FPL GROUP (NYSE: FPL) BUY 1,000 Shares
Sector: Utilities Industry: Electric Utilities
Snapshot of FPL Group:
Recent Price: $62.83
52 Week Range: $46.02 – $66.52
Market Cap: $25.56B
PEG Ratio (5 year expected): 1.96
P/E Ratio: 18.50
P/B Ratio (mrq): 2.50
P/S Ratio (ttm): 1.66
ROE (ttm): 13.98%
Company Profile 1
FPL Group, with annual revenues of more than $11.8 billion, is nationally known as a high-
quality, efficient, organization focused on energy-related products and services.
Originating in Florida, FPL Group now has a presence in 26 states and has established itself
as one of the premier power companies. Through its subsidiaries, FPL Group engages in
the generation, transmission, distribution, and sale of electric energy. FPL Group prides itself in producing
electricity from clean and reusable fuels. The company has delivered significant value to its shareholders in
the last five years, providing a 40-percent total shareholder return. During this time, FPL Groupshares
significantly outperformed both the S&P 500 Index and a key peer group, the Philadelphia Utilities Index.
Recommendation: Buy 1,000 Shares Approximate Value: $62,000
Subsidiary rapidly gaining market share in alternative energy sector
Federal tax credits encourage further development in alternative energy
Florida’s market for electricity has above average customer and usage growth
Electric Utilities Industry regulations provide revenue stability in foreseeable future
Sound balance sheet compared to industry with conservative debt -to-capital
Report Written by: Saira Bhiman i, Peter Cooper, Michael Kleiman and Brian Thompson
Table of Contents
Social Responsibility 3
Industry Analysis 4
Company Profile 5
Board of Directors 6
Company History 7
Recent Events 7
Quality Awards and Recognition 8
SWOT Analysis 10
Competition: Regulated vs. Unregulated 11
Natural Disaster Precautionary Measures 11
Investor Relations 12
BCG Matrix 13
Analyst Recommendations 13
Financial Ratio Analysis
Asset Management 14
Debt Management 14
Extended DuPont Model 14
Pro Forma Income Statement 15
Valuation Ratios 16
P/E Valuation 16
Segment Information 17
Income Statement 18
Balance Sheet 19
Statement of Cash Flows 21
Valueline Report 23
Social Responsibility 2
The U.S. currently relies heavily on coal, oil, and natural gas for its energy. Fossil fuels are nonrenewable, that is, they
draw on finite resources that will eventually dwindle, becoming too expensive or too environmentally-damaging to
retrieve. In contrast, renewable energy resources — such as wind and solar energy — are constantly replenished and will
never run out. Renewable energy is important because of the benefits it provides. The key benefits are:
Environmental Renewable energy technologies are clean sources of energy that have a much lower environmental impact
than conventional energy technologies.
Energy for the future Renewable energy never runs out. Other sources of energy are finite and will someday be depleted.
Jobs and the economy Most renewable energy investments are spent on materials and workmanship to build and maintain the
facilities, rather than on costly energy imports. Renewable energy investments are usually spent:
within the U.S.
frequently in the same state, and
often in the same county.
This means your energy dollars stay home to create jobs and to fuel local economies, rather than going
overseas. Meanwhile, renewable energy technologies developed and built in the U.S. are being sold
overseas, improving the U.S. trade deficit.
Energy security After the oil supply disruptions of the early 1970s, our nation has increased its dependence on foreign oil
supplies instead of decreasing it. This increased dependence impacts more than just our national energy
policy. Our nation’s energy security continues to be threatened by our dependency on fossil fuels. These
conventional energy sources are vulnerable to:
FPL Energy is among the leading wholesale generation companies in the U.S. The Company develops, builds and
operates electricity-generating facilities, with an emphasis on:
clean fuel sources
o natural gas
o nuclear energy
o solar energy
o hydroelectric power
In fact, these fuel sources account for more than 90 percent of the power FPL Energy produces. This electricity is sold to
utilities, municipalities, cooperatives and regional power systems that, in turn, supply it to homes and businesses in their
respective market areas.
Electric Utilities Industry3
This industry benefits from the world’s growing dependence on electricity. Coal is the primary source of
electricity generated in the United States today and will continue to be in the near future. Its abundance as well as low
processing costs allows consumers in the United States to enjoy relatively cheap electricity.
New technological developments within the industry are geared toward keeping coal as the primary source of
energy within the foreseeable future. Companies are working hard to find avenues to virtually eliminate the sulfur,
nitrogen and mercury pollutants emitted into the air when coal is burned. Additionally, industry participants are
developing ways to prevent the release of greenhouse gases into the atmosphere, a step towards mollifying the recent
discussion of global warming issues.
Research is also underway to increase the fuel efficiency of coal-fueled power plants. Today’s plants convert
only a third of coal’s energy potential to electricity. New technologies developing within the industry could nearly
double efficiency levels in the next 10-15 years. Higher efficiencies mean even more affordable electricity and fewer
Although coal is the most prevalent resource used to generate energy, natural gas is the nation’s fastest growing
fuel. More than 90% of the power plants to be built in the next 20 years will likely be fueled by natural gas. Natural gas
is also likely to be a primary fuel for distributed power generators – mini-power plants that would be sited close to
where the electricity is needed.
In addition, new technologies are being developed for the storage of energy and the transmission of energy that
will contribute to energy efficiency of the electric industry. For instance, the copper wires used in typical transmission
lines lose a percentage of the electricity passing through them because of resistance, which causes the wires to heat up.
But "superconducting" materials have no resistance, and if they are used to transmit electricity in the future, very little
of the electricity will be lost. Although the electrical utilities industry seems to be in its maturity stage, the opportunity
for new, energy saving technologies and developments can be conducive to the overall efficiency of the participants’
Alternative Energy Industry4
Electricity markets are now fully or partially open to competition in more than a dozen states. To date,
competitive marketers have offered green power to retail or wholesale customers in District of Columbia, California,
Illinois, Maryland, New Jersey, New York, Pennsylvania, Texas, or Virginia, and several New England states.
The term "green power" is used to define power generated from renewable energy sources, such as wind and
solar power, geothermal, hydropower and various forms of biomass. Green power marketing has the potential to
expand domestic markets for renewable energy technologies by fostering greater availability of renewable electric
service options in retail markets. Although renewable energy development has traditionally been limited by cost
considerations, customer choice allows consumer preferences for cleaner energy sources to be reflected in market
Green pricing is an optional utility service that allows customers an opportunity to support a greater level of
utility company investment in renewable energy technologies. Participating customers pay a premium on their electric
bill to cover the incremental cost of the additional renewable energy. As of early 2006, more than 600 utilities across the
nation, including investor-owned, municipal utilities, and cooperatives, offer a green pricing option.
Whether or not they have access to green power through their local utility or a competitive electricity marketer,
consumers can purchase renewable energy certificates or RECs (also known as green tags or tradable renewable
certificates). RECs represent the environmental attributes of the power produced from renewable energy projects and
can be sold separately from the physical electricity. Customers can buy RECs without having to switch electricity
Florida Power & Light Company 5
Florida Power & Light is among the largest and fastest-growing electric utilities in the United
States. In 2005, the company’s average number of customer accounts grew by more than
97,000, or 2.3 percent, to more than 4.3 million. The company has a favorable customer mix.
Revenues from industrial customers make up only about 3 percent of the total, compared with
an average of about 19 percent for the electric utility industry. A smaller than average percentage of industrial
customers means the company is less exposed to economic cyclicality. FPL provides power to one of the
fastest growing utility service territories in the nation. Over the last 10 years, the number of FPL’s customer
accounts has grown at a compounded average annual rate of 2.2 percent. Additionally, usage per customer
has grown at an average annual rate of 0.6 percent. FPL generation expansion plans reflect this growth, as the
company brought online 1,900 megawatts of generating capacity in 2005 and brought online an additional
1,150 megawatts of generating capacity in mid-2007.
FPL Energy has adhered to a disciplined and moderate risk strategy that focuses on clean
energy. FPL Energy’s net generation grew to more than 13,300 megawatts during 2006.
The company achieved this dramatic growth while maintaining a diversified portfolio
regionally. Meanwhile, the diversification of fuel expanded primarily due to the wind and nuclear portfolio
additions made during the year. FPL Energy is also known as a clean generator. Although gas is its primary
fuel, the company is also diversified among several other fuel types. FPL Energy is the nation’s largest
developer, owner and operator of wind powered generating plants, having roughly 4,000 net megawatts of
wind in service. Improved technology and ever increasing fuel costs have led to a greater focus on wind-
powered generating plants by energy providers across the nation. In 2006, nearly 2,500 megawatts of new
capacity were installed throughout the United States, and FPL Energy was the project developer responsible
for the largest portion of that new wind generation.
FPL FiberNet, LLC is nationally known as a high quality, efficient and customer-driven
organization focused on energy-related products and services. FPL FiberNet, LLC delivers
wholesale services throughout most major metropolitan areas in Florida, with its extensive
long-haul and metro fiber-optic networks. FPL Group’s fiber-optic network was originally developed in the late
1980’s to provide internal telecommunications services to support company operations. In 1996, FPL began
selling excess fiber-optic capacity along its network to the major telecommunications companies operating in
Florida. FPL FiberNet, LLC acquired an existing 1,600-mile inter-city fiber network from Florida Power & Light.
The company was launched in early 2000 to sell fiber-optic network capacity and dark fiber on a wholesale
basis to local and long distance telephone companies, Internet Service Providers and other
telecommunications companies in Florida. Since its inception, FPL FiberNet has invested millions of dollars to
build its fiber-optic network throughout Florida’s major metropolitan areas as well as state of the art Optical
Networking and Ethernet equipment.
Board of Directors7
Mr. Hay is the chairman and chief executive officer of FPL Group, having relinquished the title of president on
December 15, 2006. He became a director, president and chief executive officer of FPL Group in June 2001, and
chairman of FPL Group and chairman and chief executive officer of Florida Power & Light Company in January
2002. He joined FPL Group in 1999 as vice president, finance and chief financial officer. From March 2000 until
December 2001 he served as president of FPL Group’s competitive energy subsidiary, FPL Energy, LLC. He is a
director of Capital One Financial Corporation and Harris Corporation, as well as FPL Group’s subsidiary, Florida
Power & Light Company.
Mr. Robo is President and Chief Operating Officer of FPL Group. He joined FPL Group in early 2002 as Vice
President of Business Development and was named president of FPL Energy a few months later. Prior to joining
the Florida-based energy services company, Robo was with General Electric for ten years, where he was president
and CEO of a major division of GE Capital and served as chairman and CEO of GE Mexico. He received a BA Summa
Cum Laude from Harvard College and an MBA from Harvard Business School, where he was a Baker Scholar.
Moray P. Dewhurst has been Senior Vice President, Finance and Chief Financial Officer of Florida Power & Light Co.
since July 19, 2001. Mr. Dewhurst has been Vice President, Finance and Chief Financial Officer of FPL Group Inc.,
parent of Florida Power & Light Co. since July 17, 2001. Prior to July 17, 2001, Mr. Dewhurst was Senior Partner of
Dean & Company, a management consulting and investment firm that he co-founded in 1993. Mr. Dewhurst has
been a Director of Florida Power & Light Company since 2001.
Armando J. Olivera has been President of Florida Power & Light Co., since June 25, 2003. Mr. Olivera served as
Senior Vice President of Power Systems of FPL, a subsidiary of FPL Group Inc. from July 1, 1999 to July 25, 2003.
Mr. Olivera has been a Director of Florida Power & Light Company, a subsidiary of FPL Group Inc. since 1999. He
serves as Member of the Board of Directors of Enterprise Florida Inc. After finding a job at FPL, he began as an
engineer trainee, performing draft work. FPL Energy, LLC is a subsidiary of FPL Group. Mr. Olivera majored in
electrical engineering at Cornell University. Mr. Olivera was born in Sancti Spiritus, Cuba, and raised in Miami.
Carmen Perez joined FiberNet in 2004 and was named president of FPL FiberNet in January 2007 after having
served as vice-president of sales and as controller and director of accounting. Prior to joining FiberNet, she served
in the customer service organization of Florida Power & Light Company as director of revenue recovery. Before
that, Perez served as FPL’s director of corporate accounting and assistant controller. From 1982 to 1989, she was a
certified public accountant with the accounting firm of Deloitte & Touche, where she specialized in the
management of audits of large financial and governmental institutions. Perez holds a bachelor degree in business
administration degree from Florida International University.
Mitchell F. Davidson joined FPL Energy in June 2004 as vice president of business management for the subsidiary’s
Texas-based business operations and was appointed senior vice president of all business management activities in
May 2006. He has been responsible for the day-to-day activities of the business management organization,
No Picture including all activities related with FPL Energy’s generating assets. Prior to joining FPL Energy, Davidson was senior
Available vice president, energy management, for Duke Energy North America. He held a number of other senior
management positions while at Duke, including senior vice president, origination. Earlier, Davidson was at
Entergy-Koch LP where he held a number of executive positions of increasing responsibility. Mr. Davidson holds a
BA in Industrial Technology from Southwest Texas State University and an MBA from the University of Houston.
1925: Florida Power & Light (FP&L) Company is formed as part of the American Power & Light Company.
1950: FP&L becomes independent of American Power & Light Company and is listed on the New York Stock Exchange.
1965: FP&L contracts to buy natural gas for 20 years from Pan-American Petroleum Corporation and Florida Gas
1984: FPL Group, Inc. is organized as a holding company.
1985: FPL Group buys Colonial Penn Life Insurance Company and sets up ESI Energy Inc.
1990: The Company buys 76 percent of Georgia Power Company’s plant near Atlanta.
1991: Colonial Penn is sold after losing money.
2001: Jim Broadhead retires after 13 years as chairman and CEO, replaced by Lewis Hay I
2004: FPL Group ranked #1 for environmental performance in Innovest report
2005: FPL Group completed acquisition of Gexa Energy
2006: FPL Group, Inc. And Constellation Energy terminate plans to merge
FPL Group, Inc.’s FPL Energy, LLC Completes Acquisition Of Point Beach Nuclear Power Plant – October 1, 2007
FPL Group, Inc.’s FPL Energy, LLC announced that it has completed the purchase of the two-unit, 1,023-
megawatt Point Beach nuclear power plant located near Two Rivers, Wisconsin. FPL Energy purchased the Point Beach
nuclear power plant for approximately $924 million.
FPL Group, Inc.’s Subsidiary Enters Into Agreement with Citrus Energy For Developing Ethanol Plant – July 19, 2007
FPL Group, Inc.’s subsidiary FPL Energy, LLC, announced that it has signed a letter of intent with Citrus Energy,
LLC, of Boca Raton, FL, to develop the commercial scale citrus peel to ethanol plant. The cellulosic ethanol plant will be
owned and operated by FPL Energy and is expected to produce four million gallons of ethanol per year.
FPL Group, Inc. Announces Expansion Plans – April 3, 2007
FPL Group, Inc. announced that it plans to meet anticipated customer growth and electricity needs of customers
with a strategy that focuses on fuel diversity, energy conservation and renewable energy sources to improve system
reliability and help stabilize future power prices. As part of this strategy, the Company plans to increase its power
generating resources by approximately 28% by 2016. The Company’s diverse generation expansion plan includes: the
completion of construction of 1,150 megawatts of new combined-cycle natural gas-fired generation at its Turkey Point
plant site in south Miami-Dade County; construction of 2,400 megawatts of new generation at its West County plant site
in western Palm Beach County to begin serving in 2009; approval to add 1,960 megawatts of advanced clean coal
technology in Glades County. The Company expects the facility to begin serving needs by 2013 and 2014. To round out
the end of the 10 year planning horizon, the Company tentatively plans to add 1,200 megawatts of combined-cycle
natural gas-fired generation. In addition, 2018 and beyond the Company also is taking steps to create the option for new
nuclear power generation in Florida.
FPL Group, Inc. And Constellation Energy Terminate Plans to Merge – October 25, 2006
FPL Group, Inc. and Constellation Energy announced they have reached a joint and amicable agreement to
terminate their plans to merge. Constellation Energy initiated a request to end the planned merger, citing continued
uncertainty over regulatory and judicial matters in Maryland and the potential for a protracted and open-ended merger
Quality Awards and Recognition 12
2007 FPL is ranked no. 1 among Electric & Gas Utilities on Fortune Magazine’s annual list of “America’s
Most Admired Companies”
2005 FPL Group hosts U.S. business leaders in meeting of The Conference Board – U.S. Quality Council.
2004 In recognition of FPL’s restoration performance after Hurricanes Charley, Frances and Jeanne,
the company was presented the Emergency Response Award from the Edison Electric Institute
(EEI), noteworthy in that EEI is a leading trade association comprised of electric industry peers.
2003 EEI presented FPL with its Emergency Response Award for our efforts to help other utilities
restore electric service after Hurricane Isabel.
2002 FPL was named No. 1 among leading electric utilities for environmental performance by
Innovest, an investment research firm.
2001 FPL received EEI’s top award for outstanding achievements in land management and
environmental stewardship activities for our wetlands mitigation bank and crocodile protection
and research program at our Turkey Point power plant.
2000 FPL is one of six utilities honored with the Edison Electric Institute’s Emergency Response Award
for outstanding efforts to restore service to customers in the wake of natural disasters, such as
Hurricane Irene in October 1999.
1999 FPL’s Turkey Point nuclear plant is only nuclear plant in U.S. to earn Power Plant of the Year
award for world class performance.
1998 First electric utility to win William M. Benkert Award, U.S. Coast Guard’s highest honor for
excellence in marine environmental protection.
1998 FPL quality manager serves as co-chairperson of U.S. Quality Council; judge of USA Today Quality
Cup; Board of Directors, Florida Sterling Council; and Chairman, Greater Miami Chamber Quality
1998 FPL is named the most admired utility by Fortune magazine, based on its annual survey.
1997 Employees celebrated the 10 anniversary of their participating in the President’s Cup (now the
James L. Broadhead Award) challenge. FPL employees recognized for quality leadership served as
quality ambassadors and shared their successes internationally. Their appearances included the
International Convention for QC Circles in Beijing, China.
1994 A Post-Deming Prize review is held. Two examiners from JUSE (Dr. Kume and Dr. Akao) gave high
marks to FPL with special recognition for its efforts in benchmarking, creativity and technology,
empowerment and quality promotion.
1989 FPL becomes the first non-Japanese company in the world to receive the prestigious Deming
Prize, a quality award administered by the Union of Japanese Scientists and Engineers (JUSE).
1986 FPL Chairman and CEO John J. Hudiburg, Dr. Joseph Juran and Doug Ekings, Chairman of the
American Society for Quality, testified before the U.S. Congress for the establishment of what
was signed into law by President Ronald Reagan as The Malcolm Baldridge National Quality
Award. FPL staff was subsequently involved in developing the internal systems and structures of
1985 FPL receives the Edison Award for Excellence and Quality Achievements
Progress Energy Inc. (PGN)
Progress Energy, Inc., together with its subsidiaries, operates as an
integrated energy company serving the southeast region of the United
States. It engages in the generation, transmission, distribution, and sale
of electricity in North Carolina, South Carolina, and Florida. The company also produces and sells coal-based
solid synthetic fuels in Kentucky and West Virginia; operates synthetic fuels facilities for third parties in West
Virginia; and provides coal terminal services, which include procuring and processing coal, and transloading
and marketing synthetic fuels. It offers its coal terminal services in Kentucky and West Virginia. The company
serves textile, chemical, metal, paper, food, rubber and plastics, wood products, and electronic machinery and
equipment sectors, as well as phosphate rock mining and processing, electronic design and manufacturing,
and citrus and other food processing sectors. As of December 31, 2006, it had approximately 21,300
megawatts of regulated electric generation capacity and served approximately 3.1 million retail electric
customers. Progress Energy, formerly known as CP&L Energy, Inc., was founded in 1925 and is headquartered
in Raleigh, North Carolina.
Southern Company (SO)
Southern Company, through its subsidiaries, engages in the generation, transmission,
distribution, and sale of electricity in Alabama, Georgia, Florida, and Mississippi. As of
December 31, 2006, it served approximately 2,305,676 residential, commercial, and
industrial customers. The company also engages in the construction, acquisition, and management of
generation assets; provision of digital wireless communications services; and the provision of fiber optic
solutions to telecommunication providers. In addition, it holds investments in synthetic fuels and leveraged
lease projects. Southern Company was founded in 1945 and is based in Atlanta, Georgia.
TECO Energy, Inc. (TE)
TECO Energy, Inc., through its subsidiaries, engages in diversified energy-related
operations in the United States. The company’s activities primarily include
generation, purchase, transmission, distribution, and sale of electric energy. The
company provides retail electric services to approximately 661,000 customers in the west central Florida. It
also purchases, distributes, and sells natural gas to approximately 332,000 customers, including residential,
commercial, industrial, and electric power generation customers in Florida. In addition, TECO Energy owns
interests in coal processing and loading facilities, synthetic fuel production facilities, and mineral rights, as well
as owns or operates surface and underground mines in eastern Kentucky, Tennessee, and Virginia; and
provides waterborne transportation, storage, and transfer services of coal and other dry-bulk commodities.
The company was founded in 1899 and is headquartered in Tampa, Florida.
FPL Group: Environmental awareness and public support
FPL Energy: Nation’s leader in wind and solar energy generation
FPL Energy: facilities located in multiple locations, lower weather-related performance risk
FPL Energy: Diversified Portfolio and favorable customer mix
FPL Energy: Infinite amount of energy
FPL Energy: Tax Credits for renewable energy
FP&L: Above average customer growth rate
FP&L: Regulated territorial customer base
FPL Energy: Renewable energy makes up low market share
FPL Energy and FiberNet: Expensive technology and high capital costs
FPL Energy: Political scrutiny due to bird and bat deaths
FPL Energy and FiberNet: Competitive industry
FPL Energy: Wind farms need specific topography
FiberNet: Only geographical, not technological competitive advantage
FPL Group: Improvement in technology
FPL Energy: Renewable energy is a growing industry
FPL Energy: Governmental regulations that could benefit “green” energy
FPL Energy and FP&L: Acquisition of assets
FPL Energy and FiberNet: Expansion in market share
FPL Group: Natural disasters
FPL Group: Frequently changing regulatory environment
FPL Energy: Continuance of relatively cheap crude oil
FPL Group 10-K
Competition: Regulated vs. Unregulated 15
Providing services in both a regulated and deregulated market, FPL Group Inc. faces and is shielded
from direct competition. Florida Power & Light is FPL Group’s Inc. primary subsidiary, providing electricity to
residents, businesses, and industrial customers in Florida and is responsible for the majority of FPL Group’s
Inc, revenue. Other electrical providers in Florida include Teco Energy (TE) and Progress Energy (PGN).
However, these providers do not pose a direct threat, since FPL Group and other electrical facilitators operate
in a highly regulated industry. The Florida Public Service Commission (FPSC) which has jurisdiction over retail
rates, service territory, issuances of securities, planning, sighting and construction of facilities. The industry is
also regulated by the Federal Energy Regulatory Commission (FERC). With designated service territories, FP&L
serves as the only provider to its customers. This provides a difficult barrier to entry within specific
geographical locations. However, as a result of the controlled competition, FP&L’s growth is significantly based
on population growth rather than capturing customers from its competitors.
On the other hand, FPL Energy, which is an unregulated wholesale subsidiary, is not restricted to
specific territories. This gives FPL Energy the freedom to expand its operations without territorial restrictions.
FPL Energy now has a presence in twenty five states. However, this opportunity for FPL Energy is also provides
an opportunity for its competitors to produce comparable energy in the same geographical locations.
Natural Disaster Precautionary Measures 16
Stationed in Florida, FP&L is frequently susceptible to hurricanes. In 2005, Hurricane Wilma hit the
heavily populated west coast and South Florida regions. A record 3.2 million FP&L customers were
temporarily left without power as transmission lines and substations were especially hard hit. To avoid such
damages in the future, FP&L has worked to improve such programs as Storm Secure, which takes
precautionary measures to help reduce FP&L related damages caused by hurricanes. Such measures include
infrastructure hardening. Systems have been designed to better withstand high pressure winds and older
parts of the infrastructures have been replaced by stronger ones. Other preventative measures include tree
trimming. This action helps prevent trees making contact with FP&L electrical power lines and causing
electrical interruptions for its customers. FP&L has also put for effort to consistently inspect electrical poles
for any damage or weathering that may affect services in the future and that can better withstand future
storm activity. In addition, FP&L has encouraged the construction of underground facilities. Today, more than
37% of FP&L power delivery system is underground. These preventative measures hope to make a significant
impact in providing reliable electricity during the Florida’s stormy seasons.
1. How does FP&L compete for customers? Do customers of FPL Energy have a choice in purchasing renewable or non-
Florida is a regulated state, which means the government dictates regions in which separate utilities can
operate. Where a customer resides dictates their electricity provider. FPL Energy sells the majority of
its output to utilities and aggregates; hence the individual end customer does not necessarily have a
choice if they are buying green power. In many of our historical PPA agreements, the purchaser of the
power retains the green attribute and not FPL Energy necessarily.
2. What implications does the 8-K that was recently filed with the SEC have on future earnings expectations?
On October 3rd, FPL Group filed an 8-K with the SEC regarding the purchase of Point Beach for
approximately $924 million. FPL Group simply provided a cautionary statement to investors that actual
results in this quarter’s report may differ from those figures projected as a result of the acquisition.
3. Is there any pending regulation that would affect FP&L and FPL Energy?
At FP&L, the utility in Florida, the rates are set by the regulators and a rate agreement is in place though
the end of 2009. At FPL Energy, the primary force would be market dynamics to a large degree. In
certain cases legislation at either the state level or federal level could impact FPL Energy.
4. FPL is currently building an ethanol plant. What is the future of ethanol?
FPL Energy has entered into an agreement to produce cellulosic ethanol. This plant is a very small piece
of our overall portfolio. There are many companies and research labs investing a considerable amount
of money in ethanol. It remains unclear what its future will be.
5. Why did FPL issue $300 million in bonds?
Proceeds from the bond offering will be used to repay FP&L's short term debt, and also for general
6. FPL Energy announced that it will be investing in a new solar energy production with Ausra, Inc. Considering solar
energy constitutes only 1% of the company’s energy production, what type of return on this investment does FPL
Over time, FPL may invest $2.4 billion both in increasing solar thermal energy output and in programs
reducing carbon dioxide emissions. We do not disclose our ROI, but it meets or exceeds our internal
7. What is the growth potential of FiberNet given its immaterial revenue contribution in recent years?
Since we are currently in our "quiet period" (prior to an earnings release), I cannot answer that question.
8. What is each subsidiary’s competitive advantage within its respective industry?
We produce reliable power at low cost, giving us the ability to negotiate good agreements with our
regulators. We are one of the lowest cost producers in the industry. We are in the top decile in almost
every other metric that you might look at. We have a very clean portfolio both at FP&L and FPL Energy.
Eszter Dimarzio, FPL Group Shareholder Services Department
FP&L functions primarily as the cash cow for FPL Group: this
subsidiary has high market share in the slow-growth electrical Star Question
utilities industry. It generates roughly 80% of the total revenue High
within the FPL Group as a whole. Although FP&L serves as a
leader in a mature industry, the company has been expanding its Market
presence rapidly throughout Florida by investing in various Growth
energy production efficiency projects within the region.
Recently, FP&L completed construction on its Turkey Point Low
power plant in Miami, and plans to invest another $650 million
annually through the end of the decade in its transmission and
distribution infrastructure to meet the growing demand for Cash Cow Dog
electricity in Florida. Strong Weak
Relative Competitive Position
FPL Energy functions as the star out of the three subsidiaries:
this unit has high earnings and growth potential within the
developing alternative energy industry. Alternative energy has been the topic of choice among those who seek a
cleaner environment, and FPL Energy provides affordable options for consumers to utilize green energy. Currently, FPL
Energy offers a “Sunshine Energy” membership to stewards of the environment. This program educates consumers on
what they can do to help preserve the environment for future generations. For every 10,000 customers who sign up for
Sunshine Energy, an additional 150kw of solar will be built in Florida. New solar arrays are scheduled to be announced
this year which will be among the largest solar energy producers in Florida. FPL Energy is rapidly expanding its
alternative energy production capabilities with the goal of utilizing only green energy and in turn protecting our
environment for a cleaner tomorrow.
Finally, FPL FiberNet functions as the dog among the three subsidiaries: the company has a weak relative competitive
position within its industry considering it delivers wholesale services only in Florida. Its market growth is contingent
upon FP&L’s expansion plans, and unfortunately, since FP&L’s market is territorially regulated, there is little chance that
FiberNet will entertain plans of expansion outside of Florida.
Analyst Recommendations 18
Current Month Last Month Two Months Ago Three Months Ago
Strong Buy 4 3 1 1
Buy 7 7 5 4
Hold 6 7 11 12
Sell 0 0 0 0
Strong Sell 0 0 0 0
Four strong buy recommendations indicate that these analysts believe the stock will outperform the market over the
next six months. The total number of buy recommendations has more than doubled over the past three months, while
the number of sell recommendations has remained zero. Overall, analysts are confident that FPL is a strong stock with
earnings potential over the next six months.
Financial Ratio Analysis
Liquidity Ratios FPL 2004 FPL 2005 FPL 2006 PGN SO TE Industry
Current Ratio: 0.59 0.69 0.77 0.95 0.87 1.24 1.03
Quick Ratio: 0.51 0.61 0.63 0.60 0.60 0.99 0.59
Participants in the electrical utilities industry naturally have a high amount of fixed assets, which weighs down liquidity
ratios. FPL's liquidity has been increasing over the past three years; its current ratio has been increasing, but is still
below the industry average, while its quick ratio is comparable to the industry average.
Asset Management FPL 2004 FPL 2005 FPL 2006 PGN SO TE Group Avg.
Total Asset Turnover: 0.37 0.36 0.44 0.38 0.35 0.47 0.41
Fixed Asset Turnover: 0.50 0.53 0.51 0.52 0.36 0.57 0.49
Avg. collection Period: 35.72 43.46 29.31 34.98 30.43 35.29 32.50
Total asset turnover measures the company's efficiency in using its assets to generate sales; since participants within
this industry have a large amount of fixed assets, its TATO tends to be in a low range. FPL's TATO and Average
Collection Period are increasing and decreasing respectively, which are positive trends, increasing their asset
Debt Management FPL 2004 FPL 2005 FPL 2006 PGN SO TE Group Avg.
Equity Multiplier: 3.76 3.85 3.62 3.1 4.45 4.26 3.86
Debt-to-Equity: 1.29 1.24 1.13 1.15 1.35 1.99 1.41
Times Interest Earned: 4.04 3.51 3.97 2.64 4.62 2.33 3.39
In regards to debt management, FPL is currently more reliant on debt than equity; in context with the group, however,
this is normal in the industry and not necessarily a sign for concern. The times interest earned multiple shows that
revenue sufficiently covers current period interest payable charges, more so than the company average.
Profitability FPL 2004 FPL 2005 FPL PGN SO TE Industry
ROE: 11.89% 10.52% 13.98% 9.46% 14.97% 15.03% 16.36%
ROA: 3.16% 2.73% 3.79% 3.79% 3.99% 2.59% 3.36%
Extended DuPont Model PM TATO EM FPL 2006
ROE: 8% 0.44 3.62 = 12.90%
ROA: 8% 0.44 --- = 3.56%
A combination of a slightly lower Equity Multiplier and Total Asset Turnover lowers FPL’s Return on Equity. Comparing
that to the trailing twelve months, however, FPL has shown improvement from previous year end. Return on Assets is
comparable to industry standards providing more evidence that a weak equity multiplier is part of the cause for a weak
Return on Equity.
Pro Forma Income Statement and Valuation
Projected Forecasted Forecasted Forecasted Forecasted
December 31st December 31st December 31st December 31st December 31st % of
2007 2008 2009 2010 2011 Revenue
Projected Revenue Growth 13.7% 13.7% 13.7% 13.7% 13.7%
Revenue 17,862 20,309 23,092 26,255 29,852
Fuel, purchased power and interchange 9,443 10,737 12,208 13,880 15,782 52.9%
Other operations and maintenance 2,617 2,975 3,383 3,846 4,373 14.7%
Depreciation and amortization 1,773 2,016 2,292 2,606 2,963 9.9%
Taxes other than income taxes 1,396 1,587 1,805 2,052 2,333 7.8%
Other Expenses 250 284 323 368 418 1.4%
Operating Income/(Loss) 2,383 2,710 3,081 3,503 3,983 13.3%
Interest Income/(Expense) (778) (885) (1,006) (1,144) (1,301) -4.4%
Other Income/(Loss) 286 325 370 420 478 1.6%
Pre-tax Income/(Loss) 1,891 2,150 2,444 2,779 3,160 10.6%
Provision for income taxes 446 507 577 656 746 2.5%
Net Income/(Loss) 1,445 1,642 1,867 2,123 2,414 8.1%
Operating Income/(Loss) 2,383 2,710 3,081 3,503 3,983 13.3%
Add: Depreciation & Amortization Expenses 1,773 2,016 2,292 2,606 2,963 9.9%
EBITDA 4,156 4,725 5,373 6,109 6,946 23.3%
Weighted average shares outstanding
Basic 408 418 428 438 448
Diluted 411 421 431 441 451
Earnings per share of common stock
Basic 3.54 3.93 4.36 4.85 5.39
Assuming dilution 3.51 3.90 4.33 4.81 5.35
- Projected Revenue Growth is an average of the last five years
- All other fields use the average % of revenue from the past three years
- Weighted Average Shares Outstanding increase by an estimate of 10 million per year, in accordance with prior year
Valuation FPL TTM
Ratios 2003 2004 2005 2006 FPL PGN SO TE Industry
P/E 13 15.2 18.2 16.8 18.5 15.7 16.4 12.9 20
P/B 1.7 1.8 1.9 2.2 2.5 1.5 2.4 1.9 2.6
P/S 1.2 1.3 1.3 1.4 1.6 1.2 1.9 1 1.4
P/CF 5.2 5.1 9.7 8.5 6.4 8.7 9 6.5 8.4
In regards to relative pricing, FPL is on par with the industry in regards to P/B and P/S. Its P/E and P/CF ratios, however,
are below the industry averages, suggesting the stock may be slightly undervalued. A good sign of continuing growth is
that all of FPL’s year end valuation ratios have an increasing trend.
By using our forecasted diluted EPS figure for 2008 and multiplying it by our most recent P/E ratio (ttm), we estimate a
$3.90 x 18.5 = $72.15
Recent Price: $62.33
Our P/E Valuation predicts a 16% increase in value for 2008.
FPL GROUP, INC.
(millions, except per share amounts)
FPL and FPL and
FPL Energy Other Total FPL Energy Other Total
Operating revenues 11,988 3,558 164 15,710 9,528 2,221 97 11,846
Operating expenses 10,525 2,803 285 13,613 8,181 2,067 108 10,356
Interest charges 278 269 159 706 224 223 146 593
Depreciation and amortization 787 375 23 1,185 951 311 23 1,285
Equity in earnings of equity
method investees - 181 - 181 - 124 - 124
Income tax expense
(benefit) (d) 424 110 (137) 397 408 (55) (71) 282
Net income (loss) 802 610 (131) 1,281 748 203 (50) 901
Capital expenditures, independent
power investments and
nuclear fuel purchases 1,868 1,809 62 3,739 1,711 822 13 2,546
Property, plant and equipment 25,686 10,224 242 36,152 24,407 8,568 334 33,309
Accumulated depreciation 9,848 1,679 126 11,653 9,530 1,253 105 10,888
Total assets 23,073 11,371 1,547 35,991 22,726 9,394 870 32,990
Investment in equity
method investees - 361 9 370 - 320 9 329
FPL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(millions, except per share amounts)
Years Ended December 31,
2006 2005 2004
OPERATING REVENUES $ 15,710 $ 11,846 $ 10,522
Fuel, purchased power and interchange 8,943 6,171 5,217
Other operations and maintenance 2,022 1,814 1,659
Impairment and restructuring charges 105 - 81
Disallowed storm costs 52 - -
Merger-related 23 - -
Amortization of storm reserve deficiency 151 155 -
Depreciation and amortization 1,185 1,285 1,198
Taxes other than income taxes 1,132 931 882
Total operating expenses 13,613 10,356 9,037
OPERATING INCOME 2,097 1,490 1,485
OTHER INCOME (DEDUCTIONS)
Interest charges (706) (593) (489)
Equity in earnings of equity method investees 181 124 96
Gains (losses) on disposal of assets 29 52 (3)
Allowance for equity funds used during 21 28 37
Interest income 53 59 25
Other - net 3 23 17
Total other deductions - net (419) (307) (317)
INCOME BEFORE INCOME TAXES 1,678 1,183 1,168
Income Taxes 397 282 272
NET INCOME $ 1,281 $ 901 $ 896
Earnings per share of common stock:
Basic $ 3.25 $ 2.37 $ 2.5
Assuming dilution $ 3.23 $ 2.34 $ 2.48
Dividends per share of common stock $ 1.5 $ 1.42 $ 1.3
Weighted-average number of common shares outstanding:
Basic 393.5 380.1 358.6
Assuming dilution 396.5 385.7 361.7
FPL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
Years Ended December 31,
PROPERTY, PLANT AND EQUIPMENT 2,006 2,005 2004
Electric utility plant in service and other property $ 34,071 $ 31,844 29,721
Nuclear fuel 688 520 504
Construction work in progress 1,393 945 1,495
Less accumulated depreciation and amortization 11,653 10,888 (10,494)
Total property, plant and equipment - net 24,499 22,421 21,226
Cash and cash equivalents 620 530 225
Customer receivables, net of allowances of $32 and $34, respectively 1,279 1,064 785
Other receivables, net of allowances of $8 and $9, respectively 377 366 259
Materials, supplies and fossil fuel inventory - at average cost 785 567 394
Deferred clause and franchise expenses 167 795 230
Storm reserve deficiency 106 156 163
Derivatives 921 - 9
Other 3 7 -
Derivatives 376 1,074 110
Other 365 428 352
Total current assets 4,999 4,987 2,527
Nuclear decommissioning reserve funds 2,824 2,401 2,271
Pension plan assets - net 1,608 849 740
Other investments 533 474
Storm reserve deficiency 762 957 373
Deferred clause expenses - 307 -
Unamortized loss on reacquired debt 39 42 45
Litigation Settlement 45
Other 80 37 38
Other 647 515 1,068
Total other assets 6,493 5,582 4,580
TOTAL ASSETS $ 35,991 32,990 28,333
Commercial paper 1,097 1,159 492
Current maturities of long-term debt 1,645 1,404 1,225
Accounts payable 1,060 1,245 762
Customer deposits 510 433 394
Margin cash deposits 35 393 5
Accrued interest and taxes 302 253 227
Deferred clause and franchise revenues 37 32 30
Derivatives - 757 -
Pension 17 - -
Derivatives 1,144 463 118
Other 646 1,128 995
Total current liabilities 6,493 7,267 4,248
OTHER LIABILITIES AND DEFERRED CREDITS
Asset retirement obligations 1,820 1,685 2,207
Accumulated deferred income taxes 3,432 3,052 2,685
Accrued asset removal costs 2,044 2,033 2,012
Asset retirement obligation regulatory expense difference 868 786 266
Pension 531 - 81
Other 209 256 106
Other 1,073 1,311 1,164
Total other liabilities and deferred credits 9,977 9,123 8,521
TOTAL CAPITALIZATION AND LIABILITIES $ 35,991 32,990 28,333
FPL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
2006 2005 2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,281 $ 901 $ 896
Adjustments to reconcile net income to net cash provided by (used in)
Depreciation and amortization 1,143 1,242 1,153
Nuclear fuel amortization 127 99 93
Impairment and restructuring charges 105 - 33
Recoverable storm-related costs of FPL (364) (659) (627)
Amortization of storm reserve deficiency 151 155 -
Unrealized (gains) losses on marked to market energy contracts (173) 191 25
Deferred income taxes 393 343 433
Cost recovery clauses and franchise fees 940 (825) 144
Change in prepaid option premiums (66) (57) 21
Equity in earnings of equity method investees (181) (124) (96)
Distributions of earnings from equity method investees 104 86 83
Changes in operating assets and liabilities:
Customer receivables (215) (225) 23
Other receivables 62 (64) 16
Material, supplies and fossil fuel inventory (203) (173) 29
Other current assets 8 (9) (10)
Other assets (142) (47) (88)
Accounts payable (202) 346 220
Customer deposits 76 32 37
Margin cash deposits (546) 387 5
Income taxes (46) (51) 108
Interest and other taxes 49 29 (2)
Other current liabilities 50 (95) 80
Other liabilities 32 (53) (48)
Other - net 115 118 122
Net cash provided by operating activities 2,498 1,547 2,650
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures of FPL (1,763) (1,616) (1,394)
Independent power investments (1,701) (815) (476)
Nuclear fuel purchases (212) (102) (141)
Other capital expenditures (63) (13) (6)
Sale of independent power investments 20 69 93
Loan repayments and capital distributions from equity method investees - 199 9
Proceeds from sale of securities in nuclear decommissioning and storm funds 3,135 2,837 2,311
Purchases of securities in nuclear decommississioning and storm funds (3,217) (2,956) (2,220)
Proceeds from sale of other securities 96 100 30
Purchases of other securities (109) (112) (45)
Sale of Olympus Communications, L.P. note receivable - - 126
Funding of secured loan - (43) (128)
Repayment of secured loan - 218 -
Proceeds from termination and sale of leveraged leases - 58 -
Other - net 7 11 (31)
Net cash used in investing activities (3,807) (2,165) (1,872)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuances of long-term debt 3,408 1,391 569
Retirements of long-term debt and FPL preferred stock (1,665) (1,220) (432)
Proceeds from purchased Corporate Units 210 - -
Payments to terminate Corporate Units (258) - -
Net change in short-term debt (62) 667 (423)
Issuances of common stock 333 639 110
Dividends on common stock (593) (544) (467)
Other - net 26 (10) (39)
Net cash provided by (used in) financing activities 1,399 923 (682)
Net increase in cash and cash equivalents 90 305 96
Cash and cash equivalents at beginning of year 530 225 129
Cash and cash equivalents at end of year $ 620 $ 530 $ 225
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest (net of amount capitalized) $ 648 $ 543 $ 460
Cash paid (received) for income taxes - net $ 30 $ 8 $ (254
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Issuance of common stock and conversion of options and warrants in connection with
the acquisition of Gexa Corp. $ - $ 74 $ -