NextEra Energy, Inc. and Florida Power & Light Company — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; unaudited. The combined filing covers NextEra Energy, Inc. and its wholly owned regulated utility, Florida Power & Light Company (FPL). NextEra Energy’s principal segments are FPL and NextEra Energy Resources, a competitive energy business focused on generation, renewable energy, power marketing and gas infrastructure.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| NextEra operating revenues | $4,382 million | $4,691 million | $11,476 million | $11,904 million |
| NextEra operating income | $911 million | $1,125 million | $2,246 million | $2,773 million |
| NextEra net income | $407 million | $720 million | $1,256 million | $1,694 million |
| NextEra diluted EPS | $0.97 | $1.74 | $3.00 | $4.11 |
| FPL operating revenues | $3,152 million | $3,116 million | $8,200 million | $8,024 million |
| FPL operating income | $656 million | $584 million | $1,634 million | $1,478 million |
| FPL net income | $347 million | $308 million | $852 million | $764 million |
NextEra’s implied net margin was approximately 9.3% for Q3 and 10.9% for the first nine months, compared with approximately 15.3% and 14.2%, respectively, in the prior-year periods. FPL’s implied net margin was approximately 11.0% for Q3 and 10.4% for nine months, compared with approximately 9.9% and 9.5% in the comparable 2010 periods.
- Cash flow: NextEra generated $3,117 million of operating cash flow in the first nine months, up from $2,769 million. Investing cash outflow was $4,422 million, including $2,128 million of FPL capital expenditures and $1,654 million of NextEra Energy Resources investments. Financing cash inflow was $1,643 million, and ending cash was $640 million.
- FPL cash flow: FPL generated $1,748 million of operating cash flow, used $2,168 million in investing activities, and received $430 million from financing activities. Ending cash was $30 million.
- Capital structure: NextEra reported $20,039 million of long-term debt and $14,887 million of common shareholders’ equity at September 30, 2011. FPL reported $6,885 million of long-term debt and $10,534 million of common shareholders’ equity.
- Liquidity: Consolidated net available liquidity was approximately $5.5 billion, including approximately $2.8 billion for FPL. This included unused revolving credit capacity, cash, and less commercial paper outstanding.
- Dividends: NextEra paid $0.55 per share in Q3 and $1.65 per share in the first nine months, compared with $0.50 and $1.50 in the respective 2010 periods.
- Capital spending outlook: Planned capital expenditures for the remainder of 2011 through 2015 totaled approximately $10.4 billion for FPL, $5.6 billion for NextEra Energy Resources and $805 million for Corporate and Other.
Material changes versus the prior comparable period
- NextEra net income declined $313 million in Q3 and $438 million for nine months. The decline was concentrated in NextEra Energy Resources, whose net income fell $319 million in Q3 and $536 million for nine months.
- NextEra Energy Resources was adversely affected by weaker customer supply and power and gas trading results, unfavorable non-qualifying hedge mark-to-market results, lower wind results in Q3, lower Seabrook results for nine months, a $51 million pretax impairment charge, and a $148 million pretax loss on natural gas assets held for sale.
- The natural gas asset sale involved four plants totaling 2,152 MW. The transaction was expected to close in Q4 2011, subject to regulatory approvals and third-party consents. The recorded loss was approximately $97 million after tax.
- FPL net income increased $39 million in Q3 and $88 million for nine months, primarily from rate-base growth, use of the surplus depreciation credit under the 2010 rate agreement, and higher returns associated with nuclear, solar and environmental capital investments recovered through cost-recovery clauses.
- FPL’s customer accounts increased, but usage per retail customer declined 1.2% in Q3 and 1.7% for nine months, limiting retail base revenue growth. Lower fuel prices reduced Q3 fuel and energy charges by approximately $196 million.
- NextEra’s effective tax rate was approximately 28% for Q3 and 18% for nine months, versus 25% and 24% in 2010. The nine-month 2011 rate benefited from wind production tax credits, Recovery Act investment tax benefits, a $64 million state deferred tax benefit and a $26 million state ITC benefit.
- A change in estimated useful lives for certain wind equipment reduced depreciation expense by approximately $19 million in Q3 and $56 million for nine months, increasing net income by approximately $11 million and $33 million, respectively.
Guidance, outlook, risks and unusual items
- Management expected FPL earnings to continue benefiting during the remainder of 2011 from cost-recovery clauses tied to additional nuclear capacity and environmental capital expenditures.
- FPL placed the 1,220 MW West County Energy Center Unit No. 3 in service in May 2011. Approximately 450 MW of nuclear uprate capacity was under development, with completion projected by 2013. Cape Canaveral and Riviera Beach modernization projects were expected to enter service by 2013 and 2014, respectively.
- NextEra Energy Resources planned approximately 1,400 to 2,000 MW of new wind generation in 2011 and 2012 and approximately 660 MW of new solar generation during 2011-2014. These plans depend on regulatory approvals, transmission availability, market demand, access to capital and continued renewable-energy tax and policy support.
- Following the Fukushima accident, the Nuclear Regulatory Commission was evaluating enhanced nuclear safety requirements. Potential effects included additional capital and operating costs and possible impacts on FPL uprates, Turkey Point expansion plans and existing nuclear operations. The filing states that the financial impact could not yet be determined.
- Derivative and credit-support exposure was significant. If specified credit downgrades occurred, required collateral could reach approximately $350 million for a downgrade to BBB/Baa2 and approximately $2.3 billion if below investment grade at NextEra Energy and Capital Holdings, with additional collateral exposure of up to approximately $600 million under other triggers.
- NextEra reported approximately $1.1 billion of standby letters of credit, $99 million of surety bonds and $12.6 billion of guarantees; no liabilities were recorded for these instruments because management considered payment unlikely.
- Key risks include extensive regulation and cost recovery, nuclear and environmental obligations, severe weather, fuel and commodity-price volatility, derivative and counterparty exposure, credit-market access, interest rates, renewable-energy policy support, construction execution, cybersecurity and legal proceedings.
- The filing states that there were no material changes to previously disclosed risk factors. Management concluded that disclosure controls were effective as of September 30, 2011; FPL implemented a new enterprise resource planning system in July 2011.
Important facts for investors to verify
- Reconcile the decline in consolidated earnings to NextEra Energy Resources’ hedge volatility, asset-sale loss, impairment charge and operating performance.
- Monitor completion, approvals and final proceeds for the four-plant sale and the separately announced sale of a 550 MW Rhode Island gas plant, which was expected to produce an additional approximately $2 million after-tax loss in Q4 2011.
- Assess the sustainability of FPL’s earnings benefit from the 2010 rate agreement, surplus depreciation credits and cost-recovery clauses, including remaining credit capacity under the agreement.
- Evaluate liquidity against planned capital spending, debt maturities, commercial paper balances and potential derivative collateral requirements.
- Review the effect of NRC actions, environmental rules, renewable-energy incentives and regulatory approvals on nuclear, wind, solar and fossil-generation projects.
- Consider the sensitivity of decommissioning funds and debt-related instruments to market movements; the filing estimates that a 10% decrease in interest rates would increase NextEra’s net liabilities by approximately $965 million and FPL’s by approximately $388 million.
- Review disclosed litigation, including the Clean Air Act proceeding involving FPL’s interest in Scherer Unit No. 4, the Adelphia bankruptcy litigation and the TXU wind-contract matter. Management expects no material adverse effect based on current knowledge, but outcomes remain uncertain.