NEXTERA ENERGY INC quarterly report, Q2 FY2016

Business Context and Reporting Period

NextEra Energy, Inc. (NEE) and Florida Power & Light Company (FPL) filed a combined unaudited Form 10-Q for the quarter and six months ended June 30, 2016. NEE operates primarily through FPL, a rate-regulated Florida electric utility serving approximately 4.8 million customer accounts, and NextEra Energy Resources (NEER), a competitive renewable generation, power marketing and natural gas infrastructure business. FPL is wholly owned by NEE.

Financial Performance and Key Metrics

Metric	Three months ended June 30, 2016	Three months ended June 30, 2015	Six months ended June 30, 2016	Six months ended June 30, 2015
NEE operating revenues	$3,817 million	$4,358 million	$7,651 million	$8,463 million
NEE net income attributable to NEE	$540 million	$716 million	$1,193 million	$1,366 million
NEE diluted EPS	$1.16	$1.59	$2.57	$3.04
FPL operating revenues	$2,750 million	$2,996 million	$5,054 million	$5,538 million
FPL net income	$448 million	$435 million	$841 million	$794 million
NEE operating cash flow	Not separately presented	Not separately presented	$3,270 million	$2,934 million
FPL operating cash flow	Not separately presented	Not separately presented	$2,323 million	$2,032 million

NEE operating income was $1,169 million in the second quarter and $2,403 million for the six-month period, compared with $1,146 million and $2,276 million, respectively, in the prior-year periods. Approximate NEE operating margins were 30.6% for the quarter and 31.4% year to date, versus 26.3% and 26.9% in 2015. The improvement reflected lower fuel and purchased-power costs and other operating expense reductions, partially offset by higher operations and maintenance expense.

NEE's net margin was approximately 14.1% in the second quarter and 15.6% for the six months, compared with 16.4% and 16.2% in the prior-year periods. The decline in net income was driven primarily by derivative-related losses, higher interest expense and lower NEER earnings. NEE's effective income tax rates were approximately 29% for the quarter and 28% year to date.

FPL's net margin was approximately 16.3% in the second quarter and 16.6% year to date, compared with 14.5% and 14.3% in the comparable 2015 periods. FPL's operating income increased to $828 million for the quarter and $1,542 million for the six months. FPL reported an 11.50% regulatory ROE, subject to applicable regulatory mechanisms.

Balance Sheet, Debt and Liquidity

NEE total assets were $85.4 billion at June 30, 2016, up from $82.5 billion at December 31, 2015.
NEE long-term debt was $27.0 billion, and long-term debt including current maturities was $30.1 billion. Total current liabilities were $11.3 billion.
FPL total assets were $43.9 billion, with long-term debt of $9.9 billion and total current liabilities of $3.3 billion.
NEE ended the period with $730 million of cash and cash equivalents; FPL held $14 million.
Reported total net available liquidity was approximately $6.5 billion for NEE, including approximately $2.2 billion for FPL. NEECH and FPL had revolving and letter-of-credit facilities, net of borrowings and issued letters of credit.
NEE declared dividends of $0.87 per share for the quarter and $1.74 per share for the six months, compared with $0.77 and $1.54 in 2015.

Cash Flow and Capital Spending

NEE generated $3.27 billion of operating cash flow and used $5.44 billion in investing activities during the first six months. Capital expenditures and investments totaled approximately $6.07 billion.
FPL generated $2.32 billion of operating cash flow and used $2.21 billion in investing activities, including $2.13 billion of capital expenditures.
NEE financing activities provided $2.33 billion, including $2.51 billion of long-term debt issuance and $1.01 billion of increased commercial paper, partially offset by $996 million of long-term debt retirements and $803 million of dividends.
FPL financing activities used $120 million, including $900 million of dividends to NEE, partly offset by $500 million of notes payable and $307 million of increased commercial paper.

Material Changes Versus the Prior Comparable Period

NEE second-quarter net income declined $176 million, or approximately 25%, and six-month net income declined $173 million, or approximately 13%.
FPL net income increased $13 million for the quarter and $47 million for the six months. Growth was supported by higher earnings on an expanding rate base, including the modernized Port Everglades plant, higher AFUDC-equity and increased cost-recovery earnings.
NEER net income declined $42 million for the quarter and $98 million for the six months. New wind, solar and pipeline investments contributed $90 million and $157 million of incremental earnings, but these benefits were more than offset by $265 million and $368 million of unfavorable changes in non-qualifying hedge activity.
NEE discontinued hedge accounting for remaining interest-rate and foreign-currency derivatives in January 2016. This produced significant earnings volatility, including after-tax losses of approximately $341 million in the quarter and $416 million year to date from non-qualifying hedge activity.
NEER completed the sale of Texas natural gas generation facilities in April 2016 for net cash proceeds of approximately $456 million and recorded a $254 million pretax gain, or $106 million after tax.
FPL revenue declined largely because of lower fuel-recovery revenues and lower customer usage. Average usage per retail customer decreased 3.8% in the quarter and 2.6% year to date, while average customer accounts increased 1.4% in both periods. Management attributed part of the decline to milder weather.

Guidance, Outlook, Management Commentary and Risks

FPL filed a rate case requesting base annual revenue increases of $866 million effective January 2017, $262 million effective January 2018 and $209 million when the proposed Okeechobee combined-cycle unit becomes operational, expected in mid-2019. Hearings were scheduled for the third quarter of 2016, with a final decision expected in the fourth quarter.
NEER expected to add approximately 1,500 MW of contracted wind generation and 1,000 MW of contracted solar generation during 2016. During the first six months, NEER placed approximately 100 MW of wind and 400 MW of solar generation into service.
Approved capital expenditures for the remainder of 2016 through 2020 totaled approximately $16.1 billion for FPL, $5.5 billion for NEER and $0.8 billion for Corporate and Other. Actual spending may vary materially.
FPL received approval to begin construction of an approximately 1,600 MW Okeechobee natural gas-fired unit and continued licensing activities for two additional Turkey Point nuclear units totaling approximately 2,200 MW. No new target in-service dates had been established for the Turkey Point units.
FPL recorded a provision for refund of approximately $21 million pretax, or $13 million after tax, after the Florida Supreme Court reversed approval of the Woodford Shale investment. FPL's subsidiary intends to sell its share of future production at market prices.
The Spain solar projects remained subject to project-level financing defaults, liquidation proceedings and potential lender remedies. Related current project debt was $564 million and associated derivative liabilities were $118 million at June 30, 2016. Management stated that lender recourse was effectively limited under a settlement arrangement, but restructuring was not assured.
NEE had approximately $2.2 billion of guarantees related primarily to project development and construction and approximately $5.8 billion of guarantees related to divestitures, purchased power agreements, nuclear activities, tax credits and other obligations. Derivative agreements could require additional collateral following credit-rating or other covenant triggers.
Principal ongoing risks include extensive utility regulation, rate-recovery and prudence challenges, commodity and derivative volatility, interest-rate exposure, credit and counterparty risk, cyber and operational risks, environmental and nuclear liabilities, severe weather, project execution, renewable tax incentives and access to capital markets. Management reported no material changes to the risk factors in the 2015 Form 10-K.
The filing disclosed that the proposed Hawaiian Electric merger was terminated in July 2016 after the Hawaii Public Utilities Commission dismissed the application. NEE paid a $90 million termination fee plus $5 million of reimbursable expenses, to be recorded in the third quarter of 2016.

Most Important Facts for Investors to Verify

Whether FPL's requested rate increases and 11.50% regulatory ROE are approved or modified by the FPSC.
The extent to which NEE's reported earnings continue to be affected by non-qualifying hedge accounting and the January 2016 discontinuation of hedge accounting.
Progress, required funding and returns from NEER's wind, solar and natural gas pipeline expansion program.
NEE's debt maturities, commercial paper usage, credit ratings and approximately $6.5 billion of reported net available liquidity.
Resolution of the Spain solar project defaults and liquidation proceedings, including any lender acceleration or foreclosure actions.
Potential obligations under guarantees, derivative collateral provisions, nuclear insurance programs, purchased power and fuel contracts, and FPL's proposed purchase of the 330 MW Indiantown coal facility for approximately $451 million.
The final accounting and cash impact of the Hawaiian Electric merger termination and other unusual items, including the Texas generation asset sale and Woodford Shale refund provision.