FPL Group, Inc. (now associated with NextEra Energy) and Florida Power & Light Company — Q1 2010 Form 10-Q
Business context and reporting period
This combined, unaudited Form 10-Q covers the three months ended March 31, 2010. The registrants were FPL Group, Inc. and its wholly owned regulated utility subsidiary, Florida Power & Light Company (FPL). FPL Group reported two principal segments: FPL, a rate-regulated electric utility, and NextEra Energy Resources, a competitive generation and energy business. Dollar amounts are in millions unless otherwise stated.
Key financial metrics
| Metric | FPL Group 2010 | FPL Group 2009 | Change |
|---|---|---|---|
| Operating revenues | $3,622 | $3,705 | (2%) |
| Operating income | $939 | $583 | +61% |
| Operating margin | 25.9% | 15.7% | +10.2 pts. |
| Income before taxes | $770 | $383 | +101% |
| Net income | $556 | $364 | +53% |
| Net margin | 15.4% | 9.8% | +5.6 pts. |
| Basic EPS | $1.36 | $0.90 | +51% |
| Operating cash flow | $896 | $1,043 | (14%) |
| Capital and independent power investments | $1,398 | $997 | +40% |
| Net cash used in investing | $1,361 | $1,096 | Higher use |
| Net cash from financing | $1,442 | $(206) | Improved |
| Cash at March 31 | $1,215 | $276 | +340% |
FPL operating revenues declined to $2,328 from $2,573, while net income increased to $191 from $127. FPL’s operating margin improved to approximately 16.9% from 10.2%, and net margin improved to approximately 8.2% from 4.9%.
- FPL Group assets were $50,942 at March 31, 2010, compared with $48,458 at December 31, 2009.
- FPL Group long-term debt was $16,601, compared with $16,300 at year-end; commercial paper and notes payable totaled $2,935.
- FPL long-term debt was $6,275, compared with $5,794 at year-end; commercial paper and notes payable totaled $1,244.
- FPL Group common shareholders’ equity was $13,336; total capitalization was $29,937.
- Net available liquidity was approximately $4.1 billion for FPL Group, including approximately $2.0 billion for FPL, after cash, letters of credit, commercial paper and notes payable.
- The quarterly common dividend was $0.5000 per share, compared with $0.4725 in the prior-year quarter.
Material changes versus the prior comparable period
- FPL Group earnings benefited from higher NextEra Energy Resources earnings, including approximately $167 million of after-tax unrealized gains from non-qualifying hedges versus $30 million in 2009, new investments, asset-sale gains and lower nuclear decommissioning-fund impairment losses.
- NextEra Energy Resources net income increased to $367 from $228. Existing-asset earnings declined because of lower wind resources and unfavorable market conditions, but this was more than offset by mark-to-market gains and growth in new projects.
- FPL earnings increased primarily because of higher customer usage, cold weather, higher base revenues from West County Energy Center Units 1 and 2, the March 2010 rate order, and higher cost-recovery clause results.
- FPL fuel and purchased-power expense decreased to $1,107 from $1,469, primarily because of lower fuel and energy prices and the absence of the prior-year collection of deferred fuel costs.
- FPL refunded approximately $404 million of prior fuel overrecovery to customers during the quarter, contributing to lower operating cash flow. Cost-recovery and franchise-related working-capital changes reduced FPL Group operating cash flow by approximately $392 million.
- Operating cash flow declined despite higher net income, while capital spending increased. Financing inflows rose substantially because of higher short-term borrowings and $805 million of long-term debt issued during the quarter.
- The consolidated effective tax rate increased to approximately 27.8% from 4.9%, reflecting higher pretax income and the absence of certain 2009 foreign and state tax benefits. Wind production tax credits were approximately $75 million in 2010 versus $72 million in 2009.
- FPL Group discontinued hedge accounting for commodity cash-flow hedges in January 2010, increasing potential earnings volatility from mark-to-market activity.
Guidance, outlook, commentary and unusual items
- The FPSC rate order effective March 1, 2010 increased annualized FPL retail base revenues by approximately $75 million, set a 10.0% regulatory ROE with a plus-or-minus 100-basis-point range, and established a 59.1% adjusted regulatory equity ratio. FPL’s motion for reconsideration and clarification remained pending.
- FPL expects 2010 O&M expense, excluding pass-through costs, to exceed 2009 levels because of higher generation, transmission, distribution, employee benefit and nuclear insurance costs, partly related to planned staffing reductions.
- FPL resumed modernization of the Riviera Beach and Cape Canaveral plants, targeting in-service dates in 2013 and 2014. The proposed third natural-gas pipeline was deferred for further evaluation in 2011, with additional gas supply not expected to be needed until 2016.
- FPL plans to proceed stepwise with the proposed Turkey Point Units 6 and 7, with estimated in-service dates of 2022 and 2023 and no construction planned before obtaining combined operating licenses.
- FPL was constructing West County Energy Center Unit 3, expected in service by mid-2011, adding approximately 1,220 MW. Additional nuclear capacity of approximately 400–460 MW was projected for 2011 through early 2013, and a 75 MW solar thermal facility was expected by year-end 2010.
- NextEra Energy Resources planned to add approximately 600–850 MW of wind generation in 2010, 3,500–5,000 MW during 2010–2014, and 400–600 MW of solar generation during 2010–2014. Planned 2010–2014 capital expenditures were approximately $11.5 billion for FPL and $3.645 billion for NextEra Energy Resources, excluding certain contingent projects.
- FPL Group’s credit ratings were downgraded by certain agencies during March and April 2010. At April 30, ratings were Baa1/A-/A- for FPL Group, A2/A-/A for FPL, and Baa1/A-/A- for FPL Group Capital; Fitch’s outlook was negative, while Moody’s and S&P indicated stable outlooks.
- Derivative contracts with credit-related contingent features had approximately $2.4 billion of liability fair value for FPL Group and $0.5 billion for FPL. A downgrade to below investment grade could require total collateral postings of approximately $2.2 billion for FPL Group and $0.9 billion for FPL, subject to contract terms.
- Material contingencies included nuclear insurance assessments, environmental and regulatory proceedings, the Adelphia bankruptcy litigation, a TXU contract dispute, long-term power and fuel commitments, and substantial uninsured exposure to storms and other catastrophic events. Management did not expect the identified legal proceedings to have a material adverse effect, but stated that outcomes could be adverse.
Most important facts for investors to verify
- Confirm the effect of the pending FPSC reconsideration motion on FPL rates, depreciation expense and authorized returns.
- Separate recurring earnings from the approximately $167 million after-tax non-qualifying hedge gain at NextEra Energy Resources and other asset-sale or impairment-related items.
- Assess whether operating cash flow can support the company’s elevated capital program without continued reliance on debt financing.
- Review the impact of credit-rating downgrades on borrowing costs, collateral requirements and access to commercial paper and capital markets.
- Evaluate exposure to derivative valuation changes, counterparty performance, margin calls and potential credit-trigger collateral postings.
- Monitor execution, permitting, cost recovery and completion risks for FPL generation, nuclear, solar, transmission and pipeline projects.
- Review nuclear, environmental, storm, insurance and legal contingencies, including potential obligations not recorded as liabilities.
- Verify the sustainability of earnings growth given weather effects, wind variability, commodity prices, tax credits and regulated cost-recovery mechanisms.