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NEE > SEC Filings for NEE > Form 10-Q on 31-Jul-2014All Recent SEC Filings

Show all filings for NEXTERA ENERGY INC

Form 10-Q for NEXTERA ENERGY INC


31-Jul-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 11 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)                                        Earnings (Loss)
                                                            Per Share,                                              Per Share,
                            Net Income (Loss)            assuming dilution           Net Income (Loss)          assuming dilution
                           Three Months Ended           Three Months Ended           Six Months Ended           Six Months Ended
                                 June 30,                     June 30,                    June 30,                   June 30,
                            2014           2013           2014          2013         2014          2013          2014          2013
                                (millions)                                              (millions)
FPL                     $      423       $   391     $      0.96      $ 0.92     $     770       $   679     $    1.75       $ 1.60
NEER(a)                         81           229            0.18        0.54           167           189          0.38         0.45
Corporate and Other            (12 )         (10 )         (0.02 )     (0.02 )         (16 )          15         (0.03 )       0.03
NEE                     $      492       $   610     $      1.12      $ 1.44     $     921       $   883     $    2.10       $ 2.08


______________________


(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.

NEE, through NEER, formed NEP to own, operate and acquire contracted clean energy projects with stable, long-term cash flows through a limited partner interest in NEP OpCo. On July 1, 2014, NEP closed its initial public offering as further described in Note 1 - Basis of Presentation.

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 3.

During the six months ended June 30, 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. See Note 6. In addition, during the six months ended June 30, 2013, NEER recorded an after-tax loss of $43 million associated with the decision to pursue the sale of Maine fossil. During the six months ended June 30, 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 4 - Nonrecurring Fair Value Measurements. During the six months ended June 30, 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 4 - Nonrecurring Fair Value Measurements and Note 10 - 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           Six Months Ended
                                                           June 30,                    June 30,
                                                     2014            2013          2014         2013
                                                                       (millions)
Net unrealized mark-to-market after-tax losses
from non-qualifying hedge activity(a)            $     (146 )     $     (9 )   $    (273 )    $   (61 )
Income (loss) from OTTI after-tax losses on
securities held in NEER's nuclear
decommissioning funds, net of OTTI reversals     $        1       $     (1 )   $       2      $     1
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 results of NEER's Spain
solar projects                                   $        7       $      -     $      (8 )    $     -


____________________


(a) For the three months ended June 30, 2014 and 2013, approximately $140 million and $8 million of losses, respectively, are included in NEER's net income; the balance is included in Corporate and Other. For the six months ended June 30, 2014 and 2013, approximately $263 million and $61 million of losses, respectively, are included in NEER's net income; the balance is included in Corporate and Other.

(b) For the six months ended June 30, 2013, $216 million of the gain is included in NEER's net income; the balance is included in Corporate and Other.

(c) For the six months ended June 30, 2014, the gain is included in NEER's net income. For the six months ended June 30, 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 June 30, 2014 was lower than the prior period by $118 million, or 32 cents per share, reflecting lower results at NEER, partly offset by higher results at FPL. NEE's net income for the six months ended June 30, 2014 was higher than the prior period by $38 million, or 2 cents per share, primarily due to higher results at FPL, partly offset by lower results from Corporate and Other.

FPL's increase in net income for the three and six months ended June 30, 2014 was primarily driven by continued investments in plant in service while earning an 11.28% return on common equity as determined for regulatory purposes (regulatory ROE) on its retail rate base.

NEER's net income decreased for the three months ended June 30, 2014 primarily due to higher net unrealized losses from non-qualifying hedge activity. NEER's net income decreased for the six months ended June 30, 2014 reflecting higher net unrealized losses from non-qualifying hedge activity as well as the absence of the $216 million after-tax gain from discontinued operations and the absence of $342 million of after-tax charges associated with the impairment of the Spain solar projects, both recorded in 2013. In addition, NEER's results for the three and six months ended June 30, 2014 reflect, among other things, earnings from new investments and higher results from the customer supply and proprietary power and gas trading businesses as well as the NEP-related charge and costs.


Corporate and Other's results decreased for the three and six months ended June 30, 2014 primarily due to higher investment losses and, for the six months ended June 30, 2014, consolidating tax adjustments.

NEE's effective income tax rates for the three months ended June 30, 2014 and 2013 were approximately 37% and 26%, respectively. NEE's effective income tax rates for the six months ended June 30, 2014 and 2013 were approximately 33% and 35%, respectively. The rates for all periods reflect the benefit 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 June 30, 2014 and 2013 were approximately $49 million and $66 million, respectively, and $98 million and $125 million for the comparable six-month periods. Deferred income tax benefits associated with convertible ITCs for the three months ended June 30, 2014 and 2013 were approximately $10 million and $21 million, respectively, and $22 million and $33 million for the comparable six-month periods. In addition, the rates for the three and six months ended June 30, 2014 reflect a noncash income tax charge of approximately $45 million associated with structuring Canadian assets and for the six months ended June 30, 2013 reflect the establishment of a full valuation allowance during the first quarter of 2013 of approximately $132 million on the deferred tax assets associated with the Spain solar projects. See Note 4 - Nonrecurring Fair Value Measurements and Note 5.

FPL: Results of Operations

FPL's net income for the three months ended June 30, 2014 and 2013 was $423 million and $391 million, respectively, representing an increase of $32 million. FPL's net income for the six months ended June 30, 2014 and 2013 was $770 million and $679 million, respectively, representing an increase of $91 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 from customers by the FPSC. During the three months ended June 30, 2014 and 2013, FPL recorded reserve amortization of $6 million and $82 million, respectively. During the six months ended June 30, 2014 and 2013, FPL recorded reserve amortization of $131 million and $219 million, respectively.

FPL's regulatory ROE for the twelve months ended June 30, 2014 was 11.28% compared to 11.0% in the prior year period. The 2014 regulatory ROE reflects approximately $25 million of after-tax charges recorded over the past twelve months 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 11.50%, which is FPL's targeted regulatory ROE for 2014. The $32 million and $91 million increase in FPL's net income for the three and six months ended June 30, 2014, respectively, was primarily driven by:

higher earnings on investment in plant in service of $28 million and $57 million, respectively. Investment in plant in service grew FPL's average retail rate base for the three and six months ended June 30, 2014 by approximately $2.4 billion and $2.5 billion, respectively, when compared to the same periods last year, reflecting, among other things, the generation power uprates at FPL's nuclear units, the modernized Cape Canaveral and Riviera Beach power plants and ongoing transmission and distribution additions,

growth in wholesale services provided which increased earnings by $10 million and $14 million, respectively, and

for the six months ended June 30, 2014, higher earnings of approximately $29 million related to the increase in the targeted regulatory ROE from 11.25% to 11.50% implemented in the first quarter of 2014.


FPL's operating revenues consisted of the following:

                                              Three Months Ended                  Six Months Ended
                                                    June 30,                           June 30,
                                               2014              2013            2014             2013
                                                                    (millions)
Retail base                             $     1,390          $   1,280     $     2,527        $    2,310
Fuel cost recovery                              941                828           1,856             1,547
Net recognition of previously deferred
retail fuel revenues                              -                 54               -                44
Other cost recovery clauses and
pass-through costs, net of any
deferrals                                       446                459             841               847
Other, primarily wholesale and
transmission sales, customer-related
fees and pole attachment rentals                112                 75             200               137
Total                                   $     2,889          $   2,696     $     5,424        $    4,885

Retail Base

Retail base revenues increased approximately $96 million and $168 million during the three and six months ended June 30, 2014, respectively, related to plant capacity additions reflecting (1) new nuclear capacity of approximately 125 MW, which was placed in service in 2013, (2) the modernization of the Cape Canaveral power plant, which was placed in service in April 2013, and (3) the modernization of the Riviera Beach power plant that was placed in service on April 1, 2014; the annualized effect of the retail base rate increase for the Riviera Beach power plant is approximately $234 million.

Retail Customer Usage and Growth
For the three and six months ended June 30, 2014, FPL experienced a 0.4% decrease and 0.9% increase, respectively, in average usage per retail customer and a 2.0% and 1.9% increase, respectively, in the average number of customer accounts, which collectively, together with other factors, increased revenues by approximately $14 million and $49 million, respectively. Weather conditions and an improvement in the Florida economy contributed to the increased revenues for both periods.

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 June 30, 2014 and 2013, cost recovery clauses contributed approximately $20 million and $29 million, respectively, to FPL's net income; the amounts for the six months ended June 30, 2014 and 2013 were $41 million and $56 million, respectively. 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 and six months ended June 30, 2014 is primarily due to a higher average fuel factor of $80 million and $138 million, respectively, and higher energy sales of $42 million and $94 million, respectively. In addition, gas sales associated with an incentive mechanism allowed under the 2012 rate agreement (incentive gas sales) decreased fuel cost recovery revenues by approximately $9 million for the three months ended June 30, 2014. Incentive gas sales, along with higher interchange power sales, increased fuel cost recovery revenues by approximately $77 million for the six months ended June 30, 2014.

Other

The increase in other revenues for the three and six months ended June 30, 2014 reflects higher wholesale revenues of approximately $33 million and $56 million, respectively, associated with an increase in contracted load served under existing contracts.


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