Business Context and Reporting Period
NextEra Energy, Inc. (NEE) and its regulated subsidiary, Florida Power & Light Company (FPL), filed a combined unaudited Form 10-Q for the quarter ended March 31, 2018. NEE operates primarily through FPL, a Florida electric utility serving nearly five million customer accounts, and NextEra Energy Resources (NEER), a competitive renewable generation, power, gas infrastructure and energy-marketing business.
NEP was deconsolidated from NEE effective January 1, 2018 following governance changes. NEE continues to operate NEP projects and accounts for its retained interests under the equity method.
Financial Performance and Key Metrics
| Metric | NEE Q1 2018 | NEE Q1 2017 | Change |
|---|---|---|---|
| Operating revenues | $3.863 billion | $3.972 billion | Down $109 million |
| Operating income | $1.047 billion | $2.362 billion | Down $1.315 billion |
| Net income attributable to NEE | $4.428 billion | $1.583 billion | Up $2.845 billion |
| Diluted EPS | $9.32 | $3.37 | Up $5.95 |
| Operating cash flow | $1.290 billion | $1.258 billion | Up $32 million |
| Capital expenditures and investments | $3.588 billion | $5.179 billion | Down $1.591 billion |
NEE's operating margin was approximately 27.1%, compared with 59.5% in the prior-year quarter, primarily because Q1 2017 included a large fiber-optic business disposal gain and Q1 2018 included substantially higher depreciation and amortization. Net income and EPS were dominated by the approximately $3.9 billion pretax gain, or approximately $3.0 billion after tax, from NEP deconsolidation.
| FPL metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Operating revenues | $2.620 billion | $2.527 billion | Up $93 million |
| Operating income | $708 million | $811 million | Down $103 million |
| Net income | $484 million | $445 million | Up $39 million |
| Operating cash flow | $588 million | $769 million | Down $181 million |
| Capital expenditures | $1.166 billion | $1.687 billion | Down $521 million |
FPL's operating margin was approximately 27.0%, compared with 32.1%. FPL's net margin was approximately 18.5%, compared with 17.6%. FPL's earnings benefited from higher retail base revenues and lower income taxes, partly offset by higher depreciation and amortization.
- NEE effective income tax rate: approximately 25%, versus 30% in Q1 2017.
- FPL regulatory return on retail rate base: approximately 11.17%, versus 11.50%.
- NEE total assets: $94.284 billion at March 31, 2018, versus $97.827 billion at December 31, 2017.
- NEE long-term debt, including current maturities: $29.226 billion; estimated fair value was $30.828 billion.
- FPL long-term debt, including current maturities: $11.895 billion; estimated fair value was $13.077 billion.
- NEE cash, cash equivalents and restricted cash: $908 million at March 31, 2018, compared with $1.983 billion at December 31, 2017.
- NEE net available liquidity: approximately $6.7 billion, including $5.319 billion at NEECH and $1.405 billion at FPL.
- NEE common dividends paid: $523 million, or $1.11 per share; Q1 2017 dividends were $460 million, or $0.9825 per share.
Material Changes Versus the Prior Comparable Period
- NEER's net income increased substantially, primarily due to the NEP deconsolidation gain of approximately $3.9 billion pretax and $467 million of favorable tax-reform-related impacts.
- The NEP deconsolidation removed approximately $7.8 billion of assets, $4.8 billion of liabilities and $2.7 billion of noncontrolling interests from NEE's balance sheet, while creating an approximately $4.4 billion equity-method investment.
- Corporate and Other earnings declined primarily because Q1 2017 included an approximately $685 million after-tax gain on the sale of the fiber-optic telecommunications business.
- FPL retail base revenues increased approximately $110 million, including approximately $60 million from new rates under the 2016 rate agreement. Average usage per retail customer increased 1.8% and average customer accounts increased 1.1%; warmer-than-normal weather also contributed.
- FPL recorded no reserve amortization in Q1 2018, compared with approximately $211 million in Q1 2017. The absence of reserve amortization contributed to higher depreciation and amortization expense.
- NEE adopted new revenue, financial instruments, retirement-benefit presentation and partial-sale accounting standards. The new revenue standard had no material current-quarter impact; adoption adjustments affected retained earnings, accumulated other comprehensive income and noncontrolling interests.
- NEE issued $1.804 billion of long-term debt and retired $942 million. FPL issued $1.0 billion of 3.95% first mortgage bonds due 2048; NEECH issued $800 million of variable-rate debentures due 2019.
Cash Flow, Outlook, Risks and Unusual Items
NEE generated $1.290 billion of operating cash flow but used $3.667 billion in investing activities, including $3.466 billion for FPL capital expenditures, NEER investments and nuclear fuel. Financing activities provided $1.311 billion. Cash, cash equivalents and restricted cash declined by $1.075 billion during the quarter.
Management expects funding needs to be met through operating cash flow, short- and long-term borrowings, debt and, when appropriate, equity or differential-membership financing. Approved capital expenditure estimates for the remainder of 2018 through 2022 total approximately $21.380 billion for FPL, $6.150 billion for NEER and $105 million for Corporate and Other. These estimates remain subject to revision.
- FPL's capital plan emphasizes transmission and distribution, generation, nuclear fuel and other system investments. The plan excludes approximately $800 million for the proposed modernization of two Lauderdale generating units, which was pending regulatory approval.
- NEER's plan includes approximately 4,050 MW of new or repowered wind projects, approximately 100 MW of solar projects and natural-gas-pipeline investments.
- FPL paid approximately $90 million in connection with the January 2018 shutdown of the St. Johns River Power Park and reclassified approximately $191 million of related net book value to a regulatory asset.
- NEE had approximately $4.0 billion of guarantees related to purchased-power agreements, nuclear activities, production tax credit obligations and other contractual commitments, plus approximately $702 million of project-related guarantees.
- NEE's derivative positions expose it to commodity, interest-rate, foreign-currency, liquidity and counterparty risks. A downgrade below investment grade could require approximately $1.1 billion of additional collateral, before other contractual triggers.
- At March 31, 2018, approximately 94% of NEE's and 99% of FPL's energy-marketing and trading counterparty exposure was associated with investment-grade counterparties.
- Principal risks include extensive regulatory oversight, cost-recovery and prudence challenges, construction and permitting risk, weather and storm exposure, nuclear operating and insurance risk, commodity-price volatility, cyber and information-technology risk, credit-market access and changes in tax or renewable-energy policy.
- Management reported no material changes to the risk factors in the 2017 Form 10-K and concluded that disclosure controls and procedures were effective.
Most Important Facts for Investors to Verify
- Separate recurring earnings from the approximately $3.0 billion after-tax NEP deconsolidation gain and other tax-reform-related benefits.
- Review NEER's post-deconsolidation earnings profile, retained NEP ownership, equity-method accounting and related guarantees of approximately $690 million.
- Assess FPL's rate-case framework, regulatory ROE, treatment of tax-reform benefits, storm costs and the absence of reserve amortization.
- Reconcile the sizable capital program with operating cash flow, debt maturities, commercial paper balances and available liquidity.
- Monitor derivative collateral requirements, counterparty exposure and sensitivity to commodity, interest-rate and equity-price movements.
- Evaluate execution, permitting and regulatory approval for the planned wind, solar, pipeline, transmission and generation projects.
- Confirm the final accounting for tax reform and the effects of newly adopted accounting standards on future earnings volatility.