Business Context and Reporting Period
Combined unaudited Form 10-Q for NextEra Energy, Inc. (NEE) and its wholly owned regulated utility subsidiary, Florida Power & Light Company (FPL), covering the three and nine months ended September 30, 2015. NEE’s principal businesses are FPL and NextEra Energy Resources (NEER), a competitive generation, renewable energy and energy infrastructure business. FPL served approximately 4.8 million customer accounts in Florida.
Key Financial Metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Operating revenue | $4,954 million | $4,654 million | $13,417 million | $12,357 million |
| Operating income | $1,481 million | $1,163 million | $3,757 million | $2,853 million |
| Net income attributable to NEE | $879 million | $660 million | $2,245 million | $1,581 million |
| Diluted EPS | $1.93 | $1.50 | $4.97 | $3.60 |
| Dividends per share | $0.770 | $0.725 | $2.31 | $2.175 |
| Operating margin | 29.9% | 25.0% | 28.0% | 23.1% |
| Net margin attributable to NEE | 17.7% | 14.2% | 16.7% | 12.8% |
NEE generated $4,513 million of operating cash flow during the first nine months, compared with $3,968 million in the prior-year period. Investing cash outflow was $5,477 million, principally reflecting $5,676 million of capital expenditures, independent power investments and nuclear fuel purchases. Financing activities provided $1,568 million, resulting in a $604 million increase in cash to $1,181 million at September 30, 2015.
- NEE total assets were $79.96 billion, compared with $74.93 billion at December 31, 2014.
- NEE long-term debt, including current maturities, was approximately $28.10 billion; total capitalization was $48.43 billion.
- NEE reported total net available liquidity of approximately $7.1 billion, including approximately $3.0 billion for FPL.
- FPL generated $2,668 million of operating cash flow and used $2,754 million in investing activities during the first nine months. FPL ended the period with $30 million of cash and approximately $3.0 billion of net available liquidity.
- FPL net income was $489 million for the quarter and $1,283 million for the nine-month period, compared with $462 million and $1,231 million, respectively, in the prior-year periods.
Material Changes Versus the Prior Comparable Period
- NEE net income attributable to NEE increased $219 million, or approximately 33%, in the third quarter and $664 million, or approximately 42%, for the first nine months.
- NEER net income increased $171 million in the quarter and $556 million year to date. The principal contributors were favorable mark-to-market results on non-qualifying hedges, improved customer supply and proprietary trading results, earnings from new renewable investments, and the absence of certain 2014 NEP-related charges.
- NEER’s nine-month results were partly reduced by weaker wind resources, lower existing-asset performance and lower gas infrastructure results. Management also noted higher interest and general and administrative costs associated with business growth.
- FPL earnings increased primarily from growth in plant in service and higher AFUDC-equity. Average retail rate base increased approximately $0.7 billion in the quarter and $0.9 billion for the nine-month period versus the prior-year periods.
- FPL experienced higher average usage per retail customer of 1.2% in the quarter and 2.4% year to date, with average customer accounts increasing 1.4% in both periods. Favorable weather contributed to higher retail revenues.
- NEE operating revenue benefited materially from derivative valuation changes. Unrealized mark-to-market gains from non-qualifying hedges were $158 million after tax in the quarter and $210 million after tax year to date, compared with after-tax losses of $10 million and $283 million, respectively, in the prior-year periods.
- NEE recorded $20 million of merger-related operating expenses in the first nine months, including $7 million in the third quarter. Management’s adjusted earnings measure excludes these costs and other specified nonrecurring or volatile items.
Guidance, Outlook, Commentary and Unusual Items
- For 2015 through 2018, FPL expected capital investment of approximately $13.9 billion to $15.8 billion. NEER expected investment of approximately $13.7 billion to $15.1 billion, primarily in wind, solar, natural gas infrastructure, nuclear fuel and maintenance, excluding the NEP pipeline acquisition. Corporate and Other expected investment of approximately $2.9 billion to $3.1 billion.
- FPL filed for approval to construct an approximately 1,600 MW natural gas-fired combined-cycle unit in Okeechobee County, Florida, targeted for service in June 2019. FPSC and Siting Board approvals remained pending.
- FPL assumed ownership of a 250 MW coal-fired facility and terminated its related purchased power agreement for approximately $521 million. The transaction produced regulatory assets of approximately $840 million at September 30, 2015, recoverable over approximately ten years under an FPSC-approved settlement. An appeal of the settlement was filed in October 2015.
- NEP completed the acquisition of NET Midstream on October 1, 2015. The transaction was approximately $2.0 billion, including $934 million of cash consideration and $654 million of assumed debt, with potential holdbacks and expansion spending that could bring the total transaction size to approximately $2.1 billion.
- NEE issued $700 million of equity units in September 2015 and issued common stock for $1.25 billion during the first nine months, while paying $1.03 billion of common dividends.
- NEER’s Spain solar projects remained subject to project-level defaults, liquidation proceedings and potential debt restructuring. Project-level debt and related interest-rate swap liabilities classified as current totaled approximately $588 million and $115 million, respectively, at September 30, 2015. Management stated that lender recourse was effectively limited under a settlement agreement, but restructuring was not assured.
- Key risks include extensive utility regulation, cost recovery and prudence challenges, environmental and greenhouse-gas requirements, commodity and derivative volatility, counterparty and collateral exposure, nuclear operations, construction execution, credit-market access, interest rates, weather, cybersecurity and litigation.
- NEE disclosed approximately $11.7 billion of guarantees and indemnifications, $839 million of standby letters of credit and $282 million of surety bonds. Management considered payments under these arrangements unlikely and recorded no significant related liabilities.
Most Important Facts for Investors to Verify
- Determine how much of the earnings increase is attributable to recurring operating performance versus volatile unrealized derivative gains and tax credits.
- Review NEER’s wind-resource performance, PTC roll-off, gas infrastructure exposure and the sustainability of improved trading results.
- Monitor FPL’s regulatory proceedings, including the natural gas reserve program, the 250 MW coal facility settlement and the proposed Okeechobee generation unit.
- Reconcile planned capital expenditures and the NET Midstream acquisition with leverage, liquidity and future financing needs.
- Assess exposure from Spain solar project defaults and liquidation proceedings, including potential acceleration or foreclosure by lenders.
- Review derivative collateral requirements: a downgrade to below investment grade could require approximately $2.3 billion of additional collateral for NEE subsidiaries, including approximately $0.6 billion for FPL.
- Consider the pending legal, environmental and regulatory matters and the potential effect of changes in recovery mechanisms, emissions rules and nuclear obligations.