Business Context and Reporting Period
Combined unaudited Form 10-Q filed by NextEra Energy, Inc. and its wholly owned regulated utility subsidiary, Florida Power & Light Company (FPL), for the quarter and nine months ended September 30, 2010. NextEra Energy reports FPL, NextEra Energy Resources, and Corporate and Other segments. Unless stated otherwise, amounts are in millions except per-share data.
Key Financial Metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| NextEra operating revenues | $4,691 | $4,473 | $11,904 | $11,988 |
| NextEra net income | $720 | $533 | $1,694 | $1,267 |
| NextEra diluted EPS | $1.74 | $1.31 | $4.11 | $3.12 |
| NextEra net margin | 15.3% | 11.9% | 14.2% | 10.6% |
| FPL operating revenues | $3,116 | $3,301 | $8,024 | $8,738 |
| FPL net income | $308 | $306 | $764 | $646 |
| FPL net margin | 9.9% | 9.3% | 9.5% | 7.4% |
NextEra operating income was $1,125 in Q3 and $2,773 for the first nine months, compared with $849 and $2,037, respectively, in the prior-year periods. Interest expense was $247 in Q3 and $732 year to date, versus $204 and $631 in 2009. Income taxes were $240 in Q3 and $532 year to date; the nine-month effective tax rate increased to approximately 24% from 18%, primarily because of higher pretax income and the effect of wind production tax credits.
- NextEra cash flow from operations was $2,769 for the first nine months, down from $3,326 in 2009.
- Investing cash flow was $(3,556), including $2,044 of FPL capital expenditures and $1,837 of NextEra Energy Resources investments.
- Financing cash flow was $1,340, including $3,018 of long-term debt issuances, $(935) of short-term debt reduction, and $(616) of common dividends.
- Cash and cash equivalents increased to $791 at September 30, 2010, from $238 at December 31, 2009.
- NextEra long-term debt was $17,680 and current maturities were $1,703; commercial paper was $1,085. FPL long-term debt was $6,278 and commercial paper was $240.
- Reported net available liquidity was approximately $5.9 billion for NextEra Energy, including approximately $3.0 billion for FPL.
- NextEra paid quarterly dividends of $0.50 per share, compared with $0.4725 in Q3 2009.
Material Changes Versus the Prior Comparable Period
- Consolidated net income increased $187 in Q3 and $427 for the first nine months. NextEra Energy Resources contributed most of the improvement, with net income increasing $174 in Q3 and $304 year to date.
- NextEra Energy Resources benefited from after-tax mark-to-market gains on non-qualifying hedges of $114 in Q3 and $245 year to date, compared with losses of $32 and $33 in the prior-year periods. These gains are volatile and substantially drove the consolidated earnings improvement.
- NextEra Energy Resources also benefited from new investments, higher wind resources, gas infrastructure results, and higher-priced hedges, partly offset by weaker trading results, higher growth-related expenses, and lower existing-asset results for the nine-month period.
- FPL Q3 net income increased only $2, while nine-month net income increased $118. Drivers included higher customer usage, rate effects from West County Energy Center Units 1 and 2, the FPSC rate order, and lower fuel costs, partly offset by higher depreciation, operations and maintenance, property tax, and interest expense.
- FPL revenue declined because of lower fuel-cost recovery revenue and the $404 customer refund of prior-year fuel overcollections. Fuel and purchased-power expense declined $282 in Q3 and $994 for the first nine months, primarily from lower fuel and energy prices.
- Total assets increased to $52,734 from $48,458 at year-end 2009, while total capitalization increased to $31,831 from $29,267. Construction work in progress increased to $4,382 from $2,425.
- NextEra discontinued hedge accounting for commodity cash flow hedges in January 2010; certain interest-rate and foreign-currency hedges continued to qualify for hedge accounting.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- FPL’s August 2010 rate agreement, subject to FPSC approval, would freeze retail base rates through 2012, maintain a 10% midpoint authorized ROE, permit specified capacity-clause recovery for West County Energy Center Unit 3, and provide mechanisms for storm-cost recovery. Management treated approval as probable.
- If the rate agreement is not approved, the filing estimates that depreciation and amortization expense for the three and nine months ended September 30, 2010 would have been approximately $168 million lower, or $200 million lower if FPL’s motion were granted, increasing net income by approximately $103 million or $123 million, respectively.
- FPL expects West County Energy Center Unit 3 to enter service by mid-2011, additional nuclear capacity at St. Lucie and Turkey Point during 2011–2013, and modernization of the Cape Canaveral and Riviera Beach plants in 2013 and 2014. Proposed Turkey Point nuclear units are not expected to enter service before 2022 and 2023.
- Planned capital expenditures for 2010–2014 total approximately $11.5 billion for FPL, $4.8 billion for NextEra Energy Resources, and $170 million for Corporate and Other. NextEra Energy Resources expects to add approximately 3,500–5,000 MW of wind and 400–600 MW of solar capacity during that period.
- Key risks include extensive regulation, delayed or inadequate rate recovery, fuel and power-price volatility, derivative collateral requirements, credit-market access and ratings, nuclear operations, environmental regulation, construction execution, weather and storm losses, slower customer growth, and dependence on renewable-energy policies and tax credits.
- Derivative liabilities with credit-related contingent features had an aggregate fair value of approximately $2.2 billion for NextEra and $0.5 billion for FPL. A downgrade to specified levels could require total collateral postings of approximately $700 million for NextEra, including $250 million for FPL; below-investment-grade ratings could increase those amounts to approximately $2.6 billion and $1.0 billion, respectively.
- Significant contingencies include the Adelphia fraudulent-transfer litigation, the EPA Clean Air Act case involving FPL’s interest in Scherer Unit 4, and the TXU renewable-energy-credit litigation. Management believed the ultimate resolution of disclosed proceedings was not expected to have a material adverse effect, but outcomes remain uncertain.
- Other unusual items included a $24 million one-time employee-benefit tax benefit, a $12 million after-tax write-down related to leveraged-lease assets, Recovery Act cash grants of $556 million, and nine-month after-tax nuclear decommissioning fund impairment losses of $9 million.
Important Facts for Investors to Verify
- Confirm FPSC approval and final implementation of the 2010 FPL rate agreement, including the potential earnings effect of alternative depreciation treatment.
- Separate recurring operating performance from volatile mark-to-market derivative gains, which contributed materially to the 2010 earnings increase.
- Assess funding requirements for the substantial FPL and renewable-generation capital programs against operating cash flow, debt maturities, and available liquidity.
- Monitor credit ratings, collateral triggers, derivative exposures, and the availability of revolving credit facilities.
- Review regulatory, environmental, nuclear, storm, litigation, and construction contingencies, including the TXU and Adelphia matters.
- Evaluate the sustainability of earnings tax benefits from wind production tax credits, convertible investment tax credits, and other tax items.