新世紀能源 (NEE) 2003 Q3 法說會逐字稿

Good day everyone, and welcome to FPL Group third-quarter earnings conference call.

Today's conference call is being recorded.

At this time for opening remarks I would like to turn the call over to the Director of Investor Relations, Mr. Bob Barrett. (ph)

Welcome to our 2003 third-quarter earnings conference call.

Moray Dewhurst, Chief Financial Officer of FPL group will provide an overview of our performance for the quarter and our expectations for 2004.

Lew Hay, FPL Chairman and Chief Executive Officer, Armando Olivera, President of Florida Power & Light Company and Jim Robo, President of FPL Energy are also with us this morning.

Following Moray's remarks our senior management team 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 security litigation reform act of 1995.

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

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

Thank you Bob and good morning everyone.

During the third-quarter FPL Group continued to track our overall expectations.

Florida Power and Light was down slightly relative to last year, but remains well positioned to deliver full year results in line with expectations.

FPL Energy again achieved very strong growth despite lackluster market conditions, primarily on the strength from contributions from Seabrook and new win projects and it too is well positioned to deliver full year results in line with expectations.

Our full-year 2003 performance expectations which we originally developed about this time last year remain intact at 4.80 to $5.00 per share.

As we indicated at recent conferences we think it most likely we will finish the year a few cents below the midpoint of that range.

Having said that, we should note that there is still uncertainty about the fourth quarter and there are realistic scenarios that would (indiscernible) at any point in the 4.80 to $5.00 range.

Looking to next year while we have not completed our annual planning process, our current view of the fundamental drivers of performance suggest a range of 4.95 to 5.20 per share.

Both earning's outlooks exclude the cumulative effect of adopting new accounting standards, as well as the mark to market effect of nonmanaged hedges and the ongoing fair valuing of minority interests required by new accounting rules, none of which could be determined at this time.

We will discuss the key drivers affecting our projections and results later on in this call.

On a GAAP basis FPL Group's net income was 323 million or $1.81 per share compared with 150 million or 85 cents per share for the third quarter of 2002.

Excluding the effect of certain items, FPL Group earnings were 327 million compared with 315 million last year.

This year's GAAP results include the cumulative effect to changes in accounting principles which we will discuss later on.

Last year's GAAP results included restructuring charges and other items and both year's GAAP results include the mark to market effect of nonmanaged hedges.

As we said in the past, we believe the mark to market effect of nonmanaged hedges is more appropriately considered in connection with the operating results of future periods.

Therefore we continue to view results expressed excluding the current period effect of the nonmanaged hedges as a meaningful measure of current period performance.

Please refer to the appendix of the presentation for a reconciliation of the charges.

Net income of Florida Power and Light was 277 million in the third quarter down from 284 million a year ago and the earnings per share contribution was $1.55 down from a $1.61 in 2002.

Customer growth at Florida Power and Light in the third quarter continued very strong at 2.4 percent.

Over the last 12 months we have added 97,900 new customers.

Usage per customer was essentially flat for the quarter, underlying usage grew at 0.7 percent a little less than our general trend but still healthy.

However this was offset by lower usage associated with unfavorable weather comparisons this August and September.

In summary retail kilowatt hour sales grew 2.4 percent.

For the quarter, FPL's O&M expenses were 292 million up from 281 million a year ago.

As in previous periods employee benefit costs, conventional insurance continued as pressure points. (indiscernible) costs were down slightly, however this was primarily due to timing issues and the broader picture will continue to show increasing costs within (indiscernible).

In addition to the factors just mentioned this quarter's O&M was also up slightly in the fossil generation area reflecting additional maintenance outage costs this period.

Depreciation increased from 194 million to 224 million primarily as a result of (indiscernible) service and the timing of the 125 million special depreciation credit that was part of the 2002 rate agreement.

Last year the depreciation credit was amortized over an eight and one half month period, versus a twelve-month period this year.

As a consequence this quarter and next quarter's results will be negatively affected by comparison.

Up to 30 million increase in depreciation 13 million is due to this timing difference while the remainder largely reflects the growth in the asset base.

Depreciation expense will continue to grow modestly through the middle of 2005 as we continue to invest in generation distribution expansion to support our revenue growth.

The latter half of 2005 will see the introduction of the Martin and Manatee expansions which will obviously affect depreciation more substantially.

To summarize Florida Power and Light's third-quarter earnings per share were affected by the following: customer growth positive 8 cents, underlying usage growth positive 2 cents, usage due to weather negative 2 cents, depreciation credit timing negative 5 cents, depreciation new plants negative 4 cents, O&M negative 3 cents, other, including share dilution and rounding negative 2 cents, for a total of negative 6 cents at FPL.

I would like now to two update you on some other developments this quarter at the utility.

First we are now in day 19 of the regular refueling outage at Turkey Point unit four.

This is the last of the Florida units to undergo detailed testing at the reactor vessel head penetrations and I am pleased to report that these inspections revealed no problems.

The NRC is currently reviewing our results.

In addition, the Turkey Point units are similar in design to the South Texas project where minor leakage was noted around bottom mounted instrument penetrations.

Quick visual inspections confirmed no such leakage at Turkey Point unit four.

Also in the nuclear area earlier this month the NRC granted 20-year license extensions for our two units at St. Lucie, all four Florida units are therefore now licensed for up to 60 years of total operations, and our customers can expect to enjoy the benefits of this low-cost power through the middle of the century.

We continue to invest significantly in supporting the expansions and ongoing reliability of our systems and our system reliability remains well above average for the industry.

In addition, we are making good progress in our two major generation expansion projects at our Martin & Manatee facilities; these projects are on track for mid 2005 operations.

Also during the quarter, we issued a formal RFD for new capacity needed in the 2007 time period.

Consistent with regulations here in Florida, we will entertain proposals for new capacity and will determine whether purchasing or constructing new capacity is the most cost-effective means of meeting the growth and demand within our service territory.

Finally, in September we filed with the PFC our annual fuel cost projections which if approved would hold customer bills essentially flat in 2004.

Hearings are scheduled in November.

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

On an adjusted basis FPL Energy earnings rose to 58 million or 33 cents per share from 37 million or 21 cents per share on a comparable basis a year ago.

Please refer to the appendix for complete reconciliation of FPL Energy's adjusted and GAAP results.

FPL Energy's results for the third-quarter 2003 included the following items: first an after-tax charge of 9 million or 5 cents per share due to a change in accounting principle FAS 150, Accounting for certain financial instruments with characteristics of both liabilities and equity.

Second, an after-tax charge of 3 million or 2 cents per share due to a change in accounting principle, FIN 46 consolidation of variable interest entities, and third a net unrealized gain of 8 million after-tax or 5 cents per share associated with the mark to market effect in nonmanaged hedges.

There are some open questions being discussed by the electric utility industry and the financial accounting standards board about how to apply some recent changes in the accounting rules related to derivatives.

FPL Group believes it is interpretive to changes appropriately and does not expect the resolution of these open questions to affect the results reported today, however FPL Group is still awaiting clarification on the open issues from the FASB and there is some possibility that this could result in a significant adjustment to reported earnings prior to filing FPL Group's third-quarter 2003 form 10-Q.

Project additions were the principal driver of growth at FPL Energy adding 28 million to earnings with Seabrook, new wind projects, new gas plants all contributing.

Earnings from the existing portfolio were down by 4 million with modestly improved performance (indiscernible) more than offset by the combination of some timing differences in the QF portfolio but disappointing somewhat in (indiscernible) and lower than average wind resource.

Asset optimization trading activities were up 2 million compared with last year, during the quarter we executed a gas contract restructuring at a QF facility that contributed 5 million to earnings.

This is similar to the gas contract restructuring we executed during the fourth quarter last year.

The transaction is book and cash positive this year and subsequent years with an (indiscernible) return well in excess of cost of capital.

Additionally, higher interest expenses associated with the growth in the asset base contributed a negative -9 million, all other factors netted to a negative -1 million.

We continue to execute on our wind development plan with approximately 640 MW, the 836 announced wind projects of 2003 already operational.

All the remaining projects which currently are in construction remain on track for commercial operation by year end.

We are very pleased of the overall quality of the new wind projects this year and early results from the new projects are in line with our expectations.

I should also note that yesterday we announced that we had reached agreement to purchase approximately 130 megawatts of California Wind power generation projects from Enron.

We expect to complete the transactions by early 2004, subject of course to all the normal approvals including those of the Enron bankruptcy court.

In addition to our wind development activities, we continue with the final phases of our greenfield fossil construction program.

During the quarter the commission had introduced into service the second unit of Forney (ph) in Texas and both Forney and Calhoun our peaking facility in Alabama, are operating well.

We are still waiting for regulatory approvals and the resolution of some technical issues at the Blight facility in southern California and are now targeting a late 2003 startup.

Finally, at Seabrook we are now in day 20 of a regular refueling outage, like Turkey Point unit 4, Seabrook is one of the units similar in design to the South Texas project with bottom mounted instrument penetrations.

Complete visual inspections confirm no such leakage at Seabrook and we have also completed visual inspections of the reactor vessel head penetrations.

All other maintenance work is proceeding well.

This outage comes at the end of a record breaking run for Seabrook stations.

The unit ran breaker to breaker for 490 days as close to perfection and reliability as any unit is likely to come, we are delighted with a strong performance from the Seabrook team.

To summarize the third-quarter, on an adjusted basis FPL contributed $1.55;

FPL Energy contributed 33 cents, corporate and other contributed -5 cents.

That is a total of $1.83 representing a total increase of 4 cents over the same period in 2002.

The corporate and other category was down on an adjusted basis compared to last year primarily due to higher interest expenses.

With three quarters now behind us we remain on track for full-year earnings performance consistent with the expectations we originally set out about a year ago.

We expect to end the year in the range 4.80 to $5.00 per share excluding the items previously discussed.

Based on where we are through three quarters our most likely estimate is that will be a few cents below the midpoint of this range.

However, I must reemphasize that there is still significant uncertainty about fourth quarter and a range of outcomes is realistically foreseeable.

Given these comments, a range for the fourth quarter of 70 to 75 cents, once more excluding the items previously discussed and assuming normal weather is likely, although the actual value could still fall outside this range.

We do expect Florida Power and Light to be up relative to last year as last year's results included a special accrual to our storm reserves of 35 million.

FPL Energy will likely be off slightly relative to last year, given the impact of the Seabrook refueling outage and additional drag from new merchant fossil assets during months of typically low demand in pricing.

There remained significant uncertainty around the timing of certain asset restructuring activities at FPL Energy.

We could see contributions either in the fourth quarter or early next year.

As always, our ability to sustain our excellent operational track record is critical to our continued success.

Turning now to the outlook for 2004, while we are still in the midst of our annual planning process, we believe we can sufficiently identify the major drivers of performance to justify sharing initial expectations for full-year earnings.

Let me remind you that the starting point for our expectations on the FPL Energy side is always our current contractual commitments, coupled with marking the margin component of the portfolio to markets based upon current forward curves.

Our baseline expectations of course assume normal weather both at the utility and at FPL Energy, and operating performance consistent with our historical levels.

Based on our preliminary review we currently expect an EPS range in 2004 of 495 to 520, although of course actual performance could fall outside this range.

This includes rough ranges of contributions from Florida Power and Light of 420 to 435, from FPL Energy of $1.05 to $1.20, and the drag from corporate and other of 30 to 35 cents per share.

Included in our expectations across the segments is a negative impact totaling about 4 cents per share attributable to expensing employee stock options, which we indicated earlier this year we would start doing in 2004.

Again, the outlook excludes the cumulative effect of adopting new accounting standards, as well as the mark to market effects of nonmanaged hedges and the ongoing fair valuing of minority interests required by new accounting rules, none of which could be determined at this time.

Let me now take a few moments to describe the major drivers for the two main businesses.

Starting with the utility, and adjusting to a weather normalize base, we expect continued good customer growth equivalent to about 21 to 25 cents per share.

We also expect continued usage growth equivalent to about 10 to 22 cents, reflecting the greater variability year to year in this driver.

O&M will depend greatly upon circumstances as we actually (indiscernible) next year but a base increase of about 3 percent appears reasonable.

Given the historical variability this could mean a reduction of anywhere from 4 to 20 cents against next year's performance.

Similarly, depreciation increases are expected to reduce next year's earnings by 4 to 6 cents.

Finally, all other factors including AFUDC (ph) on the Martin and Manatee expansion projects, plus interest and nonincome taxes, should net to a positive 9 to 13 cents.

Taken altogether these factors suggest an overall range for Florida Power and Light of about 420 to 435 per share assuming normal weather.

But we also note that typical weather variability is generally our largest single source of variability and actual results at FPL and for 2004 could produce fluctuations of plus or minus 16 cents per share with about 80 percent probability.

Let me reemphasize that this list does not capture all the possible sources of variability and I would refer you again to our Safe Harbor statement and to our SEC reports for a more detailed discussion of possible risks that might affect our results.

Nevertheless the factors that I have described here are important ones that we will be actively monitoring in 2004.

Turning now to FPL Energy, we currently see a rough range for EPS contribution in 2004 for $1.05 to $1.20.

The major factors driving the potential growth in the FPL Energy contribution to EPS include the following: first, normalizing for poor hydro conditions and somewhat below average wind conditions this year should add approximately 11 cents.

Second, we expect the business to benefit from the full-year effect of the 2003 new wind program, a likely range of 21 to 25 cents.

Third, the absence of a refueling outage at Seabrook will add 6 to 9 cents, offsetting these positives will be a modest negative associated with the full-year impact of the new merchant fleet, amounting to between a negative 6 cents and positive 2 cents.

In addition, interest expense will be up reducing the growth in earnings by between 19 and 28 cents.

We expect all other year-to-year variances to net out to plus or minus 5 cents subject to additional sources of variability that I will describe in a moment.

Putting all these factors together suggests a reasonable range next year of $1.05 to $1.20 per share.

At FPL Energy there are a number of factors that could cause our results to vary, both within the range I have just laid out or potentially even beyond.

On average we expect variability and different factors to offset but investors should be aware of the drivers and their possible impacts.

The first source of variability will be commodity price fluctuations.

I will provide more detail on our hedge position in a moment, but at the portfolio level we see a rough range of impact for commodity price movements of between a negative 9 cents and a positive 15 cents.

Based upon the kind of volatility we have been seeing over the past 6 to 9 months.

We continue to see variability due to weather primarily to our Hydro assets and to our wind portfolios.

These could account for variability of plus or minus 2 cents and 12 cents, respectively.

Another major source of potential variability is our operational performance.

Our historical performance in this regard is excellent, and build into our expectations a normal level of forced outage time.

However, our continued tight management of this aspect of the business is crucial to our ability to meet our expectations.

Given the current state of the asset acquisition markets, we have relatively little built into our current expectations from the deployment of new capital.

We will continue to pursue wind development but the primary impact of new wind development in 2004 realistically will be seen in 2005 results.

Any contributions from fossil asset acquisitions however would represent upside to the range we have laid out.

Finally, we continue to expect incremental contributions from our contract and asset restructuring activities.

At this time we anticipate these activities to contribute up to 10 percent of FPL Energy's earnings next year.

Again, let me stress that this list is not exhaustive, but instead highlights some of the more important variables that we will be actively monitoring.

Now let me update you on our 2004 contract coverage at FPL Energy.

I would encourage you to access the slides that are available on our web site at www.FPL.com under the investor section, since I will not review every number on the slide.

These slides are also e-mailed to our analyst distribution list this morning with the press release.

Our contract coverage on a capacity basis for 2004 is 66 percent; our hedging progress remains largely unchanged from the second quarter due to weak market conditions as well as lack of liquidity in some markets.

We chose not to contract at the pricing we have seen this quarter, but rather prefer to be patient and take advantage of the natural volatility of forward markets as the year progresses.

Current forward spot spurts in some markets are toward the low end of the range that our fundamental models suggest is appropriate.

This implies that there may be asymmetry in our risk posture and therefore locking in low prices for the sake of reducing market risk is just unnecessarily giving up option value.

Accordingly we prefer to wait and take advantage of volatility if and when it occurs.

Our hedge position at Seabrook is an exception to this general statement.

Due to Seabrook's low-cost position, relatively high absolute power prices and associated significant margin potential, we hedged this position early and have hedged 94 percent of available output for 2004.

Because of our overall approach to risk management which focuses on hedging the high margin positions and leaving open those positions with significant optionality, our gross margin hedge ratio is of course higher than our capacity hedge ratio.

Overall for 2004, more than 80 percent of FPL Energy's expected gross margin is hedged against commodity price fluctuations.

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

As with previous calls, we have provided you with a rough estimate of potential variation in 2004 EPS due to changes in market pricing assumptions.

We have developed the ranges of market prices and spot spreads that we believe are representative of market conditions but I would remind you that actual changes could be later.

These potential ranges apply to our base expectations; produce a rough range of sensitivity to commodity prices of plus 15 or minus 9 cents per share.

Again I would encourage you to view the slides available on the web site for more detail, but let me draw your attention to one point that is different from previous periods.

We do not anticipate any significant fundamental strengthening of most U.S. power markets in 2004.

Yet we do see the opportunity for (indiscernible)upside than downside in some markets given current forward prices.

From an earnings perspective the most important of these is ERCOT (ph).

Nevertheless for our base expectations we will continue with our established practice of marking the unhedged portion of the portfolio to market using current foward curves.

To summarize we see a positive outlook for 2004.

Our focus on fundamentals emphasizing cost competitiveness, high quality reliable service, operational excellence and a strong balance sheet continues to serve us well.

We still expect good revenue growth at Florida Power and Light, leading to solid earnings growth even after allowing for continued pressure on O&M expenditures.

At FPL Energy we expect to benefit from the full-year effect of the 2003 wind program and the absence of the refueling outage at Seabrook.

Partially offset by modest drag from new merchant fossil units and increased interests.

At corporate we anticipate another year of breakeven income and positive cash flow from FiberNet, coupled with moderately higher interest expense.

Altogether these effects should lead to moderate growth in EPS.

We continue to enjoy a very strong financial position and while we have been disappointed so far in the asset acquisition markets, we will maintain our patient and disciplined approach which will mean additional upside if we are successful.

And now I will be happy to answer your questions.

Thank you.

(OPERATOR INSTRUCTIONS) We ask you that you initially limit yourself to one question and one follow-up question.

Ashar Khan (ph) with Foresight Investment.

I just wanted to check whether the forecast for next year assumes any equity offering or not, in terms of the 495 and 520 number?

No it doesn't.

As you stand right now and we saw the announcement yesterday and I don't know what we might expect as part of the rest of the year, are you close in terms of -- you always mentioned in terms of new acquisitions and other stuff that you would fund them through the equity markets.

Can we expect with another announcement or something that you might be going to equity markets to fund these acquisitions on the wind side if (indiscernible) announces later on towards the year?

Let me be clear.

The reason there is no significant additional equity other than what comes naturally through the benefit programs, baked into this year, there is really no incremental capital deployment baked into the expectations.

And as I have said very consistently over a year now we do expect through this period that additional capital employment would bring with it some new equity issuance.

To the extent that we are successful on pushing forward further with the wind development program, or to the extent that we find fossil acquisitions that meet our criteria, that we would expect to bring some incremental equity associated with them, but obviously we would also expect them to have positive earnings and we would expect them to be net of the incremental equity accreted.

If I could just ask one more question.

As you are looking towards acquisitions, is the focus still apart from the wind side, towards the fossil area in terms of fossil plants in the different regions?

We continue to be open both to the possible additions to the fossil portfolio and to the nuclear portfolio.

Obviously we were disappointed that the AmerGen transaction did not go through even though we will get the breakout fee that.

So we continue to be open to transactions on the nuclear side.

But those are by their nature a little more ad hoc in the way that they appear in the market.

So I am not meaning to rule out the possibility of additional nuclear transactions.

Greg Gordon with Smith Barney.

When I look at the numbers for the nine months ended, how much of the earnings of FPL energy in total have come from contract restructurings?

There really have only been two transactions;

I don't recall the exact numbers for the first one but I want to say if you add the two together on the order of 10 million of net income.

It appears that as we roll forward into next year, just given that you are expecting zero to 10 percent of your earnings to come from restructurings that would be zero to 12 cents, that's a reduction in the overall contribution on a percentage basis relative to what you have done historically.

Is it fair to say that you are reducing your overall expectations, or are you just not including the upside associated with potential transactions in your ongoing earnings guidance?

No, I think it is fair to say we are reducing it as a percentage.

Partly, that's just a natural effect because there are only so many transactions that you can work on at any one time.

But in the meantime, the rest of the business is growing.

So as a percentage I think we would expect to see it come down.

That being said, I should note that we are still actively working on some things which well hit, which we hope will hit in the fourth quarter, but we don't know for sure, they may spill over to next year.

That area is probably the biggest source of variability in near-term earnings outlook.

But year-to-date, approximately 10 million?

Correct.

The AmerGen breakup fee included as part of what you call contract restructurings, or is that going to be considered nonrecurring?

No, that's just baked in to the overall all other.

Thank you.

Paul Patterson (ph) with Glenrock Associates.

Good morning.

I wanted to ask depreciation effect of the license extension at St. Lucie.

Has that already been -- what is the impact and where will that show up or has it already been anticipated (indiscernible) booking it?

No that would not come into effect until the next time that we filed depreciation studies here in Florida which would not until 2005.

As a practical matter that would, you could expect that would become part of all the many varying factors that we will be taking into account when considering any possible extension to the current rate agreement or working through a possible rate case.

In 2005, we might see lower depreciation as a result of -- that's when it might come into effect?

It would start showing up in 2006.

We would file the new studies in 2005, and other things equal any changes would not be reflected until 2006.

Okay, and can you give us an idea of what the impact would be just from the 20-year extension from a straight line depreciation theme?

I don't know what that number is at the moment.

Thank you.

From Jefferies & Company, Deborah Bromberg (ph).

Just a question on the new wind projects that you just announced.

Could provide a little bit detail on the contract pricing and also whether they are qualifying for production tax credit?

Most of them are in if not all of them are in California.

Most of the projects out there qualified for essentially standard QF type pricing, so avoided costs in pricing.

No, they do not qualify for production tax rates.

Most of these are older projects.

Just one follow-up if I may.

Is 30 to 35 percent still a reasonable factor to assume on your wind projects in general?

I think for the portfolio overall a number around 30 is kind of a good -- the individual projects vary anywhere from 25 to (indiscernible) 40, 40 would be extremely good project but on average the portfolio probably breaks out to about 30 or so.

Thank you.

Michael Goldenberg with Luminous Management.

Just to follow-up on Deborah's question, this acquisition of Enron's wind assets, most of them will not have tax credits.

Did I understand that correctly or did I miss something?

No, that is correct.

Similar to a number of other existing wind projects out in California, they are attractive assets just off their own cash flow.

So this is purely an IRR off of contract pricing type acquisition?

Correct, with a little bit of upside, our ability to operate a little more effectively.

Can you talk in general about what's going on in Washington as to the future of tax credits and so on?

Sure, you may recall that the original House and Senate proposals for the energy bill both contained proposals for extension of the production tax credits.

Obviously the energy bill itself is now in the midst of conference.

Everything we hear suggests that assuming there is an energy bill, we will definitely see an extension of the PTC's probably for another three-year program.

Everything that we are hearing suggests that it’s likely that there will be an energy bill this year.

But I am sure you read the papers as much as we have and there is a certain amount of politics to be played out between here and there.

We are pretty optimistic that that will be resolved, and we continue to support the ability for us to develop the business.

Having said that we do not believe even if there were not an extension of PTC's, we think we would still continue to have development opportunities although it might be a little on the small-scale and a little slower.

One final question on wind.

In terms of buying versus building, is there since wind assets currently are probably distressed as opposed to gas fossil assets, is there any advantage of buying versus building?

Or (indiscernible) pretty much interchangeable in terms of cost and return on investment?

It at all comes down to the economics of the specific deal.

In the case of acquisitions it comes down to who else might be interested.

I would say that certainly the wind assets themselves are not distressed.

But it's hard to conceive of a more distressed seller than a company that's going through what Enron is going through.

So there may be situations where the competition for those assets is a little less than might be the case on the fossil side for example.

Okay, thank you very much.

Steve Fleishman with Merrill Lynch.

Let me start with accounting changes, the FAS 150 charge and the FIN 46 charge, is there any ongoing impacts of those?

Yes, in both cases, let me just explain, let me take the FIN 46 case first.

That is essentially what used to be known as SPE's now known as variable interest entities, we have consolidated the Johnson, Rhode Island facility that we call Rise in this period which is originally set us as a synthetic lease and that's really what's driving that effect.

So there will be a small ongoing affect baked into our operating earnings just from having that in the consolidated (indiscernible) lease structure.

I assume that ongoing effect is in your guidance?

Absolutely.

On the 150, this is a standard that deals with essentially minority interest that have some, under some circumstances can look like a liability.

It is to my mind a very complicated that is unnecessarily complicated accounting standard.

We have one small project on the West Coast where we have a minority partner where under certain circumstances we would have a liability to them, although as a practical matter that liability could be indefinitely postponed.

But under the new standards you have to book at fair value for that liability and that fair value has to be updated with each subsequent period.

So it is conceivable that there will be a small ongoing change in that fair value which could be at a positive or negative affecting future periods.

That one should be pretty small project and a small overall liability.

If you could clarify your comments on the FAS 133 interpretation issue that's going on.

Right, that actually relates to FAS 149 because our 133 was not good enough.

There have been some differences in interpretation or difficulties interpreting which particular contracts qualify for the so-called normal exception.

And the basic issue relates to some of these.

In effect you know that we put a number of transactions in what we call this nonmanaged hedge category and those are transactions which have the economic effect of hedging the physical asset, but which don't for various reasons qualify as a normal treatment or hedge accounting treatment.

So we break those out separately and we try to show you specifically what those are.

Essentially this issue depending upon which way the interpretation finally gets resolved, might cause as to classify additional deals, additional contracts into that category.

So the net result would be and to be more specific, for example, some of the transactions that might be so classified would be some of the forward sales we've done (technical difficulty) and fair value for those contracts which for Seabrook in general will be negative because we've been hedging in a period of rising prices, and then an ongoing fluctuation.

It doesn't change the economics of any of these things, but would change the presentation of some of the results.

But you would put those into your non-managed hedges category, I guess.

Yes, because that's what they are.

Our first choice where we can is to have something qualified for the normal exception, because then you have, in our view, proper accrual treatment, both for the hedge transaction and the physical assets that underlies it.

If we can't do that, we would opt for cash flow hedging.

But there are some things that simply still economically meet that purpose, but don't meet the letter of the accounting test, and those are the ones that we break out in the non-managed hedge category.

You said you think that might get clarified by the time you file your queue?

We are certainly hoping to -- various members of the industry supported by the two members of the Big 4 have written various letters to the FASB setting this thing out and trying to get clarification.

We think we're pretty clear on it, but I just wanted to say there is some possibility that the accounting presentation might change.

No change on the economics.

And then, with respect to this issue of potential equity issuance, you mention zero to 400 megawatts of new wind variability in the kind of variability analysis.

If you got to the 400 megawatts would you issue equity or -- is that?

Yes, yes.

The reason it's not a big deal is because as a practical matter if we were to get to the 400 it would most likely be late in the year.

And under that situation we might well look to issue additional equity probably would but again the equity would be late in the year.

Again, I would stress that any incremental equity would be associated with deals that themselves can produce net accretion.

Jay Hatfield with Zimmer Lucas.

I just wanted to clarify a couple things about your guidance.

On this chart, did you say that there are no asset restructurings in the guidance or is it in the middle of this zero to 10 percent?

I don't know that it is any specific, I would say that the zero to 10 percent range is the factor that you should consider as part of the overall range for FPL Energy.

Okay, so maybe 5 percent of the midpoint range?

I don't -- I wouldn't say that the midpoint of that range is necessarily associated with the midpoint of the EPS range for FPL Energy.

You raise a good question, so let me just pick up on that.

If you were to add up all the low points of all the items on the list for FPL Energy, and all the high points on that list you get to a range that you will quickly find arithmetically is larger than the 105 to 120.

We are trying to set out the possible variability of the individual factors but the 105 to 120 is really our kind of consolidated sense as to where we are most likely to fall.

If that helps at all.

Yes, I think so. the way I would think about it is you have sort of a base assumption now, which maybe the middle point of that range and then variability follows on the outside of those two points. (inaudible)

Yes, we certainly expect the asset restructuring efforts to continue to bear fruit.

We got a good pipeline of projects that the team is working on.

Probably the biggest uncertainty with those is always how long it takes to get them to come to fruition, there are like mini acquisitions.

I assume that the Enron acquisition, would you consider that part of wind (indiscernible) new development/wind acquisitions or would you put that in the asset acquisition?

That's really in the base.

We were hoping that we would be able to announce that in time to be consistent with the numbers so think of it as baked into the base.

An associated question, what is the rate ROE from a book basis for wind, for new wind development?

And is that sort of what we should assume for this Enron acquisition as well?

Somewhere in that 10 percent ROE range?

The difficulty with the book ROE for the wind project is it changes very quickly.

In the first couple of years it will typically start out in the mid single digits, rise to 10,11,12 percent and then it quickly rises into the high teens to low 20s.

I have not actually looked at the ROE profile for the Enron wind asset, but I would not see it as being particularly different.

It might be a little slower to rise.

But on average measured over the life of the project we would typically see high teens to low 20s ROE at a nominal 50-50 capital structure.

It has a very sharp profile to it.

(OPERATOR INSTRUCTIONS) We ask that you initially limit yourself to one question and one follow-up question.

Andy Levi (ph) from Bear (ph) Wagner.

Just a quick question for you.

I just noticed that your market price sensitivity for FPL Energy, there were some changes as far as potential 2004 impact versus what you had given at the (indiscernible) conference or Merrill conference, one or the other.

Can you just go over those and why there were changes?

First of all just for clarification let me point out the charts in the Lehman conference referred to the balance of 03, these are the first time we put anything out on '04.

So obviously there will be some differences.

The first major difference obviously is different positions, we have more assets and they are hedged to different degrees in different markets, so the base merchant open megawatts if you like in each segment will be different for '04 than '03.

Second, in keeping with the principle that we have been working with, we are starting out with marking the thing to current forwards and obviously those are what they are at this point in time and they vary across different markets.

And then the range that we put around them reflects really what we've seen in terms of variability over the last six to nine months.

For example, let me take you through one of those that may be of some interest.

The North Texas, spot spread, if you look back to the beginning of the year the first part of the year, with the run-up in gas spot spreads widened in North Texas and we saw the forward spread for '04 run up as high as $12 a megawatt hour beginning in June.

Subsequent to that it tapered off, came down, spent a fair amount of time in the $10, $9 range in July and August, since then it's really tapered off even more and is now been recently trading around the low 8, 8.50 that sort of range.

So we think that it's quite plausible that we could see over the course of the next year that market get up as high as 12 bucks.

On the other hand we don't think it's likely just based on fundamentals when looking at the supply stack, that it's going to drop a whole lot below the 8 dollar range because we know the marginal cost the marginal unit is needed to meet normal peak demand.

So as a result, we put together a range that is a little asymmetric there, so we think that even though the base expectations based on current forward curves, we think it's probably a little more likely that we would see some upside rather than downside in that particular variable.

And we apply the same kind of logic in the other markets, a couple of the other markets that we view as just more symmetrical.

We have no particular believe that they are more likely to go up or down.

It seems the biggest change was in ERCOT right?

Yes, obviously we have a much larger open position in ERCOT this year.

Zack Schreiber.

Congratulations on a good quarter.

I'm just wondering on the 2004 guidance, as far as FPL, what kind of growth rate at the utility year-over-year is that?

It looks to be 7 to 8 percent relative to sort of midpoint in 2003.

What accounts for this above trend utility growth.

How much of it is AFUDC (ph) and is there any way, is this kind of growth rate the right level of growth at the utility going forward is that kind of a more abnormal year AFUDC?

And just in terms of are we at the utility -- I mean I know 2006 is a long time away but is there a certain level ROE I know we don't have an ROE cap here per se, that you are just not comfortable earning above given a looming negotiation a year, a year and a half from now?

On the first question, I'm not quite sure how you are calculating the numbers.

We see on a normalized year two-year basis a fairly consistent opportunity for the 4 to 5 percent growth that we have been talking about since we came out of the 2002 rate agreement so we may just have some issues as to what the base is or what the range is.

But on a comparable basis, we see that the 4 to 5 percent that we have been talking about for a while.

The second part of your question, we have very good profitability at the utility and certainly there is no official cap but we are sensitive to the profitability there.

I think the more important thing is that we recognize the long term health of the business is dependent upon continued customer satisfaction which depends upon reliability and good customer service.

We are obviously living in a world of heightened NRC scrutiny on the nuclear side.

So our first priority is to make sure that we do continue to support the business adequately and that certainly is what we intend to do.

But within that framework we still are comfortable with what we said coming out of the rate case in the 2002, 2005 period overall we expect to average 4 to 5 percent a year and we don't see 2004 really being any different from that.

Maybe I'm wrong in the shares -- I was expecting around 182 million shares.

That is about right.

Probably 181.

If we are 735 million dollars of utility net income this year, and next year we are talking about a 427 midpoint on 182 let's say that is 770 versus, let's say 730, that is like 6.5 or 7 percent.

I'm just trying to figure out if structurally the growth rate at the utility is better than what you expected?

No, I think probably a conversation for (indiscernible) have to go through the numbers in more detail.

But I don't think there is (indiscernible) to answer your question, there is no real change in the structural growth rate.

We are still looking at a couple of percentage points of customer growth, a percentage point or so of usage rate growth, some growth in nominal O&M but netting out to on a weather normalized basis 4 to 5 percent growth and will be happy to take you through the mechanics of that.

Greg Gordon with Smith Barney.

I only had half an ear on your description of what's going on with this accounting change as it might relate to Seabrook, you indicated that whatever accounting change may or may not happen there would not be any change in the underlying economics of any of your businesses.

Can you describe again maybe in a little bit more simple terms what might happen and would that create sort of a movement from what people consider ongoing earnings to on an accrual basis to more of a mark to market type accounting for a portion of your business, and how big might that be?

I wish I could describe it in simple terms, but nothing associated with 133 or 149 is simple.

The closest I can get is to say that their might be some additional contracts that today qualify for normal treatment, meaning accrual treatment that we would in future be required to mark to market.

The simplest example I can give of that is a straightforward forward sale against an asset that has no fuel variability which is really what we have at Seabrook.

Hedging Seabrook's output we can transact in the marketplace with a forward sale of a fixed amount of electricity with a fixed price.

As soon as we do that we have essentially locked in margin.

So the economic effect is then fixed.

Where we to mark that contract to market we would have an inconsistency in our reported results.

We would show the fluctuations in each period of the value of the contract, but we would not show the precisely offsetting fluctuation in the value of the physical asset.

So the effect would be simply that we would have another set of contracts that we would put in this nonmanaged hedge category which as you know we already break out and show you separately.

With no substantive change to the underlying economics.

So you are reporting your operating results wouldn't be different, you would have a larger nonmanaged hedge portion that you have to explain every quarter to us?

And a larger swing in that.

Okay, thanks.

Deborah Bromberg with Jefferies & Company.

I just had a follow-up to Zack's question earlier about AFUDC.

Will you be booking that next year, at the utility particularly in view of the Martin and Manatee?

Yes, it is the Martin and Manatee expansion that are driving that, we are booking it.

We have a little bit in this year but obviously next year is the big wave of spending on those two projects.

So we will see some increase in '04 and then there will be a decrease in '05.

Is there any way you could provide any kind of guidance for the amount or range possibly?

I don't have it off the top of my head but I don't see why we can't get back to you on that.

Great, thank you.

Zack Schreiber.

What is the ROE for the last 12 months?

I recognize that there is no explicit cap now, but how high from a modeling perspective given the AFUDC and given some of the core growth and the cost management, are you kind of willing to push the ROE given this delicate balancing act that you have?

Reported ROE for the utility for the past twelve months has been in the low 13, 13.2 13.3 something like that.

Based on what we are seeing as we begin to put the numbers together for next year, we would expect 2004 again to be in the low 13's on a full year basis.

Is that on a GAAP basis or on a regulatory basis?

They are actually pretty close.

So that 50 bit differential from the ITC that has kind of worked its way off with a timing issue on the asset?

I am sorry; you lost me on that one.

You see a 50 basis point differential between regulatory and financial ROE, that was really I think a timing issue based on --

There are a number of small differences, but 20 or 30 basis point differential either way is typically where we are right now.

And with that that probably should be the last question.

It appears there are no further questions at this time.

I would like to turn it back over to you for any closing or additional remarks.

We would like to thank you for joining us this morning.

This concludes our conference call.

Thank you.

That does conclude today's conference call; we thank you very much for your participation.

Have a good day.

At this time, we ask that you please disconnect.