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 7 -Gulf Power ), 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 13 for additional segment information, including a discussion of a change in segment reporting. The following discussions should be read in conjunction with the Notes contained herein and Management's Discussion and Analysis of Financial Condition and Results of Operations appearing in the 2019 Form 10-K. The results of operations for an interim period generally will not give a true indication of results for the year. In the following discussions, all comparisons are with the corresponding items in the prior year period. Earnings (Loss) Per Share Attributable to Net Income (Loss) Attributable NEE, to NEE Assuming Dilution Three Months Ended March Three Months Ended March 31, 31, 2020 2019 2020 2019 (millions) FPL$ 642 $ 588 $ 1.31 $ 1.22 Gulf Power 40 37 0.08 0.08 NEER(a)(b) 318 321 0.65 0.67 Corporate and Other(b) (579 ) (266 ) (1.18 ) (0.56 ) NEE$ 421 $ 680 $ 0.86 $ 1.41 ---------------
(a) 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
(b) NEER's and Corporate and Other's results for 2019 were retrospectively
adjusted to reflect a segment change. See Note 13.
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 reflected 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.
Three Months Ended
2020 2019
(millions)
Net losses associated with non-qualifying hedge activity(a)
$ (25 ) $ (22 )
NEP investment gains, net - NEER $ (36 ) $ (36 )
Gain on disposal of a business - NEER(b) $ 258 $ -
Change in unrealized gains (losses) on NEER's nuclear decommissioning funds and OTTI, net - NEER
$ (229 ) $ 84 Operating results of solar projects in Spain - NEER $ 1 $ 1 Acquisition-related - Corporate and Other $
- $ (41 )
---------------
(a) For the three months ended
million 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.
(b) See Note 11 - Disposal of a Business for a discussion of the sale of two
solar generation facilities in
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
35
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and foreign currency transactions entered into as economic hedges, which do not
meet the requirements for hedge accounting or for which hedge accounting
treatment was not elected or has been discontinued. Changes in the fair value of
those transactions are marked to market and reported in the condensed
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.
RESULTS OF OPERATIONS
Summary
Net income attributable to NEE for the three months endedMarch 31, 2020 was lower than the prior year period by$259 million , reflecting lower results at Corporate and Other and NEER, partly offset by higher results atFPL and Gulf Power . FPL's increase in net income for the three months endedMarch 31, 2020 was primarily driven by continued investments in plant in service and other property. During both 2020 and 2019, FPL earned an 11.60% regulatory ROE on its retail rate base, based on a trailing thirteen-month average retail rate base as ofMarch 31, 2020 andMarch 31, 2019 , respectively.
NEER's results decreased slightly for the three months endedMarch 31, 2020 primarily reflecting unfavorable changes in the fair value of equity securities in NEER's nuclear decommissioning funds compared to 2019, mostly offset by the gain recognized on the sale of theSpain projects and higher earnings on existing generation assets and new investments. Corporate and Other's results decreased for the three months endedMarch 31, 2020 primarily due to unfavorable non-qualifying hedge activity, partly offset by the absence of 2019 acquisition-related costs.
NEE's effective income tax rates for the three months ended
NEE and FPL are closely monitoring the global outbreak of COVID-19 and are taking steps intended to mitigate the potential risks to NEE and FPL posed by COVID-19. See Note 12 - Coronavirus Pandemic.
FPL: Results of Operations
Investments in plant in service and other property grew FPL's average retail rate base for the three months endedMarch 31, 2020 by approximately$3.7 billion , when compared to the same period in the prior year, reflecting, among other things, solar generation additions and ongoing transmission and distribution additions and, at the end of the first quarter of 2019, the Okeechobee Clean Energy Center, an approximately 1,750 MW natural gas-fired combined-cycle unit, achieved commercial operation. The use of reserve amortization is permitted by aDecember 2016 FPSC final order approving a stipulation and settlement between FPL and several intervenors in FPL's base rate proceeding (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 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 as well as revenue and costs not recoverable from retail customers by the FPSC. During the three months endedMarch 31, 2020 and 2019, FPL recorded reserve amortization of approximately$149 million and$156 million , respectively. InMarch 2020 , the FPSC approved FPL's SolarTogether program, a voluntary community solar program that gives FPL customers an opportunity to participate directly in the expansion of solar energy and receive credits on their monthly FPL bill for savings generated. The program includes the addition of 20 dedicated 74.5 MW new solar power plants owned and operated by FPL. As ofMarch 31, 2020 , 6 of the 20 plants have been placed into service. The remainder of the plants are expected to be placed into service by mid-2021. 36 -------------------------------------------------------------------------------- Operating Revenues During the three months endedMarch 31, 2020 , FPL's operating revenues decreased$78 million . The decrease reflects lower fuel revenues of approximately$141 million primarily related to lower fuel and energy prices as well as lower storm-related revenues. These decreases were partly offset by an increase of$94 million in retail base revenues reflecting additional revenues of approximately$45 million related to retail base rate increases primarily associated with the Okeechobee Clean Energy Center and the addition of new solar generation in 2019. Retail base revenues during the three months endedMarch 31, 2020 were also impacted by an increase of 1.8% in the average usage per retail customer and an increase of 1.4% in the average number of customer accounts. Fuel,Purchased Power and Interchange Expense Fuel, purchased power and interchange expense decreased$143 million for the three months endedMarch 31, 2020 primarily reflecting lower fuel and energy prices. Depreciation and Amortization Expense Depreciation and amortization expense increased$27 million during the three months endedMarch 31, 2020 . The increase in depreciation and amortization expense during the three months endedMarch 31, 2020 primarily reflects increased depreciation related to higher plant in service balances partly offset by lower storm-recovery cost amortization primarily as a result of the final payment of the storm-recovery bonds in the third quarter of 2019. During the three months endedMarch 31, 2020 and 2019, FPL recorded reserve amortization of approximately$149 million and$156 million , respectively. Reserve 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 accrued asset removal costs which is reflected in noncurrent regulatory liabilities on the condensed consolidated balance sheets. AtMarch 31, 2020 , approximately$744 million remains in accrued asset removal costs related to reserve amortization.
Gulf Power's net income attributable to NEE increased$3 million for the three months endedMarch 31, 2020 . Operating revenues were approximately$328 million for both the three months endedMarch 31, 2020 and 2019 and operating expenses decreased$1 million for the three months endedMarch 31, 2020 .
NEER: Results of Operations
NEER's net income less net loss attributable to noncontrolling interests
decreased
Increase (Decrease)
From Prior Year Period
Three Months Ended March
31, 2020
(millions)
New investments(a) $ 37
Existing assets(a) 45
Gas infrastructure(a) 10
Customer supply and proprietary power and gas trading(b) (9 )
NEET(b) 21
Interest and other general and administrative expenses(c) (29 ) Other, including other investment income and income taxes (4 ) Change in non-qualifying hedge activity(d)
(7 ) Change in unrealized gains/losses on equity securities held in nuclear decommissioning funds and OTTI, net(d)
(313 )
Disposals of businesses/assets(e) 246
Decrease in net income less net loss attributable to noncontrolling interests $ (3 ) ---------------
(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, 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.
(e) Primarily relates to the sale of the
of a Business.
37-------------------------------------------------------------------------------- New Investments Results from new investments for the three months endedMarch 31, 2020 increased primarily due to higher earnings, including federal income tax credits, related to new wind and solar generating facilities that entered service during or after the three months endedMarch 31, 2019 as well as investments in pipelines. Existing Assets Results from existing assets for the three months endedMarch 31, 2020 increased primarily due to higher results from wind generation facilities related to more favorable wind resource as compared to the prior year period and increased tax credits from repowered wind generation facilities. 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 condensed consolidated statements of income as they relate to NEER. Operating Revenues Operating revenues for the three months endedMarch 31, 2020 increased$612 million primarily due to: • the impact of gains from non-qualifying commodity hedges (approximately$441
million of gains for the three months ended
million of losses for the comparable period in 2019),
• net increases in revenues of
proprietary power and gas trading business and gas infrastructure business,
• higher revenues of
• revenues from new investments of
partly offset by,
• lower revenues from existing assets of
sale of the
Operating Expenses - net Operating expenses - net for the three months endedMarch 31, 2020 decreased$159 million primarily due to higher gains of approximately$247 million primarily related to the sale of theSpain projects (see Note 11 - Disposal of a Business), partly offset by higher other operations and maintenance expenses of approximately$46 million and higher depreciation expense of$28 million primarily associated with new investments and acquisitions.
Interest Expense
NEER's interest expense for the three months ended
Equity in Earnings (Losses) of Equity Method Investees NEER recognized$390 million of equity in losses of equity method investees for the three months endedMarch 31, 2020 compared to$16 million of equity in earnings of equity method investees for the prior year period. The change for the three months endedMarch 31, 2020 primarily reflects equity in losses of NEP recorded in 2020 primarily related to unfavorable impacts related to changes in the fair value of interest rate derivative instruments. The losses during the three months endedMarch 31, 2020 were partly offset by increased equity in earnings of other equity method investees. Change in Unrealized Gains (Losses) on Equity Securities Held in NEER's Nuclear Decommissioning Funds - net For the three months endedMarch 31, 2020 , 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 unfavorable market conditions in 2020 compared to favorable market conditions in 2019. Tax Credits, Benefits and Expenses PTCs from wind projects and ITCs from solar and certain wind projects are included 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. A portion of the PTCs and ITCs have been allocated to investors in connection with sales of differential membership interests. Also see Note 6 for a discussion of PTCs and ITCs and other income tax impacts.
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$313 million during the three months endedMarch 31, 2020 . The decrease for the three months endedMarch 31, 2020 primarily reflects higher after-tax losses of approximately$345 million related to non-qualifying hedge activity as a result of unfavorable impacts related to changes in the fair value of interest rate derivative instruments, partly offset by the absence of acquisition and integration costs incurred in 2019. 38 --------------------------------------------------------------------------------
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.
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