NextEra Energy, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2019. The combined filing covers NextEra Energy, Inc. (NEE) and its wholly owned regulated utility, Florida Power & Light Company (FPL). Results are unaudited; 2018 amounts were retrospectively adjusted for lease accounting.
Business Context
- NEE operates primarily through FPL, a rate-regulated Florida electric utility, and NextEra Energy Resources (NEER), a competitive renewable energy, generation, gas infrastructure and energy-marketing business.
- NEE acquired Gulf Power on January 1, 2019. Gulf Power serves more than 460,000 customers and contributed $45 million of NEE-attributable net income in the second quarter and $81 million for the six months.
- FPL serves more than five million customer accounts in Florida. NEE reported 479 million common shares outstanding at June 30, 2019.
Financial Performance and Metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| NEE operating revenues | $4.970 billion | $4.063 billion | $9.044 billion | $7.920 billion |
| NEE operating income | $1.747 billion | $1.146 billion | $2.882 billion | $2.205 billion |
| NEE net income attributable to NEE | $1.234 billion | $781 million | $1.914 billion | $5.212 billion |
| NEE diluted EPS | $2.56 | $1.61 | $3.97 | $10.93 |
| FPL operating revenues | $3.158 billion | $2.908 billion | $5.776 billion | $5.528 billion |
| FPL net income | $663 million | $626 million | $1.251 billion | $1.110 billion |
- NEE Q2 operating revenue increased approximately 22%; operating income increased approximately 52%; and net income attributable to NEE increased approximately 58% year over year.
- NEE's Q2 operating margin was approximately 35.1%, compared with 28.2% in the prior-year quarter. Net income attributable to NEE represented approximately 24.8% of revenue, compared with 19.2% in Q2 2018.
- FPL Q2 operating income declined to $854 million from $921 million, producing an operating margin of approximately 27.0% versus 31.7%. FPL net income increased 6% year over year.
- NEE's effective income tax rate was approximately 9.8% in Q2 and 10.2% for the six months, compared with approximately 24.8% and 24.6%, respectively, in the comparable 2018 periods. The reduction primarily reflected amortization of deferred regulatory credits, lower state taxes and FPL tax-reform-related adjustments.
- FPL reported an 11.60% regulatory return on equity based on its trailing thirteen-month average retail rate base, compared with 11.48% in the prior-year period.
Cash Flow, Capital Spending, Debt and Liquidity
- NEE generated $3.281 billion of operating cash flow in the first six months, up from $2.936 billion. Investing cash flow was negative $8.891 billion, including $9.900 billion of capital expenditures, independent power investments and nuclear fuel purchases.
- NEE issued $7.554 billion of long-term debt and retired $1.876 billion during the six months. Dividends paid were $1.197 billion. Cash, cash equivalents and restricted cash declined by $3.550 billion to $1.703 billion.
- At June 30, NEE had $33.947 billion of long-term debt, $2.673 billion of current long-term debt, $4.382 billion of commercial paper and $715 million of other short-term debt. Total capitalization was $72.441 billion.
- NEE reported approximately $8.3 billion of net available liquidity, including cash and undrawn credit facilities, after outstanding commercial paper and other short-term borrowings.
- FPL generated $2.456 billion of operating cash flow and used $2.447 billion in investing activities during the first six months. FPL had $13.358 billion of long-term debt and $776 million of commercial paper at June 30.
Material Changes and Unusual Items
- The Gulf Power acquisition added approximately $5.4 billion of assets to NEE's segment disclosures and generated approximately $2.6 billion of goodwill. The purchase price included approximately $4.47 billion of cash consideration and assumed approximately $1.3 billion of debt.
- NEER sold interests in three wind and three solar facilities totaling approximately 611 MW to a NEP subsidiary for approximately $1.020 billion of cash proceeds plus working capital. NEE recognized a $351 million pretax gain, or approximately $266 million after tax.
- NEE's six-month 2018 results included a roughly $3.9 billion pretax gain, approximately $3.0 billion after tax, from the deconsolidation of NextEra Energy Partners. The absence of that gain is the principal reason six-month 2019 EPS and net income were substantially below 2018 levels.
- NEER six-month results were also affected by unfavorable non-qualifying hedge activity, lower wind resources, the absence of 2018 tax-related and NEP-related benefits, and higher interest expense. Q2 NEER results benefited from NEP investment gains and the renewable asset sale.
- FPL reversed approximately $222 million of reserve amortization in Q2 and $66 million for the six months to manage earnings toward its regulatory ROE target. The FPSC confirmed the treatment of tax-reform effects and Hurricane Irma cost recovery; the Florida Office of Public Counsel appealed the order in July 2019.
- On July 16, 2019, NEE acquired Trans Bay Cable for approximately $671 million in cash and assumed approximately $420 million of debt. NEECH subsequently borrowed $700 million under revolving facilities, primarily to finance the acquisition.
Outlook, Risks and Contingencies
- The filing does not provide a specific quantitative earnings guidance range in the supplied text.
- Approved capital expenditures for the remainder of 2019 through 2023 total approximately $39.1 billion across FPL, Gulf Power, NEER and Corporate and Other, including $27.245 billion for FPL, $3.675 billion for Gulf Power and $7.925 billion for NEER.
- Key risks include extensive utility regulation, recovery of costs and returns through rates, project construction and permitting, weather and storm damage, nuclear operations, commodity and derivative volatility, counterparty and collateral requirements, cyber and information-technology failures, environmental obligations, credit-market access and the integration of Gulf Power.
- At June 30, NEE subsidiaries had approximately $4.0 billion of guarantees for purchased-power, nuclear, production-tax-credit and other obligations, approximately $1.4 billion of standby letters of credit and approximately $360 million of surety bonds.
- Derivative contracts could require additional collateral of up to approximately $1.3 billion if specified subsidiaries were downgraded below investment grade, plus up to approximately $555 million under other financial or cross-default provisions.
- NEE remains exposed to nuclear insurance assessments, uninsured transmission and pipeline losses, changes in equity and interest-rate markets, and possible adverse regulatory or legal outcomes. Management reported no material changes to the risk factors in the 2018 Form 10-K.
Investor Verification Checklist
- Reconcile reported GAAP earnings with management's adjusted earnings, particularly the effects of non-qualifying hedges, NEP investment gains, asset-sale gains, tax reform, nuclear fund valuation changes and acquisition costs.
- Verify the financing, debt maturities, credit ratings and available liquidity following the Gulf Power and Trans Bay acquisitions.
- Monitor the FPSC appeal concerning FPL's tax-reform and Hurricane Irma regulatory treatment.
- Assess execution, funding and regulatory approval requirements for the approximately $39.1 billion of planned capital expenditures.
- Review derivative fair values, collateral triggers, counterparty exposure and the sensitivity of earnings and cash flow to commodity, interest-rate and equity-price movements.
- Evaluate the sustainability of FPL's reported regulatory ROE and the contribution and integration of Gulf Power.