NextEra Energy, Inc. 2020 Q3 Form 10-Q Summary
Business context and reporting period
NextEra Energy, Inc. (NEE) filed a combined unaudited Form 10-Q with Florida Power & Light Company (FPL) for the quarter and nine months ended September 30, 2020. NEE's principal businesses are FPL, a regulated Florida electric utility serving more than five million customer accounts, and NextEra Energy Resources (NEER), a competitive energy and renewable-generation business. Gulf Power is also reported as a regulated utility segment. FPL is wholly owned by NEE.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Change |
|---|---|---|---|
| NEE operating revenues | $4.785 billion | $5.572 billion | Down $787 million |
| NEE operating income | $1.008 billion | $1.593 billion | Down $585 million |
| NEE net income attributable to NEE | $1.229 billion | $879 million | Up $350 million |
| NEE diluted EPS | $2.50 | $1.81 | Up $0.69 |
| FPL operating revenues | $3.455 billion | $3.491 billion | Down $36 million |
| FPL net income | $757 million | $683 million | Up $74 million |
| Metric | Nine months 2020 | Nine months 2019 | Change |
|---|---|---|---|
| NEE operating revenues | $13.602 billion | $14.616 billion | Down $1.014 billion |
| NEE operating income | $4.176 billion | $4.476 billion | Down $300 million |
| NEE net income attributable to NEE | $2.924 billion | $2.794 billion | Up $130 million |
| NEE diluted EPS | $5.94 | $5.78 | Up $0.16 |
| FPL net income | $2.148 billion | $1.934 billion | Up $214 million |
NEE's calculated operating margin was approximately 21.1% in Q3 2020 versus 28.6% in Q3 2019, and 30.7% for the first nine months versus 30.6% in the prior-year period. FPL's operating margin was approximately 30.7% in Q3 2020 versus 27.9% in Q3 2019. NEE's effective income tax rate was approximately 10.3% for the quarter and 3.0% year to date, compared with 6.8% and 9.1%, respectively, in 2019.
- NEE generated $6.631 billion of operating cash flow in the first nine months, compared with $6.243 billion in 2019.
- NEE used $9.206 billion in investing activities, including $9.312 billion of capital expenditures, acquisitions, investments and nuclear fuel purchases.
- NEE ended the period with $2.437 billion of cash, cash equivalents and restricted cash, compared with $1.558 billion at September 30, 2019.
- NEE reported total debt of approximately $47.8 billion, including current maturities, versus $39.7 billion at December 31, 2019. Estimated fair value was $52.5 billion.
- NEE reported total net available liquidity of approximately $14.4 billion, including cash and unused credit facilities at FPL, Gulf Power and NEECH.
- NEE's total assets increased to $126.4 billion from $117.7 billion at December 31, 2019; total equity was $42.1 billion.
- NEE paid $2.057 billion of common dividends during the first nine months. Quarterly dividends were $1.40 per share before the four-for-one stock split.
Material changes versus the prior comparable period
- NEE's Q3 earnings increase was driven primarily by higher FPL and Gulf Power earnings and favorable Corporate and Other results, partly offset by lower NEER earnings.
- FPL earnings increased due primarily to continued investment in plant and a larger retail rate base. Average retail customer usage increased 1.3% and average customer accounts increased 1.6% in Q3.
- FPL revenues declined because of lower fuel revenues and lower storm-related revenues, but lower fuel and purchased-power costs more than offset the revenue decline.
- NEER earnings declined by $5 million in Q3 and $199 million for the nine-month period. The principal negative factor was unfavorable non-qualifying hedge activity. New investments and higher earnings from certain existing assets partly offset the decline.
- NEE recognized a $270 million pretax and after-tax gain from selling two Spanish solar facilities in February 2020. The 2019 comparison included a $341 million gain from selling interests in wind and solar facilities to NextEra Energy Partners.
- NEE's interest expense declined substantially in Q3, while equity in earnings of equity-method investees improved to $249 million from a $90 million loss, primarily reflecting favorable derivative valuation effects at NEP.
- NEE issued $2.5 billion of equity units in February and $2.0 billion in September 2020. The September issuance has a 6.219% distribution rate and requires future purchases of NEE common stock under the purchase contracts.
- On October 15, 2020, FERC approved the merger of Gulf Power into FPL, effective January 1, 2021, subject to the disclosed operating and regulatory arrangements.
Guidance, outlook, commentary and risks
- The filing does not provide a clear numerical earnings guidance update in the supplied text. Management states that liquidity needs are expected to be funded through operating cash flow, debt and equity financing, project-level financing, asset sales and proceeds from differential membership interests.
- Approved capital expenditures for the remainder of 2020 through 2024 totaled approximately $28.775 billion for FPL, $3.125 billion for Gulf Power and $8.265 billion for NEER. Actual spending may vary materially.
- NEE entered into agreements to acquire GridLiance for approximately $660 million, including assumed debt of approximately $160 million. The transaction is expected to close in 2021 and remains subject to regulatory approvals and other conditions.
- Hurricane Sally affected Gulf Power's service area in September 2020. Estimated recoverable restoration costs were approximately $200 million, subject to subsequent FPSC prudence review.
- Management reported no material COVID-19 impact on operations, financial performance, liquidity or supply chains through the filing date, but warned that the pandemic's ultimate severity and duration remain uncertain.
- Key risks include extensive regulation and cost-recovery risk, changes to renewable-energy incentives, commodity and derivative volatility, counterparty and collateral requirements, interest-rate and equity-market exposure, nuclear operations and insurance risk, severe weather, cyberattacks, environmental and litigation exposure, project execution, credit-market access and COVID-19 effects.
- Derivative credit provisions could require substantial collateral if credit ratings or other contractual conditions deteriorate. The filing estimates potential additional collateral requirements of up to approximately $1.1 billion under certain below-investment-grade scenarios, plus other possible amounts under financial-covenant triggers.
- NEE had approximately $4.2 billion of guarantees related to purchased-power agreements, nuclear activities, production tax credits and other contractual obligations, plus approximately $1.5 billion of standby letters of credit and $650 million of surety bonds.
Most important facts for an investor to verify
- Reconcile GAAP earnings with management's adjusted earnings, particularly the impact of non-qualifying hedges, derivative mark-to-market changes, NEP investment gains and the Spain asset-sale gain.
- Review NEE's increased debt balance, upcoming maturities, equity-unit settlement obligations and the announced redemption of $950 million of NEECH junior subordinated debentures on October 24, 2020.
- Assess whether the $14.4 billion liquidity balance remains adequate relative to capital spending, debt maturities, guarantees and possible derivative collateral calls.
- Evaluate FPL's rate-base growth, 11.60% regulatory ROE, reserve amortization reversals and the regulatory treatment of fuel, storm and other cost-recovery items.
- Monitor Hurricane Sally restoration costs and the outcome of the FPSC prudence review, as well as the January 2021 Gulf Power-FPL merger implementation.
- Verify the status, cost and regulatory approvals for GridLiance and the company's large renewable, transmission, storage and pipeline construction program.
- Consider the sensitivity of decommissioning-fund investments and earnings to market movements; a hypothetical 10% decline in equity prices would reduce fair value by approximately $381 million for NEE.