NEXTERA ENERGY INC quarterly report, Q3 FY2016

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, 2016. NEE’s principal businesses are FPL, a regulated Florida electric utility serving approximately 4.8 million customer accounts, and NextEra Energy Resources (NEER), a competitive generation and energy infrastructure business focused substantially on wind, solar, natural gas and pipelines.

FPL is wholly owned by NEE. The filing presents separate financial information for NEE and FPL; amounts below are in millions except per-share data.

Financial Results and Key Metrics

Metric	Q3 2016	Q3 2015	9M 2016	9M 2015
NEE operating revenues	$4,805	$4,954	$12,457	$13,417
NEE operating income	$1,279	$1,481	$3,682	$3,757
NEE net income attributable to NEE	$753	$879	$1,946	$2,245
NEE diluted EPS	$1.62	$1.93	$4.19	$4.97
FPL operating revenues	$3,283	$3,274	$8,337	$8,812
FPL operating income	$921	$855	$2,463	$2,303
FPL net income	$515	$489	$1,356	$1,283

NEE operating margins were approximately 26.6% in Q3 2016 versus 29.9% in Q3 2015, and 29.5% for the first nine months versus 28.0% in the prior-year period.
FPL operating margins were approximately 28.1% in Q3 2016 versus 26.1% in Q3 2015, and 29.5% for the first nine months versus 26.1% in the prior-year period.
NEE’s Q3 net income declined $126 million, or approximately 14%, while nine-month net income declined $299 million, or approximately 13%. FPL’s net income increased $26 million in Q3 and $73 million for the first nine months.
NEE paid dividends of $0.87 per share in Q3 and $2.61 per share for the first nine months, compared with $0.77 and $2.31, respectively, in the prior-year periods.

Cash Flow, Capital Spending and Liquidity

NEE generated $5,294 of operating cash flow in the first nine months, up from $4,513; FPL generated $3,790, up from $2,668.
NEE used $6,983 in investing cash flow, including $7,929 of capital expenditures, independent power and other investments, and nuclear fuel purchases. FPL capital expenditures were $3,097 and NEER investments were $4,683.
NEE ended the period with $681 of cash, compared with $571 at December 31, 2015. FPL ended with $46, compared with $23.
NEE total long-term debt, including current maturities, was approximately $30,555 at September 30, 2016, versus $28,897 at December 31, 2015. FPL’s comparable debt was $9,913 versus $10,020.
NEE reported approximately $9.1 billion of net available liquidity, including approximately $2.9 billion attributable to FPL. NEECH and FPL had approximately $7.85 billion of bank revolving facilities before issued letters of credit and other adjustments.

Material Changes Versus the Prior Comparable Period

FPL improved: Higher earnings were driven primarily by continued investment in plant and transmission and distribution assets and a larger retail rate base. The modernized Port Everglades plant entered service on April 1, 2016. FPL’s average retail rate base increased by approximately $2.8 billion in Q3 and $2.3 billion for the nine months.
Lower NEE and NEER earnings: NEER earnings fell $72 million in Q3 and $171 million for the nine months. New investments contributed $126 million and $281 million, respectively, but this was more than offset by unfavorable changes in non-qualifying hedge activity, lower gas infrastructure and existing-asset results, and higher interest and general and administrative expenses.
Derivative volatility: NEE discontinued hedge accounting for remaining interest-rate and foreign-currency derivatives in January 2016. This contributed approximately $355 million of unfavorable interest-rate derivative fair-value changes to nine-month interest expense and increased earnings volatility.
Revenue mix: NEE revenue declined primarily from lower fuel-related and commodity revenues and weaker NEER mark-to-market results. FPL’s lower fuel-cost recovery revenue was largely offset by higher retail base revenue and customer growth.
Capital intensity increased: NEE capital investments rose to $7,929 from $5,676, led by higher wind, solar and natural gas pipeline investment.

Guidance, Outlook, Commentary and Unusual Items

FPL rate settlement: FPL and intervenors filed a proposed settlement in October 2016, subject to Florida Public Service Commission approval. It contemplated annualized retail base-revenue increases of $400 million beginning January 2017, $211 million beginning January 2018 and $200 million when the approximately 1,600 MW Okeechobee plant enters service, expected in mid-2019. It also contemplated a 10.55% allowed regulatory ROE with a 9.60% to 11.60% range.
Storm recovery: FPL estimated Hurricane Hermine and Hurricane Matthew restoration costs at approximately $350 million, compared with approximately $112 million of remaining storm-reserve capacity before the storms. FPL intended to seek interim recovery of excess costs and reserve replenishment through FPSC-approved surcharges.
Renewables and infrastructure: NEER placed approximately 100 MW of wind and 650 MW of solar generation into service during the nine months and expected approximately 1,500 MW of new contracted wind and 1,000 MW of new contracted solar generation during 2016.
Proposed Oncor transactions: NEE agreed to transactions that, if approved, were expected to result in ownership of 100% of Oncor. The EFH-related transaction consideration was approximately $9.796 billion, the Texas Transmission Holdings transaction was approximately $2.410 billion, and an additional 0.22% Oncor interest was subject to a purchase price of approximately $27 million. Closing remained subject to bankruptcy, PUCT and FERC approvals.
Other transactions: NEE expected to sell FPL FiberNet for approximately $1.5 billion, subject to regulatory approvals, and use part of the proceeds to retire approximately $370 million of FiberNet debt. The filing also disclosed the sale of Texas natural gas generation facilities, which produced a $106 million after-tax gain.
Merger termination: NEE terminated the proposed Hawaiian Electric merger after the Hawaii Public Utilities Commission dismissed the application. NEE recorded $123 million of merger-related expense, including a $90 million termination fee and $5 million of reimbursed expenses.
Spain solar restructuring: Project-level debt was restructured, extending maturities from 2030 to 2037 and reducing interest rates. Approximately $537 million of restructured debt and $155 million of related derivative liabilities were classified as noncurrent at September 30, 2016.
Accounting and tax items: NEE early adopted a share-based compensation accounting update, recording an $18 million opening retained-earnings increase and approximately $27 million of nine-month excess tax benefits. The nine-month period also included approximately $30 million of Canadian tax restructuring benefits and a $58 million tax charge related to the Texas generation-facility sale.
Credit ratings: Fitch downgraded NEECH’s commercial-paper rating from F1 to F2 effective October 21, 2016; other stated NEE and FPL ratings were unchanged.

Risks and Contingencies

Results remain exposed to extensive utility regulation, rate recovery decisions, political and legislative changes, environmental requirements, tax law, litigation and the ability to obtain timely recovery of costs and earn authorized returns.
NEER is exposed to volatile power, natural gas, oil and renewable-energy prices, derivative fair-value changes, counterparty credit risk, trading-liquidity constraints and potential impairments of gas infrastructure assets.
Construction, permitting, project financing and completion risks affect substantial planned investments. Approved or internally authorized capital expenditures for the remainder of 2016 through 2020 totaled approximately $15.010 billion for FPL, $5.590 billion for NEER and $870 million for Corporate and Other.
NEE subsidiaries had approximately $2.2 billion of development and construction-related guarantees and approximately $6.0 billion of other guarantees and indemnifications. Derivative credit triggers could require approximately $2.2 billion of collateral if specified entities were downgraded below investment grade, plus potentially up to approximately $530 million under other financial or cross-default provisions.
Nuclear operations carry risks involving safety, licensing, outages, decommissioning funds, insurance and potential retrospective assessments. Severe weather, hurricanes, cyber incidents, terrorism and uninsured property losses also remain material risks.
The filing states that no material changes occurred in the risk factors from the 2015 Form 10-K. Management concluded that disclosure controls were effective and that there were no material changes in internal control over financial reporting.

Facts Investors Should Verify

Whether the proposed FPL 2016 rate agreement received FPSC approval and the final authorized ROE, revenue increases and storm-recovery provisions.
The final cost and regulatory recovery of Hurricanes Hermine and Matthew restoration work.
Closing status, financing, regulatory approvals and leverage implications of the proposed Oncor-related transactions.
The effect of discontinued hedge accounting and future interest-rate, foreign-currency and commodity derivative movements on reported and adjusted earnings.
NEER’s gas infrastructure valuations and exposure to sustained low commodity prices.
Progress and economics of FPL’s Okeechobee plant, solar projects, transmission investments and Indiantown coal-facility acquisition.
Changes in NEECH and FPL credit ratings, available liquidity, collateral requirements and upcoming debt maturities.
The final proceeds, debt retirement and regulatory approvals for the proposed FPL FiberNet sale.