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, 2018. NEE operates primarily through FPL, a regulated Florida electric utility serving nearly five million customer accounts, and NextEra Energy Resources (NEER), a competitive energy business focused on renewable generation, power marketing and gas infrastructure.
FPL is wholly owned by NEE. The filing presents separate registrant information and should be read with the 2017 Form 10-K.
Financial Performance and Key Metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| NEE operating revenues | $4.069 billion | $4.404 billion | $7.932 billion | $8.377 billion |
| NEE operating income | $1.162 billion | $1.276 billion | $2.209 billion | $3.638 billion |
| NEE net income attributable to NEE | $795 million | $793 million | $5.223 billion | $2.376 billion |
| NEE diluted EPS | $1.64 | $1.68 | $10.95 | $5.05 |
| NEE operating margin | 28.6% | 29.0% | 27.8% | 43.4% |
| NEE net margin attributable to NEE | 19.5% | 18.0% | 65.9% | 28.4% |
| FPL operating revenues | $2.908 billion | $3.091 billion | $5.528 billion | $5.618 billion |
| FPL operating income | $922 million | $941 million | $1.629 billion | $1.752 billion |
| FPL net income | $626 million | $526 million | $1.110 billion | $971 million |
| FPL operating margin | 31.7% | 30.4% | 29.5% | 31.2% |
| FPL net margin | 21.5% | 17.0% | 20.1% | 17.3% |
NEE’s reported six-month results include a $3.935 billion pretax gain, or approximately $3.0 billion after tax, from the January 2018 deconsolidation of NEP. Accordingly, the six-month earnings comparison is not representative of underlying operating performance.
- NEE cash flow from operations was $2.933 billion in the first six months of 2018, compared with $3.251 billion in the prior-year period.
- NEE used $5.355 billion in investing activities, including $5.923 billion of capital expenditures, independent power and other investments, and nuclear fuel purchases.
- NEE reported $1.190 billion of financing cash inflows and a $1.247 billion decrease in cash, cash equivalents and restricted cash, ending at $736 million.
- FPL generated $1.879 billion of operating cash flow and used $2.609 billion in investing activities during the first six months.
- At June 30, 2018, NEE had total assets of $95.490 billion, common shareholders’ equity of $33.021 billion, long-term debt of $28.356 billion and current maturities of long-term debt of $1.613 billion.
- FPL had total assets of $51.611 billion, common shareholders’ equity of $18.993 billion, long-term debt of $12.379 billion and current maturities of long-term debt of $92 million.
- NEE reported approximately $8.639 billion of net available liquidity, including cash, revolving credit capacity and letter-of-credit capacity, after commercial paper and other short-term borrowings.
- NEE declared dividends of $1.11 per common share in Q2 2018, compared with $0.9825 in Q2 2017.
Material Changes Versus the Prior Comparable Period
- NEP deconsolidation: NEP was deconsolidated effective January 1, 2018 following governance changes. NEE recorded an equity-method investment of approximately $4.4 billion and a $3.935 billion pretax gain. NEP’s assets, liabilities and noncontrolling interests were removed from NEE’s consolidated balance sheet.
- FPL earnings improvement: FPL’s Q2 net income increased $100 million and six-month net income increased $139 million. Drivers included higher retail base revenues and lower income-tax expense, partly offset by lower usage, milder weather and the absence of prior-year reserve amortization.
- NEER volatility: NEER’s Q2 earnings declined $27 million, while six-month earnings increased $3.423 billion, primarily because of NEP-related investment gains and tax-reform impacts. NEER also placed approximately 144 MW of solar capacity and 101 MW of wind-repowering capacity into service and sold approximately 244 MW of wind capacity.
- Tax reform: The federal corporate tax rate reduction lowered NEE’s effective tax rate to approximately 25% for both the quarter and six months, versus 26% and 29%, respectively, in the prior-year periods. FPL expects tax benefits to be reflected for customers under its regulatory arrangements.
- Accounting changes: NEE adopted new revenue, financial-instrument, retirement-benefit and partial-sale accounting guidance. The financial-instrument adoption reclassified approximately $312 million of after-tax unrealized equity gains from AOCI to retained earnings and may increase future earnings volatility.
- SJRPP shutdown: FPL shut down the St. Johns River Power Park coal units in January 2018, terminating a 375 MW take-or-pay contract and creating regulatory assets subject to future recovery.
Guidance, Outlook, Commentary and Risks
The filing does not provide a clear new consolidated earnings guidance figure. Management’s disclosed capital program for the remainder of 2018 through 2022 totals approximately $20.375 billion for FPL, $6.875 billion for NEER and $105 million for Corporate and Other. These estimates are subject to continuing review and may change materially.
- NEE agreed to acquire Gulf Power for approximately $5.75 billion, Florida City Gas for approximately $530 million and interests in two Florida gas-generation facilities for approximately $195 million. The transactions require regulatory approvals; FCG was expected to close in the third quarter of 2018 and the remaining acquisitions in the first half of 2019. NEE expected to finance approximately $5.1 billion of cash consideration with debt.
- FPL’s regulatory ROE for the period was approximately 11.48%, compared with 11.50% in the prior-year period.
- FPL expected a February 2019 proceeding concerning Hurricane Irma restoration costs and tax-reform impacts. In July 2018, FPL received approval for a settlement relating to Hurricane Matthew and expected to issue a one-time customer refund of approximately $28 million.
- Key risks include regulatory and cost-recovery decisions, changes in tax and renewable-energy incentives, construction and permitting delays, fuel and power-price volatility, derivative valuation and collateral requirements, credit and counterparty risk, cyber threats, severe weather, nuclear operations, environmental liabilities and access to capital markets.
- At June 30, 2018, NEE subsidiaries had approximately $4.1 billion of guarantees related to purchased power, nuclear and other contractual obligations, approximately $1.4 billion of standby letters of credit and approximately $306 million of surety bonds.
- Derivative contracts included approximately $1.6 billion of liabilities subject to credit-risk-related contingent features. A downgrade below investment grade could require approximately $1.2 billion of additional collateral, with further collateral potentially required under other financial or cross-default triggers.
- Management stated that there were no material changes to the risk factors disclosed in the 2017 Form 10-K and that disclosure controls and procedures were effective as of June 30, 2018.
Most Important Facts for Investors to Verify
- Separate recurring earnings from the $3.0 billion after-tax NEP deconsolidation gain and other tax-reform-related items.
- Assess whether FPL’s retail rate-base growth, approximately $3.2 billion above the prior-year average in Q2, can offset lower customer usage and weather-related revenue pressure.
- Review funding needs and leverage implications of the planned Gulf Power, Florida City Gas and gas-generation acquisitions.
- Monitor NEE’s substantial capital program, declining cash balance and reliance on debt and revolving credit facilities.
- Evaluate derivative collateral exposure, commodity-price sensitivity and the effect of future market movements on NEER earnings.
- Track FPL regulatory proceedings concerning Hurricane Irma, tax reform, storm-cost recovery and the SJRPP-related regulatory assets.
- Confirm the timing and balance-sheet impact of the new lease standard, which was scheduled to become effective January 1, 2019.