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NEE > SEC Filings for NEE > Form 10-Q on 2-May-2014All Recent SEC Filings

Show all filings for NEXTERA ENERGY INC

Form 10-Q for NEXTERA ENERGY INC


2-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

NEE's operating performance is driven primarily by the operations of its two principal subsidiaries, FPL, which serves approximately 4.7 million customer accounts in Florida and is one of the largest rate-regulated electric utilities in the U.S., and NEER, which together with affiliated entities is the largest generator in North America of renewable energy from the wind and sun. The table below presents NEE's net income (loss) and earnings (loss) per share by reportable segment - FPL, NEER and Corporate and Other, which is primarily comprised of the operating results of NEET, FPL FiberNet and other business activities, as well as other income and expense items, including interest expense, income taxes and eliminating entries (see Note 10 for additional segment information, including reported results from continuing operations). The following discussions should be read in conjunction with the Notes contained herein and Management's Discussion and Analysis of Financial Condition and Results of Operations (Management's Discussion) appearing in the 2013 Form 10-K. The results of operations for an interim period generally will not give a true indication of results for the year. In the following discussions, all comparisons are with the corresponding items in the prior year period.

                                                     Earnings (Loss)
                                                       Per Share,
                        Net Income (Loss)           assuming dilution
                       Three Months Ended          Three Months Ended
                            March 31,                   March 31,
                        2014           2013          2014          2013
                           (millions)
FPL                 $      347       $  288     $      0.79      $ 0.68
NEER(a)                     86          (40 )          0.20       (0.09 )
Corporate and Other         (3 )         24           (0.01 )      0.05
NEE                 $      430       $  272     $      0.98      $ 0.64


______________________


(a) NEER's results reflect an allocation of interest expense from NEECH based on a deemed capital structure of 70% debt and allocated shared service costs.

Adjusted Earnings

NEE prepares its financial statements under generally accepted accounting principles in the U.S. (GAAP). However, management uses earnings excluding certain items (adjusted earnings), a non-GAAP financial measure, internally for financial planning, for analysis of performance, for reporting of results to the Board of Directors and as an input in determining performance-based compensation under NEE's employee incentive compensation plans. NEE also uses adjusted earnings when communicating its financial results and earnings outlook to investors. NEE's management believes adjusted earnings provides a more meaningful representation of the company's fundamental earnings power. Although the excluded amounts are properly included in the determination of net income under GAAP, management believes that the amount and/or nature of such items make period to period comparisons of operations difficult and potentially confusing. Adjusted earnings do not represent a substitute for net income, as prepared under GAAP.

Adjusted earnings exclude the unrealized mark-to-market effect of non-qualifying hedges (as described below) and other than temporary impairment (OTTI) losses on securities held in NEER's nuclear decommissioning funds, net of the reversal of previously recognized OTTI losses on securities sold and losses on securities where price recovery was deemed unlikely (collectively, OTTI reversals). However, other adjustments may be made from time to time with the intent to provide more meaningful and comparable results of ongoing operations.

NEE and NEER segregate into two categories unrealized mark-to-market gains and losses on derivative transactions. The first category, referred to as non-qualifying hedges, represents certain energy derivative transactions, and, beginning in the second quarter of 2013 certain interest rate derivative transactions, entered into as economic hedges, which do not meet the requirements for hedge accounting, or for which hedge accounting treatment is not elected or has been discontinued. Changes in the fair value of those transactions are marked to market and reported in the consolidated statements of income, resulting in earnings volatility because the economic offset to the positions are not marked to market. As a consequence, NEE's net income reflects only the movement in one part of economically-linked transactions. For example, a gain (loss) in the non-qualifying hedge category for certain energy derivatives is offset by decreases (increases) in the fair value of related physical asset positions in the portfolio or contracts, which are not marked to market under GAAP. For this reason, NEE's management views results expressed excluding the unrealized mark-to-market impact of the non-qualifying hedges as a meaningful measure of current period performance. The second category, referred to as trading activities, which is included in adjusted earnings, represents the net unrealized effect of actively traded positions entered into to take advantage of expected market price movements and all other commodity hedging activities. At FPL, substantially all changes in the fair value of energy derivative transactions are deferred as a regulatory asset or liability until the contracts are settled, and, upon settlement, any gains or losses are passed through the fuel clause. See Note 2.


During the three months ended March 31, 2013, an after-tax gain from discontinued operations of $231 million was recorded in NEE's condensed consolidated statements of income related to the March 2013 hydro sale. In addition, during the three months ended March 31, 2013, NEER recorded an after-tax loss of $43 million associated with the decision to pursue the sale of Maine fossil. During the three months ended March 31, 2014, NEER decided not to pursue the sale of Maine fossil and recorded an after-tax gain of $12 million to increase Maine fossil's carrying value to its estimated fair value. See Note 3 - Nonrecurring Fair Value Measurements. During the three months ended March 31, 2013, NEER recorded an impairment of $300 million and other related charges ($342 million after-tax) related to the Spain solar projects in NEE's condensed consolidated statements of income. See Note 3 - Nonrecurring Fair Value Measurements and Note 9 - Spain Solar Projects. In order to make period to period comparisons more meaningful, adjusted earnings also exclude the after-tax gain from discontinued operations, the after-tax gain (loss) associated with Maine fossil, the after-tax charges associated with the impairment of the Spain solar projects and, in 2014, the after-tax operating results associated with the Spain solar projects.

The following table provides details of the adjustments to net income considered in computing NEE's adjusted earnings discussed above.

                                                                  Three Months Ended
                                                                       March 31,
                                                                 2014             2013
                                                                      (millions)
Net unrealized mark-to-market after-tax losses from
non-qualifying hedge activity(a)                            $      (126 )     $       (52 )
Income from OTTI after-tax losses on securities held in
NEER's nuclear decommissioning funds, net of OTTI reversals $         2       $         3
After-tax gain from discontinued operations(b)              $         -       $       231
After-tax gain (loss) associated with Maine fossil(c)       $        12       $       (43 )
After-tax charges recorded by NEER associated with the
impairment of the Spain solar projects                      $         -       $      (342 )
After-tax operating loss of NEER's Spain solar projects     $       (15 )     $         -


____________________


(a) For the three months ended March 31, 2014 and 2013, approximately $124 million and $53 million of losses, respectively, are included in NEER's net income; the balance is included in Corporate and Other.

(b) For the three months ended March 31, 2013, $216 million of the gain is included in NEER's net income; the balance is included in Corporate and Other.

(c) For the three months ended March 31, 2014, the gain is included in NEER's net income. For the three months ended March 31, 2013, $41 million of the loss is included in NEER's net income; the balance is included in Corporate and Other.

The change in unrealized mark-to-market activity from non-qualifying hedges is primarily attributable to changes in forward power and natural gas prices and interest rates, as well as the reversal of previously recognized unrealized mark-to-market gains or losses as the underlying transactions were realized.

RESULTS OF OPERATIONS

Summary

NEE's net income for the three months ended March 31, 2014 was higher than the prior period by $158 million, or 34 cents per share, reflecting higher results at NEER and FPL.

FPL's increase in net income for the three months ended March 31, 2014 was primarily driven by continued investments in plant in service while earning an 11.22% return on common equity as determined for regulatory purposes (regulatory ROE) on its retail rate base.

NEER's net income increased for the three months ended March 31, 2014 primarily due to the absence of $342 million of after-tax charges associated with the impairment of the Spain solar projects, partly offset by the absence of the $216 million after-tax gain from discontinued operations, both recorded in 2013. NEER's results also reflect increased earnings on new investments and existing assets, as well as lower results from the customer supply and proprietary trading businesses and higher net unrealized losses from non-qualifying hedging activity.

Corporate and Other's results decreased for the three months ended March 31, 2014 primarily due to consolidating tax adjustments and higher investment losses.

NEE's effective income tax rates for the three months ended March 31, 2014 and 2013 were approximately 26% and 78%, respectively. The rate for the three months ended March 31, 2013 reflects the establishment of a full valuation allowance during that period on the deferred tax assets associated with the Spain solar projects (see Note 3 - Nonrecurring Fair Value Measurements and Note 4). The rates for all periods reflect the effect of PTCs for wind projects at NEER and deferred income tax benefits associated with convertible ITCs under the Recovery Act. PTCs and deferred income tax benefits associated with convertible ITCs can significantly affect NEE's effective income tax rate depending on the amount of pretax income. The amount of PTCs recognized


can be significantly affected by wind generation and by PTC roll off. PTCs for the three months ended March 31, 2014 and 2013 were approximately $49 million and $59 million, respectively. Deferred income tax benefits associated with convertible ITCs for the three months ended March 31, 2014 and 2013 were approximately $12 million and $13 million, respectively. See Note 4.

FPL: Results of Operations

FPL's net income for the three months ended March 31, 2014 and 2013 was $347 million and $288 million, respectively, representing an increase of $59 million.

The use of reserve amortization is permitted by a January 2013 FPSC final order approving a stipulation and settlement between FPL and several intervenors in FPL's base rate proceeding (2012 rate agreement). In order to earn a targeted regulatory ROE, subject to limitations provided in the 2012 rate agreement, reserve amortization is calculated using a trailing thirteen-month average of retail rate base and capital structure in conjunction with the trailing twelve months regulatory retail base net operating income, which primarily includes the retail base portion of base and other revenues, net of other operations and maintenance (O&M) expenses, depreciation and amortization, interest and tax expenses. The drivers of FPL's net income not reflected in the reserve amortization calculation include wholesale and transmission service revenues and expenses, cost recovery clause revenues and expenses, the equity component of AFUDC (AFUDC - equity) and costs not allowed to be recovered by the FPSC. During the three months ended March 31, 2014 and 2013, FPL recorded reserve amortization of $125 million and $137 million, respectively.

FPL's regulatory ROE for the twelve months ended March 31, 2014 was 11.22% compared to 11.0% in the prior year period. The 2014 regulatory ROE of 11.22% reflects approximately $32 million of after-tax charges recorded in 2013 associated with an initiative focused mainly on improving productivity and reducing O&M expenses (cost savings initiative). These charges were not offset by additional reserve amortization. Excluding the impact of these charges, FPL's regulatory ROE would have been approximately 11.50%, which is FPL's targeted regulatory ROE for 2014. The $59 million increase in FPL's net income for the three months ended March 31, 2014 was primarily driven by:

higher earnings of approximately $29 million related to the increase in the regulatory ROE from 11.0% to 11.22%, and

higher earnings on investment in plant in service of $28 million. Investment in plant in service grew FPL's average retail rate base for the quarter ended March 31, 2014 by approximately $2.6 billion when compared to the same period last year, reflecting, among other things, the generation power uprates at FPL's nuclear units, the modernized Cape Canaveral facility (Cape Canaveral power plant) and ongoing transmission and distribution additions.

FPL's operating revenues consisted of the following:

                                                                  Three Months Ended
                                                                        March 31,
                                                                  2014              2013
                                                                       (millions)
Retail base                                                 $     1,136         $    1,030
Fuel cost recovery                                                  914                719
Net deferral of retail fuel revenues                                  -                (10 )
Other cost recovery clauses and pass-through costs, net of
any deferrals                                                       395                388
Other, primarily wholesale and transmission sales,
customer-related fees and pole attachment rentals                    90                 61
Total                                                       $     2,535         $    2,188

Retail Base

Retail base revenues of approximately $25 million were recorded during the three months ended March 31, 2014, related to new nuclear capacity of approximately 125 MW, which was placed in service in 2013, as permitted by the FPSC's nuclear cost recovery rule. In addition, retail base revenues related to the Cape Canaveral power plant, which was placed in service in April 2013, amounted to approximately $38 million for the three months ended March 31, 2014. Approximately $8 million of additional unbilled retail base revenues recorded during the three months ended March 31, 2014 related to the retail base rate increase associated with the modernization of the Riviera Beach power plant that was placed in service on April 1, 2014; the annualized effect of such retail base rate increase is approximately $234 million.

Retail Customer Usage and Growth
For the three months ended March 31, 2014, FPL experienced a 2.4% increase in average usage per retail customer, primarily due to weather conditions and a slight improvement in the Florida economy, which collectively increased revenues by approximately $24 million. For the three months ended March 31, 2014, FPL experienced a 1.9% increase in the average number of customer accounts, increasing retail base revenues by approximately $11 million.


Cost Recovery Clauses

Revenues from fuel and other cost recovery clauses and pass-through costs, such as franchise fees, revenue taxes and storm-related surcharges, are largely a pass-through of costs. Such revenues also include a return on investment allowed to be recovered through the cost recovery clauses on certain assets, primarily related to nuclear capacity, solar and environmental projects. For the three months ended March 31, 2014 and 2013, cost recovery clauses contributed approximately $20 million and $27 million, respectively, to FPL's net income. The decrease is primarily as a result of the collection in 2014 of retail base revenues related to new nuclear capacity which was placed in service in 2013 (see Retail Base above). Fluctuations in fuel cost recovery revenues are primarily driven by changes in fuel and energy charges which are included in fuel, purchased power and interchange expense in the condensed consolidated statements of income, as well as by changes in energy sales. Fluctuations in revenues from other cost recovery clauses and pass-through costs are primarily driven by changes in storm-related surcharges, capacity charges, franchise fee costs, the impact of changes in O&M and depreciation expenses on the underlying cost recovery clause, investment in solar and environmental projects, investment in nuclear capacity until such capacity goes into service and is recovered in base rates, pre-construction costs associated with the development of two additional nuclear units at the Turkey Point site and changes in energy sales. Capacity charges are included in fuel, purchased power and interchange expense and franchise fee costs are included in taxes other than income taxes and other in the condensed consolidated statements of income. The increase in fuel cost recovery revenues for the three months ended March 31, 2014 is primarily due to a higher average fuel factor of approximately $57 million and higher energy sales of $52 million. In addition, gas sales associated with an incentive mechanism allowed under the 2012 rate agreement (incentive gas sales) and higher interchange power sales increased fuel cost recovery revenues by approximately $86 million.

Other

The increase in other revenues reflects higher wholesale revenues of approximately $24 million associated with an increase in contracted load served under existing contracts.

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