NEXTERA ENERGY OVERVIEW
NEE's operating performance is driven primarily by the operations of its two principal businesses, FPL, which serves more than five million customer accounts inFlorida and is one of the largest electric utilities in theU.S. , and NEER, which together with affiliated entities is the world's largest generator of renewable energy from the wind and sun based on 2019 MWh produced on a net generation basis. The table below presents net income (loss) attributable to NEE and earnings (loss) per share attributable to NEE, assuming dilution, by reportable segment, FPL and NEER, as well asGulf Power , acquired inJanuary 2019 (see Note 8 -Gulf Power Company ) and Corporate and Other, which is primarily comprised of the operating results of other business activities, as well as other income and expense items, including interest expense, and eliminating entries. See Note 16 for additional segment information, including a discussion of a change in segment reporting. The following discussion should be read in conjunction with the Notes to Consolidated Financial Statements contained herein and all comparisons are with the corresponding items in the prior year. Certain 2018 and 2017 segment amounts have been retrospectively adjusted as discussed in Note 16. Net Income (Loss) Attributable Earnings (Loss) Per Share Attributable to NEE, to NEE Assuming Dilution Years Ended December 31, Years Ended December 31, 2019 2018 2017 2019 2018 2017 (millions) FPL$ 2,334 $ 2,171 $ 1,880 $ 4.81 $ 4.55 $ 3.98 Gulf Power(a) 180 - - 0.37 - - NEER(b)(c)(d) 1,807 4,704 2,997 3.72 9.82 6.34 Corporate and Other(d) (552 ) (237 ) 503 (1.14 ) (0.49 ) 1.07 NEE(c)$ 3,769 $ 6,638 $ 5,380 $ 7.76 $ 13.88 $ 11.39
______________________
(a)
(b) NEER's results reflect an allocation of interest expense from NEECH based on
a deemed capital structure of 70% debt and differential membership interests
sold by
(c) NEP was deconsolidated from NEER in
(d) NEER's and Corporate and Other's results for 2018 and 2017 were
retrospectively adjusted to reflect a segment change. See Note 16.
For the five years endedDecember 31, 2019 , NEE delivered a total shareholder return of approximately 161.5%, above the S&P 500's 73.9% return, the S&P 500 Utilities' 63.2% return and the Dow JonesU.S. Electricity's 63.0% return. The historical stock performance of NEE's common stock shown in the performance graph below is not necessarily indicative of future stock price performance. [[Image Removed: totalreturn2019.jpg]] 35
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Table of Contents Adjusted Earnings NEE prepares its financial statements under GAAP. However, management uses earnings adjusted for certain items (adjusted earnings), a non-GAAP financial measure, internally for financial planning, analysis of performance, reporting of results to the Board of Directors and as an input in determining performance-based compensation under NEE's employee incentive compensation plans. NEE also uses adjusted earnings when communicating its financial results and earnings outlook to analysts and investors. NEE's management believes that adjusted earnings provide a more meaningful representation of NEE's fundamental earnings power. Although these amounts are properly included in the determination of net income under GAAP, management believes that the amount and/or nature of such items make period to period comparisons of operations difficult and potentially confusing. Adjusted earnings do not represent a substitute for net income, as prepared under GAAP.
The following table provides details of the after-tax adjustments to net income considered in computing NEE's adjusted earnings discussed above.
Years Ended December 31,
2019 2018 2017
(millions)
Net losses associated with non-qualifying hedge
activity(a) $ (404 ) $ (186 ) $ (37 )
Tax reform-related, including the impact of tax
rate change on differential membership interests(b) $ (89 ) $ 436 $ 1,881
NEP investment gains, net(c) $ 96 $ 2,863 $ -
Change in unrealized gains (losses) on NEER's
nuclear decommissioning funds and OTTI, net(d) $ 176 $ (125 ) $ 2
Acquisition-related(e) $ (70 ) $ (14 ) $ (63 )
Operating results of solar projects in
(9 ) $ 5
Gain on sale of the fiber-optic telecommunications business - Corporate and Other(f)
$ - $ - $ 685
Duane Arnold impairment charge(g) $ - $ - $ (258 )
______________________
(a) For 2019, 2018 and 2017, approximately
gains, and
income; the balance is included in Corporate and Other. The change in
non-qualifying hedge activity is primarily attributable to changes in forward
power and natural gas prices, interest rates and foreign currency exchange
rates, as well as the reversal of previously recognized unrealized
mark-to-market gains or losses as the underlying transactions were realized.
In 2017, net losses associated with non-qualifying hedge activity were partly
offset by approximately
(b) For 2019, approximately
on differential membership interests relates to NEER. For 2018, approximately
tax rate change on differential membership interests, relates to NEER and the
balance relates to Corporate and Other. For 2017, approximately
million of net favorable tax reform impacts and
unfavorable tax reform impacts relate to NEER and FPL, respectively; the
balance relates to Corporate and Other. See Note 1 - Storm Fund , Storm
Reserve and Storm Cost Recovery and - Sales of Differential Membership
Interests and Note 6.
(c) For 2019 and 2018, approximately
respectively, relates to NEER; the 2018 balance relates to Corporate and
Other. See Note 1 - NextEra Energy Partners, LP and - Disposal of
Businesses/Assets.
(d) For 2019, 2018 and 2017, approximately
losses, and
income; the balance for 2018 is included in Corporate and Other.
(e) For 2019, approximately
included in Corporate and Other's,
respectively. For 2018,
Other's net income; the balance is included in NEER. For 2017, the costs
relate to Corporate and Other. See Note 1 - Acquisition-Related.
(f) See Note 1 - Disposal of Businesses/Assets for a discussion of the sale of
the fiber-optic telecommunications business.
(g) Approximately
income; the balance is included in Corporate and Other. See Note 5 -
Nonrecurring Fair Value Measurements.
NEE segregates into two categories unrealized mark-to-market gains and losses
and timing impacts related to derivative transactions. The first category,
referred to as non-qualifying hedges, represents certain energy derivative,
interest rate derivative and foreign currency transactions entered into as
economic hedges, which do not meet the requirements for hedge accounting, or for
which hedge accounting treatment is not elected or has been discontinued.
Changes in the fair value of those transactions are marked to market and
reported in the consolidated statements of income, resulting in earnings
volatility because the economic offset to certain of the positions are generally
not marked to market. As a consequence, NEE's net income reflects only the
movement in one part of economically-linked transactions. For example, a gain
(loss) in the non-qualifying hedge category for certain energy derivatives is
offset by decreases (increases) in the fair value of related physical asset
positions in the portfolio or contracts, which are not marked to market under
GAAP. For this reason, NEE's management views results expressed excluding the
impact of the non-qualifying hedges as a meaningful measure of current period
performance. The second category, referred to as trading activities, which is
included in adjusted earnings, represents the net unrealized effect of actively
traded positions entered into to take advantage of expected market price
movements and all other commodity hedging activities. At FPL, substantially all
changes in the fair value of energy derivative transactions are deferred as a
regulatory asset or liability until the contracts are settled, and, upon
settlement, any gains or losses are passed through the fuel clause. See Note 4.
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Table of Contents 2019 Summary Net income attributable to NEE for 2019 was lower than 2018 by$2,869 million , or$6.12 per share, assuming dilution, due to lower results at NEER and Corporate and Other, partly offset by higher results at FPL and the addition of results fromGulf Power .
FPL's increase in net income in 2019 was primarily driven by continued investments in plant in service and other property.
NEER's results decreased in 2019 primarily reflecting the absence of the 2018 NEP investment gains upon deconsolidation and the favorable adjustment to differential membership interests recognized in 2018 related to the decrease in federal corporate income tax rate effectiveJanuary 1, 2018 . These decreases were partly offset by 2019 net unrealized gains on equity securities held in NEER's nuclear decommissioning funds compared to net unrealized losses in 2018 and higher contributions from new investments. In 2019, NEER added approximately 1,125 MW of new wind generating capacity, 1,091 MW of wind repowering generating capacity and 512 MW of solar generating capacity in theU.S. and increased its backlog of contracted renewable development projects.
During 2019,
Corporate and Other's results in 2019 decreased primarily due to higher interest costs, unfavorable non-qualifying hedge activity, as well as acquisition and integration costs incurred in 2019. NEE and its subsidiaries require funds to support and grow their businesses. These funds are primarily provided by cash flows from operations, borrowings or issuances of short- and long-term debt, proceeds from differential membership investors, sales of assets to NEP or third parties and, from time to time, issuances of equity securities. See Liquidity and Capital Resources - Liquidity.
RESULTS OF OPERATIONS
Net income attributable to NEE for 2019 was$3.77 billion compared to$6.64 billion in 2018. In 2019, net income attributable to NEE declined primarily due to lower results at NEER and Corporate and Other, partly offset by higher results at FPL and the addition of results fromGulf Power . The comparison of the results of operations for the years endedDecember 31, 2018 and 2017 are included in Management's Discussion in NEE's and FPL's Annual Report on Form 10-K for the year endedDecember 31, 2018 . InJune 2019 , subsidiaries within the NEER segment sold ownership interests in three wind generation facilities and three solar generation facilities with a total net generating capacity of approximately 611 MW to a subsidiary of NEP. See Note 1 - Disposal of Businesses/Assets. InJuly 2019 , a wholly owned subsidiary of NEET acquired the outstanding membership interests of an entity that indirectly ownsTrans Bay , which owns and operates a 53-mile, high-voltage direct current underwater transmission cable system inCalifornia . See Note 8 -Trans Bay Cable, LLC . NEE's effective income tax rates for the years endedDecember 31, 2019 and 2018 were approximately 12% and 21%, respectively. The decrease in the rate primarily reflects the amortization of deferred regulatory credits, primarily at FPL, the impact of higher tax credits, an adjustment related to differential membership interests and lower pre-tax income. See Note 6.
FPL: Results of Operations
FPL obtains its operating revenues primarily from the sale of electricity to retail customers at rates established by the FPSC through base rates and cost recovery clause mechanisms. FPL's net income for 2019 and 2018 was$2,334 million and$2,171 million , respectively, representing an increase of$163 million . The increase was primarily driven by higher earnings from investments in plant in service and other property. Such investments grew FPL's average retail rate base by approximately$3.3 billion in 2019 and reflect, among other things, solar generation additions, ongoing transmission and distribution additions and investments in FPL's generation infrastructure, including the Okeechobee Clean Energy Center, which achieved commercial operation during the first quarter of 2019. InSeptember 2017 , Hurricane Irma passed throughFlorida causing damage throughout much of FPL's service territory. InDecember 2017 , following the enactment of tax reform, FPL used available reserve amortization to offset nearly all of the storm restoration costs that were expensed, and FPL is partially restoring the reserve amortization through tax savings generated during the term of the 2016 rate agreement. InSeptember 2019 , FPL's service territory was impacted by Hurricane Dorian. InDecember 2019 , FPL determined that it would not seek recovery of the costs incurred as a result of Hurricane Dorian through a storm surcharge from customers and instead recorded such costs as storm restoration costs in NEE's and FPL's consolidated statements of income. All of the Hurricane Dorian storm restoration costs were offset by utilization of available reserve amortization resulting from operational efficiencies generated at the business. See Note 1 -Storm Fund , Storm Reserve and Storm Cost Recovery. The use of reserve amortization is permitted by the 2016 rate agreement. See Item 1. Business - FPL - FPL Regulation - FPL Electric Rate Regulation - Base Rates for additional information on the 2016 rate agreement. In order to earn a targeted regulatory ROE, subject to limitations associated with the 2016 rate agreement, reserve amortization is calculated using a trailing thirteen-month average of retail rate base and capital structure in conjunction with the trailing twelve months regulatory retail base net 37
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Table of Contents operating income, which primarily includes the retail base portion of base and other revenues, net of O&M, depreciation and amortization, interest and tax expenses. In general, the net impact of these income statement line items must be adjusted, in part, by reserve amortization to earn the targeted regulatory ROE. In certain periods, reserve amortization is reversed so as not to exceed the targeted regulatory ROE. The drivers of FPL's net income not reflected in the reserve amortization calculation typically include wholesale and transmission service revenues and expenses, cost recovery clause revenues and expenses, AFUDC - equity and revenue and costs not recoverable from retail customers by the FPSC. In 2019 and 2018, FPL recorded the reversal of reserve amortization of approximately$357 million and$541 million , respectively. FPL's regulatory ROE for both 2019 and 2018 was approximately 11.60%. During 2019, FPL's operating revenues increased$330 million primarily related to higher retail base revenues of$323 million , higher revenues of$60 million as a result of the acquisition of the entity that operatesFlorida City Gas inJuly 2018 and other increases associated with various cost recovery clause revenues, partly offset by$78 million in lower storm-related revenues.
Retail Base
FPL's retail base revenues for 2019 and 2018 reflect the 2016 rate agreement. InDecember 2016 , the FPSC issued a final order approving the 2016 rate agreement which became effectiveJanuary 2017 and will remain in effect until at leastDecember 2020 , establishes FPL's allowed regulatory ROE at 10.55%, with a range of 9.60% to 11.60%, and allowed for retail rate base increases in 2017, 2018, and upon commencement of commercial operations at the Okeechobee Clean Energy Center and certain solar projects. See Item 1. Business - FPL - FPL Regulation - FPL Electric Rate Regulation - Base Rates for additional information on the 2016 rate agreement. The increase in retail base revenues in 2019 primarily reflects additional revenues of approximately$210 million related to retail base rate increases associated with the Okeechobee Clean Energy Center and the 2019 addition of new solar generation. In 2019, retail base revenues were also impacted by a decrease of 0.3% in the average usage per retail customer and an increase of 2.0% in the average number of customer accounts. Although the weather in 2019 was favorable when compared to 2018, usage per retail customer decreased slightly. See Note 1 - Rate Regulation. Cost Recovery Clauses Revenues from fuel and other cost recovery clauses and pass-through costs, such as franchise fees, revenue taxes and storm-related surcharges, are largely a pass-through of costs. Such revenues also include a return on investment allowed to be recovered through the cost recovery clauses on certain assets, primarily related to certain solar and environmental projects and the unamortized balance of the regulatory asset associated with FPL's acquisition of certain generation facilities. See Item 1. Business - FPL - FPL Regulation - FPL Electric Rate Regulation - Cost Recovery Clauses. Underrecovery or overrecovery of cost recovery clause and other pass-through costs (deferred clause and franchise expenses and revenues) can significantly affect NEE's and FPL's operating cash flows. The 2019 net overrecovery impacting NEE and FPL's operating cash flows was approximately$188 million . Storm-related revenues decreased in 2019 primarily as a result of the conclusion of the storm-recovery bond surcharge in the third quarter of 2019. See Note 9 - FPL.
In 2019 and 2018, cost recovery clauses contributed approximately
Other Items Impacting FPL's Consolidated Statements of Income
Storm Restoration Costs InDecember 2019 , FPL determined that it would not seek recovery of Hurricane Dorian storm restoration costs through a surcharge from customers and instead recorded such costs as storm restoration costs in NEE's and FPL's consolidated statements of income. See Note 1 -Storm Fund , Storm Reserve and Storm Cost Recovery. Depreciation and Amortization Expense The major components of FPL's depreciation and amortization expense are as follows: Years EndedDecember 31, 2019 2018 (millions)
Reserve reversal recorded under the 2016 rate agreement $ 357
1,876 1,739
Depreciation and amortization primarily recovered under cost recovery clauses and securitized storm-recovery cost amortization 291 353 Total$ 2,524 $ 2,633 38
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Table of Contents Depreciation expense decreased$109 million during 2019 primarily reflecting a lower reversal of reserve amortization in 2019 compared to 2018 and lower storm-recovery cost amortization primarily as a result of the final payment of the storm-recovery bonds in the third quarter 2019 (see Note 9 - FPL). Reserve amortization, or reversal of such amortization, reflects adjustments to accrued asset removal costs provided under the 2016 rate agreement in order to achieve the targeted regulatory ROE. Reserve amortization is recorded as a reduction to (or when reversed as an increase to) accrued asset removal costs which is reflected in noncurrent regulatory liabilities on the consolidated balance sheets. AtDecember 31, 2019 , approximately$893 million remains in accrued asset removal costs related to reserve amortization. The decreases in depreciation and amortization expense during 2019 were partly offset by increased depreciation related to higher plant in service balances.
NEER: Results of Operations
NEER owns, develops, constructs, manages and operates electric generation facilities in wholesale energy markets primarily in theU.S. , as well as inCanada . NEER also provides full energy and capacity requirements services, engages in power and gas marketing and trading activities, owns and operates rate-regulated transmission facilities and transmission lines and invests in natural gas, natural gas liquids and oil production and pipeline infrastructure assets. NEER's net income less net loss attributable to noncontrolling interests for 2019 and 2018 was$1,807 million and$4,704 million , respectively, resulting in a decrease in 2019 of$2,897 million . The primary drivers, on an after-tax basis, of the change are in the following table. Increase (Decrease) From Prior Period Year Ended December 31, 2019 (millions) New investments(a) $ 260 Existing assets(a) (17 ) Gas infrastructure(a) 61 Customer supply and proprietary power and gas trading(b) 24 NEET(b) 20 Asset sales/abandonment (83 ) Interest and other general and administrative expenses(c) (172 )
Other, including other investment income and income taxes
104
Change in non-qualifying hedge activity(d) (104 )
Change in unrealized gains/losses on equity securities held in nuclear decommissioning funds and OTTI, net(d)
303
Tax reform-related, including the impact of tax rate change on differential membership interests(d)
(510 )
NEP investment gains, net(d) (2,789 )
Operating results of the solar projects in Spain(d) 7
Acquisition-related(d) (1 )
Decrease in net income less net loss attributable to
noncontrolling interests $ (2,897 )
______________________(a) Reflects after-tax project contributions, including the net effect of
deferred income taxes and other benefits associated with PTCs and ITCs for
wind and solar projects, as applicable (see Note 1 - Income Taxes and - Sales
of Differential Membership Interests and Note 6), but excludes allocation of
interest expense or corporate general and administrative expenses. Results
from projects and pipelines are included in new investments during the first
twelve months of operation or ownership. Project results are included in
existing assets and pipeline results are included in gas infrastructure
beginning with the thirteenth month of operation or ownership.
(b) Excludes allocation of interest expense and corporate general and
administrative expenses.
(c) Includes differential membership interest costs. Excludes unrealized
mark-to-market gains and losses related to interest rate derivative
contracts, which are included in change in non-qualifying hedge activity.
(d) See Overview - Adjusted Earnings for additional information.
New Investments
In 2019, results from new investments increased primarily due to higher earnings, including the net effect of deferred income taxes and other benefits associated with PTCs and ITCs, related to the addition of wind and solar generating projects during or after 2018.
Other Factors
Supplemental to the primary drivers of the changes in NEER's net income less net loss attributable to noncontrolling interests discussed above, the discussion below describes changes in certain line items set forth in NEE's consolidated statements of income as they relate to NEER.
Operating Revenues
Operating revenues for 2019 increased
non-qualifying hedges,
• revenues from new investments of
• higher revenues of
power and gas trading business, and
• higher revenues of
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Table of Contents
partly offset by,
• lower revenues from existing assets of
absence of revenues of certain wind and solar facilities sold to NEP in
Operating Expenses - net
Operating expenses - net for 2019 increased
customer supply and proprietary power and gas trading and gas infrastructure
businesses,
• higher operating expenses associated with new investments of approximately
• an impairment charge of approximately
decision to no longer move forward with the construction of a wind facility
(see Note 1 - Construction Activity),
partly offset by,
• higher net gains on the disposal of businesses/assets of
primarily related to the gain recognized on the sale of ownership interests
in wind and solar projects to NEP (see Note 1 - Disposal of
Businesses/Assets).
Interest Expense
NEER's interest expense for 2019 increased $278 million primarily reflecting
unfavorable impacts of approximately $251 million related to changes in the fair
value of interest rate derivative instruments and higher borrowing costs to
support growth in the business.
Equity in Earnings of Equity Method Investees
Lower earnings from equity method investees in 2019 primarily reflects equity in
losses of NEP primarily related to unfavorable impacts related to changes in the
fair value of interest rate derivative instruments and the absence of
approximately $150 million related to a 2018 favorable adjustment at NEP to the
differential membership interests due to the decrease in the federal corporate
income tax rate. The decrease was partly offset by increased equity in earnings
of other equity method investees.
Gain on NEP Deconsolidation
The NEP deconsolidation resulted in a gain of approximately $3.9 billion ($3.0
billion after tax) in NEE's consolidated statements of income during 2018. See
Note 1 - NextEra Energy Partners, LP.
Change in Unrealized Gains (Losses) on Equity Securities Held in NEER's Nuclear
Decommissioning Funds - net
Changes in the fair value of equity securities in NEER's nuclear decommissioning
funds, primarily equity securities in NEER's special use funds, relate to
favorable market conditions in 2019 compared to 2018.
Tax Credits, Benefits and Expenses
PTCs from wind projects and ITCs from solar and certain wind projects are
reflected in NEER's earnings. PTCs are recognized as wind energy is generated
and sold based on a per kWh rate prescribed in applicable federal and state
statutes, and were approximately $75 million and $88 million in 2019 and 2018,
respectively. ITCs totaled approximately $199 million and $131 million in 2019
and 2018, respectively. A portion of the PTCs and ITCs have been allocated to
investors in connection with sales of differential membership interests. PTCs
and ITCs can significantly affect the effective income tax rate depending on the
amount of pretax income. The amount of PTCs recognized can be significantly
affected by wind generation and by PTC roll off. See Note 6.
Net Loss Attributable to Noncontrolling Interests
Net loss attributable to noncontrolling interests primarily represents the
activity related to the sales of differential membership interests. The decrease
for 2019 primarily reflects the absence of a 2018 adjustment of approximately
$497 million ($373 million after-tax) related to the decrease in federal
corporate income tax rate effective January 1, 2018 .
Following its acquisition inJanuary 2019 ,Gulf Power contributed approximately$180 million of net income attributable to NEE for 2019.Gulf Power's operating revenues were approximately$1,487 million and operating expenses totaled$1,216 million for 2019.
Corporate and Other: Results of Operations
Corporate and Other is primarily comprised of the operating results of other business activities, as well as corporate interest income and expenses. Corporate and Other allocates a portion of NEECH's corporate interest expense to NEER. Interest expense is allocated based on a deemed capital structure of 70% debt and differential membership interests sold byNextEra Energy Resources' subsidiaries. Corporate and Other's results decreased$315 million during 2019 primarily reflecting higher interest costs associated with higher debt balances primarily related to theGulf Power acquisition financing, higher after-tax losses of approximately$114 million related to non-qualifying hedge activity, as well as higher acquisition and integration costs incurred in 2019. 40
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Table of Contents
LIQUIDITY AND CAPITAL RESOURCES
NEE and its subsidiaries require funds to support and grow their businesses. These funds are used for, among other things, working capital, capital expenditures, investments in or acquisitions of assets and businesses, payment of maturing debt obligations and, from time to time, redemption or repurchase of outstanding debt or equity securities. It is anticipated that these requirements will be satisfied through a combination of cash flows from operations, short- and long-term borrowings, the issuance of short- and long-term debt and, from time to time, equity securities, proceeds from differential membership investors and sales of assets to NEP or third parties, consistent with NEE's and FPL's objective of maintaining, on a long-term basis, a capital structure that will support a strong investment grade credit rating. NEE, FPL and NEECH rely on access to credit and capital markets as significant sources of liquidity for capital requirements and other operations that are not satisfied by operating cash flows. The inability of NEE, FPL and NEECH to maintain their current credit ratings could affect their ability to raise short- and long-term capital, their cost of capital and the execution of their respective financing strategies, and could require the posting of additional collateral under certain agreements. InOctober 2015 , NEE authorized a program to purchase, from time to time, up to$150 million of common units representing limited partner interests in NEP. Under the program, purchases may be made in amounts, at prices and at such times as NEE or its subsidiaries deem appropriate, all subject to market conditions and other considerations. The purchases may be made in the open market or in privately negotiated transactions. Any purchases will be made in such quantities, at such prices, in such manner and on such terms and conditions as determined by NEE or its subsidiaries in their discretion, based on factors such as market and business conditions, applicable legal requirements and other factors. The common unit purchase program does not require NEE to acquire any specific number of common units and may be modified or terminated by NEE at any time. The purpose of the program is not to cause NEP's common units to be delisted from theNew York Stock Exchange or to cause the common units to be deregistered with theSEC . As ofDecember 31, 2019 , NEE had purchased approximately$36 million of NEP common units under this program. AtDecember 31, 2019 , NEE owned a noncontrolling general partner interest in NEP and beneficially owned approximately 59.9% of NEP's voting power. 41
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Table of Contents Cash Flows
NEE's sources and uses of cash for 2019, 2018 and 2017 were as follows:
Years Ended December 31,
2019 2018 2017
(millions)
Sources of cash:
Cash flows from operating activities $ 8,155 $ 6,593 $ 6,458
Issuances of long-term debt 13,919 4,399 8,354
Proceeds from differential membership investors 1,604 1,841 1,414
Proceeds from sale of the fiber-optic
telecommunications business - - 1,454 Sale of independent power and other investments of NEER 1,163 1,617
178
Issuances of common stock - net 1,494 718 55
Net increase in commercial paper and other short-term debt(a)
- 6,272 1,867 Proceeds from issuance of NEP convertible preferred units - net
- - 548
Non-operating distributions from equity method
investees - 637 7
Other sources - net 274 123 220
Total sources of cash 26,609 22,200 20,555
Uses of cash:
Capital expenditures, acquisitions, independent power
and other investments and nuclear fuel purchases (17,462 ) (13,004 ) (10,740 )
Retirements of long-term debt (5,492 ) (3,102 ) (6,780 ) Net decrease in commercial paper and other short-term debt(a)
(4,799 ) - -
Payments to related parties under a cash sweep and credit support agreement - net
(54 ) (21 ) -
Dividends (2,408 ) (2,101 ) (1,845 )
Other uses - net (543 ) (695 ) (762 )
Total uses of cash (30,758 ) (18,923 ) (20,127 )
Effects of currency translation on cash, cash
equivalents and restricted cash 4 (7 ) 26
Net increase (decrease) in cash, cash equivalents and
restricted cash(a) $ (4,145 ) $ 3,270 $ 454
______________________
(a) 2019 and 2018 amounts relate to the acquisition of
Gulf Power Company . NEE's primary capital requirements are for expanding and enhancingFPL's and Gulf Power's electric system and generation facilities to continue to provide reliable service to meet customer electricity demands and for funding NEER's investments in independent power and other projects. See Note 15 - Commitments for estimated capital expenditures in 2020 through 2024. The following table provides a summary of the major capital investments for 2019, 2018 and 2017. Years Ended December 31, 2019 2018 2017 (millions) FPL: Generation: New$ 1,242 $ 976 $ 1,198 Existing 1,215 1,142 1,285 Transmission and distribution 2,893 2,456 2,151 Nuclear fuel 195 123 117 General and other 550 334 431 Other, primarily change in accrued property additions and exclusion of AFUDC - equity (340 ) 104 109 Total 5,755 5,135 5,291 Gulf Power 729 - - NEER(a): Wind 1,974 4,093 2,824 Solar 1,741 698 759 Nuclear, including nuclear fuel 179 233 220 Natural gas pipelines 687 873 785 Other gas infrastructure 969 893 681 Other (2019 primarily related to acquisitions, see Note 8) 955 399 146 Total 6,505 7,189 5,415 Corporate and Other (2019 primarily related to acquisitions, see Note 8)(a) 4,473 680 34
Total capital expenditures, independent power and other investments and nuclear fuel purchases
$ 17,462 $
13,004
______________________
(a) Amounts for 2018 and 2017 were retrospectively adjusted to reflect a segment
change. See Note 16.
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Table of Contents Liquidity
At
Gulf Maturity Date
FPL Power NEECH Total FPL Gulf Power NEECH
(millions)
Syndicated revolving credit
facilities(a) $ 2,943 $ 900 $ 5,297 $ 9,140 2020 - 2024 2024 2021 - 2024
Issued letters of credit (3 ) - (212 ) (215 )
2,940 900 5,085 8,925
Bilateral revolving credit
facilities 680 - 1,075 1,755 2020 - 2022 2020 - 2023
Borrowings - - - -
680 - 1,075 1,755
Letter of credit facilities(b) - - 900 900
2020 - 2021
Issued letters of credit - - (793 ) (793 )
- - 107 107
Subtotal 3,620 900 6,267 10,787
Cash and cash equivalents 77 6 515 598
Commercial paper and other
short-term borrowings
outstanding (1,482 ) (392 ) (1,042 ) (2,916 )
Net available liquidity $ 2,215 $ 514 $ 5,740 $ 8,469 `
______________________(a) Provide for the funding of loans up to the amount of the credit facility and
the issuance of letters of credit up to
of the credit facilities is available for general corporate purposes and to
provide additional liquidity in the event of a loss to the companies' or
their subsidiaries' operating facilities (including, in the case of FPL, a
transmission and distribution property loss). FPL's syndicated revolving
credit facilities are also available to support the purchase of
of pollution control, solid waste disposal and industrial development revenue
bonds (tax exempt bonds) in the event they are tendered by individual
bondholders and not remarketed prior to maturity, as well as, the repayment
of approximately
individual noteholder requires repayment prior to maturity.
syndicated revolving credit facilities are also available to support the
purchase of approximately
they are tendered by individual bondholders and not remarketed prior to
maturity. Approximately
syndicated revolving credit facilities expire in 2024.
(b) Only available for the issuance of letters of credit.
AtDecember 31, 2019 , 73 banks participate in FPL's,Gulf Power's and NEECH's revolving credit facilities, with no one bank providing more than 6% of the combined revolving credit facilities. European banks provide approximately 25% of the combined revolving credit facilities. Pursuant to a 1998 guarantee agreement, NEE guarantees the payment of NEECH's debt obligations under its revolving credit facilities. In order for FPL,Gulf Power or NEECH to borrow or to have letters of credit issued under the terms of their respective revolving credit facilities and, also for NEECH, its letter of credit facilities, FPL, in the case of FPL,Gulf Power in the case ofGulf Power , and NEE, in the case of NEECH, are required, among other things, to maintain a ratio of funded debt to total capitalization that does not exceed a stated ratio. The FPL,Gulf Power and NEECH revolving credit facilities also contain default and related acceleration provisions relating to, among other things, failure of FPL,Gulf Power and NEE, as the case may be, to maintain the respective ratio of funded debt to total capitalization at or below the specified ratio. AtDecember 31, 2019 , each of NEE,Gulf Power and FPL was in compliance with its required ratio.
Capital Support
Guarantees, Letters of Credit, Surety Bonds and Indemnifications (Guarantee Arrangements) Certain subsidiaries of NEE issue guarantees and obtain letters of credit and surety bonds, as well as provide indemnities, to facilitate commercial transactions with third parties and financings. Substantially all of the guarantee arrangements are on behalf of NEE's consolidated subsidiaries, as discussed in more detail below. NEE is not required to recognize liabilities associated with guarantee arrangements issued on behalf of its consolidated subsidiaries unless it becomes probable that they will be required to perform. AtDecember 31, 2019 , NEE believes that there is no material exposure related to these guarantee arrangements. NEE subsidiaries issue guarantees related to equity contribution agreements associated with the development, construction and financing of certain power generation facilities, engineering, procurement and construction agreements and equity contributions associated with natural gas pipeline projects under development and construction and a related natural gas transportation agreement. Commitments associated with these activities are included in the contracts table in Note 15.
In addition, at
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Table of Contents In some instances, subsidiaries of NEE elect to issue guarantees instead of posting other forms of collateral required under certain financing arrangements, as well as for other project-level cash management activities. AtDecember 31, 2019 , these guarantees totaled approximately$375 million and support, among other things, cash management activities, including those related to debt service and O&M service agreements, as well as other specific project financing requirements. Subsidiaries of NEE also issue guarantees to support customer supply and proprietary power and gas trading activities, including the buying and selling of wholesale and retail energy commodities. AtDecember 31, 2019 , the estimated mark-to-market exposure (the total amount that these subsidiaries of NEE could be required to fund based on energy commodity market prices atDecember 31, 2019 ) plus contract settlement net payables, net of collateral posted for obligations under these guarantees totaled approximately$733 million . AtDecember 31, 2019 , subsidiaries of NEE also had approximately$1.5 billion of standby letters of credit and approximately$562 million of surety bonds to support certain of the commercial activities discussed above. FPL's and NEECH's credit facilities are available to support the amount of the standby letters of credit. In addition, as part of contract negotiations in the normal course of business, certain subsidiaries of NEE have agreed and in the future may agree to make payments to compensate or indemnify other parties, including those associated with asset divestitures, for possible unfavorable financial consequences resulting from specified events. The specified events may include, but are not limited to, an adverse judgment in a lawsuit or the imposition of additional taxes due to a change in tax law or interpretations of the tax law, or the triggering of cash grant recapture provisions under the Recovery Act. NEE is unable to estimate the maximum potential amount of future payments under some of these contracts because events that would obligate them to make payments have not yet occurred or, if any such event has occurred, they have not been notified of its occurrence. Certain guarantee arrangements described above contain requirements for NEECH and FPL to maintain a specified credit rating. For a discussion of credit rating downgrade triggers, see Credit Ratings below. NEE has guaranteed certain payment obligations of NEECH, including most of its debt and all of its debentures and commercial paper issuances, as well as most of its payment guarantees and indemnifications, and NEECH has guaranteed certain debt and other obligations of subsidiaries within the NEER segment. Shelf Registration InJuly 2018 , NEE, NEECH and FPL filed a shelf registration statement with theSEC for an unspecified amount of securities, which became effective upon filing. The amount of securities issuable by the companies is established from time to time by their respective boards of directors. Securities that may be issued under the registration statement include, depending on the registrant, senior debt securities, subordinated debt securities, junior subordinated debentures, first mortgage bonds, common stock, preferred stock, stock purchase contracts, stock purchase units, warrants and guarantees related to certain of those securities. 44
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Contractual Obligations and Estimated Capital Expenditures
NEE's commitments at
2020 2021 2022 2023 2024 Thereafter Total
(millions)
Long-term debt, including
interest:(a)
FPL(b) $ 612 $ 646 $ 1,685 $ 1,082 $ 1,199 $ 20,337 $ 25,561
Gulf Power(b) 226 345 179 68 35 1,741 2,594
NEER 382 423 383 534 454 4,326 6,502
Corporate and Other 2,390 4,305 3,169 1,210 2,816 19,790 33,680
Purchase obligations:
FPL(c) 7,320 7,310 7,105 7,020 7,310 11,625 47,690
Gulf Power(c) 800 770 645 650 680 - 3,545
NEER(d) 3,355 395 255 130 140 1,413 5,688
Elimination of FPL's purchase
obligations to NEER(d) (108 ) (105 ) (102 ) (99 ) (97 ) (1,314 ) (1,825 )
Asset retirement activities:(e)
FPL(f) 34 32 39 22 22 10,650 10,799
Gulf Power 5 15 1 1 1 98 121
NEER(g) 24 45 26 18 12 11,332 11,457
Other commitments:(h)
FPL 13 12 12 8 5 42 92
Gulf Power 64 64 64 27 - - 219
NEER(i) 36 46 41 38 41 704 906
Total $ 15,153 $ 14,303 $ 13,502 $ 10,709 $ 12,618 $ 80,744 $ 147,029
_________________________(a) Includes principal, interest, interest rate contracts and payments by NEE
under stock purchase contracts. Variable rate interest was computed using
(b) Includes tax exempt bonds at FPL of approximately
million in 2021,
2022 and
the bonds for purchase at any time prior to maturity. In the event bonds are
tendered for purchase, they would be remarketed by a designated remarketing
agent in accordance with the related indenture. If the remarketing is
unsuccessful,
purchase the tax exempt bonds. As of
Power's tax exempt bonds tendered for purchase had been successfully
remarketed. Also includes at FPL floating rate notes of approximately
million maturing after 2024 that permit individual noteholders to require
repayment prior to maturity. FPL's syndicated revolving credit facilities are
available to support the purchase of tax exempt bonds and the repayment of
floating rate notes.
available to support the purchase of
(c) Represents projected capital expenditures through 2024, as well as, for FPL,
required minimum payments primarily under long-term fuel transportation
contracts (see Note 15 - Commitments and - Contracts).
(d) See Note 15 - Contracts.
(e) Represents expected cash payments adjusted for inflation for estimated costs
to perform asset retirement activities.
(f) At
funds (included in NEE's and FPL's special use funds) for the payment of its
portion of future expenditures to decommission the
nuclear units. See Note 13.
(g) At
funds (included in NEE's special use funds) for the payment of its portion of
future expenditures to decommission Seabrook,
nuclear units. See Note 13.
(h) Includes lease payment obligations. See Note 14.
(i) Includes payments related to the acquisition of certain development rights.
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Table of Contents Credit Ratings NEE's liquidity, ability to access credit and capital markets, cost of borrowings and collateral posting requirements under certain agreements is dependent on its and its subsidiaries credit ratings. AtFebruary 14, 2020 ,Moody's Investors Service, Inc. (Moody's),S&P Global Ratings (S&P) andFitch Ratings, Inc. (Fitch) had assigned the following credit ratings to NEE, FPL and NEECH: Moody's(a) S&P(a) Fitch(a) NEE:(b) Corporate credit rating Baa1 A- A- FPL:(b) Corporate credit rating A1 A A First mortgage bonds Aa2 A+ AA- Senior unsecured notes A1 A A+
Pollution control, solid waste disposal and industrial VMIG-1/P-1 A-1
F1
development revenue bonds(c)
Commercial paper P-1 A-1 F1
NEECH:(b)
Corporate credit rating Baa1 A- A-
Debentures Baa1 BBB+ A-
Junior subordinated debentures Baa2 BBB BBB
Commercial paper P-2 A-2 F2
_________________________(a) A security rating is not a recommendation to buy, sell or hold securities and
should be evaluated independently of any other rating. The rating is subject
to revision or withdrawal at any time by the assigning rating organization.
(b) The outlook indicated by each of Moody's, S&P and Fitch is stable.
(c) Short-term ratings are presented as all bonds outstanding are currently
paying a short-term interest rate. At FPL's election, a portion or all of the
bonds may be adjusted to a long-term interest rate.
NEE and its subsidiaries have no credit rating downgrade triggers that would accelerate the maturity dates of outstanding debt. A change in ratings is not an event of default under applicable debt instruments, and while there are conditions to drawing on the credit facilities noted above, the maintenance of a specific minimum credit rating is not a condition to drawing on these credit facilities. Commitment fees and interest rates on loans under these credit facilities' agreements are tied to credit ratings. A ratings downgrade also could reduce the accessibility and increase the cost of commercial paper and other short-term debt issuances and borrowings and additional or replacement credit facilities. In addition, a ratings downgrade could result in, among other things, the requirement that NEE subsidiaries post collateral under certain agreements and guarantee arrangements, including, but not limited to, those related to fuel procurement, power sales and purchases, nuclear decommissioning funding, debt-related reserves and trading activities. FPL's,Gulf Power's and NEECH's credit facilities are available to support these potential requirements.
Covenants
NEE's charter does not limit the dividends that may be paid on its common stock. As a practical matter, the ability of NEE to pay dividends on its common stock is dependent upon, among other things, dividends paid to it by its subsidiaries. For example, FPL pays dividends to NEE in a manner consistent with FPL's long-term targeted capital structure. However, the mortgage securing FPL's first mortgage bonds contains provisions which, under certain conditions, restrict the payment of dividends to NEE and the issuance of additional first mortgage bonds. Additionally, in some circumstances, the mortgage restricts the amount of retained earnings that FPL can use to pay cash dividends on its common stock. The restricted amount may change based on factors set out in the mortgage. Other than this restriction on the payment of common stock dividends, the mortgage does not restrict FPL's use of retained earnings. AtDecember 31, 2019 , no retained earnings were restricted by these provisions of the mortgage and, in light of FPL's current financial condition and level of earnings, management does not expect that planned financing activities or dividends would be affected by these limitations. FPL may issue first mortgage bonds under its mortgage subject to its meeting an adjusted net earnings test set forth in the mortgage, which generally requires adjusted net earnings to be at least twice the annual interest requirements on, or at least 10% of the aggregate principal amount of, FPL's first mortgage bonds including those to be issued and any other non-junior FPL indebtedness. AtDecember 31, 2019 , coverage for the 12 months endedDecember 31, 2019 would have been approximately 8.2 times the annual interest requirements and approximately 3.7 times the aggregate principal requirements. New first mortgage bonds are also limited to an amount equal to the sum of 60% of unfunded property additions after adjustments to offset property retirements, the amount of retired first mortgage bonds or qualified lien bonds and the amount of cash on deposit with the mortgage trustee. AtDecember 31, 2019 , FPL could have issued in excess of$22 billion of additional first mortgage bonds based on the unfunded property additions and retired first mortgage bonds. AtDecember 31, 2019 , no cash was deposited with the mortgage trustee for these purposes. InSeptember 2006 , NEE and NEECH executed a Replacement Capital Covenant (as amended,September 2006 RCC) in connection with NEECH's offering of$350 million principal amount of Series B Enhanced Junior Subordinated Debentures due 2066 (Series B junior subordinated debentures). TheSeptember 2006 RCC is for the benefit of persons that buy, hold or sell a specified series 46
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Table of Contents of long-term indebtedness (covered debt) of NEECH (other than the Series B junior subordinated debentures) or, in certain cases, of NEE. NEECH's 3.625% Debentures, Series dueJune 15, 2023 have been designated as the covered debt under theSeptember 2006 RCC. TheSeptember 2006 RCC provides that NEECH may redeem, and NEE or NEECH may purchase, any Series B junior subordinated debentures on or beforeOctober 1, 2036 , only to the extent that the redemption or purchase price does not exceed a specified amount of proceeds from the sale of qualifying securities, subject to certain limitations described in theSeptember 2006 RCC. Qualifying securities are securities that have equity-like characteristics that are the same as, or more equity-like than, the Series B junior subordinated debentures at the time of redemption or purchase, which are sold within 365 days prior to the date of the redemption or repurchase of the Series B junior subordinated debentures. InJune 2007 , NEE and NEECH executed a Replacement Capital Covenant (as amended,June 2007 RCC) in connection with NEECH's offering of$400 million principal amount of its Series C Junior Subordinated Debentures due 2067 (Series C junior subordinated debentures). TheJune 2007 RCC is for the benefit of persons that buy, hold or sell a specified series of covered debt of NEECH (other than the Series C junior subordinated debentures) or, in certain cases, of NEE. NEECH's 3.625% Debentures, Series dueJune 15, 2023 have been designated as the covered debt under theJune 2007 RCC. TheJune 2007 RCC provides that NEECH may redeem or purchase, or satisfy, discharge or defease (collectively, defease), and NEE and any majority-owned subsidiary of NEE or NEECH may purchase, any Series C junior subordinated debentures on or beforeJune 15, 2037 , only to the extent that the principal amount defeased or the applicable redemption or purchase price does not exceed a specified amount raised from the issuance, during the 365 days prior to the date of that redemption, purchase or defeasance, of qualifying securities that have equity-like characteristics that are the same as, or more equity-like than, the applicable characteristics of the Series C junior subordinated debentures at the time of redemption, purchase or defeasance, subject to certain limitations described in theJune 2007 RCC.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
NEE's significant accounting policies are described in Note 1 to the consolidated financial statements, which were prepared under GAAP. Critical accounting policies are those that NEE believes are both most important to the portrayal of its financial condition and results of operations, and require complex, subjective judgments, often as a result of the need to make estimates and assumptions about the effect of matters that are inherently uncertain. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions.
NEE considers the following policies to be the most critical in understanding the judgments that are involved in preparing its consolidated financial statements:
Accounting for Derivatives and Hedging Activities
NEE uses derivative instruments (primarily swaps, options, futures and forwards) to manage the physical and financial risks inherent in the purchase and sale of fuel and electricity, as well as interest rate and foreign currency exchange rate risk associated primarily with outstanding and expected future debt issuances and borrowings. In addition, NEE, through NEER, uses derivatives to optimize the value of its power generation and gas infrastructure assets and engages in power and gas marketing and trading activities to take advantage of expected future favorable price movements.
Nature of Accounting Estimates
Accounting pronouncements require the use of fair value accounting if certain conditions are met, which may require significant judgment to measure the fair value of assets and liabilities. This applies not only to traditional financial derivative instruments, but to any contract having the accounting characteristics of a derivative. As a result, significant judgment must be used in applying derivatives accounting guidance to contracts. In the event changes in interpretation occur, it is possible that contracts that currently are excluded from derivatives accounting rules would have to be recorded on the balance sheet at fair value, with changes in the fair value recorded in the statement of income.
Assumptions and Accounting Approach
Derivative instruments, when required to be marked to market, are recorded on
the balance sheet at fair value using a combination of market and income
approaches. Fair values for some of the longer-term contracts where liquid
markets are not available are derived through the use of industry-standard
valuation techniques, such as internally developed models which estimate the
fair value of a contract by calculating the present value of the difference
between the contract price and the forward prices. Forward prices represent the
price at which a buyer or seller could contract today to purchase or sell a
commodity at a future date. The near-term forward market for electricity is
generally liquid and therefore the prices in the early years of the forward
curves reflect observable market quotes. However, in the later years, the market
is much less liquid and forward price curves must be developed using factors
including the forward prices for the commodities used as fuel to generate
electricity, the expected system heat rate (which measures the efficiency of
power plants in converting fuel to electricity) in the region where the purchase
or sale takes place, and a fundamental forecast of expected spot prices based on
modeled supply and demand in the region. NEE estimates the fair value of
interest rate and foreign currency derivatives using an income approach based on
a discounted cash flows valuation technique utilizing the net
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amount of estimated future cash inflows and outflows related to the derivative agreements. The assumptions in these models are critical since any changes therein could have a significant impact on the fair value of the derivative.
At FPL, substantially all changes in the fair value of energy derivative transactions are deferred as a regulatory asset or liability until the contracts are settled, and, upon settlement, any gains or losses are passed through the fuel clause. See Note 4. In NEE's non-rate regulated operations, predominantlyNextEra Energy Resources , essentially all changes in the derivatives' fair value for power purchases and sales, fuel sales and trading activities are recognized on a net basis in operating revenues; fuel purchases used in the production of electricity are recognized in fuel, purchased power and interchange expense; and the equity method investees' related activity is recognized in equity in earnings of equity method investees in NEE's consolidated statements of income. For interest rate and foreign currency derivative instruments, essentially all changes in the derivatives' fair value are recognized in interest expense and the equity method investees' related activity is recognized in equity in earnings of equity method investees in NEE's consolidated statements of income. NEE estimates the fair value of these derivatives using an income approach based on a discounted cash flows valuation technique utilizing observable inputs. Certain derivative transactions at NEER are entered into as economic hedges but the transactions do not meet the requirements for hedge accounting, hedge accounting treatment is not elected or hedge accounting has been discontinued. Changes in the fair value of those transactions are marked to market and reported in the consolidated statements of income, resulting in earnings volatility. These changes in fair value are reflected in the non-qualifying hedge category in computing adjusted earnings and could be significant to NEER's results because the economic offset to the positions are not marked to market. As a consequence, NEE's net income reflects only the movement in one part of economically-linked transactions. For example, a gain (loss) in the non-qualifying hedge category for certain energy derivatives is offset by decreases (increases) in the fair value of related physical asset positions in the portfolio or contracts, which are not marked to market under GAAP. For this reason, NEE's management views results expressed excluding the unrealized mark-to-market impact of the non-qualifying hedges as a meaningful measure of current period performance. For additional information regarding derivative instruments, see Note 4, Overview andEnergy Marketing and Trading and Market Risk Sensitivity.
Accounting for Pension Benefits
NEE sponsors a qualified noncontributory defined benefit pension plan for substantially all employees of NEE and its subsidiaries. Management believes that, based on actuarial assumptions and the well-funded status of the pension plan, NEE will not be required to make any cash contributions to the qualified pension plan in the near future. The qualified pension plan has a fully funded trust dedicated to providing benefits under the plan. NEE allocates net periodic income associated with the pension plan to its subsidiaries annually using specific criteria.
Nature of Accounting Estimates
For the pension plan, the benefit obligation is the actuarial present value, as of theDecember 31 measurement date, of all benefits attributed by the pension benefit formula to employee service rendered to that date. The amount of benefit to be paid depends on a number of future events incorporated into the pension benefit formula, including an estimate of the average remaining life of employees/survivors as well as the average years of service rendered. The projected benefit obligation is measured based on assumptions concerning future interest rates and future employee compensation levels. NEE derives pension income from actuarial calculations based on the plan's provisions and various management assumptions including discount rate, rate of increase in compensation levels and expected long-term rate of return on plan assets.
Assumptions and Accounting Approach
Accounting guidance requires recognition of the funded status of the pension
plan in the balance sheet, with changes in the funded status recognized in other
comprehensive income within shareholders' equity in the year in which the
changes occur. Since NEE is the plan sponsor, and its subsidiaries do not have
separate rights to the plan assets or direct obligations to their employees,
this accounting guidance is reflected at NEE and not allocated to the
subsidiaries. The portion of previously unrecognized actuarial gains and losses
and prior service costs or credits that are estimated to be allocable to FPL as
net periodic (income) cost in future periods and that otherwise would be
recorded in AOCI are classified as regulatory assets and liabilities at NEE in
accordance with regulatory treatment.
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Table of Contents Net periodic pension income is calculated using a number of actuarial assumptions. Those assumptions for the years endedDecember 31, 2019 , 2018 and 2017 include: 2019 2018 2017 Discount rate 4.26 % 3.59 % 4.09 % Salary increase 4.40 % 4.10 % 4.10 % Expected long-term rate of return, net of investment management fees 7.35 % 7.35 % 7.35 % In developing these assumptions, NEE evaluated input, including other qualitative and quantitative factors, from its actuaries and consultants, as well as information available in the marketplace. In addition, for the expected long-term rate of return on pension plan assets, NEE considered different models, capital market return assumptions and historical returns for a portfolio with an equity/bond asset mix similar to its pension fund, as well as its pension fund's historical compounded returns. NEE believes that 7.35% is a reasonable long-term rate of return, net of investment management fees, on its pension plan assets. NEE will continue to evaluate all of its actuarial assumptions, including its expected rate of return, at least annually, and will adjust them as appropriate. NEE utilizes in its determination of pension income a market-related valuation of plan assets. This market-related valuation reduces year-to-year volatility and recognizes investment gains or losses over a five-year period following the year in which they occur. Investment gains or losses for this purpose are the difference between the expected return calculated using the market-related value of plan assets and the actual return realized on those plan assets. Since the market-related value of plan assets recognizes gains or losses over a five-year period, the future value of plan assets will be affected as previously deferred gains or losses are recognized. Such gains and losses together with other differences between actual results and the estimates used in the actuarial valuations are deferred and recognized in determining pension income only to the extent they exceed 10% of the greater of projected benefit obligations or the market-related value of plan assets. The following table illustrates the effect on net periodic pension income of changing the critical actuarial assumptions discussed above, while holding all other assumptions constant: Decrease in 2019 Net Periodic Pension Income Change in Assumption NEE FPL (millions)
Expected long-term rate of return (0.5)%
(14 ) Discount rate 0.5% $ (2 ) $ (1 ) Salary increase 0.5% $ (2 ) $ (1 ) NEE also utilizes actuarial assumptions about mortality to help estimate obligations of the pension plan. NEE has adopted the latest revised mortality tables and mortality improvement scales released by theSociety of Actuaries , which did not have a material impact on the pension plan's obligation.
See Note 3.
Carrying Value of Long-Lived Assets
NEE evaluates long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable.
Nature of Accounting Estimates
The amount of future net cash flows, the timing of the cash flows and the determination of an appropriate interest rate all involve estimates and judgments about future events. In particular, the aggregate amount of cash flows determines whether an impairment exists, and the timing of the cash flows is critical in determining fair value. Because each assessment is based on the facts and circumstances associated with each long-lived asset, the effects of changes in assumptions cannot be generalized.
Assumptions and Accounting Approach
An impairment loss is required to be recognized if the carrying value of the
asset exceeds the undiscounted future net cash flows associated with that asset.
The impairment loss to be recognized is the amount by which the carrying value
of the long-lived asset exceeds the asset's fair value. In most instances, the
fair value is determined by discounting estimated future cash flows using an
appropriate interest rate. See Note 5 - Nonrecurring Fair Value Measurements.
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Decommissioning and Dismantlement
NEE accounts for asset retirement obligations and conditional asset retirement obligations (collectively, AROs) under accounting guidance that requires a liability for the fair value of an ARO to be recognized in the period in which it is incurred if it can be reasonably estimated, with the offsetting associated asset retirement costs capitalized as part of the carrying amount of the long-lived assets. NEE's AROs relate primarily to decommissioning obligations of FPL's and NEER's nuclear units and to obligations for the dismantlement of certain of NEER's wind and solar facilities.
Nature of Accounting Estimates
The calculation of the future cost of retiring long-lived assets, including nuclear decommissioning and plant dismantlement costs, involves estimating the amount and timing of future expenditures and making judgments concerning whether or not such costs are considered a legal obligation. Estimating the amount and timing of future expenditures includes, among other things, making projections of when assets will be retired and ultimately decommissioned and how costs will escalate with inflation. In addition, NEE also makes interest rate and rate of return projections on its investments in determining recommended funding requirements for nuclear decommissioning costs. Periodically, NEE is required to update these estimates and projections which can affect the annual expense amounts recognized, the liabilities recorded and the annual funding requirements for nuclear decommissioning costs. For example, an increase of 0.25% in the assumed escalation rates for nuclear decommissioning costs would increase NEE's AROs atDecember 31, 2019 by approximately$254 million .
Assumptions and Accounting Approach
FPL - For ratemaking purposes, FPL accrues and funds for nuclear plant decommissioning costs over the expected service life of each unit based on studies that are approved by the FPSC. The most recent studies, filed in 2015, reflect, among other things, the expiration dates of the operating licenses for FPL's nuclear units at the time of the studies. After giving effect to the recent license extensions for Turkey Point Units Nos. 3 and 4, FPL's portion of the future cost of decommissioning its four nuclear units, including spent fuel storage above what is expected to be refunded by theDOE under a spent fuel settlement agreement, is estimated to be approximately$9.7 billion , or$3.3 billion expressed in 2019 dollars. FPL intends to reflect the operating license extensions for Turkey Point Units Nos. 3 and 4 in its next nuclear decommissioning studies. FPL accrues the cost of dismantling its fossil and solar plants over the expected service life of each unit based on studies filed with the FPSC. Unlike nuclear decommissioning, dismantlement costs are not funded. The most recent studies became effectiveJanuary 1, 2017 . AtDecember 31, 2019 , FPL's portion of the ultimate cost to dismantle its fossil and solar units is approximately$1.2 billion , or$510 million expressed in 2019 dollars. The majority of the dismantlement costs are not reported as AROs. FPL accrues for interim removal costs over the life of the related assets based on depreciation studies approved by the FPSC. Any differences between the amount of the ARO and the amount recorded for ratemaking purposes are reported as a regulatory liability in accordance with regulatory accounting.
The components of FPL's decommissioning of nuclear plants, dismantlement of plants and other accrued asset removal costs are as follows:
Nuclear Fossil/Solar Interim Removal
Decommissioning Dismantlement Costs and Other Total
December 31, December 31, December 31, December 31,
2019 2018 2019 2018 2019 2018 2019 2018
(millions)
AROs $ 2,076 $ 2,045 $ 186 $ 97 $ 6 $ 6 $ 2,268 $ 2,148
Less capitalized ARO
asset net of accumulated
depreciation 225 316 48 33 1 1 274 350
Accrued asset removal
costs(a) 368 319 144 164 645 489 1,157 972
Asset retirement
obligation regulatory
expense difference(a) 2,904 2,358 (72 ) (3 ) (4 ) (3 ) 2,828 2,352
Accrued decommissioning,
dismantlement and other
accrued asset removal
costs(b) $ 5,123 $ 4,406 $ 210 $ 225 $
646
______________________
(a) Included in noncurrent regulatory liabilities on NEE's and FPL's consolidated
balance sheets. See Note 1 - Rate Regulation.
(b) Represents total amount accrued for ratemaking purposes.
NEER - NEER records liabilities for the present value of its expected nuclear plant decommissioning costs which are determined using various internal and external data and applying a probability percentage to a variety of scenarios regarding the life of the plant and timing of decommissioning. The liabilities are being accreted using the interest method through the date decommissioning activities are expected to be complete. AtDecember 31, 2019 and 2018, the AROs for decommissioning of NEER's nuclear plants approximated$623 million and$588 million , respectively. NEER's portion of the ultimate cost of decommissioning its nuclear plants, including costs associated with spent fuel storage above what is expected to be refunded by theDOE under a spent fuel settlement agreement, is estimated to be approximately$9.5 billion , or$2.0 billion expressed in 2019 dollars. 50
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See Note 1 - Asset Retirement Obligations and - Decommissioning of Nuclear Plants, Dismantlement of Plants and Other Accrued Asset Removal Costs and Note 13.
Regulatory Accounting
Certain of NEE's businesses are subject to rate regulation which results in the recording of regulatory assets and liabilities. See Note 1 - Rate Regulation for a detail of NEE's regulatory assets and liabilities.
Nature of Accounting Estimates
Regulatory assets and liabilities represent probable future revenues that will be recovered from or refunded to customers through the ratemaking process. Regulatory assets and liabilities are included in rate base or otherwise earn (pay) a return on investment during the recovery period.
Assumptions and Accounting Approach
Accounting guidance allows regulators to create assets and impose liabilities that would not be recorded by non-rate regulated entities. If NEE's rate-regulated entities, primarily FPL, were no longer subject to cost-based rate regulation, the existing regulatory assets and liabilities would be written off unless regulators specify an alternative means of recovery or refund. In addition, the regulators, including the FPSC for FPL, have the authority to disallow recovery of costs that they consider excessive or imprudently incurred. Such costs may include, among others, fuel and O&M expenses, the cost of replacing power lost when fossil and nuclear units are unavailable, storm restoration costs and costs associated with the construction or acquisition of new facilities. The continued applicability of regulatory accounting is assessed at each reporting period.
ENERGY MARKETING AND TRADING AND MARKET RISK SENSITIVITY
NEE and FPL are exposed to risks associated with adverse changes in commodity prices, interest rates and equity prices. Financial instruments and positions affecting the financial statements of NEE and FPL described below are held primarily for purposes other than trading. Market risk is measured as the potential loss in fair value resulting from hypothetical reasonably possible changes in commodity prices, interest rates or equity prices over the next year. Management has established risk management policies to monitor and manage such market risks, as well as credit risks.
Commodity Price Risk
NEE and FPL use derivative instruments (primarily swaps, options, futures and
forwards) to manage the physical and financial risks inherent in the purchase
and sale of fuel and electricity. In addition, NEE, through NEER, uses
derivatives to optimize the value of its power generation and gas infrastructure
assets and engages in power and gas marketing and trading activities to take
advantage of expected future favorable price movements. See Critical Accounting
Policies and Estimates - Accounting for Derivatives and Hedging Activities and
Note 4.
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During 2018 and 2019, the changes in the fair value of NEE's consolidated subsidiaries' energy contract derivative instruments were as follows:
Hedges on Owned Assets
FPL Cost Gulf Power
Non- Recovery Cost Recovery
Trading Qualifying Clauses Clauses NEE Total
(millions)
Fair value of contracts outstanding at December 31, 2017$ 442 $ 728 $ - $ -$ 1,170 Reclassification to realized at settlement of contracts (159 ) (28 ) (6 ) - (193 ) Value of contracts acquired (3 ) (2 ) (15 ) - (20 ) Net option premium purchases (issuances) 47 9 - - 56 Impact of adoption of new revenue standard 3 (27 ) - - (24 ) Changes in fair value excluding reclassification to realized 263 114 (20 ) - 357 Fair value of contracts outstanding at December 31, 2018 593 794 (41 ) - 1,346 Reclassification to realized at settlement of contracts (215 ) (154 ) 30 7 (332 ) Value of contracts acquired 28 9 - (6 ) 31 Net option premium purchases (issuances) 43 5 - - 48 Changes in fair value excluding reclassification to realized 202 555 1 (2 ) 756 Fair value of contracts outstanding at December 31, 2019 651 1,209 (10 ) (1 ) 1,849 Net margin cash collateral paid (received) (75 ) Total mark-to-market energy contract net assets (liabilities) at December 31, 2019$ 651 $ 1,209 $ (10 ) $ (1 )$ 1,774 NEE's total mark-to-market energy contract net assets (liabilities) atDecember 31, 2019 shown above are included on the consolidated balance sheets as follows: December 31, 2019 (millions) Current derivative assets $ 742 Noncurrent derivative assets 1,608 Current derivative liabilities (314 ) Noncurrent derivative liabilities (262 ) NEE's total mark-to-market energy contract net assets $ 1,774 52
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The sources of fair value estimates and maturity of energy contract derivative
instruments at
Maturity
2020 2021 2022 2023 2024 Thereafter Total
(millions)
Trading:
Quoted prices in active markets for
identical assets $ (191 ) $ 1 $ 29 $ (2 ) $ 4 $ - $ (159 )
Significant other observable inputs 17 8 (32 ) 1 4 (65 ) (67 )
Significant unobservable inputs 298 61 54 78
51 335 877
Total 124 70 51 77 59 270 651
Owned Assets - Non-Qualifying:
Quoted prices in active markets for
identical assets 9 8 6 - - - 23
Significant other observable inputs 185 113 97 72
39 200 706
Significant unobservable inputs 39 40 34 36 36 295 480
Total 233 161 137 108 75 495 1,209
Owned Assets - FPL Cost Recovery
Clauses:
Quoted prices in active markets for
identical assets - - - - - - -
Significant other observable inputs (2 ) - - -
- - (2 )
Significant unobservable inputs (7 ) (1 ) - - - - (8 )
Total (9 ) (1 ) - - - - (10 )
Owned Assets - Gulf Power Cost
Recovery Clauses:
Quoted prices in active markets for
identical assets - - - - - - -
Significant other observable inputs (1 ) - - -
- - (1 )
Significant unobservable inputs - - - - - - -
Total (1 ) - - - - - (1 )
Total sources of fair value $ 347 $ 230 $ 188 $ 185 With respect to commodities, NEE's Exposure Management Committee (EMC), which is comprised of certain members of senior management, and NEE's chief executive officer are responsible for the overall approval of market risk management policies and the delegation of approval and authorization levels. TheEMC and NEE's chief executive officer receive periodic updates on market positions and related exposures, credit exposures and overall risk management activities. NEE uses a value-at-risk (VaR) model to measure commodity price market risk in its trading and mark-to-market portfolios. The VaR is the estimated loss of market value based on a one-day holding period at a 95% confidence level using historical simulation methodology. The VaR figures are as follows:
Non-Qualifying Hedges
Trading and Hedges in FPL Cost Recovery Clauses(a) Total
FPL NEER NEE FPL NEER NEE FPL NEER NEE
(millions)
December 31, 2018 $ - $ 5 $ 5 $ - $ 45 $ 46 $ - $ 46 $ 46
December 31, 2019 $ - $ 2 $ 2 $ - $ 25 $ 25 $ - $ 26 $ 26
Average for the year
ended December 31,
2019 $ - $ 3 $ 3 $ - $ 34 $ 34 $ - $ 34 $ 34
______________________(a) Non-qualifying hedges are employed to reduce the market risk exposure to
physical assets or contracts which are not marked to market. The VaR figures
for the non-qualifying hedges and hedges in FPL cost recovery clauses
category do not represent the economic exposure to commodity price movements.
Interest Rate Risk
NEE's and FPL's financial results are exposed to risk resulting from changes in
interest rates as a result of their respective outstanding and expected future
issuances of debt, investments in special use funds and other investments. NEE
and FPL manage their respective interest rate exposure by monitoring current
interest rates, entering into interest rate contracts and using a combination of
fixed rate and variable rate debt. Interest rate contracts are used to mitigate
and adjust interest rate exposure when deemed appropriate based upon market
conditions or when required by financing agreements.
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The following are estimates of the fair value of NEE's and FPL's financial instruments that are exposed to interest rate risk:
December 31, 2019 December 31, 2018
Carrying Estimated Carrying Estimated
Amount Fair Value(a) Amount Fair Value(a)
(millions)
NEE:
Fixed income securities:
Special use funds $ 2,099 $ 2,099 $ 1,956 $ 1,956
Other investments, primarily debt
securities $ 181 $ 181 $ 180 $ 180
Long-term debt, including current
portion $ 39,667 $ 42,928 $ 29,498 $ 30,043
Interest rate contracts - net
unrealized losses $ (716 ) $ (716 ) $ (416 ) $ (416 )
FPL:
Fixed income securities - special
use funds $ 1,574 $ 1,574 $ 1,513 $ 1,513
Long-term debt, including current
portion $ 14,161 $ 16,448 $ 11,783 $ 12,613
______________________
(a) See Note 5.
The special use funds of NEE and FPL consist of restricted funds set aside to
cover the cost of storm damage for FPL and for the decommissioning of NEE's and
FPL's nuclear power plants. See Note 1 - Storm Fund , Storm Reserve and Storm
Cost Recovery. A portion of these funds is invested in fixed income debt
securities primarily carried at estimated fair value. At FPL, changes in fair
value, including any OTTI losses, result in a corresponding adjustment to the
related regulatory asset or liability accounts based on current regulatory
treatment. The changes in fair value of NEE's non-rate regulated operations
result in a corresponding adjustment to OCI, except for impairments deemed to be
other than temporary, including any credit losses, which are reported in current
period earnings. Because the funds set aside by FPL for storm damage could be
needed at any time, the related investments are generally more liquid and,
therefore, are less sensitive to changes in interest rates. The nuclear
decommissioning funds, in contrast, are generally invested in longer-term
securities.
At December 31, 2019 , NEE had interest rate contracts with a net notional amount
of approximately $8.9 billion related to expected future and outstanding debt
issuances and borrowings, of which $9.6 billion manages exposure to the
variability of cash flows associated with expected future and outstanding debt
issuances at NEECH and NEER. The offsetting $700 million of notional amount of
interest rate contracts effectively convert fixed-rate debt to variable-rate
debt instruments at NEECH. See Note 4.
Based upon a hypothetical 10% decrease in interest rates, which is a reasonable
near-term market change, the fair value of NEE's net liabilities would increase
by approximately $1,797 million ($611 million for FPL) at December 31, 2019 .
Equity Price Risk
NEE and FPL are exposed to risk resulting from changes in prices for equity securities. For example, NEE's nuclear decommissioning reserve funds include marketable equity securities carried at their market value of approximately$3,963 million and$3,046 million ($2,491 million and$1,850 million for FPL) atDecember 31, 2019 and 2018, respectively. NEE's and FPL's investment strategy for equity securities in their nuclear decommissioning reserve funds emphasizes marketable securities which are broadly diversified. AtDecember 31, 2019 , a hypothetical 10% decrease in the prices quoted on stock exchanges, which is a reasonable near-term market change, would result in a$370 million ($236 million for FPL) reduction in fair value. For FPL, a corresponding adjustment would be made to the related regulatory asset or liability accounts based on current regulatory treatment, and for NEE's non-rate regulated operations, a corresponding amount would be recorded in change in unrealized gains (losses) on equity securities held in NEER's nuclear decommissioning funds - net in NEE's consolidated statements of income.
Credit Risk
NEE and its subsidiaries, including FPL, are also exposed to credit risk through their energy marketing and trading operations. Credit risk is the risk that a financial loss will be incurred if a counterparty to a transaction does not fulfill its financial obligation. NEE manages counterparty credit risk for its subsidiaries with energy marketing and trading operations through established policies, including counterparty credit limits, and in some cases credit enhancements, such as cash prepayments, letters of credit, cash and other collateral and guarantees. Credit risk is also managed through the use of master netting agreements. NEE's credit department monitors current and forward credit exposure to counterparties and their affiliates, both on an individual and an aggregate basis. For all derivative and contractual transactions, NEE's energy marketing and trading operations, which include FPL's energy marketing and trading division, are exposed to losses in the event of nonperformance by counterparties to these transactions. Some relevant considerations when assessing NEE's energy marketing and trading operations' credit risk exposure include the following:
• Operations are primarily concentrated in the energy industry.
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Table of Contents • Trade receivables and other financial instruments are predominately with
energy, utility and financial services related companies, as well as
municipalities, cooperatives and other trading companies in the
• Overall credit risk is managed through established credit policies and is
overseen by the
• Prospective and existing customers are reviewed for creditworthiness based
upon established standards, with customers not meeting minimum standards
providing various credit enhancements or secured payment terms, such as
letters of credit or the posting of margin cash collateral.
• Master netting agreements are used to offset cash and noncash gains and
losses arising from derivative instruments with the same counterparty. NEE's
policy is to have master netting agreements in place with significant
counterparties.
Based on NEE's policies and risk exposures related to credit, NEE and FPL do not
anticipate a material adverse effect on their financial statements as a result
of counterparty nonperformance. At December 31, 2019 , approximately 87% of NEE's
and 99% of FPL's energy marketing and trading counterparty credit risk exposure
is associated with companies that have investment grade credit ratings.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
See Management's Discussion -
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