Fair Value Measurements

3 Months Ended

Mar. 31, 2012

Fair Value Disclosures [Abstract]

Fair Value Measurements

3.  Fair Value Measurements

NEE and FPL use several different valuation techniques to measure the fair value of assets and liabilities, relying primarily on the market approach of using prices and other market information for identical and/or comparable assets and liabilities for those assets and liabilities that are measured at fair value on a recurring basis.  NEE's and FPL's assessment of the significance of any particular input to the fair value measurement requires judgment and may affect their placement within the fair value hierarchy levels.  Non-performance risk, including the consideration of a credit valuation adjustment, is also considered in the determination of fair value for all assets and liabilities measured at fair value.

Cash Equivalents - Cash equivalents consist of short-term, highly liquid investments with original maturities of three months or less.  NEE and FPL primarily hold investments in money market funds.  The fair value of these funds is calculated using current market prices.

Special Use Funds and Other Investments - NEE and FPL hold primarily debt and equity securities directly, as well as indirectly through commingled funds.  Substantially all directly held equity securities are valued at their quoted market prices.  For directly held debt securities, multiple prices and price types are obtained from pricing vendors whenever possible, which enables cross-provider validations.  A primary price source is identified based on asset type, class or issue of each security.  Commingled funds, which are similar to mutual funds, are maintained by banks or investment companies and hold certain investments in accordance with a stated set of objectives.  The fair value of commingled funds is primarily derived from the quoted prices in active markets of the underlying securities.  Because the fund shares are offered to a limited group of investors, they are not considered to be traded in an active market.

Derivative Instruments - NEE and FPL measure the fair value of commodity contracts on a daily basis using prices observed on commodities exchanges and in the OTC markets, or through the use of industry-standard valuation techniques, such as option modeling or discounted cash flows techniques, incorporating both observable and unobservable valuation inputs.  The resulting measurements are the best estimate of fair value as represented by the transfer of the asset or liability through an orderly transaction in the marketplace at the measurement date.

Most exchange-traded derivative assets and liabilities are valued directly using unadjusted quoted prices.  For exchange-traded derivative assets and liabilities where the principal market is deemed to be inactive based on average daily volumes and open interest, the measurement is established using settlement prices from the exchanges, and therefore considered to be valued using significant other observable inputs.

NEE and FPL also enter into OTC commodity contract derivatives.  The majority of these contracts are transacted at liquid trading points, and the prices for these contracts are verified using quoted prices in active markets from exchanges, brokers or pricing services for similar contracts.  In instances where the reference markets are deemed to be inactive or do not have transactions for a similar contract, the derivative assets and liabilities may be valued using significant other observable inputs and potentially significant unobservable inputs.  In such instances, the valuation for these contracts is established using techniques including extrapolation from or interpolation between actively traded contracts, or estimated basis adjustments from liquid trading points.

NEE, through NEER, also enters into full requirements contracts, which, in many cases, meet the definition of derivatives and are measured at fair value.  These contracts typically have one or more inputs that are not observable and are significant to the valuation of the contract.  In addition, certain exchange and non-exchange traded derivative options at NEE have one or more significant inputs that are not observable, and are valued using industry-standard option models.

In all cases where NEE and FPL use significant unobservable inputs for the valuation of a commodity contract, consideration is given to the assumptions that market participants would use in valuing the asset or liability.  This consideration includes, but is not limited to, assumptions about market liquidity, volatility and contract duration as more fully described below in Significant Unobservable Inputs.

NEE uses interest rate and foreign currency swaps to mitigate and adjust interest rate and foreign currency exposure related to certain outstanding and forecasted debt issuances and borrowings.  NEE estimates the fair value of these derivatives using a discounted cash flows valuation technique based on the net amount of estimated future cash inflows and outflows related to the swap agreements.

Recurring Fair Value Measurements - NEE's and FPL's financial assets and liabilities and other fair value measurements made on a recurring basis by fair value hierarchy level are as follows:

	March 31, 2012
	Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Netting(a)			Total
	(millions)
Assets:
Cash equivalents:
NEE - equity securities	$	105	$	—		$	—	$	—		$	105
FPL - equity securities	$	5	$	—		$	—	$	—		$	5
Special use funds:
NEE:
Equity securities	$	797	$	1,421	(b)	$	—	$	—		$	2,218
U.S. Government and municipal bonds	$	507	$	142		$	—	$	—		$	649
Corporate debt securities	$	—	$	462		$	—	$	—		$	462
Mortgage-backed securities	$	—	$	512		$	—	$	—		$	512
Other debt securities	$	1	$	39		$	—	$	—		$	40
FPL:
Equity securities	$	143	$	1,259	(b)	$	—	$	—		$	1,402
U.S. Government and municipal bonds	$	460	$	111		$	—	$	—		$	571
Corporate debt securities	$	—	$	298		$	—	$	—		$	298
Mortgage-backed securities	$	—	$	436		$	—	$	—		$	436
Other debt securities	$	—	$	26		$	—	$	—		$	26
Other investments:
NEE:
Equity securities	$	10	$	—		$	—	$	—		$	10
U.S. Government and municipal bonds	$	9	$	—		$	—	$	—		$	9
Corporate debt securities	$	—	$	42		$	—	$	—		$	42
Mortgage-backed securities	$	—	$	42		$	—	$	—		$	42
Other	$	5	$	4		$	—	$	—		$	9
Derivatives:
NEE:
Commodity contracts	$	3,115	$	4,316		$	1,307	$	(6,856	)	$	1,882	(c)
Interest rate swaps	$	—	$	43		$	—	$	—		$	43	(c)
FPL - commodity contracts	$	—	$	18		$	10	$	(7	)	$	21	(c)
Liabilities:
Derivatives:
NEE:
Commodity contracts	$	3,237	$	4,502		$	718	$	(6,753	)	$	1,704	(c)
Interest rate swaps	$	—	$	306		$	—	$	—		$	306	(c)
Foreign currency swaps	$	—	$	27		$	—	$	—		$	27	(c)
FPL - commodity contracts	$	—	$	622		$	3	$	(7	)	$	618	(c)

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(a) Includes the effect of the contractual ability to settle contracts under master netting arrangements and margin cash collateral payments and receipts.

(b) At NEE, approximately $1,226 million ($1,106 million at FPL) are invested in commingled funds whose underlying investments would be Level 1 if those investments were held directly by NEE or FPL.

(c) See Note 2 for a reconciliation of net derivatives to NEE's and FPL's condensed consolidated balance sheets.

	December 31, 2011
	Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Netting(a)			Total
	(millions)
Assets:
Cash equivalents:
NEE - equity securities	$	159	$	—		$	—	$	—		$	159
FPL - equity securities	$	11	$	—		$	—	$	—		$	11
Special use funds:
NEE:
Equity securities	$	709	$	1,206	(b)	$	—	$	—		$	1,915
U.S. Government and municipal bonds	$	508	$	167		$	—	$	—		$	675
Corporate debt securities	$	—	$	516		$	—	$	—		$	516
Mortgage-backed securities	$	—	$	511		$	—	$	—		$	511
Other debt securities	$	—	$	47		$	—	$	—		$	47
FPL:
Equity securities	$	128	$	1,056	(b)	$	—	$	—		$	1,184
U.S. Government and municipal bonds	$	458	$	134		$	—	$	—		$	592
Corporate debt securities	$	—	$	359		$	—	$	—		$	359
Mortgage-backed securities	$	—	$	434		$	—	$	—		$	434
Other debt securities	$	—	$	32		$	—	$	—		$	32
Other investments:
NEE:
Equity securities	$	4	$	—		$	—	$	—		$	4
U.S. Government and municipal bonds	$	8	$	—		$	—	$	—		$	8
Corporate debt securities	$	—	$	43		$	—	$	—		$	43
Mortgage-backed securities	$	—	$	33		$	—	$	—		$	33
Other	$	5	$	5		$	—	$	—		$	10
Derivatives:
NEE:
Commodity contracts	$	2,448	$	3,478		$	1,071	$	(5,477	)	$	1,520	(c)
Interest rate swaps	$	—	$	37		$	—	$	—		$	37	(c)
Foreign currency swaps	$	—	$	27		$	—	$	—		$	27	(c)
FPL - commodity contracts	$	—	$	8		$	6	$	(2	)	$	12	(c)
Liabilities:
Derivatives:
NEE:
Commodity contracts	$	2,588	$	3,582		$	585	$	(5,453	)	$	1,302	(c)
Interest rate swaps	$	—	$	320		$	—	$	—		$	320	(c)
Foreign currency swaps	$	—	$	9		$	—	$	—		$	9	(c)
FPL - commodity contracts	$	—	$	513		$	2	$	(2	)	$	513	(c)

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(a) Includes the effect of the contractual ability to settle contracts under master netting arrangements and margin cash collateral payments and receipts.

(b) At NEE, approximately $1,086 million ($979 million at FPL) are invested in commingled funds whose underlying investments would be Level 1 if those investments were held directly by NEE or FPL.

(c) See Note 2 for a reconciliation of net derivatives to NEE's and FPL's condensed consolidated balance sheets.

Significant Unobservable Inputs - The valuation of certain commodity contracts requires the use of significant unobservable inputs.  All forward price, implied volatility, implied correlation and interest rate inputs used in the valuation of such contracts are directly based on third-party market data, such as broker quotes and exchange settlements, when that data is available.  If third-party market data is not available, then industry standard methodologies are used to develop inputs that maximize the use of relevant observable inputs and minimize the use of unobservable inputs.  Observable inputs, including some forward prices, implied volatilities and interest rates used for determining fair value are updated daily to reflect the best available market information.  Unobservable inputs which are related to observable inputs, such as illiquid portions of forward price or volatility curves, are updated daily as well, using industry standard techniques such as interpolation and extrapolation, combining observable forward inputs supplemented by historical market and other relevant data.  Other unobservable inputs, such as implied correlations, customer migration rates from full requirements contracts and some implied volatility curves, are modeled using proprietary models based on historical data and industry standard techniques.

All price, volatility, correlation and customer migration inputs used in valuation are subject to validation by the Risk Management group.  The Risk Management group performs a risk management function within NEE and FPL responsible for assessing credit, market and operational risk impact, reviewing valuation methodology and modeling, confirming transactions, monitoring approval processes and developing and monitoring trading limits.  The Risk Management group is separate from the transacting group, and the Vice President of Risk Management reports to the Chief Financial Officer of NEE and FPL.  For markets where independent third-party data is readily available, validation is conducted daily by directly reviewing this market data against inputs utilized by the transacting group, and indirectly by critically reviewing daily risk reports.  For markets where independent third-party data is not readily available, additional analytical reviews are performed on at least a quarterly basis.  These analytical reviews are designed to ensure that all price and volatility curves used for fair valuing transactions are adequately validated each quarter, and are reviewed and approved by the Vice President of Risk Management.  In addition, other valuation assumptions such as implied correlations and customer migration rates are reviewed and approved by Risk Management on a periodic basis.  Newly created models used in the valuation process are also subject to testing and approval by Risk Management prior to use and established models are reviewed annually, or more often as needed, by Risk Management.

On a monthly basis, the Exposure Management Committee (EMC), which is comprised of certain members of senior management, meets with representatives from the Risk Management group and the transacting group to discuss NEE's and FPL's energy risk profile and operations, review risk reports and to discuss fair value issues as necessary.  The EMC develops guidelines required for an appropriate risk management control infrastructure, which includes implementation and monitoring of compliance with Risk Management policy.  The EMC executes its risk management responsibilities through direct oversight and delegation of its responsibilities to the Vice President of Risk Management, as well as to other corporate and business unit personnel.

The significant unobservable inputs used in the valuation of contracts categorized as Level 3 of the fair value hierarchy at March 31, 2012 are as follows:

Transaction Type	Fair Value at March 31, 2012		Valuation Technique(s)	Significant Unobservable Inputs	Range
	Assets	Liabilities
	(millions)
Forward contracts - power	$389	$83	Discounted cash flow	Forward price (per mwh)	$7	—	$157
Options - power	$437	$559	Option models	Implied correlations	12%	—	98%
				Implied volatilities	1%	—	173%
Options - gas	$83	$26	Option models	Implied correlations	12%	—	98%
				Implied volatilities	1%	—	61%
Full requirements and unit contingent contracts	$364	$45	Discounted cash flow	Forward price (per mwh)	$8	—	$140
				Customer migration rate(a)	—%	—	20%

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(a) Applies only to full requirements contracts.

The sensitivity of NEE's fair value measurements to increases (decreases) in the significant unobservable inputs is as follows:

Significant Unobservable Input	Position	Impact on Fair Value Measurement
Forward price	Purchase power	Increase (decrease)
	Sell power	Decrease (increase)
Implied correlations	Purchase option	Decrease (increase)
	Sell option	Increase (decrease)
Implied volatilities	Purchase option	Increase (decrease)
	Sell option	Decrease (increase)
Customer migration rate	Sell power (a)	Decrease (increase)

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(a) Assumes the contract is in a gain position.

The reconciliation of changes in the fair value of derivatives that are based on significant unobservable inputs is as follows:

	Three Months Ended March 31,
	2012						2011
	NEE			FPL			NEE			FPL
	(millions)
Fair value of net derivatives based on significant unobservable inputs at December 31 of prior year	$	486		$	4		$	296		$	7
Realized and unrealized gains (losses):
Included in earnings(a)	231			—			(82		)	—
Included in regulatory assets and liabilities	4			4			—			—
Purchases	158			—			88			—
Settlements	(124		)	(1		)	(45		)	(2		)
Issuances	(177		)	—			(152		)	—
Transfers in(b)	16			—			1			—
Transfers out(b)	(5		)	—			(2		)	—
Fair value of net derivatives based on significant unobservable inputs at March 31	$	589		$	7		$	104		$	5
The amount of gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to derivatives still held at the reporting date(c)	$	221		$	—		$	(80	)	$	—

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(a) For the three months ended March 31, 2012 and 2011, $228 million and $(92) million, respectively, of realized and unrealized gains (losses) are reflected in the condensed consolidated statements of income in operating revenues and the balance is reflected in fuel, purchased power and interchange.

(b) For the three months ended March 31, 2012 and 2011, transfers into Level 3 were a result of decreased observability of market data and transfers from Level 3 to Level 2 were a result of increased observability of market data.  NEE's and FPL's policy is to recognize all transfers at the beginning of the reporting period.

(c) For the three months ended March 31, 2012 and 2011, $219 million and $(86) million, respectively, of unrealized gains (losses) are reflected in the condensed consolidated statements of income in operating revenues and the balance is reflected in fuel, purchased power and interchange.