NextEra Energy, Inc. 2018 Form 10-K Summary
Business context and reporting period
The combined filing covers NextEra Energy, Inc. (NEE) and Florida Power & Light Company (FPL) for the fiscal year ended December 31, 2018. NEE operates primarily through two segments: FPL, a rate-regulated Florida electric utility serving more than five million customer accounts, and NextEra Energy Resources (NEER), a competitive energy business focused on contracted renewable generation, natural gas infrastructure, energy marketing and trading. NEE employed approximately 14,300 people at year-end.
The filing is an annual report rather than a standalone fourth-quarter filing. Fourth-quarter 2018 NEE operating revenues were $4.390 billion, operating income was $1.107 billion, net income attributable to NEE was $422 million and diluted EPS was $0.88.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Operating revenues | $16.727 billion | $17.173 billion | Down $446 million |
| Operating income | $4.280 billion | $5.173 billion | Down $893 million |
| Net income | $5.776 billion | $5.323 billion | Up $453 million |
| Net income attributable to NEE | $6.638 billion | $5.380 billion | Up $1.258 billion |
| Diluted EPS | $13.88 | $11.39 | Up $2.49 |
| Cash flow from operations | $6.593 billion | $6.458 billion | Up $135 million |
| Capital expenditures and investments | $13.004 billion | $10.740 billion | Up $2.264 billion |
| Total assets | $103.702 billion | $97.963 billion | Up $5.739 billion |
| Long-term debt, excluding current portion | $26.782 billion | $31.410 billion | Down $4.628 billion |
Reported net margin was approximately 34.5% in 2018, compared with approximately 31.0% in 2017; the comparison is heavily affected by the 2018 NEP deconsolidation gain and other unusual items. Operating margin declined to approximately 25.6% from 30.1%, primarily because 2017 included significant gains and 2018 included higher depreciation and amortization.
- FPL: Net income was $2.171 billion, up $291 million. Operating revenues were $11.862 billion, down $110 million, while operating cash flow was $4.422 billion, up from $3.916 billion. FPL’s regulatory ROE was approximately 11.60%.
- NEER: Net income attributable to NEE was $4.664 billion, up $1.700 billion. Results benefited substantially from the NEP deconsolidation gain, tax effects and the absence of the 2017 Duane Arnold impairment charge.
- Cash and liquidity: NEE reported $638 million of unrestricted cash and approximately $7.025 billion of net available liquidity at December 31, 2018, including $2.796 billion at FPL and $4.229 billion at NEECH.
- Debt and financing: Total NEE long-term debt, including current maturities, was approximately $29.498 billion; FPL debt was approximately $11.783 billion. NEE and FPL maintained investment-grade ratings with stable outlooks as of February 15, 2019.
- Dividends: NEE paid $4.44 per share in 2018 and announced an increase in the quarterly dividend from $1.11 to $1.25 per share in February 2019.
Material changes versus the prior comparable period
- NEP was deconsolidated effective January 1, 2018 after governance changes enhanced NEP unitholder rights. NEE recorded a pretax gain of approximately $3.927 billion, or $3.0 billion after tax, and now accounts for its retained interest using the equity method.
- NEE’s investment in equity-method investees increased to $6.748 billion from $2.321 billion, largely reflecting the NEP investment.
- FPL’s 2018 earnings benefited from rate-base growth, increased retail base revenues and lower income taxes. Retail base revenues increased approximately $393 million, including $209 million from the 2016 rate agreement and $106 million from 2018 solar additions.
- FPL’s depreciation and amortization rose to $2.633 billion from $940 million because 2018 included a $541 million reversal of prior reserve amortization, whereas 2017 included $1.250 billion of reserve amortization.
- NEER added approximately 1,406 MW of wind capacity, repowered approximately 899 MW of wind capacity and added approximately 326 MW of solar capacity in the United States during 2018.
- NEER sold ten wind facilities and one solar facility to a NEP subsidiary for approximately $1.3 billion of net cash proceeds and recorded an after-tax gain of approximately $32 million.
- NEE adopted accounting standards affecting revenue recognition, partial sales of nonfinancial assets, financial instruments, retirement benefits and leases. The reported impact was generally not material to FPL; some changes increased NEE earnings volatility and altered presentation.
Guidance, outlook, commentary, risks and unusual items
Management emphasizes continued investment in FPL’s generation, transmission and distribution system and in NEER’s contracted renewable portfolio. Approved capital expenditures for 2019 through 2023 totaled approximately $32.215 billion, including $25.605 billion for FPL, $6.450 billion for NEER and $160 million for Corporate and Other. FPL’s Okeechobee Clean Energy Center, an approximately 1,750 MW natural-gas unit, was expected to enter commercial service in mid-2019 and support an additional $200 million of annualized base revenues. The filing does not provide a clear consolidated earnings guidance figure in the supplied text.
- FPL rate proceeding: Customer groups petitioned the FPSC in December 2018 for refunds of up to $736.8 million annually, permanent rate changes, a 9.6% ROE and a 55% equity ratio. FPL disputes the petition. A regulatory decision was expected in mid-May 2019.
- Gulf Power acquisition: Completed January 1, 2019 for approximately $4.47 billion in cash plus assumed debt of approximately $1.3 billion. NEE funded the cash price with approximately $4.5 billion of short-term borrowings taken in December 2018. Purchase accounting was still being evaluated at the filing date.
- Capital intensity: Planned investment, contractual purchase obligations and debt commitments create substantial funding needs. Total disclosed contractual obligations were approximately $122.929 billion, including debt, interest, purchase obligations, asset retirement activities and other commitments.
- Regulatory and environmental exposure: FPL’s cost recovery, rate base and ROE remain subject to FPSC and FERC decisions. Environmental rules, greenhouse-gas requirements, permitting and renewable-energy incentives could increase costs or delay projects.
- Weather and operations: Hurricanes, severe weather, outages, fuel availability, transmission constraints and variable wind and solar resources can affect earnings and cash flow. FPL is not fully insured against hurricane losses.
- Nuclear risks: Nuclear operations involve licensing, outage, safety, decommissioning, spent-fuel and insurance risks. NEER expected Duane Arnold operations to cease in late 2020, subject to MISO approval, following an amended power purchase agreement.
- Market and counterparty risks: NEER is exposed to commodity prices, derivatives valuation, liquidity, credit and collateral requirements. A downgrade below investment grade could require approximately $1.5 billion of additional collateral under certain derivative arrangements.
- Unusual 2018 items: Results included the NEP deconsolidation gain of approximately $3.0 billion after tax, $436 million of tax-reform-related adjustments in adjusted-earnings reconciliation, $125 million of losses related to nuclear decommissioning fund securities and $186 million of after-tax losses from non-qualifying hedges.
Most important facts for investors to verify
- Reconcile reported EPS and net income with recurring or adjusted earnings, particularly the $3.0 billion after-tax NEP deconsolidation gain and tax-related items.
- Monitor the FPSC’s resolution of the petition seeking up to $736.8 million of annual refunds and changes to FPL’s rate structure and ROE.
- Assess the funding, leverage and integration effects of the Gulf Power acquisition, including the short-term borrowings used to fund the purchase.
- Review the timing, cost recovery and execution risk of the approximately $32.2 billion 2019–2023 capital program.
- Evaluate liquidity after considering debt maturities, commercial paper, collateral requirements, guarantees and the acquisition-related borrowings.
- Track renewable tax incentives, project additions, contracted capacity, NEER’s commodity exposure and the effect of market volatility on reported earnings.
- Review nuclear decommissioning obligations, restricted funds, insurance limits and the planned Duane Arnold shutdown.
- Confirm the filing’s retrospective adjustments and accounting changes when comparing 2018 with prior periods.