Business Context and Reporting Period
NextEra Energy, Inc. (NEE) and its wholly owned utility subsidiary Florida Power & Light Company (FPL) filed a combined unaudited Form 10-Q for the three months ended March 31, 2016. NEE operates primarily through FPL, a regulated Florida electric utility serving approximately 4.8 million customer accounts, and NextEra Energy Resources (NEER), a competitive energy business focused on renewable generation, gas infrastructure, power marketing and related investments.
Key Financial Metrics
| Metric | NEE Q1 2016 | NEE Q1 2015 | Change |
|---|---|---|---|
| Operating revenues | $3,835 million | $4,104 million | Down $269 million |
| Operating income | $1,234 million | $1,129 million | Up $105 million |
| Net income attributable to NEE | $636 million | $650 million | Down $14 million |
| Diluted EPS | $1.37 | $1.45 | Down $0.08 |
| Operating cash flow | $1,545 million | $1,181 million | Up $364 million |
| Capital expenditures and investments | $3,879 million | $1,566 million | Up $2,313 million |
| Cash and equivalents at period-end | $628 million | $469 million | Up $159 million |
| Long-term debt, including current maturities | $29,936 million | Not clearly provided in the filing text for the comparable balance-sheet date | — |
NEE's operating margin was approximately 32.2% in Q1 2016 versus 27.5% in Q1 2015, based on operating income divided by operating revenues. Net margin was approximately 16.6% versus 15.8%.
| FPL metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Operating revenues | $2,303 million | $2,541 million | Down $238 million |
| Operating income | $714 million | $667 million | Up $47 million |
| Net income | $393 million | $359 million | Up $34 million |
| Operating cash flow | $1,113 million | $952 million | Up $161 million |
| Capital expenditures | $1,133 million | $721 million | Up $412 million |
At March 31, 2016, NEE reported total assets of $84.6 billion, total equity of $23.6 billion and current liabilities of $10.6 billion. NEE reported approximately $6.0 billion of net available liquidity, including approximately $2.1 billion attributable to FPL. FPL reported $31 million of cash and approximately $2.1 billion of net available liquidity.
Material Changes Versus the Prior Comparable Period
- NEE net income declined 2%, primarily because NEER earnings fell $56 million to $224 million. FPL earnings rose $34 million to $393 million, while Corporate and Other earnings increased $8 million to $19 million.
- NEER results were pressured by $102 million of after-tax unfavorable change in non-qualifying hedge activity, including approximately $83 million of losses from interest-rate derivatives after hedge accounting was discontinued in January 2016.
- NEER benefited from $67 million of higher earnings from new investments and $16 million from existing assets, but experienced lower customer supply and trading results, higher interest and general and administrative expenses, and higher impairment-related losses.
- FPL earnings benefited from continued rate-base investment, approximately $14 million of higher allowance for equity funds used during construction, and $7 million of higher cost-recovery clause earnings. Average retail rate base increased approximately $1.4 billion year over year.
- Lower fuel prices and lower dispatch reduced FPL fuel, purchased power and interchange expense by $305 million. FPL also recorded an $81 million net deferral of retail fuel revenues because rates exceeded current fuel costs.
- NEE operating cash flow increased substantially, but investing cash use increased to $3.7 billion, driven primarily by $2.6 billion of NEER independent power and other investments and $1.1 billion of FPL capital expenditures.
- Financing activities provided $2.2 billion, including $1.25 billion of long-term debt issuance, $500 million of notes payable and a $1.2 billion increase in commercial paper. NEE paid $401 million in common dividends.
Guidance, Outlook, Risks and Unusual Items
- FPL filed a rate-case petition seeking base-revenue increases of $866 million effective January 2017, $262 million effective January 2018 and $209 million when the proposed Okeechobee County natural-gas combined-cycle unit becomes operational, expected in mid-2019 if approved. 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 in 2016. FPL had begun construction on three solar projects of approximately 74 MW each, and NEER placed approximately 200 MW of solar generation into service during the quarter.
- On April 4, 2016, after the quarter-end, NEER completed the sale of Texas merchant natural-gas generation facilities totaling 2,884 MW for approximately $456 million of net cash proceeds. NEE expected to record a pretax gain of approximately $254 million, or $107 million after tax, in the second quarter of 2016; the gain was to be excluded from adjusted earnings.
- NEE discontinued hedge accounting for remaining interest-rate and foreign-currency derivatives in January 2016, increasing potential earnings volatility. Approximately $36 million of net losses in accumulated other comprehensive income was expected to be reclassified into earnings within the following 12 months, assuming scheduled payments continued.
- NEE and FPL remain exposed to extensive regulatory, environmental, nuclear, weather, construction, commodity-price, interest-rate, counterparty, cyber and credit-market risks. Management stated that no material changes occurred to the risk factors disclosed in the 2015 Form 10-K.
- The Spain solar projects remained subject to financing defaults, liquidation proceedings and potential lender remedies. Project-level debt and associated interest-rate-swap liabilities totaled approximately $585 million and $127 million, respectively, at March 31, 2016. Management continued to pursue a restructuring, but no assurance was provided that restructuring would succeed.
- NEE subsidiaries had approximately $2.4 billion of guarantees related primarily to construction and development activities and approximately $4.9 billion of additional guarantees related to purchased power, indemnification, nuclear and other obligations. Potential collateral requirements could increase materially after credit-rating downgrades.
- NEE and FPL stated that their disclosure controls were effective as of March 31, 2016, with no material change in internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify the outcome of FPL's rate case, including approved revenue increases, authorized ROE and treatment of the Okeechobee generation project.
- Reconcile reported GAAP earnings with management's adjusted earnings, particularly the effects of non-qualifying hedge activity, discontinued hedge accounting, tax credits and Spain solar results.
- Confirm the second-quarter 2016 accounting and cash proceeds from the Texas merchant-generation asset sale.
- Monitor NEER's capital spending, renewable project additions, pipeline commitments and the availability of project-level financing.
- Assess NEE's debt maturities, commercial-paper reliance, credit ratings and available liquidity relative to its substantial capital program.
- Review the Spain solar financing and liquidation status, potential lender remedies and related collateral exposure.
- Evaluate FPL fuel-cost deferrals, regulatory recovery mechanisms, storm exposure and nuclear-related insurance and assessment obligations.
- Review the Adelphia litigation appeal and other legal and regulatory proceedings, although management did not expect their ultimate resolution to have a material adverse effect based on information available at filing.