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. OnSeptember 14, 2020 , NEE's board of directors approved a four-for-one split of NEE common stock effectiveOctober 26, 2020 (see Note 9 - Earnings Per Share). The per share data included in Management's Discussion for all periods presented have not been adjusted to reflect the 2020 stock split. 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 periods. Earnings (Loss) Earnings (Loss) Per Share Per Share Attributable to Net Income (Loss) Attributable to NEE, Net Income (Loss) NEE, Attributable to NEE Assuming Dilution Attributable to NEE Assuming Dilution Three Months Ended Three Months Ended
Nine Months Ended September Nine Months Ended September
September 30, September 30, 30, 30, 2020 2019 2020 2019 2020 2019 2020 2019 (millions) (millions) FPL$ 757 $ 683 $ 1.54 $ 1.40 $ 2,148 $ 1,934 $ 4.37 $ 4.00 Gulf Power 91 76 0.18 0.16 185 158 0.38 0.33 NEER(a)(b) 376 381 0.76 0.78 1,175 1,374 2.39 2.84 Corporate and Other(b) 5 (261 ) 0.02 (0.53 ) (584 ) (672 ) (1.20 ) (1.39 ) NEE$ 1,229 $ 879 $ 2.50 $ 1.81 $ 2,924 $ 2,794 $ 5.94 $ 5.78
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(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. 40 --------------------------------------------------------------------------------
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 Nine Months Ended September September 30, 30, 2020 2019 2020 2019
(millions)
Net losses associated with non-qualifying hedge activity(a)$ (140 ) $ (211 ) $ (987 ) $ (694 ) Differential membership interests-related - NEER$ (21 ) $ (22 ) $ (67 ) $ (67 ) NEP investment gains, net - NEER$ 12 $ (48 ) $ (60 ) $ 134 Gain on disposal of a business - NEER(b) $ - $ -$ 274 $ - Change in unrealized gains (losses) on NEER's nuclear decommissioning funds and OTTI, net - NEER$ 67 $ 2 $ (4 ) $ 118 Operating results of solar projects in Spain - NEER $ -$ 4 $ 1 $ 12 Acquisition-related(c) $ -$ (9 ) $ -$ (65 ) ---------------
(a) For the three months ended
million of losses and
months ended
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 for a discussion of the sale of two
solar generation facilities in
(c) For the three months ended
respectively. For the nine months ended
million and
income, respectively; the remaining balance is included in Corporate and
Other. 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 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 endedSeptember 30, 2020 was higher than the prior year period by$350 million , reflecting higher results at Corporate and Other,FPL and Gulf Power , partly offset by lower results at NEER. Net income attributable to NEE for the nine months endedSeptember 30, 2020 was higher than the prior year period by$130 million reflecting higher results at FPL, Corporate and Other, andGulf Power , partly offset by lower results at NEER. FPL's increase in net income for the three and nine months endedSeptember 30, 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 ofSeptember 30, 2020 andSeptember 30, 2019 .
NEER's results decreased for the three months endedSeptember 30, 2020 primarily reflecting unfavorable non-qualifying hedge activity, partly offset by favorable changes in the fair value of equity securities in NEER's nuclear decommissioning funds compared to 2019, the absence of asset sales/abandonment charges, NEP investment gains and higher earnings on new investments. NEER's results decreased for the nine months endedSeptember 30, 2020 primarily reflecting unfavorable non-qualifying hedge activity, the absence of NEP investment gains recorded upon the sale of ownership interests to NEP inJune 2019 and unfavorable changes in the fair value of equity securities in NEER's nuclear decommissioning funds compared to 2019, partly offset by the gain recognized on the sale of theSpain projects and higher earnings on new investments and existing generation assets.
Corporate and Other's results increased for the three and nine months ended
41 -------------------------------------------------------------------------------- NEE's effective income tax rates for the three months endedSeptember 30, 2020 and 2019 were approximately 10% and 7%, respectively. NEE's effective income tax rates for the nine months endedSeptember 30, 2020 and 2019 were approximately 3% and 9%, respectively. See Note 6 for a discussion of NEE's and FPL's effective income tax rates. OnOctober 15, 2020 , theFERC approved an application filed by NEE, together withFPL and Gulf Power , to mergeGulf Power with and into FPL, with FPL as the surviving entity. See Note 7 - Proposed Merger ofFPL and Gulf Power .
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 and nine months endedSeptember 30, 2020 by approximately$3.8 billion and$3.7 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 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 and nine months endedSeptember 30, 2020 , FPL recorded the reversal of reserve amortization of approximately$258 million and$101 million , respectively. During the three and nine months endedSeptember 30, 2019 , FPL recorded the reversal of reserve amortization of approximately$308 million and$375 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. The program includes the addition of 20 dedicated 74.5 MW solar power plants owned and operated by FPL. As ofSeptember 30, 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. Operating Revenues During the three and nine months endedSeptember 30, 2020 , FPL's operating revenues decreased$36 million and$447 million , respectively. The decreases for the three and nine months endedSeptember 30, 2020 reflect lower fuel revenues of approximately$103 million and$535 million , respectively, primarily related to lower fuel and energy prices, including the accelerated flow back of lower expected fuel costs to retail customers inMay 2020 , and lower storm-related revenues. These decreases for the three and nine months endedSeptember 30, 2020 were partly offset by increases of$78 million and$202 million , respectively, in retail base revenues reflecting additional revenues of approximately$14 million and$53 million , respectively, related to retail base rate increases primarily associated with the addition of new solar generation and, for the nine months endedSeptember 30, 2020 , the Okeechobee Clean Energy Center which achieved commercial operation at the end of the first quarter of 2019. Retail base revenues during the three and nine months endedSeptember 30, 2020 were also impacted by an increase of 1.3% and 0.2%, respectively, in the average usage per retail customer and an increase of 1.6% and 1.5% in the average number of customer accounts, respectively. Fuel,Purchased Power and Interchange Expense Fuel, purchased power and interchange expense decreased$104 million and$542 million for the three and nine months endedSeptember 30, 2020 , respectively, primarily reflecting lower fuel and energy prices. Depreciation and Amortization Expense Depreciation and amortization expense decreased$30 million and$230 million during the three and nine months endedSeptember 30, 2020 , respectively. During the three and nine months endedSeptember 30, 2020 , FPL recorded the reversal of reserve amortization of approximately$258 million and$101 million , respectively, compared to the reversal of reserve amortization of approximately$308 million and$375 million during the three and nine months endedSeptember 30, 2019 , 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. AtSeptember 30, 2020 , approximately$994 million remains in accrued asset removal costs related to reserve amortization. 42 -------------------------------------------------------------------------------- Income Taxes During the nine months endedSeptember 30, 2020 , income taxes increased approximately$128 million , primarily related to the 2019 adjustment to income tax expense recorded pursuant to the FPSC's order in connection with its review of impacts associated with tax reform, as well as higher income before income taxes in 2020.
Gulf Power's net income attributable to NEE increased$15 million and$27 million for the three and nine months endedSeptember 30, 2020 , respectively. Operating revenues decreased$36 million and$69 million for the three and nine months endedSeptember 30, 2020 , respectively, primarily related to lower fuel revenues. Operating expenses - net decreased$43 million and$84 million for the three and nine months endedSeptember 30, 2020 , respectively, primarily related to decreases in fuel, purchased power and interchange expense, as well as the absence of 2019 acquisition-related costs, partly offset by higher depreciation and amortization.
In
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 Nine Months Ended September 30, 2020 September 30, 2020 (millions) New investments(a) $ 28 $ 101 Existing generation assets(a) (1 ) 70 Gas infrastructure(a) (2 ) 10 Customer supply and proprietary power and gas trading(b) 7 (24 ) Asset sales/abandonment 52 41 NEET(b) 6 41 Interest and other general and administrative expenses(c) 2 (25 ) Other, including other investment income and income taxes 13 16 Change in non-qualifying hedge activity(d) (240 ) (393 ) Change in unrealized gains/losses on equity securities held in nuclear decommissioning funds and OTTI, net(d) 65 (122 ) NEP investment gains, net(d) 60 (194 ) Disposals of businesses/assets(e) - 274 Acquisition-related(d) 5 6 Decrease in net income less net loss attributable to noncontrolling interests $ (5 ) $ (199 ) ---------------
(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, including repowered
wind projects, are included in existing generation 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 Businesses. New Investments Results from new investments for the three and nine months endedSeptember 30, 2020 increased primarily due to higher earnings, including federal income tax credits, related to new wind generating facilities that entered service during or after the three and nine months endedSeptember 30, 2019 as well as investments in pipelines. Asset Sales/Abandonment Asset sales/abandonment favorably impacted results for the three and nine months endedSeptember 30, 2020 primarily due to the absence of prior year charges related to the decision to no longer move forward with the construction of a wind facility. See Note 11 - Construction Activity. 43 -------------------------------------------------------------------------------- Existing Generation Assets Results from existing generation assets for the nine months endedSeptember 30, 2020 increased primarily due to higher results related to increased tax credits from repowered wind generation facilities and more favorable wind resource as compared to the prior year period, partly offset by lower earnings related to a refueling outage at the Seabrook nuclear facility. 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 endedSeptember 30, 2020 decreased$722 million primarily due to: • the impact of non-qualifying commodity hedges (approximately$410 million of
losses for the three months ended
of gains for the comparable period in 2019),
• lower revenues from existing generation assets of
related to the sale of the
compared to the prior year period, and
• net decreases in revenues of
proprietary power and gas trading business and gas infrastructure business,
partly offset by, • revenues from new investments of$41 million , and
• higher revenues of
Operating revenues for the nine months endedSeptember 30, 2020 decreased$499 million primarily due to: • the impact of non-qualifying commodity hedges (approximately$226 million of
losses for the nine months ended
of gains for the comparable period in 2019), and
• lower revenues from existing generation assets of
related to the sale of the
Seabrook nuclear facility,
partly offset by, • higher revenues of$124 million from NEET, and
• revenues from new investments of
Operating Expenses - net Operating expenses - net for the three months endedSeptember 30, 2020 decreased$91 million primarily due to the absence of prior year charges of$73 million related to the decision to no longer move forward with the construction of a wind facility (see Note 11 - Construction Activity), and lower fuel costs of$31 million , partly offset by higher costs associated with new investments. Operating expenses - net for the nine months endedSeptember 30, 2020 increased$127 million primarily due to increases of$97 million in other operations and maintenance expenses primarily associated with new investments and acquisitions. Additionally, NEER recorded lower gains on the disposal of assets of approximately$87 million primarily related to absence of theJune 2019 sale of ownership interests to NEP offset by the gain on the sale of theSpain solar projects in the first quarter of 2020 (see Note 11 - Disposal of Businesses). These increases in operating expenses - net were partly offset by the absence of prior year charges of$73 million related to the decision to no longer move forward with the construction of a wind facility. Interest Expense NEER's interest expense for the three months endedSeptember 30, 2020 decreased approximately$113 million primarily reflecting$76 million of favorable impacts related to changes in the fair value of interest rate derivative instruments as well as lower interest rates in 2020. Equity in Earnings (Losses) of Equity Method Investees NEER recognized$249 million of equity in earnings of equity method investees for the three months endedSeptember 30, 2020 compared to$90 million of equity in losses of equity method investees for the prior year period. The change for the three months endedSeptember 30, 2020 primarily reflects equity in earnings of NEP recorded in 2020 primarily related to favorable impacts due 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 endedSeptember 30, 2020 , changes in the fair value of equity securities in NEER's nuclear decommissioning funds, primarily equity securities in NEER's special use funds, related to more favorable market conditions as compared to the prior year period. For the nine months endedSeptember 30, 2020 , changes in the fair value of equity securities in NEER's nuclear decommissioning funds related 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. 44 -------------------------------------------------------------------------------- InMay 2020 , theIRS issued guidance that extends the safe harbor for continuous efforts and continuous construction requirements to include wind and solar facilities that began construction in 2016 and 2017 and are placed in service no more than five years after the year in which construction of the facilities began. GridLiance Acquisition InSeptember 2020 , a wholly owned subsidiary of NEET entered into agreements to acquire GridLiance, which owns and operates threeFERC -regulated transmission utilities across six states, five in the Midwest andNevada . See Note 7 - GridLiance.
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 increased$266 million and$88 million during the three and nine months endedSeptember 30, 2020 , respectively. The increase for the three months endedSeptember 30, 2020 was primarily due to favorable after-tax impacts of approximately$311 million related to non-qualifying hedge activity as a result of changes in the fair value of interest rate derivative instruments, partly offset by higher corporate operating expenses. The increase for the nine months endedSeptember 30, 2020 primarily reflects favorable after-tax impacts of approximately$100 million related to non-qualifying hedge activity as a result of changes in the fair value of interest rate derivative instruments and the absence of acquisition and integration costs incurred in 2019, partly offset by higher corporate operating expenses. 45 --------------------------------------------------------------------------------
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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