Business Context and Reporting Period
FPL Group, Inc. (the predecessor name of NextEra Energy, Inc.) and Florida Power & Light Company filed this combined unaudited Form 10-Q for the quarter and nine months ended September 30, 2009. The businesses comprised FPL, a rate-regulated Florida electric utility, and NextEra Energy Resources, a competitive generation and energy-marketing business.
Financial Results and Key Metrics
| FPL Group consolidated | Q3 2009 | Q3 2008 | 9M 2009 | 9M 2008 |
|---|---|---|---|---|
| Operating revenues | $4,473 million | $5,387 million | $11,988 million | $12,407 million |
| Operating income | $849 million | $1,316 million | $2,037 million | $2,073 million |
| Net income | $533 million | $774 million | $1,267 million | $1,232 million |
| Diluted EPS | $1.31 | $1.92 | $3.12 | $3.06 |
| Operating margin | 19.0% | 24.4% | 17.0% | 16.7% |
- Net income decreased 31% in the third quarter but increased 3% for the first nine months. Diluted EPS was $1.31 for the quarter and $3.12 year to date.
- The effective income tax rate was approximately 25.5% in the third quarter and 17.7% for the first nine months, benefiting from wind production tax credits and other investment tax benefits.
- FPL reported net income of $306 million for the quarter and $646 million for the first nine months, compared with $314 million and $638 million, respectively, in the prior-year periods.
- NextEra Energy Resources reported net income of $233 million for the quarter and $671 million for the first nine months, compared with $483 million and $650 million, respectively.
- Nine-month operating cash flow was $3.326 billion, versus $2.359 billion in 2008. Investing cash outflows were $4.018 billion, including approximately $1.841 billion of FPL capital expenditures and $1.884 billion of independent power investments. Financing cash flow was $321 million.
- Cash and cash equivalents declined to $164 million at September 30, 2009, from $535 million at December 31, 2008.
- At September 30, 2009, total assets were $47.155 billion, shareholders’ equity was $12.732 billion, long-term debt was $15.601 billion, commercial paper was $1.581 billion and current maturities of long-term debt were $662 million.
- Total net available liquidity was approximately $4.7 billion, including $1.9 billion for FPL, after commercial paper and letters of credit. Management stated that FPL Group, FPL and FPL Group Capital remained in compliance with applicable debt-to-capitalization requirements.
- Dividends were $0.4725 per share in the quarter and $1.4175 per share for the first nine months, up from $0.4450 and $1.3350, respectively.
Material Changes Versus the Prior Comparable Period
- Consolidated third-quarter revenue declined $914 million, primarily reflecting a sharp reversal in NextEra Energy Resources’ derivative mark-to-market results and lower commodity prices. Nine-month revenue declined $419 million.
- Third-quarter consolidated net income declined $241 million. NextEra Energy Resources’ results included an after-tax $32 million loss from non-qualifying hedge mark-to-market activity, compared with a $285 million gain in the prior year. For nine months, the comparable amounts were a $33 million loss in 2009 versus a $76 million gain in 2008.
- FPL’s third-quarter earnings declined $8 million because of income-tax adjustments and higher operations and maintenance and depreciation expense, partly offset by the West County Energy Center Unit 1 base-rate increase, higher allowance for equity funds used during construction and higher customer usage.
- FPL’s nine-month earnings increased $8 million, aided by higher allowance for equity funds used during construction, the West County Energy Center Unit 1 rate increase, lower operations and maintenance expense and the spent-fuel settlement agreement.
- NextEra Energy Resources’ nine-month earnings increased $21 million, supported by new investments, full energy and capacity requirements services, trading, tax benefits and the absence of prior-year Seabrook outages. These benefits were partly offset by weaker ERCOT market conditions, lower wind generation and a Duane Arnold nuclear refueling outage.
- FPL’s fuel and purchased-power expense declined $237 million for nine months, mainly because of lower fuel and energy prices, although prior-period fuel-cost deferrals were collected during 2009. Approximately $146 million of retail fuel revenues were deferred for later customer refund.
- Property, plant and equipment increased to $35.216 billion from $32.411 billion at year-end 2008, reflecting continuing generation, transmission and distribution investment.
Guidance, Outlook, Risks and Unusual Items
- FPL expected retail base revenues to increase approximately $65 million in 2009, or approximately $265 million on an annualized basis, as West County Energy Center Units 1 and 2 entered service. Unit 2 was expected to enter service in the fourth quarter of 2009.
- FPL requested permanent base-rate increases expected to add approximately $1 billion of annual retail base revenue in 2010 and an additional $250 million in 2011, based on a requested 12.5% regulatory return on equity. A Florida Public Service Commission decision was scheduled for January 2010, and management cautioned that approved rates could be materially lower.
- FPL planned approximately $12.3 billion of capital expenditures from the remainder of 2009 through 2013. NextEra Energy Resources planned approximately $2.8 billion over the same period, excluding additional potential wind spending of approximately $2 billion to $3.5 billion in each of 2010 through 2012.
- NextEra Energy Resources expected to add approximately 1,170 MW of wind generation in 2009, approximately 1,000 MW in 2010 and 1,000 MW to 1,500 MW annually in 2011 and 2012, subject to policy support, transmission availability, market demand and access to capital.
- The spent-fuel settlement agreement increased first-quarter 2009 net income by approximately $16 million for FPL Group and $9 million for FPL. Through September 30, FPL Group had collected approximately $124 million from the U.S. Government, with an additional approximately $30 million pending.
- FPL paid $20 million in connection with an October 2009 FERC settlement related to a 2008 outage and agreed to invest an additional $5 million in transmission reliability enhancements. FPL did not admit liability.
- Derivative positions created significant earnings volatility and liquidity exposure. At September 30, aggregate derivative liabilities with credit-related contingent features were approximately $1.6 billion for FPL Group and $0.4 billion for FPL. A downgrade below investment grade could require total collateral of approximately $1.7 billion for FPL Group and $0.9 billion for FPL.
- Other risks included commodity-price volatility, weather and customer usage, nuclear operations, regulatory and environmental changes, construction execution, counterparty performance, credit-market access, cyber and catastrophic events, and uninsured transmission, distribution and storm losses.
- The filing disclosed unresolved legal and regulatory matters, including the Scherer Unit 4 Clean Air Act litigation, the FMPA transmission-rate petition, the Adelphia bankruptcy litigation and other ordinary-course proceedings. Management did not expect their ultimate resolution to have a material adverse effect, but outcomes remained uncertain.
- FPL identified two power-purchase arrangements for which it could not obtain sufficient information to determine whether the counterparties were variable-interest entities. Payments were generally recoverable through the fuel clause.
- The filing stated that no material changes had occurred in the risk factors reported in the 2008 Form 10-K. New VIE accounting guidance was expected to be adopted January 1, 2010; the impact was still under evaluation.
Most Important Facts for Investors to Verify
- Whether the subsequent Florida rate-case decision approved the requested base-rate increases and continued the generation base-rate adjustment mechanism.
- How much of reported earnings and revenue was attributable to derivative mark-to-market movements, tax credits and the spent-fuel settlement rather than recurring operating performance.
- The funding plan and execution risk for the substantial FPL, nuclear and renewable capital programs, including projects excluded from the stated capital-expenditure table.
- Current liquidity after commercial paper, letters of credit, collateral requirements and scheduled debt maturities, particularly under adverse commodity-price or credit-rating scenarios.
- Progress and ultimate exposure from the FERC reliability settlement, Clean Air Act and Adelphia proceedings, the FMPA petition and other regulatory matters.
- Changes in customer growth and usage, fuel-cost recovery balances, wind resources, ERCOT market conditions and nuclear outages.
- The effect of subsequent corporate events, including the company’s later transition from FPL Group to NextEra Energy, Inc., which is not reflected in this 2009 filing.