Business Context and Reporting Period
NextEra Energy, Inc. and its wholly owned regulated utility, Florida Power & Light Company (FPL), filed a combined unaudited Form 10-Q for the quarter and six months ended June 30, 2011. NextEra Energy operates through FPL, NextEra Energy Resources, and Corporate and Other. The filing was signed August 1, 2011.
Financial Highlights
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| NextEra operating revenues | $3,961 million | $3,591 million | $7,094 million | $7,213 million |
| NextEra operating income | $907 million | $709 million | $1,335 million | $1,648 million |
| NextEra net income | $580 million | $417 million | $848 million | $973 million |
| NextEra diluted EPS | $1.38 | $1.01 | $2.03 | $2.37 |
| NextEra net margin | 14.6% | 11.6% | 12.0% | 13.5% |
| FPL operating revenues | $2,801 million | $2,580 million | $5,047 million | $4,908 million |
| FPL net income | $301 million | $265 million | $506 million | $456 million |
| FPL net margin | 10.7% | 10.3% | 10.0% | 9.3% |
NextEra generated $1,991 million of operating cash flow in the first six months, compared with $1,748 million in the prior-year period. Investing cash outflow was $2,359 million, including approximately $1.6 billion of FPL capital investments and $1.1 billion of NextEra Energy Resources investments. Financing cash flow was $353 million, after $459 million of common dividends. Cash declined to $287 million from $302 million at December 31, 2010.
At June 30, 2011, NextEra had $19,235 million of long-term debt, $1,050 million of commercial paper, and $1,168 million of current maturities. FPL had $6,908 million of long-term debt, $655 million of commercial paper, and $48 million of current maturities. Total net available liquidity was approximately $6.1 billion, including $2.6 billion for FPL.
NextEra shareholders’ equity was $14,906 million and total assets were $54,557 million at June 30, 2011. The quarterly dividend was $0.55 per share, compared with $0.50 in the prior-year quarter.
Material Changes Versus the Prior Comparable Period
- Second-quarter NextEra net income increased $163 million, or approximately 39%, driven by higher FPL earnings, stronger NextEra Energy Resources results, and a $64 million after-tax state tax benefit in Corporate and Other.
- Six-month net income declined $125 million, or approximately 13%, primarily because NextEra Energy Resources earned $304 million versus $521 million. The decline reflected lower customer-supply results, nuclear refueling outages, impairment charges, and less favorable non-qualifying hedge activity.
- FPL net income increased $36 million in the quarter and $50 million year to date. Drivers included rate-base growth, use of surplus depreciation credits to support the allowed 11% regulatory ROE, additional nuclear, solar and environmental cost-recovery investments, and higher AFUDC-equity.
- NextEra Energy Resources benefited from higher wind production and new projects in the quarter, but results were reduced by extended refueling outages at Seabrook and Point Beach, lower-priced Seabrook hedges, and a $51 million pretax impairment charge.
- The impairment charge reduced net income by approximately $31 million after tax and primarily affected wind assets in West Texas and oil-fired assets in Maine.
- NextEra Energy Resources changed the estimated useful lives of substantially all wind-plant equipment from 25 to 30 years. The change increased second-quarter net income by approximately $11 million and six-month net income by $22 million; management expected a full-year 2011 net-income benefit of approximately $44 million.
- The effective income tax rate was approximately 20% for the quarter and 12% for the six months, versus 16% and 23%, respectively, in the prior-year periods. Benefits included wind production tax credits, Recovery Act investment tax credits, state tax-law changes, and a $26 million state ITC benefit for the six months.
Guidance, Outlook, Risks and Unusual Items
- No specific consolidated earnings-per-share guidance is provided in the filing. Management expects FPL earnings to continue benefiting during the remainder of 2011 from cost-recovery clauses and related investments.
- FPL placed the 1,220-megawatt West County Energy Center Unit 3 into service in May 2011. FPL expected approximately 450 megawatts of additional nuclear capacity by 2013 and planned modernization of the Cape Canaveral and Riviera Beach plants by 2013 and 2014. A proposed Port Everglades modernization could cost approximately $1.2 billion and enter service in 2016, subject to approvals.
- NextEra Energy Resources planned to add approximately 1,400 to 2,000 megawatts of wind generation during 2011 and 2012 and approximately 400 to 600 megawatts of solar generation during 2010 through 2014. These plans depend on policy support, transmission availability, market demand, supply chains, and access to capital.
- Planned capital expenditures from the remainder of 2011 through 2015 totaled approximately $11.1 billion for FPL, $5.0 billion for NextEra Energy Resources, and $0.9 billion for Corporate and Other.
- The IRS settlement produced a $278 million cash refund during the second quarter and reduced gross unrecognized tax benefits by $248 million for NextEra Energy, including $214 million for FPL. The settlement did not materially affect net income.
- Nuclear operations remain subject to potential regulatory and capital requirements following the Fukushima events. The NRC review could affect existing facilities, uprates, license extensions, and proposed Turkey Point units.
- Derivative and credit risks are significant. A two-level downgrade for FPL and one-level downgrade for Capital Holdings could require approximately $200 million of collateral; a below-investment-grade downgrade could require approximately $2.3 billion. Additional contractual triggers could require up to approximately $650 million.
- Potential changes under the Dodd-Frank Act could increase collateral, compliance costs, and restrictions on OTC derivatives. The filing states that the ultimate financial and operational impact could be material but could not yet be determined.
- Other risks include extensive regulation, environmental requirements, severe weather, nuclear incidents, commodity and interest-rate volatility, counterparty nonperformance, market losses in decommissioning and pension funds, uninsured transmission and distribution losses, and pending legal proceedings.
Most Important Facts for Investors to Verify
- Reconcile reported GAAP earnings with management’s adjusted-earnings presentation, particularly non-qualifying hedge gains and losses, tax benefits, and the impairment charge.
- Assess whether FPL’s rate-base growth, surplus depreciation credits, cost-recovery mechanisms, and new generating capacity support earnings after 2011.
- Monitor capital spending, debt maturities, commercial paper usage, credit ratings, and the approximately $6.1 billion of reported net liquidity.
- Evaluate the effect of nuclear refueling outages and NRC responses to post-Fukushima recommendations on generation, licensing, operating costs, and capital requirements.
- Review the valuation and liquidity implications of derivative positions, collateral triggers, and changes in wholesale power and natural-gas prices.
- Track development and financing of planned wind, solar, nuclear, and transmission projects, including dependence on tax credits, Recovery Act grants, regulatory approvals, and market conditions.
- Follow pending litigation, environmental proceedings, insurance limitations, and possible obligations under guarantees and purchased-power contracts.