新世紀能源 (NEE) 2002 Q3 法說會逐字稿

Welcome to the FPL Group Conference Call.

At this time, Lisa Kuzel, Director of Investor Relations, has joined the conference call.

All lines will be muted during the broadcast.

After the presentation, we will begin the question-and-answer session.

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Miss Kuzel, please begin.

Good morning, welcome to our 2002 third quarter earnings conference call.

Moray Dewhurst, Chief Financial Officer of FPL Group, will provide an overview of our performance for this quarter.

Lou Hay, FPL Group's Chairman and Chief Executive Officer, Paul Evanson, President of Florida Power and Light Company, and Jim Robo, the new President of FPL Energy, are also with us this morning.

Following Moray's remarks are senior management team will be available to take your questions.

Before I turn it over to Moray, let me remind you that any statements made herein about future operating results or other future events are forward-looking statements under the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from such forward-looking statements.

A discussion of factors that could cause actual results or events to vary is contained in FPL Group's most recent SEC form 10-Q.

Moray?

Thank you, Lisa and good morning everyone.

Before getting into detail of the numbers let me start by summarizing what we will be discussing.

Our results in the third quarter were slightly better than expected.

Outlook for the remainder of the year is strong.

We are raising expectations for year 2002 earnings per share by about 5 cents.

In addition, we now have a clearer picture of the 2003 outlook than was possible in July and are firming expectations to a range of $4.80 to $5 per share.

We are pleased with our progress at FPL: Energy, hedging the portfolio, and developing profitable new win projects.

And Florida Power and Light remains on solid ground.

In the third quarter, FPL Group earnings excluding nonrecurring charges and mark to market effect of non-managed hedges were 315 million or 1.79 per share, slightly exceeding expectations, though 10% lower than last year's $1.99.

The mark to market effect of non-managed hedges was a positive 2 million after taxes or 1 cent per share in the third quarter, and an estimated negative 2 million in the year ago quarter.

Last year we did not distinguish between managed and non-managed hedge activities in the total mark to market was zero.

We estimate the trading and managed hedge activity within this was approximately a positive 2 million which we are including for comparison purposes within operating results.

Now let me outline for you that the nonrecurring items in the quarter.

As we indicated to you earlier this month, FPL group has restructured its energy and telecommunications business in response to challenging market conditions.

This restructuring included a successful renegotiation of a contract that significantly reduced overall commitment for gas turbines.

As a result, the company recorded nonrecurring, restructuring, and other charges of 167 million after tax.

Of this total, 3 million was associate with FPL energy, 64 million with FPL FiberNet and 30 million with corporate investments in leveraged leases dating back to the 1980s.

Also in the third quarter, we received 229 million out of an estimated 300 million total tax refund we expect to receive as a recent IRS ruling.

This does not effect net income, but it does strengthen our cash flows and financial position.

Earnings of Florida Power and Light were 284 million in the third quarter, down from 290 million a year ago.

Earnings per share contribution was 1.61 down from 1.72 last year.

We had expected FPL to be down as the effect of the rate reduction and increased O&M expenses exceeded the beneficial impact of the absence of last year's refund provision and the presence of the special depreciation credit.

However, FPL's performance was stronger than expected, primarily due a warm September and slightly higher customer and usage growth than we anticipated.

Customer growth for the quarter was 2.2% for an annual rate of 86,000 new accounts while growth and usage per customer was roughly 3.6%.

Of this growth and usage, roughly half or 1.8% was underlying usage not associated with weather.

We are very pleased with the strong performance.

For the the third quarter, FPL's O&M expense was 265 million, up from 233 million in last year's quarter.

O&M on a cents per kilowatt hour basis was 1.14.

As we indicated earlier, O&M continues to be pressured by rising insurance and .employee benefit expenses, as well as nuclear maintainance expenses.

We expect the underlying trends to continue in 2003.

Expenses that our nuclear facilities have increased due to the NRC order in August for more comprehensive inspections of the reactor [versal] heads.

These inspections go substantially beyond the visual inspections that we have previously conducted.

We completed the more detailed inspection procedures at St. Lucey unit one last week during its scheduled refueling outage and no problems were found.

We will perform similar inspections at our other units during their respective next refueling outages.

These inspections are much more expensive and based on the experiences of other operators with similar design reactors, we do anticipate costly repairs at some point in the future.

As such, we have begun to accrue for the expense of inspections.

Looking ahead, we anticipate in due course we will be replacing the reactive [versal] heads at all our units as a natural part of effective life cycle management.

We have placed orders for components and are evaluating the economics of the timing of the repair versus replacement.

We will manage for low-life cycle cost and based on what we have learned to date, we do not expect incremental cost to be more than a few percent of the total cost of this extremely low cost source of electricity.

Despite the adverse trends in these areas, we expect productivity in other parts of business to hold FPL flat next year.

Depreciation of FPL decreased from 223 million in Lars year's third quarter to 194 million this year.

The reduction is the result of a 44 million credit against depreciation expense part of a new rate agreement.

In total, the agreement provides for 125 million annual credit towards depreciation expense.

Without this credit, it would have been up 15 million for the quarter, reflecting growth in the asset base.

In July, we completed the analysis of the results of our second RFP for new capacity need for 2005-2006 time frame.

This analysis, supported by an independent analysis, confirmed that adding 1900 megawatts in our Martin and Manatee sites is the most reliable, cost effective way to meet growing demand in our service territory.

Public service commission hearings took place earlier in the month and a staff recommendation is due on November 7th with a commission oral decision on November 19th.

If approved, these expansion plans will go service in mid-2005.

The current outlook at FPL remains positive.

Given the beneficial impact of weather so far this year, as well as better than expect customer and usage growth to date, we now expect FPL to earn between 710 and 715 million for the full year 2002 assuming normal weather in the fourth quarter.

For 2003, we expect to return to earnings growth at 4 to 5% after 2002 weather normalized base which would mean a range of 725 to 735 million for 2003.

Moving now to FPL energy, earnings in the 2002 third quarter were 37 million excluding nonrecurring items and the effect of non-managed hedges.

The earnings per share contribution on the same basis was 21 cents.

Results last year with estimated mark to market activity of trading and managed hedges included were 46 million or 27 cents per share.

And included a 6 million gain on the sale of an asset.

Operationally FPL Energy's results were down slightly from last year.

Project additions totaling more than 1100 megawatts since the third quarter of last year and improved operating results including our wind portfolio, together added 9 million to net income.

Offsets included lower prices due in part to milder weather in Ercot, which reduced earnings by 6 million and a 7 million lower contribution from the main assets reflecting the impact of new more efficient generation displacing FPL energy's older, less expensive fossil flats in that state.

All other items, including asset optimization activities and interest, essentially netted out.

Despite a challenging third quarter, the outlook for the full year for FPL Energy remains strong.

We expect a strong fourth quarter driven by several factors.

We have streamlined our organization and reduced overhead costs by 18%.

We have recently seen a rebound in Sparks spreads and an increase in gas prices in key regions and we anticipate at significant contribution from asset restructuring activities initiated last year.

This aspect of our business gave a boost to third quarter results in 2001, this year we expect more of an effect in the fourth quarter.

Finally, the approval process for the 1024 net megawatt Seabrook plant is proceeding smoothly.

We have received all needed state approvals and expect to close in November.

These positive developments have enabled us to increase earnings projections for full year 2002.

We now expect FPL Energy's earnings to be up 20% compared with our earlier target of 10 to 15%.

We were encouraged by our outlook for 2003for a number of reasons.

We have a substantial portion of 2003 capacity and under gross margin under contract or hedged despite the limited liquidity in the power markets at the moment.

We expect full year contributions from Seabrook and the 300 megawatts of wind projects that we are adding this year.

We continue to expect development and asset restructuring segment of the business to generate earnings, albeit in a somewhat lumpy fashion.

While we cannot also always predict which quarter will benefit from these activities, making comparisons with the same quarter in prior years is difficult, we are comfortable we have a number of good opportunities available us to in this area.

We are targeting 700 to 1200 megawatts of wind project additions next year and based on the projects we have in the pipeline, we feel confident we will be in that range.

We expect to announce more wind projects in the near future.

We will continue to focus on cost reductions.

Our restructuring activities will begin to pay dividends in the fourth quarter and we expect further benefits next year.

Finally, we will continue to look selectively for acquisition opportunities.

Our focus here has not changed and we continue to look for opportunities with attractive returns that would pass the market test, that is be financable in today's market environment.

Assets without contracts would not likely pass the test in the current market environment absent extraordinary pricing.

We believe our proven track record in improving the operations of underperforming assets provides a sound basis for seeking acquisition opportunities, but we are looking first and foremost for ways to create value, not for growth for its own sake.

The sum of all these positive accomplishments and initiatives leaves us optimistic about next year's results.

Targets for FPL's net income growth for 2003 is 30 to 50%.

Now let me update on our 2003 contract coverage at FPL Energy.

For those without access to the slides, I will give the 2003 available megawatts, percent of output hedged and then comments on the pricing or margin levels we've been able to attain for each asset.

The available megawatts are waited to reflect when during year, new assets go to service and all assets are adjusted for 2003 outages including a refueling outage for Seabrook.

The first asset class consists of our wind projects.

In 2003 we expect to have roughly 1700 megawatts available.

And of those megawatts, 100% are hedged.

Pricing varies but is generally in the 25 to $35 per megawatt hour range and there is no fuel cost.

The average is slightly above 30.

Second asset class is our older projects and QF facilities. 2003 available megawatts will be roughly 1426, again 100% of those megawatts are hedged.

Pricing again varies substantially and is typically based on a utility avoided cost.

Our third general asset class consists of merchant portfolio which in turn has four subclasses.

The first of these is Seabrook.

In 2003 adjusted refueling outage, we will have 955 megawatts available.

Of these, 94% are hedged round the clock at an average price of $36 per megawatt hour.

A second subclass consists of the remaining assets in the northeast part of country. 2003 available megawatts will be 1538.

Of these 33% are hedged on peak.

The average on peak Sparks spread for this hedged volume is $30 to $35 per megawatt hour.

The third subclass is Ercot, 2003 available megawatts: 2301, of these 63% are hedged on peak at a Spark spread of approximately $11 a megawatt hour.

The fourth subclass, remainder of the portfolio, primarily WECC and [SERK] projects, 691 available megawatts in 2003 of which 28% are hedged on peak.

The pricing comment here is a little difficult to adjust because there is essentially capacity payment only on the hedged portion which represents peaking capacity which is not expected to run for many hours in 2003.

The total portfolio, 73% of the megawatts are hedged.

This represents significant progress since our second quarter conference call when percentage of total portfolio under contract for 2003 was 55.

We are particularly pleased with the progress we have made in hedging Seabrook while simultaneously managing our closing risks.

In terms have you expected 2003 gross margin, our hedge position is stronger.

We now have more than 85% of FPL energy expected 2003 gross margin hedged.

Let me now turn to the unhedged portion of our portfolio.

In setting expectations for next year, we continue to look first and foremost to current market forward prices.

For each merchant past that class, I'll give the unhedged percentage of the 2003 available megawatts.

Sensitivity being measured, a recent 2003 forward price level and dollars per mega watt hour and what impact a reasonable range would have on earnings per share.

The range of variability for forward prices is based on what we have experiences over the last six months.

Of course future fluctuations could be larger or smaller than indicated here.

Starting with Seabrook, 6% of megawatts remain unhedged.

Primary sensitivity here is to overall power prices in the region.

Recent forward prices have been around $36 a megawatt hour, round the clock, but varied plus or minus three.

Our fluctuation plus or minus $3 per megawatt hour would translate roughly to half a cent in EPS impact.

Second subclass is the remainder of the northeast assets. 67% of these megawatts remain unhedged.

The primary sensitivity here is to Spark spread against gas, recent forward Spark spreads have been around $6 and varied between $5 and $8 per megawatt hour.

A range of $5 to $8 would trans late roughly into plus or minus one cent of EPS impact.

The third subclass is Ercot, 37% of those are unhedged.

Again, primary sensitivity to Spark spreads against gas.

Recent forward Spark spreads have been $10 on peak but fluctuated plus or minus $2.

The fluctuation translates to a plus or minus three cents per share impact.

Finally, the remaining subclass at WECC and [SERK] assets 72% of those megawatts remain unhedged.

Again the primary sensitivity is to Spark spread against gas.

Again, we sent forward Spark spreads have been around 10 dollars, plus or minus $3 and a $3 range would translate to a plus or minus two cent impact in earnings per share.

Because of success of our recent hedging activities, the overall sensitivity of the 2003 earnings expectations to market risk factors has been substantially reduced.

To recap, FPL Group's recurring results in the third quarter, we saw a 20 cent decrease in earnings per share.

It was affected by the following: At FPL customer growth positive 8 cents, usage including weather, positive 13 cents, rate reduction, negative 26 cents, refund provision, positive 9 cents.

O&M, negative 11 cents, depreciation, positive 14 cents, income and other taxes, negative 10 cents, other, primarily share dilution, negative 8 cents for a total 11 cent reduction at FPL.

In addition, FPL Energy contributed negative 6 cents and corporate contributed negative 3 cents for a total FPL Group decrease of 20 cents per share.

FPL FiberNet included in corporate was unprofitable for the quarter.

Despite the modest loss this quarter, we continue to expect FiberNet to show a profit from recurring operations for 2002 and be close to break even for 2003.

To summarize the third quarter, FPL contributed $1.61, FPL Energy 31 cents and corporate and other contributed a negative 3 cents, a total of $1.79, representing a total decrease of 20 cents, 10% of the same period last year.

While we had previously indicated expectations of 470 to 475 for full year 2002 EPS, we are revising expectations upwards as I indicated at the beginning of this call.

Given the strong performance to date of Florida Power and Light we expect the business to earn 710, 715 million this year assuming normal weather in the fourth quarter.

We expect FPL Energy earnings in the fourth quarter to be up substantially compared to last year's corresponding quarter and we expect full year 2002 earnings to be up 15-20%, assuming current market forward prices for the balance of the year.

Together with the slight drag from corporate and other, this should lead to total FPL Group EPS for full year of 475 to 480, prior to nonrecurring items and the mark to market effect of nonmanaged hedges.

Turning now 2003 outlook, we see an EPS range of $4.80 to five bucks.

This outlook is based on the growth off the weather normalized the base at Florida Power and Light and FPL Energy, assuming a reasonable range around current market forward prices for the unhedged portions of FPL Energy's portfolio.

Overall corporate EPS expectations also assume a net drag in the corporate and other reporting segment of 20 to 30 cents per share, reflecting the interest associated with anticipated leverage in balance beyond our long run capital structure targets by business.

We are pleased that we were able to exceed expectations for FPL Group's third quarter results and are raising 2002 EPS expectations to $4.75-4.80.

With the good progress we have made in contracting our budget portfolio, we are firming our earnings expectations to a range of $4.80 to $5 per share for 2003.

FPL Group is distinguished by its financial strength and discipline, superior cost management and operational excellence, attributes that position us very favorably in a difficult market.

FPL Group continues to enhance shareholder value and we are optimistic about the future.

Now we would be happy to take your questions.

Again, if you like to ask a question during this time, press star and then the number 1 on your key pad.

If you on a speakerphone, you may need to pick up your handset to execute these commands.

Your first question is from Paul Patterson from Glenrock Association.

Good morning and thanks a lot for the detail.

I wanted to ask you about what your operating cash flow expectations were and what they had been for 2002 and for 2003 and Capex as well.

For both 2002 and 2003 operating cash flow will be around 1.9 to 2 billion.

Capex for this year -- well, let me speak to Capex for next year first.

There is approximately 350 to 400 million of Capex still to be spent to complete the buildout of the existing gas portfolio at FPL Energy.

On top of that, we will anticipate 700 million to anywhere between 701.2, 1200 million for the wind projects at FPL energy and so those two items will constitute the FPL Energy component.

FPL will be approximately 1.4 billion in capital expenditures.

The total will be slightly lower than we are anticipate forget this year.

Okay.

And then I wanted to ask you of the asset restructuring opportunities.

Could you elaborate a little more about those and how much they contribute.

Sure, I think it is important for people to recognize that a key part of what we do at FPL Energy is we work with projects, we buy and sell projects, we take early stage development projects and sometimes they will turn turn into operating projects and sometimes we will subsequently sell them.

In many cases operating projects have contracts attached to them which for various reasons get out of whack with the market and there are opportunities to be gained from restructuring the contracts that are beneficial to boats sides of the contract.

So there is a whole variety of activities that are constantly ongoing within FPL Energy related to those kinds of things.

And Jim could probably give you more on that.

But those kinds of activities, while they recur do not recur on a regular basis.

They are the kinds of activities that you commonly will be working on for several months to over a year.

For example, some of the opportunities that we are anticipating coming to fruition in the fourth quarter, the ones that were started last year, so we can't always predict exactly when they are going to come, but they represent a piece of our business.

If you look back over the last five years at FPL energy, probably between each year probably between 20 and 25% of earnings have come from these kinds of activities and while we probably would not expect the same proportion going forward, we expect we will continue to have some of these opportunities.

Jim, if you have any comments?

Yes, a couple of things.

First of all, most opportunities around assets and contracts and from an ongoing standpoint, while historically 20 to 25% of earnings come from those kind of activities, we think going forward actually will be a little bit slightly lower amount.

Okay, so slightly lower somewhere in the 15 to 20% range?

I think that is probably a reasonable starting point at the moment.

Now, you guys have a large amount of contracts or did originally and I'm just wondering -- as you go forward and you renegotiate these contracts, does that take out from future years?

I mean, would it seem to me that the restructurings though you may be able to continue them, I guess the question would be how much further can you continue to do those?

You see what I'm saying --

Let me just -- there are all kinds.

It is difficult to talk without addressing individual cases which obviously need to be kept confidential.

But in general, a lot of restructurings on the contract side end up opening up previously locked in optionality.

So there is often value to be created for both sides by going to what is fundamentally a more efficient economic structure.

So those kinds of ones tend to have no impact on the average level level of future earnings but nevertheless provide an opportunity for either immediate up front gain or some incremental income spread over time.

But you correct that there are some that can be simply the trade-off of some earnings in the future for relatively more earnings today.

But I think in this stage we are a long way away from seeing the end of these kinds of opportunities.

In addition as we look around at asset acquisition opportunities from the present environment, we suspect there may be more that can be brought into the portfolio.

We would like to accommodate everyone, but in the interest of time, if you can limit your comments to one question and one follow-up.

Your next question from Paul Ridzon from McDonald's Investment

A quick question.

If you could review the reconciling items at FPL and the pieces of the '03 growth, that went fast also.

Sorry.

The reconciling items at FPL the customer growth was a positive 8 cents, usage including weather was a positive 13 cents, the rate reduction was a negative 26 cents, the refund provision was a positive 9 cents, O&M a negative 11 cents, depreciation, positive 14 cents, income and other taxes, negative 10 cents and other, primarily share dilution, a negative 8 cents, a total 11 cent reduction at FPL.

FPL energy contributed negative 6 cents and corporate and other contributed negative three cents, that's a total 20 cents decrease.

And sorry, could you repeat the second part of your question?

You gave drivers for the '03 growth, FPL Energy up.

And what was the growth at FPL?

The expected growth at FPL was 4 to 5% after weather normalized 2002 base and that would get us to the 725 to 735 range for next year.

Assuming normal weather for next year.

And corporate was 20 to 30 percent drag?

Correct.

Thank you very much.

Your next question will come from Neal Stein, from Credit Suisse First Boston.

Good morning.

A couple of questions.

Can you talk about how much of the '03 growth for FPL Energy might come from contract restructuring that you talking about?

Or could you hit the growth target without doing anything in them?

I can't say exactly how much of the growth is predicated on that.

Certainly built into that is some expectation of kinds of restructuring activities we have been doing.

I believe it is the same level of this year, possibly less.

Okay.

And then you have been articulating an acquisition strategy maybe for last nine months or so and certainly there have been a lot of changes in the industry, can you talk about that how acquisition strategy might have changed over that period?

Certainly, I think the fundamental thing is it really hasn't change that much.

We have always been anticipating that in the down side of the cycle, there would be opportunities to pick up assets at more reasonable prices.

At the same time we have always been cautious about what realistic valuation of assets is.

We are looking for opportunities to create value, not simply to acquire assets.

And as we have been saying for much of the year, what we have observed so far is that asset prices have not come down anywhere near proportional to the decline in the underlying commodity.

So the asset price decline seems to be trailing the commodity price decline.

As a result, we have not seen the kind of value opportunities at least yet that we would consider necessary for us to have a good opportunity to create additional value.

But, we still think that if we are relatively early in the shall I say the workout phase of the cycle and therefore we want to be prepared.

We obviously are financially in a position to take advantage of those opportunities so we are continuing to review as we go.

Lou has referred to our posture as window shopping.

But we want to be ready to move quickly if and when those opportunities do arise.

And then my last one, what capacity factors are you assuming at Seabrook and then the projects in Ercot and do you have off peak projects in Ercot?

With respect to Seabrook we are anticipating capacity factor in the low 90s.

Obviously we have a refueling outage this year.

That is the primary driver there.

The Ercot projects, they do have some off peak contracts on them, but given the current forward pricing in Ercot, offpeak volume will not contribute significantly which is why we didn't discuss it in the table.

You can expect that high efficiency combine cycle in north Ercot will run peak hours and some portions of the year offpeak.

But the primary margin production will be in the peak hours.

Your next question from Jay Dobson with Deutsche Bank.

Hi, Moray.

Appreciate all the detail you gave us on your hedged positions, but I was wondering the pricing comments you gave.

Could you give us an idea how those stack up versus this year and I know things like Seabrook and a couple of the assets won't have been there in 02 versus a comparison 03.

I'm wondering what sort of pressure A-positive pressure or negative pressure on your growth look out to 03 given these hedges?

That is a little difficult to answer because the asset mix is changing at the same time that the markets are changing.

Probably the closest piece that is constant is the north Ercot market.

And there the spreads that we are seeing -- the range of spreads is fairly similar to what we have seen this year.

I'm not sure whether the average is slightly higher or slightly lower, but we had always anticipated that the next couple of years are going to be tough in Ercot.

But I don't know that 03 is going to be anymore tough.

It is also difficult comparison because 02 was affected by the fact that we just had a very -- although it was on average, temperature wise, reasonably normal summer, there were very few spikes.

Normally you would expect to get several periods of hundred degree plus days in and around Dallas.

I think there were two days this summer where the temperature got over 100 degrees.

So that tended to flatten the pricing curves this year.

Which makes a comparison to you know, expected prices for next year based on more normal temperature environment a little difficult.

But I would not say there is any great difference between the 02 and 03 expectations.

With respect to [Deepol] I think there is more pressure on the gas Spark spread next year than there has been this year.

But the overall -- major exposure there is to the absolute level of power prices with Seabrook and there as you saw we have 94% of megawatts hedged, and we are comfortable with where we are there.

Your next question from Jeff Gildersleeve from Argus Research.

Given large divergement on prices, the hedged portion versus the unhedged, you give us any sense of the duration of the contracts?

I know it is different by region, by plant, but any average sense of how long these contracts are selling out for?

First of all the wind in the older projects typically under high term, 15 to 25 year contracts.

Within the merchant segment, again, there is a substantial range with respect to Seabrook.

We have some activities against selling 04 and 05 capacity at the moment because of lack of liquidity in the market, those at much lower levels.

In Ercot a number of the contracts, I would say the contracts are medium or short term.

Medium being in the three to four year range, short term being in the one to two year range.

The Calhoun plant that comes on line has a seven year contract against it.

So it is a mix.

Great, thank you.

Also the restructuring announcement earlier this month or a month ago, S&P made comments that they were reviewing the rating and would comment with something by the third quarter, which has passed, have you been in discussions with the rating agencies and any feel for their reaction?

We are actively working with the S&P, we, like they, would like to get the credit watch situation resolved one way or the other.

But they continue to request additional specifics on various parts of our business and frankly I think that they have had other parts of the industry that have occupied more of their attention.

So I don't know when the time will be when we have a final resolution.

I'm hoping it will be fairly soon.

But I don't know for sure.

Your next question from Webb Ellinger from George [Wiess] and Associates.

It is Brad Donovan.

I have been on and off the call so I apologize if this has been answered.

The 15% of gross margin not hedged, can you go into specifics into what sensitivity is to what the curve is now versus where the curve goes, how that flows to EPS?

Yeah, that was covered in one of the slides.

Just a brief recap on the Seabrook market risk exposure is approximately plus or minus half a cent per share.

The market risk exposure in the remainder northeast plus or minus one cent, the Ercot portfolio plus or minus three cents and the rest, plus or minus two cents.

All those based on the kinds of movements in prices we have seen up and down in the last six months.

So obviously if the fluctuations in the future are larger, then the spreads would be larger and vice versa.

Okay, thank you.

Your next question from Andrea Feinstein from Angelo Gordon.

Moray.

I was also off and on so apologize if you answered this.

In the 20 cent range that you're giving, given that the exposure that you have to changes in wholesale prices has gone down so much, what are the major swing factors in the bottom and top of your guidance range and is it you know is it primarily driven to the execution of your wind portfolio, and on a separate note can you address what you expect the costs of the eventual replacement of the reactor heads to be and a little bit more detail on the timing of when you expect to do that?

With respect to the variability in the $4.80 to $5 for next year, there are a number of things.

First of all, I pointed out that we haven't started '03 so everything is at this stage an expectation.

Let me start with the utility.

We have got a spread in the weather normalized expectation of roughly $10 million there.

Clearly, there are some uncertainties at this stage, even about the utility.

Second, within FPL Energy, there is the market risk exposure on the order of plus or minus 10 to 15 million.

Second, within that would be the range of the success on the wind project, we're looking for somewhere between 700 and 1200 megawatts next year is uncertainty about the absolute amount and as to the specific timing of projects, that has an impact.

Thirdly, there is uncertainty about some of the what we were talking about earlier in were the project and asset restructuring opportunities.

We have a good list of things that we are work on, but there is range there.

Can you remind us how much you made on that in 2002 thus far?

I don't have that number off the top of my head.

Okay.

Then in addition at this stage there is still uncertainty in the extent of the productivity programs that we are putting in place there which extend all the way down to individual partnership projects.

So there is a lot of different factors at this point.

How much are you building in for productivity?

Again, I don't have the specific break down of that right now.

Now your second question.

On the cost of the eventual replacement of the reactor heads.

I think it is early to say for sure.

If I take the likely cost of replacement and sort of amortize that over the length of the life you can expect from a new head, you talking something on the order of $5 million, $5 to 10 million per unit.

Sorry again, how many units?

I should know how many you have --

Four plus Seabrook eventually, but I'm speaking to the FPL units.

So $5 million per unit is not a huge percentage of the overall total and as I said in the remarks, we are working on sort of economics of the optimal replacement point, whether it is better to go for an additional cycle with remarks or the possibility of repairs or better off to --

Thank you very much.

Paul has comments.

I just wanted to make another comment or two on that.

Obviously there is additional costs during the outage from pure inspections.

This is looking for cracking.

And that we estimate alone in the $4 to $5 million a unit.

What we are doing is actually beginning in this third quarter we are starting to accrue those costs into our outage accruals and you know outages are roughly every 18 months and we accrue in advance what we think those costs are, so they are normally in the 20 to 25 million range depending on the particular outage, we will be adding about $5 million more in that accrual and we did a little catch up in the third quarter.

And then to the extent that there are cracks that we find that may need to be repaired, we have proposed a stipulation with a PSC that will be voted on the end of next month.

That would enable us to take those costs of repair and amortize them over a five year period.

And the staff has recommended that the commission adopt that so that is how we would handle those costs and then ultimately of course the replacement of the heads would an capital item and placed some orders for long lead time items on that.

Great, I appreciate it.

Thank you.

Your next question from Leslie Ridge from Banc of America.

Sorry my questions have been answered.

Your next question from Faith Claus from Banc of America.

I wondered if you would provide an update on some of the credit fundamentals for the quarter, debt to cap, total debt, and also liquidity and the third thing you outlined if I wrote it down correctly, 3 billion in Capex in 2003.

With $2 billion of operating cash flow can you outline your financing plans for 2003?

Let me start with the liquidity issue first.

We have roughly 3.2 billion in outstanding lines of credit.

Which is split roughly half and half between a three-year piece which still has two years to run and a 364 day piece which we are in the midst of renewing.

Those lines are all undrawn.

Against them we have CP outstanding of approximately 1.2 billion and net against that is about a billion of cash on hand.

So essentially, lines of credit are at this stage virtually free.

We have outlined a financing plan that we have been working on for some time to meet the overall capital needs, actually out through 2005.

Which consists of a mixture of debt and equity.

Obviously this year we have gone on it and raised approximately 1.4 billion of equity or equity linked securities.

We are work on a number of different borrowing initiatives that is dealing with specific assets within the FPL Energy portfolio, either individual assets or groups of assets including some of the assets in construction and some of the wind projects.

And of course we also have available to us corporate debt capacity.

So the $1 billion of net cash need next year will be met first of all through a variety of sources, let me leave it at that.

In terms of our overall ratios on all the major S&P ratios, I don't have them on hand, we are above industry averages on a debt to total capital basis allowing on a pro forma basis adjusting for equity units.

They are somewhere in the 45 to 47% range at the moment.

Thank you very much.

Your next question from Jason Harmon from Treeson Capital.

Mr. Harmon, your line is open.

Your next question from Steve Fleischman from Merrill Lynch.

Thanks, my questions were answered.

Your next question from from Paul [Gentwickwich] from Millenium Partners.

Actually it is Dale [Meirhoffer].

Could you give us the 2004 hedge percentages for those four merchant groups you outlined?

I don't have the exact numbers off the top of my head.

What about just for Seabrook?

Probably in the 20% range in this stage.

On the nuclear outages to do head inspections, are you expecting the upcoming outages in 2003 to be longer than your past outages in order to perform these more thorough inspections?

Yeah, they will be slightly longer.

Although based on the experience of the outage that we experienced at St. Lucie One, they shouldn't be more than two to three days.

It is like anything else, once you have done it once, it gets easier to do subsequent times.

And we have developed some difficult procedures based on the experience which will be applied to outages in 30 point and St. Lucie Two, so I don't expect that to be a significant impact.

Okay, great.

Thank you.

Your next question from Win Wenchin from ABM.

Good morning.

What yo you expect for a resolution to your review at S&P?

As I indicated earlier, we are work actively with S&P.

They have requested in to us for additional data to help them evaluate various parts of our business.

We don't have a definite date.

We have been expecting for some time that it would be in the next few weeks and at this stage, I would have to say within the next few weeks.

Okay.

You expect to keep your ratings for where they are?

We believe that our current rating is well supported by our credit statistics.

And a second question, what is your level of interest in the acquisition or an acquisition of AmerTech ?

I think I will ask Lou to make a comment on that.

I finally get to say something, Moray.

That is an easy one because our policy is we don't comment on any speculation about acquisitions.

Okay, thanks lot.

Your next question from Zach Shuber from Deutsch Capital.

I think that is a new one.

Zach Shriber from Ducane Capital Management.

Was just wondering if you can sort of talk us to where we are on the non-recourse bank financing?

We at this stage -- I'm not sure if we are officially out -- I don't believe we are officially out in the market yet.

We will be in the next few weeks.

We had the basic structure of deal in place.

Had the leads in place but haven't officially launched it.

Okay.

And sort of tying that back to the earlier question about S&P, if I recall, there were a couple of things they were looking for, first getting in place some contracts for Forney, number one, number two, getting in place contracts for Seabrook and number three, the execution of the non-recourse bank financing or some replacement thereof.

The question goes do I have that right and where do we stand on the checklist or has the checklist changed?

The answer to the first part is no, you don't have it -- you have it half right.

That was Moody's checklist, reaffirmed our ratings with a negative outlook on group capital.

The negative outlook on group capital was associated with three things they wanted to monitor, and those you correctly described as they wanted to see us have some success in hedging Seabrook out and Forney output and success in working on the construction or portfolio financing.

Relative to those three objectives, I feel we have made substantial progress and certainly that has been reflected in the comments that we had.

But, of course, Moody's has reaffirmed the rating.

With S&P the situation is different because they are going through a full-blown credit review and there are literally dozens of issues that they wish to dig into there.

So that was a tougher one to respond to in a short time.

So then what you saying is we are still sort of early on in the process with S&P but from, sort of, Moody's perspective, it is possible we could get taken off negative outlook at the capital level?

It's possible, although I don't expect that to happen any time soon.

I think they will continue to monitor us and frankly monitor the development of the markets on all of those things.

I would not say it is early for S&P.

We have been working with S&P for some months and we and they would like to get the evaluation resolved, but as I indicated earlier, there is a lot to it and you know, frankly, we have not been the high of the on their priority list for obvious reasons.

Your next question is Padula Merdi from SAC Capital.

Hello?

Hello.

Am I on?

Yes.

Oh, good morning.

I unfortunately missed a little bit with regards to the financing part that you were discussing earlier in terms of '03.

If you could just real briefly recap that, I appreciate it.

Well, what I had indicated is that our overall financial plan is 2002 to 2005 plan, we completed large elements of that this year with the issuance of equity.

We are anticipating additional debt in several possible forms before we are complete.

And those could include the portfolio financing that we are working on, financing against wind assets or other specific assets within the FPL Energy portfolio, or corporate debt, a mix of any those is likely.

And you feel that the current credit ratings are consistent with no additional equity issuance during this period?

Based on everything we understand about both Moody's and S&P evaluation methodology, we believe the credit statistics, taking into account all of those things thoroughly support the current ratings.

Of course we do not control their evaluation.

And would you taking the long view, are you willing to accept a downgrade you know if that is what they chose to do in lieu of additional equity?

I think it is premature to speculate on that.

And would you issue equity in order to maintain?

Again, that is speculation.

One last thing, with regards to the hedges that you had for 85% of the expected gross margins, how sensitive are these to actual output?

For instance, if usage were to decline in any significant fashion, are you then vulnerable on your gross margin projections here?

The answer to that question really can only be addressed by going through contract by contract.

There are somewhat are known as heat rate call options in the mix, a small portion of the total and those while they have much less sensitivity to market risk, than others, do still of some sensitivity because to the extent the unit gets called upon, there is incremental margin associated with the energy sale.

But the overall sensitivity to market risk is built in to the plus or minus impact on earnings per share that gave in the presentation.

Your next question from Danielle Seitz from Salomon Smith and Barney.

Thank you.

My questions have been answered, thank you, though.

Your next question from Deborah Bramburg.

My questions were answered, thank you.

Your next question from [Misail Roger] with Cobalt Investments.

Hi, can you hear me?

Yes.

I wanted to quickly clarify the asset restructuring, you mentioned the 15 to 20%, I assume that would be FPL Energy's earnings?

That's correct.

Your next question from [Evon] Noble from Vanguard.

Hi.

I wonder if you could clarify your policy goals toward keeping the A-range credit rating versus dropping into the triple B range, how defensive are you or how proactive are you willing to be in order to maintain that A range rating.

Well, I guess a couple of comments.

First of all, I think we have been extremely proactive as I indicated. 1.4 billion of equity or equity linked security issuance this year well in advance of when it was needed was proactive and can clearly be seen to have been good timing.

In terms of our fundamental policies, we do believe and we said this for a long time that in this commodity industry, that is cyclical you need to have a strong balance sheet to manage through the cycles, and on average or long term target of somewhere in the very strong investment grade in the A range is appropriate.

We have indicated we don't see that as a static target fixed for all times and all situations and we do expect to fluctuate in balance sheet strength around that long term goal.

And clearly the reason that you have this strong balance sheet is to be able to work through the down side of the commodity cycle and still take advantage of opportunities that are likely to arise then and that is the situation we are in.

So, with those as general policy goals, then I would have to say beyond that how we would apply those policy goals is really going to depend very much on the specific circumstances which is why I can't say how we might react to a hypothetical downgrade or you know any of those things.

We have to see what situation we are actually faced with.

But we don't view the A as absolute fixed goal for all time.

Thank you.

Your next question is from Neal Stein from Credit Suisse First Boston.

A couple of follow-ups.

You gave your hedge position for, I guess, the end of this quarter.

Can you talk about what it was for '03 last quarter and then incrementally where did you put the hedges and can you talk about who your counter-parties are, maybe what percentage of portfolios with marketers, what percentage with utilities or other?

The end of the second quarter instead of being 73% output hedged we were 55%.

The changes since then have come both at Seabrook and in the Ercot portfolio.

I don't think there has been significant movement in other areas.

So that is kind of really where we have been concentrating the effort and where we had success.

You raise a good point in terms of the counter-party issue here.

We had indicated in the second quarter call that one of the things that was troubling us at that time was the liquidity and credit situation in the market, which made it difficult to effectively hedge output.

One of the things that we are very pleased with is that the credit positions that we have taken on in increasing hedge positions here are with good counter parties.

So I would say you know, somewhere in the high 90s, 98% of current portfolio was investment grade or above.

And at this stage, we feel pretty comfortable with that.

But it is something that we actively monitor and that we need carefully to trade off.

In some cases, you can make your situation worse by apparently locking in volume and reducing market risk, but by taking on significant incremental credit risks.

So we feel comfortable with what we have been able to accomplish there.

At this time, you have no further questions in queue.

You may conclude the presentation.

I'd like to thank everyone for joining us on our web cast today.

There will be a replay of the web cast available on our Web site.

Www.FPLgroup.com.

A taped replay of the conference call will be available at 11:30 am eastern time.

To listen to the replay, dial 402-220-2306, and the access code is 5278877.

This replay will be available until midnight on October 25th.

Our whole team is looking forward to seeing everyone at EEI and thanks again for joining us.