOT region and the Northeast due to increases in fuel costs partially offset by reduced generation from hydro assets due to weather conditions in the Northeast. The balance of the portfolio also experienced increases in operating expenses, primarily fuel-related, due to rising natural gas and oil prices.
|
|
Earnings from investments in partnerships and joint ventures increased $18 million from the prior year primarily due to a mark-to-market gain on a gas supply agreement, the settlement of a counterparty dispute and the settlement of disputed revenues in both 2003 and 2002. Excluding these events, earnings from FPL Energy's investment in equity method investees decreased approximately $1 million in the first six months of 2003.
|
|
FPL Energy's net income for the first six months of 2003 also reflected higher interest expense of approximately $7 million associated with increasing debt balances due to growth in the business partially offset by the effects of lower average interest rates compared with the same period in 2002. FPL Energy's net income in 2002 also includes the positive effects of a $10 million insurance settlement.
|
|
During the second quarter of 2003, FPL Energy placed into service 1,542 mw including two gas-fired plants, one located in the Mid-Atlantic region and one in the Central region, and 24 mw of wind in the Mid-Atlantic region. During the second half of 2003, FPL Energy expects to add 1,421 mw of gas-fired generation and 812 mw of new wind generation. Construction is underway on another gas-fired power plant that will add 744 mw in 2004. FPL Energy expects its future portfolio growth to come from a mix of wind development (assuming the extension of the production tax credits beyond 2003) and asset acquisitions.
|
|
FPL Energy's target is to have approximately 75% of its capacity under contract over the following twelve-month period. As of June 30, 2003, FPL Energy's capacity under contract is as follows: |
|
Energy Marketing and Trading and Market Risk Sensitivity |
|
Energy Marketing and Trading - Certain of FPL Group's subsidiaries, including FPL and FPL Energy, use derivative instruments (primarily swaps, options, futures and forwards) to manage the commodity price risk inherent in fuel purchases and electricity sales, as well as to optimize the value of power generation assets. To a lesser extent, FPL Energy engages in limited energy trading activities to take advantage of expected future favorable price movements.
|
|
Derivative instruments are recorded on FPL Group's and FPL's balance sheets as either an asset or liability (in other current assets, other assets, other current liabilities and other liabilities) measured at fair value. At FPL, substantially all changes in fair value are deferred as a regulatory asset or liability until the contracts are settled. Upon settlement, any gains or losses are passed through the fuel clause and the capacity clause. For FPL Group's non-rate regulated operations, predominantly FPL Energy, changes in the derivatives' fair value are recognized net in operating revenues for trading and managed hedge activities and in equity in earnings of equity method investees and other - net for non-managed hedges in FPL Group's condensed consolidated statements of income unless hedge accounting is applied. Settlement gains and losses are included within the line items in the statements of income to which they relate. See Note 5.
|
|
The changes in the fair value of FPL Group's consolidated subsidiaries' derivative instruments were as follows:
|
|
|
|
|
|
|
|
|
|
Hedges on Owned Assets |
|
|
|
|
Proprietary
Trading
|
|
Managed
|
|
Non-
Managed
|
|
OCI
|
|
Cost
Recovery
Clause |
|
FPL
Group
Total |
|
|
|
|
|
|
|
|
(millions) |
|
|
Three Months ended June 30, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of contracts outstanding at March 31, 2003 |
$ |
4 |
|
$ |
1 |
|
$ |
(7 |
) |
$ |
39 |
|
$ |
13 |
|
$ |
50 |
|
|
Reclassification to realized at settlement of contracts |
|
(2 |
) |
|
- |
|
|
1 |
|
|
(11 |
) |
|
(6 |
) |
|
(18 |
) |
|
Fair value of new contracts when entered into |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
Effective portion of changes in fair value recorded in OCI |
|
- |
|
|
- |
|
|
- |
|
|
18 |
|
|
- |
|
|
18 |
|
|
Ineffective portion of changes in fair value recorded in earnings |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
Changes in valuation assumptions |
|
- |
|
|
- |
|
|
2 |
|
|
- |
|
|
- |
|
|
2 |
(a) |
|
Changes in fair value excluding reclassification to realized |
|
2 |
|
|
- |
|
|
(3 |
) |
|
- |
|
|
9 |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of contracts outstanding at June 30, 2003 |
|
4 |
|
|
1 |
|
|
(7 |
) |
|
46 |
|
|
16 |
|
|
60 |
|
|
Net option premium payment/(receipts) |
|
- |
|
|
- |
|
|
(9 |
) |
|
- |
|
|
1 |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mark-to-market energy contract net assets at June 30, 2003 |
$ |
4 |
|
$ |
1 |
|
$ |
(16 |
) |
$ |
46 |
|
$ |
17 |
|
$ |
52 |
(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months ended June 30, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of contracts outstanding at December 31, 2002 |
$ |
4 |
|
$ |
- |
|
$ |
8 |
|
$ |
28 |
|
$ |
12 |
|
$ |
52 |
|
|
Reclassification to realized at settlement of contracts |
|
(4 |
) |
|
- |
|
|
2 |
|
|
(28 |
) |
|
(22 |
) |
|
(52 |
) |
|
Fair value of new contracts when entered into |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
Effective portion of changes in fair value recorded in OCI |
|
- |
|
|
- |
|
|
- |
|
|
46 |
|
|
- |
|
|
46 |
|
|
Ineffective portion of changes in fair value recorded in earnings |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
Changes in valuation assumptions |
|
- |
|
|
- |
|
|
2 |
|
|
- |
|
|
- |
|
|
2 |
(a) |
|
Changes in fair value excluding reclassification to realized |
|
4 |
|
|
1 |
|
|
(19 |
) |
|
- |
|
|
26 |
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of contracts outstanding at June 30, 2003 |
|
4 |
|
|
1 |
|
|
(7 |
) |
|
46 |
|
|
16 |
|
|
60 |
|
|
Net option premium payment/(receipts) |
|
- |
|
|
- |
|
|
(9 |
) |
|
- |
|
|
1 |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mark-to-market energy contract net assets at June 30, 2003 |
$ |
4 |
|
$ |
1 |
|
$ |
(16 |
) |
$ |
46 |
|
$ |
17 |
|
$ |
52 |
(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
_____________________ |
|
(a) |
Change in valuation assumption from applying volatility skewness (selection of an input assumption among alternatives based on the moneyness of the option) in option valuation. |
|
(b) |
Includes FPL's mark-to-market energy contract net assets of approximately $18 million at June 30, 2003. |
|
PART II - OTHER INFORMATION |
|
Item 1. Legal Proceedings |
|
Reference is made to Item 3. Legal Proceedings in the 2002 Form 10-K for FPL Group and FPL and Part II, Item 1. Legal Proceedings in the Quarterly Report on Form 10-Q for the period ended March 31, 2003 for FPL Group and FPL.
|
|
With respect to the EPA suit relating to Scherer Unit No. 4, in June 2003, the Eleventh Circuit issued its order dismissing the TVA's appeal in a separate Clean Air Act proceeding because it found the provision of the Clean Air Act allowing the EPA to issue binding administrative compliance orders was unconstitutional, and hence found that the TVA order was a non-final order that courts of appeal do not have jurisdiction to review. The EPA is reviewing its options for further review of the Eleventh Circuit decision. The EPA has not yet moved to reopen this case. In addition, under a proposed EPA rule, the civil penalties being sought by the EPA in this suit would increase, effective August 4, 2003 and thereafter, to $32,500 per day.
|
|
Regarding the FMPA suit, FMPA has petitioned the U.S. Supreme Court for review of the DC Circuit's decision that upheld FERC's order denying FMPA credits for its facilities. In addition, FERC responded to FMPA's petition to the DC Circuit to order FERC to rule on the reserved issues by stating that FMPA had not shown the extraordinary circumstances to warrant granting their petition. FERC has directed FPL and FMPA to file supplemental initial and reply briefs.
|
|
In July 2003, FPL Group's board of directors appointed a special committee, composed of James L. Camaren and Michael H. Thaman, to investigate the matters raised in the May 2, 2003 letter from the plaintiff's attorneys in the Klein lawsuit and to make a determination as to how FPL Group should respond to the matters raised therein.
|
|
In May 2003, Tish Blake and John Lowe, as personal representatives of the Estate of Ashton Lowe, on behalf of the estate and themselves, as surviving parents, brought an action in the U.S. District Court for the Southern District of Florida alleging that their son developed cancer (medulo-blastoma) as a result of the release and/or dissipation into the air, water, soil and underground areas of radioactive and non-radioactive hazardous materials, including strontium 90, and the release of other toxic materials from FPL's St. Lucie nuclear power plant. The allegations, counts and damages demanded in the complaint are virtually identical to those contained in the Finestone lawsuit described in Note 9 - Litigation. FPL will be moving to dismiss the complaint.
|
|
FPL has moved to dismiss the complaint in the March 2003 Bradstreet lawsuit. In July 2003, the Bradstreets brought an identical action in the same court on behalf of themselves and their daughter, Elizabeth Bradstreet. FPL will be moving to dismiss the complaint.
|
|
In June 2003, Monty and Kathryn Wooldridge brought an action on behalf of themselves and their son, Kevin Allen Wooldridge, in the Circuit Court of the 9th Judicial Circuit in and for Orange County, Florida, against Aventis Pasteur and a number of other named and unnamed drug manufacturing and distribution companies, the American Dental Association, the Florida Dental Association, FPL and the OUC, alleging that their son has suffered toxic neurological effects from mercury poisoning. The allegations, counts and damages demanded in the complaint are virtually identical to those contained in the Bradstreet lawsuits described in Note 9 - Litigation. FPL will be moving to dismiss the complaint.
|
|
In the action challenging the construction and operation of a generating facility by Jamaica Bay, the parties entered into a settlement agreement in August 2003 and expect that the case will be dismissed shortly.
|
|
Item 4. Submission of Matters to a Vote of Security Holders |
|
FPL Group - The Annual Meeting of FPL Group's shareholders was held on May 23, 2003. Of the 183,234,174 shares of common stock outstanding on the record date of March 17, 2003, a total of 155,391,864 shares were represented in person or by proxy.
|
|
The following directors were elected effective May 23, 2003:
|
|
|
For
|
|
Against or
Withheld |
|
|
|
|
H. Jesse Arnelle |
151,977,488 |
|
3,414,376 |
|
|
Sherry S. Barrat |
141,890,445 |
|
13,501,419 |
|
|
Robert M. Beall, II |
141,827,070 |
|
13,564,794 |
|
|
J. Hyatt Brown |
133,302,709 |
|
22,089,155 |
|
|
James L. Camaren |
152,254,547 |
|
3,137,317 |
|
|
Alexander W. Dreyfoos, Jr. |
141,744,440 |
|
13,647,424 |
|
|
Paul J. Evanson (resigned 6/9/03) |
152,087,822 |
|
3,304,042 |
|
|
Lewis Hay III |
150,949,461 |
|
4,442,403 |
|
|
Frederick V. Malek |
141,708,566 |
|
13,683,298 |
|
|
Paul R. Tregurtha |
151,182,181 |
|
4,209,683 |
|
|
Frank G. Zarb |
152,143,240 |
|
3,248,624 |
|
|
The vote to ratify the appointment of Deloitte & Touche LLP as independent auditors was 139,692,894 for, 14,285,112 against and 1,413,858 abstaining.
|
|
On July 10, 2003, Michael H. Thaman was elected to the board of directors of FPL Group at a special meeting of the board of directors.
|
|
FPL - The following FPL directors were elected effective May 23, 2003 by the written consent of FPL Group, as the sole common shareholder of FPL, in lieu of an annual meeting of shareholders:
|
|
|
|
|
|
Dennis P. Coyle |
Lawrence J. Kelleher |
|
|
Moray P. Dewhurst |
Armando J. Olivera |
|
|
Paul J. Evanson (resigned 6/9/03) |
Antonio Rodriguez |
|
|
Lewis Hay III |
John A. Stall |
|
|
Item 5. Other Information |
|
(a)
|
Reference is made to Item 1. Business - FPL Operations - Retail Ratemaking in the 2002 Form 10-K for FPL Group and FPL.
|
| |
On November 6, 2003, the Florida Supreme Court will hear oral arguments in the South Florida Hospital and Healthcare Association's appeal of the FPSC's approval of FPL's 2002-2005 rate agreement. FPL intends to continue to vigorously contest this appeal and believes that the FPSC's decision approving the 2002-2005 rate agreement will be upheld.
|
|
(b)
|
Reference is made to Item 1. Business - FPL Operations - Competition in the 2002 Form 10-K for FPL Group and FPL.
|
| |
In June 2003, the Florida Supreme Court dismissed Public Counsel's appeal of the FPSC's approval of GridFlorida without prejudice. The FPSC has restored the GridFlorida docket to active status and will reestablish a schedule for proceeding after an FPSC and FERC technical conference on September 15, 2003.
|
|
(c)
|
Reference is made to Item 1. Business - FPL Operations - System Capability and Load in the 2002 Form 10-K for FPL Group and FPL.
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On April 8, 2003, final approval of the Martin and Manatee plant expansion was granted by the Governor and Cabinet sitting as the Siting Board under the Florida Electrical Power Plant Siting Act. On April 9, 2003, CPV Gulfcoast, Ltd. filed its initial brief for its appeal to the Supreme Court of Florida challenging the FPSC's 2002 approval of the Martin and Manatee expansion. FPL has filed its answer brief, which included a request for dismissal.
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On July 9, 2003, FPL set a record all-time summer energy peak estimated to be 19,616 mw. Adequate resources were available at the time of peak to meet customer demand.
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(d)
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Reference is made to Item 1. Business - FPL Operations - Nuclear Operations in the 2002 Form 10-K for FPL Group and FPL.
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In late April and early May 2003, while volumetric inspections of the reactor vessel head at St. Lucie Unit No. 2 were being performed during a scheduled refueling outage, two small cracks were found in the control rod drive mechanism tubes. No leakage was observed and both cracks were repaired during the outage. The cost for the repairs is included in an accrual which is being recorded on a levelized basis over a five-year period beginning in 2002, as approved by the FPSC. Also during the St. Lucie Unit No. 2 scheduled refueling outage, the steam generators were inspected and more tubes had to be plugged than anticipated. The inspection results were evaluated and revised tube plugging projections developed. As a result of this evaluation, management anticipates replacing the steam generators at St. Lucie Unit No. 2 in 2007. The cost for the steam generators is estimated to be approximately $224 million and is included in FPL's capital expenditures disclosed in Note 9 - Commitments. Depending upo
n the results of future inspections, the reactor vessel head replacement for St. Lucie Unit No. 2 may be delayed until 2007 to coincide with the steam generator replacement.
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In anticipation of NRC regulatory requirements resulting from another nuclear company's recent experience, FPL and FPL Energy plan on performing visual inspections of Turkey Point Unit No. 3's, Turkey Point Unit No. 4's and Seabrook's bottom mounted instrumentation penetrations during their next scheduled refueling outages (fall of 2004 for Turkey Point Unit No. 3 and October 2003 for both Turkey Point Unit No. 4 and Seabrook). FPL performed a limited visual inspection of Turkey Point Unit No. 3 during its scheduled refueling outage in the spring of 2003 and found no evidence of leakage from these penetrations. St. Lucie Units No. 1 and 2 do not have bottom mounted instrumentation penetrations.
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(e)
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Reference is made to Item 1. Business - FPL Operations - Fuel in the 2002 Form 10-K for FPL Group and FPL.
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In March 2003, Private Fuel Storage, LLC (PFS) requested that the NRC review the Atomic Safety and Licensing Board's (ASLB) decision that requires PFS to address the consequences of a hypothetical military aircraft accident into its proposed facility before such facility is licensed. PFS has also initiated further proceedings before the ASLB to address the consequences of such an accident. Licensing on other environmental issues litigated during the hearings remain pending before the ASLB. In addition, the State of Utah has appealed certain decisions of the ASLB.
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The date that St. Lucie Unit No. 2 will lose its ability to store spent fuel upon the installation of additional storage racks in the existing spent fuel pool has been revised from 2012 to 2010. The date was revised due to a change in the number of non reusable fuel assemblies, thus causing the need to store more fuel assemblies in the spent fuel pool sooner than originally projected.
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(f)
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Reference is made to Item 1. Business - FPL Energy Operations - Employees in the 2002 Form 10-K for FPL Group and FPL.
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The collective bargaining agreement between an FPL Energy subsidiary and the Utility Workers Union of America (UWUA) expires on December 1, 2003. FPL Energy is currently negotiating with members of the UWUA for a new collective bargaining agreement.
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(g)
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Reference is made to Item 2. Properties - Character of Ownership in the 2002 Form 10-K for FPL Group and FPL.
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In July 2003, a subsidiary of FPL Energy obtained a $400 million variable rate construction term facility. In connection with this financing, two of FPL Energy's gas-fired facilities were encumbered by liens against their assets. See Note 8 - Long-term Debt.
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Also in July 2003, a subsidiary of FPL Energy sold $380 million of 6.639% senior secured bonds maturing in 2023. In connection with this financing, seven of FPL Energy's wind facilities were encumbered by liens against their assets. See Note 8 - Long-term Debt.
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