新世紀能源 (NEE) 2003 Q1 法說會逐字稿

Good morning, and welcome to the First Quarter Earnings Conference Call.

At this time I would like to turn the conference over to Mary Kromer, Vice President of Corporate Communications.

Please go ahead.

Welcome to our 2003 First Quarter Earning Conference Call.

Here with us today is Moray Dewhurst, Chief Financial Officer of FPL Group who will provide an overview of our performance for the quarter as well as Lew Hay, FPL Group Chairman and CEO, and Paul Evanson, President of Florida Power & Light Company.

After Moray’s remark our senior management team will be available to take your questions.

And 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 of 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 recent SEC form 10-K.

Moray.

Thank you Mary Lou and good morning everyone.

Both of FPL Groups two main businesses enjoyed strong performance during the period.

Florida Power & Light continued to see good customer and usage growth and benefited from favorable weather effects somewhat offset by O&M prices which we have described before.

FPL Energy grew in line with our overall expectations showing the positive impact of the acquisition of Sea Group (ph.) and our leading position in the wind business as well as the moderate risk approach we have chosen to take through wholesale generation business.

FPL Energy’s growth was achieved in spite of a second successive year of record drought levels affecting on our New England hydro assets and somewhat below average wind resource across the portfolio.

Overall we were pleased with the start we made to the year and we continue to feel very comfortable with our full year earnings expectations of $4.80 to $5 per share excluding the mark-to-market effect of non-managed hedges, which cannot be determined at this time.

On a GAAP basis FPL Group’s net income was a 175m or 99 cents per share compared with negative 56m or 33 cents per share for the first quarter in 2002 excluding the effect of non-managed hedges and certain other items.

FPL Group earnings were 172m compared with a 135m last year.

Last year’s GAAP results included a 222m after-tax charges associated with the adoption of FAS 142.

Once again of 1m after-tax from the mark-to-market effect of non-managed hedges and a positive 30m from the settlement of a tax matter with the IRS.

This year’s GAAP results included a positive 3 million after-tax gain associated with mark-to-market effects, which we believe are more appropriately considered in connection with the operating results of future periods and which I will describe in more detail later in the call.

Net income of Florida Power & Light was 135m in the first quarter up from 118m in a year ago and the earnings per share contribution was 76 cents up from 69 cents in 2002.

Primary driver of FPL’s performance was very strong revenue growth.

Base revenues added revenues excluding fuel and purchase power costs recoveries were up 3.9% for the quarter not withstanding the impact of the rate reduction that first took effect in mid-April of last year.

Retail customer growth continued very strong at 2.3% equivalent to an annual rise of more than 90,000 new customer accounts.

In addition, underlying usage growth was also strong and there appears to have been a slight favorable impact from improved economic conditions relative to last year.

On top of these underlying drivers, revenues benefited from a volatile quarter of weather.

January was colder than normal and we set a new all time system load peak of 20,190 megawatts on January 24th.

February was mild and March was unusually warm.

Altogether we estimate that weather added about 3.6% to revenue growth relative to last year.

As a result average usage per customer grew 6.9%.

All other factors including the impact of the rate reduction offset by the absence of any refund provision netted to a negative 5.5%.

Looking forward to the rest of the year we continue to expect underlying growth to be strong.

We are tapering off someone from the rapid pace of recent months.

For us the economy continues to track the trend of the rest of the nation though at more robust levels.

Like others we remain concerned that overall national levels of economic activity is still undesirably weak.

For the quarter FPL’s base O&M expenses were 284m, up from 257m a year ago.

This increase was driven by a number of factors, not all of which were expected to continue through the remainder of the year.

As we have previously indicated we expect employee healthcare, nuclear maintenance, and various insurance cost to put pressure on the O&M budget this year, and all three contributed to the first-quarter trend.

While insurance cost driven by cyclical pressures, rising healthcare appears to be a longer-term trend that we will need to work to offset through overall productivity improvement.

Nuclear maintenance cost, however, must be viewed in the light of the longer run economics of this lowest cost source of energy.

In this connection, we were particularly pleased with volumetric inspections of the reactive vessel head at Turkey Point unit 3 showed no evidence of cracks or other failure.

Two of our four units have now been tested and found to be in good condition.

The remaining two will be inspected this year.

In addition to these trends, first-quarter results were also affected by severance cost associated with productivity improvement programs and by certain legal expenses that are not likely to recur this year.

Finally, the warm weather in March also brought with it some severe conditions including tornadoes in day county, which drove our distribution cost modestly.

Not withstanding the increase in O&M in the first quarter, we remain confident that we can hold our cost per kilowatt hour flat with last year excluding the extra accrual we made to the storm reserve in the fourth quarter of 2002.

Our first quarter results even with the additional expenses are consistent with this.

Base depreciation decrease from 222m to 200m, primarily as a result of the 125m special depreciation credit that forms part of the 2002 rate agreement.

Absent of this credit, depreciation was up 9m reflecting the additions to our Fort Myers and general system growth.

We accept depreciation expense to continue to grow modestly as we support the overall growth in revenue.

Earlier this month, FPL received approval from the governor and cabinet to expand its amenity modern power plants.

Construction will begin this summer and is due to be completed in 2005.

Florida Power & Lights first-quarter earnings per share increase was effected by the following: Customer growth, positive 6 cents; usage due to weather, positive 10 cents; usage mix and other, positive 9 cents; rate reduction, negative 21 cents; refund provision, positive 7 cents;

O&M, negative 9 cents; depreciation, positive 8 cents; all other including shared illusion, negative 3 cents for a total 7-cent increase at FPL.

Turning now to the wholesale generation business, FPL Energy had a strong quarter driven heavily by the contributions from new investments primarily Seabrook and wind.

On an adjusted basis, FPL Energy’s earnings rose to 41m from 23m on a comparable basis a year ago.

Both years results exclude the mark-to-market effects of non-managed hedges.

Last year’s GAAP results were also affected by the introduction of FAS 142 and the consequent write down of goodwill.

Project additions were the principal driver of growth at FPL Energy adding 28m to earnings primarily from Seabrook and new wind projects.

Earnings from existing assets were down by 8m as a result of core hydro conditions in the north-east and operational issues.

The asset restructuring activities provided no current period earnings this quarter compared with a 6m gain on a third-party restructuring a year ago.

All other factors were a net positive 4m as reduced G&A coupled with a settlement of a counter party dispute more than offset an increase in interest expense associated with the growing portfolio.

I’d like now to update you on our wind development efforts.

As you all recall, we have previously indicated a range of 700-1200 megawatts for our 2003 program, of which we have now announced approximately 600 including 159 megawatts of projects announced earlier this week.

Today, we are tightening the range somewhat by reducing the upper end to about 1000 megawatts.

We continue to have a strong backlog of attractive projects, but given where we are in the year and the likely development cycles for individual projects, we think it is unlikely that we will be able to complete construction on projects totaling more than 1000 megawatts before the end of the year.

We remain very optimistic about the potential for an extension of the production tax credit into 2004 and beyond.

We would rather make sure that we have good solid projects with attractive economics and risk profiles rather than rush to meet a particular upper end goal.

It is worth noting that we will likely continue to increase our market share of the US wind business this year, since indications are that the total US market for new wind constructions will be the 1000-1300 megawatt this year.

The reduction in the upper end of our wind program expectations will also reduce our capital expenditure expectations by about 200m.

Before leaving FPL Energy, I would like to provide you some more detail about the non-managed hedge earnings impact that we break out separately.

As we indicated earlier, in the first quarter the net effect of the non-managed hedge category was a positive $3m after-tax.

As you will also recall, we break out some transactions because FAS 133 requires us to mark these positions to market even though the physical asset position which is the economic offset to the derivative position is not mark-to-market.

Over time the differences will be eliminated in the natural course of accounting but the individual period results will be affected.

In this quarter transactions of this nature contributed a negative $9m to GAAP results.

Of this $2m represents the reversal of previously recorded gains in the non-managed hedge category, while the remaining $7m will be reversed in subsequent periods as these transactions go to realization.

Virtually all of this will occur later in this calendar year.

And thus if we entered into no new transactions of this nature, and if there were no further market movements this year, the non-managed hedge category would show gains totaling $7m in subsequent periods this year.

In this quarter there is one transaction included in the non-managed hedge category which does not quite fit the standard pattern, and which contributed a positive $12m to GAAP earnings.

This represents the one time effect of marking to market and in the money gas contract that previously received accrual accounting treatment.

In this particular case one of our older projects with long term power and gas contracts could be operated more economically much of the time by shutting the plant down and selling the gas.

However, in shifting to this mode of operations, the gas contract no longer fulfils the requirements for accrual accounting and thus on the GAAP must be mark-to-market.

This shift in the accounting method results in the one-time gain, since the gas contract is in the money.

However, while the shift in mode of operations is clearly economically beneficial, we do not believe that the gain of $12m fairly reflects the operational impact in this period and thus we have placed it in the non-managed hedge category.

Going forward, this amount will be reversed in accordance with FAS 133 over the remaining life of the contract ending in 2007, and these amounts will continue to appear in the non-managed hedge category.

We recognize at the accounting issues associated with hedging activities in FAS 133 can be quite complex and we will be happy to answer questions on this topic in more detail, either in the Q&A or at a later date.

We continue to believe that separating the mark-to-market effects of non-managed hedges is important for providing a more accurate and consistent picture of the operational performance of our portfolio in any particular period.

To summarize the first quarter excluding the affect of non-managed hedges and certain other items, FPL contributed 76 cents, FPL Energy contributed 23 cents, and Corporate and Other contributed negative 2 cents; that is a total of 97 cents, representing a total increase of 17 cents over the same period in 2002.

Within the Corporate and Other category, FPL Fiber Nets results were a positive 3 cents with the remainder of the category impacted by higher corporate expenses.

Fiber Net's contribution was due primarily to gains associated with restructuring two prior transactions and we continue to expect the business to be about break-even for the full year.

Turning now to the outlook for the full year; we continue to feel very comfortable with our expectations of $4.80-5 per share excluding the mark-to-market effects of non-managed hedges which cannot be determined at this time.

Although, the first quarter performance was very strong, we have previously indicated an array of factors that will typically cause our earnings to fluctuate and we remain well within the band of uncertainty that we laid out in our last earnings call.

Assuming the normal rules of probability continued to hold, we can expect some factors to break in our favor and others to go against this for the remainder of the year, just as happened in the first quarter.

In addition, we would note that third quarters are normally more significant earnings contributors than the first and fourth.

To remind those who do not have immediate access to the slides, our full year expectations include about $725-735m for the utility, $165-190m for FPL energy excluding the mark-to-market effect of non-managed hedges, which cannot be determined at this time, and a drag from Corporate and Other including Fiber Net of 20-30 cents.

In terms of the pattern of earnings for the remainder of the year, let me remind everyone that last year's second and fourth quarters were affected by unusually strong weather driven results from Florida Power and Light.

Other things equal, we would not expect the second quarter this year to be as strong as last year.

Before taking questions I would like to point out that we have added an appendix to the presentation and I would encourage you to access the slides that are available on our website www.fplgroup.com under Investor Information.

The slides were also e-mailed to our investor distribution list this morning.

The slides provide updates on our contract coverage and related topics and in the interest of time I will not be discussing it today.

And now we'll be happy to take your questions.

Again, if you wish to ask a question at this time, you may press “*” then the number “1” on your touchtone phone.

Your questions will be answered in the order received.

Your first question comes from Greg Gordon of Goldman Sachs.

Thanks, good morning Moray.

Good morning Greg.

Great quarter, couple of questions.

I understand you’re hedging on, obviously only one quarter in the bag; still about three quarters to go.

But when we look at how far you are ahead of the game relative to your plans so far and I looked through your presentation, you talked about at the utility of 10 cents of weather and then 9 cents of usage/other.

So a plus 10, plus 9, plus 19 cents relative to the quarter last year; shall I look at that as you being 10 cents ahead because of weather or 19 cents ahead because of the weather going into the second quarter?

I think you should actually look at it as been a little less than 10 cents ahead due to weather.

A couple of points, first of all, our weather estimate is just bad, it is a weather estimate based on average temperatures that we've experienced relative to, you know, historical norms.

We do know that the specific effect of weather in any particular quarter can actually vary quite a bit from that depending upon how the weather is distributed across different parts of the service territory.

So first point is, the 10 cents itself is just an estimate.

Second point is, there was something of an offset to that 10 cents in the O&M, since the -- particularly in March the heavy weather resulted in more work for the field on the distribution side.

So, I would say that at this stage, probably, the weather -- the net weather effect is a plus to the 8 or 9 cents.

Great, thanks.

We will take what we can get.

Second series of questions is on FPL Energy; can you discuss what the "operating issues" were that cost you some of the upside in the first quarter?

Sure, we had a number of things that we are not entirely happy with.

The Johnson Rhode Island project has had some sort of early stage teething problems.

As you know that the winter up in your part of the world has been pretty rough and we had some instances of freezing, which has caused us to have to trip the plant at times as well as some sort of teething issues with the technology in those turbans, so we have been -- we were not as able to take advantage of the market conditions as we would have liked.

In addition, we have encountered along with others in the industry an issue with the row 0 blades of GE 7S, which is in a broader scheme of things is not that significant but it has required in a couple of cases taking a unit down to do some sort of preventive maintenance in order to avoid a bigger potential problem later on.

So, we lost some hours effectively from that.

And then in the [inaudible] market there were a couple of days when we were curtailed on; gas simply wasn’t available and that prevented us taking as much advantage of the high prices on those days as we might have liked to have; obviously, the lack and gas and high prices were highly related.

So, these are the number of things that -- these are some things that we continue to need to work on.

So, well we are very pleased with the quarter overall.

I think, actually we probably could have done better once we get things under control.

We will do better going forward.

Great.

I'll just lay out the rest of my questions and then get off.

Let other people talk.

The -- well [Ercot], have you seen -- can you qualitatively talk about what the market has done since it became obvious that South Texas project was going to be out for the whole summer?

My next question was to speak probably on the subject of outages.

When is the Seabrook outage exactly so that we can tell that into our quarterly estimates because we know that’s not going to be a provider on or across the year?

And then third, the gain you took from the counter party getting sued in your other income; how much was that?

Let me start with the Seabrook outage;

Seabrook outage is in a fall, probably in October.

The exact timing I don’t believe is actually been determined yet.

On the [Ercot] situation, I don't think we can say that there has been any real significant effect on forwards from the South Texas unit incident.

May be a little bit of a help to the, you know, the balance of ’03 but certainly no effect on the ’04 forwards.

You know, the forward prices for [Ercot] over the course of the quarter have actually strengthened.

They were pretty weak at the end of last year, and then they have come up because got in the gas on the margin market.

It impact pricing gas is also on average is slightly rise in the margin that’s available to the efficient units.

So there's been some improvement, there’s not [Ercot] mark now in the 10-11 range, but it continues to bounce around as we have seen in the past.

There has clearly been some strengthening during the course of the quarter in the forwards for the balance of ’03, which are now to north [Ercot] and the sort of 14-15 range.

But I wouldn’t say that the some Texas unit incident has really had a noticeable impact on that.

And, help me what the other question was?

You said you booked a gain from winning a counterparty suit that you booked in other income for the quarter?

Yeah, just hang on one second.

About 5.

5m or 5 cents?

5m.

Alright, thank you.

Absolutely I am sorry -- that was 5m pre tax -- 3 net.

Thank you.

Next question.

We like to ask participants at this time you keep your questions to one primary and one follow-up.

Your next question comes from Lesley Rich (ph.) of Banc of America.

Yeah.

Could you just review the restructuring activity that was a negative 3 cents at FPL Energy?

The negative impact is relative to last year.

At last year’s first quarter, we closed out restructuring transaction that contributed approximately 6m.

This year’s first quarter, we completed no transaction, so just relative to last year, there was, you know, 6m less there.

We continue to have a number of good projects that we are working on and we continue to expect that the restructuring segment will contribute, you know, roughly 10-15 percent of FPL Energy’s earnings this year.

But the first quarter performance was achieved despite not having any particular immediate contribution from that segment.

And separately, if you could just talk about your hedging activity for ’04, in [Nepo] and ERCOT, you know, what sort of liquidity and market are you seeing there?

The, in the appendix, those who have the charts is that contract coverage chart, and let me just flip through it.

For ’04 across the whole portfolio, we have about 53% of the megawatts covered.

Seabrook is about 84 % covered, obviously, the wind and the QFs close to 100%.

We continue to have very little contract coverage on the balance of [Nepo] portfolio and in ERCOT.

The -- for the same reasons that we have talked about before, there is still a long way to go before the ’04 calendar year begins.

We do continue to see movements in ’04 forward prices.

Last year, you will recall that as we got closer to the end of year we started to see more liquidity and a consequent strengthening in the spark spreads there.

So we don’t want to get ourselves in a situation where we that we have that again, we miss out on opportunity to lay in hedges at higher prices.

So at this stage which we are pretty comfortable, the big, you know, from a market risk perspective, our big exposure obviously is in Seabrook and we are very comfortable where we are there now at 84% coverage.

The gas assets in [Nepo] and ERCOT are obviously, when you think of them in option terms, not nearly as deeply in the money as Seabrook and therefore there is much more value to utilizing the remaining time between now and the end of the year to pick the right opportunity -- at which to layer in the hedges.

Having settled that, we will continue to expect that as we go into ’04, we will be somewhere in the same position as we were going into '03 which will be to have roughly three quarters of the megawatts under contract to probably somewhere in the order of 90% of our then expected gross margin under contract.

Okay, thank you.

Your next question comes from Neil Stein (ph.)of John Lehman (ph.).

On the EPS growth factor page you said due to mix and other and that’s a positive 9 cents.

Could you just talk about what kind of including there?

Is that basically every thing that’s not weather?

Yes, that's really a residual so included in there is the kind of long term underlying usage growth as your recall we have over the past decade experienced somewhere between 1.1 and 1.5% a year increase in underlying usage per customer and it's pretty clear we are still seeing some of that.

It also includes any kind of economic impact, you will recall that first quarter of last year the Florida economy along with the rest of the nation was still definitely affected by September 11.

So related to last year we get a little bit of boost because the economic conditions are better.

There are some, you know, customer mix effects because the average yield across different customer classes is slightly different and then there is kind of statistical residual so it's all those factors.

You said that like 9 cents -- you are may be related to last year is sustainable.

No I would not say that that’s sustainable.

A portion of that I think is sustainable but I would not extrapolate the 9 cents.

The little difficult to know how much we can extrapolate we always have this problem at any particular course and because it is kind of a residual -- there you it's a little difficult to know how reliable it is but Paul might want to comment on this as well.

Well I just wanted to add one of the item and that’s elasticity of demand and you know we had a rate cut last year $250m effective last April so that's set some beneficial affect, of course, we have fuel cost increase coming through April 15th so that will dampen any positive element we had on the elasticity side so that's another reason why I think that 9 cents is probably not -- shouldn't expect it to recur.

And then I guess my last one, can you talk about any pending financings that you need to do for the remainder of the year, I guess, you have to do some debt issuances I think you are working on the [non-recursion] of financing as well?

Yes, let me give a brief update on where we are.

We have previously indicated that this year we will be looking for somewhere between a $1b and $1.5b and that external capital primarily is debt, since we did majority of the equity portion of capital plan last year.

With the reduction in the top hand of our wind expectation, we can take a couple of hundred million of that and so you know sitting where we are today I think net would probably actually looking for between 800 and may be 1.2b of net external capital.

In this quarter or at least earlier this year, we have done two debt deals one on the FPL side one on the group capital side, we did 500m first mortgage bond issue for FPL and 500m group capital debenture both of which were very attractive rates -- prices and those we used to pull down our short term commercial paper balances.

So from where we sit today it is just pure liquidity terms, we could meet our needs for external capital through the rest of the year just through the short term facilities that we have.

Having said that we are continuing to work on the more permanent end of the debt financing and that includes the construction facility that we have talked about for many months, now that has gone through a number of iterations but I think we get closer on that one even no -- nowhere still by no means guaranteed.

We continue to work on non-recourse financing for the wind portfolio as we had talked about before and we will continue to have other capital markets transaction.

I think you can expect to see, you know, many of these activities come to fruition in the May, June, July time period, but I'd just repeat something that I said before which is for our point of view the financing is really a matter of optimizing our financial strategy rather than just pure access.

I think the two debt deals very clearly demonstrate we have a strong capital market access so we want to try and you know bring the most out of position and get the best deals that we can.

Okay, thank you.

Again we will like to ask you to keep your questions to one primary and one follow up.

Your next question comes from Deborah Bromberg of Jeffries & Co.

Hi, good morning.

Moray Dewhurst Good morning.

The earnings under the equity method in the quarter increased around 25m and I was just wondering if you could just review the key drivers there?

Let me just think about this.

The primary driver of that is this one-time 12m in the non-managed hedge category.

That was one of the equity soaps.

So as I indicated earlier, there is 12 minute -- 12m which is the one-time effect of taking the gas contract and marking it to the market.

So that’s the biggest single driver in there.

The -- also the counterparty settlement of 3m is in that category.

Having said that in general the equity projects continue to perform well operationally as well.

I think there is just some underlying growth there.

Okay.

Thank you.

Your next question comes from Jay Dobson of Deutsche Bank.

Good morning two question if I can.

First on the nuclear plants.

I think, you said there were two left, you still had to do RVH inspections on that.

I’m just wondering which two and what the timing of that was?

And then just a second quickly to clarify your comments on CAPEX.

Were you suggesting that sort of the lower wind would cause CAPEX to decline by 200 relative to your previous budget or was that already sort of reflected in your CAPEX budget?

Let me deal with the second question first.

We have previously put out kind of a range of CAPEX.

I think the CAPEX was actually in the 10 K, represents the high-end assuming we had been at the 1200 megawatts range on the wind program this year.

So relative to that the high end of our new range in 1000 will take up 200 to the extent that we are somewhere between 700 and 1000.

It would be lower still.

In addition, I think we are doing pretty well on our basic capital spending.

So I think we’ll be slightly below our expectations to spend for this year.

On the nuclear question, the two remaining units are St. Lucie 2 which is currently in outage or about to go to outage and Turkey Point Unit 4 which will be in outage during the fall.

We were particularly pleased that Turkey Point 3 was clean because the two Turkey Point Units are older units and according to the sort of field radical susceptibility chart should have been very high up on the list of susceptibility to cracking.

So we are delighted that that unit which is actually oldest was clean.

Now there is no guarantee that its sister will be found to be clean in the fall but at least it’s encouraging that now two of them are done and clean.

So we don’t have repairs to do on either of those.

So we’ll know more about St. Lucie 2 in the next week or so.

Perfect.

Thank you.

Your next question comes from Annie Tussle (ph.) of Alliance Capital.

Good morning Moray.

Hi Annie.

Morning.

Somebody down on the call line maybe explain that can you mind explaining the non-hedges allover again?

Sure.

You recall that we have a number of transactions that we place in this category.

Maybe it would help if I gave an example here how we use them.

Simple example would be to ride up heat rate coal option against a gas fired combined cycle plant.

Heat rate coal option as you can think of is just like a simple coal option where the strike price is fixed by the heat rate that’s negotiated.

Suppose, for example, that you ride a heat rate coal as the same heat rate as you plAnnied.

By doing so, you have effectively economically, not completely, but come close to hedging the future economic contribution of that asset.

The heat rate coal is a derivative and under FAS 133 had to mark-to-market.

So let say, in the summer of ’02, we ride a heat rate coal against an asset in North Texas for the summer of ‘03.

Once that option is written, any subsequent changes in market prices will obviously affect its value.

And those changes in value have to be recorded currently as current period income on the GAAP.

However, they are economically offset by corresponding gain or loss on the physical asset position.

That physical asset position is not mark-to-market.

Right.

Therefore we have taken those -- the amounts by which the mark-to-market on the heat rate coal option has changed in each period and we have shown those to you in the non-managed hedge category.

When that transaction goes to realization whatever the accumulation of gains or losses in the non-managed hedge category is gets reversed out and so that line if you like nets to zero overtime.

The result -- the pure economic result then shows off through our operating performance in the summer of ’03 when the unit is actually delivering against the commitment.

So, those are the typically types of transactions we have.

This period those is aggregate were negative 9m of which negative 2m is simply the reversal of prior transactions.

The previous periods have shown up with plus 2 in the non-managed hedge section.

The other negative 7 will be reversed this year.

So, all of those transaction by coincidence happen to run off in the course of this year.

So, those will get reversed in the course of the year.

So, all of those are the normal pieces.

And as you could imagine in a market where gas has been rising in spots where the part had been raising the kind of hedges that we have put in place, you would expect to generally show unrealized losses during this period offset by unrealized gains on the physical assets.

The only difference in this period is we had this one additional transaction of the gas contract on one of the equity projects and the difference in the sense that that project is always up until now qualified for accrual treatment.

So, we didn’t have to mark the gas contract.

Because of the change in operations we are now selling the gas -- significant portion of the time when it makes economic sense.

We now have to mark that contract.

Marking that contract because the gas is cheaper than current market prices obviously produces an instant mark-to-market gain.

However, we don’t feel that that instant mark-to-market gain is a fair reflection on the operational performance of that project in this period and we know that that mark-to-market gain will be reversed over this subsequent periods as we use up the gas under the contract.

Therefore, we have chosen to include that particular contract in the non-managed hedge category.

That’s a plus 12m.

So, breaking always out the risk of complicating the things, I just want people to be very clear on what we are doing, to make sure we understand.

Thank you.

Your next question comes from Paul Ridzon of McDonald Investments.

Hi.

I know it’s very early in the process, but I was wondering if you got any outlook for what kind of NRC response we could get to the STP development.

I was also wondering if any of your reactors are similarly designed.

Yes.

As I understand at these -- this issue applies to all wasting house -- PWRs which have penetration through the bottom part of the reactive vessel.

Curiously enough, quite independently of this when we did the recent Turkey Point 3 outage, we elected to do some inspections of the bottom penetrations of that units.

This had -- this was before we knew about it -- South Texas unit, but it occurred to our team that if there had been problems elsewhere in the industry on the reactive vessel head penetrations, it might be considered to be true in the bottom penetrations as well.

In fact, we found nothing there and those ones were clean as well.

I think it is early to say what the NRC is likely to do although I am sure they want to be absolutely comfortable, but there is no safety issue.

We point out that there is a somewhat of a difference between the top of the reactive vessel heads and the bottom, which is as a temperature gradient across the reactor vessel and the temperatures are higher at the head and the high temperatures are at least in part the driving force behind the cracking that’s been found at a number of different units.

So, other things equal, we would not expect the extent of any problem in bottom penetrations to be as bad.

On the other hand repairing, if it do occur, is -- will be a little more difficult -- touch place to work and you need robotic technology to get there.

So, I think we just have to wait and see as the NRC evaluates the data coming in from South Texas and, be ready to respond.

Do you have any sister units for FTP?

I am sorry, just one second.

This is Lew.

I just wanted to make sure it was clear that the St. Lucie plant don’t have any of those bottom penetrations like the Western House designs.

Just the Turkey Point Units.

Okay thank you.

Your next question is from Jay Hatfield (ph.) Zimmer Lucas Partners.

Good morning, I had a couple of questions.

First is with regard to guidance as in [inaudible] that for the utility, you specifically said when reiterating your guidance, that it was weather normalized.

So, should I assume that unless we have any special knowledge about what’s going to happen with the weather for the rest of the year that it would be reasonable to adjust your guidance up by the 8 or 9 cents associated with weather?

I think if you take it very literally, that would be fair.

However, I would caution you about that.

There is a lot of volatility in weather, and even though we are one quarter done, we actually haven't reduced the uncertainty around future weather that much.

So, I think at the end of the year, otherwise we are going into the year, we had indicated sort of plus or minus 18 cents as a reasonable range that weather could cause the thing to fluctuate.

My guess is if we did that today, we'd still be looking at plus or minus 15 or 16 cents.

So, there is still a lot of volatility partly because the bulk of the hot weather months and the volatile months are still to come, and partly just the way the statistics work because the quarters are not correlated from the weather prospective.

So, I think if absolutely nothing else happened, yes, in theory you could take the 8 or 9 cents that we talked about earlier and push it out.

I would -- as a betting's man, I think I would not bet on that being there.

I can’t tell you what the number will be, but we had some good fortune in this quarter.

We certainly had some good fortune last year.

We know that statistically sooner or later, it is going to catch up with us.

We have a long way to go.

Great.

And with regard to the balance sheet, in light of the slightly reduced CAPEX, can you just give us a general sense of where you think the equity ratio for the whole corporation might end up at '03?

And then just generally, what would the trend be in ’04?

It is a little difficult say because of some tactical cash issues related to the fuel clause at FPL, but I would expect to be in the mid 50s on an unadjusted basis by the end of the year.

And when I say unadjusted, that means taking the equity units and treating them 100 percent as debt.

If you -- if sort of pro forma give them 80% equity credit, then instead of the mid 50s, you'd be down around by, I don’t know, 51 or something like that.

In terms of the trend going out, as we have talked about before, the current investment program around which we had built the financing plan has essentially no discretionary new investment in FPL Energy in 2004.

So, other things equal, the business would be in slightly -- would be net cash flow was positive in ’04, increasingly so in ’05.

So, the ratios would, in ’04, remain about the same or strengthen slightly, and then in ’05, they start to pick up substantially.

Great, thank you very much.

Your next question comes from Zach Schreiber (ph.) of DuCain Capital Capital.

Good morning, hello, congratulations on a good quarter.

Thank you.

Just following up on the 12m again on an unmanaged hedge, is that included -- and I can see it as a line item as part of the sort of increase in equity income.

Is that included or excluded in the 97 cents?

In the --

Third quarter.

It is the $12m.

No, it is not in the 97 -- our adjusted excludes the impact of the mild-to-moderate effect on unmanaged hedges.

That’s what I thought.

Okay, and that $12m was pre-tax or after tax?

That’s an after tax number.

Great, and could you quantify for us what’s some of the negative impact was in the weaker than expected hydro conditions at the all central main assets?

And could you also quantify for us what the impact was of some of the severance costs at the utility, so that we can kind of back that out and get to -- where you are going on annual run rate basis as far as non-fuel O&M.

Okay let me deal with the hydro.

I would say that the hydro piece probably net cost us 5-6m after tax.

And that is based on what kind of comparison, what kind of utilization versus--?

That I don't know, Zach.

Okay.

And that is just a rough -- I can look that up.

I can follow up with them.

Yes.

On the FPL O&M, let me think -- I would say pretax is probably maybe somewhat between 5-7m there that I don't think -- is not sort of recurring.

Okay.

Now on the other hand, we got to be little careful because then we may have other things of that nature in subsequent quarters.

I think the best way to go on O&M is still to say O&M [inaudible] flat with last year stripping out the effect on the 35m one-time storm point accrual.

I think that s kind of the best target.

And what did the storm in the Date county cost you this quarter?

That was probably a couple of million.

Okay.

And the final question is in terms of the whole sharing deal, given where we are now with weather and in the way that flows through the different sharing bands, can you sort of explain to you how you think you will be in the different sharing bands?

I mean obviously, we don't want to get too excited about weather, but what it does do is it does raise the sort of annual kind of base in terms of where we will fall in the sharing band, how do you see that playing out over the course of the year?

Well at this stage, we still see ourselves being in the -- below the first threshold meaning no revenue with sharing.

Obviously having favorable revenue effects in the first quarter pushes us up a little bit relative to that.

I haven't sat down and done the arithmetic on how much we would have to have to pierce the threshold.

The threshold this year I believe is 3.68b.

Paul, you may have a comment.

Yes.

Like last year, we went into it by about $20m.

But when we look at this year, first of all, there is the full year impact of the rate cut.

And that was 250m, so you have about 60m additional cut coming in; plus the bracket increased by a 100m so there is a 160, plus last year you know we had warmer than normal weather, so the weather was a positive.

So if we had normal weather this year and added that in, that is a further increase in that.

And if just in normal revenue growth, if we were up 3.5-4%, you are adding 130-140m to base revenues, and this is based on base revenues.

So I'd say we are probably at or slightly under the new targets.

So I would not expect to see any meaningful sharing taking place.

Your next question comes from Vidula Murti of SAC Capital.

Good morning.

Good morning.

A couple of questions; one, you mentioned that there was no restructuring benefits in this quarter versus last year.

Can you minus again the 165-190 that is expected for FPL Energy, what the amount from restructuring projects is supposed to be?

We had indicated that we expected probably somewhere in the 10-15% range, so you know 15-20m is a reasonable estimate.

And --

As I indicated earlier, we got a lot of things that the team is working on that we think are going to come to fruition later on in the year.

But as I have also indicated in the past, these things are inherently difficult to forecast when they appear and they are inherently lumpy.

Okay.

Can you also discuss the factors that affected the existing project in terms of the modest decline year-over-year, can you talk about what you'd expect for the year trend from the existing important portfolio for the rest of the year at this point?

I think overall, we would expect the existing portfolio to be approximately flat with last year, just based on where the spark spreads are and where the hedges are.

You know it could be a little bit up or a little bit down, but it shouldn't be down as much as the first quarter was, which is heavily driven by the hydro and there a couple of operational issues.

Your next question comes from Paul Patterson of Glenrock Associates

Hi, can you hear me?

Yes.

I wanted to ask you about the restructuring of FiberNet.

You got a $5m benefit from that, and you expected to be breakeven.

Is that correct, through the rest of the year?

That's correct.

I mean there is a -- there were couple of transaction in there.

In one case we had leased fiber to a counter party taking the cash up front.

The counter party subsequently defaulted when it did chapter 11.

We recovered the fiber.

We already had the cash.

So, we simply booked to close out the transaction; we booked the income.

So we got the economic value of the whole deal, but effectively from an earnings point of view we accelerated what would previously been income spread over a number of years and end up being in that one termination period.

And then there was another incidence where the counter party where, for various reasons, they wanted to restructure the contract and in exchange for doing that we got an upfront payment.

So those two together were the ones that really contributed to the positive contribution to this year, but as I said we expect the whole business to be roughly breakeven for the full year.

Our target is on a run rate basis to be net income breakeven cash flow positive.

We are not putting any capital into the business other than needed to be due customer contracts.

Okay, is that 5m of that, I guess, something of a loss, I guess, to the rest of the year.

Is that right making breakeven for the year?

Or if the breakeven include this gain?

I guess, the way I would say is that the full year result is probably going to be somewhere between 0 and 5.

Your next question comes from Daniele Seitz of Salomon Smith Barney.

Hi, I just was wondering when you are assuming the 165-190, is there some assumptions made on the stocks spread for [Aircart] and [Overhold] since the numbers have changed quite a bit.

Does that make this range somewhat towards the higher end?

Well, the 165-190 is really the same range that we've had since we first offered expectations for '03 earnings, which was in last fall.

Right, that’s why I was asking?

That was based on what we saw a forward at the time plus the degree of hedging we've done plus, sort of, expectations of what it might have on them.

Since then we've seen some ups and downs in [Aircart], we probably today, you know, a couple of dollars per megawatt hour north [inaudible] box spreads.

At this stage, I mean, that’s a level that would push us a little bit above but well within that band.

So when we..

It -- okay, okay.

When we set out those expectations we recognized that force will likely to move plus or minus a couple of dollars and that was probably the reason why we set the range there.

So, with two within that range.

Okay and also on the maintenance of nuclear plant.

Do you anticipate the bulk of it to happen in the second quarter or is it pretty spread out?

No, the incremental nuclear maintenance is pretty spread.

Okay, so it would not come as a tremendous increase in the second quarter?

No.

Okay.

Your next question comes from Jeff Gildersleeve of Argus Research.

Thank you, good morning.

Good morning.

I want to ask you on working at the market price since the equity table and it appears in the western region the available megawatts have gone up somewhat, but the percent on hedge has gone up considerable more and I am just wondering should we assume that certain contracts have rolled off there?

No, there is no -- nothing has been rolled up.

There is really two major assets in this piece of the portfolio.

The [Blipe] asset in Southern California, which is little over 500 megawatt combined cycle unit, which is right now undergoing test.

And then the [Calhoun Peacus] which come on line in the summer, it is about 660 megawatt.

The [Calhoun Peacus] are under long-term contract or medium-term contract except for the first unit for the first year.

So, we have market price exposure in that first year realistically box spreads are whether that unit is contracted or not.

It doesn't make a great deal of difference.

The contracted value that is the asset for this first year is not that great.

So you guys should be probably better off keeping it uncovered.

The [Blipe] asset we wanted to -- that involves some new technology for us and we want to be really sure that we have got operational side under control, before we start layering in significant hedges there.

We started to hedge that asset for '04, but not greatly for '03’ so what you are seeing on that enterprise sensitivity chart is primarily the impact of the one unit that [Calhoun] gets under interim contract.

Okay I see, because it just says that in February it was 925 megawatt, 39% unhedged and now its 1,093 available 61% unhedged.

Yes -- I again have to go back and see what the difference is.

Right.

I am not -- with the 61% strikes me is much more reasonable, I am not quiet clear how we managed to get to a 39% number before, but I would check that out.

Okay thank you that’s fine and secondly I guess for Paul -- I just wanted to -- you talked a little about the O&M expenses on the call but those, I guess, are in line with your expectation of keeping things flat year-over-year?

Yes they are I mean we do have those continuing pressures in two or three areas that Moray mentioned, but overall what we are seeing or we have seen in the first quarter is relatively consistent with our target for the year.

Okay and then quickly on the financing front is there anymore discussion or potential for the win project financing?

We are continuing to work on that.

It will be a new transaction because it would be a portfolio of assets obviously the ton of work is involved in order to get to the point where we can get lenders comfortable with lending against that portfolio, including lot of engineering and technical work involved in, you know, pulling together all the years of [inaudible] and showing the correlations and that we have a group of assets would perform financially under different scenarios, as well as all that typical legal work.

So that is going ahead.

I wouldn’t expect that to come to realization to close until the middle of the year, but at this stage I am very optimistic that we will be able to get something done there.

Your next question comes from Tim Winter of A.G. Edwards.

Good morning guys and congrats for the quarter.

Thank you.

At year end it looks like you had about $2.3b in short-term debt.

Yes.

I was wondering if you could give us that number at the end of the quarter, the, kind of, what the strategy is going forward to eliminate any exposure from that rising short-term rates?

Okay today its about $1.1m.

In terms of interest rates strategy, I guess, we are trying to keep a balance.

I think our fundamental view is that we have got at least a few more months of reasonably stable low rates and in that environment you clearly want to take the short end of the curve.

On the other hand, it seems pretty clear that there is at least a risk that at some point we are going to see a kick up in the curve and that’s one of the reasons why we have been taking advantage of the overall interest rate environment to turn out some of the debt particularly on the FPL side, so by locking in both late last year and early this year, significant amounts of thirty year money, -- the 31 year deal that we did in the first quarter had a coupon of [5-5/8].

Now it’s pretty attractive to take that and lock that down for 31 years.

So we are trying to maintain a balance there, but as opportunities arise we will certainly continue to be turning out on favorable terms.

Do your estimates assume more permanent financing than short-term debt?

Oh yes.

Okay thank you.

Your next question is from Wick Titan (ph.) of Deutsche Assets (ph.).

Thank you, Moray you mentioned about no new discretionary investment at FPL Energy in 2004 or beyond.

Is that because of lack of opportunity or funding or?

No, no.

Let me be clear that relates to the existing financing plan.

So in other words we put together an investment program, which included completing the build out at the powerful assets.

Originally 700 to 1,200 megawatts, now 700 to 1,000 megawatts new wind in 2003, and obviously continue to soar uphill growth and no incremental discretionary investment in FPL Energy in '04 and beyond.

That was the program that we then built a financing plan around, we did the equity financing around last year.

We have consistently said that we hope that we will have additional of good investment opportunities in FPL Energy and if and when we find them then we would expect to come back to the equity markets for the portion of the capital needed to fund them.

So my comment referred only to what’s built into the existing financing plan.

So we are continuing to look for opportunities in FPL energy; we are continuing to be patient and disciplined; we are not going to rush out, you know, pay ridiculous prices for things but we certainly hope that we will find some additional opportunities.

At this stage I'd say that far most likely is that we will continue to have good wind investment opportunities in '04 and '05.

As you probably know, both the house and senate versions of the energy bill include an extension of the PTCs for another 3 years, so if there is -- if they can come together and agree on something in conference that the President could then sign;

I think it is extremely likely that we will have the PTC extension and that obviously allows us to differ the winter investment.

So, as a follow up then how much additional CAPEX -- additional capital could you deploy without taxing either the huge new equity or managing capability?

No I think at this stage we'd just -- we continue what we have said in the past that new projects will have us coming back to the equity markets.

I think that should be the base expectation.

But that would be only at a 40% rate or 60% rate rather?

It would depend obviously on the asset and the time what is profitability was.

I wouldn't – at this stage I wouldn't lock it down to any particular thing but it would be -- keys into a longer term outlook for capital structure.

Your final question will come from Vidula Murti of SAC Capital.

One last thing, I am wondering given what happened with gas prices this winter and the large fuel cost swings that occurred in the new generation being built up in quarter pound like which is principally gas; your fuel mix at the regular utilities are going to swing very much towards natural gas over the next few years; can you talk a little bit as to how you are going to manage in that type of you know price risk going forward and piping your potential price volatility of natural gas?

Yes, couple of comments there.

First of all, everybody should recall that we have the fuel clause at far apparent light, which allows us to pass reasonably incurred fuel directly through to the customer.

We did go in early April and received PSC approval to increase the fuel clause by total of some 370m to accommodate the run up in fuel prices.

So you know, back from the pure FPL Group income standpoint, that's obviously an important damper, from the point of the longer-term, total cost of the customer, which we clearly worry about a great deal.

We are definitely concerned about the increasing mix of the gas in the portfolio; on the one hand gas is available and on average still pretty cheap and honestly has some environmental attractions, at the same time you don't want to be too concentrated in any one fuel.

So we are clearly looking beyond the '05 plans for other ways of diversifying the portfolio.

We are particularly concerned that we should be able to retain as much as possible the flexibility to burn oil for at least limited periods of the time during the year.

We estimate that fuel switching capability just in this first quarter probably saved customers on the order of a $100m or $200m in fuel because oil didn’t run as hard as gas.

So that's an important aspect of it and we may end up with some synthetically indexed fuel supply agreements where we are buying one commodity but it's pricing is actually indexed to another.

There are number of things that we are pursuing there but certainly in this sort of short to medium, we will continue to see an increase in the gas mix for the FPL portfolio.

Okay, thank you very much.

At this time, that concludes your questions.

All right, thank you every one for joining us today.

Let me remind you that we have replay of today's conference beginning today at 11 a.m. through midnight next Thursday; that's May 1.

The replay telephone number is 402-220-2306.

The confirmation number is 560-0251.

And before I close, we send out a notice by yesterday afternoon to our investors, noting that we have named Bob Barrat, Director of Investor Relation.

We are very pleased that Bob is going to be joining our group here.

He has been with the company for over 21 years, currently serving as director of corporate planning and will be transitioning into the new role in early May.

You will find him a pleasure to work with and very informative about the company.

Thank you and good day.