新世紀能源 (NEE) 2003 Q2 法說會逐字稿

Please stand by.

We're about to begin.

Good day everyone and welcome to the FPL Group second quarter earnings conference call.

Today's call is being recorded.

At this time for opening remarks and introductions I'd like to turn the call over to the director of investor relations Mr. Bob Barrett.

Please go ahead sir.

Welcome to our 2003 second quarter earnings conference call.

Here with me today is Moray Dewhurst, Chief Financial Officer of FPL Group, who will provide an overview of our performance for the second quarter.

After his remarks Moray will be available to take your questions.

Before I turn it over to Moray let me remind you that any statement 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 most recent S.E.C. form 10-K.

Moray.

Thank you Bob and good morning everyone.

FPL Group delivered strong results for the second quarter of 2003 though down slightly from the record performance of the second quarter of last year.

Our results were in line with our expectations and both of our two main businesses enjoyed solid performance during the period.

Florida Power & Light was down slightly but continued to show good customer growth offset by O&M and depreciation increases, while FPL Energy achieved strong growth primarily on the basis on contributions from the Seabrook and from our wind business.

Corporate and other was down relative to last year as results in 2002 benefited from a significant dock fiber sale at FPL FiberNet.

Overall we are on track for the year and continue to feel comfortable with our full year earnings outlook of $4.80 to $5.00 per share excluding the mark-to-market effect of non-managed hedges with cannot be determined at this time.

On a GAAP basis FPL Group’s net income was $239 million or $1.34 per share compared with $250 million or $1.46 per share for the second quarter of 2002.

Excluding the effect of non-managed hedges FPL Group earnings were $241 million compared to $249 million last year.

Last year's GAAP results included a gain of 1 million after tax from the mark-to-market effect of non-managed hedges, this year's GAAP results included 2 million after tax loss associated with the mark-to-market effect of non-managed hedges.

Which as we said in the past we believe are more appropriate considered in connection with the operating results of future periods.

We continue to view results expressed excluding the current year effect of the non-managed hedges as the meaningful measure of current year performance.

Net income at Florida Power & Light was $199 million in the second quarter down from $205 million a year ago and the earnings per share contribution was $1.12 down from $1.20 in 2002.

Customer growth at Florida Power & Light in the second quarter continued very strong, at 2.4%.

As we mentioned at the end of the first quarter we had expected lower usage growth this quarter largely because the second quarter of last year benefited from very favorable weather.

While weather driven usage started out weak in April of this year it improved over the course of the quarter and for the full quarter we estimate the effect of weather to have been roughly a negative 0.8% compared with last year.

Underlying usage growth continued strong at about 1.3% leading to total kilowatt-hour sales growth of 2.9%.

Looking forward to the rest of the year, we anticipate some modest slowing of growth based on our current view of leading indicators however the Florida economy continues to perform well.

For the quarter, FPL's O&M expenses were 308 million up from 285 million a year ago.

This increase was driven primarily by the 3 main drivers that we have previously discussed; nuclear maintenance employee health care and various insurance costs.

In addition O&M was up in fossil generation owing to the timing of certain work associated with planned outages.

All other costs areas combined were below last year's levels.

During the quarter we completed a planned refueling outage at the St. Luci unit 2 nuclear facilities which contributed to O&M.

As we previously disclosed during the inspection of the reactive vessel head we discovered two cracks which were repaired.

While we also took advantage of the extended outage to perform additional mechanical work.

The outage duration and cost were greater than originally anticipated with the completion of this outage three of the four nuclear units in Florida have now undergone detailed volume metric inspections of the reactive vessel heads and we will complete the fourth this fall with the Turkey Point outage.

As a reminder we have placed an order for new reactive vessel heads.

Our current plans are to begin replacement starting in the fall of next year.

Notwithstanding the growth in O&M for the quarter, our target of maintaining full year O&M sense of the kilowatt hour roughly flat with last year remains within reach.

Depreciation increased from 202 million to 223 million.

Primarily as a result of more plant in service and the timing of the 125 million special depreciation credit that was part of the 2002 rate agreement.

You may recall that last year the depreciation credit was amortized over an 8.5. month period versus a 12 month period this year as a consequence this quarter and the two subsequent quarters' results will be negatively affected by comparison.

Of the 21 million increase in depreciation six is due to this timing difference while the remainder largely reflects the growth in the asset base.

Depreciation expense will continue to grow modestly as we continue to invest in generation and distribution expansion to support our revenue growth.

Florida Power & Light second quarter earnings per share were affected by the following.

Customer growth positive 7 cents.

Underlying usage growth positive 5 cents.

Usage associated weather negative 3 cents.

Depreciation associated with new plant a negative 4 cents.

Depreciation credit timing negative 2 cents.

O&M negative 8 cents.

All other including share dilution, negative 3 cents for a toll of a negative 8 cents at FPL.

Turning now to the wholesale generation business FPL Energy had a strong quarter driven heavily by the contributions from portfolio additions primarily Seabrook and Wind.

On an adjusted basis FPL Energy's earnings Rose to 51 million from 37 million on a comparable basis a year ago.

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

Project additions, adding 23 million to earnings primarily from Seabrook and new wind projects.

Earnings from the existing portfolio were down by 13 million with modestly improved performance in Urcott more than offset by the combination of weakness in Nepo lower than average wind resource and some timing differences in the QF portfolio.

Asset optimization activities were up 6 million compared with a weak performance last year and lower G&A improved results by $ 3 million.

All other factors including increased interest costs associated with growth in the asset base contributed negative 5 million as last year's results included the positive results of an insurance settlement.

Before leaving FPL Energy I would like to point out that we provided additional information in the appendix regarding our non-managed hedge transactions.

As a reminder these transactions that we enter into in order to hedge or otherwise reduce the risk associated with some of our physical asset positions but which for various reasons must be mark-to-market under FAS 133.

Because the changes in value of the offsetting physical positions are not mark-to-market, including the affect of the non-managed hedges and current period income could provide a misleading impression of current period performance and therefore we have chosen to break these out separately.

In evaluating, management examines and analyzes the results excluding the mark-to-market effect of non-managed hedges.

I'd like to update you on our construction and development efforts.

As you previously recall we have previously indicated a range of 700 to 1,000 megawatts for our 2003 wind development program, of which we have now announced approximately 835 megawatts.

All of the projects are on track for commercial operations prior to the end of the year.

Given where we are in the year, and the likely development cycles for individual projects it's unlikely we'll announce substantial additional projects for this year barring additional acquisition activities.

However we are very pleased with the development of our wind business this year and we remain very optimistic about its future.

We estimate that this year we will again have a greater than 50% share of new capacity added and therefore our share of the total business will again increase.

In addition to our wind development activities, we continue with the final phases of the build-out of our green field fossil program.

During the quarter we commissioned an introduced into service the Calhoon facility in Alabama and the first unit of the Forney facility in North Texas.

We expect to commission the second unit in Forney and the Blithe facility in Southern California during the third quarter.

Let me now update you on the progress we have made on our contract coverage position.

I would encourage you to access the slides that are available on our Website, www.

FPLgroup.com under investment information since I will not review every number on the slides.

These slides were e-mailed to or analysts with the press release.

As chart No. 14 indicates we continue to make good progress, overall our contract coverage on a capacity basis for 2004 has increased from approximately 53% at the end of the first quarter to 65% at the end of the second quarter.

As a reminder, we like to have roughly 75% of our capacity hedged out for the next 12 months.

And thus we would like to enter 2004 with roughly 75% of 2004 capacity hedged.

As you can see we are making good progress towards this goal.

The largest driver of the increase this quarter has been in our Urcott portfolio where 2004 coverage has increased from 8 percent to 43%.

As we have previously discussed being patient and taking advantage of the natural volatility of forward markets can be very helpful in executing our hedging strategy.

During the quarter, on peak slot spreads in north Urcott averaged approximately $10 per megawatt hour.

However, the average spread was approximately $11.40.

As a calibration point each incremental dollar per megawatt hour in Urcott is worth roughly two or 3 cents per share given our current positions in that market.

We therefore continue to believe that we are best served by seeking to optimize the timing and extent of our hedging activity and we continue to expect to enter 2004 with a portion of our portfolio available to take advantage of expected volatility in that year.

To summarize the second quarter, excluding the effect of non-managed hedges, FPL contributed $1.12, FPL Energy contributed 29 cents and corporate and other contributed negative 6 cents.

That is a total of 1.35 representing a total decrease of 10 cents over the same period in 2002.

The corporate and other category was down compared to last year primarily due to a sale of fiber that benefited last year's second quarter results.

We still continue to expect FiberNet's to be about break even for the full year.

Let me know update you on our financing activities and cash flow expectations for the year.

As you may recall, we ended 2003 anticipated a need for external capital to support our investment plan and we had indicated that this would be in the range of 1 billion to 1.5 billion.

Based on changes that have occurred during the first half of the year we now expect the need for external capital at the low end of that range.

In early July we completed two significant financings.

First we closed a 400 million bank facility suborning the construction and early operations of two of our new fossil projects.

And second we completed a 380 million project financing of a group of seven of our wind projects.

The latter was particularly encouraging as it represents the first time in this country that a portfolio of wind projects has been brought to the capital markets and successfully financed.

The bonds were rated invest grade by both Moody’s and standard underlying moderate risk of the wind business.

Together these two financings largely fill our neat for net external capital this year.

We will continue to be active in both the bank and capital markets for the remainder of the year but our currently planned activities will largely be driven by opportunities to optimize our liability structure.

Let me also remind you that absent the announcement of new investment opportunities at FPL Energy we expect to be modestly net cash flow positive in 2004 and increasingly so in 2005.

Turning now to the outlook for full year we continue to feel comfortable with our expectations of 4.80 to $5.00 per share excluding the mark-to-market effect of non-managed hedges with can I not be determined at this time.

As a reminder we expect FPL to deliver approximately 725 to 735 million of earnings assuming normal weather for the remainder of the year.

We expect FPL energy to be in the range of 165 to 190 million excluding the effect of non-managed hedges which cannot be determined at this time and we expect a drag of 20 to 30 cents per share from corporate and other.

So in summary we had a good second quarter down slightly from the prior year but about where we expected and we're on track for the full year and now I'll be happy to answer your questions.

Thank you sir.

Today's question-and-answer session will be conducted electronically.

Press the star key followed by 1.

If you are on a speaker phone please make sure that your mute function is turned off to allow your signal to reach our equipment.

We ask you to limit yourself to one question and one follow-up.

If you have additional questions you may reenter the queue.

Once again that is star 1 to ask a question.

We'll go first to Andre Meade with Lazard.

Hi guys.

Can you hear me?

Good morning.

Good morning.

How are you?

Good.

Quick question can I get a little update if you would on the FPL energy existing portfolio weakness, it sounded like there was some QF restructuring timing, bit of an issue there.

Wonder if you could give us a little more color around that, if you could give us an idea of what the QF restructuring contributed to the quarter as well and if you guys thought ten to 15% of FPL's earnings from that was reasonable for the year.

Let me first start by qualifying.

The QF portfolio results exclude any restructuring activities.

Got you so it's actual operations you're talking about there?

Yeah and specifically the reason, there's some timing issues.

We have one of the projects where the fuel contract essentially has a lag built into it so that the timing of the cots on the gas side is not quite in tune with the timing on the revenue side.

It catching up in due course.

Okay.

But out of whack at any point.

That's the timing issue there.

Now, on the restructuring there were no contributions from what we refer to as the restructuring segment in this period.

Okay.

We continue to have several actually several linked pieces that we're working on that we fully anticipate coming to fruition sometime later in the year most likely in the fourth quarter.

Okay.

So we continue to think that the ten to 15% that we talked about all along is a realistic you know expectation of the contribution from that segment.

But it is back-half loaded it sounds like?

That's correct.

One sort of follow up on that issue.

You said Texas had improved or Urcott had improved.

You guys had some gas deliverability issues last year.

Has that been solved?

What is going on there?

There is a couple of days that we had curtailments last quarter that the market spiked.

That has smooth out with the smoothing out of the gas markets in the second quarter.

The Urcott was up modestly compared with last year just slightly better market conditions and operations.

Unfortunately it was more than offset by weakness on the Nepo side.

Great I appreciate it thank you guys.

Next to Greg Gordon with Goldman Sachs.

Thanks.

Hey, Moray.

Good morning Greg.

Two questions.

On the financing discussion it sounds like you've raised the majority of the capital you need but there's still a running debate on whether you guys will bridge the remaining gap on your financing plan with equity, equity like securities, or incremental like debt securities.

Can you comment on the evolution of your financing plan?

Yes, we're still very much on track, very consistent with what we've been saying all along.

The expectation this year was that we would be, except for equity coming out through the benefit programs, through the drip and other things, it would be largely a debt year unless one or two conditions applied.

The two conditions being additional new investment opportunities at FPL Energy and we haven't announced any at this stage and the second one being change in rating agency standards.

With respect to the first, obviously we haven't announced anything yet but we continue to be optimistic that there will be opportunities to deploy capital at attractive rates of return and when that happens we certainly expect to be back in the equity markets.

With respect to the second changing rating agency standards, we are still very much where we were before.

I think the short way of putting it is that the fundamentals of our credit statistics in our minds clearly support the current rating and it's a matter of making sure that we can agree with the rating agencies on that.

I continue to be optimistic that we will be able to and therefore that that will not become, you know, a practical factor this year.

But I don't rule it out as a possibility, under some circumstances.

Thank you Moray.

And the second question was you mentioned a couple factors at FPL Energy driving negative comparisons one was Nepo, obviously can look at the dates on the spread sheets there.

You also mentioned wind being an issue and how much a negative impact that was?

Yeah, the wind was probably a couple of million at the shortfall in the existing portfolio.

Obviously, despite the fact that we have the great benefit of diversification from the wind portfolio because we've got projects in lots of different parts of the country and the wind resources are not correlated nonetheless there is going to be variability in the wind resource.

In any typical year we would expect the cash flow or the earnings profile from a given block of diversified wind projects to be you know, up or down by easily 10%.

That's kind of a natural variability of business.

So the second quarter we were a little bit below the long term averages for the existing block.

On the other hand, some of the newer wind projects were actually you know, above their long term expectations.

So I would count that factor as a little bit akin to weather at FPL, you know some quarters it is going to be in your favor, some quarters it is going to be against you.

It is a slight negative this quarter.

Thank you.

Andrew Levi with Bear Wagner.

This actually wasn’t my question, but just to follow up.

The problem on the energy side was went versus any type of mechanical right?

That's correct.

My two questions that haven't been asked could you go over the meter issue that's come up in Florida and also this I don't think that big a deal but also the regulatory issue as far as the court remand as well?

Could you repeat the second question?

I got the one on the meter.

I didn't --

on the court remand of the rate case.

The software house appeal.

Let me take the meter issue first.

We have a class of meters for some of our commercial customers that over time tend to get less than completely accurate.

And we're going through a program right now of really replacing all of those.

On average, they can obviously either over read or under read.

And the real issue is just how you get through and replace them.

So I don't think there's anything special there although there has been some press comment on it.

You don't think there will be any type of financial impact whether it's replacing I guess I wouldn't think or as far as any type of refunds or that's probably not material?

No.

Where we have discovered situations where we have been under billing, unless there's some obvious reason that the customer was involved, we have elected not to back-bill for those things.

But the cost of the whole program, even including that, is relatively minor, certainly well twin within our expectations for the year.

On the second question, ton hospital appeal, it would be helpful to remind people where this came from.

At the time that we negotiated the agreement that resolved the 2001-2002 rate case, all parties in the case except one, the south Florida hospital socks signed on to that agreement.

South Florida hospital association reserved and subsequently exercised their right to appeal the Florida PSC's ruling on that.

In Florida an appeal of a PSC judgment has to go to the state Supreme Court and that's what's been happening.

So this is actually the schedule on this has slipped.

We originally expected that they would be looking for hearings on this, or hearings actually in the spring or the middle part of this year, but for various reasons, partly on the court side, partly on the South Florida hospital association side.

The hearings will now be held in the fall.

The issue that South Florida Hospital Association has raised is that they believe that the PSC did not go all the way through the process that they should have done, that they cut it off prematurely and that the PSC didn't have enough information on which to base its final judgment of the approval of the negotiated agreement.

There are sort of two responses to that.

There's a substantive response which is we had by that point already filed massive amounts of information.

We filed the minimum filing requirements in the fall of 2001.

All interveners had the opportunity of discovery, we responded to thousands of interrogatories, produced additional documents, testimony was filed by all parties and rebuttal testimony was even filed.

So to say that the PSC didn't have enough information is a little bit of a stretch.

The other issue perhaps the more important one from the legal perspective is the law gives the commission wide latitude in determining essentially how it's going to resolve regulatory issues.

So based on everything we know of the law and the counsel that we have received, it's highly unlikely that the Supreme Court is going to second-guess the PSC on a discussions like this.

Great thank you very much.

We'll go to Neil Stanley with John Levin and Company.

Hi good morning.

Couple of follow-ups one from Andy Levy's question on the hospital situation.

What is the history of the Supreme Court ever overturning FPC orders?

Has this a thing that happens often?

I'm not great on the history here but to my knowledge I don't think it's ever happened.

Right, okay.

I guess the second one, should we read anything into the court setting a date for oral arguments?

Were you surprised by this?

No, as I indicated we actually expected oral arguments to occur earlier.

Okay.

And is that something they typically do over the course of hearing an appeal?

Yes, that will be quite typical.

Okay.

And just getting back to FPL Energy, could you talk a little bit more in detail about the weakness in NEPOL?

Yes, I guess there are a couple of different things.

First of all you recall in the first quarter we were way short on the certainly relative to expectations on the hydro.

The hydro flows started improving in the second quarter but as a comparison point to the second quarter of last year, they didn't come back as quickly as they did last year, if you understand me.

Both the first quarter of last year and this year had bad hydro conditions but they improved quicker last year.

So the comparison point for the second quarter is tougher.

In addition, there was just some market weakness particularly capacity prices in that market were softer than last year which is not surprising given that there is more capacity.

I think those were the main two issues.

What are you expecting for that market as you go into the third quarter or has anything changed relative to prior expectations?

I wish I could tell you for any of these markets for the rest of the year.

But it's a good question to deal with more generally.

The forward curves have been quite volatile in the first half of the year.

Most of these markets with the gas run-up we also saw some expansion of forward spreads, more for this year than for next year.

Typically, they sort of peaked around the early part of June.

And since then there's been a sharp drop-off both in absolute prices obviously driven by the gas drop-off but sparks in some of these markets.

They are bouncing around all over the place.

Although we are obviously halfway through the year, there is as much market uncertainty for the second half of the year based on recent volatility as there was for the full year when we entered it.

So it's a little difficult to say what the second half is going to be and that's probably one of our bigger areas of uncertainty for the remaining part of the year.

Having said all that, you know going back to fundamentals, we don't view any of these markets as having any fundamental forces that are really going to change them in the short term.

They continue to have excess capacity so I think we'll continue to see prices bounce around and it's up to us to do the best job we can taking advantage both in the short term but also because we continue with the hedging program for next year and on into '05.

We'll go next to Jeff Guildersleeve with Argus Research.

Good morning Moray.

You have touched on fm energy.

Back to the utility, we talk about the variability there you mentioned O&M expenses again and customer growth for the remainder of the year looking a little weaker than previously.

I'm just wondering if we should think of other items that might be offsetting that, or would that be a general decline from your previous expectation?

There is no difference from our overall expectations for the year.

The original expectations for the year always presume some tapering off of the growth rate for the latter part of the year.

I just want to make that clear in my prepared remarks.

We are not talking about a big drop-off.

We are going to continue to see robust customer growth but 2.4% is as strong customer growth as we've had in a long, long time.

And a little falloff from that would be likely.

I think we're still fine in the 725 to 735 range as long as nothing goes really south with the weather.

We're going to continue to work on the O&M side, but the pressures on the three cost components that we've talked about for some time now, you know, have been there, will continue to be there, and were baked into our expectations.

On that I guess the only thing I would add is that looking forward, I'm getting a little more optimistic that we may have seen the worst of the increases in the conventional insurance programs.

There seems to be a little more stability coming back into some those markets.

On the other hand, I'm not by any means optimistic that we or anybody else has cracked the health care equation.

I think we're going to continue to see that be a cost driver for quite some time, until you know, some national solutions are dealt with.

Sure.

And just on St. Luci.

You mentioned that that outage ran a little over cost.

I know that you're able to amortize that over a period which limits the impact.

Going into the outage at Turkey Point this fall, do you feel there are improvements to make in that process, or what was unusual I guess about St. Luci that you had the cost overruns on?

Well, the repair of these reactive vessel head cracks is still an evolving process.

It relies on robotic technology and calling it robotic technology is being fairly generous.

These are sort of custom-designed contraptions that allow the, you know, the welding rods to get in where they're needed.

There's really only one contractor who is capable of doing that at the moment.

And they had some problems with the robot the first time around on one of the cracks.

And so we basically had to go in and do that one again.

So that was really why it ended up being longer.

There certainly we learned something in the process of doing the repairs.

But I think that was more a case of bad luck quite frankly.

I don't think that the contractor did anything wrong.

I think they had applied the same techniques as they'd used elsewhere.

It's just that these robotics are not 100% reliable.

At this stage if you back up to the higher level even with the higher cost of doing that and finding those two cracks and doing that we are still within the overall estimate that we had for the inspections and possible repairs of all four units.

We won't know for sure until we do the Turkey Point unit in the fall but we still feel comfortable with that.

To repeat we are going to be replacing these units starting in the fall of next year.

So the basic economics of the repair versus replacement continued the way we saw them before.

Great, thank you.

We'll go next to Michael Goldenberg with Luminus.

Good morning Moray.

I wanted to check with NEPO, the weak prices affect the power plant, contract in '03 and I'm not sure for the gas plants it matters that much.

I wanted to check that variability is mostly for the hydro.

No that's not necessarily true.

The oil facilities in Maine and the un-contracted gas facility in Rhode Island are obviously important in the overall match and the oil facilities certainly in the year to year are in the portfolio and there is a comparison there.

Even though they might not run a lot in the typical second quarter, you know, the differences can be, you know, a couple million bucks which is what we're talking about here.

And my other question would be, when you talk about potentially doing equity, you site that one of the reasons could be the rating agency change of what they're looking at.

I mean, nobody can tell what rating agencies will do.

But are you keeping an active dialogue with them and keep updating them with your plan and are they overall happy with the way it is now?

We talk at least weekly with Moody's and S&P, and we make a significant effort to understand where we are and what we're thinking about doing.

I feel good about where we are and those dialogues at this stage.

Okay thank you.

Paul Patterson with Glen Rock Associates.

Good morning.

I want to touch bases with you on taxes.

Looking at the taxes for the six months, it looks like they went up, the tax rate went up.

And I was a little surprised considering there should be a tax benefit from wind and you got more wind.

Could you elaborate more on that?

Um -- the short answer is no, I can't.

I'd have to take a look at -- I'm not aware of anything significant that happened in this period that would have affected the real tax rate.

I'm going to have to take a look at that and get back to you.

Great, thanks a lot.

We'll go next to Tim Winter with A.G. Edwards.

Could you talk a little bit about what the Florida public utilities commission's would be should the Supreme Court favor the hospital association?

If the Supreme Court sided with the hospital association they would throw it back to the PSC, to decide if the claim is they didn't have enough information it would be up to the PSC to find out how much additional information they needed.

One of the issues is, that they didn't hold hearings and therefore the hospital association was denied their opportunity to have witnesses there and to cross-examine.

So presumably, the PSC could hold hearings.

I guess the key point to me is, there's no new information that -- they had the information that they needed in order to be able to make a sensible judgment.

They did make what I view is a very sensible judgment, the balanced agreement that benefited certainly benefited customers substantially.

So it's hard for me to see other than from a formalistic process point of view that the outcome would be any different.

Is it at all possible for the Supreme Court to nullify this settlement or is that not really within the scope of the --

No that would not be within the scope of the Supreme Court.

Okay can, thank you.

They would remand it back to the PSC to reconsider.

We'll go next to Paul Ridzon with MacDonald Investments.

Wondering if you could give any outlook for the third quarter from an earnings perspective and just let us know if there are any one-time gains or losses in the second quarter.

And then I guess lastly just a clarification, did you say that D&A energy dropped, is that related to the restructuring charge last year?

Let me just start with the first question.

The outlook for the remaining two quarters of the year, I don't think I've sat down and actually looked at the quarterly expectation, trying to think if there's anything significant that would cause us to be from a comparative point of view that affected last year's results significantly.

I don't think there is.

There's nothing I can think of off the top of my head that would cause a big comparison issue.

Could you repeat the last part of the question on the --

whether there were any unusual items in the quarter that might be one-time in nature and then just why depreciation and amortization dropped at Energy, is that just related to the restructuring charge in the third quarter of last year?

I think on the lad latter you misheard me, G&A.

General and administration.

D&A is going up.

The question on any significant sword of one-time things in this period, no, there weren't.

Okay, thank you very much.

Next is Katie Groan with A. B. Amro.

Good morning.

I would like to hear about your Wind plans on 2004 and how much these depend on an extension of the PTC and the timing of the extension?

Sure.

At this stage I think that I would characterize an extension of the PCCs and being highly desirable for the further development of the wind business but not absolutely necessary.

I think certainly our preferred path is that there be an extension.

And an extension is baked into both the house and the senate versions of the energy bill that are you know out there right now.

Clearly, that will be the best thing.

But even if we don't get an extension, I'm still optimistic that we will continue to be able to pursue the wind business.

If that were the case I think it would be inevitably probably smaller and slower than in the case where we do get an extension.

Either way I think probably the total market next year is going to be probably less than it has been this year.

Just thinking about the, you know, who the next set of off-takers are who might be interested in additional wind capacity.

So at this stage in the game, I mean it's very early to say and we certainly haven't sat down and looked at individual projects but I would be surprised if we were in the 800 megawatt range I think it would be, you know, more likely half of that.

More likely half of that?

Correct.

And that is for the total market and not just your own investments?

No, that could be for our program.

Assuming a PTC extension.

Assuming a PTC extension?

Yes.

And if it doesn't come through, how would you expect your investments to be?

I don't know.

I really haven't -- you'd really have to look at individual projects.

Without the PTCs you're going to have to look at specific opportunities would be supported by renewable energy initiatives at the state level and we haven't gotten to that level as yet.

Okay thank you.

Thank you.

Jeff Dieter with Simmons.

Can you hear me okay?

Good morning.

Good morning.

Previously you've presented a slide that was helpful that I didn't see in this packet, and it related to energy broke down earnings from wind, Seabrook, merchant, the QS and contract restructuring.

Yep.

You've already talked about contract restructuring.

Are there any adjustments that would you make to the contributions from the other pieces?

Yeah.

First, let me just say that that chart has fallen a victim to Reg G. because it represents non-GAAP measures and we haven't figured out a way that we can present that same information in a way that is Reg G compliant.

We didn't want to pull it off but we need to be cognizant of the new regulations.

At this stage given where we are in the year for the full year that split is still pretty reasonable.

We're about on track in all of those areas.

Probably Seabrook would be a little bit larger as a percentage than we had originally anticipated going into the year but the basic split is about right.

Very good.

Can you talk about -- just quantify Seabrook's performance relative to your expectations so far?

I don't have any quantification of that.

But both operationally and on the cost side, just as I sit down and listen to the monthly results, each of the months there's always been a little bit better than expectation.

So not hugely so, but you know, modest, modestly better than we'd expected.

But I'm sorry, I don't have a quantification of that.

Okay, thanks for your comments.

Thank you.

We'll go next to Vick Katan with Deutsche Asset Management.

Thank you, Moray question about Energy, that portfolio with any new opportunity or contract signing or hedging, are those profitability of those new activities are higher, or below where it used to be in the other projects we already have?

I'm talking about the incremental new projects you sign or you make a hedging or contracting.

I'm sorry, your question is, are there incremental hedges that we're looking at now, any difference in profitability from what we've seen before?

It's not related just to the hedging activities but also to any others, like you signed a new wind project.

So the profitability of those projects are better or the same?

I got you.

Let me take the core chunk.

Let me start with the asset side.

You know, we have -- other than a small peaking facility in New York under contract, we have not added any fossil assets or announced any new fossil investments for several years now.

So that's just the completion of the build out of those.

Frankly for the next few years we're well aware that the book-based profitability of those new fossil assets is going to be poor.

Obviously they also have long term potential that we continue to like.

So in the short term there will be a drag and from a long term value perspective we're still comfortable with them but we're not incrementally investing in anything new in that area.

The wind business, I wouldn't say there has been any systematic trend in the profitability of those projects.

There's some variability from one to one to the next but we're consistently looking for and getting a few percentage points above risk adjusted opportunity cost of capital as best we can estimate it.

And that really hasn't changed.

In fact our whole approach to that business is really only to do a project, if we can get all the elements to come together, such that they provide those kind of economics.

So you know, there might be a, you know, one project to the next you might vary by a percentage point or two in IRR but they are all fairly consistent.

But in the terms of the profitability of incremental hedging activity, that is determined by the shifts in the forward curves.

And there my comment would be that you know, forwards for '04 overall notwithstanding that they moved around continue to be weak consistent with the fundamentals.

But because they're volatile that's one of the reasons why we think it's important to be selective in our timing of layering in the hedges.

In other words, we could certainly go out and reach our 75% target hedge ratio pretty much overnight.

But by doing that we would probably crater the market and guarantee that we were locking in poor spots for us.

So by picking and choosing our times and taking advantage of the natural volatility, we can hope on average to do a little better than the sort of straight average which is what I tried to demonstrate by the average on Urcott.

We're still on line for that and I don't see any change in the profitability of what we've been putting in recently compared with say the first quarter.

Okay, that's good and one other question regarding this Florida Supreme Court hearing.

What has been the position of the commission so far in terms of have they made any public statement for support of the plan they had or they are keeping quiet?

I'm not aware of any public statements they've made and I doubt that they would -- you know, it's a legal case and the best thing to do is simply to go through the legal process.

But they've not made any filing or anything which suggests anything?

Well, testimony was filed a long time ago in this case.

So the written testimony is already in.

So you know we know the arguments that the Hospital Association has made and we obviously know the PSC's counterarguments and we have filed testimony in support of the PSC.

So their support remains intact?

Absolutely.

They still think the rate agreement was a good arrangement.

Thank you.

Next is Bedula Murdy with SAC Capital.

Good morning..

Good morning Bedula.

After the winter and big run-up in GAAP prices and the increases you had to put in and everything like that can you tell us where you stand in your overall rates versus the other major Florida utilities?

I don't have the exact comparisons with all the recent fuel changes, and they keep changing as well.

Progress Energy just recently filed notice with the agency that they have gone outside the 10% ban, they may ask for change in rates.

Clearly the run-up in rates hurts us disproportionately to the two utilities who have coal components, those being Gulf and TECO within the states, our position relative to Progress has remained roughly the same.

I guess where we are going with this is where we complete the re-powers of the utility for '05 and your fuel mix shifts even more towards natural gas should we be concerned at all that if we enter a period of sustained high natural gas prices, that you know, that the price of FPL power could turn out to be, you know, be the highest in the state, and you know, just possibly become an issue going forward?

I don't think it will turn out to be the highest in the state.

But clearly in that sort of scenario, in a comparison with a company like Gulf for example, that has substantial coal-fired generation, we would be at a disadvantage.

Offsetting that of course is the environmental issues are somewhat different in South Florida.

Okay.

Is there anything that you've pursued in terms of like long-term contracts or anything like that going forward that would provide a little bit more stability such that the huge swings that you've seen here can be moderated?

Yeah.

We had been working for some time on a sort of hedging program for the utility.

And we are in the midst of really implementing that.

The -- I guess what I would point out, though, is that a hedging program can reduce volatility, but to the extent that you believe that there's going to be a long-term structural shift in gas prices, relative to coal, for example, you know, that's going to show up.

Eventually.

You can smooth it out but it's going to be there.

The question is will there be a long term structural shift?

I remind you that over 100 years the history has been that energy prices go down in real terms.

So you're going to have periods of significant shortage and significant run-ups.

But the long term history shows energy gets cheaper not more expensive.

Okay.

My last thing -- my last couple questions are you talked about the wind program and that you know going forward in '04 at this point is seen possibly half of what you've done in '03.

If the agencies remain comfortable, it sounds like that given your cash flow outlook that you discussed for '04 that beyond the various stock programs, there really is no need for outside of a major acquisition, any kind of a -- any kind of additional equity issuance.

Yeah, again I would just repeat what I said earlier which is that you know, our current credit statistics when you look how particularly through the -- take the whole period out through say 2005, very clearly support the current credit ratings.

There is no question that we have stretched the balance sheet somewhat.

I've referred in the pass to sort of the pig and the python.

The pig is right in the middle of the python right now.

And '03 is the year of the greatest strain on the balance sheet.

But at the same time, you know, 400 megawatts of wind is not a huge investment program.

We'll go next to Michael Worms with Harris Nesbitt.

Good morning Moray.

Good morning Mike.

Can you give us an update of the capital structure at the end of June?

On a book business, the debt ratio is approximately 56%.

And when I say on a book basis, that means counting the equity basis, the debt associated the notes associated with the equity units as 100% debt.

If you did pro forma or credit adjustment to reflect the fact that they have significant 80% equity content that would bring the number down.

But on a pure book basis the leverage ratio is 56%.

Thank you.

Next question comes from Steve Fleishman, with Merrill Lynch.

Hi Moray.

Good morning Steve.

What's your plans with respect to providing any more specific earnings guidance for 2004?

At this stage of the year, I think there's still sufficient uncertainties, and we really haven't got down to kind of budgeting planning activities for '04 that anything that I would say would be, you know, not particularly meaningful.

I think we will do that in late in the year, whether that's in the next quarter's call or sometime in the fourth quarter, I'm not quite sure.

It might be in association with a conference.

We will have something out before we go into the year, just to give people a sense of our expectations.

But frankly, I think that the expectations of the earnings themselves are probably less of interest than the expectations of the drivers that underlie those.

And until we can get comfortable internally and settle on a consensus of what we believe those driver expectations to be I think we'd be kind of premature.

One other question, kind of related to Vick's question, but you mentioned in the quarter you were able to hedge a lots of Urcott on an average of 11.40.

How does that compare to say the Urcott hedges that were in place for 2003?

I knew somebody would ask that question.

Sorry.

I don't know the exact answer.

It's in the same range, probably slightly higher.

You know --

Slightly higher right.

If I go back to 2002 for example, forwards for 2003 in north Urcott moved around a fair amount between 10 and 12 dollars and we did the same thing you know last year.

You'll recall at about this time last year, the market just fell out of bed.

And we were not able to get anything hedged for a while and then late in the fourth quarter, we suddenly could get a lot more stuff done.

But all through that period it was moving around generally between $10 and $12.

So -- but the 11, we're very pleased with the $11.50, $11.40 range.

And I would say that's probably you know 50 cents higher than where we were before.

That's a rough guess.

Okay.

And one thing related to that is, you mentioned Forney unit 1 came up in the second quarter, Forney unit 2 in the third quarter.

Is it up already as we stand today?

It's not commercial yet, we expect it to be commercial in August.

August, okay.

Thank you.

Thanks.

We'll go next to Jay Hatfield with Zimmer Lucas.

Good morning.

Good morning Jay.

Wanted to see Moray if you could give us any indication on this non-weather usage increase.

I was surprised how large that was.

What drives that and is that something likely to continue?

If you look back over the last ten, 15 years on average we've seen about a 1 or 1.1% per year increase in what we call underlying usage so it's not out of line with that.

I should also point out that in any given quarter it's very difficult for us to tell precisely how much of our change in usage was really weather-driven.

So the weather piece that we break out is just an estimate.

Obviously we can look at the sort of total heating or cooling degree day curve across the territory and we average three or four data points in the territory.

But how the weather affects the territory can be much more complicated than that.

You can have same periods with same aggregate cooling days but one could have a greater weather load on the system than the other just because the way the weather gets distributed.

So that the .8% negative is an estimate and a consequence the 1.3 which is everything left over is also an estimate.

So it's a little stronger than we have typically seen.

I don't place too much weight on that for any particular period.

It's certainly consistent with our long term trend.

Great.

Just a couple details on energy.

What does G&A run per year at FPL Energy?

On the order of 80 million.

80 million, okay.

And is Blithe commercial yet?

Not yet.

Okay, thank you very much.

Today's final question comes with Ian Sonnot with Credit Lyonnaise.

Its actually Gordon Hallond Steve just asked our question thank you very much.

Our final question Zack Schreiber as well.

We will go to Peter Hart with Tallond Capital.

I got to slide in here with the last one.

Just a couple of things.

On the two to three cents earnings sensitive for the Urcott generation can you go over how you arrive at that again?

You can get that yourself.

If you take the open position the un-hedged portion that is in one of the charts in the appendix and sort of work it through, assume you know reasonable capacity factors, most of the -- in Urcott we're talking mainly on-peak activity for a gas plant so you can just multiply it through and multiply it by a dollar and you'll find at this it is within that two to 3 cent range.

What you've laid out in terms of the wind energy portfolio and the growth there and what you've been able to hedge out into '04 are you still comfortable with the earnings growth targets of 10 to 15% that you guys have laid out here in the past?

I know you haven't provided '04 so far but is that consistent with making that?

No, I can't remember when the last time we considered ten to 15%.

I’m a little off on that.

We had talked about an average growth target over a multiyear period for FPL Energy but obviously this year we're going to have much higher growth than that long term average.

So I would not be comfortable with ten to 15% for next year.

'03-'04 but over the '02-'04 period maybe so?

I'm going to duck that question because that's tantamount to asking me about specific predictions for '04 and I don't have them now.

Fair enough.

Could you explain the 9% swing at FiberNet quarter-over-quarter?

Yeah, that's pretty simple.

Last year we had a single very large fiber sale.

A piece of FiberNet's business is really selling dark fiber pieces selling capacity, most of it on average is the capacity side but every now and again we have these dot fiber sales that tend to be kind of lumpy, regular part of the business.

So there was a big one in the second quarter of last year and that drove the corporate and other to be positive.

This year FiberNet is very slightly negative for the quarter.

It's a little bit positive year to date.

But as we've, you know, said all along we expect it to be you know break-even for the year.

We're trying to run that business to be break-even on an income basis and positive on the cash flow basis and it is positive for the cash flow basis.

That concludes our question and answer period.

Mr. Barrett I want to turn it over the you for concluding remarks.

I want to thank you for joining us and this concludes our call.

Thank you.

This concludes the call.

Thank you for your participation.

You may disconnect at this time.