Dividend Policy at Fpl Group, Inc

Dividend Policy at FPL Group, Inc.

Question 1

Major Sources and Uses of Funds

* Sources: Operating cash flows, debt issuance, stock issuance

* Uses: Capital expenditure, dividends, retirement of debt and preferred stock

Sources of Funds (in millions) 1993 1992 1991 1990 1989

Operating cash flow 1,267 988 1,194 1,053 963 exh 5

Debt 2,399 1,025 265 276 214 exh 5 (FPL bonds + FPL Group Capital + pref stock)

Stock issuance 276 422 318 796 73 exh 5

TOTAL 3,942 2,435 1,777 2,125 1,250

Percentages Simple average

Operating cash flow 32% 41% 67% 50% 77% 53%

Debt 61% 42% 15% 13% 17% 30%

Stock issuance 7% 17% 18% 37% 6% 17%

Uses of Funds

Capital expenditures 1,248 1,391 1,344 1,039 836 exh 5

Dividends 462 431 392 324 298 exh 5

Retirement of debt and pref stock 2,648 670 360 142 194 exh 5

TOTAL 4,358 2,492 2,096 1,505 1,328

Percentages Simple average

Capital expenditures 29% 56% 64% 69% 63% 56%

Dividends 11% 17% 19% 22% 22% 18%

Retirement of debt and pref stock 61% 27% 17% 9% 15% 26%

Sources less Uses (416) (57) (319) 620 (78) calculated (TOTAL Sources - TOTAL Uses)

Other net inflows (outflows) 490 (35) 275 (428) 23 Calculated plug; includes divestitures, cash from

Discontinued ops, receipts from parterships and leases,

nuclear fuel sale, change in notes payables, other.

Net increase (decrease) in cash 74 (92) (44) 192 (55) exh 5

Industry Structure

* The industry is in the early stages of transformation from one characterized by local and regional regulated monopolies (with regulated rates, returns, and capacity planning) to an open and competitive deregulated landscape. The emergence of "retail wheeling" (the ability of customers to purchase electricity from utilities other than the local monopoly) is expected to increase the level of competition. This encourages the development of new energy technologies and a focus on customer service. Assets must be managed in an aggressive and active manner as opposed to the passive, custodial approach taken throughout the years of regulated monopolies. Competitors are focused on increasing revenues, cutting costs, and seizing market share.

* US electric power industry value chain includes generation, transmission and distribution (Ex. 1). Note that even under deregulation, there would be a single transmission system and a single distribution system in each market (the public utility's), but competing generators would be granted access to these systems.

* History of deregulation:

1978 - Deregulated generation: PURPA, or Public Utilities Regulatory Policies Act, required utilities to purchase the entire output of generators using renewable or non-traditional fuels (wind, solar, etc.)

1992 - Deregulated transmission: NEPA, or National Energy Policy Act, required utilities to open their transmission systems to utilities in other territories at the same quality and cost. Disputes broke out over access fees and rights (e.g., FPL in lawsuit over excessive rate charging for access to its transmission lines (50% of Florida transmission lines owned by FPL)). There is a general concern whether there would be sufficient transmission capacity in the future.

1994 - Deregulated distribution: CA experimenting with retail wheeling: customers can buy electricity from sources other than monopoly supplier beginning in 1996. There is considerable uncertainty as to the timing, extent, and effect of retail wheeling on the Florida power market.

* FPL is the largest utility in Florida and the 4th largest in country, with a service area of 6.5 million people (3.4 million customer accounts) that includes 6 of nation's 10 fastest growing metropolitan areas.

Key Business Risks

* Competition (in generation and in distribution) from new and existing players due to deregulation. Potential loss of business and price pressures.

* Capacity: Can FPL generate enough electricity to meet increasing demand? Will new line additions provide sufficient transmission capacity thorough 2002 as predicted?

* Rising interest rates: 140 bps since September 1993.

* Debt rating by S&P now includes evaluation of competitive position (growth prospects, revenue vulnerabilities and dependencies, rates, capacity, fuel diversity, regulatory environment, etc.). A deterioration of competitive position will lead to a lower credit rating, increasing cost of funds and insolvency risk.

* Uncertainty around how deregulation will happen - for example, will FPL be forced to sell off its generating capacity (like PG&E)?

Question 2

FPL's Strategy

* Until the 1970's, steady growth. Then, rising fuel costs, construction cost over-runs, and operating problems (power outages leading to customer service issues) reduced profitability.

* 1980s: Diversified into higher growth businesses to increase profits through acquisitions - insurance (Colonial Penn), cable (Telesat), information services (CBR), citrus (Turner Foods (BAD idea!)) - and through subsidiaries (Alandco for real estate development and ESI Energy for alternative energy development).

* Also launched a rigorous quality control program (downtime from 18% to 4%, complaints down 60%; received Deming Prize in 1989 and were considered "one of the best managed US corporations").

* 1989 - James Broadhead succeeds McDonald. Industry outsider (from telecom) with