filings.toolsItem 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
81K characters. Original on sec.gov · Markdown
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
NEE’s operating performance is driven primarily by the operations of its two principal businesses, FPL, which serves more than 5.6 million customer accounts in Florida and is one of the largest electric utilities in the U.S., and NEER, which together with affiliated entities is the world's largest generator of renewable energy from the wind and sun based on 2020 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, the FPL segment and NEER, as well as an operating segment of NEE, Gulf Power, which was acquired by NEE in January 2019 and merged into FPL on January 1, 2021 (see Note 5 – Merger of FPL and Gulf Power Company). Corporate and Other 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, and may include the net effect of rounding. Prior year's share-based data included in Management's Discussion has been retrospectively adjusted to reflect the 2020 stock split. See Note 10 – Earnings Per Share. 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 2020 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 periods.
| Net Income (Loss) Attributable to NEE | Earnings (Loss) Per Share Attributable to NEE, Assuming Dilution | Net Income (Loss) Attributable to NEE | Earnings (Loss) Per Share Attributable to NEE, Assuming Dilution | ||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||
| (millions) | (millions) | ||||||||||||||||||||||||||||||||||||||||||||||
| FPL Segment | $ | 836 | $ | 757 | $ | 0.42 | $ | 0.38 | $ | 2,375 | $ | 2,148 | $ | 1.20 | $ | 1.09 | |||||||||||||||||||||||||||||||
| Gulf Power | 91 | 91 | 0.05 | 0.05 | 211 | 185 | 0.11 | 0.09 | |||||||||||||||||||||||||||||||||||||||
| NEER(a) | (428) | 376 | (0.22) | 0.19 | (252) | 1,175 | (0.13) | 0.60 | |||||||||||||||||||||||||||||||||||||||
| Corporate and Other | (52) | 5 | (0.02) | — | 35 | (584) | 0.02 | (0.29) | |||||||||||||||||||||||||||||||||||||||
| NEE | $ | 447 | $ | 1,229 | $ | 0.23 | $ | 0.62 | $ | 2,369 | $ | 2,924 | $ | 1.20 | $ | 1.49 |
———————————————
(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 NextEra Energy Resources' subsidiaries.
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 September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (millions) | |||||||||||||||||||||||
| Net losses associated with non-qualifying hedge activity(a) | $ | (941) | $ | (140) | $ | (1,732) | $ | (986) | |||||||||||||||
| Differential membership interests-related – NEER | $ | (30) | $ | (21) | $ | (76) | $ | (67) | |||||||||||||||
| NEP investment gains, net – NEER | $ | (48) | $ | 12 | $ | (133) | $ | (60) | |||||||||||||||
| Gain on disposal of a business – NEER(b) | $ | — | $ | — | $ | — | $ | 274 | |||||||||||||||
| Change in unrealized gains (losses) on NEER's nuclear decommissioning funds and OTTI, net – NEER | $ | (17) | $ | 67 | $ | 103 | $ | (4) | |||||||||||||||
———————————————
(a) For the three months ended September 30, 2021 and 2020, approximately $952 million and $233 million of losses, respectively, and for the nine months ended September 30, 2021 and 2020, $1,937 million and $579 million of losses, respectively, are included in NEER's net 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 Businesses/Assets and Sale of Noncontrolling Ownership Interests for a discussion of the sale of two solar generation facilities in Spain (Spain projects).
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 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 2.
RESULTS OF OPERATIONS
Summary
Net income attributable to NEE for the three months ended September 30, 2021 was lower than the prior year period by $782 million reflecting lower results at NEER and Corporate and Other, partly offset by higher results at the FPL segment. Net income attributable to NEE for the nine months ended September 30, 2021 was lower than the prior year period by $555 million reflecting lower results at NEER, partly offset by higher results at Corporate and Other, the FPL segment and Gulf Power.
FPL's net income increased by $79 million for the three months ended September 30, 2021 reflecting $79 million higher results at the FPL segment. FPL's net income increased by $252 million for the nine months ended September 30, 2021 primarily reflecting $227 million higher results at the FPL segment and $26 million higher results at Gulf Power. The FPL segment's increase in net income for the three and nine months ended September 30, 2021 was primarily driven by continued investments in plant in service and other property. Gulf Power's increase in net income for the nine months ended September 30, 2021 was primarily driven by reductions in O&M expenses.
NEER's results decreased for the three months ended September 30, 2021 primarily reflecting unfavorable non-qualifying hedge activity compared to 2020 and losses associated with changes in the fair value of equity securities in NEER's nuclear decommissioning funds compared to 2020. NEER's results decreased for the nine months ended September 30, 2021 primarily reflecting unfavorable non-qualifying hedge activity compared to 2020 and the absence of the 2020 gain on the sale of the Spain projects. In October 2021, subsidiaries of NextEra Energy Resources completed the sale to a NEP subsidiary of their ownership interests in a portfolio of wind and solar generation facilities with a combined net generating capacity totaling approximately 589 MW. In addition, in October 2021, subsidiaries of NextEra Energy Resources entered into an agreement to sell to a NEP subsidiary controlling ownership interests in a portfolio of wind and solar generation facilities with a combined net generating capacity of 1,260 MW and 58 MW of battery storage capacity. See Note 11 – Disposal of Businesses/Assets and Sale of Noncontrolling Ownership Interests.
Corporate and Other's results decreased for the three months ended September 30, 2021 primarily due to less favorable non-qualifying hedge activity. Corporate and Other's results increased for the nine months ended September 30, 2021 primarily due to favorable non-qualifying hedge activity.
NEE's effective income tax rates for the three months ended September 30, 2021 and 2020 were approximately (10)% and 10%, respectively. NEE's effective income tax rates for the nine months ended September 30, 2021 and 2020 were approximately 4% and 3%, respectively. See Note 4 for a discussion of NEE's and FPL's effective income tax rates.
On June 30, 2021, the Internal Revenue Service issued guidance that extends the safe harbor for continuous efforts and continuous construction requirements to provide wind and solar facilities that began construction between 2016 and 2019 with six years to complete construction and to provide wind and solar facilities that began construction in 2020 with five years to achieve their in service dates and qualify for the applicable tax credits. Also, if the time period to satisfy the safe harbor has passed, the continuity requirement is satisfied by demonstrating satisfaction of either the continuous efforts or continuous construction requirement, regardless of the method used to begin construction.
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
The table below presents net income for FPL by reportable segment, the FPL segment and Gulf Power. On January 1, 2021, FPL and Gulf Power Company merged, with FPL as the surviving entity. However, FPL will continue to be regulated as two separate ratemaking entities until the FPSC approves consolidation of the FPL segment and Gulf Power rates and tariffs. The FPL segment and Gulf Power will continue to be separate operating segments of NEE as well as FPL, through 2021. See Note 5 – Merger of FPL and Gulf Power Company. Prior year FPL amounts have been retrospectively adjusted to reflect the merger of FPL and Gulf Power Company. In the following discussions, all comparisons are with the corresponding items in the prior year periods.
| Net Income | |||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (millions) | |||||||||||||||||||||||
| FPL Segment | $ | 836 | $ | 757 | $ | 2,375 | $ | 2,148 | |||||||||||||||
| Gulf Power | 91 | 91 | 211 | 185 | |||||||||||||||||||
| Corporate and Other | — | — | — | 1 | |||||||||||||||||||
| FPL | $ | 927 | $ | 848 | $ | 2,586 | $ | 2,334 |
FPL Segment: Results of Operations
Investments in plant in service and other property grew the FPL segment's average retail rate base for the three and nine months ended September 30, 2021 by approximately $3.0 billion and $3.4 billion, respectively, when compared to the same periods in the prior year, reflecting, among other things, solar generation additions and ongoing transmission and distribution additions.
The use of reserve amortization is permitted by 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 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 the FPL segment'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. During the three and nine months ended September 30, 2021, the FPL segment recorded the reversal of reserve amortization of approximately $124 million and reserve amortization of $291 million, respectively. During the three and nine months ended September 30, 2020, the FPL segment recorded the reversal of reserve amortization of approximately $258 million and $101 million, respectively. During both 2021 and 2020, the FPL segment earned an approximately 11.60% regulatory ROE on its retail rate base, based on a trailing thirteen-month average retail rate base as of September 30, 2021 and September 30, 2020.
On March 12, 2021, FPL filed a petition with the FPSC requesting, among other things, approval of a proposed four-year rate plan that would begin in January 2022 replacing the 2016 rate agreement. As Gulf Power Company legally merged into FPL on January 1, 2021, the proposed four-year rate plan set forth in the petition includes the total revenue requirements of the combined utility system, reflecting the legal and operational consolidation of Gulf Power Company into FPL. On August 10, 2021, FPL and several intervenors in FPL's base rate proceeding filed with the FPSC a joint motion requesting that the FPSC approve a stipulation and settlement signed by those parties that would resolve all matters in FPL's pending base rate proceeding. The proposed 2021 rate agreement is subject to FPSC approval. Hearings on the proposed four-year rate plan and the proposed 2021 rate agreement were held in September 2021 and the FPSC is expected to rule on the proposed 2021 rate agreement on October 26, 2021. See Note 11 – FPL 2021 Base Rate Proceeding.
In March 2020, the FPSC approved the SolarTogether™ program, a voluntary community solar program that gives certain FPL electric customers an opportunity to participate directly in the expansion of solar energy and receive credits on their related monthly customer bill. The program includes the addition of 20 dedicated 74.5 MW solar power plants owned and operated by FPL. As of June 30, 2021, all 20 plants had been placed into service.
Operating Revenues
During the three and nine months ended September 30, 2021, operating revenues increased $239 million and $716 million, respectively. The increase for the three and nine months ended September 30, 2021 primarily reflects higher fuel revenues of approximately $210 million and $605 million, respectively, primarily related to higher fuel and energy prices. Retail base revenues decreased $10 million and $16 million during the three and nine months ended September 30, 2021, respectively, as compared to the prior year period. Retail base revenues during the three and nine months ended September 30, 2021 were impacted by a decrease of 2.9% and 2.4%, respectively, in the average usage per retail customer, primarily related to unfavorable weather when compared to the prior year period, and an increase of 1.5% in the average number of customer accounts for both periods.
Fuel, Purchased Power and Interchange Expense
Fuel, purchased power and interchange expense increased $214 million and $612 million for the three and nine months ended September 30, 2021, respectively, primarily reflecting higher fuel and energy prices.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased $89 million and $274 million during the three and nine months ended September 30, 2021, respectively. During the three and nine months ended September 30, 2021, FPL recorded the reversal of reserve amortization of approximately $124 million and reserve amortization of $291 million, respectively, compared to the reversal of reserve amortization of approximately $258 million and $101 million during the three and nine months ended September 30, 2020, respectively. 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 (or when reversed as an increase) to accrued asset removal costs which is reflected in noncurrent regulatory liabilities on the condensed consolidated balance sheets. At September 30, 2021, approximately $597 million remains in accrued asset removal costs related to reserve amortization. The decreases related to reserve amortization were partly offset by increased depreciation related to higher plant in service balances.
Gulf Power: Results of Operations
Gulf Power's net income was flat for the three months ended September 30, 2021 as compared to the prior year period. Gulf Power's net income increased $26 million for the nine months ended September 30, 2021. Operating revenues increased $36 million and $72 million for the three and nine months ended September 30, 2021, respectively, primarily related to higher fuel revenues. Operating expenses – net increased $37 million and $59 million for the three and nine months ended September 30, 2021, respectively, primarily related to increases of $35 million and $64 million, respectively, in fuel, purchased power and interchange expense, partly offset by lower O&M expenses.
In March 2021, the FPSC approved a request to begin recovering eligible storm restoration costs related to Hurricane Sally. See Note 11 – Regulatory Assets of Gulf Power.
NEER**: Results of Operations**
NEER’s net income less net loss attributable to noncontrolling interests decreased $804 million and $1,427 million for the three and nine months ended September 30, 2021, respectively. The primary drivers, on an after-tax basis, of the changes are in the following table.
| Increase (Decrease) From Prior Year Period | |||||||||||
| Three Months Ended September 30, 2021 | Nine Months Ended September 30, 2021 | ||||||||||
| (millions) | |||||||||||
| New investments(a) | $ | 51 | $ | 214 | |||||||
| Existing generation and storage assets(a) | 21 | (29) | |||||||||
| Gas infrastructure(a) | (1) | 46 | |||||||||
| Customer supply and proprietary power and gas trading(b) | 43 | (42) | |||||||||
| NEET(b) | 1 | 16 | |||||||||
| Other, including income taxes and other investment income | (56) | (34) | |||||||||
| Change in non-qualifying hedge activity(c) | (719) | (1,358) | |||||||||
| Change in unrealized gains/losses on equity securities held in nuclear decommissioning funds and OTTI, net(c) | (84) | 107 | |||||||||
| NEP investment gains, net(c) | (60) | (73) | |||||||||
| Disposal of a business(d) | — | (274) | |||||||||
| Decrease in net income less net loss attributable to noncontrolling interests | $ | (804) | $ | (1,427) |
———————————————
(a) Reflects after-tax project contributions, including the net effect of deferred income taxes and other benefits associated with PTCs and ITCs for wind, solar, and storage 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, including repowered wind projects, are included in existing generation and storage 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) See Overview – Adjusted Earnings for additional information.
(d) Relates to the sale of the Spain projects. See Note 11 – Disposal of Businesses/Assets and Sale of Noncontrolling Ownership Interests.
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 ended September 30, 2021 decreased $695 million primarily due to:
-
the impact of non-qualifying commodity hedges due primarily to changes in energy prices (approximately $1,268 million of losses for the three months ended September 30, 2021 compared to $410 million of losses for the comparable period in 2020), and
-
lower revenues from existing generation and storage assets of $45 million primarily due to the closure of Duane Arnold in August 2020,
partly offset by,
-
net increases in revenues of $110 million from the customer supply, proprietary power and gas trading, and gas infrastructure businesses, and
-
revenues from new investments of $80 million.
Operating revenues for the nine months ended September 30, 2021 decreased $2,382 million primarily due to:
-
the impact of non-qualifying commodity hedges due primarily to changes in energy prices (approximately $2,808 million of losses for the nine months ended September 30, 2021 compared to $226 million of losses for the comparable period in 2020), and
-
lower revenues from existing generation and storage assets of $307 million primarily due to the closure of Duane Arnold in August 2020 and the February weather event,
partly offset by,
-
net increases in revenues of $222 million from the customer supply, proprietary power and gas trading, and gas infrastructure businesses, and
-
revenues from new investments of $238 million.
Operating Expenses – net
Operating expenses – net for the nine months ended September 30, 2021 increased $295 million primarily due to an increase of $106 million in O&M expenses primarily related to bad debt expense associated with the February weather event (see Note 11 – Credit Losses) and an increase in depreciation expense of $105 million primarily related to new investments.
Gains (Losses) on Disposal of Businesses/Assets – net
The change in gains on disposal of businesses/assets – net primarily relates to the absence in the nine months ended September 30, 2021 of the sale of the Spain projects that occurred in the first quarter of 2020. See Note 11 – Disposal of Businesses/Assets and Sale of Noncontrolling Ownership Interests.
Interest Expense
NEER’s interest expense for the nine months ended September 30, 2021 decreased approximately $327 million primarily reflecting $307 million of favorable impacts related to changes in the fair value of interest rate derivative instruments.
Equity in Earnings (Losses) of Equity Method Investees
NEER recognized $109 million of equity in earnings of equity method investees for the three months ended September 30, 2021 compared to $249 million of equity in earnings of equity method investees for the prior year period. The change for the three months ended September 30, 2021 primarily reflects lower equity in earnings of NEP recorded in 2021 when compared to the prior year period primarily due to unfavorable impacts related to changes in the fair value of interest rate derivative instruments. NEER recognized $465 million of equity in earnings of equity method investees for the nine months ended September 30, 2021 compared to $13 million of equity in earnings of equity method investees for the prior year period. The change for the nine months ended September 30, 2021 primarily reflects higher equity in earnings of NEP recorded in 2021 primarily due to favorable impacts related to changes in the fair value of interest rate derivative instruments.
Change in Unrealized Gains (Losses) on Equity Securities Held in NEER's Nuclear Decommissioning Funds – net
For the three months ended September 30, 2021, changes in the fair value of equity securities in NEER's nuclear decommissioning funds related to unfavorable market conditions in 2021 compared to favorable market conditions in 2020. For the nine months ended September 30, 2021, changes in the fair value of equity securities in NEER's nuclear decommissioning funds related to favorable market conditions in 2021 compared to unfavorable market conditions in 2020.
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 4 for a discussion of other income tax impacts.
GridLiance Acquisition
On March 31, 2021, a wholly owned subsidiary of NEET acquired GridLiance, which owns and operates three FERC-regulated transmission utilities across six states, five in the Midwest and Nevada. See Note 5 – GridLiance.
Corporate and Other: Results of Operations
Corporate and Other at NEE 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 NextEra Energy Resources. Interest expense is allocated based on a deemed capital structure of 70% debt and differential membership interests sold by NextEra Energy Resources' subsidiaries.
Corporate and Other's results decreased $57 million and increased $619 million during the three and nine months ended September 30, 2021, respectively. The decrease for the three months ended September 30, 2021 primarily reflects less favorable after-tax impacts of approximately $82 million, as compared to the prior year period, related to non-qualifying hedge activity as a result of changes in the fair value of interest rate derivative instruments. The increase for the nine months ended September 30, 2021 primarily reflects favorable after-tax impacts of approximately $612 million, as compared to the prior year period, related to non-qualifying hedge activity as a result of changes in the fair value of interest rate derivative instruments.
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 (see Note 12 – Commitments), investments in or acquisitions of assets and businesses (see Note 5), payment of maturing debt and related derivative obligations (see Note 2) and, from time to time, redemption or repurchase of outstanding debt (see Note 9) 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.
Cash Flows
NEE's sources and uses of cash for the nine months ended September 30, 2021 and 2020 were as follows:
| Nine Months Ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| (millions) | |||||||||||
| Sources of cash: | |||||||||||
| Cash flows from operating activities | $ | 6,236 | $ | 6,631 | |||||||
| Issuances of long-term debt, including premiums and discounts | 9,614 | 11,898 | |||||||||
| Proceeds from differential membership investors | 328 | 572 | |||||||||
| Sale of independent power and other investments of NEER | 384 | 178 | |||||||||
| Payments from related parties under the CSCS agreement – net | 295 | 70 | |||||||||
| Issuances of common stock – net | 7 | — | |||||||||
| Net increase in commercial paper and other short-term debt | 1,785 | — | |||||||||
| Other sources – net | 41 | 71 | |||||||||
| Total sources of cash | 18,690 | 19,420 | |||||||||
| Uses of cash: | |||||||||||
| Capital expenditures, independent power and other investments and nuclear fuel purchases(a) | (12,005) | (9,312) | |||||||||
| Retirements of long-term debt | (4,262) | (3,690) | |||||||||
| Net decrease in commercial paper and other short-term debt | — | (2,458) | |||||||||
| Issuances of common stock/equity units – net | — | (100) | |||||||||
| Dividends | (2,267) | (2,057) | |||||||||
| Other uses – net | (699) | (464) | |||||||||
| Total uses of cash | (19,233) | (18,081) | |||||||||
| Effects of currency translation on cash, cash equivalents and restricted cash | 1 | (10) | |||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | $ | (542) | $ | 1,329 |
———————————————
(a) 2021 includes the acquisition of GridLiance. See Note 5 – GridLiance.
In October 2021, subsidiaries of NextEra Energy Resources completed the sale to a NEP subsidiary of their ownership interests in a portfolio of wind and solar generation facilities with a combined net generating capacity totaling approximately 589 MW. See Note 11 – Disposal of Businesses/Assets and Sale of Noncontrolling Ownership Interests.
NEE's primary capital requirements are for expanding and enhancing the FPL segment'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 12 – Commitments for estimated capital expenditures for the remainder of 2021 through 2025. The following table provides a summary of capital investments for the nine months ended September 30, 2021 and 2020.
| Nine Months Ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| (millions) | |||||||||||
| FPL Segment: | |||||||||||
| Generation: | |||||||||||
| New | $ | 540 | $ | 970 | |||||||
| Existing | 770 | 590 | |||||||||
| Transmission and distribution | 2,905 | 2,317 | |||||||||
| Nuclear fuel | 110 | 122 | |||||||||
| General and other | 410 | 410 | |||||||||
| Other, primarily change in accrued property additions and the exclusion of AFUDC – equity | (153) | 92 | |||||||||
| Total | 4,582 | 4,501 | |||||||||
| Gulf Power | 527 | 859 | |||||||||
| NEER: | |||||||||||
| Wind | 3,389 | 1,720 | |||||||||
| Solar (includes solar plus battery storage projects) | 1,629 | 1,254 | |||||||||
| Battery storage | 267 | 14 | |||||||||
| Nuclear, including nuclear fuel | 173 | 94 | |||||||||
| Natural gas pipelines | 179 | 144 | |||||||||
| Other gas infrastructure | 377 | 450 | |||||||||
| Other (2021 includes the acquisition of GridLiance, see Note 5 – GridLiance) | 881 | 268 | |||||||||
| Total | 6,895 | 3,944 | |||||||||
| Corporate and Other | 1 | 8 | |||||||||
| Total capital expenditures, independent power and other investments and nuclear fuel purchases | $ | 12,005 | $ | 9,312 |
Liquidity
At September 30, 2021, NEE's total net available liquidity was approximately $7.6 billion. The table below provides the components of FPL's and NEECH's net available liquidity at September 30, 2021.
| Maturity Date | |||||||||||||||||||||||||||||||||||||||||
| FPL | NEECH | Total | FPL | NEECH | |||||||||||||||||||||||||||||||||||||
| (millions) | |||||||||||||||||||||||||||||||||||||||||
| Syndicated revolving credit facilities(a) | $ | 3,798 | $ | 5,257 | $ | 9,055 | 2022 – 2026 | 2022 – 2026 | |||||||||||||||||||||||||||||||||
| Issued letters of credit | (3) | (1,045) | (1,048) | ||||||||||||||||||||||||||||||||||||||
| 3,795 | 4,212 | 8,007 | |||||||||||||||||||||||||||||||||||||||
| Bilateral revolving credit facilities(b) | 1,980 | 1,425 | 3,405 | 2021 – 2024 | 2021 – 2024 | ||||||||||||||||||||||||||||||||||||
| Borrowings | — | — | — | ||||||||||||||||||||||||||||||||||||||
| 1,980 | 1,425 | 3,405 | |||||||||||||||||||||||||||||||||||||||
| Letter of credit facilities(c) | — | 1,250 | 1,250 | 2022 – 2023 | |||||||||||||||||||||||||||||||||||||
| Issued letters of credit | — | (1,165) | (1,165) | ||||||||||||||||||||||||||||||||||||||
| — | 85 | 85 | |||||||||||||||||||||||||||||||||||||||
| Subtotal | 5,775 | 5,722 | 11,497 | ||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | 71 | 618 | 689 | ||||||||||||||||||||||||||||||||||||||
| Commercial paper and other short-term borrowings outstanding | (899) | (3,395) | (4,294) | ||||||||||||||||||||||||||||||||||||||
| Amounts due to related parties under the CSCS agreement (see Note 6) | — | (306) | (306) | ||||||||||||||||||||||||||||||||||||||
| Net available liquidity | $ | 4,947 | $ | 2,639 | $ | 7,586 |
———————————————
(a) Provide for the funding of loans up to the amount of the credit facility and the issuance of letters of credit up to $3,275 million ($650 million for FPL and $2,625 million for NEECH). The entire amount 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 $1,375 million of pollution control, solid waste disposal and industrial development revenue bonds in the event they are tendered by individual bondholders and not remarketed prior to maturity, as well as the repayment of approximately $882 million of floating rate notes in the event an individual noteholder requires repayment at specified dates prior to maturity. Approximately $3,120 million of FPL's and $3,889 million of NEECH's syndicated revolving credit facilities expire in 2026.
(b) Approximately $300 million of NEECH's bilateral revolving credit facilities is available for costs incurred in connection with the development, construction and operations of wind and solar power generation facilities.
(c) Only available for the issuance of letters of credit.
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. At September 30, 2021, 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 a natural gas pipeline project under construction and a related natural gas transportation agreement. Commitments associated with these activities are included in the contracts table in Note 12.
In addition, at September 30, 2021, NEE subsidiaries had approximately $4.6 billion in guarantees related to obligations under purchased power agreements, nuclear-related activities, payment obligations related to PTCs, as well as other types of contractual obligations (see Note 3 – Contingent Consideration and Note 12 – Commitments).
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. At September 30, 2021, these guarantees totaled approximately $451 million and support, among other things, cash management activities, including those related to debt service and operations and maintenance 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. At September 30, 2021, 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
at September 30, 2021) plus contract settlement net payables, net of collateral posted for obligations under these guarantees, totaled approximately $2.5 billion.
At September 30, 2021, subsidiaries of NEE also had approximately $3.0 billion of standby letters of credit and approximately $844 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.
NEECH, a 100% owned subsidiary of NEE, provides funding for, and holds ownership interests in, NEE's operating subsidiaries other than FPL. NEE has fully and unconditionally guaranteed certain payment obligations of NEECH, including most of its debt and all of its debentures registered pursuant to the Securities Act of 1933 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. Certain guarantee arrangements described above contain requirements for NEECH and FPL to maintain a specified credit rating.
NEE fully and unconditionally guarantees NEECH debentures pursuant to a guarantee agreement, dated as of June 1, 1999 (1999 guarantee) and NEECH junior subordinated debentures pursuant to an indenture, dated as of September 1, 2006 (2006 guarantee). The 1999 guarantee is an unsecured obligation of NEE and ranks equally and ratably with all other unsecured and unsubordinated indebtedness of NEE. The 2006 guarantee is unsecured and subordinate and junior in right of payment to NEE senior indebtedness (as defined therein). No payment on those junior subordinated debentures may be made under the 2006 guarantee until all NEE senior indebtedness has been paid in full in certain circumstances. NEE’s and NEECH’s ability to meet their financial obligations are primarily dependent on their subsidiaries’ net income, cash flows and their ability to pay upstream dividends or to repay funds to NEE and NEECH. The dividend-paying ability of some of the subsidiaries is limited by contractual restrictions which are contained in outstanding financing agreements.
Summarized financial information of NEE and NEECH is as follows:
| Nine Months Ended September 30, 2021 | Year Ended December 31, 2020 | |||||||||||||||||||||||||||||||||||||
| Issuer/Guarantor Combined**(a)** | NEECH Consolidated**(b)** | NEE Consolidated**(b)** | Issuer/Guarantor Combined(a) | NEECH Consolidated(b) | NEE Consolidated(b) | |||||||||||||||||||||||||||||||||
| (millions) | ||||||||||||||||||||||||||||||||||||||
| Operating revenues | $ | (2) | $ | 1,477 | $ | 12,023 | $ | (1) | $ | 5,093 | $ | 17,997 | ||||||||||||||||||||||||||
| Operating income (loss) | $ | (247) | $ | (1,839) | $ | 1,558 | $ | (269) | $ | 1,221 | $ | 5,116 | ||||||||||||||||||||||||||
| Net income (loss) | $ | 4 | $ | (723) | $ | 1,874 | $ | (500) | $ | (551) | $ | 2,369 | ||||||||||||||||||||||||||
| Net income (loss) attributable to NEE/NEECH | $ | 4 | $ | (228) | $ | 2,369 | $ | (500) | $ | — | $ | 2,919 |
| September 30, 2021 | December 31, 2020 | |||||||||||||||||||||||||||||||||||||
| Issuer/Guarantor Combined**(a)** | NEECH Consolidated**(b)** | NEE Consolidated**(b)** | Issuer/Guarantor Combined(a) | NEECH Consolidated(b) | NEE Consolidated(b) | |||||||||||||||||||||||||||||||||
| (millions) | ||||||||||||||||||||||||||||||||||||||
| Total current assets | $ | 212 | $ | 6,186 | $ | 9,572 | $ | 620 | $ | 4,571 | $ | 7,382 | ||||||||||||||||||||||||||
| Total noncurrent assets | $ | 2,165 | $ | 58,463 | $ | 129,591 | $ | 2,069 | $ | 52,565 | $ | 120,302 | ||||||||||||||||||||||||||
| Total current liabilities | $ | 6,060 | $ | 15,010 | $ | 20,456 | $ | 4,317 | $ | 9,991 | $ | 15,558 | ||||||||||||||||||||||||||
| Total noncurrent liabilities | $ | 26,983 | $ | 38,384 | $ | 73,981 | $ | 22,854 | $ | 31,439 | $ | 67,197 | ||||||||||||||||||||||||||
| Redeemable noncontrolling interests | $ | — | $ | 79 | $ | 79 | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||
| Noncontrolling interests | $ | — | $ | 7,998 | $ | 7,998 | $ | — | $ | 8,416 | $ | 8,416 |
| ———————————— | |||||
| (a) | Excludes intercompany transactions, and investments in, and equity in earnings of, subsidiaries. | ||||
| (b) | Information has been prepared on the same basis of accounting as NEE's condensed consolidated financial statements. |
Shelf Registration
In March 2021, NEE, NEECH and FPL filed a shelf registration statement with the SEC 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, depositary shares, stock purchase contracts, stock purchase units, warrants and guarantees related to certain of those securities.
Covenants
On June 15, 2021, NEECH designated its 3.50% Debentures, Series due April 1, 2029 as the Covered Debt for purposes of the Replacement Capital Covenant from NEECH and NEE, dated September 19, 2006, as amended, and the Replacement Capital Covenant from NEECH and NEE, dated June 12, 2007, as amended, replacing its 3.625% Debentures, Series due June 15, 2023.
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 fuel marketing and trading activities to take advantage of expected future favorable price movements. See Note 2.
The changes in the fair value of NEE's consolidated subsidiaries' energy contract derivative instruments for the three and nine months ended September 30, 2021 were as follows:
| Hedges on Owned Assets | |||||||||||||||||||||||||||||
| Trading | Non- Qualifying | FPL Cost Recovery Clauses | NEE Total | ||||||||||||||||||||||||||
| (millions) | |||||||||||||||||||||||||||||
| Three months ended September 30, 2021 | |||||||||||||||||||||||||||||
| Fair value of contracts outstanding at June 30, 2021 | $ | 777 | $ | (356) | $ | 5 | $ | 426 | |||||||||||||||||||||
| Reclassification to realized at settlement of contracts | (44) | 79 | (6) | 29 | |||||||||||||||||||||||||
| Value of contracts acquired | (5) | 5 | — | — | |||||||||||||||||||||||||
| Net option premium purchases (issuances) | 6 | 4 | — | 10 | |||||||||||||||||||||||||
| Changes in fair value excluding reclassification to realized | 22 | (1,312) | 9 | (1,281) | |||||||||||||||||||||||||
| Fair value of contracts outstanding at September 30, 2021 | 756 | (1,580) | 8 | (816) | |||||||||||||||||||||||||
| Net margin cash collateral paid (received) | (351) | ||||||||||||||||||||||||||||
| Total mark-to-market energy contract net assets (liabilities) at September 30, 2021 | $ | 756 | $ | (1,580) | $ | 8 | $ | (1,167) |
| Hedges on Owned Assets | |||||||||||||||||||||||||||||
| Trading | Non- Qualifying | FPL Cost Recovery Clauses | NEE Total | ||||||||||||||||||||||||||
| (millions) | |||||||||||||||||||||||||||||
| Nine months ended September 30, 2021 | |||||||||||||||||||||||||||||
| Fair value of contracts outstanding at December 31, 2020 | $ | 706 | $ | 996 | $ | — | $ | 1,702 | |||||||||||||||||||||
| Reclassification to realized at settlement of contracts | 49 | 94 | (5) | 138 | |||||||||||||||||||||||||
| Value of contracts acquired | 7 | 7 | — | 14 | |||||||||||||||||||||||||
| Net option premium purchases (issuances) | 19 | 6 | — | 25 | |||||||||||||||||||||||||
| Changes in fair value excluding reclassification to realized | (25) | (2,683) | 13 | (2,695) | |||||||||||||||||||||||||
| Fair value of contracts outstanding at September 30, 2021 | 756 | (1,580) | 8 | (816) | |||||||||||||||||||||||||
| Net margin cash collateral paid (received) | (351) | ||||||||||||||||||||||||||||
| Total mark-to-market energy contract net assets (liabilities) at September 30, 2021 | $ | 756 | $ | (1,580) | $ | 8 | $ | (1,167) |
NEE's total mark-to-market energy contract net assets (liabilities) at September 30, 2021 shown above are included on the condensed consolidated balance sheets as follows:
| September 30, 2021 | |||||
| (millions) | |||||
| Current derivative assets | $ | 1,079 | |||
| Noncurrent derivative assets | 1,176 | ||||
| Current derivative liabilities | (2,522) | ||||
| Noncurrent derivative liabilities | (900) | ||||
| NEE's total mark-to-market energy contract net assets | $ | (1,167) |
The sources of fair value estimates and maturity of energy contract derivative instruments at September 30, 2021 were as follows:
| Maturity | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | Total | ||||||||||||||||||||||||||||||||||||||
| (millions) | ||||||||||||||||||||||||||||||||||||||||||||
| Trading: | ||||||||||||||||||||||||||||||||||||||||||||
| Quoted prices in active markets for identical assets | $ | 233 | $ | (196) | $ | (182) | $ | (139) | $ | (69) | $ | — | $ | (353) | ||||||||||||||||||||||||||||||
| Significant other observable inputs | 158 | 813 | 376 | 214 | 146 | 94 | 1,801 | |||||||||||||||||||||||||||||||||||||
| Significant unobservable inputs | (428) | (544) | (59) | 6 | 38 | 295 | (692) | |||||||||||||||||||||||||||||||||||||
| Total | (37) | 73 | 135 | 81 | 115 | 389 | 756 | |||||||||||||||||||||||||||||||||||||
| Owned Assets – Non-Qualifying: | ||||||||||||||||||||||||||||||||||||||||||||
| Quoted prices in active markets for identical assets | (7) | (67) | (25) | (3) | 1 | — | (101) | |||||||||||||||||||||||||||||||||||||
| Significant other observable inputs | (237) | (630) | (363) | (254) | (131) | (109) | (1,724) | |||||||||||||||||||||||||||||||||||||
| Significant unobservable inputs | 8 | 18 | 20 | 18 | 24 | 157 | 245 | |||||||||||||||||||||||||||||||||||||
| Total | (236) | (679) | (368) | (239) | (106) | 48 | (1,580) | |||||||||||||||||||||||||||||||||||||
| Owned Assets – FPL Cost Recovery Clauses: | ||||||||||||||||||||||||||||||||||||||||||||
| Quoted prices in active markets for identical assets | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Significant other observable inputs | 7 | 2 | — | — | — | — | 9 | |||||||||||||||||||||||||||||||||||||
| Significant unobservable inputs | 2 | (2) | (1) | — | — | — | (1) | |||||||||||||||||||||||||||||||||||||
| Total | 9 | — | (1) | — | — | — | 8 | |||||||||||||||||||||||||||||||||||||
| Total sources of fair value | $ | (264) | $ | (606) | $ | (234) | $ | (158) | $ | 9 | $ | 437 | $ | (816) |
The changes in the fair value of NEE's consolidated subsidiaries' energy contract derivative instruments for the three and nine months ended September 30, 2020 were as follows:
| Hedges on Owned Assets | ||||||||||||||||||||||||||
| Trading | Non- Qualifying | FPL Cost Recovery Clauses | NEE Total | |||||||||||||||||||||||
| (millions) | ||||||||||||||||||||||||||
| Three months ended September 30, 2020 | ||||||||||||||||||||||||||
| Fair value of contracts outstanding at June 30, 2020 | $ | 704 | $ | 1,350 | $ | (9) | $ | 2,045 | ||||||||||||||||||
| Reclassification to realized at settlement of contracts | (84) | (5) | 3 | (86) | ||||||||||||||||||||||
| Net option premium purchases (issuances) | 7 | 3 | — | 10 | ||||||||||||||||||||||
| Changes in fair value excluding reclassification to realized | 47 | (373) | (3) | (329) | ||||||||||||||||||||||
| Fair value of contracts outstanding at September 30, 2020 | 674 | 975 | (9) | 1,640 | ||||||||||||||||||||||
| Net margin cash collateral paid (received) | (144) | |||||||||||||||||||||||||
| Total mark-to-market energy contract net assets (liabilities) at September 30, 2020 | $ | 674 | $ | 975 | $ | (9) | $ | 1,496 |
| Hedges on Owned Assets | |||||||||||||||||||||||
| Trading | Non- Qualifying | FPL Cost Recovery Clauses | NEE Total | ||||||||||||||||||||
| (millions) | |||||||||||||||||||||||
| Nine months ended September 30, 2020 | |||||||||||||||||||||||
| Fair value of contracts outstanding at December 31, 2019 | $ | 651 | $ | 1,209 | $ | (11) | $ | 1,849 | |||||||||||||||
| Reclassification to realized at settlement of contracts | (304) | (215) | 10 | (509) | |||||||||||||||||||
| Value of contracts acquired | 91 | (38) | — | 53 | |||||||||||||||||||
| Net option premium purchases (issuances) | 3 | 4 | — | 7 | |||||||||||||||||||
| Changes in fair value excluding reclassification to realized | 233 | 15 | (8) | 240 | |||||||||||||||||||
| Fair value of contracts outstanding at September 30, 2020 | 674 | 975 | (9) | 1,640 | |||||||||||||||||||
| Net margin cash collateral paid (received) | (144) | ||||||||||||||||||||||
| Total mark-to-market energy contract net assets (liabilities) at September 30, 2020 | $ | 674 | $ | 975 | $ | (9) | $ | 1,496 |
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. The EMC 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:
| Trading(a) | Non-Qualifying Hedges and Hedges in FPL Cost Recovery Clauses(b) | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||
| FPL | NEER | NEE | FPL | NEER | NEE | FPL | NEER | NEE | |||||||||||||||||||||||||||||||||||||||||||||
| (millions) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2020 | $ | — | $ | 3 | $ | 3 | $ | 1 | $ | 77 | $ | 78 | $ | 1 | $ | 84 | $ | 85 | |||||||||||||||||||||||||||||||||||
| September 30, 2021 | $ | — | $ | 15 | $ | 15 | $ | 1 | $ | 189 | $ | 190 | $ | 1 | $ | 196 | $ | 197 | |||||||||||||||||||||||||||||||||||
| Average for the nine months ended September 30, 2021 | $ | — | $ | 8 | $ | 8 | $ | — | $ | 72 | $ | 72 | $ | — | $ | 74 | $ | 75 |
———————————————
(a) The VaR figures for the trading portfolio include positions that are marked to market. Taking into consideration offsetting unmarked non-derivative positions, such as physical inventory, the trading VaR figures were approximately $5 million and $3 million at September 30, 2021 and December 31, 2020, respectively.
(b) 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.
The following are estimates of the fair value of NEE's and FPL's financial instruments that are exposed to interest rate risk:
| September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||
| Carrying Amount | Estimated Fair Value**(a)** | Carrying Amount | Estimated Fair Value(a) | ||||||||||||||||||||
| (millions) | |||||||||||||||||||||||
| NEE: | |||||||||||||||||||||||
| Fixed income securities: | |||||||||||||||||||||||
| Special use funds | $ | 2,328 | $ | 2,328 | $ | 2,134 | $ | 2,134 | |||||||||||||||
| Other investments, primarily debt securities | $ | 394 | $ | 394 | $ | 247 | $ | 247 | |||||||||||||||
| Long-term debt, including current portion | $ | 51,047 | $ | 55,102 | $ | 46,082 | $ | 51,525 | |||||||||||||||
| Interest rate contracts – net unrealized losses | $ | (575) | $ | (575) | $ | (961) | $ | (961) | |||||||||||||||
| FPL: | |||||||||||||||||||||||
| Fixed income securities – special use funds | $ | 1,784 | $ | 1,784 | $ | 1,617 | $ | 1,617 | |||||||||||||||
| Long-term debt, including current portion | $ | 17,324 | $ | 20,273 | $ | 17,236 | $ | 21,178 |
———————————————
(a)See Notes 2 and 3.
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. 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 credit losses, result in a corresponding adjustment to the related regulatory asset or liability accounts based on current regulatory treatment. The changes in fair value for NEE's non-rate regulated operations result in a corresponding adjustment to OCI, except for credit losses and unrealized losses on available for sale securities intended or required to be sold prior to recovery of the amortized cost basis, 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 September 30, 2021, NEE had interest rate contracts with a notional amount of approximately $10.8 billion to manage exposure to the variability of cash flows associated with expected future and outstanding debt issuances at NEECH and NEER. See Note 2.
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 $1,368 million ($595 million for FPL) at September 30, 2021.
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 $5,294 million and $4,726 million ($3,427 million and $3,012 million for FPL) at September 30, 2021 and December 31, 2020, respectively. NEE's and FPL’s investment strategy for equity securities in their nuclear decommissioning reserve funds emphasizes marketable securities which are broadly diversified. At September 30, 2021, a hypothetical 10% decrease in the prices quoted on stock exchanges, which is a reasonable near-term market change, would result in an approximately $492 million ($317 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 condensed 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.
-
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 U.S.
-
Overall credit risk is managed through established credit policies and is overseen by the EMC.
-
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 September 30, 2021, NEE's credit risk exposure associated with its energy marketing and trading counterparties, taking into account collateral and contractual netting rights, totaled $2.3 billion ($57 million for FPL), of which approximately 59% (100% for FPL) was with companies that have investment grade credit ratings. With regard to credit risk exposure to counterparties with below investment grade credit ratings, NEE has first lien security positions with respect to approximately 60% of such exposure. For the remaining unsecured positions with counterparties that have below investment grade credit ratings, no one counterparty makes up more than 7% of NEE’s total exposure to below investment grade counterparties. See Notes 1, 2 and 11 – Credit Losses.
Previous: Item 1. Financial Statements · Next: Item 3. Quantitative and Qualitative Disclosures About Market Risk