NextEra Energy, Inc. 2013 Q3 Form 10-Q Summary
Business context and reporting period
Combined unaudited quarterly filing for NextEra Energy, Inc. (NEE) and wholly owned Florida Power & Light Company (FPL), covering the three and nine months ended September 30, 2013. NEE operates primarily through FPL, a rate-regulated Florida electric utility serving approximately 4.6 million customer accounts, and NextEra Energy Resources (NEER), a competitive energy business focused on renewable generation, power and gas infrastructure, and energy marketing.
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| NEE operating revenue | $4.394 billion, versus $3.843 billion | $11.506 billion, versus $10.881 billion |
| NEE operating income | $1.185 billion, versus $742 million | $2.601 billion, versus $2.545 billion |
| NEE net income | $698 million, versus $415 million | $1.581 billion, versus $1.482 billion |
| NEE diluted EPS | $1.64, versus $0.98 | $3.72, versus $3.55 |
| FPL operating revenue | $3.020 billion, versus $2.975 billion | $7.905 billion, versus $7.778 billion |
| FPL net income | $422 million, versus $392 million | $1.101 billion, versus $984 million |
| NEE operating margin | Approximately 27.0%, versus 19.3% | Approximately 22.6%, versus 23.4% |
| NEE net margin | Approximately 15.9%, versus 10.8% | Approximately 13.7%, versus 13.6% |
| Dividends per share | $0.66, versus $0.60 | $1.98, versus $1.80 |
NEE’s nine-month continuing-operations income was $1.393 billion, compared with $1.482 billion in the prior-year period. The difference between continuing-operations income and reported net income reflects a $188 million after-tax gain from discontinued operations in 2013.
- Cash flow: Nine-month operating cash flow was $3.390 billion for NEE, up from $3.157 billion, and $2.792 billion for FPL, up from $2.302 billion.
- Investing: NEE used $4.266 billion in investing activities, including $4.659 billion of capital expenditures, independent power investments and nuclear fuel purchases. FPL used $2.234 billion in investing activities.
- Liquidity: NEE reported $558 million of cash and cash equivalents at September 30, 2013, compared with $329 million at December 31, 2012. Total net available liquidity was approximately $7.1 billion, including approximately $2.7 billion attributable to FPL.
- Debt: NEE reported $23.862 billion of long-term debt, excluding current maturities, and $3.933 billion of current maturities. Including current maturities, NEE’s long-term debt carrying amount was $27.788 billion. FPL reported $8.474 billion of long-term debt and $355 million of current maturities.
- Balance sheet: NEE total assets were $67.166 billion and common shareholders’ equity was $17.409 billion at September 30, 2013. FPL total assets were $36.168 billion and shareholders’ equity was $12.560 billion.
Material changes versus the prior comparable period
- Third-quarter NEE net income increased $283 million, primarily because NEER recorded a significant improvement in unrealized mark-to-market results on non-qualifying hedges. NEER reported $281 million of quarterly net income versus $44 million.
- Nine-month NEE net income increased $99 million, although continuing-operations income declined. FPL contributed materially to the improvement, with nine-month net income up $117 million to $1.101 billion.
- FPL’s performance benefited from continued investment in plant in service and an 11.07% regulatory return on equity, versus 11.0% in the prior-year period. Excluding approximately $19 million of after-tax cost-savings initiative charges, regulatory ROE would have been approximately 11.25%.
- FPL retail sales declined 0.6% in the quarter and 0.9% for the nine months, primarily due to weather, energy-efficiency measures and, for the nine-month period, one fewer sales day. Customer growth and modestly improved Florida economic conditions partly offset the decline.
- NEER’s nine-month results declined $46 million to $470 million. The decrease primarily reflected a $342 million after-tax impairment charge for the Spain solar projects, partly offset by a $175 million after-tax gain from discontinued operations and contributions from new investments.
- NEE’s depreciation and amortization increased to $1.523 billion for the nine months from $1.121 billion, reflecting growth in plant and new investments. An impairment charge of $300 million was recorded in the first quarter for the Spain solar projects.
- NEE capital investment declined to $4.659 billion from $6.689 billion, primarily due to lower FPL and NEER investment spending compared with the prior year.
Guidance, outlook, management commentary, risks and unusual items
- Management identified potential additional growth capital through 2016, including FPL incremental capital expenditures, up to 1,500 MW of new U.S. wind generation through 2014, potential additional solar projects, and approximately $200 million to $250 million annually of net gas-infrastructure capital.
- Estimated capital expenditures from the remainder of 2013 through 2017 totaled $10.040 billion for FPL, $4.680 billion for NEER and $300 million for Corporate and Other. These estimates are subject to review and may vary materially.
- In October 2013, NEER approved approximately 850 MW of new U.S. wind projects and 80 MW of Canadian wind projects, expected to enter service in 2014 and 2015 at estimated costs of approximately $1.6 billion.
- FPL expected wholesale revenues to increase approximately $100 million in 2014, primarily from higher load under existing wholesale contracts. FPL also targeted a late-2014 closing for the proposed acquisition of the City of Vero Beach electric utility system, subject to approvals and other conditions.
- NEE expected 2013 cost-savings initiative transition costs of approximately $65 million to $75 million; $46 million, or $28 million after tax, had been recorded through September 30.
- The Spain solar projects were subject to financing defaults following changes in Spanish renewable-energy law. Approximately $784 million of project-level debt and $91 million of related derivative liabilities were classified as current. NEECH disputed lender claims that its guarantee could extend to the full debt balance and associated costs; the ultimate exposure was uncertain. Further Spanish regulatory action could result in additional impairment or repayment of tariff revenues.
- NEE elected to post approximately $463 million of additional cash collateral for commodity contracts during the third quarter, reducing operating cash flow. Management expected to resume using letters of credit for collateral in the fourth quarter.
- Key risks include extensive utility and environmental regulation, cost-recovery and rate decisions, commodity-price and derivative volatility, credit and collateral requirements, nuclear operations and outages, severe weather, cybersecurity, construction and permitting, renewable-energy incentives, litigation, and access to capital markets.
- NEE carried approximately $11.4 billion of guarantees and indemnifications, including approximately $5.9 billion expiring within five years; management stated that liabilities were not recorded because it considered payment unlikely.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing stated that there were no material changes to the risk factors in the 2012 Form 10-K.
Important facts an investor should verify
- Reconcile GAAP earnings with management’s adjusted-earnings presentation, particularly the effects of mark-to-market hedges, the Spain solar impairment, discontinued operations and related operating results.
- Monitor the Spain solar financing defaults, liquidation proceedings, lender litigation, restructuring discussions and potential additional impairment or guarantee exposure.
- Assess whether planned FPL, wind, solar and gas-infrastructure investment can be funded while maintaining credit ratings, liquidity and dividend capacity.
- Review the sensitivity of earnings and liquidity to derivative collateral calls, commodity prices, interest rates, foreign exchange rates and counterparty performance.
- Track FPL regulatory proceedings, including the appeal of the 2012 rate agreement, cost-recovery treatment, regulatory ROE and the proposed Vero Beach acquisition.
- Evaluate the sustainability of reported earnings growth given the quarter’s substantial hedge-related benefit and the nine-month contribution from the nonrecurring hydro-sale gain.