NextEra Energy, Inc. Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. The combined filing covers NextEra Energy, Inc. (NEE) and its principal subsidiary, Florida Power & Light Company (FPL). Financial statements are unaudited. NEE's principal businesses are FPL, a regulated Florida electric utility, and NextEra Energy Resources (NEER), a competitive energy, renewable generation and gas infrastructure business.
Key Financial Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| NEE operating revenues | $4.418 billion | $4.808 billion | $12.351 billion | $13.185 billion |
| NEE operating income | $970 million | $1.351 billion | $3.179 billion | $4.989 billion |
| Net income attributable to NEE | $1.007 billion | $847 million | $6.229 billion | $3.223 billion |
| Diluted EPS | $2.10 | $1.79 | $13.03 | $6.83 |
| Operating margin | 22.0% | 28.1% | 25.7% | 37.8% |
| Net margin attributable to NEE | 22.8% | 17.6% | 50.4% | 24.4% |
| Operating cash flow | Not separately provided | Not separately provided | $5.225 billion | $5.329 billion |
| Capital expenditures and investments | Not separately provided | Not separately provided | $9.257 billion | $8.587 billion |
The nine-month earnings comparison is heavily affected by the approximately $3.9 billion pretax gain, or approximately $3.0 billion after tax, from the deconsolidation of NEP.
FPL Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Operating revenues | $3.399 billion | $3.477 billion | $8.927 billion | $9.095 billion |
| Operating income | $917 million | $1.022 billion | $2.546 billion | $2.773 billion |
| Net income | $654 million | $566 million | $1.764 billion | $1.537 billion |
| Operating margin | 27.0% | 29.4% | 28.5% | 30.5% |
Balance Sheet, Debt and Liquidity
- NEE total assets were $98.603 billion at September 30, 2018, compared with $97.827 billion at December 31, 2017.
- NEE cash and cash equivalents were $497 million; cash, cash equivalents and restricted cash totaled $721 million at quarter-end.
- NEE long-term debt, including current maturities, was approximately $29.7 billion. FPL's comparable amount was approximately $11.7 billion.
- NEE total equity increased to $37.338 billion from $29.498 billion, primarily reflecting earnings, accounting changes and the effects of NEP deconsolidation.
- Total net available liquidity was approximately $8.4 billion, including $4.8 billion at FPL and $3.6 billion at NEECH after outstanding commercial paper and other short-term borrowings.
- NEE paid $1.570 billion of common-stock dividends during the first nine months and reported dividends per share of $3.33, compared with $2.9475 in the prior-year period.
Material Changes Versus the Prior Comparable Period
- NEP deconsolidation: NEP was deconsolidated effective January 1, 2018 following governance changes. NEE now accounts for its interest through the equity method. The change removed approximately $7.8 billion of assets, $4.8 billion of liabilities and $2.7 billion of noncontrolling interests, and produced the $3.9 billion pretax gain.
- Segment performance: FPL net income increased $88 million in Q3 and $227 million for nine months. NEER net income declined $78 million in Q3 but increased approximately $3.3 billion for nine months, primarily because of NEP-related gains and tax reform effects.
- Revenue and operating income: NEE revenue declined 8% in Q3 and 6% for nine months. Operating income declined 28% and 36%, respectively, reflecting NEP deconsolidation, derivative losses and other changes in the business mix.
- Tax rates: NEE's effective tax rate declined to approximately 12% in Q3 from 30% and to 23% for nine months from 29%, primarily due to the federal corporate tax-rate reduction, tax credits and other tax reform effects.
- Capital investment: Nine-month capital expenditures and investments increased to $9.257 billion from $8.587 billion. FPL invested $3.597 billion, while NEER invested $4.938 billion, principally in wind, solar, nuclear and gas infrastructure.
- Accounting changes: NEE adopted new revenue, financial-instrument and partial-sale accounting standards. The revenue standard reduced retained earnings by approximately $25 million; the financial-instrument standard reclassified approximately $312 million of after-tax unrealized equity gains from AOCI to retained earnings.
Outlook, Transactions and Unusual Items
- NEE agreed to acquire Gulf Power, Florida City Gas and interests in two Florida natural-gas generation facilities for approximately $6.475 billion, including assumed Gulf Power debt. FCG was acquired in July 2018 for approximately $530 million. Gulf Power and the generation interests remained subject to regulatory approvals, with closing expected in the first half of 2019.
- NEER agreed to sell interests in ten wind facilities and one solar facility totaling approximately 1,388 MW to NEP for approximately $1.3 billion in cash, subject to adjustments, plus NEP's assumption of approximately $930 million of existing noncontrolling interests. Closing was expected in the fourth quarter of 2018.
- Approved capital expenditures for the remainder of 2018 through 2022 totaled approximately $19.150 billion for FPL, $7.140 billion for NEER and $75 million for Corporate and Other. Management stated that estimates remain subject to review and may vary materially.
- FPL reported an 11.60% regulatory ROE on its retail rate base at September 30, 2018, compared with 11.50% in the prior-year comparable period. Results benefited from continued rate-base investment and the 2016 rate agreement.
- FPL reversed approximately $301 million of reserve amortization in both the third quarter and first nine months of 2018 to support its targeted regulatory ROE. FPL also issued a $28 million customer refund related to Hurricane Matthew costs.
- FPL's Hurricane Irma restoration costs and the effects of federal tax reform were scheduled for Florida Public Service Commission hearings in February 2019.
- NEER's Q3 results were reduced by higher losses from non-qualifying commodity hedges. NEE reported approximately $71 million of total derivative-related losses in Q3, compared with a $53 million gain in the prior-year quarter.
- NEE expects to cease operations at its 70% interest in the Duane Arnold nuclear facility after the amended power purchase agreement expires on December 31, 2020, subject to Iowa regulatory approval.
Risks and Contingencies
- The filing reports no material changes to the risk factors in the 2017 Form 10-K. Principal risks include extensive utility regulation, cost-recovery or prudence challenges, environmental and nuclear obligations, severe weather, cyber and operational disruptions, commodity-price volatility, counterparty defaults and access to capital markets.
- NEE had approximately $4.1 billion of guarantees related to purchased power agreements, nuclear activities, production tax credits and other contractual obligations, plus approximately $684 million of guarantees supporting project and cash-management requirements.
- Derivative contracts with credit-related triggers could require collateral postings of approximately $165 million after a specified downgrade to BBB/Baa2, up to approximately $1.2 billion if below investment grade, and up to approximately $280 million for other contractual triggers.
- NEE's derivative portfolio had net assets of approximately $833 million at September 30, 2018, consisting of $1.838 billion of derivative assets and $1.005 billion of derivative liabilities. Certain valuations rely on significant unobservable inputs.
- Nuclear insurance and statutory programs expose NEE and FPL to potential retrospective assessments, while substantial transmission, distribution and pipeline assets are not covered by property insurance.
- NEE estimated that a hypothetical 10% decline in equity prices would reduce the fair value of relevant nuclear decommissioning investments by approximately $328 million, and a hypothetical 10% decrease in interest rates would increase NEE's net fair-value liabilities by approximately $1.629 billion.
Facts Investors Should Verify
- Separate recurring earnings from the one-time NEP deconsolidation gain, tax reform adjustments and derivative mark-to-market effects.
- Track the regulatory approvals, financing and closing status of the Gulf Power and related generation acquisitions.
- Assess whether the projected $26.365 billion of FPL and NEER capital expenditures through 2022 can be funded while maintaining targeted credit ratings and dividend growth.
- Monitor FPL proceedings concerning Hurricane Irma cost recovery, tax reform benefits and the treatment of reserve amortization.
- Review the effect of NEP asset sales, reduced NEP ownership and related guarantees on future cash flow, earnings and leverage.
- Evaluate exposure to commodity prices, interest rates, equity markets, nuclear events, severe weather and derivative collateral requirements.