Why did FPL Group's earnings grow in 1995, and how sustainable is that growth?

Earnings grew mainly from higher retail sales (energy sales rose 3.5%, aided by customer growth and extreme weather) and lower O&M expense from workforce reductions and efficiency measures. Growth is partly offset by higher depreciation, which rose about $194 million. Sustainability depends on continued cost control, stable weather, and regulators continuing to allow the accelerated nuclear amortization, which the FPSC approved only on an interim basis pending a final decision expected by mid-1996.

Why was the dividend cut in 1994, and is it likely to increase?

In May 1994 the board reduced the quarterly dividend from $.62 to $.42, concluding that paying out a high share of earnings was inappropriate given rising competition and industry change. The dividend was held at $.44 per quarter for 1995. The board reviews the rate annually, and FPL Group's ability to pay depends on dividends from FPL, which face no current restrictions. The filing does not commit to a specific future increase.

How exposed is FPL Group to retail competition and changes in regulation?

Currently Florida law does not permit retail competition, and FPL's retail operations are regulated by the FPSC with cost-based ratemaking. However, the filing notes that competitive initiatives in other states could move the industry toward market-based pricing, and FERC's proposed open-access transmission rules are expected to be finalized in 1996. Management has responded with significant capital and O&M reductions to prepare for possible greater competition.

What are the largest litigation risks, and could they materially affect the company?

The main risks are the FMPA suits, which seek $140 million in damages plus court-ordered transmission access, and the Dade County cogeneration antitrust suit, which sought over $100 million before trebling. The latter was partly resolved by a February 1996 settlement that is subject to FPSC approval and would be recovered through customer clauses. Management believes it has meritorious defenses and does not expect a material adverse effect, but acknowledges that an unfavorable outcome in these suits could be material.

What is the company's nuclear and decommissioning exposure?

FPL operates four nuclear units. Estimated decommissioning costs for FPL's share total about $1.4 billion in 1995 dollars, against an accumulated provision of $666 million at year-end 1995. Annual decommissioning accruals were raised to $85 million, and that level is expected to continue until the next study in 2000. Spent fuel storage costs and the potential accounting change for closure liabilities are also flagged, though the filing says the latter should have no significant effect on net income or cash flows.

NEE 10-K FY1995 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 12, 1996. Cited figures are marked; the original filing is the authoritative source.

FPL Group, Inc. (NEE's predecessor name, parent of Florida Power & Light Company) reported 1995 net income of $553.3 million^a, or $3.16 per share, up from $518.7 million ($2.91 per share) in 1994.

Operating revenues rose to $5.59 billion^b from $5.42 billion. FPL, the regulated utility that drives roughly 97-98% of revenues, served about 3.5 million customer accounts across Florida. The retail regulatory ROE was 12.3% in both 1995 and 1994, within the FPSC-authorized 11%-13% band with a 12% midpoint.

Growth in earnings came against a backdrop of aggressive cost control: FPL cut its workforce by about 8,500 positions (38%) since 1990, and O&M expense fell to $1.21 billion^c from $1.30 billion, though depreciation rose sharply to $918 million, largely from special nuclear amortization and a higher decommissioning accrual. The balance sheet is de-leveraging. Long-term debt fell to $3.38 billion from $3.86 billion, and total assets declined to $12.46 billion.

Capital expenditures are shrinking, with about $1.5 billion^d planned for 1996-1998 and no new generating plants expected before 2004. The company also repurchased 1.9 million shares in 1995 and authorized up to 10 million more through 1997. Dividends were cut in 1994 from $.62 to $.42 per quarter and held at $.44 per quarter in 1995, reflecting management's view that competitive pressures warrant retaining more earnings rather than paying out a high share.

Key risks for investors include the threat of retail competition and possible move away from cost-of-service regulation, several litigation matters (notably FMPA transmission claims seeking $140 million, and a Dade County cogeneration antitrust suit seeking over $100 million before trebling, which the company is working to settle), a pending FPSC decision on accelerated nuclear cost recovery expected by mid-1996, and a FERC open-access transmission rulemaking. Management states that the pending suits are not expected to have a material adverse effect, though it acknowledges they could if the company does not prevail.

02—Key points

Key Highlights

1995 net income rose 6.6% to $553.3 million ($3.16 per share) from $518.7 million ($2.91 per share) in 1994, aided by a lower share count from buybacks.
Operating revenues reached $5.59 billion in 1995, up about 3% from $5.42 billion, driven by customer growth and more extreme weather; FPL supplied about 98% of FPL Group revenues.
Retail regulatory ROE held at 12.3% in 1995 and 1994, within the FPSC's 11%-13% authorized range (12% midpoint).
O&M expenses fell 7.5% to $1.21 billion, reflecting a workforce reduction of about 8,500 positions (38%) since 1990, while depreciation and amortization jumped to $918 million from $724 million.
Long-term debt dropped to $3.38 billion from $3.86 billion, and total assets declined to $12.46 billion, showing continued balance sheet deleveraging.
Capital expenditures are projected at about $1.5 billion for 1996-1998, with no new generating plants expected before 2004.
Material litigation includes FMPA transmission suits ($140 million claimed), a Dade County cogeneration antitrust suit (over $100 million claimed, with a settlement agreed in February 1996 pending FPSC approval), and a Johnson Enterprises judgment of about $6 million against FPL Group and Telesat.

03—Questions

Frequently Asked Questions

Why did FPL Group's earnings grow in 1995, and how sustainable is that growth?
Earnings grew mainly from higher retail sales (energy sales rose 3.5%, aided by customer growth and extreme weather) and lower O&M expense from workforce reductions and efficiency measures. Growth is partly offset by higher depreciation, which rose about $194 million. Sustainability depends on continued cost control, stable weather, and regulators continuing to allow the accelerated nuclear amortization, which the FPSC approved only on an interim basis pending a final decision expected by mid-1996.
Why was the dividend cut in 1994, and is it likely to increase?
In May 1994 the board reduced the quarterly dividend from $.62 to $.42, concluding that paying out a high share of earnings was inappropriate given rising competition and industry change. The dividend was held at $.44 per quarter for 1995. The board reviews the rate annually, and FPL Group's ability to pay depends on dividends from FPL, which face no current restrictions. The filing does not commit to a specific future increase.
How exposed is FPL Group to retail competition and changes in regulation?
Currently Florida law does not permit retail competition, and FPL's retail operations are regulated by the FPSC with cost-based ratemaking. However, the filing notes that competitive initiatives in other states could move the industry toward market-based pricing, and FERC's proposed open-access transmission rules are expected to be finalized in 1996. Management has responded with significant capital and O&M reductions to prepare for possible greater competition.
What are the largest litigation risks, and could they materially affect the company?
The main risks are the FMPA suits, which seek $140 million in damages plus court-ordered transmission access, and the Dade County cogeneration antitrust suit, which sought over $100 million before trebling. The latter was partly resolved by a February 1996 settlement that is subject to FPSC approval and would be recovered through customer clauses. Management believes it has meritorious defenses and does not expect a material adverse effect, but acknowledges that an unfavorable outcome in these suits could be material.
What is the company's nuclear and decommissioning exposure?
FPL operates four nuclear units. Estimated decommissioning costs for FPL's share total about $1.4 billion in 1995 dollars, against an accumulated provision of $666 million at year-end 1995. Annual decommissioning accruals were raised to $85 million, and that level is expected to continue until the next study in 2000. Spent fuel storage costs and the potential accounting change for closure liabilities are also flagged, though the filing says the latter should have no significant effect on net income or cash flows.

04—Continue

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