Business Context and Reporting Period
Combined unaudited Form 10-Q filed July 26, 2012, covering the three and six months ended June 30, 2012. The filing reports NextEra Energy, Inc. (NEE), its principal subsidiaries Florida Power & Light Company (FPL) and NextEra Energy Resources (NEER). FPL is a rate-regulated Florida electric utility serving approximately 4.6 million customer accounts; NEER is a competitive energy business focused substantially on renewable generation and energy marketing.
Key Financial Metrics
| Metric | Q2 2012 | Q2 2011 | H1 2012 | H1 2011 |
|---|---|---|---|---|
| Operating revenues | $3,667 million | $3,961 million | $7,038 million | $7,094 million |
| Operating income | $1,022 million | $907 million | $1,866 million | $1,335 million |
| Net income | $607 million | $580 million | $1,068 million | $848 million |
| Diluted EPS | $1.45 | $1.38 | $2.57 | $2.03 |
| Dividends per share | $0.60 | $0.55 | $1.20 | $1.10 |
| Operating margin | 27.9% | 22.9% | 26.5% | 18.8% |
- Profitability: Q2 net income increased 4.7% and diluted EPS increased 5.1%. Six-month net income increased 25.9% and diluted EPS increased 26.6%.
- Cash flow: Six-month operating cash flow was $1,928 million, compared with $1,991 million in the prior year. Investing cash use increased to $4,021 million from $2,359 million, primarily due to higher capital spending and investments.
- Capital spending: Six-month capital expenditures, independent power investments and nuclear fuel purchases totaled $4,030 million, including $2,263 million at FPL and $1,496 million at NEER.
- Liquidity: At June 30, 2012, NEE reported $295 million of cash and approximately $5.2 billion of net available liquidity, including approximately $2.7 billion attributable to FPL.
- Debt: NEE long-term debt, including current maturities, was approximately $23.3 billion at June 30, 2012, compared with $21.6 billion at year-end 2011. FPL long-term debt, including current maturities, was approximately $8.1 billion, compared with $7.5 billion.
- Balance sheet: NEE total assets increased to $60.4 billion from $57.2 billion at December 31, 2011; common shareholders’ equity increased to $15.8 billion from $14.9 billion.
FPL Performance
- Q2 net income was $353 million versus $301 million; six-month net income was $592 million versus $506 million.
- Q2 operating revenues declined to $2,580 million from $2,801 million, primarily because of lower fuel-cost recovery revenues and lower energy sales. Six-month revenues declined to $4,804 million from $5,047 million.
- Operating income increased to $662 million in Q2 from $571 million and to $1,143 million for the six months from $978 million.
- FPL customer accounts increased 0.6%, while average usage per retail customer declined 6.2% in Q2 and 2.0% for the first six months.
NEER Performance
- Q2 net income was $251 million versus $239 million; six-month net income was $472 million versus $304 million.
- Results benefited from new wind and solar investments, gas infrastructure, the absence of a prior-year impairment charge and six-month unrealized mark-to-market gains.
- Offsetting factors included lower wind resources, expiration of certain production tax credits, weaker market conditions and lower results from existing assets.
Material Changes Versus the Prior Comparable Period
- Operating income improved despite lower revenue, driven primarily by lower fuel, purchased power and interchange costs, lower depreciation and amortization, and the absence of the $51 million pre-tax impairment charge recorded in Q2 2011.
- Six-month results included approximately $223 million of unrealized mark-to-market gains from non-qualifying hedges, compared with approximately $18 million of such gains in the prior-year period. Management states that these gains can create earnings volatility because related physical assets are not marked to market.
- FPL benefited from higher plant-in-service balances, cost-recovery clause results and use of surplus depreciation credits to earn an 11% regulatory return on equity under the 2010 rate agreement.
- Corporate and Other earnings declined to $3 million in Q2 and $4 million for the six months, compared with $40 million and $38 million, respectively, largely because the prior-year periods included a significant state deferred tax benefit.
- NEE issued $600 million of equity units, $350 million of junior subordinated debentures and other debt during the first half of 2012. FPL issued $600 million of 4.05% first mortgage bonds due 2042.
Guidance, Outlook, Risks and Unusual Items
- FPL rate case: FPL requested an annualized base-rate increase of approximately $517 million effective January 2013, plus approximately $174 million when the modernized Cape Canaveral plant is placed in service, expected in June 2013. Hearings were expected in the third quarter of 2012, with a decision expected in the fourth quarter. The 2010 rate agreement expires at the end of 2012.
- Capital plan: Planned capital expenditures for the remainder of 2012 through 2016 totaled approximately $10.2 billion for FPL, $5.0 billion for NEER and $615 million for Corporate and Other. Management cautioned that actual spending may vary significantly.
- Renewable incentives: NEER’s development economics depend significantly on federal production tax credits and investment tax credits. The filing stated that the wind production tax credit was scheduled to expire for new projects commencing commercial operation after December 31, 2012, creating policy and development risk.
- Derivative and collateral risk: At June 30, 2012, NEE’s derivative instruments with credit-related contingent features had approximately $3.6 billion of liabilities; FPL had approximately $330 million. A downgrade below investment grade could require total collateral postings of approximately $2.7 billion for NEE and $800 million for FPL.
- Legal and regulatory matters: Significant proceedings included the Clean Air Act litigation involving Scherer Unit No. 4, the Adelphia bankruptcy litigation and the TXU wind-contract litigation. Management believed ultimate resolution was not expected to have a material adverse effect, but outcomes remain uncertain.
- Other risks: The filing highlights extensive regulation, environmental and greenhouse-gas requirements, nuclear operating and insurance risks, weather and outage exposure, commodity-price volatility, counterparty and credit risk, cyber and technology risks, capital-market access and potential Dodd-Frank collateral requirements.
- Unusual items: Six-month earnings benefited from mark-to-market hedge gains and the absence of the prior-year impairment charge. NEE also recorded tax benefits from wind production tax credits and convertible investment tax credits; effective tax rates were 29% for Q2 and 27% for the first half, compared with 20% and 12% in the respective 2011 periods.
Most Important Facts to Verify
- Reconcile GAAP earnings with management’s adjusted earnings, particularly the effect of unrealized hedge gains and other nonrecurring items.
- Track the FPL rate-case decision, the expiration of the 2010 rate agreement and the timing and cost recovery of major generation projects.
- Assess whether the large capital program can be funded while maintaining investment-grade ratings and adequate liquidity.
- Monitor debt maturities, commercial paper balances, credit-facility expirations and potential derivative collateral requirements.
- Evaluate the sustainability of NEER earnings given wind conditions, production-tax-credit expirations, merchant power prices and trading volatility.
- Review the status and potential exposure from the disclosed environmental, contract and bankruptcy-related legal proceedings.