新世紀能源 (NEE) 2004 Q1 法說會逐字稿

Good day everyone and welcome to the FPL Group first quarter earning conference call.

Just a reminder, today's conference is being recorded.

At this time for opening remarks and introductions, I will like to turn the conference over to the Director of Investor Relations, Mr. Bob Barrett.

Please go ahead, sir.

Thank you.

Welcome to our 2004 first quarter earnings conference call.

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

Lewis Hay, FPL Group's 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 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 the appendix herein.

Moray?

Thank you Bob.

Good morning everyone.

Not withstanding the varied effects of weather, both positive and negative, FPL Group's overall first quarter performance was consistent with our expectations and supports our confidence in our current strategy.

At Florida Power & Light, while weather was responsible for a $0.17 swing in earnings, the fundamentals remained strong.

Growth in customer accounts was the largest we had seen in over a decade, system reliability remained well above competitive levels, and base costs continued to be in line with our prior disclosures and well below industry averages.

Our fuel hedging program maintained stability in our net fuel cost position.

At FPL Energy, our conservative strategy of extensive hedging, while retaining a degree of upside optionality was reinforced by the impact of the harsh New England winter.

While we were well protected against the downside through our hedges, our open positions, especially our oil-fired assets in Maine, still allowed us to capture some additional upside with very little incremental risk.

The strong performance in New England was more than enough to offset a modest weather-driven shortfall against expectations in our wind portfolio.

The quarter also brought to fruition two large transactions at FPL Energy.

We had earlier indicated that we had been working on a complex contract restructuring initiative, which we had hoped to close last year.

This initiative in fact closed this quarter, boosting current period results by about $31m, but more importantly also providing ongoing cash flow benefits.

In addition, we executed an agreement to dispose our interest in the Bastrop combined-cycle facility, which by coincidence resulted in a book loss of about the same magnitude.

I'll have more to say about both these transactions later in this call.

Stripping aside the influences of weather, which are highly unpredictable in the short-term, but quite dependable over the longer-term, FPL Group's performance relies on the continued strong fundamentals of Florida Power & Light offering a stable and steady base of earnings and cash flow, coupled with the upside potential of our moderate risk business profile at FPL Energy.

The first quarter offers a good example of this combination of work and supports our continued confidence in a range of EPS for the full year of $4.95 to $5.20, assuming normal weather for the balance of the year, and excluding the effect of adopting new accounting standards as well as the mark-to-market effect of non-qualifying hedges, neither of which can be determined at this time.

Now let us look at the financial results for the first quarter.

In the first quarter, FPL Group's GAAP results were $138m or $0.77 per share compared to $175m or $0.99 per share during the 2003 first quarter.

FPL Group's adjusted 2004 first quarter net income was a $139m or $0.78 per share compared to $172m or $0.97 per share last year.

Our adjusted results exclude the mark-to-market effect of non-qualifying hedges.

Please refer to the appendix to this presentation for reconciliation of GAAP results to adjusted earnings.

FPL Group's management uses adjusted earnings internally for financial planning, for analysis of performance, for reporting of results to the Board of Directors and for the company's

Buoyance ended compensation plan.

FPL Group also uses earnings expressed in this fashion when communicating its earnings outlook to analysts and investors.

FPL Group management believes that adjusted earnings provide a more meaningful representation of FPL Group's fundamental earnings power.

Before going any further, I must apologize for being unable to provide a balance sheet and cash flow statement along with our earnings material today.

As you know, we began providing these last period.

Unfortunately current uncertainties about the impact of a new accounting standard prevents us from releasing them just yet.

Recent interpretations of FIN 46R, an accounting standard that deals with the consolidation of variable interest entities, may require the deconsolidation of three FPL Energy subsidiaries and perhaps the consolidation of three qualifying facilities with which Florida Power & Light has long-term contracts.

We are seeking further clarification on these interpretations, and in addition FPL is trying to obtain information from the QFs, which of course we do not control, which would be needed to perform the relevant calculations in the event the recent interpretations are in fact valid.

FPL group adopted FIN 46R on March 31st, 2004, and, therefore, the recent interpretations do not have any effect on FPL group's income statement nor would they be likely to have a material impact on net income in any future period.

We expect to have these uncertainties resolved within the next few weeks and we will of course provide balance sheet and cash flow statements in our first quarter 10-Q.

However, we did not wish to delay providing investors with earnings information on our normal schedule.

Earnings at Florida Power & Light were $105m in the first quarter, down from a $135m a year ago, and the earnings per share contribution was $0.58 compared to $0.76 in 2003.

This difference was almost all due to weather, with the first quarter this year being almost as much below normalized weather expectations as last year's first quarter was above.

Customer growth at Florida Power & Light in the first quarter continued at a remarkable 2.6% compared to the same quarter last year, equivalent to a 106,000 new customer accounts, the highest growth rate in more than a decade.

After a sharp drop in the post September 11th time frame, customer growth has come back steadily and the outlook for the next few years continues to be strong.

Florida economy is in good shape, housing starts continue strong, and the contrast between the weather we've been enjoying here and that which much of the Northeast has experienced can hardly have persuaded many people who might be contemplating a move to our service territory.

To complete the picture for retail sales, usage per retail customer was down 7.7% for the quarter relative to last year driven primarily by weak weather comparisons quarter-over-quarter.

We estimate that usage associated with weather was down about 6%, possibly more.

You may recall that last year's results benefited from extreme weather conditions.

In January of last year, we experienced unusually cold weather and recorded an all time system peak at 20,190 megawatts, while last March was one of the warmest on record.

During the first quarter of this year, the weather was delightfully mild.

In January, we had none of the deep cold spells that are common for that month while March and early April have seen a succession of mild days and nights with neither the heating degree days nor the cooling degree days that are normal for this part of the year.

Florida veterans have commented that they cannot recall a year in which it has remained so mild so late into the spring, which while very satisfactory to most residents of this state is less so to a utility executive.

Underlying usage growth, mix, and all other usage effects netted to a negative 1,7% effect quarter-over-quarter.

I should note, however, that this effect represents the residual in the simple linear model we regularly use for reporting quarterly revenue drivers.

As we have noted on several other occasions, in any particular quarter, this residual can be quite large without carrying any particular significance.

Our calculation of weather impact is dependent upon correlations between heating and cooling degree days, customer usage by type of customer, and is necessarily imprecise, since we use a two-factor model to capture a wide range of effects that may differ significantly in different parts of our wide service territory.

I suspect that for this quarter subsequent more detailed analysis may well show that we have underestimated the impact of weather.

We have historically seen over the last decade, underlying usage growth of 1% to 1.5% annually, and there has been no fundamental change that would cause us to reassess our view that this trend should continue for at least the next several years.

All of these factors together contributed to an overall decrease of 5.3% in retail kilowatt-hour sales for the quarter.

For the first quarter, FPL's O&M expenses including amounts recovered through closes was $296m, down from $301m in the 2003 first quarter.

The major drivers that we have talked about for sometime now, nuclear maintenance, employee benefit expenses, and insurance costs continued to be important.

However, their impact in this quarter was more than offset by the absence of certain legal accruals that we incurred in last year's first quarter and by productivity improvements in other areas.

We will continue to invest, both through capital and through O&M, in ensuring that our nuclear units remain safe and reliable for the long haul, and this will continue to challenge our year-over-year O&M comparisons.

We're making progress in reducing the rate of growth of healthcare costs, but this continues to be an area of long-term concern.

We are increasingly optimistic that 2004 will also see a slowing in the rate of increase of conventional insurance rates, as the insurance cycle starts to turn.

We are confident that productivity improvements in other areas will partially offset these pressure points, and we continue to expect O&M to be up only slightly in 2004.

Depreciation and amortization at FPL increased from $218m in the first quarter of 2003 to $231m in 2004 as a result of more blend in service.

We expect this trend to continue given our projected capital expenditures.

Since the beginning of the decade, the company has added more than 2,600 megawatts of generation at a cost of approximately $1.3b.

FPL has also invested more than $3.3b in its power delivery infrastructures since 1998.

In addition to supporting growth, we have raised our reserve margin from 15% to 20% during this period and have also improved the reliability of an already superior delivery system.

All of these represent investment in a fundamentally attractive business.

Construction continues on schedule on the expansion projects at our Martin and Manatee power plant sites.

As you know, these projects will add about 1,900 megawatts of generation in mid-2005.

The approval process to add 1,100 megawatts at our existing Turkey Point plant continues, with hearing scheduled for early June, and a Commission decision slated for July 20, 2004.

Final approvals from the State Sitting Board are expected later this year.

To summarize, Florida Power & Light's first quarter earnings per share were affected by the following: Customer growth, positive $0.07; usage due to weather, negative $0.17; underlying usage growth, mix, and all other, negative $0.06; depreciation, negative $0.04;

O&M, positive $0.01; other, including share dilution, positive $0.01 for a total $0.18 decrease for the quarter.

Turning now to wholesale generation business, FPL energy had an excellent quarter.

Favorable market conditions, coupled with continued solid operational performance, allowed the business to add $13m net income relative to last year, representing a growth rate of 32%.

Our extensive hedging in prior periods ensured good performance overall, while the open positions in New England, primarily our oil-fired assets in Maine and portions of our Maine hydro capacity, enabled us to take advantage of favorable weather driven market conditions, and to add some upside.

In addition, we closed down a complex contract restructuring initiative, which the team had been working on for some time, and reached a satisfactory agreement to sell our interest in the Bastrop combined-cycle facility.

This project, which does not enjoy the premium pricing available to our other gas-fired assets in Texas, has longer-term upside, but it is likely to continue to be unprofitable for the next several years.

For us it is also a standalone asset, supporting no native retail load, and with limited opportunities to market-based optimization.

Accordingly, while we have incurred an upfront loss on the transaction, we believe it is a fairly priced deal that reduces our overall merchant exposure without giving up much of our longer term upside.

The elimination of the drag from this position should add roughly $0.03 per share to FPL Energy's contribution for each of the next several years.

Finally, our hedging efforts continued to concentrate it now more on 2005 and beyond.

FPL Energy's GAAP results were $53m compared to $44m in last year's first quarter.

FPL Energy's results excluded the effect of non-qualifying hedges, were $54m compared to $41m last year.

As in prior periods we have provided in the appendix more detail on the balance sheet impact and expected future reversal of currently made transactions.

As of 03/31/04, there was a net total of $24m in derivative assets, representing gains that have been recorded and disclosed in the non-qualifying hedge category in prior periods, but which we believe are more usefully considered in the context of future periods' performance.

We would expect $15m of these to reverse during the remainder of 2004, implying future period losses in the non-qualifying hedge category, absent future price changes disregarding the impact of any future transactions.

For the first quarter, project additions contributed $0.04 per share, with strong contributions from our wind portfolio being partially offset by the drag from new gas merchant assets, which we would not expect to run much during this quarter, absent unusual market conditions.

Despite their drag on earnings, these gas assets were cash flow positive, and should be increasingly so for the full year.

Earnings for the quarter from the existing portfolio were up by $0.08 per share.

The impact of a modest shortfall in wind contribution as well as the absence of some favorable items affecting the QF portfolio last year was more than offset by a very strong performance from our Northeast portfolio.

The Northeast portfolio benefited from improved hydro conditions, strong operational performance, and favorable pricing, primarily due to the cold weather experienced in that region.

The remainder of the existing merchant portfolio primarily in Texas was roughly flat with last year.

I indicated to you last quarter that we would increase our disclosure on wind resource because one of the biggest drivers of current period performance is the variability in the natural wind resource like whether the utility will have natural variability around long-term and start making performance.

The wind resources available for our portfolio can be estimated from the average wind speeds at some 16 standard reference towers located near our various projects.

The appendix to this presentation provides you the location of the wind towers as well as some historical and quarterly data by wind tower.

As we have noted before, the relationship between wind speed at the reference towers and financial results is not simple.

Correlation between the wind speed at the reference towers and our project sites is not perfect, and average wind speeds do not completely characterize the resource available for conversion to electricity at a particular site.

However, we estimate that on an average given our current portfolio, a change of plus or minus one in the annual portfolio wind index equates to roughly a plus or minus $0.04 to $0.05 change in earnings per share.

For the quarter, the wind index was minus four, which means that the contribution from the wind portfolio was about $8m below normal expectations.

Asset optimization and trading activities were up $0.01 per share compared with last year.

Our development in asset restructuring activities netted to zero as we realized $0.17 per share from the restructuring of related power and gas contracts, which I will describe in more detail in a moment.

This was entirely offset by the loss incurred on entering an agreement to sell our interest in the Bastrop combined-cycle facility.

Higher interest expense due to the expansion of the asset base by more than 3,900 megawatts since the first quarter of 2003 negatively affected results by $0.07 per share.

All other factors netted to a positive $0.02.

Despite the substantial increase in operating assets, tight cost control continued to allow us to leverage the asset base.

Corporate G&A was slightly below last year's level.

Let me now provide you more detail on the power and gas contract restructuring, one of our plants that benefited first quarter results.

The power contract was structured like a typical QF contract that required the plant to run to fulfill the power sales agreement.

At times, it would have been more economic not to run the facility, but to purchase power in the market to fulfill the contract.

We were able to renegotiate the power of sales contract to give us that flexibility.

We also restructured the associated gas supply agreements to offset the surplus gas position created by purchasing power instead of running the facility.

Both the power and gas counter parties benefited from the contract restructurings.

On a book basis, we recorded a net gain during the first quarter associated with eliminating a liability.

In future years, the restructuring will have a small positive book earnings impact in 2004 and 2005, with little effect likely, either positive or negative thereafter.

On a cash basis, the ongoing effects are more prolonged, and we expect modest positive cash effect for each year for the remainder of the deal.

The net present value of the restructuring is roughly commensurate with the first quarter booking, cum effect.

Before we update you on our hedging progress, I would like to explain to you on new contract coverage categories.

I will encourage you to access the slides that are available on our Web site, www.fplgroup.com, under the Investors section, since I will not review every number on the slide.

The slides were also emailed to our analyst distribution list this morning with the press release.

In order to help you with this transition, we have also provided an appendix page that shows our contract coverage as previously reported.

Our new contract coverage categories better reflect how we manage these assets internally.

The wind category remains unchanged since our wind assets are virtually all under long-term contracts and are managed differently from other fuel sources.

Our next category is now called contracted assets.

This category contains all of our older projects and QFs as well as newer assets with long-term contract.

These currently include Base Water, Jamaica Bay, Calhoun, and our Doswell peaking facility.

These assets previously appeared in our merchant segment.

Since these assets have long-term contracts for substantially all of their output, we managed them differently than our merchant assets.

Absent contract renewals, we will move them into the merchant category when their contracts expire and we begin actively hedging them through power market transactions.

Finally, the merchant segment includes assets that do not have long-term power contracts associated with them and are actively hedged.

The NEPOOL category includes Seabrook, our hydro and fossil assets in Maine, and our

facility in Rhode Island, all of which are managed together as a portfolio.

The ERCOT merchant segment contains the Forney and Lamar facilities, which also are managed together.

Finally, the all other category includes the Blythe facility in California, as well as both Marcus Hook facilities.

Having explained the new segmentation scheme, let me now update you on our 2004 position and introduce the 2005 contract coverage.

Our hedging activity for 2004 is now largely complete with 82% of our asset positions hedged, up from 74% at the start of the quarter.

These accounts are well over 90% of our anticipated gross margin.

At this point, we would not expect to undertake additional hedging for 2004, unless some particularly favorable opportunity to lock in margins on our original forecast presents itself.

In addition to this, we are also making good progress on our contract coverage for 2005.

As you can see, we have about 62% of our 2005 output hedged.

We have not yet executed any hedges against the Marcus Hook facility in the other category, as this project is still under construction phase.

In addition, we have been able to execute some hedges of capacity as far forward as 2007.

We believe the last few months confirmed the validity of our hedging approach.

Last year illustrated the value of remaining patient and selective in adding hedges, while this quarter shows the value of retaining some unhedged capacity to take advantage of favorable market pricing if and when it occurs.

In this way, we can protect the downside while still leaving some exposure to additional upside.

We are providing you detail on the appendix on recent forward prices for our unhedged merchant portfolio compared to the forward prices observed late last year.

To summarize the first quarter, FPL contributed $0.58, FPL Energy contributed $0.31, and corporate and other contributed a negative $0.11.

That is a total of $0.78 compared to $0.97 in the 2003 first quarter on an adjusted basis.

The corporate and other category was negatively impacted by a $0.01 loss at FPL FiberNet, with the remainder being higher interest expense.

We continued to project, roughly, breakeven results for FPL FiberNet, and an earnings drag related to higher interest expense in the remainder of the year.

The interest impact should be approximately equal in each quarter this year, absent large changes in interest rates.

Even though we are unable to provide you with preliminary balance sheet and cash flow data, owing to the FIN 46 uncertainties I mentioned earlier, I can make a few remarks about the strength of our financial position.

As you know last year, we largely completed both the heavy capital spending phase at FPL Energy and the associated financing plan to support both this and continued investment that followed upon on Light.

Going into 2004, our committed CAPEX program was about $1.6b at Florida Power & Light, and about $200m elsewhere.

Thus, absent large new investment opportunities on the unregulated side, we expect it to be modestly net cash flow positive after paying the dividend.

This continues to be our expectation.

On the financing side, last year we increased our utilization of project finance structures, which maximized our ability to raise capital, while preserving our overall corporate credit.

Because we are now complete with this program, we would expect some of our conventional credit industries such as book capitalization to begin to improve even as our real credit position remains roughly constant.

To conclude, we remain comfortable with the range of earnings expectations that we set out to you last October.

As a reminder, this range is $4.95 to $5.20 of earnings per share at the FPL group level, with contributions from Florida Power & Light of $4.20 to $4.35, from FPL Energy of $1.05 to $1.20, and the drag from corporate and other of $0.30 to $0.35 per share.

Our expectations continue to assume normal weather for the balance of the year.

Also, as a reminder, our outlooks always exclude the effect of adopting new accounting standards as well as the mark-to-market effect of non-qualifying hedges neither of which can be determined at this time.

During the first quarter, Florida Power & Light fell short of our expectations owing to the impact of weather by roughly the same amount, but FPL Energy exceeded them.

With the bulk of the year still ahead, we feel comfortable that we will still be within the overall range we've set out.

And now I will be happy to take questions.

Thank you.

For our telephone audience, if you would like to ask a question, please press the star key followed by the digit one on your telephone keypad.

We will proceed in the order that you signal us and take as many questions as time permits.

Once again that is star one to ask a question.

We will pause for just a moment.

We will have a question from Asher

- FAG

.

Could I just ask you, I guess that air quality bill is now dead as you had expected it, when you came -- as mentioned to us some month back, but your neighbor had mentioned that they expect that they might be able to reach a settlement before year-end.

Can we look similarly to you guys that we might hear something by year-end regarding the rate agreement?

I am going to ask Armando to comment and let me just say a couple of -- that we have indicated pretty consistently, which is I think in order to ensure that we have the best possible chance of getting the best possible results for going into 2006, we are and will be fully prepared to go down two parallel paths namely, certainly we would be open to a negotiated solution that would continue forward with the kind of structure that we've enjoyed to date, but we must be fully prepared to go through a full-grown rate case.

But let me ask Armando to comment on that overall outlook.

This really allow to add expect to say that we are really on

, we'll be looking at putting all the documentation together for a rate case, at the same time that we'll be looking for opportunities to get any settlement.

I frankly would give the probability to having a settlement this year less than 50%.

Okay, I appreciate it.

And then if I can just go to where I guess you mentioned on the slides that you still expect 400 megawatts coming from wind, can that still come from 0 to 400 megawatts?

Can that still come without the tax credit extension or we might be able to see some of that still without those extensions going through?

Yes, first let me make sure everybody understands that the range has been 0 up to 400 that was what we said originally; we're still sticking with that at the moment.

The 400 was certainly always based on the expectation that we would get a reasonably prompt extension of the PTCs.

So to be fair that end of the range is looking less and less likely.

I think we had indicated that if PTCs were to die completely as a program, we would not seize wind development, but we would see kind of a lag of there.

I think the practical situation that we're actually looking at is we will get a PTC extension, but it will be delayed.

As a result, nobody's going to sign a deal with us for pricing that's based on world without PTCs, if they think the PTCs are actually going to be extended.

So, I think all that that will do is really push things out.

So, the net way of saying it is it's still conceivable we could be at the 400, although it's looking pretty slim for this year.

I would point out however, that if we get a more than one-year extension of the tax credit, it matters less than it has in the past, in the sense that whether a project comes in, in December or January or February, it doesn't make a great deal of difference to this overall financial impact as long as it's eligible for the credit.

Thank you, and I'll move on to you Andy Levi with Bear Wagner.

Hi, guys how are you?

Good morning.

First question I guess I have just has to do with the outlook for the rest of the year.

I guess with the $0.77, $0.78 number, if you look at your guidance, you have to make it up anywhere between $0.26 to $0.50, and I think you said it's

consensus.

Could you just go over second, third and fourth quarter for just in general in next three months where you tend to make that up?

Well I guess that do is refer it back to discussion we had at the end of last quarter, and also recently we move up in New York, and most presentation in Morgan Stanley.

We kind of laid out why we expected first quarter comparison to be a challenging one anyway.

So, it's less to do with the way '04 lays out and the way '03 happened to lay out.

So, I'm not sure there's a lot more to add.

I think the only other thing I would say is we're keeping not nearly the same overall range, but obviously as you saw the same range for both Florida Power and Light, and FPL Energy.

Clearly, with what's happened in first quarter, we are more to the left end of the FPL range and more to the right end of the FPL Energy range.

So, we're going to have to work pretty hard at the FPL side, and for the rest of the year and FPL Energy is starting off with a little bit of a tailwind, but we still think in either case we are well within those overall ranges.

Thank you.

We'll now hear from Michael Goldenberg with Luminous.

Hi, good morning guys.

Morning.

I wanted to ask I think missed part of discussion slide 14 where you broke up your merchant portfolio into new asset classes, which one is Seabrook in, is it NEPOOL or contracted?

Seabrook has been the NEPOOL merchant segment.

The key reason for doing that is we managed that entire portfolio of assets as a cluster.

So, it's kind of arbitrary whether we place a hedge against the Seabrook or rise or the Maine assets.

Conceptionally we can move them one place to another.

So, with that in mind, is it possible to say that given your whole pool of different types of assets, you are now capable of really doing the load shaping and not purely contracting Seabrook against counter

but really doing a BGS type product of round the clock or climate and getting premier pricing for it?

Yes, we have actually been doing the low falling products for over a year.

So, certainly that's true in NEPOOL.

That's really one of the values of that collection of assets as they do give us that kind of capability.

And, have you seen the pricing benefits once you started doing the load shaping products?

Yes, there's no question that there's a price premium there.

I would point out though that there's no such thing as a free lunch, that market itself is very competitive just like every other part of this business.

So, we still have to be very disciplined on our pricing and our risk management, but in aggregate, that definitely allows us to boost our margin slightly.

Thank you.

We will now hear from Paul Ridzon with KeyBanc Capital Markets.

A quick question as to why do you see any contract restructuring opportunities for the balance of the year?

And then if you could you give some flavor on if you do have to do this consolidation and deconsolidation on your FIN 46R, any potential impacts on the balance sheet or credit metrics?

Sure.

Let me take the second question first, were we to deconsolidate the three projects at FPL Energy, we would talking on the order of $400m in assets or $300m in debt coming off of the books.

Because of the way that the credit stats are calculated, whether that would have an impact or not on credit stats, depend on which ones you're looking at.

And what I mean by that is if you look at book credit stats, certainly there would be an impact obviously there was debt in there.

But given that the rating agencies and we, for example, when we think about fundamentals of credit, make adjustments depending upon the nature of the debt, the extent of its recourse, non-recourse nature and other things like that.

As a practical matter, we have no real impact on our underlying credit.

Obviously, it doesn't change the underlying obligation that we have.

On the first question of additional restructuring opportunity, we do see additional possibilities in the portfolio, and I think Jim is on the line, maybe he would like to comment.

More or less, we are working a variety of opportunities and we feel good about the pipeline, and the timing on these things is always uncertain, but we feel good about what we're working on.

Okay and thank you very much.

We will now hear from Ron Barone with UBS.

Yes, good morning Moray.

Good morning.

Couple of questions, could you talk a little bit about the Seafarer pipeline, I know you've bought all the capacity on that line, what's your strategy options and timing?

Yes, let me give a little background on that, first.

What we are talking about here is the possibility of bringing LNG to Florida.

This is a project that we have been interested in for some time, which starts from our interest from Florida Power and Light, and they're really two drivers there.

The potential to get a third physically distinct source of gas supply into Florida, which would increase overall system reliability at a time when our fleet is becoming more dependent upon natural gas.

And secondly, the possibility of getting better economics, better transportation economics essentially by bringing gas in from the East instead of going all the way around through the Gulf and coming back down to one or other of the existing pipelines.

So, we are looking to see if that's a possibility from the FPL angle.

At the same time, we want to make sure that we get the best possible structure there, best possible economics and it appeared to us relatively early on that there was a lot to be said from taking a direct FPL group position in one or other of the projects, at very least to ensure that we have an extremely healthy competition and possibly also for selling direct economic merits.

So, that's kind of where we are right now.

We are pushing ahead with the various permitting aspects of the development of that project and would fully expect to have a vigorous economic competition to see if LNG does make sense for Florida Power and Light, and if so, which of those three projects that are out there would make the most sense.

And secondly, could you -- well I see you have had great customer additions, this 106,000, do you think you could maintain something in that facility?

Well, every time we sit down to do the forecast for customer growth, we would basically start with the population count drivers and our focus nearly always sees a tapering off from our current rate.

For really since September 11th, we have been constantly revising that look upwards.

So, I don't see us continuing the 2.6% forever, I do see some tapering off.

But based on the fundamentals that we're looking at right now, I don't see it going much below the 2% range for sometime either.

Okay.

Thank you very much.

Moving on we hear from Steve Fleishman with Merrill Lynch.

Hi, Moray.

Hi, good morning.

What was the - quickly the weather versus normal at the utility we just had?

Given the cooler degree-days, 18-degree days, in the attachment to the press release.

Essentially what happened is we had a mild January.

Normally we get at least a couple of very deep cold fronts, which cause everybody to turn their heaters on.

We didn't have those and then we've had a pretty mild March.

Actually, extending over into early April.

March, traditionally is kind of a transition month, where we get some heating load and some cooling load and we really haven't had either of that.

It's been just absolutely gorgeous.

It goes down to the high 60s at night, sunny and up in the high 70s in the day, so that just doesn't cause anybody to use either heating or cooling.

So, if you look at the statistics, the heating degree-days last year were 254, normal is about 220; this year was 177, so we were off there.

And cooling degree-days normal would be about 50, last year was 120; this year was 31.

So, you could see that we lost out on both ends.

Is that right?

Okay.

And then two quick others.

The trailing 12-month ROE at the utility and also any more flavor on the wind PTCs and where they might or might not be legislated through right now?

On the let me ask Lewis comments on the PTC outlook.

I don't know that we have any more to say Lew.

Hi, Steve.

On the PTC front, we're encouraged by the fact that the tax provisions of the energy bill looks like we're trying to be attached to the

sales corporation, extra territorial income bill.

There's progress on that bill which is considered to be a must passed bill, but sure you've seen over the last several months both with the energy bill and a lot of other legislations, there's been an awful lot of conflict between the Republicans and the Democrats.

This being an election year, our lobbyists expects that to continue.

We continue to see broad support for PTCs related legislations.

I think it is more a question of timing and I would love to say that given the latest action, this would happen pretty quickly, but our lobbyist is still pretty conservative on when we're really likely to see the PTCs extended.

We're optimistic that something could happen soon, but I think more realistic it could still be a while.

Steve your question on regulatory ROE.

The regulatory ROE is 4.8.

Okay.

Thank you.

Now we hear from Neil Stein with John.

Levin & Co.

Just a couple of questions, first on the Seabrook upgrade, could you talk about where you stand in getting that approval?

Jim you want to take that?

Yes, it's moving smoothly along.

And the project is going well and we are expecting it in the spring of next year.

So nothing could change that view?

No.

And then on the last conference call, I don't know if you said something about this earlier, but you gave the impression you wouldn't be selling any of your assets in Texas.

Could you talk about if there's been a change in your strategic thinking or view the market or was it just a valuation you got for this particular plant?

Yes.

Let me first clarify what we said before.

You may recall that there was rumor that our entire Texas portfolio was on the block and that we'd hired an investment bank to shop it around.

That was not true and it remains untrue.

At the same time we have also always indicated that we are constantly going through the portfolio to see if there's room for tweaking here and there.

The real issue with this one is Bastrop in the sense for us didn't sit very well.

It's in the wrong part of Texas, it's off by itself and we only had a 50% share of the asset.

So, it was more a question of getting at least value for it and just reshaping the risk profile of the portfolio.

We continue to like the assets in North Texas; we continue to see good solid spreads both currently and forward for North Texas over a seller's choice of South Texas.

So, we continue to like those positions and of course we still like our wind assets in West Texas.

No fundamental change in strategy.

Could you disclose the actual sales price?

I don't think we did, but the deal was worth about $75m or $90m including taxes.

Okay.

Thank you, very much.

And I hear from Vikas Dwivedi with Prudential.

Good morning.

Had a question on the QF restructuring, can you describe the recurring versus nonrecurring nature of the earnings that you realized from that activity, and then comment if those restructurings get easier as long as market power prices stay low?

The short answer on describing the book impact is not easily as you might imagine fairly complicated as far best I can do is say that the big upfront gain rarely comes from extinguishing a liability associated with one of the gas contracts, which was off market.

So, when the gas contract goes away, you wipe out that liability.

I think the real thing to focus on here is just the cash effect.

When you free an asset up whether you don't have to supply from a high cost position all the time, there's obvious cash flow benefits and the debate is really how do you split those between all the different parties to make sure that you have a deal.

There's actually quite a few contracts involved here, so it was a lot more involved than we thought it would be when we started out.

As the question of the impact of fluctuating commodity prices, I would say that in some ways it makes the business both easier and more difficult.

The fact that commodity prices move creates opportunities to restructure, and is one of the reasons why we believe there will continue to be opportunities.

On the other hand, in the short-term, obviously fluctuating prices can affect the different parties perceptions of the relative value of the deal and what they're getting versus what everybody else is getting, and therefore they can make it more complicated to execute.

So, I don't know how you net those two throughout, but they're sort of a deterrent product of the fact piece of the business as we've indicated many times.

This stuff is there, but it's going to be very lumpy and as you know, we're not very good at predicting when it could occur since we thought that this one was going to close last year.

Okay.

That's helpful.

Thank you.

Moving on we hear from Wen-Wen Chen with ABN AMRO.

Good morning.

Good morning.

What's the reason for the higher interest expense that's apparent?

The fundamental reason is this is kind of a residual that above the nominal 50-50 level at which we report FPL Energy.

So, for the financial policy point of view, we run the utility to a roughly constant equity ratio and obviously report results the same way.

For reporting purposes, we report results at FPL Energy on a deemed 50-50 capital structure, the purpose of which is to try and show the ongoing changes in operating performance to the extent that the corporate balance sheet is out of balance with the weighted average of that combination.

The residual is a corporate another.

What happened really in second half of last year is as we moved assets from construction to operation, we seized capitalizing interest, so we started expensing more and indirectly more of that shows up through corporate other.

That will continue through this year and then will start to decay away.

Okay.

And then after you've sold Bastrop, you expect to have any cash coming in the door?

Yes, on a cash basis the deal is worth about $90m, most of which will be this year in the closing.

And you don't have any debt you need to pay off with that?

There's no asset-specific debt on that, so it will just go into the general financing plan.

Okay.

Thank you very much.

We will now hear from Paul Clegg with Credit Lyonnais.

Good morning.

Could you just talk about your spark spread outlook in ERCOT?

We fundamentally don't see a lot of cause for change this year.

Let me go back, for the last couple of years, forward spreads in North ERCOT have traded in a range of $8 to $12 a megawatt hour and that appears to us to be fairly consistent with the fundamentals of that market.

By fundamentals, I mean really just looking at the supply demand.

For this year, we don't see a lot of change, but the demand forecast is reasonably good for ERCOT, but there is still a lot of capacity out there.

So, we would continue to expect the spreads to be in that range.

For the first quarter, you may recall that they tightened up in the fourth quarter of last year, the first quarter they have averaged in $10 to $11 megawatt hour for North ERCOT, with a $3 to $4 spread over in the South.

And, I think we can expect to see them bounce up and down in that range.

In the last couple of years, we have seen them sag in the middle of the year and then come back again in the fourth quarter.

It wouldn't surprise me if we saw the same thing, but we don't see any fundamental reason for them to be much outside that band for this year.

Okay.

And just one another thing press release out this morning with $143m price-tag on the Bastrop deal.

Can you -- to the extent that you know where they're getting that number and how it jibes with your $90m number, please?

The $140m is that they are purchasing 100% of the asset.

Our original interest in it was 50%.

And Moray, the $90m is after the tax benefit?

After tax effect.

Is after tax effect.

The transaction value is on the order of $75m.

Thank you.

We will now hear from Laura Blanco with Credit Suisse First Boston.

Hi, good morning.

Good morning.

Most of my questions have been answered, but I still have one, going back to the expiration of your agreement at the end of '05, if Armando could provide a little bit more color on why you've seen that this settlement is probably is less than 50% and where you're seeing the commission maybe rough and -- like where are the most problematic issues?

Sure.

Good morning Laura.

When I spoke about 50%, I was talking about less than 50% this year.

Obviously as we get closer to the end of the agreement, I think we'll have a few more leverages than that.

And as we continue down the track of a rate filing and a rate proceeding, I think we'll have a little bit better opportunity.

Just from a strategic point of view, the earlier you go, the less you're going to have negotiate with, frankly.

Okay.

Let me just add, I think the key here for us is not to get impatient.

The existing agreement runs through the end of 2005, the fundamental structure is sound, even though the environmental legislation didn't pass, that embodied the same kind of structure and I think everybody is pretty comfortable with that.

So, the key for us is just to be patient on this thing.

There's plenty of time between now and when the existing agreement expires.

It may also be worth noting that we've got effectively the same state regulators are going to be all through '05.

So, we're not going to have except for one exception and we don't know whether she's going to go in or get reappointed or not.

Looking at effectively the same regulators we've had before in the prior agreement.

And the PSD is on record as indicating that as a general guide, they clearly support settlements and incentive based structures.

So, I think that we find them encouraging, but as I said earlier, we have to be prepared to go through a full-grown rate case if we want to ensure that we get the best possible position.

Okay that will be helpful.

And also I just wanted to know if you are comfortable with your level of leverage at this point or you are looking to in the future when you start getting more cash flow in 2005 to reduce your leverage or -- I mean how you are going to really employ that cash flow next year?

Yes.

Sure, I guess the answer depends little bit of what you mean by leverage.

We're certainly comfortable with our overall credit position.

Everything that we have done has been very consistent with the financing plan that we actually laid out a couple of years ago which was designed to get us through this phase.

Now on a book basis -- on a GAAP basis, you can certainly expect to see our book capitalization ratios improve just in the natural course of events, but that won't represent any real change in our fundamental credit situation.

We like our fundamental credit position, we like the rating.

And so, what we do with additional free cash flow will depend upon a number of things, our first priority obviously is to look for ways to redeploy that free cash flow at rates of return in excess of what the shareholder could expect to earn elsewhere on a risk adjusted basis to the extent that we could find those opportunities, we want to keep investing; to the extent that we can't, then we want to find the most efficient way to get extra back to the shareholder, but we will do that in a fashion that continues to maintain overall credit strength, which is not necessarily the same as maintaining book capitalization.

All right.

So you're still looking for more assets?

Yes, we continue to pursue possible asset acquisitions that could enhance the strength of the FPL Energy portfolio.

Obviously, you've seen that we haven't made any announcements to that effect.

I think I would characterize the market as being very similar to where it's been for quite a while now, which is there's a lot of assets out there.

We're not convinced that the prices that some of the assets are going for are really justified by at least our outlook for prices.

So, we continue to be disciplined, but we'll continue to look.

Thank you.

We will now hear from Mandy

with Reliance Capital.

Good morning.

Just two follow-up questions.

The first one has to deal, when you talk about the quarter and overall net drag of $0.30 to $0.35 that you expect for this year, you went through the high interest expense and can you talk a little bit about what your outlook is in terms of FPL FiberNet?

Yes.

We expect FiberNet to be roughly breakeven, plus or minus a little bit and continue to be cash flow positive, really just as it was last year.

I don't think there's a lot that's changed there.

The market continues to be a tough one, the business is well positioned here in Florida, and we're sort of squeezing things down to make sure that we keep it roughly close to breakeven and cash flow positive.

So, the net drag of $0.30-0.35 that you estimated, is it mostly from higher interest expense or are there other things?

No, that drag is pretty much entirely interest expense, the other things, corporate and other, probably slightly positive, actually.

Thank you.

We will now hear from Paul Patterson with Glenrock Associates.

Hi, how are you guys doing?

Good morning.

I just want to get an idea, if there was any, I mean the impact going forward from the renegotiated contract, from the restructured contract, you mentioned positive cash flow and earnings, would it be the same, were those earnings the same as they would have been if you hadn't done the deal?

Otherwise, going forward, what's the impact from a plus or minus earnings per share basis from having done the deal?

On the earnings basis, the full positive effect for the next couple of years is relative to what we would otherwise have seen, after that it's really no net effect, this is basically a cash impact.

Okay.

It reduced right now like $0.17 in this quarter and it's actually incrementally positive going forward for the next couple of years?

Yes.

Okay.

And then the second thing I wanted to ask you was in terms of the other assets and taxes, is there a potential that there might be a write-down and therefore other potential accretion in 2005 and beyond because of this, any thoughts there?

We always go periodically through the asset impairment tests, those assets are by no means impaired.

So, there will be no basis for us to -- no good accounting basis for us to take a write-down.

So, we are pretty comfortable with those assets, the way they are.

As we have indicated many times in the past, they are contributors on a cash flow basis, a drag on an earnings basis.

So, people need to think about how they contribute to value.

Obviously, if you just multiply that income effect by a standard PE, you are going to get a very misleading assumption of what their value is.

And the other thing, Paul, to keep in mind is those assets trade, relative to the Bastrop trade, the spark spreads traded at about a $3 to $4 premium relative to the south zone.

So they are significantly better positioned than Bastrop.

Thank you.

We will now hear from Vick

with Deutsche Bank.

Yes, thank you.

Moray, just a clarification question on this FPL Energy contract coverage, which you went through -- you said that you increased your hedge position from 70% to 82% or so.

So, is that incremental improvement coming at a higher margin or pretty much similar as the previous months?

It's probably a little bit higher than the average but not probably enough to move the deal significantly.

Obviously, prices have been good, both in the fourth quarter and the first quarter.

Our strategy, obviously is to put the hedges on, when we think the prices are attractive.

So, that is a little bit of a plus.

I wouldn't say it's a huge thing -- if you think about the outlook for FPL Energy, we feel pretty good about where we are.

We had a good start to the year, and the fundamentals look pretty good for the rest of the year, but there is a long way to go there is always lots if pluses and minuses

And the hedging policy is to remain like keep some of that powder dry, or is that you don't right now have the opportunity to contract the rest of it?

No as we have said in the past we have a set of rules down that we like to have about 75% of the capacity positions hedged, looking out over any 12-month period, and one of the reasons is we want to retain some open positions because we know that on average we are going to see some volatility in these markets.

Now the open positions that we want to take are obviously the ones that are either out of the money at the moment or are processed to being out of the money.

We cover the positions that are deep in the money, like Seabrook, early.

So, the oil-fired -- let met just give an example from the first quarter the oil-fired assets in May, we would not normally expect to run in first quarter, so those positions were open.

Because of the strength of the market, the way oil moved against gas, we had excellent opportunities to run them, as part of the value of having the mix of assets that we do, and part of the value of retaining some open positions.

So, absolutely we deliberately intent that we will have some open positions.

I think at this point I can probably take two more questions.

We'll now hear from Ted

with Scotia Capital.

Yes, good morning.

Couple of follow up from previous questions.

Firstly, I was little confused about the about the response on whether or not there was debt on Bastrop, the facilities you sold in Texas.

Was there or was there not debt on?

No asset-specific debt on Bastrop.

Okay.

Secondly, I wonder if you talk about the process of selling that plant., you had mentioned earlier there was a rumor that you had your entire Texas portfolio up for sale, but were you marketing this plant, or were you approached by Centrica?

One of you could talk about that a little bit.

No, this was not an active market, I guess.

Okay, so basically you were approached by Centrica, about the possible purchase of that plant?

I honestly don't know what the genesis of it was, but it was definitely a very counter-party specific deal shall we say.

And we do have time for one last question, and the question will come from Zack Schreiber with Duquesne Capital

HI.

I'm Zack Schreiber from Duquesne Capital Management.

Just one sort of detailed question and then one more sort of strategic question.

On the detail side you mentioned at the holding company that, that was sort of done seeing the incremental hurt from the capitalized interest expense rolling off, and that we are now going to have the same sort of interest expense, pro rata for each quarter of the year.

Let me make sure I got that right, and if we could the say the same thing at the FPL Energy level, or if there if still to be an incremental interest expense hurdles that offset against the current increased gross margin in the assets?

Let me be clear about this for the corporate and other segment, we'll see absent large changes in interest rates, we'll see about the same levels of net drag from interest.

That means that the second quarter comparison will be a difficult one for that fact, just as the first quarter comparison was, because the assets that really are driving this shift came in, in the middle of last year.

So, that means the first quarter and second quarter comparisons will look bad on that factor, and then it will start to wash out as a comparative factor, and the same thing is really true for FPL Energy.

Okay.

Are we at the right run rate for interest expense at FPL Energy, or is there still some capitalized interest there?

We still have one project in construction at Marcus Hook, so, obviously there is capitalized interest associated with that.

So, that will move on to the income statement when that project comes on.

That's the last of those.

And the one out left, it escapes me why that one is done?

It came on in the middle of last year, that's one of the ones that is driving this effect.

Got it, and this just sort taking a step back on a broader strategic front and just in terms of the balance sheet and cash flow, and looking at assets, looking at the converts, looking at what we really are, in terms of your pig and python metaphor, do you think it's more likely now than it was a quarter ago that we are going to be using this capital to retire some of the converts or its more likely.

There going to have opportunities now in terms of a dose of reality on the part of things, maybe asset goals are really getting into more responsible hands, if you will.

Will all this be an overall major issue for the industry in terms of this difference between

spread?

I love to be able to answer that, the truth is I'm not sure that we really know.

I can tell you what we are doing which is, we have kind of said to ourselves that we are going to keep plugging away for this year, but if we don't see some significant movements in the relative value equation by the year, then we are going to have to really kind of reconsider whether there is just something fundamental that we are disconnecting with the market on.

I think you can make a case either way that we will see some more rationality returning to it, or not.

I don't know.

we just have to plug away, that is what we're doing.

And as I have indicated before, that kind of makes sense just given our overall cash flow position because it won't really be till the end of this year that we start to see the effect of positive net cash flow forcing us into a decision about either redeploying or returning to shareholder.

Before I close I should just correct myself, I was confused when the came into service actually at the end of last year.

Thank you that is all the time we have for questions.

Mr. Barret do you have any additional or closing comments?

Just want to thank everyone for participating and this concludes our call.

Thank you.

Thank you.

That does conclude today's conference call.

We do thank you for your participation, you may now disconnect.